EXHIBIT 10.5
 
[TX]
 
DEED OF TRUST, MORTGAGE,
ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING
AND FINANCING STATEMENT

FROM
FOOTHILLS TEXAS, INC.
(Organizational I.D. Number 4192631)

 
TO
JOHN K. HOWIE, TRUSTEE

 
AND
J. ARON & COMPANY, AGENT

 
Dated September 8, 2006
 
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES PAYMENT OF
FUTURE ADVANCES, AND COVERS PROCEEDS OF COLLATERAL.
 
THIS INSTRUMENT COVERS, AMONG OTHER THINGS, (A) GOODS WHICH ARE OR ARE TO BECOME
FIXTURES RELATED TO THE REAL PROPERTY DESCRIBED HEREIN, AND (B) AS-EXTRACTED
COLLATERAL RELATED TO THE REAL PROPERTY DESCRIBED HEREIN (INCLUDING WITHOUT
LIMITATION OIL, GAS, OTHER MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH AND ACCOUNTS ARISING OUT OF THE SALE AT THE WELLHEAD OR
MINEHEAD THEREOF). THIS INSTRUMENT IS TO BE FILED FOR RECORD, AMONG OTHER
PLACES, IN THE REAL ESTATE OR COMPARABLE RECORDS OF THE COUNTIES REFERENCED IN
EXHIBIT A HERETO AND SUCH FILING SHALL SERVE, AMONG OTHER PURPOSES, AS A FIXTURE
FILING AND AS A FINANCING STATEMENT COVERING AS-EXTRACTED COLLATERAL. THE
MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE AND IMMOVABLE PROPERTY
CONCERNED, WHICH INTEREST IS DESCRIBED IN SECTION 1.1 OF THIS INSTRUMENT.
 
A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW THE
TRUSTEE (AS HEREINAFTER DEFINED) TO TAKE THE MORTGAGED PROPERTIES AND SELL THEM
WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR (AS
HEREINAFTER DEFINED) UNDER THIS MORTGAGE.
 
WHEN RECORDED OR FILED RETURN TO:
 
Thompson & Knight L.L.P.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
Attention: Sharon Nye
THIS DOCUMENT PREPARED BY:
 
Shad E. Sumrow, Esq.
Thompson & Knight L.L.P.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201

 

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

 

DEED OF TRUST, MORTGAGE,
ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING
AND FINANCING STATEMENT
(this “Mortgage”)
 
ARTICLE I.  
 
Granting Clauses; Secured Indebtedness
 
Section 1.1.  Grant and Mortgage. Foothills Texas, Inc., a Delaware corporation
(herein called “Mortgagor”), in consideration of the sum of One Thousand Dollars
($1000.00) to Mortgagor in hand paid, and in order to secure the payment of the
secured indebtedness hereinafter referred to and the performance of the
obligations, covenants, agreements, warranties and undertakings of Mortgagor
hereinafter described, does hereby (a) GRANT, BARGAIN, SELL, CONVEY, TRANSFER,
ASSIGN AND SET OVER to John K. Howie, Trustee (the “Trustee”), and grant to
Trustee a POWER OF SALE (pursuant to this Mortgage and applicable law) with
respect to the following described properties, rights, and interests to the
extent the same are located in (or cover properties located in) the State of
Texas or in any other state pursuant to the law of which a deed of trust is a
lawful security instrument (the “Mortgaged Properties”):
 
A  The oil, gas and/or other mineral properties, mineral servitudes, and/or
mineral rights which are described in Exhibit A attached hereto and made a part
hereof;
 
B  Without limitation of the foregoing, all other right, title and interest of
Mortgagor of whatever kind or character (whether now owned or hereafter acquired
by operation of law or otherwise) in and to (i) the oil, gas and/or mineral
leases or other agreements described in Exhibit A hereto and (ii) the lands
described or referred to in Exhibit A (or described in any of the instruments
described or referred to in Exhibit A), without regard to any limitations as to
specific lands or depths that may be set forth in Exhibit A hereto or in any of
the leases or other agreements described in Exhibit A hereto;
 
C  All of Mortgagor’s interest (whether now owned or hereafter acquired by
operation of law or otherwise) in and to all presently existing and hereafter
created oil, gas and/or mineral unitization, pooling and/or communitization
agreements, declarations and/or orders, and in and to the properties, rights and
interests covered and the units created thereby (including units formed under
orders, rules, regulations or other official acts of any federal, state or other
authority having jurisdiction), which cover, affect or otherwise relate to the
properties, rights and interests described in clause A or B above;
 
D  All of Mortgagor’s interest in and rights under (whether now owned or
hereafter acquired by operation of law or otherwise) all presently existing and
hereafter created operating agreements, equipment leases, production sales
contracts, processing agreements, transportation agreements, gas balancing
agreements, farmout and/or farm-in agreements, salt water disposal agreements,
area of mutual interest agreements, and other contracts and/or agreements which
cover, affect, or otherwise relate to the properties, rights and interests
described in clause A, B or C above or to the operation of such properties,
rights and interests or to the treating, handling, storing, processing,
transporting or marketing of oil, gas, other hydrocarbons, or other minerals
produced from (or allocated to) such properties, rights and interests (including
those contracts listed in Exhibit A hereto), as same may be amended or
supplemented from time to time;
 

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

 
E  All of Mortgagor’s interest (whether now owned or hereafter acquired by
operation of law or otherwise) in and to all improvements, fixtures, and other
real and/or personal property (including all wells, pumping units, wellhead
equipment, tanks, pipelines, flow lines, gathering lines, compressors,
dehydration units, separators, meters, buildings, injection facilities, salt
water disposal facilities, and power, telephone and telegraph lines), and all
easements, servitudes, rights-of-way, surface leases, licenses, permits and
other surface rights, which are now or hereafter used, or held for use, in
connection with the properties, rights and interests described in clause A, B or
C above, or in connection with the operation of such properties, rights and
interests, or in connection with the treating, handling, storing, processing,
transporting or marketing of oil, gas, other hydrocarbons, or other minerals
produced from (or allocated to) such properties, rights and interests; and
 
F  All rights, estates, powers and privileges of Mortgagor appurtenant to the
foregoing rights, interests and properties.
 
TO HAVE AND TO HOLD the Mortgaged Properties unto the Trustee, and its
successors or substitutes in this trust, and to its or their successors and
assigns, in trust, however, upon the terms, provisions and conditions herein set
forth. Mortgagor will warrant and defend title to the Property (as hereinafter
defined), free and clear of all liens, security interests, and encumbrances
except for Permitted Liens (as defined in the Creditor Agreement, hereinafter
defined) against the claims and demands of all persons claiming or to claim the
same or any part thereof.
 
Section 1.2.  Scope of Mortgage. This Mortgage is a deed of trust and mortgage
of both real and personal property, a security agreement, a financing statement
and an assignment, and also covers goods which are or are to become fixtures,
as-extracted collateral, and all proceeds thereof.
 
Section 1.3.  Grant of Security Interest. In order to further secure the payment
of the secured indebtedness hereinafter referred to and the performance of the
obligations, covenants, agreements, warranties, and undertakings of Mortgagor
hereinafter described, Mortgagor hereby grants to Agent (as hereinafter defined)
a security interest in the entire interest of Mortgagor (whether now owned or
hereafter acquired by operation of law or otherwise) in and to:
 
(a)  all oil, gas, other hydrocarbons, and other minerals produced from or
allocated to the Mortgaged Properties, and any products processed or obtained
therefrom (herein collectively called the “Production”), together with all
proceeds of Production (regardless of when the Production to which such proceeds
relate occurred), and together with all liens and security interests securing
payment of the proceeds of the Production, including those liens and security
interests provided for under (i) statutes enacted in the jurisdictions in which
the Mortgaged Properties are located, or (ii) statutes made applicable to the
Mortgaged Properties under federal law (or some combination of federal and state
law);
 
(b)  without limitation of any other provisions of this Section 1.3, all
payments received in lieu of Production (regardless of when such payments
accrued, and/or the events which gave rise to such payments occurred), including
“take or pay” payments and similar payments, payments received in settlement of
or pursuant to a judgment rendered with respect to take or pay or similar
obligations or other obligations under a production sales contract, payments
received in buyout or buydown or other settlement of a production sales
contract, and payments received under a gas balancing or similar agreement as a
result of (or received otherwise in settlement of or pursuant to judgment
rendered with respect to) rights held by Mortgagor as a result of Mortgagor
(and/or its predecessors in title) taking or having taken less gas from lands
covered by a Mortgaged Property (or lands pooled or unitized therewith) than
their ownership of such Mortgaged Property would entitle them to receive (the
payments described in this subsection (b) being herein called “Payments in Lieu
of Production”);
 
