--------------------------------------------------------------------------------

 
AMENDED AND RESTATED CREDIT AGREEMENT

BETWEEN

CROSS BORDER RESOURCES, INC.

AND

TEXAS CAPITAL BANK, N.A.

January 31, 2011
 

--------------------------------------------------------------------------------

REVOLVING LINE OF CREDIT AND LETTER
OF CREDIT FACILITY OF UP TO $25,000,000
 

--------------------------------------------------------------------------------

 

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS
 

         
Page
            ARTICLE I
DEFINITIONS AND INTERPRETATION
 
2
             
1.1
 
Terms Defined Above
 
2
 
1.2
 
Additional Defined Terms
 
2
 
1.3
 
Undefined Financial Accounting Terms
 
14
 
1.4
 
References
 
14
 
1.5
 
Articles and Sections
 
14
 
1.6
 
Number and Gender
 
14
 
1.7
 
Incorporation of Schedules and Exhibits
 
15
 
1.8
 
Negotiated Transaction
 
15
            ARTICLE II
TERMS OF FACILITIES
 
15
             
2.1
 
Revolving Line of Credit
 
15
 
2.2
 
Letter of Credit Facility
 
16
 
2.3
 
Additional Provisions Applicable to Letters of Credit
 
16
 
2.4
 
Use of Loan Proceeds and Letters of Credit
 
17
 
2.5
 
Interest
 
17
 
2.6
 
Repayment of Loans and Interest
 
18
 
2.7
 
Outstanding Amounts
 
18
 
2.8
 
Taxes and Time, Place, and Method of Payments
 
18
 
2.9
 
Borrowing Base and Monthly Reduction Amount
 
20
 
2.10
 
Mandatory Prepayments
 
21
 
2.11
 
Voluntary Prepayments
 
21
 
2.12
 
Engineering Fees and Expenses
 
21
 
2.13
 
Commitment Fees
 
21
 
2.14
 
Additional Fees
 
22
 
2.15
 
Loans to Satisfy Obligations
 
22
 
2.16
 
General Provisions Relating to Interest
 
22
 
2.17
 
Yield Protection
 
23
 
2.18
 
Letters in Lieu of Transfer Orders or Division Orders
 
24
 
2.19
 
Power of Attorney
 
24
 
2.20
 
Security Interest in Accounts; Right of Offset
 
25
            ARTICLE III
CONDITIONS
 
25
             
3.1
 
Receipt of Loan Documents and Other Items
 
25
 
3.2
 
Each Loan
 
28
 
3.3
 
Issuance of Letters of Credit
 
29
            ARTICLE IV
REPRESENTATIONS AND WARRANTIES
 
30
 
4.1
 
Due Authorization
 
30
 
4.2
 
Existence
 
30

 
- i -

--------------------------------------------------------------------------------

 

 
4.3
 
Valid and Binding Obligations
 
30
 
4.4
 
Security Documents
 
30
 
4.5
 
Title to Oil and Gas Properties
 
30
 
4.6
 
Scope and Accuracy of Financial Statements
 
31
 
4.7
 
No Material Adverse Effect or Default
 
31
 
4.8
 
No Material Misstatements
 
31
 
4.9
 
Liabilities, Litigation and Restrictions
 
31
 
4.10
 
Authorizations; Consents
 
31
 
4.11
 
Compliance with Laws
 
31
 
4.12
 
ERISA
 
31
 
4.13
 
Environmental Laws
 
32
 
4.14
 
Compliance with Federal Reserve Regulations
 
32
 
4.15
 
Investment Company Act
 
32
 
4.16
 
Proper Filing of Tax Returns; Payment of Taxes Due
 
32
 
4.17
 
Refunds
 
32
 
4.18
 
Gas Contracts
 
32
 
4.19
 
Intellectual Property
 
33
 
4.20
 
Casualties or Taking of Property
 
33
 
4.21
 
Principal Location
 
33
 
4.22
 
Subsidiaries
 
33
 
4.23
 
Compliance with Anti-Terrorism Laws
 
33
 
4.24
 
Identification Numbers
 
34
 
4.25
 
Solvency
 
34
            ARTICLE V
AFFIRMATIVE COVENANTS
 
35
             
5.1
 
Maintenance and Access to Records
 
35
 
5.2
 
Quarterly Financial Statements and Compliance Certificates
 
35
 
5.3
 
Annual Financial Statements and Compliance Certificate
 
35
 
5.4
 
Oil and Gas Reserve Reports and Production Reports
 
36
 
5.5
 
Title Opinions; Title Defects; Mortgaged Properties
 
36
 
5.6
 
Notices of Certain Events
 
37
 
5.7
 
Letters in Lieu of Transfer Orders or Division Orders
 
37
 
5.8
 
Commodity Hedging
 
38
 
5.9
 
Joinder of New Domestic Subsidiaries
 
38
 
5.10
 
Additional Information
 
38
 
5.11
 
Compliance with Laws
 
38
 
5.12
 
Payment of Assessments and Charges
 
38
 
5.13
 
Maintenance of Existence or Qualification and Good Standing
 
38
 
5.14
 
Payment of Note; Performance of Obligations
 
39
 
5.15
 
Further Assurances
 
39
 
5.16
 
Initial Expenses of Lender
 
39
 
5.17
 
Subsequent Expenses of Lender
 
39
 
5.18
 
Operation of Oil and Gas Properties
 
39
 
5.19
 
Maintenance and Inspection of Properties
 
40
 
5.20
 
Maintenance of Insurance
 
40
 
5.21
 
Environmental Indemnification
 
41

 
- ii -

--------------------------------------------------------------------------------

 

 
5.22
 
General Indemnification
 
41
 
5.23
 
Evidence of Compliance with Anti-Terrorism Laws
 
42
 
5.24
 
Deposit Accounts
 
42
            ARTICLE VI
NEGATIVE COVENANTS
 
42
             
6.1
 
Indebtedness
 
42
 
6.2
 
Contingent Obligations
 
43
 
6.3
 
Liens
 
43
 
6.4
 
Sales of Assets
 
43
 
6.5
 
Leasebacks
 
43
 
6.6
 
Sale or Discount of Receivables
 
43
 
6.7
 
Loans or Advances
 
43
 
6.8
 
Investments
 
43
 
6.9
 
Dividends, Distributions and Certain Payments
 
44
 
6.10
 
Issuance of Equity; Changes in Corporate Structure
 
44
 
6.11
 
Transactions with Affiliates
 
44
 
6.12
 
Lines of Business
 
44
 
6.13
 
Plan Obligation
 
44
 
6.14
 
Current Ratio
 
45
 
6.15
 
Total Funded Indebtedness to EBITDA Ratio
 
45
 
6.16
 
Interest Coverage Ratio
 
45
 
6.17
 
Anti-Terrorism Laws
 
45
            ARTICLE VII
EVENTS OF DEFAULT
 
46
             
7.1
 
Enumeration of Events of Default
 
46
 
7.2
 
Remedies
 
48
            ARTICLE VIII
MISCELLANEOUS
 
49
             
8.1
 
Assignments; Participations
 
49
 
8.2
 
Survival of Representations, Warranties, and Covenants
 
50
 
8.3
 
Notices and Other Communications
 
50
 
8.4
 
Parties in Interest
 
51
 
8.5
 
Renewals; Extensions
 
51
 
8.6
 
Rights of Third Parties
 
51
 
8.7
 
No Waiver; Rights Cumulative
 
51
 
8.8
 
Survival Upon Unenforceability
 
51
 
8.9
 
Amendments; Waivers
 
52
 
8.10
 
Controlling Agreement
 
52
 
8.11
 
Disposition of Collateral
 
52
 
8.12
 
Governing Law
 
52
 
8.13
 
Waiver of Rights to Jury Trial
 
52
 
8.14
 
Jurisdiction and Venue
 
52
 
8.15
 
Integration
 
53
 
8.16
 
Waiver of Punitive and Consequential Damages
 
53

 
- iii -

--------------------------------------------------------------------------------

 

 
8.17
 
Counterparts
 
53
 
8.18
 
USA Patriot Act Notice
 
53
 
8.19
 
Tax Shelter Regulations
 
53
 
8.20
 
Contribution and Indemnification
 
54

 
LIST OF SCHEDULES
 
Schedule 4.9
-
Liabilities and Litigation
 
Schedule 4.13
-
Environmental Matters
 
Schedule 4.17
-
Refunds
 
Schedule 4.18
-
Gas Contracts
 
Schedule 4.20
-
Casualties
 
Schedule 4.24
-
Taxpayer ID and Organizational Numbers
         
LIST OF EXHIBITS
         
Exhibit I
-
Form of Note
 
Exhibit II
-
Form of Borrowing Request
 
Exhibit III
-
Form of Compliance Certificate
 
Exhibit IV
-
Form of Opinion of Counsel
 
Exhibit V
-
Form of Opinion of Texas Counsel
 

 
- iv -

--------------------------------------------------------------------------------

 

AMENDED AND RESTATED CREDIT AGREEMENT
 
This AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into this 31st
day of January, 2011, by and between CROSS BORDER RESOURCES, INC., a Nevada
corporation (the “Borrower”), and TEXAS CAPITAL BANK, N.A., a national banking
association (the “Lender”).
 
WITNESSETH:
 
WHEREAS, Pure Energy Partners II, L.P., a Texas limited liability partnership
(“Pure Energy”), and the Lender entered into that certain Credit Agreement dated
August 4, 2006 (as amended to the date hereof, the “Existing Credit Agreement”);
 
WHEREAS, all obligations of Pure Energy under the Existing Credit Agreement and
the other Loan Documents (as such term is defined in the Existing Credit
Agreement) were assumed and ratified by its General Partner, Pure Gas Group,
Inc., a Texas corporation (“Pure Gas”), pursuant to the following documents:
 
Assignment, Bill of Sale and Assumption Agreement dated December 27, 2010, to be
effective January 1, 2011 by Pure Energy in favor of Pure Gas filed December 29,
2010 under Reception No. 101331 and recorded in Book 838, Pages 945 et. seq.,
Official Public Records of Eddy County, New Mexico; and
 
Assignment, Bill of Sale and Assumption Agreement dated December 27, 2010, to be
effective January 1, 2011 by Pure Energy in favor of Pure Gas filed December 29,
2010 as Document No. 25850 and recorded in Book 1710, Pages 758 et seq.,
Official Public Records of Lea County, New Mexico;
 
WHEREAS, Pure Gas has been merged with and into Doral Acquisition Corp., a
Nevada corporation (“Doral Acquisition”);
 
WHEREAS, Doral Acquisition has been merged with and into the Borrower, which,
prior to such merger, was known as Doral Energy Corp.; and
 
WHEREAS, the Borrower and the Lender desire to amend and restate in its entirety
the Existing Credit Agreement by entering into this Amended and Restated Credit
Agreement;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows,
restating in its entirety the Existing Credit Agreement:

 

--------------------------------------------------------------------------------

 

ARTICLE I
DEFINITIONS AND INTERPRETATION
 
1.1           Terms Defined Above.  As used in this Amended and Restated Credit
Agreement, each of the terms “Borrower,” “Doral Acquisition,” “Existing Credit
Agreement,” “Lender,” “Pure Energy” and “Pure Gas” shall have the meaning
assigned to such term hereinabove.
 
1.2           Additional Defined Terms.  As used in this Amended and Restated
Credit Agreement, each of the following terms shall have the meaning assigned
thereto in this Section 1.2 or in Sections referred to in this Section 1.2,
unless the context otherwise requires:
 
“Additional Amount” shall have the meaning assigned to such term in Section 2.8.
 
“Adjusted Base Rate” shall mean, for any Loan, an interest rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Lender to be the greater of (a) the Base Rate and (b) the Federal Funds Rate.
 
“Affiliate” shall mean, as to any Person, any other Person directly or
indirectly, controlling, or under common control with, such Person and includes
any “affiliate” of such Person within the meaning of Rule 12b-2 promulgated by
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, with “control,” as used in this definition, meaning possession,
directly or indirectly, of the power to direct or cause the direction of
management, policies or action through ownership of voting securities, contract,
voting trust, or membership in management or in the group appointing or electing
management or otherwise through formal or informal arrangements or business
relationships; provided, however, that in no event shall the Lender be deemed an
Affiliate of the Borrower or any of the Guarantors.
 
“Agreement” shall mean this Amended and Restated Credit Agreement, as it may be
amended, supplemented, restated or otherwise modified from time to time.
 
“Anti-Terrorism Laws” shall mean any laws relating to terrorism or money
laundering, including Executive Order No. 13224 and the USA Patriot Act.
 
“Approved Fund” shall mean any (a) investment company, fund, trust,
securitization vehicle or conduit that is (or will be) engaged in making,
purchasing, holding or otherwise investing in commercial loans and similar
extensions of credit in the ordinary course of its business or (b) any Person
(other than a natural person) which temporarily warehouses loans for the Lender
or any entity described in the preceding clause (a) and that, with respect to
each of the preceding clauses (a) and (b), is administered or managed by (i) the
Lender, (ii) an Affiliate of the Lender or (iii) a Person (other than a natural
person) or an Affiliate of a Person (other than a natural person) that
administers or manages the Lender.
 
“Approved Hedge Counterparty” shall mean the Lender or an Affiliate of the
Lender.

 
- 2 -

--------------------------------------------------------------------------------

 

“Available Commitment” shall mean, at any time, an amount equal to the
remainder, if any, of (a) the sum of the Revolving Commitment Amount in effect
at such time minus (b) the sum of the Loan Balance at such time plus the L/C
Exposure at such time.
 
“Base Rate” shall mean the interest rate announced by the Lender from time to
time as its prime rate or its general reference rate of interest, which Base
Rate shall change upon any change in such announced or published general
reference interest rate and which Base Rate may not be the lowest interest rate
charged by the Lender.
 
“Blocked Person” shall have the meaning assigned to such term in Section 4.23.
 
“Borrowing Base” shall mean, at any time, the amount stated in Section 2.9(a)
and each other amount established and in effect from time to time in accordance
with the provisions of Section 2.9.
 
“Borrowing Request” shall mean each written request, substantially in the form
attached hereto as Exhibit II, by the Borrower to the Lender for a borrowing
pursuant to Section 2.1, each of which shall:
 
(a)           be signed by a Responsible Officer of the Borrower;
 
(b)           specify the amount of the Loan requested and the date of the
borrowing (which shall be a Business Day); and
 
(c)           be delivered to the Lender no later than 2:00 p.m., Central
Standard or Central Daylight Savings Time, as the case may be, on the Business
Day preceding the requested date of the borrowing
 
“Business Day” shall mean a day other than a Saturday, Sunday, legal holiday for
commercial banks under the laws of the State of Texas, or any other day when
banking is suspended in the State of Texas.
 
“Business Entity” shall mean a corporation, partnership, joint venture, limited
liability company, joint stock association, business trust, or other business
entity.
 
“Closing” shall mean the establishment of the Facilities.
 
“Closing Date” shall mean the  date of this Agreement.
 
“Collateral” shall mean the Mortgaged Properties and any other Property now or
at any time pledged to the Lender by the Borrower or any of the Guarantors as
security for the payment or performance of all or any portion of the
Obligations, including any Property that was considered in determining or
redetermining the Borrowing Base and expressly including “as extracted
collateral” as defined in the UCC or the Uniform Commercial Code of any other
applicable state.

 
- 3 -

--------------------------------------------------------------------------------

 

“Commitment” shall mean the obligation of the Lender to make Loans to or for the
benefit of the Borrower and to issue Letters of Credit pursuant to applicable
provisions of this Agreement.
 
“Commitment Fees” shall mean the fees payable to the Lender by the Borrower
pursuant to the provisions of Section 2.13.
 
“Commitment Period” shall mean the period from and including the Closing Date
to, but not including, the Commitment Termination Date.
 
“Commitment Termination Date” shall mean the earlier of (a) January 31, 2014 and
(b) the date the Commitment is terminated pursuant to the provisions of Section
7.2.
 
“Commodity Hedge Agreements” shall mean crude oil, natural gas, or other
hydrocarbon floor, collar, cap, price protection or hedge agreements.
 
“Commonly Controlled Entity” shall mean any Person which is under common control
with the Borrower or any of the Guarantors within the meaning of Section 4001 of
ERISA.
 
“Compliance Certificate” shall mean each certificate, substantially in the form
attached hereto as Exhibit III, executed by a Responsible Officer of the
Borrower and furnished to the Lender from time to time in accordance with the
provisions of Section 5.2 or Section 5.3, as the case may be.
 
“Contingent Obligation” shall mean, as to any Person, any obligation of such
Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends, or other obligations of any other Person (for purposes of this
definition, a “primary obligation”) in any manner, whether directly or
indirectly, including any obligation of such Person, regardless of whether such
obligation is contingent, (a) to purchase any primary obligation or any Property
constituting direct or indirect security therefor, (b) to advance or supply
funds (i) for the purchase or payment of any primary obligation, or (ii) to
maintain working or equity capital of any other Person in respect of any primary
obligation, or otherwise to maintain the net worth or solvency of any other
Person, (c) to purchase Property, securities or services primarily for the
purpose of assuring the owner of any primary obligation of the ability of the
Person primarily liable for such primary obligation to make payment thereof, or
(d) otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof, with the amount of any Contingent
Obligation being deemed to be equal to the stated or determinable amount of the
primary obligation in respect of which such Contingent Obligation is made or, if
not stated or determinable, the maximum reasonably anticipated liability in
respect thereof  as determined by such Person in good faith.
 
“Contribution Percentage” shall mean, for each party obligated to make a payment
due pursuant to the provisions of Section 8.20, the percentage obtained by
dividing such party’s Obtained Benefit by the aggregate Obtained Benefits of all
of the Guarantors.

 
- 4 -

--------------------------------------------------------------------------------

 

“Current Assets” shall mean all assets which would, in accordance with GAAP, be
included as current assets on a consolidated balance sheet of the Borrower and
its consolidated Subsidiaries as of the date of calculation, after deducting
adequate reserves in each case in which a reserve is proper in accordance with
GAAP, plus the then current Available Commitment and, if not already included,
the amount of any cash on deposit with the Lender in accordance with the
provisions of Section 5.24, but excluding non-cash derivative current assets
arising from Commodity Hedge Agreements.
 
“Current Liabilities” shall mean all liabilities which would, in accordance with
GAAP, be included as current liabilities on a consolidated balance sheet of the
Borrower and its consolidated Subsidiaries, but excluding current maturities in
respect of the Obligations, both principal and interest, and non-cash derivative
current liabilities arising from Commodity Hedge Agreements.
 
“Default” shall mean any event or occurrence which with the lapse of time or the
giving of notice or both would become an Event of Default.
 
“Default Rate” shall mean a daily interest rate equal to the per annum interest
rate equal to the Adjusted Base Rate for each relevant day plus three percent
(3%) converted to a daily rate on the basis of a year of 365 or 366 days, as the
case may be, and the rate so determined for each relevant day being applied on
the basis of actual days elapsed (including the first day, but excluding the
last day) during the period for which interest is payable at the Default Rate,
but in no event shall the Default Rate exceed the Highest Lawful Rate.
 
“Deficiency” shall have the meaning assigned to such term in Section 2.10.
 
“Dollars” and “$” shall mean dollars in lawful currency of the United States of
America.
 
“Domestic Subsidiary” shall mean any Subsidiary of the Borrower that is
organized under the laws of the United States of America or any state thereof or
the District of Columbia.
 
“EBITDA” shall mean, for any period for which the amount thereof is to be
determined and on a consolidated basis for the Borrower and its consolidated
Subsidiaries, Net Income for such period, but excluding (i) unrealized gains or
losses or charges in respect of Commodity Hedge Agreements (including those
under GAAP arising from the application of FAS 133), (ii) extraordinary or
non-recurring income items and, to the extent acceptable to the Lender, expense
items and (iii) deferred financing costs written off, including equity
discounts, and premiums paid in connection with any early extinguishment of
Indebtedness permitted pursuant to this Agreement, including the refinancing of
the senior secured Indebtedness of the Borrower outstanding prior to the Closing
Date), plus, in each case to the extent deducted in the determination of Net
Income for such period and without duplication of any item in more than one
category, each of the following for such period: (a) Interest Expense, (b)
Taxes, (c) depreciation, depletion and amortization expenses, (d) intangible
drilling and completion costs and (e) other non-cash expenses, including
write-downs of non-current assets and unrealized non-cash losses resulting from
foreign currency balance sheet adjustments required under GAAP, and minus, to
the extent credited in the determination of Net Income for such period, non-cash
credits for such period.

 
- 5 -

--------------------------------------------------------------------------------

 

“Environmental Complaint” shall mean any written or oral complaint, order,
directive, claim, citation, notice of environmental report or investigation, or
other notice by any Governmental Authority or any other Person with respect to
(a) air emissions, (b) spills, releases, or discharges to soils, any
improvements located thereon, surface water, groundwater, or the sewer, septic,
waste treatment, storage, or disposal systems servicing any Property of the
Borrower or any of the Guarantors, (c) solid or liquid waste disposal, (d) the
use, generation, storage, transportation, or disposal of any Hazardous
Substance, or (e) other environmental, health, or safety matters affecting any
Property of the Borrower or any of the Guarantors or the business conducted
thereon.
 
