Linn Energy
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LINN ENERGY, LLC (Form: 10-Q, Received: 07/30/2015 17:18:45)


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2015
OR
¨
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: 000-51719
LINN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
65-1177591
(IRS Employer
Identification No.)
600 Travis, Suite 5100
Houston, Texas
(Address of principal executive offices)
77002
(Zip Code)
(281) 840-4000
(Registrant’s telephone number, including area code)
600 Travis, Suite 4900
Houston, Texas 77002
(Former address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     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. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x      Accelerated filer   ¨     Non-accelerated filer   ¨     Smaller reporting company ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of June 30, 2015, there were 355,204,907 units outstanding.
 


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i
Table of Contents

GLOSSARY OF TERMS
As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
Bbl. One stock tank barrel or 42 United States gallons liquid volume.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
MBbls/d. MBbls per day.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMBbls. One million barrels of oil or other liquid hydrocarbons.
MMBtu. One million British thermal units.
MMcf. One million cubic feet.
MMcf/d. MMcf per day.
MMcfe. One million cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMcfe/d. MMcfe per day.
MMMBtu. One billion British thermal units.
NGL. Natural gas liquids, which are the hydrocarbon liquids contained within natural gas.

ii
Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
LINN ENERGY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2015
 
December 31,
2014
 
(in thousands,
except unit amounts)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,943

 
$
1,809

Accounts receivable - trade, net
305,404

 
471,684

Derivative instruments
895,723

 
1,077,142

Assets held for sale
104,987

 
—

Other current assets
148,263

 
155,955

Total current assets
1,458,320

 
1,706,590

 
 
 
 
Noncurrent assets:
 
 
 
Oil and natural gas properties (successful efforts method)
17,965,789

 
18,068,900

Less accumulated depletion and amortization
(5,513,440
)
 
(4,867,682
)
 
12,452,349

 
13,201,218

 
 
 
 
Other property and equipment
696,300

 
669,149

Less accumulated depreciation
(173,013
)
 
(144,282
)
 
523,287

 
524,867

 
 
 
 
Derivative instruments
704,099

 
848,097

Restricted cash
256,744

 
6,225

Other noncurrent assets
117,227

 
136,512

 
1,078,070

 
990,834

Total noncurrent assets
14,053,706

 
14,716,919

Total assets
$
15,512,026

 
$
16,423,509

 
 
 
 
LIABILITIES AND UNITHOLDERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
579,289

 
$
814,809

Derivative instruments
3,333

 
—

Other accrued liabilities
157,384

 
167,736

Total current liabilities
740,006

 
982,545

 
 
 
 
Noncurrent liabilities:
 
 
 
Credit facilities
3,178,175

 
2,968,175

Term loan
500,000

 
500,000

Senior notes, net
6,646,372

 
6,827,634

Derivative instruments
1,639

 
684

Other noncurrent liabilities
584,505

 
600,866

Total noncurrent liabilities
10,910,691

 
10,897,359

 
 
 
 
Commitments and contingencies (Note 10)


 


 
 
 
 
Unitholders’ capital:
 
 
 
355,204,907 units and 331,974,913 units issued and outstanding at June 30, 2015, and December 31, 2014, respectively
5,431,822

 
5,395,811

Accumulated deficit
(1,570,493
)
 
(852,206
)
 
3,861,329

 
4,543,605

Total liabilities and unitholders’ capital
$
15,512,026

 
$
16,423,509

The accompanying notes are an integral part of these condensed consolidated financial statements.

1
Table of Contents

LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per unit amounts)
Revenues and other:
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
496,419

 
$
967,850

 
$
946,988

 
$
1,906,727

Gains (losses) on oi l and natural gas derivatives
(191,188
)
 
(408,788
)
 
233,593

 
(650,281
)
Marketing revenues
10,733

 
30,273

 
44,477

 
60,819

Other revenues
5,864

 
7,616

 
13,317

 
13,273

 
321,828

 
596,951

 
1,238,375

 
1,330,538

Expenses:
 
 
 
 
 
 
 
Lease operating expenses
140,652

 
184,901

 
313,673

 
378,934

Transportation expenses
55,795

 
44,854

 
109,335

 
90,484

Marketing expenses
9,159

 
23,274

 
38,000

 
44,346

General and administrative expenses
98,650

 
66,906

 
177,618

 
146,134

Exploration costs
564

 
1,551

 
960

 
2,642

Depreciation, depletion and amortization
215,732

 
274,435

 
430,746

 
542,236

Impairment of long-lived assets
—

 
—

 
532,617

 
—

Taxes, other than income taxes
58,034

 
68,531

 
112,079

 
134,244

(Gains) losses on sa le of assets and other, net
(17,996
)
 
5,467

 
(30,283
)
 
8,053

 
560,590

 
669,919

 
1,684,745

 
1,347,073

Other income and (expenses):
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(146,100
)
 
(134,300
)
 
(289,201
)
 
(268,113
)
Gain on extinguish ment of debt
9,151

 
—

 
15,786

 
—

Other, net
(6,146
)
 
(2,549
)
 
(8,359
)
 
(4,852
)
 
(143,095
)
 
(136,849
)
 
(281,774
)
 
(272,965
)
Loss before  income taxes
(381,857
)
 
(209,817
)
 
(728,144
)
 
(289,500
)
Income tax expense (benefit)
(2,730
)
 
(1,947
)
 
(9,857
)
 
3,707

N et loss
$
(379,127
)
 
$
(207,870
)
 
$
(718,287
)
 
$
(293,207
)
 
 
 
 
 
 
 
 
Ne t loss per  unit:
 
 
 
 
 
 
 
Basic
$
(1.12
)
 
$
(0.64
)
 
$
(2.15
)
 
$
(0.91
)
Diluted
$
(1.12
)
 
$
(0.64
)
 
$
(2.15
)
 
$
(0.91
)
Weighted average units outstanding:
 
 
 
 
 
 
 
Basic
340,934

 
328,844

 
335,817

 
328,588

Diluted
340,934

 
328,844

 
335,817

 
328,588

 
 
 
 
 
 
 
 
Distributions declared per unit
$
0.313

 
$
0.725

 
$
0.625

 
$
1.45

The accompanying notes are an integral part of these condensed consolidated financial statements.

2
Table of Contents

LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS’ CAPITAL
(Unaudited)
 
Units
 
Unitholders’ Capital
 
Accumulate d Deficit
 
Total Unitholders’ Capital
 
(in thousands)
 
 
 
 
 
 
 
 
December 31, 2014
331,975

 
$
5,395,811

 
$
(852,206
)
 
$
4,543,605

Sale of units, net of offering costs of $8,824
19,622

 
224,603

 
—

 
224,603

Issuance of units
3,608

 
—

 
—

 
—

Distributions to unitholders
 
 
(212,631
)
 
—

 
(212,631
)
Unit-based compensation expenses
 
 
33,711

 
—

 
33,711

Excess tax benefit from unit-based compensation and other
 
 
(9,672
)
 
—

 
(9,672
)
Ne t loss
 
 
—

 
(718,287
)
 
(718,287
)
June 30, 2015
355,205

 
$
5,431,822

 
$
(1,570,493
)
 
$
3,861,329

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

LINN ENERGY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
Cash flow from operating activities:
 
 
 
Net loss
$
(718,287
)
 
$
(293,207
)
Adjustments to reconcile net loss  to net cash provided by  operating activities:
 
 
 
Depreciation, depletion and amortization
430,746

 
542,236

Impairment of long-lived assets
532,617

 
—

Unit-based compensation expenses
33,711

 
32,583

Gain  on extinguishment of debt
(15,786
)
 
—

Amortization and write-off of deferred financing fees
17,546

 
6,202

(Gains) losses on sale of assets and other, net
(25,894
)
 
3,506

Deferred income taxes
(9,857
)
 
3,475

Derivatives activities:
 
 
 
Total (gains) losses
(236,653
)
 
650,281

Cash settlements
566,343

 
(23,123
)
Changes in assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable - trade, net
169,978

 
(61,891
)
(Increase) decrease in other assets
3,523

 
(6,947
)
Increase (decrease) in accounts payable and accrued expenses
(47,474
)
 
113,582

Decrease  in other liabilities
(27,031
)
 
(51,062
)
Net cash provided by  operating activities
673,482

 
915,635

 
 
 
 
Cash flow from investing activities:
 
 
 
Acquisition of oil and natural gas properties and joint-venture funding
—

 
(25,891
)
Development of oil and natural gas properties
(416,347
)
 
(805,617
)
Purchases of other property and equipment
(29,287
)
 
(31,411
)
Proceeds from sale of properties and equipment and other
58,714

 
(11,730
)
Net cash used in  investing activities
(386,920
)
 
(874,649
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from sale of units
233,427

 
—

Proceeds from borrowings
645,000

 
1,095,000

Repayments of debt
(850,051
)
 
(616,124
)
Distributions to unitholders
(212,631
)
 
(480,583
)
Financing fees and offering costs
(8,649
)
 
(16,479
)
Excess tax benefit from unit-based compensation
(9,467
)
 
3,016

Other
(82,057
)
 
(39,648
)
Net cash used in  financing activities
(284,428
)
 
(54,818
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
2,134

 
(13,832
)
Cash and cash equivalents:
 
 
 
Beginning
1,809

 
52,171

Ending
$
3,943

 
$
38,339

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Nature of Business
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and natural gas company. LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. The Company’s properties are located in eight operating regions in the United States (“U.S.”), in the Rockies, the Hugoton Basin, California, the Mid-Continent, the Permian Basin, TexLa, South Texas and Michigan/Illinois.
Principles of Consolidation and Reporting
The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission (“SEC”) rules and regulations; as such, this report should be read in conjunction with the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.
The condensed consolidated financial statements for previous periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), unitholders’ capital or cash flows.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, fair values of commodity derivatives and fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Issued Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU will be applied retrospectively as of the date of adoption and is effective for fiscal years beginning after December 15, 2015, and interim periods within those years (early adoption permitted). Adoption of this ASU is expected

5
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

to result in a decrease to the Company’s assets and liabilities in its consolidated balance sheets, with no impact to the consolidated statements of operations.
In May 2014, the FASB issued an ASU that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers. This ASU will be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years (early adoption permitted for fiscal years beginning after December 15, 2016, including interim periods within that year). The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
Note 2 - Acquisitions, Divestiture and Joint-Venture Funding
The revenues and expenses related to certain oil and natural gas properties acquired in 2014 from subsidiaries of Devon Energy Corporation (“Devon” and the acquisition, the “Devon Assets Acquisition”) are included in the condensed consolidated statements of operations of the Company as of August 29, 2014. The following unaudited pro forma financial information presents a summary of the Company’s condensed combined results of operations for the three months and six months ended June 30, 2014 , assuming the Devon Assets Acquisition had been completed as of January 1, 2014, including adjustments to reflect the values assigned to the net assets acquired. The pro forma financial information has been prepared for informational purposes only and does not purport to represent what the actual results of operations would have been had the transaction been completed as of the date assumed, nor is this information necessarily indicative of future consolidated results of operations. The pro forma financial information does not give effect to the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the transaction.
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
 
(in thousands, except
per unit amounts)
 
 
 
 
Total revenues and other
$
729,179

 
$
1,608,294

Total operating expenses
$
(750,486
)
 
$
(1,515,977
)
Net loss
$
(190,367
)
 
$
(252,672
)
 
 
 
 
Net loss per unit:
 
 
 
Basic
$
(0.59
)
 
$
(0.78
)
Diluted
$
(0.59
)
 
$
(0.78
)
The pro forma condensed combined results of operations includes adjustments to:
•
Reflect the results of the Devon Assets Acquisition.
•
Reflect incremental depreciation, depletion and amortization expense, using the unit-of-production method related to oil and natural gas properties acquired and an estimated useful life of 10 years for other property and equipment.
•
Reflect incremental accretion expense related to asset retirement obligations on oil and natural gas properties acquired.
•
Reflect an increase in interest expense related to incremental debt of $2.3 billion incurred to fund the purchase price.
•
Reflect incremental amortization of deferred financing fees associated with debt incurred to fund the purchase price.

6
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Divestiture - Pending
On July 2, 2015, the Company, through certain of its wholly owned subsidiaries, entered into a definitive purchase and sale agreement to sell its remaining position in Howard County in the Permian Basin for a contract price of approximately $281 million , subject to closing adjustments. The sale is anticipated to close in the third quarter of 2015, subject to closing conditions. There can be no assurance that all of the conditions to closing will be satisfied. At June 30, 2015, the Company’s condensed consolidated balance sheet included current assets of approximately $105 million as “assets held for sale” and current liabilities of approximately $3 million included in “other accrued liabilities” classified as “held for sale” related to the sale.
Joint-Venture Funding - 2014
During January and February of 2014, the Company paid approximately $25 million , including interest, to complete the total funding commitment of $400 million related to the joint-venture agreement it entered into with an affiliate of Anadarko Petroleum Corporation (“Anadarko”) in April 2012.
Note 3 - Unitholders’ Capital
At-the-Market Offering Program
The Company’s Board of Directors has authorized the sale of up to $500 million of units under an at-the-market offering program. Sales of units, if any, will be made under an equity distribution agreement by means of ordinary brokers’ transactions, through the facilities of the NASDAQ Global Select Market, any other national securities exchange or facility thereof, a trading facility of a national securities association or an alternate trading system, to or through a market maker or directly on or through an electronic communication network, a “dark pool” or any similar market venue, at market prices, in block transactions, or as otherwise agreed with a sales agent. The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
During the six months ended June 30, 2015 , the Company, under its equity distribution agreement, sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). In connection with the issuance and sale of these units, the Company also incurred professional services expenses of approximately $459,000 . The Company used the net proceeds for general corporate purposes including the open market repurchases of a portion of its senior notes (see Note 6). At June 30, 2015, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
Public Offering of Units
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ( $11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million ). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a distribution of available cash, which includes cash on hand plus borrowings less any reserves established by the Company’s Board of Directors to provide for the proper conduct of the Company’s business (including reserves for future capital expenditures, including drilling, acquisitions and anticipated future credit needs) or to fund distributions over the next four quarters. Distributions paid by the Company are presented on the condensed consolidated statement of unitholders’ capital and the condensed consolidated statements of cash flows. On July 1, 2015, the Company’s Board of Directors declared a cash distribution of $0.3125 per unit with respect to the second quarter of 2015, to be paid in three equal installments of $0.1042 per unit. The first monthly

7
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

distribution with respect to the second quarter of 2015, totaling approximately $37 million , was paid on July 16, 2015, to unitholders of record as of the close of business on July 13, 2015.
Note 4 - Oil and Natural Gas Properties
Oil and Natural Gas Capitalized Costs
Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Proved properties:
 
 
 
Leasehold acquisition
$
13,302,759

 
$
13,362,642

Development
2,807,595

 
2,830,841

Unproved properties
1,855,435

 
1,875,417

 
17,965,789

 
18,068,900

Less accumulated depletion and amortization
(5,513,440
)
 
(4,867,682
)
 
$
12,452,349

 
$
13,201,218

Impairment of Proved Properties
The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows of proved and risk-adjusted probable and possible reserves are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
Based on the analysis described above, the Company recorded no impairment charges for the three months ended June 30, 2015 , or the six months ended June 30, 2014 . During the first quarter of 2015, the Company recorded noncash impairment charges, before and after tax, of approximately $533 million associated with proved oil and natural gas properties. The impairment was due to a decline in commodity prices. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. For the six months ended June 30, 2015 , the following impairment charges are included in “impairment of long-lived assets” on the condensed consolidated statement of operations:
•
Shallow Texas Panhandle Brown Dolomite formation - $278 million ;
•
California region - $207 million ;
•
TexLa region - $33 million ;
•
South Texas region - $9 million ; and
•
Mid-Continent region - $6 million .
Note 5 - Unit-Based Compensation
During the six months ended June 30, 2015 , the Company granted 3,471,095 restricted units and 697,120 phantom units to employees, primarily as part of its annual review of its employees’ compensation, including executives, with an aggregate fair

8
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

value of approximately $42 million . The restricted units and phantom units vest over three years . A summary of unit-based compensation expenses included on the condensed consolidated statements of operations is presented below:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
General and administrative expenses
$
11,044

 
$
9,496

 
$
27,677

 
$
27,719

Lease operating expenses
2,157

 
1,587

 
6,034

 
4,864

Total unit-based compensation expenses
$
13,201

 
$
11,083

 
$
33,711

 
$
32,583

Income tax benefit
$
4,877

 
$
4,095

 
$
12,456

 
$
12,039


Cash-Based Performance Unit Awards
In January 2015, the Company also granted 567,320 performance units (the maximum number of units available to be earned) to certain executive officers. The 2015 performance unit awards vest three years from the award date. The vesting of these units is determined based on the Company’s performance compared to the performance of a predetermined group of peer companies over a specified performance period, and the value of vested units is to be paid in cash. To date, no performance units have vested and no amounts have been paid to settle any such awards. Performance unit awards that are settled in cash are recorded as a liability with the changes in fair value recognized over the vesting period. Based on the performance criteria, there was no liability recorded for these performance unit awards at June 30, 2015 .
Note 6 - Debt
The following summarizes the Company’s outstanding debt:
 
June 30,
2015
 
December 31, 2014
 
(in thousands, except percentages)
 
 
 
 
LINN credit facility (1)
$
2,005,000

 
$
1,795,000

Berry credit facility (2)
1,173,175

 
1,173,175

Term loan (3)
500,000

 
500,000

6.50% senior notes due May 2019
1,200,000

 
1,200,000

6.25% senior notes due November 2019
1,800,000

 
1,800,000

8.625% senior notes due April 2020
1,173,619

 
1,300,000

6.75% Berry senior notes due November 2020
275,177

 
299,970

7.75% senior notes due February 2021
994,000

 
1,000,000

6.50% senior notes due September 2021
650,000

 
650,000

6.375% Berry senior notes due September 2022
572,700

 
599,163

Net unamortized discounts and premiums
(19,124
)
 
(21,499
)
Total debt, net
10,324,547

 
10,295,809

Less current maturities
—

 
—

Total long-term debt, net
$
10,324,547

 
$
10,295,809

(1)  
Variable interest rates of 1.94% and 1.92% at June 30, 2015 , and December 31, 2014, respectively.
(2)  
Variable interest rates of 2.69% and 2.67% at June 30, 2015 , and December 31, 2014, respectively.
(3)  
Variable interest rates of 2.69% and 2.66% at June 30, 2015 , and December 31, 2014, respectively.

9
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Fair Value
The Company’s debt is recorded at the carrying amount in the condensed consolidated balance sheets. The carrying amounts of the Company’s credit facilities and term loan approximate fair value because the interest rates are variable and reflective of market rates. The Company uses a market approach to determine the fair value of its senior notes using estimates based on prices quoted from third-party financial institutions, which is a Level 2 fair value measurement.
 
June 30, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
Credit facilities
$
3,178,175

 
$
3,178,175

 
$
2,968,175

 
$
2,968,175

Term loan
500,000

 
500,000

 
500,000

 
500,000

Senior notes, net
6,646,372

 
5,247,250

 
6,827,634

 
5,703,649

Total debt, net
$
10,324,547

 
$
8,925,425

 
$
10,295,809

 
$
9,171,824

Credit Facilities
LINN Credit Facility
The Company’s Sixth Amended and Restated Credit Agreement (“LINN Credit Facility”) provides for (1) a senior secured revolving credit facility and (2) a $500 million senior secured term loan, in aggregate subject to the then-effective borrowing base. Borrowing capacity under the revolving credit facility is limited to the lesser of: (i) the then-effective borrowing base reduced by the $500 million term loan and (ii) the maximum commitment amount of $4.0 billion , and is currently $3.55 billion . The maturity date is April 2019. At June 30, 2015 , the borrowing base under the LINN Credit Facility was $4.05 billion and availability under the revolving credit facility was approximately $1.5 billion , which includes reductions for the $500 million term loan and $6 million of outstanding letters of credit.
Redetermination of the borrowing base under the LINN Credit Facility, based primarily on reserve reports using lender commodity price expectations at such time, occurs semi-annually, in April and October. The administrative agent, at the direction of a super-majority of certain of the lenders, has the right to request one interim borrowing base redetermination per year. The Company also has the right to request one interim borrowing base redetermination per year, as well as the right to an additional interim redetermination each year in connection with certain acquisitions. The spring 2015 semi-annual redetermination was completed in May 2015, and the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion as a result of lower commodity prices. Continued low or further declining commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the maturity schedule of the Company’s hedges, are expected to result in further decreases in the borrowing base at the October 2015 redetermination and may also impact future redeterminations.
The Company’s obligations under the LINN Credit Facility are secured by mortgages on certain of its material subsidiaries’ oil and natural gas properties and other personal property as well as a pledge of all ownership interests in the Company’s direct and indirect material subsidiaries. The Company is required to maintain either: 1) mortgages on properties representing at least 80% of the total value of oil and natural gas properties included on its most recent reserve report, or 2) a Collateral Coverage Ratio of at least 2.5 to 1 . Collateral Coverage Ratio is defined as the ratio of the present value of future cash flows from proved reserves from the currently mortgaged properties to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount. Additionally, the obligations under the LINN Credit Facility are guaranteed by all of the Company’s material subsidiaries, other than Berry Petroleum Company, LLC (“Berry”), and are required to be guaranteed by any future material subsidiaries. The Company is in compliance with all financial and other covenants of the LINN Credit Facility.
At the Company’s election, interest on borrowings under the LINN Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.5% and 2.5% per annum (depending on the then-current level of borrowings under the LINN Credit Facility) or the alternate base rate (“ABR”) plus an applicable margin between 0.5% and 1.5% per annum (depending on the then-current level of borrowings under the LINN Credit Facility).

10
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR. The Company is required to pay a commitment fee to the lenders under the LINN Credit Facility, which accrues at a rate per annum between 0.375% and 0.5% (depending on the then-current level of borrowings under the LINN Credit Facility) on the average daily unused amount of the maximum commitment amount of the lenders.
The $500 million term loan has a maturity date of April 2019 and incurs interest based on either the LIBOR plus a margin of 2.5% per annum or the ABR plus a margin of 1.5% per annum, at the Company’s election. Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR. The term loan may be repaid at the option of the Company without premium or penalty, subject to breakage costs. While the term loan is outstanding, the Company is required to maintain either: 1) mortgages on properties representing at least 80% of the total value of oil and natural gas properties included on its most recent reserve report, or 2) a Term Loan Collateral Coverage Ratio of at least 2.5 to 1 . The Term Loan Collateral Coverage Ratio is defined as the ratio of the present value of future cash flows from proved reserves from the currently mortgaged properties to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount and the aggregate amount of the term loan outstanding. The other terms and conditions of the LINN Credit Facility, including the financial and other restrictive covenants set forth therein, are applicable to the term loan.
Berry Credit Facility
Berry’s Second Amended and Restated Credit Agreement (“Berry Credit Facility”) currently has a borrowing base of $1.2 billion , subject to lender commitments. The maturity date is April 2019. At June 30, 2015 , lender commitments under the facility were $1.2 billion but there was less than $1 million of available borrowing capacity, including outstanding letters of credit.
Redetermination of the borrowing base under the Berry Credit Facility, based primarily on reserve reports using lender commodity price expectations at such time, occurs semi-annually, in April and October. A super-majority of the lenders under the Berry Credit Facility and Berry also have the right to request interim borrowing base redeterminations once between scheduled redeterminations. The spring 2015 semi-annual borrowing base redetermination was completed in May 2015, and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion as a result of lower commodity prices. Continued low or further declining commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the maturity schedule of the Company’s hedges, are expected to result in further decreases in the borrowing base at the October 2015 redetermination and may also impact future redeterminations.
In connection with the reduction in Berry’s borrowing base, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a concurrent reduction of the borrowing base under the Berry Credit Facility or lender consent in connection with a redetermination of such borrowing base. The $250 million may be used to satisfy obligations under the Berry Credit Facility or, subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future. The amount is included in “restricted cash” on the condensed consolidated balance sheet.
Berry’s obligations under the Berry Credit Facility are secured by mortgages on its oil and natural gas properties and other personal property. Berry is required to maintain mortgages on properties representing at least 80% of the present value of its oil and natural gas proved reserves. Berry is in compliance with all financial and other covenants of the Berry Credit Facility.
At Berry’s election, interest on borrowings under the Berry Credit Facility is determined by reference to either the LIBOR plus an applicable margin between 1.5% and 2.5% per annum (depending on the then-current level of borrowings under the Berry Credit Facility) or a Base Rate (as defined in the Berry Credit Facility) plus an applicable margin between 0.5% and 1.5% per annum (depending on the then-current level of borrowings under the Berry Credit Facility). Interest is generally payable quarterly for loans bearing interest based on the Base Rate and at the end of the applicable interest period for loans bearing interest at the LIBOR. Berry is required to pay a commitment fee to the lenders under the Berry Credit Facility, which accrues at a rate per annum between 0.375% and 0.5% (depending on the then-current level of utilization under the Berry Credit Facility) on the average daily unused amount of the maximum commitment amount of the lenders.

11
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The Company refers to the LINN Credit Facility and the Berry Credit Facility, collectively, as the “Credit Facilities.”
Repurchases of Senior Notes
During the six months ended June 30, 2015 , the Company repurchased on the open market approximately $184 million of its outstanding senior notes as follows:
•
8.625% senior notes due April 2020 - $127 million ;
•
6.75% Berry senior notes due November 2020 - $25 million ;
•
7.75% senior notes due February 2021 - $6 million ; and
•
6.375% Berry senior notes due September 2022 - $26 million .
In connection with the repurchases, the Company recorded a gain on extinguishment of debt of approximately $16 million for the six months ended June 30, 2015.
Repurchases of Senior Notes - Subsequent Event
In July 2015, the Company repurchased through privately negotiated transactions approximately $599 million of its outstanding senior notes as follows:
•
6.50% senior notes due May 2019 - $41 million ;
•
6.25% senior notes due November 2019 - $316 million ;
•
8.625% senior notes due April 2020 - $50 million ;
•
6.75% Berry senior notes due November 2020 - $14 million ;
•
7.75% senior notes due February 2021 - $30 million ; and
•
6.50% senior notes due September 2021 - $148 million .
Senior Notes Covenants
The Company’s senior notes contain covenants that, among other things, may limit its ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. The Company is in compliance with all financial and other covenants of its senior notes.
Berry’s senior notes contain covenants that, among other things, may limit its ability to: (i) incur or guarantee additional indebtedness; (ii) pay distributions or dividends on Berry’s equity or redeem its subordinated debt; (iii) create certain liens; (iv) enter into agreements that restrict distributions or other payments from Berry’s restricted subsidiaries to Berry; (v) sell assets; (vi) engage in transactions with affiliates; and (vii) consolidate, merge or transfer all or substantially all of Berry’s assets. Berry is in compliance with all financial and other covenants of its senior notes.
In addition, any cash generated by Berry is currently being used by Berry to fund its activities. To the extent that Berry generates cash in excess of its needs, the indentures governing Berry’s senior notes limit the amount it may distribute to LINN Energy to the amount available under a “restricted payments basket,” and Berry may not distribute any such amounts unless it is permitted by the indentures to incur additional debt pursuant to the consolidated coverage ratio test set forth in the Berry indentures. Berry’s restricted payments basket may be increased in accordance with the terms of the Berry indentures by, among other things, 50% of Berry’s future net income, reductions in its indebtedness and restricted investments, and future capital contributions.

12
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 7 - Derivatives
Commodity Derivatives
The Company seeks to hedge a significant portion of its forecasted production to reduce exposure to fluctuations in the prices of oil and natural gas and provide long-term cash flow predictability to manage its business, service debt and pay distributions. The current direct NGL hedging market is constrained in terms of price, volume, duration and number of counterparties, which limits the Company’s ability to effectively hedge its NGL production. As a result, currently, the Company directly hedges only its oil and natural gas production. The Company also hedges its exposure to natural gas differentials in certain operating areas but does not currently hedge exposure to oil differentials.
The Company enters into commodity hedging transactions primarily in the form of swap contracts that are designed to provide a fixed price and, from time to time, put options that are designed to provide a fixed price floor with the opportunity for upside. The Company enters into these transactions with respect to a portion of its projected production or consumption to provide an economic hedge of the risk related to the future commodity prices received or paid. The Company does not enter into derivative contracts for trading purposes. In connection with the 2013 acquisition of Berry, the Company assumed certain derivative contracts that Berry had entered into prior to the acquisition date, including swap contracts, collars and three-way collars. The Company did not designate any of its contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.
The following table summarizes derivative positions for the periods indicated as of June 30, 2015 :
 
July 1 - December 31, 2015
 
2016
 
2017
 
2018
Natural gas positions:
 
 
 
 
 
 
 
Fixed price swaps (NYMEX Henry Hub):
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
59,506

 
121,841

 
120,122

 
36,500

Average price ($/MMBtu)
$
5.19

 
$
4.20

 
$
4.26

 
$
5.00

Put options (NYMEX Henry Hub):
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
36,222

 
76,269

 
66,886

 
—

Average price ($/MMBtu)
$
5.00

 
$
5.00

 
$
4.88

 
$
—

Oil positions:
 
 
 
 
 
 
 
Fixed price swaps (NYMEX WTI):  (1)
 
 
 
 
 
 
 
Hedged volume (MBbls)
7,810

 
11,465

 
4,755

 
—

Average price ($/Bbl)
$
87.12

 
$
90.56

 
$
89.02

 
$
—

Three-way collars (NYMEX WTI):
 
 
 
 
 
 
 
Hedged volume (MBbls)
552

 
—

 
—

 
—

Short put ($/Bbl)
$
70.00

 
$
—

 
$
—

 
$
—

Long put ($/Bbl)
$
90.00

 
$
—

 
$
—

 
$
—

Short call ($/Bbl)
$
101.62

 
$
—

 
$
—

 
$
—

Put options (NYMEX WTI):
 
 
 
 
 
 
 
Hedged volume (MBbls)
1,727

 
3,271

 
384

 
—

Average price ($/Bbl)
$
90.00

 
$
90.00

 
$
90.00

 
$
—

Natural gas basis differential positions:   (2)
 
 
 
 
 
 
 
Panhandle basis swaps: (3)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
43,939

 
59,954

 
59,138

 
16,425

Hedged differential ($/MMBtu)
$
(0.33
)
 
$
(0.32
)
 
$
(0.33
)
 
$
(0.33
)
 
 
 
 
 
 
 
 

13
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
July 1 - December 31, 2015
 
2016
 
2017
 
2018
NWPL Rockies basis swaps: (3)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
29,731

 
65,794

 
38,880

 
10,804

Hedged differential ($/MMBtu)
$
(0.23
)
 
$
(0.24
)
 
$
(0.19
)
 
$
(0.19
)
MichCon basis swaps: (3)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
4,710

 
7,768

 
7,437

 
2,044

Hedged differential ($/MMBtu)
$
0.06

 
$
0.05

 
$
0.05

 
$
0.05

Houston Ship Channel basis swaps: (3)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
14,472

 
34,364

 
36,730

 
986

Hedged differential ($/MMBtu)
$
(0.03
)
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.08
)
Permian basis swaps: (3)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
2,558

 
4,219

 
4,819

 
1,314

Hedged differential ($/MMBtu)
$
(0.21
)
 
$
(0.20
)
 
$
(0.20
)
 
$
(0.20
)
 
 
 
 
 
 
 
 
SoCal basis swaps: (4)
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
16,560

 
32,940

 
—

 
—

Hedged differential ($/MMBtu)
$
(0.03
)
 
$
(0.03
)
 
$
—

 
$
—

Oil timing differential positions:
 
 
 
 
 
 
 
Trade month roll swaps (NYMEX WTI): (5)
 
 
 
 
 
 
 
Hedged volume (MBbls)
3,655

 
7,446

 
6,486

 
—

Hedged differential ($/Bbl)
$
0.24

 
$
0.25

 
$
0.25

 
$
—

(1)  
Includes certain outstanding fixed price oil swaps of approximately 5,384 MBbls which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2017, and December 31, 2018, and $90.00 per Bbl for the year ending December 31, 2019, at counterparty election on a designated date in each respective preceding year. The extension for each year is exercisable without respect to the other years.
(2)  
Settle on the respective pricing index to hedge basis differential to the NYMEX Henry Hub natural gas price.
(3)  
For positions which hedge exposure to differentials in producing areas, the Company receives the NYMEX Henry Hub natural gas price plus the respective spread and pays the specified index price. Cash settlements are made on a net basis.
(4)  
For positions which hedge exposure to differentials in consuming areas, the Company pays the NYMEX Henry Hub natural gas price plus the respective spread and receives the specified index price. Cash settlements are made on a net basis.
(5)  
The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent, Hugoton Basin and Permian Basin regions. In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX WTI price during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the “trade month roll”).
During the six months ended June 30, 2015 , the Company entered into commodity derivative contracts consisting of natural gas basis swaps for May 2015 through December 2017, to hedge exposure to differentials in certain producing areas, and oil swaps for April 2015 through December 2015. In addition, the Company entered into natural gas basis swaps for May 2015 through December 2016 to hedge exposure to the differential in California, where it consumes natural gas in its heavy oil development operations.
Settled derivatives on natural gas production for the three months and six months ended June 30, 2015 , included volumes of 47,344 MMMBtu and 94,167 MMMBtu, respectively, at an average contract price of $5.12 per MMBtu. Settled derivatives on oil production for the three months and six months ended June 30, 2015 , included volumes of 4,820 MBbls and 8,795 MBbls, respectively, at average contract prices of $88.60 per Bbl and $91.20 per Bbl. Settled derivatives on natural gas production for

14
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

the three months and six months ended June 30, 2014 , included volumes of 44,136 MMMBtu and 87,787 MMMBtu, respectively, at an average contract price of $5.14 per MMBtu. Settled derivatives on oil production for the three months and six months ended June 30, 2014 , included volumes of 6,230 MBbls and 12,391 MBbls, respectively, at an average contract price of $92.39 per Bbl.
The natural gas derivatives are settled based on the closing price of NYMEX Henry Hub natural gas on the last trading day for the delivery month, which occurs on the third business day preceding the delivery month, or the relevant index prices of natural gas published in Inside FERC’s Gas Market Report on the first business day of the delivery month. The oil derivatives are settled based on the average closing price of NYMEX WTI crude oil for each day of the delivery month.
Balance Sheet Presentation
The Company’s commodity derivatives are presented on a net basis in “derivative instruments” on the condensed consolidated balance sheets. The following summarizes the fair value of derivatives outstanding on a gross basis:
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Assets:
 
 
 
Commodity derivatives
$
1,636,607

 
$
2,014,815

Liabilities:
 
 
 
Commodity derivatives
$
41,757

 
$
90,260

By using derivative instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are current participants or affiliates of participants in its Credit Facilities or were participants or affiliates of participants in its Credit Facilities at the time it originally entered into the derivatives. The Credit Facilities are secured by the Company’s oil, natural gas and NGL reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $1.6 billion at June 30, 2015 . The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.
Gains (Losses) on Derivatives
A summary of gains and losses on derivatives included on the condensed consolidated statements of operations is presented below:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
Gains (losses) on oil and natural gas derivatives
$
(191,188
)
 
$
(408,788
)
 
$
233,593

 
$
(650,281
)
Lease operating expenses (1)
3,986

 
—

 
3,060

 
—

Total gains (losses) on oil and natural gas derivatives
$
(187,202
)
 
$
(408,788
)
 
$
236,653

 
$
(650,281
)
(1)  
Consists of gains and losses on derivatives used to hedge natural gas consumption which were entered into in March 2015.

15
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

For the three months and six months ended June 30, 2015 , the Company received net cash settlements of approximately $284 million and $566 million , respectively. For the three months and six months ended June 30, 2014 , the Company paid net cash settlements of approximately $9 million and $23 million , respectively.
Note 8 - Fair Value Measurements on a Recurring Basis
The Company accounts for its commodity derivatives at fair value (see Note 7) on a recurring basis. The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets. Assumed credit risk adjustments, based on published credit ratings, public bond yield spreads and credit default swap spreads, are applied to the Company’s commodity derivatives.
Fair Value Hierarchy
In accordance with applicable accounting standards, the Company has categorized its financial instruments, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
 
June 30, 2015
 
Level 2
 
Netting (1)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
Commodity derivatives
$
1,636,607

 
$
(36,785
)
 
$
1,599,822

Liabilities:
 
 
 
 
 
Commodity derivatives
$
41,757

 
$
(36,785
)
 
$
4,972

 
December 31, 2014
 
Level 2
 
Netting (1)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
Commodity derivatives
$
2,014,815

 
$
(89,576
)
 
$
1,925,239

Liabilities:
 
 
 
 
 
Commodity derivatives
$
90,260

 
$
(89,576
)
 
$
684

(1)  
Represents counterparty netting under agreements governing such derivatives.
Note 9 - Asset Retirement Obligations
The Company has the obligation to plug and abandon oil and natural gas wells and related equipment at the end of production operations. Estimated asset retirement costs are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets when the obligation is incurred. The liabilities are included in “other accrued liabilities” and “other noncurrent liabilities” on the condensed consolidated balance sheets. Accretion expense is included in “depreciation, depletion and amortization” on the condensed consolidated statements of operations. The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors ( 2% for the six months ended June 30, 2015 ); and (iv) a credit-adjusted

16
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

risk-free interest rate (average of 5.5% for the six months ended June 30, 2015 ). These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
The following presents a reconciliation of the Company’s asset retirement obligations (in thousands):
Asset retirement obligations at December 31, 2014
$
497,570

Liabilities added from drilling
1,875

Liabilities reclassified as held for sale
(2,000
)
Current year accretion expense
14,888

Settlements
(2,920
)
Revision of estimates
(15,228
)
Asset retirement obligations at June 30, 2015
$
494,185


Note 10 - Commitments and Contingencies
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations. With respect to a certain statewide class action case, the parties have agreed on a scheduling order, which provides for briefing on the class certification issues in late 2015 and the first part of 2016. The Company has denied that it has liability on the claims asserted in the case and has denied that class certification is proper. If the Court accepts the Company’s arguments, there will be no liability to the Company in the case. For another statewide class action royalty payment dispute, briefing on class certification issues is expected to be completed during the fall of 2015. The Company has denied that it has any liability on the claims and has denied that class certification is proper. If the Court accepts the Company’s arguments, there will be no liability to the Company in the case. The Company is unable to estimate a possible loss, or range of possible loss, if any, in these cases. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
During the six months ended June 30, 2015 , and June 30, 2014 , the Company made no significant payments to settle any legal, environmental or tax proceedings. The Company regularly analyzes current information and accrues for probable liabilities on the disposition of certain matters as necessary. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.
In 2008, Lehman Brothers Holdings Inc. and Lehman Brothers Commodity Services Inc. (together “Lehman”), filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. In March 2011, the Company and Lehman entered into Termination Agreements under which the Company was granted general unsecured claims against Lehman in the amount of $51 million (the “Company Claim”). In December 2011, a Chapter 11 Plan (“Lehman Plan”) was approved by the Bankruptcy Court. In both April 2015 and April 2014, the Company received approximately $3 million of the Company Claim, of which both amounts are included in “gains (losses) on oil and natural gas derivatives” on the condensed consolidated statements of operations. In the aggregate, the Company has received approximately $49 million of the Company Claim.
Note 11 - Earnings Per Unit
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents. The Company uses the treasury stock method to determine the dilutive effect.

17
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The following table provides a reconciliation of the numerators and denominators of the basic and diluted per unit computations for net loss:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per unit data)
 
 
 
 
 
 
 
 
Net loss
$
(379,127
)
 
$
(207,870
)
 
$
(718,287
)
 
$
(293,207
)
Allocated to participating securities
(1,662
)
 
(2,154
)
 
(3,273
)
 
(4,306
)
 
$
(380,789
)
 
$
(210,024
)
 
$
(721,560
)
 
$
(297,513
)
 
 
 
 
 
 
 
 
Basic net loss per unit
$
(1.12
)
 
$
(0.64
)
 
$
(2.15
)
 
$
(0.91
)
Diluted net loss per unit
$
(1.12
)
 
$
(0.64
)
 
$
(2.15
)
 
$
(0.91
)
 
 
 
 
 
 
 
 
Basic weighted average units outstanding
340,934

 
328,844

 
335,817

 
328,588

Dilutive effect of unit equivalents
—

 
—

 
—

 
—

Diluted weighted average units outstanding
340,934

 
328,844

 
335,817

 
328,588

Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 5 million unit options and warrants for both the three months and six months ended June 30, 2015 , and approximately 6 million for both the three months and six months ended June 30, 2014 . All equivalent units were antidilutive for both the three months and six months ended June 30, 2015, and June 30, 2014.
Note 12 - Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. As such, with the exception of the state of Texas and certain subsidiaries, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company. Amounts recognized for income taxes are reported in “income tax expense (benefit)” on the condensed consolidated statements of operations.
Note 13 - Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows
“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
 
 
 
 
Accrued interest
$
101,003

 
$
105,310

Accrued compensation
36,632

 
44,875

Asset retirement obligations
16,187

 
16,187

Other
3,562

 
1,364

 
$
157,384

 
$
167,736


18
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
Six Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
 
 
 
 
Cash payments for interest, net of amounts capitalized
$
280,018

 
$
264,141

Cash payments for income taxes
$
601

 
$
—

 
 
 
 
Noncash investing activities:
 
 
 
Accrued capital expenditures
$
105,115

 
$
316,427

Included in “acquisition of oil and natural gas properties and joint-venture funding” on the condensed consolidated statement of cash flows for the six months ended June 30, 2014 , is approximately $25 million paid by the Company to fund the commitment related to the joint-venture agreement entered into with Anadarko in April 2012 (see Note 2).
For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. “Restricted cash” on the condensed consolidated balance sheet at June 30, 2015 , includes $250 million LINN Energy borrowed under the LINN Credit Facility and contributed to Berry in May 2015 to post as restricted cash with Berry’s lenders in connection with the reduction in the Berry Credit Facility’s borrowing base. Restricted cash also includes approximately $7 million and $6 million at June 30, 2015, and December 31, 2014, respectively, of cash deposited by the Company into a separate account designated for asset retirement obligations in accordance with contractual agreements.
The Company manages its working capital and cash requirements to borrow only as needed from its Credit Facilities. At June 30, 2015 , and December 31, 2014, net outstanding checks of approximately $13 million and $95 million , respectively, were reclassified and included in “accounts payable and accrued expenses” on the condensed consolidated balance sheets. Net outstanding checks are presented as cash flows from financing activities and included in “other” on the condensed consolidated statements of cash flows.
Note 14 - Related Party Transactions
LinnCo
LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, was formed on April 30, 2012. LinnCo’s initial sole purpose was to own units in LINN Energy. In connection with the 2013 acquisition of Berry, LinnCo amended its limited liability company agreement to permit, among other things, the acquisition and subsequent contribution of assets to LINN Energy. All of LinnCo’s common shares are held by the public. As of June 30, 2015 , LinnCo had no significant assets or operations other than those related to its interest in LINN Energy and owned approximately 37% of LINN Energy’s outstanding units.
LINN Energy has agreed to provide to LinnCo, or to pay on LinnCo’s behalf, any financial, legal, accounting, tax advisory, financial advisory and engineering fees, and other administrative and out-of-pocket expenses incurred by LinnCo, along with any other expenses incurred in connection with any public offering of shares in LinnCo or incurred as a result of being a publicly traded entity. These expenses include costs associated with annual, quarterly and other reports to holders of LinnCo shares, tax return and Form 1099 preparation and distribution, NASDAQ listing fees, printing costs, independent auditor fees and expenses, legal counsel fees and expenses, limited liability company governance and compliance expenses and registrar and transfer agent fees. In addition, the Company has agreed to indemnify LinnCo and its officers and directors for damages suffered or costs incurred (other than income taxes payable by LinnCo) in connection with carrying out LinnCo’s activities. All expenses and costs paid by LINN Energy on LinnCo’s behalf are expensed by LINN Energy.

