MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND

ASSIGNMENT OF PRODUCTION AND REVENUES

 

FROM

 

WORKING INTEREST, LLC

(Mortgagor and Debtor)

 

TO

 

TEXAS CAPITAL BANK, N.A.

(Mortgagee and Secured Party)

 

For purposes of filing this instrument as a financing statement, the mailing
address of Mortgagor/Debtor is 4040 Broadway, Suite 305, San Antonio, Texas
78209; the mailing address of Mortgagee/Secured Party is ONE RIVERWAY, SUITE
2100, HOUSTON, TEXAS 77056.

 

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, AND COVERS FUTURE
ADVANCES AND PROCEEDS. INTERESTS IN OIL, GAS, MINERALS AND OTHER AS-EXTRACTED
COLLATERAL OR IN ACCOUNTS RESULTING FROM THE SALE THEREOF, WHICH ARE INCLUDED IN
THE MORTGAGED PROPERTY, WILL BE FINANCED AT WELLHEADS LOCATED ON THE LANDS OR
LANDS ASSOCIATED WITH PIPELINE DESCRIBED IN EXHIBIT A-1 AND EXHIBIT A-2 HERETO.

 

PERSONAL PROPERTY CONSTITUTING A PORTION OF THE MORTGAGED PROPERTY MAY BE OR MAY
IN THE FUTURE BE AFFIXED TO THE LANDS OR LANDS ASSOCIATED WITH PIPELINE
DESCRIBED IN EXHIBIT A-1 AND EXHIBIT A-2 HERETO.

 

A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT TO THE EXTENT PERMITTED
UNDER KANSAS LAW. A POWER OF SALE MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGED
PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT
BY THE MORTGAGOR UNDER THIS INSTRUMENT.

 

THIS FINANCING STATEMENT IS TO BE FILED, AMONG OTHER PLACES, IN THE REAL ESTATE
RECORDS AND INDEXED AS BOTH A MORTGAGE AND A FINANCING STATEMENT.

*********************************

 

This instrument was prepared by Matthew D. Lea, PORTER HEDGES LLP, 1000 Main
Street, 36th Floor, Houston, Texas 77002.

 

ATTENTION OF RECORDING OFFICER: This instrument is a mortgage of both real and
personal property and is, among other things, a Security Agreement and Financing
Statement under the Uniform Commercial Code. This instrument creates a lien on
rights in or relating to lands of Mortgagor which are described, referred to, or
referred to in the documents described, in Exhibit A-1 and Exhibit A-2 hereto.

 

RECORDED DOCUMENT SHOULD BE RETURNED TO:

 

PORTER HEDGES LLP

1000 Main Street, 36th Floor

Houston, Texas 77002

Attn: Matthew D. Lea

 

 

 

 

MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT

AND ASSIGNMENT OF PRODUCTION and revenues

 

(THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS)

 

Article I

 

GRANT OF LIENS AND SECURITY INTERESTS

 

KNOW ALL MEN BY THESE PRESENTS: That the undersigned WORKING INTEREST, LLC, a
Kansas limited liability company (“Mortgagor”), whose mailing address is 4040
Broadway, Suite 305, San Antonio, Texas 78209, for valuable consideration, the
receipt of which is hereby acknowledged, and in consideration of the debt,
effective as of December __, 2012, has granted, bargained, sold, conveyed,
transferred and assigned, and by these presents does GRANT, BARGAIN, WARRANT,
SELL, CONVEY, MORTGAGE, PLEDGE, TRANSFER, ASSIGN AND SET OVER to TEXAS CAPITAL
BANK, N.A., a national banking association, whose address is One Riverway, Suite
2100, Houston, Texas 77056, (“Mortgagee”), for itself, the Banks (as defined in
the Credit Agreement), and for any Approved Counterparty (as defined in the
Credit Agreement) under an Intercreditor Agreement (as defined in the Credit
Agreement), all of Mortgagor’s rights, titles, interests and estates in and to
the following property, whether real, personal or mixed, whether now owned or
hereafter acquired under law or in equity (collectively, the “Mortgaged
Property”); the inclusion of certain specific types and items of property and
interests in one or more of the following Paragraphs are not intended in any way
to limit the effect of the more general descriptions:

 

OIL AND GAS PROPERTIES

 

A.           All of Mortgagor’s rights, titles, interests and estates, now owned
or hereafter acquired by Mortgagor, in and to those certain oil, gas and mineral
leases, mineral interests, mineral servitudes, royalty interests, overriding
royalty interests, production payments, net profits interests, fee interests,
carried interests, reversionary interests and all other rights, titles,
interests or estates described on Exhibit A-1 attached hereto and made a part
hereof or in, on or under any lands described or referred to on Exhibit A-1 (the
“Lands”), whether such rights, titles, interests or estates or such Lands are
correctly described therein or not (all of which rights, titles, interests and
estates described in this Paragraph A are hereinafter included within the term
“Subject Interests”). The term “oil, gas and mineral leases,” as used in this
instrument and in Exhibit A-1 includes, in addition to oil, gas and mineral
leases, oil and gas leases, oil, gas and sulphur leases, other mineral leases,
co-lessor’s agreements and extensions, amendments, ratifications and subleases
of all or any of the foregoing, all as may be appropriate.

 

B.           All of Mortgagor’s rights, titles, interests and estates, now owned
or hereafter acquired by Mortgagor, in and to present and future drilling,
spacing, proration or production units, as created by the terms of any
unitization, communitization and pooling agreements and orders, and all
properties, property rights and estates created thereby which include, belong or
appertain to the Subject Interests, including, without limitation, all such
units formed voluntarily or under or pursuant to any Law relating to any of the
Subject Interests. As used herein, the term “Law” means all applicable statutes,
laws, ordinances, regulations, orders, writs, injunctions, or decrees of any
state, commonwealth, nation, territory, possession, county, township, parish,
municipality, or Tribunal, and the term “Tribunal” means any court or
governmental department, commission, board, bureau, agency, or instrumentality
of the United States or of any state, commonwealth, nation, territory,
possession, county, parish, or municipality, whether now or hereafter
constituted or existing.

 

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C.           All oil, gas, casinghead gas, drip gasoline, natural gasoline,
distillate, all other liquid or gaseous hydrocarbons produced or to be produced
in conjunction therewith (including all as-extracted collateral), all products,
by-products and all other substances derived therefrom or the processing
thereof, and all other similar minerals, now owned or hereafter acquired by
Mortgagor, now or hereafter accruing to, attributable to or produced from the
Subject Interests or to which Mortgagor now or hereafter may be entitled as a
result or by virtue of Mortgagor’s ownership of the Subject Interests
(collectively, “Hydrocarbons”).

 

D.           All sulphur, lignite, coal, uranium, thorium, iron, geothermal
steam, water, carbon dioxide, helium and all other minerals, ores or substances
of value (whether similar to the foregoing or not), and the products and
proceeds therefrom now owned or hereafter acquired by Mortgagor, including,
without limitation, all gas resulting from the in-situ combustion of coal or
lignite now or hereafter accruing to, attributable to or produced from the
Subject Interests or to which Mortgagor now or hereafter may be entitled as a
result of or by virtue of Mortgagor’s ownership of the Subject Interests
(collectively, “Other Minerals”).

 

E.           All oil and gas wells, disposal and injection wells, rigs,
improvements, fixtures, machinery and other equipment, inventory and articles of
personal property or movables, wherever located, now owned or hereafter acquired
by Mortgagor, including, without limitation, connection apparatus and flow lines
from wells to tanks, wells, pipelines, gathering lines, trunk lines, lateral
lines, flow lines, compressor, dehydration and pumping equipment, pumping
plants, gas plants, processing plants, pumps, dehydration units, separators,
heater treaters, valves, gauges, meters, derricks, rig substructures, buildings,
tanks, reservoirs, tubing, rods, liquid extractors, engines, boilers, tools,
appliances, cables, wires, tubular goods, machinery, supplies and any and all
other equipment, inventory and articles of personal property of any kind or
character whatsoever appurtenant to, or used or held for use in connection with
the production of Hydrocarbons or Other Minerals from the Subject Interests, or
now or hereafter located on any of the Lands encumbered by or pooled with any of
the Subject Interests, or used on or about the Lands in connection with the
operations thereon, together with all present and future improvements or
products of, accessions, attachments and other additions to, tools, parts and
equipment used in connection with, and substitutes and replacements for, all or
any part of the foregoing (all of the types or items of property and interests
described in this Paragraph E are hereinafter collectively referred to as the
“Personal Property”).

 

F.           All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor (including, without limitation, all rights to receive
payments) under or by virtue of all easements, permits, licenses, rights-of-way,
surface leases, franchises, servitudes, division orders, transfer orders and
other agreements relating or pertaining to purchasing, exchanging, exploring
for, developing, operating, treating, processing, storing, marketing or
transporting Hydrocarbons now or hereafter found in, on or under, or produced
from, any of the Subject Interests, or under or by virtue of any contract
relating in any way to all or any part of the Mortgaged Property otherwise
described herein, including, without limitation, farmout contracts, farmin
contracts, operating or joint operating agreements, trade letter agreements and
all agreements creating rights-of-way for ingress and egress to and from the
Subject Interests (all of such rights, titles, interests and estates referred to
or described in this Paragraph F are hereinafter collectively referred to as the
“Subject Contracts”).