“Environmental Laws” shall mean (a) the following federal laws as they may be
cited, referenced, and amended from time to time:  the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Endangered Species Act, the
Resource Conservation and Recovery Act, the Hazardous Materials Transportation
Act, the Occupational Safety and Health Act, the Oil Pollution Act, the Resource
Conservation and Recovery Act, the Superfund Amendments and Reauthorization Act,
and the Toxic Substances Control Act; (b) any and all equivalent environmental
statutes of any state in which Property of the Borrower or any of the Guarantors
is situated, as they may be cited, referenced and amended from time to time; (c)
any rules or regulations promulgated under or adopted pursuant to the above
federal and state laws; and (d) any other equivalent federal, state, or local
statute or any requirement, rule, regulation, code, ordinance, or order adopted
pursuant thereto, including those relating to the generation, transportation,
treatment, storage, recycling, disposal, handling, or release of Hazardous
Substances.
 
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, and the
regulations thereunder and interpretations thereof.
 
“Event of Default” shall mean any of the events specified in Section 7.1.
 
“Excess Payments” shall have the meaning assigned to such term in Section 8.20.
 
“Excluded Taxes” shall mean, with respect to any and all payments to the Lender
or any other recipient of any payment to be made by or on account of any
Obligation, net income taxes, branch profits taxes, franchise and excise taxes
(to the extent imposed in lieu of net income taxes), and all interest, penalties
and liabilities with respect thereto, imposed on the Lender.
 
“Executive Order No. 13224” shall mean Executive Order No. 13224 on Terrorist
Financing, effective September 24, 2001, as the same has been, or shall
hereafter be, renewed, extended, amended or replaced.
 
“Facility Amount” shall mean $10,000,000, as modified from time to time pursuant
to the terms hereof; provided, however, upon delivery by the Borrower to the
Lender of a written consent of the Trustee under the Trust Indenture, pursuant
to the provisions of the Trust Indenture, to such increase, such term shall mean
$25,000,000, as modified from time to time pursuant to the terms hereof.

 
- 6 -

--------------------------------------------------------------------------------

 

“Federal Funds Rate” shall mean, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers on such day, as published by
the Federal Reserve Bank of Dallas, Texas, on the Business Day next succeeding
such day; provided that (a) if the day for which such rate is to be determined
is not a Business Day, the Federal Funds Rate for such day shall be such rate on
such transactions on the next preceding Business Day as so published on the next
succeeding Business Day, and (b) if such rate is not so published for any day,
the Federal Funds Rate for such day shall be the average rate charged to the
Lender on such day on such transactions as determined by the Lender.
 
“Financial Statements” shall mean consolidated and consolidating financial
statements of the Borrower and its consolidated Subsidiaries as at the point in
time and for the period indicated, including all notes thereto, and consisting
of at least a balance sheet and related statements of operations, members’,
shareholders’ or partners’ equity, and cash flows and, when required by
applicable provisions of this Agreement to be audited, accompanied by the
unqualified certification of a nationally-recognized or regionally-recognized
firm of independent certified public accountants or other independent certified
public accountants acceptable to the Lender and footnotes to any of the
foregoing, all of which, unless otherwise indicated, shall be prepared in
accordance with GAAP consistently applied and in comparative form with respect
to the corresponding period of the preceding fiscal year.
 
“GAAP” shall mean generally accepted accounting principles established by the
Financial Accounting Standards Board or the American Institute of Certified
Public Accountants and in effect in the United States from time to time.
 
“Governmental Authority” shall mean any nation, country, commonwealth,
territory, government, state, county, parish, municipality, or other political
subdivision and any entity exercising executive, legislative, judicial,
regulatory, or administrative functions of or pertaining to government.
 
“Guaranties” shall mean, collectively, guarantees of payment and performance of
the Obligations, in form and substance acceptable to the Lender, provided from
time to time by the Guarantors in compliance with the provisions of Section 5.9.
 
“Guarantors” shall mean, collectively, any and all Domestic Subsidiaries of the
Borrower formed or acquired subsequent to the Closing Date.
 
“Hazardous Substances” shall mean flammables, explosives, radioactive materials,
hazardous wastes, asbestos, or any material containing asbestos, polychlorinated
biphenyls (PCBs), toxic substances or related materials, petroleum, petroleum
products, associated oil or natural gas exploration, production, and development
wastes, or any substances defined as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” or “toxic substances” under the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendments
and Reauthorization Act, the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, the Toxic Substances Control Act, or any
other Requirement of Law.
 
“Highest Lawful Rate” shall mean the maximum non-usurious interest rate, if any
(or, if the context so requires, an amount calculated at such rate), that at any
time or from time to time may be contracted for, taken, reserved, charged or
received under laws applicable to the Lender, as such laws are presently in
effect or, to the extent allowed by applicable law, as such laws may hereafter
be in effect and which allow a higher maximum non-usurious interest rate than
such laws now allow.

 
- 7 -

--------------------------------------------------------------------------------

 

“Indebtedness” shall mean, as to any Person, without duplication, (a) all
liabilities (excluding capital, surplus, reserves for deferred income taxes,
deferred compensation liabilities, other deferred liabilities and credits and
asset retirement obligations) which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance sheet,
(b) all obligations of such Person evidenced by bonds, debentures, promissory
notes, or similar evidences of indebtedness, (c) all other indebtedness of such
Person for borrowed money, (d) all obligations of others, to the extent any such
obligation is secured by a Lien on the assets of such Person (whether or not
such Person has assumed or become liable for the obligation secured by such
Lien),  (e) all direct or contingent obligations of such Person under letters of
credit, banker’s acceptances, surety bonds, and similar instruments and (f) net
obligations of such Person under any Commodity Hedge Agreements or Interest Rate
Hedge Agreements.
 
“Indemnified Taxes” shall mean Taxes other than Excluded Taxes.
 
“Indemnitee” shall have the meaning assigned to such term in Section 5.21.
 
“Insolvency Proceeding” shall mean application (whether voluntary or instituted
by another Person) for or the consent to the appointment of a receiver, trustee,
conservator, custodian, or liquidator of any Person or of all or a substantial
part of the Property of such Person, or the filing of a petition (whether
voluntary or instituted by another Person) commencing a case under Title 11 of
the United States Code, seeking liquidation, reorganization, or rearrangement or
taking advantage of any bankruptcy, insolvency, debtor’s relief, or other
similar law of the United States, the State of Texas, or any other jurisdiction.
 
“Intellectual Property” shall mean patents, patent applications, trademarks,
tradenames, copyrights, technology, know how, and processes.
 
“Interest Expense” shall mean, for any period for which the amount thereof is to
be determined, any and all expenses relating to the accrual of interest on
Indebtedness of the Borrower, on a consolidated basis with its consolidated
Subsidiaries, including interest expense attributable to capitalized leases.
 
“Interest Rate Hedge Agreements” shall mean interest rate floor, collar, cap,
rate protection or hedge agreements.
 
“Investment” in any Person shall mean any stock, bond, note, or other evidence
of Indebtedness, or any other security (other than current trade and customer
accounts) of, investment or partnership interest in or loan to, such Person.
 
“Joinder Agreement” shall mean each agreement, in form and substance acceptable
to the Lender, pursuant to which a Domestic Subsidiary of the Borrower formed or
acquired subsequent to the Closing Date agrees to become a party to and bound by
this Agreement.

 
- 8 -

--------------------------------------------------------------------------------

 

“L/C Exposure” shall mean, at any time, the sum of (a) the then aggregate
maximum amount available to be drawn under outstanding Letters of Credit plus
(b) prior to the making of any related Letter of Credit Payments in respect of
such Letters of Credit, the aggregate of all unpaid reimbursement obligations in
respect of such Letters of Credit.
 
“L/C Sublimit” shall mean $500,000.
 
“Letter of Credit” shall mean any standby letter of credit issued for the
account of the Borrower pursuant to Section 2.2.
 
“Letter of Credit Application” shall mean the standard letter of credit
application employed by the Lender, as the issuer of the Letters of Credit, from
time to time in connection with its issuance of letters of credit.
 
“Letter of Credit Payment” shall mean any payment made by the Lender under a
Letter of Credit, to the extent that such payment has not been repaid by the
Borrower.
 
“Lien” shall mean any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of such Property, whether such interest
is based on common law, statute, or contract, and including, but not limited to,
the lien or security interest arising from a mortgage, ship mortgage,
encumbrance, pledge, security agreement, conditional sale or trust receipt, or a
lease, consignment, or bailment for security purposes (other than true leases or
true consignments), liens of mechanics, materialmen, and artisans, maritime
liens and reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases, and other title exceptions and
encumbrances affecting Property which secure an obligation owed to, or a claim
by, a Person other than the owner of such Property (for the purpose of this
Agreement, the Borrower and each of the Guarantors shall be deemed to be the
owner of any Property which it has acquired or holds subject to a conditional
sale agreement, financing lease, or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person for security
purposes).
 
“Limitation Period” shall mean any period while any amount remains owing on the
Note and interest on such amount, calculated at the applicable interest rate,
plus any fees or other sums payable to the Lender under any Loan Document and
deemed to be interest under applicable law, would exceed the amount of interest
which would accrue at the Highest Lawful Rate.
 
“Loan” shall mean any loan made by the Lender to or for the benefit of the
Borrower pursuant to this Agreement and any payment made by the Lender under a
Letter of Credit.
 
“Loan Balance” shall mean, at any point in time, the aggregate outstanding
principal balance of the Note at such time.
 
“Loan Documents” shall mean this Agreement, the Note, all of the documents in
effect under the terms of the Existing Credit Agreement, the Letter of Credit
Applications, the Letters of Credit, the Security Documents, any Joinder
Agreements and all other documents and instruments now or hereafter delivered
pursuant to the terms of or in connection with this Agreement, the Note, any of
the documents in effect under the terms of the Existing Credit Agreement, the
Letter of Credit Applications, the Letters of Credit, the Security Documents or
any Joinder Agreement, and all renewals and extensions of, amendments and
supplements to, and restatements of, any or all of the foregoing from time to
time in effect.

 
- 9 -

--------------------------------------------------------------------------------

 

“Material Adverse Effect” shall mean (a) any material and adverse effect on the
business, operations, assets, properties, liabilities (actual or contingent) or
financial condition of the Borrower, on a consolidated basis with its
consolidated Subsidiaries, (b) any material and adverse effect upon the
Collateral, including any material and adverse effect upon the value or
impairment of the Borrower or its Subsidiary’s ownership of the Collateral, (c)
any material adverse effect on the validity or enforceability of any Loan
Document or (d) any material adverse effect on the rights or remedies of the
Lender or any Approved Hedge Counterparty under any Loan Document.
 
“Monthly Reduction Amount” shall mean, at any time, the amount determined as
such by the Lender and then in effect in accordance with the provisions of
Section 2.9.
 
“Mortgaged Properties” shall mean all Oil and Gas Properties of the Borrower and
its Domestic Subsidiaries subject to a perfected first priority Lien (subject
only to Permitted Liens) in favor of the Lender, as security for the
Obligations.
 
“Net Income” shall mean, for any relevant period, the net income of the
Borrower, on a consolidated basis with its consolidated Subsidiaries, during
such period, determined in accordance with GAAP.
 
“Note” shall mean the promissory note of the Borrower payable to the Lender in
the face amount of up to the Aggregate Facility Amount in the form attached
hereto as Exhibit I with all blanks in such form completed appropriately,
together with all renewals, extensions for any period, increases and
rearrangements thereof.
 
“Obligations” shall mean, without duplication of the same amount in more than
one category, (a) all Indebtedness of the Borrower evidenced by the Note, (b)
the obligation of the Borrower to provide to or reimburse the Lender, as the
issuer of the Letters of Credit, as the case may be, for amounts payable, paid
or incurred with respect to Letters of Credit, (c) the undrawn, unexpired amount
of all outstanding Letters of Credit, (d) Indebtedness of the Borrower in
respect of Commodity Hedge Agreements or Interest Rate Hedge Agreements with
Approved Hedge Counterparties, so long as in compliance with the provisions of
Section 6.1 (which it is agreed shall rank pari passu with all other items
listed in this definition), (e) the obligation of the Borrower for the payment
of Commitment Fees and other fees pursuant to the provisions of this Agreement
and (f) all other obligations and liabilities of the Borrower to the Lender, now
existing or hereafter incurred, under, arising out of or in connection with any
Loan Document or any Commodity Hedge Agreement or Interest Rate Hedge Agreement
with an Approved Hedge Counterparty and in compliance with the provisions of
Section 6.1, and to the extent that any of the foregoing includes or refers to
the payment of amounts deemed or constituting interest, only so much thereof as
shall have accrued, been earned and which remains unpaid at each relevant time
of determination.
 
 
- 10 -

--------------------------------------------------------------------------------

 
 
“Obtained Benefit” shall mean the aggregate amount of benefits, both direct and
indirect, obtained by any of the Borrower and the Guarantors from the extension
of credit to the Borrower under this Agreement and not repaid by the Borrower or
one of the Guarantors.
 
“OFAC” shall mean the Office of Foreign Assets Control of the United States
Department of the Treasury, or any successor Governmental Authority.
 
“Oil and Gas Properties” shall mean fee, leasehold, or other interests in or
under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon
leases, including undivided interests in any such property rights owned jointly
with others, with respect to Properties situated in the United States or
offshore from any State of the United States, including overriding royalty and
royalty interests, leasehold estate interests, net profits interests, production
payment interests, and mineral fee interests, together with contracts executed
in connection therewith and all tenements, hereditaments, appurtenances, and
Properties appertaining, belonging, affixed, or incidental thereto.
 
“Other Taxes” shall mean any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made under any Loan Document or from the execution, delivery or
enforcement of, or otherwise with respect to, any Loan Document.
 
“Permitted Liens” shall mean (a) Liens for taxes, assessments, or other
governmental charges or levies not yet due or which (if foreclosure, distraint,
sale, or other similar proceedings shall not have been initiated) are being
contested in good faith by appropriate proceedings, and such reserve as may be
required by GAAP shall have been made therefor, (b) Liens in connection with
workers’ compensation, unemployment insurance or other social security (other
than Liens created by Section 4068 of ERISA), old age pension, employee
benefits, or public liability obligations which are not yet due or which are
being contested in good faith by appropriate proceedings, if such reserve as may
be required by GAAP shall have been made therefor, (c) Liens in favor of
vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen,
constructors, laborers, landlords or similar Liens arising by operation of law
in the ordinary course of business in respect of obligations that are not yet
due or which are being contested in good faith by appropriate proceedings, if
such reserve as may be required by GAAP shall have been made therefor, (d) Liens
in favor of operators and non-operators under joint operating agreements or
similar contractual arrangements arising in the ordinary course of the business
of the Borrower to secure amounts owing, which amounts are not yet due or are
being contested in good faith by appropriate proceedings, if such reserve as may
be required by GAAP shall have been made therefor, (e) Liens under production
sales agreements, division orders, operating agreements, and other agreements
customary in the oil and gas business for processing, producing, and selling
hydrocarbons securing obligations not constituting Indebtedness and provided
that such Liens do not secure obligations to deliver hydrocarbons at some future
date without receiving full payment therefor within 90 days of delivery, (f)
covenants, liens, rights, easements, rights of way, restrictions and other
similar encumbrances , and minor defects in the chain of title which are
customarily accepted in the oil and gas financing industry, none of which
interfere with the ordinary conduct of the business of the Borrower or
materially detract from the value or use of the Property to which they apply,
(g) Liens securing the purchase price of Property, including vehicles and
equipment, acquired by the Borrower in the ordinary course of business
(including Liens existing under conditional sale or title retention contracts),
provided that such Liens cover only the acquired Property and the aggregate
unpaid purchase price secured by such Liens does not exceed $250,000, (h) Liens
securing leases of equipment, provided that, as to any particular lease, the
Lien covers only the relevant leased equipment and secures only amounts which
are not yet due and payable under the relevant lease or are being contested in
good faith by appropriate proceedings and such reserve as may be required by
GAAP shall have been made therefor , (i) Liens in favor or for the benefit of
Secured Third Party Hedge Counterparties securing Indebtedness of the Borrower
in respect of Commodity Hedge Agreements and Interest Rate Hedge Agreements
(other than such as constitute a portion of the Obligations) permitted pursuant
to the provisions of Section 6.1, (j) Liens in favor or for the benefit of the
Lender, (k) Liens securing the Subordinated Debt pursuant to the Trust
Indenture, so long as subordinated to the Liens in favor or for the benefit of
the Lender securing the Obligations and (l) other Liens expressly permitted
hereunder or in the Security Documents.

 
- 11 -

--------------------------------------------------------------------------------

 

“Person” shall mean an individual, Business Entity, trust, unincorporated
organization, Governmental Authority or any other form of entity.
 
“Plan” shall mean, at any time, any employee benefit plan which is covered by
Title IV of ERISA and in respect of which the Borrower, any of the Guarantors or
any Commonly Controlled Entity of any is (or, if such plan were terminated at
such time, would under Section 4069 of ERISA be deemed to be) an “employer” as
defined in Section 3(5) of ERISA.
 
“Principal Office” shall mean the office of the Lender in Houston,
Texas  located at One Riverway, Suite 2100, Houston, Texas 77056 or such other
office as the Lender may designate in writing to the Borrower from time to time.
 
“Property” shall mean any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
 
“Regulation D” shall mean Regulation D of the Board of Governors of the Federal
Reserve System (or any successor).
 
“Regulatory Change” shall mean, with respect to the Lender, the passage,
adoption, institution or amendment of any federal, state, local, or foreign
Requirement of Law (including Regulation D), or any interpretation, directive,
or request (whether or not having the force of law) of any Governmental
Authority or monetary authority charged with the enforcement, interpretation, or
administration thereof, occurring after the Closing Date and applying to a class
of lenders including the Lender or its lending office.
 
“Release of Hazardous Substances” shall mean any emission, spill, release,
disposal, or discharge, except in accordance with a valid permit, license,
certificate, or approval of the relevant Governmental Authority, of any
Hazardous Substance into or upon (a) the air, (b) soils or any improvements
located thereon, (c) surface water or groundwater, or (d) the sewer or septic
system, or the waste treatment, storage, or disposal system servicing any
Property of the Borrower or any of the Guarantors.

 
- 12 -

--------------------------------------------------------------------------------

 

“Requirement of Law” shall mean, as to any Person, the certificate or articles
of incorporation and by-laws, the certificate or articles of organization and
regulations, operating agreement or limited liability company agreement, the
agreement of limited partnership, the partnership agreement, or other
organizational or governing documents of such Person, and any applicable law,
treaty, ordinance, order, judgment, rule, decree, regulation, or determination
of an arbitrator, court, or other Governmental Authority, including rules,
regulations, orders, and requirements for permits, licenses, registrations,
approvals, or authorizations, in each case as such now exist or may be hereafter
amended and are applicable to or binding upon such Person or any of its Property
or to which such Person or any of its Property is subject.
 
“Reserve Report” shall mean each report delivered to the Lender pursuant to the
provisions of Section 5.4.
 
“Responsible Officer” shall mean, as to any Business Entity, its President, any
Vice President or any other Person duly authorized in accordance with the
applicable organizational documents, bylaws, regulations or resolutions to act
on behalf of such Business Entity.
 
“Revolving Commitment Amount” shall mean, subject to the applicable provisions
of this Agreement and the right of the Borrower to reduce such amount on an
irrevocable basis by written notice to the Lender, at any time (provided,
however, the Borrower shall not be entitled to any reduction to an amount less
than the sum of the then existing Loan Balance and L/C Exposure), the lesser of
(a) the Facility Amount and (b) the Borrowing Base in effect at such time.
 
“Revolving Facility” shall mean the credit facility provided to the Borrower
pursuant to the provisions of Section 2.1.
 
“Secured Third Party Hedge Counterparty” shall mean any counterparty of the
Borrower to a Commodity Hedge Agreement or Interest Rate Hedge Agreement that is
party to an intercreditor agreement with the Lender, in form and substance
reasonably satisfactory to the Lender and such counterparty.
 
“Security Documents” shall mean the security documents executed and delivered in
satisfaction of the condition set forth in Section 3.1(f), any existing security
documents assigned or amended by any of such documents set forth in Section
3.1(f) and all other documents and instruments at any time executed as security
for all or any portion of the Obligations, as such instruments may be amended,
supplemented, restated, or otherwise modified from time to time.
 
“Subordinated Debt” shall mean the debt described in the Trust Indenture.
 
“Subsidiary” shall mean, as to any Person, any Business Entity of which shares
of stock or other equity interests having ordinary voting power (other than
stock or other equity interests having such power only by reason of the
happening of a contingency) to elect a majority of the board of directors or
other governing body or other managers of such Business Entity are at the time
owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by such Person.
 
“Superfund Site” shall mean those sites listed on the Environmental Protection
Agency National Priority List and eligible for remedial action or any comparable
state registry or list in any state of the United States.

