Exhibit 10.1

 

 

 

$100,000,000

 

CREDIT AGREEMENT

 

dated

 

October 14, 2014

 

BETWEEN

 

REEF OIL & GAS DRILLING AND INCOME FUND, L.P.,

as Borrower

 

AND

 

TEXAS CAPITAL BANK, N.A.,

as Lender

 

 

 

Reducing Revolving Credit Facility

Standby Letter of Credit Facility

 

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TABLE OF CONTENTS

 

ARTICLE I DEFINITIONS

1

 

 

 

1.1.

Definitions

1

1.2.

Accounting Terms and Determinations; Changes in Accounting

20

1.3.

References

20

1.4.

Amendment of Defined Instruments

21

1.5.

Joint Preparation; Construction of Indemnities and Releases

21

1.6.

Time References

22

1.7.

Types of Loans and Advances

22

 

 

 

ARTICLE II TERMS OF FACILITIES

22

 

 

 

2.1.

Reducing Revolving Line of Credit and Letter of Credit Facilities

22

2.2.

Method of Borrowing and Obtaining Letters of Credit

23

2.3.

Note

25

2.4.

Certain Payments and Prepayments of Principal

25

2.5.

Interest Rates; Payment of Interest

25

2.6.

Unused Available Commitment Fees; Commitment and Facility Fees; Letter of Credit
Fees; Authorized Payments by Lender; Processing Fee

27

2.7.

Termination of Credit Facilities; Maturity of Note; Right of Borrower to
Terminate Credit Facilities

28

2.8.

Determination of Borrowing Base; Automatic Reductions in Borrowing Base;
Borrowing Base Deficiency; Notice of Redeterminations; Requests for Reductions
in Borrowing Base

28

2.9.

Interest Elections for Conversions and Continuations

29

2.10.

Request for Extension of Maturity

30

 

 

 

ARTICLE III GENERAL PROVISIONS

31

 

 

 

3.1.

General Provisions as to Payments and Loans

31

3.2.

Telephonic Notices

31

3.3.

Default Interest

31

3.4.

Prepayments Permitted

31

3.5.

Limitation Period

32

3.6.

Illegality

32

3.7.

LATE CHARGE

32

3.8.

Guarantor Waiver

32

3.9.

Borrower Waiver

32

 

 

 

ARTICLE IV COLLATERAL

33

 

 

 

4.1.

Security

33

 

 

 

ARTICLE V CONDITIONS PRECEDENT TO ADVANCES AND LETTERS OF CREDIT

33

 

 

 

5.1.

All Advances and Letters of Credit

33

5.2.

Initial Advance

34

5.3.

Conditions Precedent for the Benefit of the Lender

35

 

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ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE BORROWER

36

 

 

 

6.1.

Existence and Power

36

6.2.

Authorization; Contravention

37

6.3.

Binding Effect

37

6.4.

Subsidiaries

37

6.5.

Disclosure

37

6.6.

Financial Information

37

6.7.

Litigation

38

6.8.

ERISA Plans

38

6.9.

Taxes and Filing of Tax Returns

38

6.10.

Title to Properties; Liens; Environmental Liability

38

6.11.

Business Compliance

39

6.12.

Licenses, Permits, Etc.

40

6.13.

Compliance with Laws

40

6.14.

Governmental Consent

40

6.15.

Investment Company Act

40

6.16.

State Utility

40

6.17.

Refunds; Certain Contracts

41

6.18.

No Default

41

6.19.

Anti-Terrorism Laws

41

6.20.

Flood Matters

42

 

 

 

ARTICLE VII COVENANTS

42

 

 

 

7.1.

Use of Proceeds and Letters of Credit

42

7.2.

Financial Statements; Reserve and Other Reports; Certain Required Notices from
Borrower; Additional Information

43

7.3.

Inspection of Properties and Books

45

7.4.

Maintenance of Security; Insurance; Authorization to File Financing Statements;
Operating Accounts; Transfer Orders

45

7.5.

Payment of Taxes and Claims

46

7.6.

Payment of Debt; Additional Debt; Payment of Accounts

47

7.7.

Negative Pledge

48

7.8.

Loans and Advances to Others; Investments; Restricted Payments; Subsidiaries

48

7.9.

Consolidation, Merger, Maintenance, Change of Control; Disposition of Property;
Restrictive Agreements; Hedging Agreements; Modification of Organizational
Documents; Issuance of Equity Interests

49

7.10.

Primary Business; Location of Borrower’s Office; Ownership of Assets

51

7.11.

Operation of Properties and Equipment; Compliance with and Maintenance of
Contracts; Duties as Nonoperator

51

7.12.

Transactions with Affiliates

53

7.13.

Plans

53

7.14.

Compliance with Laws and Documents

53

7.15.

Certain Financial Covenants

53

7.16.

Tax Shelter

54

 

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7.17.

Additional Documents; Quantity of Documents; Title Data; Additional Information

54

7.18.

ENVIRONMENTAL INDEMNIFICATION

55

7.19.

Exceptions to Covenants

55

7.20.

Anti-Terrorism Laws

55

7.21.

Special Title Matters

56

 

 

 

ARTICLE VIII DEFAULTS; REMEDIES

56

 

 

 

8.1.

Events of Default; Acceleration of Maturity

56

8.2.

Suits for Enforcement

59

8.3.

Remedies Cumulative

59

8.4.

Remedies Not Waived

59

 

 

 

ARTICLE IX MISCELLANEOUS

60

 

 

 

9.1.

Amendments and Waivers

60

9.2.

Highest Lawful Interest Rate

60

9.3.

INDEMNITY

60

9.4.

Expenses

61

9.5.

Taxes

62

9.6.

Survival

62

9.7.

Applicable Law; Venue

62

9.8.

WAIVER OF JURY TRIAL AND EXEMPLARY DAMAGES

63

9.9.

Headings

63

9.10.

Counterparts

63

9.11.

Invalid Provisions, Severability

63

9.12.

Communications Via Internet

64

9.13.

USA Patriot Act Notice

64

9.14.

EXCULPATION PROVISIONS

64

9.15.

[Intentionally Omitted.]

64

9.16.

[Intentionally Omitted.]

64

9.17.

Increased Cost and Reduced Return

65

9.18.

Taxes

65

 

 

 

ARTICLE X [INTENTIONALLY OMITTED]

66

 

 

 

ARTICLE XI SETOFF

66

 

 

 

11.1.

Setoff

66

11.2.

Adjustments

66

 

 

 

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

67

 

 

 

12.1.

Successors and Assigns

67

12.2.

Participations; Setoffs by Participants

67

12.3.

Dissemination of Information

67

 

 

 

ARTICLE XIII NOTICES

67

 

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13.1.

Notices

67

13.2.

Change of Address

68

 

 

 

ARTICLE XIV ENTIRE AGREEMENT

1

 

 

 

FORM OF PROMISSORY NOTE

 

FORM OF NOTICE OF BORROWING

 

FORM OF COMPLIANCE CERTIFICATE

 

SCHEDULE 6.4.1 SUBSIDIARIES

 

EXHIBIT 6.7 LITIGATION

 

 

iv

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CREDIT AGREEMENT

 

THIS CREDIT AGREEMENT is entered into as of October 14, 2014, by and between
Reef Oil & Gas Drilling and Income Fund, L.P., a Texas limited partnership; and
Texas Capital Bank, N.A., a national banking association. Certain terms used
herein are defined in Section 1.1.

 

RECITALS:

 

A.                                    The Borrower desires to borrow funds from
the Lender; and

 

B.                                    The Borrower desires to acquire Oil and
Gas Properties and to provide for additional credit facilities;

 

NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

1.1.                            Definitions. The following terms, as used
herein, have the following meanings:

 

“Acceptable Commodity Hedging Transaction” means:

 

(a)                                 a Commodity Hedging Transaction meeting each
of the following criteria unless a variation therefrom is consented to in
writing by the Lender:

 

(i)                                     The quantity of gaseous and liquid
hydrocarbons owned by the Borrower subject to all Commodity Hedging Transactions
(other than floors covered by clause (b) below) at the time of entering into
such Commodity Hedging Transaction, shall not, without the prior written
approval of the Lender, be greater than (x) for gaseous hydrocarbons, 75% of the
monthly Projected Production of gaseous hydrocarbons from the Oil and Gas
Properties of the Borrower used in determining the Borrowing Base and not the
subject of Commodity Hedging Transactions under clause (b) below and (y) for
liquid hydrocarbons, 75% of the monthly Projected Production of liquid
hydrocarbons from the Oil and Gas Properties of the Borrower used in determining
the Borrowing Base and not the subject of Commodity Hedging Transactions under
clause (b) below; in either case, as forecast in the most recent engineering
evaluation delivered to the Borrower by the Lender;

 

(ii)                                  The “strike prices” of any calls or swaps
sold under the Commodity Hedging Transaction, at the time of entering into such
Commodity Hedging Transaction, shall not be less than the lowest prices utilized
in the most recent base case evaluation of the Oil and Gas Properties used by
the Lender in determining the Borrowing Base, as reported to the Borrower,
except that under certain downside conditions such lower strike price as the
Lender may approve in writing following a written request by the Borrower may be
used;

 

(iii)                               The counterparty thereto must be an Approved
Swap Counterparty;

 

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(iv)                              The Lender shall have received first and prior
perfected security interests pursuant to security agreements in form and
substance reasonably satisfactory to the Lender in the Borrower’s right, title
and interest in and to all of its Commodity Hedging Transactions;

 

(v)                                 The Commodity Hedging Transaction is a
standard commodity hedging arrangement entered into in the ordinary course of
business for the principal purpose of protecting against fluctuations in
commodity prices or commodity basis risk and not for purpose of speculation;

 

(vi)                              The Commodity Hedging Transaction does not
involve the sale of any calls other than calls sold in order to complete a
permitted collar being executed; provided that, (A) such call shall cover only
Projected Production reflected at the time such call is sold, (B) both such call
and the corresponding put purchase to complete the collar shall cover the same
period and the same volume of Projected Production, and (C) such call is
otherwise permitted under the terms of this definition;

 

(vii)                           The Commodity Hedging Transaction does not
involve the purchase of any calls except calls purchased at the time a collar is
put in place to serve as a so-called “blowout preventer”, which purchased calls
shall cover the same period and the same volume of Projected Production as
covered by such collar;

 

(viii)                        The Commodity Hedging Transaction is unsecured
except as specifically permitted by the Loan Documents;

 

(ix)                              The Commodity Hedging Transaction does not
involve the sale of any puts;

 

(x)                                 The Commodity Hedging Transaction does not
involve “put spreads” or “call spreads” as such terms are commonly understood by
swap dealers; and

 

(xi)                              The Lender has not notified the Borrower prior
to the Borrower’s entry into the Commodity Hedging Transaction that, in the
opinion of the Lender, the particular type of Commodity Hedging Transaction is
non-standard.

 

As used in this definition, the term “Projected Production” means the projected
production of oil or gas (measured by volume unit or BTU equivalent, not sales
price), as applicable, for the term of the contracts or a particular month, as
applicable, from properties and interests owned by the Borrower which are
Collateral and which have attributable to them oil or gas proven reserves which
are categorized as “proved developed producing” as reflected in the engineering
review prepared by the Lender in connection with the most recent determination
of the Borrowing Base hereunder, after deducting projected production from any
properties or interests sold or under contract for sale that had been included
in such report.

 

(b)                                 a Commodity Hedging Transaction in the form
of a minimum price guarantee or “floor”, when combined with all other Commodity
Hedging Transactions, is limited to 100% of the monthly Projected Production
from the Borrower’s Oil and Gas Properties not subject to Commodity Hedging
Transactions under clause (a) above and otherwise satisfying the requirements of
subclauses (ii) through (xi) of clause (a) of this definition.

 

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“Acceptable Hedging Transactions” means Acceptable Commodity Hedging
Transactions and Acceptable Rate Management Transactions.

 

“Acceptable Rate Management Transaction” means any Rate Management Transaction
meeting all of the following criteria:

 

(i)                                     The terms thereof are reasonably
satisfactory to the Lender; and

 

(ii)                                  The Person with whom such Transaction is
effected is reasonably satisfactory to the Lender.

 

“Adjusted LIBOR Rate” means, with respect to any Eurodollar Advance for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the greater of (a) the sum of (i) the LIBOR Rate
for such Interest Period multiplied by the Statutory Reserve Rate plus
(ii) three percent (3.00%), and (b) five percent (5.00%).

 

“Advance” means a Loan or Loans of the Lender of the same Type, made, converted
or continued on the same date and, in the case of Eurodollar Loans, as to which
a single Interest Period is in effect.

 

“Affected Loans” has the meaning assigned such term in Section 3.6.

 

“Affiliate” means, with respect to a Person, (a) any Person owning, Controlling
or holding with power to vote 10% or more of the outstanding voting interests of
the referenced Person, (b) any Person 10% or more of whose outstanding voting
interests are directly or indirectly owned, Controlled or held with power to
vote by the referenced Person, (c) any Person directly or indirectly
Controlling, Controlled by or under common Control with the referenced Person,
(d) any relative within the third degree of kindred of the referenced Person, or
(e) any officer, director, limited liability company manager, trustee,
beneficiary, employee or general partner of the referenced Person or of any
Person referred to in clauses (a), (b), (c) or (d) of this definition. The term
“Affiliate” shall include Affiliates of Affiliates (and so on).

 

“Agreement” or “Credit Agreement” means this Credit Agreement, as the same may
hereafter be modified or amended from time to time.

 

“Anti-Terrorism Laws” mean any Laws relating to terrorism or money laundering,
including Executive Order No. 13224 and the USA Patriot Act.

 

“Approved Swap Counterparty” means each swap counterparty approved in writing by
the Lender from time to time; provided, however, the Lender may, by giving
written notice to the Borrower, elect to revoke such swap counterparty’s status
as an Approved Swap Counterparty for purposes of any Hedging Transactions
entered into following such notice if the Lender has concerns about such swap
counterparty’s long or short term financial well being or creditworthiness.

 

“Available Commitment” means at any time, an amount equal to the Borrowing Base
as in effect at such time.

 

“Board of Governors” means the Board of Governors of the Federal Reserve System.

 

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“Borrower” means Reef Oil & Gas Drilling and Income Fund, L.P., a Texas limited
partnership.

 

“Borrower Requested Determination” has the meaning given such term in
Section 2.8.1.

 

“Borrowing Base” means the amount most recently determined and designated by the
Lender as the Borrowing Base in accordance with Section 2.8.1, as such Borrowing
Base is reduced in accordance with Section 2.8.2 or other provisions hereof. The
Borrowing Base under Section 2.8.1 is deemed to be $4,000,000 as of the Closing
Date.

 

“Borrowing Base Deficiency” means, as of the date of determination of a new
Borrowing Base under Section 2.8.1, the amount, if any, by which the sum of the
outstanding principal balance of the Note plus the Letter of Credit Exposure
exceeds the Borrowing Base.

 

“Borrowing Date” means a date on which an Advance is made or is to be made to
the Borrower hereunder.

 

“Business Day” means any day that is not a Saturday, Sunday or other day on
which commercial banks in Dallas, Texas, are authorized or required by Law to
remain closed; and if such day relates to an Advance 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 Eurodollar Loan or a notice by the Borrower
with respect to any such Advance 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.

 

“Capitalized Lease” of a Person means any lease of Property by such Person as
lessee which would be capitalized on a balance sheet of such Person prepared in
accordance with generally accepted accounting principles.

 

“Capitalized Lease Obligations” of a Person means the amount of the obligations
of such Person under Capitalized Leases which would be shown as a liability on a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles.

 

“Cash Flow” for any period, means EBITDAX of the Borrower and its consolidated
subsidiaries for such period minus Cash Taxes of the Borrower for such period.

 

“Cash Taxes” for any period, means federal income taxes and state taxes actually
paid by the Borrower during such period.

 

“Change of Control Event” means (a) the failure of Reef Partners to be the sole
general partner of the Borrower or (b) the failure of Reef Partners GP to be the
sole general partner of Reef Partners.

 

“Closing” means the consummation of the transactions contemplated herein.

 

“Closing Date” means the date of this Agreement.

 

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“Collateral” means the Property described in the Security Documents as securing
the Note or other Obligations.

 

“Commitment” means the obligation of the Lender to make Loans to and issue
letters of credit for the account of the Borrower hereunder, subject to the
terms hereof, up to the lesser of the face amount of the Note or the Borrowing
Base as in effect from time to time; provided that, the outstanding principal of
the Note plus the Letter of Credit Exposure shall not exceed at any time the
Borrowing Base as in effect from time to time.

 

“Commodity Hedging Transaction” means any swap transaction, cap, floor, collar,
exchange transaction, forward transaction, or other exchange or protection
transaction relating to hydrocarbons or any option with respect to any such
transaction, including derivative financial instruments.

 

“Compliance Certificate” means a certificate, substantially in the form attached
hereto entitled “Form of Compliance Certificate”, executed by a Responsible
Representative and furnished to the Lender from time to time in accordance with
Section 7.2.1.

 

“Contingent Obligation” shall mean, as to any Person, without duplication, any
obligation of such Person guaranteeing or in effect guaranteeing any Debt,
leases, dividends, or other obligations of any other Person (for purposes of
this definition, a “primary obligation”) in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
regardless of whether such obligation is contingent, (a) to purchase any primary
obligation or any Property constituting direct or indirect security therefor,
(b) to advance or supply funds (i) for the purchase or payment of any primary
obligation, or (ii) to maintain working or equity capital of any other Person in
respect of any primary obligation, or otherwise to maintain the net worth or
solvency of any other Person, (c) to purchase Property, securities or services
primarily for the purpose of assuring the owner of any primary obligation of the
ability of the Person primarily liable for such primary obligation to make
payment thereof, or (d) otherwise to assure or hold harmless the owner of any
such primary obligation against loss in respect thereof, with the amount of any
Contingent Obligation being deemed to be equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith.

 

“Control,” “Controlling” and “Controlled by” mean the ability (directly or
indirectly through one or more intermediaries) to direct or cause the direction
of the management or affairs of a Person, whether through the ownership of
voting interests, by contract or otherwise.

 

“Controlled Group” means all members of a controlled group of corporations and
all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414(b) or (c) of the Internal Revenue Code of
1986, as amended.

 

“CT”, with respect to any stated time of day, means such time of day generally
in effect in the Central Time Zone as in effect in the State of Texas.

 

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“Current Assets” means the current assets of the Borrower plus the Unused
Available Commitment, but excluding inter-company receivables.

 

“Current Liabilities” means the current liabilities of the Borrower, exclusive
of the current portion of the Note.

 

“Debt” of any Person means at any date, without duplication:

 

(i)                                     all obligations of such Person for money
borrowed, including (a) the obligations of such Person for money borrowed by a
partnership of which such Person is a general partner, (b) obligations, whether
or not assumed, which are secured in whole or in part by the Property of such
Person or payable out of the proceeds or production from Property of such
Person, and (c) any obligations of such Person in respect of letters of credit
and repurchase agreements;

 

(ii)                                  all obligations of such Person evidenced
by notes, debentures, bonds or similar instruments;

 

(iii)                               all obligations of such Person to pay the
deferred purchase price of Property or services (except trade accounts arising
in the ordinary course of business if interest is not paid or accrued thereon);

 

(iv)                              all Capitalized Lease Obligations of such
Person;

 

(v)                                 all liabilities which in accordance with
applicable accounting principles would be included in determining total
liabilities as shown on the liability side of a balance sheet;

 

(vi)                              all obligations of such Person under Hedging
Agreements and Hedging Transactions;

 

(vii)                           all reimbursement obligations with respect to
letters of credit;

 

(viii)                        all Guarantees by such Person;

 

(ix)                              all Off-Balance Sheet Debt; and

 

(x)                                 all Disqualified Stock.

 

“Default” means the occurrence of an Event of Default or any event which with
notice, lapse of time or both would, unless cured or waived, become an Event of
Default.

 

“Default Rate” means a per annum interest rate equal to five percent (5.00%)
plus the Floating Rate from time to time in effect, but in no event exceeding
the Highest Lawful Rate.

 

“Discretionary Determination” has the meaning given such term in Section 2.8.1.

 

“Disqualified Stock” means any preferred stock or other Securities issued by the
Borrower or any of its Subsidiaries that, by its terms (or by the terms of any
security into which

 

6

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it is convertible or for which it is exchangeable), or upon the occurrence or
happening of any event or circumstance, (a) matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the Final Maturity Date, or (b) requires the declaration
or payment of any dividend or other distribution on or prior to the date that is
91 days after the Final Maturity Date, in each case unless the consideration
paid and payable upon such maturity or redemption (in the case of clause
(a) preceding) or as a result of such dividend or other distribution (in the
case of clause (b) preceding) is payable and paid solely in Securities of the
issuer which is not Disqualified Stock.

 

“Distributions” means dividends, distributions or other payments to Persons on
account of their being the holders of Equity Interests in the Borrower.

 

“Dollars” and “$” means dollars in lawful currency of the United States of
America.

 

“EBITDAX” means, for any period, the pre-tax net income of the Borrower and its
consolidated subsidiaries for such period plus (without duplication and only to
the extent deducted in determining such net income), interest expense of the
Borrower and its consolidated subsidiaries for such period, all tangible and
intangible expenses directly related to the exploration for oil and gas,
depreciation, non-cash amortization, depletion, write-down of Oil and Gas
Properties and other non-cash expenses of the Borrower and its consolidated
subsidiaries for such period less gains on sales of assets and other non-cash
income for such period included in the determination of net income of the
Borrower and its consolidated subsidiaries.

 

“Environmental Complaint” means any written or oral complaint, order, directive,
claim, citation, notice of environmental report or investigation, or other
notice by any Governmental Authority or any other Person with respect to (a) air
emissions, (b) spills, releases, or discharges to soils, any improvements
located thereon, surface water, groundwater, or the sewer, septic, waste
treatment, storage, or disposal systems servicing any Property of the Borrower
or any Guarantor, (c) solid or liquid waste disposal, (d) the use, generation,
storage, transportation, or disposal of any Hazardous Substance, or (e) other
environmental, health, or safety matters affecting any Property of the Borrower
or any Guarantor or the business conducted thereon.

 

“Environmental Law” means (a) the following federal laws as they may be cited,
referenced, and amended from time to time: the Clean Air Act, the Clean Water
Act, the Safe Drinking Water Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Endangered Species Act, the Resource
Conservation and Recovery Act, the Hazardous Materials Transportation Act, the
Superfund Amendments and Reauthorization Act, and the Toxic Substances Control
Act; (b) any and all equivalent environmental statutes of any state in which
Property of the Borrower or any Guarantor is situated, as they may be cited,
referenced and amended from time to time; (c) any rules or regulations
promulgated under or adopted pursuant to the above federal and state Laws; and
(d) any other equivalent federal, state, or local statute or any requirement,
rule, regulation, code, ordinance, or order adopted pursuant thereto, including
those relating to the generation, transportation, treatment, storage, recycling,
disposal, handling, or Release of Hazardous Substances.