 

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G.           All accounts (including, but not limited to, all open accounts
receivable and accounts receivable arising under or pursuant to any joint
operating agreements, division orders or other agreements, documents or
instruments relating to any of the Subject Interests), general intangibles
(including right to proceeds under Swap Contracts, as defined in the Credit
Agreement), chattel paper, documents, instruments, cash and noncash proceeds and
other rights, now owned or hereafter acquired by Mortgagor, arising from or by
virtue of, or from the voluntary or involuntary sale or other disposition of, or
collections with respect to, or insurance proceeds payable with respect to, or
proceeds payable by virtue of warranty or other claims against manufacturers of,
or claims against any other person or entity with respect to, all or any part of
the Mortgaged Property described in this Paragraph G or otherwise (all of which
types and items of property and interests described in this Paragraph G are
hereinafter collectively referred to as the “Accounts”).

 

H.           All tenements, hereditaments, appurtenances, profits and properties
in anyway appertaining, belonging, affixed or incidental to, or used or useful
in connection with, all or any part of the properties and assets described
herein, now owned or hereafter acquired by Mortgagor, including, without
limitation, all reversions, remainders, carried interests, tolls, rents,
revenues, issues, proceeds, earnings, income, products, profits, deposits,
easements, permits, licenses, servitudes, surface leases, rights-of-way and
franchises relating to all or any part of the Mortgaged Property.

 

PIPELINE

 

I.           All pipelines and gathering systems now owned and/or operated or
hereafter acquired and/or operated by Mortgagor for the gathering, transmission,
or distribution of Hydrocarbons including, without limitation, those pipelines
and gathering systems described on Exhibit A-2 which is attached hereto, and any
and all interests in real property relating thereto (collectively called the
“Pipelines”).

 

J.           All tracts and parcels of real property described or referred to in
Exhibit A-2 attached hereto, or the description of which is incorporated in
Exhibit A-2 by reference to any other instrument or document associated with the
Pipelines now owned or hereafter acquired by Mortgagor (collectively, the “Lands
Associated with Pipelines”).

 

K.          All leases, leaseholds, easements, rights-of-way, licenses,
franchises, privileges, permits, ordinances, grants, rights, consents,
servitudes, surface leases or rights, amendatory grants and interests in land
for the installation, maintenance and operation of the Pipelines or the assets
associated with the Pipelines or any portion thereof, now owned or held or
hereafter owned or held by Mortgagor including, without limitation, those
leases, leaseholds, easements, rights-of-way, licenses, franchises, privileges,
permits, ordinances, grants, rights, consents, servitudes, surface leases or
rights, amendatory grants and interests in land applicable to the Pipelines or
the Pipeline Assets now owned or held or hereafter owned or held by Mortgagor
and those leases, leaseholds, easements, rights-of-way, licenses, franchises,
privileges, permits, ordinances, grants, rights, consents, servitudes, surface
leases or rights, amendatory grants and interests in land owned or held by
Mortgagor and described on Exhibit A-2 attached hereto or arising by virtue of
the documents described in Exhibit A-2 (collectively, the “Rights-of-Way and
Franchises”).

 

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L.           All other assets of Mortgagor now or hereafter situated on any of
the Lands Associated with Pipelines or the Rights-of-Way and Franchises,
including, without limitation, fixtures, improvements, equipment, surface or
subsurface machinery, facilities, supplies, replacement parts, vehicles of every
description, all process control computer systems and equipment or other
property of whatsoever kind or nature, and including, without limitation, all
buildings, structures, machinery, gas processing plants, stations, substations,
pumps, pumping stations, meter houses, metering stations, regulator houses,
ponds, tanks, scrapers and scraper traps, fittings, valves, connections,
cathodic or electrical protection by-passes, regulators, drips, meters, pumps,
pumping units, pumping stations, storage or tankage facilities, engines, pipes,
gates, telephone and telegraph lines, electric power lines, poles, wires,
casings, radio towers, fixtures, mechanical equipment, electrical equipment,
machine shops and other equipment, used or useful in connection therewith;
together with all of Mortgagor’s liquid hydrocarbons, carbon dioxide, natural
gas liquids, refined petroleum products and other inventory fuels, carbon,
chemicals, electric energy, and other consumable materials or products
manufactured, processed, generated, produced, transmitted, stored (whether above
or below ground) or purchased by Mortgagor for sale, exchange, distribution,
consumption or transmission by Mortgagor, including, without limitation, off
system gas, drip gas and line fill (collectively, the “Pipeline Assets”).

 

GENERAL

 

M.           All other interests of every kind and character which Mortgagor now
owns or at any time hereafter acquires in and to the types and items of property
and interests described in Paragraphs A, B, C, D, E, F, G, H, I, J, K and L
preceding and all property which is used or useful in connection with the
Mortgaged Property and the proceeds and products of all of the foregoing,
whether now owned or hereafter acquired.

 

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N.           To further secure the full and complete payment and performance of
the Secured Indebtedness (defined below), Mortgagor, as debtor, hereby grants to
Mortgagee and Mortgagee’s successors in title and assigns, as secured party, a
first and prior security interest in and to all of Mortgagor’s right, title and
interest now owned or hereafter acquired in and to the following types and items
of property and interests now owned or hereafter acquired by Mortgagor (all of
which are included within the term “Mortgaged Property”): (a) all Personal
Property, Subject Contracts and Accounts; (b) all Subject Interests,
Hydrocarbons and Other Minerals including all as-extracted collateral (including
Accounts), as defined in and subject to the Uniform Commercial Code as enacted,
amended and in effect in each jurisdiction in which any of the Mortgaged
Property is situated (the “UCC”), and for which the creation and perfection of a
security interest or Lien therein is governed by the provisions of the UCC; (c)
all other Mortgaged Property described in “A” through “M” above consisting of
Accounts, contract rights, general intangibles, chattel paper, documents,
instruments, inventory, equipment, fixtures and other goods and articles of
personal property of any kind or character defined in and subject to the UCC;
(d) all increases, profits, combinations, reclassifications, improvements and
products of, accessions, attachments and other additions to, tools, parts and
equipment used in connection with, and substitutes and replacements for, all or
any part of the Mortgaged Property described in this or any other clause of this
Paragraph N; (e) all Accounts, contract rights, general intangibles, chattel
paper, documents, instruments, cash and noncash proceeds and other rights
arising from or by virtue of, or from the voluntary or involuntary sale or other
disposition of, or collections with respect to, or insurance proceeds payable
with respect to, or proceeds payable by virtue of warranty or other claims
against manufacturers of, or claims against any other person or entity with
respect to, all or any part of the Hydrocarbons, the Other Minerals or the
Mortgaged Property described in this or any other clause of this Paragraph N;
and (f) all security for the payment to Mortgagor of any of the Mortgaged
Property described in this or any other clause of this Paragraph N and goods
which gave or will give rise to any of such Mortgaged Property or are evidenced,
identified, or represented therein or thereby; provided that nothing in this
paragraph shall be deemed to permit any action prohibited by this instrument or
by terms incorporated in this instrument.

 

In the event that the Mortgagor acquires additional undivided interests in some
or all of the Mortgaged Property, this Mortgage shall automatically encumber
such additions or increases to the Mortgagor’s interest in the Mortgaged
Property without need of further act or document. Further, in the event the
Mortgagor becomes the owner of an interest in any part of the lands described
either on Exhibit A-1 or Exhibit A-2 or the documents described on Exhibit A-1
or Exhibit A-2 or otherwise subject to or covered by the Mortgaged Properties,
this Mortgage shall automatically encumber such ownership interest of the
Mortgagor without need of further act or document.

 

For the same consideration, Mortgagor hereby grants to Mortgagee any and all
rights of Mortgagor to Liens and security interests in the Mortgaged Property
securing payment of proceeds from the sale of production from the Mortgaged
Property, including, but not limited to, those Liens and security interests
provided for under applicable Law, including but not limited to the UCC.

 

TO HAVE AND TO HOLD all and singular the Mortgaged Property and all other
property which, by the terms hereof, has or may hereafter become subject to the
Lien of this Mortgage, Security Agreement, Financing Statement and Assignment of
Production and Revenues (the “Mortgage”), together with all rights,
hereditaments and appurtenances in anywise belonging to the Mortgagee or assigns
forever. Any additional right, title or interest which Mortgagor may hereafter
acquire or become entitled to in all assets of the types described above shall
inure to the benefit of and be covered by this Mortgage and constitute
“Mortgaged Property,” the same as if expressly described and conveyed herein.
Mortgagor hereby binds itself, its successors and permitted assigns, to warrant
and forever defend all and singular the above described property, rights, and
interests constituting the Mortgaged Property to Mortgagee and to its successors
and assigns forever, against every person whomsoever lawfully claiming or to
claim the same or any part thereof.