19
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

For the three months and six months ended June 30, 2015 , LinnCo incurred total general and administrative expenses and certain offering costs of approximately $1.1 million and $2.5 million , respectively, of which approximately $2.2 million had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2015 . The expenses for the three months and six months ended June 30, 2015 , include approximately $492,000 and $983,000 , respectively, related to services provided by LINN Energy necessary for the conduct of LinnCo’s business, such as accounting, legal, tax, information technology and other expenses.
For the three months and six months ended June 30, 2014 , LinnCo incurred total general and administrative expenses and certain offering costs of approximately $749,000 and $1.5 million , respectively, all of which had been paid by LINN Energy on LinnCo’s behalf as of June 30, 2014 . The expenses for the three months and six months ended June 30, 2014 , include approximately $471,000 and $941,000 , respectively, related to services provided by LINN Energy necessary for the conduct of LinnCo’s business, such as accounting, legal, tax, information technology and other expenses. In addition, during the six months ended June 30, 2014 , LINN Energy paid approximately $11 million on LinnCo’s behalf for general and administrative expenses incurred by LinnCo in 2013.
During the three months and six months ended June 30, 2015 , the Company paid approximately $40 million and $80 million , respectively, in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy. During the three months and six months ended June 30, 2014 , the Company paid approximately $93 million and $186 million , respectively, in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy.
Other
One of the Company’s directors is the President and Chief Executive Officer of Superior Energy Services, Inc. (“Superior”), which provides oilfield services to the Company. For the three months and six months ended June 30, 2015 , the Company incurred expenditures of approximately $2 million and $5 million , respectively, and for the three months and six months ended June 30, 2014 , the Company incurred expenditures of approximately $8 million and $12 million , respectively, related to services rendered by Superior and its subsidiaries.
Note 15 - Subsidiary Guarantors
Linn Energy, LLC’s May 2019 senior notes, November 2019 senior notes, April 2020 senior notes, February 2021 senior notes and September 2021 senior notes are guaranteed by all of the Company’s material subsidiaries, other than Berry Petroleum Company, LLC, which is an indirect 100% wholly owned subsidiary of the Company.
The following condensed consolidating financial information presents the financial information of Linn Energy, LLC, the guarantor subsidiaries and the non-guarantor subsidiary in accordance with SEC Regulation S-X Rule 3‑10. The condensed consolidating financial information for the co-issuer, Linn Energy Finance Corp., is not presented as it has no assets, operations or cash flows. The financial information may not necessarily be indicative of the financial position or results of operations had the guarantor subsidiaries or non-guarantor subsidiary operated as independent entities. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.

20
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2015
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
35

 
$
1,244

 
$
2,664

 
$
—

 
$
3,943

Accounts receivable - trade, net
—

 
222,090

 
83,314

 
—

 
305,404

Accounts receivable - affiliates
3,693,834

 
28,630

 
—

 
(3,722,464
)
 
—

Derivative instruments
—

 
880,189

 
15,534

 
—

 
895,723

Assets held for sale
—

 
104,987

 
—

 
—

 
104,987

Other current assets
—

 
105,032

 
43,238

 
(7
)
 
148,263

Total current assets
3,693,869

 
1,342,172

 
144,750

 
(3,722,471
)
 
1,458,320

 
 
 
 
 
 
 
 
 
 
Noncurrent assets:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties (successful efforts method)
—

 
12,998,067

 
4,967,722

 
—

 
17,965,789

Less accumulated depletion and amortization
—

 
(4,649,099
)
 
(923,731
)
 
59,390

 
(5,513,440
)
 
—

 
8,348,968

 
4,043,991

 
59,390

 
12,452,349

 
 
 
 
 
 
 
 
 
 
Other property and equipment
—

 
574,789

 
121,511

 
—

 
696,300

Less accumulated depreciation
—

 
(159,264
)
 
(13,749
)
 
—

 
(173,013
)
 
—

 
415,525

 
107,762

 
—

 
523,287

 
 
 
 
 
 
 
 
 
 
Derivative instruments
—

 
703,123

 
976

 
—

 
704,099

Restricted cash
—

 
6,582

 
250,162

 
—

 
256,744

Notes receivable - affiliates
160,900

 
—

 
—

 
(160,900
)
 
—

Advance to affiliate
—

 
—

 
171,044

 
(171,044
)
 
—

Investments in consolidated subsidiaries
8,277,148

 
—

 
—

 
(8,277,148
)
 
—

Other noncurrent assets, net
100,442

 
5,198

 
11,587

 
—

 
117,227

 
8,538,490

 
714,903

 
433,769

 
(8,609,092
)
 
1,078,070

Total noncurrent assets
8,538,490

 
9,479,396

 
4,585,522

 
(8,549,702
)
 
14,053,706

Total assets
$
12,232,359

 
$
10,821,568

 
$
4,730,272

 
$
(12,272,173
)
 
$
15,512,026

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND UNITHOLDERS’ CAPITAL
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
963

 
$
388,422

 
$
189,904

 
$
—

 
$
579,289

Accounts payable - affiliates
—

 
3,693,834

 
28,630

 
(3,722,464
)
 
—

Advance from affiliate
—

 
171,044

 
—

 
(171,044
)
 
—

Derivative instruments
—

 
—

 
3,333

 
—

 
3,333

Other accrued liabilities
86,234

 
53,359

 
17,798

 
(7
)
 
157,384

Total current liabilities
87,197

 
4,306,659

 
239,665

 
(3,893,515
)
 
740,006

 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities:
 

 
 

 
 

 
 

 
 

Credit facilities
2,005,000

 
—

 
1,173,175

 
—

 
3,178,175

Term loan
500,000

 
—

 
—

 
—

 
500,000

Senior notes, net
5,785,692

 
—

 
860,680

 
—

 
6,646,372

Notes payable - affiliates
—

 
160,900

 
—

 
(160,900
)
 
—

Derivative instruments
—

 
1,051

 
588

 
—

 
1,639

Other noncurrent liabilities
—

 
388,565

 
195,940

 
—

 
584,505

Total noncurrent liabilities
8,290,692

 
550,516

 
2,230,383

 
(160,900
)
 
10,910,691

 
 
 
 
 
 
 
 
 
 
Unitholders’ capital:
 
 
 
 
 
 
 
 
 
Units issued and outstanding
5,424,963

 
4,831,136

 
2,609,158

 
(7,433,435
)
 
5,431,822

Accumulated income (deficit)
(1,570,493
)
 
1,133,257

 
(348,934
)
 
(784,323
)
 
(1,570,493
)
 
3,854,470

 
5,964,393

 
2,260,224

 
(8,217,758
)
 
3,861,329

Total liabilities and unitholders’ capital
$
12,232,359

 
$
10,821,568

 
$
4,730,272

 
$
(12,272,173
)
 
$
15,512,026


21
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2014
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
38

 
$
185

 
$
1,586

 
$
—

 
$
1,809

Accounts receivable - trade, net
—

 
371,325

 
100,359

 
—

 
471,684

Accounts receivable - affiliates
4,028,890

 
13,205

 
—

 
(4,042,095
)
 
—

Derivative instruments
—

 
1,033,448

 
43,694

 
—

 
1,077,142

Other current assets
18

 
96,678

 
59,259

 
—

 
155,955

Total current assets
4,028,946

 
1,514,841

 
204,898

 
(4,042,095
)
 
1,706,590

 
 
 
 
 
 
 
 
 
 
Noncurrent assets:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties (successful efforts method)
—

 
13,196,841

 
4,872,059

 
—

 
18,068,900

Less accumulated depletion and amortization
—

 
(4,342,675
)
 
(525,007
)
 
—

 
(4,867,682
)
 
—

 
8,854,166

 
4,347,052

 
—

 
13,201,218

 
 
 
 
 
 
 
 
 
 
Other property and equipment
—

 
553,150

 
115,999

 
—

 
669,149

Less accumulated depreciation
—

 
(135,830
)
 
(8,452
)
 
—

 
(144,282
)
 
—

 
417,320

 
107,547

 
—

 
524,867

 
 
 
 
 
 
 
 
 
 
Derivative instruments
—

 
848,097

 
—

 
—

 
848,097

Restricted cash
—

 
6,100

 
125

 
—

 
6,225

Notes receivable - affiliates
130,500

 
—

 
—

 
(130,500
)
 
—

Advance to affiliate
—

 
—

 
293,627

 
(293,627
)
 
—

Investments in consolidated subsidiaries
8,562,608

 
—

 
—

 
(8,562,608
)
 
—

Other noncurrent assets, net
116,637

 
5,716

 
14,159

 
—

 
136,512

 
8,809,745

 
859,913

 
307,911

 
(8,986,735
)
 
990,834

Total noncurrent assets
8,809,745

 
10,131,399

 
4,762,510

 
(8,986,735
)
 
14,716,919

Total assets
$
12,838,691

 
$
11,646,240

 
$
4,967,408

 
$
(13,028,830
)
 
$
16,423,509

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND UNITHOLDERS’ CAPITAL
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
3,784

 
$
581,880

 
$
229,145

 
$
—

 
$
814,809

Accounts payable - affiliates
—

 
4,028,890

 
13,205

 
(4,042,095
)
 
—

Advance from affiliate
—

 
293,627

 
—

 
(293,627
)
 
—

Derivative instruments
—

 
—

 
—

 
—

 
—

Other accrued liabilities
89,507

 
59,142

 
19,087

 
—

 
167,736

Total current liabilities
93,291

 
4,963,539

 
261,437

 
(4,335,722
)
 
982,545

 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities:
 

 
 

 
 

 
 

 
 

Credit facilities
1,795,000

 
—

 
1,173,175

 
—

 
2,968,175

Term loan
500,000

 
—

 
—

 
—

 
500,000

Senior notes, net
5,913,857

 
—

 
913,777

 
—

 
6,827,634

Notes payable - affiliates
—

 
130,500

 
—

 
(130,500
)
 
—

Derivative instruments
—

 
684

 
—

 
—

 
684

Other noncurrent liabilities
—

 
400,851

 
200,015

 
—

 
600,866

Total noncurrent liabilities
8,208,857

 
532,035

 
2,286,967

 
(130,500
)
 
10,897,359

 
 
 
 
 
 
 
 
 
 
Unitholders’ capital:
 
 
 
 
 
 
 
 
 
Units issued and outstanding
5,388,749

 
4,831,339

 
2,416,381

 
(7,240,658
)
 
5,395,811

Accumulated income (deficit)
(852,206
)
 
1,319,327

 
2,623

 
(1,321,950
)
 
(852,206
)
 
4,536,543

 
6,150,666

 
2,419,004

 
(8,562,608
)
 
4,543,605

Total liabilities and unitholders’ capital
$
12,838,691

 
$
11,646,240

 
$
4,967,408

 
$
(13,028,830
)
 
$
16,423,509


22
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2015
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
—

 
$
323,038

 
$
173,381

 
$
—

 
$
496,419

Losses on oil and natural gas derivatives
—

 
(186,714
)
 
(4,474
)
 
—

 
(191,188
)
Marketing revenues
—

 
3,285

 
7,448

 
—

 
10,733

Other revenues
—

 
4,329

 
1,535

 
—

 
5,864

 
—

 
143,938

 
177,890

 
—

 
321,828

Expenses:
 
 
 
 
 
 
 
 
 
Lease operating expenses
—

 
90,756

 
49,896

 
—

 
140,652

Transportation expenses
—

 
42,817

 
12,978

 
—

 
55,795

Marketing expenses
—

 
3,161

 
5,998

 
—

 
9,159

General and administrative expenses
—

 
61,548

 
37,102

 
—

 
98,650

Exploration costs
—

 
564

 
—

 
—

 
564

Depreciation, depletion and amortization
—

 
150,739

 
63,052

 
1,941

 
215,732

Impairment of long-lived assets
—

 
—

 
—

 
—

 
—

Taxes, other than income taxes
—

 
35,838

 
22,196

 
—

 
58,034

Gains on sale of assets and other, net
—

 
(17,185
)
 
(811
)
 
—

 
(17,996
)
 
—

 
368,238

 
190,411

 
1,941

 
560,590

Other income and (expenses):
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(123,555
)
 
145

 
(22,690
)
 
—

 
(146,100
)
Interest expense - affiliates
—

 
(3,235
)
 
—

 
3,235

 
—

Interest income - affiliates
3,235

 
—

 
—

 
(3,235
)
 
—

Gain on extinguishment of debt
2,320

 
—

 
6,831

 
—

 
9,151

Equity in losses from consolidated subsidiaries
(255,426
)
 
—

 
—

 
255,426

 
—

Other, net
(5,701
)
 
18

 
(463
)
 
—

 
(6,146
)
 
(379,127
)
 
(3,072
)
 
(16,322
)
 
255,426

 
(143,095
)
Loss before income taxes
(379,127
)
 
(227,372
)
 
(28,843
)
 
253,485

 
(381,857
)
Income tax benefit
—

 
(2,719
)
 
(11
)
 
—

 
(2,730
)
Net loss
$
(379,127
)
 
$
(224,653
)
 
$
(28,832
)
 
$
253,485

 
$
(379,127
)

23
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2014
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
—

 
$
607,470

 
$
360,380

 
$
—

 
$
967,850

Losses on oil and natural gas derivatives
—

 
(383,226
)
 
(25,562
)
 
—

 
(408,788
)
Marketing revenues
—

 
17,839

 
12,434

 
—

 
30,273

Other revenues
—

 
7,607

 
9

 
—

 
7,616

 
—

 
249,690

 
347,261

 
—

 
596,951

Expenses:
 
 
 
 
 
 
 
 
 
Lease operating expenses
—

 
91,547

 
93,354

 
—

 
184,901

Transportation expenses
—

 
37,371

 
7,483

 
—

 
44,854

Marketing expenses
—

 
13,549

 
9,725

 
—

 
23,274

General and administrative expenses
—

 
38,584

 
28,322

 
—

 
66,906

Exploration costs
—

 
1,551

 
—

 
—

 
1,551

Depreciation, depletion and amortization
—

 
196,682

 
77,753

 
—

 
274,435

Taxes, other than income taxes
—

 
45,052

 
23,479

 
—

 
68,531

Losses on sale of assets and other, net
—

 
1,210

 
4,257

 
—

 
5,467

 
—

 
425,546

 
244,373

 
—

 
669,919

Other income and (expenses):
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(111,603
)
 
789

 
(23,486
)
 
—

 
(134,300
)
Interest expense - affiliates
—

 
(1,859
)
 
—

 
1,859

 
—

Interest income - affiliates
1,859

 
—

 
—

 
(1,859
)
 
—

Equity in losses from consolidated subsidiaries
(96,084
)
 
—

 
—

 
96,084

 
—

Other, net
(2,042
)
 
(62
)
 
(445
)
 
—

 
(2,549
)
 
(207,870
)
 
(1,132
)
 
(23,931
)
 
96,084

 
(136,849
)
Income (loss) before income taxes
(207,870
)
 
(176,988
)
 
78,957

 
96,084

 
(209,817
)
Income tax benefit
—

 
(1,896
)
 
(51
)
 
—

 
(1,947
)
Net income (loss)
$
(207,870
)
 
$
(175,092
)
 
$
79,008

 
$
96,084

 
$
(207,870
)

24
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2015
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
—

 
$
617,021

 
$
329,967

 
$
—

 
$
946,988

Gains (losses) on oil and natural gas derivatives
—

 
234,800

 
(1,207
)
 
—

 
233,593

Marketing revenues
—

 
29,497

 
14,980

 
—

 
44,477

Other revenues
—

 
9,886

 
3,431

 
—

 
13,317

 
—

 
891,204

 
347,171

 
—

 
1,238,375

Expenses:
 
 
 
 
 
 
 
 
 
Lease operating expenses
—

 
196,588

 
117,085

 
—

 
313,673

Transportation expenses
—

 
83,751

 
25,584

 
—

 
109,335

Marketing expenses
—

 
26,357

 
11,643

 
—

 
38,000

General and administrative expenses
—

 
119,329

 
58,289

 
—

 
177,618

Exploration costs
—

 
960

 
—

 
—

 
960

Depreciation, depletion and amortization
—

 
291,438

 
136,031

 
3,277

 
430,746

Impairment of long-lived assets
—

 
325,417

 
272,000

 
(64,800
)
 
532,617

Taxes, other than income taxes
2

 
66,549

 
45,528

 
—

 
112,079

Gains on sale of assets and other, net
—

 
(24,999
)
 
(5,284
)
 
—

 
(30,283
)
 
2

 
1,085,390

 
660,876

 
(61,523
)
 
1,684,745

Other income and (expenses):
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(246,941
)
 
1,851

 
(44,111
)
 
—

 
(289,201
)
Interest expense - affiliates
—

 
(5,617
)
 
—

 
5,617

 
—

Interest income - affiliates
5,617

 
—

 
—

 
(5,617
)
 
—

Gain on extinguishment of debt
8,955

 
—

 
6,831

 
—

 
15,786

Equity in losses from consolidated subsidiaries
(478,237
)
 
—

 
—

 
478,237

 
—

Other, net
(7,679
)
 
(47
)
 
(633
)
 
—

 
(8,359
)
 
(718,285
)
 
(3,813
)
 
(37,913
)
 
478,237

 
(281,774
)
Loss before income taxes
(718,287
)
 
(197,999
)
 
(351,618
)
 
539,760

 
(728,144
)
Income tax benefit
—

 
(9,796
)
 
(61
)
 
—

 
(9,857
)
Net loss
$
(718,287
)
 
$
(188,203
)
 
$
(351,557
)
 
$
539,760

 
$
(718,287
)


25
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2014
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
$
—

 
$
1,213,231

 
$
693,496

 
$
—

 
$
1,906,727

Losses on oil and natural gas derivatives
—

 
(628,184
)
 
(22,097
)
 
—

 
(650,281
)
Marketing revenues
—

 
33,570

 
27,249

 
—

 
60,819

Other revenues
—

 
13,280

 
(7
)
 
—

 
13,273

 
—

 
631,897

 
698,641

 
—

 
1,330,538

Expenses:
 
 
 
 
 
 
 
 
 
Lease operating expenses
—

 
195,549

 
183,385

 
—

 
378,934

Transportation expenses
—

 
75,008

 
15,476

 
—

 
90,484

Marketing expenses
—

 
23,640

 
20,706

 
—

 
44,346

General and administrative expenses
—

 
74,321

 
71,813

 
—

 
146,134

Exploration costs
—

 
2,642

 
—

 
—

 
2,642

Depreciation, depletion and amortization
—

 
395,852

 
146,384

 
—

 
542,236

Taxes, other than income taxes
—

 
87,736

 
46,508

 
—

 
134,244

Losses on sale of assets and other, net
—

 
429

 
7,624

 
—

 
8,053

 
—

 
855,177

 
491,896

 
—

 
1,347,073

Other income and (expenses):
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(221,253
)
 
627

 
(47,487
)
 
—

 
(268,113
)
Interest expense - affiliates
—

 
(3,409
)
 
—

 
3,409

 
—

Interest income - affiliates
3,409

 
—

 
—

 
(3,409
)
 
—

Equity in losses from consolidated subsidiaries
(71,191
)
 
—

 
—

 
71,191

 
—

Other, net
(4,172
)
 
(46
)
 
(634
)
 
—

 
(4,852
)
 
(293,207
)
 
(2,828
)
 
(48,121
)
 
71,191

 
(272,965
)
Income (loss) before income taxes
(293,207
)
 
(226,108
)
 
158,624

 
71,191

 
(289,500
)
Income tax expense (benefit)
—

 
3,789

 
(82
)
 
—

 
3,707

Net income (loss)
$
(293,207
)
 
$
(229,897
)
 
$
158,706

 
$
71,191

 
$
(293,207
)


26
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2015
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Cash flow from operating activities:
 
 
 
 
 
 
 
 
 
Net loss
$
(718,287
)
 
$
(188,203
)
 
$
(351,557
)
 
$
539,760

 
$
(718,287
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation, depletion and amortization
—

 
291,438

 
136,031

 
3,277

 
430,746

Impairment of long-lived assets
—

 
325,417

 
272,000

 
(64,800
)
 
532,617

Unit-based compensation expenses
—

 
33,711

 
—

 
—

 
33,711

Gain on extinguishment of debt
(8,955
)
 
—

 
(6,831
)
 
—

 
(15,786
)
Amortization and write-off of deferred financing fees
16,692

 
—

 
854

 
—

 
17,546

Gains on sale of assets and other, net
—

 
(22,903
)
 
(2,991
)
 
—

 
(25,894
)
Equity in losses from consolidated subsidiaries
478,237

 
—

 
—

 
(478,237
)
 
—

Deferred income taxes
—

 
(9,796
)
 
(61
)
 
—

 
(9,857
)
Derivatives activities:
 
 
 
 
 
 
 
 
 
Total gains
—

 
(234,800
)
 
(1,853
)
 
—

 
(236,653
)
Cash settlements
—

 
533,400

 
32,943

 
—

 
566,343

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
Decrease in accounts receivable - trade, net
—

 
154,697

 
15,281

 
—

 
169,978

(Increase) decrease in accounts receivable - affiliates
371,275

 
(15,425
)
 
—

 
(355,850
)
 
—

Decrease in other assets
—

 
8

 
3,515

 
—

 
3,523

Decrease in accounts payable and accrued expenses
—

 
(43,427
)
 
(4,047
)
 
—

 
(47,474
)
Increase (decrease) in accounts payable and accrued expenses - affiliates
—

 
(371,275
)
 
15,425

 
355,850

 
—

Decrease in other liabilities
(3,597
)
 
(13,124
)
 
(10,310
)
 
—

 
(27,031
)
Net cash provided by operating activities
135,365

 
439,718

 
98,399

 
—

 
673,482

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
Development of oil and natural gas properties
—

 
(413,271
)
 
(3,076
)
 
—

 
(416,347
)
Purchases of other property and equipment
—

 
(26,305
)
 
(2,982
)
 
—

 
(29,287
)
Investment in affiliates
57,223

 
—

 
—

 
(57,223
)
 
—

Change in notes receivable with affiliate
(30,400
)
 
—

 
—

 
30,400

 
—

Proceeds from sale of properties and equipment and other
(2,168
)
 
49,580

 
11,302

 
—

 
58,714

Net cash provided by (used in) investing activities
24,655

 
(389,996
)
 
5,244

 
(26,823
)
 
(386,920
)

27
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from sale of units
233,427

 
—

 
—

 
—

 
233,427

Proceeds from borrowings
645,000

 
—

 
—

 
—

 
645,000

Repayments of debt
(804,698
)
 
—

 
(45,353
)
 
—

 
(850,051
)
Distributions to unitholders
(212,631
)
 
—

 
—

 
—

 
(212,631
)
Financing fees and offering costs
(8,646
)
 
—

 
(3
)
 
—

 
(8,649
)
Change in notes payable with affiliate
—

 
30,400

 
—

 
(30,400
)
 
—

Distributions to affiliate
—

 
—

 
(57,223
)
 
57,223

 
—

Excess tax benefit from unit-based compensation
(9,467
)
 
—

 
—

 
—

 
(9,467
)
Other
(3,008
)
 
(79,063
)
 
14

 
—

 
(82,057
)
Net cash used in financing activities
(160,023
)
 
(48,663
)
 
(102,565
)
 
26,823

 
(284,428
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(3
)
 
1,059

 
1,078

 
—

 
2,134

Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning
38

 
185

 
1,586

 
—

 
1,809

Ending
$
35

 
$
1,244

 
$
2,664

 
$
—

 
$
3,943


28
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2014
 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Cash flow from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(293,207
)
 
$
(229,897
)
 
$
158,706

 
$
71,191

 
$
(293,207
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation, depletion and amortization
—

 
395,852

 
146,384

 
—

 
542,236

Unit-based compensation expenses
—

 
32,583

 
—

 
—

 
32,583

Amortization and write-off of deferred financing fees
11,694

 
—

 
(5,492
)
 
—

 
6,202

Losses on sale of assets and other, net
—

 
3,506

 
—

 
—

 
3,506

Equity in losses from consolidated subsidiaries
71,191

 
—

 
—

 
(71,191
)
 
—

Deferred income taxes
—

 
3,557

 
(82
)
 
—

 
3,475

Derivatives activities:
 
 
 
 
 
 
 
 
 
Total losses
—

 
628,184

 
22,097

 
—

 
650,281

Cash settlements
—

 
(12,651
)
 
(10,472
)
 
—

 
(23,123
)
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
Increase in accounts receivable - trade, net
—

 
(27,597
)
 
(34,294
)
 
—

 
(61,891
)
(Increase) decrease in accounts receivable - affiliates
220,694

 
(9,964
)
 
—

 
(210,730
)
 
—

(Increase) decrease in other assets
(146
)
 
(8,287
)
 
1,486

 
—

 
(6,947
)
Increase in accounts payable and accrued expenses
2

 
111,675

 
1,905

 
—

 
113,582

Increase (decrease) in accounts payable and accrued expenses - affiliates
—

 
(220,694
)
 
9,964

 
210,730

 
—

Increase (decrease) in other liabilities
702

 
(26,291
)
 
(25,473
)
 
—

 
(51,062
)
Net cash provided by operating activities
10,930

 
639,976

 
264,729

 
—

 
915,635

 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of oil and natural gas properties and joint-venture funding
—

 
(25,891
)
 
—

 
—

 
(25,891
)
Development of oil and natural gas properties
—

 
(536,488
)
 
(269,129
)
 
—

 
(805,617
)
Purchases of other property and equipment
—

 
(25,786
)
 
(5,625
)
 
—

 
(31,411
)
Investment in affiliates
(178,463
)
 
—

 
—

 
178,463

 
—

Change in notes receivable with affiliate
(28,200
)
 
—

 
—

 
28,200

 
—

Proceeds from sale of properties and equipment and other
(12,983
)
 
1,253

 
—

 
—

 
(11,730
)
Net cash used in investing activities
(219,646
)
 
(586,912
)
 
(274,754
)
 
206,663

 
(874,649
)
 
 
 
 
 
 
 
 
 
 

29
LINN ENERGY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
Linn Energy, LLC
 
Guarantor Subsidiaries
 
Non-
Guarantor Subsidiary
 
Eliminations
 
Consolidated
 
(in thousands)
Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
1,095,000

 
—

 
—

 
—

 
1,095,000

Repayments of debt
(410,000
)
 
—

 
(206,124
)
 
—

 
(616,124
)
Distributions to unitholders
(480,583
)
 
—

 
—

 
—

 
(480,583
)
Financing fees and offering costs
(5,613
)
 
—

 
(10,866
)
 
—

 
(16,479
)
Change in notes payable with affiliate
—

 
28,200

 
—

 
(28,200
)
 
—

Capital contributions - affiliates
—

 
—

 
178,463

 
(178,463
)
 
—

Excess tax benefit from unit-based compensation
3,016

 
—

 
—

 
—

 
3,016

Other
6,876

 
(46,524
)
 
—

 
—

 
(39,648
)
Net cash provided by (used in) financing activities
208,696

 
(18,324
)
 
(38,527
)
 
(206,663
)
 
(54,818
)
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(20
)
 
34,740

 
(48,552
)
 
—

 
(13,832
)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
Beginning
52

 
1,078

 
51,041

 
—

 
52,171

Ending
$
32

 
$
35,818

 
$
2,489

 
$
—

 
$
38,339


30

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that reflect the Company’s future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside the Company’s control. The Company’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil, natural gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” below and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2014, and elsewhere in the Annual Report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
The following discussion and analysis should be read in conjunction with the financial statements and related notes included in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”
Executive Overview
LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. LINN Energy is an independent oil and natural gas company that began operations in March 2003 and completed its initial public offering in January 2006. The Company’s properties are located in eight operating regions in the United States (“U.S.”):
•
Rockies, which includes properties located in Wyoming (Green River, Washakie and Powder River basins), Utah (Uinta Basin), North Dakota (Williston Basin) and Colorado (Piceance Basin);
•
Hugoton Basin, which includes properties located in Kansas, the Oklahoma Panhandle and the Shallow Texas Panhandle;
•
California, which includes properties located in the San Joaquin Valley and Los Angeles basins;
•
Mid-Continent, which includes Oklahoma properties located in the Anadarko and Arkoma basins, as well as waterfloods in the Central Oklahoma Platform;
•
Permian Basin, which includes properties located in west Texas and southeast New Mexico;
•
TexLa, which includes properties located in east Texas and north Louisiana;
•
South Texas; and
•
Michigan/Illinois, which includes properties located in the Antrim Shale formation in north Michigan and oil properties in south Illinois.
Results for the three months ended June 30, 2015, included the following:
•
oil, natural gas and NGL sales of approximately $496 million compared to $968 million for the second quarter of 2014;
•
average daily production of approximately 1,219 MMcfe/d compared to 1,131 MMcfe/d for the second quarter of 2014;
•
net loss of approximately $379 million compared to $208 million for the second quarter of 2014;
•
capital expenditures, excluding acquisitions, of approximately $115 million compared to $407 million for the second quarter of 2014; and
•
148 wells drilled (all successful) compared to 268 wells drilled (all successful) for the second quarter of 2014.
Results for the six months ended June 30, 2015, included the following:
•
oil, natural gas and NGL sales of approximately $947 million compared to $1.9 billion for the six months ended June 30, 2014;
•
average daily production of approximately 1,210 MMcfe/d compared to 1,117 MMcfe/d for the six months ended June 30, 2014;
•
net loss of approximately $718 million compared to $293 million for the six months ended June 30, 2014;
•
net cash provided by operating activities of approximately $673 million compared to $916 million for the six months ended June 30, 2014;

31
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

•
capital expenditures, excluding acquisitions, of approximately $312 million compared to $816 million for the six months ended June 30, 2014; and
•
344 wells drilled (all successful) compared to 468 wells drilled (467 successful) for the six months ended June 30, 2014.
Reduction of 2015 Oil and Natural Gas Capital Budget and Distribution
The Company’s 2015 budget includes a 61% reduction in total capital expenditures to approximately $610 million, from approximately $1.6 billion spent in 2014, and includes approximately $530 million related to its oil and natural gas capital program. The 2015 budget contemplates significantly lower commodity prices as compared to 2014. In January 2015, the Company reduced its distribution to $1.25 per unit, from the previous level of $2.90 per unit, on an annualized basis. The reduction of the 2015 budget and the distribution was intended to solidify the Company’s financial position and allow it to regain a useful cost of capital.
In July 2015, the Company announced that management intends to recommend to the Board of Directors that it suspend payment of the Company’s distribution at the end of the third quarter of 2015.
Alliance with GSO Capital Partners
The Company signed definitive agreements dated June 30, 2015, with affiliates of private capital investor GSO Capital Partners LP (“GSO”), the credit platform of The Blackstone Group L.P., to fund oil and natural gas development (“DrillCo”). Funds managed by GSO and its affiliates have agreed to commit up to $500 million with 5-year availability to fund drilling programs on locations provided by LINN Energy. Subject to adjustments depending on asset characteristics and return expectations of the selected drilling plan, GSO will fund 100% of the costs associated with new wells drilled under the DrillCo agreement and is expected to receive an 85% working interest in these wells until it achieves a 15% internal rate of return on annual groupings of wells, while LINN Energy is expected to receive a 15% carried working interest during this period. Upon reaching the internal rate of return target, GSO’s interest will be reduced to 5%, while LINN Energy’s interest will increase to 95%.
Alliance with Quantum Energy Partners
The Company signed definitive agreements dated June 30, 2015, with affiliates of private capital investor Quantum Energy Partners (“Quantum”) to fund selected future oil and natural gas acquisitions and the development of those acquired assets (“AcqCo”). See the Company’s Current Report on Form 8-K filed on July 7, 2015, for additional details regarding this transaction.
Divestiture - Pending
On July 2, 2015, the Company, through certain of its wholly owned subsidiaries, entered into a definitive purchase and sale agreement to sell its remaining position in Howard County in the Permian Basin for a contract price of approximately $281 million, subject to closing adjustments. The sale is anticipated to close in the third quarter of 2015, subject to closing conditions. There can be no assurance that all of the conditions to closing will be satisfied. Upon completion of this sale, the Company will have divested all of its remaining capital intensive, high-decline rate properties.
Financing Activities
The spring 2015 semi-annual borrowing base redetermination of the Company’s Credit Facilities, as defined in Note 6, was completed in May 2015, and the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion as a result of lower commodity prices. Continued low or further declining commodity prices, reductions in the Company’s capital budget and the resulting reserve write-downs, along with the maturity schedule of the Company’s hedges, are expected to result in further decreases in both borrowing bases at the October 2015 redetermination and may also impact future redeterminations.
In connection with the reduction in Berry’s borrowing base, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a concurrent reduction of the borrowing base under the Berry Credit Facility or lender consent in connection with a redetermination of such borrowing base. The $250 million may

32
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

be used to satisfy obligations under the Berry Credit Facility or, subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future.
During the six months ended June 30, 2015, the Company, under its equity distribution agreement, sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). The Company used the net proceeds for general corporate purposes including the open market repurchases of a portion of its senior notes (see Note 6). At June 30, 2015, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ($11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
During the six months ended June 30, 2015, the Company repurchased on the open market approximately $184 million of its outstanding senior notes. In addition, in July 2015, the Company repurchased through privately negotiated transactions approximately $599 million of its outstanding senior notes. See Note 6 for additional details.
Commodity Derivatives
During the six months ended June 30, 2015, the Company entered into commodity derivative contracts consisting of natural gas basis swaps for May 2015 through December 2017, to hedge exposure to differentials in certain producing areas, and oil swaps for April 2015 through December 2015. In addition, the Company entered into natural gas basis swaps for May 2015 through December 2016 to hedge exposure to the differential in California, where it consumes natural gas in its heavy oil development operations.

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

Results of Operations
Three Months Ended June 30, 2015, Compared to Three Months Ended June 30, 2014
 
Three Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
Revenues and other:
 
 
 
 
 
Natural gas sales
$
149,908

 
$
205,050

 
$
(55,142
)
Oil sales
310,454

 
651,509

 
(341,055
)
NGL sales
36,057

 
111,291

 
(75,234
)
Total oil, natural gas and NGL sales
496,419

 
967,850

 
(471,431
)
Losses on oil and natural gas derivatives
(191,188
)
 
(408,788
)
 
217,600

Marketing and other revenues
16,597

 
37,889

 
(21,292
)
 
321,828

 
596,951

 
(275,123
)
Expenses:
 
 
 
 
 
Lease operating expenses
140,652

 
184,901

 
(44,249
)
Transportation expenses
55,795

 
44,854

 
10,941

Marketing expenses
9,159

 
23,274

 
(14,115
)
General and administrative expenses (1)
98,650

 
66,906

 
31,744

Exploration costs
564

 
1,551

 
(987
)
Depreciation, depletion and amortization
215,732

 
274,435

 
(58,703
)
Taxes, other than income taxes
58,034

 
68,531

 
(10,497
)
(Gains) losses on sale of assets and other, net
(17,996
)
 
5,467

 
(23,463
)
 
560,590

 
669,919

 
(109,329
)
Other income and (expenses)
(143,095
)
 
(136,849
)
 
(6,246
)
Loss before income taxes
(381,857
)
 
(209,817
)
 
(172,040
)
Income tax benefit
(2,730
)
 
(1,947
)
 
(783
)
Net loss
$
(379,127
)
 
$
(207,870
)
 
$
(171,257
)
(1)  
General and administrative expenses for the three months ended June 30, 2015, and June 30, 2014, include approximately $11 million and $9 million, respectively, of noncash unit-based compensation expenses.

34
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 
Three Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
Average daily production:
 
 
 
 
 
Natural gas (MMcf/d)
666

 
493

 
35
 %
Oil (MBbls/d)
64.8

 
74.5

 
(13
)%
NGL (MBbls/d)
27.4

 
31.8

 
(14
)%
Total (MMcfe/d)
1,219

 
1,131

 
8
 %
 
 
 
 
 
 
Weighted average prices: (1)
 
 
 
 
 
Natural gas (Mcf)
$
2.47

 
$
4.57

 
(46
)%
Oil (Bbl)
$
52.65

 
$
96.06

 
(45
)%
NGL (Bbl)
$
14.44

 
$
38.42

 
(62
)%
 
 
 
 
 
 
Average NYMEX prices:
 
 
 
 
 
Natural gas (MMBtu)
$
2.64

 
$
4.67

 
(43
)%
Oil (Bbl)
$
57.94

 
$
102.99

 
(44
)%
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
Lease operating expenses
$
1.27

 
$
1.80

 
(29
)%
Transportation expenses
$
0.50

 
$
0.44

 
14
 %
General and administrative expenses (2)
$
0.89

 
$
0.65

 
37
 %
Depreciation, depletion and amortization
$
1.94

 
$
2.67

 
(27
)%
Taxes, other than income taxes
$
0.52

 
$
0.67

 
(22
)%
(1)  
Does not include the effect of gains (losses) on derivatives.
(2)  
General and administrative expenses for the three months ended June 30, 2015, and June 30, 2014, include approximately $11 million and $9 million, respectively, of noncash unit-based compensation expenses.


35
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately $472 million or 49% to approximately $496 million for the three months ended June 30, 2015, from approximately $968 million for the three months ended June 30, 2014, due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Lower oil, natural gas and NGL prices resulted in a decrease in revenues of approximately $256 million, $127 million and $60 million, respectively.
Average daily production volumes increased to approximately 1,219 MMcfe/d for the three months ended June 30, 2015, from 1,131 MMcfe/d for the three months ended June 30, 2014. Higher natural gas production volumes resulted in an increase in revenues of approximately $72 million. Lower oil and NGL production volumes resulted in a decrease in revenues of approximately $85 million and $16 million, respectively.
The following table sets forth average daily production by region:
 
Three Months Ended
June 30,
 
 
 
 
 
2015
 
2014
 
Variance
Average daily production (MMcfe/d):
 
 
 
 
 
 
 
Rockies
445

 
278

 
167

 
60
 %
Hugoton Basin
255

 
151

 
104

 
69
 %
California
187

 
172

 
15

 
9
 %
Mid-Continent
100

 
297

 
(197
)
 
(66
)%
Permian Basin
85

 
169

 
(84
)
 
(50
)%
TexLa
80

 
31

 
49

 
156
 %
South Texas
36

 
—

 
36

 
—

Michigan/Illinois
31

 
33

 
(2
)
 
(5
)%
 
1,219

 
1,131

 
88

 
8
 %
The increase in average daily production volumes in the Rockies region primarily reflects the impact of the acquisition of properties from subsidiaries of Devon Energy Corporation (the “Devon Assets Acquisition”) on August 29, 2014, and development capital spending. The increase in average daily production volumes in the Hugoton Basin region primarily reflects the impact of the properties received in the exchange with Exxon Mobil Corporation and its affiliates, including its wholly owned subsidiary XTO Energy Inc. (“Exxon XTO”), on August 15, 2014, and the acquisition of properties from Pioneer Natural Resources Company (the “Pioneer Assets Acquisition”) on September 11, 2014. The increase in average daily production volumes in the California region primarily reflects the impact of the properties received in the exchange with Exxon Mobil Corporation (“ExxonMobil”) on November 21, 2014, and development capital spending. The decrease in average daily production volumes in the Mid-Continent region primarily reflects lower production volumes as a result of the properties sold to privately held institutional affiliates of EnerVest, Ltd. and its joint venture partner FourPoint Energy, LLC (the “Granite Wash Assets Sale”) on December 15, 2014, partially offset by the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Permian Basin region primarily reflects lower production volumes as a result of the properties relinquished in the two exchanges with Exxon XTO and ExxonMobil and the properties sold to Fleur de Lis Energy, LLC (the “Permian Basin Assets Sale”) on November 14, 2014. The increase in average daily production volumes in the TexLa region primarily reflects the impact of the Devon Assets Acquisition. Average daily production volumes in the South Texas region reflect the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Michigan/Illinois region primarily reflects a low-decline asset base and minimal development capital spending.

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

See below for details regarding capital expenditures for the periods presented:
 
Three Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
 
 
 
 
Oil and natural gas
$
99,430

 
$
389,313

Plant and pipeline
2,749

 
6,268

Other
12,614

 
10,932

Capital expenditures, excluding acquisitions
$
114,793

 
$
406,513

Gains (Losses) on Oil and Natural Gas Derivatives
Losses on oil and natural gas derivatives were approximately $191 million for the three months ended June 30, 2015, compared to approximately $409 million for the three months ended June 30, 2014, representing a variance of approximately $218 million. Losses on oil and natural gas derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivatives contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
During the three months ended June 30, 2015, the Company had commodity derivative contracts for approximately 78% of its natural gas production and 82% of its oil production. During the three months ended June 30, 2014, the Company had commodity derivative contracts for approximately 98% of its natural gas production and 92% of its oil production. The Company does not hedge the portion of natural gas production used to economically offset natural gas consumption related to its heavy oil development operations in California.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional information about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing and other revenues decreased by approximately $21 million or 56% to approximately $17 million for the three months ended June 30, 2015, from approximately $38 million for the three months ended June 30, 2014. The decrease was primarily due to lower revenues generated by the Jayhawk natural gas processing plant in Kansas, lower electricity sales revenues generated by the Company’s California cogeneration facilities and the impact of properties sold during the fourth quarter of 2014, partially offset by higher helium sales revenues in the Hugoton Basin.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $44 million or 24% to approximately $141 million for the three months ended June 30, 2015, from approximately $185 million for the three months ended June 30, 2014. The decrease was primarily due to lower costs as a result of the properties sold during the fourth quarter of 2014, a decrease in steam costs caused by a lower price of natural gas used in steam generation and cost savings initiatives, partially offset by costs associated with properties acquired during the third quarter of 2014. Lease operating expenses per Mcfe also decreased to $1.27 per Mcfe for the three months ended June 30, 2015, from $1.80 per Mcfe for the three months ended June 30, 2014.