 

7

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“Environmental Liability” means any claim, demand, obligation, cause of action,
accusation, allegation, order, violation, damage, injury, judgment, penalty or
fine, cost of enforcement, cost of remedial action or any other cost or expense
whatsoever, including reasonable attorneys’ fees and disbursements, resulting
from the violation or alleged violation of any Environmental Law or the
imposition of any Environmental Lien.

 

“Environmental Lien” means a Lien in favor of a Tribunal or other Person (i) for
any liability under an Environmental Law or (ii) for damages arising from or
costs incurred by such Tribunal or other Person in response to a release or
threatened release of hazardous or toxic waste, substance or constituent into
the environment.

 

“Equity Interest” means, with respect to any Person, an ownership and other
equity interest, including Securities, in such Person and rights to convert into
an ownership or other equity interest, including Securities, in such Person or
to otherwise acquire an ownership or other equity interest, including
Securities, in such Person.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time, together with all presently effective and future regulations
issued pursuant thereto.

 

“ERISA Affiliate” the Borrower, all of its Subsidiaries and any other member of
the Controlled Group.

 

“Eurodollar”, when used in reference to any Loan or Advance, refers to whether
such Loan, or the Loans comprising such Advance, are bearing interest at a rate
determined by reference to the Adjusted LIBOR Rate.

 

“Event of Default” has the meaning stated in Section 8.1 hereof.

 

“Executive Order No. 13224” shall mean Executive Order No. 13224 on Terrorist
Financing, effective September 24, 2001, as the same has been, or shall
hereafter be, renewed, extended, amended or replaced.

 

“Final Maturity Date” or “Final Maturity” means October 14, 2017, or such
earlier date on which the payment of the Note is accelerated.

 

“Fixed Charges” means with respect to any period, the actual principal and
interest payments on the Funded Debt of the Borrower and its consolidated
subsidiaries during such period other than on Debt owed to the Lender plus
interest payments on Debt owed to the Lender during such period.

 

“Floating Rate” means for any day a per annum interest rate equal to the sum of
two percent (2.00%) plus the WSJ Rate from time to time in effect.

 

“Flood Insurance Regulations” means (a) the National Flood Insurance Act of
1968, (b) the Flood Disaster Protection Act of 1973, (c) the National Flood
Insurance Reform Act of 1994 (amending 42 USC 4001 et seq.), and (d) the Flood
Insurance Reform Act of 2004, in each case as now or hereafter in effect or any
successor statute thereto and including any regulations promulgated thereunder.

 

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“FLR”, when used in reference to any Loan or Advance, refers to whether such
Loan, or the Loans comprising such Advance, are bearing interest at a rate
determined by reference to the Floating Rate.

 

“Free Cash Flow” for any period means (i) Cash Flow for that period minus
(ii) 1.5 multiplied by the Fixed Charges for that period.

 

“Funded Debt” of any Person means at any date, Debt referred to in clauses
(i) through (vii) of the definition of “Debt” and all Guarantees by such Person
of Funded Debt of another Person.

 

“GAAP” means those generally accepted accounting principles and practices which
are recognized as such by the American Institute of Certified Public Accountants
acting through its Accounting Principles Board or by the Financial Accounting
Standards Board or through other appropriate boards or committees thereof. Any
accounting principle or practice required to be changed by the Accounting
Principles Board or Financial Accounting Standards Board (or other appropriate
board or committee of such Boards) in order to continue as a generally accepted
accounting principle or practice may be so changed. In the event of a change in
GAAP, the Loan Documents shall continue to be construed in accordance with GAAP
as in existence on the date hereof.

 

“Governmental Authority” means any nation, country, commonwealth, territory,
government, state, county, parish, municipality, or other political subdivision
and any entity exercising executive, legislative, judicial, regulatory, or
administrative functions of or pertaining to government.

 

“Guarantee” by any Person means any obligation, contingent or otherwise, of such
Person directly or indirectly guaranteeing or in effect guaranteeing any Debt,
leases, dividends or other obligations of any other Person (for purposes of this
definition, a “primary obligation”) and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) any primary obligation or any Property constituting direct or
indirect security therefor (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods, securities
or services, to take-or-pay, to make reimbursement in connection with any letter
of credit or to maintain financial statement conditions, by comfort letter or
other similar undertaking of support or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of any primary obligation of
the payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part) with the amount of any Guarantee being deemed to be equal
to the stated or determinable amount of the primary obligation in respect of
which such Guarantee is made or, if not stated or determinable, the maximum
primary obligation which could reasonably be anticipated to arise in respect
thereof. The term Guarantee includes the pledging or other encumbrance of assets
by a Person to secure the obligations of another Person and restrictions or
limitations on a Person or its assets agreed to in connection with the
obligations of another Person, but does not include endorsements for collection
or deposit in the ordinary course of business; and “Guaranteed” by a Person
shall mean the act or condition of providing a Guarantee by such Person or
permitting a Guarantee of such Person to exist.

 

9

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“Guarantor” means at any time any Person who has executed or does execute a
Guaranty, which is in effect at such time.

 

“Guaranty” means the guaranty of a Person guarantying all or a portion of the
Obligations of the Borrower, in form and substance satisfactory to the Lender
and such Person.

 

“Hazardous Substance” means flammables, explosives, radioactive materials,
hazardous wastes, asbestos, or any material containing asbestos, polychlorinated
biphenyls (PCBs), toxic substances or related materials, petroleum, petroleum
products, associated oil or natural gas exploration, production, and development
wastes, or any substances defined as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” or “toxic substances” under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act, as amended, the Hazardous
Materials Transportation Act, as amended, the Resource Conservation and Recovery
Act, as amended, the Toxic Substances Control Act, as amended, or any other
Environmental Laws.

 

“Hedge Termination Value” means, in respect of any one or more Hedging
Transactions, after taking into account the effect of any legally enforceable
netting agreement relating to such Hedging Transactions, (a) for any date on or
after the date such Hedging Transactions have been closed out and termination
value(s) determined in accordance therewith, such termination value(s) and
(b) for any date prior to the date referenced in clause (a) preceding, the
amount(s) determined as the mark-to-market value(s) for such Hedging
Transactions, as determined by the counterparties to such Hedging Transactions.

 

“Hedging Agreement” means any International Swap Dealers Association, Inc.
Master Agreement or other agreement and all schedules and exhibits attached
thereto and incorporated therein that set forth the general terms upon which a
Person may enter into one or more Hedging Transactions.

 

“Hedging Transaction” means a Commodity Hedging Transaction or a Rate Management
Transaction or any other transaction with respect to any swap, forward, future
or derivative transaction or option or similar transaction, whether exchange
traded, “over-the-counter” or otherwise, involving, or settled by reference to,
one or more rates, currencies, commodities, equity or debt instruments or
securities, or economic, financial or pricing indices or measures of economic,
financial or pricing risk or value or any similar transaction or any combination
of these transactions.

 

“Highest Lawful Rate” means the maximum non-usurious interest rate, if any (or,
if the context so requires, an amount calculated at such rate), that at any time
or from time to time may be contracted for, taken, reserved, charged, or
received by the Lender under applicable Laws of the State of Texas or the United
States of America, whichever authorizes the greater rate, as such Laws are
presently in effect or, to the extent allowed by applicable Law, as such Laws
may hereafter be in effect and which allow a higher maximum non-usurious
interest rate than such Laws now allow. To the extent the Laws of the State of
Texas are applicable for the purpose of determining the “Highest Lawful Rate”,
such term shall mean the “weekly ceiling” from time to time in effect as
referred to and defined in Chapter 303 of the Finance Code of Texas, as amended.
The determination of the Highest Lawful Rate shall, to the extent required by

 

10

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applicable Law, take into account as interest paid, taken, received, charged,
reserved or contracted for any and all relevant payments or charges under the
Loan Documents.

 

“Indemnified Party” means (i) the Lender (and its assigns) and each of its
shareholders, officers, directors, employees, agents, attorneys-in-fact,
attorneys and affiliates and (ii) each trustee for the benefit of the Lender
under any Security Document.

 

“Insolvency Proceeding” of any Person means any application (whether voluntary
or instituted by another Person) for or the consent to the appointment of a
receiver, trustee, conservator, custodian, or liquidator of such Person or of
all or a substantial part of the Property of such Person, or the filing of a
petition (whether voluntary or instituted by another Person) commencing a case
under Title 11 of the United States Code, seeking liquidation, reorganization,
or rearrangement or taking advantage of any bankruptcy, insolvency, debtor’s
relief, or other similar Law of the United States, the State of Texas, or any
other jurisdiction.

 

“Intercreditor Agreement” means each Intercreditor Agreement among the Borrower,
one or more Approved Swap Counterparties, and Texas Capital Bank, N.A., as
contractual collateral representative for itself and such Approved Swap
Counterparties, whether executed contemporaneously with or following the
execution and delivery of this Agreement, as amended and in effect from time to
time.

 

“Interest Election Request” means a request by the Borrower to convert or
continue an Advance in accordance with Section 2.9.

 

“Interest Payment Date” means (a) with respect to any FLR Loan, the first day of
each month commencing with November 1, 2014, and upon maturity of the Note
(whether stated or upon acceleration) and (b) with respect to any Eurodollar
Loan, the last day of the Interest Period applicable to the Advance of which
such Loan is a part; provided that with respect to any Eurodollar Loan having an
Interest Period of more than three months’ duration, “Interest Payment Date”
shall mean (i) each date that occurs at intervals of three months’ duration
after the first day of the Interest Period applicable to the Advance of which
such Loan is a part and (ii) the last day of such Interest Period.

 

“Interest Period” means with respect to any Eurodollar Advance, the period
commencing on the date of such Advance and ending on the numerically
corresponding day in the calendar month that is one, three or six months
thereafter, as the Borrower may elect; provided, that (a) if any Interest Period
would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day and (b) any Interest Period
pertaining to a Eurodollar Advance that commences on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the last calendar month of such Interest Period) shall end on the last
Business Day of the last calendar month of such Interest Period. For purposes
hereof, the date of an Advance initially shall be the date on which such Advance
is made and thereafter shall be the effective date of the most recent conversion
or continuation of such Advance.

 

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“Investment” means, for any Person: (a) the acquisition (whether for cash,
Property, services or securities or otherwise) of Equity Interests of any other
Person, the contribution of capital to any other Person, or any agreement to
make any such acquisition (including, without limitation, any “short sale” or
any sale of any securities at a time when such securities are not owned by the
Person entering into such short sale) or capital contribution; (b) the making of
any deposit with, or advance, loan or capital contribution to, assumption of
Debt of, purchase or other acquisition of any other Debt or equity participation
or interest in, or other extension of credit to, any other Person (including the
purchase of Property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such Property to such Person, but
excluding any such advance, loan or extension of credit having a term not
exceeding ninety (90) days representing the purchase price of inventory, goods
or services sold or provided by such Person in the ordinary course of business);
(c) the purchase or acquisition (in one or a series of transactions) of Property
of another Person that constitutes a business unit or (d) the entering into of
any guarantee of, or other contingent obligation (including the deposit of any
Equity Interests to be sold) with respect to, Debt or other liability of any
other Person and (without duplication) any amount committed to be advanced, lent
or extended to such Person.

 

“Law” mean at any time with respect to any Person or its Property, any statute,
law, executive order, treaty, ordinance, order, writ, injunction, judgment,
ruling, decree, regulation, or determination of an arbitrator, court or other
Governmental Authority, existing at such time which are applicable to or binding
upon such Person or such Property or to which such Person or such Property is
subject.

 

“Lender” means Texas Capital Bank, N.A., a national banking association, and its
successors and assigns.

 

“Letter of Credit” means any letter of credit issued pursuant to this Agreement.

 

“Letter of Credit Application” shall mean the standard letter of credit
application employed by the Lender from time to time in connection with letters
of credit, completed by the Borrower as the “applicant” thereunder.

 

“Letter of Credit Exposure” shall mean, at any time, the aggregate maximum
amount available to be drawn under outstanding Letters of Credit at such time
plus the amount of the Letter of Credit Payments.

 

“Letter of Credit Payment” means the amount advanced by the Lender to the
beneficiary of a Letter of Credit which is not evidenced by the Note and for
which the Lender remains unreimbursed by the Borrower.

 

“Letter of Credit Reimbursement Obligation” means the obligation of the Borrower
to pay to the Lender, or reimburse the Lender for, any amounts payable, paid, or
incurred by the Lender with respect to Letters of Credit.

 

“LIBOR Rate” means:

 

(a)                                 with respect to each Interest Period, the
rate per annum quoted by the Lender two Business Days prior to the commencement
of such Interest Period, as the

 

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Lender’s LIBOR rate for deposits in U.S. Dollars for the same period based upon
quotes from the London Interbank Offered Rate from ICE Benchmark Administration
Interest Settlement Rates, as quoted for U.S. Dollars by Bloomberg, or other
comparable services selected by the Lender; and

 

(b)                                 for any interest calculation with respect to
a Loan that bears interest based on the Floating Rate on any date, the rate per
annum quoted by the Lender on such date as the Lender’s LIBOR rate for deposits
in U.S. Dollars for one (1) month based upon quotes from the London Interbank
Offered Rate from ICE Benchmark Administration Interest Settlement Rates, as
quoted for U.S. Dollars by Bloomberg, or other comparable services selected by
the Lender.

 

“Lien” means, as to any Property of any Person, (a) any mortgage, deed of trust,
lien, pledge, hypothecation, or security interest in, on or of such Property, or
any other charge or encumbrance on any such asset to secure Debt or liabilities,
but excluding any right to netting or setoff, (b) the interest of a vendor under
any conditional sale agreement or title retention agreement (or any financing
lease having substantially the same economic effect as any of the foregoing)
relating to such Property, (c) in the case of Securities, any purchase option,
call or similar right of a third party with respect to such Securities and
(d) the signing or filing of a financing statement which names the Person as
debtor, or the signing of any security agreement authorizing any other Person as
the secured party thereunder to file any financing statement which names such
Person as debtor.

 

“Limitation Period” means any period while any amount remains owing on the Notes
that interest on such amount, calculated at the applicable interest rate (plus
any fees or other sums payable to the Lender under any Loan Document and deemed
to be interest under applicable Law) would exceed the amount of interest which
would accrue at the Highest Lawful Rate.

 

“Loan” means an Advance made by the Lender.

 

“Loan Documents” shall mean this Agreement, the Note, the Letter of Credit
Applications, the Security Documents, and all other documents and instruments
now or hereafter delivered pursuant to the terms of or in connection with this
Agreement, the Note, the Letter of Credit Applications, or the Security
Documents, and all renewals and extensions of, amendments and supplements to,
and restatements of, any or all of the foregoing from time to time in effect
(exclusive of term sheets and commitment letters); provided, however, that the
term shall exclude the Intercreditor Agreement.

 

“Loan Party” means each of the Borrower and the Guarantors.

 

“Margin Regulations” means Regulations T, U and X of the Board of Governors, as
in effect from time to time.

 

“Material Adverse Effect” shall mean (i) for any Loan Party, any adverse effect
on the business, operations, properties, results of operations or condition
(financial or otherwise) of such Loan Party, (ii) for any Loan Party, any
adverse effect upon the business operations, properties, results of operations
or condition (financial or otherwise) of such Loan Party which

 

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increases the risk that any of the Debt of such Loan Party will not be repaid as
and when due, (iii) any adverse effect upon the Collateral or (iv) any adverse
effect on the priority or enforceability of the Liens securing the Note; if,
with respect to any of the circumstances described in clauses (i), (ii) and
(iii) preceding, the adverse effect could reasonably be anticipated to involve
damage, loss or Debt of $25,000 or more.

 

“Material Agreement” means, with respect to any Person, any written or oral
agreement, contract, commitment, or understanding to which such Person is a
party, by which such Person is directly or indirectly bound, or to which any
Property of such Person may be subject, which is not cancelable by such Person
upon notice of 90 days or less without (i) liability for further payment in
excess of $25,000 or (ii) forfeiture of Property having an aggregate value in
excess of $25,000.

 

“Material Debt” means, as to any Person, Debt (other than, with respect to the
Borrower, Debt arising hereunder) of such Person in the principal amount
aggregating in excess of $25,000. For purposes of determining Material Debt, the
“principal amount” of the obligations of such Person in respect of any Hedging
Transaction at any time shall be the Hedge Termination Value.

 

“Mortgages” mean deeds of trust, mortgages, assignments of production, security
agreements, collateral mortgages, and acts of pledge in form and substance
reasonably acceptable to the Lender, executed or to be executed by the
appropriate Person as security for the Obligations and other indebtedness
described therein.

 

“Note” means a promissory note issued pursuant hereto, in substantially the form
attached hereto entitled “Form of Promissory Note”, duly executed by the
Borrower and payable to the order of a Lender, including any amendment,
modification, renewal or replacement of such promissory note, which Note shall
be in the amount of up to $100,000,000.

 

“Notice of Borrowing” means the notice referred to in Section 2.2, which shall
be substantially in the form of the attachment hereto entitled “Form of Notice
of Borrowing,” plus any applicable attachments.

 

“Obligated Parties” mean the Borrower and any other Persons, including the
Guarantors, from time obligated by Guaranty or otherwise to pay all or any
portion of the Obligations.

 

“Obligations” shall mean, without duplication, (i) all Debt evidenced by the
Note, (ii) the Letter of Credit Reimbursement Obligations, (iii) the Letter of
Credit Exposure, (iv) the obligation of the Borrower for the payment of the fees
payable hereunder or under the other Loan Documents, (v) all other obligations
and liabilities of the Borrower to the Lender, now existing or hereafter
incurred, under, arising out of or in connection with any Loan Document or the
Intercreditor Agreement and (vi) all other obligations and liabilities of the
Borrower to the Lender, now existing or hereafter incurred; and to the extent
that any of the foregoing includes or refers to the payment of amounts deemed or
constituting interest, only so much thereof as shall have accrued, been earned
and which remains unpaid at each relevant time of determination.

 

“OFAC” means the Office of Foreign Assets Control of the United States
Department of the Treasury, or any successor Governmental Authority.

 

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“Off-Balance Sheet Debt” means, with respect to a Person, (a) any repurchase
indebtedness, liability or obligation of such Person with respect to accounts or
notes receivable sold by such Person, (b) any indebtedness, liability or
obligation of such Person under any sale and leaseback transaction which is not
a Capitalized Lease Obligation, (c) any indebtedness, liability or obligation of
such Person under any synthetic, off-balance sheet or tax retention lease, or
(d) any indebtedness, liability or obligation of such Person arising with
respect to any other transaction, or agreement for the use or possession of any
Property, which is the functional equivalent, or takes the place, of borrowing
but which does not constitute a liability on the balance sheet of such Person.

 

“Oil and Gas Properties” means fee, leasehold, or other interests in or under
mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with
respect to Properties situated in the United States or offshore from any State
of the United States, including, without limitation, overriding royalty and
royalty interests, leasehold estate interests, net profits interests, production
payment interests, and mineral fee interests, together with contracts executed
in connection therewith and all tenements, hereditaments, appurtenances and
Properties appertaining, belonging, affixed, or incidental thereto.

 

“Organizational Documents” means, as to any Person, the articles of
incorporation, certificate of limited partnership, articles of formation or
similar organizational documents, as applicable, of such Person.

 

“Participant” has the meaning given such term in Section 12.2.

 

“Permitted Indebtedness” means (i) the Obligations, (ii) unsecured accounts
payable incurred in the ordinary course of business, which are not unpaid in
excess of 90 days beyond the invoice date therefor or are being contested in
good faith and as to which such reserve as is required by GAAP has been made and
on which interest charges are not paid or accrued, and (iii) if the Lender has
given its prior written consent thereto, Subordinated Debt and (iv) Debt arising
under Acceptable Hedging Transactions and under the Hedging Agreement governing
such Acceptable Hedging Transactions (but only to the extent such Debt arises in
connection with Acceptable Hedging Transactions).

 

“Permitted Investments” means Investments in (i) indebtedness, evidenced by
notes maturing not more than 12 months after the date of issue, issued or
Guaranteed by the government of the United States of America, (ii) certificates
of deposit maturing not more than 12 months after the date of issue, issued by
the Lender or by commercial banking institutions each of which is a member of
the Federal Reserve System and which has combined capital and surplus and
undivided profits of not less than $100,000,000, (iii) commercial paper,
maturing not more than 270 days after the date of issue, issued by (a) the
Lender (or any parent corporation of the Lender) or (b) a corporation (other
than an Affiliate of the Borrower) with a rating of “P1” (or its then
equivalent) according to Moody’s Investors Service, Inc., “A-1” (or its then
equivalent) according to Standard & Poor’s Corporation or “F-1” (or its then
equivalent) according to Fitch’s Investors Services, Inc., (iv) money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (iii) above, (v) Investments by the
Borrower or any Guarantor that is not a natural person in, any Person not
exceeding in the aggregate outstanding at any time for all such Persons the
amount of

 

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$25,000 and not otherwise permitted under this Agreement, or (vi) such other
instruments, evidences of indebtedness or investment securities as the Lender
may approve in writing.

 

“Permitted Liens” means, with respect to any Property, each of the following:

 

(i)                                     Liens securing the Obligations;

 

(ii)                                  the following, if the validity and amount
thereof are being contested in good faith and by appropriate legal proceedings
and so long as (a) levy and execution thereon have been stayed and continue to
be stayed, (b) they do not in the aggregate materially detract from or threaten
the value of such Property, or materially impair the use thereof in the
operation of the business of the owner of such Property, and (c) a reserve
therefor, if appropriate, has been established: claims and Liens for Taxes due
and payable; claims and Liens upon and defects of title to real and personal
property; claims and Liens of landlords, repairmen, mechanics, materialmen,
warehousemen, or carriers, or similar Liens; and adverse judgments on appeal;

 

(iii)                               Liens for Taxes not past due;

 

(iv)                              landlords’, carriers’, warehousemen’s,
repairmen’s, mechanics’ and materialmen’s Liens for services or materials (or
other like Liens that do not secure Funded Debt) for which payment is not past
due;

 

(v)                                 operators’ Liens incurred pursuant to oil
and gas joint operating agreements entered into by the owner of such Property in
the ordinary course of business which secure obligations not past due;

 

(vi)                              Liens in favor of the lessor on the Property
being leased under any Capitalized Lease permitted hereunder;

 

(vii)                           minor defects in title to an Oil and Gas
Property not in any case materially detracting from the value of such Property;
and

 

(viii)                        Liens that are permitted by an Intercreditor
Agreement that secure the payment of obligations relating to Acceptable
Commodity Hedging Transactions;

 

provided, that Liens described in clauses (ii) through (vi) shall remain
Permitted Liens only for so long as no action to enforce any of such Liens has
been commenced and; provided, further, no intention to subordinate the first
priority Liens granted to secure the Obligations is hereby implied or expressed
or is to be inferred by the permitted existence of such Permitted Liens.