 

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Article II

 

SECURED INDEBTEDNESS

 

This Mortgage is executed and delivered, to secure and enforce the payment of
the following indebtedness, obligations and liabilities:

 

(a)That certain promissory note dated October 3, 2011, in the face amount of
$50,000,000 executed by EnerJex Resources, Inc., Enerjex Kansas, Inc., DD
Energy, Inc., Black Sable Energy, LLC and Mortgagor (collectively, the
“Borrowers”), and made payable to Mortgagee bearing interest and payable as
therein provided, with the final payment thereof due on or before the Maturity
Date (as defined in the Credit Agreement hereinafter described), and containing
the usual provisions in notes of this character, and all renewals,
rearrangements, amendments, modifications and extensions thereof (whether one or
more, the “Note”);

 

(b)All Obligations of Borrowers owed to Mortgagee and the Banks arising pursuant
to the terms of that certain Amended and Restated Credit Agreement dated as of
October 3, 2011 (as amended by that certain First Amendment thereto dated
December 14, 2011, as amended by that certain Second Amendment thereto dated
August 31, 2012, as amended by that certain Third Amendment thereto dated
November 2, 2012, as amended by that certain Fourth Amendment thereto of even
date herewith and as amended, restated, supplemented or otherwise modified from
time to time, collectively, the “Credit Agreement”; all capitalized terms used
but not defined within the Mortgage bear the meanings set forth in the Credit
Agreement);

 

(c)Payment of any sums which may be advanced or paid by Mortgagee under the
terms hereof on account of the failure of Mortgagor to comply with the covenants
of Mortgagor contained herein; and all other indebtedness of Mortgagor arising
pursuant to the provisions of this Mortgage;

 

(d)All obligations of each Guarantor under its Guaranty owed to Mortgagee;

 

(e)All obligations of Borrowers owed to Approved Counterparty, as counterparty
under those certain Permitted Swap Contracts arising pursuant to the terms of
the Credit Agreement and referenced as “Swap Documents” in the Intercreditor
Agreement, including without limitation, that certain Master Swap Agreement
dated as of July 3, 2008 between Mortgagor and Approved Counterparty (together
will all schedules and confirmations in respect thereof, as amended,
supplemented, restated, extended or replaced from time to time);

 

(f)All renewals, extensions, replacements and modifications of indebtedness
described, referred to or mentioned in paragraphs (a) through (e) above, and all
substitutions therefor, in whole or in part;

 

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(g)The term “Secured Indebtedness” wherever used in this Mortgage shall refer to
all present and future indebtedness, debts, obligations and liabilities
described or referred to in this ARTICLE II or otherwise in this Mortgage; and

 

(h)NOTWITHSTANDING ANYTHING TO THE CONTRARY IN ARTICLE II HEREOF OR ANY OTHER
PROVISION HEREOF, THE MAXIMUM AMOUNT OF SECURED INDEBTEDNESS SHALL NOT EXCEED AT
ANY ONE TIME OUTSTANDING ONE MILLION DOLLARS ($1,000,000).

 

Article III

 

REPRESENTATIONS AND WARRANTIES

 

By execution of this Mortgage, Mortgagor does hereby adopt and ratify all of
Mortgagor’s warranties and representations set forth in the Credit Agreement;
and all the warranties and representations set forth in the Credit Agreement as
they relate to the properties described on Exhibit A-1 and Exhibit A-2 attached
thereto are hereby made and adopted with respect to the properties listed on
Exhibit A-1 and Exhibit A-2 attached hereto. In addition, Mortgagor hereby
represents and warrants as follows:

 

(a)Revenue and Cost Bearing Interest. That Mortgagor’s ownership of the Subject
Interests and the undivided interests therein as specified on attached Exhibit
A-1 will, after giving full effect to all Permitted Liens, afford Mortgagor not
less than those net revenue interests in the production from or allocated to
such Subject Interest as is specified on attached Exhibit A-1 and will cause
Mortgagor to bear not more than that portion of the costs of drilling,
developing and operating the wells or units identified on Exhibit A-1, unless
there is a proportionate increase in Mortgagor’s net revenue interest in such
property.

 

(b)Power to Create Lien. Mortgagor has full power and lawful authority to
bargain, grant, sell, mortgage, assign, transfer, convey, pledge and hypothecate
and grant a security interest in all of Mortgaged Property all in the manner and
form herein provided and without obtaining the waiver, consent or approval of
any lessor, sublessor, Governmental Authority or other Person whomsoever or
whatsoever, except to the extent the approval or consent of the State of Kansas
or the Department of the Interior, United States of America, as the case may be,
is required by applicable Law to the transfer, deed or assignment of an interest
in any of the Mortgaged Property.

 

(c)Taxes. All (a) Property Taxes, (b) Severance Taxes, (c) ad valorem taxes, (d)
conservation taxes, and (e) any other taxes of any kind, excluding only income
taxes and franchise taxes, imposed on Mortgagor or any producer in connection
with or as a result of its ownership of interests in the Mortgaged Properties
have been paid except to the extent failure to pay such taxes could not be
reasonably expected to result in a Material Adverse Effect. For purposes of this
Paragraph, “Property Taxes” means taxes imposed annually on Mortgagor which are
based on or measured by the estimated value (at the time such taxes are
assessed) of any Hydrocarbons situated within the Mortgaged Property as
calculated by the governing authority where located and “Severance Taxes” means
taxes imposed at the time Hydrocarbons are produced from a well which are based
on or measured by the amount or value of such production.

 

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(d)Rentals Paid; Leases in Effect. All rentals and royalties due and payable in
accordance with the terms of the leases comprising a part of the Subject
Interest have been duly paid or provided for except to the extent failure to pay
such rentals and royalties could not reasonably be expected to result in a
Material Adverse Effect.

 

(e)Operation of Mortgaged Property. The Mortgaged Property (and properties
unitized or pooled therewith) has been maintained, operated and developed in a
good and workmanlike manner according to practices and procedures that are
standard in the petroleum industry in the area where the Mortgaged Property is
located and in conformity with all applicable Laws and in material conformity
with the provisions of all leases, subleases or other material contracts
comprising a part of the Subject Interests and other contracts and agreements
forming a part of the Mortgaged Property; specifically in this connection, (i)
no Mortgaged 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) and (ii) none of the wells comprising a part of the Mortgaged Property (or
properties unitized therewith) are, to the knowledge of Mortgagor, deviated from
the vertical more than the maximum permitted by applicable Laws, and such wells
are, in fact, bottomed under and are producing from, and the well bores are
wholly within, the Mortgaged Property (or, in the case of wells located on
properties unitized therewith, such unitized properties).

 

(f)Pipelines and Pipeline Assets. All Pipelines and Pipeline Assets have been
constructed and operated in conformity in all material respects with all
applicable Laws.

 

Any fractions or percentages specified on attached Exhibit A-1 in referring to
Mortgagor’s interests are solely for the purposes of the warranties made by
Mortgagor above and shall in no manner limit the quantum of interest with
respect to any Subject Interests or with respect to any Unit or Well identified
on Exhibit A-1. If any of the Lands covered by the Subject Interests or Lands
Associated with Pipelines or other instrument mentioned on Exhibit A-1 and
Exhibit A-2 are incorrectly described, then nevertheless this Mortgage shall
cover all Mortgagor’s interest in such Subject Interests, the Lands Associated
with Pipelines and other instrument as to all of the lands covered thereby.

 

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Article IV

 

COVENANTS OF MORTGAGOR

 

In consideration of the Secured Indebtedness, Mortgagor, for itself and its
successors and its permitted assigns, hereby ratifies, covenants and agrees that
Mortgagor shall comply with all Affirmative Covenants described in Article VI of
the Credit Agreement, and Mortgagor shall not violate any of the Negative
Covenants described in Article VII of the Credit Agreement. In addition,
Mortgagor hereby covenants and agrees as follows:

 

A.           Defend Title. Mortgagor will not create or suffer to be created or
permit to exist any Lien, senior to, junior to, or on a parity with, the Lien of
this Mortgage upon the Mortgaged Property or any part thereof or upon the rents,
issues, revenues, profits and other income therefrom, except Permitted Liens.
Except for the Permitted Liens, Mortgagor will warrant and defend the title to
the Mortgaged Property against the claims and demands of all other persons
whomsoever and will maintain and preserve the Lien created hereby so long as any
of the Secured Indebtedness secured hereby remains unpaid. Except for the
Permitted Liens, should an adverse claim be made against or a cloud develop upon
the title to any part of the Mortgaged Property, Mortgagor agrees it will
immediately defend against such adverse claim or take appropriate action to
remove such cloud at Mortgagor’s cost and expense, and Mortgagor further agrees
that Mortgagee may take such other action as Mortgagee reasonably deems
advisable to protect and preserve its interests in the Mortgaged Property, and
in such event Mortgagor will indemnify Mortgagee against any and all costs,
attorneys’ fees and other expenses which it may reasonably incur in defending
against any such adverse claim or taking action to remove any such cloud.

 

B.           Correct Defects. Upon request of Mortgagee, Mortgagor will promptly
correct any defect which may be discovered after the execution and delivery of
this Mortgage, in the note or notes above described or other documents executed
in connection herewith, in the execution or acknowledgment hereof or thereof or
in the description of the Mortgaged Property, and will execute, acknowledge, and
deliver such division orders, transfer orders and other assurances and
instruments as shall, in the opinion of Mortgagee, be necessary or proper to
convey and assign to Mortgagee all of the Mortgaged Property herein conveyed or
assigned, or intended to be so.