2

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

 
(c)  all equipment, inventory, improvements, fixtures, accessions, goods and
other personal property of whatever nature now or hereafter located on or used
or held for use in connection with the Mortgaged Properties (or in connection
with the operation thereof or the treating, handling, storing, processing,
transporting, or marketing of Production), and all licenses and permits of
whatever nature now or hereafter used or held for use in connection with the
Mortgaged Properties (or in connection with the operation thereof or the
treating, handling, storing, processing, transporting, or marketing of
Production), and all renewals or replacements of the foregoing or substitutions
for the foregoing;
 
(d)  all contracts, contract rights, choses in action (i.e., rights to enforce
contracts or to bring claims thereunder) and other general intangibles
(regardless of whether the same arose, and/or the events which gave rise to the
same occurred, on or before or after the date hereof) related to the Mortgaged
Properties, the operation thereof (whether Mortgagor is operator or
non-operator), or the treating, handling, separation, stabilization, storing,
processing, transporting, gathering, or marketing of Production (including any
of the same relating to payment of proceeds of Production or to payment of
amounts which could constitute Payments in Lieu of Production);
 
(e)  without limitation of the generality of the foregoing, any rights and
interests of Mortgagor under any present or future hedge or swap agreements,
cap, floor, collar, exchange, forward or other hedge or protection agreements or
transactions relating to interest rates or to crude oil, natural gas or other
hydrocarbons, or any option with respect to any such agreement or transaction
now existing or hereafter entered into by or on behalf of Mortgagor (provided
that the Collateral, as defined herein, shall not include any rights and
interests under any such agreements or transactions entered into between
Mortgagor and J. Aron & Company, a New York general partnership);
 
(f)  all geological, geophysical, engineering, accounting, title, legal, and
other technical or business data concerning the Mortgaged Properties, the
Production or any other item of Property (as hereinafter defined) which are now
or hereafter in the possession of Mortgagor or in which Mortgagor can otherwise
grant a security interest, and all books, files, records, magnetic media, and
other forms of recording or obtaining access to such data;
 
(g)  without limitation of or by any of the foregoing, all rights, titles and
interests now owned or hereafter acquired by Mortgagor in any and all goods,
inventory, equipment, as-extracted collateral, documents, money, instruments,
intellectual property, certificated securities, uncertificated securities,
investment property, letters of credit, rights to proceeds of written letters of
credit and other letter-of-credit rights, commercial tort claims, deposit
accounts, payment intangibles, general intangibles, contract rights, chattel
paper (including electronic chattel paper and tangible chattel paper), rights to
payment evidenced by chattel paper, software, supporting obligations and
accounts, wherever located, and all rights and privileges with respect thereto
(all of the properties, rights and interests described in subsections (a), (b),
(c), (d), (e), and (f) above, subsection (h) below, and this subsection (g)
being herein sometimes collectively called the “Collateral”); and
 
(h)  all proceeds of the Collateral (the Mortgaged Properties, the Collateral
and the proceeds of the Mortgaged Properties and of the Collateral being herein
sometimes collectively called the “Property”).
 
Except as otherwise expressly provided in this Mortgage, all terms in this
Mortgage relating to the Collateral and the grant of the foregoing security
interest which are defined in the applicable Uniform Commercial Code (the “UCC”)
shall have the meanings assigned to them in Article 9 (or, absent definition in
Article 9, in any other Article) of the UCC, as those meanings may be amended,
revised or replaced from time to time. Notwithstanding the foregoing, the
parties intend that the terms used herein which are defined in the UCC have, at
all times, the broadest and most inclusive meanings possible. Accordingly, if
the UCC shall in the future be amended or held by a court to define any term
used herein more broadly or inclusively than the UCC in effect on the date of
this Mortgage, then such term, as used herein, shall be given such broadened
meaning. If the UCC shall in the future be amended or held by a court to define
any term used herein more narrowly, or less inclusively, than the UCC in effect
on the date of this Mortgage, such amendment or holding shall be disregarded in
defining terms used in this Mortgage.
 
3

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

 
Section 1.4.  Transaction Documents and Other Obligations. This Mortgage is made
to secure and enforce the payment and performance of all of the following
obligations, indebtedness, loans, and liabilities:
 
(a)  All indebtedness and other obligations of Foothills Resources, Inc., a
Nevada corporation (“Parent”), now or hereafter incurred or arising pursuant to
the ISDA Agreement and all indebtedness and obligations of Mortgagor now or
hereafter incurred or arising under any guaranty now or hereafter given by
Mortgagor of the ISDA Agreement or the indebtedness and obligations thereunder.
As used herein, “ISDA Agreement” refers collectively to (i) that certain ISDA
Master Agreement dated as of September 8, 2006 between Parent and J. Aron &
Company, a New York general partnership, (ii) all transactions and transaction
confirmations entered into in connection with such ISDA Master Agreement, (iii)
all supplements, amendments or modifications of or to such ISDA Master
Agreement, any such transaction, or any such transaction confirmation, and (iv)
all agreements given in substitution for any of the foregoing or in restatement,
renewal or extension of any of the foregoing, in whole or in part.
 
(b)  All indebtedness and other obligations of Mortgagor, Parent or any
subsidiary of Parent now or hereafter incurred or arising pursuant to any
Specified Transaction. As used herein, “Specified Transaction” means (a) any
transaction (including any agreement with respect thereto) now existing or
hereafter entered into between Mortgagor, Parent, or any subsidiary of Parent
with J. Aron & Company or any subsidiary of J. Aron & Company that (i) is a rate
swap transaction, swap option, basis swap, forward rate transaction, commodity
swap, commodity option, commodity spot transaction, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency
option, weather swap, weather derivative, weather option, credit protection
transaction, credit swap, credit default swap, credit default option, total
return swap, credit spread transaction, repurchase transaction, reverse
repurchase transaction, buy/sell-back transaction, securities lending
transaction, or forward purchase or sale of a security, commodity or other
financial instrument or interest (including any option with respect to any of
these transactions) or (ii) is a type of transaction that is similar to any
transaction referred to in clause (i) that is currently, or in the future
becomes, recurrently entered into the financial markets (including terms and
conditions incorporated by reference in such agreement) and that is a forward,
swap, future, option or other derivative on one or more rates, currencies,
commodities, equity securities or other equity instruments, debt securities or
other debt instruments, or economic indices or measures of economic risk or
value, or (b) any combination of any of the foregoing transactions.
 
(c)  [RESERVED].
 
(d)  [RESERVED].
 
4

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

 
(e)  All indebtedness, covenants and other obligations now or hereafter incurred
or arising pursuant to the provisions of this Mortgage or any other document or
instrument now or hereafter evidencing, governing, guaranteeing or securing the
“secured indebtedness” (as hereinafter defined) or any part thereof or otherwise
executed in connection with any of the agreements or instruments described in
the preceding subsections (a), (b), (c) or (d). This Mortgage, all other
documents or instruments now or hereafter evidencing, governing, guaranteeing or
securing the secured indebtedness, and all of the agreements or instruments
described or referred to in the preceding subsections (a), (b), (c) or (d) are
herein collectively called the “Transaction Documents”.
 
(f)  Without limiting the generality of the foregoing, all post-petition
interest, expenses, and other duties and liabilities with respect to
indebtedness or other obligations described above in this Section 1.4, which
would be owed but for the fact that they are unenforceable or not allowable due
to the existence of a bankruptcy, reorganization, or similar proceeding.
 
Section 1.5.  Certain Definitions. The indebtedness and other obligations
referred to in Section 1.4, and all renewals, extensions and modifications
thereof, and all substitutions therefor, in whole or in part, are herein
sometimes referred to as the “secured indebtedness” or the “indebtedness secured
hereby.” Each person or entity to whom any secured indebtedness is owing is
herein called a “Creditor”. The ISDA Agreement is herein sometimes referred to
as the “Creditor Agreement”. J. Aron & Company, acting for itself or as on
behalf of any other Creditors, is herein called the “Agent”.
 