 

“Person” means a natural person, a corporation, a partnership, a limited
partnership, a limited liability company, an association, a joint venture, a
trust or any other entity or organization including a government or political
subdivision or any governmental agency or instrumentality thereof.

 

“Plan” means any employee benefit plan which is covered by Title IV of ERISA.

 

“Property” means any interest in any kind of property or asset, whether real,
personal or mixed, tangible or intangible.

 

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“PW9 Value” means with respect to any Oil and Gas Property, the net present
value of the oil and gas to be produced from such Oil and Gas Property,
calculated using a discount rate of nine percent (9.00%) per annum and estimates
of reserves, prices, production rates and costs acceptable to the Lender.

 

“Rate Management Transaction” shall mean any transaction (including an agreement
with respect thereto) now existing or hereafter entered into by the Borrower
which is a rate swap, basis swap, forward rate transaction, commodity swap,
commodity option, equity or equity index swap, equity or equity index option,
bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, forward transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
these transactions) or any combination thereof, whether linked to one or more
interest rates, foreign currencies, commodity prices, equity prices or other
financial measures.

 

“Reef Partners” means Reef Oil & Gas Partners, LP, a Nevada limited partnership.

 

“Reef Partners GP” means Reef Oil & Gas Partners, GP, LLC, a Texas limited
liability company.

 

“Regulation U” means Regulation U of the Board of Governors, as in effect from
time to time.

 

“Regulatory Documents” means, as to any Person, the bylaws, limited partnership
agreement, regulations, operating agreement or similar regulatory documents, as
applicable, governing the internal affairs of such Person.

 

“Release of Hazardous Substances” means any emission, spill, release, disposal,
or discharge, except in accordance with a valid permit, license, certificate, or
approval of the relevant Governmental Authority, of any Hazardous Substance into
or upon (a) the air, (b) soils or any improvements located thereon, (c) surface
water or groundwater, or (d) the sewer or septic system, or the waste treatment,
storage, or disposal system servicing any Property of the Borrower or any
Guarantor, with respect to which the Borrower or such Guarantor is legally
obligated to respond under applicable Environmental Laws, by notifying the
relevant Governmental Authority, investigating or undertaking corrective action.

 

“Representative’s Certificate” means a certificate signed by a Responsible
Representative.

 

“Requirement of Law” means, as to any Person, its Organizational Documents, its
Regulatory Documents, and all applicable Laws.

 

“Responsible Representative” means Michael J. Mauceli, Manager of Reef Partners
GP, as general partner of Reef Partners, as general partner of the Borrower.

 

“Restricted Payment” means any of the following:

 

(i)                                     any withdrawal from the Borrower or any
Guarantor of cash or other Property by an owner of an Equity Interest in the
Borrower or such Guarantor, as applicable, or

 

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the declaration or payment of any dividend on, or the incurrence of any
liability to make, or the making of, any other payment or distribution in
respect of, any Securities of or other Equity Interests in the Borrower or such
Guarantor, as applicable, without the prior written consent of the Lender except
that, if no Default exists and the declaration and payment of cash dividends or
cash distributions will not cause a Default to exist, including a violation of
Section 7.15.3, the term Restricted Payment shall not include the declaration
and the payment of cash dividends or cash distributions by the Borrower;

 

(ii)                                  any payment or distribution on account of
the purchase, redemption or other retirement of any Securities of or other
Equity Interests in the Borrower or any Guarantor, or of any warrant, option or
other right to acquire such Securities or such other Equity Interests, or any
other payment or distribution made in respect thereof, either directly or
indirectly;

 

(iii)                               the repayment by the Borrower or any
Guarantor of any Debt owed to an Affiliate (other than repayments to the
Borrower), except as specifically permitted by the Loan Documents.

 

“Revolving Credit Period” means the period commencing on the Closing Date and
ending on the Final Maturity Date.

 

“Scheduled Determinations” has the meaning given such term in Section 2.8.1.

 

“Security” means any stock, share, voting trust certificate, limited or general
partnership interest, member interest, bond debenture, note, or other evidence
of indebtedness, secured or unsecured, convertible, subordinated or otherwise,
or in general any instrument commonly known as a “security” or any certificate
of interest, share or participation in temporary or interim certificates for the
purchase or acquisition of, or any right to subscribe to, purchase or acquire
any of the foregoing.

 

“Security Documents” means the security instruments executed and delivered in
satisfaction of the condition set forth in Section 5.2.3, and all other
documents and instruments at any time executed as security for all or any
portion of the Obligations, as such instruments may be amended, restated, or
supplemented from time to time.

 

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board of Governors to which the Lender is subject with
respect to the Adjusted LIBOR Rate, for eurocurrency funding (currently referred
to as “Eurocurrency liabilities” in Regulation D of the Board of Governors).
Such reserve percentages shall include those imposed pursuant to such Regulation
D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to the Lender
under such Regulation D or any comparable regulation. The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change in
any reserve percentage.

 

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“Subordinated Debt” means Debt of the Borrower evidenced by promissory notes
which by their terms, and by separate written subordination agreements among the
payee thereof, the Borrower and the Lender, have been subordinated to the Note
and other Obligations on terms satisfactory to the Lender in its sole
discretion.

 

“Subsidiary” means for any Person, any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned, collectively, by such Person and
any Subsidiaries of such Person. The term Subsidiary shall include Subsidiaries
of Subsidiaries (and so on).

 

“Taxes” means all taxes, assessments, filing or other fees, levies, imposts,
duties, deductions, withholdings, stamp taxes, interest equalization taxes,
capital transaction taxes, foreign exchange taxes or charges, or other charges
of any nature whatsoever from time to time or at any time imposed by any Law or
Tribunal.

 

“Transferee” means any Person to which the Lender has sold, assigned or
transferred an interest in, or granted a participation in, any of the
Obligations, as authorized hereunder, and including Participants and potential
purchasers, and any Person acquiring, by purchase, assignment, transfer
(including transfers by operation of law), or participation, from any such
purchaser, assignee, transferee, or participant, any part of such Obligations.

 

“Tribunal” means any court, tribunal, governmental body, agency, arbitration
panel, or instrumentality.

 

“Type” when used in reference to any Loan or Advance, refers to whether the rate
of interest on such Loan, or on the Loans comprising such Advance, is determined
by reference to the Floating Rate or the Adjusted LIBOR Rate.

 

“UCC” shall mean the Uniform Commercial Code as from time to time in effect in
the State of Texas.

 

“Unused Available Commitment” means, at any time, an amount (not less than zero)
equal to the remainder, if any, of the (a) Available Commitment for the Lender
in effect at such time minus (b) the outstanding principal amount owed to the
Lender under the Note at such time minus (c) the Letter of Credit Exposure at
such time.

 

“USA Patriot Act” means the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub.
L. No. 107-56, 115 Stat. 272 (2001), as the same has been, or shall hereafter
be, renewed, extended, amended or replaced.

 

“WSJ Rate” means, on any day, the greater of (i) the U.S. prime rate as
published in The Wall Street Journal’s “Money Rates” table for such day or
(ii) three percent (3.00%). If multiple prime rates are quoted in such table,
then the highest U.S. prime rate quoted therein shall be the prime rate under
clause (i) above. In the event that a U.S. prime rate is not published in The
Wall Street Journal’s “Money Rates” table for any reason or The Wall Street
Journal is not published that day in the United States of America for general
distribution, the Lender will

 

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choose a substitute U.S. prime rate, for purposes of calculating the interest
rate applicable hereunder, which is based on comparable information, until such
time as a prime rate is published in The Wall Street Journal’s “Money Rates”
table. Each change in the WSJ Rate shall become effective without notice to the
Borrower on the effective date of each such change.

 

1.2.                            Accounting Terms and Determinations; Changes in
Accounting.

 

1.2.1.                          Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with GAAP, applied on a basis
consistent (except for changes concurred in by the independent public
accountants and with respect to which the Borrower shall have promptly notified
the Lender on becoming aware thereof) with the most recent financial statements
of the Borrower delivered to the Lender. Accounting principles are applied on a
“consistent basis” when the accounting principles applied in a current period
are comparable in all material respects to those accounting principles applied
in a preceding period. Changes in the application of accounting principles which
do not have a material impact on calculating the financial covenants herein
shall be deemed comparable in all material respects to accounting principles
applied in a preceding period.

 

1.2.2.                          The Borrower will not change its method of
accounting, other than immaterial changes in methods, changes permitted by GAAP
in which the Borrower’s independent public accountants concur and changes
required by a change in GAAP, without the prior written consent of the Lender.
To enable the ready and consistent determination of compliance by the Borrower
with its obligations under this Agreement, neither the Borrower nor any of its
Subsidiaries will change the manner in which either the last day of its fiscal
year or the last day of the first three fiscal quarters of its fiscal years is
calculated without the prior written consent of the Lender.

 

1.2.3.                          The Borrower’s fiscal year shall end on
December 31.

 

1.3.                            References. References in this Agreement to
Exhibits, Schedules, Annexes, Appendixes, Attachments, Articles, Sections or
clauses shall be to exhibits, schedules, annexes, appendixes, attachments,
articles, sections or clauses of this Agreement, unless expressly stated to the
contrary. References in this Agreement to “hereby,” “herein,” “hereinafter,”
“hereinabove,” “hereinbelow,” “hereof,” “hereunder” and words of similar import
shall be to this Agreement in its entirety and not only to the particular
Exhibit, Schedule, Annex, Appendix, Attachment, Article, or Section in which
such reference appears. Exhibits and Schedules to any Loan Document shall be
deemed incorporated by reference in such Loan Document. References to any
document, instrument, or agreement (a) shall include all exhibits, schedules,
and other attachments thereto, and (b) shall include all documents, instruments,
or agreements issued or executed in replacement thereof. This Agreement, for
convenience only, has been divided into Articles and Sections; and it is
understood that the rights and other legal relations of the parties hereto shall
be determined from this instrument as an entirety and without regard to the
aforesaid division into Articles and Sections and without regard to headings
prefixed to such Articles or Sections. The phrases “this Section” and “this
clause” and similar phrases refer only to the sections or clauses hereof in
which such phrases occur. Whenever the context requires, reference herein made
to the single number shall be understood to include the plural; and likewise,
the

 

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plural shall be understood to include the singular. Definitions of terms defined
in the singular or plural shall be equally applicable to the plural or singular,
as the case may be, unless otherwise indicated. Words denoting sex shall be
construed to include the masculine, feminine and neuter, when such construction
is appropriate; and specific enumeration shall not exclude the general but shall
be construed as cumulative; the word “or” is not exclusive; the word “including”
(in its various forms) shall mean “including, without limitation”; in the
computation of periods of time, the word “from” means “from and including” and
the words “to” and “until” mean “to but excluding”; and all references to money
refer to the legal currency of the United States of America. The Exhibits,
Schedules, Annexes, Appendixes and Attachments attached to this Agreement and
items referenced as being attached to this Agreement are incorporated herein and
shall be considered a part of this Agreement for all purposes. Except as
otherwise indicated, references in this Agreement to statutes, sections, or
regulations are to be construed as including all statutory or regulatory
provisions consolidating, amending, replacing, succeeding, or supplementing the
statute, section, or regulation referred to. References in this Agreement to
“writing” include printing, typing, lithography, facsimile reproduction, and
other means of reproducing words in a tangible visible form. References in this
Agreement to agreements and other contractual instruments shall be deemed to
include all exhibits and appendices attached thereto and all subsequent
amendments and other modifications to such instruments, but only to the extent
such amendments and other modifications are not prohibited by the terms of this
Agreement. References in this Agreement to Persons include their respective
successors and permitted assigns. References in this Agreement and the other
Loan Documents to “reasonable”, “reasonably” and words of similar import when
applied to any request or demand which the Lender is permitted to make hereunder
or under any other Loan Document or as applied to a determination of the
reasonableness of the amount or the incurrence of any expense shall be
interpreted and construed from the perspective of an administrative agent, a
collateral agent or a lender, as applicable, in a senior credit facility where
such administrative agent, collateral agent or lender is regulated by various
governmental agencies, seeks a high level of assurance regarding the operations,
collateral position, condition (financial or otherwise) and Properties of the
Borrower and other Persons Guaranteeing or otherwise connected to such facility
and seeks a high level of assurance and advice regarding its rights and duties
under the Loan Documents, and the Borrower and any other Person Guaranteeing or
otherwise connected to such facility shall comply with such request or demand or
accept such determination unless the Borrower or such other Person proves that
such request, demand or determination is or was unreasonable.

 

1.4.                            Amendment of Defined Instruments. Unless the
context otherwise requires or unless otherwise provided herein, the terms
defined in this Agreement which refer to a particular agreement, instrument or
document also refer to and include all renewals, extensions, modifications,
amendments and restatements of such agreement, instrument or document, provided
that nothing contained in this Section shall be construed to authorize any such
renewal, extension, modification, amendment or restatement.

 

1.5.                            Joint Preparation; Construction of Indemnities
and Releases. This Agreement and the other Loan Documents have been reviewed and
negotiated by sophisticated parties with access to legal counsel, and no rule of
construction shall apply hereto or thereto which would require or allow any Loan
Document to be construed against any party because of its role in drafting such
Loan Document. All indemnification and release of liability provisions of this
Agreement shall be construed broadly (and not narrowly) in favor of the Persons
receiving indemnification or releases of liability.

 

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1.6.                            Time References. Unless otherwise indicated, all
references to a time of day refer to the time of day in the Central Time Zone
for such day, as generally in effect in the state of Texas.

 

1.7.                            Types of Loans and Advances. For purposes of
this Agreement, Loans and Advances, respectively, may be classified and referred
to by Type (e.g., a “Eurodollar Loan” or a “Eurodollar Advance”).

 

ARTICLE II

 

TERMS OF FACILITIES

 

2.1.                            Reducing Revolving Line of Credit and Letter of
Credit Facilities.

 

2.1.1.                  (i)              During the Revolving Credit Period, and
if no Default exists, the Lender agrees, subject to the other terms and
conditions of this Agreement, to make Loans to the Borrower from time to time in
amounts not to exceed, in the aggregate at any one time outstanding, its
Available Commitment.

 

(ii)                  Subject to the terms hereof, each Advance shall be
comprised entirely of FLR Loans or Eurodollar Loans as the Borrower may request
in accordance herewith. The Lender at its option may make any Eurodollar Loan by
causing any domestic or foreign branch or Affiliate of the Lender to make such
Loan; provided that any exercise of such option shall not affect the obligation
of the Borrower to repay such Loan in accordance with the terms of this
Agreement.

 

(iii)               At the commencement of each Interest Period for any
Eurodollar Advance, such Advance shall be in an aggregate amount that is an
integral multiple of $100,000 and not less than $1,000,000. At the time that
each FLR Advance is made, such Advance shall be in an aggregate amount that is
an integral multiple of $100,000 and not less than $500,000; provided that an
FLR Advance may be in an aggregate amount that is equal to the Unused Available
Commitment. Advances of more than one Type may be outstanding at the same time;
provided that there shall not at any time be more than a total of five
(5) Eurodollar Advances outstanding. Notwithstanding any other provision of this
Agreement, the Borrower shall not be entitled to request, or to elect to convert
or continue, any Advances if the Interest Period requested with respect thereto
would end after the Final Maturity Date.

 

2.1.2.                  The Lender shall not be obligated to lend to the
Borrower, and the Borrower shall not be entitled to borrow hereunder, any amount
which would cause the sum of the outstanding principal amount of the Note plus
the Letter of Credit Exposure, to exceed the Available Commitment.

 

2.1.3.                  Upon the terms and conditions and relying on the
representations and warranties contained in this Agreement,

 

(i)                      the Lender agrees, from the date of this Agreement
until the date which is 30 days prior to the Final Maturity Date, to issue
standby letters of credit hereunder for the account of the Borrower, and to
renew and extend standby Letters of Credit.

 

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(ii)                   letters of credit shall be issued hereunder and Letters
of Credit shall be renewed or extended from time to time on any Business Day
designated by the Borrower following the receipt by the Lender of the written
(or oral, confirmed promptly in writing) request by a Responsible Representative
of the Borrower therefor and, if for the issuance of a new letter of credit
hereunder, a Letter of Credit Application; provided, however, that

 

(a)                         the expiry date of such requested letter of credit
cannot be later than the earlier of (1) 365 days from the date of issuance,
unless automatically renewable by its terms, or, if issued in favor of the Texas
Railroad Commission, 15 months following the date of issuance, (2) the last date
before which the Borrowing Base is scheduled to reduce to an amount less than
the sum of the maximum drawable amount of the requested letter of credit plus
the undrawn amount of all outstanding Letters of Credit which, by their terms,
might be outstanding on such reduction date or (3) 30 days prior to the Final
Maturity Date;

 

(b)                         the aggregate outstanding principal balance of the
Note plus the Letter of Credit Exposure shall not exceed at any time the
Borrowing Base;

 

(c)                          the Letter of Credit Exposure shall not exceed at
any time $500,000;

 

(d)                         with the exception of standby letters of credit to
support plugging bond obligations of the Borrower (for which there shall be no
minimum dollar amount or maximum number of such letters of credit), no letter of
credit shall be issued hereunder in an amount less than $25,000; and

 

(e)                          the Lender shall not be obligated to issue a letter
of credit pursuant hereto or to renew or extend a Letter of Credit, and the
Borrower shall not be entitled to have a letter of credit issued pursuant hereto
or to have a Letter of Credit renewed or extended, if the issuance of the
requested letter of credit or the renewal or extension of an existing Letter of
Credit would cause, after taking into account the mandatory reductions in the
Borrowing Base required during the proposed term of such requested letter of
credit or existing Letters of Credit, the sum of the undrawn amount of all
Letters of Credit plus the aggregate outstanding principal amount of the Note,
to exceed the Available Commitment.

 

(iii)                except as otherwise permitted by clause (ii)(d) above, the
Lender shall have no obligation to issue a letter of credit hereunder if as a
result thereof, there would be outstanding more than five (5) standby Letters of
Credit under clause (i) above.

 

2.2.                            Method of Borrowing and Obtaining Letters of
Credit.

 

2.2.1.                  The Borrower shall give the Lender an irrevocable notice
(a “Notice of Borrowing”) not later than (a) in the case of a Eurodollar
Advance, not later than 11:00 a.m. CT, three (3) Business Days before the date
of such proposed Advance or (b) in the case of an FLR Advance, not later than
12:00 p.m. CT on the date of such proposed Advance. Each Notice of Borrowing
shall specify each of the following:

 

(i)                      the Borrowing Date, which shall be a Business Day, of
such requested Advance.

 

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(ii)                   the aggregate amount of such requested Advance.

 

(iii)                whether such Advance is to be an FLR Advance or a
Eurodollar Advance.

 

(iv)               in the case of a Eurodollar Advance, the initial Interest
Period to be applicable thereto, which shall be a period contemplated by the
definition of the term “Interest Period.”

 

If no election as to the Type of Advance is specified, then the requested
Advance shall be an FLR Advance. If no Interest Period is specified with respect
to any requested Eurodollar Advance, then the Borrower shall be deemed to have
selected an Interest Period of one (1) month’s duration. Each Notice of
Borrowing shall constitute a representation by the Borrower that (a) the amount
of the requested Advance shall not cause the total principal of the Note plus
the Letter of Credit Exposure to exceed the Commitment and (b) no Default is in
existence at the time of delivery to the Lender of such Notice of Borrowing.

 

2.2.2.                  A Notice of Borrowing shall not be revocable by the
Borrower without the consent of the Lender.

 

2.2.3.                  The Lender shall make each Loan to be made by it
hereunder on the proposed Borrowing Date thereof. The Lender will make such
Loans available to the Borrower by promptly crediting the amount of the Loan, to
an account of the Borrower maintained at the Lender. Nothing herein shall be
deemed to obligate the Lender to obtain the funds for such Loan in any
particular place or manner or to constitute a representation by the Lender that
it has obtained or will obtain the funds for the Loan in any particular place or
manner.

 

2.2.4.                  The Borrower shall give the Lender an irrevocable
request for a letter of credit prior to 12:00 p.m. CT at least three
(3) Business Days before each such requested letter of credit under Section 2.1,
by completing and delivering an irrevocable Notice of Borrowing together with a
completed and executed Letter of Credit Application. The Letter of Credit
Application must be completed in a manner and shall use such wording as is
acceptable to the Lender.

 

2.2.5.                  Upon receipt of the Letter of Credit Application, the
Lender shall issue such letter of credit if the conditions of Section 2.1.3,
Article V or elsewhere herein have been satisfied.

 

2.2.6.                  Subject to the terms hereof, in the event that any
beneficiary of a Letter of Credit shall have taken the steps necessary in the
sole judgment of the Lender to obligate or permit the Lender to make a payment
under such Letter of Credit, the Borrower shall be deemed to have delivered to
the Lender a Notice of Borrowing under Section 2.2 for an Advance in the amount
of such payment amount, regardless of any limitations or unsatisfied conditions
set forth herein or if a Default exists. The Lender shall pay over the proceeds
of such Advance to itself as reimbursement for amounts paid by the Lender to the
beneficiary under such Letter of Credit.

 

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2.3.                            Note.

 

2.3.1.                  The Loans shall be evidenced by a Note issued by the
Borrower, payable to the order of the Lender.

 

2.3.2.                  The outstanding principal of the Note reflected by the
notations (whether handwritten, electronic or otherwise) by the Lender on its
records shall be deemed rebuttably presumptive evidence of the principal amount
owing on the Note.

 

2.3.3.                  The Lender will record on its books each Loan and the
particulars thereof (e.g., date and amount) and each payment of principal or
interest made by the Borrower with respect thereto, and may, if the Lender so
elects in connection with any transfer or enforcement of the Note, endorse on
the schedule (modified as the Lender shall deem advisable) forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of the Lender to
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Note. The Lender is hereby irrevocably
authorized by the Borrower so to endorse the Note and to attach to and make a
part of the Note a continuation of any such schedule (modified as the Lender
shall deem advisable) as and when required.

