Exhibit 10.11
Execution Version
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of August 30, 2006
Among
CALLON PETROLEUM COMPANY
as Borrower,
UNION BANK OF CALIFORNIA, N.A.,
as Lead Arranger and Administrative Agent,
GUARANTY BANK, as Syndication Agent
NATEXIS BANQUES POPULAIRES, as Documentation Agent,
and
THE LENDERS SIGNATORY HERETO
$175,000,000 Senior Secured Credit Facility

 

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TABLE OF CONTENTS

                              Page ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS
    1  
 
  Section 1.01   Terms Defined Above     1  
 
  Section 1.02   Certain Defined Terms     1  
 
  Section 1.03   Accounting Terms and Determinations     17   ARTICLE II
COMMITMENTS     17  
 
  Section 2.01   Loans and Letters of Credit     17  
 
  Section 2.02   Borrowings, Continuations and Conversions, Letters of Credit  
  18  
 
  Section 2.03   Changes of Commitments     20  
 
  Section 2.04   Fees     20  
 
  Section 2.05   Several Obligations     21  
 
  Section 2.06   Notes     21  
 
  Section 2.07   Prepayments     22  
 
  Section 2.08   Borrowing Base     23  
 
  Section 2.09   Assumption of Risks     24  
 
  Section 2.10   Obligation to Reimburse and to Prepay     25  
 
  Section 2.11   Lending Offices     27   ARTICLE III PAYMENTS OF PRINCIPAL AND
INTEREST     27  
 
  Section 3.01   Repayment of Principal     27  
 
  Section 3.02   Payment of Interest     27  
 
  Section 3.03   Payment Waterfall     28   ARTICLE IV PAYMENTS; PRO RATA
TREATMENT; COMPUTATIONS; ETC     29  
 
  Section 4.01   Payments     29  
 
  Section 4.02   Pro Rata Treatment     30  
 
  Section 4.03   Computations     30  
 
  Section 4.04   Non-receipt of Funds by the Administrative Agent     30  
 
  Section 4.05   Set-off, Sharing of Payments, Etc     31  
 
  Section 4.06   Taxes     32  
 
  Section 4.07   Disposition of Proceeds     34   ARTICLE V CAPITAL ADEQUACY AND
YIELD PROTECTION     35  
 
  Section 5.01   Additional Costs     35  

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TABLE OF CONTENTS
(continued)

                              Page
 
  Section 5.02   Limitation on LIBOR Loans     36  
 
  Section 5.03   Illegality     37  
 
  Section 5.04   Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03     37
 
 
  Section 5.05   Compensation     37  
 
  Section 5.06   Time Limit; Etc     38  
 
  Section 5.07   Replacement Lenders     38   ARTICLE VI CONDITIONS PRECEDENT  
  39  
 
  Section 6.01   Initial Funding     39  
 
  Section 6.02   Initial and Subsequent Loans and Letters of Credit     41  
 
  Section 6.03   Conditions Precedent for the Benefit of Lenders     41  
 
  Section 6.04   No Waiver     42   ARTICLE VII REPRESENTATIONS AND WARRANTIES  
  42  
 
  Section 7.01   Corporate Existence     42  
 
  Section 7.02   Financial Condition     42  
 
  Section 7.03   Litigation     42  
 
  Section 7.04   No Breach     43  
 
  Section 7.05   Authority     43  
 
  Section 7.06   Approvals     43  
 
  Section 7.07   Use of Loans     43  
 
  Section 7.08   ERISA     43  
 
  Section 7.09   Taxes     44  
 
  Section 7.10   Titles, Etc     45  
 
  Section 7.11   No Material Misstatements     45  
 
  Section 7.12   Investment Company Act     46  
 
  Section 7.13   [Reserved]     46  
 
  Section 7.14   Subsidiaries     46  
 
  Section 7.15   Location of Business, Offices and Inventory     46  
 
  Section 7.16   Defaults     46  
 
  Section 7.17   Environmental Matters     46  
 
  Section 7.18   Compliance with the Law     47  

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TABLE OF CONTENTS
(continued)

                              Page
 
  Section 7.19   Insurance     48  
 
  Section 7.20   Hedging Agreements     48  
 
  Section 7.21   Restriction on Liens     48  
 
  Section 7.22   Material Agreements     48   ARTICLE VIII AFFIRMATIVE COVENANTS
    49  
 
  Section 8.01   Reporting Requirements     49  
 
  Section 8.02   Litigation     51  
 
  Section 8.03   Maintenance, Etc     51  
 
  Section 8.04   Environmental Matters     53  
 
  Section 8.05   Further Assurances     54  
 
  Section 8.06   Performance of Obligations     54  
 
  Section 8.07   Engineering Reports     54  
 
  Section 8.08   Title Information     55  
 
  Section 8.09   Collateral     56  
 
  Section 8.10   ERISA Information and Compliance     57  
 
  Section 8.11   Inspection; Books and Records     57   ARTICLE IX NEGATIVE
COVENANTS     58  
 
  Section 9.01   Debt     58  
 
  Section 9.02   Liens     59  
 
  Section 9.03   Investments, Loans and Advances     60  
 
  Section 9.04   Dividends, Distributions and Redemptions     61  
 
  Section 9.05   Sales and Leasebacks     61  
 
  Section 9.06   Nature of Business     61  
 
  Section 9.07   [Intentionally omitted]     61  
 
  Section 9.08   Mergers, Etc     61  
 
  Section 9.09   Proceeds of Notes; Letters of Credit     61  
 
  Section 9.10   ERISA Compliance     62  
 
  Section 9.11   [Intentionally omitted]     63  
 
  Section 9.12   Current Ratio     63  
 
  Section 9.13   Fixed Charge Coverage Ratio     63  

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TABLE OF CONTENTS
(continued)

                              Page
 
  Section 9.14   Leverage Ratio     63  
 
  Section 9.15   Sale of Oil and Gas Properties     64  
 
  Section 9.16   Environmental Matters     64  
 
  Section 9.17   Transactions with Affiliates     64  
 
  Section 9.18   Subsidiaries     64  
 
  Section 9.19   Negative Pledge Agreements     64  
 
  Section 9.20   [Reserved]     64  
 
  Section 9.21   Subordinated Debt     65  
 
  Section 9.22   Hanover Agreements     65  
 
  Section 9.23   Permitted Medusa Transactions; Permitted Entrada Transactions  
  65   ARTICLE X EVENTS OF DEFAULT; REMEDIES     65  
 
  Section 10.01   Events of Default     65  
 
  Section 10.02   Remedies     67   ARTICLE XI THE ADMINISTRATIVE AGENT     68  
 
  Section 11.01   Appointment, Powers and Immunities     68  
 
  Section 11.02   Reliance by Administrative Agent     68  
 
  Section 11.03   Defaults     69  
 
  Section 11.04   Rights as a Lender     69  
 
  Section 11.05   Indemnification     69  
 
  Section 11.06   Non-Reliance on Administrative Agent and other Lenders     69
 
 
  Section 11.07   Action by Administrative Agent     70  
 
  Section 11.08   Resignation or Removal of Administrative Agent     70  
 
  Section 11.09   Agents     71   ARTICLE XII MISCELLANEOUS     71  
 
  Section 12.01   Waiver     71  
 
  Section 12.02   Notices     71  
 
  Section 12.03   Payment of Expenses, Indemnities, etc     71  
 
  Section 12.04   Amendments, Etc     74  
 
  Section 12.05   Successors and Assigns     74  

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TABLE OF CONTENTS
(continued)

                              Page
 
  Section 12.06   Assignments and Participations     74  
 
  Section 12.07   Invalidity     76  
 
  Section 12.08   Counterparts     76  
 
  Section 12.09   References; Use of Word “Including”     76  
 
  Section 12.10   Survival     76  
 
  Section 12.11   Captions     76  
 
  Section 12.12   No Oral Agreements     77  
 
  Section 12.13   Governing Law; Submission to Jurisdiction     77  
 
  Section 12.14   Interest     78  
 
  Section 12.15   Confidentiality     79  
 
  Section 12.16   Exculpation Provisions     79  
 
  Section 12.17   Hedging Agreement Substitution of Collateral     80  
 
  Section 12.18   Amendment, Restatement and Rearrangement of Prior Debt     80
 
 
  Section 12.19   Obligations as Senior Indebtedness; Specified Senior
Indebtedness     80  

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ANNEXES, EXHIBITS AND SCHEDULES

     
Annex I
  - List of Percentage Shares and Maximum Credit Amounts
Exhibit A
  - Form of Note
Exhibit B
  - Form of Borrowing, Continuation and Conversion Request
Exhibit C
  - Form of Compliance Certificate
Exhibit D
  - List of Security Instruments
Exhibit E
  - Form of Assignment Agreement
Schedule 7.02
  - Liabilities
Schedule 7.03
  - Litigation
Schedule 7.09
  - Taxes
Schedule 7.10
  - Titles, etc.
Schedule 7.14
  - Subsidiaries and Partnerships
Schedule 7.17
  - Environmental Matters
Schedule 7.19
  - Insurance
Schedule 7.20
  - Hedging Agreements
Schedule 7.22
  - Material Agreements
Schedule 7.23
  - Gas Imbalances
Schedule 9.01
  - Debt
Schedule 9.02
  - Liens
Schedule 9.03
  - Investments, Loans and Advances

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     THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 30, 2006 is
among CALLON PETROLEUM COMPANY, a corporation formed under the laws of the State
of Delaware (the “Borrower”); each of the lenders that is a signatory hereto or
which becomes a signatory hereto as provided in Section 12.06 (individually,
together with its successors and assigns, a “Lender” and, collectively, the
“Lenders”); GUARANTY BANK, as Syndication Agent, NATEXIS BANQUES POPULAIRES, as
Documentation Agent, and UNION BANK OF CALIFORNIA, N.A., (in its individual
capacity, “UBOC”), as administrative agent for the Lenders (in such capacity,
together with its successors in such capacity, the “Administrative Agent”) and
as documentation agent.
RECITALS
     A. The Borrower has previously requested that the Lenders provide certain
loans to and extensions of credit on behalf of the Borrower;
     B. Pursuant to such request, the Lenders agreed to make such loans and
extensions of credit subject to the terms and conditions of the Prior Credit
Agreement; and
     C. The Borrower has now requested (and the Lenders have agreed) that the
Prior Credit Agreement be amended and restated in its entirety in accordance
with the terms and provisions of this Agreement.
     D. In consideration of the mutual covenants and agreements herein contained
and of the loans, extensions of credit and commitments hereinafter referred to,
the parties hereto agree that the Prior Credit Agreement is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
Definitions and Accounting Matters
     Section 1.01 Terms Defined Above. As used in this Agreement, the terms
“Administrative Agent,” “Borrower,” “Lender,” “Lenders” and “UBOC” shall have
the meanings indicated above.
     Section 1.02 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Article I or in
other provisions of this Agreement in the singular to have equivalent meanings
when used in the plural and vice versa):
     “2010 Senior Notes” shall mean the 9.75% Senior Notes due December 5, 2010,
issued by Borrower under that certain indenture dated March 15, 2004, between
Borrower and American Stock Transfer & Trust Company, as trustee, as modified,
renewed, or supplemented from time to time to the extent permitted under
Sections 9.01 and 9.23 of this Agreement.
     “Additional Costs” shall have the meaning assigned such term in
Section 5.01(a).
     “Affected Loans” shall have the meaning assigned such term in Section 5.04.

 

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     “Affiliate” of any Person shall mean (i) any Person directly or indirectly
controlled by, controlling or under common control with such first Person,
(ii) any director or officer of such first Person or of any Person referred to
in clause (i) above and (iii) if any Person in clause (i) above is an
individual, any member of the immediate family (including parents, spouse and
children) of such individual and any trust whose principal beneficiary is such
individual or one or more members of such immediate family and any Person who is
controlled by any such member or trust. For purposes of this definition, any
Person which owns directly or indirectly 20% or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation or 10% or more of the partnership or other ownership interests of
any other Person (other than as a limited partner of such other Person) will be
deemed to “control” (including, with its correlative meanings, “controlled by”
and “under common control with”) such corporation or other Person.
     “Agreement” shall mean this Credit Agreement, as the same may from time to
time be amended or supplemented.
     “Aggregate Commitments” at any time shall equal the amount calculated in
accordance with Section 2.03.
     “Aggregate Maximum Credit Amount” at any time shall equal the sum of the
Maximum Credit Amounts of the Lenders, as the same may be reduced pursuant to
Section 2.03(b). The Aggregate Maximum Credit Amount on the Closing Date shall
be $175,000,000.
     “Applicable Lending Office” shall mean, for each Lender and for each Type
of Loan, the lending office of such Lender (or an Affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
offices of such Lender (or of an Affiliate of such Lender) as such Lender may
from time to time specify to the Administrative Agent and the Borrower as the
office by which its Loans of such Type are to be made and maintained.
     “Applicable Margin” shall mean the applicable per annum percentage set
forth at the appropriate intersection in the table shown below, based on the
Borrowing Base Utilization as in effect from time to time:

                      Applicable Margin Borrowing Base Utilization   LIBOR Loans
  Base Rate Loans
Less than 50%
    1.375 %     0.00 %
Greater than or equal to 50%, but less than 75%
    1.625 %     0.00 %
Greater than or equal to 75%, but less than 90%
    1.750 %     0.25 %
Greater than or equal to 90%
    2.000 %     0.50 %

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Each change in the Applicable Margin resulting from a change in the Borrowing
Base Utilization shall take effect on the day such change in the Borrowing Base
Utilization occurs.
     “Assignment” shall have the meaning assigned such term in Section 12.06(b).
     “Base Rate” shall mean, with respect to any Base Rate Loan, for any day,
the higher of (i) the Federal Funds Rate for any such day plus 1/2 of 1% or
(ii) the Prime Rate for such day. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
     “Base Rate Loans” shall mean Loans that bear interest at rates based upon
the Base Rate.
     “Beneficiaries” shall mean the Administrative Agent, the Lenders, each
Issuing Bank and each Affiliate of a Lender that is a party to a Hedging
Agreement with the Borrower or any Guarantor.
     “Borrowing Base” shall mean at any time an amount equal to the amount
determined in accordance with Section 2.08.
     “Borrowing Base Deficiency” shall occur and be continuing at any time that,
and relate to the amount by which, the sum of the aggregate outstanding
principal amount of the Loans, plus the LC Exposure, exceeds the Borrowing Base.
     “Borrowing Base Properties” means those Oil and Gas Properties of Borrower
and the Guarantors elected by the Borrower to be evaluated for Borrowing Base
purposes and included in the most recent Reserve Report delivered to the Lenders
under this Agreement.
     “Business Day” shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas or Los Angeles,
California and, where such term is used in the definition of “Quarterly Date” or
if such day relates to a borrowing or continuation of, a payment or prepayment
of principal of or interest on, or a conversion of or into, or the Interest
Period for, a LIBOR Loan or a notice by the Borrower with respect to any such
borrowing or continuation, payment, prepayment, conversion or Interest Period,
any day which is also a day on which dealings in Dollar deposits are carried out
in the London interbank market.
     “Change of Control” means the occurrence of any of the following events:
(i) any Person or two or more Persons, other than the Borrower or any Affiliate
of the Borrower, acting as a group shall acquire beneficial ownership (within
the meaning of Rule 13d-3 of the Securities and Exchange Commission under the
Exchange Act, and including holding proxies to vote for the election of
directors other than proxies held by the Borrower’s management or their
designees to be voted in favor of persons nominated by the Borrower’s Board of
Directors) of 40% or more of the outstanding voting securities of the Borrower,
measured by voting power (including both ordinary shares and any preferred stock
or other equity securities entitling the holders thereof to vote with the
holders of common stock in elections for directors of the Borrower), (ii) the
Borrower shall fail beneficially to own, directly or indirectly, 100% of the
outstanding shares of voting capital stock of any of the Guarantors on a
fully-diluted basis, or (iii) 50% or more of the directors of the Borrower shall
consist of Persons not nominated by the Borrower’s Board of

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Directors (not including as Board nominees any directors which the Board is
obligated to nominate pursuant to shareholders agreements, voting trust
arrangements or similar arrangements).
     “Closing Date” shall mean the date on which all conditions precedent
described in Section 6.01 have been satisfied or waived.
     “Code” shall mean the Internal Revenue Code of 1986, as amended from time
to time and any successor statute.
     “Collateral” shall mean the Property owned by the Borrower and the
Guarantors which is subject to the Liens existing and to exist under the terms
of the Security Instruments.
     “Commitment” shall mean, for any Lender, its obligation to make Loans as
provided in Section 2.01(a) and to participate in the Letters of Credit as
provided in Section 2.01(b) up to the lesser of (i) such Lender’s Maximum Credit
Amount and (ii) the Lender’s Percentage Share of the amount equal to the then
effective Borrowing Base.
     “Consolidated Net Income” shall mean with respect to the Borrower and its
Consolidated Subsidiaries, for any period, the aggregate of the net income (or
loss) of the Borrower and its Consolidated Subsidiaries after allowances for
taxes for such period, determined on a consolidated basis in accordance with
GAAP; provided that there shall be excluded from such net income (to the extent
otherwise included therein) the following: (i) the net income of any Person in
which the Borrower or any Consolidated Subsidiary has an interest (which
interest does not cause the net income of such other Person to be consolidated
with the net income of the Borrower and its Consolidated Subsidiaries in
accordance with GAAP), except to the extent of the amount of dividends or
distributions actually paid in such period by such other Person to the Borrower
or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but
not loss) of any Consolidated Subsidiary to the extent that the declaration or
payment of dividends or similar distributions or transfers or loans by that
Consolidated Subsidiary is not at the time permitted by operation of the terms
of its charter or any agreement, instrument or Governmental Requirement
applicable to such Consolidated Subsidiary, or is otherwise restricted or
prohibited in each case determined in accordance with GAAP; (iii) the net income
(or loss) of any Person acquired in a pooling of interests transaction for any
period prior to the date of such transaction; (iv) any extraordinary gains or
losses, including gains or losses attributable to Property sales not in the
ordinary course of business; and (v) the cumulative effect of a change in
accounting principles and any gains or losses attributable to writeups or write
downs of assets.
     “Consolidated Subsidiaries” shall mean each Subsidiary of a Person (whether
now existing or hereafter created or acquired) the financial statements of which
shall be (or should have been) consolidated with the financial statements of
such Person in accordance with GAAP. Unless otherwise indicated, each reference
to the term “Consolidated Subsidiary” shall mean a Subsidiary consolidated with
the Borrower.
     “CPOC” means Callon Petroleum Operating Company, a Delaware corporation.
     “Debt” shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or

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other similar instruments (including principal, interest, fees and charges);
(ii) all obligations of such Person (whether contingent or otherwise) in respect
of bankers’ acceptances, letters of credit, surety or other bonds and similar
instruments; (iii) all obligations of such Person to pay the deferred purchase
price of Property or services (other than for borrowed money); (iv) all
obligations under leases which shall have been, or should have been, in
accordance with GAAP, recorded as capital leases in respect of which such Person
is liable (whether contingent or otherwise); (v) all obligations of such Person
under leases treated as operating leases under GAAP and as a loan or financing
for U.S. income tax purposes; (vi) all Debt (as described in the other clauses
of this definition) and other obligations of others secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person;
(vii) all Debt (as described in the other clauses of this definition) and other
obligations of others guaranteed by such Person or in which such Person
otherwise assures a creditor against loss of the debtor or obligations of
others; (viii) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of others or to
purchase the Debt or Property of others; (ix) obligations to deliver goods or
services including Hydrocarbons in consideration of advance payments, except as
permitted by Section 9.20 and disclosed by Section 8.07(c); (x) obligations to
pay for goods or services whether or not such goods or services are actually
received or utilized by such Person; (xi) any capital stock of such Person in
which such Person has a mandatory obligation to redeem such stock, but
excluding, in the case of the Borrower, mandatory obligations to redeem such
stock after September 15, 2004; (xii) any Debt of a Special Entity for which
such Person is liable either by agreement or because of a Governmental
Requirement; (xiii) the undischarged balance of any production payment created
by such Person or for the creation of which such Person directly or indirectly
received payment; and (xiv) all obligations of such Person under Hedging
Agreements.
     “Default” shall mean an Event of Default or an event which with notice or
lapse of time or both would become an Event of Default.
     “Deficiency Payment” shall mean, in respect of any Borrowing Base
Deficiency, any payments made by the Borrower during a Deficiency Period for
such Borrowing Base Deficiency equal to either (i) in the case of each such
payment the amount of the Borrowing Base Deficiency on the first day of such
Deficiency Period divided by six (6) or (ii) such other amount as the Majority
Lenders may approve, which when aggregated with the other such payments for such
Deficiency Period, are sufficient to reduce the Borrowing Base Deficiency to
zero on or before the final day of such Deficiency Period.
     “Deficiency Period” shall mean any period of time commencing on the date
that the Administrative Agent notifies the Borrower of the existence of a
Borrowing Base Deficiency and ending on the date which is six (6) months
thereafter.
     “Documentation Agent” shall mean Natexis Banques Populaires.
     “Dollars” and “$” shall mean lawful money of the United States of America.
     “EBITDA” shall mean, for any period, the sum of Consolidated Net Income for
such period plus the following expenses or charges to the extent deducted from
Consolidated Net

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Income in such period: interest, taxes, depreciation, depletion and amortization
and any other non cash charges or expenses.
     “Engineering Reports” shall have the meaning assigned such term in
Section 2.08.
     “Entrada Assets” shall have the meaning assigned to such term in
Section 8.09(a).
     “Entrada Entity” shall have the meaning assigned to such term in
Section 8.09(a).
     “Entrada Field” means any and all Oil and Gas Properties on, under or
related to Garden Banks Blocks 738, 782, 826 and 827 located in the federal
offshore waters of the Gulf of Mexico.
     “Environmental Laws” shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all jurisdictions
in which the Borrower or any Subsidiary is conducting or at any time has
conducted business, or where any Property of the Borrower or any Subsidiary is
located, including without limitation, the Oil Pollution Act of 1990 (“OPA”),
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 (“CERCLA”), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
(“RCRA”), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and Reauthorization
Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended,
and other environmental conservation or protection laws. The term “oil” shall
have the meaning specified in OPA, the terms “hazardous substance” and “release”
(or “threatened release”) have the meanings specified in CERCLA, and the terms
“solid waste” and “disposal” (or “disposed”) have the meanings specified in
RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is
amended so as to broaden the meaning of any term defined thereby, such broader
meaning shall apply subsequent to the effective date of such amendment and
(ii) to the extent the laws of the state in which any Property of the Borrower
or any Subsidiary is located establish a meaning for “oil,” “hazardous
substance,” “release,” “solid waste” or “disposal” which is broader than that
specified in either OPA, CERCLA or RCRA, such broader meaning shall apply.
     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time and any successor statute.
     “ERISA Affiliate” shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would be deemed
to be a “single employer” within the meaning of section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.
     “ERISA Event” shall mean (i) a “Reportable Event” described in Section 4043
of ERISA and the regulations issued thereunder, (ii) the withdrawal of the
Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan year
in which it was a “substantial employer” as defined in Section 4001(a)(2) of
ERISA, (iii) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA,
(iv) the institution of proceedings to terminate a Plan by the PBGC or (v) any
other event or condition

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which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan.
     “Event of Default” shall have the meaning assigned such term in
Section 10.01.
     “Excepted Liens” shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action and for which adequate reserves have been
maintained; (ii) Liens in connection with workmen’s compensation, unemployment
insurance or other social security, old age pension or public liability
obligations not yet due or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; (iii) operators’, vendors’, carriers’, warehousemen’s,
repairmen’s, mechanics’, workmen’s, materialmen’s, construction or other like
Liens arising by operation of law in the ordinary course of business or incident
to the exploration, development, operation and maintenance of Oil and Gas
Properties or landlord’s liens, each of which is in respect of obligations that
have not been outstanding more than 90 days or which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
maintained in accordance with GAAP; (iv) any Liens reserved in leases or farmout
agreements for rent or royalties and for compliance with the terms of the
farmout agreements or leases in the case of leasehold estates, to the extent
that any such Lien referred to in this clause does not materially impair the use
of the Property covered by such Lien for the purposes for which such Property is
held by the Borrower or any Subsidiary or materially impair the value of such
Property subject thereto; (v) encumbrances (other than to secure the payment of
borrowed money or the deferred purchase price of Property or services),
easements, restrictions, servitudes, permits, conditions, covenants, exceptions
or reservations in any rights of way or other Property of the Borrower or any
Subsidiary for the purpose of roads, pipelines, transmission lines,
transportation lines, distribution lines for the removal of gas, oil, coal or
other minerals or timber, and other like purposes, or for the joint or common
use of real estate, rights of way, facilities and equipment, and defects,
irregularities, zoning restrictions and deficiencies in title of any rights of
way or other Property which in the aggregate do not materially impair the use of
such rights of way or other Property for the purposes of which such rights of
way and other Property are held by the Borrower or any Subsidiary or materially
impair the value of such Property subject thereto; (vi) deposits of cash or
securities to secure the performance of bids, trade contracts, leases, statutory
obligations and other obligations of a like nature incurred in the ordinary
course of business; and (vii) Liens permitted by the Security Instruments.
     “Existing Letters of Credit” means the letters of credit issued by the
Issuing Banks under the Prior Credit Agreement and which have not been
terminated or expired and returned to the respective Issuing Bank as of the
Closing Date.
     “Existing Other Debt” shall mean the 2010 Senior Notes.
     “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 a member of the
Federal Reserve System arranged by federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if the date for which such rate is to be

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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 (ii) 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 Administrative Agent on such day on such transactions as
determined by the Administrative Agent.
     “Fee Letter” shall mean that certain letter agreement from UBOC to the
Borrower dated as of August 30, 2006 concerning certain fees in connection with
this Agreement and any agreements or instruments executed in connection
therewith, as the same may be amended or replaced from time to time.
     “Financial Statements” shall mean the financial statement or statements of
the Borrower and its Consolidated Subsidiaries described or referred to in
Section 7.02.
     “Funded Debt” shall mean, for any Person the sum (without duplication) of
all Debt of the type described in clauses (i), (iv) and (v) of the definition
thereof.
     “GAAP” shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
     “Governmental Authority” shall include the country, the state, county, city
and political subdivisions in which any Person or such Person’s Property is
located or which exercises valid jurisdiction over any such Person or such
Person’s Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which exercises
valid jurisdiction over any such Person or such Person’s Property. Unless
otherwise specified, all references to Governmental Authority herein shall mean
a Governmental Authority having jurisdiction over, where applicable, the
Borrower, its Subsidiaries or any of their Property or the Administrative Agent,
any Lender, any Affiliate of Lender or any Applicable Lending Office.
     “Governmental Requirement” shall mean any law, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement
(whether or not having the force of law), including, without limitation,
Environmental Laws, energy regulations and occupational, safety and health
standards or controls, of any Governmental Authority.
     “Guarantors” shall mean CPOC, Callon Offshore Production, Inc., a
Mississippi corporation, Mississippi Marketing, Inc., a Mississippi corporation,
and Callon Mineral Properties, Inc., each a “Guarantor”.
     “Guaranty Agreement” shall mean an agreement executed by each Guarantor in
form and substance satisfactory to the Administrative Agent guarantying,
unconditionally, payment of the Obligations, as the same may be amended,
modified or supplemented from time to time.
     “Hanover Processing Agreement” shall mean that certain Processing Agreement
dated as of December 14, 2001 by and between CPOC and Hanover Compression
Limited Partnership and an accurate copy of which has been previously provided
to the Lenders.