 

C.           Notifications. Mortgagor will notify Mortgagee of the destruction,
loss, termination or acquisition of any Mortgaged Property within two (2)
Business Days of Mortgagor’s receipt of notice thereof.

 

D.           Pooling. Except as required by applicable Law, Mortgagor will not,
without the prior written consent of Mortgagee, which consent shall not be
unreasonably withheld, voluntarily pool or unitize all or any part of the
Mortgaged Property where the pooling or unitization would result in the
diminution of Mortgagor’s net revenue interest in production from the pooled or
unitized lands. Immediately after the formation of any pool or unit in
accordance herewith, Mortgagor will furnish to Mortgagee a conformed copy of the
pooling agreement, declaration of pooling, or other instrument creating the pool
or unit. The interest of Mortgagor included in any pool or unit attributable to
the Mortgaged Property or any part thereof shall become a part of the Mortgaged
Property and shall be subject to Liens hereof in the same manner and with the
same effect as though the pool or unit and the interest of Mortgagor therein
were specifically described in Exhibit A-1 hereto. In the event any proceedings
of any governmental body which could result in pooling or unitizing all or any
part of the Mortgaged Property are commenced, Mortgagor shall give immediate
written notice thereof to Mortgagee.

 

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E.Maintenance and Operation of Mortgaged Property.

 

(a)Mortgagor will, from time to time, pay or cause to be paid before they become
delinquent and payable all taxes, assessments and governmental charges lawfully
levied or assessed upon the Mortgaged Property or any part thereof, or upon or
arising from any of the rents, issues, revenues, profits and other income from
the Mortgaged Property, or incident to or in connection with the production of
Hydrocarbons or other minerals therefrom, or the operation and development
thereof; provided, that the foregoing covenant shall be suspended so long as the
amount, applicability or validity of any such charges is being diligently
contested in good faith by appropriate proceedings and if Mortgagor shall have
set up reserves therefor which are adequate under generally accepted accounting
principles.

 

(b)Mortgagor will at its own expense do or cause to be done all things
reasonably necessary to preserve and keep in full repair, working order and
efficiency (subject to reasonable wear and tear) all of the Mortgaged Property,
including, without limitation, all equipment, machinery and other tangible or
movable personal property, and from time to time will make or cause to be made
all the needful and proper repairs, renewals and replacements so that at all
times the state and condition of the Mortgaged Property will be fully preserved
and maintained in accordance with the standards of a prudent operator.

 

(c)Mortgagor will promptly pay and discharge before delinquent, or cause to be
promptly paid or discharged before delinquent, all rentals, delay rentals,
royalties and indebtedness accruing under, and in all material respects perform
or cause to be performed each and every act, matter or thing required by, each
and all of the assignments, deeds, leases, sub-leases, contracts and agreements
described or referred to herein or affecting Mortgagor’s interests in the
Mortgaged Property, and will do or cause to be done all other things necessary
to keep unimpaired Mortgagor’s rights with respect thereto and prevent any
forfeiture thereof or default thereunder. Mortgagor will operate or cause to be
operated the Mortgaged Property in a careful and efficient manner in accordance
with the practices of the industry and in compliance in all material respects
with all applicable contracts and agreements and in compliance with all
applicable proration and conservation Laws of the jurisdiction in which the
Mortgaged Property is situated, and, in all material respects, all applicable
Laws of every other agency and authority from time to time constituted to
regulate the development and operation of the Mortgaged Property and the
production and sale of Hydrocarbons and Other Minerals therefrom. Mortgagor will
do or cause to be done such development work as may be reasonably necessary to
the prudent and economical operation of the Mortgaged Property in accordance
with the most approved practices of operators in the industry.

 

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(d)If any tax is levied or assessed against the Secured Indebtedness or any part
thereof, or against this Mortgage, or against the Mortgagee with respect to said
Secured Indebtedness or any part thereof or this Mortgage (excluding, however,
any income tax payable by Mortgagee), Mortgagor shall promptly pay the same.

 

(e)Mortgagor will do all things necessary to keep unimpaired Mortgagor’s rights
and remedies in or under the Mortgaged Property and shall not abandon, shall,
convey, assign, lease or otherwise transfer any right, title or interest of
Mortgagor in, to, or under the Pipelines or the Pipeline Assets, or consent to
any of the foregoing, directly or indirectly, without the express prior written
consent of Mortgagee.

 

(f)Mortgagor will perform or cause to be performed, each and all covenants,
agreements, terms, conditions and limitations imposed upon Mortgagor or its
predecessors in interest and expressly contained in any assignment or other form
of conveyance, under or through which the Pipelines, Pipeline Assets, Lands
Associated with Pipelines, or Rights-of-Way and Franchises, or an undivided
interest therein are now held, and perform or cause to be performed all material
(expressed or implied) covenants and obligations imposed upon Mortgagor in
connection with any document or instrument relating thereto.

 

(g)Mortgagor will cause, or in the event Mortgagor is not the operator of the
Pipeline Assets, use its best efforts to cause, the Pipeline Assets to be
maintained, developed, and continuously operated for the gathering, storing,
transmission and distribution of Hydrocarbons in a good and workmanlike manner
as would be operated by a prudent operator and in compliance with all applicable
operating agreements and contracts, and all applicable Laws, excepting those
being diligently contested in good faith.

 

(h)Mortgagor will cause the Pipelines to be kept in good and effective operating
condition (reasonable wear and tear excepted), and all repairs, renewals,
replacements, additions and improvements thereof or thereto, needful to the
gathering, storing, transmission and distribution of Hydrocarbons through the
Pipelines, to be promptly made.

 

F.           Taxes/Insurance. Mortgagor will carry with standard insurance
companies satisfactory to the Mortgagee, insurance with respect to the Mortgaged
Property against such liabilities, casualties, risks and contingencies and in
amounts as is customary in the industry; and acceptable certificates evidencing
the same thereof shall be delivered to Mortgagee annually after the execution of
this Mortgage. Mortgagor will at all times maintain workers’ compensation
insurance with a responsible insurance company where required by, and in
accordance with, the applicable Laws of the state (i) in which the Mortgaged
Property is located or (ii) which requires workers’ compensation to be
maintained on such employees. In the event Mortgagor fails or neglects to pay
any taxes, general or special, or fails or neglects to relieve the Mortgaged
Property from any Lien which might become superior or equal to the Lien of this
Mortgage, or fail to carry such workers’ compensation or other insurance,
Mortgagee, at its option, may pay such taxes, Liens or charges, or any part
thereof, or effect such workmen’s compensation insurance, and Mortgagor will
promptly reimburse Mortgagee, as the case may be, therefor; and any and all such
sums so paid hereunder shall be paid by Mortgagor upon demand at Mortgagee’s
principal offices, and shall constitute a part of the Secured Indebtedness.

 

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G.           Operation by Third Parties. All or portions of the Mortgaged
Property may be comprised of interests in the Subject Interests which are other
than working interests or which may be operated by a party or parties other than
Mortgagor and with respect to all or any such Subject Interests as may be
comprised of interests other than working interests or which may be operated by
parties other than Mortgagor, Mortgagor’s covenants set forth in as expressed in
Paragraph E are modified to require that Mortgagor use commercially reasonable
efforts to obtain compliance with such covenants by the working interest owners
or the operator or operators of such Subject Interest.

 

H.           Labor/Materials. Mortgagor agrees to promptly pay before
delinquent, or cause to be paid before delinquent, all bills for labor and
materials incurred in the operation of the Mortgaged Property, except any that
is being contested in good faith and as to which satisfactory accruals have been
provided; will promptly pay its share of all costs and expenses incurred under
any joint operating agreement affecting the Mortgaged Property or any portion
thereof; will furnish Mortgagee, as and when requested, full information as to
the status of any joint account maintained with others under any such operating
agreement; will not take any action to incur any liability or Lien thereunder;
and will not enter into any new operating agreement or amendment of existing
operating agreement affecting the Mortgaged Property that in Mortgagor’s
commercially reasonable opinion would diminish or alter Mortgagor’s net revenue
interest therein, all without prior written consent of the Mortgagee.

 

I.           Legal Proceedings. Mortgagor will promptly notify Mortgagee or
other holder or holders of the Secured Indebtedness, in writing, of the
commencement of any legal proceedings affecting the Mortgaged Property or any
part thereof, and will take such action as may be necessary to preserve its and
Mortgagee’s rights affected thereby; and should Mortgagor fail or refuse to take
any such action, Mortgagee may at its election take such action on behalf and in
the name of Mortgagor and at Mortgagor’s cost and expense.