 
- 13 -

--------------------------------------------------------------------------------

 

“Taxes” shall mean any and all present or future taxes, levies, imposts, duties,
fees, deductions, charges or withholdings imposed by any Governmental Authority.
 
“Trust Indenture” shall mean the Trust Indenture dated as of March 1, 2005, from
Pure Energy and Pure Gas, as Issuer, to First Security Bank, as Trustee and
Paying Agent.
 
“UCC” shall mean the Uniform Commercial Code as from time to time in effect in
the State of Texas.
 
“USA Patriot Act” shall mean the Uniting and Strengthening America by Providing
Appropriate Tools required to Intercept and Obstruct Terrorism Act of 2001, Pub.
L. No. 107-56, 115 Stat. 272 (2001), as the same has been, or shall hereafter
be, renewed, extended, amended or replaced.
 
1.3           Undefined Financial Accounting Terms.  Financial accounting terms
used in this Agreement without definition are used herein with the respective
meanings assigned thereto in accordance with GAAP at the time in effect.
 
1.4           References.  References in this Agreement to Schedule, Exhibit,
Article or Section numbers shall be to Schedules, Exhibits, Articles or Sections
of this Agreement, unless expressly stated to the contrary.  References in this
Agreement to “hereby,” “herein,” “hereinafter,” “hereinabove,” “hereinbelow,”
“hereof,” “hereunder” and words of similar import shall be to this Agreement in
its entirety and not only to the particular Schedule, Exhibit, Article, or
Section in which such reference appears.  Specific enumeration herein shall not
exclude the general and, in such regard, the terms “includes” and “including”
used herein shall mean “includes, without limitation,” or “including, without
limitation,” as the case may be, where appropriate.  Except as otherwise
indicated, references in this Agreement to statutes, sections, or regulations
are to be construed as including all statutory or regulatory provisions
consolidating, amending, replacing, succeeding, or supplementing the statute,
section, or regulation referred to.  References in this Agreement to “writing”
include printing, typing, lithography, facsimile reproduction, and other means
of reproducing words in a tangible visible form.  References in this Agreement
to agreements and other contractual instruments shall be deemed to include all
exhibits and appendices attached thereto and all subsequent amendments and other
modifications to such instruments, but only to the extent such amendments and
other modifications are not prohibited by the terms of this
Agreement.  References in this Agreement to Persons include their respective
successors and permitted assigns.
 
1.5           Articles and Sections.  This Agreement, for convenience only, has
been divided into Articles and Sections; and it is understood that the rights
and other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.
 
1.6           Number and Gender.  Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular.  Definitions
of terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated.  Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative.

 
- 14 -

--------------------------------------------------------------------------------

 

1.7           Incorporation of Schedules and Exhibits.  The Schedules and
Exhibits attached to this Agreement are incorporated herein and shall be
considered a part of this Agreement for all purposes.
 
1.8           Negotiated Transaction.  Each party to this Agreement affirms to
the others that it has had the opportunity to consult, and discuss the
provisions of this Agreement with, independent counsel and fully understands the
legal effect of each provision.
 
ARTICLE II

 
TERMS OF FACILITIES
 
2.1           Revolving Line of Credit.
 
(a)           Upon the terms and conditions (including the right of the Lender
to decline to make any Loan, other than a Letter of Credit Payment, so long as
any condition to the making of such Loan set forth in Section 3.2 has not been
satisfied) and relying on the representations and warranties contained in this
Agreement, the Lender agrees to make Loans during the Commitment Period to or
for the benefit of the Borrower in an aggregate outstanding principal amount not
to exceed at any time the Revolving Commitment Amount minus the then existing
L/C Exposure.  Loans shall be made from time to time on any Business Day
designated in a Borrowing Request.
 
(b)           Subject to the provisions of this Agreement, during the Commitment
Period, the Borrower may borrow, repay and reborrow Loans.  Each borrowing of
principal of Loans shall be in an amount at least equal to $50,000 and a whole
multiple of $10,000.  Except for prepayments made pursuant to the provisions of
Section 2.10, each prepayment of principal shall be in an amount at least equal
to $50,000 and a whole multiple of $10,000.  Each borrowing or prepayment of a
Loan shall be deemed a separate borrowing and prepayment for purposes of the
foregoing.
 
(c)           Proceeds of borrowings requested by the Borrower shall, subject to
the terms and conditions hereof, be made available to the Borrower in
immediately available funds at the Principal Office.  All Loans shall be
evidenced by the Note.
 
- 15 -

--------------------------------------------------------------------------------

2.2         Letter of Credit Facility.  Upon the terms and conditions (including
the right of the Lender to decline to issue, renew or extend any such Letter of
Credit so long as any condition to the issuance, renewal or extension of such
Letter of Credit set forth in Section 3.3 has not been satisfied) and relying on
the representations and warranties contained in this Agreement, the Lender
agrees, from the date of this Agreement until the date which is 30 days prior to
the Commitment Termination Date, to issue Letters of Credit under the Facility
for the account of the Borrower and to renew and extend such Letters of
Credit.  Such Letters of Credit shall be issued, renewed or extended from time
to time on any Business Day designated by the Borrower following the receipt in
accordance with the terms hereof by the Lender of the written (or oral,
confirmed promptly in writing) request by a Responsible Officer of the Borrower
therefor and a Letter of Credit Application.  Such Letters of Credit shall be
issued in such amounts as the Borrower may request; provided, however, that (i)
no such Letter of Credit shall have an expiration date which is less than 30
days prior to the Commitment Termination Date, (ii) the Loan Balance plus the
L/C Exposure, including that under any then requested Letter of Credit to be
issued under the Facility, shall not exceed at any time the Revolving Commitment
Amount, (iii) the L/C Exposure, including that under any then requested Letter
of Credit to be issued under the Facility, shall not exceed at any time the L/C
Sublimit and (iii) no such Letter of Credit shall be issued in an amount less
than $10,000.
 
2.3         Additional Provisions Applicable to Letters of Credit.
 
(a)           In connection with the issuance, renewal or extension by the
Lender of any Letter of Credit pursuant to Section 2.2, the Borrower shall pay
to the Lender a letter of credit fee in an amount equal to the greater of (i)
the face amount of such Letter of Credit multiplied by two and one half percent
(2.50%) per annum, calculated on the basis of a year of 360 days and actual days
elapsed (including the first day but excluding the last day), on the amount of
the L/C Exposure under such Letter of Credit and for the period for which such
Letter of Credit is issued or renewed or extended and remains outstanding or
(ii) $750.  Such fee with respect to each Letter of Credit shall be payable in
advance commencing on the date of issuance, renewal or extension of the relevant
Letter of Credit.  The Lender shall not have any obligation to refund any
portion of any such fee upon early cancellation of the relevant Letter of
Credit.  The Borrower also agrees to pay on demand to the Lender its customary
letter of credit transaction fees and expenses, including amendment fees,
payable with respect to each Letter of Credit.
 
(b)           The Borrower agrees that the Lender shall not be responsible for,
nor shall the Obligations be affected by, among other things, (i) the validity
or genuineness of documents or any endorsements thereon presented in connection
with any Letter of Credit, even if such documents shall in fact prove to be in
any and all respects invalid, fraudulent or forged, so long as the Lender has no
actual knowledge of any such invalidity, lack of genuineness, fraud or forgery
prior to the presentment for payment of a corresponding Letter of Credit or any
draft thereunder or (ii) any dispute between or among the Borrower and any
beneficiary of any Letter of Credit or any other Person to which any Letter of
Credit may be transferred, or any claims whatsoever of the Borrower against any
beneficiary of any Letter of Credit or any such transferee.  The Borrower
further acknowledges and agrees that the Lender shall be liable to the Borrower
to the extent, but only to the extent, of any direct, as opposed to
consequential or punitive, damages suffered by the Borrower as a result of the
willful misconduct or gross negligence of the Lender in determining whether
documents presented under a Letter of Credit complied with the terms of such
Letter of Credit that resulted in either a wrongful payment under such Letter of
Credit or a wrongful dishonor of a claim or draft properly presented under such
Letter of Credit.  In the absence of gross negligence or willful misconduct by
the Lender, the Lender shall not be liable for any error, omission, interruption
or delay in transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit.  The Lender and the
Borrower agree that any action taken or omitted by the Lender under or in
connection with any Letter of Credit or the related drafts or documents, if done
in the absence of gross negligence or willful misconduct, shall be binding as
among the Lender and the Borrower and shall not put the Lender under any
liability to the Borrower.

 
- 16 -

--------------------------------------------------------------------------------

 

(c)           Unless the Borrower provides to the Lender  funds sufficient to
allow the Lender to pay any drawing by a beneficiary under a Letter of Credit
prior to the Lender being obligated to pay the relevant drawing under a Letter
of Credit, the Lender shall make a Letter of Credit Payment in payment of such
drawing.
 
(d)           Each Letter of Credit Payment shall be deemed to be a Loan by the
Lender under and shall be evidenced by the Note and shall be payable by the
Borrower upon demand by the Lender.
 
2.4         Use of Loan Proceeds and Letters of Credit.
 
(a)           Proceeds of all Loans shall be used solely by the Borrower (i) to
refinance the Indebtedness of the Borrower under the Existing Credit Agreement,
(ii) to acquire and develop Oil and Gas Properties, (iii) for the Borrower’s
working capital and general business purposes and capital expenditures not
otherwise prohibited under applicable provisions of this Agreement, (iv) to
advance funds to the Guarantors for working capital and general business
purposes and capital expenditures not prohibited under the provisions of this
Agreement or to acquire and develop Oil and Gas Properties and (v) to pay fees
and expenses incurred in connection with this Agreement and for other general
business purposes of the Borrower.
 
(b)           Letters of Credit shall be issued solely for the account of the
Borrower for general business purposes of the Borrower and the Guarantors not
otherwise prohibited under applicable provisions of this Agreement; provided,
however, no Letter of Credit may be used in lieu or in support of stay or appeal
bonds or Obligations in respect of Commodity Hedge Agreements or Interest Rate
Hedge Agreements.
 
2.5         Interest.  Subject to applicable provisions of this Agreement
(including those of Section 2.16), interest on the Loan Balance shall accrue and
be payable at a daily interest rate based on the per annum rate equal to the
lesser of (a) the Adjusted Base Rate for each relevant day plus one half of one
percent (0.50%), but in no event based on a per annum rate less than four
percent (4.00%), and (b) the Highest Lawful Rate for each relevant day,
converted to a daily rate on the basis of a year of 365 or 366 days, as the case
may be, with such rates being applied on the basis of actual days elapsed
(including the first day, but excluding the last day) during the period for
which interest is payable at the relevant rate.  Notwithstanding the foregoing,
interest on past due principal and, to the extent permitted by applicable law,
past due interest and fees, shall accrue at the Default Rate and shall be
payable upon demand by the Lender at any time as to all or any portion of such
interest.  Interest provided for herein shall be calculated on unpaid sums
actually advanced and outstanding pursuant to the terms of this Agreement and
only for the period from the date or dates of such advances to, but not
including, the date or dates of repayment.

 
- 17 -

--------------------------------------------------------------------------------

 

2.6         Repayment of Loans and Interest.  Accrued and unpaid interest on the
Loan Balance shall be due and payable monthly commencing on the first day of
March, 2011 and continuing on the first day of each calendar month thereafter
while any Loan remains outstanding, the payment in each instance to be the
amount of interest which has accrued and remains unpaid in respect of the
relevant Loan.  The Loan Balance, together with all accrued and unpaid interest
thereon as of such date, shall be due and payable on the Commitment Termination
Date.  At the time of making each payment hereunder or under the Note, the
Borrower shall specify to the Lender the Loans or other amounts payable by the
Borrower hereunder to which such payment is to be applied.  In the event the
Borrower fails to so specify, or if an Event of Default has occurred, the Lender
may apply such payment as it may elect in its discretion and in accordance with
the terms hereof.  Subject to the provisions of Section 2.16, if any payment due
under the terms of this Agreement remains unpaid for a period of 15 days or more
from the date such payment is due, the Lender may charge a delinquency charge
equal to five percent (5.00%) of the amount of such payment.
 
2.7         Outstanding Amounts.  The outstanding principal balance of the Note
reflected by the notations of the Lender on its records shall be deemed
rebuttably presumptive evidence of the principal amount owing on the Note.  The
liability for payment of principal and interest evidenced by the Note shall be
limited to principal amounts actually advanced and outstanding pursuant to this
Agreement and interest on such amounts calculated in accordance with this
Agreement.
 
2.8         Taxes and Time, Place, and Method of Payments.
 
(a)           All payments required pursuant to this Agreement or the Note shall
be made without set-off or counterclaim in Dollars and in immediately available
funds free and clear of, and without deduction for, any Indemnified Taxes or
Other Taxes; provided, however that if the Borrower shall be required to deduct
any Indemnified Taxes or Other Taxes from such payments, then (i) the sum
payable shall be increased by the amount (the “Additional Amount”) necessary so
that after making all required deductions (including deductions applicable to
additional sums described in this paragraph) the Lender receives an amount equal
to the sum it would have received had no such deductions been made, (ii) the
Borrower shall make such deductions and (iii) the Borrower shall pay the full
amount deducted to the relevant Governmental Authority in accordance with
applicable law.  In addition, to the extent not paid in accordance with the
preceding sentence, the Borrower shall pay any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.
 
(b)           The Borrower shall indemnify the Lender for Indemnified Taxes and
Other Taxes paid by the Lender, including any Indemnified Taxes or Other Taxes
arising from the negligence, whether sole or concurrent, of the Lender;
provided, however, that the Borrower shall not in any event be obligated to make
payment to the Lender in respect of penalties, interest and other similar
liabilities attributable to such Indemnified Taxes or Other Taxes if such
penalties, interest or other similar liabilities are attributable to the gross
negligence or willful misconduct of, or breach of this Agreement by, the Lender.

 
- 18 -

--------------------------------------------------------------------------------

 

(c)           If the Lender shall become aware that it is entitled to claim a
refund from a Governmental Authority in respect of Indemnified Taxes or Other
Taxes paid by the Borrower pursuant to this Section 2.8, including Indemnified
Taxes or Other Taxes as to which it has been indemnified by the Borrower, or
with respect to which the Borrower has paid Additional Amounts pursuant to the
Loan Documents, it shall promptly notify the Borrower of the availability of
such refund claim and, if the Lender determines in good faith that making a
claim for refund will not have an adverse effect to its taxes or business
operations, shall, within 10 days after receipt of a request by the Borrower,
make a claim to such Governmental Authority for such refund at the expense of
the Borrower.  If the Lender receives a refund in respect of any Indemnified
Taxes or Other Taxes paid by the Borrower pursuant to the Loan Documents, it
shall within 30 days from the date of such receipt pay over such refund to the
Borrower (but only to the extent of Indemnified Taxes or Other Taxes paid
pursuant to the Loan Documents, including indemnity payments made or Additional
Amounts paid, by the Borrower under this Section 2.8 with respect to the
Indemnified Taxes or Other Taxes giving rise to such refund), net of all
reasonable out of pocket expenses of the Lender and without interest (other than
interest paid by the relevant Governmental Authority with respect to such
refund).
 
(d)           If the Lender is or becomes eligible under any applicable law,
regulation, treaty or other rule to a reduced rate of taxation, or a complete
exemption from withholding, with respect to Indemnified Taxes or Other Taxes on
payments made to it or for its benefit by the Borrower, the Lender shall, upon
the request, and at the cost and expense, of the Borrower, complete and deliver
from time to time any certificate, form or other document requested by the
Borrower, the completion and delivery of which are a precondition to obtaining
the benefit of such reduced rate or exemption, provided that the taking of such
action by the Lender would not, in the reasonable judgment of the Lender be
disadvantageous or prejudicial to the Lender or inconsistent with its internal
policies or legal or regulatory restrictions.  For any period with respect to
which the Lender has failed to provide any such certificate, form or other
document requested by the Borrower, the Lender shall not be entitled to any
payment under this Section 2.8 in respect of any Indemnified Taxes or Other
Taxes that would not have been imposed but for such failure.
 
(e)           The Lender, shall (i) deliver to the Borrower, upon the written
request of the Borrower, two original copies of United States Internal Revenue
Service Form W-9 or any successor form, properly completed and duly executed by
the Lender, certifying that the Lender is exempt from United States backup
withholding Tax on payments of interest made under the Loan Documents and (ii)
thereafter, at each time it is so reasonably requested in writing by the
Borrower, deliver within a reasonable time two original copies of an updated
United States Internal Revenue Service Form W-9 or any successor form thereto.
 
(f)           All payments by the Borrower  shall be deemed received on (i)
receipt or (ii) the next Business Day following receipt if such receipt is after
2:00 p.m., Central Standard or Central Daylight Savings Time, as the case may
be, on any Business Day, and shall be made to the Lender at the Principal
Office.  Except as provided to the contrary herein, if the due date of any
payment hereunder or under the Note would otherwise fall on a day which is not a
Business Day, such date shall be extended to the next succeeding Business Day,
and interest shall be payable for any principal so extended for the period of
such extension.

 
- 19 -

--------------------------------------------------------------------------------

 

2.9         Borrowing Base and Monthly Reduction Amount.
 
(a)           The Borrowing Base as of the Closing Date is acknowledged by the
Borrower and the Lender to be $4,000,000.  Commencing on March 1, 2011 and
continuing thereafter on the first day of each calendar month through the
Commitment Termination Date, the amount of the Borrowing Base then in effect
shall be reduced by the Monthly Reduction Amount, which Monthly Reduction Amount
as of the Closing Date is acknowledged to be $0.
 
(b)           The Borrowing Base and the Monthly Reduction Amount shall be
redetermined semi-annually as soon as practicable following each receipt of
Reserve Reports pursuant to the provisions of Section 5.4, and all other
information available to the Lender.  In addition, the Lender shall, in the
normal course of business following a request of the Borrower, redetermine the
Borrowing Base and the Monthly Reduction Amount; provided, however, the Lender
shall not be obligated to respond to more than one such request during the
period between the scheduled semi-annual redeterminations provided for
above.  Notwithstanding the foregoing, the Borrowing Base in effect at any time
shall be subject to reduction at such other time or times as may be permitted by
the terms of this Agreement and the Lender may redetermine the Borrowing Base
and the Monthly Reduction Amount at any time.
 
(c)           Upon each determination of the Borrowing Base and the Monthly
Reduction Amount, the Lender shall notify the Borrower orally (confirming such
notice promptly in writing) of such determination, and, subject to the operation
of the Monthly Reduction Amount, the Borrowing Base and the Monthly Reduction
Amount so communicated to the Borrower shall become effective upon such oral
notification and shall remain in effect until the next subsequent determination
of the Borrowing Base and the Monthly Reduction Amount.
 
(d)           The Borrowing Base shall represent the determination by the
Lender, in accordance with the applicable definitions and provisions herein
contained and the customary lending practices of the Lender for loans of this
nature (but taking into account floor and cap prices or other price protection
under Commodity Hedge Agreements), of the value, for loan purposes, of the
Mortgaged Properties and any other Oil and Gas Properties of the Borrower and
its Domestic Subsidiaries acceptable to the Lender, subject, in the case of any
increase in the Borrowing Base, to the credit approval processes of the
Lender.  Furthermore, the Borrower acknowledges that the determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by the Borrower to be essential for the adequate
protection of the Lender.

 
- 20 -

--------------------------------------------------------------------------------

 

2.10        Mandatory Prepayments.  If at any time the sum of the Loan Balance
and the L/C Exposure exceeds the Borrowing Base then in effect (such excess, a
“Deficiency”), the Borrower shall, within 30 days of notice from the Lender of
such occurrence, (i) prepay the amount of the Deficiency for application on the
portion of the Loan Balance applicable to the Revolving Facility and then to
provide cash as Collateral for the Revolving Facility L/C Exposure in the manner
provided below in this Section 2.10, (ii) provide additional Collateral, of
character and value satisfactory to the Lender in its sole discretion, and/or
cash as Collateral to secure the Obligations, by way of the execution and
delivery to the Lender of Security Documents in form and substance satisfactory
to the Lender, or (iii) affect any combination of the alternatives described in
clauses (i) and (ii) of this sentence and acceptable to the Lender in its
reasonable discretion.  Any prepayment pursuant to the provisions of this
Section 2.10 shall be without premium or penalty, except as provided in Section
2.17, and the amount of any such prepayment may be reborrowed if otherwise
available to the Borrower pursuant to the terms of this Agreement.  In the event
that a mandatory prepayment is to be made under this Section 2.10 or any other
applicable provision of this Agreement and the Loan Balance is less than the
amount required to be prepaid, the Borrower shall repay the entire Loan Balance
and, in accordance with the provisions of the relevant Letter of Credit
Applications executed by the Borrower or otherwise to the satisfaction of the
Lender, deposit with the Lender, as additional Collateral securing the
Obligations, an amount of cash, in immediately available funds, equal to the
Revolving Facility L/C Exposure minus the Revolving Commitment Amount.  The cash
deposited with the Lender in satisfaction of the requirement provided in this
Section 2.10 shall be invested, at the express direction of the Borrower as to
investment vehicle and maturity (which shall be no later than the latest expiry
date of any then outstanding Letter of Credit), for the account of the Borrower
in cash or cash equivalent investments offered by or through the Lender.
 