37
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Transportation Expenses
Transportation expenses increased by approximately $11 million or 24% to approximately $56 million for the three months ended June 30, 2015, from approximately $45 million for the three months ended June 30, 2014. The increase was primarily due to costs associated with properties acquired during the third quarter of 2014 partially offset by lower costs as a result of the properties sold during the fourth quarter of 2014. Transportation expenses per Mcfe also increased to $0.50 per Mcfe for the three months ended June 30, 2015, from $0.44 per Mcfe for the three months ended June 30, 2014.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $14 million or 61% to approximately $9 million for the three months ended June 30, 2015, from approximately $23 million for the three months ended June 30, 2014. The decrease was primarily due to lower expenses associated with the Jayhawk natural gas processing plant in Kansas and lower electricity generation expenses incurred by the Company’s California cogeneration facilities.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses increased by approximately $32 million or 47% to approximately $99 million for the three months ended June 30, 2015, from approximately $67 million for the three months ended June 30, 2014. The increase was primarily due to higher advisory fees related to the alliance agreements and higher salaries and benefits related expenses, principally driven by severance costs. General and administrative expenses per Mcfe also increased to $0.89 per Mcfe for the three months ended June 30, 2015, from $0.65 per Mcfe for the three months ended June 30, 2014.
Exploration Costs
Exploration costs decreased by approximately $1 million or 64% to approximately $564,000 for the three months ended June 30, 2015, from approximately $2 million for the three months ended June 30, 2014. The decrease was primarily due to lower leasehold impairment expenses on unproved properties.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately $58 million or 21% to approximately $216 million for the three months ended June 30, 2015, from approximately $274 million for the three months ended June 30, 2014. The decrease was primarily due to the 2014 divestitures of properties with higher rates compared to the rates of properties acquired in 2014, as well as lower rates as a result of the impairments recorded in the prior year and the first quarter of 2015, partially offset by higher total production volumes. Depreciation, depletion and amortization per Mcfe also decreased to $1.94 per Mcfe for the three months ended June 30, 2015, from $2.67 per Mcfe for the three months ended June 30, 2014.
Taxes, Other Than Income Taxes
 
Three Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
 
 
 
 
 
 
Severance taxes
$
20,676

 
$
35,765

 
$
(15,089
)
Ad valorem taxes
31,780

 
28,046

 
3,734

California carbon allowances
5,548

 
4,607

 
941

Other
30

 
113

 
(83
)
 
$
58,034

 
$
68,531

 
$
(10,497
)
Taxes, other than income taxes decreased by approximately $10 million or 15% for the three months ended June 30, 2015, compared to the three months ended June 30, 2014. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased primarily due to acquisitions completed during the third quarter of 2014. California carbon allowances increased primarily due to an

38
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

increase in estimated emissions for which credits are needed, caused by production increases and higher costs for acquired allowances.
Other Income and (Expenses)
 
Three Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
 
 
 
 
 
 
Interest expense, net of amounts capitalized
$
(146,100
)
 
$
(134,300
)
 
$
(11,800
)
Gain on extinguishment of debt
9,151

 
—

 
9,151

Other, net
(6,146
)
 
(2,549
)
 
(3,597
)
 
$
(143,095
)
 
$
(136,849
)
 
$
(6,246
)
Other income and (expenses) increased by approximately $6 million for the three months ended June 30, 2015, compared to the three months ended June 30, 2014. Interest expense increased primarily due to higher outstanding debt during the period and higher amortization of financing fees and expenses associated with the senior notes issued in September 2014 and amendments made to the Company’s Credit Facilities during 2014. For the three months ended June 30, 2015, the Company recorded a gain on extinguishment of debt of approximately $9 million as a result of the repurchases of a portion of its senior notes. See “Debt” under “Liquidity and Capital Resources” below for additional details. Other expenses increased primarily due to write-offs of deferred financing fees related to the Credit Facilities during 2015.
Income Tax Expense (Benefit)
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized an income tax benefit of approximately $3 million and $2 million for the three months ended June 30, 2015, and June 30, 2014, respectively. The income tax benefit increased primarily due to lower income from the Company’s taxable subsidiaries during the three months ended June 30, 2015, compared to the same period in 2014.
Net Income (Loss)
Net loss increased by approximately $171 million or 82% to approximately $379 million for the three months ended June 30, 2015, from approximately $208 million for the three months ended June 30, 2014. The increase was primarily due to lower production revenues, partially offset by decreased losses on oil and natural gas derivatives and lower expenses. See discussions above for explanations of variances.

39
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations
Six Months Ended June 30, 2015, Compared to Six Months Ended June 30, 2014
 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
Revenues and other:
 
 
 
 
 
Natural gas sales
$
322,004

 
$
431,739

 
$
(109,735
)
Oil sales
545,691

 
1,247,154

 
(701,463
)
NGL sales
79,293

 
227,834

 
(148,541
)
Total oil, natural gas and NGL sales
946,988

 
1,906,727

 
(959,739
)
Gains (losses) on oil and natural gas derivatives
233,593

 
(650,281
)
 
883,874

Marketing and other revenues
57,794

 
74,092

 
(16,298
)
 
1,238,375

 
1,330,538

 
(92,163
)
Expenses:
 
 
 
 
 
Lease operating expenses
313,673

 
378,934

 
(65,261
)
Transportation expenses
109,335

 
90,484

 
18,851

Marketing expenses
38,000

 
44,346

 
(6,346
)
General and administrative expenses (1)
177,618

 
146,134

 
31,484

Exploration costs
960

 
2,642

 
(1,682
)
Depreciation, depletion and amortization
430,746

 
542,236

 
(111,490
)
Impairment of long-lived assets
532,617

 
—

 
532,617

Taxes, other than income taxes
112,079

 
134,244

 
(22,165
)
(Gains) losses on sale of assets and other, net
(30,283
)
 
8,053

 
(38,336
)
 
1,684,745

 
1,347,073

 
337,672

Other income and (expenses)
(281,774
)
 
(272,965
)
 
(8,809
)
Loss before income taxes
(728,144
)
 
(289,500
)
 
(438,644
)
Income tax expense (benefit)
(9,857
)
 
3,707

 
(13,564
)
Net loss
$
(718,287
)
 
$
(293,207
)
 
$
(425,080
)
(1)  
General and administrative expenses for both the six months ended June 30, 2015, and June 30, 2014, include approximately $28 million of noncash unit-based compensation expenses.

40
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
Average daily production:
 
 
 
 
 
Natural gas (MMcf/d)
659

 
487

 
35
 %
Oil (MBbls/d)
63.8

 
72.9

 
(12
)%
NGL (MBbls/d)
28.1

 
32.2

 
(13
)%
Total (MMcfe/d)
1,210

 
1,117

 
8
 %
 
 
 
 
 
 
Weighted average prices: (1)
 
 
 
 
 
Natural gas (Mcf)
$
2.70

 
$
4.90

 
(45
)%
Oil (Bbl)
$
47.27

 
$
94.55

 
(50
)%
NGL (Bbl)
$
15.58

 
$
39.14

 
(60
)%
 
 
 
 
 
 
Average NYMEX prices:
 
 
 
 
 
Natural gas (MMBtu)
$
2.81

 
$
4.80

 
(41
)%
Oil (Bbl)
$
53.29

 
$
100.84

 
(47
)%
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
Lease operating expenses
$
1.43

 
$
1.87

 
(24
)%
Transportation expenses
$
0.50

 
$
0.45

 
11
 %
General and administrative expenses (2)
$
0.81

 
$
0.72

 
13
 %
Depreciation, depletion and amortization
$
1.97

 
$
2.68

 
(26
)%
Taxes, other than income taxes
$
0.51

 
$
0.66

 
(23
)%
(1)  
Does not include the effect of gains (losses) on derivatives.
(2)  
General and administrative expenses for both the six months ended June 30, 2015, and June 30, 2014, include approximately $28 million of noncash unit-based compensation expenses.

41
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales decreased by approximately $960 million or 50% to approximately $947 million for the six months ended June 30, 2015, from approximately $1.9 billion for the six months ended June 30, 2014, due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Lower oil, natural gas and NGL prices resulted in a decrease in revenues of approximately $545 million, $262 million and $120 million, respectively.
Average daily production volumes increased to approximately 1,210 MMcfe/d for the six months ended June 30, 2015, from 1,117 MMcfe/d for the six months ended June 30, 2014. Higher natural gas production volumes resulted in an increase in revenues of approximately $152 million. Lower oil and NGL production volumes resulted in a decrease in revenues of approximately $156 million and $29 million, respectively.
The following table sets forth average daily production by region:
 
Six Months Ended
June 30,
 
 
 
 
 
2015
 
2014
 
Variance
Average daily production (MMcfe/d):
 
 
 
 
 
 
 
Rockies
434

 
275

 
159

 
58
 %
Hugoton Basin
251

 
147

 
104

 
70
 %
California
189

 
164

 
25

 
15
 %
Mid-Continent
101

 
300

 
(199
)
 
(66
)%
Permian Basin
90

 
167

 
(77
)
 
(46
)%
TexLa
79

 
31

 
48

 
152
 %
South Texas
35

 
—

 
35

 
—

Michigan/Illinois
31

 
33

 
(2
)
 
(6
)%
 
1,210

 
1,117

 
93

 
8
 %
The increase in average daily production volumes in the Rockies region primarily reflects the impact of the Devon Assets Acquisition on August 29, 2014, and development capital spending. The increase in average daily production volumes in the Hugoton Basin region primarily reflects the impact of the properties received in the exchange with Exxon XTO on August 15, 2014, and the Pioneer Assets Acquisition on September 11, 2014. The increase in average daily production volumes in the California region primarily reflects the impact of the properties received in the exchange with ExxonMobil on November 21, 2014, and development capital spending. The decrease in average daily production volumes in the Mid-Continent region primarily reflects lower production volumes as a result of the Granite Wash Assets Sale on December 15, 2014, partially offset by the impact of the Devon Assets Acquisition.  The decrease in average daily production volumes in the Permian Basin region primarily reflects lower production volumes as a result of the properties relinquished in the two exchanges with Exxon XTO and ExxonMobil and the properties sold in the Permian Basin Assets Sale on November 14, 2014. The increase in average daily production volumes in the TexLa region primarily reflects the impact of the Devon Assets Acquisition. Average daily production volumes in the South Texas region reflect the impact of the Devon Assets Acquisition. The decrease in average daily production volumes in the Michigan/Illinois region primarily reflects a low-decline asset base and minimal development capital spending.

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Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

See below for details regarding capital expenditures for the periods presented:
 
Six Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
 
 
 
 
Oil and natural gas
$
282,403

 
$
786,513

Plant and pipeline
5,002

 
11,663

Other
24,175

 
17,777

Capital expenditures, excluding acquisitions
$
311,580

 
$
815,953

Gains (Losses) on Oil and Natural Gas Derivatives
Gains on oil and natural gas derivatives were approximately $234 million for the six months ended June 30, 2015, compared to losses of approximately $650 million for the six months ended June 30, 2014, representing a variance of approximately $884 million. Gains on oil and natural gas derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivatives contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.
During the six months ended June 30, 2015, the Company had commodity derivative contracts for approximately 79% of its natural gas production and 76% of its oil production. During the six months ended June 30, 2014, the Company had commodity derivative contracts for approximately 100% of its natural gas production and 94% of its oil production. The Company does not hedge the portion of natural gas production used to economically offset natural gas consumption related to its heavy oil development operations in California.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional information about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing and other revenues decreased by approximately $16 million or 22% to approximately $58 million for the six months ended June 30, 2015, from approximately $74 million for the six months ended June 30, 2014. The decrease was primarily due to lower electricity sales revenues generated by the Company’s California cogeneration facilities, lower revenues generated by the Jayhawk natural gas processing plant in Kansas and the impact of properties sold during the fourth quarter of 2014, partially offset by higher helium sales in the Hugoton Basin.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $65 million or 17% to approximately $314 million for the six months ended June 30, 2015, from approximately $379 million for the six months ended June 30, 2014. The decrease was primarily due to lower costs as a result of the properties sold during the fourth quarter of 2014, a decrease in steam costs caused by a lower price of natural gas used in steam generation and cost savings initiatives, partially offset by costs associated with properties acquired during the third quarter of 2014. Lease operating expenses per Mcfe also decreased to $1.43 per Mcfe for the six months ended June 30, 2015, from $1.87 per Mcfe for the six months ended June 30, 2014.

43
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Transportation Expenses
Transportation expenses increased by approximately $19 million or 21% to approximately $109 million for the six months ended June 30, 2015, from approximately $90 million for the six months ended June 30, 2014. The increase was primarily due to costs associated with properties acquired during the third quarter of 2014 partially offset by lower costs as a result of the properties sold during the fourth quarter of 2014. Transportation expenses per Mcfe also increased to $0.50 per Mcfe for the six months ended June 30, 2015, from $0.45 per Mcfe for the six months ended June 30, 2014.
Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $6 million or 14% to approximately $38 million for the six months ended June 30, 2015, from approximately $44 million for the six months ended June 30, 2014. The decrease was primarily due to lower electricity generation expenses incurred by the Company’s California cogeneration facilities and lower expenses associated with the Jayhawk natural gas processing plant in Kansas.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses increased by approximately $32 million or 22% to approximately $178 million for the six months ended June 30, 2015, from approximately $146 million for the six months ended June 30, 2014. The increase was primarily due to higher advisory fees related to the alliance agreements and higher salaries and benefits related expenses, principally driven by severance costs. General and administrative expenses per Mcfe also increased to $0.81 per Mcfe for the six months ended June 30, 2015, from $0.72 per Mcfe for the six months ended June 30, 2014.
Exploration Costs
Exploration costs decreased by approximately $2 million or 64% to approximately $1 million for the six months ended June 30, 2015, from approximately $3 million for the six months ended June 30, 2014. The decrease was primarily due to lower leasehold impairment expenses on unproved properties.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased by approximately $111 million or 21% to approximately $431 million for the six months ended June 30, 2015, from approximately $542 million for the six months ended June 30, 2014. The decrease was primarily due to the 2014 divestitures of properties with higher rates compared to the rates of properties acquired in 2014, as well as lower rates as a result of the impairments recorded in the prior year and the first quarter of 2015, partially offset by higher total production volumes. Depreciation, depletion and amortization per Mcfe also decreased to $1.97 per Mcfe for the six months ended June 30, 2015, from $2.68 per Mcfe for the six months ended June 30, 2014.
Impairment of Long-Lived Assets
The Company recorded no impairment charges for the three months ended June 30, 2015, or the six months ended June 30, 2014. During the first quarter of 2015, the Company recorded noncash impairment charges, before and after tax, of approximately $533 million associated with proved oil and natural gas properties. The impairment was due to a decline in commodity prices. Following are the impairment charges recorded:
•
Shallow Texas Panhandle Brown Dolomite formation - $278 million;
•
California region - $207 million;
•
TexLa region - $33 million;
•
South Texas region - $9 million; and
•
Mid-Continent region - $6 million.

44
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Taxes, Other Than Income Taxes
 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
 
 
 
 
 
 
Severance taxes
$
34,566

 
$
67,881

 
$
(33,315
)
Ad valorem taxes
65,896

 
57,122

 
8,774

California carbon allowances
11,699

 
9,126

 
2,573

Other
(82
)
 
115

 
(197
)
 
$
112,079

 
$
134,244

 
$
(22,165
)
Taxes, other than income taxes decreased by approximately $22 million or 17% for the six months ended June 30, 2015, compared to the six months ended June 30, 2014. Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower oil, natural gas and NGL prices partially offset by higher production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased primarily due to acquisitions completed during the third quarter of 2014. California carbon allowances increased primarily due to an increase in estimated emissions for which credits are needed, caused by production increases and higher costs for acquired allowances.
Other Income and (Expenses)
 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
 
 
 
 
 
 
Interest expense, net of amounts capitalized
$
(289,201
)
 
$
(268,113
)
 
$
(21,088
)
Gain on extinguishment of debt
15,786

 
—

 
15,786

Other, net
(8,359
)
 
(4,852
)
 
(3,507
)
 
$
(281,774
)
 
$
(272,965
)
 
$
(8,809
)
Other income and (expenses) increased by approximately $9 million for the six months ended June 30, 2015, compared to the six months ended June 30, 2014. Interest expense increased primarily due to higher outstanding debt during the period and higher amortization of financing fees and expenses associated with the senior notes issued in September 2014 and amendments made to the Company’s Credit Facilities during 2014. For the six months ended June 30, 2015, the Company recorded a gain on extinguishment of debt of approximately $16 million as a result of the repurchases of a portion of its senior notes. See “Debt” under “Liquidity and Capital Resources” below for additional details. Other expenses increased primarily due to write-offs of deferred financing fees related to the Credit Facilities during 2015.
Income Tax Expense (Benefit)
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized an income tax benefit of approximately $10 million for the six months ended June 30, 2015, compared to income tax expense of approximately $4 million for the six months ended June 30, 2014. The income tax benefit was primarily due to lower income from the Company’s taxable subsidiaries during the six months ended June 30, 2015, compared to the same period in 2014.

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

Net Income (Loss)
Net loss increased by approximately $425 million or 145% to approximately $718 million for the six months ended June 30, 2015, from approximately $293 million for the six months ended June 30, 2014. The increase was primarily due to lower production revenues and higher impairment charges, partially offset by higher gains on oil and natural gas derivatives and lower expenses. See discussions above for explanations of variances.
Liquidity and Capital Resources
The Company utilizes funds from debt and equity offerings, borrowings under its Credit Facilities and net cash provided by operating activities for capital resources and liquidity. To date, the primary use of capital has been for acquisitions and the development of oil and natural gas properties. For the six months ended June 30, 2015, the Company’s total capital expenditures, excluding acquisitions, were approximately $312 million. For 2015, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $610 million, including approximately $530 million related to its oil and natural gas capital program and approximately $40 million related to its plant and pipeline capital. This estimate reflects amounts for the development of properties associated with acquisitions (see Note 2), is under continuous review and subject to ongoing adjustments. The Company expects to fund the capital expenditures primarily with net cash provided by operating activities. At June 30, 2015, there was approximately $1.5 billion of available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility, each as defined in Note 6.
The spring 2015 semi-annual borrowing base redetermination of the Company’s Credit Facilities was completed in May 2015, and the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion as a result of lower commodity prices. In connection with the reduction in Berry’s borrowing base, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders. As directed by LINN Energy, the $250 million was deposited on Berry’s behalf in a security account with the administrative agent subject to a security control agreement. Berry’s ability to withdraw funds from this account is subject to a concurrent reduction of the borrowing base under the Berry Credit Facility or lender consent in connection with a redetermination of such borrowing base. The $250 million may be used to satisfy obligations under the Berry Credit Facility or, subject to restrictions in the indentures governing Berry’s senior notes, may be returned to LINN Energy in the future.
As the Company pursues growth, it continually monitors the capital resources available to meet future financial obligations and planned capital expenditures. The Company’s future success in growing reserves and production volumes will be highly dependent on the capital resources available and its success in drilling for or acquiring additional reserves. The Company actively reviews acquisition opportunities on an ongoing basis. If the Company were to make significant additional acquisitions for cash, it would need to borrow additional amounts under its Credit Facilities, if available, or obtain additional debt or equity financing. The Company’s Credit Facilities and indentures governing its senior notes impose certain restrictions on the Company’s ability to obtain additional debt financing. Based upon current expectations, the Company believes its liquidity and capital resources will be sufficient to conduct its business and operations.
Statements of Cash Flows
The following is a comparative cash flow summary:
 
Six Months Ended
June 30,
 
 
 
2015
 
2014
 
Variance
 
(in thousands)
Net cash:
 
 
 
 
 
Provided by operating activities
$
673,482

 
$
915,635

 
$
(242,153
)
Used in investing activities
(386,920
)
 
(874,649
)
 
487,729

Used in financing activities
(284,428
)
 
(54,818
)
 
(229,610
)
Net increase (decrease) in cash and cash equivalents
$
2,134

 
$
(13,832
)
 
$
15,966


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

Operating Activities
Cash provided by operating activities for the six months ended June 30, 2015, was approximately $673 million, compared to approximately $916 million for the six months ended June 30, 2014. The decrease was primarily due to lower production related revenues principally due to lower commodity prices partially offset by higher cash settlements on derivatives.
Investing Activities
The following provides a comparative summary of cash flow from investing activities:
 
Six Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
Cash flow from investing activities:
 
 
 
Acquisition of oil and natural gas properties and joint-venture funding
$
—

 
$
(25,891
)
Capital expenditures
(445,634
)
 
(837,028
)
Proceeds from sale of properties and equipment and other
58,714

 
(11,730
)
 
$
(386,920
)
 
$
(874,649
)
The primary use of cash in investing activities is for capital spending, including acquisitions and the development of the Company’s oil and natural gas properties. Capital expenditures decreased primarily due to lower spending on development activities throughout the Company’s various operating regions as a result of the Company’s reduced 2015 capital budget.
Financing Activities
Cash used in financing activities for the six months ended June 30, 2015, was approximately $284 million, compared to approximately $55 million for the six months ended June 30, 2014. The decrease in financing cash flow needs was primarily attributable to decreased capital expenditures during the six months ended June 30, 2015, as compared to the six months ended June 30, 2014. The following provides a comparative summary of proceeds from borrowings and repayments of debt:
 
Six Months Ended
June 30,
 
2015
 
2014
 
(in thousands)
Proceeds from borrowings:
 
 
 
LINN Credit Facility
$
645,000

 
$
1,095,000

Repayments of debt:
 
 
 
LINN Credit Facility
$
(685,000
)
 
$
(410,000
)
Senior notes
(165,051
)
 
(206,124
)
 
$
(850,051
)
 
$
(616,124
)
In addition, in May 2015, LINN Energy borrowed $250 million under the LINN Credit Facility, which it contributed to Berry to post as restricted cash with Berry’s lenders (see Note 6).

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

Debt
The following summarizes the Company’s outstanding debt:
 
June 30,
2015
 
December 31, 2014
 
(in thousands, except percentages)
 
 
 
 
LINN credit facility
$
2,005,000

 
$
1,795,000

Berry credit facility
1,173,175

 
1,173,175

Term loan
500,000

 
500,000

6.50% senior notes due May 2019
1,200,000

 
1,200,000

6.25% senior notes due November 2019
1,800,000

 
1,800,000

8.625% senior notes due April 2020
1,173,619

 
1,300,000

6.75% Berry senior notes due November 2020
275,177

 
299,970

7.75% senior notes due February 2021
994,000

 
1,000,000

6.50% senior notes due September 2021
650,000

 
650,000

6.375% Berry senior notes due September 2022
572,700

 
599,163

Net unamortized discounts and premiums
(19,124
)
 
(21,499
)
Total debt, net
$
10,324,547

 
$
10,295,809

During the six months ended June 30, 2015, the Company repurchased on the open market approximately $184 million of its outstanding senior notes as follows:
•
8.625% senior notes due April 2020 - $127 million;
•
6.75% Berry senior notes due November 2020 - $25 million;
•
7.75% senior notes due February 2021 - $6 million; and
•
6.375% Berry senior notes due September 2022 - $26 million.
At June 30, 2015, there was approximately $1.5 billion of available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility. For additional information related to the Company’s outstanding debt, see Note 6. The Company plans to file Berry’s stand-alone financial statements with the Securities and Exchange Commission at a later date.

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

Financial Covenants
The Credit Facilities contain requirements and financial covenants, among others, to maintain: 1) a ratio of EBITDA to Interest Expense (as each term is defined in the LINN Credit Facility) and Adjusted EBITDAX to Interest Expense (as each term is defined in the Berry Credit Facility) (“Interest Coverage Ratio”) for the preceding four quarters of greater than 2.5 to 1.0, and 2) a ratio of adjusted current assets to adjusted current liabilities (as described in the LINN Credit Facility) and Current Assets to Current Liabilities (as each term is defined in the Berry Credit Facility) (“Current Ratio”) as of the last day of any fiscal quarter of greater than 1.0 to 1.0. The Interest Coverage Ratio is intended as a measure of the Company’s ability to make interest payments on its outstanding indebtedness and the Current Ratio is intended as a measure of the Company’s solvency. The Company is required to demonstrate compliance with each of these ratios on a quarterly basis. The following represents the calculations of the Interest Coverage Ratio and the Current Ratio as presented to the lenders under the Credit Facilities:
 
At or for the Quarter Ended
 
 
 
September 30, 2014
 
December 31, 2014
 
March 31, 2015
 
June 30,
2015
 
Twelve Months Ended June 30, 2015
LINN Credit Facility:
 
 
 
 
 
 
 
 
 
Interest Coverage Ratio
3.4

 
2.7

 
2.9

 
3.0

 
3.0

Current Ratio
3.7

 
2.6

 
3.0

 
2.9

 
2.9

Berry Credit Facility:
 
 
 
 
 
 
 
 
 
Interest Coverage Ratio
9.4

 
6.7

 
1.9

 
2.7

 
5.2

Current Ratio (1)
2.0

 
0.6

 
0.6

 
0.5

 
0.5

Current Ratio (consolidated) (1)
3.3

 
2.9

 
3.2

 
2.9

 
2.9

(1)  
The Berry Credit Facility allows Berry to demonstrate its compliance with the Current Ratio financial covenant on a consolidated basis with LINN Energy for up to three quarters of each calendar year.
The Company has included disclosure of the Interest Coverage Ratio for the twelve months ended June 30, 2015, and the Current Ratio as of June 30, 2015, to demonstrate its compliance for the three months ended June 30, 2015, as well as the Interest Coverage Ratio for each of the preceding four quarters on an individual basis (rather than on a last twelve months basis) and the Current Ratio as of the end of each of the preceding four quarters to provide investors with trend information about the Company’s ongoing compliance with these financial covenants. If the Company fails to demonstrate compliance with either or both of the Interest Coverage Ratio or the Current Ratio as of the end of the quarter and such failure continues beyond applicable cure periods, an event of default would occur and the Company would be unable to make additional borrowings and outstanding indebtedness may be accelerated. The Company depends, in part, on its Credit Facilities for future capital needs. In addition, the Company has drawn on the LINN Credit Facility to fund or partially fund cash distribution payments. Absent such borrowings, the Company would have at times experienced a shortfall in cash available to pay the declared cash distribution amount. For additional information, see “Distribution Practices” below.
The Company is in compliance with all financial and other covenants of its Credit Facilities and senior notes.
Counterparty Credit Risk
The Company accounts for its commodity derivatives at fair value. The Company’s counterparties are current participants or affiliates of participants in its Credit Facilities or were participants or affiliates of participants in its Credit Facilities at the time it originally entered into the derivatives. The LINN Credit Facility is secured by LINN Energy’s oil, natural gas and NGL reserves and the Berry Credit Facility is secured by Berry’s oil, natural gas and NGL reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.

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

At-the-Market Offering Program
The Company’s Board of Directors has authorized the sale of up to $500 million of units under an at-the-market offering program. Sales of units, if any, will be made under an equity distribution agreement by means of ordinary brokers’ transactions, through the facilities of the NASDAQ Global Select Market, any other national securities exchange or facility thereof, a trading facility of a national securities association or an alternate trading system, to or through a market maker or directly on or through an electronic communication network, a “dark pool” or any similar market venue, at market prices, in block transactions, or as otherwise agreed with a sales agent. The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
During the six months ended June 30, 2015, the Company, under its equity distribution agreement, sold 3,621,983 units representing limited liability company interests at an average unit price of $12.37 for net proceeds of approximately $44 million (net of approximately $448,000 in commissions). In connection with the issuance and sale of these units, the Company also incurred professional services expenses of approximately $459,000. The Company used the net proceeds for general corporate purposes including the open market repurchases of a portion of its senior notes (see Note 6). At June 30, 2015, units totaling approximately $455 million in aggregate offering price remained available to be sold under the agreement.
Public Offering of Units
In May 2015, the Company sold 16,000,000 units representing limited liability company interests in an underwritten public offering at $11.79 per unit ($11.32 per unit, net of underwriting discount) for net proceeds of approximately $181 million (after underwriting discount and offering costs of approximately $8 million). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under the LINN Credit Facility, which included debt initially incurred to fund the open market repurchases of a portion of its senior notes during 2015 (see Note 6).
Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a distribution of available cash, which includes cash on hand plus borrowings less any reserves established by the Company’s Board of Directors to provide for the proper conduct of the Company’s business (including reserves for future capital expenditures, including drilling, acquisitions and anticipated future credit needs) or to fund distributions over the next four quarters. The following provides a summary of distributions paid by the Company during the six months ended June 30, 2015:
Date Paid
 
Distributions
Per Unit
 
Total
Distributions
 
 
 
 
(in millions)
 
 
 
 
 
June 2015
 
$
0.1042

 
$
37

May 2015
 
$
0.1042

 
$
35

April 2015
 
$
0.1042

 
$
35

March 2015
 
$
0.1042

 
$
35

February 2015
 
$
0.1042

 
$
35

January 2015
 
$
0.1042

 
$
35

On July 1, 2015, the Company’s Board of Directors declared a cash distribution of $0.3125 per unit with respect to the second quarter of 2015, to be paid in three equal monthly installments of $0.1042 per unit. The first monthly distribution with respect to the second quarter of 2015, totaling approximately $37 million, was paid on July 16, 2015, to unitholders of record as of the close of business on July 13, 2015.
In July 2015, the Company announced that management intends to recommend to the Board of Directors that it suspend payment of the Company’s distribution at the end of the third quarter of 2015.
Off-Balance Sheet Arrangements
The Company does not currently have any off-balance sheet arrangements.

50
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Contingencies
See Part II. Item 1. “Legal Proceedings” for information regarding legal proceedings that the Company is party to and any contingencies related to these legal proceedings.
Commitments and Contractual Obligations
The Company has contractual obligations for long-term debt, operating leases and other long-term liabilities that were summarized in the table of contractual obligations in the 2014 Annual Report on Form 10-K. With the exception of the open market repurchases of approximately $184 million of its outstanding senior notes, there have been no significant changes to the Company’s contractual obligations since December 31, 2014. See Note 6 for additional information about the Company’s debt instruments.
Distribution Practices
The Company’s Board of Directors determines the appropriate level of distributions on a periodic basis in accordance with the provisions of the Company’s limited liability company agreement. Management considers the timing and size of planned capital expenditures and long-term views about expected results in determining the amount of its distributions. Capital spending and resulting production and net cash provided by operating activities do not typically occur evenly throughout the year due to a variety of factors which are difficult to predict, including rig availability, weather, well performance, the timing of completions and the commodity price environment. Consistent with practices common to publicly traded partnerships, the Company’s Board of Directors historically has not varied the distribution it declares from period to period based on uneven net cash provided by operating activities. The Company’s Board of Directors reviews historical financial results and forecasts for future periods, including development activities, as well as considers the impact of significant acquisitions in making a determination to increase, decrease or maintain the current level of distribution. If shortfalls are sustained over time and forecasts demonstrate expectations for continued future shortfalls, the Company’s Board of Directors may determine to reduce, suspend or discontinue paying distributions.
In January 2015, the Company’s Board of Directors approved a reduction of the Company’s distribution to $1.25 per unit, from the previous level of $2.90 per unit, on an annualized basis. The reduction of the distribution was intended to solidify the Company’s financial position and allow it to regain a useful cost of capital, and was primarily driven by the contemplation of significantly lower commodity prices and a reduced capital budget in 2015 as compared to 2014.
In July 2015, the Company announced that management intends to recommend to the Board of Directors that it suspend payment of the Company’s distribution at the end of the third quarter of 2015 and reserve the approximately $450 million in cash from annualized distributions. Subject to declaration by the Board of Directors of the record and payment dates, the Company expects to pay the monthly distributions for August 2015 and September 2015. Management and the Board of Directors will continue to evaluate, on a quarterly basis, the appropriate level of cash reserves in determining a future distribution.
For 2015, the Company’s Board of Directors approved an oil and natural gas capital budget of approximately $530 million. At this level of capital investment, the Company forecasts a modest decline in production during 2015 while it focuses only on projects that generate an acceptable rate of return in the current low commodity price environment, and plans to balance cash flow and spending. As a result, for 2015, the Company intends to fund interest expense, its total oil and natural gas development costs and distributions to unitholders paid through September 2015 from net cash provided by operating activities, and will present “excess (shortfall) of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors” after deducting total oil and natural gas development costs. Previously, the Company intended to fund interest expense, a portion of its oil and natural gas development costs and distributions to unitholders from net cash provided by operating activities and presented “excess (shortfall) of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors” after deducting only a portion of oil and natural gas development costs.
The Company funds acquisitions and premiums paid for derivatives, if any, primarily with proceeds from debt or equity offerings, borrowings under the LINN Credit Facility or other external sources of funding. Although it is the Company’s

51
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

practice to acquire or modify derivative instruments with external sources of funding, any cash settlements on derivatives are reported as net cash provided by operating activities and may be used to fund distributions.
See below for details regarding the discretionary adjustments considered by the Company’s Board of Directors in assessing the appropriate distribution amount for each period, as well as the extent to which sources of funding have been sufficient for the periods presented:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
298,779

 
$
481,153

 
$
673,482

 
$
915,635

Distributions to unitholders
(107,816
)
 
(240,510
)
 
(212,631
)
 
(480,583
)
Excess of net cash provided by operating activities after distributions to unitholders
190,963

 
240,643

 
460,851

 
435,052

Discretionary adjustments considered by the Board of Directors:
 
 
 
 
 
 
 
Discretionary reductions for a portion of oil and natural gas development costs (1)
NM*

 
(199,448
)
 
NM*

 
(392,868
)
Development of oil and natural gas properties (2)
(99,430
)
 
NM*

 
(282,403
)
 
NM*

Cash recoveries of bankruptcy claim (3)
(2,877
)
 
(2,913
)
 
(2,877
)
 
(2,913
)
Cash received (paid) for acquisitions or divestitures - revenues less operating expenses  (4)
—

 
—

 
(2,712
)
 
—

Provision for legal matters (5)
—

 
2,400

 
(1,000
)
 
1,598

Changes in operating assets and liabilities and other, net  (6)
(17,335
)
 
(8,626
)
 
(137,672
)
 
(11,806
)
Excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors, including a portion of oil and natural gas development costs  (7)
NM*

 
$
32,056

 
NM*

 
$
29,063

Excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments considered by the Board of Directors, including total development of oil and natural gas properties  (7)
$
71,321

 
NM*

 
$
34,187

 
NM*

*  
Not meaningful due to the 2015 change in presentation.
(1)  
Represent discretionary reductions for a portion of oil and natural gas development costs, an estimated component of total development costs. The Board of Directors establishes the discretionary reductions with the objective of replacing proved developed producing reserves, current production and cash flow, taking into consideration the Company’s overall commodity mix. Management evaluates all of these objectives as part of the decision-making process to determine the discretionary reductions for a portion of oil and natural gas development costs for the year, although every objective may not be met in each year. Furthermore, there may be certain years in which commodity prices and other economic conditions do not merit capital spending at a level sufficient to accomplish any of these objectives. The 2014 amounts were established by the Board of Directors at the end of the previous year, allocated across four quarters, and were intended to fully offset declines in production and proved developed producing reserves during the year as compared to the prior year.
The portion of oil and natural gas development costs includes estimated drilling and development costs associated with projects to convert a portion of non-producing reserves to producing status. However, the amounts do not include the historical cost of acquired properties as those amounts have already been spent in prior periods, were financed primarily with external sources of funding and do not affect the Company’s ability to pay distributions in the current period. The Company’s existing reserves, inventory of drilling locations and production levels will decline over time as a result of development and production activities. Consequently, if the Company were to limit its total capital expenditures to this portion of oil and natural gas development costs and not acquire new reserves, total reserves would decrease over time, resulting in an inability to maintain production at current levels, which could adversely affect the Company’s ability to pay a distribution at the current level or at all. However, the Company’s current total reserves do not

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

include reserve additions that may result from converting existing probable and possible resources to additional proved reserves, potential additional discoveries or technological advancements on the Company’s existing acreage position.
(2)  
Represents total capital expenditures for the development of oil and natural gas properties as presented on an accrual basis. For 2015, the Company intends to fund its total oil and natural gas capital program, in addition to interest expense and distributions to unitholders, from net cash provided by operating activities. Previously, the Company intended to fund only a portion of its oil and natural gas capital program, in addition to interest expense and distributions to unitholders, from net cash provided by operating activities.
(3)  
Represent the recoveries of a bankruptcy claim against Lehman Brothers which was not a transaction occurring in the ordinary course of the Company’s business.
(4)  
Represents adjustments to the purchase price of acquisitions and divestitures, based on the Company’s contractual right to revenues less operating expenses for periods from the effective date of a transaction to the closing date of a transaction. When the Company is the buyer, it is legally entitled to revenues less operating expenses generated during this period, and the Company’s Board of Directors has historically made a discretionary adjustment to include this cash in the amount available for distribution. Conversely, when the Company is the seller, the Company’s Board of Directors has historically made a discretionary adjustment to reduce this cash from the amount available for distribution during the period. Beginning with the three months ended June 30, 2015, the Board decided to no longer make this discretionary adjustment.
(5)  
Represents reserves and settlements related to legal matters.
(6)  
Represents primarily working capital adjustments. These adjustments may or may not impact cash provided by (used in) operating activities during the respective period, but are included as discretionary adjustments considered by the Company’s Board of Directors as the Board historically has not varied the distribution it declares period to period based on uneven cash flows. The Company’s Board of Directors, when determining the appropriate level of cash distributions, excluded the impact of the timing of cash receipts and payments; as such, this adjustment is necessary to show the historical amounts considered by the Company’s Board of Directors in assessing the appropriate distribution amount for each period.
(7)  
Represents the excess (shortfall) of net operating cash flow after distributions to unitholders and discretionary adjustments. Any excess was retained by the Company for future operations, future capital expenditures, future debt service or other future obligations. Any shortfall was funded with cash on hand and/or borrowings under the LINN Credit Facility.
Any cash generated by Berry is currently being used by Berry to fund its activities. To the extent that Berry generates cash in excess of its needs, the indentures governing Berry’s senior notes limit the amount it may distribute to LINN Energy to the amount available under a “restricted payments basket,” and Berry may not distribute any such amounts unless it is permitted by the indentures to incur additional debt pursuant to the consolidated coverage ratio test set forth in the Berry indentures. Berry’s restricted payments basket was approximately $431 million at June 30, 2015, and may be increased in accordance with the terms of the Berry indentures by, among other things, 50% of Berry’s future net income, reductions in its indebtedness and restricted investments, and future capital contributions.
A summary of the significant sources and uses of funding for the respective periods is presented below:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
298,779

 
$
481,153

 
$
673,482

 
$
915,635

Distributions to unitholders
(107,816
)
 
(240,510
)
 
(212,631
)
 
(480,583
)
Excess of net cash provided by operating activities after distributions to unitholders
190,963

 
240,643

 
460,851

 
435,052

Plus (less):
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities (excluding distributions to unitholders)
(98,131
)
 
163,006

 
(71,797
)
 
425,765

Acquisition of oil and natural gas properties and joint-venture funding
—

 
(546
)
 
—

 
(25,891
)
Development of oil and natural gas properties
(151,529
)
 
(410,774
)
 
(416,347
)
 
(805,617
)
Purchases of other property and equipment
(16,886
)
 
(21,260
)
 
(29,287
)
 
(31,411
)
Proceeds from sale of properties and equipment and other
31,214

 
(1,044
)
 
58,714

 
(11,730
)
Net increase (decrease) in cash and cash equivalents
$
(44,369
)
 
$
(29,975
)
 
$
2,134

 
$
(13,832
)

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

Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that are believed to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates and assumptions used in the preparation of the financial statements.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards, see Note 1 of Notes to Condensed Consolidated Financial Statements.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. These statements may include discussions about the Company’s:
•
business strategy;
•
acquisition strategy;
•
financial strategy;
•
effects of legal proceedings;
•
ability to maintain or grow distributions;
•
drilling locations;
•
oil, natural gas and NGL reserves;
•
realized oil, natural gas and NGL prices;
•
production volumes;
•
capital expenditures;
•
economic and competitive advantages;
•
credit and capital market conditions;
•
regulatory changes;
•
lease operating expenses, general and administrative expenses and development costs;
•
future operating results, including results of acquired properties;
•
plans, objectives, expectations and intentions; and
•
integration of acquired businesses and operations and commencement of activities in the Company’s strategic alliances with GSO and Quantum, which may take longer than anticipated, may be more costly than anticipated as a result of unexpected factors or events and may have an unanticipated adverse effect on the Company’s business.
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 Item 2. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “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 Company expectations, which reflect estimates and assumptions made by Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors set forth in Item 1A. “Risk Factors” in this Quarterly

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

Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2014, and elsewhere in the Annual Report. The forward-looking statements speak only as of the date made and, other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures. All of the Company’s market risk sensitive instruments were entered into for purposes other than trading.
The following should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s 2014 Annual Report on Form 10-K. The reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”
Commodity Price Risk
As an important part of its business strategy, the Company seeks to hedge a significant portion of its forecasted production to reduce exposure to fluctuations in the prices of oil and natural gas and provide long-term cash flow predictability to manage its business, service debt and pay distributions. Successful execution of that strategy depends on a number of factors including current and future expected commodity market prices, a liquid and actively traded market for hedging and availability and capacity of counterparties to enter into hedges. The current direct NGL hedging market is constrained in terms of price, volume, duration and number of counterparties, which limits the Company’s ability to effectively hedge its NGL production. As a result, currently, the Company directly hedges only its oil and natural gas production. The Company also hedges its exposure to natural gas differentials in certain operating areas but does not currently hedge exposure to oil differentials. By removing a portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in net cash provided by operating activities due to fluctuations in commodity prices.
Commodity hedging transactions are entered into with respect to a portion of the Company’s projected production or consumption to provide an economic hedge of the risk related to the future commodity prices received or paid. The Company does not enter into derivative contracts for trading purposes. The Company enters into commodity hedging transactions primarily in the form of swap contracts that are designed to provide a fixed price and, from time to time, put options that are designed to provide a fixed price floor with the opportunity for upside. A swap contract specifies a fixed price that the Company will receive from the counterparty as compared to floating market prices, and on the settlement date the Company will receive or pay the difference between the swap price and the market price. A put option requires the Company to pay the counterparty a premium equal to the fair value of the option at the purchase date and receive from the counterparty the excess, if any, of the fixed price floor over the market price at the settlement date.
In addition, as part of the 2013 acquisition of Berry Petroleum Company, now Berry Petroleum Company, LLC (“Berry”), the Company assumed certain derivative contracts that Berry had entered into prior to the acquisition date, including swap contracts, collars and three-way collars. Collar contracts specify floor and ceiling prices to be received as compared to floating market prices. Three-way collar contracts combine a short put (the lower price), a long put (the middle price) and a short call (the higher price) to provide a higher ceiling price as compared to a regular collar and limit downside risk to the market price plus the difference between the middle price and the lower price if the market price drops below the lower price.
The Company maintains a substantial portion of its hedges in the form of swap contracts. From time to time, the Company has chosen to purchase put option contracts primarily in connection with acquisition activity to hedge volumes in excess of those already hedged with swap contracts. The appropriate level of production to be hedged is an ongoing consideration and is based on a variety of factors, including current and future expected commodity market prices, cost and availability of put option contracts, the level of acquisition activity and the Company’s overall risk profile, including leverage and size and scale considerations. As a result, the appropriate percentage of production volumes to be hedged may change over time. There have