Section 1.6.  Limit on Secured Indebtedness and Collateral. It is the intention
of Mortgagor, Agent and Creditors that this Mortgage not constitute a fraudulent
transfer or fraudulent conveyance under any state or federal law that may be
applied hereto. Mortgagor, and by their acceptance hereof, Agent and Creditors
hereby acknowledge and agree that, notwithstanding any other provision of this
Mortgage: (a) the indebtedness secured hereby shall be limited to the maximum
amount of indebtedness that can be incurred or secured by Mortgagor without
rendering this Mortgage voidable under applicable law relating to fraudulent
conveyances or fraudulent transfers, and (b) the Property granted by Mortgagor
hereunder shall be limited to the maximum amount of Property that can be granted
by Mortgagor without rendering this Mortgage voidable under applicable law
relating to fraudulent conveyances or fraudulent transfers.
 
ARTICLE II.  
 
Representations, Warranties and Covenants
 
Section 2.1.  Mortgagor represents, warrants, and covenants as follows:
 
(a)  Title and Permitted Encumbrances. Mortgagor has, and Mortgagor covenants to
maintain, good and defensible title to the fee interests in real property and
the oil and gas leasehold interests comprising the Property, in each case free
and clear of all liens, security interests, and encumbrances except for
Permitted Liens (as defined in the Creditor Agreement). The ownership by
Mortgagor of the Mortgaged Properties does and will, with respect to each well
or unit identified on Exhibit A, attached hereto and made a part hereof, entitle
Mortgagor to receive (subject to the terms and provisions of this Mortgage) a
decimal or percentage share of the oil, gas and other hydrocarbons produced
from, or allocated to, such well or unit equal to not less than the decimal or
percentage share set forth, for such well or unit, in the column headed “Net
Revenue Interest” on Exhibit A, and cause Mortgagor to be obligated to bear a
decimal or percentage share of the cost of operation of such well or unit equal
to not more than the decimal or percentage share set forth, for such well or
unit, in the column headed “Working Interest” on Exhibit A without a
corresponding and proportional increase in Mortgator’s “Net Revenue Interest”
attributable thereto. The above-described shares of production which Mortgagor
is entitled to receive and shares of expenses which Mortgagor is obligated to
bear are not and will not be subject to change (other than changes which arise
pursuant to non-consent provisions of operating agreements described in Exhibit
A in connection with operations hereafter proposed), except, and only to the
extent that, such changes are reflected in Exhibit A. There is not and will not
be any unexpired financing statement covering any part of the Property on file
in any public office naming any party other than Agent as secured party and
other than Permitted Liens, as defined in the Creditor Agreement.
 
5

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

 
(b)  [Reserved].
 
(c)  Not Abandon Wells; Participate in Operations. Mortgagor will not, without
prior written consent of Agent, abandon, or consent to the abandonment of, any
well producing from the Mortgaged Properties (or properties unitized therewith)
so long as such well is capable (or is subject to being made capable through
drilling, reworking or other operations which it would be commercially feasible
to conduct) of producing oil, gas, or other hydrocarbons or other minerals in
commercial quantities (as determined without considering the effect of this
Mortgage). Mortgagor will not, without prior written consent of Agent, elect not
to participate in a proposed operation on the Mortgaged Properties where the
effect of such election would be the forfeiture either temporarily (i.e. until a
certain sum of money is received out of the forfeited interest) or permanently
of any interest in the Mortgaged Properties.
 
(d)  Defense of Mortgage. If the validity or priority of this Mortgage or of any
rights, titles, liens or security interests created or evidenced hereby with
respect to the Property or any part thereof or the title of Mortgagor to the
Property shall be endangered or questioned or shall be attacked directly or
indirectly or if any legal proceedings are instituted against Mortgagor with
respect thereto, Mortgagor will give prompt written notice thereof to Agent and
at Mortgagor’s own cost and expense will diligently endeavor to cure any defect
that may be developed or claimed, and will take all reasonably necessary and
proper steps for the defense of such legal proceedings, including the employment
of counsel, the prosecution or defense of litigation and the release or
discharge of all adverse claims, and Trustee and Agent, or either of them
(whether or not named as parties to legal proceedings with respect thereto), are
hereby authorized and empowered to take such additional steps as in their
judgment and discretion may be reasonably necessary or proper for the defense of
any such legal proceedings or the protection of the validity or priority of this
Mortgage and the rights, titles, liens and security interests created or
evidenced hereby, including the employment of independent counsel, the
prosecution or defense of litigation, the compromise or discharge of any adverse
claims made with respect to the Property, the purchase of any tax title and the
removal of prior liens or security interests, and all expenditures so made of
every kind and character shall be a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to Agent or
Trustee (as the case may be) and shall bear interest from the date expended
until paid at the rate described in Section 2.3 hereof, and the party incurring
such expenses shall be subrogated to all rights of the person receiving such
payment.
 
(e)  Insurance. Mortgagor will carry insurance as required under the Transaction
Documents. In the event of foreclosure of this Mortgage, or other transfer of
title to the Property in extinguishment in whole or in part of the secured
indebtedness, all right, title and interest of Mortgagor in and to such policies
then in force concerning the Property and all proceeds payable thereunder shall
thereupon vest in the purchaser at such foreclosure or other transferee in the
event of such other transfer of title.
 
(f)  Further Assurances. Mortgagor will, on request of Agent, (i) promptly
correct any defect, error or omission which may be discovered in the contents of
this Mortgage, or in any other Transaction Document, or in the execution or
acknowledgment of this Mortgage or any other Transaction Document; and
(ii) execute, acknowledge, deliver and record and/or file such further
instruments (including further deeds of trust, mortgages, security agreements,
financing statements, continuation statements, and assignments of production,
accounts, funds, contract rights, general intangibles, and proceeds) and do such
further acts as may be necessary, desirable or proper to carry out more
effectively the purposes of this Mortgage and the other Transaction Documents
and to more fully identify and subject to the liens and security interests
hereof any property intended to be covered hereby, including any renewals,
additions, substitutions, replacements, or appurtenances to the Property.
Mortgagor shall pay all reasonable costs connected with any of the foregoing.
 
6

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

 
(g)  Not a Foreign Person. Mortgagor is not a “foreign person” within the
meaning of the Internal Revenue Code of 1986, as amended, (hereinafter called
the “Code”), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident alien,
foreign corporation, foreign partnership, foreign trust or foreign estate as
those terms are defined in the Code and any regulations promulgated thereunder).
 
Section 2.2.  Compliance by Operator. As to any part of the Mortgaged Properties
which is not a working interest, Mortgagor agrees to take all commercially
reasonable action and to exercise all rights and remedies as are reasonably
available to Mortgagor to cause the owner or owners of the working interest in
such properties to comply with the covenants and agreements contained herein;
and as to any part of the Mortgaged Properties which is a working interest but
which is operated by a party other than Mortgagor, Mortgagor agrees to take all
commercially reasonable action and to exercise all rights and remedies as are
reasonably available to Mortgagor (including all rights under any operating
agreement) to cause the party who is the operator of such property to comply
with the covenants and agreements contained herein.
 
Section 2.3.  Performance on Mortgagor’s Behalf. Mortgagor agrees that, if
Mortgagor fails to perform any act or to take any action which hereunder
Mortgagor is required to perform or take, or to pay any money which hereunder
Mortgagor is required to pay, Agent, in Mortgagor’s name or its own name, may,
but shall not be obligated to, perform or cause to be performed such act or take
such action or pay such money, and any expenses so incurred by Agent and any
money so paid by Agent shall be a demand obligation owing by Mortgagor to Agent
(which obligation Mortgagor hereby expressly promises to pay) and Agent, upon
making such payment, shall be subrogated to all of the rights of the person,
corporation or body politic receiving such payment. Each amount due and owing by
Mortgagor to Trustee and/or Agent and/or any Creditor pursuant to this Section
2.3 or other sections of this Mortgage that specifically refer to this Section
2.3 shall bear interest each day, from the date of such expenditure or payment
until paid, at a rate then in effect with respect to the Loans; all such
amounts, together with such interest thereon, shall be a part of the secured
indebtedness and shall be secured by this Mortgage.
 
Section 2.4.  Recording. Mortgagor will cause this Mortgage and all amendments
and supplements thereto and substitutions therefor and all financing statements
and continuation statements relating thereto to be recorded, filed, re-recorded
and refiled in such manner and in such places as Trustee or Agent shall
reasonably request and will pay all such recording, filing, re-recording and
refiling taxes, fees and other charges.
 
Section 2.5.  Reporting Compliance. Mortgagor agrees to comply with any and all
reporting requirements applicable to the transaction evidenced by the secured
indebtedness which are set forth in any law, statute, ordinance, rule,
regulation, order or determination of any governmental authority, and further
agrees upon request of Agent to furnish Agent with evidence of such compliance.
 