2.11        Voluntary Prepayments.  Subject to applicable provisions of this
Agreement, the Borrower shall have the right at any time or from time to time to
prepay all or any portion of the Loan Balance without prepayment penalty;
provided, however, that (a) the Borrower shall give the Lender notice of each
such prepayment of all or any portion of the Loan Balance no less than one
Business Day prior to prepayment, (b) any prepayment of any portion of the Loan
Balance shall be in an amount of at least equal to $50,000 and a whole multiple
of $10,000, (c) the Borrower shall pay all accrued and unpaid interest on the
amounts prepaid, (d) no such prepayment shall serve to postpone the repayment
when due of any Obligation or any installments thereof, and (e) the Borrower
shall reimburse the Lender for any losses, expenses or costs reasonably incurred
by the Lender as a result of the failure of the Borrower to make such
prepayment.  Except as provided in the immediately preceding sentence, any
prepayment pursuant to the provisions of this Section 2.11 shall be without
premium or penalty and the amount of any such prepayment  may be reborrowed if
otherwise available to the Borrower pursuant to the terms of this Agreement.
 
2.12        Engineering Fees and Expenses.  The Borrower shall pay the Lender a
fee in the amount of $2,500 on the Closing Date and in connection with each
regularly scheduled or Borrower-requested redetermination of the Borrowing Base
subsequent to the Closing Date by the independent petroleum engineer or firm of
independent petroleum engineers engaged by the Lender, payable within ten days
of receipt by the Borrower of an invoice therefor or statement thereof.
 
2.13         Commitment Fees.  In addition to interest on the Note as provided
herein and other fees payable hereunder, and to compensate the Lender for
maintaining funds available under the Facilities, the Borrower shall pay to the
Lender, in immediately available funds, on the first day of each calendar
quarter during the Commitment Period, commencing on the first day of April,
2011, and on the Commitment Termination Date, a fee equal to a per annum rate of
one half of one percent (0.50%), calculated on the basis of a year of 365 or 366
days, as the case may be, and actual days elapsed (including the first day, but
excluding the last day), multiplied by the average daily amount of the Available
Commitment during the preceding quarterly or shorter period, as the case may
be.  Commitment Fees shall be payable by the Borrower within ten days of receipt
of an invoice therefor or statement thereof delivered by the Lender.

 
- 21 -

--------------------------------------------------------------------------------

 

2.14       Additional Fees.  In addition to interest on the Note as provided
herein and other fees payable hereunder, and to compensate the Lenders for the
costs of the extension of credit hereunder, the Borrower shall pay to the
Lender, on the Closing Date, in immediately available funds, a fee in the amount
of $30,000.  Additionally, the Borrower shall pay a fee to the Lender at any
time the Borrowing Base is increased, with the agreement of the Borrower, above
the highest Borrowing Base previously in effect, equal to three quarters of one
percent (0.75%) of such increased Borrowing Base.
 
2.15       Loans to Satisfy Obligations.  Upon a Default, the Lender may, but
shall not be obligated to, make Loans for the benefit of the Borrower and apply
proceeds thereof to the satisfaction of any condition, warranty, representation
or covenant of the Borrower or any of the Guarantors contained in this Agreement
or any other Loan Document .  Such Loans shall be evidenced by the Note and
shall bear interest at the Adjusted Base Rate in the manner provided in Section
2.5, subject, however, to the provisions of Section 2.5 regarding the accrual of
interest at the Default Rate in certain circumstances.
 
2.16       General Provisions Relating to Interest.
 
(a)           It is the intention of the parties hereto to comply strictly with
the usury laws of the State of Texas and the United States of America.  In this
connection, there shall never be collected, charged, or received on the sums
advanced hereunder interest in excess of that which would accrue at the Highest
Lawful Rate.  The Borrower agrees that, to the extent the Highest Lawful Rate is
determined with reference to the laws of the State to Texas, the Highest Lawful
Rate shall be the “weekly” rate as defined in Chapter 303 of the Texas Finance
Code, provided, however, that the Lender may, at its election, substitute for
the “weekly” rate the “annualized” or “quarterly” rate, as such terms are
defined in the aforesaid statute, upon the giving of notices provided for in
such statute and effective upon the giving of such notices.  The Lender may also
rely, to the extent permitted by applicable laws of the State of Texas or the
United States of America, on alternative maximum rates of interest under other
laws of the State of Texas or the United States of America applicable to the
Lender, if greater.
 
(b)           Notwithstanding anything herein or in the Note to the contrary,
during any Limitation Period, the interest rate to be charged on amounts
evidenced by the Note shall be the Highest Lawful Rate, and the obligation, if
any, of the Borrower for the payment of fees or other charges deemed to be
interest under applicable law shall be suspended.  During any period or periods
of time following a Limitation Period, to the extent permitted by applicable
laws of the State of Texas or the United States of America, the interest rate to
be charged hereunder on amounts evidenced by the Note shall remain at the
Highest Lawful Rate until such time as there has been paid to the Lender (i) the
amount of interest in excess of that accruing at the Highest Lawful Rate that
the Lender would have received during the Limitation Period had the interest
rate remained at the otherwise applicable rate, and (ii) all interest and fees
otherwise payable to the Lender but for the effect of such Limitation Period.

 
- 22 -

--------------------------------------------------------------------------------

 

(c)           If, under any circumstances, the aggregate amounts paid on the
Note or under this Agreement or any other Loan Document include amounts which by
law are deemed interest and which would exceed the amount permitted if the
Highest Lawful Rate were in effect, the Borrower stipulates that such payment
and collection will have been and will be deemed to have been, to the extent
permitted by applicable laws of the State of Texas or the United States of
America, the result of mathematical error on the part of the Borrower and the
Lender; and the Lender shall promptly refund the amount of such excess (to the
extent only of such interest payments in excess of that which would have accrued
and been payable on the basis of the Highest Lawful Rate) upon discovery of such
error by the Lender or notice thereof from the Borrower.  In the event that the
maturity of any Obligation is accelerated, by reason of an election by the
Lender or otherwise, or in the event of any required or permitted prepayment,
then the consideration constituting interest under applicable laws may never
exceed that payable on the basis of the Highest Lawful Rate, and excess amounts
paid which by law are deemed interest, if any, shall be credited by the Lender
on the principal amount of the Obligations, or if the principal amount of the
Obligations shall have been paid in full, refunded to the Borrower.
 
(d)           All sums paid, or agreed to be paid, to the Lender for the use,
forbearance and detention of the proceeds of any advance hereunder shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term hereof until paid in full so that the actual rate of
interest is uniform but does not exceed the Highest Lawful Rate throughout the
full term hereof.
 
2.17       Yield Protection.
 
(a)           Without limiting the effect of the other provisions of this
Section 2.17 (but without duplication), the Borrower shall pay to the Lender
from time to time on request such amounts as the Lender may reasonably determine
are necessary to compensate the Lender or the Lender’s holding company for any
costs attributable to the maintenance by the Lender, pursuant to any Regulatory
Change, of capital in respect of its Commitment, such compensation to include an
amount equal to any reduction of the rate of return on assets or equity of the
Lender or the Lender’s holding company to a level below that which the Lender or
the Lender’s holding company could have achieved but for such Regulatory Change.
 
(b)           Without limiting the effect of the other provisions of this
Section 2.17 (but without duplication), in the event that any Requirement of Law
or Regulatory Change or the compliance by the Lender therewith shall (i) impose,
modify or hold applicable any reserve, special deposit or similar requirement
against any Letter of Credit or obligation to issue Letters of Credit or (ii)
impose upon the Lender any other condition regarding any Letter of Credit or
obligation to issue Letters of Credit, and the result of any such event shall be
to increase the cost to the Lender of issuing or maintaining any Letter of
Credit or obligation to issue Letters of Credit or any liability with respect to
Letter of Credit Payments, or to reduce any amount receivable in connection
therewith, then upon demand by the Lender, the Borrower shall pay to the Lender,
from time to time as specified by the Lender in the exercise of its reasonable
judgment, additional amounts which shall be sufficient to compensate the Lender
for such increased cost or reduced amount receivable.

 
- 23 -

--------------------------------------------------------------------------------

 

(c)           Determinations by the Lender for purposes of this Section 2.17 of
the effect of any Regulatory Change on capital maintained, its costs or rate of
return, its obligation to make and maintain Loans, issuing or participating in
Letters of Credit, or on amounts receivable by it in respect of Loans, Letters
of Credit or such other obligations, and the additional amounts required to
compensate the Lender under this Section 2.17 shall be conclusive, absent
manifest error.  The Lender shall furnish the Borrower with a certificate
setting forth in reasonable detail the basis and amount of any loss, cost or
expense incurred as a result of any such event, and the statements set forth
therein shall be conclusive, absent manifest error.  The Lender shall notify the
Borrower, as promptly as practicable after the Lender obtains knowledge of any
sums payable pursuant to this Section 2.17 and determines to request
compensation therefor, of any event occurring after the Closing Date which will
entitle the Lender to compensation pursuant to this Section 2.17.  Any
compensation requested by the Lender pursuant to this Section 2.17 shall be due
and payable within 30 days of receipt by the Borrower of any such notice.
 
(d)           The Lender agrees not to request, and the Borrower shall not be
obligated to pay, any sums payable pursuant to this Section 2.17 unless similar
sums are also generally assessed by the Lender against other customers similarly
situated where such customers are subject to documents providing for such
assessment.
 
2.18       Letters in Lieu of Transfer Orders or Division Orders.  The Lender
agrees that none of the letters in lieu of transfer or division orders provided
pursuant to the provisions of Section 3.1(f) or Section 5.7 will be sent to the
addressees thereof unless an Event of Default has occurred, at which time the
Lender may, at its option, and in addition to the exercise of any of its other
rights and remedies, send any or all of such letters.
 
2.19       Power of Attorney.  The Borrower hereby designates the Lender as its
agent and attorney-in-fact, to act in its name, place and stead solely for the
purpose of completing and, upon the occurrence of an Event of Default,
delivering any and all of the letters in lieu of transfer or division orders
delivered by the Borrower pursuant to the provisions of Section 3.1(f) or
Section 5.7, including completing any blanks contained in such letters and
attaching exhibits thereto describing the relevant Collateral.  The Borrower
hereby ratifies and confirms all that the Lender shall lawfully do or cause to
be done by virtue of this power of attorney and the rights granted with respect
to such power of attorney.  This power of attorney is coupled with the interests
of the Lender in the Collateral, shall commence and be in full force and effect
as of the Closing Date and shall remain in full force and effect and shall be
irrevocable so long as any Obligation remains outstanding or unpaid or any
Commitment exists.  The powers conferred on the Lender by this appointment are
solely to protect the interests of the Lender and any other Approved Hedge
Counterparties under the Loan Documents with respect to the assignment of
production proceeds under certain of the Security Documents and shall not impose
any duty upon the Lender to exercise any such powers.  The power of attorney
under this Section 2.19 is expressly limited to the rights and powers set forth
herein and no additional rights or powers are herein created or implied.  The
Lender shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers and shall not be responsible to the
Borrower or any other Person for any act or failure to act with respect to such
powers, except for gross negligence or willful misconduct.

 
- 24 -

--------------------------------------------------------------------------------

 

2.20       Security Interest in Accounts; Right of Offset.  As security for the
payment and performance of the Obligations, the Borrower hereby transfers,
assigns, and pledges to the Lender and grants to the Lender (for the pro rata
benefit of the Lender and any other Approved Hedge Counterparties) a security
interest in all of its funds now or hereafter or from time to time on deposit
with the Lender or any other Approved Hedge Counterparty, with such interest of
the Lender to be retransferred, reassigned and/or released at the expense of the
Borrower upon payment in full and complete performance  of all Obligations.  All
remedies as secured party or assignee of such funds shall be exercisable  upon
the occurrence of any Event of Default, regardless of whether the exercise of
any such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof.  Furthermore, the Borrower hereby grants to the Lender
(for the pro rata benefit of the Lender and any other Approved Hedge
Counterparties) the right, exercisable at such time as any Obligation shall
mature, whether by acceleration of maturity or otherwise, of offset or banker’s
lien against all of its funds now or hereafter or from time to time on deposit
with the Lender or any other Approved Hedge Counterparty, regardless of whether
the exercise of any such remedy would result in any penalty or loss of interest
or profit with respect to any withdrawal of funds deposited in a time deposit
account prior to the maturity thereof.  The Lender shall notify the Borrower
promptly of the exercise of any such right of offset or banker’s lien.
 
ARTICLE III
 
CONDITIONS
 
The obligations of the Lender to enter into this Agreement and to make Loans or
issue Letters of Credit are subject to the satisfaction of the following
conditions precedent:
 
3.1         Receipt of Loan Documents and Other Items.  The Lender shall have no
obligation under this Agreement unless and until all matters incident to the
consummation of the transactions contemplated herein shall be satisfactory to
the Lender and the Lender shall have received, reviewed and approved the
following documents and other items, appropriately executed when necessary and,
where applicable, acknowledged by one or more Responsible Officers of the
Borrower or other Persons, as the case may be, all in form and substance
satisfactory to the Lender and dated, where applicable, of even date herewith or
a date prior thereto or thereafter and acceptable to the Lender:
 
(a)           multiple counterparts of this Agreement as requested by the
Lender;
 
(b)           the Note;
 
(c)           copies of the organizational documents of the Borrower and all
amendments to any of such documents, accompanied by a certificate dated the
Closing Date issued by the secretary or an assistant secretary or another
authorized representative of the Borrower to the effect that each such copy is
correct and complete;
 
(d)           a certificate of incumbency dated the Closing Date, including
specimen signatures of all officers or other representatives of the Borrower who
are authorized to execute Loan Documents on behalf of the Borrower, each such
certificate being executed by the secretary or an assistant secretary or another
authorized representative of the Borrower;

 
- 25 -

--------------------------------------------------------------------------------

 

(e)           copies of resolutions adopted by the governing body of the
Borrower approving the Loan Documents to which the Borrower is a party and
authorizing the transactions contemplated herein and therein, accompanied by a
certificate dated the Closing Date issued by the secretary or an assistant
secretary or another authorized representative of the Borrower to the effect
that such copies are true and correct copies of resolutions duly adopted and
that such resolutions constitute all the resolutions adopted with respect to
such transactions, have not been amended, modified or rescinded in any respect,
and are in full force and effect as of the date of such certificate;
 
(f)           the following documents continuing in effect or establishing Liens
in favor or for the benefit of the Lender in and to the Collateral, including
Mortgaged Properties constituting at least ninety percent (90%) of the
discounted present value, as determined by the Lender in its reasonable
discretion, of the proved reserves attributable to the Oil and Gas Properties of
the Borrower:
 
 
(i)
amendments to and ratifications of the security documents in effect under the
terms of the Existing Credit Agreement;

 
 
(ii)
if requested by the Lender, additional security documents from the Borrower in
favor of the Lender covering certain Property of the Borrower, including
additional Oil and Gas Properties of the Borrower sufficient for the Borrower to
be in compliance with the provisions of Section 5.5;

 
 
(iii)
financing statement amendments and, if requested by the Lender, new financing
statements, in each case constituent to the documents described in clauses (i)
and (ii) above; and

 
 
(iv)
undated letters, in form and substance satisfactory to the Lender, from the
Borrower to each purchaser of production and disburser of the proceeds of
production from or attributable to the Mortgaged Properties, with the addressees
left blank, authorizing and directing the addressees to make future payments
attributable to production from the Mortgaged Properties directly to the Lender
for the account of the Borrower;

 
(g)           unaudited pro forma Financial Statements as of January 4, 2011,
certified by a Responsible Officer of the Borrower as having been prepared in
accordance with GAAP consistently applied and as a fair presentation of the
condition of the Borrower, subject to changes resulting from normal year-end
audit adjustments;
 
(h)           certificates dated as of a recent date from the Secretary of State
or other appropriate Governmental Authority evidencing the existence or
qualification and, if applicable, good standing of the Borrower in its
jurisdiction of organization and in any other jurisdictions where it owns
property or does business;

 
- 26 -

--------------------------------------------------------------------------------

 

(i)           results of a search of the uniform commercial code records of the
Secretary of State of the State of Nevada in the name of the Borrower, such
search report to be from a source or sources acceptable to the Lender and
reflecting no Liens, other than Permitted Liens, against any of the Collateral
as to which perfection of a Lien is accomplished by the filing of a financing
statement;
 
(j)          confirmation, acceptable to the Lender, of the title of the
Borrower, free and clear of Liens other than Permitted Liens, to Mortgaged
Properties constituting at least ninety percent (90%) of the discounted present
value, as determined by the Lender in its discretion, of the proved reserves
attributable to such Mortgaged Properties;
 
(k)         confirmation acceptable to the Lender that the Oil and Gas
Properties of the Borrower are in compliance, in all material respects, with
applicable Environmental Laws;
 
(l)          copies of executed counterparts of all operating, lease, sublease,
royalty, sales, exchange, processing, farmout, bidding, pooling, unitization,
communitization and other agreements relating to the Mortgaged Properties as of
the Closing Date, as  requested by the Lender;
 
(m)        engineering information regarding the Oil and Gas Properties of the
Borrower, as requested by the Lender;
 
(n)         the opinion of O’Neill Law Group PLLC, as Nevada counsel to the
Borrower in connection with this Agreement and the other Loan Documents to which
the Borrower is a party, substantially in the form attached hereto as Exhibit
IV, with such changes thereto as may be approved by the Lender;
 
(o)         the opinion of Friday Eldredge & Clark LLP, as Texas counsel to the
Borrower in connection with this Agreement and the other Loan Documents to which
the Borrower is a party, substantially in the form attached hereto as Exhibit V,
with such changes thereto as may be approved by the Lender;
 
(p)         certificates evidencing the insurance coverage required by the
provisions of Section 5.20;
 
(q)         payment of any fees due as of the Closing Date pursuant to this
Agreement;
 
(r)          payment from the Borrower for estimated fees charged by filing
officers and other public officials incurred or to be incurred in connection
with the filing and recordation of any Security Documents and for which invoices
have been presented as of the Closing Date;
 
(s)         copies of all Commodity Hedge Agreements to which the Borrower is a
party as of the Closing Date;
 
(t)          a certificate of a Responsible Officer of the Borrower to the
effect that all representations and warranties made by the Borrower in this
Agreement or any other Loan Document in place on the Closing Date are true and
correct in all material respects as of the Closing Date and that no Default or
Event of Default exists as of the Closing Date;

 
- 27 -

--------------------------------------------------------------------------------

 

(u)         confirmation acceptable to the Lender that no event or circumstance,
including any action, suit, investigation or proceeding pending, or, to the
knowledge of the Borrower, threatened in any court or before any arbitrator or
Governmental Authority, shall have occurred which could reasonably be expected
to have a Material Adverse Effect; and
 
(v)         such other agreements, documents, instruments, opinions,
certificates, waivers, consents and evidence as the Lender may reasonably
request.
 
3.2          Each Loan.  In addition to the conditions precedent stated
elsewhere herein, the Lender shall not be obligated to make any Loan, other than
in connection with a Letter of Credit Payment, unless:
 
(a)           at least the requisite time prior to the requested date for the
relevant Loan, the Borrower shall have delivered to the Lender a Borrowing
Request and a funding direction advising the Lender whether the requested Loan
should be funded to an account of the Borrower at the Lender or should be funded
by wire transfer to an account of another Person (in which case wire transfer
instructions shall be included) and each statement or certification made in such
Borrowing Request shall be true and correct in all material respects on the
requested date for such Loan;
 
(b)           no Event of Default or Default shall exist or will occur as a
result of the making of the requested Loan;
 
(c)           if requested by the Lender, the Borrower shall have delivered
evidence satisfactory to the Lender substantiating any of the matters contained
in this Agreement which are necessary to enable the Borrower to qualify for such
Loan;
 
(d)          the Lender shall have received a copy of any notice to the Trustee
under the Trust Indenture required, pursuant to the provisions of the Trust
Indenture, with respect to such Loan;
 
(e)          the Lender shall have received, reviewed and approved such
additional documents and items as described in Section 3.1 as may be requested
by the Lender with respect to such Loan;
 
(f)           no event shall have occurred which, in the opinion of the Lender,
could reasonably be expected to have a Material Adverse Effect;
 
(g)           each of the representations and warranties of the Borrower or any
of the Guarantors contained in this Agreement and the other Loan Documents shall
be true and correct in all material respects and shall be deemed to be repeated
by the relevant entity as if made on the requested date for such Loan;
 
(h)          all of the Security Documents shall be in full force and effect;

 
- 28 -

--------------------------------------------------------------------------------

 

(i)           neither the consummation of the transactions contemplated hereby
nor the making of such Loan shall contravene, violate or conflict with any
Requirement of Law applicable to the Lender, the Borrower or any of the
Guarantors; and
 
(j)           the Borrower or any relevant Guarantor, as applicable, shall hold
full legal title to the Collateral pledged by it under the Security Documents
and be the sole beneficial owner thereof.
 