 

J.           Waivers. Mortgagor hereby expressly waives any and all rights or
privileges of marshalling of assets, sale in inverse order of alienation,
notices, appraisements, redemption and any prerequisite to the full extent
permitted by applicable Law, in the event of foreclosure of the Liens created
herein. Mortgagee at all times shall have the right to release any part of the
Mortgaged Property now or hereafter subject to the Lien of this Mortgage, any
part of the proceeds of production or other income herein or hereafter assigned
or pledged, or any other security it now has or may hereafter have securing the
Secured Indebtedness, without releasing any other part of the Mortgaged
Property, proceeds or income, and without affecting the Liens hereof as to the
part or parts thereof not so released, or the right to receive future proceeds
and income.

 

K.          Disposition. Without prior approval and written consent of
Mortgagee, Mortgagor will not sell, assign, lease, transfer or otherwise dispose
of all or any portion of the Mortgaged Property except as provided in the Credit
Agreement, nor shall Mortgagor mortgage, pledge or otherwise encumber the
Mortgaged Property or any part thereof, regardless of whether the Lien is
senior, coordinate, junior, inferior or subordinate to the Lien created hereby,
except for Permitted Liens.

 

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L.           Notice of Assignments. Upon request of Mortgagee, Mortgagor will
execute and deliver written notices of assignments to any persons, corporations
or other entities owing or which may in the future owe to Mortgagor monies or
accounts arising in connection with any of the following matters: (a) any oil,
gas or mineral production from the Mortgaged Property; (b) any gas contracts,
processing contracts or other contracts relating to the Mortgaged Property; or
(c) the operation of or production from any part of the Mortgaged Property. The
notices of assignments shall advise the third parties that all of the monies or
accounts described above have been assigned to Mortgagee, and if required by
Mortgagee, shall also require and direct that future payments thereof, including
amounts then owing and unpaid, be paid directly to the Lockbox or directly to
Mortgagee.

 

M.           Prohibitions Ineffective. Any (i) mortgage, pledge, or
encumbrance, or (ii) unitization, pooling, or communitization (except as
required by applicable Law) or other action or instrument in violation of the
prohibitions contained in this Article IV shall be of no force or effect against
Mortgagee.

 

Article V

 

RIGHTS AFTER EVENT OF DEFAULT

 

A.           If an Event of Default shall occur and be continuing, the Mortgagee
shall have the right and option to proceed with foreclosure and to sell, to the
extent permitted by applicable Law, all or any portion of the Mortgaged Property
at one or more sales, as an entirety or in parcels, at such place or places and
otherwise in such manner and upon such notice as may be required by applicable
Law or, in the absence of any such requirements, as the Mortgagee may deem
appropriate, and to make conveyance to the purchaser or purchasers.

 

B.           Notwithstanding any other provision of this Article V, if any of
the Secured Indebtedness shall become due and payable and shall not be promptly
paid, Mortgagee shall have the right and power to proceed by a suit or suits in
equity or at law, whether for the specific performance of any covenant or
agreement herein contained or in aid of the execution of any power herein
granted, or for any foreclosure hereunder or for the sale of the Mortgaged
Property under the judgment or decree of any court or courts of competent
jurisdiction, or for the appointment of a receiver pending any foreclosure
hereunder or the sale of the Mortgaged Property under the order of a court or
courts of competent jurisdiction or under executory or other legal process, or
for the enforcement of any other appropriate legal or equitable remedy. Any
money advanced by Mortgagee in connection with any such receivership shall be a
demand obligation (which obligation Mortgagor hereby expressly promises to pay)
owing by Mortgagor to Mortgagee and shall bear interest from the date of making
such advance by Mortgagee until paid at the Default Rate.

 

13

 

  

C.           Notwithstanding any other provision, Mortgagee shall also have the
option to proceed with foreclosure in satisfaction of any installments of the
Secured Indebtedness which have not been paid when due either through the courts
or by proceeding with foreclosure in satisfaction of the matured but unpaid
portion of the Secured Indebtedness as if under a full foreclosure, conducting
the sale as herein provided and without declaring the entire principal balance
and accrued interest due; such sale may be made subject to the unmatured portion
of the Secured Indebtedness, and any such sale shall not in any manner affect
the unmatured portion of the Secured Indebtedness, but, as to such unmatured
portion of the Secured Indebtedness, this Mortgage shall remain in full force
and effect just as though no sale had been made hereunder. It is further agreed
that several sales may be made hereunder without exhausting the right of sale
for any unmatured part of the Secured Indebtedness, it being the purpose hereof
to provide for a foreclosure and sale of the security for any matured portion of
the Secured Indebtedness without exhausting the power to foreclose and sell the
Mortgaged Property for any subsequently maturing portion of the Secured
Indebtedness.

 

D.           The Mortgaged Property may be sold in one or more parcels and in
such manner and order as Mortgagee, in his sole discretion, may elect, it being
expressly understood and agreed that the right of sale arising out of any Event
of Default shall not be exhausted by any one or more sales.

 

E.           Upon the happening of any of the Events of Default, Mortgagee shall
be entitled to all of the rights, powers and remedies afforded a secured party
by the UCC with reference to the personal property, as-extracted collateral and
fixtures in which Mortgagee has been granted a security interest hereby, or
Mortgagee may proceed as to both the real and personal property covered hereby.

 

F.           Mortgagor agrees to the full extent it lawfully may, that, in case
one or more of the Events of Default shall have occurred and shall not have been
remedied, then, and in every such case, Mortgagee shall have the right and power
to enter into and upon and take possession of all or any part of the Mortgaged
Property in the possession of Mortgagor, its successors or permitted assigns, or
its agents or servants, and may exclude Mortgagor, its successors or permitted
assigns, and all persons claiming under Mortgagor, and its agents or servants
wholly or partly therefrom. All costs, expenses and liabilities of every
character incurred by Mortgagee in administering, managing, operating, and
controlling the Mortgaged Property shall constitute a demand obligation (which
obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor to
Mortgagee and shall bear interest from date of expenditure until paid at the
Default Rate, all of which shall constitute a portion of the Secured
Indebtedness and shall be secured by this Mortgage and all other Collateral
Documents.

 

G.           Every right, power and remedy herein given to Mortgagee shall be
cumulative and in addition to every other right, power and remedy herein
specifically given or now or hereafter existing in equity, at law or by statute
(including specifically those granted by the UCC in effect and applicable to the
Mortgaged Property or any portion thereof) each and every right, power and
remedy whether specifically herein given or otherwise existing may be exercised
from time to time and so often and in such order as may be deemed expedient by
Mortgagee, and the exercise, or the beginning of the exercise, of any such
right, power or remedy shall not be deemed a waiver of the right to exercise, at
the same time or thereafter any other right, power or remedy. No delay or
omission by Mortgagee in the exercise of any right, power or remedy shall impair
any such right, power or remedy or operate as a waiver thereof or of any other
right, power or remedy then or thereafter existing.

 

14

 

  

H.           Neither Mortgagor, nor any guarantor or any other person hereafter
obligated for payment of all or any part of the Secured Indebtedness shall be
relieved of such obligation by reason of (a) the failure of Mortgagee to comply
with any request of Mortgagor, or any guarantor or any other person so
obligated, to foreclose the Lien of this Mortgage or to enforce any provision
hereunder or under the Credit Agreement; (b) the release, regardless of
consideration, of the Mortgaged Property or any portion thereof or interest
therein or the addition of any other property to the Mortgaged Property; (c) any
agreement or stipulation between any subsequent owner of the Mortgaged Property
and Mortgagee extending, renewing, rearranging or in any other way modifying the
terms of this Mortgage without first having obtained the consent of, given
notice to or paid any consideration to Mortgagor, any guarantor or such other
person, and in such event Mortgagor, guarantor and all such other persons shall
continue to be liable to make payment according to the terms of any such
extension or modification agreement unless expressly released and discharged in
writing by Mortgagee; or (d) by any other act or occurrence save and except the
complete payment of the Secured Indebtedness and the complete fulfillment of all
obligations hereunder or under the Credit Agreement.

 

I.           Mortgagee may release, regardless of consideration, any part of the
Mortgaged Property without, as to the remainder, in any way impairing,
affecting, subordinating or releasing the Lien created in or evidenced by this
Mortgage or its stature as a first and prior Lien in and to the Mortgaged
Property, and without in any way releasing or diminishing the liability of any
person or entity liable for the repayment of the Secured Indebtedness. For
payment of the Secured Indebtedness, Mortgagee may resort to any other security
therefor held by Mortgagee in such order and manner as Mortgagee may elect.

 

J.           To the fullest extent permitted by applicable Law, Mortgagor hereby
irrevocably and unconditionally waives and releases (a) all benefits that might
accrue to Mortgagor by virtue of any present or future moratorium Law or other
Law exempting the Mortgaged Property from attachment, levy or sale on execution
or providing for any appraisement, valuation, stay of execution, exemption from
civil process, redemption or extension of time for payment; (b) all notices of
any Event of Default or of Mortgagee’s intention to accelerate maturity of the
Secured Indebtedness or of its election to exercise (or its actual exercise of)
any right, remedy or recourse provided for hereunder or under the Credit
Agreement; and (c) any right to a marshaling of assets or a sale in inverse
order of alienation. If any Law referred to in this Mortgage and now in force,
(of which Mortgagor or its successor or successors might take advantage despite
the provisions hereof), shall hereafter be repealed or cease to be in force,
such Law shall thereafter be deemed not to constitute any part of the contract
herein contained or to preclude the operation or application of the provisions
hereof.