Section 2.6.  Release of Mortgage. If all of the secured indebtedness be paid in
full and no further obligation shall exist to provide credit or advance funds to
Mortgagor or the maker of any promissory note (or other obligor with respect to
other indebtedness) secured hereby, then, at Mortgagor’s request and expense,
this Mortgage shall be released as provided in the Creditor Agreement; provided,
however, that, notwithstanding such release, the indemnifications, and other
rights, which are provided herein or in the Transaction Documents to continue
following the release hereof shall continue in effect unaffected by such
release; and provided that if any payment to any Creditor or Agent is held to
constitute a preference or a voidable transfer under applicable state or federal
laws or if for any other reason any Creditor or Agent is required to refund such
payment to the payor thereof or to pay the amount thereof to any third party,
this Mortgage shall be reinstated to the extent of such payment or payments.
 
7

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

 
ARTICLE III.  
 
Assignment of Production, Accounts, and Proceeds
 
Section 3.1.  Assignment of Production. Mortgagor does hereby absolutely and
unconditionally assign, transfer and set over to Agent all Production which
accrues to Mortgagor’s interest in the Mortgaged Properties, all proceeds of
such Production and all Payments in Lieu of Production (herein collectively
referred to as the “Production Proceeds”), together with the immediate and
continuing right to collect and receive such Production Proceeds. Mortgagor
directs and instructs any and all purchasers of any Production to pay to Agent
all of the Production Proceeds accruing to Mortgagor’s interest until such time
as such purchasers have been furnished with evidence that all secured
indebtedness has been paid and that this Mortgage has been released. Mortgagor
agrees that no purchasers of the Production shall have any responsibility for
the application of any funds paid to Agent.
 
Section 3.2.  Effectuating Payment of Production Proceeds to Agent. Independent
of the foregoing provisions and authorities herein granted, Mortgagor agrees to
execute and deliver any and all transfer orders, division orders and other
instruments that may be requested by Agent or that may be required by any
purchaser of any Production for the purpose of effectuating payment of the
Production Proceeds to Agent. If under any existing sales agreements, other than
division orders or transfer orders, any Production Proceeds are required to be
paid by the purchaser to Mortgagor so that under such existing agreements
payment cannot be made of such Production Proceeds to Agent, Mortgagor’s
interest in all Production Proceeds under such sales agreements and in all other
Production Proceeds which for any reason may be paid to Mortgagor shall, when
received by Mortgagor, constitute trust funds in Mortgagor’s hands and shall be
immediately paid over to Agent. Without limitation upon any of the foregoing,
Mortgagor hereby constitutes and appoints Agent as Mortgagor’s special
attorney-in-fact (with full power of substitution, either generally or for such
periods or purposes as Agent may from time to time prescribe) in the name, place
and stead of Mortgagor to do any and every act and exercise any and every power
that Mortgagor might or could do or exercise personally with respect to all
Production and Production Proceeds (the same having been assigned by Mortgagor
to Agent pursuant to Section 3.1 hereof), expressly inclusive, but not limited
to, the right, power and authority to:
 
(a)  Execute and deliver in the name of Mortgagor any and all transfer orders,
division orders, letters in lieu of transfer orders, indemnifications,
certificates and other instruments of every nature that may be requested or
required by any purchaser of Production from any of the Mortgaged Properties for
the purposes of effectuating payment of the Production Proceeds to Agent or
which Agent may otherwise deem necessary or appropriate to effect the intent and
purposes of the assignment contained in Section 3.1; and
 
(b)  If under any product sales agreements other than division orders or
transfer orders, any Production Proceeds are required to be paid by the
purchaser to Mortgagor so that under such existing agreements payment cannot be
made of such Production Proceeds to Agent, to make, execute and enter into such
sales agreements or other agreements as are necessary to direct Production
Proceeds to be payable to Agent;
 
8

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

 
giving and granting unto said attorney-in-fact full power and authority to do
and perform any and every act and thing whatsoever necessary and requisite to be
done as fully and to all intents and purposes, as Mortgagor might or could do if
personally present; and Mortgagor shall be bound thereby as fully and
effectively as if Mortgagor had personally executed, acknowledged and delivered
any of the foregoing certificates or documents. The powers and authorities
herein conferred upon Agent may be exercised by Agent through any person who, at
the time of the execution of the particular instrument, is an officer of Agent.
The power of attorney herein conferred is granted for valuable consideration and
hence is coupled with an interest and is irrevocable so long as the secured
indebtedness, or any part thereof, shall remain unpaid. All persons dealing with
Agent or any substitute shall be fully protected in treating the powers and
authorities conferred by this paragraph as continuing in full force and effect
until advised by Agent that all the secured indebtedness is fully and finally
paid. Agent may, but shall not be obligated to, take such action as it deems
appropriate in an effort to collect the Production Proceeds and any reasonable
expenses (including reasonable attorney’s fees) so incurred by Agent shall be a
demand obligation of Mortgagor and shall be part of the secured indebtedness,
and shall bear interest each day, from the date of such expenditure or payment
until paid, at the rate described in Section 2.3 hereof.
 
Section 3.3.  Change of Purchaser. To the extent a default has occurred
hereunder and is continuing, should any person now or hereafter purchasing or
taking Production fail to make payment promptly to Agent of the Production
Proceeds, Agent shall, subject to then existing contractual prohibitions, have
the right to make, or to require Mortgagor to make, a change of purchaser, and
the right to designate or approve the new purchaser, and Agent shall have no
liability or responsibility in connection therewith so long as ordinary care is
used in making such designation.
 
Section 3.4.  Application of Production Proceeds. Any Production Proceeds
received by Agent shall be applied by Agent in accordance with the provisions of
the Creditor Agreement.
 
Section 3.5.  Release From Liability; Indemnification. Agent and its successors
and assigns are hereby released and absolved from all liability for failure to
enforce collection of the Production Proceeds and from all other responsibility
in connection therewith, except the responsibility of each to account to
Mortgagor for funds actually received by each. Mortgagor agrees to indemnify and
hold harmless Agent (for purposes of this paragraph, the term “Agent” shall
include the directors, officers, partners, employees and agents of Agent and any
persons or entities owned or controlled by or affiliated with Agent) from and
against all claims, demands, liabilities, losses, damages (including
consequential damages), causes of action, judgments, penalties, costs and
expenses (including reasonable attorneys’ fees and expenses) imposed upon,
asserted against or incurred or paid by Agent by reason of the assertion that
Agent received, either before or after payment in full of the secured
indebtedness, funds from the Production claimed by third persons (and/or funds
attributable to sales of Production which (i) were made at prices in excess of
the maximum price permitted by applicable law or (ii) were otherwise made in
violation of laws, rules, regulations and/or orders governing such sales), and
Agent shall have the right to defend against any such claims or actions,
employing attorneys of its own selection, and if not furnished with indemnity
satisfactory to it, Agent shall have the right to compromise and adjust any such
claims, actions and judgments, and in addition to the rights to be indemnified
as herein provided, all amounts paid by Agent in compromise, satisfaction or
discharge of any such claim, action or judgment, and all court costs, attorneys’
fees and other expenses of every character expended by Agent pursuant to the
provisions of this section shall be a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to Agent and
shall bear interest, from the date expended until paid, at the rate described in
Section 2.3 hereof. The foregoing indemnities shall not terminate upon the
release, foreclosure or other termination of this Mortgage but will survive such
release, foreclosure of this Mortgage or conveyance in lieu of foreclosure, or
other termination, and the repayment of the secured indebtedness and the
discharge and release of this Mortgage and the other documents evidencing and/or
securing the secured indebtedness. WITHOUT LIMITATION, IT IS THE INTENTION OF
MORTGAGOR AND MORTGAGOR AGREES THAT THE FOREGOING RELEASES AND INDEMNITIES SHALL
APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO ALL CLAIMS, DEMANDS,
LIABILITIES, LOSSES, DAMAGES (INCLUDING CONSEQUENTIAL DAMAGES), CAUSES OF
ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING REASONABLE
ATTORNEYS’ FEES AND EXPENSES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE
OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY.
Notwithstanding the foregoing, however, such indemnities shall not apply to any
particular indemnified party (but shall apply to the other indemnified parties)
to the extent the subject of the indemnification is caused by or arises out of
the gross negligence or willful misconduct of such particular indemnified party.
 