3.3         Issuance of Letters of Credit.  The obligation of the Lender to
issue, renew, or extend any Letter of Credit is subject to the satisfaction of
the following additional conditions precedent:
 
(a)           the Borrower shall have delivered to the Lender a written (or
oral, confirmed promptly in writing) request for the issuance, renewal or
extension of a Letter of Credit at least three Business Days prior to the
requested issuance, renewal or extension date and a Letter of Credit Application
at least one Business Day prior to the requested issuance date, and each
statement or certification made in such Letter of Credit Application shall be
true and correct in all material respects on the requested date for the issuance
of such Letter of Credit;
 
(b)           no Event of Default or Default shall exist or will occur as a
result of the issuance, renewal, or extension of such Letter of Credit;
 
(c)           if requested by the Lender, the Borrower shall have delivered
evidence satisfactory to the Lender substantiating any of the matters contained
in this Agreement which are necessary to enable the Borrower to qualify for the
issuance, renewal or extension of such Letter of Credit;
 
(d)           the Lender shall have received a copy of any notice to the Trustee
under the Trust Indenture required, pursuant to the provisions of the Trust
Indenture, with respect to such Letter of Credit;
 
(e)           no event shall have occurred which, in the opinion of the Lender,
could reasonably be expected to have a Material Adverse Effect;
 
(f)           each of the representations and warranties of the Borrower
contained in this Agreement and the other Loan Documents shall be true and
correct in all material respects and shall be deemed to be repeated by the
Borrower as if made on the requested date for the issuance, renewal or extension
of such Letter of Credit;
 
(g)           all of the Security Documents shall be in full force and effect;
 
(h)           neither the consummation of the transactions contemplated hereby
nor the issuance, renewal or extension of such Letter of Credit shall
contravene, violate or conflict with any Requirement of Law applicable to the
Lender, the Borrower or any of the Guarantors;
 
(i)           the Borrower or any relevant Guarantor, as applicable, shall hold
full legal title to the Collateral pledged by it under the Security Documents
and be the sole beneficial owner thereof; and

 
- 29 -

--------------------------------------------------------------------------------

 

(j)           the terms, provisions and beneficiary of the Letter of Credit or
such renewal or extension shall be satisfactory to the Lender in its reasonable
discretion.
 
ARTICLE IV
 
REPRESENTATIONS AND WARRANTIES
 
To induce the Lender to enter into this Agreement and to make the Loans and
issue and renew Letters of Credit, the Borrower and each of the Guarantors
represents and warrants to the Lender (which representations and warranties
shall survive the delivery of the Note) that:
 
4.1           Due Authorization.  The execution and delivery by it of this
Agreement and the borrowings by the Borrower hereunder, the execution and
delivery by the Borrower of the Note, the repayment by the Borrower of the Note
and interest and fees provided for in the Note and this Agreement, the execution
and delivery of the Security Documents to which it is a party and the
performance by it of its obligations under the Loan Documents to which it is a
party are within the power of the Borrower or such Person as the case may be,
have been duly authorized by all necessary action by the Borrower or such
Person, as the case may be, and do not and will not (a) require the consent of
any Governmental Authority, (b) contravene or conflict with any applicable
Requirement of Law, (c) contravene or conflict in any material respect with any
material indenture, instrument or other agreement to which it is a party or by
which any of its Property may be presently bound or encumbered or (d) result in
or require the creation or imposition of any Lien in, upon or on any of its
Property under any such indenture, instrument, or other agreement, other than
under any of the Loan Documents.
 
4.2           Existence.  It is a corporation, a limited partnership, a limited
liability company or other entity, as the case may be, duly organized, legally
existing and, if applicable, in good standing under the laws of the state of its
organization or formation and is duly qualified as a foreign limited partnership
or limited liability company and, if applicable, in good standing in all
jurisdictions wherein the ownership of its Property or the operation of its
business necessitates same and where the failure to so qualify would have a
Material Adverse Effect.
 
4.3           Valid and Binding Obligations.  Each Loan Document to which it is
a party, when duly executed and delivered by it, constitutes its legal, valid
and binding obligation enforceable against it in accordance with its terms.
 
4.4           Security Documents.  The provisions of each Security Document
executed by it are effective to create, in favor or for the benefit of the
Lender, a legal, valid and enforceable Lien in all of its right, title and
interest in the Collateral described therein, which Lien, assuming the
accomplishment of recording and filing in accordance with applicable laws prior
to the intervention of rights of other Persons, constitutes a fully perfected
first-priority Lien (except as to Permitted Liens) on all of its right, title
and interest in the Collateral described therein.
 
4.5           Title to Oil and Gas Properties.  It has good and indefeasible
title to all of its Oil and Gas Properties, free and clear of all Liens except
Permitted Liens.  No Person other than it has any ownership interest, whether
legal or beneficial, in its interest in any of its Oil and Gas Properties.

 
- 30 -

--------------------------------------------------------------------------------

 

4.6           Scope and Accuracy of Financial Statements.  The Financial
Statements provided to the Lender in satisfaction of the condition set forth in
Section 3.1(g) present fairly (subject to normal year-end audit adjustments) the
financial position and results of operations and cash flows of the Borrower and
its consolidated Subsidiaries in accordance with GAAP as at the relevant point
in time or for the period indicated, as applicable.
 
4.7           No Material Adverse Effect or Default.  No event or circumstance
has occurred since January 4, 2011 which could reasonably be expected to have a
Material Adverse Effect, and, to its best knowledge, no Default has occurred and
is continuing.
 
4.8           No Material Misstatements.  No information, exhibit, statement or
report furnished to the Lender by it or at its direction in connection with this
Agreement or any other Loan Document contains any material misstatement of fact
or omits to state a material fact or  any fact necessary to make the statements
contained therein not misleading as of the date made or deemed made.
 
4.9           Liabilities, Litigation and Restrictions.  Other than as reflected
in the Financial Statements provided to the Lender in satisfaction of the
condition set forth in Section 3.1(i) or listed on Schedule 4.9 under the
heading “Liabilities”, it has no liabilities, direct or contingent, which may
materially and adversely affect its business or operations or its ownership of
any Collateral.  Except as set forth under the heading “Litigation” on Schedule
4.9, no litigation or other action of any nature affecting it is pending before
any Governmental Authority or, to the best of its knowledge, threatened against
or affecting it or any of its Subsidiaries which could, if adversely determined,
reasonably be expected to have a Material Adverse Effect.  No unusual or unduly
burdensome restriction, restraint or hazard exists by contract, Requirement of
Law or otherwise relative to its business or operations or its ownership and
operation of any Collateral other than such as relate generally to Persons
engaged in business activities similar to those conducted by it or as could not
reasonably be expected to have a Material Adverse Effect.
 
4.10           Authorizations; Consents.  Except as expressly contemplated by
this Agreement, no authorization, consent, approval, exemption, franchise,
permit or license of, or filing with, any Governmental Authority or any other
Person is required to authorize, or is otherwise required in connection with,
the valid execution and delivery by it of the Loan Documents to which it is a
party or any instrument contemplated hereby, the repayment of the Note and
interest and fees provided in the Note and this Agreement or the performance of
the Obligations.
 
4.11           Compliance with Laws.  It and its Properties, including any
Mortgaged Properties and Oil and Gas Properties owned by it, are in compliance
with all applicable Requirements of Law, except to the extent any such failure
to comply could not reasonably be expected to have a Material Adverse Effect.
 
4.12           ERISA.  It does not maintain, nor has it maintained, any
Plan.  It does not currently contribute to or have any obligation to contribute
to or otherwise have any liability with respect to any Plan.
 

 
- 31 -

--------------------------------------------------------------------------------

 

4.13        Environmental Laws.  Except as  described on Schedule 4.13:
 
(a)           no Property owned by it, or, to its knowledge, Property of others
adjacent to Property owned by it, is currently on or has, to its knowledge, ever
been on any federal or state list of Superfund Sites;
 
(b)           no Hazardous Substances have been generated, transported and/or
disposed of by it at a site which was, at the time of such generation,
transportation and/or disposal, or has since become, a Superfund Site;
 
(c)           except in accordance with applicable Requirements of Law or the
terms of a valid permit, license, certificate or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by it or from,
affecting or related to any Property owned by it has occurred which could
reasonably be expected to have a Material Adverse Effect; and
 
(d)           no Environmental Complaint has been received by it that has not
been resolved in full.
 
4.14        Compliance with Federal Reserve Regulations.  No transaction
contemplated by the Loan Documents is in violation of, and it has not taken any
action that would result in any transaction contemplated by the Loan Documents
being in violation of, in any material respect, any regulations promulgated by
the Board of Governors of the Federal Reserve System, including Regulations T, U
or X.
 
4.15        Investment Company Act.  It is not, nor is it directly or indirectly
controlled by or acting on behalf of any Person which is an “investment company”
or an “affiliated person” subject to regulation as an “investment company”
within the meaning of the Investment Company Act of 1940.
 
4.16        Proper Filing of Tax Returns; Payment of Taxes Due.  It has filed
its United States income tax returns and all other tax returns which are
required to be filed and has paid all taxes shown as due from it thereon, except
such as are being contested in good faith and as to which adequate provisions
and disclosures have been made.  The respective charges and reserves on its
books with respect to taxes and other governmental charges are adequate.
 
4.17        Refunds.  Except as described on Schedule 4.17, no orders of,
proceedings pending before, or other requirements of any Governmental Authority
exist which could result in it being required to refund any portion of the
proceeds received or to be received by it from the sale of hydrocarbons
constituting part of the Mortgaged Property or other Oil and Gas Properties
owned by it.
 
4.18        Gas Contracts.  Except as described on Schedule 4.18, (a) it is not
obligated in any material respect by virtue of any prepayment made under any
contract containing a “take-or-pay” or “prepayment” provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Mortgaged Property or other Oil and Gas Properties owned by it at some
future date without receiving full payment therefor within 90 days of delivery,
and (b) it has not produced gas, in any material amount, subject to, and neither
it nor any of the Mortgaged Properties  or other Oil and Gas Properties owned by
it is subject to, balancing rights of third parties or subject to balancing
duties under Requirements of Law, except as to such matters for which it has
established monetary reserves adequate in amount to satisfy such obligations and
has segregated such reserves from other accounts.

 
- 32 -

--------------------------------------------------------------------------------

 

4.19        Intellectual Property.  It owns or is licensed to use all
Intellectual Property necessary to conduct its business as currently conducted,
except where the failure to own or license such property could not reasonably be
expected to have a Material Adverse Effect.  No claim is pending, or to its
knowledge has been asserted, by any Person with respect to the use of any such
Intellectual Property or challenging or questioning the validity or
effectiveness of any such Intellectual Property; and it knows of no valid basis
for any such claim.  The use of such Intellectual Property by it does not
infringe on the rights of any Person, except for such claims and infringements
as do not, in the aggregate, give rise to any material liability on its part.
 
4.20        Casualties or Taking of Property.  Except as disclosed on Schedule
4.20, since the later of (a) January 4, 2011, or (b) the date of the most recent
Financial Statements furnished to the Lender pursuant to either Section 5.2 or
Section 5.3, neither its business nor any of its Property has been affected as a
result of any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking of Property,
or cancellation of contracts, permits or concessions by any Governmental
Authority, riot, activities of armed forces or acts of God, except as could not
reasonably be expected to have a Material Adverse Effect.
 
4.21        Principal Location.  Its principal place of business and chief
executive office is located at its address set forth in Section 8.3 or at such
other location as it may have, by proper written notice hereunder, advised the
Lender.
 
4.22        Subsidiaries.  It has no Subsidiaries other than Doral West Corp., a
Nevada corporation, which owns no assets of material value, as disclosed to the
Lender in writing from time to time.
 
4.23        Compliance with Anti-Terrorism Laws.
 
(a)           Neither it nor any of its Affiliates is in violation in any
material respect of any applicable Anti-Terrorism Law or knowingly engages in or
conspires to engage in any transaction that evades or avoids, or has the purpose
of evading or avoiding, or attempts to violate, any of the prohibitions set
forth in any applicable Anti-Terrorism Law.
 
(b)           Neither it nor any of its Affiliates is any of the following (each
a “Blocked Person”):
 
 
(i)
a Person that is listed in the annex, to, or is otherwise subject to the
provisions of, Executive Order No. 13224;

 
 
(ii)
a Person owned or controlled by, or acting for or on behalf of, any Person that
is listed in the annex to, or is otherwise subject to the provisions of,
Executive Order No. 13224;

 
 
- 33 -

--------------------------------------------------------------------------------

 

 
(iii)
a Person with which any bank or other financial institution is prohibited from
dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;

 
 
(iv)
a Person that commits, threatens or conspires to commit or supports “terrorism”
as defined in Executive Order No. 13224;

 
 
(v)
a Person that is named as a “specially designated national” on the most current
list published by OFAC at its official website or any replacement website or
other replacement official publication of such list; or

 
 
(vi)
an Affiliate of a Person or entity listed above.

 
(c)           Neither it nor any of its Affiliates (i) conducts any business or
engages in making or receiving any contribution of funds, goods or services to
or for the benefit of any Blocked Person or (ii) deals in, or otherwise engages
in any transaction relating to, any property or interests in property blocked
pursuant to Executive Order No. 13224.
 
(d)           Neither it nor any of its Affiliates is in violation in any
material respect of any rules or regulations promulgated by OFAC or of any
economic or trade sanctions administered and enforced by OFAC or engages in or
conspires to engage in any transaction that evades or avoids, or has the purpose
of evading or avoiding, or attempts to violate, any of the prohibitions set
forth in any rules or regulations promulgated by OFAC.
 
4.24        Identification Numbers.  Its federal taxpayer identification number
and organizational number with the Secretary of State of the state of its
organization or formation are as set out on Schedule 4.24 or as otherwise
provided to the Lender in writing.
 
4.25        Solvency.  Immediately after the Closing and immediately following
the making of each Loan made on the Closing Date and following the making of any
Loan made after the Closing Date, after giving effect to the application of the
proceeds of each such Loan, (a) the fair value of its assets, at a fair
valuation, will exceed its debts and liabilities, subordinated, contingent or
otherwise, at a fair valuation; (b) the present fair saleable value of its
assets, at a fair valuation, will be greater than the amount that will be
required to pay the probable liability of its debts and other liabilities,
subordinated, contingent or otherwise, as such debts and other liabilities
become absolute and matured considering all financing alternatives and potential
asset sales reasonably available to it; (c) it will be able to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured; and (d) it will not have unreasonably
small capital with which to conduct the business in which it is engaged as such
business is now conducted and are proposed to be conducted following the Closing
Date.

 
- 34 -

--------------------------------------------------------------------------------

 

ARTICLE V
 
AFFIRMATIVE COVENANTS
 
So long as any Obligation remains outstanding or unpaid or any Commitment
exists, each of the Borrower and the Guarantors shall (provided, however, that
Section 5.14 shall apply only to the Borrower):
 
5.1         Maintenance and Access to Records.  Keep adequate records, in
accordance with GAAP, of all its transactions so that at any time, and from time
to time, its true and complete financial condition (subject to normal year-end
audit adjustments) may be readily determined, and promptly following the request
of the Lender, make such records available for inspection by the Lender and, at
the expense of the Borrower allow Lender to make and take away copies thereof.
 
5.2         Quarterly Financial Statements and Compliance Certificates.  Deliver
to the Lender, on or before the 60th day after the close of each of the first
three quarterly periods of each fiscal year of the Borrower, commencing with
that ending March 31, 2011, (a) a copy of the Financial Statements  as at the
close of such quarterly period and from the beginning of such fiscal year to the
end of such period, such Financial Statements to be certified by a Responsible
Officer of the Borrower as having been prepared in accordance with GAAP
consistently applied and as a fair presentation of the financial condition, as
of the date and for the period indicated therein, of the Borrower, on a
consolidated basis with its consolidated Subsidiaries, subject to changes
resulting from normal year end audit adjustments, and (b) a Compliance
Certificate prepared as of the close of such quarterly period.
 
5.3         Annual Financial Statements and Compliance Certificate.  Deliver to
the Lender, on or before the 120th day after the close of each fiscal year of
the Borrower, commencing with that ending on December 31, 2011, (a) a copy of
the annual audited Financial Statements, such Financial Statements to be
certified by a Responsible Officer of the Borrower as having been prepared in
accordance with GAAP consistently applied and as a fair presentation of the
financial condition, as of the date and for the period indicated therein, of the
Borrower on a consolidated basis with its consolidated Subsidiaries, with such
audited Financial Statements accompanied by an unqualified opinion from a
nationally recognized or regionally-recognized firm of independent certified
public accountants or other independent certified public accountants acceptable
to the Lender, and (b) a Compliance Certificate prepared as of the close of the
relevant fiscal year.

 
- 35 -

--------------------------------------------------------------------------------

 
 
5.4          Oil and Gas Reserve Reports and Production Reports.
 
(a)           Deliver to the Lender, no later than each March 31 during the term
of this Agreement, commencing with March 31, 2012, an engineering report in form
satisfactory to the Lender, prepared as of the preceding December 31 and
certified by a nationally or regionally-recognized firm of independent
consulting petroleum engineers or other firm of independent consulting petroleum
engineers acceptable to the Lender as fairly and accurately setting forth (i)
the proved and producing, non-producing, shut-in, behind-pipe and undeveloped
oil and gas reserves (separately classified as such) attributable to the
Mortgaged Properties and other Oil and Gas Properties of the Borrower and its
Subsidiaries as of the most recent practicable date, (ii) the aggregate present
value of the future net income with respect to proved and producing reserves
attributable to the Mortgaged Properties and other Oil and Gas Properties of the
Borrower and its Subsidiaries, discounted at a stated per annum discount rate,
(iii) projections of the annual rate of production, gross income and net income
with respect to such proved and producing reserves, (iv) information with
respect to the “take-or-pay,” “prepayment” and gas-balancing liabilities of the
Borrower and its Subsidiaries with respect to such reserves, and (v) general
economic assumptions.

(b)          Deliver to the Lender, no later than each September 30 during the
term of this Agreement, commencing with September 30, 2011, an engineering
report, in substantially the format of and providing the information provided in
the engineering reports provided pursuant to Section 5.4(a), prepared as of the
preceding June 30 and certified, at the election of the Borrower, by either the
chief operating officer or senior reserve engineer of the Borrower or a
nationally or regionally-recognized firm of independent consulting petroleum
engineers acceptable to the Lender or other firm of independent consulting
petroleum engineers acceptable to the Lender as fairly and accurately setting
forth the information provided therein.
 
(c)           Deliver to the Lender, no later than the 60th day following the
end of each calendar quarter, a report, in form satisfactory to the Lender,
setting forth information as to quantities of production from the Mortgaged
Properties, volumes of production sold, volumes of production committed to
Commodity Hedge Agreements, pricing, purchasers of production, gross revenues,
lease operating expenses, and such other information as the Lender may
reasonably request with respect to the relevant quarterly period.
 
5.5          Title Opinions; Title Defects; Mortgaged Properties.
 
(a)          Promptly upon the request of the Lender, furnish to the Lender
title opinions, in form and substance and by counsel satisfactory to the Lender,
or other confirmation of title reasonably acceptable to the Lender, covering Oil
and Gas Properties of the Borrower and its Subsidiaries the discounted present
value of the proved reserves attributable to which, in the aggregate, equals no
less than ninety percent (90%) of the aggregate discounted present value of the
proved reserves attributable to the combined Oil and Gas Properties of the
Borrower and its Domestic Subsidiaries.
 
(b)          Promptly, but in any event within 30 days after notice by the
Lender of any defect having a Material Adverse Effect, clear such title defect.
 
(c)           Promptly upon request of the Lender, execute and deliver to the
Lender additional Security Documents as necessary to maintain, as Mortgaged
Properties, Oil and Gas Properties of the Borrower and its Domestic Subsidiaries
constituting no less than ninety percent (90%) of the aggregate discounted
present value of the proved reserves attributable to the combined Oil and Gas
Properties of the Borrower and its Domestic Subsidiaries.
 
 
- 36 -

--------------------------------------------------------------------------------

 

5.6         Notices of Certain Events.  Deliver to the Lender, promptly, but in
no event later than the fifth Business Day after having knowledge of the
occurrence of any of the following events or circumstances, a written statement
with respect thereto, signed by a Responsible Officer of the relevant Business
Entity or its general partner and setting forth the relevant event or
circumstance and the steps being taken by the relevant Business Entity with
respect to such event or circumstance:
 
(a)           any Default or Event of Default;
 
(b)          any default by it under any contractual obligation or any
litigation, investigation or proceeding between it and any Governmental
Authority which, in either case, if not cured or if adversely determined, as the
case may be, could reasonably be expected to have a Material Adverse Effect;
 
(c)          any litigation or proceeding involving it as a defendant or in
which any of its Property is subject to a claim and in which the amount involved
is $100,000 or more and which is not covered by insurance or in which injunctive
or similar relief is sought;
 
(d)          the receipt by it of any Environmental Complaint, which if
adversely determined could reasonably be expected to have a Material Adverse
Effect;
 
(e)          any actual, proposed, or threatened testing or other investigation
by any Governmental Authority or other Person concerning the environmental
condition of, or relating to, any of its Property following any allegation of a
material violation of any Requirement of Law;
 
(f)           any Release of Hazardous Substances by it or from, affecting, or
related to any of its Property or Property of others adjacent to any of its
Property which could reasonably be expected to have a Material Adverse Effect,
except in accordance with applicable Requirements of Law or the terms of a valid
permit, license, certificate, or approval of the relevant Governmental
Authority, or the violation of any Environmental Law in any material respect, or
the revocation, suspension, or forfeiture of or failure to renew, any permit,
license, registration, approval, or authorization which could reasonably be
expected to have a Material Adverse Effect;
 
(g)          any change in its senior management;
 
(h)          any material change in its accounting or financial reporting
practices; and
 
(i)           any other event or condition which could reasonably be expected to
have a Material Adverse Effect.
 