 

2.4.                            Certain Payments and Prepayments of Principal.

 

2.4.1.                  If at any time the aggregate principal of the Note
outstanding plus the Letter of Credit Exposure exceeds the Borrowing Base then
in effect, the Borrower shall on the day of such occurrence, repay the principal
of the Note in an amount equal to such excess, except that if the circumstances
described in this Section are the direct result of a decrease of the Borrowing
Base under Section 2.8.1, then the provisions of Section 2.8.3 shall apply.

 

2.4.2.                  In the event that a prepayment of the Note is required
under the terms hereof, and the aggregate outstanding principal of the Note is
less than the amount required to be prepaid, the Borrower shall repay the entire
balance of the Note and, in accordance with the provisions of the relevant
Letter of Credit Application executed by the Borrower or otherwise to the
satisfaction of the Lender, deposit with the Lender as additional collateral
securing the Obligations, an amount of immediately available funds equal to the
difference of the Letter of Credit Exposure less the Borrowing Base.

 

2.5.                            Interest Rates; Payment of Interest.

 

2.5.1.                  The unpaid principal of the Note shall bear interest
from the date hereof, at a rate per annum equal to the lesser of the (i) the
Floating Rate or such higher rate as is specified in Section 3.3 or (ii) the
Highest Lawful Rate. Each Loan comprising an FLR Advance shall bear interest on
the outstanding principal amount thereof, for each day from and including the
date such FLR Advance is made or is automatically converted from a Eurodollar
Advance into an FLR Advance pursuant to Section 2.5.5, to but excluding the date
it is paid or is converted into a Eurodollar Advance pursuant to Section 2.5.5,
at a rate per annum equal to the lesser of (a) the Floating Rate or, if
applicable, such higher rate as is specified in Section 3.3 or (b) the Highest
Lawful Rate.

 

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2.5.2.                  Each Loan comprising a Eurodollar Advance shall bear
interest on the outstanding principal amount thereof from and including the
first day of the Interest Period applicable thereto to (but not including) the
last day of such Interest Period equal to the lesser of (a) the Adjusted LIBOR
Rate for the Interest Period in effect for such Advance or, if applicable, such
higher rate as is specified in Section 3.3 or (b) the Highest Lawful Rate.

 

2.5.3.                  Accrued interest on each Loan shall be payable in
arrears on each Interest Payment Date for such Loan and on the Final Maturity
Date; provided that interest accrued pursuant to Section 3.3 shall be payable on
demand.

 

2.5.4.                  Each determination hereunder of interest on the Note and
fees hereunder based on per annum calculations shall be computed on the basis of
a year of 360 days and paid for the actual number of days elapsed (including the
first day but excluding the last day), subject to the limitations of the Highest
Lawful Rate. All interest rates applicable hereunder shall be determined by the
Lender, and such determinations shall be conclusive absent manifest error, and
be binding upon the parties hereto.

 

2.5.5.                  If prior to the commencement of any Interest Period for
a Eurodollar Advance:

 

(a)                         the Lender determines (which determination shall be
conclusive absent manifest error) that adequate and reasonable means do not
exist for ascertaining the Adjusted LIBOR Rate or the LIBOR Rate for such
Interest Period; or

 

(b)                         the Lender determines that the Adjusted LIBOR Rate
or LIBOR Rate, as applicable, for such Interest Period will not adequately and
fairly reflect the cost to the Lender of making or maintaining its Loans
included in such Advance for such Interest Period;

 

then the Lender shall give notice thereof to the Borrower by telephone or
electronic means as promptly as practicable thereafter and, until the Lender
notifies the Borrower that the circumstances giving rise to such notice no
longer exist, (i) any Interest Election Request that requests the conversion of
any Advance to, or continuation of any Advance as, a Eurodollar Advance shall be
ineffective, and (ii) if any Notice of Borrowing requests a Eurodollar Advance,
such Advance shall be made as an FLR Advance.

 

2.5.6.                                                  Each change in the rate
of interest charged hereunder shall become effective automatically and without
notice to the Borrower upon the effective date of each change in the Floating
Rate or the Highest Lawful Rate, as the case may be.

 

2.5.7.                                                  In the event of (a) the
payment of any principal of any Eurodollar Loan other than on the last day of an
Interest Period applicable thereto (including as a result of an Event of
Default), (b) the conversion of any Eurodollar Loan into an FLR Loan other than
on the last day of the Interest Period applicable thereto, or (c) the failure to
borrow, convert, continue or prepay any Eurodollar Loan on the date specified in
any notice delivered pursuant hereto, then, in any such event, the Borrower
shall compensate the Lender for the loss, cost and expense attributable to such
event. In the case of a Eurodollar Loan, such loss, cost or expense to the
Lender shall be deemed to include an amount determined by the Lender to be the
excess, if

 

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any, of (i) the amount of interest which would have accrued on the principal
amount of such Loan had such event not occurred, at the Adjusted LIBOR Rate that
would have been applicable to such Loan, for the period from the date of such
event to the last day of the then current Interest Period therefor (or, in the
case of a failure to borrow, convert or continue, for the period that would have
been the Interest Period for such Loan), over (ii) the amount of interest which
would accrue on such principal amount for such period at the interest rate which
the Lender would bid were it to bid, at the commencement of such period, for
dollar deposits of a comparable amount and period from other banks in the
Eurodollar market.

 

A certificate of the Lender setting forth any amount or amounts that the Lender
is entitled to receive pursuant to this Section shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
the Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.

 

2.6.                            Unused Available Commitment Fees; Commitment and
Facility Fees; Letter of Credit Fees; Authorized Payments by Lender; Processing
Fee.

 

2.6.1.                  The Borrower shall pay to the Lender an unused fee of
one-half of one percent (1/2 of 1.00%) per annum, calculated daily on the actual
number of days the Commitments are outstanding on the amount of the Unused
Available Commitment in effect from time to time, such commitment fee to be
payable quarterly in arrears on each January 1, April 1, July 1, and October 1
occurring hereafter, and upon termination of the Commitment.

 

2.6.2.                  To compensate the Lender for the costs of the extension
of credit hereunder and its commitment hereunder, the Borrower shall pay to the
Lender (i) on the Closing Date, a commitment and facility fee of $40,000 and
(ii) thereafter upon each determination of an increase in the Borrowing Base
pursuant to Section 2.8.1, a fee in the amount of one percent (1.00%) of the
amount by which the Borrowing Base is increased over that in effect on the date
of determination.

 

2.6.3.                          The Borrower shall pay to the Lender at the time
of each issuance of a letter of credit hereunder and at the time of each renewal
(including extensions) of a Letter of Credit, a letter of credit fee equal to
the greater of (i) two percent (2.00%) per annum of the face amount of such
letter of credit or Letter of Credit, as applicable, for the maximum number of
days from such date of issuance or renewal, as applicable, to the expiry date of
such letter of credit or Letter of Credit, as applicable, and (ii) $1,000.

 

2.6.4.                  The Lender is irrevocably authorized to make Loans under
the Note for the payment of the fees and expenses of the Lender required to be
paid by the Borrower hereunder. The Lender shall pay over such Loan proceeds to
itself or directly to such other Persons entitled to payment hereunder.

 

2.6.5.                  To compensate the Lender for the cost of processing
requests for waivers, partial releases, amendments and consents regarding the
provisions of this Agreement, the other Loan Documents or the Intercreditor
Agreement, the Borrower shall pay to the Lender at the time of granting such
waiver, providing such partial release, entering into such amendment or granting
such consent, the amount of $2,500 plus such additional amounts as the Lender
and the Borrower shall agree.

 

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2.7.                            Termination of Credit Facilities; Maturity of
Note; Right of Borrower to Terminate Credit Facilities.

 

2.7.1.                          The obligations of the Lender to the Borrower
under Section 2.1 shall, subject to its continuing obligation to fund Letters of
Credit, terminate on the Final Maturity Date, unless terminated earlier in
accordance with the terms hereof.

 

2.7.2.                          The Note shall finally mature no later than the
Final Maturity Date, and any unpaid principal of the Note and accrued, unpaid
interest thereon shall be due and payable on such date.

 

2.7.3.                          The Borrower shall have the right upon payment
in full of the Obligations and the cancellation of all outstanding Letters of
Credit, to cancel in full (but not in part) the credit facilities provided for
herein, with no right of reinstatement.

 

2.8.                            Determination of Borrowing Base; Automatic
Reductions in Borrowing Base; Borrowing Base Deficiency; Notice of
Redeterminations; Requests for Reductions in Borrowing Base.

 

2.8.1.                  On the basis of the information furnished to the Lender
hereunder and such other reports, appraisals and information as the Lender may
reasonably deem appropriate, the Lender shall have the right to determine a new
Borrowing Base two (2) times a year prior to the Final Maturity Date, such
determinations to occur approximately six (6) months apart, or at any time it
may elect if a Default has occurred which is continuing (each a “Scheduled
Determination”), or at such other or additional times prior to the Final
Maturity Date as the Lender in its reasonable discretion may elect (each a
“Discretionary Determination”), and the Lender shall determine a new Borrowing
Base at the Borrower’s expense at such additional times, but no more often than
one (1) time in any 12-month period without the Lender’s consent, as the
Borrower may request in connection with any material change in the value of the
Oil and Gas Properties included in the most recent determination of the
Borrowing Base (each a “Borrower Requested Determination”). Such determinations,
if made, shall be in the Lender’s discretion and in accordance with the
customary practices and standards of the Lender for loans of a similar nature as
in effect at the time such determinations are made (except that the Lender and
the Borrower may agree to different amount than would be determined in
accordance with the foregoing) and shall be conclusive as to the Borrower, and
any increases in the Borrowing Base must be approved by the Lender and shall be
subject to the Lender’s complete credit approval process. There is no duty,
implied or explicit, on the Lender to ever increase the Borrowing Base. In the
event that any swap counterparty loses its status as an Approved Swap
Counterparty for the purposes of future Hedging Transactions, the Lender shall
be entitled in connection with any redetermination of the Borrowing Base to
ignore or discount the effect and value of existing Hedging Transactions
previously entered into with such swap counterparty.

 

2.8.2.                  The Borrowing Base shall be automatically reduced as of
the 1st day of each month, commencing November 1, 2014, and continuing on the
first day of each month thereafter until the Final Maturity Date. Such
reductions in the Borrowing Base each month shall be in the amount of $50,000
per month unless redetermined as herein permitted. At the time of each new
Borrowing Base determination under Section 2.8.1, the Lender in its sole
discretion may increase the amount of such monthly reductions, and the Lender
may decrease the

 

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amount of such monthly reductions. Any decreases in the monthly reductions must
be approved by the Lender and shall be subject to the Lender’s complete credit
approval process. There is no duty, implied or explicit, on the Lender to ever
decrease the amount of the monthly Borrowing Base reduction amounts.

 

2.8.3.                  Upon the occurrence of a Borrowing Base Deficiency, the
Borrower shall, within 30 days following notice by the Lender of the existence
of such Borrowing Base Deficiency, do any one or more of the following in an
aggregate amount at least equal to such Borrowing Base Deficiency: (i) prepay
the principal of the Note or (ii) cause to be created first and prior perfected
Liens (subject only to Permitted Liens) in favor of the Lender, by instruments
reasonably satisfactory to the Lender, on producing Oil and Gas Properties (or
in immediately available funds if the circumstances described in Section 2.4.2
are applicable) which in the opinion of the Lender would increase the Borrowing
Base by an amount sufficient, in combination with clause (i) preceding, to
eliminate such Borrowing Base Deficiency.

 

2.8.4.                  Upon each redetermination of the Borrowing Base, the
Lender will notify the Borrower of such determination (which notice may be
orally communicated to the Borrower and confirmed promptly thereafter in writing
if the Borrowing Base is being decreased or the monthly Borrowing Base reduction
amount is being increased), and the Borrowing Base and the amount by which the
Borrowing Base shall be reduced so communicated to the Borrower shall become
effective immediately upon such notification (or such other date as is stated in
such notice and regardless of any Notice of Borrowing the Lender might have
received) and shall remain in effect until the next subsequent redetermination
of the Borrowing Base. The Lender may condition any increase in the Borrowing
Base or decrease in the monthly Borrowing Base reduction amount to the
Borrower’s execution and return of the notice given under this Section, which
notice may contain and require confirmations by the Borrower of representations,
warranties and covenants contained in the Loan Documents.

 

2.8.5.                  The Borrower may at any time by written notice to the
Lender request that the Borrowing Base be reduced (with no right of
reinstatement) by an amount specified by the Borrower in such reduction notice,
and the Borrowing Base shall be deemed so reduced upon receipt by the Lender of
such reduction notice. Further, in the event the Borrower is advised of any
increase in the Borrowing Base, the Borrower may decline to utilize the
increased borrowing availability created thereby and by written notice to the
Lender irrevocably refuse to accept all or a portion of such increase, but any
such refusal notice received by the Lender more than five (5) Business Days
following such increase in the Borrowing Base shall be treated as a Borrowing
Base reduction notice under the immediately preceding sentence.

 

2.9.                            Interest Elections for Conversions and
Continuations.

 

2.9.1.                  Each Advance initially shall be of the Type specified in
the applicable Notice of Borrowing and, in the case of a Eurodollar Advance,
shall have an initial Interest Period as specified in such Notice of Borrowing.
Thereafter, the Borrower may elect to convert such Advance to a different Type
or to continue such Advance and, in the case of a Eurodollar Advance, may elect
Interest Periods therefor, all as provided in this Section 2.9. The Borrower may
elect different options with respect to different portions of the affected
Advance, and the Loans comprising each such portion shall be considered a
separate Advance.

 

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2.9.2.                  To make an election pursuant to this Section 2.9, the
Borrower shall notify the Lender of such election by telephone by the time that
a Notice of Borrowing would be required under Section 2.2.1 if the Borrower were
requesting an Advance of the Type resulting from such election. Each such
telephonic Interest Election Request shall be irrevocable and shall be confirmed
promptly by hand delivery or telecopy to the Lender of a written Interest
Election Request in a form approved by the Lender and signed by the Borrower.

 

2.9.3.                  Each telephonic and written Interest Election Request
shall specify the following information and be in compliance with Section 2.1:

 

(i)                      the Advance to which such Interest Election Request
applies and, if different options are being elected with respect to different
portions thereof, the portions thereof to be allocated to each resulting Advance
(in which case the information to be specified pursuant to clauses (iii) and
(iv) below shall be specified for each resulting Advance);

 

(ii)                   the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;

 

(iii)                whether the resulting Advance is to be an FLR Advance or a
Eurodollar Advance; and

 

(iv)               if the resulting Advance is a Eurodollar Advance, the
Interest Period to be applicable thereto after giving effect to such election,
which shall be a period contemplated by the definition of the term “Interest
Period”.

 

If any such Interest Election Request requests a Eurodollar Advance but does not
specify an Interest Period, then the Borrower shall be deemed to have selected
an Interest Period of one (1) month’s duration.

 

2.9.4.                  If the Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Advance prior to the end of the
Interest Period applicable thereto, then, unless such Advance is repaid as
provided herein, at the end of such Interest Period such Advance shall be
converted to an FLR Advance. Notwithstanding any contrary provision hereof, if
an Event of Default or a Borrowing Base Deficiency has occurred and is
continuing: (i) no outstanding Advance may be converted to or continued as a
Eurodollar Advance (and any Interest Election Request that requests the
conversion of any Advance to, or continuation of any Advance as, a Eurodollar
Advance shall be ineffective) and (ii) unless repaid, each Eurodollar Advance
shall be converted to an FLR Advance at the end of the Interest Period
applicable thereto.

 

2.10.                     Request for Extension of Maturity. Following receipt
by the Lender of a written request from the Borrower, given by the Borrower no
earlier than six (6) months prior to the Final Maturity Date, the Lender agrees
to consider, in accordance with the customs and standards of the Lender in
effect at such time for loans of a similar nature to the Loan and subject to the
Lender’s complete approval process, a request by the Borrower to extend the
Final Maturity Date. The Lender might charge the Borrower fees to process any
such request or to grant any such extension.

 

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ARTICLE III

 

GENERAL PROVISIONS

 

3.1.                            General Provisions as to Payments and Loans.

 

3.1.1.                  All payments of principal and interest on the Note and
of fees hereunder shall be made, without setoff, deduction or counterclaim, by
12:00 p.m. CT on the date such payments are due in federal or other funds
immediately available at the principal office of the Lender referred to in
Article XIII and, if not made by such time or in immediately available funds,
then such payment shall be deemed made when such funds are available to the
Lender for its full and unrestricted use. Whenever any payment of principal of
or interest on the Note or of fees hereunder shall be due on a day which is not
a Business Day, the date for payment thereof shall be extended to the next
succeeding Business Day. If the date for any payment is extended by operation of
law or otherwise, interest thereon shall be payable for such extended time. The
Lender is hereby authorized upon notice to the Borrower to charge the account of
the Borrower maintained with the Lender, for each payment of principal, interest
and fees as it becomes due hereunder.

 

3.1.2.                  All payments made by the Borrower on the Note shall be
made free and clear of, and without reduction by reason of, any Taxes.

 

3.1.3.                  All requests for Advances or letters of credit hereunder
and renewals (including extensions) of Letters of Credit shall be made on a
Business Day.

 

3.1.4.                  All Advances shall be made available to the Borrower on
a Business Day at the Lender’s address referred to in Article XIII; all letters
of credit hereunder shall be issued on a Business Day; and all Letters of Credit
shall be renewed (including extensions) on a Business Day.

 

3.1.5.                  All payments and fundings shall be denominated in
Dollars.

 

3.2.                            Telephonic Notices. The Borrower hereby
authorizes the Lender to extend Advances, to issue letters of credit hereunder,
to renew (including extensions) Letters of Credit and to transfer funds, and
hereby authorizes the Lender to make Loans, based on telephonic, e-mail or other
electronic notices made by any Person the Lender in good faith believes to be
acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the
Lender a written confirmation, if such confirmation is requested by the Lender,
of each telephonic, e-mail or other electronic notices, signed by a Responsible
Representative. If the written confirmation differs in any material respect from
the action taken by the Lender, the records of the Lender shall be prima facie,
but not conclusive, evidence of the matter notwithstanding anything to the
contrary in such confirmation.

 

3.3.                            Default Interest. Unless waived by the Lender,
the principal of the Note shall bear interest at the Default Rate during any
time an Event of Default exists and, to the extent not prohibited by Law,
overdue interest on the Note shall bear interest at the Default Rate.

 

3.4.                            Prepayments Permitted. The principal of the Note
and accrued interest thereon may be prepaid by the Borrower in whole or in part
at any time and, except as otherwise

 

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specifically provided herein or with respect to Eurodollar Advances, shall be
without premium or penalty. Each prepayment of Advances pursuant to this
Section shall be applied, first, ratably to any FLR Advances then outstanding,
and, second, to any Eurodollar Advances then outstanding, and if more than one
Eurodollar Advance is then outstanding, to each such Eurodollar Advance in order
of priority beginning with the Eurodollar Advance with the least number of days
remaining in the Interest Period applicable thereto and ending with the
Eurodollar Advance with the most number of days remaining in the Interest Period
applicable thereto. Prepayments of Advances shall be accompanied by accrued
interest to the date of prepayment. In the event of any conversion of any
Eurodollar Loan prior to the end of the current Interest Period therefor,
accrued interest on such Loan shall be payable on the effective date of such
conversion.

 

3.5.                            Limitation Period. Notwithstanding anything
herein or in the Note to the contrary, during any Limitation Period, the
interest rate to be charged on amounts evidenced by the Note shall be the
Highest Lawful Rate, and the obligation, if any, of the Borrower for the payment
of fees or other charges deemed to be interest under applicable law shall be
suspended. During any period or periods of time following a Limitation Period,
to the extent permitted by applicable laws of the State of Texas or the United
States of America, the interest rate to be charged hereunder shall remain at the
Highest Lawful Rate until such time as there has been paid to the Lender (i) the
amount of interest in excess of that accruing at the Highest Lawful Rate that
the Lender would have received during the Limitation Period had the interest
rate remained at the otherwise applicable rate, and (ii) the amount of all
interest and fees otherwise payable to the Lender but for the effect of such
Limitation Period.

 

3.6.                            Illegality. Notwithstanding any other provision
of this Agreement, in the event that it becomes unlawful for the Lender or its
applicable lending office to honor its obligation to make or maintain Eurodollar
Loans either generally or having a particular Interest Period hereunder, then
(a) the Lender shall promptly notify the Borrower thereof and the Lender’s
obligation to make such Eurodollar Loans shall be suspended (the “Affected
Loans”) until such time as the Lender may again make and maintain such
Eurodollar Loans and (b) all Affected Loans which would otherwise be made by the
Lender shall be made instead as FLR Loans (and, if the Lender so requests by
notice to the Borrower, all Affected Loans of the Lender then outstanding shall
be automatically converted into FLR Loans on the date specified by the Lender in
such notice) and, to the extent that Affected Loans are so made as (or converted
into) FLR Loans, all payments of principal which would otherwise be applied to
the Lender’s Affected Loans shall be applied instead to its FLR Loans.

 

3.7.                            LATE CHARGE. If a payment remains unpaid for a
period of 15 days or more from the date such payment is due, the Lender may
charge a delinquency charge equal to 5.00% of the amount of such payment, which
charge shall be due upon demand.

 

3.8.                            Guarantor Waiver. Each Guarantor waives any
rights such Guarantor has under, or any requirements imposed by,
(i) Section 17.001 of the Texas Civil Practice and Remedies Code, as amended,
(ii) Rule 31 of the Texas Rules of Civil Procedure, as amended, and
(iii) Sections 51.003, 51.004 and 51.005 of the Texas Property Code, as amended.

 

3.9.                            Borrower Waiver. The Borrower waives any rights
the Borrower has under, or any requirements imposed by, Sections 51.003, 51.004
and 51.005 of the Texas Property Code, as amended.

 

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ARTICLE IV

 

COLLATERAL

 

4.1.                            Security.

 

4.1.1.                          To secure the Obligations, the Borrower will
cause the appropriate Person to execute and deliver to the Lender each of the
following documents and instruments:

 

(i)                                     the Mortgages from the Borrower on no
less than 90% of the PW9 Value of the Oil and Gas Properties utilized in
determining the Borrowing Base.

 

(ii)                                  a general security agreement from the
Borrower.

 

4.1.2.                          All documents delivered or to be delivered
hereunder shall be in form and substance reasonably satisfactory to the Lender
and its counsel and shall be supported by such legal opinions as the Lender or
its counsel may reasonably request.

