Note 6 – Commitments and Contingencies

Commitments

The Company has entered into various agreements, which include drilling rig contracts of $91.4 million, gathering, transportation, and processing through-put commitments of $858.7 million, office leases, including maintenance, of $55.3 million, and other miscellaneous contracts and leases of $7.2 million. The annual minimum payments for the next five years and total minimum lease payments thereafter are presented below:



Years Ending December 31,	(in thousands)

2013	$	127,753
2014	111,674
2015	99,854
2016	102,540
2017	101,456
Thereafter	469,348
Total	$	1,012,625

The Company has gathering, processing, and transportation through-put commitments with various parties that require delivery of a fixed determinable quantity of product. The aggregate minimum commitment to deliver is 1,515 Bcf of natural gas and 36 MMBbls of oil. These contracts expire at various dates through 2023, and the total amount of the commitment is approximately $858.7 million. The Company will be required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments. As of the filing date of this report, the Company does not expect to incur any material shortfalls.

The Company leases office space under various operating leases with terms extending as far as May 31, 2024. Rent expense for 2012, 2011, and 2010 was $5.4 million, $3.7 million, and $2.7 million, respectively. The Company also leases office equipment under various operating leases.

In addition to the amounts in the above table, the Company entered into a capital project commencing in 2011 for the development of midstream infrastructure in the Company’s non-operated Eagle Ford shale play. Pursuant to the terms of the agreement for the construction, ownership and operation of these assets, the Company is required to pay its portion of the costs for the next two years. Based on current estimates, the Company does not expect its costs to exceed $67 million during this time.

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the results of such pending litigation and claims will not have a material effect on the results of operations, the financial position, or the cash flows of the Company.

The Company was a defendant in litigation wherein the plaintiffs claimed an aggregate overriding royalty interest of 7.46875 percent in production from approximately 22,000 of the Company’s net acres in the Eagle Ford shale play in South Texas. The plaintiffs sought to quiet title to their claimed overriding royalty interest and to recover unpaid overriding royalty interest proceeds allegedly due. The Company believes that the claimed overriding royalty interest has been terminated under the governing agreements and the applicable law, and has contested the plaintiffs’ claims. Both parties filed motions for summary judgment, and on February 8, 2011, the District Court in Webb County, Texas, issued an order granting plaintiffs’ motion for summary judgment and denying the Company’s motion for summary judgment. On September 30, 2011, the District Court entered final judgment for the plaintiffs and awarded then current damages of approximately $5.1 million, which included prejudgment interest. The District Court also awarded attorneys’ fees and costs to the plaintiffs. The Company appealed the District Court’s judgment and obtained a stay pending appeal that prevented the plaintiffs from executing on the judgment.

On May 23, 2012, the Fourth Court of Appeals for the State of Texas delivered its opinion in this case, which reversed the summary judgment granted to the plaintiffs by the District Court and rendered judgment that the plaintiffs take nothing. Accordingly, based on the judgment of the Fourth Court of Appeals, the plaintiffs are not entitled to their claimed aggregate 7.46875 percent overriding royalty interest, nor are they entitled to the claimed damages related to the overriding royalty interest, attorneys fees or costs. The plaintiffs filed a petition with the Supreme Court of Texas requesting a review of the Fourth Court of Appeals judgment. The Supreme Court of Texas denied this petition for review on February 15, 2013. As a result, the decision of the Fourth Court of Appeals is dispositive and its dismissal of the plaintiffs’ claims is final.

On January 27, 2011, Chieftain filed a Class Action Petition against the Company in the District Court of Beaver County, Oklahoma, claiming damages related to royalty valuation on all of the Company's Oklahoma wells. These claims include breach of contract, breach of fiduciary duty, fraud, unjust enrichment, tortious breach of contract, conspiracy, and conversion, based generally on asserted improper deduction of post-production costs. The Company removed this lawsuit to the United States District Court for the Western District of Oklahoma on February 22, 2011. The Company has responded to the petition and denied the allegations. The court has not yet ruled on Chieftain's motion to certify the putative class, and has stayed any such ruling until the United States Court of Appeals for the Tenth Circuit issues its ruling on class certification in two similar royalty class action lawsuits, where the defendants have appealed such certification. The opinion from the Tenth Circuit is expected during the summer of 2013.

This case involves complex legal issues and uncertainties; a potentially large class of plaintiffs, and a large number of related producing properties, lease agreements and wells; and an alleged class period commencing in 1988 and spanning the entire producing life of the wells. Because the proceedings are in the early stages, with substantive discovery yet to be conducted, the Company is unable to estimate what impact, if any, the action will have on its financial condition, results of operations or cash flows. The Company is still evaluating the claims, but believes that it has properly valued and paid royalty under Oklahoma law and has and will continue to vigorously defend this case.