9

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

 
Section 3.6.  Mortgagor’s Absolute Obligation to Pay Loans. Nothing herein
contained shall detract from or limit the Obligations of Mortgagor under the
Transaction Documents, and any and all other secured indebtedness, at the time
and in the manner provided herein and in the Transaction Documents, regardless
of whether the Production and Production Proceeds herein assigned are sufficient
to pay same, and the rights under this Article III shall be cumulative of all
other rights under the Transaction Documents.
 
ARTICLE IV.
 
Remedies Upon Default
 
Section 4.1.  Default. The term “default” as used in this Mortgage shall mean
the occurrence of an “Event of Default” as defined in the Creditor Agreement.
 
Section 4.2.  Acceleration of Secured Indebtedness. The secured indebtedness may
be (and in certain circumstances shall automatically be) accelerated as provided
in the Transaction Documents.
 
Section 4.3.  Pre-Foreclosure Remedies. Upon the occurrence of a default, Agent
is authorized, prior or subsequent to the institution of any foreclosure
proceedings, to enter upon the Property, or any part thereof, and to take
possession of the Property and all books and records relating thereto, and to
exercise without interference from Mortgagor any and all rights which Mortgagor
has with respect to the management, possession, operation, protection or
preservation of the Property. If necessary to obtain the possession provided for
above, Agent may invoke any and all remedies to dispossess Mortgagor. Mortgagor
agrees to peacefully surrender possession of the Property upon default if
requested by Agent. All costs, expenses and liabilities of every character
incurred by Agent in managing, operating, maintaining, protecting or preserving
the Property shall constitute a demand obligation (which obligation Mortgagor
hereby expressly promises to pay) owing by Mortgagor to Agent and shall bear
interest from date of expenditure until paid at the rate described in Section
2.3 hereof, all of which shall constitute a portion of the secured indebtedness
and shall be secured by this Mortgage and by any other instrument securing the
secured indebtedness. In connection with any action taken by Agent pursuant to
this Section 4.3, AGENT SHALL NOT BE LIABLE FOR ANY LOSS SUSTAINED BY MORTGAGOR
RESULTING FROM ANY ACT OR OMISSION OF AGENT (INCLUDING AGENT’S OWN NEGLIGENCE)
IN MANAGING THE PROPERTY UNLESS SUCH LOSS IS CAUSED BY THE GROSS NEGLIGENCE,
WILLFUL MISCONDUCT, OR BAD FAITH OF AGENT, nor shall Agent be obligated to
perform or discharge any obligation, duty or liability of Mortgagor arising
under any agreement forming a part of the Property or arising under any
Permitted Lien (as defined in the Creditor Agreement) or otherwise arising.
Mortgagor hereby assents to, ratifies and confirms any and all actions of Agent
with respect to the Property taken under this Section 4.3, other than gross
negligence, willful misconduct, or bad faith of Agent.
 
10

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

 
Section 4.4.  Foreclosure.
 
(a)  Upon the occurrence of a default, Trustee is authorized and empowered and
it shall be Trustee’s special duty at the request of Agent to sell the Mortgaged
Properties, or any part thereof, as an entirety or in parcels as Agent may
elect, at such place or places and otherwise in the manner and upon such notice
as may be required by law or, in the absence of any such requirement, as Trustee
may deem appropriate. If Trustee shall have given notice of sale hereunder, any
successor or substitute Trustee thereafter appointed may complete the sale and
the conveyance of the property pursuant thereto as if such notice had been given
by the successor or substitute Trustee conducting the sale. Cumulative of the
foregoing and the other provisions of this Section 4.4, as to any portion of the
Mortgaged Properties located in the State of Texas (or within the offshore area
over which the United States of America asserts jurisdiction and to which the
laws of such state are applicable with respect to this Mortgage and/or the liens
or security interests created hereby), such sales of all or any part of such
Mortgaged Properties shall be conducted at the courthouse of any county (whether
or not the counties in which such Mortgaged Properties are located are
contiguous) in the State of Texas in which any part of such Mortgaged Properties
is situated or which lies shoreward of any Mortgaged Property (i.e., to the
extent a particular Mortgaged Property lies offshore within the reasonable
projected seaward extension of the relevant county boundary), at public vendue
to the highest bidder for cash between the hours of ten o’clock a.m. and four
o’clock p.m. on the first Tuesday in any month or at such other place, time and
date as provided by the statutes of the State of Texas then in force governing
sales of real estate under powers conferred by deed of trust, after having given
notice of such sale in accordance with such statutes;
 
(b)  Upon the occurrence of a default, this Mortgage may be foreclosed as to the
Other Mortgaged Properties, or any part thereof, in any manner permitted by
applicable law;
 
(c)  Upon the occurrence of a default, Agent may exercise its rights of
enforcement with respect to the Collateral under the Texas Business and Commerce
Code, as amended, or under the UCC or any other statute in force in any state to
the extent the same is applicable law. Cumulative of the foregoing and the other
provisions of this Section 4.4:
 
(i)  Agent may enter upon the Mortgaged Properties or otherwise upon Mortgagor’s
premises to take possession of, assemble and collect the Collateral or to render
it unusable; and
 
(ii)  Agent may require Mortgagor to assemble the Collateral and make it
available at a place Agent designates which is mutually convenient to allow
Agent to take possession or dispose of the Collateral; and
 
(iii)  written notice mailed to Mortgagor as provided herein at least five (5)
days prior to the date of public sale of the Collateral or prior to the date
after which private sale of the Collateral will be made shall constitute
reasonable notice; and
 
(iv)  in the event of a foreclosure of the liens and/or security interests
evidenced hereby, the Collateral, or any part thereof, and the Mortgaged
Properties, or any part thereof, may, at the option of Agent, be sold, as a
whole or in parts, together or separately (including where a portion of the
Mortgaged Properties is sold, the Collateral related thereto may be sold in
connection therewith); and
 
11

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

 
(v)  the expenses of sale provided for in clause FIRST of Section 4.7 shall
include the reasonable expenses of retaking the Collateral, or any part thereof,
holding the same and preparing the same for sale or other disposition; and
 
(vi)  should, under this subsection, the Collateral be disposed of other than by
sale, any proceeds of such disposition shall be treated under Section 4.7 as if
the same were sales proceeds. 
 
(d)  To the extent permitted by applicable law, the sale hereunder of less than
the whole of the Property shall not exhaust the powers of sale herein granted or
the right to judicial foreclosure, and successive sale or sales may be made
until the whole of the Property shall be sold, and, if the proceeds of such sale
of less than the whole of the Property shall be less than the aggregate of the
indebtedness secured hereby and the expense of conducting such sale, this
Mortgage and the liens and security interests hereof shall remain in full force
and effect as to the unsold portion of the Property just as though no sale had
been made; provided, however, that Mortgagor shall never have any right to
require the sale of less than the whole of the Property. In the event any sale
hereunder is not completed or is defective in the opinion of Agent, such sale
shall not exhaust the powers of sale hereunder or the right to judicial
foreclosure, and Agent shall have the right to cause a subsequent sale or sales
to be made. Any sale may be adjourned by announcement at the time and place
appointed for such sale without further notice except as may be required by law.
The Trustee or his successor or substitute acting under power of sale may
appoint or delegate any one or more persons as agent to perform any act or acts
necessary or incident to any sale held by it (including the posting of notices
and the conduct of sale), and such appointment need not be in writing or
recorded. Any and all statements of fact or other recitals made in any deed or
deeds, or other instruments of transfer, given in connection with a sale as to
nonpayment of the secured indebtedness or as to the occurrence of any default,
or as to all of the secured indebtedness having been declared to be due and
payable, or as to the request to sell, or as to notice of time, place and terms
of sale and the properties to be sold having been duly given, or, with respect
to any sale by the Trustee, or any successor or substitute trustee, as to the
refusal, failure or inability to act of Trustee or any substitute or successor
trustee or the appointment of any substitute or successor trustee, or as to any
other act or thing having been duly done, shall be taken as prima facie evidence
of the truth of the facts so stated and recited. Notwithstanding any reference
herein to the Creditor Agreement or any other Transaction Document, all persons
dealing with the Mortgaged Properties shall be entitled to rely on any document,
or certificate, of Agent as to the occurrence of an event, such as an Event of
Default, and shall not be charged with or forced to review any provision of any
other document to determine the accuracy thereof. With respect to any sale held
in foreclosure of the liens and/or security interests covered hereby, it shall
not be necessary for the Trustee, Agent, any public officer acting under
execution or order of the court or any other party to have physically present or
constructively in his/her or its possession, either at the time of or prior to
such sale, the Property or any part thereof.
 