 

K.          In case Mortgagee shall have proceeded to invoke any right, remedy
or recourse permitted hereunder or under the Credit Agreement and shall
thereafter elect to discontinue or abandon same for any reason, Mortgagee shall
have the unqualified right so to do and, in such an event, Mortgagor and
Mortgagee shall be restored to their former positions with respect to the
Secured Indebtedness, this Mortgage, the Credit Agreement, the Mortgaged
Property and otherwise, and the rights, remedies, recourses and powers of
Mortgagee shall continue as if same had never been invoked.

 

15

 

  

L.           The proceeds of any sale of the Mortgaged Property or any part
thereof and all other monies received by Mortgagee through any proceedings for
the enforcement hereof or otherwise, whose application has not elsewhere herein
been specifically provided for, shall be applied:

 

FIRST, to the payment of all expenses incurred by Mortgagee incident to the
enforcement of this Mortgage, the Credit Agreement or any of the Secured
Indebtedness (including, without limiting the generality of the foregoing,
expenses of any entry or taking of possession, of any sale, of advertisement
thereof and of conveyances, and court costs, compensation of agents and
employees, and reasonable legal fees, and to the payment of all other charges,
expenses, liabilities and advances incurred or made by Mortgagee under this
Mortgage or in executing any power hereunder;

 

SECOND, to payment of the Secured Indebtedness in such order and manner as
Mortgagee may elect; and

 

THIRD, to Borrowers, Mortgagor or as otherwise required by any applicable Law.

 

In connection with any action taken by Mortgagee pursuant to this mortgage,
Mortgagee and employees, representatives, agents, attorneys, accountants and
experts (“Indemnified Parties”) shall not be liable for any loss sustained by
Mortgagor resulting from an assertion that Mortgagee has received funds from the
production of Hydrocarbons claimed by third persons or any act or omission of
any Indemnified Party in administering, managing, operating or controlling the
Mortgaged Property unless such loss is caused by the gross negligence or willful
misconduct of an Indemnified Party, nor shall Mortgagee be obligated to perform
or discharge any obligation, duty or liability of Mortgagor. Unless such
liability, loss, or damage is caused by the gross negligence or willful
misconduct of an Indemnified Party, Mortgagor shall and do hereby agrees to
indemnify each Indemnified Party for, and to hold each Indemnified Party
harmless from, any and all liability, loss or damage which may or might be
incurred by any Indemnified Party by reason of this Mortgage or the exercise of
rights or remedies hereunder; should Mortgagee make any expenditure on account
of any such liability, loss or damage, the amount thereof, including costs,
expenses and reasonable attorneys’ fees, shall be a demand obligation (which
obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor to
Mortgagee and shall bear interest from the date expended until paid at the
applicable interest rate set forth in the Credit Agreement, shall be a part of
the Secured Indebtedness and shall be secured by this Mortgage and any other
security instrument. Mortgagor hereby assents to, ratifies and confirms any and
all actions of Mortgagee with respect to the Mortgaged Property taken under this
Mortgage. The liabilities of the Mortgagor as set forth in this Article V shall
survive the termination of this Mortgage.

 

16

 

  

Article VI

 

ASSIGNMENT OF PRODUCTION AND REVENUES

(this “Assignment”)

 

Production

 

A.           In addition to the assignment and conveyance to Mortgagee herein
made, Mortgagor does hereby transfer, assign, deliver and convey unto Mortgagee,
its successors and assigns, all of the Hydrocarbons and Other Minerals produced,
saved or sold from the Mortgaged Property and attributable to the interest of
Mortgagor therein subsequent to 7:00 A.M. on the 1st day of the month in which
this Mortgage is executed, together with the proceeds of any sale thereof
(“Hydrocarbon Proceeds”); Mortgagor hereby directs any purchaser now or
hereafter taking any production from the Mortgaged Property to pay to Mortgagee
such Hydrocarbon Proceeds derived from the sale thereof, and to continue to make
payments directly to Mortgagee until notified in writing by Mortgagee to
discontinue the same; and the purchaser of any such production shall have no
duty or obligation to inquire into the right of Mortgagee to receive the same,
what application is made thereof, or as to any other matter; and the payment
made to Mortgagee shall be binding and conclusive as between such purchaser and
Mortgagor. Mortgagor further agrees to perform all such acts, and to execute all
such further assignments, transfer and division orders, and other instruments as
may be required or desired by Mortgagee or any other party to have such
Hydrocarbon Proceeds so paid to Mortgagee.

 

Revenues

 

B.           In addition to the assignment and conveyance to Mortgagee herein
made, Mortgagor does hereby transfer, assign, deliver and convey unto Mortgagee,
its successors and assigns, all the income, revenues, rents, issues, profits and
proceeds arising from the Pipelines relating to the Mortgaged Property and
attributed to the interest of Mortgagor therein whether due, payable or accruing
(collectively, the “Revenues”) under any and all present and future contracts or
other agreements relating to the transmission of the Hydrocarbons or the
ownership of all or any portion of the Mortgaged Property. Mortgagor hereby
directs any payor to pay to Mortgagee such Revenues derived from such contracts
and agreements, and to continue to make payments directly to Mortgagee until
notified in writing by Mortgagee to discontinue the same; and the payor shall
have no duty or obligation to inquire into the right of Mortgagee to receive the
same, what application is made thereof, or as to any other matter; and the
payment made to Mortgagee shall be binding and conclusive as between such payor
and Mortgagor. Mortgagor agrees to perform all such acts, and to execute all
such further assignments, transfers and other instruments as may be required or
desired by the Mortgagee or any party in order to have said Revenues so paid to
the Mortgagee.

 

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General

 

C.           The Mortgagee is fully authorized to (i) receive and receipt for
said Revenues and Hydrocarbon Proceeds; (ii) to endorse and cash any and all
checks and drafts payable to the order of Mortgagor or the Mortgagee for the
account of Mortgagor received from or in connection with said Revenues and
Hydrocarbon Proceeds and apply the proceeds thereof to the payment of the
Secured Indebtedness, when received, regardless of the maturity of any of the
Secured Indebtedness, or any installment thereof, and (iii) execute any
instrument in the name of Mortgagor to facilitate any of the foregoing. Upon
receipt of written instructions from Mortgagor, Mortgagee agrees to release to
Mortgagor any Revenues and Hydrocarbon Proceeds belonging to third parties;
provided that the Mortgagee shall not be liable for any delay, neglect, or
failure to effect collection of any Revenues and Hydrocarbon Proceeds or to take
any other action in connection therewith or hereunder; but shall have the right,
at its election, in the name of Mortgagor or otherwise, to prosecute and defend
any and all actions or legal proceedings deemed advisable by the Mortgagee in
order to collect such funds and to protect the interests of the Mortgagee and/or
Mortgagor, with all costs, expenses and attorney’s fees incurred in connection
therewith being paid by Mortgagor. Unless Mortgagee has claimed or is claiming,
for its benefit Revenues and Hydrocarbon Proceeds belonging to third parties and
not attributable to the Mortgaged Property, Mortgagor hereby agrees to indemnify
the Mortgagee against all claims, actions, liabilities, judgments, costs,
charges and attorneys’ fees made against or incurred by it, based on the
assertion that it received Revenues claimed by third persons either before or
after the payment in full of the Secured Indebtedness. Mortgagee shall have the
right to defend against any such claims, actions and judgments, employing its
attorneys therefor, and if it is not furnished with reasonable indemnity, it
shall have the right to compromise and adjust any such claims, actions and
judgments. Mortgagor agrees to indemnify and pay to the Mortgagee any and all
such claims, judgments, costs, charges and attorney’s fees as may be paid in any
judgment, release or discharge thereof or as may be adjudged against the
Mortgagee. Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue
any and all rights of Mortgagor to Liens on the Mortgaged Property. Mortgagor
hereby further transfers and assigns to Mortgagee any and all such Liens,
security instruments or similar interests of Mortgagor attributable to its
interest in the Mortgaged Property and Revenues and Hydrocarbon Proceeds arising
under or created by any statutory provision, judicial decision or otherwise. The
power of attorney granted to Mortgagee in this Paragraph C, being coupled with
an interest, shall be irrevocable so long as the Secured Indebtedness or any
part thereof remains unpaid.

 

D.           Should any purchaser or other party taking the production from the
Mortgaged Property or owing payment to Mortgagor fails to make prompt payment to
Mortgagee in accordance with this Assignment, Mortgagee shall, if permitted by
applicable Law, have the right at Mortgagor’s expense to demand a change of
connection and to designate another purchaser or other party with whom a new
connection may be made, without any liability on the part of Mortgagee in making
such selection, so long as ordinary care is used in the making thereof; and
failure of Mortgagor to consent to and promptly effect such change of connection
shall constitute an event of default hereunder, and the whole Secured
Indebtedness may be immediately declared due and payable, at the option of
Mortgagee, and the Mortgaged Property shall become subject to the foreclosure
proceedings hereunder.