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk - Continued

been no significant changes to the Company’s objectives, general strategies or instruments used to manage the Company’s commodity price risk exposures from the year ended December 31, 2014.
In certain historical periods, the Company paid an incremental premium to increase the fixed price floors on existing put options because the Company typically hedges multiple years in advance and in some cases commodity prices had increased significantly beyond the initial hedge prices. As a result, the Company determined that the existing put option strike prices did not provide reasonable downside protection in the context of the current market.
At June 30, 2015, the fair value of fixed price swaps, put option contracts and three-way collars was a net asset of approximately $1.5 billion. A 10% increase in the index oil and natural gas prices above the June 30, 2015, prices would result in a net asset of approximately $1.2 billion, which represents a decrease in the fair value of approximately $340 million; conversely, a 10% decrease in the index oil and natural gas prices below the June 30, 2015, prices would result in a net asset of approximately $1.8 billion, which represents an increase in the fair value of approximately $338 million.
At December 31, 2014, the fair value of fixed price swaps, put option contracts and three-way collars was a net asset of approximately $1.8 billion. A 10% increase in the index oil and natural gas prices above the December 31, 2014, prices would result in a net asset of approximately $1.4 billion, which represents a decrease in the fair value of approximately $423 million; conversely, a 10% decrease in the index oil and natural gas prices below the December 31, 2014, prices would result in a net asset of approximately $2.2 billion, which represents an increase in the fair value of approximately $421 million.
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets.
The prices of oil, natural gas and NGL have been extremely volatile, and the Company expects this volatility to continue. Prices for these commodities may fluctuate widely in response to relatively minor changes in the supply of and demand for such commodities, market uncertainty and a variety of additional factors that are beyond its control. Actual gains or losses recognized related to the Company’s derivative contracts will likely differ from those estimated at June 30, 2015, and December 31, 2014, and will depend exclusively on the price of the commodities on the specified settlement dates provided by the derivative contracts.
The Company cannot be assured that its counterparties will be able to perform under its derivative contracts. If a counterparty fails to perform and the derivative arrangement is terminated, the Company’s cash flows and ability to pay distributions could be impacted.
Interest Rate Risk
At June 30, 2015, the Company had long-term debt outstanding under its credit facilities and term loan of approximately $3.7 billion which incurred interest at floating rates (see Note 6). A 1% increase in the LIBOR would result in an estimated $37 million increase in annual interest expense.
At December 31, 2014, the Company had long-term debt outstanding under its credit facilities and term loan of approximately $3.5 billion which incurred interest at floating rates. A 1% increase in the LIBOR would result in an estimated $35 million increase in annual interest expense.
Counterparty Credit Risk
The Company accounts for its commodity derivatives at fair value on a recurring basis (see Note 8). The fair value of these derivative financial instruments includes the impact of assumed credit risk adjustments, which are based on the Company’s and counterparties’ published credit ratings, public bond yield spreads and credit default swap spreads, as applicable.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk - Continued

At June 30, 2015, the average public bond yield spread utilized to estimate the impact of the Company’s credit risk on derivative liabilities was approximately 1.78%. A 1% increase in the average public bond yield spread would result in an estimated $40,000 increase in net income for the six months ended June 30, 2015. At June 30, 2015, the credit default swap spreads utilized to estimate the impact of counterparties’ credit risk on derivative assets ranged between 0% and 2.35%. A 1% increase in each of the counterparties’ credit default swap spreads would result in an estimated $16 million decrease in net income for the six months ended June 30, 2015.
At December 31, 2014, the average public bond yield spread utilized to estimate the impact of the Company’s credit risk on derivative liabilities was approximately 1.85%. A 1% increase in the average public bond yield spread would result in an estimated $18,000 increase in net income for the year ended December 31, 2014. At December 31, 2014, the credit default swap spreads utilized to estimate the impact of counterparties’ credit risk on derivative assets ranged between 0% and 2.15%. A 1% increase in each of the counterparties’ credit default swap spreads would result in an estimated $20 million decrease in net income for the year ended December 31, 2014.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, and the Company’s Audit Committee of the Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2015.
Changes in the Company’s Internal Control Over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal controls were designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation and presentation of the condensed consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in the Company’s internal control over financial reporting during the second quarter of 2015 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II - Other Information

Item 1.
Legal Proceedings
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations. With respect to a certain statewide class action case, the parties have agreed on a scheduling order, which provides for briefing on the class certification issues in late 2015 and the first part of 2016. The Company has denied that it has liability on the claims asserted in the case and has denied that class certification is proper. If the Court accepts the Company’s arguments, there will be no liability to the Company in the case. For another statewide class action royalty payment dispute, briefing on class certification issues is expected to be completed during the fall of 2015. The Company has denied that it has any liability on the claims and has denied that class certification is proper. If the Court accepts the Company’s arguments, there will be no liability to the Company in the case. The Company is unable to estimate a possible loss, or range of possible loss, if any, in these cases. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
Item 1A.
Risk Factors
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our units are described in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. Except as set forth below, as of the date of this report, these risk factors have not changed materially. This information should be considered carefully, together with other information in this report and other reports and materials we file with the United States Securities and Exchange Commission.
Our Board of Directors has the ability to reserve any or all of our cash on hand at the end of a quarter for purposes other than distribution to unitholders, including reduction of indebtedness.
Although we may have generated sufficient net cash provided by operating activities during any particular quarter, our Board of Directors has the ability under our limited liability company agreement to establish a cash reserve, which could encompass all of the cash otherwise available for distribution, to provide for the proper conduct of our business in both the short and long term. To provide for the proper conduct of our business, the Board of Directors can determine to reserve cash to reduce indebtedness, among other things.
Any decision to reserve some or all of our cash on hand for such purposes and not distribute it may significantly impact our unitholders, as well as our business and operations. The market value of our units may decrease in response to or in anticipation of a decrease or suspension of a distribution. Suspension of the distribution may have a tax impact on our unitholders. Please see the risk factor in our 2014 Annual Report on Form 10-K entitled “Unitholders are required to pay taxes on their share of our taxable income, including their share of ordinary income and capital gain upon dispositions of properties by us, even if they do not receive any cash distributions from us” for more information. External perceptions of the health of our business and our liquidity may also be impacted, which could further limit our ability to access capital markets, cause our vendors to tighten our credit terms and cause a strain in our relationship with landowners and other business partners. Further, our employees may become distracted from our day to day operations due to concern about our business and unit price.
We are currently dependent on our Credit Facilities, as defined in Note 6, for liquidity. Any further reduction of the borrowing bases under our Credit Facilities could reduce or eliminate our ability to borrow under the Credit Facilities and may require us to repay indebtedness under our Credit Facilities earlier than anticipated, which would adversely impact our liquidity.
Subject to amounts reserved in the discretion of our Board of Directors to provide for the proper conduct of our business, our limited liability company agreement provides that we make distributions to our unitholders of available cash. Therefore, we have not historically accumulated cash to preserve liquidity and have been dependent on the capital markets and our Credit Facilities for liquidity. Due to low commodity prices and other factors, the capital markets have been constrained. If these constraints continue, we will be primarily reliant on our Credit Facilities for liquidity.
At June 30, 2015, there was approximately $1.5 billion of available borrowing capacity under the LINN Credit Facility but less than $1 million available under the Berry Credit Facility, each as defined in Note 6. Each of our Credit Facilities is subject to

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Item 1A.    Risk Factors - Continued

scheduled redeterminations, semi-annually in April and October, of its borrowing base, based primarily on reserve reports using lender commodity price expectations at such time. As a result of lower commodity prices, in May 2015 the borrowing base under the LINN Credit Facility decreased from $4.5 billion to $4.05 billion and the borrowing base under the Berry Credit Facility decreased from $1.4 billion to $1.2 billion. Continued low or further declining commodity prices, reductions in our capital budget and the resulting reserve write-downs, along with the maturity schedule of our hedges, are expected to result in further decreases in both borrowing bases at the October 2015 redetermination and may also impact future redeterminations.
To the extent our borrowing bases are reduced to or below the amount of borrowings outstanding, we would be unable to continue to borrow and any excess borrowings may become due within a short time span. We may not have the financial resources to make mandatory prepayments and our liquidity would be significantly impacted.
We may experience difficulties in fully utilizing our alliances with GSO and Quantum, which could cause us to fail to realize many of the anticipated potential benefits of those alliances.
As part of our plan to i) create new sources of capital to allow us to acquire and develop assets without increasing capital intensity, ii) enhance our long-term ability to live within cash flow and iii) provide opportunities for dropdowns of stable production over time, we entered into strategic alliances with GSO Capital Partners LP (“GSO”), the credit platform of The Blackstone Group L.P., to fund oil and natural gas development (“DrillCo”) and Quantum Energy Partners (“Quantum”) to fund selected future oil and natural gas acquisitions and the development of those acquired assets through a new entity (“AcqCo”).
Achieving the anticipated benefits of DrillCo will depend in part on whether we and GSO are able to agree on a drilling plan during any of the five years of the term of DrillCo, as well as our ability to execute on that drilling plan. Achieving the anticipated benefits of the alliance with Quantum will depend in part on whether we are able to come to an agreement with Quantum and AcqCo regarding identification and acquisition of suitable assets for AcqCo, whether we are able to fund the acquisition of our required minimum working interest in such assets and ultimately whether we are able to purchase back assets from AcqCo after they have matured into conventional MLP assets. An inability to realize the full extent of the anticipated benefits of these alliances may affect our ability to accomplish the objectives identified above.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized the repurchase of up to $250 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. The timing and amounts of any such repurchases are at the discretion of management, subject to market conditions and other factors, and in accordance with applicable securities laws and other legal requirements. The repurchase plan does not obligate the Company to acquire any specific number of units and may be discontinued at any time. The Company did not repurchase any units during the six months ended June 30, 2015, and as of June 30, 2015, the entire amount remained available for unit repurchase under the program.
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
Exhibit Number
 
Description
 
 
 
2.1*
—
Purchase and Sale Agreement by and between Linn Energy Holdings, LLC and Linn Operating, Inc., as seller, and Rock Oil Holdings LLC, as buyer, executed on July 2, 2015
3.1
—
Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1 (File No. 333-125501) filed on June 3, 2005)
3.2
—
Certificate of Amendment to Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S‑1 (File No. 333-125501) filed on June 3, 2005)
3.3
—
Third Amended and Restated Limited Liability Company Agreement of Linn Energy, LLC dated September 3, 2010 (incorporated herein by reference to Exhibit 3.1 to Current Report on Form 8-K filed on September 7, 2010)
3.4
—
Amendment No. 1, dated April 23, 2013, to Third Amended and Restated LLC Agreement of Linn Energy, LLC, dated September 3, 2010 (incorporated herein by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q filed on April 25, 2013)
10.1
—
Limited Liability Company Agreement of QL Energy I, LLC, dated as of June 30, 2015 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 7, 2015)
10.2
—
Development Agreement, by and between Linn Energy, LLC and QL Energy I, LLC, dated as of June 30, 2015 (incorporated herein by reference to Exhibit 10.2 to Current Report on Form 8-K filed on July 7, 2015)
10.3
—
Sixth Amendment to Sixth Amended and Restated Credit Agreement, dated as of May 12, 2015, among Linn Energy, LLC as Borrower, Wells Fargo Bank, National Association as Administrative Agent, and the Lenders and agents party thereto (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 15, 2015)
10.4
—
Tenth Amendment and Borrowing Base Agreement to Second Amended and Restated Credit Agreement of Berry Petroleum Company, LLC, dated as of May 12, 2015, among Berry Petroleum Company, LLC as Borrower, Wells Fargo Bank, National Association as Administrative Agent, and the Lenders and agents party thereto (incorporated herein by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 15, 2015)
10.5*
—
Form of Executive Phantom Performance Unit Grant Agreement (2015-2017 Performance Period)
31.1*
—
Section 302 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC
31.2*
—
Section 302 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn Energy, LLC
32.1*
—
Section 906 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC
32.2*
—
Section 906 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn Energy, LLC
101.INS**
—
XBRL Instance Document
101.SCH**
—
XBRL Taxonomy Extension Schema Document
101.CAL**
—
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
—
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
—
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
—
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith.

60
Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
LINN ENERGY, LLC
 
(Registrant)
 
 
Date: July  30, 2 015
/s/ David B. Rottino
 
David B. Rottino
 
Executive Vice President, Business Development
and Chief Accounting Officer
 
(As Duly Authorized Officer and Chief Accounting Officer)


61

Exhibit 2.1
Execution Version


PURCHASE AND SALE AGREEMENT
BY AND BETWEEN

Linn Energy Holdings, LLC
and
Linn Operating, Inc.
collectively, as Seller,
and
Rock Oil Holdings LLC
as Buyer



EXECUTED ON JULY 2, 2015



HN\1299513.15


TABLE OF CONTENTS
 
 
Page

ARTICLE I
 
 
DEFINITIONS AND INTERPRETATION
1

1.1
Defined Terms
1

1.2
References and Rules of Construction
1

 
 
 
ARTICLE II
 
 
PURCHASE AND SALE
2

2.1
Purchase and Sale
2

2.2
Excluded Assets
3

2.3
Revenues and Expenses
3

 
 
 
ARTICLE III
 
 
PURCHASE PRICE
4

3.1
Purchase Price
4

3.2
Deposit
4

3.3
Adjustment to Purchase Price
4

3.4
Adjustment Methodology
6

3.5
Preliminary Settlement Statement
6

3.6
Final Settlement Statement
7

3.7
Disputes
7

3.8
Allocation of Purchase Price / Allocated Values
8

3.9
Allocation for Imbalances at Closing
8

 
 
 
ARTICLE IV
 
 
ACCESS / DISCLAIMERS
9

4.1
Access
9

4.2
Confidentiality
11

4.3
Disclaimers
11

 
 
 
ARTICLE V
 
 
TITLE MATTERS; CASUALTIES; TRANSFER RESTRICTIONS
13

5.1
General Disclaimer of Title Warranties and Representations
13

5.2
Special Warranty
14

5.3
Notice of Title Defects; Defect Adjustments
14

5.4
Casualty or Condemnation Loss
19

5.5
Preferential Purchase Rights and Consents to Assign
19

 
 
 
ARTICLE VI
 
 
ENVIRONMENTAL MATTERS
21

6.1
Environmental Defects
21

6.2
NORM, Asbestos, Wastes and Other Substances
24

 
 
 
ARTICLE VII
 
 
REPRESENTATIONS AND WARRANTIES OF SELLER
24

7.1
Organization, Existence and Qualification
25


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HN\1299513.15


7.2
Authorization, Approval and Enforceability
25

7.3
No Conflicts
25

7.4
Consents
25

7.5
Bankruptcy
26

7.6
Litigation
26

7.7
Material Contracts
26

7.8
No Violation of Laws
27

7.9
Preferential Rights
27

7.10
Payment of Burdens
27

7.11
Imbalances
27

7.12
Current Commitments
27

7.13
Tax Matters
27

7.14
Brokers’ Fees
28

7.15
Equipment
28

7.16
Payouts
28

7.17
Condemnation
28

7.18
[INTENTIONALLY OMITTED]
28

7.19
Environmental Matters
28

7.20
Permits
29

7.21
Wells
29

7.22
Hedge Contracts
29

7.23
Leases
29

7.24
Liens
29

 
 
 
ARTICLE VIII
 
 
REPRESENTATIONS AND WARRANTIES OF BUYER
29

8.1
Organization, Existence and Qualification
29

8.2
Authorization, Approval and Enforceability
29

8.3
No Conflicts
30

8.4
Consents
30

8.5
Bankruptcy
30

8.6
Litigation
30

8.7
Regulatory
30

8.8
Financing
31

8.9
Independent Evaluation
31

8.10
Brokers’ Fees
31

8.11
Accredited Investor
31

 
 
 
ARTICLE IX
 
 
CERTAIN AGREEMENTS
31

9.1
Conduct of Business
31

9.2
Successor Operator
33

9.3
Governmental Bonds
33

9.4
Record Retention
33

9.5
Regulatory Matters
34

9.6
Release of Liens
34

9.7
Knowledge of Breach
35


ii
HN\1299513.15


9.8
Amendment to Schedules
35

 
 
 
ARTICLE X
 
 
BUYER’S CONDITIONS TO CLOSING
35

10.1
Representations
35

10.2
Performance
35

10.3
No Legal Proceedings
35

10.4
Title Defects and Environmental Defects
36

10.5
Closing Deliverables
36

 
 
 
ARTICLE XI
 
 
SELLER’S CONDITIONS TO CLOSING
36

11.1
Representations
36

11.2
Performance
36

11.3
No Legal Proceedings
36

11.4
Title Defects and Environmental Defects
37

11.5
Closing Deliverables
37

 
 
 
ARTICLE XII
 
 
CLOSING
37

12.1
Date of Closing
37

12.2
Place of Closing
37

12.3
Closing Obligations
37

12.4
Records
38

 
 
 
ARTICLE XIII
 
 
ASSUMPTION; INDEMNIFICATION; SURVIVAL
39

13.1
Assumption by Buyer; Specified Obligations
39

13.2
Indemnities of Seller
40

13.3
Indemnities of Buyer
40

13.4
Limitation on Liability
41

13.5
Express Negligence
41

13.6
Exclusive Remedy
41

13.7
Indemnification Procedures
42

13.8
Survival
43

13.9
Non-Compensatory Damages
44

13.10
Waiver of Right to Rescission
44

13.11
Insurance
45

13.12
Disclaimer of Application of Anti-Indemnity Statutes
45

 
 
 
ARTICLE XIV
 
 
EMPLOYMENT MATTERS
45

14.1
Employees
45

 
 
 
ARTICLE XV
 
 
TERMINATION, DEFAULT AND REMEDIES
45

15.1
Right of Termination
45

15.2
Effect of Termination
46


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HN\1299513.15


15.3
Return of Documentation and Confidentiality
46

15.4
Distribution of Deposit Upon Termination
46

 
 
 
ARTICLE XVI
 
 
MISCELLANEOUS
47

16.1
Appendices, Exhibits and Schedules
47

16.2
Expenses and Taxes
47

16.3
Assignment
48

16.4
Preparation of Agreement
49

16.5
Publicity
49

16.6
Notices
49

16.7
Further Cooperation
50

16.8
Filings, Notices and Certain Governmental Approvals
51

16.9
Entire Agreement; Non-Reliance; Conflicts
51

16.10
Successors and Permitted Assigns
52

16.11
Parties in Interest
52

16.12
Amendment
52

16.13
Waiver; Rights Cumulative
52

16.15
Severability
53

16.16
Removal of Name
53

16.17
Counterparts
54

16.18
Like-Kind Exchange
54

16.19
Specific Performance
54

16.20
Financial Statements
54


iv
HN\1299513.15



LIST OF APPENDICES, EXHIBITS AND SCHEDULES

Appendices
Appendix I
―
Definitions
 
 
 
Exhibits
Exhibit A
―
Leases
Exhibit A-3
―
Easements and Surface Interests
Exhibit B
―
Wells
Exhibit B-1
―
Acreage Tracts
Exhibit C
―
Personal Property
Exhibit D
―
Form of Assignment and Bill of Sale
Exhibit E
―
Excluded Assets
Exhibit G
―
Allocated Values
Exhibit L
―
Form of Transition Services Agreement
Exhibit O
―
Target Formations
Exhibit P
―
Escrow Agreement

Schedules
Schedule 2.3(a)
―
Designated Well Costs
Schedule 7.4
―
Seller Consents
Schedule 7.6
―
Litigation
Schedule 7.7
―
Material Contracts
Schedule 7.8
―
Violation of Laws
Schedule 7.9
―
Preferential Rights
Schedule 7.10
―
Payment of Burdens
Schedule 7.11
―
Imbalances
Schedule 7.12
―
Current Commitments
Schedule 7.13
―
Tax Matters
Schedule 7.15
―
Certain Equipment Matters
Schedule 7.16
―
Payout Information
Schedule 7.17
―
Condemnation Proceedings
Schedule 7.19
―
Environmental Issues
Schedule 7.20
―
Permits
Schedule 9.1
―
Conduct of Business
Schedule 9.6
―
Mortgages


v
HN\1299513.15


PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance herewith, this “ Agreement ”) is entered into this 2nd day of July, 2015 (the “ Execution Date ”), between Linn Energy Holdings, LLC, a Delaware limited liability company, (“ LEH ”) and Linn Operating, Inc., a Delaware corporation (“ LOI ” and, collectively with LEH, “ Seller ”), and Rock Oil Holdings LLC, a Delaware limited liability company (“ Buyer ”). Buyer and Seller may be referred to collectively as the “ Parties ” or individually as a “ Party .”
Recitals
Seller desires to sell and assign, and Buyer desires to purchase and pay for, all of the Conveyed Interests (as defined hereinafter) effective as of the Effective Time (as defined hereinafter).
NOW, THEREFORE, for and in consideration of the mutual agreements herein contained, the benefits to be derived by each Party, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1     Defined Terms . Capitalized terms used herein shall have the meanings given such terms in Appendix I , unless the context otherwise requires.
1.2     References and Rules of Construction . All references in this Agreement to Exhibits, Appendices, Schedules, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Appendices, Schedules, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any Exhibits, Appendices, Schedules, Articles, Sections, subsections and other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof. The words “this Agreement,” “herein,” “hereby,” “hereunder,” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection or other subdivision unless expressly so limited. The words “this Article,” “this Section,” and “this subsection,” and words of similar import, refer only to the Article, Section or subsection hereof in which such words occur. The word “including” (in its various forms) means including without limitation. All references to “$” or “dollars” shall be deemed references to United States dollars. Each accounting term not defined herein, and each accounting term partly defined herein, to the extent not defined, will have the meaning given to it under GAAP. Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. References to any agreement (including this Agreement) shall mean such agreement as it may be amended, supplemented or otherwise modified from time to time. References to any date shall mean such

1
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date in Houston, Texas and for purposes of calculating the period of time in which any notice or action is to be given or undertaken hereunder, such period shall be deemed to begin at 12:01 A.M. on the applicable date in Houston, Texas.
ARTICLE II
PURCHASE AND SALE
2.1     Purchase and Sale . Subject to the terms and conditions of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase and pay for, effective as of the Effective Time, all of Seller’s right, title and interest in and to the interests and properties described in Section 2.1(a) through Section 2.1(n) (such right, title and interest, less and except the Excluded Assets, collectively, the “ Conveyed Interests ”):
(a)    all of the oil, gas and/or mineral leases described in Exhibit A , together with any and all other right, title and interest of Seller in and to the leasehold estates created thereby subject to the terms, conditions, covenants and obligations set forth in such leases and/or Exhibit A (such interest in such leases, the “ Leases ”), and all rights and interests in the lands covered by the Leases or on any of the lands covered by the Acreage Tracts described in Exhibit B-1 and any lands pooled or unitized therewith (such lands, the “ Lands ”);
(b)    all oil, gas, water, injection and/or disposal wells located on any of the Lands (such interest in such wells, including the wells set forth in Exhibit B , the “ Wells ”), and all Hydrocarbons produced therefrom or allocated thereto from and after the Effective Time;
(c)    [Reserved];
(d)    all rights and interests in, under or derived from all unitization and pooling agreements, declarations and orders in effect with respect to any of the Leases or Wells and the units created thereby (the “ Units ”) (the Leases, the Lands, the Fee Minerals, the Units and the Wells being collectively referred to hereinafter as the “ Properties ” or individually as a “ Property ”);
(e)    to the extent that they may be assigned, all permits, licenses, servitudes, easements, rights-of-way, surface leases, other surface interests and surface rights to the extent appurtenant to or used primarily in connection with the ownership, operation, production, gathering, treatment, processing, storing, sale or disposal of Hydrocarbons or produced water from the Properties or any of the Conveyed Interests, including those described on Exhibit A-3 ;
(f)    all equipment, machinery, fixtures and other personal, movable and mixed property located on any of the Properties or other Conveyed Interests that is used primarily in connection therewith, including those items listed in Exhibit C , and including well equipment, casing, tubing, pumps, motors, machinery, platforms, rods, tanks, boilers, fixtures, compression equipment, flowlines, pipelines, gathering systems associated with the Wells, manifolds, processing and separation facilities, water supply and/or treatment facilities, pads, structures, materials, and other items primarily used in the operation thereof (collectively, the “ Personal Property ”);
(g)    [Reserved];

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(h)    [Reserved];
(i)    [Reserved];
(j)    to the extent assignable, all Applicable Contracts and all rights thereunder to the extent, and only to the extent, relating to the Conveyed Interests;
(k)    all Imbalances relating to the Conveyed Interests;
(l)    all of the files, records, information and data, whether written or electronically stored, primarily relating to the Conveyed Interests in Seller’s or its Affiliates’ possession, including: (i) land and title records (including abstracts of title, title opinions and title curative documents); (ii) Applicable Contract files; (iii) correspondence; (iv) operations, environmental, production and accounting records; (v) facility and well files (including all logs and other geologic data related to wells) in each case to the extent that the same can be assigned to Buyer without penalty or payment (except to the extent Buyer is willing to make such payment); and (vi) documents relating to Taxes imposed on the Conveyed Interests (collectively, “ Records ”);
(m)    all of Seller’s right, title and interest in and to all claims and causes of action (including claims for adjustments or refunds and any benefits actually received from insurance claims Seller makes on behalf of the Buyer, with a waiver of subrogation in favor of the Buyer; provided, however, that Seller will make such claims at Buyer’s written request) to the extent attributable to (i) the Conveyed Interests insofar as initially accruing from and after the Effective Time, and (ii) any of the Assumed Obligations; and
(n)    all Hydrocarbons in storage or existing in stock tanks, pipelines and/or plants (including inventory).
2.2     Excluded Assets . Seller shall reserve and retain all of the Excluded Assets.
2.3     Revenues and Expenses .
(a)    Except as expressly provided otherwise in this Agreement, Seller shall remain entitled to all of the rights of ownership (including the right to all production, proceeds of production, and other proceeds) and shall remain responsible (by payment, through the adjustments to the Purchase Price under this Agreement or otherwise) for all Operating Expenses, in each case attributable to the Conveyed Interests for the period of time prior to the Effective Time. Except as expressly provided otherwise in this Agreement, and subject to the occurrence of Closing, Buyer shall be entitled to all of the rights of ownership (including the right to all production, proceeds of production, and other proceeds), and shall be responsible for (by payment, through the adjustments to the Purchase Price under this Agreement or otherwise) (i) all Operating Expenses, in each case attributable to the Conveyed Interests for the period of time commencing at the Effective Time, and (ii) all Operating Expenses relating to each Well that has not been completed and placed on production prior to the Effective Time, whether or not such expenses were incurred before or after the Effective Time, but only to the extent all such Operating Expenses are set forth on Schedule 2.3(a) (the “ Designated Well Costs ”). Such amounts which are received or paid prior to Closing shall be accounted for in the Preliminary

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Settlement Statement or Final Settlement Statement, as applicable; provided , however , that the Preliminary Settlement Statement may contain estimated amounts. Such amounts which are received or paid after Closing but prior to the date of the Final Settlement Statement shall be accounted for in the Final Settlement Statement.
(b)    After the Parties’ agreement upon the Final Settlement Statement, (i) if either Party receives monies belonging to the other Party, including proceeds of production, then such amount shall, within 30 days after the end of the calendar month in which such amounts were received, be paid over to the proper Party, (ii) if either Party pays monies for Operating Expenses which are the obligation of the other Party, then such other Party shall, within 30 days after the end of the calendar month in which the applicable invoice and proof of payment of such invoice were received, reimburse the Party which paid such Operating Expenses, (iii) if a Party receives an invoice of an expense or obligation (other than an invoice of an expense or obligation with respect to Asset Taxes or Income Taxes) which is owed by the other Party, such Party receiving the invoice shall promptly forward such invoice to the Party obligated to pay the same, and (iv) if an invoice or other evidence of an obligation (other than an obligation with respect to Asset Taxes or Income Taxes) is received by a Party, which is partially an obligation of both Seller and Buyer, then the Parties shall consult with each other, and each shall promptly pay its portion of such obligation to the obligee thereof.
(c)    Each of Seller and Buyer shall be permitted to offset any Operating Expenses owed by such Party to the other Party pursuant to this Section 2.3 against amounts owing by the second Party to the first Party pursuant to this Section 2.3 , but not otherwise.
ARTICLE III
PURCHASE PRICE
3.1     Purchase Price . The purchase price for the transfer of the Conveyed Interests and the transactions contemplated hereby shall be $280,706,163 (the “ Purchase Price ”), as adjusted pursuant to this Agreement and payable by Buyer to Seller at Closing by wire transfer in immediately available funds to a bank account of Seller (the details of which shall be provided by Seller to Buyer in the Preliminary Settlement Statement).
3.2     Deposit . Upon execution of this Agreement, Buyer shall deposit with Wells Fargo Bank, National Association, a national banking association, (the “ Escrow Agent ”) a deposit equal to six percent (6%) of the Purchase Price to assure Buyer’s performance of its obligations hereunder (the “ Deposit ”). The Deposit will be held by the Escrow Agent pursuant to the terms of this Section 3.2 and the Escrow Agreement. The Deposit shall be applied against the Purchase Price if the Closing occurs or shall otherwise be distributed in accordance with the terms of Section 15.4 , and the Parties agree, pursuant to the terms of the Escrow Agreement, to jointly instruct the Escrow Agent in writing to release the Deposit to the appropriate Party in accordance with this Section 3.2 .
3.3     Adjustment to Purchase Price . The Purchase Price shall be adjusted as follows (without duplication), and the resulting amount shall be herein called the “ Adjusted Purchase Price ”:

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(a)    The Purchase Price shall be adjusted upward by the following amounts:
(i)    an amount equal to the value of all Hydrocarbons attributable to the Conveyed Interests in storage or existing in stock tanks, pipelines and/or plants (including inventory), in each case that are, as of the Effective Time, (A) upstream of the pipeline connection or (B) upstream of the sales meter, if any, the value to be based upon the contract price in effect as of the Effective Time (or the price paid to Seller in connection with the sale of such Hydrocarbons, if there is no contract price, during the Interim Period), net of (i) amounts payable as Burdens on such production and (ii) any Asset Taxes on such Hydrocarbons economically borne by Buyer but not taken into account pursuant to Section 3.3(b)(ii) ;
(ii)    an amount equal to all Operating Expenses and all other costs and expenses that are attributable to the Conveyed Interests (other than Overhead Costs, Asset Taxes and Income Taxes) incurred by Seller during the period of time commencing at the Effective Time, whether paid before or after the Effective Time, including (A) Burdens, (B) bond and insurance premiums paid by or on behalf of Seller with respect to the period of time commencing at the Effective Time, and (C) rentals and other lease maintenance payments;
(iii)    an amount equal to all of the Designated Well Costs paid by Seller, whether paid before or after the Effective Time;
(iv)    [INTENTIONALLY OMITTED];
(v)    the amount of all Asset Taxes allocated to Buyer in accordance with Section 16.2 but that are paid or otherwise economically borne by Seller;
(vi)    subject to Section 3.9 , to the extent that Seller is underproduced as shown with respect to the net Well Imbalances set forth in Schedule 7.11 , the sum of $0, which is an amount equal to the product of the underproduced volumes times $2.81/MMBtu;
(vii)    subject to Section 3.9 , to the extent that Seller has overdelivered any Hydrocarbons as of the Effective Time as shown with respect to the net Pipeline Imbalances set forth in Schedule 7.11 , the sum of $0, which is an amount equal to the product of the overdelivered volumes times $2.81/MMBtu;
(viii)    the Overhead Costs from and after the Effective Time up to the Closing Date; and
(ix)    any other amount expressly provided for elsewhere in this Agreement or otherwise agreed upon in writing by Seller and Buyer.
(b)    The Purchase Price shall be adjusted downward by the following amounts:
(i)    an amount equal to all proceeds actually received by Seller attributable to the sale of Hydrocarbons (A) produced from or allocable to the Conveyed Interests during the period of time commencing at the Effective Time or (B) contained in storage or existing in stock tanks, pipelines and/or plants (including inventory) as of the Effective Time for which an upward Purchase Price adjustment was made pursuant to Section 3.3(a)(i) , (in each

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case) net of expenses (other than Operating Expenses and other expenses taken into account pursuant to Section 3.3(a) , Income Taxes and Asset Taxes) directly incurred in earning or receiving such proceeds;
(ii)    the amount of all Asset Taxes allocated to Seller in accordance with Section 16.2 but that are paid or otherwise economically borne by Buyer;
(iii)    if the election under Section 5.3(d)(i) is made with respect to a Title Defect, the Title Defect Amount with respect to such Title Defect (subject to adjustments with respect to Title Benefits pursuant to Section 5.3(e) );
(iv)    if the election under Section 6.1(b)(i) is made with respect to an Environmental Defect, the Remediation Amount with respect to such Environmental Defect;
(v)    the Allocated Value of the Conveyed Interests excluded from the transactions contemplated hereby pursuant to Sections 5.5(b)(i)(A) , 5.5(b)(ii)(B) or 6.1(b)(ii) ;
(vi)    subject to Section 3.9 , to the extent that Seller is overproduced as shown with respect to the net Well Imbalances set forth in Schedule 7.11 , the sum of $0, which is an amount equal to the product of the overproduced volumes times $2.81/MMBtu;
(vii)    subject to Section 3.9 , to the extent that Seller has underdelivered any Hydrocarbons as of the Effective Time as shown with respect to the net Pipeline Imbalances set forth in Schedule 7.11 , the sum of $0, which is an amount equal to the product of the underdelivered volumes times $2.81/MMBtu;
(viii)    an amount equal to all proceeds from sales of Hydrocarbons relating to the Conveyed Interests and payable to owners of Working Interests, royalties, overriding royalties and other similar interests (in each case) that are held by Seller in suspense as of the Closing Date; and
(ix)    any other amount expressly provided for elsewhere in this Agreement or otherwise agreed upon in writing by Seller and Buyer.
(c)    Notwithstanding anything to the contrary in the foregoing, the Parties recognize that certain amounts of Hydrocarbons are being flared by Seller in the ordinary course of business and in accordance with applicable law and no adjustment to the Purchase Price will be made on account of such flared Hydrocarbons to the extent flared in accordance with applicable law.
3.4     Adjustment Methodology . When available, actual figures will be used for the adjustments to the Purchase Price at Closing. To the extent actual figures are not available, Seller’s good faith estimates will be used subject to final adjustments in accordance with Section 3.6 and Section 3.7 .
3.5     Preliminary Settlement Statement . Not less than five Business Days prior to Closing, Seller shall prepare and submit to Buyer for review a draft settlement statement (the “ Preliminary Settlement Statement ”) that shall set forth the Adjusted Purchase Price, reflecting

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each adjustment made in accordance with this Agreement as of the date of preparation of such Preliminary Settlement Statement and the calculation of the adjustments used to determine such amount, together with the designation of Seller’s accounts for the wire transfers of funds as set forth in Section 3.1 and Section 12.3(c) . Within three Business Days after receipt of the Preliminary Settlement Statement, Buyer will deliver to Seller a written report containing all changes, with explanation therefor, that Buyer proposes to be made to the Preliminary Settlement Statement, if any. The Parties shall in good faith attempt to agree on the Preliminary Settlement Statement as soon as possible after Seller’s receipt of Buyer’s written report. The Preliminary Settlement Statement, as agreed upon by the Parties, will be used to adjust the Purchase Price at Closing; provided that if the Parties do not agree on an adjustment set forth in the Preliminary Settlement Statement prior to the Closing, the amount of such adjustment set forth in the Preliminary Settlement Statement as presented by Seller in good faith (and as modified by those amounts agreed upon by the Parties) will be used to adjust the Purchase Price at Closing.
3.6     Final Settlement Statement .
(a)    On or before 120 days after the Closing, Seller shall deliver to Buyer a final settlement statement (the “ Final Settlement Statement ”) prepared by Seller based on actual income and expenses during the Interim Period and which takes into account all final adjustments made to the Purchase Price and shows the resulting final Adjusted Purchase Price (the “ Final Price ”). The Final Settlement Statement shall set forth the actual proration of the amounts required by this Agreement. Within 30 days after receipt of the Final Settlement Statement, Buyer will deliver to Seller a written report containing any proposed changes to the Final Settlement Statement and an explanation of any such changes and the reasons therefor (the “ Dispute Notice ”). Any changes not so specified in the Dispute Notice shall be deemed waived and Seller’s determinations with respect to all such elements of the Final Settlement Statement that are not addressed specifically in the Dispute Notice shall prevail. If Buyer fails to timely deliver a Dispute Notice to Seller containing changes Buyer proposes to be made to the Final Settlement Statement, the Final Settlement Statement as delivered by Seller will be deemed to be correct and mutually agreed upon by the Parties, and will be final and binding on the Parties and not subject to further audit or arbitration. If the Final Price set forth in the Final Settlement Statement is mutually agreed upon by Seller and Buyer, the Final Settlement Statement and the Final Price shall be final and binding on the Parties, subject to the provisions of Section 2.3(b). Any difference in the Adjusted Purchase Price as paid at Closing pursuant to the Preliminary Settlement Statement and the Final Price shall be paid by the owing Party to the owed Party within 10 days after final determination of such owed amounts in accordance herewith. All amounts paid pursuant to this Section 3.6 shall be delivered in United States currency by wire transfer of immediately available funds to the account specified in writing by the relevant Party.
(b)    Subject to matters for which a Party has an indemnity obligation pursuant to Article XIII and as set forth in Section 2.3(b) , the Final Settlement Statement shall be the final accounting for any and all Operating Expenses, and there shall be no adjustment for, or obligation to pay, any Operating Expenses between the Parties following the Final Settlement Statement.
3.7     Disputes . If Seller and Buyer are unable to resolve the matters addressed in the Dispute Notice (if any), each of Buyer and Seller shall within 14 Business Days after the

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delivery of such Dispute Notice, summarize its position with regard to such dispute in a written document of 20 pages or less and submit such summaries to the Houston office of Ernst & Young LLP or such other Person as the Parties may mutually select (the “ Accounting Arbitrator ”), together with the Dispute Notice, the Final Settlement Statement and any other documentation such Party may desire to submit. Within 20 Business Days after receiving the Parties’ respective submissions, the Accounting Arbitrator shall render a decision choosing either Seller’s position or Buyer’s position (with no authority to change the amount contemplated thereby) with respect to each matter addressed in any Dispute Notice, based on the materials submitted to the Accounting Arbitrator as described above. Any decision rendered by the Accounting Arbitrator pursuant hereto shall be final, conclusive and binding on Seller and Buyer and will be enforceable against the Parties in any court of competent jurisdiction. Seller and Buyer shall each bear its own legal fees and other costs of presenting its case to the Accounting Arbitrator. The costs of the Accounting Arbitrator shall be borne one-half by Seller and one-half by Buyer.
3.8     Allocation of Purchase Price / Allocated Values.
(a)    The “ Allocated Values ” for the Acreage Tracts and Wells are set forth on Exhibit G . The Allocated Value for the Acreage Tracts or Wells is equal to the portion of the unadjusted Purchase Price that is allocated to such Acreage Tract or Well on Exhibit G , increased or decreased by a share of each adjustment to the unadjusted Purchase Price in accordance with Section 3.3 . The share of each adjustment allocated to a particular Acreage Tract or Well shall be allocated to the particular Acreage Tract or Well to which such adjustment relates to the extent such adjustment relates to such Acreage Tract or Well and to the extent that it is, in the commercially reasonable discretion of Seller, possible to do so. Any adjustment not allocated to a specific Acreage Tract or Well pursuant to the immediately preceding sentence shall be allocated among the various Acreage Tract or Wells on a pro-rata basis in proportion to the unadjusted Purchase Price allocated to such Acreage Tract or Well on Exhibit G . Seller has accepted such Allocated Values for purposes of this Agreement and the transactions contemplated hereby, but makes no representation or warranty as to the accuracy of such values.
(b)    For purposes of Income Taxes, Asset Taxes, and other Taxes, Buyer and Seller shall agree to an allocation of the Purchase Price, in a manner consistent with Section 1060 of the Code, and Treasury Regulations thereunder (and, if applicable, in accordance with any other similar provision of state or local Law) within 90 days following the Closing Date. Such allocation schedule shall be reasonably consistent with the Allocated Values, as adjusted pursuant to this Agreement. Buyer and Seller shall report the purchase and sale of the Conveyed Interests consistently with any such agreed allocation schedule unless otherwise required by applicable Law.
3.9     Allocation for Imbalances at Closing . If, prior to Closing, either Party discovers an error in the Imbalances set forth in Schedule 7.11 , then the Purchase Price shall be further adjusted at Closing pursuant to Sections 3.3(a)(vi) , 3.3(a)(vii) , 3.3(b)(vi) , or 3.3(b)(vii) , as applicable, and Schedule 7.11 will be deemed amended immediately prior to Closing to reflect the Imbalances for which the Purchase Price is so adjusted.

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ARTICLE IV
ACCESS / DISCLAIMERS
4.1     Access .
(a)    From and after the Execution Date and up to and including the Closing Date (or earlier termination of this Agreement pursuant to the terms herein) but subject to the other provisions of this Section 4.1 and obtaining of any required consents of Third Parties (provided that Seller shall use good faith efforts to obtain such consent from all applicable Third Parties), including Third Party operators of the Properties (with respect to which consents Seller shall not be obligated to expend any monies) and including surface owners who are given notice of surface access in the ordinary course of Seller’s business, Seller shall afford to Buyer and its representatives (“ Buyer’s Representatives ”) reasonable access, during normal business hours, to the Properties and all Records in Seller’s or any of its Affiliate’s possession at such time to the extent necessary to conduct the title or environmental review described in Article V and Article VI . All investigations and due diligence conducted by Buyer or any Buyer’s Representative shall be conducted at Buyer’s sole cost, risk and expense and any conclusions made from any examination done by Buyer or any Buyer’s Representative shall result from Buyer’s own independent review and judgment, but subject to any scheduling requirements by the Third Parties referenced above.
(b)    From the Execution Date to the Closing Date, Buyer’s inspection right with respect to the Environmental Condition of the Properties shall be limited to undertake a Phase I Environmental Site Assessment of the Properties conducted by a reputable environmental consulting or engineering firm and may include only visual inspections and record reviews relating to the Properties. In conducting such inspection, Buyer shall not operate any equipment or conduct any testing or sampling of soil, groundwater or other materials (including any testing or sampling for Hazardous Substances, Hydrocarbons or NORM). Seller or Seller’s designee shall have the right to be present during any stage of the assessment. Buyer shall give Seller reasonable prior written notice before gaining physical access to any of the Conveyed Interests, and Seller or its designee shall have the right but not the obligation to accompany Buyer and Buyer’s Representatives whenever Buyer and/or Buyer’s Representative gain physical access to any Conveyed Interests. Notwithstanding anything contained herein to the contrary, Buyer shall not have access to, and shall not be permitted to conduct any inspections (including any Phase I Environmental Site Assessment) with respect to, any Conveyed Interests with respect to which Seller does not have the authority to grant access for such due diligence; provided that Seller shall request access rights and use good faith efforts to obtain consent from Third Parties for Buyer to conduct such inspections (including any Phase I Environmental Site Assessment) with respect to, such Conveyed Interests. Notwithstanding the foregoing, in the event that Buyer’s Phase I Environmental Site Assessment identifies, in Buyer’s or Buyer’s Representative’s reasonable opinion, any potential Environmental Conditions, Buyer shall have the right to conduct an ASTM Phase II Environmental Site Assessment of the Properties; provided that if Buyer elects to conduct such ASTM Phase II Environmental Site Assessment, the Defect Claim Date (as to the assertion of Environmental Defects related to such ASTM Phase II Environmental Site Assessment and the underlying Phase I Environmental Site Assessment only), the Scheduled Closing Date and the Outside Date shall be extended for 8 days.