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     “Hanover Sales Documents” shall mean that certain Bill of Sale dated as of
December 14, 2001 and that certain Engineering, Procurement, Construction and
Installation (EPCI) Contract dated as of December 14, 2001 each by and between
CPOC and Hanover Compression Limited Partnership and accurate copies of which
have been previously provided to the Lenders.
     “Hedging Agreements” shall mean any commodity, interest rate or currency
swap, cap, floor, collar, forward agreement (for a term in excess of thirty
days) or other exchange or protection agreements or any option with respect to
any such transaction.
     “Highest Lawful Rate” shall mean, with respect to each Lender, the maximum
nonusurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Notes or on other
Obligations under laws applicable to such Lender which are presently in effect
or, to the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
     “Hydrocarbon Interests” shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas and
mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserved or residual interests of
whatever nature.
     “Hydrocarbons” shall mean oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined or separated therefrom.
     “Indemnified Parties” shall have the meaning assigned such term in Section
12.03(a)(ii).
     “Indemnity Matters” shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or nature
whatsoever incurred by such Person whether caused by the sole or concurrent
negligence of such Person seeking indemnification.
     “Initial Funding” shall mean the funding of the initial Loans or issuance
of the initial Letters of Credit upon satisfaction of the conditions set forth
in Sections 6.01 and 6.02.
     “Initial Reserve Report” shall mean the report of the Borrower, dated
effective as of June 1, 2006, with respect to the Oil and Gas Properties of the
Borrower as of December 31, 2005, a copy of which has been delivered to the
Administrative Agent.
     “Interest Period” shall mean, with respect to any LIBOR Loan, the period
commencing on the date such LIBOR Loan is made and ending on the numerically
corresponding day in the first, second, third or sixth calendar month
thereafter, as the Borrower may select as provided in Section 2.02 (or such
other period as may be requested by the Borrower and agreed to by the Majority
Lenders), except that each Interest Period which commences on the last Business
Day of a calendar month (or on any day for which there is no numerically
corresponding day in the

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appropriate subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month.
     Notwithstanding the foregoing: (i) no Interest Period may end after the
Revolving Credit Termination Date; (ii) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day); and
(iii) no Interest Period shall have a duration of less than one month and, if
the Interest Period for any LIBOR Loans would otherwise be for a shorter period,
such Loans shall not be available hereunder.
     “Issuing Bank” shall mean UBOC or any other Lender agreed to among the
Borrower, such Lender and the Administrative Agent to issue Letters of Credit.
     “LC Commitment” at any time shall mean $20,000,000.
     “LC Exposure” at any time shall mean the difference between (i) the
aggregate face amount of all undrawn and uncancelled Letters of Credit plus the
aggregate of all amounts drawn under all Letters of Credit and not yet
reimbursed, minus (ii) the aggregate amount of all cash securing outstanding
Letters of Credit pursuant to Section 2.10(b).
     “Letter of Credit Agreements” shall mean the written agreements with the
Issuing Bank, as issuing lender for any Letter of Credit, executed in connection
with the issuance by the Issuing Bank of the Letters of Credit, such agreements
to be on the Issuing Bank’s customary form for letters of credit of comparable
amount and purpose as from time to time in effect or as otherwise agreed to by
the Borrower and the Issuing Bank.
     “Letters of Credit” shall mean the letters of credit issued pursuant to
Section 2.01(b) and all reimbursement obligations pertaining to any such letters
of credit, and “Letter of Credit” shall mean any one of the Letters of Credit
and the reimbursement obligations pertaining thereto.
     “LIBOR” shall mean the rate of interest determined on the basis of the rate
for deposits in Dollars for a period equal to the applicable Interest Period
commencing on the first day of such Interest Period appearing on Dow Jones
Market Service Page 3750 as of 11:00 a.m. (London time) two (2) Business Days
prior to the first day of the applicable Interest Period. In the event that such
rate does not appear on Dow Jones Market Service Page 3750, “LIBOR” shall be
determined by the Administrative Agent to be the rate per annum at which
deposits in Dollars are offered by leading reference banks in the London
interbank market to UBOC at approximately 11:00 a.m. (London time) two Business
Days prior to the first day of the applicable Interest Period for a period equal
to such Interest Period and in an amount substantially equal to the amount of
the applicable Loan.
     “LIBOR Loans” shall mean Loans the interest rates on which are determined
on the basis of rates referred to in the definition of “LIBOR Rate”.
     “LIBOR Rate” shall mean, with respect to any LIBOR Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Administrative Agent to be

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equal to the quotient of (i) LIBOR for such Loan for the Interest Period for
such Loan divided by (ii) 1 minus the Reserve Requirement for such Loan for such
Interest Period.
     “Lien” shall mean any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to
(i) the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes or (ii) production payments and the like payable
out of Oil and Gas Properties. The term “Lien” shall include reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purposes of this Agreement, the Borrower or any Subsidiary
shall be deemed to be the owner of any Property which it has acquired or holds
subject to a conditional sale agreement, or leases under a financing lease or
other arrangement pursuant to which title to the Property has been retained by
or vested in some other Person in a transaction intended to create a financing.
     “Loan Documents” shall mean this Agreement, the Notes, all Letters of
Credit, all Letter of Credit Agreements, the Fee Letter and the Security
Instruments.
     “Loans” shall mean the loans as provided for by Section 2.01(a).
     “Majority Lenders” shall mean, at any time while no Loans or Letters of
Credit are outstanding, Lenders having at least sixty six and two thirds percent
(66-2/3%) of the Aggregate Commitments and, at any time while Loans or Letters
of Credit are outstanding, Lenders holding at least sixty six and two thirds
percent (66-2/3%) of the outstanding aggregate principal amount of the Loans and
Letters of Credit (without regard to any sale by a Lender of a participation in
any Loan or Letter of Credit under Section 12.06(c)).
     “Material Adverse Effect” shall mean any set of circumstances or events
that (i) has or could reasonably be expected to have any material and adverse
effect upon, or result in or reasonably be expected to result in a material
adverse change in, (A) the assets, liabilities, prospects, financial condition,
business, operations or affairs of the Borrower and its Subsidiaries taken as a
whole different from those reflected in the Financial Statements or the
financial statements most recently furnished pursuant to Section 8.01(a) or from
the facts represented or warranted in any Loan Document, or (B) the ability of
the Borrower and its Subsidiaries taken as a whole to carry out their business
as at the Closing Date or as proposed as of the Closing Date to be conducted or
to duly and punctually pay and perform their obligations under any of the Loan
Documents, or (C) the validity, binding effect or enforceability of this
Agreement or any of the other Loan Documents or (ii) impairs materially or could
reasonably be expected to impair materially the ability of the Administrative
Agent or any of the Lenders, to the extent permitted, to enforce its legal
remedies pursuant to the Loan Documents or otherwise available at law or in
equity.
     “Maximum Credit Amount” shall mean, as to each Lender, the amount set forth
opposite such Lender’s name on Annex I under the caption “Maximum Credit
Amounts” (as the same

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may be reduced pursuant to Section 2.03(b) pro rata to each Lender based on its
Percentage Share), as modified from time to time to reflect any assignments
permitted by Section 12.06(b).
     “Mortgaged Oil and Gas Property” shall mean any Borrowing Base Property
that is Collateral.
     “Multiemployer Plan” shall mean a Plan defined as such in Section 3(37) or
4001(a)(3) of ERISA.
     “Notes” shall mean the Notes provided for by Section 2.06, together with
any and all renewals, extensions for any period, increases, rearrangements,
substitutions, amendments, and/or modifications thereof.
     “Obligations” shall mean all indebtedness, obligations and liabilities of
the Borrower to any of the Lenders, any of the Lenders’ Affiliates, any Issuing
Bank or the Administrative Agent, individually or collectively, existing on the
date of this Agreement or arising thereafter, direct or indirect, joint or
several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising or incurred under any Hedging
Agreement, under this Agreement or any of the other Loan Documents or in respect
of any of the Loans made or reimbursement obligations incurred or any of the
Notes, Letters of Credit or other instruments at any time evidencing any
thereof, including interest accruing subsequent to the filing of a petition or
other action concerning bankruptcy or other similar proceedings, and all
renewals, extensions, rearrangements, amendments, refinancings, replacements
and/or increases of the foregoing. The term “Obligations” shall include, where
the context refers to “Obligations” of any or all of the Guarantors, all
obligations of any or all of the Guarantors, pursuant to any and all guarantees,
guaranty agreements, and all other instruments, executed by any and all of the
Guarantors, now or in the future, guaranteeing all or any portion of the
“Obligations” of the Borrower.
     “Oil and Gas Properties” shall mean Hydrocarbon Interests; the Properties
now or hereafter pooled or unitized with Hydrocarbon Interests; all presently
existing or future unitization, pooling agreements and declarations of pooled
units and the units created thereby (including without limitation all units
created under orders, regulations and rules of any Governmental Authority) which
may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds, products, revenues and other incomes
from or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment or other personal property which may be on such
premises for the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, fuel separators, liquid extraction

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plants, plant compressors, pumps, pumping units, field gathering systems, tanks
and tank batteries, fixtures, valves, fittings, machinery and parts, engines,
boilers, meters, apparatus, equipment, appliances, tools, implements, cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements
and servitudes together with all additions, substitutions, replacements,
accessions and attachments to any and all of the foregoing.
     “Other Taxes” shall have the meaning assigned such term in Section 4.06(b).
     “PBGC” shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
     “Percentage Share” shall mean the percentage of the Aggregate Commitments
to be provided by a Lender under this Agreement as indicated on Annex I hereto,
as modified from time to time to reflect any assignments permitted by
Section 12.06(b).
     “Permitted Entrada Transaction” means (A) any Debt (i) incurred to finance
the cost of development of the Entrada Assets, (ii) which is non-recourse to the
Borrower and its Subsidiaries, and (iii) the provider of which shall have no
recourse to any assets of the Borrower and its Subsidiaries (other than the
Entrada Assets and the capital stock or other equity interests of any Subsidiary
of Borrower substantially all of the assets of which consist of Entrada Assets)
and (B) any contribution, transfer or conveyance of all or a portion of the
Entrada Assets to any Affiliate of the Borrower (other than an Affiliate that is
a Subsidiary of the Borrower that owns any material or significant asset other
than Entrada Assets or that is a Guarantor).
     “Permitted Medusa Transaction” means each of the following transactions now
or hereafter undertaken by the Borrower or any Subsidiary with respect to the
development of Oil and Gas Properties related to Mississippi Canyon Blocks 582,
538, 493, 624, 539, and 581 located in the federal offshore waters of the Gulf
of Mexico (the “Medusa Field”) in conjunction with the other working interest
owners in the Medusa Field:
     (i) the construction of the gas export line and related facilities designed
to transport natural gas production from the Medusa Field to downstream markets
(the “Medusa Gas System”); the conveyance of all or a portion thereof to a third
party (the “Medusa Gas System Owner”) upon completion thereof in consideration
of the Medusa Field working interest owners being reimbursed for all or a
portion of their actual costs incurred for construction of that portion of the
Medusa Gas System so conveyed; and the agreement of the Medusa Field working
interest owners to transport all or a portion of their future gas production
from the Medusa Field for a gathering fee (which gathering fee may vary based on
actual throughput) paid to the Medusa Gas System Owner, pursuant to, among other
things, the documents and agreements listed as items 6 through 18 on
Schedule 7.22, as the same may be from time to time modified or amended;
     (ii) the construction of the oil export line and related facilities
designed to transport oil production from the Medusa Field to downstream markets
(the “Medusa Oil System”); the conveyance of all or a portion thereof to a third
party (the “Medusa Oil System Owner”) upon completion thereof in consideration
of the Medusa Field working interest owners being reimbursed for all or a
portion of their actual costs incurred for

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construction of that portion of the Medusa Oil System so conveyed; and the
agreement of the Medusa Field working interest owners to transport all or a
portion of their future oil production from the Medusa Field for a
transportation fee (which transportation fee may vary based on actual
throughput) paid to the Medusa Oil System Owner, pursuant to, among other
things, the documents and agreements listed as items 6 through 18 on
Schedule 7.22, as the same may be from time to time modified or amended; and
     (iii) the construction of a spar facility ( the “Medusa SPAR”) to produce
and process the Medusa field hydrocarbons; the conveyance of all or a portion
thereof to an Affiliate or a third party (the “Medusa SPAR Owner”) upon
completion thereof in consideration of the Medusa Field working interest owners
being reimbursed for all or a portion of their actual costs incurred for
construction of that portion of the Medusa SPAR so conveyed; and the agreement
of the Medusa Field working interest owners to produce and process all or a
portion of their future production from the Medusa Field through the Medusa SPAR
for a tariff (which tariff may vary based on actual throughput) paid to the
Medusa SPAR Owner, pursuant to, among other things, the documents and agreements
listed as items 6 through 18 on Schedule 7.22, as the same may be from time to
time modified or amended.
     “Person” shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
     “Plan” shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained
or contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or
(ii) was at any time during the preceding six calendar years sponsored,
maintained or contributed to, by the Borrower, any Subsidiary or an ERISA
Affiliate.
     “Post Default Rate” shall mean, in respect of any principal of any Loan and
any past due interest thereon or any other amount payable by the Borrower under
this Agreement or any other Loan Document, a rate per annum during the period
commencing on the date of occurrence of an Event of Default until such amount is
paid in full or all Events of Default are cured or waived equal to 2% per annum
above the Base Rate as in effect from time to time plus the Applicable Margin
(if any), but in no event to exceed the Highest Lawful Rate; provided however,
that for a LIBOR Loan, and any past due interest thereon, the “Post Default
Rate” for such principal shall be, for the period commencing on the date of
occurrence of an Event of Default and ending on the earlier to occur of the last
day of the Interest Period therefor or the date all Events of Default are cured
or waived, 2% per annum above the interest rate for such Loan as provided in
Section 3.02(a)(ii), but in no event to exceed the Highest Lawful Rate.
     “Prime Rate” shall mean the rate of interest from time to time announced
publicly by the Administrative Agent at the Principal Office as its prime
commercial lending rate. Such rate is set by the Administrative Agent as a
general reference rate of interest, taking into account such factors as the
Administrative Agent may deem appropriate, it being understood that many of the
Administrative Agent’s commercial or other loans are priced in relation to such
rate, that it is not necessarily the lowest or best rate actually charged to any
customer and that the Administrative

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Agent may make various commercial or other loans at rates of interest having no
relationship to such rate.
     “Principal Office” shall mean the principal office of the Administrative
Agent, presently located at 445 South Figueroa Street, Los Angeles, California
90071.
     “Prior Credit Agreement” shall mean that certain Credit Agreement dated as
of June 14, 2004 among the Borrower, the lenders party thereto and UBOC, as a
lender and administrative agent, as amended, supplemented and modified on or
before the Closing Date.
     “Prior Debt” shall mean the outstanding Debt under the Prior Credit
Agreement.
     “Property” shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
     “Quarterly Dates” shall mean the last day of each March, June, September,
and December, in each year, the first of which shall be September 30, 2006.
     “Redetermination Date” shall mean the date that the redetermined Borrowing
Base becomes effective subject to the notice requirements specified in
Section 2.08(e) both for scheduled redeterminations and unscheduled
redeterminations.
     “Regulation D” shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
     “Regulatory Change” shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including Regulation D)
or the adoption or making after such date of any interpretations, directives or
requests applying to a class of lenders (including such Lender or its Applicable
Lending Office) of or under any Governmental Requirement (whether or not having
the force of law) by any Governmental Authority charged with the interpretation
or administration thereof.
     “Required Payment” shall have the meaning assigned such term in
Section 4.04.
     “Reserve Report” shall mean a report, in form and substance satisfactory to
the Administrative Agent, setting forth, as of each January 1 or July 1 (or such
other date in the event of an unscheduled redetermination); (i) the oil and gas
reserves attributable to the Borrowing Base Properties together with a
projection of the rate of production and future net income, taxes, operating
expenses and capital expenditures with respect thereto as of such date, based
upon the pricing assumptions consistent with SEC reporting requirements at the
time and (ii) such other information as the Administrative Agent may reasonably
request.
     “Reserve Requirement” shall mean, for any Interest Period for any LIBOR
Loan, the average maximum rate at which reserves (including any marginal,
supplemental or emergency reserves) are required to be maintained during such
Interest Period under Regulation D by member banks of the Federal Reserve System
in New York City with deposits exceeding one billion Dollars against
“Eurocurrency liabilities” (as such term is used in Regulation D).

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Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks by
reason of any Regulatory Change against (i) any category of liabilities which
includes deposits by reference to which LIBOR is to be determined as provided in
the definition of “LIBOR” or (ii) any category of extensions of credit or other
assets which include a LIBOR Loan.
     “Responsible Officer” shall mean, as to any Person, the Chief Executive
Officer, the President or any Vice President of such Person and, with respect to
financial matters, the term “Responsible Officer” shall include the Chief
Financial Officer or the Treasurer of such Person. Unless otherwise specified,
all references to a Responsible Officer herein shall mean a Responsible Officer
of the Borrower.
     “Revolving Credit Termination Date” shall mean the earlier to occur of
(i) July 31, 2010 or (ii) the date that the Commitments are sooner terminated
pursuant to Sections 2.03(b) or 10.02.
     “Scheduled Redetermination Date” shall have the meaning assigned such term
in Section 2.08(d).
     “SEC” shall mean the Securities and Exchange Commission or any successor
Governmental Authority.
     “Security Instruments” shall mean the agreements or instruments described
or referred to in Exhibit D, and any and all other agreements or instruments
heretofore, now or hereafter executed and delivered by the Borrower or any other
Person (other than participation or similar agreements between any Lender and
any other lender or creditor with respect to any Obligations pursuant to this
Agreement) in connection with, or as security for the payment or performance of,
the Notes, this Agreement, the Prior Credit Agreement, or reimbursement
obligations under the Letters of Credit, as such agreements may be amended,
supplemented or restated from time to time.
     “Special Entity” shall mean any joint venture, limited liability company or
partnership, general or limited partnership or any other type of partnership or
company other than a corporation in which a Person or one or more of its other
Subsidiaries is a member, owner, partner or joint venturer and owns, directly or
indirectly, at least a majority of the equity of such entity or controls such
entity, but excluding any tax partnerships that are not classified as
partnerships under state law. For purposes of this definition, any Person which
owns directly or indirectly an equity investment in another Person which allows
the first Person to manage or elect managers who manage the normal activities of
such second Person will be deemed to “control” such second Person (e.g. a sole
general partner controls a limited partnership).
     “Subordinated Debt” shall mean any Debt of the Borrower expressly
subordinated to the Obligations, on terms specifically including, without
limitation, that payments on such Debt shall be prohibited if a Default exists
or would result from such payment, and other terms and conditions and pursuant
to documentation, all in form and substance satisfactory to the Majority
Lenders.

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     “Subsidiary” shall mean (i) any corporation of which at least a majority of
the outstanding shares of stock having by the terms thereof ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned or
controlled by another Person or one or more of such Person’s Subsidiaries or by
such Person and one or more of its Subsidiaries and (ii) any Special Entity of
which at least a majority of the equity interests are owned, directly or
indirectly or controlled by such Person. Unless otherwise indicated herein, each
reference to the term “Subsidiary” shall mean a Subsidiary of the Borrower.
     “Syndication Agent” shall mean Guaranty Bank.
     “Taxes” shall have the meaning assigned such term in Section 4.06(a).
     “Transfer” shall have the meaning assigned such term in Section 9.15.
     “Type” shall mean, with respect to any Loan, a Base Rate Loan or a LIBOR
Loan.
     Section 1.03 Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Administrative Agent or the Lenders hereunder
shall be prepared, in accordance with GAAP, applied on a basis consistent with
the audited financial statements of the Borrower referred to in Section 7.02
(except for changes concurred with by the Borrower’s independent public
accountants).
ARTICLE II
Commitments
     Section 2.01 Loans and Letters of Credit.
     (a) Loans. Each Lender severally agrees, on the terms and conditions of
this Agreement, to make loans to the Borrower during the period from and
including (i) the Closing Date or (ii) such later date that such Lender becomes
a party to this Agreement as provided in Section 12.06(b), to and up to, but
excluding, the Revolving Credit Termination Date in an aggregate principal
amount at any one time outstanding up to, but not exceeding, the amount of such
Lender’s Commitment as then in effect; provided, however, that the aggregate
principal amount of all such Loans by all Lenders hereunder at any one time
outstanding, plus the LC Exposure shall not exceed the Aggregate Commitments.
Subject to the terms of this Agreement, during the period from the Closing Date
to and up to, but excluding, the Revolving Credit Termination Date, the Borrower
may borrow, repay and reborrow the amount described in this Section 2.01(a).
     (b) Letters of Credit. During the period from and including the Closing
Date to, but excluding, the Revolving Credit Termination Date, the Issuing Bank,
as issuing bank for the Lenders, agrees to extend credit for the account of the
Borrower or any Guarantor at any time and from time to time by issuing,
renewing, extending or reissuing

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Letters of Credit; provided, however, the LC Exposure at any one time
outstanding shall not exceed the lesser of (i) the LC Commitment or (ii) the
Aggregate Commitments, as then in effect, minus the aggregate principal amount
of all Loans and the LC Exposure then outstanding. The Lenders shall participate
in such Letters of Credit according to their respective Percentage Shares. Each
of the Letters of Credit shall (i) be issued by the Issuing Bank, (ii) contain
such terms and provisions as are reasonably required by the Issuing Bank,
(iii) be for the account of the Borrower and (iv) expire not later than the
earlier to occur of (A) twenty-four months after the date of its issuance and
(B) ten (10) days before the Revolving Credit Termination Date.
     (c) Limitation on Types of Loans. Subject to the other terms and provisions
of this Agreement, at the option of the Borrower, the Loans may be Base Rate
Loans or LIBOR Loans; provided that, without the prior written consent of the
Majority Lenders, no more than ten (10) LIBOR Loans may be outstanding at any
time.
     Section 2.02 Borrowings, Continuations and Conversions, Letters of Credit.
     (a) Borrowings. The Borrower shall give the Administrative Agent (which
shall promptly notify the Lenders) advance notice as hereinafter provided of
each borrowing hereunder, which shall specify (i) the aggregate amount of such
borrowing, (ii) the Type and (iii) the date (which shall be a Business Day) of
the Loans to be borrowed, and (iv) (in the case of LIBOR Loans) the duration of
the Interest Period therefor.
     (b) Minimum Amounts. All Base Rate Loan borrowings shall be in amounts of
at least $100,000 or the remaining balance of the Aggregate Commitments, if
less, or any whole multiple of $50,000 in excess thereof, and all LIBOR Loans
shall be in amounts of at least $500,000 or any whole multiple of $100,000 in
excess thereof.
     (c) Notices. All borrowings, continuations and conversions shall require
advance written notice to the Administrative Agent (which shall promptly notify
the Lenders) in the form of Exhibit B (or telephonic notice promptly confirmed
by such a written notice), which in each case shall be irrevocable, from the
Borrower to be received by the Administrative Agent not later than 10:00 a.m.
Los Angeles, California time (i) on the date of each Base Rate Loan borrowing
and (ii) three Business Days prior to the date of each LIBOR Loan borrowing,
continuation or conversion. Without in any way limiting the Borrower’s
obligation to confirm in writing any telephonic notice, the Administrative Agent
may act without liability upon the basis of telephonic notice believed by the
Administrative Agent in good faith to be from the Borrower prior to receipt of
written confirmation. In each such case, the Borrower hereby waives the right to
dispute the Administrative Agent’s record of the terms of such telephonic notice
except in the case of gross negligence or willful misconduct by the
Administrative Agent.
     (d) Continuation Options. Subject to the provisions made in this Section
2.02(d), the Borrower may elect to continue all or any part of any LIBOR Loan
beyond the expiration of the then current Interest Period relating thereto by
giving advance notice as provided in Section 2.02(c) to the Administrative Agent
(which shall promptly notify the Lenders) of such election, specifying the
amount of such Loan to be continued and

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the Interest Period therefor. In the absence of such a timely and proper
election, the Borrower shall be deemed to have elected to convert such LIBOR
Loan to a Base Rate Loan pursuant to Section 2.02(e). All or any part of any
LIBOR Loan may be continued as provided herein, provided that (i) any
continuation of any such Loan shall be (as to each Loan as continued for an
applicable Interest Period) in amounts of at least $500,000 or any whole
multiple of $100,000 in excess thereof and (ii) no Default shall have occurred
and be continuing. If a Default shall have occurred and be continuing, each
LIBOR Loan shall be converted to a Base Rate Loan on the last day of the
Interest Period applicable thereto.
     (e) Conversion Options. The Borrower may elect to convert all or any part
of any LIBOR Loan on the last day of the then current Interest Period relating
thereto to a Base Rate Loan by giving advance notice to the Administrative Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the Borrower may elect to convert all
or any part of any Base Rate Loan at any time and from time to time to a LIBOR
Loan by giving advance notice as provided in Section 2.02(c) to the
Administrative Agent (which shall promptly notify the Lenders) of such election.
All or any part of any outstanding Loan may be converted as provided herein,
provided that (i) any conversion of any Base Rate Loan into a LIBOR Loan shall
be (as to each such Loan into which there is a conversion for an applicable
Interest Period) in amounts of at least $500,000 or any whole multiple of
$100,000 in excess thereof and (ii) no Default shall have occurred and be
continuing. If a Default shall have occurred and be continuing, no Base Rate
Loan may be converted into a LIBOR Loan.
     (f) Advances. Not later than 11:00 a.m. Los Angeles, California time on the
date specified for each borrowing hereunder, each Lender shall make available
the amount of the Loan to be made by it on such date to the Administrative
Agent, to an account which the Administrative Agent shall specify, in
immediately available funds, for the account of the Borrower. The amounts so
received by the Administrative Agent shall be made available to Borrower by
depositing the same, in immediately available funds, in an account of the
Borrower, designated by the Borrower.
     (g) Letters of Credit.
          (i) The Borrower shall give the Issuing Bank (which shall promptly
notify the Lenders of such request and their Percentage Share of such Letter of
Credit, with a copy to the Administrative Agent) advance notice to be received
by the Issuing Bank not later than 11:00 a.m. Los Angeles, California time not
less than three (3) Business Days prior thereto of each request for the
issuance, and at least three (3) Business Days prior to the date of the renewal
or extension, of a Letter of Credit hereunder which request shall specify
(i) the amount of such Letter of Credit which shall be at least $50,000,
(ii) the date (which shall be a Business Day) such Letter of Credit is to be
issued, renewed or extended, (iii) the duration thereof, (iv) the name and
address of the beneficiary thereof, (v) the type of the Letter of Credit and
(vi) such other information as the Issuing Bank may reasonably request, all of
which shall be reasonably satisfactory to the Issuing Bank. Subject to the terms
and conditions of this Agreement, on the date

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specified for the issuance, renewal or extension of a Letter of Credit, the
Issuing Bank shall issue, renew or extend such Letter of Credit to the
beneficiary thereof.
          (ii) In conjunction with the issuance of each Letter of Credit, the
Borrower and the applicable Guarantor, if the account party, shall execute a
Letter of Credit Agreement. In the event of any conflict between any provision
of a Letter of Credit Agreement and this Agreement, the Borrower, the Issuing
Bank, the Administrative Agent and the Lenders hereby agree that the provisions
of this Agreement shall govern.
          (iii) The Issuing Bank will send to the Borrower, the Administrative
Agent and each Lender, immediately upon issuance of any Letter of Credit, or an
amendment thereto, a true and complete copy of such Letter of Credit, or such
amendment thereto.
     Section 2.03 Changes of Commitments.
     (a) The Aggregate Commitments shall at all times be equal to the lesser of
(i) the Aggregate Maximum Credit Amounts after adjustments resulting from
reductions pursuant to Section 2.03(b) or (ii) the Borrowing Base as determined
from time to time.
     (b) The Borrower shall have the right to terminate or to reduce the amount
of the Aggregate Maximum Credit Amounts at any time, or from time to time, upon
not less than three (3) Business Days’ prior notice to the Administrative Agent
(which shall promptly notify the Lenders) of each such termination or reduction,
which notice shall specify the effective date thereof and the amount of any such
reduction (which shall not be less than $1,000,000 or any whole multiple of
$1,000,000 in excess thereof) and shall be irrevocable and effective only upon
receipt by the Administrative Agent. Each reduction in the Aggregate Maximum
Credit Amount shall apply pro rata to each Lender based on its Percentage Share.
     (c) The Aggregate Maximum Credit Amounts once terminated or reduced may not
be reinstated.
     Section 2.04 Fees.
     (a) Commitment Fee. The Borrower shall pay to the Administrative Agent for
the account of each Lender a commitment fee on the daily unused amount of the
Aggregate Commitments for the period from and including the Closing Date up to,
but excluding, the earlier of the date the Aggregate Commitments are terminated
or the Revolving Credit Termination Date at a rate per annum equal to the rate
set forth at the appropriate intersection in the table set forth below:

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          Borrowing Base Utilization   Rate
Less than 90%
    0.375 %
 
       
Greater than or equal to 90%
    0.250 %

Accrued commitment fees shall be payable quarterly in arrears on each Quarterly
Date and on the earlier of the date the Aggregate Commitments are terminated or
the Revolving Credit Termination Date.
     (b) Letter of Credit Fees.
          (i) The Borrower agrees to pay the Administrative Agent, for the
account of each Lender, commissions for issuing the Letters of Credit on the
daily average outstanding of the maximum liability of the Issuing Bank existing
from time to time under such Letters of Credit (calculated separately for each
Letter of Credit) at the per annum rate equal to the then effective Applicable
Margin for LIBOR Loans, provided that each Letter of Credit shall bear a minimum
commission of $500. Each Letter of Credit shall be deemed to be outstanding up
to the full face amount of the Letter of Credit until the Issuing Bank has
received the canceled Letter of Credit or a written cancellation of the Letter
of Credit from the beneficiary of such Letter of Credit in form and substance
acceptable to the Issuing Bank, or for any reductions in the amount of the
Letter of Credit (other than from a drawing), written notification from the
beneficiary of such Letter of Credit. Such commissions are payable quarterly in
arrears on each Quarterly Date and upon cancellation or expiration of each such
Letter of Credit.
          (ii) The Issuing Bank, for its own account, shall receive 0.125% of
the face amount of each Letter of Credit as an issuing fee.
          (iii) The Borrower agrees to pay concurrently with each issuance,
negotiation, drawing, or amendment of each Letter of Credit, to the Issuing Bank
for the sole account of the Issuing Bank, issuance, negotiation, drawing and
amendment fees in the amounts set forth from time to time as the Issuing Bank’s
published scheduled fees for such services.
     (c) Fee Letter. The Borrower shall pay to the Administrative Agent such
other fees as are set forth in the Fee Letter on the dates and in the amounts
specified therein.
     Section 2.05 Several Obligations. The failure of any Lender to make any
Loan to be made by it or to provide funds for disbursements or reimbursements
under Letters of Credit on the date specified therefor shall not relieve any
other Lender of its obligation to make its Loan or provide funds on such date,
but no Lender shall be responsible for the failure of any other Lender to make a
Loan to be made by such other Lender or to provide funds to be provided by such
other Lender.