Section 4.5.  Effective as Mortgage. This instrument shall be effective as a
mortgage as well as a deed of trust and upon the occurrence of a default may be
foreclosed as to the Mortgaged Properties, or any portion thereof, in any manner
permitted by applicable law, and any foreclosure suit may be brought by Trustee
or by Agent. To the extent, if any, required to cause this instrument to be so
effective as a mortgage as well as a deed of trust, Mortgagor hereby mortgages
the Mortgaged Properties to Agent. In the event a foreclosure hereunder as to
the Mortgaged Properties, or any part thereof, shall be commenced by Trustee, or
his substitute or successor, Agent may at any time before the sale of such
properties direct Trustee to abandon the sale, and may then institute suit for
the foreclosure of this Mortgage as to such properties. It is agreed that if
Agent should institute a suit for the foreclosure of this Mortgage, Agent may at
any time before the entry of a final judgment in said suit dismiss the same, and
require Trustee, its substitute or successor, to sell the Mortgaged Properties,
or any part thereof, in accordance with the provisions of this Mortgage.
 
12

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

 
Section 4.6.  Receiver. In addition to all other remedies herein provided for,
Mortgagor agrees that, upon the occurrence of a default, Agent shall as a matter
of right be entitled to the appointment of a receiver or receivers for all or
any part of the Property, whether such receivership be incident to a proposed
sale (or sales) of such property or otherwise, and without regard to the value
of the Property or the solvency of any person or persons liable for the payment
of the indebtedness secured hereby, and Mortgagor does hereby consent to the
appointment of such receiver or receivers, waives any and all defenses to such
appointment, and agrees not to oppose any application therefor by Agent, and
agrees that such appointment shall in no manner impair, prejudice or otherwise
affect the rights of Agent under Article III hereof. Mortgagor expressly waives
notice of a hearing for appointment of a receiver and the necessity for bond or
an accounting by the receiver. Nothing herein is to be construed to deprive
Agent or any Creditor of any other right, remedy or privilege it may now or
hereafter have under the law to have a receiver appointed. Any money advanced by
Agent in connection with any such receivership shall be a demand obligation
(which obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor
to Agent and shall bear interest, from the date of making such advancement by
Agent until paid, at the rate described in Section 2.3 hereof.
 
Section 4.7.  Proceeds of Foreclosure. The proceeds of any sale held in
foreclosure of the liens and/or security interests evidenced hereby shall be
applied:
 
FIRST, to the payment of all necessary costs and expenses incident to such
foreclosure sale, including all court costs and charges of every character in
the event foreclosed by suit or any judicial proceeding and including a
reasonable fee to the Trustee if such sale was made by the Trustee acting under
the provisions of Section 4.4.(a);
 
SECOND, to the payment of the secured indebtedness (including the principal,
interest and attorneys’ fees due and unpaid under the Transaction Documents and
the amounts due and unpaid and owed under this Mortgage) in such manner and
order as provided by the Creditor Agreement; and
 
THIRD, the remainder, if any there shall be, shall be paid to Mortgagor, or to
Mortgagor’s heirs, devisees, representatives, successors or assigns, or such
other persons as may be entitled thereto by law.
 
Section 4.8.  Creditor as Purchaser. Any Creditor shall have the right to become
the purchaser at any sale held in foreclosure of the liens and/or security
interests evidenced hereby, and any Creditor purchasing at any such sale shall
have the right to credit upon the amount of the bid made therefor, to the extent
necessary to satisfy such bid, the secured indebtedness owing to such Creditor,
or if such Creditor holds less than all of such indebtedness, the pro rata part
thereof owing to such Creditor, accounting to all other Creditors not joining in
such bid in cash for the portion of such bid or bids apportionable to such
non-bidding Creditor or Creditors.
 
Section 4.9.  Foreclosure as to Matured Debt. Upon the occurrence of a default,
Agent shall have the right to proceed with foreclosure of the liens and/or
security interests evidenced hereby without declaring the entire secured
indebtedness due, and in such event, any such foreclosure sale may be made
subject to the unmatured part of the secured indebtedness and shall not in any
manner affect the unmatured part of the secured indebtedness, but as to such
unmatured part, this Mortgage shall remain in full force and effect just as
though no sale had been made. The proceeds of such sale shall be applied as
provided in Section 4.7 except that the amount paid under clause SECOND thereof
shall be only the matured portion of the secured indebtedness and any proceeds
of such sale in excess of those provided for in clauses FIRST and SECOND
(modified as provided above) shall be applied as provided in Section 3.4 hereof.
Several sales may be made hereunder without exhausting the right of sale for any
unmatured part of the secured indebtedness.
 
13

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

 
Section 4.10.  Remedies Cumulative. All remedies herein provided for are
cumulative of each other and of all other remedies existing at law or in equity
and are cumulative of any and all other remedies provided for in any other
Transaction Document, and, in addition to the remedies herein provided, there
shall continue to be available all such other remedies as may now or hereafter
exist at law or in equity for the collection of the secured indebtedness and the
enforcement of the covenants herein and the foreclosure of the liens and/or
security interests evidenced hereby, and the resort to any remedy provided for
hereunder or under any such other Transaction Document or provided for by law
shall not prevent the concurrent or subsequent employment of any other
appropriate remedy or remedies.
 
Section 4.11.  Discretion as to Security. Agent may resort to any security given
by this Mortgage or to any other security now existing or hereafter given to
secure the payment of the secured indebtedness, in whole or in part, and in such
portions and in such order as may seem best to Agent in its sole and absolute
discretion, and any such action shall not in any way be considered as a waiver
of any of the rights, benefits, liens or security interests evidenced by this
Mortgage.
 
Section 4.12.  Mortgagor’s Waiver of Certain Rights. To the full extent
Mortgagor may do so, Mortgagor agrees that Mortgagor will not at any time insist
upon, plead, claim or take the benefit or advantage of any law now or hereafter
in force providing for any appraisement, valuation, stay, extension or
redemption, and Mortgagor, for Mortgagor, Mortgagor’s heirs, devisees,
representatives, successors and assigns, and for any and all persons ever
claiming any interest in the Property, to the extent permitted by applicable
law, hereby waives and releases all rights of appraisement, valuation, stay of
execution, redemption, notice of intention to mature or declare due the whole of
the secured indebtedness, notice of election to mature or declare due the whole
of the secured indebtedness and all rights to a marshaling of assets of
Mortgagor, including the Property, or to a sale in inverse order of alienation
in the event of foreclosure of the liens and/or security interests hereby
created. Mortgagor shall not have or assert any right under any statute or rule
of law pertaining to the marshaling of assets, sale in inverse order of
alienation, the exemption of homestead, the administration of estates of
decedents, or other matters whatever to defeat, reduce or affect the right under
the terms of this Mortgage to a sale of the Property for the collection of the
secured indebtedness without any prior or different resort for collection, or
the right under the terms of this Mortgage to the payment of the secured
indebtedness out of the proceeds of sale of the Property in preference to every
other claimant whatever. If any law referred to in this section and now in
force, of which Mortgagor or Mortgagor’s heirs, devisees, representatives,
successors or assigns or any other persons claiming any interest in the
Mortgaged Properties or the Collateral might take advantage despite this
section, shall hereafter be repealed or cease to be in force, such law shall not
thereafter be deemed to preclude the application of this section.
 
Section 4.13.  Mortgagor as Tenant Post-Foreclosure. In the event there is a
foreclosure sale hereunder and at the time of such sale Mortgagor or Mortgagor’s
representatives, successors or assigns or any other persons claiming any
interest in the Property by, through or under Mortgagor are occupying or using
the Property, or any part thereof, each and all shall immediately become the
tenant of the purchaser at such sale, which tenancy shall be a tenancy from day
to day, terminable at the will of either landlord or tenant, at a reasonable
rental per day based upon the value of the property occupied, such rental to be
due daily to the purchaser. To the extent permitted by applicable law, the
purchaser at such sale shall, notwithstanding any language herein apparently to
the contrary, have the sole option to demand immediate possession following the
sale or to permit the occupants to remain as tenants at will. In the event the
tenant fails to surrender possession of said property upon demand, the purchaser
shall be entitled to institute and maintain a summary action for possession of
the property (such as an action for forcible entry and detainer) in any court
having jurisdiction.
 
14

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

 
ARTICLE V. 
 