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(c)    Buyer shall coordinate its access rights, environmental property assessments and physical inspections of the Conveyed Interests with Seller and all Third Party operators, as applicable, to reasonably minimize any inconvenience to or interruption of the conduct of business by Seller or any such Third Party operator. Buyer shall abide by Seller’s, and any Third Party operator’s, safety rules, regulations and operating policies while conducting its due diligence evaluation of the Conveyed Interests, including any environmental or other inspection or assessment of the Conveyed Interests and, to the extent reasonably required by any Third Party operator, execute and deliver any reasonable access and bonding agreement required by any such Third Party operator, in each case before conducting Buyer’s assessment on such Conveyed Interest in accordance with this Section 4.1 . Buyer hereby indemnifies, defends, and holds harmless each of the operators of the Conveyed Interests and each Seller Indemnified Party from and against any and all Liabilities arising out of, resulting from or relating to any field visit, environmental assessment or other due diligence activity conducted by Buyer or any Buyer’s Representative with respect to the Conveyed Interests, EVEN IF SUCH LIABILITIES ARISE OUT OF OR RESULT FROM, IN WHOLE OR IN PART, THE SOLE, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF, OR THE VIOLATION OF LAW BY, A MEMBER OF THE SELLER INDEMNIFIED PARTIES, EXCEPTING ONLY LIABILITIES TO THE EXTENT RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY SUCH OPERATOR OF THE CONVEYED INTERESTS OR A MEMBER OF THE SELLER INDEMNIFIED PARTIES .
(d)    Buyer acknowledges that any entry into Seller’s offices or onto the Conveyed Interests shall be at Buyer’s sole risk, cost and expense, and, subject to the terms hereof, that none of the Seller Indemnified Parties shall be liable in any way for any injury, loss or damage arising out of such entry that may occur to Buyer or any of Buyer’s Representatives pursuant to this Agreement. Buyer hereby fully waives and releases any and all Liabilities against all of the Seller Indemnified Parties for any injury, death, loss or damage to any of Buyer’s Representatives or their property in connection with Buyer’s due diligence activities, EVEN IF SUCH LIABILITIES ARISE OUT OF OR RESULT FROM, IN WHOLE OR IN PART, THE SOLE, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF, OR THE VIOLATION OF LAW BY, A MEMBER OF THE SELLER INDEMNIFIED PARTIES, EXCEPTING ONLY LIABILITIES RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF A MEMBER OF THE SELLER INDEMNIFIED PARTIES .
(e)    Buyer agrees to promptly provide Seller, but in no event less than five days after receipt or creation thereof by Buyer or any of Buyer’s Representatives (including Buyer’s environmental consulting or engineering firm), copies of all final environmental reports prepared by Buyer and/or any of Buyer’s Representatives, which contain data collected or generated from Buyer’s and/or any of Buyer’s Representatives’ due diligence with respect to the Conveyed Interest, but only to the extent Buyer intends to use the same to support the assertion of any Environmental Defect. Seller shall not be deemed by its receipt of said documents or otherwise to have made any representation or warranty, express, implied or statutory, as to the condition of the Conveyed Interests or to the accuracy of said documents or the information contained therein.

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(f)    Upon completion of Buyer’s due diligence, Buyer shall at its sole cost and expense and without any cost or expense to Seller or any of its Affiliates (i) repair all damage done to any Conveyed Interests in connection with Buyer’s and/or any of Buyer’s Representatives’ due diligence (including due diligence conducted by Buyer’s environmental consulting or engineering firm), (ii) restore the Conveyed Interests to the approximate same condition as they were prior to commencement of any such due diligence, and (iii) remove all equipment, tools or other property brought onto the Conveyed Interests by any Buyer Representative in connection with such due diligence. Any disturbance to the Conveyed Interests (including the leasehold associated therewith) resulting from such due diligence will be promptly corrected by Buyer at Buyer’s sole cost and expense.
(g)    During all periods that Buyer and/or any of Buyer’s Representatives (including Buyer’s environmental consulting or engineering firm) are on the Conveyed Interests, Buyer shall maintain, at its sole cost and expense, reasonable policies of insurance.
4.2     Confidentiality . Buyer acknowledges that, pursuant to its right of access to the Records or the Conveyed Interests, Buyer and/or Buyer’s Representatives (including Buyer’s environmental consulting or engineering firm) will become privy to confidential and other information of Seller and/or Seller’s Affiliates and Buyer shall ensure that such confidential information (a) shall not be used for any purpose other than in connection with the transactions contemplated by this Agreement and (b) shall be held confidential by Buyer and Buyer’s Representatives (including Buyer’s environmental consulting or engineering firm) in accordance with the terms of the Confidentiality Agreement. If the Closing should occur, the foregoing confidentiality restriction on Buyer, including the Confidentiality Agreement, shall terminate as of the Closing Date (except as to (i) such portions of the Conveyed Interest that are not conveyed to Buyer pursuant to the provisions of this Agreement, and (ii) information that is solely related to the Excluded Assets and/or Seller and its Affiliates.
4.3     Disclaimers .
(a)    EXCEPT TO THE EXTENT EXPRESSLY SET FORTH IN ARTICLE VII AND IN THE ASSIGNMENTS DELIVERED AT CLOSING, (i) SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, AND (ii) SELLER EXPRESSLY DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER OR ANY OF ITS AFFILIATES, EMPLOYEES, AGENTS, CONSULTANTS OR REPRESENTATIVES (INCLUDING ANY OPINION, INFORMATION, PROJECTION OR ADVICE THAT MAY HAVE BEEN PROVIDED TO BUYER BY A MEMBER OF THE SELLER INDEMNIFIED PARTIES).
(b)    EXCEPT TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE IN ARTICLE VII , AND IN THE ASSIGNMENTS DELIVERED AT CLOSING AND WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) TITLE TO ANY OF THE CONVEYED INTERESTS, (ii) THE CONTENTS, CHARACTER OR NATURE OF ANY REPORT OF ANY

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PETROLEUM ENGINEERING CONSULTANT, OR ANY ENGINEERING, GEOLOGICAL OR SEISMIC DATA OR INTERPRETATION, RELATING TO THE CONVEYED INTERESTS, (iii) THE QUANTITY, QUALITY OR RECOVERABILITY OF HYDROCARBONS IN OR FROM THE CONVEYED INTERESTS, (iv) ANY ESTIMATES OF THE VALUE OF THE CONVEYED INTERESTS OR FUTURE REVENUES TO BE GENERATED BY THE CONVEYED INTERESTS, (v) THE PRODUCTION OF OR ABILITY TO PRODUCE HYDROCARBONS FROM THE CONVEYED INTERESTS, (vi) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE CONVEYED INTERESTS, (vii) THE CONTENT, CHARACTER OR NATURE OF ANY INFORMATION MEMORANDUM, REPORTS, BROCHURES, CHARTS OR STATEMENTS PREPARED BY SELLER OR THIRD PARTIES WITH RESPECT TO THE CONVEYED INTERESTS, (viii) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE TO BUYER OR ITS AFFILIATES, OR ITS OR THEIR RESPECTIVE EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO AND (ix) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT. EXCEPT TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE IN ARTICLE VII AND IN THE ASSIGNMENTS, SELLER FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY OR IMPLIED, OF MERCHANTABILITY, FREEDOM FROM LATENT VICES OR DEFECTS, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY OF THE CONVEYED INTERESTS, RIGHTS OF A PURCHASER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES THAT BUYER SHALL BE DEEMED TO BE OBTAINING THE CONVEYED INTERESTS IN THEIR PRESENT STATUS, CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS” WITH ALL FAULTS OR DEFECTS (KNOWN OR UNKNOWN, LATENT, DISCOVERABLE OR UNDISCOVERABLE), AND THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS BUYER DEEMS APPROPRIATE.
(c)    EXCEPT TO THE EXTENT EXPRESSLY REPRESENTED OTHERWISE IN ARTICLE VII AND IN THE ASSIGNMENTS, (i) SELLER HAS NOT AND WILL NOT MAKE ANY REPRESENTATION OR WARRANTY REGARDING ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT OR THE PROTECTION OF HUMAN HEALTH, SAFETY, NATURAL RESOURCES OR THE ENVIRONMENT, OR ANY OTHER ENVIRONMENTAL CONDITION OF THE CONVEYED INTERESTS, (ii) NOTHING IN THIS AGREEMENT OR OTHERWISE SHALL BE CONSTRUED AS SUCH A REPRESENTATION OR WARRANTY, AND (iii) SUBJECT TO BUYER’S RIGHTS UNDER SECTION 6.1 , BUYER SHALL BE DEEMED TO BE TAKING THE CONVEYED INTERESTS “AS IS” AND “WHERE IS” WITH ALL FAULTS FOR PURPOSES OF THEIR ENVIRONMENTAL CONDITION AND THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH ENVIRONMENTAL INSPECTIONS AS BUYER DEEMS APPROPRIATE.

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(d)    IT IS THE INTENTION OF THE PARTIES THAT BUYER’S RIGHTS AND REMEDIES WITH RESPECT TO THIS TRANSACTION AND WITH RESPECT TO ALL ACTS OR PRACTICES OF SELLER, PAST, PRESENT OR FUTURE, IN CONNECTION WITH THIS TRANSACTION SHALL BE GOVERNED BY LEGAL PRINCIPLES OTHER THAN THE TEXAS DECEPTIVE TRADE PRACTICES--CONSUMER PROTECTION ACT, TEX. BUS. & COM. CODE ANN. § 17.41 ET SEQ . (THE "DTPA"). AS SUCH, BUYER HEREBY WAIVES THE APPLICABILITY OF THE DTPA TO THIS TRANSACTION AND ANY AND ALL DUTIES, RIGHTS OR REMEDIES THAT MIGHT BE IMPOSED BY THE DTPA, WHETHER SUCH DUTIES, RIGHTS AND REMEDIES ARE APPLIED DIRECTLY BY THE DTPA ITSELF OR INDIRECTLY IN CONNECTION WITH OTHER STATUTES. BUYER ACKNOWLEDGES, REPRESENTS AND WARRANTS THAT IT IS PURCHASING THE GOODS AND/OR SERVICES COVERED BY THIS AGREEMENT FOR COMMERCIAL OR BUSINESS USE; THAT IT HAS ASSETS OF $5 MILLION OR MORE ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENT PREPARED IN ACCORDANCE WITH GAAP; THAT IT HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF A TRANSACTION SUCH AS THIS; AND THAT IT IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH SELLER. BUYER EXPRESSLY RECOGNIZES THAT THE PRICE FOR WHICH SELLER HAS AGREED TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT HAS BEEN PREDICATED UPON THE INAPPLICABILITY OF THE DTPA AND THIS WAIVER OF THE DTPA. PURCHASER FURTHER RECOGNIZES THAT SELLER, IN DETERMINING TO PROCEED WITH THE ENTERING INTO OF THIS AGREEMENT, HAS EXPRESSLY RELIED ON THIS WAIVER AND THE INAPPLICABILITY OF THE DTPA.
(e)    SELLER AND BUYER AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE EFFECTIVE, THE DISCLAIMERS OF CERTAIN REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION 4.3 ARE “CONSPICUOUS” DISCLAIMERS FOR THE PURPOSE OF ANY APPLICABLE LAW.
(f)    NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE FOREGOING DISCLAIMERS AND WAIVERS DO NOT WAIVE OR PRECLUDE ANY POTENTIAL CLAIM OF FRAUD BY THE BUYER, OTHER THAN THE WAIVER DESCRIBED IN SECTION 4.3(d) .
ARTICLE V
TITLE MATTERS; CASUALTIES; TRANSFER RESTRICTIONS
5.1     General Disclaimer of Title Warranties and Representations . Except for the special warranty of title set forth in the Assignments, and without limiting Buyer’s remedies for Title Defects set forth in this Article V , Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to Seller’s title to any of the Conveyed Interests, and Buyer hereby acknowledges and agrees that Buyer’s sole remedy for any defect of title, including any Title Defect, with respect to any of the Conveyed Interests (a) before Closing, shall be as set forth in Section 5.3 and (b) from and after Closing, shall be pursuant to the contractual special warranty of title set forth in the Assignments.

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5.2     Special Warranty . The Assignments delivered at Closing will contain a special warranty of title with regard to the Conveyed Interests whereby Seller shall warrant Defensible Title to the Conveyed Interests unto Buyer against every Person whomsoever lawfully claiming or to claim the same or any part thereof by, through or under Seller, but not otherwise, subject, however, to the Permitted Encumbrances.
5.3     Notice of Title Defects; Defect Adjustments .
(a)     Title Defect Notices . On or before the Defect Claim Date, Buyer must deliver claim notices to Seller meeting the requirements of this Section 5.3(a) (collectively, the “ Title Defect Notices ” and, individually, a “ Title Defect Notice ”) setting forth any matters which, in Buyer’s reasonable opinion, constitute Title Defects and which Buyer intends to assert as a Title Defect pursuant to this Section 5.3(a) . For all purposes of this Agreement and notwithstanding anything herein to the contrary, Buyer shall be deemed to have waived, and Seller shall have no liability for, any Title Defect which Buyer fails to assert as a Title Defect by a properly delivered Title Defect Notice received by Seller on or before the Defect Claim Date, subject, however, to Seller’s rights under the special warranty of title set forth in the Assignments. To be effective, each Title Defect Notice shall be in writing, and shall include (i) a description of the alleged Title Defect and the Conveyed Interest or portion thereof, affected by such alleged Title Defect (each a “ Title Defect Property ”), (ii) the Allocated Value of each Title Defect Property, (iii) supporting documents reasonably necessary for Seller to verify the existence of the alleged Title Defect, (iv) Buyer’s preferred manner of curing such Title Defect and (v) the amount by which Buyer reasonably believes the Allocated Value of each Title Defect Property is reduced by such alleged Title Defect and the computations upon which Buyer’s belief is based. To give Seller an opportunity to commence reviewing and curing Title Defects, Buyer agrees to use reasonable efforts to give Seller, on or before the end of each calendar week prior to the Defect Claim Date, written notice of all alleged Title Defects discovered by Buyer during the preceding calendar week, which notice may be preliminary in nature and supplemented prior to the Defect Claim Date; provided that Buyer’s failure to do so shall not constitute a waiver of any Title Defects by Buyer. Buyer shall also, promptly upon actual discovery, furnish Seller with written notice of any Title Benefit which to Buyer’s knowledge is discovered by any of Buyer’s or any of its Affiliates’ employees, title attorneys, landmen or other title examiners while conducting Buyer’s due diligence with respect to the Conveyed Interests prior to the Defect Claim Date; provided that Buyer shall have no duty or obligation to search for Title Benefits.
(b)     Title Benefit Notices . Seller shall have the right, but not the obligation, to deliver to Buyer on or before the Defect Claim Date with respect to each Title Benefit a notice (a “ Title Benefit Notice ”), including (i) a description of the alleged Title Benefit and the Conveyed Interest, or portion thereof, affected by such alleged Title Benefit (each a “ Title Benefit Property ”), (ii) the amount by which Seller reasonably believes the Allocated Value of such Title Benefit Property is increased by such alleged Title Benefit, (iii) the computations upon which Seller’s belief is based, and (iv) supporting documents reasonably necessary for Buyer to verify the existence of the Title Benefit. Seller shall be deemed to have waived any Title Benefit which Seller fails to assert as a Title Benefit by a Title Benefit Notice delivered to Buyer on or before the Defect Claim Date.

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(c)     Seller’s Right to Cure . Seller shall have the right, but not the obligation, to attempt, at its sole cost, to cure any properly asserted Title Defects at any time prior to 90 days after the Closing Date (the “ Cure Period ”). During the period of time from Closing to the expiration of the Cure Period, Buyer agrees to afford Seller and its officers, employees and other authorized representatives reasonable access, during normal business hours, to the Conveyed Interests and all Records in Buyer’s or any of its Affiliates’ possession in order to facilitate Seller’s attempt to cure any such Title Defects. No reduction shall be made to the Purchase Price with respect to any Title Defect for which Seller has provided notice to Buyer prior to or on the Closing Date that Seller intends to attempt to cure the Title Defect during the Cure Period. An election by Seller to attempt to cure a Title Defect shall be without prejudice to its rights under Section 5.3(j) and shall not constitute an admission against interest or a waiver of Seller’s right to dispute the existence, nature or value of, or cost to cure, the alleged Title Defect. If Seller elects to cure a Title Defect and the Title Defect is not cured prior to Closing, the Conveyed Interests affected by such Title Defect shall be conveyed to Buyer at the Closing; an amount equal to the Title Defect Amount of such Title Defect (as asserted in good faith by Buyer, unless the Parties have otherwise agreed upon an amount) shall be deducted from amounts otherwise payable at the Closing; and at the Closing, Buyer shall deposit such amount into an escrow account established with Escrow Agent pursuant to the terms of an Escrow Agreement pending the curing or resolution of the applicable Title Defect.
(d)     Remedies for Title Defects . Subject to Seller’s continuing right to dispute the existence of a Title Defect and/or the Title Defect Amount asserted with respect thereto, and subject to the rights of the Parties pursuant to Section 15.1(e) , in the event that any Title Defect timely asserted by Buyer in accordance with Section 5.3(a) is not waived in writing by Buyer or cured during the Cure Period, Seller shall, at its sole option but subject to Buyer’s agreement in the case of the remedy described in Section 5.3(d)(ii) , elect to:
(i)    subject to the Individual Title Defect Threshold and the Title Deductible, reduce the Purchase Price or the Final Price, as applicable, by the Title Defect Amount determined pursuant to Section 5.3(g) or Section 5.3(j) ; or
(ii)    if and only if Buyer agrees to this remedy in its sole discretion, indemnify Buyer against all Liability (up to the Allocated Value of the applicable Title Defect Property) resulting from such Title Defect with respect to such Title Defect Property pursuant to an indemnity agreement prepared by Seller in a form and substance reasonably acceptable to Buyer (a “ Title Indemnity Agreement ”).
(e)     Remedies for Title Benefits . With respect to each Title Benefit Property reported under Section 5.3(a) , in the event there is a reduction in the Purchase Price for Title Defects under Section 5.3(d)(i) , then, as Seller’s sole and exclusive remedy for each Title Benefit, such reduction in the Purchase Price shall be offset by an amount (the “ Title Benefit Amount ”) equal to the increase in the Allocated Value for such Title Benefit Property caused by such Title Benefit, as determined pursuant to Section 5.3(h) or Section 5.3(j) .
(f)     Exclusive Remedy . Except for Buyer’s rights under Seller’s special warranty of title in the Assignments delivered at Closing and Buyer’s right to terminate this Agreement pursuant to Section 15.1(e) , Section 5.3(d) shall be the exclusive right and remedy of

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Buyer with respect to Seller’s failure to have Defensible Title or any other title matter with respect to any Conveyed Interest, and Buyer hereby waives any and all other rights or remedies with respect thereto.
(g)     Title Defect Amount . The amount by which the Allocated Value of a Title Defect Property is reduced as a result of the existence of a Title Defect shall be the “ Title Defect Amount ” for such Title Defect Property and shall be determined in accordance with the following terms and conditions (without duplication):
(i)    if Buyer and Seller agree on the Title Defect Amount, then that amount shall be the Title Defect Amount;
(ii)    if the Title Defect is an Encumbrance that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the Title Defect from the Title Defect Property;
(iii)    if the Title Defect represents a discrepancy between (A) Seller’s Net Revenue Interest for any Title Defect Property and (B) the Net Revenue Interest set forth for such Title Defect Property in Exhibit B or Exhibit B-1 , then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest set forth for such Title Defect Property in Exhibit B or Exhibit B-1 ;
(iv)    if the Title Defect represents an increase of (A) Seller’s Working Interest for any Title Defect Property over (B) the Working Interest set forth for such Title Defect Property in Exhibit B, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction, the numerator of which is the Working Interest increase and the denominator of which is the Working Interest set forth for such Title Defect Property in Exhibit B ;
(v)    if the Title Defect represents an obligation or Encumbrance upon or other defect in title to the Title Defect Property of a type not described above, then the Title Defect Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Buyer and Seller and such other reasonable factors as are necessary to make a proper evaluation; provided, however, that if such Title Defect is reasonably capable of being cured, the Title Defect Amount shall not be greater than the lesser of (A) the reasonable cost and expense of curing such Title Defect and (B) the Allocated Value of the Title Defect Property;
(vi)    In connection with the Acreage Tracts, if the Title Defect is based on Seller owning less Net Acres than those represented on Exhibit B-1 , then the value of the Title Defect (as to each Acreage Tract affected by the Title Defect) shall be equal to the product of multiplying the Allocated Value set forth in Exhibit B-1 for such Acreage Tract by a fraction the numerator of which is the Net Acres for such Acreage Tract shown on Exhibit B-1 , less the

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actual Net Acres, and the denominator of which is the Net Acres shown for such Acreage Tract on Exhibit B-1 ;
(vii)    the Title Defect Amount with respect to a Title Defect Property shall be determined without duplication of any costs or losses included in another Title Defect Amount hereunder; and
(viii)    notwithstanding anything to the contrary in this Article V , the aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of such Title Defect Property.
(h)     Title Benefit Amount . The Title Benefit Amount resulting from a Title Benefit shall be determined in accordance with the following methodology, terms and conditions (without duplication):
(i)    if Buyer and Seller agree on the Title Benefit Amount, then that amount shall be the Title Benefit Amount;
(ii)    if the Title Benefit represents a discrepancy between (A) Seller’s Net Revenue Interest for any Title Benefit Property and (B) the Net Revenue Interest set forth for such Title Benefit Property in Exhibit B, then the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the Net Revenue Interest increase and the denominator of which is the Net Revenue Interest set forth for such Title Benefit Property in Exhibit B;
(iii)    if the Title Benefit represents a decrease of (A) Seller’s Working Interest for any Title Benefit Property over (B) the Working Interest set forth for such Title Benefit Property in Exhibit B , then the Title Benefit Amount shall be the product of the Allocated Value of such Title Benefit Property multiplied by a fraction, the numerator of which is the Working Interest decrease and the denominator of which is the Work Interest set forth for such Title Benefit Property in Exhibit B ;
(iv)    In connection with the Acreage Tracts, if the Title Benefit is based on Seller owning more Net Acres than those represented on Exhibit B-1 , then the value of the Title Benefit shall be equal to the product of multiplying the Allocated Value set forth in Exhibit B-1 for such Acreage Tract by a fraction the numerator of which is the actual Net Acres owned by Seller less the Net Acres for such Acreage Tract shown on Exhibit B-1 , and the denominator of which is the Net Acres shown for such Acreage Tract on Exhibit B-2 ; and
(v)    if the Title Benefit is of a type not described above, then the Title Benefit Amounts shall be determined by taking into account the Allocated Value of the Title Benefit Property, the portion of such Title Benefit Property affected by such Title Benefit, the legal effect of the Title Benefit, the potential economic effect of the Title Benefit over the life of such Title Benefit Property, the values placed upon the Title Benefit by Buyer and Seller and such other reasonable factors as are necessary to make a proper evaluation.
(i)     Title Defect Threshold and Deductible . Notwithstanding anything herein to the contrary, (i) in no event shall there be any adjustments to the Purchase Price or other

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remedies provided by Seller hereunder for any individual Title Defect for which the Title Defect Amount does not exceed $100,000 (“ Individual Title Defect Threshold ”); and (ii) in no event shall there be any adjustment to the Purchase Price or other remedies provided by Seller hereunder for any Title Defect for which the Title Defect Amount exceeds the Individual Title Defect Threshold unless (A) the amount of the aggregate Title Defect Amounts of all such Title Defects that exceed the Individual Title Defect Threshold (but excluding any Title Defect Amounts attributable to Title Defects cured by Seller) less the amount of the aggregate Title Benefit Amounts exceeds (B) the Title Deductible, after which point Buyer shall be entitled to adjustments to the Purchase Price or other applicable remedies available hereunder, but only to the extent that the amount by which the aggregate amount of such Title Defect Amounts less Title Benefit Amounts exceeds the Title Deductible.
(j)     Title Dispute Resolution . Seller and Buyer shall attempt to agree on matters regarding (i) all Title Defects, Title Benefits, Title Defect Amounts and Title Benefit Amounts, and (ii) the adequacy of any curative materials provided by Seller to cure any alleged Title Defect (collectively “ Title Disputes ”) prior to Closing. If Seller and Buyer are unable to agree by Closing (or by the Title Dispute Date if Seller elects to attempt to cure an alleged Title Defect after Closing), the Title Disputes shall be exclusively and finally resolved pursuant to this Section 5.3(j) . There shall be a single arbitrator, who shall be a title attorney with at least 10 years’ experience in oil and gas titles involving properties in any of the regional areas in which the Title Defect Properties or Title Benefit Properties, as applicable, are located, in each case as selected by the mutual agreement of Buyer and Seller within 15 days after Closing or the Title Dispute Date, as applicable (the “ Title Arbitrator ”). If the Parties do not mutually agree upon the Title Arbitrator in accordance with this Section 5.3(j) , the Houston office of the AAA shall appoint the Title Arbitrator under such conditions as the AAA in its sole discretion deems necessary or advisable. The place of arbitration shall be Houston, and the arbitration shall be conducted in accordance with the AAA Rules, to the extent such rules do not conflict with the terms of this Section 5.3(j) . The Title Arbitrator’s determination shall be made within 30 days after submission of Title Disputes and shall be final and binding upon both Parties, without right of appeal. In making his determination with respect to any Title Dispute, the Title Arbitrator shall be bound by the rules set forth in Section 5.3 and, subject to the foregoing, may consider such other matters as, in the opinion of the Title Arbitrator, are necessary to make a proper determination. The Title Arbitrator, however, may not award Buyer a greater Title Defect Amount than the Title Defect Amount claimed by Buyer in its applicable Title Defect Notice or less than that asserted by Seller. The Title Arbitrator shall act as an expert for the limited purpose of determining the specific Title Disputes submitted by either Party, and the Title Arbitrator may not award damages, interest or penalties to either Party with respect to any matter. Seller and Buyer shall each bear its own legal fees and other costs of presenting its case to the Title Arbitrator. Each of Seller and Buyer shall bear one-half of the costs and expenses of the Title Arbitrator. To the extent the award of the Title Arbitrator with respect to any Title Defect Amount or Title Benefit Amount is not taken into account as an adjustment to the Purchase Price pursuant to Section 3.5 or Section 3.6 , then within 10 days after the Title Arbitrator delivers written notice to Buyer and Seller of his award with respect to a Title Dispute, and, subject to Section 5.3(i) , the Parties shall direct the Escrow Agent to release the amounts so awarded by the Title Arbitrator to the applicable Party. Nothing herein shall operate to cause Closing to be delayed on account of any arbitration that may be conducted pursuant to this Section 5.3(j) , and, to the extent any adjustments are not agreed upon by the Parties as of Closing, the disputed

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amounts shall be deducted from the amounts otherwise paid by Buyer at Closing and at Closing, Buyer shall deposit such amounts into the escrow account with the Escrow Agent pursuant to the Escrow Agreement pending final resolution under this Section 5.3(j) .
5.4     Casualty or Condemnation Loss .
(a)    Notwithstanding anything herein to the contrary, from and after the Effective Time, if Closing occurs, Buyer shall assume all risk of loss with respect to production of Hydrocarbons through normal depletion (including watering out of any well, collapsed casing or sand infiltration of any well) and the depreciation of Personal Property due to ordinary wear and tear, in each case, with respect to the Conveyed Interests, and Buyer shall not assert such matters as Casualty Losses or Title Defects hereunder.
(b)    If, after the Execution Date but prior to the Closing Date, any portion of the Conveyed Interests is damaged or destroyed by fire or other casualty or is taken in condemnation or under right of eminent domain (each, a “ Casualty Loss ”), and the Closing thereafter occurs, Seller, at Closing, shall pay to Buyer all sums actually paid to Seller by Third Parties by reason of any Casualty Loss to the extent affecting the Conveyed Interests and shall assign, transfer and set over to Buyer or subrogate Buyer to all of Seller’s right, title and interest (if any) in insurance claims, unpaid awards, and other rights against Third Parties (excluding any Liabilities, other than insurance claims, of or against any Seller Indemnified Party) arising out of such Casualty Loss to the extent affecting the Conveyed Interests; provided , however , that Seller shall reserve and retain (and Buyer shall assign to Seller) all right, title, interest and claims against Third Parties for the recovery of Seller’s costs and expenses incurred prior to Closing in repairing such Casualty Loss and/or pursuing or asserting any such insurance claims or other rights against Third Parties.
5.5     Preferential Purchase Rights and Consents to Assign .
(a)    With respect to each Preferential Purchase Right set forth in Schedule 7.9 , not later than 10 days after the Execution Date (and, with respect to each Preferential Purchase Right that is not set forth in Schedule 7.9 but is discovered by either Party after the Execution Date and before the Closing Date, not later than five days after the discovery thereof), Seller shall send to the holder of each such Preferential Purchase Right a notice in material compliance with the contractual provisions applicable to such Preferential Purchase Right.
(i)    If, prior to Closing, any holder of a Preferential Purchase Right notifies Seller that it intends to consummate the purchase of the Conveyed Interest to which its Preferential Purchase Right applies, then the Conveyed Interest subject to such Preferential Purchase Right shall be excluded from the Conveyed Interests to be assigned to Buyer at Closing (but only to the extent of the portion of such Conveyed Interest affected by the Preferential Purchase Right), and the Purchase Price shall be reduced by the Allocated Value of the Conveyed Interest (or portion thereof) so excluded. Seller shall be entitled to all proceeds paid by any Person exercising a Preferential Purchase Right prior to Closing. If such holder of such Preferential Purchase Right thereafter fails to consummate the purchase of the Conveyed Interest (or portion thereof) covered by such Preferential Purchase Right on or before the end of the period of time for closing such sale but no later than 180 days following the Closing Date, (A)

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Seller shall so notify Buyer, (B) Buyer shall purchase, on or before 10 days following receipt of such notice, such Conveyed Interest (or portion thereof) that was so excluded from the Conveyed Interests to be assigned to Buyer at Closing, under the terms of this Agreement and for a price equal to the amount by which the Purchase Price was reduced at Closing with respect to such excluded Conveyed Interest (or portion thereof), and (C) Seller shall assign to Buyer the Conveyed Interest (or portion thereof) so excluded at Closing pursuant to an instrument in substantially the same form as the Assignment. If, as of Closing, the time for exercising a Preferential Purchase Right has not expired and such Preferential Purchase Right has not been exercised or waived, then the Conveyed Interest subject to such Preferential Purchase Right shall be included in the Conveyed Interests to be assigned to Buyer at Closing, and Buyer shall be solely responsible for complying with the terms of such Preferential Purchase Right and shall be entitled to the proceeds, if any, associated with the exercise of such Preferential Purchase Right.
(ii)    All Conveyed Interests for which any applicable Preferential Purchase Right has been waived, or as to which the period to exercise the applicable Preferential Purchase Right has expired, in each case, prior to Closing, shall be sold to Buyer at Closing pursuant to the provisions of this Agreement.
(b)    With respect to each Consent set forth in Schedule 7.4 , Seller, not later than 10 days after the Execution Date (and, with respect to each Consent that is not set forth in Schedule 7.4 but is discovered by either Party after the Execution Date and before the Closing Date, not later than five days after the discovery thereof), shall send to the holder of each such Consent a notice in material compliance with the contractual provisions applicable to such Consent seeking such holder’s consent to the transactions contemplated hereby.
(i)    If (A) Seller fails to obtain a Consent set forth in Schedule 7.4 (or any Consent that is not set forth in Schedule 7.4 but is discovered by either Party after the Execution Date and before the Closing Date) prior to Closing and the failure to obtain such Consent would cause (1) the assignment of the Conveyed Interests affected thereby to Buyer to be void or (2) the termination of a Lease under the express terms thereof or (3) the payment of any consideration in exchange for granting such Consent or (B) a Consent requested by Seller is denied in writing, then, in each case, the Conveyed Interest (or portion thereof) affected by such un-obtained Consent shall be excluded from the Conveyed Interests to be assigned to Buyer at Closing, and the Purchase Price shall be reduced by the Allocated Value of such Conveyed Interest (or portion thereof) so excluded. In the event that any such Consent (with respect to a Conveyed Interest excluded pursuant to this Section 5.5(b)(i) ) that was not obtained prior to Closing is obtained within 180 days following the Closing Date, then, within 10 Business Days after such Consent is obtained, (x) Buyer shall purchase the Conveyed Interest (or portion thereof) that was so excluded as a result of such previously un-obtained Consent and pay to Seller the amount by which the Purchase Price was reduced at Closing with respect to the Conveyed Interest (or portion thereof) so excluded and (y) Seller shall assign to Buyer the Conveyed Interest (or portion thereof) so excluded at Closing pursuant to an instrument in substantially the same form as the Assignment.
(ii)    If Seller fails to obtain a Consent set forth in Schedule 7.4 (or any Consent that is not set forth in Schedule 7.4 but is discovered by either Party after the Execution Date and before the Closing Date) prior to Closing and (A) the failure to obtain such Consent

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would not cause (1) the assignment of the Conveyed Interest (or portion thereof) affected thereby to Buyer to be void or (2) the termination of a Lease under the express terms thereof or (3) the payment of any consideration in exchange for granting such Consent and (B) such Consent requested by Seller is not denied in writing by the holder thereof, then the Conveyed Interest (or portion thereof) subject to such un-obtained Consent shall nevertheless be assigned by Seller to Buyer at Closing as part of the Conveyed Interests and Buyer shall have no claim against, and Seller shall have no Liability for, the failure to obtain such Consent.
(iii)    Prior to Closing, Seller shall use their commercially reasonable efforts to obtain all Consents listed in Schedule 7.4 (and any Consent that is not set forth in Schedule 7.4 but is discovered by either Party after the Execution Date and before the Closing Date); provided , however , that neither Party shall be required to incur any Liability or pay any money (other than de minimis costs and expenses) in order to obtain any such Consent. Subject to the foregoing, Buyer agrees to provide Seller with any information or documentation that may be reasonably requested by Seller and/or the Third Party holder(s) of such Consents in order to facilitate the process of obtaining such Consents.
ARTICLE VI
ENVIRONMENTAL MATTERS
6.1     Environmental Defects .
(a)     Assertions of Environmental Defects . Buyer must deliver claim notices to Seller meeting the requirements of this Section 6.1(a) (collectively the “ Environmental Defect Notices ” and individually an “ Environmental Defect Notice ”) not later than the Defect Claim Date setting forth any matters which, in Buyer’s reasonable opinion, constitute Environmental Defects and which Buyer intends to assert as Environmental Defects pursuant to this Section 6.1 . For all purposes of this Agreement, other than and except for breaches of Seller’s representations in Article VII asserted prior to the Closing Date, Buyer shall be deemed to have waived, and Seller shall have no liability for, any Environmental Defect which Buyer fails to assert as an Environmental Defect by a properly delivered Environmental Defect Notice received by Seller on or before the Defect Claim Date, with such liabilities being “ Buyer’s Environmental Liabilities .” To be effective, each Environmental Defect Notice shall be in writing and shall include (i) a description of the matter constituting the alleged Environmental Condition (including the applicable Environmental Law violated or implicated thereby) and the Conveyed Interests affected by such alleged Environmental Condition, (ii) the Allocated Value of the Conveyed Interests (or portions thereof) affected by such alleged Environmental Condition, (iii) supporting documents reasonably necessary for Seller to verify the existence of such alleged Environmental Condition, and (iv) a calculation of the Remediation Amount (itemized in reasonable detail) that Buyer asserts is attributable to such alleged Environmental Condition. Buyer’s calculation of the Remediation Amount included in the Environmental Defect Notice must describe in reasonable detail the Remediation proposed for the alleged Environmental Condition that gives rise to the asserted Environmental Defect. Notwithstanding anything to the contrary contained in this Article VI , Seller shall have the right, but not the obligation, to cure any asserted Environmental Defect on or before the expiration of the Cure Period. To give Seller an opportunity to commence reviewing and curing Environmental Defects, Buyer agrees to use reasonable efforts to give Seller, on or before the end of each calendar week prior to the Defect

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Claim Date, written notice of all alleged Environmental Defects discovered by Buyer during the preceding calendar week, which notice may be preliminary in nature and supplemented prior to the Defect Claim Date; provided that failure to do so shall not constitute a waiver of any Environmental Defects by Buyer. If Seller elects to cure an Environmental Defect and the Environmental Defect is not cured prior to Closing, the Conveyed Interests affected by such Environmental Defect shall be conveyed to Buyer at the Closing; an amount equal to the Remediation Amount of such Environmental Defect (as asserted in good faith by Buyer, unless the Parties have otherwise agreed upon an amount) shall be deducted from amounts otherwise payable at the Closing; and at the Closing, Buyer shall deposit such amount into an escrow account established with Escrow Agent pursuant to the terms of an Escrow Agreement pending the curing or resolution of the applicable Environmental Defect.
(b)     Remedies for Environmental Defects . Subject to Seller’s continuing right to dispute the existence of an Environmental Defect and/or the Remediation Amount asserted with respect thereto, and subject to the rights of the Parties pursuant to Section 15.1(e) , in the event that any Environmental Defect timely asserted by Buyer in accordance with Section 6.1(a) is not waived in writing by Buyer or cured prior to Closing, Seller shall, at its sole option but subject to Buyer’s agreement in the case of the remedy described in Section 6.1(b)(iii) , elect to:
(i)    Subject to the Individual Environmental Threshold and the Environmental Deductible, reduce the Purchase Price by the Remediation Amount;
(ii)    in the event the Environmental Defect Amount attributable to any Environmental Defect exceeds 50% of the Allocated Value of the Conveyed Interest subject to such Environmental Defect, retain the entirety of the Conveyed Interest that is subject to such Environmental Defect, together with all associated Conveyed Interests, in which event the Purchase Price shall be reduced by an amount equal to the Allocated Value of such Conveyed Interest and such associated Conveyed Interests;
(iii)    if and only if Buyer agrees to this remedy in its sole discretion, have Seller indemnify Buyer against all Liability resulting from such Environmental Defect with respect to the Conveyed Interests pursuant to an indemnity agreement prepared by Seller in a form and substance reasonably acceptable to Buyer (each, an “ Environmental Indemnity Agreement ”).
(iv)    If Seller elects the option set forth in clause (i) above, Buyer shall be deemed to have assumed responsibility for all of the costs and expenses attributable to the Remediation of the Environmental Condition attributable to such Environmental Defect and for all Liabilities with respect thereto and Buyer’s obligations with respect to the foregoing shall be deemed to constitute Assumed Obligations.
Notwithstanding anything herein to the contrary, in the event the Environmental Defect Amount attributable to any Environmental Defect exceeds 50% of the Allocated Value of the Conveyed Interest subject to such Environmental Defect, Buyer shall have the right, at its sole option, to cause Seller to retain the entirety of the Conveyed Interest that is subject to such Environmental Defect, together with all associated Conveyed Interests, in which event the Purchase Price shall

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be reduced by an amount equal to the Allocated Value of such Conveyed Interest and such associated Conveyed Interests.
(c)     Exclusive Remedy . Except for Buyer’s rights to terminate this Agreement pursuant to Section 15.1(e) , the provisions set forth in Section 6.1(b) shall be the exclusive right and remedy of Buyer with respect to any Environmental Defect with respect to any Conveyed Interest or other environmental matter.
(d)     Environmental Deductibles . Notwithstanding anything herein to the contrary, (i) in no event shall there be any adjustment to the Purchase Price or other remedies provided by Seller for any individual Environmental Defect for which the Remediation Amount does not exceed $100,000 (the “ Individual Environmental Threshold ”); and (ii) in no event shall there be any adjustment to the Purchase Price or other remedies provided by Seller for any Environmental Defect for which the Remediation Amount exceeds the Individual Environmental Threshold unless (A) the amount of the aggregate Remediation Amounts of all such Environmental Defects that exceed the Individual Environmental Threshold (but excluding any Remediation Amounts attributable to any Environmental Defects cured by Seller and Conveyed Interests retained by Seller pursuant to Section 6.1(b) ) exceeds (B) the Environmental Deductible, after which point Buyer shall be entitled to adjustments to the Purchase Price or other applicable remedies available hereunder, but only with respect to the amount by which the aggregate amount of such Remediation Amounts exceeds the Environmental Deductible. For the avoidance of doubt, if Seller retains any Conveyed Interest related to any Environmental Defect pursuant to Section 6.1(b) , then (x) the Purchase Price shall be reduced by the Allocated Value of such retained Conveyed Interest and (y) the Remediation Amount for the Environmental Defect relating to such retained Conveyed Interest will not be counted towards the Environmental Deductible.
(e)     Environmental Dispute Resolution . Seller and Buyer shall attempt to agree on all Environmental Defects (that Seller is not attempting to cure after Closing), and Remediation Amounts associated with such Environmental Defects, prior to Closing. If Seller and Buyer are unable to agree by Closing (or the end of the Cure Period if Seller elects to cure any alleged Environmental Defect after Closing), the Environmental Defects and/or Remediation Amounts in dispute shall be exclusively and finally resolved by arbitration pursuant to this Section 6.1(e) . There shall be a single arbitrator, who shall be an environmental attorney with at least 10 years’ experience in environmental matters involving oil and gas producing properties in any of the regional areas in which the affected Conveyed Interests are located, as selected by the mutual agreement of Buyer and Seller within 15 days after the Closing Date (the “ Environmental Arbitrator ”). If the Parties do not mutually agree upon the Environmental Arbitrator in accordance with this Section 6.1(e) , the Houston office of the AAA shall appoint such Environmental Arbitrator under such conditions as the AAA in its sole discretion deems necessary or advisable. The place of arbitration shall be Houston, and the arbitration shall be conducted in accordance with the AAA Rules, to the extent such rules do not conflict with the terms of this Section 6.1(e) . The Environmental Arbitrator’s determination shall be made within 30 days after submission of the matters in dispute and shall be final and binding upon both Parties, without right of appeal. In making his determination, the Environmental Arbitrator shall be bound by the rules set forth in this Section 6.1 and, subject to the foregoing, may consider such other matters as in the opinion of the Environmental Arbitrator are necessary or helpful to