 

4.1.3.                          All Liens to be created by delivery of the
documents referred to in this Section shall be first and prior perfected Liens
in favor of the Lender for the benefit of the Persons identified therein,
subject only to Permitted Liens.

 

ARTICLE V

 

CONDITIONS PRECEDENT TO ADVANCES AND LETTERS OF CREDIT

 

The obligation of the Lender to make Loans comprising an Advance or of the
Lender to issue standby letters of credit hereunder or to renew or extend
Letters of Credit shall be subject to the satisfaction of each of the following
conditions:

 

5.1.                            All Advances and Letters of Credit. In the case
of each Advance to be made or letter of credit to be issued hereunder or
renewals (including extensions) of Letters of Credit (except the initial Advance
made hereunder):

 

5.1.1.                          timely receipt by the Lender of a Notice of
Borrowing and, if applicable, a Letter of Credit Application and other items
required to be included therewith;

 

5.1.2.                          the fact that, immediately before such requested
Advance or letter of credit or requested renewal (including extensions) of a
Letter of Credit, no Default shall have occurred and be continuing and that the
making of any such Advance, the issuing of such letter of credit or the renewal
(including extensions) of such Letter of Credit will not cause a Default;

 

5.1.3.                          the fact that the representations and warranties
of the Borrower contained in this Agreement shall be true in all material
respects on and as of the date of such Advance, except to the extent that any
such representation specifically makes reference to an earlier date, then such
representation will be as of such earlier date;

 

5.1.4.                          the fact that the Borrower shall have received
all authorizations necessary under its Regulatory Documents to permit it to
incur indebtedness in an aggregate amount equal

 

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to the sum of the requested Advance reflected in the Notice of Borrowing plus
the outstanding principal balance of the Note plus the Letter of Credit
Exposure, and the Lender shall have received evidence satisfactory to the Lender
of such authorizations;

 

5.1.5.                          each request for an Advance, for a letter of
credit to be issued hereunder or for the renewal (including extensions) of a
Letter of Credit shall be deemed to be a representation and warranty by the
Borrower on the date of such request, as to the facts specified in Sections
5.1.2 and 5.1.3; and

 

5.1.6.                          the fact that each condition specified in
Section 5.2 was satisfied at the time of the initial Advance hereunder or has
been satisfied subsequent thereto or has been waived in writing by the Lender.

 

5.2.                            Initial Advance. In the case of the initial
Advance or Letter of Credit:

 

5.2.1.                          receipt by the Lender of each of the following:

 

(i)                                     copies of the Organizational Documents,
and all amendments thereto, of the Borrower, accompanied by certificates that
such copies are correct and complete, one issued by the Secretary of State of
the state of incorporation or formation of the Borrower, dated a current date,
and one executed by an authorized representative acceptable to the Lender dated
the Closing Date.

 

(ii)                                  copies of the Regulatory Documents (or
similar documents), and all amendments thereto, of the Borrower, accompanied by
certificates that such copies are correct and complete of an authorized
representative acceptable to the Lender dated the Closing Date.

 

(iii)                               certificates of the appropriate Tribunals of
each jurisdiction in which the Borrower has an executive office or principal
place of business, the Borrower was formed or in which any Collateral is located
(if the Borrower is required to qualify to do business in such state), each
dated a current date, to the effect that the Borrower is in good standing with
respect to the payment of franchise and/or other Taxes and, if required by Law,
is duly qualified to transact business in such jurisdictions. Any such
certificate(s) due from the Texas Comptroller of Public Accounts may be
satisfied with a printout of an electronic search of such office’s records which
shows that the applicable Person’s status with respect to its right to transact
business in Texas is “active.”

 

(iv)                              certificates of incumbencies and signatures of
all officers of the Borrower who will be authorized to execute or attest any of
the Loan Documents on behalf of the Borrower, executed by an authorized
representative acceptable to the Lender, dated the Closing Date.

 

(v)                                 copies of resolutions approving the Loan
Documents and authorizing the transactions contemplated therein, duly adopted by
the governing authority of the Borrower, accompanied by certificates of an
authorized representative acceptable to the Lender, that such copies are true
and correct copies of resolutions duly adopted at the meeting of, or by the
unanimous written consent of, the authorized body of the Borrower, and that such
resolutions

 

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constitute all the resolutions adopted with respect to such transactions, have
not been amended, modified or revoked in any respect, and are in full force and
effect as of the Closing Date.

 

5.2.2.                          receipt by the Lender of the duly executed Note
in the amount at least equal to its Commitment, dated the Closing Date.

 

5.2.3.                          receipt by the Lender of the documents described
in Section 4.1.1, each duly executed and delivered by the appropriate Person
and, if such is required by the Lender with respect to the Mortgages, duly
recorded in the appropriate county or parish records.

 

5.2.4.                          receipt by the Lender of assignments in
recordable form from Arbol Resources, Inc. to the Borrower covering all of the
Properties evaluated in the initial Borrowing Base, duly executed and delivered
by Arbol Resources, Inc.

 

5.2.5.                          receipt by the Lender of such title opinions or
title data as the Lender may reasonably request, in form and substance and from
attorneys or other Persons reasonably acceptable to the Lender, covering and
confirming title in such portions of the Collateral as the Lender may specify
and such other documentation and information reasonably required by the Lender
to satisfy the Lender of the status of the title of the Collateral.

 

5.2.6.                          receipt by the Lender of a certificate of
ownership interests in form and substance satisfactory to the Lender, certifying
as to the ownership interests of the Borrower in its Oil and Gas Properties.

 

5.2.7.                          receipt by the Lender of satisfactory evidence
that prior Liens, if any, on the Collateral (other than Permitted Liens) are
being released or assigned to the Lender concurrently with the Closing.

 

5.2.8.                          receipt by the Lender of the results of searches
of the UCC records of the applicable jurisdictions from sources acceptable to
the Lender reflecting no Liens against any of the intended Collateral other than
Permitted Liens.

 

5.2.9.                          receipt by the Lender of certificates of
insurance from the insurance companies insuring the Borrower, confirming
insurance for the Borrower meeting the standards of Section 7.4.1.

 

5.2.10.                   receipt by the Lender of such additional information
and documentation as the Lender may reasonably require relating to the Loan
Documents (and amendments thereto) and the transactions contemplated hereby and
thereby.

 

5.3.                            Conditions Precedent for the Benefit of the
Lender. All conditions precedent to the obligations of the Lender to make any
Advance or Loan or of the Lender to issue any letter of credit hereunder are
imposed hereby solely for the benefit of the Lender, and no other Person may
require satisfaction of any such condition precedent or be entitled to assume
that the Lender will refuse to make any Advance or Loan or that the Lender will
refuse to issue any letter of credit hereunder or renew or extend any Letter of
Credit in the absence of strict compliance with such conditions precedent.

 

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ARTICLE VI

 

REPRESENTATIONS AND WARRANTIES OF THE BORROWER

 

The Borrower and, to the extent applicable to any Guarantor, such Guarantor
hereby represents and warrants to the Lender as follows with the intention that
the Lender shall rely thereon without any investigation or verification by the
Lender or its counsel:

 

6.1.                            Existence and Power. The Borrower:

 

6.1.1.                          is a limited partnership, duly organized,
validly existing and in good standing under the laws of the State of Texas.

 

6.1.2.                          has all partnership powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.

 

6.1.3.                          is duly qualified to transact business as a
foreign entity in each jurisdiction where the nature of its business requires
the same, except where the failure to so qualify could not reasonably be
expected to have a Material Adverse Effect.

 

6.1.4.                          owns, both beneficially and of record, all of
its assets reflected in its financial statements delivered to the Lender.

 

Reef Partners:

 

6.1.5.                          is a limited partnership, duly organized,
validly existing and in good standing under the laws of the State of Nevada and
is the sole general partner of the Borrower.

 

6.1.6.                          has all partnership powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.

 

6.1.7.                          is duly qualified to transact business as a
foreign entity in each jurisdiction where the nature of its business requires
the same, except where the failure to so qualify could not reasonably be
expected to have a Material Adverse Effect.

 

6.1.8.                          owns, both beneficially and of record, all of
its assets reflected in its financial statements delivered to the Lender.

 

Reef Partners GP:

 

6.1.9.                          is a limited liability company, duly organized,
validly existing and in good standing under the laws of the State of Texas and
is the sole general partner of Reef Partners.

 

6.1.10.                   has all company powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.

 

6.1.11.                   is duly qualified to transact business as a foreign
entity in each jurisdiction where the nature of its business requires the same,
except where the failure to so qualify could not reasonably be expected to have
a Material Adverse Effect.

 

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6.1.12.                   owns, both beneficially and of record, all of its
assets reflected in its financial statements delivered to the Lender.

 

6.2.                            Authorization; Contravention. The execution,
delivery and performance by each Person (other than the Lender) purporting to
execute this Agreement or the other Loan Documents are within such Person’s
power, have been duly authorized by all necessary action, require no action by
or in respect of, or filing with, any governmental body, agency or official
(except that the perfection of Liens created by certain of the Security
Documents may require the filing of financing statements or Mortgages in the
appropriate recordation offices), and do not contravene, or constitute a default
under, any provision of applicable law or regulation (including the Margin
Regulations) or any agreement creating or governing such Person or any
agreement, judgment, injunction, order, decree or other instrument binding upon
such Person or result in the creation or imposition of any Lien on any Property
of the Borrower, except Permitted Liens and Liens securing the Obligations.

 

6.3.                            Binding Effect.

 

6.3.1.                          This Agreement constitutes a valid and binding
agreement of the Borrower; the Note, when executed and delivered in accordance
with this Agreement, will constitute the valid and binding obligation of the
Borrower; the Security Documents, when executed and delivered in accordance with
this Agreement, will constitute valid and binding obligations of each Person
purporting to execute the same.

 

6.3.2.                          Each Loan Document is enforceable in accordance
with its terms except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors’ rights generally and
(ii) rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.

 

6.4.                            Subsidiaries. The Borrower has no Subsidiaries
other than, if subsequent to the Closing Date, such Subsidiaries as have been
specifically approved by the Lender in writing.

 

6.5.                            Disclosure. No document, certificate or
statement delivered to the Lender by or on behalf of the Borrower in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact. All information heretofore furnished by the Borrower to the
Lender for purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all such information hereafter furnished by the
Borrower to the Lender will be, true and accurate in every material respect or
based on reasonable estimates on the date as of which such information is stated
or certified. The Borrower has disclosed to the Lender in writing any and all
facts known to the Borrower (except facts of general public knowledge) which
could reasonably be expected to materially and adversely affect the business,
operations, prospects or condition, financial or otherwise, of the Borrower or
the ability of the Borrower to perform its obligations under this Agreement.

 

6.6.                            Financial Information.

 

6.6.1.                          The financial information of the Borrower
delivered to the Lender in connection with the request for this credit facility
fairly present in all material respects, in conformity with GAAP, the financial
position of the Borrower at the respective dates thereof.

 

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6.6.2.                          Except as disclosed in a writing delivered by
the Borrower to the Lender prior to the execution and delivery of this
Agreement, since the dates referenced in the financial information referred to
in Section 6.6.1 above, there has been no material adverse change in the
business, financial position, results of operations or prospects of the
Borrower.

 

6.7.                            Litigation. Except as disclosed in Exhibit 6.7,
there is no action, suit or proceeding pending against, or to the knowledge of
the Borrower threatened against or affecting the Borrower or any Guarantor
before any Tribunal or arbitrator in which there is a reasonable possibility of
an adverse decision which could reasonably be expected to materially and
adversely affect the business, operations, prospects or condition, financial or
otherwise of the Borrower, or which could in any manner draw into question the
validity of this Agreement or any other Loan Documents.

 

6.8.                            ERISA Plans. Neither the Borrower nor any ERISA
Affiliate of the Borrower currently sponsors, maintains or contributes to or has
at any time sponsored, maintained or contributed to any Plan.

 

6.9.                            Taxes and Filing of Tax Returns.

 

6.9.1.                          (i)                                     The
Borrower has filed or properly extended all returns required to have been filed
or extended with respect to Taxes and has paid all Taxes shown to be due and
payable by it on such returns, including interest and penalties, and all other
Taxes which are payable by it, to the extent the same have become due and
payable (unless, with respect to such other Taxes, the criteria set forth in
Section 7.5 are being met). The Borrower does not know of any proposed
assessment of Taxes of a material amount against it, and all liabilities for
Taxes of the Borrower are adequately provided for.

 

(ii)                                  For each Guarantor, such Guarantor has
filed or properly extended all returns required to have been filed or extended
with respect to Taxes and has paid all Taxes shown to be due and payable by it
on such returns, including interest and penalties, and all other Taxes which are
payable by it, to the extent the same have become due and payable (unless, with
respect to such other Taxes, the criteria set forth in Section 7.5 are being
met). Such Guarantor does not know of any proposed assessment of Taxes of a
material amount against it, and all liabilities for Taxes of such Guarantor are
adequately provided for.

 

6.9.2.         The Borrower does not intend to treat the Loans or Letters of
Credit as being a “reportable transaction” (within the meaning of Treasury
Regulation Section 1.6011-4).

 

6.10.                     Title to Properties; Liens; Environmental Liability.

 

6.10.1.                   (i) The Borrower has good and indefeasible record
title to all Property purported to be owned by it (except for Permitted Liens).
All of such Property is free and clear of all Liens other than Permitted Liens.
Upon the recordation of the Security Documents in the appropriate recordation
offices, the Liens covering the Collateral will be valid, enforceable, first and
prior, perfected Liens in favor of the Lender, subject only to Permitted Liens.

 

(ii) Each Guarantor has good and indefeasible record title to all Property
purported to be owned by it (except for Permitted Liens). All of such Property
is free and clear of all Liens

 

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other than Permitted Liens. Upon the recordation of the Security Documents in
the appropriate recordation offices, the Liens covering the Collateral will be
valid, enforceable, first and prior, perfected Liens in favor of the Lender,
subject only to Permitted Liens.

 

6.10.2.                   (i)                                     The Borrower
has not (a) received notice or otherwise learned of any Environmental Liability
arising in connection with (1) any non-compliance with or violation of the
requirements of any Environmental Law or (2) the release or threatened release
of any Hazardous Substance into the environment, or (b) received notice or
otherwise learned of any federal or state investigation evaluating whether any
remedial action is needed to respond to a release or threatened release of any
Hazardous Substance into the environment for which the Borrower is or may be
liable.

 

(ii)                                  For each Guarantor, such Guarantor has not
(a) received notice or otherwise learned of any Environmental Liability arising
in connection with (1) any non-compliance with or violation of the requirements
of any Environmental Law or (2) the release or threatened release of any
Hazardous Substance into the environment or (b) received notice or otherwise
learned of any federal or state investigation evaluating whether any remedial
action is needed to respond to a release or threatened release of any Hazardous
Substance into the environment for which such Guarantor is or may be liable.

 

6.10.3.                   (i)                                     Except in
accordance with applicable Requirements of Law or the terms of a valid permit,
license, certificate, or approval of the relevant Governmental Authority, no
Release of Hazardous Substances by the Borrower from, affecting, or related to
any Property of the Borrower has occurred.

 

(ii)                                  For each Guarantor, except in accordance
with applicable Requirements of Law or the terms of a valid permit, license,
certificate, or approval of the relevant Governmental Authority, no Release of
Hazardous Substances by such Guarantor from, affecting, or related to any
Property of such Guarantor has occurred.

 

6.10.4.                   (i)                                     No
Environmental Complaint has been received by the Borrower.

 

(ii)                                  For each Guarantor, no Environmental
Complaints have been received by such Guarantor.

 

6.11.                     Business Compliance.

 

6.11.1.                   The Borrower has performed and abided by all
obligations required to be performed by it to the extent required under each
license, permit, order, authorization, grant, contract, agreement, or regulation
to which it is a party or by which it or any of its Property is bound.

 

6.11.2.                   For each Guarantor, such Guarantor has performed and
abided by all obligations required to be performed by it to the extent required
under each license, permit, order, authorization, grant, contract, agreement, or
regulation to which it is a party or by which it or any of its Property is
bound.

 

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6.12.                     Licenses, Permits, Etc.

 

6.12.1.                   The Borrower possesses such valid franchises,
certificates of convenience and necessity, operating rights, licenses, permits,
consents, authorizations, exemptions and orders of Tribunals as are necessary to
carry on its business as now being conducted and to own its Properties.

 

6.12.2.                   For each Guarantor, such Guarantor possesses such
valid franchises, certificates of convenience and necessity, operating rights,
licenses, permits, consents, authorizations, exemptions and orders of Tribunals
as are necessary to carry on its business as now being conducted and to own its
Properties.

 

6.13.                     Compliance with Laws.

 

6.13.1.                   The business and operations of the Borrower have been
and are being conducted in accordance with all applicable Laws.

 

6.13.2.                   For each Guarantor, the business and operations of
such Guarantor have been and are being conducted in accordance with all
applicable Laws.

 

6.14.                     Governmental Consent.

 

6.14.1.                   No consent, approval or authorization of, or
declaration or filing with, any Governmental Authority is required for the valid
execution, delivery and the performance of this Agreement or any other Loan
Documents by the Borrower.

 

6.14.2.                   For each Guarantor, no consent, approval or
authorization of, or declaration or filing with, any Governmental Authority is
required for the valid execution, delivery and the performance of any Loan
Document by such Guarantor.

 

6.15.                     Investment Company Act. (i) The Borrower is not an
“investment company,” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as amended.

 

(ii)                                  For each Guarantor, such Guarantor is not
an “investment company,” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as amended.

 

6.16.                     State Utility.

 

6.16.1.                   (i)                                     The Borrower
is not defined as a “utility” under the laws of the State of Texas or any other
jurisdiction wherein the Borrower is required to qualify to do business.

 

(ii)                                  For each Guarantor, such Guarantor is not
defined as a “utility” under the Laws of the State of Texas or any other
jurisdiction wherein such Guarantor is required to qualify to do business.

 

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6.16.2.                   (i)                                     The Borrower
is not subject to any state or federal Law that would limit its ability to have
Liens placed on any of its Property.

 

(ii)                                  For each Guarantor, such Guarantor is not
subject to any state or federal Law that would limit its ability to have Liens
placed on any of its Property.

 

6.17.                     Refunds; Certain Contracts.

 

6.17.1.                   (i)                                     No orders of,
proceedings pending before, or other requirements of, the Federal Energy
Regulatory Commission, the Texas Railroad Commission, or any Governmental
Authority exist which could result in the Borrower or any Guarantor being
required to refund any material portion of the proceeds received or to be
received from the sale of hydrocarbons constituting part of the Collateral.

 

(ii)                                  For each Guarantor, no orders of,
proceedings pending before, or other requirements of, the Federal Energy
Regulatory Commission, the Texas Railroad Commission, or any Governmental
Authority exist which could result in such Guarantor being required to refund
any material portion of the proceeds received or to be received from the sale of
hydrocarbons constituting part of the Collateral.

 

6.17.2.                   (i)                                     The Borrower
is not obligated in any material respect by virtue of any prepayment made under
any contract containing a “take-or-pay” or “prepayment” provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Collateral at some future date without receiving full payment therefor
within 90 days of delivery.

 

(ii)                                  For each Guarantor, such Guarantor is not
obligated in any material respect by virtue of any prepayment made under any
contract containing a “take-or-pay” or “prepayment” provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Collateral at some future date without receiving full payment therefor
within 90 days of delivery.

 

6.17.3.                   (i)                                     The Borrower
has not produced gas, in any material amount, subject to, and neither the
Borrower nor any of the Collateral is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements.

 

(ii)                                  For each Guarantor, such Guarantor has not
produced gas, in any material amount, subject to, and neither the Guarantor nor
any of the Collateral is subject to, balancing rights of third parties or
subject to balancing duties under governmental requirements.

 

6.18.                     No Default. No Default has occurred which is
continuing as of the Closing Date, and the receipt by the Borrower of the
initial Advance will not cause a Default to exist.

 

6.19.                     Anti-Terrorism Laws.

 

6.19.1.                   Anti-Terrorism Laws. None of the Obligated Parties nor
any Affiliate of any Obligated Party is in violation of any Anti-Terrorism Law
or knowingly engages in or conspires to engage in any transaction that evades or
avoids, or has the purpose of evading or avoiding, or attempts to violate, any
of the prohibitions set forth in any Anti-Terrorism Law.

 

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6.19.2.                   OFAC. None of the Obligated Parties nor any Affiliate
of any Obligated Party is in violation of any rules or regulations promulgated
by OFAC or of any economic or trade sanctions or engages in any transaction
administered and enforced by OFAC or conspires to engage in any transaction that
evades or avoids, or has the purpose of evading or avoiding, or attempts to
violate, any of the prohibitions set forth in any rules or regulations
promulgated by OFAC.

 

6.20.                     Flood Matters. No “Building” (as defined in the
applicable Flood Insurance Regulation) or “Manufactured (Mobile) Home” (as
defined in the applicable Flood Insurance Regulation) is located on any
Mortgaged Property within an area having special flood hazards and in which
flood insurance is available under the Flood Insurance Regulations, and no
“Building” or “Manufactured (Mobile) Home” is encumbered by the Mortgages.

 

ARTICLE VII

 

COVENANTS

 

So long as the Lender is required to make Loans hereunder or the Lender is
required to issue letters of credit hereunder, any principal of or interest on
the Note shall remain unpaid or any Letter of Credit remains outstanding, the
Borrower will duly perform and observe each and all of the covenants and
agreements hereinafter set forth:

 

7.1.                            Use of Proceeds and Letters of Credit.

 

7.1.1.                          The Borrower will use the proceeds of the Loans
solely to finance the acquisition of Oil and Gas Properties, to develop its Oil
and Gas Properties and for working capital purposes.

 

7.1.2.                          Letters of Credit shall be used for the support
of oil and gas operations; provided, however, no Letter of Credit may be used in
lieu or in support of stay or appeal bonds, without the prior written consent of
the Lender.

 

7.1.3.                          The Borrower will not, directly or indirectly,
use any of the proceeds of the Loans for the purpose of purchasing or carrying
any “margin stock” within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System (12 C. F. R. 221, as amended), or any “security
that is publicly-held” within the meaning of Regulation T of such Board of
Governors (12 C.F.R. 220, as amended), or otherwise take or permit any action
which would involve a violation of such Regulation U, Regulation T or Regulation
X (12 C.F.R. 224, as amended) or any other regulation of such Board of
Governors. The Loans are not secured, directly or indirectly, in whole or in
part, by collateral that includes any “margin stock” within the meaning of
Regulation U. The Borrower will not engage principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying any “margin stock” within the meaning of such Regulation
U.