Miscellaneous
 
Section 5.1.  Effective as a Financing Statement. This Mortgage covers goods
which are or are to become fixtures on the real property described herein, and
this Mortgage shall be effective as a financing statement filed as a fixture
filing with respect to all fixtures included within the Property. This Mortgage
shall also be effective as a financing statement, filed as a fixture filing,
covering as-extracted collateral, minerals and other substances of value which
may be extracted from the earth (including oil and gas), and accounts related
thereto, which will be financed at the wellhead or minehead of the wells or
mines located on the Mortgaged Properties. This Mortgage is to be filed for
record in the real property or other appropriate records of each county where
any part of the Mortgaged Properties is situated or which lies shoreward of any
Mortgaged Property (i.e., to the extent a Mortgaged Property lies offshore
within the projected seaward extension of the relevant county boundaries), and
may also be filed in the offices of the Bureau of Land Management or the
Minerals Management Service or any relevant state agency (or any successor
agencies). This Mortgage shall also be effective as a financing statement
covering any other Property and may be filed in any other appropriate filing or
recording office. The mailing address of Mortgagor is the address of Mortgagor
set forth at the end of this Mortgage and the address of Agent from which
information concerning the security interests hereunder may be obtained is the
address of Agent set forth at the end of this Mortgage.
 
Section 5.2.  Reproduction of Mortgage as Financing Statement. A carbon,
photographic, facsimile or other reproduction of this Mortgage or of any
financing statement relating to this Mortgage shall be sufficient as a financing
statement for any of the purposes referred to in Section 5.1. Without limiting
any other provision herein, Mortgagor hereby authorizes Agent to file one or
more financing statements, or renewal or continuation statements thereof,
describing the Collateral.
 
Section 5.3.  Notice to Account Debtors. In addition to, but without limitation
of, the rights granted in Article III hereof, Agent may, at any time after a
default has occurred that is continuing, notify the account debtors or obligors
of any accounts, chattel paper, negotiable instruments or other evidences of
indebtedness included in the Collateral to pay Agent directly.
 
Section 5.4.  Waivers. Agent may at any time and from time to time in writing
waive compliance by Mortgagor with any covenant herein made by Mortgagor to the
extent and in the manner specified in such writing, or consent to Mortgagor’s
doing any act which hereunder Mortgagor is prohibited from doing, or to
Mortgagor’s failing to do any act which hereunder Mortgagor is required to do,
to the extent and in the manner specified in such writing, or release any part
of the Property or any interest therein or any Production Proceeds from the lien
and security interest of this Mortgage, without the joinder of Trustee. Any
party liable, either directly or indirectly, for the secured indebtedness or for
any covenant herein or in any other Transaction Document may be released from
all or any part of such obligations without impairing or releasing the liability
of any other party. No such act shall in any way impair any rights or powers
hereunder except to the extent specifically agreed to in such writing.
 
15

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

 
Section 5.5.  No Impairment of Security. The lien, security interest and other
security rights hereunder shall not be impaired by any indulgence, moratorium or
release which may be granted, including any renewal, extension or modification
which may be granted with respect to any secured indebtedness, or any surrender,
compromise, release, renewal, extension, exchange or substitution which may be
granted in respect of the Property (including Production Proceeds), or any part
thereof or any interest therein, or any release or indulgence granted to any
endorser, guarantor or surety of any secured indebtedness.
 
Section 5.6.  Acts Not Constituting Waiver. Any default may be waived without
waiving any other prior or subsequent default. Any default may be remedied
without constituting a waiver by Agent or any Creditor of the default remedied.
Neither failure to exercise, nor delay in exercising, any right, power or remedy
upon any default shall be construed as a waiver of such default or as a waiver
of the right to exercise any such right, power or remedy at a later date. No
single or partial exercise of any right, power or remedy hereunder shall exhaust
the same or shall preclude any other or further exercise thereof, and every such
right, power or remedy hereunder may be exercised at any time and from time to
time. No modification or waiver of any provision hereof nor consent to any
departure by Mortgagor therefrom shall in any event be effective unless the same
shall be in writing and signed by Agent and then such waiver or consent shall be
effective only in the specific instances, for the purpose for which given and to
the extent therein specified. No notice to nor demand on Mortgagor in any case
shall of itself entitle Mortgagor to any other or further notice or demand in
similar or other circumstances. Acceptance of any payment in an amount less than
the amount then due on any secured indebtedness shall be deemed an acceptance on
account only and shall not in any way excuse the existence of a default
hereunder (except to the extent waived in writing in compliance with the
relevant Transaction Document).
 
Section 5.7.  Mortgagor’s Successors. In the event the ownership of the Property
or any part thereof becomes vested in a person other than Mortgagor, then,
without notice to Mortgagor, such successor or successors in interest may be
dealt with, with reference to this Mortgage and to the indebtedness secured
hereby, in the same manner as with Mortgagor, without in any way vitiating or
discharging Mortgagor’s liability hereunder or for the payment of the
indebtedness or performance of the obligations secured hereby. No transfer of
the Property, no forbearance, and no extension of the time for the payment of
the indebtedness secured hereby shall operate to release, discharge, modify,
change or affect, in whole or in part, the liability of Mortgagor hereunder or
for the payment of the indebtedness or performance of the obligations secured
hereby or the liability of any other person hereunder or for the payment of the
indebtedness secured hereby.
 
Section 5.8.  [Reserved.]
 
Section 5.9.  Application of Payments to Certain Indebtedness. If any part of
the secured indebtedness cannot be lawfully secured by this Mortgage or if any
part of the Property cannot be lawfully subject to the lien and security
interest hereof to the full extent of such indebtedness, then all payments made
shall be applied on said indebtedness first in discharge of that portion thereof
which is not secured by this Mortgage.
 
Section 5.10.  Compliance With Usury Laws. It is the intent of Mortgagor,
Creditors and all other parties to the Transaction Documents to contract in
strict compliance with applicable usury law from time to time in effect. In
furtherance thereof, it is stipulated and agreed that, as more fully provided in
the Transaction Documents, none of the terms and provisions contained herein
shall ever be construed to create a contract to pay, for the use, forbearance or
detention of money, interest in excess of the maximum amount of interest
permitted to be collected, charged, taken, reserved, or received by applicable
law from time to time in effect.
 
16

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

 
Section 5.11.  Substitute Trustee. The Trustee may resign by an instrument in
writing addressed to Agent, or Trustee may be removed at any time with or
without cause by an instrument in writing executed by Agent. In case of the
death, resignation, removal, or disqualification of Trustee, or if for any
reason Agent shall deem it desirable to appoint a substitute or successor
trustee to act instead of the herein named trustee or any substitute or
successor trustee, then Agent shall have the right and is hereby authorized and
empowered to appoint a successor trustee, or a substitute trustee, without other
formality than appointment and designation in writing executed by Agent and the
authority hereby conferred shall extend to the appointment of other successor
and substitute trustees successively until the indebtedness secured hereby has
been paid in full, or until the Property is sold hereunder. Such appointment and
designation by Agent shall be full evidence of the right and authority to make
the same and of all facts therein recited. If Agent is a corporation or
association and such appointment is executed in its behalf by an officer of such
corporation or association, such appointment shall be conclusively presumed to
be executed with authority and shall be valid and sufficient without proof of
any action by the board of directors or any superior officer of the corporation
or association. Agent may act through an agent or attorney-in-fact in
substituting trustees. Upon the making of any such appointment and designation,
all of the estate and title of Trustee in the Mortgaged Properties shall vest in
the named successor or substitute Trustee and such successor or substitute shall
thereupon succeed to, and shall hold, possess and execute, all the rights,
powers, privileges, immunities and duties herein conferred upon Trustee; but
nevertheless, upon the written request of Agent or of the successor or
substitute Trustee, the Trustee ceasing to act shall execute and deliver an
instrument transferring to such successor or substitute Trustee all of the
estate and title in the Mortgaged Properties of the Trustee so ceasing to act,
together with all the rights, powers, privileges, immunities and duties herein
conferred upon the Trustee, and shall duly assign, transfer and deliver any of
the properties and moneys held by said Trustee hereunder to said successor or
substitute Trustee. All references herein to Trustee shall be deemed to refer to
Trustee (including any successor or substitute appointed and designated as
herein provided) from time to time acting hereunder.
 