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make a proper determination. The Environmental Arbitrator, however, may not award Buyer a greater Remediation Amount than the Remediation Amount claimed by Buyer in its applicable Environmental Defect Notice or less than the Remediation Amount asserted by Seller). The Environmental Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Environmental Defects and/or Remediation Amounts submitted by either Party and may not award damages, interest or penalties to either Party with respect to any matter. Seller and Buyer shall each bear its own legal fees and other costs of presenting its case to the Environmental Arbitrator. Each of Seller and Buyer shall bear one-half of the costs and expenses of the Environmental Arbitrator. To the extent that the award of the Environmental Arbitrator with respect to any Remediation Amount is not taken into account as an adjustment to the Purchase Price pursuant to Section 3.5 or Section 3.6 , then within 10 days after the Environmental Arbitrator delivers written notice to Buyer and Seller of his award with respect to any Remediation Amount, and, subject to Section 6.1(d) , the Parties shall direct the Escrow Agent to release the amounts so awarded by the Environmental Arbitrator to the applicable Party. Nothing herein shall operate to cause Closing to be delayed on account of any arbitration conducted pursuant to this Section 6.1(e) , and, to the extent any adjustments are not agreed upon by the Parties as of Closing, the disputed amounts shall be deducted from the amounts otherwise paid by Buyer at Closing and at Closing, Buyer shall deposit such amounts into the escrow account with the Escrow Agent pursuant to the Escrow Agreement pending final resolution under this Section 6.1(e) .
6.2     NORM, Asbestos, Wastes and Other Substances . Buyer acknowledges that the Conveyed Interests have been used for exploration, development, and production of oil and gas and that there may be petroleum, produced water, wastes, or other substances or materials located in, on or under the Conveyed Interests or associated with the Conveyed Interests. Equipment and sites included in the Conveyed Interests may contain asbestos, NORM or other Hazardous Substances. NORM may affix or attach itself to the inside of wells, materials, and equipment as scale, or in other forms. The wells, materials, and equipment located on the Conveyed Interests or included in the Conveyed Interests may contain asbestos, NORM and other wastes or Hazardous Substances. NORM containing material and/or other wastes or Hazardous Substances may have come in contact with various environmental media, including water, soils or sediment. Special procedures may be required for the assessment, remediation, removal, transportation, or disposal of any affected environmental media, wastes, asbestos, NORM and other Hazardous Substances from the Conveyed Interests. Notwithstanding anything herein to the contrary, Buyer shall not be permitted to claim any Environmental Defect on the account of the presence of NORM or asbestos-containing materials that are non-friable, unless and only to the extent such presence of NORM or asbestos-containing materials that are non-friable constitutes an Environmental Condition resulting in a violation of Environmental Laws or to the extent such NORM or asbestos-containing material is present on out of service surface equipment included in the Conveyed Interests.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF SELLER
Subject to the matters specifically listed or disclosed in the Schedules (as added, supplemented or amended pursuant to Section 9.8 ), each entity constituting Seller jointly, and not severally, represents and warrants to Buyer as follows:

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7.1     Organization, Existence and Qualification .
(a)    LEH is a limited liability company duly formed and validly existing under the Laws of the State of Delaware. LEH has all requisite power and authority to own and operate its property (including its interests in the Conveyed Interests) and to carry on its business as now conducted. LEH is duly licensed or qualified to do business as a foreign limited liability company in all jurisdictions in which it carries on business or owns assets and such qualification is required by Law, except where the failure to be so qualified would not have a Material Adverse Effect.
(b)    LOI is a corporation duly formed and validly existing under the Laws of the State of Delaware. LOI has all requisite power and authority to own and operate its property (including its interests in the Conveyed Interests) and to carry on its business as now conducted. LOI is duly licensed or qualified to do business as a foreign corporation in all jurisdictions in which it carries on business or owns assets and such qualification is required by Law, except where the failure to be so qualified would not have a Material Adverse Effect.
7.2     Authorization, Approval and Enforceability . Seller has full power and authority to enter into and perform this Agreement and the Transaction Documents to which it is a party and the transactions contemplated herein and therein. The execution, delivery, and performance by Seller of this Agreement have been duly and validly authorized and approved by all necessary limited partnership action on the part of Seller. Assuming the due authorization, execution and delivery by the other parties to such documents, this Agreement is, and the Transaction Documents to which Seller is a party when executed and delivered by Seller will be, the valid and binding obligations of Seller and enforceable against Seller in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium, and similar Laws, as well as to principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
7.3     No Conflicts . Assuming the receipt of all Consents and the waiver of, or compliance with, all Preferential Purchase Rights applicable to the transactions contemplated hereby, the execution, delivery, and performance by Seller of this Agreement and the Transaction Documents to which it is a party and the consummation of the transactions contemplated herein and therein will not (a) conflict with or result in a breach of any provisions of the organizational documents of Seller or (b) except for Permitted Encumbrances, result in a default or the creation of any Encumbrance or give rise to any right of termination, cancellation, or acceleration under any of the terms, conditions, or provisions of any note, bond, mortgage, indenture, or other Applicable Contract to which Seller is a party or by which Seller or the Conveyed Interests may be bound or (c) violate any Law applicable to Seller or any of the Conveyed Interests, except in the case of clauses (b) and (c) where such default, Encumbrance, termination, cancellation, acceleration or violation would not have a Material Adverse Effect.
7.4     Consents . Except (a) as set forth in Schedule 7.4 , (b) for Customary Post-Closing Consents, and (c) for any Preferential Purchase Rights applicable to the transactions contemplated by this Agreement that are set forth in Schedule 7.9 , and (c) as described in Section 9.8 , there are no restrictions to assignment, including requirements for consents from Third Parties to any assignment (in each case), that Seller is required to obtain in connection with the

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transfer of the Conveyed Interests by Seller to Buyer or the consummation of the transactions contemplated by this Agreement by Seller (each, a “ Consent ”).
7.5     Bankruptcy . There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to Seller’s Knowledge, threatened in writing against Seller.
7.6     Litigation . Except as set forth in Schedule 7.6 , there is no lawsuit, action, litigation or arbitration by any Person or before any Governmental Authority pending, or asserted in writing against Seller, or to Seller’s Knowledge, threatened, with respect to the Conveyed Interests or otherwise relating to the Conveyed Interests. As of the Execution Date, there is no investigation, lawsuit, action, litigation or arbitration by any Person or before any Governmental Authority pending, or to Seller’s Knowledge, threatened against Seller or any of its Affiliates that has or would have a material adverse effect upon the ability of Seller to consummate the transactions contemplated by this Agreement or perform its obligations hereunder.
7.7     Material Contracts .
(a)     Schedule 7.7 sets forth as of the Execution Date all Applicable Contracts of the type described below (collectively, the “ Material Contracts ”):
(i)    any Applicable Contract that can reasonably be expected to result in aggregate payments by Seller of more than $150,000 during the remainder of the current or any subsequent fiscal year (based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues);
(ii)    any Applicable Contract that can reasonably be expected to result in aggregate revenues to Seller of more than $150,000 during the remainder of the current or any subsequent fiscal year (based solely on the terms thereof and current volumes, without regard to any expected increase in volumes or revenues);
(iii)    any Hydrocarbon purchase and sale, transportation, gathering, treating, marketing, processing or similar Applicable Contract that is not terminable without penalty on 90 days’ or less notice;
(iv)    any indenture, mortgage, loan, credit or sale-leaseback or similar Applicable Contract that can reasonably be expected to result in aggregate payments by Seller during the current or any subsequent fiscal year;
(v)    any Applicable Contract that constitutes a lease under which Seller is the lessor or the lessee of real or personal property which lease (A) cannot be terminated by Seller without penalty upon 90 days’ or less notice and (B) involves an annual base rental of more than $150,000;
(vi)    any Applicable Contract with any Affiliate of Seller which will be binding on Buyer after the Closing Date and will not be terminable by Buyer without penalty within 30 days’ or less notice;

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(vii)    any farmout agreement, area of mutual interest agreement, exploration agreement, participation agreement, joint operating agreement or similar Applicable Contract where the primary obligation thereunder has not been fully performed; and
(viii)    any Applicable Contract for the sale of gas containing a take-or-pay, advance payment, prepayment or similar provision or requiring gas to be gathered, delivered, processed or transported without then or thereafter receiving full payment therefor.
(b)    Except as set forth in Schedule 7.7 , there exists no material default under any Material Contract by Seller or, to Seller’s Knowledge, by any other Person that is a party to such Material Contract, and no event has occurred that with notice or lapse of time or both would constitute any material default under any such Material Contract by Seller or, to Seller’s Knowledge, any other Person who is a party to such Material Contract.
7.8     No Violation of Laws . Except as set forth in Schedule 7.8 and Schedule 7.20 and except as would not have a Material Adverse Effect, as of the Execution Date, Seller is not in violation of any applicable Laws with respect to its ownership and operation of the Conveyed Interests. For the avoidance of doubt, this Section 7.8 does not include any matters with respect to Environmental Laws, which shall be exclusively addressed in Article VI and Section 7.19 , respectively.
7.9     Preferential Rights . Except as set forth in Schedule 7.9 , there are no preferential purchase rights, rights of first refusal or other similar rights that are applicable to the transfer of the Conveyed Interests in connection with the transactions contemplated hereby (each a “ Preferential Purchase Right ”).
7.10     Payment of Burdens . Except as would not have a Material Adverse Effect for such items that are not yet due or are being held in suspense for which the Purchase Price will be adjusted in accordance herewith pursuant to Section 3.3(b)(viii) and except as set forth on Schedule 7.10 , Seller has paid all Burdens due by Seller with respect to the Conveyed Interests in accordance with the provisions of the Leases and applicable Laws, or if not paid, is contesting such Burdens described in Schedule 7.10 in good faith in the normal course of business.
7.11     Imbalances . Schedule 7.11 sets forth all material Imbalances associated with the Conveyed Interests as of the Effective Time.
7.12     Current Commitments . Schedule 7.12 sets forth, as of the Execution Date, all approved authorizations for expenditures and other approved capital commitments, individually equal to or greater than $150,000 (net to Seller’s interest) (the “ AFEs ”) relating to the Conveyed Interests to drill, rework or conduct other operations with respect to any Wells or for other capital expenditures pursuant to any of the Material Contracts for which all of the activities anticipated in such AFEs have not been completed by the Execution Date.
7.13     Tax Matters . Except as set forth in Schedule 7.13 , during the period of Seller’s ownership of the Conveyed Interests, all Asset Taxes that have become due and payable by Seller before the Effective Time have been properly paid, other than any Asset Taxes that are being contested in good faith. Except as set forth in Schedule 7.13 , during the period of Seller’s ownership of the Conveyed Interests, all Tax Returns with respect to the Conveyed Interests that

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have become due prior to the Effective Time have been timely filed and such Tax Returns were correct and complete in all material respects. There is not currently in effect any extension or waiver of any statute of limitations of any jurisdiction regarding the assessment or collection of any Tax of Seller relating to Seller’s acquisition, ownership or operation of the Conveyed Interests. There are no administrative or judicial proceedings pending against the Conveyed Interests or against Seller relating to or in connection with the Conveyed Interests by any Governmental Authority with respect to Taxes. All Tax withholding and deposit requirements imposed by applicable Law with respect to any of the Conveyed Interests have been satisfied in full in all respects. Except as set forth in Schedule 7.13 no transfer of any part of the Conveyed Interests pursuant to this Agreement will be treated as a transfer of an interest in a partnership for Tax purposes. Each partnership listed on Schedule 7.13 has in effect a valid election under Section 754 of the Code.
7.14     Brokers’ Fees . Seller has incurred no liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Buyer or any Affiliate of Buyer shall have any responsibility.
7.15     Equipment . To Seller's Knowledge, except as set forth in Schedule 7.15 , the Personal Property has been maintained in operable repair, working order and operating condition and is adequate for normal operation of the Conveyed Interests consistent with current practices, ordinary wear and tear excepted.
7.16     Payouts . Schedule 7.16 contains a complete and accurate list of the status of any “payout” balance, as of the Effective Time, for the Seller operated Wells 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).
7.17     Condemnation . Except as set forth in Schedule 7.17 , there is no actual or threatened taking (whether permanent, temporary, whole or partial) of any part of the Conveyed Interests by reason of condemnation or the threat of condemnation.
7.18    [ INTENTIONALLY OMITTED ] .
7.19     Environmental Matters . Except as set forth on Schedule 7.19 ,
(a)    Seller has not entered into any agreements, consents, orders, decrees or judgments of any Governmental Authority, that are in existence as of the Execution Date, that are based on any Environmental Laws and that relate to the current or future use of any of the Conveyed Interests; and
(b)    as of the Execution Date, Seller has not received written notice (other than those that have been fully and finally resolved) from any Person of any release or disposal of any Hazardous Substance concerning any land, facility, asset or property included in the Conveyed Interests that would reasonably be expected to: (i) materially interfere with or prevent compliance by Seller with any Environmental Law or the terms of any license or permit issued pursuant thereto; or (ii) give rise to or result in any common Law or other liability of Seller to any Person.

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(c)    to Seller’s Knowledge, as of the Closing Date, (i) the Conveyed Interests are in material compliance with all applicable Environmental Laws, and (ii) there is not a material Environmental Condition existing with respect to the Conveyed Interests operated by Seller.
7.20     Permits . Except as set forth on Schedule 7.20 , Seller has maintained and is maintaining all material permits with respect to Seller’s ownership and/or operation of the Conveyed Interests. The Conveyed Interests are in material compliance with all applicable permits. No event has occurred which permits, or after the giving of notice or lapse of time or both would permit, the revocation or termination of any permit or the imposition of any restrictions of such a nature as may limit the operation or use of the Conveyed Interests as historically conducted.
7.21     Wells . There are not any Wells located on the Conveyed Interests that (i) Seller is currently obligated by any Laws or contract to currently plug, dismantle and/or abandon as of the Effective Time that have not already been plugged, dismantled and/or abandoned; or (ii) have been plugged, dismantled or abandoned by Seller or its Affiliates in a manner that does not comply in all material respects with Laws.
7.22     Hedge Contracts . There are no Hedge Contracts pursuant to which any production of Hydrocarbons from any of the Conveyed Interests is dedicated or committed from and after the Effective Time.
7.23     Leases . Seller has not received any written notice from any Person that Seller has violated or is otherwise in breach of the terms of any Lease, excluding written notices for violations or breaches that have been cured by Seller and except as referenced in Schedule 7.6 .
7.24     Liens . As of the Closing, and except for Permitted Encumbrances, there are no liens and encumbrances by, through or under Seller that burden the Conveyed Interests and are not filed of record.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller the following:
8.1     Organization, Existence and Qualification . Buyer is a limited liability company, duly formed, validly existing and in good standing under the Laws of the State of Delaware and has all requisite power and authority to own and operate its property and to carry on its business as now conducted. Buyer is duly licensed or qualified to do business as a foreign limited liability company in all jurisdictions in which it carries on business or owns assets and such qualification is required by Law except where the failure to be so qualified would not have a material adverse effect upon the ability of Buyer to consummate the transactions contemplated by this Agreement or perform its obligations hereunder.
8.2     Authorization, Approval and Enforceability . Buyer has full power and authority to enter into and perform this Agreement, the Transaction Documents to which it is a party and the transactions contemplated herein and therein. The execution, delivery, and performance by

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Buyer of this Agreement and the Transaction Documents have been duly and validly authorized and approved by all necessary limited liability company action on the part of Buyer. This Agreement is, and the Transaction Documents to which Buyer is a party, when executed and delivered by Buyer, will be the valid and binding obligations of Buyer and enforceable against Buyer in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium, and similar Laws, as well as to principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
8.3     No Conflicts . The execution, delivery, and performance by Buyer of this Agreement and the Transaction Documents to which it is a party and the consummation of the transactions contemplated herein and therein will not (a) conflict with or result in a breach of any provisions of the organizational or other governing documents of Buyer or (b) result in a default or the creation of any Encumbrance or give rise to any right of termination, cancellation or acceleration under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license or other agreement to which Buyer is a party or by which Buyer or any of its property may be bound or (c) violate any Law applicable to Buyer or any of its property, except in the case of clauses (b) and (c) where such default, Encumbrance, termination, cancellation, acceleration or violation would not, individually or in the aggregate, have a material adverse effect upon the ability of Buyer to consummate the transactions contemplated by this Agreement or perform its obligations hereunder.
8.4     Consents . Except as described in Section 9.5 , there are no consents or other restrictions on assignment, including requirements for consents from Third Parties to any assignment, in each case, that Buyer is required to obtain in connection with the consummation of the transactions contemplated by this Agreement by Buyer.
8.5     Bankruptcy . There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to Buyer’s Knowledge, threatened against Buyer or any Affiliate of Buyer. Buyer is not insolvent.
8.6     Litigation . As of the Execution Date, there is no investigation, lawsuit, action, litigation or arbitration by any Person or before any Governmental Authority pending, or to Buyer’s Knowledge, threatened against Buyer or any of its Affiliates that has or would have a material adverse effect upon the ability of Buyer to consummate the transactions contemplated by this Agreement or perform its obligations hereunder.
8.7     Regulatory . Buyer (or its designated Affiliate) is and hereafter shall continue to be qualified under Law to own and assume operatorship of the Conveyed Interests in all jurisdictions where the Conveyed Interests are located, and the consummation of the transactions contemplated by this Agreement will not cause Buyer to be disqualified as such an owner or operator. To the extent required by any Laws, Buyer has maintained, 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 Laws governing the ownership and operation of the Conveyed Interests and has filed any and all reports necessary for such ownership and/or operation with all Governmental Authorities having jurisdiction over such ownership and/or operation. To Buyer’s Knowledge, there is no fact or condition with respect to Buyer or its obligations hereunder that may cause any Governmental Authority to withhold its unconditional

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approval of the transactions contemplated hereby to the extent approval by such Governmental Authority is required by Law.
8.8     Financing . Buyer shall have as of the Closing Date, sufficient cash in immediately available funds with which to pay the Purchase Price, consummate the transactions contemplated by this Agreement and perform its obligations under this Agreement and the Transaction Documents. Buyer expressly acknowledges that the failure to have sufficient funds shall in no event be a condition to the performance of its obligations hereunder, and in no event shall the Buyer’s failure to perform its obligations hereunder be excused by failure to receive funds from any source.
8.9     Independent Evaluation . Buyer is (a) sophisticated in the evaluation, purchase, ownership and operation of oil and gas properties and related facilities, (b) is capable of evaluating the merits and risks of the Conveyed Interests, Buyer’s acquisition, ownership and operation thereof, and its obligations hereunder, and (c) is able to bear the economic risks associated with the Conveyed Interests, Buyer’s acquisition, ownership and operation thereof, and its obligations hereunder. In making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer (i) has relied or shall rely solely on its own independent investigation and evaluation of the Conveyed Interests and the advice of its own legal, Tax, economic, environmental, engineering, geological and geophysical advisors and the express provisions of this Agreement and not on any comments, statements, projections or other materials made or given by any representatives or consultants or advisors of Seller or any Affiliates of Seller, and (ii) subject to Seller’s compliance with Section 4.1 , has satisfied or shall satisfy itself through its own due diligence as to the environmental and physical condition of and contractual arrangements and other matters affecting the Conveyed Interests. As of the Execution Date, Buyer has no knowledge of any breach of any representation, warranty or covenant of Seller given hereunder.
8.10     Brokers’ Fees . None of Buyer or Buyer’s Affiliates has incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement or the Transaction Documents for which Seller or any of Seller’s Affiliates has or shall have any responsibility.
8.11     Accredited Investor . Buyer is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, and will acquire the Conveyed Interests for its own account and not with a view to a sale, distribution, or other disposition thereof in violation of the Securities Act of 1933, as amended, and the rules and regulations thereunder, any applicable state blue sky Laws or any other applicable securities Laws.
ARTICLE IX
CERTAIN AGREEMENTS
9.1     Conduct of Business . Except (w) as set forth in Schedule 9.1 , (x) for the operations covered by the AFEs and other capital commitments described in Schedule 7.12 , (y) for actions taken in connection with emergency situations or to maintain a Lease, and/or (z) as expressly contemplated by this Agreement or as expressly consented to by Buyer (which consent shall not be unreasonably delayed, withheld or conditioned),

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(a)    Seller shall, from and after the Execution Date until Closing:
(i)    maintain or cause its Affiliates to maintain, and if Seller or one of its Affiliates is the operator thereof, operate, the Conveyed Interests in the usual and ordinary manner consistent with past practices and in material compliance with all Laws;
(ii)    maintain the books of account and Records relating to the Conveyed Interests in the usual and ordinary manner, in accordance with its usual accounting practices;
(iii)    use commercially reasonable efforts to maintain in full force and effect all Leases, except where any such Lease terminates pursuant to its existing terms or where a reasonably prudent operator would not maintain the same (provided Seller has provided Buyer with reasonably advance written notice prior to termination);
(iv)    maintain insurance coverage on the Conveyed Interests in the amounts and types currently in force; and
(v)    keep Buyer reasonably informed regarding current and proposed activities and operations relating to the Conveyed Assets, including by providing Buyer copies of written notices received by Seller with respect to breaches or potential breaches of Applicable Contracts.
(b)    Seller shall not, from and after the Execution Date until Closing, without Buyer’s written consent:
(i)    except in the case of any Contracts that are crude oil, condensate, and natural gas purchase and sale, gathering, transportation, and marketing arrangements entered into in the ordinary course of business and terminable by Buyer upon 30 days’ notice, enter into an Applicable Contract that, if entered into on or prior to the Execution Date, would be required to be listed in Schedule 7.7 , or materially amend the terms of any Material Contract;
(ii)    terminate (unless such Material Contract terminates pursuant to its stated terms) or materially amend the terms of any Material Contract;
(iii)    propose any operation reasonably expected to cost Seller in excess of $50,000;
(iv)    consent to any operation proposed by a Third Party that is reasonably expected to cost Seller in excess of $50,000 (unless Buyer fails to respond to Seller’s written request for consent within 7 days, at which point Seller may consent to such operation);
(v)    transfer, sell, mortgage, pledge or dispose of the Conveyed Interests (or permit any Affiliate to do any of the foregoing), other than (A) the transfer, sale, or disposal of Hydrocarbons in the ordinary course of business, and (B) sales of equipment that is no longer necessary or desirable in the operation of the Conveyed Interests or for which replacement equipment has been, or will be on or prior to Closing, obtained;

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(vi)    waive, compromise or settle any claim that would have a material adverse effect on the ownership, operation or value of the Conveyed Interests after the Effective Time;
(vii)    elect to be a non-consenting party under the underlying operating agreement or other agreement with respect to any of the Conveyed Interests;
(viii)    make, change or revoke any Tax election; change an annual accounting period; adopt or change any accounting method with respect to Taxes; file any amended Tax Return; enter into any closing agreement; settle or compromise any Tax claim or assessment; or consent to any extension or waiver of the limitation period applicable to any claim or assessment with respect to Taxes; in each case to the extent such action would adversely affect the Conveyed Interests in a Post-Closing Tax Period; or
(ix)    commit to do any of the foregoing.
(c)    Buyer acknowledges that Seller owns undivided interests in certain of the properties comprising the Conveyed Interests with respect to which it is not the operator, and Buyer agrees that the acts or omissions of any other Working Interest owner (including any operator) or any other Person who is not Seller or an Affiliate of Seller shall not constitute a breach of the provisions of this Section 9.1 , and no action required by a vote of Working Interest owners shall constitute such a breach so long as Seller has voted its interest in a manner that complies with the provisions of this Section 9.1 .
9.2     Successor Operator . Buyer acknowledges that it desires to succeed Seller as operator of those Conveyed Interests or any portion thereof that Seller may presently operate. Buyer further acknowledges and agrees that Seller does not covenant or warrant that Buyer shall become successor operator of such Conveyed Interests. Seller agrees, however, that, as to the Conveyed Interests it operates, it shall use its commercially reasonable efforts to designate, to the extent legally possible and permitted under any applicable joint operating agreement, Buyer (or Buyer’s designee) as, and use commercially reasonable efforts to assist Buyer in becoming, successor operator of such Conveyed Interests effective as of Closing.
9.3     Governmental Bonds . Buyer acknowledges that none of the bonds, letters of credit and guarantees, if any, posted by Seller or its Affiliates with any Governmental Authority and/or relating to the Conveyed Interests are transferable to Buyer. On or before the Closing Date, Buyer shall obtain, or cause to be obtained in the name of Buyer (or, if applicable, its designated Affiliate), replacements for such bonds, letters of credit and guarantees to the extent such replacements are necessary (a) for Buyer’s ownership of the Conveyed Interests, and (b) to permit the cancellation of the bonds, letters of credit and guarantees posted by Seller and/or any Affiliate of Seller with respect to the Conveyed Interests. In addition, at or prior to Closing, Buyer shall deliver to Seller evidence of the posting of bonds or other security with all applicable Governmental Authorities meeting the requirements of such Governmental Authorities to own and, if applicable, operate the Conveyed Interests.
9.4     Record Retention . Buyer shall and shall cause its successors and assigns to, for a period of five years following Closing (or, in the case of Records related to Tax matters, until the

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expiration of the period of time set forth in the applicable statute of limitations), (a) retain copies of the Records, (b) provide Seller, its Affiliates and its and their respective officers, employees and representatives with access to the Records (but only to the extent Seller does not have electronic copies of such Records and does not need access to an original version) during normal business hours for review and copying at Seller’s expense, and (c) provide Seller, its Affiliates and its and their respective officers, employees and representatives with access, during normal business hours, to materials received or produced after Closing relating to any indemnity claim made under Section 13.2 for review and copying at Seller’s expense. At the end of such five-year period and prior to destroying any of the Records, Buyer shall notify Seller in writing in advance of such destruction and provide Seller a reasonable opportunity to copy any or all of such Records at Seller’s expense.
9.5     Regulatory Matters . If applicable, Seller and Buyer shall (a) make or cause to be made an appropriate filing of a Notification and Report Form pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”) with respect to the transactions contemplated hereby as promptly as practicable, but in no event later than 10 Business Days, after the Execution Date, Seller and Buyer shall request early termination of the HSR Act waiting period on the Notification and Report Form, and Seller and Buyer shall bear their own costs and expenses incurred in connection with such filings, provided that Buyer shall pay any filing fees in connection therewith, and (b) use their commercially reasonable efforts to respond at the earliest practicable date to any requests for additional information made by the Antitrust Division of the Department of Justice (the “ DOJ ”), the Federal Trade Commission (the “ FTC ”) or any other Governmental Authority, to take all actions necessary to cause the waiting periods under the HSR Act and any other Laws to terminate or expire at the earliest possible date, to resist in good faith, at each of their respective cost and expense, any assertion that the transactions contemplated hereby constitute a violation of Laws, and to eliminate every impediment under any Laws that may be asserted by any Governmental Authority so as to enable the Closing to occur as soon as reasonably possible in accordance herewith, all to the end of expediting consummation of the transactions contemplated hereby. In connection with this Section 9.5 , the Parties shall, to the extent permitted by Laws, (i) cooperate in all respects with each other in connection with any filing, submission, investigation or inquiry, (ii) promptly inform the other Party of any communication received by such Party from, or given by such Party to, the DOJ or the FTC or any other Governmental Authority and of any material communication received or given in connection with any proceeding by a private party, in each case, regarding the transactions contemplated hereby, (iii) have the right to review in advance, and to the extent practicable each shall consult the other on, any filing made with, or written materials to be submitted to, the DOJ, the FTC or any other Governmental Authority or, in connection with any proceeding by a private party, any other Person, in connection with the transactions contemplated hereby, and (iv) consult with each other in advance of any meeting, discussion, telephone call or conference with the DOJ, the FTC or any other Governmental Authority or, in connection with any proceeding by a private party, with any other Person, and to the extent not expressly prohibited by the DOJ, the FTC or any other Governmental Authority or person, give the other Party the opportunity to attend and participate in such meetings and conferences, in each case, regarding the transactions contemplated hereby.
9.6     Release of Liens . Concurrent with the Closing, Seller shall procure and deliver to Buyer a release or releases, in recordable form, executed by the applicable Person of those liens

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and security interests encumbering any of the Conveyed Interests, including those set forth on Schedule 9.6 .
9.7     Knowledge of Breach . Prior to Closing, each Party will notify the other promptly after any officer of such Party has actual knowledge that any representation, warranty, covenant, or other agreement of the other Party contained in this Agreement is or becomes untrue or has been breached in any material respect before the Closing Date; provided that the failure of either Party to notify the other Party of its breach of any representation, warranty, covenant, or other agreement prior to the Closing Date, shall not affect either Party’s rights under Article XIII following Closing.
9.8     Amendment to Schedules . Buyer agrees that, with respect to the representations and warranties of Seller contained in this Agreement, Seller shall have the continuing right until the Closing Date to add, supplement, or amend the Schedules to its representations and warranties with respect to any matter occurring after the Execution Date, which, if existing on the Execution Date would have been required to be set forth or described in such Schedules. Notwithstanding the foregoing, for all purposes in this Agreement, including for the purposes of determining whether the conditions set forth in Article X have been fulfilled, the Schedules to the Seller’s representations and warranties contained in this Agreement shall be deemed to include only that information contained therein on the Execution Date and shall be deemed to exclude all information contained in any addition, supplement or amendment thereto; provided however that if Closing shall occur, then all matters disclosed pursuant to any such addition, supplement or amendment at or prior to the Closing Date that arose in the ordinary course of business 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.
ARTICLE X
BUYER’S CONDITIONS TO CLOSING
The obligations of Buyer to consummate the transactions provided for herein are subject, at the option of Buyer, to the fulfillment by Seller or waiver by Buyer, on or prior to Closing of each of the following conditions precedent:
10.1     Representations . The representations and warranties of Seller set forth in Article VII shall be true and correct (without regard to materiality, or Material Adverse Effect qualifiers) on and as of the Closing Date as though such representations and warranties had been made or given on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date), except for those breaches, if any, of such representations and warranties that in the aggregate would not have a Material Adverse Effect.
10.2     Performance . Seller shall have materially performed or complied with all obligations, agreements, and covenants contained in this Agreement as to which performance or compliance by Seller is required prior to or at the Closing Date.
10.3     No Legal Proceedings . No material suit, action, litigation or other proceeding instituted by any Third Party shall be pending or threatened before any Governmental Authority

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seeking to restrain, prohibit, enjoin, or declare illegal, or seeking substantial damages in connection with, the transactions contemplated by this Agreement.
10.4     Title Defects and Environmental Defects . In each case subject to the Individual Title Threshold, Individual Environmental Threshold, the Title Deductible, and the Environmental Deductible, as applicable, the sum of (a) all Title Defect Amounts determined under Section 5.3(d)(i) prior to the Closing or if not so determined prior to the Closing, as determined by Buyer in its reasonable opinion, less the sum of all Title Benefit Amounts determined under Section 5.3(a) prior to the Closing, plus (b) all Remediation Amounts for Environmental Defects determined under Section 6.1(b)(i) prior to the Closing or if not so determined prior to the Closing, as determined by Seller in its reasonable opinion ( provided , however , if the Remediation Amounts asserted in good faith by Buyer in accordance with Section 6.1(a) with respect to such Environmental Defects cause the 25% threshold in this Section 10.4 to be reached, then the Closing will be delayed until the Parties mutually agree on such Remediation Amounts or such amounts are determined pursuant to Section 6.1(e) ), and the sum of all Purchase Price adjustments for Conveyed Interests retained by Seller pursuant to Section 6.1(b)(i) , plus (c) the value of all Casualty Losses, plus (d) the amount by which the Purchase Price is reduced for any Preferential Purchase Right or Consent under Section 5.5 , shall be less than 25% of the Purchase Price.
10.5     Closing Deliverables . Seller shall have delivered (or be ready, willing and able to deliver at Closing) to Buyer the documents and other items required to be delivered by Seller under Section 12.3 .
ARTICLE XI
SELLER’S CONDITIONS TO CLOSING
The obligations of Seller to consummate the transactions provided for herein are subject, at the option of Seller, to the fulfillment by Buyer or waiver by Seller, on or prior to Closing of each of the following conditions precedent:
11.1     Representations . The representations and warranties of Buyer set forth in Article VIII shall be true and correct in all material respects (without regard to materiality qualifiers) on and as of the Closing, with the same force and effect as though such representations and warranties had been made or given on and as of the Closing Date (other than representations and warranties that refer to a specified date, which need only be true and correct on and as of such specified date).
11.2     Performance . Buyer shall have materially performed or complied with all obligations, agreements, and covenants contained in this Agreement as to which performance or compliance by Buyer is required prior to or at the Closing Date.
11.3     No Legal Proceedings . No material suit, action, litigation or other proceeding instituted by any Third Party shall be pending or threatened before any Governmental Authority seeking to restrain, prohibit, or declare illegal, or seeking substantial damages in connection with, the transactions contemplated by this Agreement.

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11.4     Title Defects and Environmental Defects . In each case subject to the Individual Title Threshold, Individual Environmental Threshold, the Title Deductible, and the Environmental Deductible, as applicable, the sum of (a) all Title Defect Amounts determined under Section 5.3(d)(i) prior to the Closing or if not so determined prior to the Closing, as determined by Buyer in its reasonable opinion, less the sum of all Title Benefit Amounts determined under Section 5.3(a) prior to the Closing, plus (b) all Remediation Amounts for Environmental Defects determined under Section 6.1(b)(i) prior to the Closing or if not so determined prior to the Closing, as determined by Seller in its reasonable opinion ( provided , however , if the Remediation Amounts asserted in good faith by Buyer in accordance with Section 6.1(a) with respect to such Environmental Defects cause the 25% threshold in this Section 11.4 to be reached, then the Closing will be delayed until the Parties mutually agree on such Remediation Amounts or such amounts are determined pursuant to Section 6.1(e) ), and the sum of all Purchase Price adjustments for Conveyed Interests retained by Seller pursuant to Section 6.1(b)(i) , plus (c) the value of all Casualty Losses, plus (d) the amount by which the Purchase Price is reduced for any Preferential Purchase Right or Consent under Section 5.5 , shall be less than 25% of the Purchase Price.
11.5     Closing Deliverables . Buyer shall have delivered (or be ready, willing and able to deliver at Closing) to Seller the documents and other items required to be delivered by Buyer under Section   12.3 .
ARTICLE XII
CLOSING
12.1     Date of Closing . Subject to the conditions stated in this Agreement, the sale by Seller and the purchase by Buyer of the Conveyed Interests pursuant to this Agreement (the “ Closing ”) shall occur on or before August 31, 2015 (the “ Scheduled Closing Date ”), or such other date as Buyer and Seller may agree upon in writing. The date on which the Closing actually occurs shall be the “ Closing Date .”
12.2     Place of Closing . Closing shall be held at the offices of Seller at 600 Travis Street, Suite 5100, Houston, Texas 77002 or such other location as Buyer and Seller may agree upon in writing.
12.3     Closing Obligations . At Closing, the following documents shall be delivered and the following events shall occur, the execution of each document and the occurrence of each event being a condition precedent to the others and each being deemed to have occurred simultaneously with the others:
(a)    Seller and Buyer (or its designated Affiliate) shall execute and deliver the Assignment, in sufficient counterparts to facilitate recording in the applicable counties, covering the Conveyed Interests;
(b)    Seller and Buyer shall execute and deliver the Preliminary Settlement Statement;

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(c)    Buyer shall deliver to Seller, to the accounts designated in the Preliminary Settlement Statement, by direct bank or wire transfer in same day funds, the Adjusted Purchase Price;
(d)     Seller and Buyer shall execute and deliver the Transition Services Agreement;
(e)    Seller shall deliver, on forms supplied by Buyer and reasonably acceptable to Seller, transfer orders or letters in lieu thereof directing all purchasers of production to make payment to Buyer (or its designee) of proceeds attributable to production from the Conveyed Interests from and after the Effective Time, for delivery by Buyer to the purchaser of production;
(f)    Seller shall deliver an executed certificate of non-foreign status that meets the requirements set forth in Treasury Regulation § 1.1445-2(b)(2);
(g)    An authorized officer of Seller shall execute and deliver a certificate, dated as of Closing Date, certifying that the conditions set forth in Section 10.1 and Section 10.2 have been fulfilled and, if applicable, any exceptions to such conditions that have been waived by Buyer;
(h)    An authorized officer of Buyer shall execute and deliver a certificate, dated as of Closing, certifying that the conditions set forth in Section 11.1 and Section 11.2 have been fulfilled and, if applicable, any exceptions to such conditions that have been waived by Seller;
(i)    Seller shall deliver duly executed releases and terminations of all mortgages, deeds of trust, assignments of production, financing statements, fixture filings, and other encumbrances and interests burdening the Conveyed Interests (or any portion thereof), including those set forth on Schedule 9.6 , which shall, in each case, be in form and substance reasonably satisfactory to Buyer and forms of which shall have been delivered to Buyer on or before the Closing Date;
(j)    Buyer shall deliver any instruments and documents required by Section 9.3 ;
(k)    Seller shall deliver to Buyer P-4 forms of all Conveyed Interests operated by Seller designating Buyer (or its designee) as the replacement operator and letters signed by Seller notifying all non-operators under joint operating agreements that Buyer will assume operations thereunder (only to the extent Seller is currently the operator and subject to the terms of Section 9.2 ); and
(l)    Seller and Buyer shall execute and deliver any other agreements, instruments and documents that are required by other terms of this Agreement to be executed and/or delivered at Closing.
12.4     Records . In addition to the obligations set forth under Section   12.3 above, but notwithstanding anything herein to the contrary, as soon as reasonably practical, but in any event no later than 30 days following the Transition Date (as defined in the Transition Services

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Agreement), Seller shall make available to Buyer the Records for pickup from Seller’s offices during normal business hours.
ARTICLE XIII
ASSUMPTION; INDEMNIFICATION; SURVIVAL
13.1     Assumption by Buyer; Specified Obligations .
(a)    Without limiting Buyer’s rights to indemnity under this Article XIII and Buyer’s rights under any Title Indemnity Agreement or Environmental Indemnity Agreement, if applicable, from and after Closing, Buyer assumes and hereby agrees to fulfill, perform, pay and discharge (or cause to be fulfilled, performed, paid and discharged) all obligations and Liabilities, known or unknown, arising from, based upon, related to or associated with the Conveyed Interests, regardless of whether such obligations or Liabilities arose prior to, at or after the Effective Time, including obligations and Liabilities relating in any manner to the use, ownership or operation of the Conveyed Interests, including obligations:
(i)    to furnish makeup gas and/or settle Imbalances according to the terms of applicable gas sales, processing, gathering or transportation Contracts;
(ii)    to pay Working Interests, royalties, overriding royalties and other interest owners’ revenues or proceeds attributable to sales of Hydrocarbons, including those held in suspense (including those amounts for which the Purchase Price was adjusted pursuant to Section 3.3(b)(viii) );
(iii)    to decommission the Conveyed Interests (the “ Decommissioning Obligations ”);
(iv)    subject to Seller’s obligations under Article VI , to clean up, restore and/or Remediate the premises covered by or related to the Conveyed Interests in accordance with applicable Contracts and Laws;
(v)    to perform all obligations applicable to or imposed on the lessee, owner, or operator under the Leases and the Applicable Contracts, or as required by any Law;
(vi)    subject to Article VI , arising from or related to Environmental Conditions, Environmental Defects and Buyer’s Environmental Liabilities; and
(vii)    the matters set forth on Schedule 7.6 ;
(all of said obligations and Liabilities, subject to the following exclusion, herein being referred to as the “ Assumed Obligations ”); provided that Buyer does not assume any obligations or Liabilities of Seller to the extent that they are Specified Obligations or attributable to or arise out of the ownership, use or operation of the Excluded Assets.
(b)    Upon Closing, each entity constituting Seller jointly, and not severally, retains and hereby agrees to fulfill, perform, pay and discharge (or cause to be fulfilled, performed, paid and discharged) all obligations and Liabilities, arising from, based upon, related

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to or associated with (i) Seller’s failure to properly, timely and legally pay, in accordance with the terms of any Lease, Applicable Contract and/or applicable Laws, all Burdens with respect to the Conveyed Interests due by Seller and attributable to Seller’s ownership of the Conveyed Interests prior to the Effective Time (other than for amounts held in suspense for which the Purchase Price was adjusted pursuant to Section 3.3(b)(viii) ); (ii) personal injury or death relating and attributable to such Seller’s ownership or operation of the Conveyed Interests attributable to the period of time prior to the Closing Date; (iii) Operating Expenses for which Seller is responsible pursuant to Section 2.3 , (iv) the Excluded Assets; (v) Asset Taxes for which Seller is responsible pursuant to Section 16.2(b) (taking into account, and without duplication of, (A) such Asset Taxes effectively borne by Seller as a result of Purchase Price adjustments made pursuant to Section 3.3 and (B) any payments made from one Party to the other in respect of Asset Taxes pursuant to Section 16.2(d) ), (vi) the matters set forth on Schedule 7.6 , (vii) employment issues for employees of Seller or its Affiliates; and (viii) any off-site disposal of Hazardous Substances at locations off of the Conveyed Interests (all of said Liabilities herein being referred to as the “ Specified Obligations ”).
13.2     Indemnities of Seller . Effective as of Closing, subject to the limitations set forth in Section 13.4 and Section 13.8 , each entity constituting Seller, jointly and not severally, shall be responsible for, shall pay on a current basis, and hereby defends, indemnifies, holds harmless and forever releases Buyer and its Affiliates, and all of its and their respective stockholders, partners, members, directors, officers, managers, employees, attorneys, consultants, agents and representatives (collectively, the “ Buyer Indemnified Parties ”) from and against any and all Liabilities, whether or not relating to Third Party claims or incurred in the investigation or defense of any of the same or in asserting, preserving or enforcing any of their respective rights hereunder, arising from, based upon, related to or associated with:
(a)    any breach by Seller of its representations or warranties contained in Article VII ;
(b)    any breach by Seller of its covenants and agreements under this Agreement; or
(c)    the Specified Obligations.
13.3     Indemnities of Buyer . Effective as of Closing, Buyer and its successors and assigns shall assume and be responsible for, shall pay on a current basis, and hereby defends, indemnifies, holds harmless and forever releases Seller and its Affiliates, and all of their respective stockholders, partners, members, directors, officers, managers, employees, attorneys, consultants, agents and representatives (collectively, the “ Seller Indemnified Parties ”) from and against any and all Liabilities, whether or not relating to Third Party claims or incurred in the investigation or defense of any of the same or in asserting, preserving or enforcing any of their respective rights hereunder arising from, based upon, related to or associated with:
(a)    any breach by Buyer of its representations or warranties contained in Article VIII ;

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(b)    any breach by Buyer of its covenants and agreements under this Agreement; or
(c)    the Assumed Obligations.
13.4     Limitation on Liability .
(a)    Seller shall not have any liability for any indemnification under Section 13.2(a) of this Agreement (i) for any individual Liability unless the amount with respect to such Liability exceeds $100,000, and (ii) until and unless the aggregate amount of all Liabilities exceeding the threshold described in clause (i) above and for which Claim Notices are delivered by Buyer exceeds the Indemnity Deductible, and then only to the extent such Liabilities exceed the Indemnity Deductible; provided that any indemnity for any breach of the representations in Sections 7.1 , 7.2 , 7.3 , 7.5 , 7.13 or 7.14 shall not be limited by this Section 13.4(a) .
(b)    Notwithstanding anything to the contrary contained in this Agreement, Seller shall not be required to indemnify Buyer under Section 13.2(a) and Section 13.2(b) for aggregate Liabilities in excess of an amount equal to 25% of the Purchase Price; provided that any indemnity for any breach of the representations in Sections 7.1 , 7.2 , 7.3 , 7.5 , 7.13 or 7.14 shall not be limited by this Section 13.4(b) .
13.5     Express Negligence . EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 4.1(c) , 4.1(d) , AND 4.3 , THE DEFENSE, INDEMNIFICATION, HOLD HARMLESS, RELEASE, ASSUMED OBLIGATIONS AND LIMITATION OF LIABILITY PROVISIONS PROVIDED FOR IN THIS AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LIABILITIES, LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE OR RESULTED SOLELY OR IN PART FROM THE GROSS, SOLE, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF LAW OF OR BY ANY INDEMNIFIED PARTY. BUYER AND SELLER ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS “CONSPICUOUS.”
13.6     Exclusive Remedy . Notwithstanding anything to the contrary contained in this Agreement, from and after Closing, Sections 4.1(c) , 13.2 and 13.3 , the Assignments and any Title Indemnity Agreement or Environmental Indemnity Agreement entered into by the Parties contain the Parties’ exclusive remedies against each other with respect to the transactions contemplated hereby, including breaches of the representations, warranties, covenants and agreements of the Parties contained in this Agreement or in any document or certificate delivered pursuant to this Agreement. Except as specified in Section 4.1(c) , Section 13.2 and any Title Indemnity Agreement or Environmental Indemnity Agreement entered into by the Parties or as otherwise provided in this Agreement, effective as of Closing, Buyer, on its own behalf and on behalf of the Buyer Indemnified Parties, hereby releases, remises and forever discharges Seller and its Affiliates and all of such Persons’ equityholders, partners, members, directors, officers, employees, agents, advisors, and representatives from any and all suits, legal or administrative proceedings, claims, demands, damages, losses, costs, Liabilities, interest or causes of action

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whatsoever, at Law or in equity, known or unknown, which Buyer or the Buyer Indemnified Parties might now or subsequently have, based on, relating to or arising out of this Agreement, the transactions contemplated by this Agreement, the ownership, use or operation of any of the Conveyed Interests prior to Closing or the condition, quality, status or nature of any of the Conveyed Interests prior to Closing, including rights to contribution under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and any similar Environmental Law, breaches of statutory or implied warranties, nuisance or other tort actions, rights to punitive damages, common law rights of contribution and rights under insurance maintained by Seller or any of its Affiliates (except as provided in Section 5.4 ).
13.7     Indemnification Procedures . All claims for indemnification under Sections 4.1(c) , 13.2 and 13.3 shall be asserted and resolved as follows:
(a)    For purposes of Section 4.1(c), and this Article XIII , the term “ Indemnifying Party ” when used in connection with particular Liabilities shall mean the Party or Parties having an obligation to indemnify another Party and/or other Person(s) with respect to such Liabilities pursuant to Section 4.1(c), or this Article XIII , and the term “ Indemnified Party ” when used in connection with particular Liabilities shall mean the Party and/or other Person(s) having the right to be indemnified with respect to such Liabilities by the Indemnifying Party pursuant to Section 4.1(c), or this Article XIII .
(b)    To make a claim for indemnification under Sections 4.1(c) , 13.2 or 13.3 , an Indemnified Party shall notify the Indemnifying Party in writing of its claim under this Section 13.7 , including the specific details of and specific basis under this Agreement for its claim (the “ Claim Notice ”). In the event that the claim for indemnification is based upon a claim by a Third Party against the Indemnified Party (a “ Third Party Claim ”), the Indemnified Party shall provide its Claim Notice promptly after the Indemnified Party has actual knowledge of the Third Party Claim and shall enclose a copy of all papers (if any) served with respect to the Third Party Claim; provided that the failure of any Indemnified Party to give notice of a Third Party Claim as provided in this Section   13.7(b) shall not relieve the Indemnifying Party of its obligations under Sections 4.1(c) , 13.2 or 13.3 (as applicable) except to the extent such failure results in insufficient time being available to permit the Indemnifying Party to effectively defend against the Third Party Claim or otherwise materially prejudices the Indemnifying Party’s ability to defend against the Third Party Claim. In the event that the claim for indemnification is based upon an inaccuracy or breach of a representation, warranty, covenant or agreement, the Claim Notice shall specify the representation, warranty, covenant or agreement that was inaccurate or breached.
(c)    In the case of a claim for indemnification based upon a Third Party Claim, the Indemnifying Party shall have 30 days from its receipt of the Claim Notice to notify the Indemnified Party whether it admits or denies its obligation to defend and indemnify the Indemnified Party against such Third Party Claim at the sole cost and expense of the Indemnifying Party. The Indemnified Party is authorized, prior to and during such 30-day period, at the expense of the Indemnifying Party, to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and that is not prejudicial to the Indemnifying Party.