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     Section 2.06 Notes. The Loans made by each Lender shall be evidenced by a
single promissory note of the Borrower in substantially the form of Exhibit A,
dated (i) the Closing Date or (ii) the effective date of an Assignment pursuant
to Section 12.06(b), payable to the order of such Lender in a principal amount
equal to its Maximum Credit Amount as originally in effect and otherwise duly
completed and such substitute Notes as required by Section 12.06(b). The date,
amount, Type, interest rate and Interest Period of each Loan made by each
Lender, and all payments made on account of the principal thereof, shall be
recorded by such Lender on its books for its Note, and, prior to any transfer
may be endorsed by such Lender on the schedule attached to such Note or any
continuation thereof or on any separate record maintained by such Lender.
Failure to make any such notation or to attach a schedule shall not affect any
Lender’s or the Borrower’s rights or obligations in respect of such Loans or
affect the validity of such transfer by any Lender of its Note.
     Section 2.07 Prepayments.
     (a) Voluntary Prepayments. The Borrower may prepay the Base Rate Loans upon
not less than one (1) Business Day’s prior notice to the Administrative Agent
(which shall promptly notify the Lenders), which notice shall specify the
prepayment date (which shall be a Business Day) and the amount of the prepayment
(which shall be at least $100,000 or the remaining aggregate principal balance
outstanding on the Notes) and shall be irrevocable and effective only upon
receipt by the Administrative Agent, provided that interest on the principal
prepaid, accrued to the prepayment date, shall be paid on the prepayment date.
The Borrower may prepay LIBOR Loans on the same conditions as for Base Rate
Loans (except that prior notice to the Administrative Agent shall be not less
than three (3) Business Days for LIBOR Loans) and in addition such prepayments
of LIBOR Loans shall be subject to the terms of Section 5.05 and shall be in an
amount equal to all of the LIBOR Loans for the Interest Period prepaid provided
that interest on the principal prepaid accrued to the prepayment date, shall be
paid on the prepayment date.
     (b) Mandatory Prepayments.
          (i) If, after giving effect to any optional termination or reduction
by the Borrower of the Aggregate Maximum Credit Amounts pursuant to
Section 2.03(b), the outstanding aggregate principal amount of the Loans plus
the LC Exposure exceeds the Aggregate Maximum Credit Amounts, the Borrower shall
(i) prepay the Loans on the date of such termination or reduction in an
aggregate principal amount equal to the excess, together with interest on the
principal amount paid accrued to the date of such prepayment and (ii) if any
excess remains after prepaying all of the Loans because of LC Exposure, pay to
the Administrative Agent on behalf of the Lenders an amount equal to the excess
to be held as cash collateral as provided in Section 2.10(b) hereof.
          (ii) Upon any redetermination of the amount of the Borrowing Base in
accordance with Section 2.08, if the redetermined Borrowing Base results in a
Borrowing Base Deficiency, then the Borrower shall within thirty (30) days of
receipt of written notice thereof either: (A) prepay the Loans (and provide cash
collateral for the Letters of Credit) in an aggregate principal amount equal to
the Borrowing Base Deficiency,

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together with interest on the principal amount paid accrued to the date of such
prepayment; or (B) the Borrower shall notify the Administrative Agent (which
will promptly notify the Lenders) in writing of the Borrower’s election to
initiate a Deficiency Period during which it will eliminate such Borrowing Base
Deficiency by making six (6) consecutive monthly Deficiency Payments, the first
of such payments being due and payable with the delivery to the Administrative
Agent of such notice and each of the remaining payments due and payable on the
same day of each month thereafter during the Deficiency Period; provided
however, in the event of an acceleration of the maturity of the Notes pursuant
to Section 10.02 hereof, such acceleration shall also accelerate the maturity of
all outstanding and unpaid Deficiency Payments. All payments under this
subsection (ii), whether a single payment under clause (A) or monthly Deficiency
Payments under clause (B), shall be applied in the order of priority specified
in Section 3.03, and any payments required by Section 3.03(a)(iii) to be held as
cash collateral shall be held in accordance with Section 2.10(b).
     (c) Generally. Prepayments permitted or required under this Section 2.07
shall be without premium or penalty, except as required under Section 5.05 for
prepayment of LIBOR Loans. Any prepayments on the Loans may be reborrowed
subject to the then effective Aggregate Commitments.
     Section 2.08 Borrowing Base.
     (a) The Borrowing Base shall be determined in accordance with
Section 2.08(b) by the Administrative Agent with the concurrence of the Lenders
and is subject to redetermination in accordance with Section 2.08(d). Upon any
redetermination of the Borrowing Base, such redetermination shall remain in
effect until the next successive Redetermination Date. So long as any of the
Commitments are in effect or any LC Exposure or Loans are outstanding hereunder,
this facility shall be governed by the then effective Borrowing Base. During the
period from and after the Closing Date until the first redetermination pursuant
to Section 2.08(d) or adjusted pursuant to Section 8.08(c), the amount of the
Borrowing Base shall be $75,000,000.
     (b) Upon receipt of the reports required by Section 8.07 and such other
reports, data and supplemental information as may from time to time be
reasonably requested by the Administrative Agent (the “Engineering Reports”),
the Administrative Agent will redetermine the Borrowing Base. Such
redetermination will be in accordance with its normal and customary procedures
for evaluating oil and gas reserves and other related assets as such exist at
that particular time, and the Administrative Agent, in its sole discretion, may
make adjustments to the rates, volumes and prices and other assumptions set
forth therein in accordance with its normal and customary procedures for
evaluating oil and gas reserves and other related assets as such exist at that
particular time. The Administrative Agent shall propose to the Lenders a new
Borrowing Base within 30 days following receipt by the Administrative Agent and
the Lenders of the Engineering Reports in a timely and complete manner. After
having received notice of such proposal by the Administrative Agent, the Lenders
shall have 14 days to agree or disagree with such proposal. Any Lenders that
have not communicated their approval or disapproval at the end of the 14 days
shall be deemed to have approved the

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Administrative Agent’s proposal of the redetermined Borrowing Base. To the
extent that within such 14 days the Administrative Agent has not received the
requisite number of approvals from the Lenders of the redetermined Borrowing
Base, the requisite number of Lenders shall, within a reasonable period of time,
agree on a new Borrowing Base. Any increase in the Borrowing Base must be
approved by the Administrative Agent and all of the Lenders and any decrease in
or reaffirmation of the existing Borrowing Base must be approved by the Majority
Lenders.
     (c) The Administrative Agent may exclude any Oil and Gas Property or
portion of production therefrom or any income from any other Property from the
Borrowing Base, at any time, because title information is not reasonably
satisfactory, such Property is not Collateral or such Property is not
assignable.
     (d) So long as any of the Commitments are in effect and until payment in
full of all Loans hereunder, on or around the first Business Day of each May and
November, commencing November 2006 (each being a “Scheduled Redetermination
Date”), the Lenders shall redetermine the amount of the Borrowing Base in
accordance with Section 2.08(b). In addition, (i) the Borrower may initiate a
redetermination of the Borrowing Base at any other time as it so elects by
specifying in writing to the Administrative Agent (who will promptly notify the
Lenders) the date by which the Borrower will furnish to the Administrative Agent
and the Lenders a Reserve Report in accordance with Section 8.07(b) and the date
by which such redetermination is requested to occur; provided, however, that the
Borrower may initiate only one such unscheduled redetermination between
Scheduled Redetermination Dates during the first twelve (12) months after the
Closing Date and thereafter, may initiate only one such unscheduled
redetermination per year and (ii) the Majority Lenders may initiate a
redetermination of the Borrowing Base at any other time as they so elect by
specifying in writing to the Borrower the date by which the Borrower is to
furnish a Reserve Report in accordance with Section 8.07(b) and the date on
which such redetermination is to occur; provided, however, that the Majority
Lenders may initiate only one such unscheduled redetermination between Scheduled
Redetermination Dates during the first twelve (12) months after the Closing Date
and thereafter, may initiate only one such unscheduled redetermination per year.
     (e) The Administrative Agent shall promptly notify in writing the Borrower
and the Lenders of the new Borrowing Base. Any redetermination of the Borrowing
Base shall not be in effect until written notice is received by the Borrower.
     Section 2.09 Assumption of Risks. The Borrower assumes all risks of the
acts or omissions of any beneficiary of any Letter of Credit or any transferee
thereof with respect to its use of such Letter of Credit. Neither the Issuing
Bank (except in the case of gross negligence or willful misconduct on the part
of the Issuing Bank or any of its employees), its correspondents nor any Lender
shall be responsible for the validity, sufficiency or genuineness of
certificates or other documents or any endorsements thereon, even if such
certificates or other documents should in fact prove to be invalid,
insufficient, fraudulent or forged; for errors, omissions, interruptions or
delays in transmissions or delivery of any messages by mail, telex, or
otherwise, whether or not they be in code; for errors in translation or for
errors in interpretation of technical terms; the validity or sufficiency of any
instrument transferring or assigning or purporting to

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transfer or assign any Letter of Credit or the rights or benefits thereunder or
proceeds thereof, in whole or in part, which may prove to be invalid or
ineffective for any reason; the failure of any beneficiary or any transferee of
any Letter of Credit to comply fully with conditions required in order to draw
upon any Letter of Credit; or for any other consequences arising from causes
beyond the Issuing Bank’s control or the control of the Issuing Bank’s
correspondents (including the Issuing Bank’s own negligence). In addition,
neither the Issuing Bank, the Administrative Agent nor any Lender shall be
responsible for any error, neglect, or default of any of the Issuing Bank’s
correspondents; and none of the above shall affect, impair or prevent the
vesting of any of the Issuing Bank’s, the Administrative Agent’s or any Lender’s
rights or powers hereunder or under the Letter of Credit Agreements, all of
which rights shall be cumulative. The Issuing Bank and its correspondents may
accept certificates or other documents that appear on their face to be in order,
without responsibility for further investigation of any matter contained therein
regardless of any notice or information to the contrary. In furtherance and not
in limitation of the foregoing provisions, the Borrower agrees that any action,
inaction or omission taken or not taken by the Issuing Bank or by any
correspondent for the Issuing Bank in good faith in connection with any Letter
of Credit, or any related drafts, certificates, documents or instruments, shall
be binding on the Borrower and shall not put the Issuing Bank or its
correspondents under any resulting liability to the Borrower.
     Section 2.10 Obligation to Reimburse and to Prepay.
     (a) If a disbursement by the Issuing Bank is made under any Letter of
Credit, the Borrower shall pay to the Administrative Agent within two
(2) Business Days after notice of any such disbursement is received by the
Borrower, the amount of each such disbursement made by the Issuing Bank under
the Letter of Credit (if such payment is not sooner effected as may be required
under this Section 2.10 or under other provisions of the Letter of Credit),
together with interest on the amount disbursed from and including the date of
disbursement until payment in full of such disbursed amount at a varying rate
per annum equal to (i) the then applicable interest rate for Base Rate Loans
through the second Business Day after notice of such disbursement is received by
the Borrower and (ii) thereafter, the Post-Default Rate for Base Rate Loans (but
in no event to exceed the Highest Lawful Rate) for the period from and including
the third Business Day following the date of such disbursement to and including
the date of repayment in full of such disbursed amount. The obligations of the
Borrower under this Agreement with respect to each Letter of Credit shall be
absolute, unconditional and irrevocable and shall be paid or performed strictly
in accordance with the terms of this Agreement under all circumstances
whatsoever, including, without limitation, but only to the fullest extent
permitted by applicable law, the following circumstances: (i) any lack of
validity or enforceability of this Agreement, any Letter of Credit or any of the
Security Instruments; (ii) any amendment or waiver of (including any default),
or any consent to departure from this Agreement (except to the extent permitted
by any amendment or waiver), any Letter of Credit or any of the Security
Instruments; (iii) the existence of any claim, set-off, defense or other rights
which the Borrower may have at any time against the beneficiary of any Letter of
Credit or any transferee of any Letter of Credit (or any Persons for whom any
such beneficiary or any such transferee may be acting), the Issuing Bank, the
Administrative Agent, any Lender or any other Person, whether in connection with
this Agreement, any Letter of Credit, the Security Instruments, the transactions
contemplated

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hereby or any unrelated transaction; (iv) any statement, certificate, draft,
notice or any other document presented under any Letter of Credit proves to have
been forged, fraudulent, insufficient or invalid in any respect or any statement
therein proves to have been untrue or inaccurate in any respect whatsoever;
(v) payment by the Issuing Bank under any Letter of Credit against presentation
of a draft or certificate which appears on its face to comply, but does not
comply, with the terms of such Letter of Credit; and (vi) any other circumstance
or happening whatsoever, whether or not similar to any of the foregoing.
Notwithstanding anything in this Agreement to the contrary, the Borrower will
not be liable for payment or performance that results from the gross negligence
or willful misconduct of the Issuing Bank, except where the Borrower or any
Subsidiary actually recovers the proceeds for itself or the Issuing Bank of any
payment made by the Issuing Bank in connection with such gross negligence or
willful misconduct.
     (b) In the event of a payment or prepayment pursuant to Section 2.07(b) or
the maturity of the Notes, whether by acceleration or otherwise, an amount equal
to the LC Exposure (or the excess in the case of Section 2.07(b)) shall be
deemed to be forthwith due and owing by the Borrower to the Issuing Bank, the
Administrative Agent and the Lenders as of the date of any such occurrence; and
the Borrower’s obligation to pay such amount shall be absolute and
unconditional, without regard to whether any beneficiary of any such Letter of
Credit has attempted to draw down all or a portion of such amount under the
terms of a Letter of Credit, and, to the fullest extent permitted by applicable
law, shall not be subject to any defense or be affected by a right of set-off,
counterclaim or recoupment which the Borrower may now or hereafter have against
any such beneficiary, the Issuing Bank, the Administrative Agent, the Lenders or
any other Person for any reason whatsoever. Such payments shall be held by the
Issuing Bank on behalf of the Lenders as cash collateral securing the LC
Exposure in an account or accounts at the Principal Office; and the Borrower
hereby grants to and by its deposit with the Administrative Agent grants to the
Administrative Agent a security interest in such cash collateral. In the event
of any such payment by the Borrower of amounts contingently owing under
outstanding Letters of Credit and in the event that thereafter drafts or other
demands for payment complying with the terms of such Letters of Credit are not
made prior to the respective expiration dates thereof, the Administrative Agent
agrees, if no Event of Default has occurred and is continuing or if no other
amounts are outstanding under this Agreement, the Notes or the Security
Instruments, to remit to the Borrower amounts for which the contingent
obligations evidenced by the Letters of Credit have ceased.
     (c) Each Lender severally and unconditionally agrees that it shall promptly
reimburse the Issuing Bank an amount equal to such Lender’s Percentage Share of
any disbursement made by the Issuing Bank under any Letter of Credit that is not
reimbursed according to this Section 2.10.
     (d) Notwithstanding anything to the contrary contained herein, if no
Default exists and subject to availability under the Aggregate Maximum Credit
Amount (after reduction for LC Exposure), to the extent the Borrower has not
reimbursed the Issuing

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Bank for any drawn upon Letter of Credit within one (1) Business Day after
notice of such disbursement has been received by the Borrower, the amount of
such Letter of Credit reimbursement obligation shall automatically be funded by
the Lenders as a Base Rate Loan hereunder and used by the Lenders to pay such
Letter of Credit reimbursement obligation. If the funding of such Letter of
Credit reimbursement obligation as a Base Rate Loan would cause the aggregate
amount of all Loans outstanding to exceed the Aggregate Maximum Credit Amount
(after reduction for LC Exposure), such Letter of Credit reimbursement
obligation shall not be funded as a Base Rate Loan, but instead shall accrue
interest as provided in Section 2.10(a).
     Section 2.11 Lending Offices. The Loans of each Type made by each Lender
shall be made and maintained at such Lender’s Applicable Lending Office for
Loans of such Type.
ARTICLE III
Payments of Principal and Interest
     Section 3.01 Repayment of Principal.
     (a) Loans. On the Revolving Credit Termination Date the Borrower shall
repay the outstanding aggregate principal of the Loans and the Notes evidencing
the Loans.
     (b) Generally. The Borrower will pay to the Administrative Agent, for the
account of each Lender, the principal payments required by this Section 3.01.
     Section 3.02 Payment of Interest.
     (a) Interest Rates. The Borrower will pay to the Administrative Agent, for
the account of each Lender, interest on the unpaid principal amount of each Loan
made by such Lender for the period commencing on the date such Loan is made to,
but excluding, the date such Loan shall be paid in full, at the following rates
per annum:
          (i) if such a Loan is a Base Rate Loan, the Base Rate (as in effect
from time to time) plus the Applicable Margin, but in no event to exceed the
Highest Lawful Rate; and
          (ii) if such a Loan is a LIBOR Loan, for each Interest Period relating
thereto, the LIBOR Rate for such Loan plus the Applicable Margin (as in effect
from time to time), but in no event to exceed the Highest Lawful Rate.
     (b) Post-Default Rate. Notwithstanding the foregoing, the Borrower will pay
to the Administrative Agent, for the account of each Lender interest at the
applicable Post-Default Rate on any principal of any Loan made by such Lender,
and (to the fullest extent permitted by law) on any other amount payable by the
Borrower hereunder, under any Loan Document or under any Note held by such
Lender to or for account of such Lender, for the period commencing on the date
of an Event of Default until the same is paid in full or all Events of Default
are cured or waived.

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     (c) Due Dates. Accrued interest on Base Rate Loans shall be payable on each
Quarterly Date commencing on September 30, 2006, and accrued interest on each
LIBOR Loan shall be payable on the last day of the Interest Period therefor and,
if such Interest Period is longer than three months at three-month intervals
following the first day of such Interest Period, except that interest payable at
the Post-Default Rate shall be payable from time to time on demand and interest
on any LIBOR Loan that is converted into a Base Rate Loan (pursuant to
Section 5.04) shall be payable on the date of conversion (but only to the extent
so converted). Any accrued and unpaid interest on the Loans on the Revolving
Credit Termination Date shall be paid on such date.
     (d) Determination of Rates. Promptly after the determination of any
interest rate provided for herein or any change therein, the Administrative
Agent shall notify the Lenders to which such interest is payable and the
Borrower thereof. Each determination by the Administrative Agent of an interest
rate or fee hereunder shall, except in cases of manifest error, be final,
conclusive and binding on the parties.
     Section 3.03 Payment Waterfall. Notwithstanding any other provision in this
Agreement or any other Loan Document to the contrary:
     (a) Whenever the Borrower (or any Guarantor) pays or is required to make
payments on the Obligations, or whenever any Lender receives (and such funds
were not received from the Administrative Agent in accordance with the
priorities established by this Section 3.03) or has the right to receive funds
to be applied to the Obligations (whether in bankruptcy, pursuant to
Section 4.05, or otherwise), or whenever the Administrative Agent holds proceeds
of collection or other funds to be applied to the Obligations, in each case
whether before or after maturity (and notwithstanding any bankruptcy,
insolvency, or any other proceeding), such payments shall be made and such
proceeds and other funds shall be applied in the following order of priority:
          (i) first, to reimbursements of expenses and payment of indemnities
due and owing at the time in question to the Administrative Agent or the Lenders
under this Agreement and the other Loan Documents;
          (ii) second, to accrued interest (including, without limitation,
interest which may accrue subsequent to Borrower or any Guarantor becoming
subject to any state or federal debtor-relief statute), fees, and principal then
due and owing to the Lenders (whether such principal is due and owing at
maturity, due to acceleration, or due to a reduction in the Borrowing Base, or
for any reason), together with any payments then due and owing to the Lenders or
their Affiliates under Hedging Agreements permitted hereunder;
          (iii) third, to the extent expressly required at such time under
Section 2.10(b), to serve as cash collateral to be held by the Administrative
Agent to secure the LC Exposure;
          (iv) fourth, to the prepayment of principal on the Loans until they
are paid in full;

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          (v) fifth, to the pro rata payment of all other Obligations; and
          (vi) last, any excess shall be paid to the Borrower or as otherwise
required by any Governmental Requirement.
     (b) Payments must be made in accordance with the foregoing order of
priority whether or not the Borrower provides sufficient funds to make all
payments due on the Obligations at the time in question, but compliance with
such order of priority does not relieve the Borrower of its duty to make all
payments of the Obligations whenever they become due and any breach of such duty
shall constitute an Event of Default or Default as provided in Section 10.01.
     (c) Should any Lender receive any funds to be applied to the Obligations
from any source whatsoever (whether in bankruptcy, pursuant to Section 4.05, or
otherwise) and such funds have not been distributed to the Lenders in accordance
with the provisions of this Section 3.03, such funds shall immediately be paid
to the Administrative Agent who shall distribute such funds in accordance with
the provisions of this Section 3.03. The Lenders grant to the Administrative
Agent the right to enforce, collect and receive any such payment or distribution
and to give releases or acquittances therefor, subject, however to the express
provisions contained in this Agreement permitting all or certain Lenders to
direct the Administrative Agent to act or refrain from acting; provided,
however, that nothing contained in this section shall prohibit the Lenders from
suing for collections of principal on the Notes at maturity or for collection of
interest on the Notes provided that the Administrative Agent has not already
commenced such suits, and provided that the Lenders have the right to bring such
suits under the provisions of this Agreement including, without limitation, all
provisions under Section 10.02; provided that if any sums are collected by any
of the Lenders, they will be paid to the Administrative Agent for payment and
distribution in accordance with Section 3.03.
ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
     Section 4.01 Payments. Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by the Borrower
under this Agreement, the Notes and the Letter of Credit Agreements shall be
made in Dollars, in immediately available funds, to the Administrative Agent at
such account as the Administrative Agent shall specify by notice to the Borrower
from time to time, not later than 11:00 a.m. Los Angeles, California time on the
date on which such payments shall become due (each such payment made after such
time on such due date to be deemed to have been made on the next succeeding
Business Day). Such payments shall be made without (to the fullest extent
permitted by applicable law) defense, set-off or counterclaim. Each payment
received by the Administrative Agent under this Agreement or any Note for
account of a Lender shall be paid promptly to such Lender in immediately
available funds. Except as otherwise provided in the definition of “Interest
Period”, if the due date of any payment under this Agreement or any 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. At the time of

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each payment to the Administrative Agent of any principal of or interest on any
borrowing, the Borrower shall notify the Administrative Agent of the Loans to
which such payment shall apply. In the absence of such notice the Administrative
Agent may specify the Loans to which such payment shall apply, but to the extent
possible such payment or prepayment will be applied first to the Loans comprised
of Base Rate Loans.
     Section 4.02 Pro Rata Treatment. Except to the extent otherwise provided
herein each Lender agrees that: (i) each borrowing from the Lenders under
Section 2.01 and each continuation and conversion under Section 2.02 shall be
made from the Lenders pro rata in accordance with their Percentage Share, each
payment of commitment fee under Section 2.04(a) shall be made for account of the
Lenders pro rata in accordance with their Percentage Share, and each termination
or reduction of the amount of the Aggregate Maximum Credit Amounts under
Section 2.03(b) shall be applied to the Commitment of each Lender, pro rata
according to the amounts of its respective Commitment; (ii) each payment of
principal of Loans by the Borrower shall be made for account of the Lenders pro
rata in accordance with the respective unpaid principal amount of the Loans held
by the Lenders; and (iii) each payment of interest on Loans by the Borrower
shall be made for account of the Lenders pro rata in accordance with the amounts
of interest due and payable to the respective Lenders; and (iv) each
reimbursement by the Borrower of disbursements under Letters of Credit shall be
made for account of the Issuing Bank or, if funded by the Lenders, pro rata for
the account of the Lenders, in accordance with the amounts of reimbursement
obligations due and payable to each respective Lender.
     Section 4.03 Computations. Interest on LIBOR Loans and fees shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which such
interest is payable, unless such calculation would exceed the Highest Lawful
Rate, in which case interest shall be calculated on the per annum basis of a
year of 365 or 366 days, as the case may be. Interest on Base Rate Loans shall
be computed 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)
occurring in the period for which such interest is payable.
     Section 4.04 Non-receipt of Funds by the Administrative Agent. Unless the
Administrative Agent shall have been notified by a Lender or the Borrower prior
to the date on which such notifying party is scheduled to make payment to the
Administrative Agent (in the case of a Lender) of the proceeds of a Loan or a
payment under a Letter of Credit to be made by it hereunder or (in the case of
the Borrower) a payment to the Administrative Agent for account of one or more
of the Lenders hereunder (such payment being herein called the “Required
Payment”), which notice shall be effective upon receipt, that it does not intend
to make the Required Payment to the Administrative Agent, the Administrative
Agent may assume that the Required Payment has been made and may, in reliance
upon such assumption (but shall not be required to), make the amount thereof
available to the intended recipient(s) on such date and, if such Lender or the
Borrower (as the case may be) has not in fact made the Required Payment to the
Administrative Agent, the recipient(s) of such payment shall, on demand, repay
to the Administrative Agent the amount so made available together with interest
thereon in respect of each day during the period commencing on the date such
amount was so made available by the Administrative Agent until, but excluding,
the date the Administrative Agent recovers such amount at a rate per annum
which, for any Lender as recipient, will be equal to the Federal Funds

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Rate, and for the Borrower as recipient, will be equal to the Base Rate plus the
Applicable Margin.
     Section 4.05 Set-off, Sharing of Payments, Etc.
     (a) The Borrower agrees that, in addition to (and without limitation of)
any right of set-off, bankers’ lien or counterclaim a Lender may otherwise have,
each Lender shall have the right and be entitled (after consultation with the
Administrative Agent), at its option, to offset balances held by it or by any of
its Affiliates for account of the Borrower or any Guarantor at any of its
offices, in Dollars or in any other currency, against any principal of or
interest on any of such Lender’s Loans, or any other amount payable to such
Lender hereunder, which is not paid when due after the passage of any applicable
grace periods (regardless of whether such balances are then due to the
Borrower), in which case it shall promptly notify the Borrower and the
Administrative Agent thereof, provided that such Lender’s failure to give such
notice shall not affect the validity thereof.
     (b) If any Lender shall obtain payment of any principal of or interest on
any Loan made by it to the Borrower under this Agreement (or reimbursement as to
any Letter of Credit) through the exercise of any right of set-off, banker’s
lien or counterclaim or similar right or otherwise, and, as a result of such
payment, such Lender shall have received a greater portion of the principal or
interest (or reimbursement) then due hereunder by the Borrower to such Lender
than the portion received by any other Lenders, it shall promptly (i) notify the
Administrative Agent and each other Lender thereof and (ii) purchase from such
other Lenders participations in (or, if and to the extent specified by such
Lender, direct interests in) the Loans (or participations in Letters of Credit)
made by such other Lenders (or in interest due thereon, as the case may be) in
such amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all the Lenders shall share the benefit of such
excess payment (net of any expenses which may be incurred by such Lender in
obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal and/or interest on the Loans held by each of the Lenders (or
reimbursements of Letters of Credit). To such end all the Lenders shall make
appropriate adjustments among themselves (by the resale of participations sold
or otherwise) if such payment is rescinded or must otherwise be restored. The
Borrower agrees that any Lender so purchasing a participation (or direct
interest) in the Loans made by other Lenders (or in interest due thereon, as the
case may be) may exercise all rights of set-off, banker’s lien, counterclaim or
similar rights with respect to such participation as fully as if such Lender
were a direct holder of Loans (or Letters of Credit) in the amount of such
participation. Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of the Borrower. If under any applicable bankruptcy, insolvency or
other similar law, any Lender receives a secured claim in lieu of a set off to
which this Section 4.05 applies, such Lender shall, to the extent practicable,
exercise its rights in respect of such secured claim in a manner consistent with
the rights of the Lenders entitled under this Section 4.05 to share the benefits
of any recovery on such secured claim.