 

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7.2.                            Financial Statements; Reserve and Other Reports;
Certain Required Notices from Borrower; Additional Information. The Borrower
will furnish to the Lender:

 

7.2.1.                          (i) as soon as available and in any event within
120 days after the end of each fiscal year of the Borrower, copies of the
consolidated and consolidating statement of assets and liabilities of the
Borrower and its consolidated subsidiaries as of the end of such fiscal year,
and copies of the related statements of revenues and expenses, operations,
changes in owners’ equity and cash flow for such fiscal year, setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail, prepared in accordance with GAAP; such financial statements
to be audited by a firm of independent certified public accountants selected by
the Borrower and reasonably acceptable to the Lender and accompanied by the
unqualified opinion of such accountants.

 

(ii)                                  on or before 60 days after the last day of
each fiscal quarter a copy of (a) the unaudited consolidated and consolidating
statement of assets and liabilities of the Borrower and its consolidated
subsidiaries as at the close of such quarter and from the beginning of such
fiscal year to the end of such quarter and (b) the related statements of
revenues and expenses, operations, changes in owners’ equity and cash flows for
the quarter just ended and for that portion of the year ending on such last day,
all in reasonable detail and prepared on a basis consistent with the financial
statements previously delivered by the Borrower under this Section.

 

(iii)                               simultaneously with the delivery of each set
of financial statements pursuant to the preceding clauses of this Section, a
Compliance Certificate of the Borrower stating that such financial statements
fairly and accurately reflect in all material respects the financial condition
and results of operation of the Borrower for the periods and as of the dates set
forth therein, subject, with respect to quarterly financial statements, to
changes resulting from normal year-end adjustments and that the signers have
reviewed the terms of this Agreement and the other Loan Documents, and have
made, or caused to be made under their supervision, a review of the transactions
and financial condition of the Borrower during the fiscal period covered by such
financial statements, and that such review has not disclosed the existence
during such period, and that the signers do not have knowledge of the existence
as of the date of such certificate, of any condition or event which constitutes
a Default, or, if any such condition or event existed or exists, specifying the
nature and period of existence thereof and what action the Borrower has taken or
is taking or proposes to take with respect thereto.

 

(iv)                              by the later of 30 days following each filing
thereof by the Borrower or any Guarantor with any Governmental Authority and the
Lender’s request therefor, complete copies of the federal and state income tax
returns so filed.

 

7.2.2.                          (i)                                     within
60 days following each June 30 and December 31, a report setting forth oil, gas
and liquid hydrocarbons production volumes by major field and in total from the
Oil and Gas Properties utilized in determining the Borrowing Base for such
six-month period just ended, and the total oil, gas and liquids production of
all fields of the Borrower and the prices received therefor, the lease operating
expenses on a property-by-property basis and such other information as the
Lender shall request.

 

(ii)                                  within 15 days following each request by
the Lender, a report setting forth all accounts receivable and accounts payable
of the Borrower as of the date specified in such

 

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request, such report to show the age of such accounts and such other information
as the Lender shall reasonably request.

 

(iii)                               simultaneously with the delivery of such
engineering and other reports under clauses (i) through (ii) above, a
Representative’s Certificate certifying that, to the best of such signatory’s
knowledge, such engineering and other reports are true, accurate and complete in
all material respects for the periods covered in such reports; provided that to
the extent such reports include projections of future volumes of production and
future costs, it is understood that such estimates are necessarily based upon
professional opinions, and the Borrower does not warrant that such opinions will
ultimately prove to have been accurate.

 

(iv)                              within 10 days after any material change in
insurance coverage by the Borrower from that previously disclosed to the Lender,
a report describing such change, and, within 30 days after each request by the
Lender, certificates of insurance from the insurance companies insuring the
Borrower, describing the insurance coverage of the Borrower.

 

(v)                                 within 10 days after incurring any
Guarantee, a report describing such Guarantee in reasonable detail; provided,
however, that such reporting requirement shall not be construed as waiving or
eliminating the restrictions set forth in Section 7.6.2 hereof.

 

7.2.3.                          (i)                                     within
10 days after any Responsible Representative becomes aware of the occurrence of
any condition or event which constitutes a Default, a Representative’s
Certificate specifying the nature of such condition or event, the period of
existence thereof, what action the Borrower has taken or is taking and proposes
to take with respect thereto and the date, if any, on which it is estimated the
same will be remedied.

 

(ii)                                  within 10 days after the Borrower’s or any
Guarantor’s learning of any claim, demand, action, event, condition, report or
investigation indicating any potential or actual liability of the Borrower or
any Guarantor arising in connection with (a) the non-compliance with or
violation of the requirements of any Environmental Law, (b) the release or
threatened release of any toxic or hazardous waste, substance or constituent
into the environment, or (c) the existence of any Environmental Lien on any
Properties of the Borrower or any Guarantor, notice thereof.

 

(iii)                               within 10 days of the Borrower’s learning of
any litigation or other event or circumstance which could reasonably be expected
to have a Material Adverse Effect, notice thereof.

 

(iv)                              within 10 days after the occurrence thereof,
notice of the change in identity or address of any Person remitting to the
Borrower proceeds from the sale of hydrocarbon production from or attributable
to any Collateral.

 

(v)                                 within 10 days after the occurrence thereof,
notice of any Change of Control Event.

 

7.2.4.                          with reasonable promptness, such other
information relating directly or indirectly to the financial condition,
business, results of operations or Properties of the Borrower or any Guarantor
as from time to time may reasonably be requested by the Lender.

 

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7.3.                            Inspection of Properties and Books.

 

7.3.1.                          The Borrower will permit any officer, employee
or representative of the Lender to visit and inspect any of its Properties, to
examine its books of account (and to make copies thereof and take extracts
therefrom) and to discuss its affairs, finances and accounts (including
transactions, agreements and other relations with any shareholders) with, and to
be advised as to the same by, its officers and independent public accountants,
all upon at least two (2) Business Days’ notice and at such reasonable times
during normal business hours and intervals as the requesting Person may desire
and, if a Default has occurred and is continuing, at the expense of the
Borrower.

 

7.3.2.                          Each Guarantor will permit any officer, employee
or representative of the Lender to visit and inspect any of its Properties, to
examine its books of account (and to make copies thereof and take extracts
therefrom) and to discuss its affairs, finances and accounts (including
transactions, agreements and other relations with any shareholders) with, and to
be advised as to the same by, its officers and independent public accountants,
all upon at least two (2) Business Days’ notice and at such reasonable times
during normal business hours and intervals as the requesting Person may desire
and, if a Default has occurred and is continuing, at the expense of the
Borrower.

 

7.4.                            Maintenance of Security; Insurance;
Authorization to File Financing Statements; Operating Accounts; Transfer Orders.

 

7.4.1.                          (i)                                     The
Borrower shall execute and deliver, or cause the appropriate Person to execute
and deliver, to the Lender all mortgages, deeds of trust, security agreements,
financing statements, assignments and such other documents and instruments
(including division and transfer orders), and supplements and amendments
thereto, and take such other actions as the Lender deems necessary or desirable
in order to (a) maintain as valid, enforceable, first-priority, perfected Liens
(subject only to the Permitted Liens), all Liens granted to secure the
Obligations or (b) monitor or control the proceeds from the Collateral.

 

(ii)                                  The Borrower and each Guarantor which has
granted a security interest in connection herewith authorizes the Lender to
complete and file, from time to time, financing statements naming the Borrower
and such Guarantor, as applicable, as debtor to perfect Liens granted to secure
the Obligations.

 

(iii)                               The Borrower shall take such action as may
be requested from time to time by the Lender to maintain, or cause to be in
effect at all times, first and prior Liens (subject to Permitted Liens) in favor
of the Lender by instruments executed by the appropriate Person and properly
recorded in the applicable jurisdictions on at least 90% by PW9 Value of the Oil
and Gas Properties included in the most recent determination of the Borrowing
Base.

 

(iv)                              The Borrower and each Guarantor will at all
times maintain or cause to be maintained hazard and liability insurance and
additional insurance covering such risks as are customarily carried by
businesses similarly situated, all such insurance to be in amounts and from
insurers reasonably acceptable to the Lender, maintained by Borrower or
Guarantor, as applicable, naming the Lender as loss payee, and, upon any renewal
of any such insurance and at other times upon request by the Lender, promptly
furnish to the Lender evidence, reasonably

 

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satisfactory to the Lender, of the maintenance of such insurance. The Lender
shall have the right to collect, and the Borrower and each Guarantor hereby
assigns to the Lender any and all monies that may become payable under any
policies of insurance relating to business interruption, if any, or by reason of
damage, loss, or destruction of any of the Collateral. In the event of any
damage, loss, or destruction for which insurance proceeds relating to business
interruption, if any, or Collateral exceed $100,000, the Lender may, at its
option, apply all such sums or any part thereof received by it toward the
payment of the Obligations, whether matured or unmatured, application to be made
first to interest and then to principal, and shall deliver to the Borrower or
the Guarantor, as applicable, the balance, if any, after such application has
been made. In the event of any such damage, loss, or destruction for which
insurance proceeds are $100,000 or less, provided that no Default has occurred
and is continuing, the Lender shall deliver any such proceeds received by it to
the Borrower or the Guarantor, as applicable.

 

7.4.2.                          The Borrower and each Guarantor will maintain
its primary operating accounts with Texas Capital Bank, N.A., and will deposit
on a monthly basis all net revenues of the Borrower and each such Guarantor in
such accounts, although such requirement shall not be construed as requiring the
maintenance of deposit balances.

 

7.4.3.                          Within 30 days following the Closing, the
Borrower shall cause each limited partnership of which Reef Partners is the
general partner to establish and maintain their primary operating accounts at
Texas Capital Bank, N.A.

 

7.4.4.                          The Borrower and each Guarantor which has
granted a Lien on Oil and Gas Properties in connection herewith shall upon
request of the Lender, execute such transfer orders, letters-in-lieu of transfer
orders or division orders as the Lender may from time to time request in respect
of the Collateral to effect a transfer and delivery to the Lender of the
proceeds of production attributable to the Collateral.

 

7.5.                            Payment of Taxes and Claims.

 

7.5.1.                          The Borrower will pay (i) all Taxes imposed upon
it or any of its assets or with respect to any of its franchises, business,
income or profits before any material penalty or interest accrues thereon and
(ii) all material claims (including claims for labor, services, materials and
supplies) for sums which have become due and payable and which have or might
become a Lien (other than a Permitted Lien) on any of its assets; provided,
however, that no payment of such Taxes or claims shall be required if (a) the
amount, applicability or validity thereof is currently being contested in good
faith by appropriate proceedings promptly initiated and diligently conducted,
(b) the Borrower shall have set aside on its books reserves (segregated to the
extent required by applicable accounting principles) reasonably deemed by it to
be adequate with respect thereto, and (c) if material, the Borrower has notified
the Lender of such circumstances, in detail reasonably satisfactory to the
Lender.

 

7.5.2.                          Each Guarantor will pay (i) all Taxes imposed
upon it or any of its assets or with respect to any of its franchises, business,
income or profits before any material penalty or interest accrues thereon and
(ii) all material claims (including claims for labor, services, materials and
supplies) for sums which have become due and payable and which have or might
become a Lien (other than a Permitted Lien) on any of its assets; provided,
however, that no payment of such Taxes or claims shall be required if (a) the
amount, applicability or validity

 

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thereof is currently being contested in good faith by appropriate proceedings
promptly initiated and diligently conducted, (b) such Guarantor shall have set
aside on its books reserves (segregated to the extent required by applicable
accounting principles) reasonably deemed by it to be adequate with respect
thereto, and (c) if material, such Guarantor has notified the Lender of such
circumstances, in detail reasonably satisfactory to the Lender.

 

7.6.                            Payment of Debt; Additional Debt; Payment of
Accounts.

 

7.6.1.                          (i) The Borrower will (a) pay, renew or extend
or cause to be paid, renewed or extended the principal of, and the prepayment
charge, if any, and interest on all Debt heretofore or hereafter incurred or
assumed by it when and as the same shall become due and payable unless such
payment is prohibited by the Loan Documents or would cause a Default hereunder;
(b) faithfully perform, observe and discharge all unwaived covenants, conditions
and obligations within any applicable periods of grace imposed on it by any
instrument evidencing such Debt or by any indenture or other agreement securing
such Debt or pursuant to which such Debt is issued unless such performance,
observance or discharge would cause a Default hereunder; and (c) not permit the
occurrence of any act or omission which would constitute a default under any
such instrument, indenture or agreement.

 

(ii)                                          Each Guarantor will (a) pay, renew
or extend or cause to be paid, renewed or extended the principal of, and the
prepayment charge, if any, and interest on all Debt heretofore or hereafter
incurred or assumed by it when and as the same shall become due and payable
unless such payment is prohibited by the Loan Documents or would cause a Default
hereunder; (b) faithfully perform, observe and discharge all unwaived covenants,
conditions and obligations within any applicable periods of grace imposed on it
by any instrument evidencing such Debt or by any indenture or other agreement
securing such Debt or pursuant to which such Debt is issued unless such
performance, observance or discharge would cause a Default hereunder; and
(c) not permit the occurrence of any act or omission which would constitute a
default under any such instrument, indenture or agreement.

 

7.6.2.                          (i) The Borrower will not create, incur or
suffer to exist any Funded Debt, except without duplication (a) Funded Debt to
the Lender and (b) Permitted Indebtedness.

 

(ii) No Guarantor will create, incur or suffer to exist any Funded Debt, except
without duplication (a) Funded Debt to the Lender and (b) Permitted
Indebtedness.

 

7.6.3.                          (i) The Borrower shall pay all of its trade and
other accounts payable within 90 days after the invoice date therefor, unless
such payables are being contested in good faith by appropriate proceedings or
other written protest thereof.

 

(ii)            Each Guarantor shall pay all of its trade and other accounts
payable within 90 days after the invoice date therefor, unless such payables are
being contested in good faith by appropriate proceedings or other written
protest thereof.

 

7.6.4.                          (i) At any time an Event of Default exists or if
any such payments will cause an Event of Default to exist, the Borrower shall
not voluntarily make any payments on any of its Debts, other than the
Obligations.

 

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(ii) At any time an Event of Default exists or if any such payments will cause
an Event of Default to exist, no Guarantor shall voluntarily make any payments
on any of its Debts, other than the Obligations or payments made by such
Guarantor to the Borrower.

 

7.7.                            Negative Pledge. (i) The Borrower will not
create, suffer to exist or otherwise allow any Liens to be on or otherwise to
affect any of its Property whether now owned or hereafter acquired, except
Permitted Liens.

 

(ii)                                  No Guarantor will create, suffer to exist
or otherwise allow any Liens to be on or otherwise to affect any of its Property
whether now owned or hereafter acquired, except Permitted Liens.

 

7.8.                            Loans and Advances to Others; Investments;
Restricted Payments; Subsidiaries.

 

7.8.1.                  (i) The Borrower will not make or suffer to exist any
loan, advance or extension of credit to any Person except (a) trade and customer
accounts receivable which are for goods furnished or services rendered in the
ordinary course of business and which are payable in accordance with customary
trade terms, (b) Permitted Investments, and (c) advances to employees of the
Borrower for payment of expenses in the ordinary course of business.

 

(ii) No Guarantor will make or suffer to exist any loan, advance or extension of
credit to any Person except (a) trade and customer accounts receivable which are
for goods furnished or services rendered in the ordinary course of business and
which are payable in accordance with customary trade terms, (b) Permitted
Investments, and (c) advances to employees of such Guarantor for payment of
expenses in the ordinary course of business.

 

7.8.2.                          (i) The Borrower will not make any capital
contribution to or make any Investment in, or to purchase or make a commitment
to purchase any interest in, any Person except as permitted in clauses (a),
(b) and (c) of Section 7.8.1(i).

 

(ii) No Guarantor will make any capital contribution to or make any Investment
in, or to purchase or make a commitment to purchase any interest in, any Person
except as permitted in clauses (a), (b) and (c) of Section 7.8.1(ii).

 

7.8.3.                          (i) The Borrower will not, directly or
indirectly, make any Restricted Payment without the prior written consent of the
Lender except as specifically permitted in the definition of such defined term.

 

(ii) No Guarantor will, directly or indirectly, make any Restricted Payment
without the prior written consent of the Lender except as specifically permitted
in the definition of such defined term.

 

7.8.4.                          (i) The Borrower shall not form or acquire any
Subsidiaries, either directly or indirectly through other Subsidiaries, without
the prior written consent of the Lender, which consent, if given, may be
conditioned on such Subsidiary’s execution of a Guaranty and security
instruments covering all of the Property of such Subsidiary, each in form and
substance reasonably satisfactory to the Lender.

 

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(ii) No Guarantor shall form or acquire any Subsidiaries, either directly or
indirectly through other Subsidiaries, without the prior written consent of the
Lender, which consent, if given, may be conditioned on such Subsidiary’s
execution of a Guaranty and security instruments covering all of the Property of
such Subsidiary, each in form and substance reasonably satisfactory to the
Lender.

 

7.9.                            Consolidation, Merger, Maintenance, Change of
Control; Disposition of Property; Restrictive Agreements; Hedging Agreements;
Modification of Organizational Documents; Issuance of Equity Interests.

 

7.9.1.                          (i)                                     The
Borrower will not (a) consolidate or merge with or into any other Person without
the prior written consent of the Lender, (b) sell, lease or otherwise transfer
all or substantially all of its Property to any other Person, (c) terminate, or
fail to maintain, its existence as the type of entity represented in Section 6.1
and in its state of formation represented in Section 6.1. or (d) terminate, or
fail to maintain, its good standing and qualification to transact business in
all jurisdictions where the nature of its business requires the same (except
where the failure to maintain its good standing or qualification could not
reasonably be expected to have a Material Adverse Effect) or (e) permit a Change
of Control Event to occur.

 

(ii)                                  No Guarantor will (a) consolidate or merge
with or into any other Person without the prior written consent of the Lender,
(b) sell, lease or otherwise transfer all or substantially all of its Property
to any other Person, (c) terminate, or fail to maintain, its existence as the
type of entity represented in Section 6.1 and in its state of formation
represented in Section 6.1. or (d) terminate, or fail to maintain, its good
standing and qualification to transact business in all jurisdictions where the
nature of its business requires the same (except where the failure to maintain
its good standing or qualification could not reasonably be expected to have a
Material Adverse Effect) or (e) permit a Change of Control Event to occur.

 

7.9.2.                                  (i)                                    
The Borrower will not sell, encumber, or otherwise transfer all or any portion
of the Collateral, any Property having PW9 Value, or any of its other Property
without the consent of the Lender, except for (i) sales of oil and gas after
severance in the ordinary course of business, provided that no contract for the
sale of hydrocarbons shall obligate the Borrower to deliver hydrocarbons
produced from any of the Collateral at some future date without receiving full
payment therefor within 90 days of delivery or (ii) the sale or other
disposition of its personal Property destroyed, worn out, damaged, or having
only salvage value or no longer used or useful in the business of the Borrower.
Any consent by the Lender to the sale of any Property covered by this
Section may include a requirement (to be treated as a Borrower Requested
Determination) that a new Borrowing Base be determined under Section 2.8.1 and
that the proceeds of such sale plus such additional amounts as the Lender deem
necessary to avoid the occurrence of a Borrowing Base Deficiency be applied to
the Obligations.

 

(ii)                                                  No Guarantor will sell,
encumber, or otherwise transfer all or any portion of the Collateral, any
Property having PW9 Value, or any of its other Property without the prior
written consent of the Lender, except for (a) sales of oil and gas after
severance in the ordinary course of business, provided that no contract for the
sale of hydrocarbons shall obligate such Guarantor to deliver hydrocarbons
produced from any of the Collateral at some future date without receiving full
payment therefor within 90 days of delivery or (b) the sale or other disposition
of its personal Property destroyed, worn out, damaged, or having only salvage
value

 

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or no longer used or useful in the business of the Borrower. Any consent by the
Lender to the sale of any Property covered by this Section may include a
requirement (to be treated as a Borrower Requested Determination) that a new
Borrowing Base be determined under Section 2.8.1 and that the proceeds of such
sale plus such additional amounts as the Lender deems necessary to avoid the
occurrence of a Borrowing Base Deficiency be applied to the Obligations.

 

7.9.3.                          (i)                                     The
Borrower will not be or become party to or bound by any agreement (including any
undertaking in connection with the incurrence of Debt or issuance of Securities)
which imposes any limitation on the disposition of the Collateral more
restrictive than those set forth above or which in any way would be contravened
by the Borrower’s performance of its obligations hereunder or under the other
Loan Documents or which contains any negative pledge on all or any portion of
the Borrower’s Property, except in favor of the Lender.

 

(ii)                                  No Guarantor will be or become party to or
bound by any agreement (including any undertaking in connection with the
incurrence of Debt or issuance of securities) which imposes any limitation on
the disposition of the Collateral more restrictive than those set forth above or
which in any way would be contravened by such Guarantor’s or the Borrower’s
performance of its obligations hereunder or under the other Loan Documents or
which contains any negative pledge on all or any portion of such Guarantor’s or
the Borrower’s Property, except in favor of the Lender.

 

7.9.4.                          (i)                                     The
Borrower will not enter into any Hedging Transaction unless (a) such Hedging
Transaction is an Acceptable Hedging Transaction and (b) the Hedging Agreement
governing such Hedging Transaction does not contain any anti-assignment
provisions restricting the Borrower or, if such agreement contains
anti-assignment provisions which cannot be removed, such provisions shall be
modified to read substantially as follows: “The interest and obligations arising
from this agreement are non-transferable and non-assignable, except that Reef
Oil & Gas Drilling and Income Fund, L.P. may assign and grant a security
interest in its rights and interests hereunder to Texas Capital Bank, N.A. and
its assigns, (the “Lender”) as security for Reef Oil & Gas Drilling and Income
Fund, L.P.’s present and future obligations to the Lender. Until [hedge
provider] is notified in writing by Texas Capital Bank, N.A. to pay to the
Lender amounts due Reef Oil & Gas Drilling and Income Fund, L.P. hereunder,
[hedge provider] may continue to make such payments to Reef Oil & Gas Drilling
and Income Fund, L.P.”

 

(ii)                                  The Borrower will not cause or permit any
Hedging Transaction now existing or hereafter entered into by the Borrower to be
amended, modified, terminated, negated through the Borrower’s entry into one or
more new Hedging Transactions with the opposing effect, or liquidated without
the prior written consent of the Lender.