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(d)    If the Indemnifying Party admits its obligation to defend and indemnify the Indemnified Party against a Third Party Claim, it shall have the right and obligation to diligently defend and indemnify, at its sole cost and expense, the Indemnified Party against such Third Party Claim. The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate in contesting any Third Party Claim which the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, at its own expense, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this Section 13.7(d) . An Indemnifying Party shall not, without the written consent of the Indemnified Party, (i) settle any Third Party Claim or consent to the entry of any judgment with respect thereto which does not include an unconditional written release of the Indemnified Party from all Liability in respect of such Third Party Claim or (ii) settle any Third Party Claim or consent to the entry of any judgment with respect thereto in any manner that may materially and adversely affect the Indemnified Party (other than as a result of money damages covered by the indemnity).
(e)    If the Indemnifying Party does not admit its obligation or admits its obligation to defend and indemnify the Indemnified Party against a Third Party Claim, but fails to diligently prosecute, indemnify against or settle such Third Party Claim, then the Indemnified Party shall have the right to defend against the Third Party Claim at the sole cost and expense of the Indemnifying Party, with counsel of the Indemnified Party’s choosing, subject to the right of the Indemnifying Party to admit its liability and assume the defense of the Third Party Claim at any time prior to settlement or final determination thereof. If the Indemnifying Party has not yet admitted its obligation to defend and indemnify the Indemnified Party against a Third Party Claim, the Indemnified Party shall send written notice to the Indemnifying Party of any proposed settlement and the Indemnifying Party shall have the option for 10 days following receipt of such notice to (i) admit in writing its obligation to indemnify the Indemnified Party from and against the liability and consent to such settlement, (ii) if liability is so admitted, reject, in its reasonable judgment, the proposed settlement, or (iii) deny liability. Any failure by the Indemnifying Party to respond to such notice shall be deemed to be an election under subsection (i) above.
(f)    In the case of a claim for indemnification not based upon a Third Party Claim, the Indemnifying Party shall have 30 days from its receipt of the Claim Notice to (i) cure the Liabilities complained of, (ii) admit its liability for such Liability or (iii) dispute the claim for such Liabilities. If the Indemnifying Party does not notify the Indemnified Party within such 30-day period that it has cured the Liabilities or that it disputes the claim for such Liabilities, the amount of such Liabilities shall conclusively be deemed a liability of the Indemnifying Party hereunder.

13.8     Survival .
(a)    Except for the Specified Representations, the representations and warranties set forth in Section 7.13 and Section 7.19 and the special warranty of title included in the Assignments, the representations and warranties of Seller in Article VII and Buyer in Article VIII and the covenants and agreements of the Parties in Section 9.1 and Section 12.4 , shall in

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each case terminate on the date that is twelve calendar months from the Closing Date. The Specified Representations shall survive Closing without time limit. The representations and warranties set forth in Section 7.13 shall survive until 30 days after the expiration of the period of time set forth in the statute of limitations. The representations and warranties set forth in Section 7.19 shall survive until the Closing Date. The special warranty of title included in the Assignments shall survive without time limit. Subject to the foregoing and as set forth in Section 13.8(b) , the remainder of this Agreement shall survive Closing without time limit. Representations, warranties, covenants and agreements shall be of no further force or effect after the date of their expiration, provided that there shall be no termination of any bona fide claim asserted pursuant to this Agreement with respect to such a representation, warranty, covenant or agreement prior to its expiration date.
(b)    The indemnities in Sections 13.2(a) , 13.2(b) , 13.3(a) and 13.3(b) shall terminate as of the termination date of each respective representation, warranty, covenant or agreement that is subject to indemnification. Seller’s indemnities set forth in Section 13.2(c) shall survive the Closing for a period of four years from the Closing Date; provided however that (i) Seller’s indemnities set forth in Section 13.2(c) relating to the portions of the Specified Obligations defined in items (i), (v) and (vii) of Section 13.1(b) shall survive until 30 days after the expiration of the period of time set forth in the statute of limitations regarding the same and Seller’s indemnities set forth in Section 13.2(c) relating to the portions of the Specified Obligations defined in item (iv) of Section 13.1.(b) shall survive without time limit. Buyer’s indemnity set forth in Sections 4.1(c) and 13.3(c) shall survive the Closing without time limit and shall be deemed covenants running with the lands. Notwithstanding the foregoing, there shall be no termination of any bona fide claim asserted pursuant to the indemnities in Sections 13.2(a) through 13.2(b) or Sections 13.3(a) through 13.3(c) prior to the date of termination for such indemnity.
13.9     Non-Compensatory Damages . NONE OF THE BUYER INDEMNIFIED PARTIES NOR SELLER INDEMNIFIED PARTIES SHALL BE ENTITLED TO RECOVER FROM SELLER OR BUYER, OR THEIR RESPECTIVE AFFILIATES, ANY INDIRECT, CONSEQUENTIAL, PUNITIVE, EXEMPLARY, REMOTE OR SPECULATIVE DAMAGES OR DAMAGES FOR LOST PROFITS OF ANY KIND ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, EXCEPT TO THE EXTENT ANY SUCH PARTY SUFFERS SUCH DAMAGES TO A THIRD PARTY, WHICH DAMAGES (INCLUDING COSTS OF DEFENSE AND REASONABLE ATTORNEYS’ FEES INCURRED IN CONNECTION WITH DEFENDING AGAINST SUCH DAMAGES) SHALL NOT BE EXCLUDED BY THIS PROVISION AS TO RECOVERY HEREUNDER. SUBJECT TO THE PRECEDING SENTENCE, BUYER, ON BEHALF OF EACH OF THE BUYER INDEMNIFIED PARTIES, AND SELLER, ON BEHALF OF EACH OF THE SELLER INDEMNIFIED PARTIES, WAIVE ANY RIGHT TO RECOVER PUNITIVE, SPECIAL, INDIRECT, EXEMPLARY, OR CONSEQUENTIAL DAMAGES, REMOTE OR SPECULATIVE, OR DAMAGES FOR LOST PROFITS OF ANY KIND, ARISING IN CONNECTION WITH OR WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
13.10     Waiver of Right to Rescission . Seller and Buyer acknowledge that, following Closing, the payment of money, as limited by the terms of this Agreement, shall be adequate

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compensation for breach of any representation, warranty, covenant or agreement contained herein or for any other claim arising in connection with or with respect to the transactions contemplated by this Agreement. As the payment of money shall be adequate compensation, following Closing, Buyer and Seller waive any right to rescind this Agreement or any of the transactions contemplated hereby.
13.11     Insurance . The amount of any Liabilities for which any of the Buyer Indemnified Parties or Seller Indemnified Parties is entitled to indemnification under this Agreement or in connection with or with respect to the transactions contemplated by this Agreement shall be reduced by any corresponding insurance proceeds actually received by an such indemnified party under any insurance agreement.
13.12     Disclaimer of Application of Anti-Indemnity Statutes . The Parties acknowledge and agree that the provisions of any anti-indemnity statute relating to oilfield services and associated activities shall not be applicable to this Agreement and/or the transactions contemplated hereby.
ARTICLE XIV
EMPLOYMENT MATTERS
14.1     Employees . Buyer or its Affiliates may not offer employment to any employees of Seller or any of its Affiliates who provide services in relation to the Assets (“ Seller Employees ”) for a period of 1 year after the Closing.
ARTICLE XV
TERMINATION, DEFAULT AND REMEDIES
15.1     Right of Termination . This Agreement and the transactions contemplated herein may be terminated at any time prior to Closing:
(a)    by the mutual prior written consent of Seller and Buyer;
(b)    by either Seller or Buyer if Closing has not occurred on or before September 30, 2015 (or such later date as agreed to in writing by Seller and Buyer) (the “ Outside Date ”);
(c)    by Seller, at Seller’s option, if any of the conditions set forth in Article XI have not been satisfied on or before the Outside Date and, following written notice thereof from Seller to Buyer specifying the reason such condition is unsatisfied (including any breach by Buyer of this Agreement), such condition remains unsatisfied for a period of 10 Business Days after Buyer’s receipt of written notice thereof from Seller;
(d)    by Buyer, at Buyer’s option, if any of the conditions set forth in Article X have not been satisfied on or before the Outside Date and, following written notice thereof from Buyer to Seller specifying the reason such condition is unsatisfied (including any breach by Seller of this Agreement), such condition remains unsatisfied for a period of 10 Business Days after Seller’s receipt of written notice thereof from Buyer; or

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(e)    by Buyer if the condition set forth in Section 10.4 has not been satisfied on or before the Scheduled Closing Date or by Seller if the condition set forth in Section 11.4 is not satisfied on or before the Scheduled Closing Date;
provided , however , that neither Party shall be entitled to terminate this Agreement pursuant to Sections 15.1(b) through (d) above if such Party or its Affiliates are, at such time, in material breach of this Agreement.
15.2     Effect of Termination . If the obligation to close the transactions contemplated by this Agreement is terminated pursuant to any provision of Section 15.1 hereof, then, except for the provisions of Article I , Sections 4.1(c) through 4.1(f) , 4.2 , 4.3 , 13.9 , this Section 15.2 through Section 15.4 , Article XVI (other than Sections 16.2(b), 16.7 , 16.8 , 16.16 , 16.18 , 16.19 , and 16.20) and such of the defined terms in Appendix I to give context to the surviving provisions, this Agreement shall forthwith become void and the Parties shall have no liability or obligation hereunder except and to the extent such termination results from the material breach by a Party of any of its covenants or agreements hereunder in which case (except in the case of termination described in Section 15.4(a) ) the other Party shall have the right to seek all remedies available at law or in equity for such material breach and shall be entitled to recover court costs and attorneys’ fees in addition to any other relief to which such Party may be entitled.
15.3     Return of Documentation and Confidentiality . Upon termination of this Agreement, Buyer shall destroy or return to Seller all title, engineering, geological and geophysical data, environmental assessments and/or reports, maps and other information furnished by or no behalf of Seller to Buyer or prepared by or on behalf of Buyer in connection with its due diligence investigation of the Conveyed Interests, in each case, in accordance with the Confidentiality Agreement and, if Buyer elects to destroy any such information, an officer of Buyer shall certify the destruction of such information to Seller in writing.
15.4     Distribution of Deposit Upon Termination .
(a)    If Seller terminates this Agreement under Section 15.1(c), all of Buyer’s conditions set forth in Article X have been satisfied and the Closing has not occurred (i) because Buyer has willfully failed to perform or observe its covenants and agreements or (ii) because Buyer is in material breach of its representations and warranties hereunder, Seller shall be entitled to retain the Deposit as liquidated damages (and Seller and Buyer shall direct the Escrow Agent to pay the Deposit to Seller), free of any claims by Buyer or any other Person with respect thereto, as Seller’s sole and exclusive remedy. The Parties agree that such liquidated damages are reasonable considering the circumstances and are a good faith estimate of the actual damages reasonably expected to result. In the event of such termination, Seller shall be free to enjoy immediately all rights of ownership of the Conveyed Interests and to sell, transfer, encumber or otherwise dispose of the Conveyed Interests to any party without any restriction under this Agreement.
(b)    If this Agreement is terminated for any reason other than the reasons set forth in Section 15.4(a), Seller and Buyer shall direct the Escrow Agent to return the Deposit to Buyer, exclusive of interest, free of any claims by Seller or any other Person with respect thereto.

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ARTICLE XVI
MISCELLANEOUS
16.1     Appendices, Exhibits and Schedules . All of the Appendices, Exhibits and Schedules referred to in this Agreement are hereby incorporated into this Agreement by reference and constitute a part of this Agreement. Each Party to this Agreement and its counsel has received a complete set of Appendices, Exhibits and Schedules prior to and as of the execution of this Agreement.
16.2     Expenses and Taxes .
(a)    Except as otherwise specifically provided herein, all fees, costs and expenses incurred by the Parties in negotiating this Agreement or in consummating the transactions contemplated by this Agreement shall be paid by the Party incurring the same, including legal and accounting fees, costs and expenses.
(b)    Seller shall be allocated and bear all Asset Taxes for any period or portion thereof ending prior to the Effective Time, and Buyer shall be allocated and bear all Asset Taxes for any period or portion thereof that begins at or after the Effective Time. Each Party shall be responsible for its own Income Taxes.
(c)    For purposes of Section 16.2(b) , (i) Asset Taxes that are attributable to the severance or production of Hydrocarbons shall be allocated to the period in which the severance or production giving rise to such Asset Taxes occurred, (ii) Asset Taxes that are based upon or related to income or receipts or imposed on a transactional basis (other than such Asset Taxes described in clause (i)), shall be allocated to the period in which the transaction giving rise to such Asset Taxes occurred, and (iii) Asset Taxes that are ad valorem, property or other Asset Taxes imposed on a periodic basis pertaining to a Straddle Period shall be allocated between the portion of such Straddle Period ending immediately prior to the date on which the Effective Time occurs and the portion of such Straddle Period beginning on the date on which the Effective Time occurs by prorating each such Asset Tax based on the number of days in the applicable Straddle Period that occur before the date on which the Effective Time occurs, on the one hand, and the number of days in such Straddle Period that occur on or after the date on which the Effective Time occurs, on the other hand. For purposes of clause (iii) of the preceding sentence, the period for such Asset Taxes shall begin on the date on which ownership of the applicable Conveyed Interests gives rise to liability for the particular Asset Tax and shall end on the day before the next such date.
(d)    To the extent the actual amount of an Asset Tax is not determinable at the Closing or at the time of the determination of the Final Settlement Statement pursuant to Section 3.6 , as applicable, (i) the Parties shall utilize the most recent information available in estimating the amount of such Asset Tax for purposes of such adjustment, and (ii) upon the later determination of the actual amount of such Asset Tax, timely payments will be made from one Party to the other to the extent necessary to cause each Party to bear the amount of such Asset Tax that is allocable to such Party under Section 16.2(b) . Buyer shall be responsible for the preparation and timely filing of any Tax Returns that become due on or after the Closing Date and for the payment to the applicable Taxing Authority of all Asset Taxes that become due and

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payable on or after the Closing Date, provided that Seller shall reimburse Buyer for any such Taxes that are allocated to Seller pursuant to Section 16.2(b) , and Buyer shall indemnify and hold Seller harmless for any failure to file such Tax Returns and to make such payments; except Seller shall be responsible for the payment of all ad valorem, real property and personal property taxes for the Straddle Period on Conveyed Interests operated by Seller, provided that Buyer shall reimburse Seller for any such Taxes that are allocated to Buyer pursuant to Section 16.2(b) , and Seller shall indemnify and hold Buyer harmless for any failure to file such Tax Returns and to make such payments.
(e)    All required documentary, filing and recording fees and expenses in connection with the filing and recording of the assignments, conveyances or other instruments required to convey title to the Conveyed Interests to Buyer shall be borne by Buyer. Any and all sales, use, transfer, stamp, documentary, registration or similar Taxes incurred or imposed with respect to the transactions described in this Agreement (collectively, “ Transfer Taxes ”) shall be borne by Buyer. Buyer and Seller further agree, upon request, to use commercially reasonable efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed in connection with the transactions contemplated hereby.
(f)    The Parties shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns and any audit, litigation, or other proceeding with respect to Taxes relating to the Conveyed Interests. Such cooperation shall include the retention and (upon another Party’s request) the provision of records and information that are relevant to any such Tax Return or audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided under this Agreement. The Parties agree to retain all books and records with respect to Tax matters pertinent to the Conveyed Interests relating to any Tax period beginning before the Closing Date until the expiration of the statute of limitations of the respective Tax periods and to abide by all record retention agreements entered into with any Governmental Authority.
(g)    Seller shall promptly notify Buyer in writing upon receipt by Seller of notice of any pending or threatened Tax audits or assessments relating to the income, properties or operations of Seller that reasonably may be expected to relate to or give rise to a Lien on the Conveyed Interests. Each of Buyer and Seller shall promptly notify the other in writing upon receipt of notice of any pending or threatened Tax audit or assessment challenging the Allocation.
(h)    Any payments made to any party pursuant to Article XIII shall constitute an adjustment of the Purchase Price for Tax purposes and shall be treated as such by Buyer and Seller on their Tax Returns to the extent permitted by law.
16.3     Assignment . Subject to the provisions of Section 16.18 , this Agreement may not be assigned by either Party without the prior written consent of the other Party; provided, however , at any time prior to three Business Days prior to the Closing Date, Buyer may, by written notice to Seller, direct Seller to assign Buyer’s interest in this Agreement or all or a portion of the Conveyed Interests and Assumed Obligations to one or more Affiliates of Buyer.

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Such assignment shall not relieve Buyer of any obligations and responsibilities hereunder, including obligations and responsibilities arising following such assignment. Any assignment or other transfer by Buyer or its successors and assigns of any of the Conveyed Interests shall not relieve Buyer or its successors or assigns of any of their obligations (including indemnity obligations) hereunder, as to the Conveyed Interests so assigned or transferred.
16.4     Preparation of Agreement . Both Seller and Buyer and their respective counsel participated in the preparation of this Agreement. In the event of any ambiguity in this Agreement, no presumption shall arise based on the identity of the draftsman of this Agreement.
16.5     Publicity . Seller and Buyer shall promptly consult with each other with regard to all press releases or other public or private announcements issued or made at or prior to Closing concerning this Agreement or the transactions contemplated herein, and, except as may be required by applicable Laws or the applicable rules and regulations of any Governmental Authority or stock exchange, neither Buyer nor Seller shall issue any such press release or other public or private announcement without the prior written consent of the other Party, which shall not be unreasonably withheld or delayed; provided that under no circumstances shall either Party issue any press release or other public or private announcement disclosing the name of the other Party (or its Affiliates) without the express written consent of such Party, which may be withheld in its sole discretion, except as may be required by applicable Laws or the applicable rules and regulations of any Governmental Authority or stock exchange.
16.6     Notices . All notices and communications required or permitted to be given hereunder shall be given in writing and shall be delivered personally, or sent by bonded overnight courier, or mailed by U.S. Express Mail, Federal Express or United Parcel Service Express Delivery or by certified or registered United States Mail with all postage fully prepaid, or sent by facsimile transmission ( provided any such facsimile transmission is confirmed either orally or by written confirmation), addressed to the appropriate Party at the address for such Party shown below or at such other address as such Party shall have theretofore designated by written notice delivered to the Party giving such notice:
 
If to Seller:
 
 
 
 
 
Linn Energy Holdings, LLC
 
 
Linn Operating, Inc.
 
 
600 Travis Street, Suite 5100
 
 
Houston, Texas 77002
 
 
Attention:
Candice Wells
 
 
 
Vice President, General Counsel and Corporate Secretary
 
 
Fax: (832) 426-5956
 
 
Email: CWells@linnenergy.com
 
 
 

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With a copy to (which copy shall not count as notice):
 
 
 
 
 
Linn Energy Holdings, LLC
 
 
Linn Operating, Inc.
 
 
600 Travis Street, Suite 5100
 
 
Houston, Texas 77002
 
 
Attention:
David Beathard,
 
 
 
VP Business Development, Strategy & Planning
 
 
Fax: (832) 426-5909
 
 
Email: DBeathard@linnenergy.com
 
 
 
 
If to Buyer:
 
 
 
 
 
Rock Oil Holdings LLC
 
 
909 Fannin St., Suite 1350
 
 
Houston, Texas 77010
 
 
Attention:
Kyle R. Miller
 
 
 
Chief Executive Officer
 
 
Fax: (832) 701-1775
 
 
 
 
With a copy to (which copy shall not count as notice):
 
 
 
 
 
Latham & Watkins LLP
 
 
811 Main Street, Suite 3700
 
 
Houston, Texas 77002
 
 
Attention:
Chad M. Smith
 
 
Email: chad.smith@lw.com
Any notice given in accordance herewith shall be deemed to have been given when delivered to the addressee in person, or by courier, or transmitted by facsimile or email transmission during normal business hours on a Business Day (or if delivered or transmitted after normal business hours on a Business Day or on a day other than a Business Day, then on the next Business Day), or upon actual receipt by the addressee during normal business hours on a Business Day after such notice has either been delivered to an overnight courier or deposited in the United States Mail or with Federal Express or United Parcel Service, as the case may be (or if delivered after normal business hours on a Business Day or on a day other than a Business Day, then on the next Business Day). Either Party may change their contact information for notice by giving written notice to the other Party in the manner provided in this Section 16.6 . If the date specified in this Agreement for giving any notice or taking any action is not a Business Day (or if the period during which any notice is required to be given or any action taken expires on a date which is not a Business Day), then the date for giving such notice or taking such action (and the expiration date of such period during which notice is required to be given or action taken) shall be the next day which is a Business Day.
16.7     Further Cooperation . Following Closing, Buyer and Seller shall execute and deliver, or shall cause to be executed and delivered from time to time, such further instruments of conveyance and transfer, and shall take such other actions as either Party may reasonably

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request, to convey and deliver the Conveyed Interests to Buyer, to perfect Buyer’s title thereto, and to accomplish the orderly transfer of the Conveyed Interests to Buyer in the manner contemplated by this Agreement.
16.8     Filings, Notices and Certain Governmental Approvals . Promptly after Closing, Buyer shall (a) record all assignments executed at Closing in the records of the applicable Governmental Authority (including any federal or state agencies, if applicable), (b) if applicable, send notices to vendors supplying goods and services for the Conveyed Interests and to the operator of such Conveyed Interests of the assignment of such Conveyed Interests to Buyer, (c) actively pursue the unconditional approval of all applicable Governmental Authorities of the assignment of the Conveyed Interests to Buyer and (d) actively pursue all other consents and approvals that may be required in connection with the assignment of the Conveyed Interests to Buyer and the assumption of the Liabilities assumed by Buyer hereunder, in each case, that shall not have been obtained prior to Closing. Buyer obligates itself to take any and all action required by any Governmental Authority in order to obtain such unconditional approval, including the posting of any and all bonds or other security that may be required in excess of its existing lease, pipeline or area-wide bond.
16.9     Entire Agreement; Non-Reliance; Conflicts . THIS AGREEMENT, THE APPENDICES, EXHIBITS AND SCHEDULES HERETO, THE TRANSACTION DOCUMENTS AND THE CONFIDENTIALITY AGREEMENT COLLECTIVELY CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ALL PRIOR AGREEMENTS, UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER OF THIS AGREEMENT. THERE ARE NO WARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT OR THE TRANSACTION DOCUMENTS, AND NEITHER PARTY SHALL BE BOUND BY OR LIABLE FOR ANY ALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENTS OF INTENTION NOT SO SET FORTH. EACH PARTY ACKNOWLEDGES THAT, IN ENTERING INTO THIS AGREEMENT, IT HAS RELIED SOLELY ON THE PROMISES, AGREEMENTS, STATEMENTS OR REPRESENTATIONS THAT ARE EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE TRANSACTION DOCUMENTS AND THAT NEITHER PARTY HAD ANY DUTY TO MAKE ANY PROMISES, AGREEMENTS, STATEMENTS OR REPRESENTATIONS THAT ARE NOT EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN THE TRANSACTION DOCUMENTS. EACH PARTY ALSO ACKNOWLEDGES THAT, IN ENTERING THIS AGREEMENT, IT HAS NOT RELIED ON ANY PROMISES, AGREEMENTS, STATEMENTS OR REPRESENTATIONS THAT ARE NOT EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN THE TRANSACTION DOCUMENTS. IN THE EVENT OF A CONFLICT BETWEEN: (A) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY SCHEDULE OR EXHIBIT HERETO; OR (B) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY TRANSACTION DOCUMENT, THE TERMS AND PROVISIONS OF THIS AGREEMENT SHALL GOVERN AND CONTROL, PROVIDED , HOWEVER , THAT THE INCLUSION IN ANY OF THE SCHEDULES OR EXHIBITS HERETO OR ANY

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TRANSACTION DOCUMENT OF TERMS AND PROVISIONS NOT ADDRESSED IN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH ADDITIONAL PROVISIONS SHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE PROVISIONS OF THIS SECTION 16.9 .
16.10     Successors and Permitted Assigns . This Agreement shall be binding upon and inure to the benefit of Buyer and Seller and their respective successors and permitted assigns.
16.11     Parties in Interest . Notwithstanding anything contained in this Agreement, nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the Parties or their respective successors and permitted assigns, or the Parties’ respective related Indemnified Parties hereunder any rights, remedies, obligations or Liabilities under or by reason of this Agreement; provided that only a Party and its respective successors and permitted assigns will have the right to enforce the provisions of this Agreement on its own behalf or on behalf of any of its related Indemnified Persons (but shall not be obligated to do so).
16.12     Amendment . This Agreement may be amended, restated, supplemented or otherwise modified only by an instrument in writing executed by all of the Parties and expressly identified as an amendment, restatement, supplement or modification.
16.13     Waiver; Rights Cumulative . Any of the terms, covenants, representations, warranties, or conditions hereof may be waived only by a written instrument executed by or on behalf of the Party waiving compliance. No course of dealing on the part of either Party, or their respective officers, employees, agents, or representatives, and no failure by a Party to exercise any of its rights under this Agreement, shall, in any such case, operate as a waiver thereof or affect in any way the right of such Party at a later time to enforce the performance of such provision. No waiver by either Party of any condition, or any breach of any term, covenant, representation, or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term, covenant, representation, or warranty. The rights of the Parties under this Agreement shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right.
16.14     Governing Law; Jurisdiction; Venue; Jury Waiver . THIS AGREEMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE RIGHTS, DUTIES AND THE LEGAL RELATIONS AMONG THE PARTIES HERETO AND THERETO SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCEPT THAT, WITH RESPECT TO ISSUES RELATING TO REAL PROPERTY FOR PROPERTIES LOCATED IN A SPECIFIC STATE, THE LAWS OF SUCH STATE SHALL GOVERN), EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE PARTIES HERETO CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN HOUSTON, TEXAS OR THE STATE COURTS LOCATED IN HOUSTON, TEXAS FOR ANY ACTION ARISING OUT OF THIS AGREEMENT, THE TRANSACTION DOCUMENTS, OR ANY

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TRANSACTION CONTEMPLATED HEREBY OR THEREBY. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT, THE TRANSACTION DOCUMENTS OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY SHALL BE EXCLUSIVELY LITIGATED IN SUCH COURTS DESCRIBED ABOVE HAVING SITES IN HOUSTON, TEXAS AND EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS SOLELY IN RESPECT OF ANY PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT. EACH PARTY HERETO VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE TRANSACTION DOCUMENTS OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY. 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. TO THE EXTENT THAT EITHER PARTY OR ANY OF ITS AFFILIATES HAS ACQUIRED, OR HEREAFTER MAY ACQUIRE, ANY IMMUNITY FROM 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, SUCH PARTY (ON ITS OWN BEHALF AND ON BEHALF OF ITS AFFILIATES) 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 THIS SECTION 16.14 .
16.15     Severability . If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to either Party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.
16.16     Removal of Name . As promptly as practicable, but in any case within 60 days after the termination of the obligations under Section 1.1 of the Transition Services Agreement or such earlier time as may be required by applicable Law, Buyer shall eliminate the names “Linn” and any variants thereof from the Conveyed Interests and, except with respect to such grace period for eliminating existing usage, shall have no right to use any logos, trademarks or trade names belonging to Seller or any of its Affiliates.

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16.17     Counterparts . This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all of such counterparts shall constitute for all purposes one agreement. Any signature hereto delivered by a Party by facsimile or other electronic transmission shall be deemed an original signature hereto.
16.18     Like-Kind Exchange . Buyer and Seller agree that either or both of Seller and Buyer may elect to treat the acquisition or sale of the Conveyed Interests as an exchange of like-kind property under Section 1031 of the Code (an “ Exchange ”), provided that the Closing shall not be delayed by reason of the Exchange.  Each Party agrees to use reasonable efforts to cooperate with the other Party in the completion of such an Exchange including an Exchange subject to the procedures outlined in Treasury Regulation § 1.1031(k)-1 and/or Internal Revenue Service Revenue Procedure 2000-37.  Each of Seller and Buyer shall have the right at any time prior to Closing to assign all or a part of its rights under this Agreement to a qualified intermediary (as that term is defined in Treasury Regulation § 1.1031(k)-1(g)(4)(iii)) or an exchange accommodation titleholder (as that term is defined in Internal Revenue Service Revenue Procedure 2000-37) to effect an Exchange.  In connection with any such Exchange, any exchange accommodation titleholder shall have taken all steps necessary to own the Conveyed Interests under applicable Law.  Each Party acknowledges and agrees that neither an assignment of a Party’s rights under this Agreement nor any other actions taken by a Party or any other Person in connection with the Exchange shall release either Party from, or modify, any of its liabilities and obligations (including indemnity obligations to the other Party) under this Agreement, and neither Party makes any representations as to any particular Tax treatment that may be afforded to any other Party by reason of such assignment or any other actions taken in connection with the Exchange.  Either Party electing to treat the acquisition or sale of the Conveyed Interests as an Exchange shall be obligated to pay all additional costs incurred hereunder as a result of the Exchange, and in consideration for the cooperation of the other Party, the Party electing Exchange treatment shall agree to pay all costs associated with the Exchange and to indemnify and hold the other Party, its Affiliates, and their respective former, current and future partners, members, shareholders, owners, officers, directors, managers, employees, agents and representatives harmless from and against any and all liabilities and Taxes arising out of, based upon, attributable to or resulting from the Exchange or transactions or actions taken in connection with the Exchange that would not have been incurred by the other Party but for the electing Party’s Exchange election.
16.19     Specific Performance . The Parties agree that if any of the provisions of this Agreement are not performed by a Party in accordance with their specific terms, the other Party shall be entitled to specific performance of the terms hereof, except as otherwise provided herein, in addition to any other remedy available at law or in equity.
16.20     Financial Statements . Seller acknowledges that Buyer and its Affiliates may desire now or in the future (including as a result of a potential initial public offering or Rule 144A offering of Buyer and or any of its Affiliates), to include statements of revenues and direct operating expenses and other financial information relating to the transactions contemplated by this Agreement in documents distributed to investors and perhaps filed by Buyer and its Affiliates with the Securities Exchange Commission pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and that such financial statements may be required to be audited. Accordingly, from and after the Closing Date, Seller

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shall if requested use commercially reasonable efforts to (at Buyer’s sole cost and expense) (a) promptly provide Buyer with such information about the Conveyed Interests as may be required to be included in such documents, (b) provide, and shall cause its Affiliates, officers and employees to provide, reasonable cooperation in connection with the preparation of such documents, including providing reasonable access to auditors, auditor work papers, employees, books and records, and any financial data reasonably requested by Buyer in connection therewith, and (c) request that its independent public accountants to provide any consent necessary for the filing of such documents and to deliver a customary comfort letter to Buyer or its underwriters or placement agents with respect to financial information relating to the transactions contemplated by this Agreement included as part of such documents. Notwithstanding the foregoing, (i) Seller shall in no event be required to create new records relating to the Conveyed Interests and (ii) the access to be provided to Purchaser pursuant to this Section 16.20 shall not interfere with Seller’s ability to prepare its own financial statements or its regular conduct of business and shall be made available during Seller’s normal business hours.
[ Remainder of page intentionally left blank. Signature page follows. ]


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IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement on the date first above written.
 
Seller :
 
 
 
LINN ENERGY HOLDINGS, LLC
 
 
 
 
 
By:
/s/ Mark E. Ellis
 
Name:
Mark E. Ellis
 
Title:
Chairman, President & CEO
 
 
 
 
 
LINN OPERATING, INC.
 
 
 
 
 
By:
/s/ Mark E. Ellis
 
Name:
Mark E. Ellis
 
Title:
Chairman, President & CEO
 
 


SIGNATURE PAGE TO PURCHASE AND SALE AGREEMENT


 
Buyer :
 
 
 
ROCK OIL HOLDINGS LLC
 
 
 
 
 
By:
/s/ Jason Cansler
 
Name:
Jason Cansler
 
Title:
President


SIGNATURE PAGE TO PURCHASE AND SALE AGREEMENT


APPENDIX I
Definitions
Capitalized terms used in this Agreement shall have the meanings set forth in this Appendix I unless the context requires otherwise.
“ AAA ” means the American Arbitration Association.
“ AAA Rules ” means the Commercial Arbitration Rules of the AAA.
“ Accounting Arbitrator ” has the meaning set forth in Section 3.7 .
“ Acreage Tract ” means each of the tracts of land described on Exhibit B-1.
“ Adjusted Purchase Price ” has the meaning set forth in Section 3.3 .
“ AFEs ” has the meaning set forth in Section 7.12 .
“ Affiliate ” means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term “ control ” and its derivatives with respect to any Person mean 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. Notwithstanding the foregoing, with respect to Buyer, Affiliate shall not include Riverstone Holdings LLC, funds advised by Riverstone Holdings LLC or portfolio companies of such funds other than Rock Oil Holdings LLC and its controlled subsidiaries.
“ Agreement ” has the meaning set forth in the first paragraph herein.
“ Allocated Values ” has the meaning set forth in Section 3.8(a).
“ Applicable Contracts ” means all Contracts to which Seller is a party or is bound relating to any of the Conveyed Interests and (in each case) that will be binding on Buyer after the Closing, including: communitization agreements; net profits agreements; production payment agreements; area of mutual interest agreements; joint venture agreements; confidentiality agreements; farmin and farmout agreements; bottom hole agreements; crude oil, condensate, and natural gas purchase and sale, gathering, transportation, and marketing agreements; hydrocarbon storage agreements; acreage contribution agreements; operating agreements; balancing agreements; pooling declarations or agreements; unitization agreements; processing agreements; saltwater disposal agreements; facilities or equipment leases; all confidentiality agreements related to the Conveyed Interests (even if not otherwise binding on Buyer at Closing) and other similar contracts and agreements, but exclusive of any master service agreements and Contracts relating to the Excluded Assets.
“ Asset Taxes ” means ad valorem, property, excise, severance, production, sales, use, or similar Taxes (including any interest, fine, penalty or additions to tax imposed by a Governmental Body in connection with such taxes but excluding, for the avoidance of doubt, any Income Taxes and Transfer Taxes) attributable to or measured by the ownership or operation of

ANNEX I
PAGE 1
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the Conveyed Interests or the production of Hydrocarbons therefrom or the receipt of proceeds therefrom.
“ Assignment ” means the Assignment and Bill of Sale from Seller to Buyer, pertaining to the Conveyed Interests, substantially in the form attached to this Agreement as Exhibit D.
“ Assumed Obligations ” has the meaning set forth in Section 13.1(a) .
“ Burden ” means any and all royalties (including lessor’s royalty), overriding royalties, production payments, net profits interests and other burdens upon, measured by or payable out of production (excluding, for the avoidance of doubt, any Taxes).
“ Business Day ” means any day (other than Saturday or Sunday) on which commercial banks in Houston, Texas are generally open for business.
“ Buyer ” has the meaning set forth in the first paragraph herein.
“ Buyer Indemnified Parties ” has the meaning set forth in Section 13.2 .
“ Buyer’s Environmental Liabilities ” has the meaning set forth in Section 6.1(a) .
“ Buyer’s Representatives ” has the meaning set forth in Section 4.1(a) .
“ Casualty Loss ” has the meaning set forth in Section 5.4(b) .
“ Claim Notice ” has the meaning set forth in Section 13.7(b) .
“ Closing ” has the meaning set forth in Section 12.1 .
“ Closing Date ” has the meaning set forth in Section 12.1 .
“ Code ” means the Internal Revenue Code of 1986, as amended, and any successor statute.
“ Confidentiality Agreement ” shall mean that certain Confidentiality Agreement, dated as of May 4, 2015, by and between LEH and Buyer.
“ Consent ” has the meaning set forth in Section 7.4 .
“ Contract ” means any written or oral contract, agreement or any other legally binding arrangement, but excluding, however, any Lease, easement, right-of-way, permit or other instrument creating or evidencing an interest in the Conveyed Interests or any real or immovable property related to or used in connection with the operations of any Conveyed Interests.
“ Conveyed Interests ” has the meaning set forth in Section 2.1 .
“ Cure Period ” has the meaning set forth in Section 5.3(c) .

ANNEX I
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“ Customary Post-Closing Consents ” means the consents and approvals from Governmental Authorities for the assignment of the Conveyed Interests to Buyer that are customarily obtained after the assignment of properties similar to the Conveyed Interests.
“ Decommissioning Obligations ” has the meaning set forth in Section 13.1(a)(iii) .
“ Defect Claim Date ” means on or before 5:00 P.M. (Central Time) on the date that is 37 days after the Execution Date.
“ Defensible Title ” means such title of Seller with respect to the Wells and Acreage Tracts that, as of the Effective Time, and subject to Permitted Encumbrances:
(a)    with respect to each Well set forth in Exhibit B (subject to any reservations, limitations or depth restrictions described in Exhibit B ), entitles Seller to receive not less than the Net Revenue Interest set forth in Exhibit B as to all depths from the surface to the base of the applicable Target Formation, except for decreases in connection with those operations in which Seller may from time to time after the Effective Time elect to be a non-consenting co-owner to the extent permitted by this Agreement;

(b)    with respect to each Well set forth in Exhibit B (subject to any reservations, limitations or depth restrictions described in Exhibit B) , obligates Seller to bear not more than the Working Interest set forth in Exhibit B as to all depths from the surface to the base of the applicable Target Formation, except increases to the extent that such increases are accompanied by a proportionate increase in Seller’s Net Revenue Interest;

(c)    with respect to each of the Acreage Tracts (subject to any reservations, limitations or depth restrictions described in Exhibit B-1) , Seller owns at least the Net Acres and Net Revenue Interest for such Acreage Tract as is represented in Exhibit B-1 , as to all depths from the surface to the base of the applicable Target Formation; and

(d)    is free and clear of all Encumbrances.