5.7         Letters in Lieu of Transfer Orders or Division Orders.  Promptly
upon request by the Lender at any time and from time to time, and without
limitation on the rights of the Lender pursuant to the provisions of Section
2.18 and Section 2.19, execute such letters in lieu of transfer or division
orders, in addition to the letters delivered to the Lender in satisfaction of
the condition set forth in Section 3.1(f), as are necessary or appropriate to
transfer and deliver to the Lender proceeds from or attributable to any
Mortgaged Property.
 
- 37 -

--------------------------------------------------------------------------------

 
5.8          Commodity Hedging.  Comply in all material respects with any
Commodity Hedge Agreements entered into by the Borrower or any Domestic
Subsidiary of the Borrower subsequent to the Closing Date and not in violation
of the provisions of Section 6.1.
 
5.9          Joinder of New Domestic Subsidiaries.  Execute and deliver Security
Documents covering all of its equity ownership in each Domestic Subsidiary of
the Borrower formed or acquired after the Closing Date or sixty five percent
(65%) of the equity ownership in any Subsidiary of the Borrower formed or
acquired after the Closing Date which is not a Domestic Subsidiary of the
Borrower and take all other action requested by the Lender to perfect the Lien
of all such Security Documents and cause each Domestic Subsidiary of the
Borrower or any of the Guarantors formed or acquired after the Closing Date to
execute and deliver Joinder Agreements and Guaranties, as requested by the
Lender, and take all such other action reasonably requested by the Lender in
connection with such Guaranties and Joinder Agreements.
 
5.10       Additional Information.  Furnish to the Lender, promptly upon the
request of the Lender, such additional financial or other information concerning
its assets, liabilities, operations and transactions as the Lender may from time
to time reasonably request; and notify the Lender not less than ten Business
Days prior to the occurrence of any condition or event that may change the
proper location for the filing of any financing statement or other public notice
or recording for the purpose of perfecting a Lien in any Collateral, including
any change in its name or jurisdiction of  organization; and upon the request of
the Lender, execute such additional Security Documents as may be necessary or
appropriate in connection therewith.
 
5.11       Compliance with Laws.  Except to the extent the failure to comply or
cause compliance could not reasonably be expected to have a Material Adverse
Effect, comply in all material respects with all applicable Requirements of Law,
including (a) ERISA, (b) Environmental Laws and (c) all permits, licenses,
registrations, approvals, and authorizations (i) related to any natural or
environmental resource or media located on, above, within, related to or
affected by any of its Property, (ii) required for the performance of its
operations, or (iii) applicable to the use, generation, handling, storage,
treatment, transport or disposal of any Hazardous Substances; and use its best
efforts to cause all of its employees, crew members, agents, contractors,
subcontractors and future lessees (pursuant to appropriate lease provisions),
while such Persons are acting within the scope of their relationship with it, to
comply with all such Requirements of Law as may be necessary or appropriate to
enable it to so comply.
 
5.12       Payment of Assessments and Charges.  Pay all taxes, assessments,
governmental charges, rent and other Indebtedness which, if unpaid, might become
a Lien against any of its Property, except any of the foregoing that are being
contested in good faith and as to which an adequate reserve in accordance with
GAAP has been established or unless failure to pay would not have a Material
Adverse Effect.
 
5.13       Maintenance of Existence or Qualification and Good
Standing.  Maintain its separate corporate, limited partnership or limited
liability company existence and identity, as the case may be, and, if
applicable, good standing and qualification in its jurisdiction of organization
and in all jurisdictions wherein the Property now owned or hereafter acquired or
business now or hereafter conducted by it necessitates same, except where the
failure to so qualify would not reasonably be expected to have a Material
Adverse Effect.
 
 
- 38 -

--------------------------------------------------------------------------------

 

5.14           Payment of Note; Performance of Obligations.  Pay the Note
according to the reading, tenor and effect thereof, as modified hereby, and do
and perform every act and discharge all of the other Obligations in all material
respects.
 
5.15           Further Assurances.  Promptly cure any defects in the execution
and delivery of any of the Loan Documents to which it is a party and all
agreements contemplated thereby, and execute, acknowledge and deliver to the
Lender such other assurances and instruments as shall, in the reasonable opinion
of the Lender, be necessary to fulfill the terms of the Loan Documents to which
it is a party.
 
5.16           Initial Expenses of Lender.  Upon request by the Lender, promptly
reimburse the Lender for, or pay directly to such special counsel, all
reasonable fees and expenses of Jackson Walker  L.L.P., special counsel to the
Lender, in connection with the preparation of this Agreement and all
documentation contemplated hereby, the satisfaction of the conditions precedent
set forth herein, the filing and recordation of Security Documents and the
consummation of the transactions contemplated in this Agreement.
 
5.17           Subsequent Expenses of Lender.  Upon request by the Lender,
promptly reimburse the Lender (to the fullest extent permitted by law) for all
amounts reasonably expended, advanced or incurred by or on behalf of the Lender
to evaluate the Mortgaged Properties or to satisfy any of the Borrower’s or any
Guarantor’s obligations under any of the Loan Documents; to collect the
Obligations; to ratify, amend, restate or prepare additional Loan Documents, as
the case may be; for the filing and recordation of Security Documents; to
enforce the rights of the Lender under any of the Loan Documents; and to protect
the relevant Person’s Properties or business, including the Collateral, which
amounts shall be deemed compensatory in nature and liquidated as to amount upon
notice to the relevant Person by the Lender and which amounts shall include (a)
all court costs, (b) reasonable attorneys’ fees, (c) reasonable fees and
expenses of auditors, accountants and independent petroleum engineers incurred
to protect the interests of the Lender and any other Approved Hedge
Counterparties, (d) fees and expenses incurred in connection with the
participation by the Lender as members of the creditors’ committee in any
Insolvency Proceeding, (e) fees and expenses incurred in connection with lifting
the automatic stay prescribed in §362 Title 11 of the United States Code, and
(f) fees and expenses reasonably incurred in connection with any action pursuant
to §1129 Title 11 of the United States Code all incurred by the Lender in
connection with the collection of any sums due under the Loan Documents,
together with interest at the per annum interest rate equal to the Adjusted Base
Rate on each such amount from the date of notification that the same was
expended, advanced, or incurred by the Lender until the date it is repaid to the
Lender, with the obligations under this Section 5.17 surviving the
non-assumption of this Agreement in any Insolvency Proceeding and being binding
upon it and/or a trustee, receiver, custodian, or liquidator of it  appointed in
any such case.
 
5.18           Operation of Oil and Gas Properties.  Develop, maintain and
operate or, to the extent that the right or obligation to do so rests with
another Person, exercise its best efforts to cause such other Person to develop,
maintain and operate its Oil and Gas Properties in a prudent and workmanlike
manner and in accordance with customary industry standards.
 
 
- 39 -

--------------------------------------------------------------------------------

 

5.19           Maintenance and Inspection of Properties.  Maintain or, to the
extent that the right or obligation to do so rests with another Person, exercise
its best efforts to cause such other Person to maintain all of its material
tangible Properties necessary to operate its business as currently conducted in
good repair and condition, ordinary wear and tear excepted; make or, to the
extent that the right or obligation to do so rests with another Person, exercise
its best efforts to cause such other Person to make all necessary replacements
thereof and operate such Properties in a good and workmanlike manner; and permit
any authorized representative of the Lender, upon prior notice to visit and
inspect, at reasonable times, any of its tangible Property.
 
5.20           Maintenance of Insurance.  Maintain insurance with respect to its
Properties and businesses against such liabilities, casualties, risks and
contingencies as is customary in the relevant industry and sufficient to prevent
a Material Adverse Effect, all such insurance to be in amounts and from insurers
reasonably acceptable to the Lender,  name the Lender as an additional insured
(in the case of liability insurance) and co-loss payee (in the case of physical
damage insurance), and, upon any renewal of any such insurance and at other
times upon request by the Lender, furnish to the Lender evidence, satisfactory
to the Lender, of the maintenance of such insurance.  The Lender shall have the
right to collect, and each of the Borrower and the Guarantors hereby assigns to
the Lender, any and all monies that may become payable under any policies of
insurance relating to business interruption or by reason of damage, loss or
destruction of any of the Collateral.  In the event of any damage, loss or
destruction for which insurance proceeds relating to (a) business interruption
exceed $250,000 or (b) Collateral exceed ten percent (10%) of the book value of
such Collateral, the Lender may, at its option, apply all such sums or any part
thereof received by it toward the payment of the Obligations, whether matured or
unmatured, application to be made first to fees, then to interest and then to
principal, and shall deliver to the Borrower or the relevant Guarantor, as the
case may be, the balance, if any, after such application has been made.  In the
event of any other damage, loss or destruction for which insurance proceeds are
received, and provided that no Default or Event of Default has occurred and is
continuing, the Lender shall deliver any such proceeds received by it to the
Borrower or the relevant Guarantor, as the case may be, for use to repair or
replace the damaged, destroyed or lost property.  In the event the Lender
receives insurance proceeds not attributable to Collateral or business
interruption, the Lender shall deliver any such proceeds to the Borrower or the
relevant Guarantor, as the case may be.
 
 
- 40 -

--------------------------------------------------------------------------------

 

5.21           Environmental Indemnification.  Indemnify and hold the Lender and
its shareholders, officers, directors, employees, agents, attorneys-in-fact and
Affiliates and each trustee for the benefit of the Lender under any Security
Document (each of the foregoing an “Indemnitee”) harmless from and against any
and all claims, losses, damages, liabilities, fines, penalties, charges,
administrative and judicial proceedings and orders, judgments, remedial actions,
requirements and enforcement actions of any kind, and all costs and expenses
incurred in connection therewith (including reasonable attorneys’ fees and
expenses), arising directly or indirectly, in whole or in part, from (a) the
presence of any Hazardous Substances on, under, or from any of its Property,
whether prior to or during the term hereof, (b) any activity carried on or
undertaken on any of its Property, whether prior to or during the term hereof,
and whether by it or any of its predecessors in title, employees, agents,
contractors or subcontractors or any other Person at any time occupying or
present on such Property, in connection with the handling, treatment, removal,
storage, decontamination, cleanup, transportation, or disposal of any hazardous
substances at any time located or present on or under such Property, (c) any
residual contamination on or under any of its Property, (d) any contamination of
any Property or natural resources arising in connection with the generation,
use, handling, storage, transportation or disposal of any Hazardous Substances
by it or any of its employees, agents, contractors, or subcontractors while such
Persons are acting within the scope of their relationship with it, irrespective
of whether any of such activities were or will be undertaken in accordance with
applicable Requirements of Law, or (e) the performance and enforcement of any
Loan Document or any other act or omission in connection with or related to any
Loan Document or the transactions contemplated thereby, including any such
claim, loss, damage, liability, fine, penalty, charge, administrative or
judicial proceeding, order, judgment, remedial action, requirement, enforcement
action, cost or expense, arising from the negligence (but not the gross
negligence or willful misconduct), whether sole or concurrent, of any
Indemnitee; with the foregoing indemnity surviving satisfaction of all
Obligations and the termination of this Agreement, unless all such Obligations
have been satisfied wholly in cash and not by way of realization against any
Collateral or the conveyance of any Property in lieu thereof, provided, however,
that such Indemnity shall not extend to any act or omission by the Lender with
respect to any Property subsequent to the Lender becoming the owner of such
Property and with respect to which Property such claim, loss, damage, liability,
fine, penalty, charge, proceeding, order, judgment, action or requirement arises
subsequent to the acquisition of title thereto by the Lender.  All amounts due
under this Section 5.21 shall be payable on written demand therefor.
 
5.22           General Indemnification.  Indemnify and hold each Indemnitee
harmless from and against any and all losses, claims, damages, liabilities and
related expenses, including reasonable attorneys’ fees and expenses (including
the allocated cost of internal counsel), incurred by or asserted against any
Indemnitee arising out of, in any way connected with, or as a result of (a) the
execution and delivery of this Agreement and the other Loan Documents, the
performance by the parties hereto and thereto of their respective Obligations
hereunder and thereunder and consummation of the transactions contemplated
hereby and thereby, (b) the use of proceeds of the Loans or Letters of Credit,
or (c) any claim, litigation, investigation or proceeding relating to any of the
foregoing, whether or not any Indemnitee is a party thereto, including any such
loss, claim, damage, liability or expense arising from the negligence (but not
the gross negligence or willful misconduct), whether sole or concurrent, of any
Indemnitee; with the foregoing Indemnity surviving satisfaction of all
Obligations and the termination of this Agreement.  All amounts due under this
Section 5.22 shall be payable on written demand therefor.
 
 
- 41 -

--------------------------------------------------------------------------------

 

5.23           Evidence of Compliance with Anti-Terrorism Laws.  Deliver to the
Lender any certification or other evidence requested from time to time by the
Lender confirming its compliance with the provisions of Section 6.17.
 
5.24           Deposit Accounts.  Open and maintain with the Lender its primary
operating accounts.
 
ARTICLE VI
 
NEGATIVE COVENANTS
 
So long as any Obligation remains outstanding or unpaid or any Commitment
exists, neither the Borrower nor any of the Guarantors will:

6.1            Indebtedness.  Create, incur, assume or suffer to exist any
Indebtedness, whether by way of loan or otherwise; provided, however, the
foregoing restriction shall not apply to (a) the Obligations, (b) unsecured
accounts payable, taxes and other assessments, in each case incurred in the
ordinary course of business and which are not unpaid in excess of 90 days beyond
invoice date or are being contested in good faith and as to which such reserve
as is required by GAAP has been made, (c) Indebtedness under Commodity Hedge
Agreements, including reimbursement obligations under letters of credit securing
or supporting such Indebtedness, with any Approved Hedge Counterparty, any
Secured Third Party Hedge Counterparty or, so long as each such Person is
acceptable to the Lender, other counterparties, provided that (i) such
agreements shall not be for a term in excess of three years and shall not,
except as to floors, be entered into with respect to more than seventy five
percent (75%) of the projected production of proved developed producing volumes
of each commodity category, as determined by the Lender in connection with each
determination of the Borrowing Base provided pursuant to the provisions of
Section 5.4 during the term of the relevant agreement, and (ii) the floor prices
in such agreements are not less than the prices used by the Lender in its most
recent Borrowing Base determination as of the time the relevant agreement is
entered into, (d) Indebtedness under Interest Rate Hedge Agreements with any
Approved Hedge Counterparty, any Secured Third Party Hedge Counterparty or, so
long as each such Person is acceptable to the Lender, other counterparties,
provided that such agreements shall not be entered into with respect to notional
principal amounts in excess of seventy five percent (75%) of the Loan Balance,
(e) Indebtedness incurred with respect to all or a portion of the purchase price
of Property acquired in the ordinary course of business not exceeding $250,000
in the aggregate for the Borrower on a consolidated basis with its Subsidiaries,
(f) Indebtedness from time to time owing by any Guarantor to the Borrower or any
other Guarantor with respect to loans or advances not prohibited by the
provisions of Section 6.7, (g) the Subordinated Debt provided that such
Indebtedness is paid as and when due and is not renewed or extended in any
respect and the material terms thereof are not amended in any material respect,
(h) Indebtedness secured by Permitted Liens and (i) other unsecured Indebtedness
not exceeding, in the aggregate at any time, $100,000 for the Borrower on a
consolidated basis with its consolidated Subsidiaries.
 
- 42 -

--------------------------------------------------------------------------------

 
6.2            Contingent Obligations.  Create, incur, assume or suffer to exist
any Contingent Obligation; provided, however, the foregoing restriction shall
not apply to (a) performance guarantees, performance surety or other bonds or
endorsements of items deposited for collection, in each case provided in the
ordinary course of business, (b) trade credit incurred or operating leases
entered into in the ordinary course of business, (c) the Guaranties or (d)
Indebtedness permitted by Section 6.1.
 
6.3            Liens.  Create, incur, assume or suffer to exist any Lien on any
of its Oil and Gas Properties or any other Property, whether now owned or
hereafter acquired; provided, however, the foregoing restriction shall not apply
to Permitted Liens.
 
6.4            Sales of Assets.  Sell, transfer or otherwise dispose of, in one
or any series of transactions, any of its Property, whether now owned or
hereafter acquired, or enter into any agreement to do so; provided, however, the
foregoing restriction shall not apply to (a) the sale of hydrocarbons or
inventory in the ordinary course of business, provided, however, that no
contract for the sale of hydrocarbons shall obligate the relevant Person to
deliver hydrocarbons produced from any of its Oil and Gas Properties at some
future date without receiving full payment therefor within 90 days of delivery,
or (b) the sale or other disposition of Property destroyed, lost, worn out,
damaged or having only salvage value or no longer used or useful in the business
in which it is used, (c) the sale, transfer or other disposition of Property
from the Borrower to its Domestic Subsidiaries or from the Subsidiaries of the
Borrower to the Borrower, or (d) if no Default exists or would result therefrom,
sales of assets having an aggregate book value of less than $250,000 in the
aggregate in any fiscal year of the Borrower.
 
6.5            Leasebacks.  Enter into any agreement to sell or transfer any
Property and thereafter rent or lease as lessee such Property or other Property
intended for the same use or purpose as the Property sold or transferred.
 
6.6            Sale or Discount of Receivables.  Except to minimize losses on
bona fide debts previously contracted, discount or sell with recourse, or sell
for less than the greater of the face or market value thereof, any of its notes
receivable or accounts receivable.
 
6.7            Loans or Advances.  Make or agree to make or allow to remain
outstanding any loans or advances to any Person; provided, however, the
foregoing restriction shall not apply to (a) advances or extensions of credit in
the form of accounts receivable incurred in the ordinary course of business and
upon terms common in the industry for such accounts receivable, (b) advances to
employees for the payment of expenses in the ordinary course of business not
exceeding $50,000 in the aggregate for the Borrower on a consolidated basis with
its consolidated Subsidiaries, (c) loans or advances by the Borrower or any
Domestic Subsidiary of the Borrower to a Guarantor or the Borrower or (d) other
loans or advances so long as not exceeding, in the aggregate outstanding
principal balance at any time, $50,000.
 
6.8            Investments.  Make or acquire Investments in, or purchase or
otherwise acquire all or substantially all of the assets of, any Person;
provided, however, the foregoing restriction shall not apply to the purchase or
acquisition of (a) Oil and Gas Properties, (b) Investments in the form of (i)
debt securities issued or directly and fully guaranteed or insured by the United
States Government or any agency or instrumentality thereof, with maturities of
no more than one year, (ii) commercial paper of a domestic issuer rated at the
date of acquisition at least P-2 by Moody’s Investors Service, Inc. or A-2 by
Standard & Poor’s Corporation and with maturities of no more than one year from
the date of acquisition, or (iii) repurchase agreements covering debt securities
or commercial paper of the type permitted in this Section 6.8, certificates of
deposit, demand deposits, eurodollar time deposits, overnight bank deposits and
bankers’ acceptances, with maturities of no more than 180 days from the date of
acquisition, issued by or acquired from or through the Lender or any bank or
trust company organized under the laws of the United States of America or any
state thereof and having capital surplus and undivided profits aggregating at
least $100,000,000, (c) other short-term Investments similar in nature and
degree of risk to those described in clause (b) of this Section 6.8, (d)
Investments in money-market funds sponsored or administered by Persons
acceptable to the Lender and which funds invest in short-term Investments
similar in nature and degree of risk to those described in clause (b) of this
Section 6.8, (e) evidences of loans or advances not prohibited by the provisions
of Section 6.7 or (f) Investments by the Borrower or any Domestic Subsidiary of
the Borrower in a Guarantor.
 
- 43 -

--------------------------------------------------------------------------------

 
6.9            Dividends, Distributions and Certain Payments.  Declare, pay or
make, whether in cash or Property of the Borrower, any dividend or distribution
on, or purchase, redeem or otherwise acquire for value, any of its equity
interests at any time when there exists a Default or an Event of Default or if a
Default or an Event of Default would exist after giving effect to such dividend,
distribution, purchase, redemption or other acquisition or make any payment on
the Subordinated Debt other than scheduled payments of principal and interest
pursuant to the provisions of the Trust Indenture or any payment on the
Subordinated Debt when there exists a Default or an Event of Default or if a
Default or an Event of Default would exist after giving effect to such payment.
 