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     Section 4.06 Taxes.
     (a) Payments Free and Clear. Any and all payments by the Borrower hereunder
shall be made, in accordance with Section 4.01, free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding, in
the case of each Lender, the Issuing Bank and the Administrative Agent, taxes
imposed on its income, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Administrative
Agent, the Issuing Bank or such Lender, as the case may be, is a citizen or
resident or in which such Lender has an Applicable Lending Office, (ii) the
jurisdiction (or any political subdivision thereof) in which the Administrative
Agent, the Issuing Bank or such Lender is organized, or (iii) any jurisdiction
(or political subdivision thereof) in which such Lender, the Issuing Bank or the
Administrative Agent is presently doing business which taxes are imposed solely
as a result of doing business in such jurisdiction (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as “Taxes”). If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder to the Lenders,
the Issuing Bank or the Administrative Agent (i) the sum payable shall be
increased by the amount necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section 4.06) such Lender, the Issuing Bank or the Administrative Agent (as the
case may be) shall receive 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 taxing
authority or other Governmental Authority in accordance with applicable law.
     (b) Other Taxes. In addition, to the fullest extent permitted by applicable
law, the Borrower agrees to pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies that arise from
any payment made hereunder or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement or any Security Instrument
(hereinafter referred to as “Other Taxes”).
     (c) Indemnification. To the fullest extent permitted by applicable law, the
Borrower will indemnify each Lender and the Issuing Bank and the Administrative
Agent for the full amount of Taxes and Other Taxes (including, but not limited
to, any Taxes or Other Taxes imposed by any Governmental Authority on amounts
payable under this section 4.06) paid by such Lender, the Issuing Bank or the
Administrative Agent (on their behalf or on behalf of any Lender), as the case
may be, and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted unless the payment of such Taxes was not correctly
or legally asserted and such Lender’s payment of such Taxes or Other Taxes was
the result of its gross negligence or willful misconduct. Any payment pursuant
to such indemnification shall be made within thirty (30) days after the date any
Lender, the Issuing Bank or the Administrative Agent, as the case may be, makes
written demand therefor. If any Lender,

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the Issuing Bank or the Administrative Agent receives a refund or credit in
respect of any Taxes or Other Taxes for which such Lender, Issuing Bank or the
Administrative Agent has received payment from the Borrower it shall promptly
notify the Borrower of such refund or credit and shall, if no default has
occurred and is continuing, within thirty (30) days after receipt of a request
by the Borrower (or promptly upon receipt, if the Borrower has requested
application for such refund or credit pursuant hereto), pay an amount equal to
such refund or credit to the Borrower without interest (but with any interest so
refunded or credited), provided that the Borrower, upon the request of such
Lender, the Issuing Bank or the Administrative Agent, agrees to return such
refund or credit (plus penalties, interest or other charges) to such Lender or
the Administrative Agent in the event such Lender or the Administrative Agent is
required to repay such refund or credit.
     (d) Lender Representations.
          (i) Each Lender represents that it is either (A) not a “foreign
person” as such term is defined in U.S. Treasury Regulations
Section 1.1441-1(c)(2) or (B) it is entitled to complete exemption from United
States withholding tax imposed on or with respect to any payments, including
fees, to be made to it pursuant to this Agreement (1) under an applicable
provision of a tax convention to which the United States of America is a party
or (2) because it is acting through a branch, agency or office in the United
States of America and any payment to be received by it hereunder is effectively
connected with a trade or business in the United States of America. Each Lender
that is a “foreign person” as such term is defined in U.S. Treasury Regulations
Section 1.441-1(c)(2) agrees to provide to the Borrower and the Administrative
Agent on the Closing Date, or on the date of its delivery of the Assignment
pursuant to which it becomes a Lender, and at such other times as required by
United States law or as the Borrower or the Administrative Agent shall
reasonably request, two accurate and complete original signed copies of either
(y) Internal Revenue Service Form W-8ECI (or successor form) certifying that all
payments to be made to it hereunder will be effectively connected to a United
States trade or business (the “Form W-8ECI Certification”) or (z) Internal
Revenue Service Form W-8BEN (or successor form) certifying that it is entitled
to the benefit of a provision of a tax convention to which the United States of
America is a party which completely exempts from United States withholding tax
all payments to be made to it hereunder (the “Form W-8BEN Certification”). In
addition, each Lender agrees that if it previously filed a Form W-8ECI
Certification, it will deliver to the Borrower and the Administrative Agent a
new Form W-8ECI Certification prior to the first payment date occurring in each
of its subsequent taxable years; and if it previously filed a Form W-8BEN
Certification, it will deliver to the Borrower and the Administrative Agent a
new certification prior to the first payment date falling in the third year
following the previous filing of such certification. Each Lender also agrees to
deliver to the Borrower and the Administrative Agent such other or supplemental
forms as may at any time be required as a result of changes in applicable law or
regulation in order to confirm or maintain in effect its entitlement to
exemption from United States withholding tax on any payments hereunder, provided
that the circumstances of such

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Lender at the relevant time and applicable laws permit it to do so. If a Lender
determines, as a result of any change in either (i) a Governmental Requirement
or (ii) its circumstances, that it is unable to submit any form or certificate
that it is obligated to submit pursuant to this Section 4.06, or that it is
required to withdraw or cancel any such form or certificate previously
submitted, it shall promptly notify the Borrower and the Administrative Agent of
such fact. If a Lender is organized under the laws of a jurisdiction outside the
United States of America, unless the Borrower and the Administrative Agent have
received a Form W-8BEN Certification or Form W-8ECI Certification satisfactory
to them indicating that all payments to be made to such Lender hereunder are not
subject to United States withholding tax, the Borrower shall withhold taxes from
such payments at the applicable statutory rate. Each Lender agrees to indemnify
and hold harmless the Borrower or Administrative Agent, as applicable, from any
United States taxes, penalties, interest and other expenses, costs and losses
incurred or payable by (i) the Administrative Agent as a result of such Lender’s
failure to submit any form or certificate that it is required to provide
pursuant to this Section 4.06 or (ii) the Borrower or the Administrative Agent
as a result of their reliance on any such form or certificate which such Lender
has provided to them pursuant to this Section 4.06.
     (ii) For any period with respect to which a Lender has failed to provide
the Borrower with the form required pursuant to this Section 4.06, if any,
(other than if such failure is due to a change in a Governmental Requirement
occurring subsequent to the date on which a form originally was required to be
provided), such Lender shall not be entitled to indemnification under
Section 4.06 with respect to taxes imposed by the United States which taxes
would not have been imposed but for such failure to provide such forms;
provided, however, that if a Lender, which is otherwise exempt from or subject
to a reduced rate of withholding tax, becomes subject to taxes because of its
failure to deliver a form required hereunder, the Borrower shall take such steps
as such Lender shall reasonably request to assist such Lender to recover such
taxes.
     (iii) Any Lender claiming any additional amounts payable pursuant to this
Section 4.06 shall use reasonable efforts (consistent with legal and regulatory
restrictions) to file any certificate or document requested by the Borrower or
the Administrative Agent or to change the jurisdiction of its Applicable Lending
Office or to contest any tax imposed if the making of such a filing or change or
contesting such tax would avoid the need for or reduce the amount of any such
additional amounts that may thereafter accrue and would not, in the sole
determination of such Lender, be otherwise disadvantageous to such Lender.
     Section 4.07 Disposition of Proceeds. Certain of the Security Instruments
contain an assignment by the Borrower and the Guarantors, as the case may be,
unto and in favor of the Agent for the benefit of the Lenders of all Hydrocarbon
production and all proceeds attributable thereto which may be produced from or
allocated to the Mortgaged Oil and Gas Properties, and further provides in
general for the application of such proceeds to the satisfaction of the
Obligations and any other obligations described therein and secured thereby.
Notwithstanding the assignment contained in such Security Instruments, until the
occurrence of an Event of Default, the Lenders agree that they will neither
notify the purchaser or purchasers of such production nor take any other action
to cause such proceeds to be remitted to the Lenders, but the

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Lenders will instead permit such proceeds to be paid to the Borrower and the
Guarantors, as the case may be.
ARTICLE V
Capital Adequacy and Yield Protection
     Section 5.01 Additional Costs.
     (a) LIBOR Regulations, etc. The Borrower shall pay directly to each Lender
from time to time such amounts as such Lender may determine to be necessary to
compensate such Lender for any costs which it determines are attributable to its
making or maintaining of any LIBOR Loans or issuing or participating in Letters
of Credit hereunder or its obligation to make any LIBOR Loans or issue or
participate in any Letters of Credit hereunder, or any reduction in any amount
receivable by such Lender hereunder in respect of any of such LIBOR Loans,
Letters of Credit or such obligation (such increases in costs and reductions in
amounts receivable being herein called “Additional Costs”), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to such Lender under this Agreement or any Note in respect of any of
such LIBOR Loans or Letters of Credit (other than taxes imposed on the overall
net income of such Lender or of its Applicable Lending Office for any of such
LIBOR Loans by the jurisdiction in which such Lender has its principal office or
Applicable Lending Office); or (ii) imposes or modifies any reserve, special
deposit, minimum capital, capital ratio or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of such Lender, or the Commitment or Loans of such Lender or the
London interbank market; or (iii) imposes any other condition affecting this
Agreement or any Note (or any of such extensions of credit or liabilities) or
such Lender’s Commitment or Loans. Each Lender will notify the Administrative
Agent and the Borrower of any event occurring after the Closing Date which will
entitle such Lender to compensation pursuant to this Section 5.01(a) as promptly
as practicable after it obtains knowledge thereof and determines to request such
compensation, and will designate a different Applicable Lending Office for the
Loans of such Lender affected by such event if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the sole
opinion of such Lender, be disadvantageous to such Lender, provided that such
Lender shall have no obligation to so designate an Applicable Lending Office
located in the United States. If any Lender requests compensation from the
Borrower under this Section 5.01(a), the Borrower may, by notice to such Lender,
suspend the obligation of such Lender to make additional Loans of the Type with
respect to which such compensation is requested until the Regulatory Change
giving rise to such request ceases to be in effect (in which case the provisions
of Section 5.04 shall be applicable).
     (b) Regulatory Change. Without limiting the effect of the provisions of
Section 5.01(a), in the event that at any time (by reason of any Regulatory
Change or any other circumstances arising after the Closing Date affecting
(A) any Lender, (B) the London interbank market or (C) such Lender’s position in
such market), the LIBOR Rate, as determined in good faith by such Lender, will
not adequately and fairly reflect the cost

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to such Lender of funding its LIBOR Loans, then, if such Lender so elects, by
notice to the Borrower and the Administrative Agent, the obligation of such
Lender to make additional LIBOR Loans shall be suspended until such Regulatory
Change or other circumstances ceases to be in effect (in which case the
provisions of Section 5.04 shall be applicable).
     (c) Capital Adequacy. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower shall
pay directly to any Lender from time to time on request such amounts as such
Lender may reasonably determine to be necessary to compensate such Lender or its
parent or holding company for any costs which it determines are attributable to
the maintenance by such Lender or its parent or holding company (or any
Applicable Lending Office), pursuant to any Governmental Requirement following
any Regulatory Change, of capital in respect of its Commitment, its Note, or its
Loans or any interest held by it in any Letter of Credit, such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of such Lender or its parent or holding company (or
any Applicable Lending Office) to a level below that which such Lender or its
parent or holding company (or any Applicable Lending Office) could have achieved
but for such Governmental Requirement. Such Lender will notify the Borrower that
it is entitled to compensation pursuant to this Section 5.01(c) as promptly as
practicable after it determines to request such compensation.
     (d) Compensation Procedure. Any Lender notifying the Borrower of the
incurrence of Additional Costs under this Section 5.01 shall in such notice to
the Borrower and the Administrative Agent set forth in reasonable detail the
basis and amount of its request for compensation. Determinations and allocations
by each Lender for purposes of this Section 5.01 of the effect of any Regulatory
Change pursuant to Section 5.01(a) or (b), or of the effect of capital
maintained pursuant to Section 5.01(c), on its costs or rate of return of
maintaining Loans or its obligation to make Loans or issue Letters of Credit, or
on amounts receivable by it in respect of Loans or Letters of Credit, and of the
amounts required to compensate such Lender under this Section 5.01, shall be
conclusive and binding for all purposes, provided that such determinations and
allocations are made on a reasonable basis. Any request for additional
compensation under this Section 5.01 shall be paid by the Borrower within thirty
(30) days of the receipt by the Borrower of the notice described in this
Section 5.01(d).
     Section 5.02 Limitation on LIBOR Loans. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any LIBOR Rate for any
Interest Period:
     (a) the Administrative Agent determines (which determination shall be
conclusive, absent manifest error) that quotations of interest rates for the
relevant deposits referred to in the definition of “LIBOR Rate” in Section 1.02
are not being provided in the relevant amounts or for the relevant maturities
for purposes of determining rates of interest for LIBOR Loans as provided
herein; or
     (b) the Administrative Agent determines (which determination shall be
conclusive, absent manifest error) that the relevant rates of interest referred
to in the

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definition of “LIBOR Rate” in Section 1.02 upon the basis of which the rate of
interest for LIBOR Loans for such Interest Period is to be determined are not
sufficient to adequately cover the cost to the Lenders of making or maintaining
LIBOR Loans;
then the Administrative Agent shall give the Borrower prompt notice thereof, and
so long as such condition remains in effect, the Lenders shall be under no
obligation to make additional LIBOR Loans.
     Section 5.03 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain LIBOR
Loans hereunder, then such Lender shall promptly notify the Borrower thereof and
such Lender’s obligation to make LIBOR Loans shall be suspended until such time
as such Lender may again make and maintain LIBOR Loans (in which case the
provisions of Section 5.04 shall be applicable).
     Section 5.04 Base Rate Loans Pursuant to Sections 5.01, 5.02 and 5.03. If
the obligation of any Lender to make LIBOR Loans shall be suspended pursuant to
Sections 5.01, 5.02 or 5.03 (“Affected Loans”), all Affected Loans which would
otherwise be made by such Lender shall be made instead as Base Rate Loans (and,
if an event referred to in Section 5.01(b) or Section 5.03 has occurred and such
Lender so requests by notice to the Borrower, all Affected Loans of such Lender
then outstanding shall be automatically converted into Base Rate Loans on the
date specified by such Lender in such notice) and, to the extent that Affected
Loans are so made as (or converted into) Base Rate Loans, all payments of
principal which would otherwise be applied to such Lender’s Affected Loans shall
be applied instead to its Base Rate Loans.
     Section 5.05 Compensation. The Borrower shall pay to each Lender within
thirty (30) days of receipt of written request of such Lender (which request
shall set forth, in reasonable detail, the basis for requesting such amounts and
which shall be conclusive and binding for all purposes provided that such
determinations are made on a reasonable basis), such amount or amounts as shall
compensate it for any loss, cost, expense or liability which such Lender
determines are attributable to:
     (a) any payment, prepayment or conversion of a LIBOR Loan properly made by
such Lender or the Borrower for any reason (including, without limitation, the
acceleration of the Loans pursuant to Section 10.01) on a date other than the
last day of the Interest Period for such Loan; or
     (b) any failure by the Borrower for any reason (including but not limited
to, the failure of any of the conditions precedent specified in Article VI to be
satisfied) to borrow, continue or convert a LIBOR Loan from such Lender on the
date for such borrowing, continuation or conversion specified in the relevant
notice given pursuant to Section 2.02(c).
     Without limiting the effect of the preceding sentence, such compensation
shall include an amount equal to the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount so paid, prepaid or
converted or not borrowed for the period from the date of such payment,
prepayment or conversion or failure to borrow to the last day of the Interest

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Period for such Loan (or, in the case of a failure to borrow, the Interest
Period for such Loan which would have commenced on the date specified for such
borrowing) at the applicable rate of interest for such Loan provided for herein
over (ii) the interest component of the amount such Lender would have bid in the
London interbank market for Dollar deposits of leading banks in amounts
comparable to such principal amount and with maturities comparable to such
period (as reasonably determined by such Lender).
     Section 5.06 Time Limit; Etc.
     (a) Time Limited. Notwithstanding anything to the contrary contained in
Sections 5.01 through 5.05, the Borrower shall not be required to reimburse or
pay any costs or expenses to any Lender as required by such sections which have
accrued more than 180 days prior to such Lender’s giving notice to the Borrower
that such Lender has suffered or incurred such costs or expenses.
     (b) Non Discriminatory Basis. None of the Lenders shall be permitted to
pass through to the Borrower costs and expenses under Sections 5.01 through 5.05
which are not also passed through by such Lender to other customers of such
Lender similarly situated when such customer is subject to documents containing
similar provisions as those contained in such Sections.
     Section 5.07 Replacement Lenders.
     (a) Terminated Lenders. If any Lender has notified the Borrower and the
Administrative Agent of its incurring Additional Costs under Section 5.01 or has
required the Borrower to make payments for Taxes under Section 4.06 or it is
unable to make LIBOR Loans under Section 5.03, then the Borrower may, unless
such Lender has notified the Borrower and the Administrative Agent that the
circumstances giving rise to such notice no longer apply, terminate, in whole
but not in part, the Commitment of any Lender (other than the Administrative
Agent) (the “Terminated Lender”) at any time upon five (5) Business Days’ prior
written notice to the Terminated Lender and the Administrative Agent (such
notice referred to herein as a “Notice of Termination”).
     (b) Replacement Lenders. In order to effect the termination of the
Commitment of the Terminated Lender, the Borrower shall: (i) obtain an agreement
with one or more Lenders to increase their Commitment and/or (ii) request any
one or more other banking institutions to become parties to this Agreement in
place and instead of such Terminated Lender and agree to accept a Commitment;
provided, however, that such one or more other banking institutions are
reasonably acceptable to the Administrative Agent and become parties by
executing an Assignment (the lenders or other banking institutions that agree to
accept in whole or in part the Commitment of the Terminated Lender being
referred to herein as the “Replacement Lenders”), such that the aggregate
increased and/or accepted Commitments of the Replacement Lenders under clauses
(i) and (ii) above equal the Commitment of the Terminated Lender.
     (c) Content of Notice of Termination. The Notice of Termination shall
include the name of the Terminated Lender, the date the termination will occur
(the

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“Lender Termination Date”), and the Replacement Lender or Replacement Lenders to
which the Terminated Lender will assign its Commitment and, if there will be
more than one Replacement Lender, the portion of the Terminated Lender’s
Commitment to be assigned to each Replacement Lender.
     (d) Effecting Termination. On the Lender Termination Date, (i) the
Terminated Lender shall by execution and delivery of an Assignment assign its
Commitment to the Replacement Lender or Replacement Lenders (pro rata, if there
is more than one Replacement Lender, in proportion to the portion of the
Terminated Lender’s Commitment to be assigned to each Replacement Lender)
indicated in the Notice of Termination and shall assign to the Replacement
Lender or Replacement Lenders each of its Loans (if any) then outstanding and
participation interests in Letters of Credit (if any) then outstanding pro rata
as aforesaid), (ii) the Terminated Lender shall endorse its Note, payable
without recourse, representation or warranty to the order of the Replacement
Lender or Replacement Lenders (pro rata as aforesaid), (iii) the Replacement
Lender or Replacement Lenders shall purchase the Note held by the Terminated
Lender (pro rata as aforesaid) at a price equal to the unpaid principal amount
thereof plus interest and facility and other fees accrued and unpaid to the
Lender Termination Date, and (iv) the Replacement Lender or Replacement Lenders
will thereupon (pro rata as aforesaid) succeed to and be substituted in all
respects for the Terminated Lender with like effect as if becoming a Lender
pursuant to the terms of Section 12.06(b), and the Terminated Lender will have
the rights and benefits of an assignor under Section 12.06(b). To the extent not
in conflict, the terms of Section 12.06(b) shall supplement the provisions of
this Section 5.06(d). For each assignment made under this Section 5.06, the
Replacement Lender shall pay to the Administrative Agent the processing fee
provided for in Section 12.06(b). The Borrower will be responsible for the
payment of any breakage costs associated with termination and Replacement
Lenders, as set forth in Section 5.05.
ARTICLE VI
Conditions Precedent
     Section 6.01 Conditions Precedent to Effectiveness of this Agreement. The
effectiveness of this Agreement is subject to the conditions precedent that the
Administrative Agent shall have received on or before such date all fees due and
payable pursuant to Section 2.04 and the receipt by the Administrative Agent of
the following documents (in sufficient original counterparts, other than the
Notes, for each Lender) and satisfaction of the other conditions provided in
this Section 6.01, each of which shall be satisfactory to the Administrative
Agent in form and substance:
     (a) A certificate of the Secretary or an Assistant Secretary of the
Borrower setting forth (i) resolutions of its board of directors with respect to
the authorization of the Borrower to execute and deliver the Loan Documents to
which it is a party and to enter into the transactions contemplated in those
documents, (ii) the officers of the Borrower (y) who are authorized to sign the
Loan Documents to which Borrower is a party and (z) who will, until replaced by
another officer or officers duly authorized for

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that purpose, act as its representative for the purposes of signing documents
and giving notices and other communications in connection with this Agreement
and the transactions contemplated hereby, (iii) specimen signatures of the
authorized officers, and (iv) the articles or certificate of incorporation and
bylaws of the Borrower, certified as being true and complete. The Administrative
Agent and the Lenders may conclusively rely on such certificate until the
Administrative Agent receives notice in writing from the Borrower to the
contrary.
     (b) A certificate of the Secretary or an Assistant Secretary of each of the
Guarantors (other than Callon Mineral Properties, Inc.) setting forth
(i) resolutions of its board of directors with respect to the authorization of
such Guarantor to execute and deliver the Loan Documents to which it is a party
and to enter into the transactions contemplated in those documents, (ii) the
officers of such Guarantor (y) who are authorized to sign the Loan Documents to
which such Guarantor is a party and (z) who will, until replaced by another
officer or officers duly authorized for that purpose, act as its representative
for the purposes of signing documents and giving notices and other
communications in connection with this Agreement and the transactions
contemplated hereby, (iii) specimen signatures of the authorized officers, and
(iv) the articles or certificate of incorporation and bylaws of such Guarantor,
certified as being true and complete. The Administrative Agent and the Lenders
may conclusively rely on such certificate until they receive notice in writing
from such Guarantor to the contrary.
     (c) Certificates of the appropriate state agencies with respect to the
existence, qualification and good standing of the Borrower and each of the
Guarantors (other than Callon Mineral Properties, Inc.).
     (d) The Notes, duly completed and executed.
     (e) The Security Instruments described on Exhibit D, duly completed and
executed in sufficient number of counterparts for recording, if necessary.
     (f) An opinion of Haynes and Boone, LLP, counsel to the Borrower and the
Guarantors (other than Callon Mineral Properties, Inc.), in form and substance
satisfactory to the Administrative Agent and its counsel, as to such matters
incident to the transactions herein contemplated as the Administrative Agent and
its counsel may reasonably request. An opinion of Simon, Peragrine, Smith &
Redfearn, L.L.P., Louisiana counsel satisfactory to the Administrative Agent and
its counsel, in form and substance satisfactory to the Administrative Agent and
its counsel, as to such matters incident to the transactions herein contemplated
as the Administrative Agent and its counsel may reasonably request including,
without limitation, opinions that all mortgage taxes have been properly paid.
     (g) A certificate of insurance coverage of the Borrower evidencing that the
Borrower is carrying insurance in accordance with Section 7.19.

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     (h) Title information satisfactory to the Administrative Agent setting
forth a status of title acceptable to the Administrative Agent to at least 75%
of the value of the Oil and Gas Properties included in the Initial Reserve
Report.
     (i) Appropriate UCC search certificates reflecting no prior Liens other
than those permitted pursuant to Section 9.02.
     (j) Environmental assessment reports relating to the Oil and Gas Properties
of the Borrower and the Subsidiaries as may be requested by the Administrative
Agent, including environmental audits, phase I reports or other environmental
reports of any nature whatsoever (whether prepared internally or by third party
consultants); and the Administrative Agent must be satisfied with the results of
the review of such reports and environmental condition of such Oil and Gas
Properties.
     (k) Letters in lieu, in form and substance satisfactory to the
Administrative Agent, executed by the Borrower and each Subsidiary, as
appropriate, to each of the purchasers of the Hydrocarbons of the Borrower and
each such Guarantor produced from the Borrower’s and such Guarantors’ Mortgaged
Oil and Gas Properties, as may be requested by the Administrative Agent.
     (l) Such other documents as the Administrative Agent or any Lender or
special counsel to the Administrative Agent may reasonably request.
     Section 6.02 Initial and Subsequent Loans and Letters of Credit. The
obligation of the Lenders to make Loans to the Borrower upon the occasion of
each borrowing hereunder and to issue, renew, extend or reissue Letters of
Credit for the account of the Borrower (including the Initial Funding and the
deemed issuance of the Existing Letters of Credit) is subject to the further
conditions precedent that, as of the date of such Loans and after giving effect
thereto:
     (a) no Default shall exist;
     (b) no Material Adverse Effect shall have occurred; and
     (c) the representations and warranties made by the Borrower in Article VII
and in the Security Instruments shall be true on and as of the date of the
making of such Loans or issuance, renewal, extension or reissuance of a Letter
of Credit with the same force and effect as if made on and as of such date and
following such new borrowing, except to the extent such representations and
warranties are expressly limited to an earlier date or the Majority Lenders may
expressly consent in writing to the contrary.
     Each request for a borrowing or issuance, renewal, extension or reissuance
of a Letter of Credit by the Borrower hereunder shall constitute a certification
by the Borrower to the effect set forth in Section 6.02(c) (both as of the date
of such notice and, unless the Borrower otherwise notifies the Administrative
Agent prior to the date of and immediately following such borrowing or issuance,
renewal, extension or reissuance of a Letter of Credit as of the date thereof).
     Section 6.03 Conditions Precedent for the Benefit of Lenders. All
conditions precedent to the obligations of the Lenders to make any Loan or the
Issuing Bank to issue, renew or extend

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any Letter of Credit are imposed hereby solely for the benefit of the Lenders
and the Issuing Bank, and no other Person may require satisfaction of any such
condition precedent or be entitled to assume that the Lenders will refuse to
make any Loan or the Issuing Bank to issue, renew or extend any Letter of Credit
in the absence of strict compliance with such conditions precedent.
     Section 6.04 No Waiver. No waiver of any condition precedent shall preclude
the Administrative Agent or the Lenders from requiring such condition to be met
prior to making any subsequent Loan or preclude the Lenders from thereafter
declaring that the failure of the Borrower to satisfy such condition precedent
constitutes a Default.
ARTICLE VII
Representations and Warranties
     The Borrower represents and warrants to the Administrative Agent and the
Lenders that (each representation and warranty herein is given as of the Closing
Date and shall be deemed repeated and reaffirmed on the dates of each borrowing
and issuance, renewal, extension or reissuance of a Letter of Credit as provided
in Section 6.02):
     Section 7.01 Corporate Existence. Each of the Borrower and each Guarantor:
(i) is a corporation duly organized, legally existing and in good standing under
the laws of the jurisdiction of its incorporation; (ii) has all requisite
corporate power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted; and (iii) is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure so to qualify would have a
Material Adverse Effect.
     Section 7.02 Financial Condition. The audited consolidated balance sheet of
the Borrower and its Consolidated Subsidiaries as at December 31, 2005 and the
related consolidated statement of income, stockholders’ equity and cash flow of
the Borrower and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon of Ernst & Young LLP heretofore furnished to the
Administrative Agent and the unaudited consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as at March 31, 2006 and their
related consolidated statements of income, stockholders’ equity and cash flow of
the Borrower and its Consolidated Subsidiaries for the three month period ended
on such date heretofore furnished to the Administrative Agent, are complete and
correct in all material respects and fairly present the consolidated financial
condition of the Borrower and its Consolidated Subsidiaries as at said dates and
the results of its operations for the fiscal year and the three month period
ending on said dates, all in accordance with GAAP, as applied on a consistent
basis (subject, in the case of the interim financial statements, to normal
year-end adjustments). Neither the Borrower nor any Subsidiary has on the
Closing Date any material Debt, contingent liabilities, liabilities for taxes,
unusual forward or long-term commitments or unrealized or anticipated losses
from any unfavorable commitments, except as referred to or reflected or provided
for in the Financial Statements or in Schedule 7.02. As of the Closing Date,
since December 31, 2005, there has been no change or event having a Material
Adverse Effect.