“ Deposit ” has the meaning set forth in Section 3.2 .
“ Designated Well Costs ” has the meaning set forth in Section 2.3(a) .
“ Dispute Notice ” has the meaning set forth in Section 3.6(a) .
“ DOJ ” has the meaning set forth in Section 9.5 .
“ DTPA ” has the meaning set forth in Section 4.3(d) .
“ Effective Time ” means 7:00 A.M. (Central Time) on May 1, 2015.
“ Encumbrance ” means any lien, mortgage, security interest, pledge, charge or similar encumbrance.

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“ Environmental Arbitrator ” has the meaning set forth in Section 6.1(e) .
“ Environmental Condition ” means (a) a condition existing on the Execution Date with respect to the air, soil, subsurface, surface waters, ground waters and/or sediments that causes a Conveyed Interest (or Seller or its Affiliates with respect to a Conveyed Interest) not to be in compliance with any Environmental Law, or (b) the existence as of the Execution Date with respect to the Conveyed Interests or the operation thereof of any environmental pollution, contamination or degradation where remedial or corrective action is presently required (or if known, would be presently required) under Environmental Laws.
“ Environmental Deductible ” means two percent (2%) of the Purchase Price.
“ Environmental Defect ” means an Environmental Condition with respect to a Conveyed Interest.
“ Environmental Defect Notice ” has the meaning set forth in Section 6.1(a) .
“ Environmental Indemnity Agreement ” has the meaning set forth in Section 6.1(b)(iii) .
“ Environmental Laws ” means all Laws in effect as of the Execution Date, including common law, relating to the protection of the environment, including those Laws relating to the storage, handling, and use of Hazardous Substances and those Laws relating to the generation, processing, treatment, storage, transportation, disposal or other management thereof. The term “ Environmental Laws ” does not include good or desirable operating practices or standards that may be voluntarily employed or adopted by other oil and gas well operators or recommended, but not required, by a Governmental Authority or (b) the Occupational Safety and Health Act of 1970, 29 U.S.C. § 651 et. seq., as amended, or any other Law governing worker safety or workplace conditions.
“ Escrow Agent ” has the meaning set forth in Section 3.2 .
“ Escrow Agreement ” means the form of Escrow Agreement attached hereto as Exhibit P .
“ Exchange ” has the meaning set forth in Section 16.18 .
“ Excluded Assets ” means (a) all of Seller’s corporate minute books, financial records and other business records that relate to Seller’s business generally (including the ownership and operation of the Conveyed Interests); (b) to the extent that they do not relate to the Assumed Obligations for which Buyer is providing indemnification hereunder, all trade credits, all accounts, all receivables of Seller and all other proceeds, income or revenues of Seller attributable to the Conveyed Interests and attributable to any period of time prior to the Effective Time; (c) to the extent that they do not relate to the Assumed Obligations for which Buyer is providing indemnification hereunder, all claims and causes of action of Seller arising under or with respect to any Contracts that are attributable to periods of time prior to the Effective Time (including claims for adjustments or refunds); (d) subject to Section 5.4 and to the extent that they do not relate to the Assumed Obligations for which Buyer is providing indemnification hereunder, all rights and interests of Seller (i) under any policy or agreement of insurance or indemnity, (ii) under any bond, or (iii) to any insurance or condemnation proceeds or awards

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arising, in each case, from acts, omissions or events or damage to or destruction of property; (e) Seller’s rights with respect to all Hydrocarbons produced and sold from the Conveyed Interests with respect to all periods prior to the Effective Time; (f) all claims of Seller or any of its Affiliates for refunds of, rights to receive funds from any Governmental Authority, or loss carry forwards or credits with respect to (i) Asset Taxes attributable to any period (or portion thereof) prior to the Effective Time, (ii) Income Taxes, or (iii) any Taxes attributable to the Excluded Assets; (g) all information technology assets, including desktop computers, laptop computers, servers, networking equipment and any associated peripherals and other computer hardware, computer software, all radio and telephone equipment, SCADA and measurement technology, smartphones, tablets and other mobility devices (such as MiFi and SCADA controllers), well communication devices, and any other information technology systems; (h) all of Seller’s proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property; (i) all documents and instruments of Seller that may be protected by an attorney-client privilege or any attorney work product doctrine; (j) all data that cannot be disclosed to Buyer as a result of confidentiality arrangements under agreements with Third Parties (provided that, if requested by Buyer, Seller has used reasonable efforts to obtain consent to disclose such data); (k) all audit rights or obligations of Seller arising under any of the Applicable Contracts or otherwise with respect to any period prior to the Effective Time or to any of the Excluded Assets, except for any Imbalances assumed by Buyer; (l) to the extent not assignable (after Seller, upon request from Buyer, has used reasonable efforts to obtain all required consents to assign) all geophysical and other seismic and related technical data and information relating to the Conveyed Interests; (m) documents prepared or received by Seller or its Affiliates with respect to (i) lists of prospective purchasers for such transactions compiled by Seller, (ii) bids submitted by other prospective purchasers of the Conveyed Interests, (iii) analyses by Seller or its Affiliates of any bids submitted by any prospective purchaser, (iv) correspondence between or among Seller, its representatives, and any prospective purchaser other than Buyer, and (v) correspondence between Seller or any of its representatives with respect to any of the bids, the prospective purchasers or the transactions contemplated by this Agreement; (n) any offices, office leases and any personal property located in or on such offices or office leases; (o) any leases, rights and other assets specifically listed in Exhibit E ; (p) any Hedge Contracts; and (q) any debt instruments.
“ Execution Date ” has the meaning set forth in the first paragraph herein.
“ Fee Minerals ” has the meaning set forth in Section 2.1(c) .
“ Final Price ” has the meaning set forth in Section 3.6(a) .
“ Final Settlement Statement ” has the meaning set forth in Section 3.6(a) .
“ FTC ” has the meaning set forth in Section 9.5.
“ GAAP ” means generally accepted accounting principles in the United States as interpreted as of the Execution Date.
“ Governmental Authority ” means any federal, state, local, municipal, tribal or other government; any governmental, regulatory or administrative agency, commission, body or other

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authority exercising or entitled to exercise any administrative, executive, judicial, legislative, regulatory or Taxing Authority or power; and any court or governmental tribunal, including any tribal authority having or asserting jurisdiction.
“ Hazardous Substances ” means any pollutants, contaminants, toxins or hazardous or extremely hazardous substances, materials, wastes, constituents, compounds, or chemicals that are regulated by, or may form the basis of liability under, any Environmental Laws, including NORM and other substances referenced in Section 6.2 .
“ Hedge Contract ” means any Contract to which Seller or any of its Affiliates is a party with respect to any swap, forward, future or derivative transaction or option or similar agreement, whether exchange traded, “over-the-counter” or otherwise, involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions.
“ Horizontal Impairments ” has the meaning set forth in the definition of “Permitted Encumbrances.”
“ HSR Act ” has the meaning set forth in Section 9.5 .
“ Hydrocarbons ” means oil and gas and other hydrocarbons (including condensate) produced or processed in association therewith (whether or not such item is in liquid or gaseous form), or any combination thereof, and any minerals produced in association therewith.
“ Imbalances ” means all Well Imbalances and Pipeline Imbalances.
“ Income Taxes ” means any income, franchise and similar Taxes.
“ Indemnified Party ” has the meaning set forth in Section 13.7(a) .
“ Indemnifying Party ” has the meaning set forth in Section 13.7(a) .
“ Indemnity Deductible ” means two and one-half percent (2.5%) of the Purchase Price.
“ Individual Environmental Threshold ” has the meaning set forth in Section 6.1(d) .
“ Individual Title Defect Threshold ” has the meaning set forth in Section 5.3(i) .
“ Interim Period ” means that period of time commencing at the Effective Time and ending at 7:00 A.M. (Central Time) on the Closing Date.
“ Knowledge ” means with respect to Seller, the actual knowledge (without investigation) of the following Persons: Mark Ellis, Arden Walker, Jr., Kolja Rockov, David B. Rottino, Thomas Emmons, David R. Beathard, and Matt Roberts.
“ Lands ” has the meaning set forth in Section 2.1(a) .

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“ Law ” means any applicable statute, law, rule, regulation, ordinance, order, code, ruling, writ, injunction, decree or other official act of or by any Governmental Authority.
“ Leases ” has the meaning set forth in Section 2.1(a) .
“ LEH ” has the meaning set forth in the first paragraph herein.
“ Liabilities ” means any and all claims, obligations, causes of action, payments, charges, judgments, assessments, liabilities, losses, damages, penalties, fines, costs, and expenses, including any attorneys’ fees, legal or other expenses incurred in connection therewith, including liabilities, costs, losses and damages for personal injury, death, property damage, environmental damage, or Remediation.
“ LOI ” has the meaning set forth in the first paragraph herein.
“ Material Adverse Effect ” means any change, offset, fact, condition, event or circumstance that, individually or in the aggregate, results in a material adverse effect on the ownership, operation or value of the Conveyed Interest, taken as a whole and as operated or expected to be operated as of the Execution Date or a material adverse effect on the ability of Seller to consummate the transactions contemplated by this Agreement or the Transaction Documents and perform its obligations hereunder; provided , however , that the term “ Material Adverse Effect ” shall not include any material adverse effect resulting from: (a) entering into this Agreement or the announcement of the transactions contemplated by this Agreement; (b) any action or omission of Seller taken in accordance with the terms of this Agreement or with the prior consent of Buyer; (c) changes in general market, economic, financial, or political conditions (including changes in commodity prices, fuel supply or transportation markets, interests or rates), regardless of location; (d) changes in conditions or developments generally applicable to the oil and gas industry; (e) acts of God, including hurricanes, storms or other naturally occurring events; (f) acts or failures to act of a Governmental Authority; (g) civil unrest, any outbreak of disease or hostilities, terrorist activities or war or any similar disorder; (h) matters that are cured or no longer exist by the earlier of Closing and the termination of this Agreement; (i) any reclassification or recalculation of reserves in the ordinary course of business; (j) changes in the prices of any Hydrocarbons; and (k) natural declines in well performance.
“ Material Contracts ” has the meaning set forth in Section 7.7(a) .
“ Net Acres ” means, as computed separately with respect to each Lease, (a) the number of gross acres of land covered by such Lease, multiplied by (b) the undivided percentage interest in Hydrocarbons covered by such Lease in such lands, multiplied by (c) Seller’s aggregate Working Interest or undivided interest in such Lease.
“ Net Revenue Interest ” means, with respect to any Well set forth in Exhibit B or any Acreage Tract set forth in Exhibit B-1 , the interest in and to (and, with respect to an Acreage Tract, the weighted average (based on acreage) interest in and to) all Hydrocarbons produced, saved and sold from or allocated to such Well (in each case, limited to depths from the surface to the base of the Target Formation as described in the definition of “Defensible Title” and subject

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to any reservations, limitations or depth restrictions described in Exhibit B and Exhibit B-1 ), after giving effect to all Burdens.
“ NORM ” means naturally occurring radioactive material.
“ Operating Expenses ” means (other than the Designated Well Costs) all operating expenses (including costs of insurance) and all capital expenditures incurred in the ownership and operation of the Conveyed Interests in the ordinary course of business and, where applicable, in accordance with the relevant operating or unit agreement, if any, and overhead costs charged to the Conveyed Interests under the relevant operating agreement or unit agreement, if any, but excluding Liabilities attributable to (a) personal injury or death, property damage, or violation of any Law, (b) Decommissioning Obligations, (c) environmental matters, including obligations to remediate any contamination of water or Personal Property under applicable Environmental Laws, (d) obligations with respect to Imbalances, (e) obligations to pay Working Interests, royalties, overriding royalties or other interest owners revenues or proceeds attributable to sales of Hydrocarbons relating to the Conveyed Interests, including those held in suspense, and (f) Income Taxes and Asset Taxes.
“ Outside Date ” has the meaning set forth in Section 15.1(b) .
“ Overhead Costs ” means an amount equal to $100,000 per calendar month during the Interim Period.
“ Party ” and “ Parties ” has the meaning set forth in the first paragraph herein.
“ Permitted Encumbrances ” means:
(a)    the terms and conditions of all Leases and all Burdens if the net cumulative effect of such Leases and Burdens does not (i) materially interfere with the operation or use of any of the Conveyed Interests as currently operated and used, (ii) operate to reduce the Net Revenue Interest of Seller with respect to any Well or Acreage Tract to an amount less than the Net Revenue Interest set forth in Exhibit B for such Well or Exhibit B-1 for such Acreage Tract, (iii) does not obligate Seller to bear a Working Interest with respect to any Well in any amount greater than the Working Interest set forth in Exhibit B for such Well (unless the Net Revenue Interest for such Well is greater than the Net Revenue Interest set forth in Exhibit B in the same or greater proportion as any increase in such Working Interest), and (iv) does not reduce the number of Net Acres as to any Acreage Tract below the number of Net Acres set forth on Exhibit B-1 . provided, however that any drilling obligation included in the Leases will be considered a permitted encumbrance so long as Seller is not in breach of such obligations;
(b)    preferential rights to purchase and required consents to assignment and similar agreements (but only as applicable to the transfer to Buyer);
(c)    liens for Taxes not yet due or delinquent or, if delinquent, that are being contested in good faith;
(d)    Customary Post-Closing Consents;

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(e)    conventional and customary rights of reassignment upon final intention to abandon or release any of the Conveyed Interests;
(f)    such Title Defects as Buyer may have waived or is deemed to have waived pursuant to the terms of this Agreement;
(g)    all Laws and all rights reserved to or vested in any Governmental Authority (i) to control or regulate any Conveyed Interest in any manner; (ii) by the terms of any right, power, franchise, grant, license or permit, or by any provision of Law, to terminate such right, power, franchise, grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any of the Conveyed Interests; (iii) to use such property in a manner which does not materially impair the use of such property for the purposes for which it is currently owned and operated; or (iv) to enforce any obligations or duties affecting the Conveyed Interests to any Governmental Authority with respect to any right, power, franchise, grant, license or permit;
(h)    rights of a common owner of any interest in rights-of-way, permits or easements held by Seller and such common owner as tenants in common or through common ownership;
(i)    easements, conditions, covenants, restrictions, servitudes, permits, rights-of-way, surface leases, and other rights in the Conveyed Interests for the purpose of operations, facilities, roads, alleys, highways, railways, pipelines, transmission lines, transportation lines, distribution lines, power lines, telephone lines, removal of timber, grazing, logging operations, canals, ditches, reservoirs and other like purposes, or for the joint or common use of real estate, rights-of-way, facilities and equipment (“ Surface Items ”), which, in each case, (i) do not materially impair the operation or use of the Conveyed Interests as currently operated and used or (ii) would not reasonably be expected to both unreasonably and materially impair the operation or use of the Conveyed Interests to conduct a horizontal drilling and development program on the Leases and Lands (“ Horizontal Impairments ”); provided, however, that any Horizontal Impairment caused by such Surface Items shall be a “Permitted Encumbrance” if such Horizontal Impairment (i) is generally expected to arise in a horizontal drilling and development program in the Permian Basin or (ii) may be resolved using reasonable efforts generally expended in the oil and gas industry in the Permian Basin during horizontal drilling and development (including the reasonable spending of money, reasonable modification of development plans, and reasonable delays);
(j)    vendors, carriers, warehousemen’s, repairmen’s, mechanics’, workmen’s, materialmen’s, construction or other like liens arising by operation of Law in the ordinary course of business or incident to the construction or improvement of any property in respect of obligations which are not yet due or which are being contested in good faith by appropriate proceedings by or on behalf of Seller;
(k)    liens created under the Conveyed Interests or operating agreements or by operation of Law in respect of obligations that are not yet due or that are being contested in good faith by appropriate proceedings by or on behalf of Seller;

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(l)    any Encumbrance affecting the Conveyed Interests that is discharged by Seller at or prior to Closing;
(m)    mortgage liens burdening a lessor’s interest in the Conveyed Interests, to the extent, and only to the extent, subordinated to the applicable Lease or other Conveyed Interest or to the extent scheduled on Schedule 9.6 and released at or before Closing; and
(n)    the terms and conditions of all Applicable Contracts if the net cumulative of such Applicable Contracts (i) do not materially interfere with the operation or use of any of the Conveyed Interests, (ii) do not reduce the Net Revenue Interest of Seller with respect to any Well or Acreage Tract to an amount less than the Net Revenue Interest set forth in Exhibit B for such Well or Exhibit B-1 for such Acreage Tract, (iii) do not obligate Seller to bear a Working Interest in any amount greater than the Working Interest set forth in Exhibit B for such Well (unless the Net Revenue Interest for such Lease, Well is greater than the Net Revenue Interest set forth in Exhibit B in the same or greater proportion as any increase in such Working Interest), and (iv) do not reduce the number of Net Acres as to any Acreage Tract below the number of Net Acres set forth on Exhibit B-1 .
“ Person ” means any individual, firm, corporation, company, partnership (general and limited), limited liability company, joint venture, association, trust, estate, unincorporated organization, Governmental Authority or any other entity.
“ Personal Property ” has the meaning set forth in Section 2.1(f) .
“ Phase I Environmental Site Assessment ” means an environmental site assessment performed pursuant to ASTM Standard E1527, or any similar environmental assessment that does not involve any invasive, sampling or testing activities.
“ Pipeline Imbalance ” means any marketing imbalance between the quantity of Hydrocarbons attributable to the Conveyed Interests required to be delivered by Seller under any Contract relating to the purchase and sale, gathering, transportation, storage, processing (including any production handling and processing at a separation facility) or marketing of Hydrocarbons and the quantity of Hydrocarbons attributable to the Conveyed Interests actually delivered by Seller pursuant to the relevant Contract, together with any appurtenant rights and obligations concerning production balancing at the delivery point into the relevant sale, gathering, transportation, storage or processing facility.
“ Preferential Purchase Right ” has the meaning set forth in Section 7.9 .
“ Preliminary Settlement Statement ” has the meaning set forth in Section 3.5 .
“ Property ” or “ Properties ” has the meaning set forth in Section 2.1(d) .
“ Purchase Price ” has the meaning set forth in Section 3.1 .
“ Records ” has the meaning set forth in Section 2.1(l) .

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“ Release ” shall mean any depositing, spilling, leaking, pumping, pouring, placing, emitting, discarding, abandoning, emptying, discharging, injecting, escaping, leaching, dumping or disposing of any Hazardous Substances into the environment.
“ Remediation ” means, with respect to an Environmental Condition, the implementation and completion of any remedial, removal, response, construction, closure, disposal or other corrective actions to the extent but only to the extent required under Environmental Laws and/or to completely correct or remove such Environmental Condition.
“ Remediation Amount ” means, with respect to an Environmental Condition, the present value as of the Closing Date (using an annual discount rate of 6%) of the cost (net to Seller’s interest prior to the consummation of the transactions contemplated by this Agreement) of the most cost effective Remediation of such Environmental Condition.
“ Scheduled Closing Date ” has the meaning set forth in Section 12.1 .
“ Seller ” has the meaning set forth in the first paragraph herein.
“ Seller Benefit Plans ” has the meaning set forth in Section 7.18 .
“ Seller Employees ” has the meaning set forth in Section 14.1 .
“ Seller Indemnified Parties ” has the meaning set forth in Section 13.3 .
“ Specified Obligations ” has the meaning set forth in Section 13.1(b) .
“ Specified Representations ” means the representations and warranties in Sections 7.1 , 7.2 , 7.14 , 8.1 , 8.2 , 8.10 , and 8.11 .
“ Straddle Period ” means any Tax period beginning before and ending on or after the date on which the Effective Time occurs.
“ Surface Items ” has the meaning set forth in the definition of “Permitted Encumbrances.”
“ Target Formations ” has the meaning set forth in Exhibit O .
“ Taxes ” means any taxes, assessments, unclaimed property or escheat obligations and other governmental charges imposed by any Governmental Authority, including income, profits, gross receipts, employment, stamp, occupation, premium, alternative or add-on minimum, ad valorem, real property, personal property, transfer, real property transfer, value added, sales, use, customs, duties, capital stock, franchise, excise, withholding, social security (or similar), unemployment, disability, payroll, windfall profit, severance, production, estimated or other tax, including any interest, penalty or addition thereto, whether disputed or not.
“ Taxing Authority ” means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision, including any governmental or quasi-governmental

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entity or agency that imposes, or is charged with collecting, social security or similar charges or premiums.
“ Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
“ Third Party ” means any Person other than a Party or an Affiliate of a Party.
“ Third Party Claim ” has the meaning set forth in Section 13.7(b) .
“ Title Arbitrator ” has the meaning set forth in Section 5.3(j) .
“ Title Benefit ” means, with respect to each Well shown in Exhibit B or Acreage Tract shown in Exhibit B-1, any right, circumstance or condition that operates (a) to increase the Net Revenue Interest of Seller above that shown for such Well in Exhibit B or Acreage Tract in Exhibit B-1 to the extent the same does not cause a greater than proportionate increase in Seller’s Working Interest therein above that shown in Exhibit B or Exhibit B-1 , as applicable, or (b) to decrease the Working Interest of Seller in any Well or Acreage Tract below that shown for such Well in Exhibit B or Acreage Tract in Exhibit B-1 to the extent the same causes a decrease in Seller’s Working Interest that is proportionately greater than the decrease in Seller’s Net Revenue Interest therein below that shown in Exhibit B or Exhibit B-1 , as applicable.
“ Title Benefit Amount ” has the meaning set forth in Section 5.3(e) .
“ Title Benefit Notice ” has the meaning set forth in Section 5.3(a) .
“ Title Benefit Property ” has the meaning set forth in Section 5.3(a) .
“ Title Deductible ” means two percent (2%) of the Purchase Price.
“ Title Defect ” means any Encumbrance, defect or other matter that causes Seller not to have Defensible Title in and to the Wells or Acreage Tracts as of the Effective Time, without duplication; provided that the following shall not be considered Title Defects:
(a)    defects arising out of the lack of corporate or other entity authorization unless Buyer provides reasonable affirmative evidence that such corporate or other entity action was not authorized and results in another Person’s actual and superior claim of title to the relevant Conveyed Interest;
(b)    defects based on a gap in Seller’s chain of title in the federal, state, county or parish records or other records of a Governmental Authority as to the Leases, unless Buyer affirmatively shows such gap to exist in such records by an abstract of title, title opinion or landman’s title chain, which documents (if any) shall be included in a Title Defect Notice (for the avoidance of doubt, a non-certified, cursory or limited title chain will satisfy this requirement);

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(c)    defects based upon the failure to record any federal or state Leases or any assignments of interests in such Leases in any applicable public records;
(d)    defects based on the failure to recite marital status in a document or omission of successors or heirship or estate proceedings provides reasonable affirmative evidence that such failure results in another Person’s actual and superior claim of title to the relevant Conveyed Interest;
(e)    defects that have been cured by applicable Laws of limitation or prescription;
(f)    any Encumbrance or loss of title resulting from Seller’s conduct of business in compliance with this Agreement (including Section 9.1 );
(g)    defects based upon the exercise of any Preferential Purchase Rights or failure to obtain any Consents but only in connection with the proposed transfer to Buyer;
(h)    defects or irregularities resulting from or related to probate proceedings or the lack thereof, which defects or irregularities have been outstanding for seven years or more;
(i)    defects arising from or relating to the outcome of any litigation set forth in Schedule 7.6 ;
(j)    defects that affect only which Person has the right to receive royalty payments rather than the amount or the proper payment of such royalty payment;
(k)    defects based solely on (i) lack of information in Seller’s files, or (ii) references to an unrecorded document(s) to which neither Seller nor any Affiliate of Seller is a party, if such document is dated earlier than January 1, 1960 and is not in Seller’s files;
(l)    defects or irregularities that would customarily be waived by a reasonable owner or operator of oil and gas properties;
(m)    defects based solely on the failure of a lease to hold a specified number of Net Acres after the primary term of such lease has expired based on any provision in the lease providing that the lease holds only the acreage within the minimum proration unit required to produce the maximum allowable or any similar provision but only if Seller is not claiming to hold more than 80 acres by any vertical oil well; and
(n)    defects arising out of lack of survey, unless a survey is expressly required by applicable Laws.
“ Title Defect Amount ” has the meaning set forth in Section 5.3(g) .
“ Title Defect Notice ” has the meaning set forth in Section 5.3(a) .

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“ Title Defect Property ” has the meaning set forth in Section 5.3(a) .
“ Title Disputes ” has the meaning set forth in Section 5.3(j) .
“ Title Dispute Date ” means on or before 5:00 P.M. (Central Time) on the date that is 30 days after the expiration of the Cure Period.
“ Title Indemnity Agreement ” has the meaning set forth in Section 5.3(d)(ii) .
“ Transaction Documents ” means those documents executed pursuant to or in connection with this Agreement.
“ Transition Period ” shall mean the period of time for which certain transition services are provided by Seller pursuant to the Transition Services Agreement covering three production months after Closing.
“ Transition Services Agreement ” shall mean a transition services agreement pertaining to the Conveyed Interests in substantially the same form as Exhibit L .
“ Transfer Taxes ” has the meaning set forth in Section 16.2(e) .
“ Treasury Regulations ” means the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Treasury Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute, proposed or final Treasury Regulations.
“ Units ” has the meaning set forth in Section 2.1(d) .
“ Well Imbalance ” means any imbalance at the wellhead between the amount of Hydrocarbons produced from a Well and allocable to the interests of Seller therein and the shares of production from the relevant Well to which Seller is entitled, together with any appurtenant rights and obligations concerning future in kind and/or cash balancing at the wellhead.
“ Wells ” has the meaning set forth in Section 2.1(b) .
“ Working Interest ” means, with respect to any Well set forth in Exhibit B or any Acreage Tract set forth in Exhibit B-1 , the interest in and to (and, with respect to an Acreage Tract, the weighted average (based on acreage) interest in and to) such Well or Acreage Tract that is burdened with the obligation to bear and pay costs and expenses of maintenance, development and operations on or in connection with such Well or Acreage Tract (in each case, limited to depths from the surface to the base of the applicable Target Formation as described in the definition of “Defensible Title” and in each case, subject to any reservations, limitations or depth restrictions described in Exhibit B and Exhibit B-1) , but without regard to the effect of any Burdens.

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Exhibit 10.5

LINN ENERGY, LLC
LONG-TERM INCENTIVE PLAN
EXECUTIVE PHANTOM PERFORMANCE UNIT GRANT AGREEMENT
2015 - 2017 PERFORMANCE PERIOD
This Phantom Performance Unit grant agreement (“Grant Agreement”) is made and entered into effective as of [Grant Date] , (the “Grant Date”) by and between LINN ENERGY, LLC, a Delaware limited liability company (together with its subsidiaries, the “Company”), and [Executive] (“Participant”).
WHEREAS , the Company considers it to be in its best interest that Participant be given an added incentive to advance the interests of the Company;
WHEREAS , the Company desires to accomplish such objectives by granting Participant Phantom Performance Units pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended which is attached hereto as Appendix A and incorporated by reference herein (the “Plan”); and
WHEREAS , the Phantom Performance Units shall be subject to vesting based in part on the achievement of certain performance conditions, as set forth herein.
NOW, THEREFORE , in consideration of the mutual agreements hereinafter set forth, the parties hereby agree as follows:
1.    Grant of Phantom Performance Units. The Company hereby grants to Participant _________ Phantom Performance Units (the “Target Phantom Performance Units”), each Phantom Performance Unit equal to the cash value of a Unit, under and subject to the terms and conditions of this Grant Agreement and the Plan; provided that (except as otherwise provided in this Agreement) the final number of Phantom Performance Units that vest shall be determined in accordance with the performance criteria set forth on Appendix B. This grant of Phantom Performance Units also includes a tandem grant of DERs (a contingent right to receive an equivalent of any cash distributions made by the Company with respect to Units, as defined in the Plan) with respect to each Phantom Performance Unit.
2.    Payment of DERs. Upon the payment of any cash distribution on Units of the Company, with respect to each Phantom Performance Unit granted hereunder, the dollar amount of such distributions with respect to the number of Units then underlying the Target Phantom Performance Units shall be increased by a number of Units equal to the value of the cash distribution divided by the Fair Market Value of a Unit on the ex-dividend date and such increased amount of Units shall be deemed the Target Phantom Performance Units. The number of Target Phantom Performance Units, as so increased, shall be eligible for adjustment based on subsequent dividends or distributions.
3.    Vesting. On December 31, 2017 (the “Vesting Date”), a number of Phantom Performance Units shall vest based on the extent to which the Company has satisfied the performance condition set forth on Appendix B, provided that, 1) except as otherwise provided herein, the Participant is continuously employed by the Company through the Vesting Date and

Active 17894677.5

2) payment of any cash upon vesting shall not made until such time as the Committee has certified the performance conditions in accordance with Appendix B. For purposes of this paragraph, continued service on the board of directors of the Company or any affiliate or employment with any affiliate of the Company will constitute continued employment with the Company.
4.    General Restrictions. The Phantom Performance Units shall not be assignable or transferable except as expressly provided in the Plan or by the Committee in its sole discretion.
5.    Termination by Company other than for Cause or by Participant with Good Reason.
a.
Participants Not Covered by an Employment Agreement. In the event the Participant is terminated by the Company other than for Cause (as defined in Section 18 of this Grant Agreement), then within forty-five days of the date of termination, the Committee shall determine, in its sole and absolute discretion, the percentage, if any, of the Target Phantom Performance Units that the Participant shall continue to be eligible to earn at the end of the Performance Period (the “Adjusted Target Phantom Performance Units”) in accordance with the performance criteria set forth on Appendix B. On the Vesting Date, the Participant shall vest in a number of Phantom Performance Units, determined in accordance with Section 3 had the Participant’s employment not terminated and based on the Adjusted Target Phantom Performance Units determined by the Committee. Notwithstanding the foregoing, the Committee shall maintain discretion at any time prior to payment of the Phantom Performance Units to reduce or eliminate the amount to which Participant is otherwise due based on Participant’s failure to comply with any post-termination restrictive covenants.
b.
Participants Covered by an Employment Agreement . In the event the Participant is terminated by the Company other than for Cause or the Participant terminates Participant’s employment with the Company for Good Reason (as defined in Section 18 of this Grant Agreement), then on the Vesting Date the Participant shall vest in the number of Phantom Performance Units that would have vested as determined in accordance with Section 3 had the Participant’s employment not terminated.
6.    Death or Disability. In the case of termination of the Participant’s service relationship with the Company due to death or in the case of the Participant’s Disability (as defined in Section 18 of this Grant Agreement), the Participant shall vest in a number of Phantom Performance Units equal to the Target Phantom Performance Units. In the event of death following termination of Participant’s service under Section 5 above, the Participant shall vest in a number of units equal to the Target Phantom Performance Units or Adjusted Target Phantom Performance Units, whichever is applicable.
7.    Change of Control. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control (as defined in the Plan), the Performance Period shall be treated as

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ending on the date the Change of Control occurred, the Vesting Date shall be the date the Change of Control occurred, and the number of Phantom Performance Units that vest shall be calculated in accordance with Appendix B, subject to modification as described in this Section 7.
8.    Termination by Company for Cause or by Participant without Good Reason. In the case of a termination of the Participant’s employment other than as described in Sections 5 and 6, all outstanding Phantom Performance Units granted hereby which have not vested pursuant to any provision of this Grant Agreement shall be automatically and immediately forfeited, and Participant hereby agrees to undertake any action and execute any document, instrument or papers reasonably requested by the Company to effect such forfeiture of Phantom Performance Units resulting from any such termination.
9.    Settlement of Phantom Performance Units. Any Phantom Performance Units that become payable pursuant to this Grant Agreement (including DER payments, as described above) shall be paid in a single lump sum cash payment (based on the Fair Market Value of a Unit on the day immediately preceding the date of payment, except as provided below) at the times indicated below, and any partial unit shall be rounded up to the next whole unit.
a.
Section 3 and Section 5 . Phantom Performance Units that become payable pursuant to Section 3 or Section 5 of this Grant Agreement shall be paid to the Participant on March 15 of the calendar year immediately following the end of the Performance Period.
b.
Section 6 . Phantom Performance Units that become payable pursuant to Section 6 of this Grant Agreement shall be paid to the Participant (or to the Participant’s estate in the event of death) as soon as practicable following the date of the Participant’s death or Disability, as applicable, but in no event later than March 15 of the calendar year immediately following the calendar year in which the Participant’s death or Disability, as applicable, occurred.
c.
Section 7 . Phantom Performance Units that become payable pursuant to Section 7 of this Grant Agreement shall be paid to the Participant within 60 days after the consummation of the Change of Control.
10.    Plan Controlling Document. Unless otherwise defined herein (including any attachments hereto), capitalized terms shall have the meaning given such terms in the Plan. Participant agrees that the Plan is the controlling instrument and that to the extent there is any conflict between the terms of the Plan and this Grant Agreement, the Plan shall control and be the governing document.
11.    Limited Liability Company Agreement. Participant agrees to be bound by all applicable provisions of the Company’s limited liability company agreement, as it may be amended from time to time.
12.    Taxes. The Company and any affiliate thereof are authorized to withhold from any payment relating to the Phantom Performance Units granted hereby, or any payroll or other payment to Participant, amounts of withholding and other taxes due or potentially payable in connection with the Phantom Performance Units granted hereby, and to take such other action as

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the Committee may deem advisable to enable the Company, any affiliate, and Participant to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Phantom Performance Units granted hereby. This authority shall include authority to withhold cash from the Participant’s payment thereof in satisfaction of Participant’s tax obligations, either on a mandatory or elective basis in the discretion of the Committee.
14.    Notices. Any notices given in connection with this Grant Agreement shall, if issued to Participant, be delivered to Participant’s current address on file with the Company, or if issued to the Company, be delivered to the Company’s principal offices.
15.    Execution of Receipts and Releases. Any payment of cash to Participant, or to Participant’s legal representatives, heirs, legatees or distributees, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require Participant or Participant’s legal representatives, heirs, legatees or distributees, as a condition precedent to such payment, to execute a release and receipt therefor in such form as it shall determine.
16.    Successors. This Grant Agreement shall be binding upon Participant, Participant’s legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.
17.    Section 409A of the Code. It is intended that the Phantom Performance Units granted hereby be exempt from or compliant with the requirements of Section 409A of the Code, and this Grant Agreement shall be interpreted and administered accordingly. For purposes of this Grant Agreement, Participant will be considered to have a termination of Participant’s service relationship with the Company only upon Participant’s “separation from service” with the Company as such term is defined in Treasury Regulation Section 1.409A‑1(h), and any successor provision thereto. If Participant is identified by the Company as a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code on the date on which the Participant has a “separation from service” (other than due to death) within the meaning of Treasury Regulation § 1.409A-1(h), any Phantom Performance Units payable or settled on account of a separation from service that are deferred compensation subject to Section 409A of the Code shall be paid or settled on the earliest of (1) the first business day following the expiration of six months from Participant’s separation from service, (2) the date of Participant’s death, or (3) such earlier date as complies with the requirements of Section 409A of the Code.
18.    Definitions.
a.
Cause . If Participant is covered by a written employment agreement between the Company and Participant in effect on the date of the Participant’s termination (the “Employment Agreement”) and cause is defined in such Employment Agreement, then Cause shall have the meaning therein. If Participant is not covered by an Employment Agreement or cause is not defined therein and Participant is covered by a severance arrangement and cause is defined in such severance arrangement, then Cause shall have the meaning therein. If Participant is not covered by an Employment Agreement or severance arrangement or cause is not defined therein,

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then Cause shall mean the Company’s termination of Participant’s employment by reason of any of the following:
(i)
Participant’s conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to any of the Company or its direct or indirect subsidiaries (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct;
(ii)
Participant’s repeated intoxication by alcohol or drugs during the performance of his or her duties;
(iii)
Participant’s willful and intentional misuse of any of the funds of the Company or its direct or indirect subsidiaries;
(iv)
embezzlement by Participant;
(v)
Participant’s willful and material misrepresentations or concealments on any written reports submitted to any of the Company or its direct or indirect subsidiaries;
(vi)
Participant’s material failure to follow or comply with the reasonable and lawful written directives of the board of directors of the Company; or
(vii)
conduct constituting a material breach by Participant of the Company’s then current (A) Code of Business Conduct and Ethics, and any other written policy referenced therein, (B) the Code of Ethics for Chief Executive Officer and senior financial officers, if applicable, provided that in each case Participant knew or should have known such conduct to be a breach.
b.
Disability . If Participant is covered by an Employment Agreement and disability is defined in such Employment Agreement, then Disability shall have the meaning therein. If Participant is not covered by an Employment Agreement or disability is not defined therein, then Disability shall mean the earlier of (a) written determination by a physician selected by the Company that Participant has been unable to perform substantially Participant’s usual and customary duties for a period of at least 120 consecutive days or a non-consecutive period of 180 days during any twelve-month period as a result of incapacity due to mental or physical illness or disease; and (b) “disability” as such term is defined in the Company’s applicable long-term disability insurance plan. Notwithstanding the foregoing, if the Phantom Performance Units are deferred compensation within the meaning of Section 409A of the Code, then “Disability” shall have the meaning set forth in Treasury Regulation § 1.409A-3(i)(4)(i).
c.
Good Reason . If Participant is covered by an Employment Agreement and good reason is defined in such Employment Agreement, then Good Reason shall have

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the meaning therein. If Participant is not covered by an Employment Agreement or good reason is not defined therein, then Good Reason shall mean any of the following to which Participant will not consent in writing:
(i)
a reduction in Participant’s then current base salary;
(ii)
failure by the Company to pay in full on a current basis any amounts due and owing to Participant under any long-term or short-term or other incentive compensation plans, agreements or awards; or
(iii)
any material reduction in Participant’s title, authority or responsibilities.

IN WITNESS WHEREOF , the parties hereto have executed this Grant Agreement to be effective as of the day and year first above written.
 
LINN ENERGY, LLC
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 
 
 
 
PARTICIPANT:
 
 
 
 



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APPENDIX A
Linn Energy, LLC Amended and Restated Long-Term Incentive Plan


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APPENDIX B
1.
Definitions.
(i)
“ Comparison Companies ” means a set of peer companies, determined by the Committee at the beginning of a Performance Period, as updated on Appendix C on an annual basis. In the event a peer company ceases to be publicly traded company on a national securities exchange during the Performance Period for one of the following reasons defined below, they shall be treated as follows:
1)
Acquisition or Merger . If a company is acquired or merged into another company and ceases to be publicly traded under the same ticker symbol on a national securities exchange during the Performance Period, the company will remain on the list. Stock price performance for the period will be determined using the peer company’s actual stock price performance through the day before the date of announcement of the acquisition/merger and the average return of the SIG Oil Exploration & Production Index (ticker symbol EPX) for the remainder of the Performance Period.
2)
Bankruptcy . If a company becomes Bankrupt during the Performance Period, such company will remain on the list but shall be deemed the bottom performer. “Bankrupt” shall mean that the company ceases to be publicly traded on a national securities exchange as of the end of the Performance Period as a result of a liquidation commenced under Chapter 7 of the Bankruptcy Code, an assignment of the company’s assets for the benefit of creditors under applicable state law, or the commencement of a reorganization proceeding under Chapter 11 of the Bankruptcy Code.
(ii)
“ Beginning Price ” means the average per share closing unit price for the 20 trading days preceding the first day of the Performance Period.
(iii)
“ Ending Price ” means the average per share closing price for the last 20 trading days of the Performance Period.
(iv)
“ Multiplier ” means the multiplier determined in accordance with Section 2 of this Appendix B.
(v)
“ Performance Period ” means the period between January 1, 2015 and December 31, 2017 .
(vi)
“ Total Unitholder Return ” is defined as the Ending Price minus the Beginning Price plus any distributions (cash or unit based on ex-distribution date) paid per unit over the Performance Period, with such distributions assumed to be reinvested in units on the ex-distribution date, the total of which is divided by the Beginning Price.

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2.
Calculation of Multiplier . The Total Unitholder Return of the Company and of the Comparison Companies shall be calculated and certified by the Committee. The percentile ranking of the Company’s Total Unitholder Return as compared to the Total Unitholder Return of each Comparison Company shall determine the Multiplier using the chart below. The Committee will make the final determination as to the amount paid, notwithstanding the chart below.
Rank
Percentile Ranking
Multiplier
1
100 th  percentile
200%
2
92 nd  percentile
200%
3
85 th  percentile
187%
4
77 th  percentile
167%
5
69 th   percentile
148%
6
62 nd  percentile
129%
7
54 th  percentile
110%
8
46 th  percentile
90%
9
38 th  percentile
71%
10
31 st  percentile
52%
11
23 rd  percentile
33%
12
15 th  percentile
0%
13
8 th  percentile
0%
14
0 percentile
0%

3.
Calculation of Vested Phantom Performance Units . The number of Phantom Performance Units that shall vest as of the Vesting Date (and paid upon certification by the Committee) shall be equal to the product of (i) the Target Phantom Performance Units or Adjusted Target Phantom Performance Units, if terminated under Section 5.a. and (ii) the Multiplier (with any fractional units rounded up to the next whole unit).

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Appendix C

2015 - 2017 Comparison Companies

Upstream E&P MLP’s
Upstream E&P C-Corps
Breitburn Energy Partners LP
Chesapeake Energy Corp.
Eagle Rock Energy Partners LP
Denbury Resources Inc.
EV Energy Partners LP
Encana Corp
Legacy Reserves LP
EP Energy Corp.
Memorial Production Partners LP
Newfield Exploration Co.
Vanguard Natural Resources
QEP Resources Inc.
 
Whiting Petroleum Corp.


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Exhibit 31.1
I, Mark E. Ellis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Linn Energy, LLC (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2015


/s/ Mark E. Ellis
 
Mark E. Ellis
 
Chairman, President and Chief Executive Officer
 




Exhibit 31.2
I, Kolja Rockov, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Linn Energy, LLC (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2015


/s/ Kolja Rockov
 
Kolja Rockov
 
Executive Vice President and Chief Financial Officer
 




Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Linn Energy, LLC (the “Company”) on Form 10-Q for the quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark E. Ellis, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: Ju ly 30, 20 15
/s/ Mark E. Ellis
 
Mark E. Ellis
 
Chairman, President and Chief Executive Officer




Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Linn Energy, LLC (the “Company”) on Form 10-Q for the quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kolja Rockov, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July  30, 201 5
/s/ Kolja Rockov
 
Kolja Rockov
 
Executive Vice President and Chief Financial Officer