 

18

 

  

E.           Mortgagor authorizes and empowers Mortgagee to receive, hold and
collect all sums of money paid to Mortgagee in accordance with this Assignment,
and to apply the same as hereinafter provided, all without any liability or
responsibility on the part of Mortgagee, save and except as to good faith in so
receiving and applying such sums. All payments provided for in this Assignment
shall be paid promptly to Mortgagee, and any provisions contained in the Note or
any part thereof to the contrary notwithstanding, Mortgagee may apply the same
or so much thereof as it elects to the payment of the Secured Indebtedness,
application to be made in such manner as it may elect, regardless of whether the
application so made shall exceed the payments of principal and interest then due
as provided in the Note. After such application has been so made by Mortgagee,
the balance of any such payment or payments remaining shall be paid to
Mortgagor. Mortgagee agrees to give Mortgagor written notice simultaneously with
its notice to the purchaser that such payments are to be paid to Mortgagee in
accordance with the terms of this Article.

 

F.           It is understood and agreed that should such payments provided for
by this Assignment be less than the sum or sums then due on the Secured
Indebtedness, such sum or sums then due shall nevertheless be paid by Mortgagor
in accordance with the provisions of the Loan Documents evidencing the Secured
Indebtedness, and neither this Assignment nor any provisions hereof shall in any
manner be construed to affect the terms and provisions of such Loan Documents.
Likewise, neither this Assignment nor any provisions hereof shall in any manner
be construed to affect the Liens, rights, title and remedies herein granted
securing the Secured Indebtedness or Mortgagor’s liability therefor. The rights
under this Assignment are cumulative of all other rights, remedies, and powers
granted under this Mortgage, and are cumulative of any other Lien which
Mortgagee now holds or may hereafter hold to secure the payment of the Secured
Indebtedness.

 

G.           Should Mortgagor receive any of the proceeds which under the terms
hereof should have been remitted to Mortgagee, Mortgagor will immediately remit
same in full to Mortgagee.

 

H.           Upon payment and performance in full of all Secured Indebtedness,
the remainder of such proceeds held by Mortgagee, if any, shall be paid over to
Mortgagor upon demand, and a release of the interest hereby assigned will be
made by Mortgagee to Mortgagor at its request and its expense.

 

I.           Mortgagee shall not be liable for any failure to collect, or for
any failure to exercise diligence in collecting, any funds assigned hereunder.
Mortgagee shall be accountable only for funds actually received.

 

J.           To the extent permissible under applicable Law, Mortgagor hereby
acknowledges that this Assignment is intended to be presently, unconditionally
and immediately effective. Furthermore and to the extent permitted by applicable
Law, Mortgagor agrees that Mortgagee is not required to assert any affirmative
act, including the institution of any legal proceedings, to enforce this
Assignment.

 

19

 

  

Article VII

 

ADDITIONAL REMEDIES

 

A.           If Mortgagor should fail to comply with any of the covenants or
obligations of Mortgagor hereunder, then Mortgagee or its attorney in fact or
agent may perform the same for the account and at the expense of Mortgagor but
shall not be obligated so to do, and any and all expenses incurred or paid in so
doing shall be payable by Mortgagor to Mortgagee, with interest at the rate
agreed upon in the Credit Agreement, from the date when same was so incurred or
paid, and the amount thereof shall be payable on demand and shall be secured by
and under this Mortgage, and the amount and nature of such expense and the time
when paid shall be presumptively established by the affidavit of Mortgagee or
any officer or agent thereof, or by the affidavit of any attorney in fact or
agent acting hereunder; provided, however, that the exercise of the privileges
granted in this Paragraph A shall not be considered or constitute a waiver of
the right of Mortgagee upon the happening of an Event of Default hereunder to
declare the Secured Indebtedness at once due and payable but shall be cumulative
of such right and all other rights herein given.

 

B.           To the extent permitted by applicable Law, in case any one or more
of the Events of Default shall occur, then in each and every such case
Mortgagee, whether or not the Secured Indebtedness shall have been declared due
and payable, in addition to the other rights and remedies hereunder, may
exercise the following additional remedy, but shall not be obligated so to do:
Mortgagee or its attorney in fact or agent may enter into and upon and take
possession of all or any part of the Mortgaged Property and each and every part
thereof and may exclude Mortgagor, its agents, employees and representatives
wholly therefrom and have, hold, use, operate, manage and control the Mortgaged
Property and each and every part thereof and produce the Hydrocarbons and Other
Minerals therefrom and market the same, all at the sole risk and expense of
Mortgagor and at the expense of the Mortgaged Property, applying the net
proceeds so derived, first, to the cost of maintenance and operation of such
Mortgaged Property; second, to the payment of all Secured Indebtedness secured
hereby, principal and interest, application to be made first to interest and
then to principal; and the balance thereof, if any, shall be paid to Mortgagor.
Upon such payment of all such costs and Secured Indebtedness, the Mortgaged
Property shall be returned to Mortgagor in its then condition and Mortgagee
shall not be liable to Mortgagor for any damage or injury to the Mortgaged
Property except such as may be caused through his, its or their fraud or willful
misconduct.

 

C.           To the extent permitted by applicable Law, Mortgagor does hereby
designate Mortgagee as Mortgagor’s agent to exercise each and every remedy set
forth herein and to conduct any and all operations and take any and all action
reasonably necessary to do so.

  

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Article VIII

 

MISCELLANEOUS

 

A.           Any provision in any document that may be executed in connection
herewith to the contrary notwithstanding, the Mortgagee shall in no event be
entitled to receive or collect, nor shall any amounts received hereunder be
credited so that the Mortgagee shall be paid as interest, a sum greater than
that authorized by Law. If any possible construction of this Mortgage or any
instrument evidencing the Secured Indebtedness, or any or all other notes,
guaranties or papers relating to the Secured Indebtedness, seems to indicate any
possibility of a different power given to the Mortgagee, or any authority to ask
for, demand, or receive any larger rate of interest, such as a mistake in
calculation or wording, this clause shall override and control, and proper
adjustments shall be made accordingly.

 

B.           This Mortgage, for convenience only, has been divided into Articles
and Paragraphs, and it is understood that the rights, powers, privileges, duties
and other legal relations of the Mortgagor and the Mortgagee, shall be
determined from this Mortgage as an entirety and without regard to the aforesaid
division into Articles and Paragraphs and without regard to headings prefixed to
such Articles.

 

C.           The terms used to designate any of the parties herein shall be
deemed to include the heirs, successors and assigns of such parties; the term
“successors” shall include the heirs, trustees and legal representatives; and
the term “Mortgagee” shall also include any lawful owner, holder or pledgee of
any Secured Indebtedness. Whenever the context requires, reference herein made
to the single number shall be understood to include the plural and the plural
shall likewise be understood to include the singular. Words denoting sex shall
be construed to include the masculine, feminine, and neuter when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative.

 

D.           Every right and remedy provided for herein shall be cumulative of
each and every other right or remedy of Mortgagee, whether herein or otherwise
conferred, and may be enforced concurrently therewith, and the unenforceability
or invalidity of any one or more provisions, clauses, sentences or paragraphs of
this Mortgage shall not render any other provision, clause, sentence or
paragraph unenforceable or invalid. No security theretofore, herewith or
subsequently taken by Mortgagee shall in any manner impair or affect the
security given by this Mortgage or any security by endorsement or otherwise
presently or previously given, and all security shall be taken, considered and
held as cumulative. In addition to the rights and remedies expressly set forth
herein, Mortgagee shall be entitled to all other rights and remedies at law and
in equity, which rights and remedies, together with rights and remedies
described above are cumulative.

 

E.           This Mortgage shall be binding upon the parties, their respective
successors and permitted assigns, and shall inure to the benefit of the
Mortgagee, and the covenants and agreements herein contained shall constitute
covenants running with the land.

 

F.           It is contemplated by the parties hereto that from time to time
additional interests and properties may or will be added to the interests and
properties on Exhibit A-1 and Exhibit A-2 attached hereto by means of
supplements or amendments identifying this Mortgage and describing such
interests and properties to be so added and included, and upon the execution of
any such supplements or amendments, the Lien, rights, titles and interests
created herein shall immediately attach to and be effective as of the date of
such supplemental indenture in respect to any such interests and properties so
described, and the same being included in the term “Mortgaged Property,” as used
herein.

 

21

 

  

G.           This Mortgage shall be deemed, and may be enforced from time to
time, as a chattel mortgage, real estate mortgage, deed of trust, security
agreement, assignment or contract, or as one or more thereof.

 

H.           Without in any manner limiting the generality of any of the
foregoing hereof, some portions of the Personal Property described hereinabove
are or are to become fixtures on the Lands or Lands Associated with Pipelines
described herein or to which reference is made herein. In addition, the security
interest created hereby under applicable provisions of the UCC attaches to
minerals, including oil, gas and other as-extracted collateral, or accounts
resulting from the sale thereof, at the wellhead or minehead located on the
Lands or Lands Associated with Pipelines described or to which reference is made
herein.