6.10           Issuance of Equity; Changes in Corporate Structure.  Issue or
agree to issue any additional equity interests; enter into any transaction of
consolidation, merger or amalgamation; or liquidate, wind up or dissolve (or
suffer any liquidation or dissolution); provided, however, the foregoing shall
not restrict (a) the issuance of shares of the common stock of the Borrower, (b)
transactions of merger, consolidation or amalgamation among any of the Domestic
Subsidiaries of the Borrower or, if the Borrower is the surviving entity,
between the Borrower and any Domestic Subsidiary of the Borrower or (c) any
liquidation, winding up or dissolution of a Domestic Subsidiary of the Borrower.
 
6.11           Transactions with Affiliates.  Directly or indirectly, enter into
any transaction (including the sale, lease or exchange of Property or the
rendering of service) with any of its Affiliates (other than transactions
entered into in the normal course of business between the Borrower or a Domestic
Subsidiary of the Borrower with another Domestic Subsidiary of the Borrower not
otherwise prohibited hereunder), other than upon fair and reasonable terms no
less favorable than could be obtained in an arm’s length transaction with a
Person which was not an Affiliate.
 
6.12           Lines of Business.  Change its principal line of business from
that in which it is engaged as of the date hereof.
 
6.13           Plan Obligation.  Assume or otherwise become subject to an
obligation to contribute to or maintain any Plan or acquire any Person which has
at any time had an obligation to contribute to or maintain any Plan.
 
- 44 -

--------------------------------------------------------------------------------

 
6.14           Current Ratio.  Permit, as of the close of any quarterly period
of any fiscal year of the Borrower, commencing with the quarterly period ending
March 31, 2011, the ratio of Current Assets to Current Liabilities to be less
than 1.00 to 1.00.
 
6.15           Total Funded Indebtedness to EBITDA Ratio.  Permit the ratio,
determined as of the close of any quarterly period of any quarterly period of
any fiscal year of the Borrower, commencing with the quarterly period ending
March 31, 2011, of (a) Indebtedness of the Borrower in respect of funded
borrowed money, including the Loan Balance (exclusive, for the avoidance of
doubt, of trade accounts payable and accrued liabilities, net unrealized losses
or charges in respect of Commodity Hedge Agreements or Interest Rate Hedge
Agreements and the undrawn, unexpired amount of all outstanding Letters of
Credit, if such would otherwise be included), which is not subordinated to
payment in full of all Obligations on terms approved by the Lender (which shall
include the Subordinated Debt) to (b) EBITDA determined as follows (provided
that for any calendar quarter in which any acquisitions or divestitures occur,
EBITDA shall be determined on a pro forma basis as if the relevant acquisitions
or divestitures were consummated on the first day of the relevant calendar
quarter):
 
Quarterly Period
 
EBITDAX
     
Ending March 31, 2011
 
EBITDA for the period January 4, 2011 2011 through March 31, 2011 multiplied by
four
     
Ending June 30, 2011
 
EBITDA for the period January 4, 2011 through June 30, 2011 multiplied by two
     
Ending September 30, 2011
 
EBITDA for the period January 4, 2011 through September 30, 2011 multiplied by
one and one third
     
Ending December 31, 2012
and thereafter
 
EBITDA for such calendar quarter and the three immediately preceding calendar
quarters

 
to be greater than 4.00 to 1.00.
 
6.16           Interest Coverage Ratio.  Permit, as of the close of any
quarterly period of any fiscal year of the Borrower, commencing with the
quarterly period ending March 31, 2011, the ratio of (a) EBITDA for the
quarterly period then ended to (b) Interest Expense for the quarterly period
then ended to be less than 3.00 to 1.00.
 
6.17           Anti-Terrorism Laws.  Conduct any business or engage in any
transaction or dealing with any Blocked Person, including the making or
receiving of any contribution of funds, goods or services to or for the benefit
of any Blocked Person; deal in, or otherwise engage in any transaction relating
to, any Property or interests in Property blocked pursuant to Executive Order
No. 13224; or engage in or conspire to engage in any transaction that evades or
avoids, or has the purpose of evading or avoiding, or attempts to violate, (i)
any of the prohibitions set forth in Executive Order No. 13224 or the USA
Patriot Act, or (ii) any prohibitions set forth in the rules or regulations
issued by OFAC or any sanctions against targeted foreign countries, terrorism
sponsoring organizations, and international narcotics traffickers based on
United States foreign policy.
 
- 45 -

--------------------------------------------------------------------------------

 
ARTICLE VII
 
EVENTS OF DEFAULT
 
7.1         Enumeration of Events of Default.  Any of the following events shall
constitute an Event of Default:
 
(a)          default shall be made in the payment when due of (i) any
installment of principal or interest under this Agreement or the Note and such
default shall remain unremedied in excess of three days, (ii) in the payment
when due of any fee or other sum payable under any Loan Document and such
default shall remain unremedied in excess of three days or (iii) any
Indebtedness of the Borrower under any Commodity Hedge Agreement or Interest
Rate Hedge Agreement permitted or required under applicable provisions of this
Agreement and such default shall remain unremedied for in excess of the period
of grace, if any, with respect thereto;

(b)          default shall be made by the Borrower or any of the Guarantors in
the due observance or performance of any of its obligations, covenants or
agreements under (i) the Note, (ii) Section 4.6, Section 5.14 or Article VI or
(iii) any material provision of any Loan Documents, other than this Agreement,
and such default shall continue beyond any applicable grace or cure period or
default shall be made by the Borrower or any of the Guarantors in the due
observance or performance of any of its obligations, covenants or agreements
under any other provision of any Loan Document and such default shall continue
for 30 days after the earlier of notice thereof  by the Lender or knowledge
thereof by the Borrower or the relevant Guarantor, as the case may be;
 
(c)          any representation or warranty made by or on behalf of the Borrower
or any of the Guarantors in any of the Loan Documents proves to have been untrue
in any material respect or any representation, statement (including Financial
Statements), certificate or data furnished or made to the Lender in connection
herewith proves to have been untrue in any material respect as of the date the
facts therein set forth were stated or certified;
 
(d)          default shall be made by the Borrower or any of the Guarantors (as
principal or guarantor or other surety) in the payment or performance of any
bond, debenture, note or other Indebtedness in excess of $250,000 in the
aggregate or under any credit agreement, loan agreement, indenture, promissory
note or similar agreement or instrument executed in connection with any of the
foregoing, and such default shall remain unremedied for in excess of the period
of grace, if any, with respect thereto or there shall occur any event or
condition in respect of any such Indebtedness which would allow the holders
thereof to require such Indebtedness to be repaid, repurchased or redeemed;
 
- 46 -

--------------------------------------------------------------------------------

 
(e)           the Borrower or any of the Guarantors shall be unable to satisfy
any condition or cure any circumstance specified in Article III, the
satisfaction or curing of which is precedent to the right of the Borrower to
obtain a Loan or the issuance, renewal or extension of a Letter of Credit, and
such inability shall continue for a period in excess of 60 days;
 
(f)           the levy against any significant portion of the Property of the
Borrower or any of the Guarantors of any execution, garnishment, attachment,
sequestration or other writ or similar proceeding in an amount in excess of
$250,000 which is not permanently dismissed or discharged within 60 days after
the levy;
 
(g)          the Borrower or any of the Guarantors shall (i) apply for or
consent to the appointment of a receiver, trustee, or liquidator of it or all or
a substantial part of its assets, (ii) file a voluntary petition commencing an
Insolvency Proceeding, (iii) make a general assignment for the benefit of
creditors of all or substantially all of its assets, (iv) be unable, or admit in
writing its inability, to pay its debts generally as they become due, or (v)
file an answer admitting the material allegations of a petition filed against it
in any Insolvency Proceeding;
 
(h)          an order, judgment or decree shall be entered against the Borrower
or any of the Guarantors by any court of competent jurisdiction or by any other
duly authorized authority, on the petition of a creditor or otherwise, granting
relief in any Insolvency Proceeding or approving a petition seeking
reorganization or an arrangement of its debts or appointing a receiver, trustee,
conservator, custodian, or liquidator of it or all or any substantial part of
its assets, and such order, judgment, or decree shall not be dismissed or stayed
within 60 days;
 
(i)           a final and non-appealable order, judgment, or decree shall be
entered against the Borrower or any of the Guarantors for money damages and/or
Indebtedness due in an amount in excess of $250,000, and such order, judgment,
or decree shall not be dismissed or stayed within 60 days or is not fully
covered by insurance (excluding any deductible);
 
(j)           any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower or any of the
Guarantors under the Racketeering Influence and Corrupt Organizations Statute
(18 U.S.C. §1961 et seq.), the result of which could be the forfeiture or
transfer of any material Property of the Borrower or any of the Guarantors
subject to a Lien in favor of the Lender without (i) satisfaction or provision
for satisfaction of such Lien, or (ii) such forfeiture or transfer of such
Property being expressly made subject to such Lien;
 
(k)           the Borrower or any of the Guarantors shall have (i) concealed,
removed or diverted, or permitted to be concealed, removed or diverted, any part
of its Property, with intent to hinder, delay or defraud its creditors or any of
them, (ii) made or suffered a transfer of any of its Property which is
fraudulent under any bankruptcy, fraudulent conveyance, or similar law with
intent to hinder, delay or defraud its creditors, (iii) made any transfer of its
Property to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid with intent to hinder, delay or defraud
its creditors, or (iv) shall have suffered or permitted, while insolvent, any
creditor to obtain a Lien upon any of its Property through legal proceedings or
distraint which is not vacated within 60 days from the date thereof;
 
- 47 -

--------------------------------------------------------------------------------

 
(l)           any Security Document shall for any reason not, or cease to,
create valid and perfected first priority Liens (subject only to Permitted
Liens) against the Collateral purportedly covered thereby, except to the extent
permitted by this Agreement or resulting from the negligence of the Lender;
 
(m)         the Borrower or one of the Guarantors shall cease to be the sole
shareholder or member or the sole general partner of any Guarantor;
 
(n)          any Loan Document, at any time after its execution and delivery and
for any reason other than as expressly permitted hereunder or thereunder or
satisfaction in full of all Obligations and termination of the Commitments and
this Agreement, ceases to be in full force and effect;
 
(o)          the Borrower or any Guarantor purports to revoke, terminate or
rescind any Loan Document or any provision of any Loan Document; or
 
(p)          the occurrence of a Material Adverse Effect which is not remedied
within 30 days following written notice thereof from the Lender or knowledge
thereof by the Borrower.
 
7.2         Remedies.
 
(a)           Upon the occurrence of an Event of Default specified in Section
7.1(f) or Section 7.1(g), immediately and without notice, (i) all Obligations
under the Loan Documents shall automatically become immediately due and payable,
without presentment, demand, protest, notice of protest, default, or dishonor,
notice of intent to accelerate maturity, notice of acceleration of maturity, or
other notice of any kind, except as may be provided to the contrary elsewhere
herein, all of which are hereby expressly waived by the Borrower and the
Guarantors and (ii) the Commitment shall immediately cease and terminate unless
and until reinstated by the Lender in writing.
 
(b)          Upon the occurrence of any Event of Default other than those
specified in Section 7.1(f) or Section 7.1(g), (i) the Lender may, by notice in
writing to the Borrower, declare all Obligations under the Loan Documents
immediately due and payable, without presentment, demand, protest, notice of
protest, default, or dishonor, notice of intent to accelerate maturity, notice
of acceleration of maturity, or other notice of any kind, except as may be
provided to the contrary elsewhere herein, all of which are hereby expressly
waived by the Borrower and the Guarantors and (ii) the Lender may declare the
Commitment terminated, whereupon the Commitment shall immediately cease and
terminate unless and until reinstated by the Lender in writing.
 
(c)          Upon the occurrence of any Event of Default,  the Lender may, in
addition to the foregoing in this Section 7.2, exercise any or all of the rights
and remedies provided by law or pursuant to the Loan Documents.
 
- 48 -

--------------------------------------------------------------------------------

 
(d)           Should the Obligations under the Loan Documents become immediately
due and payable in accordance with any of the preceding subsections of this
Section 7.2, the obligation of the Borrower with respect to the L/C Exposure
shall be to provide cash as Collateral therefor, to be held and administered by
the Lender as provided in Section 2.10 with respect to mandatory prepayments
and, failing receipt by the Lender of immediate payment in full of the Loan
Balance, any additional Obligations then due and payable, and all accrued and
unpaid interest and fees and such cash to serve as Collateral for the L/C
Exposure, the Lender shall be entitled to proceed against the Collateral, and
proceeds from any realization against any such Collateral, other than cash, in
excess of the sum of the costs of such realization, the Loan Balance, any
additional Obligations then due and payable, and accrued and unpaid interest and
fees shall constitute cash Collateral for the remaining L/C Exposure, if any, to
be held and administered by the Lender as provided in Section 2.10.
 
(e)           Proceeds from realization against the Collateral and any other
funds received by the Lender from the Borrower or any of the Guarantors when an
Event of Default has occurred shall be applied (i) first, to fees and expenses
due pursuant to the terms of this Agreement, any other Loan Document or any
Commodity Hedge Agreement or Interest Rate Hedge Agreement with an Approved
Hedge Counterparty, (ii) second, to accrued interest on the Obligations under
the Loan Documents or any Commodity Hedge Agreement or Interest Rate Hedge
Agreement with an Approved Hedge Counterparty, (iii) third, to the Loan Balance,
in any manner elected by the Lender, and any other Obligations then due and
payable, pro rata in accordance with the ratio of the Loan Balance or such other
Obligations, as the case may be, to the sum of the Loan Balance and such other
Obligations and (iv) as provided in subsection (d) immediately above, if
applicable.
 
ARTICLE VIII
 
MISCELLANEOUS
 
8.1         Assignments; Participations.
 
(a)           Neither the Borrower nor any of the Guarantors may assign any of
its rights or delegate any of its obligations under any Loan Document without
the prior consent of the Lender.
 
(b)           With the consent of the Lender and, except when a Default or an
Event of Default shall have occurred, the Borrower (which shall not be
unreasonably withheld or delayed in either case), the Lender may assign to one
or more assignees all or a portion of its rights and obligations under this
Agreement; provided, however, (i) such consent  shall not be required with
respect to an assignment from the Lender to one or more Affiliates of the Lender
and (ii) such consent shall not be required with respect to an assignment from
the Lender to one or more Approved Funds or Affiliates of Approved Funds.  Upon
the effectiveness of any assignment pursuant to this Section 8.1(b), the
assignee will become a “Lender,” if not already a “Lender,” for all purposes of
the Loan Documents, and the assignor shall be relieved of its obligations
hereunder to the extent of such assignment.  If the assignor no longer holds any
rights or obligations under this Agreement, such assignor shall cease to be a
“Lender” hereunder, except that its rights under Section 5.17, Section 5.21 and
Section 5.22, shall not be affected.
 
- 49 -

--------------------------------------------------------------------------------

 
(c)           Lender may transfer, grant, or assign participations in all or any
portion of its interests hereunder to any Person pursuant to this Section
8.1(c), provided, however, that the Lender shall remain the “Lender” for all
purposes of this Agreement and the transferee of such participation shall not
constitute a “Lender” hereunder.  In the case of any such participation, the
participant shall not have any rights under any Loan Document, the rights of the
participant in respect of such participation to be against the granting Lender
as set forth in the agreement with such Lender creating such participation, and
all amounts payable by the Borrower hereunder shall be determined as if such
Lender had not sold such participation.
 
(d)          The Lender may furnish any information concerning the Borrower or
any of the Guarantors in the possession of the Lender from time to time to its
permitted assignees and participants and prospective assignees and
participants.  The Lender shall require any Person receiving any such
information to agree, in writing, to keep all such information confidential.
 
(e)           Notwithstanding anything in this Section 8.1 to the contrary, the
Lender may assign and pledge the Note or any interest therein to any Federal
Reserve Bank or the United States Treasury as collateral security pursuant to
Regulation A of the Board of Governors of the Federal Reserve System and any
operating circular issued by such Federal Reserve System and/or such Federal
Reserve Bank.  No such assignment or pledge shall release the Lender from its
obligations hereunder.
 
(f)           Notwithstanding any other provisions of this Section 8.1, no
transfer or assignment of the interests or obligations of the Lender or grant of
participations therein shall be permitted if such transfer, assignment, or grant
would require the Borrower to file a registration statement with the Securities
and Exchange Commission or any successor Governmental Authority or qualify the
Loans under the “Blue Sky” laws of any state.
 
8.2        Survival of Representations, Warranties, and Covenants.  All
representations and warranties of the Borrower and the Guarantors and all
covenants and agreements of the Borrower and the Guarantors herein made shall
survive the execution and delivery of the Note and the Security Documents and
shall remain in force and effect so long as any Obligation is outstanding or any
Commitment exists.
 
8.3        Notices and Other Communications.  Except as to oral notices
expressly authorized herein, which oral notices shall be confirmed in writing,
all notices, requests, and communications hereunder shall be in writing
(including by facsimile, electronic mail or other electronic form).  Unless
otherwise expressly provided herein, any such notice, request, demand, or other
communication shall be deemed to have been duly given or made when delivered by
hand or by a nationally-recognized overnight courier service, or, in the case of
delivery by mail, five days after being deposited in the mail, certified mail,
return receipt requested, postage prepaid, or, in the case of facsimile notice,
when receipt thereof is acknowledged orally or by written confirmation report,
addressed as follows:
 
(a)           if to the Lender, to:
 
Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas  77056
Attention:  Energy Banking
Facsimile:  (832) 308-7042
 
- 50 -

--------------------------------------------------------------------------------

 
(b)           if to the Borrower or any of the Guarantors, to:
 
22610 U.S. Hwy. 281 North
Suite 218
San Antonio, Texas  78258
Attention:  Chief Financial Officer
Facsimile:  (210) 930-3967
 
Any party may, by proper written notice hereunder to the others, change the
individuals or addresses to which such notices to it shall thereafter be sent.
 
8.4         Parties in Interest.  Subject to the restrictions on changes in
structure set forth in Section 6.10 and other applicable restrictions contained
herein, all covenants and agreements herein contained by or on behalf of the
Borrower, any of the other Guarantors, or the Lender shall be binding upon and
inure to the benefit of the Borrower, any of the other Guarantors, or the
Lender, as the case may be, and their respective legal representatives,
successors, and permitted assigns.
 
8.5         Renewals; Extensions.  All provisions of this Agreement relating to
the Note shall apply with equal force and effect to each promissory note
hereafter executed which in whole or in part represents a renewal or extension
of any part of the Indebtedness of the Borrower under this Agreement, the Note
or any other Loan Document.
 
8.6         Rights of Third Parties.  All provisions herein are imposed solely
and exclusively for the benefit of the Lender, any other Approved Hedge
Counterparties, the Borrower and the Guarantors.  No other Person shall have any
right, benefit, priority, or interest hereunder or as a result hereof or have
standing to require satisfaction of provisions hereof in accordance with their
terms.
 
8.7         No Waiver; Rights Cumulative.  No course of dealing on the part of
the Lender or its officers or employees, nor any failure or delay by the Lender
with respect to exercising any of its rights under any Loan Document shall
operate as a waiver thereof.  The rights of the Lender under the Loan Documents
shall be cumulative and the exercise or partial exercise of any such right shall
not preclude the exercise of any other right.  Neither the making of any Loan
nor the issuance of any Letter of Credit shall constitute a waiver of any of the
covenants, warranties or conditions of the Borrower contained herein.  In the
event the Borrower is unable to satisfy any such covenant, warranty or
condition, neither the making of any Loan nor the issuance of any Letter of
Credit shall have the effect of precluding the Lender from thereafter declaring
such inability to be an Event of Default as hereinabove provided.
 
8.8         Survival Upon Unenforceability.  In the event any one or more of the
provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.
 
- 51 -

--------------------------------------------------------------------------------

 
8.9           Amendments; Waivers.  Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
amendment, waiver, discharge or termination is sought.  Subject to the preceding
sentence, any provision of this Agreement or any other Loan Document may be
amended, modified or waived by the Borrower, the Guarantors and the Lender.
 
8.10         Controlling Agreement.  In the event of a conflict between the
provisions of this Agreement and those of any other Loan Document, the
provisions of this Agreement shall control.
 
8.11         Disposition of Collateral.  Notwithstanding any term or provision,
express or implied, in any of the Security Documents, but subject to applicable
provisions of this Agreement, the realization, liquidation, foreclosure or any
other disposition on or of any or all of the Collateral shall be in the order
and manner and determined in the sole discretion of the Lender; provided,
however, that in no event shall the Lender violate applicable law or exercise
rights and remedies other than those provided in such Security Documents or
otherwise existing at law or in equity.
 
8.12         Governing Law.  This Agreement and the Note shall be deemed to be
contracts made under and shall be construed in accordance with and governed by
the laws of the State of Texas, without giving effect to principles thereof
relating to conflicts of law.
 