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     Section 7.03 Litigation. Except as disclosed to the Lenders in
Schedule 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Borrower threatened against or
affecting the Borrower or any Subsidiary which involves the possibility of any
judgment or liability against the Borrower or any Subsidiary not fully covered
by insurance (except for normal deductibles).
     Section 7.04 No Breach. Neither the execution and delivery of the Loan
Documents, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent which has not been
obtained as of the Closing Date under, the respective charter or by laws of the
Borrower or any Subsidiary, or any Governmental Requirement or any agreement or
instrument to which the Borrower or any Subsidiary is a party or by which it is
bound or to which it or its Properties are subject, or constitute a default
under any such agreement or instrument, or result in the creation or imposition
of any Lien upon any of the revenues or assets of the Borrower or any Subsidiary
pursuant to the terms of any such agreement or instrument other than the Liens
created by the Loan Documents.
     Section 7.05 Authority. The Borrower and each Guarantor have all necessary
corporate power and authority to execute, deliver and perform its obligations
under the Loan Documents to which it is a party; and the execution, delivery and
performance by the Borrower and each Guarantor of the Loan Documents to which it
is a party, have been duly authorized by all necessary corporate action on its
part; and the Loan Documents constitute the legal, valid and binding obligations
of the Borrower and each Guarantor, enforceable in accordance with their terms.
     Section 7.06 Approvals. No authorizations, approvals or consents of, and no
filings or registrations with, any Governmental Authority are necessary for the
execution, delivery or performance by the Borrower or any Guarantor of the Loan
Documents or for the validity or enforceability thereof, except for the
recording and filing of the Security Instruments as required by this Agreement.
     Section 7.07 Use of Loans. The proceeds of the Loans shall be used for
(i) the acquisition of Oil and Gas Properties, (ii) exploration and development
of Oil and Gas Properties, (iii) working capital, (iv) to refinance Debt under
the Prior Credit Agreement, (v) to repurchase, redeem or repay Existing Other
Debt or Subordinated Debt to the extent otherwise permitted under this Agreement
and (vi) general corporate purposes. None of the Guarantors or the Borrower is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose, whether immediate, incidental or ultimate, of
buying or carrying margin stock (within the meaning of Regulation T, U or X of
the Board of Governors of the Federal Reserve System) and no part of the
proceeds of any Loan hereunder will be used to buy or carry any margin stock.
     Section 7.08 ERISA.
     (a) The Borrower, each Subsidiary and each ERISA Affiliate have complied in
all material respects with ERISA and, where applicable, the Code regarding each
Plan.

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     (b) Each Plan is, and has been, maintained in substantial compliance with
ERISA and, where applicable, the Code.
     (c) No act, omission or transaction has occurred which could result in
imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether
directly or indirectly) of (i) either a civil penalty assessed pursuant to
section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under
section 409 of ERISA.
     (d) No Plan (other than a defined contribution plan) or any trust created
under any such Plan has been terminated since September 2, 1974. No liability to
the PBGC (other than for the payment of current premiums which are not past due)
by the Borrower, any Subsidiary or any ERISA Affiliate has been or is expected
by the Borrower, any Subsidiary or any ERISA Affiliate to be incurred with
respect to any Plan. No ERISA Event with respect to any Plan has occurred.
     (e) Full payment when due has been made of all amounts which the Borrower,
any Subsidiary or any ERISA Affiliate is required under the terms of each Plan
or applicable law to have paid as contributions to such Plan, and no accumulated
funding deficiency (as defined in section 302 of ERISA and section 412 of the
Code), whether or not waived, exists with respect to any Plan.
     (f) The actuarial present value of the benefit liabilities under each Plan
which is subject to Title IV of ERISA does not, as of the end of the Borrower’s
most recently ended fiscal year, exceed the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities. The term “actuarial present
value of the benefit liabilities” shall have the meaning specified in section
4041 of ERISA.
     (g) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors,
maintains, or contributes to an employee welfare benefit plan, as defined in
section 3(1) of ERISA, including, without limitation, any such plan maintained
to provide benefits to former employees of such entities, that may not be
terminated by the Borrower, a Subsidiary or any ERISA Affiliate in its sole
discretion at any time without any material liability.
     (h) None of the Borrower, any Subsidiary or any ERISA Affiliate sponsors,
maintains or contributes to, or has at any time in the preceding six calendar
years, sponsored, maintained or contributed to, any Multiemployer Plan.
     (i) None of the Borrower, any Subsidiary or any ERISA Affiliate is required
to provide security under section 401(a)(29) of the Code due to a Plan amendment
that result in an increase in current liability for the Plan.
     Section 7.09 Taxes. Except as set out in Schedule 7.09, each of the
Borrower and its Subsidiaries has filed all United States Federal income tax
returns and all other tax returns which are required to be filed by them and
have paid all material taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower or any Subsidiary. The charges, accruals

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and reserves on the books of the Borrower and its Subsidiaries in respect of
taxes and other governmental charges are, in the opinion of the Borrower,
adequate. No tax lien has been filed and, to the knowledge of the Borrower, no
claim is being asserted with respect to any such tax, fee or other charge.
     Section 7.10 Titles, Etc.
     (a) Except as set out in Schedule 7.10, each of the Borrower and the
Guarantors has good and defensible title to its material (individually or in the
aggregate) Properties (other than the Entrada Assets), free and clear of all
Liens, except Liens permitted by Section 9.02. Except as set forth in
Schedule 7.10, after giving full effect to the Excepted Liens, the Borrower owns
at least the net interests in production attributable to the Hydrocarbon
Interests reflected in the most recently delivered Reserve Report and the
ownership of such Properties does not in any material respect obligate the
Borrower to bear the costs and expenses relating to the maintenance, development
and operations of each such Property in an amount in excess of the working
interest of each Property set forth in the most recently delivered Reserve
Report without a corresponding increase in net revenue interest for such
Properties. All information contained in the most recently delivered Reserve
Report is true and correct in all material respects as of the date thereof.
     (b) All material leases and agreements necessary for the conduct of the
business of the Borrower and the Guarantors are valid and subsisting, in full
force and effect and there exists no default or event or circumstance which with
the giving of notice or the passage of time or both would give rise to a default
under any such lease or agreement, which would affect in any material respect
the conduct of the business of the Borrower and the Guarantors.
     (c) The rights, Properties and other assets presently owned, leased or
licensed by the Borrower and the Guarantors including, without limitation, all
easements and rights of way, include all rights, Properties and other assets
reasonably necessary to permit the Borrower and the Guarantors to conduct their
business in all material respects in the same manner as its business has been
conducted prior to the Closing Date.
     (d) All of the assets and Properties of the Borrower and the Guarantors
which are reasonably necessary for the operation of its business are in good
working condition and are maintained in accordance with customary industry
standards.
     Section 7.11 No Material Misstatements. No written information, statement,
exhibit, certificate, document or report furnished to the Administrative Agent
and the Lenders (or any of them) by the Borrower or any Subsidiary in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the light of the
circumstances in which made and with respect to the Borrower and its
Subsidiaries taken as a whole. There is no fact peculiar to the Borrower or any
Subsidiary which has a Material Adverse Effect or in the future is reasonably
likely to have (so far as the Borrower can now foresee) a Material Adverse
Effect and which has not been disclosed in writing to the Administrative Agent

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and the Lenders by or on behalf of the Borrower or any Subsidiary prior to, or
on, the Closing Date in connection with the transactions contemplated hereby.
     Section 7.12 Investment Company Act. Neither the Borrower nor any
Subsidiary is an “investment company” or a company “controlled” by an
“investment company,” within the meaning of the Investment Company Act of 1940,
as amended.
     Section 7.13 [Reserved].
     Section 7.14 Subsidiaries. Except as set forth on Schedule 7.14, as of the
Closing Date the Borrower has no Subsidiaries.
     Section 7.15 Location of Business, Offices and Inventory. The Borrower’s
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement. The principal place of
business and chief executive office of each Subsidiary are located at the
addresses stated on Schedule 7.14. Schedule 7.14 sets forth as of the Closing
Date each of the locations where the Borrower and its Subsidiaries conducts
business or maintains inventory and indicates whether the Borrower or the
applicable Subsidiary is qualified to do business in that jurisdiction.
     Section 7.16 Defaults. Neither the Borrower nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default under any material agreement or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary
is bound which default would have a Material Adverse Effect. No Default
hereunder has occurred and is continuing.
     Section 7.17 Environmental Matters. Except (i) as provided in Schedule 7.17
or (ii) as would not have a Material Adverse Effect (or with respect to (c),
(d) and (e) below, where the failure to take such actions would not have a
Material Adverse Effect):
     (a) Neither any Property of the Borrower or any Subsidiary nor the
operations conducted thereon violate any order or requirement of any court or
Governmental Authority or any Environmental Laws;
     (b) Without limitation of clause (a) above, no Property of the Borrower or
any Subsidiary nor the operations currently conducted thereon or, to the best
knowledge of the Borrower, by any prior owner or operator of such Property or
operation, are in violation of or subject to any existing, pending or threatened
action, suit, investigation, inquiry or proceeding by or before any court or
Governmental Authority or to any remedial obligations under Environmental Laws;
     (c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of the Borrower and each Subsidiary, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly obtained
or filed, and the Borrower and each Subsidiary are in

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compliance with the terms and conditions of all such notices, permits, licenses
and similar authorizations;
     (d) All hazardous substances, solid waste, and oil and gas exploration and
production wastes, if any, generated at any and all Property of the Borrower or
any Subsidiary have in the past been transported, treated and disposed of in
accordance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment, and, to
the best knowledge of the Borrower, all such transport carriers and treatment
and disposal facilities have been and are operating in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not the
subject of any existing, pending or threatened action, investigation or inquiry
by any Governmental Authority in connection with any Environmental Laws;
     (e) The Borrower has taken all steps reasonably necessary to determine and
has determined that no hazardous substances, solid waste, or oil and gas
exploration and production wastes, have been disposed of or otherwise released
and there has been no threatened release of any hazardous substances on or to
any Property of the Borrower or any Subsidiary except in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment;
     (f) To the extent applicable, all Property of the Borrower and each
Subsidiary currently satisfies all design, operation, and equipment requirements
imposed by the OPA or scheduled as of the Closing Date to be imposed by OPA
during the term of this Agreement, and the Borrower does not have any reason to
believe that such Property, to the extent subject to OPA, will not be able to
maintain compliance with the OPA requirements during the term of this Agreement;
and
     (g) Neither the Borrower nor any Subsidiary has any known contingent
liability in connection with any release or threatened release of any oil,
hazardous substance or solid waste into the environment.
     Section 7.18 Compliance with the Law. Neither the Borrower nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Except for such acts or failures to act as would not have a Material Adverse
Effect, the Oil and Gas Properties (and properties unitized therewith) have been
maintained, operated and developed in a good and workmanlike manner and in
conformity with all applicable laws and all rules, regulations and orders of all
duly constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Interests and other contracts and agreements forming a part of the
Oil and Gas Properties; specifically in this connection, (i) after the Closing
Date, no Oil and Gas Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Closing Date and (ii) none of the wells
comprising a part

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of the Oil and Gas Properties (or properties unitized therewith) are deviated
from the vertical more than the maximum permitted by applicable laws,
regulations, rules and orders, and such wells are, in fact, bottomed under and
are producing from, and the well bores are wholly within, the Oil and Gas
Properties (or in the case of wells located on properties unitized therewith,
such unitized properties).
     Section 7.19 Insurance. Schedule 7.19 attached hereto contains an accurate
and complete description of all material policies of fire, liability, workmen’s
compensation and other forms of insurance owned or held by the Borrower and each
Subsidiary. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the date of the closing
have been paid, and no notice of cancellation or termination has been received
with respect to any such policy. Such policies are sufficient for compliance
with all requirements of law and of all material agreements to which the
Borrower or any Subsidiary is a party; are valid, outstanding and enforceable
policies; provide adequate insurance coverage in at least such amounts and
against at least such risks (but including in any event public liability) as are
customarily insured against in the same general area by companies engaged in the
same or a similar business for the assets and operations of the Borrower and
each Subsidiary; will remain in full force and effect through the respective
dates set forth in Schedule 7.19 without the payment of additional premiums; and
will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. Schedule 7.19 identifies all
material risks, if any, which the Borrower and its Subsidiaries and their
respective Board of Directors or officers have designated as being self insured.
Neither the Borrower nor any Subsidiary has been refused any insurance with
respect to its assets or operations, nor has its coverage been limited below
usual and customary policy limits, by an insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years.
     Section 7.20 Hedging Agreements. Schedule 7.20 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements (including
commodity price swap agreements, forward agreements (for terms in excess of
thirty days) or contracts of sale which provide for prepayment for deferred
shipment or delivery of oil, gas or other commodities) of the Borrower and each
Subsidiary, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements relating thereto (including any
margin required or supplied), and the counter party to each such agreement.
     Section 7.21 Restriction on Liens. Neither the Borrower nor any of the
Guarantors is a party to any agreement or arrangement (other than this
Agreement, the Security Instruments and the agreements and instruments governing
the Existing Other Debt), or subject to any order, judgment, writ or decree,
which either restricts or purports to restrict its ability to grant Liens to
other Persons on or in respect of their respective assets or Properties.
     Section 7.22 Material Agreements. Set forth on Schedule 7.22 hereto is a
complete and correct list of all material agreements, leases, indentures,
purchase agreements, obligations in respect of letters of credit, guarantees,
joint venture agreements, and other instruments in effect or to be in effect as
of the Closing Date (other than Hedging Agreements and agreements relating to
Debt of the type described in clause (iii) in the definition of Debt or clause
(vii) in the definition of Debt to the extent relating to primary obligations of
the type described in clause (iii)

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in the definition of Debt) providing for, evidencing, securing or otherwise
relating to any Debt of the Borrower or any of its Subsidiaries, and all
obligations of the Borrower or any of its Subsidiaries to issuers of surety or
appeal bonds issued for account of the Borrower or any such Subsidiary, and such
list correctly sets forth the names of the debtor or lessee and creditor or
lessor with respect to the Debt or lease obligations outstanding or to be
outstanding and the Property subject to any Lien securing such Debt or lease
obligation. The Borrower has heretofore delivered to the Administrative Agent a
complete and correct copy of all such material credit agreements, indentures,
purchase agreements, contracts, letters of credit, guarantees, joint venture
agreements, or other instruments, including any modifications or supplements
thereto, as in effect on the Closing Date, which the Administrative Agent has
requested.
ARTICLE VIII
Affirmative Covenants
     The Borrower covenants and agrees that, so long as any of the Commitments
are in effect and until payment in full of all Loans hereunder, all interest
thereon and all other amounts payable by the Borrower hereunder:
     Section 8.01 Reporting Requirements. The Borrower shall deliver, or shall
cause to be delivered, to the Administrative Agent with sufficient copies of
each for the Lenders:
     (a) Annual Financial Statements. As soon as available and in any event
within 90 days after the end of each fiscal year of the Borrower, the audited
consolidated statement of income, stockholders’ equity, changes in financial
position and cash flows of the Borrower and its Consolidated Subsidiaries for
such fiscal year, and the related consolidated balance sheet of the Borrower and
its Consolidated Subsidiaries as at the end of such fiscal year, and setting
forth in each case in comparative form the corresponding figures for the
preceding fiscal year, and accompanied by the related opinion of independent
public accountants of recognized national standing reasonably acceptable to the
Administrative Agent which opinion shall state that said financial statements
fairly present the consolidated and consolidating financial condition and
results of operations of the Borrower and its Consolidated Subsidiaries as at
the end of, and for, such fiscal year and that such financial statements have
been prepared in accordance with GAAP, except for such changes in such
principles with which the independent public accountants shall have concurred
and such opinion shall not contain a “going concern” or like qualification or
exception, and a certificate of such accountants stating that, in making the
examination necessary for their opinion, they obtained no knowledge, except as
specifically stated, of any Default.
     (b) Quarterly Financial Statements. As soon as available and in any event
within 45 days after the end of each of the first three fiscal quarterly periods
of each fiscal year of the Borrower, consolidated statements of income, changes
in financial position and cash flows of the Borrower and its Consolidated
Subsidiaries for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related balance sheet
as at the end of such period, and setting forth in each case in comparative form
the corresponding figures for the corresponding period in the

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preceding fiscal year, accompanied by the certificate of a Responsible Officer,
which certificate shall state that said financial statements fairly present the
consolidated financial condition and results of operations of the Borrower and
its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and
for, such period (subject to normal year-end audit adjustments).
     (c) Notice of Default, Etc. Promptly after the Borrower knows that any
Default or any Material Adverse Effect has occurred, a notice of such Default or
Material Adverse Effect, describing the same in reasonable detail and the action
the Borrower proposes to take with respect thereto.
     (d) Other Accounting Reports. Promptly upon receipt thereof, a copy of each
other material report or letter submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and its Subsidiaries, and a copy of
any response by the Borrower or any Subsidiary of the Borrower, or the Board of
Directors of the Borrower or any Subsidiary of the Borrower, to such letter or
report.
     (e) SEC Filings, Etc. Promptly upon its becoming available, each financial
statement, report, notice or proxy statement sent by the Borrower to
stockholders generally and each regular or periodic report and any registration
statement, prospectus or material written communication (other than transmittal
letters) in respect thereof filed by the Borrower with or received by the
Borrower in connection therewith from any securities exchange or the SEC or any
successor agency.
     (f) Notices Under Other Loan Agreements. Promptly after the furnishing
thereof, copies of any statement, report or notice furnished to any Person
pursuant to the terms of any indenture, loan or credit or other similar
agreement, other than this Agreement and not otherwise required to be furnished
to the Lenders pursuant to any other provision of this Section 8.01.
     (g) Other Matters. From time to time such other information regarding the
business, affairs or financial condition of the Borrower or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan, any reports or
other information required to be filed under ERISA), and any operating reports
with respect to the operation of Oil and Gas Properties as any Lender or the
Administrative Agent may reasonably request.
     (h) Hedging Agreements. As soon as available and in any event within forty
five days after the last day of each calendar quarter, a report, in form and
substance satisfactory to the Administrative Agent, setting forth as of the last
Business Day of such calendar quarter a true and complete list of all Hedging
Agreements (including commodity price swap agreements, forward agreements with
terms in excess of thirty days or contracts of sale which provide for prepayment
for deferred shipment or delivery of oil, gas or other commodities) of the
Borrower and each Subsidiary, the material terms thereof (including the type,
term, effective date, termination date and notional amounts or volumes), the net
mark to market value therefor, any new credit support agreements

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relating thereto not listed on Schedule 7.20, any margin required or supplied
under any credit support document, and the counter party to each such agreement.
     (i) Monthly Reports. As soon as available and in any event within 45 days
after the end of each month, a report in form and substance satisfactory to the
Administrative Agent prepared by the Borrower for each of its Borrowing Base
Properties detailing for such month production, revenue, expense, production
taxes and price information;
     (j) Annual Projected Budget. At the time it furnishes each set of financial
statements pursuant to paragraph (a) above, an annual operating budget for the
Borrower and its Subsidiaries in form and substance reasonably acceptable to the
Administrative Agent, which budget shall include revenues, expenses and capital
expenditures (detailing the projected capital expenditures with respect to
drilling (both development and exploration), leasehold, geological and
geophysical, capitalized general and administrative expenses, and capitalized
interest) for the following fiscal year.
     (k) Sales and Leasebacks. Prompt written notice if the Borrower or any
Subsidiary enters into any arrangement permitted by Section 9.05.
     Future Subsidiaries. (i) Prompt written notice if the Borrower or any
Subsidiary forms any new Subsidiary that is not a Guarantor under this Agreement
and (ii) a quarterly summary (due on the same days that quarterly financial
statements are required to be delivered pursuant to Section 8.01(b) above) of
any changes in loans, advances or investments by the Borrower or any Guarantor
in or to any Subsidiary that is not a Guarantor under this Agreement.
The Borrower will furnish to the Administrative Agent, at the time it furnishes
each set of financial statements pursuant to paragraph (a) or (b) above, a
certificate substantially in the form of Exhibit C executed by a Responsible
Officer (i) certifying as to the matters set forth therein and stating that no
Default has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail), and (ii) setting forth in
reasonable detail the computations necessary to determine whether the Borrower
is in compliance with Sections 9.12, 9.13 and 9.14 as of the end of the
respective fiscal quarter or fiscal year.
     Section 8.02 Litigation. The Borrower shall promptly give to the
Administrative Agent notice of: (i) all legal or arbitral proceedings, and of
all proceedings before any Governmental Authority affecting the Borrower or any
Subsidiary, except proceedings which, if adversely determined, could not
reasonably be expected to have a Material Adverse Effect, and (ii) of any
litigation or proceeding against or adversely affecting in any material respect
the Borrower or any Subsidiary in which the amount involved is not covered in
full by insurance (subject to normal and customary deductibles and for which the
insurer has not assumed the defense) or injunctive or similar relief is sought.
The Borrower will, and will cause each of its Subsidiaries to, promptly notify
the Administrative Agent and each of the Lenders of any claim, judgment, Lien
(other than those permitted under Section 9.02) or other encumbrance affecting
any Borrowing Base Property of the Borrower or any Subsidiary if the value of
the claim, judgment, Lien, or other encumbrance affecting such Borrowing Base
Property shall exceed $500,000.

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     Section 8.03 Maintenance, Etc.
     (a) Generally. The Borrower shall and shall cause each Subsidiary to:
preserve and maintain its corporate existence and all of its material rights,
privileges and franchises; keep books of record and account in which full, true
and correct entries will be made of all dealings or transactions in relation to
its business and activities; comply with all Governmental Requirements if
failure to comply with such requirements will have a Material Adverse Effect;
pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attach thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained;
upon reasonable notice, permit representatives of the Administrative Agent or
any Lender, during normal business hours, to examine, copy and make extracts
from its books and records, to inspect its Properties, and to discuss its
business and affairs with its officers, all to the extent reasonably requested
by such Lender or the Administrative Agent (as the case may be); and keep, or
cause to be kept, insured by financially sound and reputable insurers all
Property of a character usually insured by Persons engaged in the same or
similar business similarly situated against loss or damage of the kinds and in
the amounts customarily insured against by such Persons and carry such other
insurance as is usually carried by such Persons. The Borrower shall promptly
obtain endorsements to such insurance policies naming “Union Bank of California,
N.A., as Administrative Agent for the Beneficiaries” as joint loss payee and
containing provisions that such policies will not be canceled without 30 days
prior written notice having been given by the insurance company to the
Administrative Agent.
     (b) Proof of Insurance. Contemporaneously with the delivery of the
financial statements required by Section 8.01(a) to be delivered for each year,
the Borrower will furnish or cause to be furnished to the Administrative Agent
and the Lenders a certificate of insurance coverage from the insurer in form and
substance satisfactory to the Administrative Agent and, if requested, will
furnish the Administrative Agent and the Lenders copies of the applicable
policies.
     (c) Oil and Gas Properties. The Borrower will and will cause each
Subsidiary to, at its own expense, (i) do or cause to be done all things
reasonably necessary to preserve and keep in good repair, working order and
efficiency all of its Oil and Gas Properties and other material Properties
including, without limitation, all equipment, machinery and facilities, and from
time to time will make all the reasonably necessary repairs, renewals and
replacements so that at all times the state and condition of its Oil and Gas
Properties and other material Properties will be preserved and maintained in
accordance with customary industry standards, except to the extent a portion of
such Properties is no longer capable of producing Hydrocarbons in economically
reasonable amounts and (ii) maintain good and defensible title to its material
(individually and in the aggregate) Properties, free and clear of all Liens,
except Liens permitted by Section 9.02. The Borrower will and will cause each
Subsidiary to promptly: (i) pay and discharge, or make reasonable and customary
efforts to cause to be paid and discharged, all delay rentals, royalties,
expenses and indebtedness accruing under the material leases or other

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agreements affecting or pertaining to its Oil and Gas Properties, (ii) perform
or make reasonable and customary efforts to cause to be performed, in accordance
with customary industry standards, the material obligations required by each and
all of the material assignments, deeds, leases, sub leases, contracts and
agreements affecting its interests in its Oil and Gas Properties and other
material Properties, (iii) will and will cause each Subsidiary to do all other
things reasonably necessary to keep unimpaired, except for Liens permitted under
Section 9.02, its rights with respect to its Oil and Gas Properties and other
material Properties and prevent any material forfeiture thereof or default
thereunder, except to the extent a portion of such Properties is no longer
capable of producing Hydrocarbons in economically reasonable amounts and except
for dispositions permitted by Section 9.15. The Borrower will and will cause
each Subsidiary to operate its Oil and Gas Properties and other material
Properties or cause or make reasonable and customary efforts to cause such Oil
and Gas Properties and other material Properties to be operated in a reasonably
prudent manner in accordance with the customary practices of the industry and in
compliance in all material respects with all applicable contracts and agreements
and in compliance in all material respects with all Governmental Requirements.
The Borrower will not amend, waive, or release any such contract if such
amendment, waiver or release could reasonably be expected to cause a Material
Adverse Effect.
     Section 8.04 Environmental Matters.
     (a) Establishment of Procedures. The Borrower will and will cause each
Subsidiary to establish and implement such procedures as may be reasonably
necessary to continuously determine and assure that any failure of the following
could not reasonably be expected to have a Material Adverse Effect: (i) all
Property of the Borrower and its Subsidiaries and the operations conducted
thereon and other activities of the Borrower and its Subsidiaries are in
compliance with and do not violate the requirements of any Environmental Laws,
(ii) no oil, hazardous substances or solid wastes are disposed of or otherwise
released on or to any Property owned by any such party except in compliance with
Environmental Laws, (iii) no hazardous substance will be released on or to any
such Property in a quantity equal to or exceeding that quantity which requires
reporting pursuant to Section 103 of CERCLA, and (iv) no oil, oil and gas
exploration and production wastes or hazardous substance is released on or to
any such Property so as to pose an imminent and substantial endangerment to
public health or welfare or the environment.
     (b) Notice of Action. The Borrower will promptly notify the Administrative
Agent and the Lenders in writing of any threatened action, investigation or
inquiry by any Governmental Authority of which the Borrower has knowledge in
connection with any Environmental Laws, excluding routine testing, monitoring
and corrective action.
     (c) Future Acquisitions. The Borrower will and will cause each Subsidiary
to provide environmental audits and tests as reasonably requested by the
Administrative Agent or the Lenders (or as otherwise required to be obtained by
the Administrative Agent or the Lenders by any Governmental Authority) in
connection with any future acquisitions of material Oil and Gas Properties or
other material Properties.

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     Section 8.05 Further Assurances. The Borrower will and will cause each
Guarantor to cure promptly any defects in the creation and issuance of the Notes
and the execution and delivery of the Security Instruments and this Agreement.
The Borrower at its expense will and will cause each Guarantor to promptly
execute and deliver to the Administrative Agent upon request all such other
documents, agreements and instruments to comply with or accomplish the covenants
and agreements of the Borrower or any Guarantor, as the case may be, in the
Security Instruments and this Agreement, or to further evidence and more fully
describe the collateral intended as security for the Notes, or to correct any
omissions in the Security Instruments, or to state more fully the security
obligations set out herein or in any of the Security Instruments, or to perfect,
protect or preserve any Liens created pursuant to any of the Security
Instruments, or to make any recordings, to file any notices or obtain any
consents, all as may be necessary or appropriate in connection therewith.
     Section 8.06 Performance of Obligations. The Borrower will pay the Notes
according to the reading, tenor and effect thereof; and the Borrower will and
will cause each Subsidiary to do and perform every act and discharge all of the
obligations to be performed and discharged by them under the Security
Instruments and this Agreement, at the time or times and in the manner
specified.
     Section 8.07 Engineering Reports.
     (a) Not less than 60 days prior to each Scheduled Redetermination Date,
commencing with the Scheduled Redetermination Date to occur on or around
November 1, 2006, the Borrower shall furnish to the Administrative Agent and the
Lenders a Reserve Report. The Reserve Report for the November 1 redetermination
of each year shall be for reserves attributable to the Borrowing Base Properties
as of the previous July 1, and prepared by or under the supervision of the chief
engineer of the Borrower who shall certify such Reserve Report to be true and
accurate and to have been prepared in all material respects in accordance with
the procedures (other than forecasted product prices) used in the immediately
preceding Reserve Report prepared for the prior May 1 Scheduled Redetermination
Date. The May 1 Reserve Report of each year shall be for reserves attributable
to the Borrowing Base Properties as of the previous January 1, and prepared by
certified independent petroleum engineers or other independent petroleum
consultant(s) acceptable to the Administrative Agent.
     (b) In the event of an unscheduled redetermination, the Borrower shall
furnish to the Administrative Agent and the Lenders a Reserve Report prepared by
or under the supervision of the chief engineer of the Borrower who shall certify
such Reserve Report to be true and accurate and to have been prepared in all
material respects in accordance with the procedures (other than forecasted
product prices) used in the immediately preceding Reserve Report. For any
unscheduled redetermination requested by the Majority Lenders or the Borrower
pursuant to Section 2.08(d)), the Borrower shall provide such Reserve Report
with an “as of” date as required by the Majority Lenders as soon as possible,
but in any event no later than 30 days following the receipt of the request by
the Administrative Agent.