 

(iii)                               The Borrower will not cause or permit any
Hedging Agreement now existing or hereafter entered into by the Borrower to be
amended, modified or terminated without the prior written consent of the Lender
except for entering into usual and customary confirmations under such Hedging
Agreements setting forth volume, pricing, duration and other such standard
terms.

 

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7.9.5.                          (i)                                     The
Borrower will not amend its Organizational Documents or its Regulatory Documents
in any material respect or in any respect which could be adverse to the
interests of the Lender.

 

(ii)                                          No Guarantor will amend its
Organizational Documents or its Regulatory Documents in any material respect or
in any respect which could be adverse to the interests of the Lender.

 

7.9.6.                          (i)                                     The
Borrower will not issue any Equity Interests or rights, options or warrants to
purchase any of the Borrower’s Equity Interests.

 

(ii)                                          No Guarantor will issue any Equity
Interests or rights, options or warrants to purchase any of such Guarantor’s
Equity Interests.

 

7.10.                     Primary Business; Location of Borrower’s Office;
Ownership of Assets.

 

7.10.1.                   (i)                                     The primary
business of the Borrower shall be and remain the oil and gas exploration,
development and production business.

 

(ii)                                          The primary business of each
Guarantor shall be and remain the oil and gas exploration, development and
production business.

 

7.10.2.                   The location of the Borrower’s principal place of
business and executive office shall remain at the address for the Borrower set
forth on the signature page hereof, unless at least 10 days prior to any change
in such address the Borrower provides the Lender with written notice of such
pending change.

 

7.11.                     Operation of Properties and Equipment; Compliance with
and Maintenance of Contracts; Duties as Nonoperator.

 

7.11.1.                   (i)                                     The Borrower
shall at all times maintain, develop and operate its Oil and Gas Properties in a
good and workmanlike manner and will observe and comply in all material respects
with all of the terms and provisions, express or implied, of all oil and gas
leases relating to such Oil and Gas Properties so long as such oil and gas
leases are capable of producing hydrocarbons in commercial quantities, to the
extent that the failure to so observe and comply could reasonably be expected to
have a Material Adverse Effect.

 

(ii)                                          Each Guarantor shall at all times
maintain, develop and operate its Oil and Gas Properties in a good and
workmanlike manner and will observe and comply in all material respects with all
of the terms and provisions, express or implied, of all oil and gas leases
relating to such Oil and Gas Properties so long as such oil and gas leases are
capable of producing hydrocarbons in commercial quantities, to the extent that
the failure to so observe and comply could reasonably be expected to have a
Material Adverse Effect.

 

(iii)                               The Borrower and each Guarantor shall remain
as the named operator for each oil or gas well in which it now or hereafter owns
an interest if (a) it or such Guarantor is the operator thereof on the date
hereof or becomes the operator thereof subsequent hereto and (b) such well is
now or hereafter becomes Collateral.

 

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(iv)                              The Borrower shall at all times, maintain,
preserve and keep all operating equipment used or useful with respect to the Oil
and Gas Properties of the Borrower in proper repair, working order and
condition, and make all necessary or appropriate repairs, renewals,
replacements, additions and improvements thereto so that the efficiency of such
operating equipment shall at all times be properly preserved and maintained,
provided that no item of operating equipment need be so repaired, renewed,
replaced, added to or improved, if the Borrower shall in good faith determine
that such action is not necessary or desirable for the continued efficient and
profitable operation of the business of the Borrower.

 

(v)                                 Each Guarantor shall at all times, maintain,
preserve and keep all operating equipment used or useful with respect to the Oil
and Gas Properties of such Guarantor in proper repair, working order and
condition, and make all necessary or appropriate repairs, renewals,
replacements, additions and improvements thereto so that the efficiency of such
operating equipment shall at all times be properly preserved and maintained,
provided that no item of operating equipment need be so repaired, renewed,
replaced, added to or improved, if such Guarantor shall in good faith determine
that such action is not necessary or desirable for the continued efficient and
profitable operation of the business of such Guarantor.

 

7.11.2.                   (i) The Borrower shall comply in all material respects
with all Laws and agreements applicable to or relating to its Oil and Gas
Properties or the production and sale of hydrocarbons therefrom and all
applicable proration and conservation laws of the jurisdictions in which such
Properties are located, to the extent that the failure to so comply with such
Laws or agreements could reasonably be expected to expose the Borrower to any
material loss, penalty or forfeiture.

 

(ii)            Each Guarantor shall comply in all material respects with all
Laws and agreements applicable to or relating to its Oil and Gas Properties or
the production and sale of hydrocarbons therefrom and all applicable proration
and conservation laws of the jurisdictions in which such Properties are located,
to the extent that the failure to so comply with such Laws or agreements could
reasonably be expected to expose such Guarantor to any material loss, penalty or
forfeiture.

 

7.11.3.                   With respect to the Oil and Gas Properties referred to
in this Section which are operated by operators other than the Borrower or a
Guarantor or any Affiliate of the Borrower or a Guarantor, the Borrower shall
not be obligated itself to perform any undertakings contemplated by the
covenants and agreements contained in this Section which are performable only by
such operators and are beyond the control of the Borrower, but the Borrower
shall use commercially reasonable efforts to cause such operators to perform
such undertakings.

 

7.11.4.                   (i) The Borrower will not amend, alter or change in
any respect which could reasonably be expected to be adverse to the interests of
the Borrower or the Lender any agreements relating to the operations or business
arrangements of the Borrower or the compression, gathering, sale or
transportation of oil and gas from the Oil and Gas Properties included in the
most recent determination of the Borrowing Base without the prior written
consent of the Lender, which consent shall not be unreasonably withheld.

 

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(ii)                                          No Guarantor will amend, alter or
change in any respect which could reasonably be expected to be adverse to the
interests of such Guarantor or the Lender any agreements relating to the
operations or business arrangements of such Guarantor or the compression,
gathering, sale or transportation of oil and gas from the Oil and Gas Properties
included in the most recent determination of the Borrowing Base without the
prior written consent of the Lender, which consent shall not be unreasonably
withheld.

 

7.12.                     Transactions with Affiliates.

 

7.12.1.                   The Borrower will not engage in any transaction with
an Affiliate unless (i) such transaction is at least as favorable to the
Borrower as could be obtained in an arm’s length transaction with an
unaffiliated third party and (ii) such transaction is not disadvantageous to the
Lender as the holder of the Note and (iii) the Lender is advised in writing of
the terms of such transaction prior to the consummation thereof.

 

7.12.2.                   No Guarantor will engage in any transaction with an
Affiliate unless (i) such transaction is at least as favorable to such Guarantor
as could be obtained in an arm’s length transaction with an unaffiliated third
party and (ii) such transaction is not disadvantageous to the Lender as the
holder of the Note.

 

7.13.                     Plans.

 

7.13.1.                   The Borrower will not assume or otherwise become
subject to an obligation to contribute to or maintain any Plan or acquire any
Person which has at any time had an obligation to contribute to or maintain any
Plan.

 

7.13.2.                   No Guarantor will assume or otherwise become subject
to an obligation to contribute to or maintain any Plan or acquire any Person
which has at any time had an obligation to contribute to or maintain any Plan.

 

7.14.                     Compliance with Laws and Documents.

 

7.14.1.                   The Borrower will not, directly or indirectly, violate
the provisions of any Laws, its Organizational Documents or its Regulatory
Documents or any Material Agreement, if such violation, alone or when combined
with all other such violations, could reasonably be expected to have or does
have a Material Adverse Effect.

 

7.14.2.                   No Guarantor will, directly or indirectly, violate the
provisions of any Laws, its Organizational Documents or its Regulatory Documents
or any Material Agreement, if such violation, alone or when combined with all
other such violations, could reasonably be expected to have or does have a
Material Adverse Effect.

 

7.15.                     Certain Financial Covenants.

 

7.15.1.                   Interest Coverage Ratio. The Borrower will not permit
the ratio of Cash Flow to Fixed Charges to be less than 3.00 to 1.00, determined
as of the end of each fiscal quarter of the Borrower ending on or after
March 31, 2015.

 

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7.15.2.                   Current Ratio. The Borrower will not permit the ratio
of its Current Assets to its Current Liabilities to be less than 1.00 to 1.00,
determined as of the end of each fiscal quarter of the Borrower ending on or
after March 31, 2015.

 

Notwithstanding the foregoing, during such times that the Borrower is required
to deliver financial information to the Lender in accordance with generally
accepted accounting principles, neither Current Assets nor Current Liabilities
shall include the amount of or any liabilities respecting any non-cash items as
a result of the application of Financial Accounting Standards Board Statement
Nos. 115 and 133 and any subsequent amendments thereto or the fair value of any
Hedging Agreement or any non-hedge derivative contract (whether deemed effective
or non-effective).

 

7.15.3.                   Additional Limitations on Distributions. The Borrower
will be entitled to make cash Distributions from time to time if (i) no Default
exists at the time of a proposed Distribution, (ii) the Borrower will have no
less than $500,000 in cash in Borrower’s account at the Lender after the making
of such proposed Distribution and (iii) all such Distributions during any fiscal
quarter do not, in the aggregate, exceed the lesser of Free Cash Flow for the
immediately preceding fiscal quarter or the revenues actually received by the
Borrower during the immediately preceding fiscal quarter.

 

7.16.                             Tax Shelter. In the event the Borrower
determines to take any action inconsistent with the representation in
Section 6.9.2, it will promptly notify the Lender thereof. Accordingly, if the
Borrower so notifies the Lender, the Borrower acknowledges that the Lender may
treat the Loans and Letters of Credit as part of a transaction that is subject
to Treasury Regulation Section 301.6112-1, and the Lender will maintain the
lists and other records required by such Treasury Regulation.

 

7.17.                             Additional Documents; Quantity of Documents;
Title Data; Additional Information.

 

7.17.1.                   The Borrower shall execute and deliver or cause to be
executed and delivered such other and further instruments or documents as in the
reasonable judgment of the Lender may be required to better effectuate the
transactions contemplated herein and in the other Loan Documents.

 

7.17.2.                   The Borrower will deliver all certificates, opinions,
reports and documents hereunder in such number of counterparts as the Lender may
reasonably request.

 

7.17.3.                                   Within 60 days following a written
request therefor from the Lender, the Borrower shall cause to be delivered to
the Lender title opinions, in form and substance and from attorneys reasonably
acceptable to the Lender, or other confirmation of title acceptable to the
Lender, covering Oil and Gas Properties that are covered by the Mortgages and
constitute not less than 81% by PW Value of the Oil and Gas Properties utilized
in the most recent determination of the Borrowing Base; and promptly, but in any
event within 60 days following notice from the Lender of any defect, material in
the opinion of the Lender, in the title of the mortgagor under any Mortgage to
any Oil and Gas Property covered thereby, clear such title defect, and in the
event any such title defects are not cured in a timely manner, pay all related
costs and fees incurred by the Lender in attempting to do so.

 

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7.17.4.                   The Borrower shall furnish to the Lender, promptly
upon the request of the Lender, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of the Borrower
as the Lender may from time to time reasonably request; and notify the Lender
not less than 10 days prior to the occurrence of any condition or event that may
change the proper location for the filing of any financing statement or other
public notice or recording for the purpose of perfecting a Lien in any
Collateral, including any change in its name or the location of its principal
place of business or chief executive office; and upon the request of the Lender,
execute such additional Security Documents as may be necessary or appropriate in
connection therewith.

 

7.18.                     ENVIRONMENTAL INDEMNIFICATION. The Borrower shall, on
a current basis, indemnify, defend and hold each Indemnified Party harmless on a
current basis from and against any and all claims, losses, damages, liabilities,
fines, penalties, charges, administrative and judicial proceedings and orders,
judgments, remedial actions, requirements and enforcement actions of any kind,
and all costs and expenses incurred in connection therewith (including, without
limitation, reasonable attorneys’ fees and expenses), arising directly or
indirectly, in whole or in part, from (a) the presence of any hazardous
substances on, under, or from any Property of the Borrower, whether prior to or
during the term hereof, (b) any activity carried on or undertaken on or off any
Property of the Borrower, whether prior to or during the term hereof, and
whether by the Borrower or any predecessor in title, employee, agent,
contractor, or subcontractor of the Borrower or any other Person at any time
occupying or present on such Property, in connection with the handling,
treatment, removal, storage, decontamination, cleanup, transportation, or
disposal of any hazardous substances at any time located or present on or under
such Property, (c) any residual contamination on or under any Property of the
Borrower, or (d) any contamination of any Property or natural resources arising
in connection with the generation, use, handling, storage, transportation or
disposal of any hazardous substances by the Borrower or any employee, agent,
contractor, or subcontractor of the Borrower while such Persons are acting
within the scope of their relationship with the Borrower, irrespective of
whether any of such activities were or will be undertaken in accordance with
applicable requirements of Law, INCLUDING ANY OF THE FOREGOING IN THIS
SECTION ARISING FROM THE SOLE NEGLIGENCE, COMPARATIVE NEGLIGENCE OR CONCURRENT
NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES OR THE SOLE OR CONCURRENT STRICT
LIABILITY IMPOSED ON ANY OF THE INDEMNIFIED PARTIES, but not any of the
foregoing in this section arising from the gross negligence or willful
misconduct on the part of the Indemnified Party seeking indemnification under
this section; with the foregoing indemnity surviving satisfaction of all
obligations and the termination of this Agreement.

 

7.19.                     Exceptions to Covenants. The Borrower shall not be
permitted to take any action which is permitted by any of the covenants
contained in this Agreement if such action is in breach of any other covenant
contained in this Agreement.

 

7.20.                     Anti-Terrorism Laws. Neither the Borrower nor any of
the other Obligated Parties shall (a) deal in, or otherwise engage in any
transaction relating to, any Property or interests in Property blocked pursuant
to Executive Order No. 13224; or (b) engage in or conspire to engage in any
transaction that evades or avoids, or has the purpose of evading or avoiding, or
attempts to violate, (i) any of the prohibitions set forth in Executive Order
No. 13224 or the USA Patriot Act, or (ii) any prohibitions set forth in the
rules or regulations issued

 

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by OFAC or any sanctions against targeted foreign countries, terrorism
sponsoring organizations, and international narcotics traffickers based on U.S.
foreign policy. The Borrower shall deliver to the Lender any certification or
other evidence requested from time to time by the Lender, in its reasonable
discretion, confirming the Obligated Parties’ compliance with this Section.

 

7.21.                     Special Title Matters. Within 30 days following the
Closing, the Borrower shall have delivered to the Lender or its counsel, title
data which in the sole judgment of the Lender is sufficient to prove the
Borrower’s record, beneficial and unencumbered ownership (other than Permitted
Liens) of Oil and Gas Properties that are encumbered by the Mortgages and
comprise at least 81% by PW9 Value of the Oil and Gas Properties utilized by the
Lender in determining the initial Borrowing Base.

 

ARTICLE VIII

 

DEFAULTS; REMEDIES

 

8.1.                            Events of Default; Acceleration of Maturity. If
any one or more of the following events (each an “Event of Default”) has
occurred and has not been waived in accordance with the provisions hereof
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body or otherwise):

 

8.1.1.                          (i) the Borrower shall fail to pay, when due,
any principal of, or interest on, (a) the Note or (b) any other Debt of the
Borrower to the Lender.

 

(ii)                                          the Borrower shall fail to pay
when due, any fees or other amounts payable hereunder and not covered by clause
(i) above, if such failure shall continue unremedied for a period of 10 days
after notice thereof is given to the Borrower.

 

8.1.2.                          (i) the Borrower shall fail to observe or
perform any covenant or agreement contained in Sections 7.1, 7.2.3, 7.6.2, 7.7,
7.8, 7.9 or 7.15.

 

(ii)                                          any Guarantor shall (a) fail to
comply with the provisions of its Guaranty or (b) revoke or attempt to revoke
such Guarantor’s Guaranty or deny the validity or enforceability of such
Guarantor’s Guaranty.

 

8.1.3.                          the Borrower or any other Person (other than the
Lender) shall fail to observe or perform any covenant or agreement contained in
this Agreement, the other Loan Documents or the Intercreditor Agreement (other
than those covered by Sections 8.1.1 or 8.1.2), for a period of 30 days after
the earlier of (i) any Responsible Representative shall have become aware or
reasonably should have become aware (regardless of the source of such awareness)
of such default or (ii) written notice specifying such default has been given to
such Person by the Lender.

 

8.1.4.                          (i) the Borrower shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment

 

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of a trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its Property, or shall consent to any such relief or to
the appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate or other action to
authorize any of the foregoing.

 

(ii)                                          Any Guarantor shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its Property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate or other action to authorize any of the
foregoing.

 

8.1.5.                          (i) an involuntary case or other proceeding
shall be commenced against the Borrower seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its Property, and such involuntary case or other proceeding
shall remain undismissed or unstayed for a period of 30 days; or an order for
relief shall be entered against the Borrower under the federal bankruptcy laws
as now or hereafter in effect which remains undismissed or unstayed for a period
of 30 days.

 

(ii)                                          an involuntary case or other
proceeding shall be commenced against any Guarantor seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its Property, and such
involuntary case or other proceeding shall remain undismissed or unstayed for a
period of 30 days; or an order for relief shall be entered against any Guarantor
under the federal bankruptcy laws as now or hereafter in effect which remains
undismissed or unstayed for a period of 30 days.

 

8.1.6.                          (i) the Borrower (a) shall default in the
payment of any of its Material Debts (other than the Note) and such default
shall continue beyond any applicable cure period, (b) shall default in the
performance or observance of any other provision contained in any agreements or
instruments evidencing or governing such Material Debt and such default is not
waived and continues beyond any applicable cure period, or (c) any other event
or condition occurs which results in the acceleration of such Material Debt.

 

(ii) Any Guarantor (a) shall default in the payment of any of its Material Debts
(other than its Guaranty) and such default shall continue beyond any applicable
cure period, (b) shall default in the performance or observance of any other
provision contained in any agreements or instruments evidencing or governing
such Material Debt and such default is not waived and continues beyond any
applicable cure period, or (c) any other event or condition occurs which results
in the acceleration of such Material Debt.

 

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8.1.7.                          (i) the Borrower shall default in the payment of
any of its Debts to the Lender or shall default in the performance or observance
of any provision contained in any agreements or instruments evidencing or
governing any such Debt and such default is not waived and continues beyond any
applicable cure period.

 

(ii)                                          any Guarantor shall default in the
payment of any of its Debts to the Lender or shall default in the performance or
observance of any provision contained in any agreements or instruments
evidencing or governing any such Debt and such default is not waived and
continues beyond any applicable cure period.

 

8.1.8.                          (i) one or more judgments or orders for the
payment of money aggregating in excess of $25,000 shall be rendered against the
Borrower which in the opinion of the Lender is not adequately covered by
insurance and such judgment or order (a) shall continue unsatisfied or unstayed
(unless bonded with a supersedeas bond at least equal to such judgment or order)
for a period of 30 days, or (b) is not fully paid and satisfied at least 10 days
prior to the date on which any of its Property may be lawfully sold to satisfy
such judgment or order.

 

(ii) one or more judgments or orders for the payment of money aggregating in
excess of $25,000 shall be rendered against any Guarantor which in the opinion
of the Lender is not adequately covered by insurance and such judgment or order
(a) shall continue unsatisfied or unstayed (unless bonded with a supersedeas
bond at least equal to such judgment or order) for a period of 30 days, or
(b) is not fully paid and satisfied at least 10 days prior to the date on which
any of its Property may be lawfully sold to satisfy such judgment or order.

 

8.1.9.                          any representation, warranty, certification or
statement made or deemed to have been made by or on behalf of the Borrower in
this Agreement or by the Borrower or any other Person in any certificate,
financial statement or other document delivered pursuant to this Agreement shall
prove to have been incorrect in any material respect when made. Without limiting
the generality of the foregoing sentence, such incorrect representation,
warranty, certification or statement shall be deemed to be incorrect in a
material respect if such incorrect representation, warranty, certification or
statement (i) could reasonably be expected to have any adverse effect whatsoever
upon the validity, performance or enforceability of any Loan Document, (ii) is
or might reasonably be expected to be material and adverse to the financial
condition or business operations of any Person or to the prospects of any
Person, (iii) could reasonably be expected to impair the Borrower’s ability to
fulfill its obligations under the terms and conditions of the Loan Documents, or
(iv) could reasonably be expected to impair the Lender’s ability to receive full
and timely payment of the Note.

 

8.1.10.                   (i) any material license, franchise, permit, or
authorization issued to the Borrower by any Tribunal is forfeited, revoked, or
not renewed; or any proceeding with respect to seeking forfeiture or revocation
thereof is instituted and is not resolved or dismissed within one year of the
date of the publication of the order instituting such proceeding.

 

(ii) any material license, franchise, permit, or authorization issued to any
Guarantor by any Tribunal is forfeited, revoked, or not renewed; or any
proceeding with respect to seeking forfeiture or revocation thereof is
instituted and is not resolved or dismissed within one year of the date of the
publication of the order instituting such proceeding.

 

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8.1.11.                   (i) a default shall occur under any Material
Agreement, other than this Agreement, to which the Borrower is a party or by
which any of its Property is bound and such default continues beyond any
applicable period of grace provided therefor, if such default, alone or when
combined with all other defaults under Material Agreements causes or could
reasonably be expected to cause a Material Adverse Effect.

 

(ii)                                          a default shall occur under any
Material Agreement to which any Guarantor is a party or by which any of its
Property is bound and such default continues beyond any applicable period of
grace provided therefor, if such default, alone or when combined with all other
defaults under Material Agreements causes or could reasonably be expected to
cause a Material Adverse Effect.

 

8.1.12.                   a Change of Control Event shall occur.

 

then, and in every such event, the Lender may at its option (i) declare the
outstanding principal balance of and accrued interest on the Note to be, and the
same shall thereupon forthwith become, due and payable without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or other
notice of any kind, all of which are hereby waived by the Borrower, (ii) proceed
to foreclose the Liens securing the Note, and (iii) take such other actions as
are permitted by Law; provided that in the case of any of the Events of Default
specified in Sections 8.1.4 and 8.1.5 with respect to the Borrower, without any
notice to the Borrower or any other act by the Lender, (1) the commitment of the
Lender to make Loans hereunder shall terminate except for funding obligations
for Letters of Credit, (2) the commitment of the Lender to issue letters of
credit hereunder or to renew (including extensions) Letters of Credit shall
terminate and (3) the Note (together with accrued interest thereon) shall become
immediately due and payable without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other notice of any kind, all of
which are hereby waived by the Borrower.

 

8.2.                            Suits for Enforcement. In case any one or more
of the Events of Default specified in Section 8.1 shall have occurred and be
continuing, the Lender may, at its option, proceed to protect and enforce its
rights either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant or agreement contained in this Agreement or
in aid of the exercise of any power granted in this Agreement.