Section 5.12.  No Liability for Trustee. THE TRUSTEE SHALL NOT BE LIABLE FOR ANY
ERROR OF JUDGMENT OR ACT DONE BY TRUSTEE IN GOOD FAITH, OR BE OTHERWISE
RESPONSIBLE OR ACCOUNTABLE UNDER ANY CIRCUMSTANCES WHATSOEVER (INCLUDING THE
TRUSTEE’S NEGLIGENCE), EXCEPT FOR TRUSTEE’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. The Trustee shall have the right to rely on any instrument, document
or signature authorizing or supporting any action taken or proposed to be taken
by the Trustee hereunder, believed by the Trustee in good faith to be genuine.
All moneys received by Trustee shall, until used or applied as herein provided,
be held in trust for the purposes for which they were received, but need not be
segregated in any manner from any other moneys (except to the extent required by
law), and Trustee shall be under no liability for interest on any moneys
received by him hereunder. Mortgagor hereby ratifies and confirms any and all
acts which the herein named Trustee or its successor or successors, substitute
or substitutes, shall do lawfully by virtue hereof. Mortgagor will reimburse
Trustee for, and indemnify and save Trustee harmless against, any and all
liability and expenses (including attorneys fees) which may be incurred by
Trustee in the performance of his duties. The foregoing indemnities shall not
terminate upon the release, foreclosure or other termination of this Mortgage
but will survive such release, termination and/or foreclosure of this Mortgage,
or conveyance in lieu of foreclosure, and the repayment of the secured
indebtedness and the discharge and release of this Mortgage and the other
documents evidencing and/or securing the secured indebtedness. Any amount to be
paid hereunder by Mortgagor to Trustee shall be a demand obligation owing by
Mortgagor to Trustee and shall be subject to and covered by the provisions of
Section 2.3 hereof.
 
Section 5.13.  Notices. All notices, requests, consents, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed sufficiently given or furnished if delivered in compliance with and
according to the Creditor Agreement. Notwithstanding the foregoing, or anything
else in the Transaction Documents which may appear to the contrary, any notice
given in connection with a foreclosure of the liens and/or security interests
created hereunder, or otherwise in connection with the exercise by Agent, any
Creditor or Trustee of their respective rights hereunder or under any other
Transaction Document, which is given in a manner permitted by applicable law
shall constitute proper notice; without limitation of the foregoing, notice
given in a form required or permitted by statute shall (as to the portion of the
Property to which such statute is applicable) constitute proper notice.
 
17

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

 
Section 5.14.  Invalidity of Certain Provisions. A determination that any
provision of this Mortgage is unenforceable or invalid shall not affect the
enforceability or validity of any other provision and the determination that the
application of any provision of this Mortgage to any person or circumstance is
illegal or unenforceable shall not affect the enforceability or validity of such
provision as it may apply to other persons or circumstances.
 
Section 5.15.  Interpretation, etc. Within this Mortgage, words of any gender
shall be held and construed to include any other gender, and words in the
singular number shall be held and construed to include the plural, unless the
context otherwise requires. Titles appearing at the beginning of any
subdivisions hereof are for convenience only, do not constitute any part of such
subdivisions, and shall be disregarded in construing the language contained in
such subdivisions. References herein to any Section or Exhibit shall be to a
Section or an Exhibit, as the case may be, hereof unless otherwise specifically
provided. The word “or” is not exclusive. The use herein of the word “include”
or “including”, when following any general statement, term or matter, shall not
be construed to limit such statement, term or matter to the specific items or
matters set forth immediately following such word or to similar items or
matters, whether or not nonlimiting language (such as “without limitation” or
“but not limited to” or words of similar import) is used with reference thereto,
but rather shall be deemed to refer to all other items or matters that fall
within the broadest possible scope of such general statement, term or matter.
This Mortgage has been reviewed and negotiated by sophisticated parties with
access to legal counsel and no rule of construction shall apply hereto or
thereto which would require or allow this Mortgage to be construed against any
party because of its role in drafting this Mortgage.
 
Section 5.16.  Certain Consents. Except where otherwise expressly provided
herein, in any instance hereunder where the approval, consent or the exercise of
judgment of Agent or any Creditor is required, the granting or denial of such
approval or consent and the exercise of such judgment shall be within the sole
discretion of such party, and such party shall not, for any reason or to any
extent, be required to grant such approval or consent or exercise such judgment
in any particular manner, regardless of the reasonableness of either the request
or the judgment of such party.
 
Section 5.17.  Certain Obligations of Mortgagor. Without limiting Mortgagor’s
obligations hereunder, Mortgagor’s liability hereunder shall extend to and
include all post-petition interest, expenses, and other duties and liabilities
with respect to Mortgagor’s obligations hereunder which would be owed but for
the fact that the same may be unenforceable due to the existence of a
bankruptcy, reorganization or similar proceeding.
 
Section 5.18.  Authority of Agent. The persons constituting Creditors may, by
agreement among themselves, provide for and regulate the exercise of rights and
remedies hereunder, but, unless and until modified to the contrary in writing
signed by all such persons and recorded in the same counties as this Mortgage is
recorded, (i) all persons other than Mortgagor and its affiliates shall be
entitled to rely on the releases, waivers, consents, approvals, notifications
and other acts (including the appointment of substitute or successor trustee, or
trustees, hereunder and the bidding in of all or any part of the secured
indebtedness held by any one or more Creditors, whether the same be conducted
under the provisions hereof or otherwise) of Agent, without inquiry into any
such agreements or the existence of required consent or approval of any persons
constituting Creditor and without the joinder of any party other than Agent in
such releases, waivers, consents, approvals, notifications or other acts and
(ii) all notices, requests, consents, demands and other communications required
or permitted to be given hereunder may be given to Agent.
 
18

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

 
Section 5.19.  Counterparts. This Mortgage may be executed in several
counterparts, all of which are identical, except that, to facilitate
recordation, certain counterparts hereof may include only that portion of
Exhibit A which contains descriptions of the properties located in (or otherwise
subject to the recording or filing requirements and/or protections of the
recording or filing acts or regulations of) the recording jurisdiction in which
the particular counterpart is to be recorded, and other portions of Exhibit A
shall be included in such counterparts by reference only. All of such
counterparts together shall constitute one and the same instrument. Complete
copies of this Mortgage containing the entire Exhibit A have been retained by
Mortgagor and Agent.
 
Section 5.20.  Successors and Assigns. The terms, provisions, covenants,
representations, indemnifications and conditions hereof shall be binding upon
Mortgagor, and the successors and assigns of Mortgagor, and shall inure to the
benefit of Agent, Trustee and the persons constituting Creditors and their
respective successors and assigns, and shall constitute covenants running with
the Mortgaged Properties. Should the agency under which Agent serves be
terminated, or otherwise cease to exist, Creditors shall be deemed to be the
successors to Agent. All references in this Mortgage to Mortgagor, Agent,
Trustee or Creditors shall be deemed to include all of their respective
successors and assigns.
 
Section 5.21.  FINAL AGREEMENT OF THE PARTIES. THE WRITTEN TRANSACTION DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
 
Section 5.22.  CHOICE OF LAW. WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW,
THIS MORTGAGE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT
THAT TO THE EXTENT THAT THE LAW OF A STATE IN WHICH A PORTION OF THE PROPERTY IS
LOCATED (OR WHICH IS OTHERWISE APPLICABLE TO A PORTION OF THE PROPERTY)
NECESSARILY GOVERNS WITH RESPECT TO PROCEDURAL AND SUBSTANTIVE MATTERS RELATING
TO THE CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS, SECURITY INTERESTS AND
OTHER RIGHTS AND REMEDIES OF THE TRUSTEE OR THE AGENT GRANTED HEREIN, THE LAW OF
SUCH STATE SHALL APPLY AS TO THAT PORTION OF THE PROPERTY LOCATED IN (OR WHICH
IS OTHERWISE SUBJECT TO THE LAWS OF) SUCH STATE.
 
Section 5.23.  Place of Payment. All secured indebtedness which may be owing
hereunder at any time by Mortgagor shall be payable at the place designated in
the Creditor Agreement (or if no such designation is made, at the address of
Agent indicated at the end of this Mortgage), or at such other place as Agent
may designate in writing.
 
[The remainder of this page is intentionally left blank.]

19

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

 

IN WITNESS WHEREOF, this instrument is executed by Mortgagor on the date set
forth below in the acknowledgment to be effective as of the date first written
above.

        FOOTHILLS TEXAS, INC.  
   
   
    By:   /s/ W. Kirk Bosche  

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

W. Kirk Bosche
Assistant Secretary and Chief Financial Officer
   

The address of Agent is:
85 Broad Street
New York, New York 10004
 
 
The address of the Trustee is:
1000 Louisiana, Suite 550
Houston, Texas 77002
 
The address of Mortgagor is:
4540 California Avenue, Suite 550
Bakersfield, California 93390

 

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