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     (c) With the delivery of each Reserve Report, the Borrower shall provide to
the Administrative Agent and the Lenders, a certificate from a Responsible
Officer certifying that, to the best of his knowledge and in all material
respects: (i) the information contained in the Reserve Report and any other
information delivered in connection therewith is true and correct, (ii) the
Borrower owns good and defensible title to the Borrowing Base Properties
evaluated in such Reserve Report and such Properties are free of all Liens
except for Liens permitted by Section 9.02, (iii) except as set forth on an
exhibit to the certificate, on a net basis there are no gas imbalances, take or
pay or other prepayments with respect to its Borrowing Base Properties evaluated
in such Reserve Report which would require the Borrower to deliver Hydrocarbons
produced from such Borrowing Base Properties at some future time without then or
thereafter receiving full payment therefor, (iv) none of its Borrowing Base
Properties listed in the immediately prior Reserve Report as having proved
reserves have been sold since the date of the last Borrowing Base determination
except as set forth on an exhibit to the certificate, which certificate shall
list all of such Borrowing Base Properties sold and in such detail as reasonably
required by the Administrative Agent, (v) attached to the certificate is a list
of all Persons disbursing proceeds to the Borrower from its Mortgaged Oil and
Gas Properties and (vi) except as set forth on a schedule attached to the
certificate all of the Borrowing Base Properties evaluated by such Reserve
Report are Mortgaged Oil and Gas Properties.
     Section 8.08 Title Information.
     (a) Delivery. On or before the delivery to the Administrative Agent and the
Lenders of each Reserve Report required by Section 8.07(a), the Borrower will
deliver title information in form and substance acceptable to the Administrative
Agent covering enough of the Mortgaged Oil and Gas Properties evaluated by such
Reserve Report that were not included in the immediately preceding Reserve
Report, so that the Administrative Agent shall have received together with title
information previously delivered to the Administrative Agent, satisfactory title
information on at least seventy-five percent (75%) of the value of the Mortgaged
Oil and Gas Properties evaluated by such Reserve Report.
     (b) Cure of Title Defects. The Borrower shall cure any title defects or
exceptions which are not Excepted Liens raised by such information, or
substitute acceptable Oil and Gas Properties of an equivalent value, with no
title defects or exceptions except for Excepted Liens, within 60 days after a
request by the Administrative Agent or the Lenders to cure such defects or
exceptions.
     (c) Failure to Cure Title Defects. If the Borrower is unable to cure any
title defect requested by the Administrative Agent or the Lenders to be cured
within the 60- day period or the Borrower does not comply with the requirements
to provide acceptable title information covering seventy-five percent (75%) of
the value of the Mortgaged Oil and Gas Properties evaluated in the most recent
Reserve Report and included in the determination of the then current Borrowing
Base, such default shall not be a Default or an Event of Default, but instead
the Administrative Agent and the Lenders shall have the right to exercise the
following remedy in their sole discretion from time to time, and any

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failure to so exercise this remedy at any time shall not be a waiver as to
future exercise of the remedy by the Administrative Agent or the Lenders. To the
extent that the Administrative Agent or the Lenders are not satisfied with title
to any Mortgaged Oil and Gas Property after the time period in Section 8.08(b)
has elapsed, such unacceptable Mortgaged Oil and Gas Property shall not count
towards the seventy-five percent (75%) requirement, and the Administrative Agent
may send a notice to the Borrower and the Lenders that the then outstanding
Borrowing Base shall be reduced by an amount as determined by all of the Lenders
to cause the Borrower to be in compliance with the requirement to provide
acceptable title information on seventy-five percent (75%) of the value of the
Mortgaged Oil and Gas Properties included in the determination of the Borrowing
Base. This new Borrowing Base shall become effective immediately after receipt
of such notice.
     Section 8.09 Collateral.
     (a) Collateral. The Obligations shall be secured by a perfected first
priority Lien (subject only to Liens permitted under Section 9.02 entitled to
priority under applicable law or under Section 9.02) granted to the
Administrative Agent for the benefit of the Beneficiaries in (i) the Oil and Gas
Properties of the Borrower and the Guarantors, whether now owned or hereafter
acquired, pursuant to the terms of the Security Instruments to which they are
parties, and which compose at least 80% of the value of the Borrowing Base
Properties described in the most recent Reserve Report and (ii) all of the
accounts receivable, inventory, contract rights, all of the equity interests in
all Subsidiaries of the Borrower and each Guarantor organized in a state,
province, or territory of the United States of America and 65% of the equity
interests in all Subsidiaries of the Borrower and each Guarantor organized in a
jurisdiction other than a state, province or territory of the United States
pursuant to the terms of the Security Instruments to which they are parties.
Notwithstanding the foregoing, (i) none of the Borrower’s or any of its
Subsidiaries’ ownership interest in and to Medusa Spar, LLC shall be part of the
collateral security for the Obligations and (ii) none of the Borrower’s or any
of its Subsidiaries’ ownership in and to (A) the Entrada Field or related
equipment, accounts receivable, contracts, general intangibles or other assets
(collectively, the “Entrada Assets”) or (B) any equity interests of any
Affiliate or Subsidiary of the Borrower formed in connection with any Permitted
Entrada Transaction (other than an Affiliate that is a Subsidiary of the
Borrower that owns any material or significant asset other than Entrada Assets
or that is a Guarantor) (an “Entrada Entity”) shall be collateral security for
the Obligations unless the Borrower has notified the Administrative Agent, in
writing, that it has elected to include such Entrada Assets or any other assets
owned by such Entrada Entity as a portion of the Borrowing Base.
     (b) Title Information. Subject to the provisions of Section 8.08,
concurrently with the granting of the Lien or other action referred to in
Section 8.09(a) above, the Borrower will provide to the Administrative Agent
title information in form and substance satisfactory to the Administrative Agent
in its sole discretion with respect to the Borrower’s interests in such
Mortgaged Oil and Gas Properties.

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     (c) Legal Opinions. Also, promptly after the filing of any new Security
Instrument in any state, upon the reasonable request of the Administrative
Agent, the Borrower will provide to the Administrative Agent an opinion
addressed to the Administrative Agent for the benefit of the Lenders in form and
substance satisfactory to the Administrative Agent in its sole discretion from
counsel acceptable to Administrative Agent, stating that the Security Instrument
is valid, binding and enforceable in accordance with its terms in legally
sufficient form for such jurisdiction, and the means by which such Security
Instrument will perfect the Lien created thereby.
     Section 8.10 ERISA Information and Compliance. The Borrower will promptly
furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly
furnish to the Administrative Agent with sufficient copies to the Lenders
(i) promptly after the filing thereof with the United States Secretary of Labor,
the Internal Revenue Service or the PBGC, copies of each annual and other report
with respect to each Plan or any trust created thereunder, (ii) immediately upon
becoming aware of the occurrence of any ERISA Event or of any “prohibited
transaction,” as described in section 406 of ERISA or in section 4975 of the
Code, in connection with any Plan or any trust created thereunder, a written
notice signed by a Responsible Officer specifying the nature thereof, what
action the Borrower, the Subsidiary or the ERISA Affiliate is taking or proposes
to take with respect thereto, and, when known, any action taken or proposed by
the Internal Revenue Service, the Department of Labor or the PBGC with respect
thereto, and (iii) immediately upon receipt thereof, copies of any notice of the
PBGC’s intention to terminate or to have a trustee appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer Plan), the Borrower
will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full
and in a timely manner, without incurring any late payment or underpayment
charge or penalty and without giving rise to any lien, all of the contribution
and funding requirements of section 412 of the Code (determined without regard
to subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay,
or cause to be paid, to the PBGC in a timely manner, without incurring any late
payment or underpayment charge or penalty, all premiums required pursuant to
sections 4006 and 4007 of ERISA.
     Section 8.11 Inspection; Books and Records. Upon reasonable notice, the
Borrower will and will cause each Guarantor to permit the Administrative Agent
and any Lender or any of their respective agents or representatives thereof,
during normal business hours and subject to the terms of any applicable
confidentiality or non-disclosure agreements to which the Borrower or such
Guarantor may be bound, to (a) examine and make copies of and abstracts from the
records and books of account of, and visit and inspect at their reasonable
discretion the Properties of, the Borrower or such Guarantor, and (b) discuss
the affairs, finances and accounts of the Borrower or such Guarantor with any of
their respective officers or directors, all to the extent reasonably requested
by the Administrative Agent or such Lender, as the case may be. The Borrower
will and will cause each Guarantor to keep proper books of records and account
in which full, true and correct entries in conformity with GAAP and all
Governmental Requirements in all material respects shall be made of all dealings
and transactions in relation to its business and activities.

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ARTICLE IX
Negative Covenants
     The Borrower covenants and agrees that, so long as any of the Commitments
are in effect and until payment in full of Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder, without the prior
written consent of the Majority Lenders:
     Section 9.01 Debt. Neither the Borrower nor any Subsidiary will incur,
create, assume or permit to exist any Debt, except:
     (a) the Notes or other Obligations or any guaranty of or suretyship
arrangement for the Notes or other Obligations;
     (b) Debt of the Borrower and its Subsidiaries existing on the Closing Date
which is reflected in the Financial Statements or is disclosed in Schedule 9.01,
and any renewals or extensions (but not increases) thereof;
     (c) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of business which,
if greater than 120 days past the invoice or billing date, are being contested
in good faith by appropriate proceedings, provided that reserves adequate under
GAAP shall have been established therefor;
     (d) purchase money Debt and Debt under capital leases (as required to be
reported on the financial statements of the Borrower pursuant to GAAP) in
addition to any obligations that are Debt as permitted under Section 9.05, not
to exceed $5,000,000, provided, however, that the obligations due under the
Hanover Processing Agreement shall not be considered capital lease obligations
for purposes of the limitation on capital leases contained in this
Section 9.01(d);
     (e) Debt in addition to any Debt not otherwise permitted this Section 9.01
that is unsecured and not to exceed [$5,000,000] in the aggregate outstanding at
one time;
     (f) Subordinated Debt in an amount not to exceed $40,000,000 in the
aggregate outstanding at any one time, provided that such Subordinated Debt has
(i) a final maturity after September 30, 2010 and (ii) no sinking fund payments,
scheduled principal payments, or mandatory redemption obligations on or prior to
September 30, 2010;
     (g) Existing Other Debt and any refinancings, renewals or extensions (but
not increases) of such Existing Other Debt, provided that any such refinancing
(i) provides for a final maturity after September 30, 2010, (ii) has no sinking
fund payments, scheduled principal payments, or mandatory redemption obligations
on or prior to September 30, 2010, and (iii) is otherwise pursuant to terms and
conditions satisfactory to the Majority Lenders, provided further that if any
such refinancing is being accomplished by using the proceeds from an issuance of
preferred stock of the Borrower, then such issuance complies with Section 9.21
hereof;

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     (h) Debt associated with bonds or surety obligations required by
Governmental Requirements in connection with the operation of the Oil and Gas
Properties of the Borrower and its Subsidiaries;
     (i) Hedging Agreements covering (A) oil and gas production of proved
developed producing Oil and Gas Properties of the Borrower or any Guarantor;
provided, however, that such Hedging Agreements related to oil or gas production
shall not, either individually or in the aggregate, cover more than ninety
percent (90%) of estimated production of oil or gas of the Borrower and the
Guarantors for each individual period covered by the Hedging Agreements and
(B) fluctuations in interest rates for notional principal amounts not to exceed
at any time outstanding 80% of the Debt for borrowed money of the Borrower and
its Consolidated Subsidiaries; and
     (j) any Permitted Entrada Transaction.
     Section 9.02 Liens. Neither the Borrower nor any Subsidiary will create,
incur, assume or permit to exist any Lien on any of its Properties (now owned or
hereafter acquired except for the Additional Entrada Assets), except:
     (a) Liens securing the payment of any Obligations (provided that any Lien
securing any of the Obligations must secure all of the Obligations);
     (b) Excepted Liens;
     (c) Liens securing leases allowed under Section 9.01(d), but only on the
Property under lease;
     (d) Liens disclosed on Schedule 9.02;
     (e) Liens on cash or securities of the Borrower or any Subsidiary securing
the Debt described in Section 9.01(h) and 9.01(i); provided, however that the
aggregate amount of cash or securities which may secure Debt described in
Section 9.01(i) shall not exceed $7,500,000;
     (f) Liens on Entrada Assets or the equity interests of an Entrada Entity
granted to secure the obligations under any Permitted Entrada Transaction so
long as such Entrada Assets are not included in the Borrowing Base and no other
assets of an Entrada Entity is included in the Borrowing Base; and
     (g) other Liens securing Debt permitted under Section 9.01 not exceeding
$5,000,000 in the aggregate at any time.
     Section 9.03 Investments, Loans and Advances. Neither the Borrower nor any
Guarantor will make or permit to remain outstanding any loans or advances to or
investments in any Person, except that the foregoing restriction shall not apply
to:
     (a) investments, loans or advances reflected in the Financial Statements or
which are disclosed to the Lenders in Schedule 9.03;

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     (b) accounts receivable arising in the ordinary course of business;
     (c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof;
     (d) commercial paper maturing within one year from the date of creation
thereof rated in one of the two highest grades by Standard & Poor’s Corporation
or Moody’s Investors Service, Inc.;
     (e) deposits maturing within one year from the date of creation thereof
with, including certificates of deposit issued by, any Lender or any office
located in the United States of any other bank or trust company which is
organized under the laws of the United States or any state thereof, has capital,
surplus and undivided profits aggregating at least $500,000,000 (as of the date
of such Lender’s or bank or trust company’s most recent financial reports) and
has a short term deposit rating of no lower than A2 or P2, as such rating is set
forth from time to time, by Standard & Poor’s Corporation or Moody’s Investors
Service, Inc., respectively;
     (f) deposits in money market funds investing exclusively in investments
described in Section 9.03(c), 9.03(d) or 9.03(e);
     (g) investments, loans or advances made by the Borrower in or to the
Guarantors or by any Guarantor in or to Borrower or another Guarantor;
     (h) investments by the Borrower in direct ownership interests in additional
Oil and Gas Properties and gas gathering systems related thereto, and
investments, loans or advances in connection with or related to farm out
agreements, farm in agreements, joint operating agreements, joint venture or
area of mutual interest agreements, processing facilities, seismic acquisition
and evaluation, pipelines or other similar or customary arrangements made in the
ordinary course of business only insofar as they do not (i) reduce the net
revenue interest of the Borrower or any Guarantor in any Borrowing Base Property
for which value was given in the most recent Borrowing Base redetermination
below the undivided net revenue interest specified for the Borrower or such
Guarantor in the most recent Reserve Report utilized by the Administrative Agent
and the Lenders in determining the then effective Borrowing Base and/or
(ii) increase the undivided working interest in any such Borrowing Base Property
without a corresponding increase in the net revenue interest specified for the
Borrower or such Guarantor in the most recent Reserve Report utilized by the
Administrative Agent and the Lenders in determining the then effective Borrowing
Base;
     (i) loans or advances to employees of the Borrower and the Guarantors in
the ordinary course of business not to exceed an amount equal to $1,000,000 in
the aggregate at any time outstanding;
     (j) in addition to the contribution, transfer or conveyance of all or a
portion of the Entrada Assets to any Affiliate of the Borrower (other than an
Affiliate that is a Subsidiary of the Borrower that owns any material or
significant asset other than Entrada

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Assets or that is a Guarantor), cash investments, loans or advances made by the
Borrower in or to the Entrada Entity in an aggregate amount not to exceed
$10,000,000; provided that, at the request of the Borrower, the Majority Lenders
may, in their sole discretion, increase such amount; and
     (k) other investments, loans or advances not to exceed, in the aggregate at
any time outstanding, an amount equal to $10,000,000.
     Section 9.04 Dividends, Distributions and Redemptions. The Borrower will
not declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its stock now or hereafter outstanding, return any capital to its
stockholders or make any distribution of its assets to its stockholders, except
that, if no Default exists or would result therefrom, the Borrower may (i) pay
cash dividends on preferred stock issued to refinance Subordinated Debt or
Existing Other Debt pursuant to Section 9.01(g) hereof, (ii) redeem preferred
stock with the proceeds of or in connection with the issuance of equity
securities, and (iii) pay stock dividends only in common stock of the Borrower.
     Section 9.05 Sales and Leasebacks. Neither the Borrower nor any Subsidiary
will enter into any arrangement, directly or indirectly, with any Person whereby
the Borrower or any Subsidiary shall sell or transfer any of its Borrowing Base
Property with respect to Borrowing Base Property having a value, in the
aggregate at any time outstanding, in excess of $5,000,000, whether now owned or
hereafter acquired, and whereby the Borrower or any Subsidiary shall then or
thereafter rent or lease as lessee such Borrowing Base Property or any part
thereof or other Borrowing Base Property which the Borrower or any Subsidiary
intends to use for substantially the same purpose or purposes as the Borrowing
Base Property sold or transferred; provided, however, that the sale of Property
undertaken pursuant to the Hanover Sales Documents shall not be deemed to be a
sale and leaseback for purposes of the limitations on sales and leasebacks of
Property contained in this Section 9.05.
     Section 9.06 Nature of Business. Neither the Borrower nor any Subsidiary
will allow any material change to be made in the character of its business as an
independent oil and gas exploration and production company.
     Section 9.07 [Intentionally omitted].
     Section 9.08 Mergers, Etc. Neither the Borrower nor any Subsidiary will
merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its Property or assets to any other Person, except
that, provided no Default or Change of Control exists or would result therefrom,
(i) any Subsidiary may merge into, or transfer all or substantially all of its
Property or assets to, the Borrower (provided the Borrower is the surviving
entity) or with any other Guarantor and (ii) the Borrower or any Subsidiary may
merge with, or transfer all or substantially all of its Property or assets to,
another Person if the Borrower or such Subsidiary is the surviving entity. The
Borrower shall provide the Administrative Agent with at least 30 days prior
written notice of any merger or consolidation permitted by this Section 9.08.

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     Section 9.09 Proceeds of Notes; Letters of Credit. The Borrower will not
permit the proceeds of the Notes or Letters of Credit to be used for any purpose
other than those permitted by Section 7.07. Neither the Borrower nor any Person
acting on behalf of the Borrower has taken or will take any action which might
cause any of the Loan Documents to violate Regulation T, U or X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
Section 7 of the Securities Exchange Act of 1934 or any rule or regulation
thereunder, in each case as now in effect or as the same may hereinafter be in
effect.
     Section 9.10 ERISA Compliance. The Borrower will not at any time:
     (a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in,
any transaction in connection with which the Borrower, any Subsidiary or any
ERISA Affiliate could be subjected to either a civil penalty assessed pursuant
to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of
Subtitle D of the Code;
     (b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could result in any material liability to the Borrower, any Subsidiary or any
ERISA Affiliate to the PBGC;
     (c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to
make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary
or any ERISA Affiliate is required to pay as contributions thereto;
     (d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit
to exist, any accumulated funding deficiency within the meaning of Section 302
of ERISA or section 412 of the Code, whether or not waived, with respect to any
Plan;
     (e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan maintained by
the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under
Title IV of ERISA to exceed the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan allocable
to such benefit liabilities. The term “actuarial present value of the benefit
liabilities” shall have the meaning specified in section 4041 of ERISA;
     (f) Contribute to or assume an obligation to contribute to, or permit any
Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;
     (g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an
interest in any Person that causes such Person to become an ERISA Affiliate with
respect to the Borrower, any Subsidiary or any ERISA Affiliate if such Person
sponsors, maintains or contributes to, or at any time in the six year period
preceding such acquisition has sponsored, maintained, or contributed to, (1) any
Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA
under which the actuarial present value of the benefit liabilities under such
Plan exceeds the current value of the assets

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(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities;
     (h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA;
     (i) Contribute to or assume an obligation to contribute to, or permit any
Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or
     (j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan
resulting in an increase in current liability such that the Borrower, any
Subsidiary or any ERISA Affiliate is required to provide security to such Plan
under section 401(a)(29) of the Code.
     Section 9.11 [Intentionally omitted].
     Section 9.12 Current Ratio. The Borrower will not permit its ratio of (a)
consolidated current assets, plus the amount equal to the difference between
(i) the Borrowing Base and (ii) the sum of all Loans outstanding, plus LC
Exposure to (b) consolidated current liabilities (excluding current maturities
of long term debt (determined in accordance with GAAP)) to be less than 1.0 to
1.0 at any time. For purposes of this Section 9.12, “consolidated current
assets” shall mean assets which would, in accordance with GAAP, be included as
current assets on a consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries and “consolidated current liabilities” shall mean
liabilities which would, in accordance with GAAP, be included as current
liabilities on a consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries. Notwithstanding the foregoing, consolidated current liabilities
shall be determined excluding recognized but unrealized gains and/or losses
attributable to commodity or interest rate derivative instruments or asset
retirement obligations determined under the provisions of Financial Accounting
Standards Board Statements (“FASB”) 133 or 143, as the same may be further
amended, modified or clarified by the FASB.
     Section 9.13 Fixed Charge Coverage Ratio. The Borrower will not permit its
Fixed Charge Coverage Ratio as of the end of any fiscal quarter of the Borrower
(calculated quarterly at the end of each fiscal quarter) to be less than 2.50 to
1.00. For purposes of this Section 9.13, “Fixed Charge Coverage Ratio” shall
mean the ratio of (a) EBITDA for the immediately preceding four fiscal quarters
of the Borrower and its Consolidated Subsidiaries to (b) the sum of cash
interest expense, capital lease obligations, required payments of principal on
Debt (excluding, however, any principal due upon the final maturity date for
such Debt), and preferred dividends paid in cash by the Borrower and its
Consolidated Subsidiaries during such four fiscal quarters.
     Section 9.14 Leverage Ratio. The Borrower will not permit its Leverage
Ratio as of the end of any fiscal quarter of the Borrower (calculated quarterly
at the end of each fiscal quarter)

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to be greater than 4.00 to 1.00. For the purposes of this Section 9.14,
“Leverage Ratio” shall mean the ratio of (a) Funded Debt for the Borrower and
its Subsidiaries on a Consolidated basis as of the end of such fiscal quarter to
(b) EBITDA for the immediately preceding four fiscal quarters of the Borrower
and its Consolidated Subsidiaries then ended.
     Section 9.15 Sale of Oil and Gas Properties. The Borrower will not, and
will not permit any Guarantor to, sell, assign, farm-out, convey or otherwise
transfer any Borrowing Base Property or any interest in any Borrowing Base
Property (a “Transfer”) except for (a) the sale of Hydrocarbons in the ordinary
course of business; (b) farmouts of undeveloped acreage and assignments in
connection with such farmouts; (c) the sale or transfer of equipment that is no
longer necessary for the business of the Borrower or such Guarantor or is
contemporaneously replaced by equipment of at least comparable value and use and
(d) during any consecutive 12 month period, sales in the ordinary course of
business of Borrowing Base Properties which shall not exceed 15% of the then
current Borrowing Base; provided, however, that upon any such Transfer of
Borrowing Base Properties the Lenders may reduce the Borrowing Base by an amount
equal to 100% of the loan value of such Collateral and if a Borrowing Base
Deficiency results therefrom, the Borrower shall concurrently, with completing
such Transfer, made a prepayment of the outstanding principal amount of the
Loans sufficient to eliminate such Borrowing Base Deficiency.
     Section 9.16 Environmental Matters. Neither the Borrower nor any Subsidiary
will cause or permit any of its Property to be in violation of, or do anything
or permit anything to be done which will subject any such Property to any
remedial obligations under any Environmental Laws, assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
     Section 9.17 Transactions with Affiliates. Neither the Borrower nor any
Subsidiary will enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of Property or the rendering of any service,
with any Affiliate (other than the Borrower or a Guarantor) unless such
transactions are otherwise permitted under this Agreement, are in the ordinary
course of its business and are upon fair and reasonable terms no less favorable
to it than it would obtain in a comparable arm’s length transaction with a
Person not an Affiliate.
     Section 9.18 Subsidiaries. The Borrower shall not and shall not permit any
Subsidiary to sell or to issue any stock or ownership interest of a Subsidiary
unless such sale or issuance would be in compliance with Section 9.03 and the
other terms and provisions of this Agreement.
     Section 9.19 Negative Pledge Agreements. Except for provisions in Existing
Other Debt documents, neither the Borrower nor any Guarantor will create, incur,
assume or permit to exist any contract, agreement or understanding (other than
this Agreement and the Security Instruments, and the agreements and instruments
creating Liens otherwise permitted under Section 9.02 with respect to the
Property covered by such Liens only) which in any way prohibits or restricts the
granting, conveying, creation or imposition of any Lien on any of its Property
or restricts any Guarantor from paying dividends to the Borrower, or which
requires the consent of or notice to other Persons in connection therewith.