 

I.           This Mortgage may be filed as provided in Article 9 of the Texas
Business and Commerce Code and Article 9 of the Kansas Uniform Commercial Code
relating to the granting of security interests. In this connection, this
instrument will be presented to a filing officer under the Uniform Commercial
Code to be filed in the real estate records or official public records as a
Financing Statement covering minerals and fixtures and as-extracted collateral,
pursuant to Section 9.502(c) of the Texas Business and Commerce Code and K.S.A.
84-9-501.

 

J.           For purposes of filing this Mortgage as a financing statement, the
addresses for Mortgagor, as the debtor, and Mortgagee, as the secured party, are
as set forth hereinabove.

 

K.          For the convenience of the parties, this Mortgage may be executed in
multiple counterparts. For recording purposes, various counterparts have been
executed and there may be attached to each such counterpart an Exhibit A-1 and
Exhibit A-2 containing only the description of the Mortgaged Property, or
portions thereof, which relates to the county or state in which the particular
counterpart is to be recorded. A complete, original counterpart of this Mortgage
with a complete Exhibit A-1 and Exhibit A-2 may be obtained from the Mortgagee.
Each of the counterparts hereof so executed shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same Mortgage.

 

L.           The failure or delay of Mortgagee to file or give any notice as to
this Mortgage, or to exercise any right, remedy or option to declare the
maturity of the principal debt, or any other sums hereby secured, or the payment
by Mortgagee of any taxes, Liens, charges or assessments, shall not be taken or
deemed a waiver of any rights to exercise such right or option or to declare any
such maturity as to any past or subsequent violations of any of such covenants
or stipulations, and shall not waive or prejudice any right or Lien hereunder.
Any election or failure by Mortgagee to exercise any rights, remedies or options
hereunder shall not constitute a waiver or prejudice the exercise of other
rights or remedies existing hereunder. All rights, powers, immunities, remedies
and Liens of Mortgagee existing and to exist hereunder or under any other
instruments, and all other or additional security, and Mortgagee’s rights at law
and in equity, shall be cumulative and not exclusive, each of the other; and
Mortgagee shall, in addition to the remedies herein expressly provided, be
entitled to such other remedies as may now or hereafter exist at law or in
equity for securing and collecting the Secured Indebtedness, for enforcing the
covenants herein, and for foreclosing the Liens hereof. Resort by Mortgagee to
any remedy provided for hereunder or at law or in equity shall not prevent
concurrent or subsequent resort to the same or any other remedy or remedies.

 

22

 

  

M.            In the event of a conflict between the terms and provisions of
this Mortgage and those of the Credit Agreement, or in the event that
obligations imposed upon the Mortgagor in the Mortgage and the Credit Agreement
in relation to non-monetary matters are inconsistent and require differing
levels of performance, the terms and provisions of the Credit Agreement shall
govern and control.

 

N.           This Mortgage is executed by Mortgagee solely for the purpose of
acknowledging and accepting the benefits conferred on the Mortgagee and to
evidence the agreements of Mortgagee set forth herein.

 

O.           Mortgagor and Mortgagee intend to contract in strict compliance
with applicable usury Laws from time to time in effect. In furtherance thereof,
the parties stipulate and agree that none of the terms and provisions contained
in this Mortgage shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable Law from time to time in
effect. No Borrower nor any present or future guarantors, endorsers or other
Persons hereafter becoming liable for payment of the Secured Indebtedness shall
ever be liable for unearned interest thereon or shall ever be required to pay
interest thereon in excess of the maximum amount that may be lawfully charged
under applicable Law from time to time in effect. Mortgagee expressly disavows
any intention to charge or collect excessive unearned interest or finance
charges in the event the maturity of any Secured Indebtedness is accelerated. If
(a) the maturity of any Secured Indebtedness is accelerated for any reason, (b)
any Secured Indebtedness is prepaid and as a result any amounts held to
constitute interest are determined to be in excess of the legal maximum, or
(c) Mortgagee or any other holder of any or all of the Secured Indebtedness
shall otherwise collect moneys which are determined to constitute interest which
would otherwise increase the interest on any or all of the Secured Indebtedness
to an amount in excess of that permitted to be charged by applicable Law then in
effect, then all such sums determined to constitute interest in excess of such
legal limit shall, without penalty, be promptly applied to reduce the then
outstanding principal of the related Secured Indebtedness or, at Mortgagor’s or
such holder’s option, promptly returned to Mortgagor or the other payor thereof
upon such determination. In determining whether or not the interest paid or
payable under any specific circumstance exceeds the maximum amount permitted
under applicable Law, Mortgagor or Mortgagee (and any other payors thereof)
shall to the greatest extent permitted under applicable Law, (x) characterize
any non principal payment as an expense, fee or premium rather than as interest,
(y) exclude voluntary prepayments and the effects thereof, and (z) amortize,
prorate, allocate and spread the total amount of interest throughout the entire
contemplated term of the instruments evidencing the Secured Indebtedness in
accordance with the amounts outstanding from time to time thereunder and the
maximum legal rate of interest from time to time in effect under applicable Law
in order to lawfully charge the maximum amount of interest permitted under
applicable Law.

 

P.           THIS MORTGAGE SUPERSEDES ALL PRIOR AGREEMENTS BETWEEN THE PARTIES
WITH RESPECT TO ITS SUBJECT MATTER AND CONSTITUTES (ALONG WITH THE DOCUMENTS
REFERRED TO IN THIS MORTGAGE) A COMPLETE AND EXCLUSIVE STATEMENT OF THE TERMS OF
THE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO ITS SUBJECT MATTER. THIS
AGREEMENT MAY NOT BE AMENDED EXCEPT BY A WRITTEN AGREEMENT EXECUTED BY THE PARTY
TO BE CHARGED WITH THE AMENDMENT. THIS AGREEMENT WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE
STATE OF KANSAS THAT APPLY MANDATORILY, REGARDLESS OF THE LAWS THAT MIGHT
OTHERWISE GOVERN UNDER PRINCIPLES OF CONFLICT OF LAWS THEREOF.

 

23

 

  

[Signature and acknowledgement pages follow]

 

 

 

  

EXECUTED as of the date set forth in the notary below, but effective for all
purposes as of the date first written above.

 

  MORTGAGOR/DEBTOR:       WORKING INTEREST, LLC,   a Kansas limited liability
company       By:       Robert G. Watson, Jr.     Chief Executive Officer

 

THE STATE OF TEXAS §     §   COUNTY OF BEXAR §  

  

BEFORE ME, the undersigned authority, on this day personally appeared Robert G.
Watson, Jr., Chief Executive Officer of Working Interest, LLC, a Kansas limited
liability company, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes and consideration therein expressed, as the act and deed of such
limited liability company and in the capacity therein stated.

 

GIVEN UNDER MY HAND AND SEAL OF OFFICE this _______ day of December, 2012.

  

      NOTARY PUBLIC, STATE OF TEXAS

 

(Signature and Acknowledgement Page to Mortgage)

 

 

 

 

  MORTGAGEE:       TEXAS CAPITAL BANK, N.A.,   a national banking association  
    By:       W. David McCarver IV .   Senior Vice President

 

THE STATE OF TEXAS §     §   COUNTY OF HARRIS §  

  

BEFORE ME, the undersigned authority, on this day personally appeared W. David
McCarver IV, Senior Vice President of TEXAS CAPITAL BANK, N.A., a national
banking association, known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, as the act and deed of such
national banking association and in the capacity therein stated.

 

GIVEN UNDER MY HAND AND SEAL OF OFFICE this ____ day of December, 2012.

  

      NOTARY PUBLIC, STATE OF TEXAS

 

(Signature and Acknowledgement Page to Mortgage)

 

 

 

 

EXHIBIT A

 

This Exhibit A consists of Exhibit A-1 and Exhibit A-2

  

Exhibit A

 

 

 

EXHIBIT A-1

TO MORTGAGE

 

Oil and Gas Properties

 

This Exhibit A-1 sets forth the description of the property interests covered by
the Mortgage to which this Exhibit A-1 is attached. All of the terms defined in
the Mortgage are used in this Exhibit A-1 with the same meanings given therein.

 

In addition, the designation “Working Interest” or “WI” means an interest owned
in an oil, gas, and mineral lease that determines the cost bearing percentage of
the owner of such interest. The designation “Net Revenue Interest” or “NRI”
means net revenue interest, or that portion of the production attributable to
the owner of a working interest after deduction for all royalty burdens,
overriding royalty burdens, or other burdens on production, except severance,
production, windfall profits and other similar taxes. The designation
“Overriding Royalty Interest” or “ORRI” means an interest in production which is
free of any obligation for the expense of exploration, development and
production, bearing only its pro rata share of severance, production, windfall
profits and other similar taxes.

  

Exhibit A-1

 

 

 

PROPERTY EXHIBIT

 

Miami County, Kansas

  

Name   Legal Description  Section   Township   Range   Net Revenue
Interest   Working
Interest   Book   Page  Howell-Gorges   E/2 SW/4 (part, 62 acres), SE/4 (part 60
acres)   1    18S   21E    0.79750000    1.0000000    345    157              
                            

 

 

  

EXHIBIT A-2

TO MORTGAGE

 

Pipelines

 

All pipelines, gathering systems and related fixtures and equipment associated
with the Wells and the Subject Interests.