 

8.3.                            Remedies Cumulative. No remedy herein conferred
upon the Lender is intended to be exclusive of any other remedy and each and
every such remedy shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute or otherwise.

 

8.4.                            Remedies Not Waived. No course of dealing and no
delay in exercising any rights under this Agreement or under the other Loan
Documents shall operate as a waiver of any rights hereunder or thereunder of the
Lender.

 

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ARTICLE IX

MISCELLANEOUS

 

9.1.                            Amendments and Waivers.

 

9.1.1.                          Any provision of this Agreement, the Note or the
other Loan Documents may be amended or waived (either generally or in a
particular instance and either retroactively or prospectively) by a written
instrument signed by the Borrower and the Lender, and any consent required of
the Lender herein must be in writing and, unless specifically stated otherwise
herein, may be withheld for any reason or no reason. Delivery of an executed
counterpart of such written instrument by telecopy, e-mail, facsimile or other
electronic means shall be effective delivery of a manually executed counterpart
of such written instrument.

 

9.1.2.                          Even though certain Guarantors might join in the
execution of this Agreement or amendments hereto, the signature or consent of
such Guarantors shall not be required with respect to any future amendments to
this Agreement.

 

9.2.                            Highest Lawful Interest Rate. The Lender, the
Borrower and any other parties to the Loan Documents intend to contract in
strict compliance with applicable usury law from time to time in effect. In
furtherance thereof such Persons stipulate and agree that none of the terms and
provisions contained in the Loan Documents 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, and the provisions of this Section 9.2 shall
control over all other provisions of the Loan Documents which may be in conflict
or apparent conflict herewith. Regardless of any provision contained in any of
the Loan Documents, the Lender shall never be entitled to receive, collect, or
apply as interest on all or any part of the Loans, any amount in excess of the
Highest Lawful Rate in effect from day to day, and, in the event the Lender ever
receives, collects, or applies as interest any such excess, such amount which
would be deemed excessive interest shall be deemed a partial prepayment of the
principal of the Loans and treated hereunder as such; and, if the entire
principal amount of the Loans owed to the Lender is paid in full, any remaining
excess shall be repaid to the Borrower. In determining whether the interest paid
or payable, under any specific contingency, exceeds the Highest Lawful Rate in
effect from day to day, the Borrower and the Lender shall, to the maximum extent
permitted under applicable law, (i) characterize any nonprincipal payment as an
expense, fee, or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and
spread the total amount of interest throughout the entire contemplated term of
the Loans so that the interest rate is uniform throughout the entire term of the
Loans; provided that, if the interest received by the Lender for the actual
period of existence thereof exceeds the Highest Lawful Rate in effect from day
to day, the Lender shall apply or refund to the Borrower the amount of such
excess as provided in this Section, and, in such event, the Lender shall not be
subject to any penalties provided by any laws for contracting for, charging,
taking, reserving, or receiving interest in excess of the Highest Lawful Rate in
effect from day to day.

 

9.3.                            INDEMNITY.

 

9.3.1.                  Whether or not any Loans are ever funded or any letter
of credit is ever issued hereunder, and in addition to any other
indemnifications herein or in any other Loan

 

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Documents or the Intercreditor Agreement, the Borrower agrees to indemnify and
defend and hold harmless on a current basis each Indemnified Party, from and
against any and all liabilities, losses, damages, costs, interest, charges,
counsel fees and other expenses and penalties of any kind which any of the
Indemnified Parties may sustain or incur in connection with any investigative,
administrative or judicial proceeding (whether or not any Indemnified Party
shall be designated a party thereto) or otherwise by reason of or arising out of
the execution and delivery of this Agreement, any of the other Loan Documents,
the Intercreditor Agreement and/or the consummation of the transactions
contemplated hereby or thereby. The indemnification provisions in this
Section shall be enforceable regardless of whether the liability is based on
past, present or future acts, claims or legal requirements (including any past,
present or future bulk sales law, environmental law, fraudulent transfer act,
occupational safety and health law, or products liability, securities or other
legal requirement), AND REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON
FROM WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE, CONCURRENT,
CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING INDEMNIFICATION OR
OF ANY OTHER INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT STRICT LIABILITY
IMPOSED ON THE PERSON SEEKING INDEMNIFICATION OR ON ANY OTHER INDEMNIFIED PARTY,
but not any of the foregoing in this Section arising from the gross negligence
or willful misconduct on the part of the Indemnified Party seeking
indemnification under this Section; with the foregoing indemnity surviving
satisfaction of all obligations and the termination of this Agreement.

 

9.3.2.                  Any amount to be paid under Section 9.3 to the Lender
shall be a demand obligation owing by the Borrower and if not paid within three
Business Days of demand shall bear interest from the date of expenditure by the
Lender until paid at a per annum rate equal to the Default Rate. The obligations
of the Borrower under Section 9.3 shall survive payment of the Note and the
assignment of any right hereunder.

 

9.4.                            Expenses.

 

9.4.1.                  Whether or not any one or more of the Loans are ever
funded, the Borrower shall pay or reimburse Lender, at Lender’s discretion, for
(i) all reasonable out-of-pocket expenses of the Lender, including, without
limitation, fees and disbursements of counsel for the Lender, incurred in
connection with the preparation of this Agreement and the other Loan Documents
(including the furnishing of any written or oral opinions or advice incident to
this transaction) and, if appropriate, the recordation of the Loan Documents,
any waiver or consent hereunder or any amendment hereof or any Default or
alleged Default hereunder, (ii) all title review expenses, appraisal expenses,
environmental assessment expenses, and any other due diligence expenses
incurred, and (iii) if an Event of Default occurs, all reasonable out-of-pocket
expenses incurred by the Lender, including fees and disbursements of counsel in
connection with such Event of Default and collection and other enforcement
proceedings resulting therefrom, fees of auditors, consultants, engineers and
other Persons incurred in connection therewith (including the supervision,
maintenance or disposition of the Collateral) and investigative expenses
incurred by the Lender in connection therewith, which amounts shall be deemed
compensatory in nature and liquidated as to amount upon notice to the Borrower
by the Lender and which amounts shall include, but not be limited to (a) all
court costs, (b) reasonable attorneys’ fees, (c) reasonable fees and expenses of
auditors and accountants incurred to protect

 

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the interests of the Lender, (d) fees and expenses incurred in connection with
the participation by the Lender as a member of the creditors’ committee in a
case commenced under any Insolvency Proceeding, (e) fees and expenses incurred
in connection with lifting the automatic stay prescribed in Title 11 §362 of the
United States Code, and (f) fees and expenses incurred in connection with any
action pursuant to Title 11 §1129 of the United States Code all reasonably
incurred by the Lender in connection with the collection of any sums due under
the Loan Documents, together with interest at the per annum interest rate equal
to the Default Rate, calculated on a basis of a calendar year of 365 or 366
days, as the case may be, counting the actual number of days elapsed, on each
such amount from the date of notification that the same was expended, advanced,
or incurred by the Lender until the date it is repaid to the Lender, with the
obligations under Section 9.4 surviving the non-assumption of this Agreement in
a case commenced under any Insolvency Proceeding and being binding upon the
Borrower or a trustee, receiver, custodian, or liquidator of the Borrower
appointed in any such case.

 

9.4.2.                  THE BORROWER SHALL INDEMNIFY THE LENDER AGAINST ANY
TRANSFER TAXES, DOCUMENTARY TAXES, ASSESSMENTS OR CHARGES MADE BY ANY
GOVERNMENTAL AUTHORITY BY REASON OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS.

 

9.4.3.                  Any amount to be paid under Section 9.4 shall be a
demand obligation owing by the Borrower and if not paid within three
(3) Business Days of demand shall bear interest from the date of expenditure
until paid at a per annum rate equal to the Default Rate. The obligations of the
Borrower under Section 9.4 shall survive payment of the Note and the assignment
of any right hereunder.

 

9.5.                            Taxes. The Borrower will, to the extent it may
lawfully do so, pay all Taxes (including interest and penalties but expressly
excluding federal or state income taxes) which may be payable in respect of the
execution and delivery of this Agreement or the other Loan Documents, or in
respect of any amendment of or waiver under or with respect to the foregoing,
and will hold the Lender harmless on a current basis against any loss or
liability resulting from nonpayment or delay in payment of any such Taxes (as
limited above). The obligations of the Borrower under this Section shall survive
the payment of the Note and the assignment of any right hereunder.

 

9.6.                            Survival. All representations and warranties
made by or on behalf of the Borrower in this Agreement or the other Loan
Documents or in any certificate or other instrument delivered by the Borrower or
on the Borrower’s behalf under the Loan Documents shall be considered to have
been relied upon by the Lender and shall survive the delivery to the Lender of
such Loan Documents or the extension of the Loans (or any part thereof),
regardless of any investigation made by or on behalf of the Lender.

 

9.7.                            Applicable Law; Venue.

 

9.7.1.                          This Agreement has been negotiated, is being
executed and delivered, and will be performed in whole or in part, in the State
of Texas. This Agreement, the other Loan Documents, the entire relationship of
the parties hereto, and any litigation between the parties (whether grounded in
contract, tort, statute, law or equity) shall be governed by, construed in
accordance with, and interpreted and enforced pursuant to the Laws of the State
of Texas (and

 

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the applicable federal Laws of the United States of America) without giving
effect to its choice of law principles, except to the extent the Laws of any
jurisdiction where Collateral is located require application of such Laws with
respect to such Collateral.

 

9.7.2.                          The Borrower hereby irrevocably submits to the
non-exclusive jurisdiction of any United States federal or Texas state court
sitting in Dallas, Dallas County, Texas in any action or proceeding arising out
of or relating to any Loan Documents and the Borrower hereby irrevocably agrees
that all claims in respect of such action or proceeding may be heard and
determined in any such court, and the Borrower hereby specifically consents to
the jurisdiction of the State District Courts of Dallas County, Texas and the
United States District Court for the Northern District of Texas, Dallas
Division. Nothing herein shall limit the right of the Lender to bring
proceedings against the Borrower in the courts of any other jurisdiction. Any
judicial proceeding by the Borrower against the Lender or any Affiliate of the
Lender involving, directly or indirectly, any matter in any way arising out of,
related to, or connected with any Loan Document shall be brought only in the
State District Courts of Dallas County, Texas, or in the United States District
Court for the Northern District of Texas, Dallas Division.

 

9.8.                            WAIVER OF JURY TRIAL AND EXEMPLARY DAMAGES. THE
BORROWER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND
UNCONDITIONALLY WAIVES (A) ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT,
PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF
ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE
LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH RESPECT THERETO AND (B) TO THE MAXIMUM
EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
SUCH LITIGATION ANY SPECIAL DAMAGES (AS DEFINED BELOW). THE PROVISIONS OF THIS
SECTION ARE A MATERIAL INDUCEMENT FOR THE LENDER’S ENTERING INTO THIS AGREEMENT.
AS USED IN THIS SECTION, “SPECIAL DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED).

 

9.9.                            Headings. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof and words such as “hereunder” or “ herein” shall refer to the entirety of
this Agreement unless specifically indicated otherwise.

 

9.10.                     Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original and all of which
together shall constitute one and the same instrument. This Agreement shall
become effective at such time as the counterparts hereof which, when taken
together, bear the signature of the Borrower and the Lender, shall be delivered
to the Lender. Delivery of an executed counterpart of a signature page of this
Agreement by telecopy, e-mail, facsimile or other electronic means shall be
effective as a delivery of a manually executed counterpart of this Agreement.

 

9.11.                     Invalid Provisions, Severability. If any provision of
this Agreement or the other Loan Documents is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term hereof or
thereof, such provision shall be fully severable, this

 

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Agreement and the other Loan Documents shall be construed and enforced as if
such illegal, invalid, or unenforceable provision had never comprised a part
thereof, and the remaining provisions hereof and thereof shall remain in full
force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance therefrom. Furthermore, in lieu of
such illegal, invalid or unenforceable provision there shall be added
automatically as a part of this Agreement or the other Loan Documents a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.

 

9.12.                     Communications Via Internet. The Borrower and each
Guarantor (by its or his/her execution of a Guaranty), hereby authorizes the
Lender and its counsel and agents to communicate and transfer documents and
other information (including confidential information) concerning this
transaction or the Borrower and such Guarantor and the business affairs of the
Borrower and such Guarantor via the Internet or other electronic communication
without regard to the lack of security of such communications.

 

9.13.                     USA Patriot Act Notice. The Lender hereby notifies the
Borrower and the other Obligated Parties that pursuant to the requirements of
the USA Patriot Act, they are required to obtain, verify and record information
that identifies the Borrower and the other Obligated Parties, which information
includes the name and address of the Borrower and the other Obligated Parties
and other information that will allow them to identify the Borrower and the
other Obligated Parties in accordance with such Act.

 

9.14.                     EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS AND THE INTERCREDITOR AGREEMENT AND AGREES THAT IT IS CHARGED WITH
NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
AND THE INTERCREDITOR AGREEMENT; 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, THE OTHER LOAN DOCUMENTS AND THE INTERCREDITOR AGREEMENT; AND
HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS AND THE INTERCREDITOR AGREEMENT; AND THAT IT RECOGNIZES
THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS 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, THE OTHER LOAN
DOCUMENTS OR THE INTERCREDITOR AGREEMENT ON THE BASIS THAT THE PARTY HAD NO
NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
“CONSPICUOUS.”

 

9.15.                     [Intentionally Omitted.].

 

9.16.                     [Intentionally Omitted.].

 

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9.17.                     Increased Cost and Reduced Return.

 

9.17.1.                                           If on or after the date
hereof, in the case of any Loan or any obligation to make Loans, the adoption of
any applicable law, rule or regulation, or any change in any applicable law,
rule or regulation, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by the Lender
with any request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System), special
deposit, insurance assessment or similar requirement against assets of, deposits
with or for the account of, or credit extended by, the Lender and the result of
any of the foregoing is to reduce the amount of any sum received or receivable
by the Lender under this Agreement or under the Note with respect thereto, by an
amount reasonably deemed by the Lender to be material, then, within 15 days
after demand by the Lender, the Borrower shall pay to the Lender such additional
amount or amounts as will compensate the Lender for such increased cost or
reduction.

 

9.17.2.                                           If the Lender shall have
reasonably determined that, after the date hereof, the adoption of any
applicable law, rule or regulation regarding capital adequacy, or any change in
any such rule or regulation, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration thereof, or any request
or directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on capital of the Lender as a consequence
of the Lender’s obligations hereunder to a level below that which the Lender
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies with respect to capital adequacy) by an amount
deemed by the Lender to be material, then from time to time, within 15 days
after demand by the Lender, the Borrower shall pay to the Lender such additional
amount or amounts as will compensate the Lender for such reduction.

 

9.17.3.                                           The Lender will promptly
notify the Borrower of any event of which it has knowledge, occurring after the
date hereof, which will entitle the Lender to compensation pursuant to this
Section. A certificate of the Lender claiming compensation under this
Section and setting forth the additional amount or amounts to be paid to it
hereunder shall be conclusive in the absence of manifest error. In determining
such amount, the Lender may use any reasonable averaging and attribution
methods.

 

9.18.                     Taxes.

 

9.18.1. For the purpose of this Section 9.18, the following terms have the
following meanings:

 

“Taxes” means any and all present or future taxes, duties, levies, imposts,
deductions, charges or withholdings with respect to any payment by the Borrower
pursuant to this Agreement or under the Note, and all penalties and interest
with respect thereto, excluding (i) in the case of the Lender, taxes imposed on
its income, and franchise or similar taxes imposed on it, by a jurisdiction
under the laws of which the Lender is organized or in which its principal

 

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executive office is located, or in which it would be subject to tax due to some
connection other than that created by this Agreement and (ii) in the case of the
Lender, any United States withholding tax at the time the Lender first becomes a
party to this Agreement.

 

“Other Taxes” means any present or future stamp or documentary taxes and any
other excise or property taxes, or similar charges or levies and all penalties
and interest with respect thereto, which arise from the making of any payment
pursuant to this Agreement or under the Note or from the execution or delivery
of this Agreement or the Note.

 

9.18.2.                                           Any and all payments by the
Borrower to or for the account of the Lender hereunder or under the Note shall
be made without deduction for any Taxes or Other Taxes; provided that, if the
Borrower shall be required by law to deduct any Taxes or Other Taxes from any
such payments, (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under Section 9.13) the Lender receives an amount equal to the sum
it would have received had no such deductions been made, (ii) the Borrower shall
make such deductions, (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law and (iv) the Borrower shall furnish to the Lender, at its address referred
to in Article XIII, the original or a certified copy of a receipt evidencing
payment thereof.

 

9.18.3.                                           The Borrower agrees to
indemnify the Lender for the full amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes on amounts payable under this
Section) paid by the Lender. This indemnification shall be paid within 15 days
after the Lender makes appropriate demand therefor.

 

ARTICLE X

 

[INTENTIONALLY OMITTED]

 

ARTICLE XI

 

SETOFF

 

11.1.                     Setoff. In addition to, and without limitation of, any
rights of the Lender under applicable law, if any Event of Default occurs, any
and all deposits (including all account balances, whether provisional or final
and whether or not collected or available) and any other indebtedness at any
time held or owing by the Lender or any Affiliate thereof to or for the credit
or account of the Borrower may be offset and applied toward the payment of the
Obligations, whether or not the Obligations, or any part hereof, shall then be
due. The Lender shall give the Borrower written notice of such offset and
application promptly after effecting it. To the extent that the Borrower has
accounts, which in the style thereof as reflected in the Lender’s records are
designated as royalty, joint interest owner or operator accounts, the foregoing
right of set off shall not extend to funds in such accounts which belong to, or
otherwise arise from payments to the Borrower for the account of, third-party
royalty, joint interest owners, or operators.

 

11.2.                     Adjustments. In the event that any payments made
hereunder on the Obligations at any particular time are insufficient to satisfy
in full the Obligations due and payable at such

 

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time, such payments shall be applied (i) first, to that portion of the
Obligations consisting of fees and expenses then due and payable, (ii) second,
to that portion of the Obligations consisting of accrued, unpaid interest then
due and payable, (iii) third, to that portion of the Obligations consisting of
principal then due and payable, and (iv) last, to any other Obligations.

 

ARTICLE XII

 

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

 

12.1.                     Successors and Assigns. The terms and provisions of
the Loan Documents shall be binding upon and inure to the benefit of the
Borrower and the Lender and their respective successors and assigns, except that
the Borrower shall not have any right to assign its rights or obligations under
the Loan Documents.

 

12.2.                     Participations; Setoffs by Participants.

 

12.2.1.                                           The Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time sell to one or more banks or other entities (each a “Participant”)
participating interests in any Loan owing to the Lender, the Note, any
Commitment of the Lender or any other interest of the Lender under the Loan
Documents. In the event of any such sale by the Lender of participating
interests to a Participant, the Lender’s obligations under the Loan Documents
shall remain unchanged, the Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, the Lender shall remain
the holder of the Note for all purposes under the Loan Documents, all amounts
payable by the Borrower under this Agreement shall be determined as if the
Lender had not sold such participating interests, and the Borrower shall
continue to deal solely and directly with the Lender in connection with the
Lender’s rights and obligations under the Loan Documents.

 

12.2.2.                                           The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in Section 11.1
in respect of its participating interest in amounts owing under the Loan
Documents to the same extent as if the amount of its participating interest were
owing directly to it as the Lender under the Loan Documents, and the Lender
shall also retain the right of setoff provided in Section 11.1 with respect to
the amount of participating interests sold to each Participant.

 

12.3.                     Dissemination of Information. The Borrower authorizes
the Lender to disclose to any Transferee and any prospective Transferee any and
all information in the Lender’s possession concerning the Borrower, each
Guarantor and their respective Affiliates.

 

ARTICLE XIII

 

NOTICES

 

13.1.                     Notices. Except as otherwise specifically permitted
herein, all notices, requests and other communications to any party hereunder
shall be in writing (including electronic transmission, facsimile transmission
or similar writing) and shall be given to such party: (x) in the case of the
Borrower or the Lender, at its address or facsimile number set forth on the
signature pages hereof, or (y) in the case of any party, at such other address
or facsimile number as such party may hereafter specify for the purpose by
notice to the Lender and the Borrower in

 

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accordance with the provisions of this Section 13.1. Each such notice, request
or other communication shall be effective (i) if given by facsimile
transmission, when transmitted to the facsimile number specified in this
Section and confirmation of receipt is received (the receipt thereof shall be
deemed to have been acknowledged upon the sending Person’s receipt of its
facsimile machine’s confirmation of successful transmission; provided that if
the day on which such facsimile is received is not a Business Day or is after
4:00 p.m. CT on a Business Day, then the receipt of such facsimile shall be
deemed to have been acknowledged on the next following Business Day), (ii) if
given by mail, three (3) Business Days after such communication is deposited in
the mail with first class postage prepaid, addressed as aforesaid, or (iii) if
given by any other means, when delivered (or, in the case of electronic
transmission, received) at the address specified in this Section; except that
notices to the Lender under Article II shall not be effective until received by
the Lender, and except that oral notices to the Borrower of decreases in the
Borrowing Base or increases in the amount of the monthly Borrowing Base
reductions shall be effective when so communicated to the Borrower.

 

13.2.                     Change of Address. The Borrower and the Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.

 

[Signature Page follows]

 

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ARTICLE XIV

 

ENTIRE AGREEMENT

 

THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN
THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF.
FURTHERMORE, IN THIS REGARD, THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG
THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

 

In witness whereof, the undersigned have executed this Agreement as of the day
and year first above written.

 

 

BORROWER:

 

 

 

REEF OIL & GAS DRILLING AND INCOME FUND, L.P.

 

 

 

 

By:

Reef Oil & Gas Partners, L.P., as General Partner

 

 

 

 

By:

Reef Oil & Gas Partners, GP, LLC, as General Partner

 

 

 

 

1901 N. Central Expressway, Suite 300

 

By:

/s/ Michael J. Mauceli

Richardson, Texas 75080

 

Name:

Michael J. Mauceli

 

 

Title:

Manager

 

 

 

 

 

LENDER:

 

 

 

TEXAS CAPITAL BANK, N.A.

 

 

 

 

 

2000 McKinney Avenue, Suite 1800

By:

/s/ Brad Kraus

Dallas, Texas 75201

Name:

Brad Kraus

Attention: Energy Banking Group

Title:

Assistant Vice President

Facsimile: 214/932-6704

 

 

Signature Page

to Credit Agreement

 

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