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     Section 9.20 [Reserved].
     Section 9.21 Subordinated Debt; Existing Other Debt. Neither the Borrower
nor any Guarantor shall make any voluntary prepayment in respect of any
Subordinated Debt or the Existing Other Debt, nor will they make any other
payment thereon that would not be allowed under the subordination provisions of
any Subordinated Debt or the Existing Other Debt; provided that, the Borrower
and the Guarantor may prepay such Subordinated Debt or Existing Other Debt with
proceeds from an issuance of preferred stock of the Borrower; provided further
that, (a) the maximum aggregate amount of such prepayments may not exceed
$75,000,000, (b) the dividend rate on such preferred stock may not be greater
than the interest rate on the Debt being repaid, and (c) such preferred stock
may not provide for mandatory redemption obligations on or prior to
September 30, 2010. The Borrower will not amend, supplement or otherwise modify
any instruments evidencing, or agreements relating to or executed in connection
with, any Existing Other Debt, in any manner which would have the effect of
(i) accelerating the timing or amount of any scheduled payments of principal or
interest thereon, (ii) increasing the rate of interest payable thereon or (iii)
resulting in a Material Adverse Effect.
     Section 9.22 Hanover Agreements. Without the prior written consent of the
Lenders, the Borrower will not, and will not permit any Subsidiary to, amend,
supplement, restate or otherwise modify the Hanover Processing Agreement, the
Hanover Sales Documents or any other document executed in connection therewith
that could adversely affect in any material respect the Lenders and their rights
and remedies under any Loan Document.
     Section 9.23 Permitted Medusa Transactions; Permitted Entrada Transactions.
Notwithstanding anything in this Agreement or any other Loan Document to the
contrary, so long as no Default or Event of Default has occurred and is
continuing at the time Borrower or any of its Subsidiaries enters into any
Permitted Medusa Transaction or Permitted Entrada Transaction, the entering into
and carrying out of such Permitted Medusa Transaction or Permitted Entrada
Transaction shall be allowed hereunder and shall not in itself constitute a
breach of, non-compliance with, or Default or Event of Default under this
Agreement or any other Loan Document.
ARTICLE X
Events of Default; Remedies
     Section 10.01 Events of Default. One or more of the following events shall
constitute an “Event of Default”:
     (a) the Borrower shall default in the payment or prepayment when due of any
principal of or interest on any Loan, or any reimbursement obligation for a
disbursement made under any Letter of Credit, or any fees or other amount
payable by it hereunder or under any Security Instrument and such default, other
than a default of a payment or prepayment of principal (which shall have no cure
period), shall continue unremedied for a period of three Business Days; or

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     (b) the Borrower or any Subsidiary shall default in the payment when due of
any principal of or interest on any of its other Debt aggregating $5,000,000 or
more, or any event specified in any note, agreement, indenture or other document
evidencing or relating to any such Debt shall occur if the effect of such event
is to cause, or (with the giving of any notice or the lapse of time or both) to
permit the holder or holders of such Debt (or a trustee or agent on behalf of
such holder or holders) to cause, such Debt to become due prior to its stated
maturity; or
     (c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower or any Subsidiary, or any
certificate furnished to any Lender or the Administrative Agent pursuant to the
provisions hereof or any Security Instrument, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
     (d) the Borrower shall default in the performance of any of its obligations
under Article IX, Section 8.01(c) or any other Article of this Agreement other
than under Article VIII (excluding Section 8.01(c)); or the Borrower shall
default in the performance of any of its obligations under Article VIII or any
Security Instrument (other than the payment of amounts due which shall be
governed by Section 10.01(a)) and such default shall continue unremedied for a
period of thirty (30) days after the earlier to occur of (i) notice thereof to
the Borrower by the Administrative Agent or any Lender (through the
Administrative Agent), or (ii) the Borrower otherwise becoming aware of such
default; or
     (e) the Borrower shall admit in writing its inability to, or be generally
unable to, pay its debts as such debts become due; or
     (f) the Borrower shall (i) apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, liquidation or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
     (g) a proceeding or case shall be commenced, without the application or
consent of the Borrower, in any court of competent jurisdiction, seeking (i) its
liquidation, reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Borrower of all or any substantial part
of its assets, or (iii) similar relief in respect of the Borrower under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing shall
be entered and continue unstayed and in effect, for a period of 60 days; or
(iv) an

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order for relief against the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
     (h) a judgment or judgments for the payment of money in excess of
$5,000,000 in the aggregate shall be rendered by a court against the Borrower or
any Subsidiary and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be procured,
within thirty (30) days from the date of entry thereof and the Borrower or such
Subsidiary shall not, within said period of 30 days, or such longer period
during which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal; or
     (i) the Security Instruments after delivery thereof shall for any reason,
except to the extent permitted by the terms thereof, cease to be in full force
and effect and valid, binding and enforceable in accordance with their terms, or
cease to create a valid and perfected Lien of the priority required thereby on
any of the collateral purported to be covered thereby, except to the extent
permitted by the terms of this Agreement, or the Borrower shall so state in
writing; or
     (j) a Change of Control occurs; or
     (k) Any Guarantor takes, suffers or permits to exist any of the events or
conditions referred to in paragraphs (e), (f), (g) or (h) or if any provision of
any guaranty agreement related thereto shall for any reason cease to be valid
and binding on such Guarantor or if such Guarantor shall so state in writing; or
     (l) an Event of Default (as defined thereunder) shall occur under the
Hanover Processing Agreement or Hanover Sales Documents.
     Section 10.02 Remedies.
     (a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clause (k) to the extent it
relates to clauses (e), (f) or (g), the Administrative Agent, upon request of
the Majority Lenders, shall, by notice to the Borrower, cancel the Commitments
(in whole or part) and/or declare the principal amount then outstanding of, and
the accrued interest on all (but not less than all) of, the Loans and all other
amounts payable by the Borrower hereunder and under the Notes (including without
limitation the payment of cash collateral to secure the LC Exposure as provided
in Section 2.10(b)) to be forthwith due and payable, whereupon such amounts
shall be immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Borrower.
     (b) In the case of the occurrence of an Event of Default referred to in
clauses (e), (f) or (g) of Section 10.01 or in clause (k) to the extent it
relates to clauses (e), (f) or (g), the Commitments shall be automatically
canceled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Borrower hereunder and under
the Notes (including without limitation the payment of

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cash collateral to secure the LC Exposure as provided in Section 2.10(b)) shall
become automatically immediately due and payable without presentment, demand,
protest, notice of intent to accelerate, notice of acceleration or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower.
     (c) In the case of an acceleration of the Loans pursuant to the foregoing
clause (a) or (b) of this Section 10.02, or if the Borrower defaults in the full
and complete payment of all of the Loans or other Obligations due on the
Revolving Credit Termination Date, then the Administrative Agent, upon request
of the Majority Lenders, shall take reasonable actions to liquidate the
Collateral.
     (d) All proceeds received after maturity of the Notes, whether by
acceleration or otherwise shall be applied as provided in Section 3.03.
ARTICLE XI
The Administrative Agent
     Section 11.01 Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Administrative Agent to act as its agent
hereunder and under the Security Instruments with such powers as are
specifically delegated to the Administrative Agent by the terms of this
Agreement and the Security Instruments, together with such other powers as are
reasonably incidental thereto. The Administrative Agent (which term as used in
this sentence and in Section 11.05 and the first sentence of Section 11.06 shall
include reference to its Affiliates and its and its Affiliates’ officers,
directors, employees, attorneys, accountants, experts and agents): (i) shall
have no duties or responsibilities except those expressly set forth in the Loan
Documents, and shall not by reason of the Loan Documents be a trustee or
fiduciary for any Lender; (ii) makes no representation or warranty to any Lender
and shall not be responsible to the Lenders for any recitals, statements,
representations or warranties contained in this Agreement, or in any certificate
or other document referred to or provided for in, or received by any of them
under, this Agreement, or for the value, validity, effectiveness, genuineness,
execution, effectiveness, legality, enforceability or sufficiency of this
Agreement, any Note or any other document referred to or provided for herein or
for any failure by the Borrower or any other Person (other than the
Administrative Agent) to perform any of its obligations hereunder or thereunder
or for the existence, value, perfection or priority of any collateral security
or the financial or other condition of the Borrower, its Subsidiaries or any
other obligor or guarantor; (iii) except pursuant to Section 11.07 shall not be
required to initiate or conduct any litigation or collection proceedings
hereunder; and (iv) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other document or instrument referred to
or provided for herein or in connection herewith including its own ordinary
negligence, except for its own gross negligence or willful misconduct. The
Administrative Agent may employ agents, accountants, attorneys and experts and
shall not be responsible for the negligence or misconduct of any such agents,
accountants, attorneys or experts selected by it in good faith or any action
taken or omitted to be taken in good faith by it in accordance with the advice
of such agents, accountants, attorneys or experts. The Administrative Agent may
deem and treat the payee of any Note as the holder thereof for all purposes
hereof unless and until a written notice of the assignment or transfer thereof
permitted hereunder shall have been filed with the Administrative

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Agent. The Administrative Agent is authorized to release any collateral that is
permitted to be sold or released pursuant to the terms of the Loan Documents.
     Section 11.02 Reliance by Administrative Agent. The Administrative Agent
shall be entitled to rely upon any certification, notice or other communication
(including any thereof by telephone, telex, telecopier, telegram or cable)
believed by it to be genuine and correct and to have been signed or sent by or
on behalf of the proper Person or Persons, and upon advice and statements of
legal counsel, independent accountants and other experts selected by the
Administrative Agent.
     Section 11.03 Defaults. The Administrative Agent shall not be deemed to
have knowledge of the occurrence of a Default (other than the non payment of
principal of or interest on Loans or of fees or failure to reimburse for Letter
of Credit drawings) unless the Administrative Agent has received notice from a
Lender or the Borrower specifying such Default and stating that such notice is a
“Notice of Default.” In the event that the Administrative Agent receives such a
notice of the occurrence of a Default, the Administrative Agent shall give
prompt notice thereof to the Lenders. In the event of a payment Default, the
Administrative Agent shall give each Lender prompt notice of each such payment
Default.
     Section 11.04 Rights as a Lender. With respect to its Commitments and the
Loans made by it and its participation in the issuance of Letters of Credit,
UBOC (and any successor acting as Administrative Agent) in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting as the
Administrative Agent, and the term “Lender” or “Lenders” shall, unless the
context otherwise indicates, include the Administrative Agent in its individual
capacity. UBOC (and any successor acting as Administrative Agent) and its
Affiliates may (without having to account therefor to any Lender) accept
deposits from, lend money to and generally engage in any kind of banking, trust
or other business with the Borrower (and any of its Affiliates) as if it were
not acting as the Administrative Agent, and UBOC and its Affiliates may accept
fees and other consideration from the Borrower for services in connection with
this Agreement or otherwise without having to account for the same to the
Lenders.
     Section 11.05 Indemnification. The Lenders agree to indemnify the
Administrative Agent and the Issuing Bank ratably in accordance with their
Percentage Shares for the Indemnity Matters as described in section 12.03 to the
extent not indemnified or reimbursed by the Borrower under section 12.03, but
without limiting the obligations of the Borrower under said section 12.03 and
for any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind and
nature whatsoever which may be imposed on, incurred by or asserted against the
Administrative Agent or the Issuing Bank in any way relating to or arising out
of: (i) this Agreement, the Security Instruments or any other documents
contemplated by or referred to herein or the transactions contemplated hereby,
but excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the performance of its agency
duties hereunder or (ii) the enforcement of any of the terms of this Agreement,
any Security Instrument or of any such other documents; whether or not any of

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the foregoing specified in this section 11.05 arises from the sole or concurrent
negligence of the Administrative Agent or the Issuing Bank, provided that no
Lender shall be liable for any of the foregoing to the extent they arise from
the gross negligence or willful misconduct of the Administrative Agent.
     Section 11.06 Non-Reliance on Administrative Agent and other Lenders. Each
Lender acknowledges and agrees that it has, independently and without reliance
on the Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Borrower and its decision to enter into this Agreement, and that it will,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under this Agreement. The Administrative Agent shall not be
required to keep itself informed as to the performance or observance by the
Borrower of this Agreement, the Notes, the Security Instruments or any other
document referred to or provided for herein or to inspect the properties or
books of the Borrower. Except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Borrower (or any
of its Affiliates) which may come into the possession of the Administrative
Agent or any of its Affiliates. In this regard, each Lender acknowledges that
Bracewell & Patterson, L.L.P. is acting in this transaction as special counsel
to the Administrative Agent only, except to the extent otherwise expressly
stated in any legal opinion or any Loan Document. Each Lender will consult with
its own legal counsel to the extent that it deems necessary in connection with
the Loan Documents and the matters contemplated therein.
     Section 11.07 Action by Administrative Agent. Except for action or other
matters expressly required of the Administrative Agent hereunder, the
Administrative Agent shall in all cases be fully justified in failing or
refusing to act hereunder unless it shall (i) receive written instructions from
the Majority Lenders (or all of the Lenders as expressly required by
Section 12.04) specifying the action to be taken, and (ii) be indemnified to its
satisfaction by the Lenders against any and all liability and expenses which may
be incurred by it by reason of taking or continuing to take any such action. The
instructions of the Majority Lenders (or all of the Lenders as expressly
required by Section 12.04) and any action taken or failure to act pursuant
thereto by the Administrative Agent shall be binding on all of the Lenders. If a
Default has occurred and is continuing, the Administrative Agent shall take such
action with respect to such Default as shall be directed by the Majority Lenders
(or all of the Lenders as required by Section 12.04) in the written instructions
(with indemnities) described in this Section 11.07, provided that, unless and
until the Administrative Agent shall have received such directions, the
Administrative Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default as it shall deem
advisable in the best interests of the Lenders. In no event, however, shall the
Administrative Agent be required to take any action which exposes the
Administrative Agent to personal liability or which is contrary to this
Agreement and the Loan Documents or applicable law.
     Section 11.08 Resignation or Removal of Administrative Agent. Subject to
the appointment and acceptance of a successor Administrative Agent as provided
below, the

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Administrative Agent may resign at any time by giving notice thereof to the
Lenders and the Borrower, and the Administrative Agent may be removed at any
time with or without cause by the Majority Lenders. Upon any such resignation or
removal, the Majority Lenders shall have the right to appoint a successor
Administrative Agent with the consent of the Borrower (such consent not to be
unreasonably withheld). If no successor Administrative Agent shall have been so
appointed by the Majority Lenders and shall have accepted such appointment
within thirty (30) days after the retiring Administrative Agent’s giving of
notice of resignation or the Majority Lenders’ removal of the retiring
Administrative Agent, then the retiring Administrative Agent may, on behalf of
the Lenders, appoint a successor Administrative Agent with the consent of the
Borrower (such consent not to be unreasonably withheld). Upon the acceptance of
such appointment hereunder by a successor Administrative Agent, such successor
Administrative Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Administrative Agent, and
the retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. After any retiring Administrative Agent’s resignation or
removal hereunder as Administrative Agent, the provisions of this Article XI and
Section 12.03 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as the Administrative
Agent.
     Section 11.09 Agents. Neither the Syndication Agent nor the Documentation
Agent shall have any duties, obligations, or liabilities in such respective
capacities; the Lenders shall have no right to replace the Syndication Agent or
the Documentation Agent if either the Syndication Agent or the Documentation
Agent is no longer a Lender, and neither the Syndication Agent nor the
Documentation Agent may assign its status as Syndication Agent or Documentation
Agent to any Person.
ARTICLE XII
Miscellaneous
     Section 12.01 Waiver. No failure on the part of the Administrative Agent or
any Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under any of the Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under any of the Loan Documents preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
     Section 12.02 Notices. All notices and other communications provided for
herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made in writing by telex, telecopy, courier or U.S.
Mail and telexed, telecopied, mailed or delivered to the intended recipient at
the “Address for Notices” specified below its name on the signature pages hereof
or in the Loan Documents or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding Business Day) by telex or telecopier and evidence or confirmation of
receipt is

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obtained, or personally delivered or, in the case of a mailed notice, three
(3) Business Days after the date deposited in the mails, postage prepaid, in
each case given or addressed as aforesaid.
     Section 12.03 Payment of Expenses, Indemnities, etc.
     (a) The Borrower agrees:
          (i) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Administrative Agent in the
administration (both before and after the execution hereof and including advice
of counsel as to the rights and duties of the Administrative Agent and the
Lenders with respect thereto) of, and in connection with the negotiation,
syndication, investigation, preparation, execution and delivery of, recording or
filing of, preservation of rights under, enforcement of, and refinancing,
renegotiation or restructuring of, the Loan Documents and any amendment, waiver
or consent relating thereto (including, without limitation, travel, photocopy,
mailing, courier, telephone and other similar expenses of the Administrative
Agent, the cost of environmental audits, surveys and appraisals at reasonable
intervals, the reasonable fees and disbursements of counsel and other outside
consultants for the Administrative Agent and, in the case of enforcement, the
reasonable fees and disbursements of counsel for the Administrative Agent and
any of the Lenders); and promptly reimburse the Administrative Agent for all
amounts expended, advanced or incurred by the Administrative Agent or the
Lenders to satisfy any obligation of the Borrower under this Agreement or any
Security Instrument, including without limitation, all costs and expenses of
foreclosure;
          (ii) To indemnify the Administrative Agent and each Lender and each of
their Affiliates and each of their officers, directors, employees,
representatives, agents, attorneys, accountants and experts (“Indemnified
Parties”) from, hold each of them harmless against and promptly upon demand pay
or reimburse each of them for, the Indemnity Matters which may be incurred by or
asserted against or involve any of them (whether or not any of them is
designated a party thereto) as a result of, arising out of or in any way related
to (i) any actual or proposed use by the Borrower of the proceeds of any of the
Loans or Letters of Credit, (ii) the execution, delivery and performance of the
Loan Documents, (iii) the operations of the business of the Borrower and its
Subsidiaries, (iv) the failure of the Borrower or any Subsidiary to comply with
the terms of any Security Instrument or this Agreement, or with any Governmental
Requirement, (v) any inaccuracy of any representation or any breach of any
warranty of the Borrower or any Guarantor set forth in any of the Loan
Documents, (vi) the issuance, execution and delivery or transfer of or payment
or failure to pay under any Letter of Credit, or (vii) the payment of a drawing
under any Letter of Credit notwithstanding the non-compliance, non-delivery or
other improper presentation of the manually executed draft(s) and
certification(s), (viii) any assertion that the Lenders were not entitled to
receive the proceeds received pursuant to the Security Instruments or (ix) any
other aspect of the Loan

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Documents, including, without limitation, the reasonable fees and disbursements
of counsel and all other expenses incurred in connection with investigating,
defending or preparing to defend any such action, suit, proceeding (including
any investigations, litigation or inquiries) or claim and including all
Indemnity Matters arising by reason of the ordinary negligence of any
Indemnified Party, but excluding all Indemnity Matters arising solely by reason
of claims between the Lenders or any Lender and the Administrative Agent or a
Lender’s shareholders against the Administrative Agent or Lender or by reason of
the gross negligence or willful misconduct on the part of any Indemnified Party;
and
          (iii) to indemnify and hold harmless from time to time the Indemnified
Parties from and against any and all losses, claims, cost recovery actions,
administrative orders or proceedings, damages and liabilities to which any such
Person may become subject (i) under any Environmental Law applicable to the
Borrower or any Subsidiary or any of their Properties, including without
limitation, the treatment or disposal of hazardous substances on any of their
Properties, (ii) as a result of the breach or non-compliance by the Borrower or
any Subsidiary with any Environmental Law applicable to the Borrower or any
Subsidiary, (iii) due to past ownership by the Borrower or any Subsidiary of any
of their Properties or past activity on any of their Properties which, though
lawful and fully permissible at the time, could result in present liability,
(iv) the presence, use, release, storage, treatment or disposal of hazardous
substances on or at any of the Properties owned or operated by the Borrower or
any Subsidiary, or (v) any other environmental, health or safety condition in
connection with the Loan Documents; provided, however, no indemnity shall be
afforded under this section 12.03(a)(iii) in respect of any Property for any
occurrence arising from the acts or omissions of the Administrative Agent or any
Lender during the period after which such Person, its successors or assigns
shall have obtained possession of such Property (whether by foreclosure or deed
in lieu of foreclosure, as mortgagee-in-possession or otherwise).
     (b) No Indemnified Party may settle any claim to be indemnified without the
consent of the Borrower, such consent not to be unreasonably withheld; provided,
however, that the Borrower may not reasonably withhold consent to any settlement
that an Indemnified Party proposes, if the Borrower does not have the financial
ability to pay all its obligations outstanding and asserted against the Borrower
at that time, including the maximum potential claims against the Indemnified
Party to be indemnified pursuant to this Section 12.03.
     (c) In the case of any indemnification hereunder, the Administrative Agent
or Lender, as appropriate shall give notice to the Borrower of any such claim or
demand being made against the Indemnified Party and the Borrower shall have the
non exclusive right to join in the defense against any such claim or demand
provided that if the

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Borrower provides a defense, the Indemnified Party shall bear its own cost of
defense unless there is a conflict between the Borrower and such Indemnified
Party.
     (d) The foregoing indemnities shall extend to the Indemnified Parties
notwithstanding the sole or concurrent negligence of every kind or character
whatsoever, whether active or passive, whether an affirmative act or an
omission, including without limitation, all types of negligent conduct
identified in the restatement (second) of torts of one or more of the
Indemnified Parties or by reason of strict liability imposed without fault on
any one or more of the Indemnified Parties. To the extent that an Indemnified
Party is found to have committed an act of gross negligence or willful
misconduct, this contractual obligation of indemnification shall continue but
shall only extend to the portion of the claim that is deemed to have occurred by
reason of events other than the gross negligence or willful misconduct of the
Indemnified Party.
     (e) The Borrower’s obligations under this Section 12.03 shall survive any
termination of this Agreement and the payment of the Notes and shall continue
thereafter in full force and effect.
     (f) The Borrower shall pay any amounts due under this Section 12.03 within
thirty (30) days of the receipt by the Borrower of notice of the amount due.
     Section 12.04 Amendments, Etc. Any provision of this Agreement or any
Security Instrument may be amended, modified or waived with the Borrower’s and
the Majority Lenders’ prior written consent; provided that (i) no amendment,
modification or waiver which extends the final maturity of the Loans, increases
the Aggregate Maximum Credit Amounts, increases the Borrowing Base, forgives the
principal amount of any Obligations outstanding under this Agreement, releases
any guarantor of the Obligations or releases all or substantially all of the
collateral, reduces the interest rate applicable to the Loans or the fees
payable to the Lenders generally, affects Section 2.03(a), this Section 12.04 or
Section 12.06(a) or modifies the definition of “Majority Lenders” shall be
effective without consent of all Lenders; (ii) no amendment, modification or
waiver which increases the Maximum Credit Amount of any Lender shall be
effective without the consent of such Lender; and (iii) no amendment,
modification or waiver which modifies the rights, duties or obligations of the
Administrative Agent shall be effective without the consent of the
Administrative Agent.
     Section 12.05 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
     Section 12.06 Assignments and Participations.
     (a) The Borrower may not assign its rights or obligations hereunder or
under the Notes or any Letters of Credit without the prior consent of all of the
Lenders and the Administrative Agent.
     (b) Any Lender may, upon the written consent of the Administrative Agent
and, if no Event of Default has occurred and is continuing, the Borrower (which
consent

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will not be unreasonably withheld), assign to one or more assignees all or a
portion of its rights and obligations under this Agreement pursuant to an
Assignment Agreement substantially in the form of Exhibit E (an “Assignment”);
provided, however, that (i) any such assignment of a partial interest in a Note
shall be in the amount of at least $5,000,000 or such lesser amount to which the
Borrower has consented; (ii) the assignee or assignor shall pay to the
Administrative Agent a processing and recordation fee of $3,500 for each
assignment and (iii) no consent of the Administrative Agent of the Borrower
shall be required for any assignment by a Lender to any Lender or any nominee or
Affiliate of any Lender. Any such assignment will become effective upon the
execution and delivery to the Administrative Agent of the Assignment and the
consent of the Administrative Agent and, if applicable, the Borrower. Promptly
after receipt of an executed Assignment, the Administrative Agent shall send to
the Borrower a copy of such executed Assignment. Upon receipt of such executed
Assignment, the Borrower, will, at its own expense, execute and deliver new
Notes to the assignor and/or assignee, as appropriate, in accordance with their
respective interests as they appear. Upon the effectiveness of any assignment
pursuant to this Section 12.06(b), the assignee will become a “Lender,” if not
already a “Lender,” for all purposes of this Agreement and the Loan Documents.
The assignor shall be relieved of its obligations hereunder to the extent of
such assignment (and if the assigning Lender no longer holds any rights or
obligations under this Agreement, such assigning Lender shall cease to be a
“Lender” hereunder except that its rights under Sections 4.06, 5.01, 5.05 and
12.03 shall not be affected). The Administrative Agent will prepare on the last
Business Day of each month during which an assignment has become effective
pursuant to this Section 12.06(b), a new Annex I giving effect to all such
assignments effected during such month, and will promptly provide the same to
the Borrower and each of the Lenders.
     (c) Each Lender may transfer, grant or assign participations in all or any
part of such Lender’s interests hereunder pursuant to this Section 12.06(c) to
any Person, provided that: (i) such Lender shall remain a “Lender” for all
purposes of this Agreement and the transferee of such participation shall not
constitute a “Lender” hereunder; and (ii) no participant under any such
participation shall have rights to approve any amendment to or waiver of any of
the Loan Documents except to the extent such amendment or waiver would
(x) forgive any principal owing on any Obligations or extend the final maturity
of the Loans, (y) reduce the interest rate (other than as a result of waiving
the applicability of any post-default increases in interest rates) or fees
applicable to any of the Commitments or Loans or Letters of Credit in which such
participant is participating, or postpone the payment of any thereof, or
(z) release any guarantor of the Obligations or release all or substantially all
of the collateral (except as provided in the Loan Documents) supporting any of
the Commitments or Loans or Letters of Credit in which such participant is
participating. In the case of any such participation, the participant shall not
have any rights under this Agreement or any of the Security Instruments (the
participant’s rights against the granting Lender in respect of such
participation to be those 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, provided that such
participant shall be entitled to receive additional amounts under Article V on
the same basis as if it were a Lender and be indemnified under Section 12.03 as
if it were a Lender. In addition, each agreement creating any

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participation must include an agreement by the participant to be bound by the
provisions of Section 12.15.
     (d) The Lenders may furnish any information concerning the Borrower in the
possession of the Lenders from time to time to assignees and participants
(including prospective assignees and participants); provided that, such Persons
agree to be bound by the provisions of Section 12.15.
     (e) Notwithstanding anything in this Section 12.06 to the contrary, any
Lender may assign and pledge its Note to any Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging Lender from
its obligations hereunder.
     (f) Notwithstanding any other provisions of this Section 12.06, no transfer
or assignment of the interests or obligations of any Lender or any grant of
participations therein shall be permitted if such transfer, assignment or grant
would require the Borrower to file a registration statement with the SEC or to
qualify the Loans under the “Blue Sky” laws of any state.
     Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in any of the Loan Documents the Letters of Credit, or the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of the Notes, this Agreement or any other
Loan Document.
     Section 12.08 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
     Section 12.09 References; Use of Word “Including”. The words “herein,”
“hereof,” “hereunder” and other words of similar import when used in this
Agreement refer to this Agreement as a whole, and not to any particular article,
section or subsection. Any reference herein to a Section or Article shall be
deemed to refer to the applicable Section or Article of this Agreement unless
otherwise stated herein. Any reference herein to an exhibit, schedule, or other
attachment shall be deemed to refer to the applicable exhibit, schedule, or
other attachment attached hereto unless otherwise stated herein. The word
“including”, “includes” and words of similar import means “including, without
limitation”.
     Section 12.10 Survival. The obligations of the parties under Section 4.06,
Article V, and Sections 11.05 and 12.03 shall survive the repayment of the Loans
and the termination of the Commitments. To the extent that any payments on the
Obligations or proceeds of any collateral are subsequently invalidated, declared
to be fraudulent or preferential, set aside or required to be repaid to a
trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Administrative Agent’s and the Lenders’ Liens, security
interests, rights, powers and remedies under this Agreement and each Security
Instrument shall continue in full force and effect. In such event, each Security
Instrument shall be automatically reinstated and the Borrower shall take such

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action as may be reasonably requested by the Administrative Agent and the
Lenders to effect such reinstatement.
     Section 12.11 Captions. Captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
     Section 12.12 No Oral Agreements. The Loan Documents embody the entire
agreement and understanding between the parties and supersede all other
agreements and understandings between such parties relating to the subject
matter hereof and thereof. The Loan 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 12.13 Governing Law; Submission to Jurisdiction.
     (a) This Agreement and the Notes shall be governed by, and construed in
accordance with, the laws of the State of Texas, except to the extent that
United States federal law permits any Lender to charge interest at the rate
allowed by the laws of the state where such Lender is located. Ch. 346 of the
Texas Finance Code (which regulates certain revolving credit loan accounts and
revolving tri-party accounts) shall not apply to this Agreement or the Notes.
     (b) Any legal action or proceeding with respect to the Loan Documents shall
be brought in the courts of the State of Texas or of the United States of
America for the Southern District of Texas, and, by execution and delivery of
this Agreement, the Borrower hereby accepts for itself and (to the extent
permitted by law) in respect of its Property, generally and unconditionally, the
jurisdiction of the aforesaid courts. The Borrower hereby irrevocably waives any
objection, including, without limitation, any objection to the laying of venue
or based on the grounds of forum non conveniens, which it may now or hereafter
have to the bringing of any such action or proceeding in such respective
jurisdictions. This submission to jurisdiction is non-exclusive and does not
preclude the Administrative Agent or any Lender from obtaining jurisdiction over
the Borrower in any court otherwise having jurisdiction.
     (c) The Borrower hereby irrevocably consents to the service of process of
any of the aforementioned courts in any such action or proceeding by the mailing
of copies thereof by registered or certified mail, postage prepaid, to the
Borrower at its said address, such service to become effective thirty (30) days
after such mailing. Nothing herein shall affect the right of the Administrative
Agent, any Lender or any holder of a Note to serve process in any other manner
permitted by law or to

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commence legal proceedings or otherwise proceed against the Borrower or its
Properties in any other jurisdiction.
     (d) The Borrower, the Administrative Agent and each Lender hereby (i)
irrevocably and unconditionally waive, to the fullest extent permitted by law,
trial by jury in any legal action or proceeding relating to this Agreement or
any Loan Document and for any counterclaim therein; (ii) irrevocably waive, to
the maximum extent not prohibited by law, any right it may have to claim or
recover in any such litigation any special, exemplary, punitive or consequential
damages, or damages other than, or in addition to, actual damages; (iii) certify
that no party hereto nor any representative, agent or counsel for any party
hereto has represented, expressly or otherwise, or implied that such party would
not, in the event of litigation, seek to enforce the foregoing waivers, and (iv)
acknowledge that it has been induced to enter into this Credit Agreement and the
other Loan Documents and the transactions contemplated hereby and thereby by,
among other things, the mutual waivers and certifications contained in this
section 12.13.
     Section 12.14 Interest. It is the intention of the parties hereto that each
Lender shall conform strictly to usury laws applicable to it. Accordingly, if
the transactions contemplated hereby would be usurious as to any Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to such Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in any
of the Loan Documents or any agreement entered into in connection with or as
security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Obligations (or, to the extent that the principal amount of the Obligations
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrower); and (ii) in the event that the maturity of the Notes is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to any Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by such Lender on the principal amount of the Obligations (or, to the
extent that the principal amount of the Obligations shall have been or would
thereby be paid in full, refunded by such Lender to the Borrower). All sums paid
or agreed to be paid to any Lender for the use, forbearance or detention of sums
due hereunder shall, to the extent permitted by law applicable to such Lender,
be amortized, prorated, allocated and spread throughout the full term of the
Loans evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to

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any Lender on any date shall be computed at the Highest Lawful Rate applicable
to such Lender pursuant to this Section 12.14 and (ii) in respect of any
subsequent interest computation period the amount of interest otherwise payable
to such Lender would be less than the amount of interest payable to such Lender
computed at the Highest Lawful Rate applicable to such Lender, then the amount
of interest payable to such Lender in respect of such subsequent interest
computation period shall continue to be computed at the Highest Lawful Rate
applicable to such Lender until the total amount of interest payable to such
Lender shall equal the total amount of interest which would have been payable to
such Lender if the total amount of interest had been computed without giving
effect to this Section 12.14. To the extent that Chapter 303 of the Texas
Finance Code is relevant for the purpose of determining the Highest Lawful Rate,
such Lender elects to determine the applicable rate ceiling under such Chapter
by the weekly ceiling from time to time in effect.
     Section 12.15 Confidentiality. In the event that the Borrower or any
Subsidiary provides to the Administrative Agent or the Lenders confidential
information belonging to the Borrower or such Subsidiary, which the Borrower or
any Subsidiary shall designate in writing as “confidential”, the Administrative
Agent and the Lenders shall thereafter maintain such information in confidence
in accordance with the standards of care and diligence that each utilizes in
maintaining its own confidential information. This obligation of confidence
shall not apply to such portions of the information which (i) are in the public
domain, (ii) hereafter become part of the public domain without the
Administrative Agent or the Lenders breaching their obligation of confidence to
the Borrower, (iii) are previously known by the Administrative Agent or the
Lenders from some source other than the Borrower, (iv) are hereafter developed
by the Administrative Agent or the Lenders without using the Borrower’s
information, (v) are hereafter obtained by or available to the Administrative
Agent or the Lenders from a third party who owes no obligation of confidence to
the Borrower with respect to such information or through any other means other
than through disclosure by the Borrower, (vi) are disclosed with the Borrower’s
consent, (vii) must be disclosed either pursuant to any Governmental Requirement
or to Persons regulating the activities of the Administrative Agent or the
Lenders, or (viii) as may be required by law or regulation or order of any
Governmental Authority in any judicial, arbitration or governmental proceeding.
Further, the Administrative Agent or a Lender may disclose any such information
to any other Lender, any Affiliate of any Lender, any independent petroleum
engineers or consultants, any independent certified public accountants, any
legal counsel employed by such Person in connection with this Agreement or any
Security Instrument, including without limitation, the enforcement or exercise
of all rights and remedies thereunder, or any assignee or participant (including
prospective assignees and participants) in the Loans; provided, however, that
the Administrative Agent or the Lenders shall receive a confidentiality
agreement from the Person to whom such information is disclosed such that said
Person shall have the same obligation to maintain the confidentiality of such
information as is imposed upon the Administrative Agent or the Lenders
hereunder. Notwithstanding anything to the contrary provided herein, this
obligation of confidence shall cease three (3) years from the date the
information was furnished, unless the Borrower requests in writing at least
thirty (30) days prior to the expiration of such three year period, to maintain
the confidentiality of such information for an additional three year period. The
Borrower waives any and all other rights it may have to confidentiality as
against the Administrative Agent and the Lenders arising by contract, agreement,
statute or law except as expressly stated in this Section 12.15.