8.13        Waiver of Rights to Jury Trial.  The Borrower, the Guarantors and
the Lender hereby knowingly, voluntarily, intentionally, irrevocably and
unconditionally waive all rights to trial by jury in any action, suit,
proceeding, counterclaim or other litigation that relates to or arises out of
this Agreement or any other Loan Document or the acts or omissions of the Lender
in the enforcement of any of the terms or provisions of this Agreement or any
other Loan Document or otherwise with respect thereto.  The provisions of this
Section 8.13 are a material inducement for the Lender to enter into this
Agreement.
 
8.14         Jurisdiction and Venue.  Subject to the provisions of Section 8.13,
all actions or proceedings with respect to, arising directly or indirectly in
connection with, out of, related to or from this Agreement or any other Loan
Document may be litigated, at the sole discretion and election of the Lender, in
courts having situs in Houston, Harris County, Texas.  In such regard, the
Borrower and each of the Guarantors hereby submits to the jurisdiction of any
local, state or federal court located in Houston, Harris County, Texas, and
hereby waives any rights it may have to transfer or change the jurisdiction or
venue of any litigation brought against it by the Lender in accordance with this
Section 8.14.
 
- 52 -

--------------------------------------------------------------------------------

 
8.15         Integration.  This Agreement and the other Loan Documents
constitute the entire Agreement between the parties hereto and thereto with
respect to the subject hereof and thereof and shall supersede any prior
agreement between the parties hereto and thereto, whether written or oral,
relating to the subject hereof and thereof, including any term sheet provided to
the Borrower by the Lender.  Furthermore, in this regard, this Agreement and the
other written Loan Documents represent, collectively, the final agreement
between the parties thereto and may not be contradicted by evidence of prior,
contemporaneous, or subsequent oral agreements of such parties.  There are no
unwritten oral agreements between such parties.
 
8.16        Waiver of Punitive and Consequential Damages.  Each of the Borrower,
the Guarantors and the Lender hereby knowingly, voluntarily, intentionally and
irrevocably (a) waives, to the maximum extent it may lawfully and effectively do
so, any right it may have to claim or recover, in any dispute based hereon, or
directly or indirectly at any time arising out of, under or in connection with
the Loan Documents or any transaction contemplated thereby or associated
therewith, before or after maturity, any special, exemplary, punitive or
consequential damages, or damages other than, or in addition to, actual damages
and (b) acknowledges that it has been induced to enter into this Agreement, the
other Loan Documents and the transactions contemplated hereby and thereby by,
among other things, the mutual waivers and certifications contained in this
Section 8.16.
 
8.17         Counterparts.  For the convenience of the parties, this Agreement
may be executed in multiple counterparts and by different parties hereto in
separate counterparts, each of which for all purposes shall be deemed to be an
original, and all such counterparts shall together constitute but one and the
same Agreement and shall be enforceable as of the date hereof upon the execution
of one or more counterparts hereof by each of the parties hereto.  In this
regard, each of the parties hereto acknowledges that a counterpart of this
Agreement containing a set of counterpart execution pages reflecting the
execution of each party hereto shall be sufficient to reflect the execution of
this Agreement by each party hereto and shall constitute one instrument.
 
8.18         USA Patriot Act Notice.  The Lender hereby notifies the Borrower
that, pursuant to the requirements of the USA Patriot Act, it is required to
obtain, verify and record information that identifies the Borrower, which
information includes the name and address of the Borrower and other information
that will allow the Lender to identify the Borrower in accordance with the USA
Patriot Act.
 
8.19         Tax Shelter Regulations.  The Borrower does not intend to treat the
Loans and related transactions hereunder and under the other Loan Documents as a
“reportable transaction” (within the meanings under current Treasury Regulation
Section 1.6011-4 and Proposed Treasury Regulation Section 1.6011-4, promulgated
on November 1, 2006).  In the event the Borrower determines to take any action
inconsistent with the foregoing statement, it will promptly notify the Lender
thereof.  If the Borrower so notifies the Lender, the Borrower acknowledges that
the Lender may treat the Loans and related transactions hereunder and under the
other Loan Documents as part of a transaction that is subject to current
Treasury Regulation Section 301.6112-1 or Proposed Treasury Regulation Section
301.6112-1, promulgated on November 1, 2006, and, in such case, the Lender will
maintain the lists and other records required, if any, by such Treasury
Regulations.
 
- 53 -

--------------------------------------------------------------------------------

 
8.20        Contribution and Indemnification.  In the event that any  Guarantor
pays (whether through direct payments or as a result of providing Collateral for
the Obligations) any amounts on the Obligations in excess of such Guarantor’s
Obtained Benefit (the “Excess Payments”), such Guarantor shall be entitled to
make demand on the Borrower for such Excess Payments, and, to the extent not
recovered from the Borrower, to receive from each other Guarantor that received
an Obtained Benefit, such Guarantor’s Contribution Percentage of the Excess
Payment.  If any party obligated to make such a payment is unable to pay the
Contribution Percentage of the Excess Payment, each Guarantor agrees to make a
contribution to the party entitled to such payment to the extent necessary so
that each Guarantor shares equally the liability for such Excess Payment in
relation to the relative Obtained Benefit received by such Guarantor.  In such
regard, to the maximum extent permitted by law, each Guarantor shall indemnify,
defend and hold harmless the other Guarantors from and against any and all
liability, claims, costs and expenses (including reasonable attorneys’ fees and
expenses) arising with respect to the Obligations and exceeding such other
Guarantor’s obtained benefit or contribution percentage thereof as provided
herein.  Any amount due under this Section 8.20 shall be due and payable within
ten days of demand therefor by the party entitled to payment and shall be made
to the party entitled thereto at the Borrower’s address for notices under this
Agreement, in immediately available funds, not later than 2:00 p.m., Central
Standard or Daylight Time, on the date on which such payment shall come
due.  The remedies available to any Guarantor pursuant to the provisions of this
Section 8.20 are not exclusive.  All rights and claims of contribution,
indemnification and reimbursement under this Section 8.20 shall be subordinate
in right of payment to the prior payment in full of the Obligations.  The
provisions of this Section 8.20 shall, to the extent expressly inconsistent with
any provision in any Loan Document, supersede such inconsistent provision.
 
(Signatures appear on following pages)

 
- 54 -

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
 
BORROWER:
 
CROSS BORDER RESOURCES, INC.
 
By:
/s/ P. Mark Stark
   
P. Mark Stark
   
Chief Financial Officer
 

(Signatures continue on following page)

 
- 55 -

--------------------------------------------------------------------------------

 
LENDER:
 
TEXAS CAPITAL BANK, N.A.
 
By:
/s/ Jeff Treadway
 
Jeff Treadway
 
Vice President

 
 
- 56 -

--------------------------------------------------------------------------------

 

Schedule 4.9
 
LIABILITIES AND LITIGATION
 
Liabilities:

None.

Litigation:

None.

 
Schedule 4.9

--------------------------------------------------------------------------------

 

Schedule 4.13
 
ENVIRONMENTAL MATTERS
 
None.

 
Schedule 4.13

--------------------------------------------------------------------------------

 

Schedule 4.17
 
REFUNDS
 
None.

 
Schedule 4.17

--------------------------------------------------------------------------------

 

Schedule 4.18
 
GAS CONTRACTS
 
None.

 
Schedule 4.18

--------------------------------------------------------------------------------

 
 
Schedule 4.20
 
CASUALTIES
 
None.

 
Schedule 4.20

--------------------------------------------------------------------------------

 

Schedule 4.24
 
TAXPAYER I.D. AND ORGANIZATIONAL NUMBERS
 
Entity
 
Taxpayer I.D. No.
 
Organizational No.
         
Borrower
 
98-0555508
 
NV20051667323

 
 
Schedule 4.24

--------------------------------------------------------------------------------

 

EXHIBIT I

[FORM OF NOTE]

PROMISSORY NOTE
(this “Note”)
 
$25,000,000.00
Houston, Texas
January 31, 2011

 
FOR VALUE RECEIVED and WITHOUT GRACE (except to the extent, if any, provided in
the Amended and Restated Credit Agreement referred to hereinafter), the
undersigned (“Maker”) promises to pay to the order of Texas Capital Bank, N.A.
(“Payee”), at the Principal Office (as such term is defined in the Credit
Agreement referred to hereinafter) of Payee, TWENTY FIVE MILLION AND NO/100
DOLLARS ($25,000,000.00) or so much thereof as may be advanced against this Note
and remains unpaid pursuant to the Amended and Restated Credit Agreement dated
January 31, 2011 by and between Maker and Payee (as amended,  supplemented,
restated or otherwise modified from time to time, the “Credit Agreement”),
together with interest at the rates and calculated as provided in the Credit
Agreement.
 
Reference is hereby made to the Credit Agreement for matters governed thereby,
including, without limitation, certain events which will entitle the holder
hereof to accelerate the maturity of all amounts due hereunder.  Capitalized
terms used but not defined in this Note shall have the respective meanings
assigned to such terms in the Credit Agreement.
 
This Note is issued pursuant to, is the “Note” under, and is payable as provided
in the Credit Agreement.  Subject to compliance with applicable provisions of
the Credit Agreement, Maker may at any time pay the full amount or any part of
this Note without the payment of any premium or fee, but such payment shall not,
until this Note is fully paid and satisfied, excuse the payment as it becomes
due of any payment on this Note provided for in the Credit Agreement.
 
This Note represents, in part, a renewal, but not a novation or discharge, of
all or a portion of the Indebtedness of Maker previously evidenced by the
Promissory Note or Promissory Notes issued by Maker pursuant to the Existing
Credit Agreement.
 
Without being limited thereto or thereby, this Note is secured by the Security
Documents.
 
This Note shall be governed and controlled by the laws of the State of Texas,
without giving effect to principles thereof relating to conflicts of law.
 
CROSS BORDER RESOURCES, INC.
 
By:
  
 
P. Mark Stark
 
Chief Financial Officer

 
 
Exhibit I-i

--------------------------------------------------------------------------------

 

EXHIBIT II
 
[FORM OF BORROWING REQUEST]
 
[Date]
 
Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas 77056
Attention:  Energy Banking
 
 
Re:
Amended and Restated Credit Agreement dated January 31, 2011, by and between
Cross Border Resources, Inc., a Nevada corporation, and Texas Capital Bank,
N.A., a national banking association (as amended, supplemented, restated or
otherwise modified from time to time, the “Credit Agreement”)

 
Ladies and Gentlemen:
 
Pursuant to the Credit Agreement, the undersigned hereby makes the requests
indicated below:
 
 
1.
Loans

 
 
(a)
Amount of new Loan:  $__________

 
 
(b)
Requested funding date:  ______________, 20__

 
 
2.
Certification

 
The undersigned individual certifies that [s]he is the ___________ of the
Borrower, has obtained all consents necessary, and as such [s]he is authorized
to execute this request on behalf of the Borrower.  The undersigned individual
further certifies, represents, and warrants on behalf of the Borrower, that the
Borrower is entitled to receive the requested borrowing under the terms and
conditions of the Credit Agreement and that, to the best knowledge of such
undersigned individual, there exists as of the date hereof neither a Default nor
an Event of Default under the Credit Agreement.
 
Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.
 
Very truly yours,
 
     
________________ of
 
Cross Border Resources, Inc.

 
 
Exhibit II-i

--------------------------------------------------------------------------------

 

EXHIBIT III
 
[FORM OF COMPLIANCE CERTIFICATE]
 
[Date]
 
Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas 77056
Attention:  Energy Banking
 
 
Re:
Amended and Restated Credit Agreement dated January 31, 2011, by and between
Cross Border Resources, Inc., a Nevada corporation, and Texas Capital Bank,
N.A., a national banking association (as amended, supplemented, restated or
otherwise modified from time to time, the “Credit Agreement”)

 
Ladies and Gentlemen:
 
Pursuant to applicable requirements of the Credit Agreement, the undersigned, as
a Responsible Officer of the Borrower, hereby certifies to you the following
information as true and correct as of the date hereof or for the period
indicated, as the case may be:
 
1.           [To the best of the knowledge of the undersigned, no Default or
Event of Default (including, but not limited to, any arising from any violation
or alleged violation of any Environmental Law) exists as of the date hereof or
has occurred since the date of our previous certification to you, if any.]
 
[To the best of the knowledge of the undersigned, the following Defaults or
Events of Default (including, but not limited to, any arising from any violation
or alleged violation of any Environmental Law) exist as of the date hereof or
have occurred since the date of our previous certification to you, if any, and
the actions set forth below are being taken to remedy such circumstances:]
 
2.           The compliance of the Borrower, on a consolidated basis with its
consolidated Subsidiaries, with the financial covenants of the Credit Agreement,
as of the close of business on _________________________, is evidenced by the
following:
 
 
(a)
Section 6.14:
Current Ratio

 
Required
Actual
Not less than 1.00 to 1.00
___ to 1.00

 
 
(b)
Section 6.15:
Total Funded Indebtedness to EBITDA Ratio

 
Required
Actual
Not greater than 4.00 to 1.00
___ to 1.00

 
Exhibit III-i

--------------------------------------------------------------------------------

 

 
(c)
Section 6.16:
Interest Coverage Ratio

 
Required
Actual
Not less than 4.00 to 1.00
___ to 1.00

 
(See attached detailed calculation of EBITDA)
 
3.           The Borrower and the Guarantors [are] [are not] in compliance with
the provisions of Section 6.1 of the Credit Agreement relating to Commodity
Hedge Agreements.
 
4.           No Material Adverse Effect has occurred since the date of the
combined consolidated Financial Statements of the Borrower as of [_____________]
and for the period then ended.
 
Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.
 
Very truly yours,
 
   
________________ of
 
Cross Border Resources, Inc.

 
Exhibit III-ii

--------------------------------------------------------------------------------

 

EXHIBIT IV
 
[FORM OF OPINION OF NEVADA COUNSEL]
 
January 31, 2011
 
Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas  77056
Attention:  Energy Banking
 
 
Re:
Amended and Restated Credit Agreement dated effective January 31, 2011 (as
amended, supplemented, restated or otherwise modified from time to time, the
“Credit Agreement”) by and between Cross Border Resources, Inc., a Nevada
corporation and Texas Capital Bank, N.A., a national banking association (the
“Lender”)

 
Ladies and Gentlemen:
 
[We][I] have acted as counsel to the Borrower and Texas Capital Bank, N.A., a
national banking association (the “Lender”) in connection with the transactions
contemplated in the Credit Agreement.  This opinion is delivered pursuant to
Section 3.1(n) of the Credit Agreement, and the Lender is hereby authorized to
rely upon this opinion in connection with the transactions contemplated in the
Credit Agreement.  For convenience, each capitalized term used but not defined
herein shall have the meaning assigned to such term in the Credit Agreement,
unless expressly provided to the contrary herein.
 
In [our][my] representation of the Borrower, [we][I] have examined an executed
counterpart or a copy of an executed counterpart of each of the following
(collectively, the “Loan Documents”), each of which is dated of even date
herewith:
 
(i)           the Credit Agreement;
 
(ii)          the Note;
 
(iii)         Amendment to and Ratification of Mortgage, Deed of Trust, Security
Agreement, Financing Statement and Assignment of Production by and between the
Borrower and the Lender;
 
(iv)         Deed of Trust, Security Agreement, Financing Statement and
Assignment of Production from the Borrower to Stephen Scholl, Trustee for the
benefit of the Lender; and
 
(v)          Amendment to and Ratification of Security Agreement by and between
the Borrower and the Lender.

 
Exhibit IV-i

--------------------------------------------------------------------------------

 

In making such examinations, [we][I] have, with your permission, assumed:
 
(i)           the genuineness of all signatures to the Loan Documents other than
those of officers of the Borrower;
 
(ii)          the authenticity of all documents submitted to [us][me] as
originals and the conformity with the originals of all documents submitted to
[us] [me] as copies;
 
(iii)         that the Lender is duly organized, legally existing and in good
standing under the laws of its jurisdiction of organization;
 
(iv)         that the Lender is authorized and has the power to enter into and
perform its obligations under those of the Loan Documents to which it is a
party; and
 
(v)          the due authorization, execution and delivery by the Lender of all
Loan Documents to which it is a party.
 
Based upon the foregoing and subject to the qualifications set forth herein, [we
are][I am] of the opinion that:
 
1.           The Borrower is a corporation duly incorporated legally existing
and in good standing under the laws of the State of Nevada and is duly qualified
and in good standing as a foreign corporation in each of the State of New Mexico
and the State of Texas.
 
2.           The execution and delivery by the Borrower of the Credit Agreement
and the borrowings and obtaining of Letters of Credit by the Borrower
thereunder, the execution and delivery by the Borrower of the other Loan
Documents to which it is a party, the payment and performance by the Borrower of
all Obligations and the performance of all obligations of the Borrower under the
Credit Agreement and the other Loan Documents to which it is a party are within
the power of the Borrower, have been duly authorized by all necessary action by
the Borrower, and do not (a) require the consent of any Governmental Authority,
(b) contravene or conflict with any Requirement of Law, (c) to [our][my]
knowledge, contravene or conflict with any indenture, instrument or other
agreement to which the Borrower is a party or by which any Property of the
Borrower may be presently bound or encumbered or (d) result in or require the
creation or imposition of any Lien upon any Property of the Borrower other than
as contemplated by the Loan Documents.
 
3.           The Borrower is not, nor is the Borrower directly or indirectly
controlled by or acting on behalf of any Person which is, an “investment
company” or an “affiliate person” of an “investment company” within the meaning
of the Investment Company Act of 1940, as amended.
 
The opinions expressed herein are subject to the qualification and limitation
that [we are] [I am] licensed to practice law only in the State of Nevada [and
other jurisdictions the laws of which are not applicable to the opinions
expressed herein]; accordingly, the foregoing opinions are limited solely to the
laws of the State of Nevada and applicable United States federal law.  Further
to the foregoing, [we][I] express no opinion herein regarding matters governed
by the laws of either the State of New Mexico or the State of Texas.

 
Exhibit IV-ii

--------------------------------------------------------------------------------

 

This opinion is furnished for the benefit of the Lender and any transferee or
assignee of any the Lender in connection with the transactions contemplated by
the Credit Agreement and the other Loan Documents and is not to be quoted in
whole or in part or otherwise referred to or disclosed to any other Person or in
any other transaction.
 
Very truly yours,

 
Exhibit IV-iii

--------------------------------------------------------------------------------

 

EXHIBIT V
 
[FORM OF OPINION OF TEXAS COUNSEL]
 
January 31, 2011
 
Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas  77056
Attention:  Energy Banking
 
 
Re:
Amended and Restated Credit Agreement dated effective January 31, 2011 (as
amended, supplemented, restated or otherwise modified from time to time, the
“Credit Agreement”) by and between Cross Border Resources, Inc., a Nevada
corporation and Texas Capital Bank, N.A., a national banking association (the
“Lender”)

 
Ladies and Gentlemen:
 
[We][I] have acted as counsel to the Borrower in connection with the
transactions contemplated in the Credit Agreement.  This opinion is delivered
pursuant to Section 3.1(o) of the Credit Agreement, and the Lender are hereby
authorized to rely upon this opinion in connection with the transactions
contemplated in the Credit Agreement.  For convenience, each capitalized term
used but not defined herein shall have the meaning assigned to such term in the
Credit Agreement, unless expressly provided to the contrary herein.
 
In [our][my] representation of the Borrower, [we][I] have examined an executed
counterpart or a copy of an executed counterpart of each of the following
(collectively, the “Loan Documents”), each of which is dated of even date
herewith:
 
(i)           the Credit Agreement;
 
(ii)          the Note; and
 
(iii)         Amendment to and Ratification of Security Agreement by and between
the Borrower and the Lender.
 
In making such examinations, [we][I] have, with your permission, assumed:
 
(iv)         the genuineness of all signatures to the Loan Documents other than
those of officers of the Borrower;
 
(v)         the authenticity of all documents submitted to [us][me] as originals
and the conformity with the originals of all documents submitted to [us] [me] as
copies;
 
(vi)         that each of the Borrower and the Lender is duly organized, legally
existing and in good standing under the laws of its jurisdiction of
organization;

 
Exhibit V-i

--------------------------------------------------------------------------------

 

(vii)        that each of the Borrower and the Lender, is authorized and has the
power to enter into and perform its obligations under those of the Credit
Agreement and the other Loan Documents to which it is a party; and
 
(viii)       the due authorization, execution and delivery of all Loan Documents
by each party thereto.
 
Based upon the foregoing and subject to the qualifications set forth herein, [we
are][I am] of the opinion that the Loan Documents to constitute legal, valid and
binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms.
 
The opinions expressed herein are subject to the qualification and limitation
that [we are] [I am] licensed to practice law only in the State of Texas [and
other jurisdictions the laws of which are not applicable to the opinions
expressed herein]; accordingly, the foregoing opinions are limited solely to the
laws of the State of Texas and applicable United States federal law.  Further to
the foregoing, [we][I] express no opinion herein with respect to any matter
governed by the laws of the State of Nevada.
 
This opinion is furnished for the benefit of the Lender and any transferee or
assignee of any the Lender in connection with the transactions contemplated by
the Credit Agreement and the other Loan Documents and is not to be quoted in
whole or in part or otherwise referred to or disclosed to any other person or
entity or in any other transaction.
 
Very truly yours,

 
Exhibit V-ii

--------------------------------------------------------------------------------