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     Section 12.16 Exculpation Provisions. Each of the parties hereto
specifically agrees that it has a duty to read this Agreement and the Security
Instruments and agrees that it is charged with notice and knowledge of the terms
of this Agreement and the Security Instruments; that it has in fact read this
Agreement and is fully informed and has full notice and knowledge of the terms,
conditions and effects of this Agreement; that it has been represented by
independent legal counsel of its choice throughout the negotiations preceding
its execution of this Agreement and the Security Instruments; and has received
the advice of its attorney in entering into this Agreement and the Security
Instruments; and that it recognizes that certain of the terms of this Agreement
and the Security Instruments result in one party assuming the liability inherent
in some aspects of the transaction and relieving the other party of its
responsibility for such liability. Each party hereto agrees and covenants that
it will not contest the validity or enforceability of any exculpatory provision
of this Agreement and the Security Instruments on the basis that the party had
no notice or knowledge of such provision or that the provision is not
“conspicuous.”
     Section 12.17 Hedging Agreement Substitution of Collateral. If the
Obligations are paid in full and this Agreement is terminated, the
Administrative Agent and the Lenders shall execute and deliver or cause to be
executed and delivered such instruments of satisfaction and reassignment as may
be appropriate in order to release all liens and security interests created by
the Security Instruments, provided, however, that in lieu of paying off any such
Obligations arising under any Hedging Agreement with any Lender or Affiliate of
any Lender, the Borrower may provide substitute credit support under a standard
form ISDA Credit Support Annex acceptable to such Lender (or its Affiliate) in
the form of a letter of credit or cash equivalents in an amount equal to 110% of
the then current exposure under such Hedging Agreement.
     Section 12.18 Amendment, Restatement and Rearrangement of Prior Debt. The
parties hereto agree that this Agreement amends, restates and rearranges the
Prior Credit Agreement in its entirety and that all Loans and all Existing
Letters of Credit outstanding under the Prior Credit Agreement on the Closing
Date shall be and be deemed to be Loans (of the same Type and having the same
Interest Periods) made and Letters of Credit issued under this Agreement, and
shall thereafter be evidenced and governed by the terms and conditions of this
Agreement.
     Section 12.19 Obligations as Senior Indebtedness; Specified Senior
Indebtedness. It is the intent of all the parties hereto that all of the
Obligations arising under this Agreement and the other Loan Documents shall
constitute (and to the extent, if any, required are hereby designated by
Borrower to constitute) “Senior Indebtedness” and “Specified Senior
Indebtedness” as such terms are defined in the indentures governing the Existing
Other Debt. This Agreement and the other Loan Documents represent the “Credit
Facility” or the “Senior Secured Credit Facility”, as the case may be, as
defined in the indentures governing the Existing Other Debt. Notwithstanding the
foregoing, the acknowledgment of intent contained in this Section 12.19 shall
not be deemed to modify or amend any provision of this Agreement or any of the
other Loan Documents.
[SIGNATURES BEGIN ON NEXT PAGE]

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     The parties hereto have caused this Agreement to be duly executed as of the
day and year first above written.

              BORROWER:   CALLON PETROLEUM COMPANY    
 
           
 
  By:   /s/ Rodger W. Smith, Jr.    
 
     
 
          Rodger W. Smith, Jr.    
 
                Treasurer    
 
                Address for Notices:    
 
                P.O. Box 1287, Natchez, MS 39121 1287;    
 
                or    
 
                200 North Canal Street, Natchez, MS 39120         Telecopier
No.: 601 446 1410         Telephone No.: 601 442 1601         Attention: Rodger
W. Smith, Treasurer    

 

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ADMINISTRATIVE AGENT
            and LENDER:   UNION BANK OF CALIFORNIA, N.A., individually        
and as Administrative Agent    
 
           
 
  By:   /s/ Damien Meiburger    
 
     
 
          Damien Meiburger    
 
                Senior Vice President    

     
 
  Lending Office for Base Rate Loans and LIBOR
 
  Loans:
 
   
 
  1980 Saturn Street, Mail Code V01-120
 
  Monterey Park, CA 91754
 
  Telephone: (323) 720-2870
 
  Telecopy: (323) 724-6198 and (323) 724-0042
 
  Attention: Silvia Cruz, Commercial Loan
 
  Operations Department

 
  Email: #clo_synd @uboc.com
 
   
 
  Address for Notices:
 
   
 
  Energy Capital Services — Dallas Office
 
  500 N. Akard, Suite 4200
 
  Dallas, TX 75201
 
  Telecopier No.: (214) 922 4209
 
  Telephone No.: (214) 922 4200
 
  Attention: Damien Meiburger
 
   
 
  With copy to:
 
   
 
  Energy Capital Services — Dallas Office
 
  500 N. Akard, Suite 4200
 
  Dallas, TX 75201
 
  Telecopier No.: (214) 922 4209
 
  Telephone No.: (214) 922 4200
 
  Attention: Hannah Payne

 

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              LENDER:   GUARANTY BANK    
 
           
 
  By:        
 
  Name:  
 
   
 
  Title:  
 
   
 
     
 
   
 
                Lending Office for Base Rate Loans and LIBOR         Loans:    

                       
 
                     
 
                     
 
  Telecopier No.:        
 
     
 
   
 
  Telephone No.:        
 
     
 
   
 
  Attention:        
 
     
 
   
 
                Address for Notices:    
 
                     
 
                     
 
                     
 
  Telecopier No.:        
 
     
 
   
 
  Telephone No.:        
 
     
 
   
 
  Attention:        
 
     
 
   

 

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              LENDER:   NATEXIS BANQUES POPULAIRES    
 
           
 
  By:        
 
  Name:  
 
   
 
  Title:  
 
   
 
     
 
   
 
                Lending Office for Base Rate Loans and LIBOR         Loans:    

                       
 
                     
 
                     
 
  Telecopier No.:        
 
     
 
   
 
  Telephone No.:        
 
     
 
   
 
  Attention:        
 
     
 
   
 
                Address for Notices:    
 
                     
 
                     
 
                     
 
  Telecopier No.:        
 
     
 
   
 
  Telephone No.:        
 
     
 
   
 
  Attention:        
 
     
 
   

 

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CONSENT OF GUARANTORS
     Each Guarantor hereby consents and agrees to the terms of this Agreement
and agrees that each and every guaranty executed in connection with this
Agreement shall be legal, valid, and binding obligations of each Guarantor
enforceable against each Guarantor in accordance with its terms.
     WITNESS THE EXECUTION HEREOF, as of the ___th day of August, 2006.
CALLON PETROLEUM OPERATING COMPANY,
           a Delaware corporation
CALLON OFFSHORE PRODUCTION, INC.,
          a Mississippi corporation
MISSISSIPPI MARKETING, INC.,
          a Mississippi corporation
CALLON MINERAL PROPERTIES, INC.,
          a Mississippi corporation

             
 
  Each By:   /s/ Rodger W. Smith, Jr.    
 
     
 
          Rodger W. Smith, Jr.    
 
                Treasurer    

 

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ANNEX I
LIST OF PERCENTAGE SHARES AND
MAXIMUM CREDIT AMOUNTS

                      Percentage     Name of Lender   Share   Maximum Credit
Amount
Union Bank of California, N.A.
    41.666666667 %   $ 72,916,666.67  
Guaranty Bank
    41.666666667 %   $ 72,916,666.67  
Natexis Banques Populaires
    16.666666666 %   $ 29,166,666.66  
TOTAL
    100 %   $ 175,000,000  

 

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EXHIBIT A
FORM OF NOTE

      $                                                              
                                        , 200___

     FOR VALUE RECEIVED, CALLON PETROLEUM COMPANY, a Delaware corporation (the
“Borrower”) hereby promises to pay to the order of
                                         (the “Lender”), at the Principal Office
of Union Bank of California, N.A. (the “Administrative Agent”), at 445 South
Figueroa Street, Los Angeles, California 90071, the principal sum of
                     Dollars ($                    ) (or such lesser amount as
shall equal the aggregate unpaid principal amount of the Loans made by the
Lender to the Borrower under the Credit Agreement, as hereinafter defined), in
lawful money of the United States of America and in immediately available funds,
on the dates and in the principal amounts provided in the Credit Agreement, and
to pay interest on the unpaid principal amount of each such Loan, at such
office, in like money and funds, for the period commencing on the date of such
Loan until such Loan shall be paid in full, at the rates per annum and on the
dates provided in the Credit Agreement.
     The date, amount, Type, interest rate, Interest Period and maturity of each
Loan made by the Lender to the Borrower, and each payment made on account of the
principal thereof, shall be recorded by the Lender on its books and, prior to
any transfer of this Note, endorsed by the Lender on the schedules attached
hereto or any continuation thereof.
     This Note is one of the Notes referred to in the Amended and Restated
Credit Agreement dated as of August ___, 2006 among the Borrower, the Lenders
which are or become parties thereto (including the Lender) and the
Administrative Agent (as the same may be amended or supplemented from time to
time, the “Credit Agreement”), and evidences Loans made by the Lender
thereunder. Capitalized terms used in this Note have the respective meanings
assigned to them in the Credit Agreement.
     This Note is issued pursuant to the Credit Agreement and is entitled to the
benefits provided for in the Credit Agreement and the Loan Documents. The Credit
Agreement provides for the acceleration of the maturity of this Note upon the
occurrence of certain events, for prepayments of Loans upon the terms and
conditions specified therein and other provisions relevant to this Note.
     This Note represents the renewal, extension and rearrangement, but not a
novation, of the indebtedness evidenced by that certain $175,000,000.00 Note
dated August ___, 2004 executed by the Borrower and payable to the order of the
Lender.
     THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS.

            CALLON PETROLEUM COMPANY
      By:      

            Name:
Title:
                       

 

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EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
                                                            , 200___
     CALLON PETROLEUM COMPANY, a Delaware corporation (the “Borrower”), pursuant
to the Amended and Restated Credit Agreement dated as of August ___, 2006 among
the Borrower, UNION BANK OF CALIFORNIA, N.A., as Administrative Agent for the
lenders (the “Lenders”) which are or become parties thereto, and such Lenders
(together with all amendments or supplements thereto, the “Credit Agreement”),
hereby makes the requests indicated below (unless otherwise defined herein,
capitalized terms are defined in the Credit Agreement):

¨ 1.   Loans:     (a)   Aggregate amount of new Loans to be
$                                        ;     (b)   Requested funding date is
                    , 200___;     (c)  
$                                         of such borrowings are to be LIBOR
Loans;         $                                         of such borrowings are
to be Base Rate Loans; and     (d)   Length of Interest Period for LIBOR Loans
is:                                         .   ¨ 2.   LIBOR Loan Continuation
for LIBOR Loans maturing on                                         :     (a)  
Aggregate amount to be continued as LIBOR Loans is
$                                        ;     (b)   Aggregate amount to be
converted to Base Rate Loans is $                                        ;    
(c)   Length of Interest Period for continued LIBOR Loans is
                                        .   ¨ 3.   Conversion of Outstanding
Base Rate Loans to LIBOR Loans:         Convert
$                                         of the outstanding Base Rate Loans to
LIBOR Loans on                                          with an Interest Period
of                                         .   ¨ 4.   Conversion of outstanding
LIBOR Loans to Base Rate Loans:         Convert
$                                         of the outstanding LIBOR Loans with
Interest Period maturing on                                         , 200_, to
Base Rate Loans.

     The undersigned certifies that he is the
                                         of the Borrower, and that as such he is
authorized to execute this certificate on behalf of the Borrower. The
undersigned further certifies, represents and warrants on behalf of the Borrower
that the

 

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Borrower is entitled to receive the requested borrowing, continuation or
conversion under the terms and conditions of the Credit Agreement.

                  CALLON PETROLEUM COMPANY
 
           
 
  By:        
 
                Name:     Title:  

 

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EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
     The undersigned hereby certifies that he is the
                                         of CALLON PETROLEUM COMPANY, a Delaware
corporation (the “Borrower”) and that as such he is authorized to execute this
certificate on behalf of the Borrower. With reference to the Amended and
Restated Credit Agreement dated as of August ___, 2006 among the Borrower, UNION
BANK OF CALIFORNIA, N.A., as Administrative Agent for the lenders (the
“Lenders”) which are or become a party thereto, and such Lenders (together with
all amendments or supplements thereto being the “Credit Agreement”), the
undersigned represents and warrants as follows (each capitalized term used
herein having the same meaning given to it in the Credit Agreement unless
otherwise specified):
     (a) The representations and warranties of the Borrower contained in
Article VII of the Credit Agreement and in the Security Instruments and
otherwise made in writing by or on behalf of the Borrower pursuant to the Credit
Agreement and the Security Instruments were true and correct when made, and are
repeated at and as of the time of delivery hereof and are true and correct at
and as of the time of delivery hereof, except to the extent any such
representations and warranties are expressly limited to an earlier date or the
Majority Lenders have expressly consented in writing to the contrary.
     (b) The Borrower has performed and complied with all agreements and
conditions contained in the Credit Agreement and in the Security Instruments
required to be performed or complied with by it prior to or at the time of
delivery hereof.
     (c) Since                                         , no change has occurred,
either in any case or in the aggregate, in the condition, financial or
otherwise, of the Borrower or any Subsidiary which would have a Material Adverse
Effect.
     (d) There exists, and, after giving effect to the loan or loans with
respect to which this certificate is being delivered, will exist, no Default
under the Credit Agreement.
     (e) The financial statements furnished to the Administrative Agent with
this certificate fairly present the consolidated financial condition and results
of operations of the Borrower and its Consolidated Subsidiaries as at the end
of, and for, the [fiscal quarter] [fiscal year] ending
                                                             and such financial
statements have been prepared in accordance with the accounting procedures
specified in the Credit Agreement.
     (f) Attached hereto are the detailed computations necessary to determine
whether the Borrower and its Consolidated Subsidiaries are in compliance with
Sections 9.12, 9.13, and 9.14 of the Credit Agreement as of the end of the
[fiscal quarter] [fiscal year] ending
                                                            .

 

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     EXECUTED AND DELIVERED this ___ day of
                                        .

                  CALLON PETROLEUM COMPANY
 
           
 
  By:        
 
                Name:     Title:  

 

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EXHIBIT D
SECURITY INSTRUMENTS

1.   Reaffirmation of Guaranties and Security Agreements executed by Borrower,
Callon Petroleum Operating Company, Callon Offshore Production, Inc.,
Mississippi Marketing, Inc., Callon Mineral Properties, Inc.

2.   Mortgage, Deed of Trust, Security Agreement, Fixture Filing and Financing
Statement (Texas) executed by Borrower and Callon Petroleum Operating Company,
and UCC-1 Financing Statements related thereto.

3.   First Amendment to Act of Mortgage, Security Agreement, Fixture Filing and
Financing Statement (Louisiana) executed by Borrower and Callon Petroleum
Operating Company, and UCC-1 Financing Statements related thereto.

 

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EXHIBIT E
FORM OF ASSIGNMENT AGREEMENT
     ASSIGNMENT AGREEMENT (“Agreement”) dated as of                     ,
200___between:                                                              (the
“Assignor”) and                                                             
(the “Assignee”).
RECITALS
     A. The Assignor is a party to the Amended and Restated Credit Agreement
dated as of August ___, 2006 (as amended and supplemented and in effect from
time to time, the “Credit Agreement”) among CALLON PETROLEUM COMPANY, a Delaware
corporation (the “Borrower”), each of the lenders that is or becomes a party
thereto as provided in Section 12.06 of the Credit Agreement (individually,
together with its successors and assigns, a “Lender”, and collectively, together
with their successors and assigns, the “Lenders”), and UNION BANK OF CALIFORNIA,
N.A., in its individual capacity, (“UBOC”) and as agent for the Lenders (in such
capacity, together with its successors in such capacity, the “Administrative
Agent”).
     B. The Assignor proposes to sell, assign and transfer to the Assignee, and
the Assignee proposes to purchase and assume from the Assignor, [all][a portion]
of the Assignor’s Maximum Credit Amount, outstanding Loans and its Percentage
Share of the outstanding LC Exposure, all on the terms and conditions of this
Agreement.
     C. In consideration of the foregoing and the mutual agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
Definitions.
     Section 1.01 Definitions. All capitalized terms used but not defined herein
have the respective meanings given to such terms in the Credit Agreement.
     Section 1.02 Other Definitions. As used herein, the following terms have
the following respective meanings:
     “Assigned Interest” shall mean all of Assignor’s (in its capacity as a
“Lender”) rights and obligations (i) under the Credit Agreement and the other
Security Instruments in respect of the Maximum Credit Amount of the Assignor in
the principal amount equal to $                    , including, without
limitation, any obligation to participate pro rata in any LC Exposure, and any
obligation to participate pro rata in any LC Exposure and (ii) to make Loans
under the Maximum Credit Amount and any right to receive payments for the Loans
outstanding under the Maximum Credit Amount assigned hereby of equal
to$                     (the “Loan Balance”), plus the interest and fees which
will accrue from and after the Assignment Date.

 

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     “Assignment Date” shall mean                     , 200___.
ARTICLE II
Sale and Assignment.
     Section 2.01 Sale and Assignment. On the terms and conditions set forth
herein, effective on and as of the Assignment Date, the Assignor hereby sells,
assigns and transfers to the Assignee, and the Assignee hereby purchases and
assumes from the Assignor, all of the right, title and interest of the Assignor
in and to, and all of the obligations of the Assignor in respect of, the
Assigned Interest. Such sale, assignment and transfer is without recourse and,
except as expressly provided in this Agreement, without representation or
warranty.
     Section 2.02 Assumption of Obligations. The Assignee agrees with the
Assignor (for the express benefit of the Assignor and the Borrower) that the
Assignee will, from and after the Assignment Date, perform all of the
obligations of the Assignor in respect of the Assigned Interest. From and after
the Assignment Date: (a) the Assignor shall be released from the Assignor’s
obligations in respect of the Assigned Interest, and (b) the Assignee shall be
entitled to all of the Assignor’s rights, powers and privileges under the Credit
Agreement and the other Security Instruments in respect of the Assigned
Interest.
     Section 2.03 Consent by Administrative Agent [and the Borrower]. By
executing this Agreement as provided below, in accordance with Section 12.06(b)
of the Credit Agreement, the Administrative Agent [and the Borrower] hereby
acknowledge[s] notice of the transactions contemplated by this Agreement and
consents to such transactions.
ARTICLE III
Payments.
     Section 3.01 Payments. As consideration for the sale, assignment and
transfer contemplated by Section 2.01 hereof, the Assignee shall, on the
Assignment Date, assume Assignor’s obligations in respect of the Assigned
Interest and pay to the Assignor an amount equal to the Loan Balance, if any. An
amount equal to all accrued and unpaid interest and fees shall be paid to the
Assignor as provided in Section 3.02 (iii) below. Except as otherwise provided
in this Agreement, all payments hereunder shall be made in Dollars and in
immediately available funds, without setoff, deduction or counterclaim.
     Section 3.02 Allocation of Payments. The Assignor and the Assignee agree
that (i) the Assignor shall be entitled to any payments of principal with
respect to the Assigned Interest made prior to the Assignment Date, together
with any interest and fees with respect to the Assigned Interest accrued prior
to the Assignment Date, (ii) the Assignee shall be entitled to any payments of
principal with respect to the Assigned Interest made from and after the
Assignment Date, together with any and all interest and fees with respect to the
Assigned Interest accruing from and after the Assignment Date, and (iii) the
Administrative Agent is authorized and instructed to allocate payments received
by it for account of the Assignor and the Assignee as provided in the foregoing
clauses. Each party hereto agrees that it will hold any interest, fees or other
amounts that it may receive to which the other party hereto shall be entitled
pursuant to the

 

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preceding sentence for account of such other party and pay, in like money and
funds, any such amounts that it may receive to such other party promptly upon
receipt.
     Section 3.03 Delivery of Notes. Promptly following the receipt by the
Assignor of the consideration required to be paid under Section 3.01 hereof, the
Assignor shall, in the manner contemplated by Section 12.06(b) of the Credit
Agreement, (i) deliver to the Administrative Agent (or its counsel) the Note[s]
held by the Assignor and (ii) notify the Administrative Agent to request that
the Borrower execute and deliver new Notes to the Assignor, if Assignor
continues to be a Lender, and the Assignee, dated the date of this Agreement in
respective principal amounts equal to the respective [Maximum Credit
Amounts][Commitments] of the Assignor (if appropriate) and the Assignee after
giving effect to the sale, assignment and transfer contemplated hereby.
     Section 3.04 Further Assurances. The Assignor and the Assignee hereby agree
to execute and deliver such other instruments, and take such other actions, as
either party may reasonably request in connection with the transactions
contemplated by this Agreement.
ARTICLE IV
Conditions Precedent.
     Section 4.01 Conditions Precedent. The effectiveness of the sale,
assignment and transfer contemplated hereby is subject to the satisfaction of
each of the following conditions precedent:
     (a) the execution and delivery of this Agreement by the Assignor and the
Assignee;
     (b) the receipt by the Assignor of the payment required to be made by the
Assignee under Section 3.01 hereof; and
     (c) the acknowledgment and consent by the Administrative Agent contemplated
by Section 2.03 hereof.
ARTICLE V
Representations and Warranties.
     Section 5.01 Representations and Warranties of the Assignor. The Assignor
represents and warrants to the Assignee as follows:
     (a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;
     (b) the execution, delivery and compliance with the terms hereof by
Assignor and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Governmental Requirement applicable to
it;

 

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     (c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against it in accordance with its terms;
     (d) all approvals and authorizations of, all filings with and all actions
by any Governmental Authority necessary for the validity or enforceability of
its obligations under this Agreement have been obtained;
     (e) the Assignor has good title to, and is the sole legal and beneficial
owner of, the Assigned Interest, free and clear of all Liens, claims,
participations or other charges of any nature whatsoever; and
     (f) the transactions contemplated by this Agreement are commercial banking
transactions entered into in the ordinary course of the banking business of the
Assignor.
     Section 5.02 Disclaimer. Except as expressly provided in Section 5.01
hereof, the Assignor does not make any representation or warranty, nor shall it
have any responsibility to the Assignee, with respect to the accuracy of any
recitals, statements, representations or warranties contained in the Credit
Agreement or in any certificate or other document referred to or provided for
in, or received by any Lender under, the Credit Agreement, or for the value,
validity, effectiveness, genuineness, execution, effectiveness, legality,
enforceability or sufficiency of the Credit Agreement, the Notes or any other
document referred to or provided for therein or for any failure by the Borrower
or any other Person (other than Assignor) to perform any of its obligations
thereunder prior or for the existence, value, perfection or priority of any
collateral security or the financial or other condition of the Borrower or the
Subsidiaries [or any other obligor or guarantor], or any other matter relating
to the Credit Agreement or any other Security Instrument or any extension of
credit thereunder.
     Section 5.03 Representations and Warranties of the Assignee. The Assignee
represents and warrants to the Assignor as follows:
     (a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;
     (b) the execution, delivery and compliance with the terms hereof by
Assignee and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Governmental Requirement applicable to
it;
     (c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignee, enforceable
against it in accordance with its terms;
     (d) all approvals and authorizations of, all filings with and all actions
by any Governmental Authority necessary for the validity or enforceability of
its obligations under this Agreement have been obtained;

 

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     (e) the Assignee has fully reviewed the terms of the Credit Agreement and
the other Security Instruments and has independently and without reliance upon
the Assignor, and based on such information as the Assignee has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement;
     (f) the Assignee hereby affirms that the representations contained in
Section 4.06(d)[(i)][ii)] of the Credit Agreement are true and accurate as to it
[IF (ii) IS SELECTED ADD: and, the Assignee has contemporaneously herewith
delivered to the Administrative Agent and the Borrower such certifications as
are required thereby to avoid the withholding taxes referred to in
Section 4.06]; and
     (g) the transactions contemplated by this Agreement are commercial banking
transactions entered into in the ordinary course of the lending business of the
Assignee.
ARTICLE VI
Miscellaneous.
     Section 6.01 Notices. All notices and other communications provided for
herein (including, without limitation, any modifications of, or waivers,
requests or consents under, this Agreement) shall be given or made in writing
(including, without limitation, by telex or telecopy) to the intended recipient
at its “Address for Notices” specified below its name on the signature pages
hereof or, as to either party, at such other address as shall be designated by
such party in a notice to the other party.
     Section 6.02 Amendment, Modification or Waiver. No provision of this
Agreement may be amended, modified or waived except by an instrument in writing
signed by the Assignor and the Assignee, and consented to by the Administrative
Agent.
     Section 6.03 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. The representations and warranties made herein by the
Assignee are also made for the benefit of the Administrative Agent and the
Borrower, and the Assignee agrees that the Administrative Agent and the Borrower
are entitled to rely upon such representations and warranties.
     Section 6.04 Assignments. Neither party hereto may assign any of its rights
or obligations hereunder except in accordance with the terms of the Credit
Agreement.
     Section 6.05 Captions. The captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
     Section 6.06 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be identical and all of which, taken together,
shall constitute one and the same instrument, and each of the parties hereto may
execute this Agreement by signing any such counterpart.

 

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     Section 6.07 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of Texas.
     Section 6.08 Expenses. To the extent not paid by the Borrower pursuant to
the terms of the Credit Agreement, each party hereto shall bear its own expenses
in connection with the execution, delivery and performance of this Agreement.
     Section 6.09 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
     IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.

                  ASSIGNOR:
 
           
 
  By:        
 
                Name:     Title:
 
                Address for Notices:
 
                Telecopier No.:     Telephone No.:     Attention:
 
                ASSIGNEE:
 
           
 
  By:        
 
                Name:     Title:
 
                Address for Notices:
 
                Telecopier No.:     Telephone No.:     Attention:  

 

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              ACKNOWLEDGED AND CONSENTED TO:
 
           
 
    ,                 as Administrative Agent
 
           
By:
           
 
            Name: Title:
 
            [CALLON PETROLEUM COMPANY]
 
           
By:
           
 
            Name: Title: