Exhibit 10.13

 

AMENDED AND RESTATED SECURITY AGREEMENT

 

THIS AMENDED AND RESTATED SECURITY AGREEMENT dated as of December 17, 2008 (this
“Security Agreement”) is by and among CANO PETROLEUM, INC., a Delaware
corporation (“Borrower”), each subsidiary of the Borrower signatory hereto
(together with the Borrower, the “Grantors” and individually, each a “Grantor”)
and Union Bank of California, N.A. as Administrative Agent (as hereinafter
defined) for the ratable benefit of itself, the Issuing Lender (as hereinafter
defined), the Lenders (as hereinafter defined), and the Swap Counterparties (as
defined in the Credit Agreement referred to below, and together with the
Administrative Agent, the Issuing Lender, and the Lenders collectively referred
to herein as the “Secured Parties” and individually, a “Secured Party”).

 

RECITALS

 

A.                                   The Borrower has previously entered into
that certain Credit Agreement dated November 29, 2005 (as it has been amended,
restated, supplemented or otherwise modified from time to time, the “Existing
Credit Agreement”), among Borrower, the Lenders (as hereinafter defined), the
Administrative Agent (as hereinafter defined) and the Issuing Lender (as
hereinafter defined).

 

B.                                     In order to secure the full and punctual
payment and performance of the obligations under the Existing Credit Agreement
and the other Loan Documents (as defined in the Existing Credit Agreement), the
Borrower executed and delivered to the Administrative Agent that certain
Security Agreement dated as of November 29, 2005 (as heretofore amended and
supplemented, the “Existing Security Agreement”).

 

C.                                     The parties to the Existing Credit
Agreement have agreed to amend and restate the Existing Credit Agreement in its
entirety pursuant to that certain Amended and Restated Credit Agreement dated as
of December 17, 2008 (as amended, restated, supplemented or otherwise modified
from time to time, the “Credit Agreement”), among the Borrower, the lenders
party thereto from time to time (the “Lenders”), and Union Bank of California,
N.A., as administrative agent (in such capacity, the “Administrative Agent”) and
as issuing lender (in such capacity, the “Issuing Lender”).

 

D.                                    It is a requirement under the Credit
Agreement that (i) the Borrower shall continue to secure the due payment and
performance of all Obligations (as defined in the Credit Agreement) by amending
and restating in its entirety the Existing Security Agreement as set forth
herein, and (ii) the other Grantors shall continue to secure the due payment and
performance of all Obligations (as defined in the Credit Agreement) by executing
and delivering this Security Agreement, in each case, in favor of the
Administrative Agent for the ratable benefit of the Secured Parties.

 

E.                                      Each Grantor (other than the Borrower)
is a subsidiary of the Borrower and will derive substantial direct and indirect
benefits from (i) the transactions contemplated by the Credit Agreement and the
other Loan Documents (as defined the Credit Agreement) and (ii) the Hedge
Contracts (as defined in the Credit Agreement) entered into by the Borrower or
any of its subsidiaries with a Swap Counterparty.

 

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AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged and
confessed, each Grantor hereby agrees with the Administrative Agent for its
benefit and the benefit of the Secured Parties as follows:

 

Section 1.                                            Definitions;
Interpretation.  (a) All capitalized terms not otherwise defined in this
Security Agreement that are defined in the Credit Agreement shall have the
meanings assigned to such terms by the Credit Agreement.  Any terms used in this
Security Agreement that are defined in the UCC (as defined below) and not
otherwise defined herein or in the Credit Agreement, shall have the meanings
assigned to those terms by the UCC.  All meanings to defined terms, unless
otherwise indicated, are to be equally applicable to both the singular and
plural forms of the terms defined.  The following terms shall have the meanings
specified below:

 

“Accounts” means an “account” as defined in the UCC, including, without
limitation, all of any Grantor’s rights to payment for goods sold or leased,
services performed, or otherwise, whether now in existence or arising from time
to time hereafter, including, without limitation, rights arising under any of
the Contracts or evidenced by an account, note, contract, security agreement,
Chattel Paper (including, without limitation, tangible Chattel Paper and
electronic Chattel Paper), or other evidence of indebtedness or security,
together with all of the right, title and interest of any Grantor in and to
(i) all security pledged, assigned, hypothecated or granted to or held by any
Grantor to secure the foregoing, (ii) all of any Grantor’s right, title and
interest in and to any goods or services, the sale of which gave rise thereto,
(iii) all guarantees, endorsements and indemnifications on, or of, any of the
foregoing, (iv) all powers of attorney granted to any Grantor for the execution
of any evidence of indebtedness or security or other writing in connection
therewith, (v) all books, correspondence, credit files, records, ledger cards,
invoices, and other papers relating thereto, including without limitation all
similar information stored on a magnetic medium or other similar storage device
and other papers and documents in the possession or under the control of any
Grantor or any computer bureau from time to time acting for any Grantor,
(vi) all evidences of the filing of financing statements and other statements
granted to any Grantor and the registration of other instruments in connection
therewith and amendments thereto, notices to other creditors or secured parties,
and certificates from filing or other registration officers, (vii) all credit
information, reports and memoranda relating thereto, and (viii) all other
writings related in any way to the foregoing.

 

“Cash Collateral” means all amounts from time to time held in any checking,
savings, deposit or other account of such Grantor, including, if applicable, the
Cash Collateral Account, all monies, proceeds or sums due or to become due
therefrom or thereon and all documents (including, but not limited to passbooks,
certificates and receipts) evidencing all funds and investments held in such
accounts.

 

“Chattel Paper” has the meaning set forth in the UCC.

 

“Collateral” has the meaning set forth in Section 2 of this Security Agreement.

 

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“Commitments” shall have the meaning assigned to such term in the Credit
Agreement.

 

“Contracts” means all contracts to which any Grantor now is, or hereafter will
be bound, or to which such Grantor is or hereafter will be a party, beneficiary
or assignee, all Insurance Contracts, and all exhibits, schedules and other
attachments to such contracts, as the same may be amended, supplemented or
otherwise modified or replaced from time to time.

 

“Contract Documents” means all Instruments, Chattel Paper, letters of credit,
bonds, guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.

 

“Contract Rights” means (i) all (A) of any Grantor’s rights to payment under any
Contract or Contract Document and (B) payments due and to become due to any
Grantor under any Contract or Contract Document, in each case whether as
contractual obligations, damages or otherwise; (ii) all of any Grantor’s claims,
rights, powers, or privileges and remedies under any Contract or Contract
Document; and (iii) all of any Grantor’s rights under any Contract or Contract
Document to make determinations, to exercise any election (including, but not
limited to, election of remedies) or option or to give or receive any notice,
consent, waiver or approval together with full power and authority with respect
to any Contract or Contract Document to demand, receive, enforce or collect any
of the foregoing rights or any property which is the subject of any Contract or
Contract Document, to enforce or execute any checks, or other instruments or
orders, to file any claims and to take any action which, in the opinion of the
Secured Parties, may be necessary or advisable in connection with any of the
foregoing.

 

“Document” means a bill of lading, dock warrant, dock receipt, warehouse receipt
or order for the delivery of goods, and also any other document which in the
regular course of business or financing is treated as adequately evidencing that
the person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.

 

“Equipment” means any equipment now or hereafter owned or leased by any Grantor,
or in which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the
equipment), and similar items which relate to the above, and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.

 

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“Fixtures” means any fixtures now or hereafter owned or leased by any Grantor,
or in which any Grantor holds or acquires any other right, title or interest,
constituting “fixtures” under the UCC, including without limitation any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.

 

“General Intangibles” means all general intangibles now or hereafter owned by
any Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business identifiers, prints, labels, trade styles and service
marks (whether or not registered), trade dress, including logos and/or designs,
copyrights, patents, patent applications, goodwill of any Grantor’s business
symbolized by any of the foregoing, trade secrets, license rights, license
agreements, permits, franchises, and any rights to tax refunds to which any
Grantor is now or hereafter may be entitled.

 

“Hedge Contract” shall have the meaning assigned to such term in the Credit
Agreement.

 

“Instrument” means an “instrument” as defined in the UCC, including, without
limitation, any Negotiable Instrument, or any other writing which evidences a
right to the payment of money and is not itself a security agreement or lease
and is of a type which is in the ordinary course of business transferred by
delivery with any necessary endorsement or assignment (other than Instruments
constituting Chattel Paper).

 

“Insurance Contracts” means all contracts and policies of insurance and
re-insurance maintained or required to be maintained by or on behalf of any
Grantor under the Loan Documents.

 

“Inventory” means all of the inventory of any Grantor, or in which any Grantor
holds or acquires any right, title or interest, of every type or description,
now owned or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary course
of its business, all present and future substitutions therefor, parts and
accessories thereof and all additions thereto, all Proceeds thereof and products
of such inventory in any form whatsoever, and any other item constituting
“inventory” under the UCC.

 

“Investment Property” means “investment property” as defined in the UCC,
including, without limitation, all securities (whether certificated or
uncertificated), security entitlements, securities accounts, commodity
contracts, and commodity accounts.

 

“Loan Documents” shall have the meaning assigned to such term in the Credit
Agreement.

 

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“Negotiable Instrument” means a “negotiable instrument” as defined in the UCC.

 

“Permitted Liens” shall have the meaning assigned to such term in the Credit
Agreement.

 

“Proceeds” means all proceeds (as defined in the UCC) of any or all of the
Collateral, including without limitation (i) any and all proceeds of, all claims
for, and all rights of any Grantor to receive the return of any premiums for,
any insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting under
color of any Governmental Authority), (iii) all proceeds received or receivable
when any or all of the Collateral is sold, exchanged or otherwise disposed,
whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) all claims
of any Grantor for damages arising out of, or for breach of or default under,
any Collateral, (v) all rights of any Grantor to terminate, amend, supplement,
modify or waive performance under any Contracts, to perform thereunder and to
compel performance and otherwise exercise all remedies thereunder, and (vi) any
and all other amounts from time to time paid or payable under or in connection
with any of the Collateral.

 

“Secured Obligations” means, collectively, all of the following: (i) all
Obligations (as defined in the Credit Agreement) now or hereafter owed by the
Borrower, any Guarantor, or any of their respective Subsidiaries to the Secured
Parties, (ii) all amounts now or hereafter owed by the Borrower, any Debtor, or
any of their respective Subsidiaries under this Security Agreement or the other
Loan Documents to the Administrative Agent, and (iii) any increases, extensions,
modifications, substitutions, amendments and renewals thereof, whether for
principal, interest, fees, expenses, indemnification, or otherwise, including
any post-petition interest in the event of a bankruptcy, to the extent such
interest is enforceable by law.  All such obligations shall be referred to in
this Security Agreement as the “Secured Obligations”.

 

“Security Agreement” means this Security Agreement, as the same may be modified,
supplemented or amended from time to time in accordance with its terms.

 

“UCC” shall mean the Uniform Commercial Code as the same may, from time to time,
be in effect in the State of Texas; provided, however, in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
Texas, the term “UCC” shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
attachment, perfection or priority and for purposes of definitions related to
such provisions.

 

(b)                                 All meanings to defined terms, unless
otherwise indicated, are to be equally applicable to both the singular and
plural forms of the terms defined.  Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and Exhibits to
this Security Agreement, unless otherwise specified.  All references to
instruments, documents, contracts, and

 

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agreements are references to such instruments, documents, contracts, and
agreements as the same may be amended, supplemented, and otherwise modified from
time to time, unless otherwise specified.  The words “hereof”, “herein” and
“hereunder” and words of similar import when used in this Security Agreement
shall refer to this Security Agreement as a whole and not to any particular
provision of this Security Agreement.  As used herein, the term “including”
means “including, without limitation,”. Paragraph headings have been inserted in
this Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.

 

Section 2.                                            Assignment, Pledge and
Grant of Security Interest.

 

(a)                                  As collateral security for the prompt and
complete payment and performance when due of all Secured Obligations, each
Grantor hereby assigns, pledges, and grants to the Administrative Agent for the
benefit of the Secured Parties a lien on and continuing security interest in all
of such Grantor’s right, title and interest in, to and under, all items
described in this Section 2, whether now owned or hereafter acquired by such
Grantor and wherever located and whether now or hereafter existing or arising
(collectively, the “Collateral”):

 

(i)

 

all Contracts, all Contract Rights, Contract Documents and Accounts associated
with such Contracts and each and every document granting security to such
Grantor under any such Contract;

 

 

 

(ii)

 

all Accounts;

 

 

 

(iii)

 

all Inventory;

 

 

 

(iv)

 

all Equipment;

 

 

 

(v)

 

all General Intangibles;

 

 

 

(vi)

 

all Investment Property;

 

 

 

(vii)

 

all Fixtures;

 

 

 

(viii)

 

all Cash Collateral;

 

 

 

(ix)

 

any Legal Requirements now or hereafter held by such Grantor (except that any
Legal Requirement which would by its terms or under applicable law become void,
voidable, terminable or revocable by being subjected to the Lien of this
Security Agreement or in which a Lien is not permitted to be granted under
applicable law, is hereby excluded from such Lien to the extent necessary so as
to avoid such voidness, voidability, terminability or revocability);

 

 

 

(x)

 

any right to receive a payment under any Hedge Contract in connection with a
termination thereof;

 

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(xi)

 

(A) all policies of insurance and Insurance Contracts, now or hereafter held by
or on behalf of such Grantor, including casualty and liability, business
interruption, and any title insurance, (B) all Proceeds of insurance, and
(C) all rights, now or hereafter held by such Grantor to any warranties of any
manufacturer or contractor of any other Person;

 

 

 

(xii)

 

any and all liens and security interests (together with the documents evidencing
such security interests) granted to such Grantor by an obligor to secure such
obligor’s obligations owing under any Instrument, Chattel Paper, or Contract
which is pledged hereunder or with respect to which a security interest in such
Grantor’s rights in such Instrument, Chattel Paper, or Contract is granted
hereunder;

 

 

 

(xiii)

 

any and all guaranties given by any Person for the benefit of such Grantor which
guarantees the obligations of an obligor under any Instrument, Chattel Paper or
Contract, which are pledged hereunder;

 

 

 

(xiv)

 

without limiting the generality of the foregoing, all other personal property,
goods, Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands
and assets of such Grantor whether now existing or hereafter acquired from time
to time; and

 

 

 

(xv)

 

any and all additions, accessions and improvements to, all substitutions and
replacements for and all products and Proceeds of or derived from all of the
items described above in this Section 2.

 

(b)                                 Notwithstanding anything contained herein to
the contrary, it is the intention of each Grantor, the Administrative Agent, and
the Secured Parties that the amount of the Secured Obligation secured by each
Grantor’s interests in any of its Property shall be in, but not in excess of,
the maximum amount permitted by fraudulent conveyance, fraudulent transfer and
other similar law, rule or regulation of any Governmental Authority applicable
to such Grantor. Accordingly, notwithstanding anything to the contrary contained
in this Security Agreement in any other agreement or instrument executed in
connection with the payment of any of the Secured Obligations, the amount of the
Secured Obligations secured by each Grantor’s interests in any of its Property
pursuant to this Security Agreement shall be limited to an aggregate amount
equal to the largest amount that would not render such Grantor’s obligations
hereunder or the liens and security interest granted to the Administrative Agent
hereunder subject to avoidance under Section 548 of the United States Bankruptcy
Code or any comparable provision of any other applicable law.

 

Section 3.                                            Representations and
Warranties.  Each Grantor hereby represents and warrants the following to the
Administrative Agent and the other Secured Parties:

 

(a)                                  Records.  Such Grantor’s sole jurisdiction
of formation and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the Accounts, General Intangibles, or any other
Collateral applicable to such Grantor are located at the address for such

 

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Grantor on such Schedule 1.  None of the Accounts is evidenced by a promissory
note or other instrument.

 

(b)                               Other Liens.  Such Grantor is, and will be the
record, legal, and beneficial owner of all of the Collateral pledged by such
Grantor free and clear of any Lien, except for the Permitted Liens.  No
effective financing statement or other instrument similar in effect covering all
or any part of the Collateral is, or will be, on file in any recording office,
except such as may be filed in connection with this Security Agreement or in
connection with other Permitted Liens or for which satisfactory releases have
been received by the Administrative Agent.

 

(c)                                Lien Priority and Perfection.

 

(i)                                     Subject only to Permitted Liens, this
Security Agreement creates valid and continuing security interests in the
Collateral, securing the payment and performance of all the Secured
Obligations.  Upon the filing of financing statements with the jurisdiction
listed in Schedule 1, the security interests granted to the Secured Parties
hereunder will constitute valid first-priority perfected security interests in
all Collateral with respect to which a security interest can be perfected by the
filing of a financing statement, subject only to Permitted Liens.

 

(ii)                                  No consent of any other Person and no
authorization, approval, or other action by, and no notice to or filing with any
Governmental Authority is required (A) for the grant by such Grantor of the
pledge, assignment, and security interest granted hereby or for the execution,
delivery, or performance of this Security Agreement by such Grantor, (B) for the
validity, perfection, or maintenance of the pledge, assignment, lien, and
security interest created hereby (including the first-priority (subject to
Permitted Liens) nature thereof), except for security interests that cannot be
perfected by filing under the UCC, or (C) for the exercise by the Administrative
Agent of the rights provided for in this Security Agreement or the remedies in
respect of the Collateral pursuant to this Security Agreement, except (1) those
consents to assignment of licenses, permits, approvals, and other rights that
are as a matter of law not assignable, (2) those consents, approvals,
authorizations, actions, notices or filings which have been duly obtained or
made and, in the case of the maintenance of perfection, the filing of
continuation statements under the UCC, and (3) those filings and actions
described in Section 3(c)(i).

 

(d)                               Tax Identification Number and Organizational
Number.  The federal tax identification number of such Grantor and the
organizational number of such Grantor are as set forth in Schedule 1.

 

(e)                                Tradenames; Prior Names.  Except as set forth
on Schedule 1, such Grantor has not conducted business under any name other than
its current name during the last five years prior to the date of this Security
Agreement.

 

(f)                                  Exclusive Control.  Such Grantor has
exclusive possession and control of its respective Equipment and Inventory.

 

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Section 4.                                            Covenants.

 

(a)                                Further Assurances.

 

(i)                                     Each Grantor agrees that from time to
time, at its expense, such Grantor shall promptly execute and deliver all
instruments and documents, and take all action, that may be reasonably necessary
or desirable, or that the Administrative Agent may reasonably request, in order
to perfect and protect any pledge, assignment, or security interest granted or
intended to be granted hereby or to enable the Administrative Agent to exercise
and enforce its rights and remedies hereunder with respect to any Collateral. 
Without limiting the generality of the foregoing, each Grantor (A) at the
request of the Administrative Agent, shall execute such instruments,
endorsements or notices, as may be reasonably necessary or desirable or as the
Administrative Agent may reasonably request, in order to perfect and preserve
the assignments and security interests granted or purported to be granted
hereby, (B) shall, at the reasonable request of the Administrative Agent, mark
conspicuously each material document included in the Collateral, each Chattel
Paper included in the Accounts, and each of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to the
Administrative Agent, including that such document, Chattel Paper, or record is
subject to the pledge, assignment, and security interest granted hereby,
(C) shall, if any Collateral shall be evidenced by a promissory note or other
instrument or chattel paper, deliver and pledge to the Administrative Agent
hereunder such note or instrument or chattel paper duly endorsed and accompanied
by duly executed instruments of transfer or assignment, all in form and
substance satisfactory to the Administrative Agent, and (D) authorizes the
Administrative Agent to file any financing statements, amendments or
continuations without the signature of such Grantor to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under this Security Agreement (including, without limitation,
financing statements using an “all assets” or “all personal property” collateral
description).

 

(ii)                                  Each Grantor shall pay all filing,
registration and recording fees and all refiling, re-registration and
re-recording fees, and all other reasonable expenses incident to the execution
and acknowledgment of this Security Agreement, any assurance, and all federal,
state, county and municipal stamp taxes and other taxes, duties, imports,
assessments and charges arising out of or in connection with the execution and
delivery of this Security Agreement, any agreement supplemental hereto, any
financing statements, and any instruments of further assurance.

 

(iii)                               Each Grantor shall promptly provide to the
Administrative Agent all information and evidence the Administrative Agent may
reasonably request concerning the Collateral to enable the Administrative Agent
to enforce the provisions of this Security Agreement.

 

(b)                               Change of Name; State of Formation.  Each
Grantor shall give the Administrative Agent at least 30 days’ prior written
notice before it (i) in the case of any Grantor that is not a “registered
organization” (as such term is defined in Section 9-102 of the UCC), changes the
location of its principal place of business and chief executive office,
(ii) changes the location of its jurisdiction of formation or organization,
(iii) changes the location of the Equipment, Inventory, or original copies of
any Chattel Paper evidencing Accounts, or (iv) uses a trade name other than its
current name used on the date hereof.  Other than as permitted by Section 6.11
of the Credit Agreement, no Grantor shall amend, supplement, modify or restate
its articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent

 

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organizational documents, nor amend its name or change its jurisdiction of
incorporation, organization or formation.

 

(c)                                  Right of Inspection.  Each Grantor shall
hold and preserve, at its own cost and expense satisfactory and complete records
of the Collateral, including, but not limited to, Instruments, Chattel Paper,
Contracts, and records with respect to the Accounts, and will permit
representatives of the Administrative Agent, upon reasonable advance notice, at
any time during normal business hours to inspect and copy them.  Upon the
occurrence and during the continuation of any Event of Default, at the
Administrative Agent’s request, each Grantor shall promptly deliver copies of
any and all such records to the Administrative Agent.

 

(d)                                 Liability Under Contracts and Accounts. 
Notwithstanding anything in this Security Agreement to the contrary, (i) the
execution of this Security Agreement shall not release any Grantor from its
obligations and duties under any of the Contract Documents, or any other
contract or instrument which are part of the Collateral and Accounts included in
the Collateral, (ii) the exercise by the Administrative Agent of any of its
rights hereunder shall not release any Grantor from any of its duties or
obligations under any Contract Documents, or any other Contract or Instrument
which are part of the Collateral and Accounts included in the Collateral, and
(iii) the Administrative Agent shall not have any obligation or liability under
any Contract Documents, or any other contract or instrument which are part of
the Collateral and Accounts included in the Collateral by reason of the
execution and delivery of this Security Agreement, nor shall the Administrative
Agent be obligated to perform any of the obligations or duties of any Grantor
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.

 

(e)                                  Transfer of Certain Collateral; Release of
Certain Security Interest.  Each Grantor agrees that it shall not sell, assign,
or otherwise dispose of any Collateral, except as otherwise permitted under the
Credit Agreement.  The Administrative Agent shall promptly, at the Grantors’
expense, execute and deliver all further instruments and documents, and take all
further action that a Grantor may reasonably request in order to release its
security interest in any Collateral which is disposed of in accordance with the
terms of the Credit Agreement.

 

(f)                                    Accounts.  Each Grantor agrees that it
will use commercially reasonable efforts to ensure that each Account (i) is and
will be, in all material respects, the genuine, legal, valid, and binding
obligations of the account debtor in respect thereof, representing an
unsatisfied obligation of such account debtor, (ii) is and will be, in all
material respects, enforceable in accordance with its terms, (iii) is not and
will not be subject to any setoffs, defenses, taxes, counterclaims, except in
the ordinary course of business, (iv) is and will be, in all material respects,
in compliance with all applicable laws, whether federal, state, local or
foreign, and (v) which if evidenced by Chattel Paper, will not require the
consent of the account debtor in respect thereof in connection with its
assignment hereunder.

 

(g)                                 Negotiable Instrument.  If any Grantor shall
at any time hold or acquire any Negotiable Instruments, including promissory
notes, such Grantor shall forthwith endorse, assign and deliver the same to the
Administrative Agent, accompanied by such instruments of transfer or assignment
duly executed in blank as the Administrative Agent may from time to time
reasonably request.

 

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(h)                                 Other Covenants of Grantor.  Each Grantor
agrees that (i) any action or proceeding to enforce this Security Agreement may
be taken by the Administrative Agent either in such Grantor’s name or in the
Administrative Agent’s name, as the Administrative Agent may deem necessary, and
(ii) such Grantor will, until the indefeasible payment in full in cash of the
Secured Obligations (including all Letter of Credit Obligations), the
termination of all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit, the termination of the Hedge Contracts with the Secured
Parties and the termination or expiration of the Commitments, warrant and defend
its title to the Collateral and the interest of the Administrative Agent in the
Collateral against any claim or demand of any Persons (other than Permitted
Liens) which could reasonably be expected to materially adversely affect such
Grantor’s title to, or the Administrative Agent’s right or interest in, such
Collateral.

 

Section 5.                                            Termination of Security
Interest.  Upon the indefeasible payment in full in cash of the Secured
Obligations (including all Letter of Credit Obligations), the termination or
expiration of all Letters of Credit and the termination of all obligations of
the Issuing Lender and the Lenders in respect of Letters of Credit, the
termination of the Hedge Contracts with the Secured Parties and the termination
or expiration of the Commitments, the security interest granted hereby shall
terminate and all rights to the Collateral shall revert to the applicable
Grantor to the extent such Collateral shall not have been sold or otherwise
applied pursuant to the terms hereof.  Upon any such termination, the
Administrative Agent will, at the Grantors’ expense, execute and deliver to the
applicable Grantor such documents (including, without limitation, UCC-3
termination statements) as such Grantor shall reasonably request to evidence
such termination.

 

Section 6.                                            Reinstatement. If, at any
time after payment in full of all Secured Obligations and termination of the
Administrative Agent’s security interest, any payments on the Secured
Obligations previously made must be disgorged by any Secured Party for any
reason whatsoever, including, without limitation, the insolvency, bankruptcy or
reorganization of any Grantor or any other Person, this Security Agreement and
the Administrative Agent’s security interests herein shall be reinstated as to
all disgorged payments as though such payments had not been made, and each
Grantor shall sign and deliver to the Administrative Agent all documents, and
shall do such other acts and things, as may be necessary to reinstate and
perfect the Administrative Agent’s security interest.  EACH GRANTOR SHALL DEFEND
AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER SECURED PARTY FROM AND
AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 6
(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH
ACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
ARISING AS A RESULT OF THE INDEMNIFIED SECURED PARTY’S OWN NEGLIGENCE BUT
EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN
A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE
RESULTED FROM SUCH INDEMNIFIED SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

11

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Section 7.                                            Remedies upon Event of
Default.

 

(a)                                  If any Event of Default has occurred and is
continuing, the Administrative Agent may (and shall at the written request of
the Majority Lenders or all Lenders, as applicable), (i) proceed to protect and
enforce the rights vested in it by this Security Agreement or otherwise
available to it, including but not limited to, the right to cause all revenues
and other moneys pledged hereby as Collateral to be paid directly to it, and to
enforce its rights hereunder to such payments and all other rights hereunder by
such appropriate judicial proceedings as it shall deem most effective to protect
and enforce any of such rights, either at law or in equity or otherwise, whether
for specific enforcement of any covenant or agreement contained in any of the
Contract Documents, or in aid of the exercise of any power therein or herein
granted, or for any foreclosure hereunder and sale under a judgment or decree in
any judicial proceeding, or to enforce any other legal or equitable right vested
in it by this Security Agreement or by law; (ii) cause any action at law or suit
in equity or other proceeding to be instituted and prosecuted and enforce any
rights hereunder or included in the Collateral, subject to the provisions and
requirements thereof; (iii) sell or otherwise dispose of any or all of the
Collateral or cause the Collateral to be sold or otherwise disposed of in one or
more sales or transactions, at such prices and in such manner as may be
commercially reasonable, and for cash or on credit or for future delivery,
without assumption of any credit risk, at public or private sale, without demand
of performance or notice of intention to sell or of time or place of sale
(except such notice as is required by applicable statute and cannot be waived),
it being agreed that the Administrative Agent may be a purchaser on behalf of
the Secured Parties or on its own behalf at any such sale and that the
Administrative Agent, any other Secured Party, or any other Person who may be a
bona fide purchaser for value and without notice of any claims of any or all of
the Collateral so sold shall thereafter hold the same absolutely free from any
claim or right of whatsoever kind, including any equity of redemption of any
Grantor, any such demand, notice or right and equity being hereby expressly
waived and released to the extent permitted by law; (iv) incur reasonable
expenses, including reasonable attorneys’ fees, reasonable consultants’ fees,
and other costs appropriate to the exercise of any right or power under this
Security Agreement; (v) perform any obligation of any Grantor hereunder and make
payments, purchase, contest or compromise any encumbrance, charge or lien, and
pay taxes and expenses, without, however, any obligation to do so; (vi) in
connection with any acceleration and foreclosure, take possession of the
Collateral and render it usable and repair and renovate the same, without,
however, any obligation to do so, and enter upon any location where the
Collateral may be located for that purpose, control, manage, operate, rent and
lease the Collateral, collect all rents and income from the Collateral and apply
the same to reimburse the Secured Parties for any cost or expenses incurred
hereunder or under any of the Loan Documents and to the payment or performance
of any Grantor’s obligations hereunder or under any of the Loan Documents, and
apply the balance to the other Secured Obligations and any remaining excess
balance to whomsoever is legally entitled thereto; (vii) secure the appointment
of a receiver for the Collateral or any part thereof; (viii) require any Grantor
to, and each Grantor hereby agrees that it will at its expense and upon request
of the Administrative Agent forthwith, assemble all or part of the Collateral as
directed by the Administrative Agent and make it available to the Administrative
Agent at a place to be designated by the Administrative Agent which is
reasonably convenient to both parties; (ix) exercise any other or additional
rights or remedies granted to a secured party under the UCC; or (x) occupy any
premises owned or leased by any Grantor where the Collateral or any part thereof
is assembled for a reasonable period in order to effectuate its rights and
remedies hereunder or

 

12

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under law, without obligation to any Grantor in respect of such occupation.  If,
pursuant to applicable law, prior notice of sale of the Collateral under this
Section is required to be given to any Grantor, each Grantor hereby acknowledges
that the minimum time required by such applicable law, or if no minimum time is
specified, 10 days, shall be deemed a reasonable notice period.   The
Administrative Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given.  The Administrative Agent may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.

 

(b)                                 All reasonable costs and expenses (including
reasonable attorneys’ fees and expenses) incurred by the Administrative Agent in
connection with any suit or proceeding in connection with the performance by the
Administrative Agent of any of the agreements contained in any of the Contract
Documents, or in connection with any exercise of its rights or remedies
hereunder, pursuant to the terms of this Security Agreement, shall constitute
additional indebtedness secured by this Security Agreement and shall be paid on
demand by the Grantors to the Administrative Agent on behalf of the Secured
Parties.

 

Section 8.                                            Remedies Cumulative; Delay
Not Waiver.

 

(a)                                  No right, power or remedy herein conferred
upon or reserved to the Administrative Agent is intended to be exclusive of any
other right, power or remedy and every such right, power and remedy shall, to
the extent permitted by law, be cumulative and in addition to every other right,
power and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise.  The assertion or employment of any right or remedy
hereunder or otherwise shall not prevent the concurrent assertion or employment
of any other appropriate right or remedy.  Resort to any or all security now or
hereafter held by the Administrative Agent may be taken concurrently or
successively and in one or several consolidated or independent judicial actions
or lawfully taken nonjudicial proceedings, or both.

 

(b)                                 No delay or omission of the Administrative
Agent to exercise any right or power accruing upon the occurrence and during the
continuance of any Event of Default as aforesaid shall impair any such right or
power or shall be construed to be a waiver of any such Event of Default or an
acquiescence therein; and every power and remedy given by this Security
Agreement may be exercised from time to time, and as often as shall be deemed
expedient, by the Administrative Agent.

 

Section 9.                                            Contract Rights.  After
the occurrence and during the continuance of an Event of Default, the
Administrative Agent may exercise any of the Contract Rights and remedies of any
Grantor under or in connection with the Instruments, Chattel Paper, or Contracts
which represent Accounts, the General Intangibles, or which otherwise relate to
the Collateral, including, without limitation, any rights of any Grantor to
demand or otherwise require payment of any amount under, or performance of any
provisions of, the Instruments, Chattel Paper, or Contracts which represent
Accounts, or the General Intangibles.

 

13

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Section 10.                                      Accounts.

 

(a)                                  After the occurrence and during the
continuance of an Event of Default, the Administrative Agent may, or may direct
any Grantor to, take any action the Administrative Agent deems necessary or
advisable to enforce collection of the Accounts, including, without limitation,
notifying the account debtors or obligors under any Accounts of the assignment
of such Accounts to the Administrative Agent and directing such account debtors
or obligors to make payment of all amounts due or to become due directly to the
Administrative Agent.  Upon such notification and direction, and at the expense
of the Grantors, the Administrative Agent may enforce collection of any such
Accounts, and adjust, settle, or compromise the amount or payment thereof in the
same manner and to the same extent as any Grantor might have done.

 

(b)                                 After receipt by any Grantor of the notice
referred to in Section 10(a) above that an Event of Default has occurred and is
continuing, all amounts and Proceeds (including instruments) received by such
Grantor in respect of the Accounts shall be received in trust for the benefit of
the Administrative Agent hereunder, shall be segregated from other funds of such
Grantor, and shall promptly be paid over to the Administrative Agent in the same
form as so received (with any necessary indorsement) to be held as Collateral. 
No Grantor shall adjust, settle, or compromise the amount or payment of any
Account, nor release wholly or partly any account debtor or obligor thereof, nor
allow any credit or discount thereon other than in the ordinary course of
business and consistent with past practices.

 

Section 11.                                      Application of Collateral.  The
proceeds of any sale, or other realization (other than that received from a sale
or other realization permitted by the Credit Agreement) upon all or any part of
the Collateral pledged by any Grantor shall be applied by the Administrative
Agent as set forth in Section 7.06 of the Credit Agreement.

 

Section 12.                                      Administrative Agent as
Attorney-in-Fact for Grantor.  Each Grantor hereby constitutes and irrevocably
appoints the Administrative Agent, acting for and on behalf of itself and the
Secured Parties and each successor or assign of the Administrative Agent and the
Secured Parties, the true and lawful attorney-in-fact of such Grantor, with full
power and authority in the place and stead of such Grantor and in the name of
such Grantor, the Administrative Agent or otherwise to, following the occurrence
and during the continuation of an Event of Default, take any action and execute
any instrument at the written direction of the Secured Parties and enforce all
rights, interests and remedies of such Grantor with respect to the Collateral,
including the right:

 

(a)                                  to ask, require, demand, receive and give
acquittance for any and all moneys and claims for moneys due and to become due
under or arising out of the any of the other Collateral, including without
limitation, any Insurance Contracts;

 

(b)                                 to elect remedies thereunder and to endorse
any checks or other instruments or orders in connection therewith;

 

(c)                                  to file any claims or take any action or
institute any proceedings in connection therewith which the Administrative Agent
may deem to be necessary or advisable;

 

14

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

 

(d)                                 to pay, settle or compromise all bills and
claims which may be or become liens or security interests against any or all of
the Collateral, or any part thereof, unless a bond or other security
satisfactory to the Administrative Agent has been provided; and

 

(e)                                  upon foreclosure, to do any and every act
which any Grantor may do on its behalf with respect to the Collateral or any
part thereof and to exercise any or all of such Grantor’s rights and remedies
under any or all of the Collateral;

 

provided, however, that the Administrative Agent shall not exercise any such
rights except upon the occurrence and continuation of an Event of Default.  This
power of attorney is a power coupled with an interest and shall be irrevocable.

 

Section 13.                                      Administrative Agent
May Perform.  The Administrative Agent may from time-to-time perform any act
which any Grantor has agreed hereunder to perform and which such Grantor shall
fail to perform after being requested in writing so to perform (it being
understood that no such request need be given after the occurrence and during
the continuance of any Event of Default and after notice thereof by the
Administrative Agent to any Grantor) and the Administrative Agent may from
time-to-time take any other action which the Administrative Agent deems
necessary for the maintenance, preservation or protection of any of the
Collateral or of its security interest therein, and the reasonable expenses of
the Administrative Agent incurred in connection therewith shall be part of the
Secured Obligations and shall be secured hereby.

 

Section 14.                                      Administrative Agent Has No
Duty.  The powers conferred on the Administrative Agent hereunder are solely to
protect its interest in the Collateral and shall not impose any duty on it to
exercise any such powers.  Except for reasonable care of any Collateral in its
possession and the accounting for moneys actually received by it hereunder, the
Administrative Agent shall have no duty as to any Collateral or responsibility
for taking any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral.

 

Section 15.                                      Reasonable Care.  The
Administrative Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Administrative Agent
accords its own Property.

 

Section 16.                                      Payments Held in Trust.  During
the continuance of an Event of Default, all payments received by any Grantor
under or in connection with any Collateral shall be received in trust for the
benefit of the Administrative Agent, and shall be segregated from other funds of
such Grantor and shall be forthwith paid over to the Administrative Agent in the
same form as received (with any necessary endorsement).

 

Section 17.                                      Miscellaneous.

 

(a)                                  Expenses.  Each Grantor will upon demand
pay to the Administrative Agent for its benefit and the benefit of the Secured
Parties the amount of any reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of its counsel and of any experts, which the
Administrative Agent and the Secured Parties may incur in connection with
(i) the

 

15

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custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Collateral, (ii) the exercise or enforcement of any
of the rights of the Administrative Agent or any Secured Party hereunder, and
(iii) the failure by any Grantor to perform or observe any of the provisions
hereof.

 

(b)                                 Amendments; Etc.  No amendment or waiver of
any provision of this Security Agreement nor consent to any departure by any
Grantor herefrom shall be effective unless the same shall be in writing and
executed by the affected Grantor and the Administrative Agent (acting upon the
written direction of the Majority Lenders), and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.

 

(c)                                  Addresses for Notices.  All notices and
other communications provided for hereunder shall be made in the manner and to
the addresses set forth in the Credit Agreement.

 

(d)                                 Continuing Security Interest; Transfer of
Interest.  This Security Agreement shall create a continuing security interest
in the Collateral and, unless expressly released by the Administrative Agent,
shall (a)  remain in full force and effect until the indefeasible payment in
full in cash of the Secured Obligations (including all Letter of Credit
Obligations), the termination or expiration of all Letters of Credit and the
termination of all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit, the termination of the Hedge Contracts with the Secured
Parties and the termination or expiration of the Commitments, (b) be binding
upon each Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, the Issuing
Lender, the Lenders, and their respective successors, transferees, and assigns,
and to the benefit of and be binding upon, the Swap Counterparties, and each of
their respective successors, transferees, and assigns to the extent such
successors, transferees, and assigns of a Swap Counterparty is a Lender or an
Affiliate of a Lender.  Without limiting the generality of the foregoing clause,
when any Lender assigns or otherwise transfers any interest held by it under the
Credit Agreement or other Loan Documents to any other Person pursuant to the
terms of the Credit Agreement or such other Loan Documents, that other Person
shall thereupon become vested with all the benefits held by such Lender under
this Security Agreement.  Notwithstanding the foregoing, when any Swap
Counterparty assigns or otherwise transfers any interest held by it under any
Hedge Contract to any other Person pursuant to the terms of such agreement, that
other Person shall thereupon become vested with all the benefits held by such
Secured Party under this Security Agreement only if such Person is also then a
Lender or an Affiliate of a Lender.

 

(e)                                  Severability.  Wherever possible each
provision of this Security Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Security Agreement shall be prohibited by or invalid under such law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Security Agreement.

 

(f)                                    Choice of Law.  This Security Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Collateral are governed by the laws of a jurisdiction other than the
state of Texas.

 

16

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(g)                                 Counterparts.  The parties may execute this
Security Agreement in counterparts, each of which constitutes an original, and
all of which, collectively, constitute only one agreement.  Delivery of an
executed counterpart signature page by facsimile is as effective as executing
and delivering this Security Agreement in the presence of the other parties to
this Security Agreement.  In proving this Security Agreement, a party must
produce or account only for the executed counterpart of the party to be charged.

 

(h)                                 Headings.  Paragraph headings have been
inserted in this Security Agreement as a matter of convenience for reference
only and it is agreed that such paragraph headings are not a part of this
Security Agreement and shall not be used in the interpretation of any provision
of this Security Agreement.

 

(i)                                     Conflicts.  In the event of any explicit
or implicit conflict between any provision of this Security Agreement and any
provision of the Credit Agreement, the terms of the Credit Agreement shall be
controlling.

 

(j)                                     Additional Grantors.  Pursuant to
Section 6.15 of the Credit Agreement, each Subsidiary of the Borrower that was
not in existence on the date of the Credit Agreement is required to enter into
this Security Agreement as a Grantor upon becoming a Subsidiary of the
Borrower.  Upon execution and delivery after the date hereof by the
Administrative Agent and such Subsidiary of an instrument in the form of
Annex 1, such Subsidiary shall become a Grantor hereunder with the same force
and effect as if originally named as a Grantor herein.  The execution and
delivery of any instrument adding an additional Grantor as a party to this
Security Agreement shall not require the consent of any other Grantor
hereunder.  The rights and obligations of each Grantor hereunder shall remain in
full force and effect notwithstanding the addition of any new Grantor as a party
to this Security Agreement.

 

(k)                                  Amendment and Restatement; Confirmation of
Liens.  This Security Agreement is an amendment and restatement of the Existing
Security Agreement and supersedes the Existing Security Agreement in its
entirety; provided, however, that (i) the execution and delivery of this
Security Agreement shall not effect a novation of the Existing Security
Agreement but shall be, to the fullest extent applicable, in modification,
renewal, confirmation and extension of such Existing Security Agreement, and
(ii) the Liens, security interests and other interests in the collateral as
described in the Existing Security Agreement (the “Original Collateral”) granted
under the Existing Security Agreement are and shall remain legal, valid, binding
and enforceable with regard to such Original Collateral.  Each Grantor party to
the Existing Security Agreement hereby acknowledges and confirms the continuing
existence and effectiveness of such Liens, security interests and other
interests in the Original Collateral granted under the Existing Security
Agreement, and further agrees that the execution and delivery of this Security
Agreement and the other Loan Documents shall not in any way release, diminish,
impair, reduce or otherwise affect such Liens, security interests and other
interests in the Original Collateral granted under the Existing Security
Agreement.

 

(l)                                     Entire Agreement.  THIS SECURITY
AGREEMENT, THE CREDIT AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY

 

17

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EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

18

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

 

The parties hereto have caused this Security Agreement to be duly executed as of
the date first above written.

 

 

GRANTORS:

 

 

 

CANO PETROLEUM, INC.

 

 

 

By:

  /s/ Benjamin Daitch

 

 

  Benjamin Daitch

 

 

  Senior Vice President and Chief Financial

 

 

  Officer

 

 

 

LADDER COMPANIES, INC.

 

SQUARE ONE ENERGY, INC.

 

W.O. ENERGY, INC.

 

W.O. ENERGY OF NEVADA, INC.

 

CANO PETRO OF NEW MEXICO, INC.

 

 

 

Each by:

  /s/ Benjamin Daitch

 

 

Benjamin Daitch

 

 

Vice President and Chief Financial

 

 

Officer

 

 

 

W.O. OPERATING COMPANY, LTD.

 

W.O. PRODUCTION COMPANY, LTD.

 

Each By: WO Energy, Inc., as general partner

 

 

 

 

By:

  /s/ Benjamin Daitch

 

 

 

Benjamin Daitch

 

 

 

Vice President and Chief Financial
Officer

 

Signature Page to Amended and Restated Security Agreement

 

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

 

 

ADMINISTRATIVE AGENT:

 

 

 

UNION BANK OF CALIFORNIA, N.A., as
Administrative Agent

 

 

 

 

 

By:

 /s/ Randall Osterberg

 

 

Randall Osterberg

 

 

Senior Vice President

 

Signature Page to Amended and Restated Security Agreement

 

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

 

SCHEDULE 1

to Security Agreement

 

Grantor:

Cano Petroleum, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Delaware

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

3664494

 

 

Federal Tax Identification Number:

77-0635673

 

 

Prior Names:

Huron Ventures, Inc.

 

 

Grantor:

Ladder Companies, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Delaware

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

2097505

 

 

Federal Tax Identification Number:

73-1282131

 

 

Prior Names:

d/b/a Ladder Energy Company

 

 

Grantor:

Square One Energy, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Texas

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

Schedule 1 to Amended and Restated Security Agreement

 

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

 

Organizational Number:

800262012

 

 

Federal Tax Identification Number:

81-0639886

 

 

Prior Names:

None.

 

 

Grantor:

WO Energy, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Texas

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

113518200

 

 

Federal Tax Identification Number:

75-2303966

 

 

Prior Names:

None.

 

 

Grantor:

W.O. Energy of Nevada, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Nevada

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

C20757-1996-001

 

 

Federal Tax Identification Number:

88-0369151

 

 

Prior Names:

None.

 

 

Grantor:

W.O. Operating Company, Ltd.

 

 

Sole Jurisdiction of Formation / Filing:

Texas

 

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

 

Type of Organization:

Limited Partnership

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

9373210

 

 

Federal Tax Identification Number:

75-2675224

 

 

Prior Names:

None.

 

 

Grantor:

W.O. Production Company, Ltd.

 

 

Sole Jurisdiction of Formation / Filing:

Texas

 

 

Type of Organization:

Limited Partnership

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

9295410

 

 

Federal Tax Identification Number:

75-2675222

 

 

Prior Names:

None.

 

 

Grantor:

Cano Petro of New Mexico, Inc.

 

 

Sole Jurisdiction of Formation / Filing:

Texas

 

 

Type of Organization:

Corporation

 

 

Address where records for Collateral are kept:

801 Cherry Street, Suite 3200

 

Fort Worth, Texas 76102

 

 

Organizational Number:

TX 800782069

 

 

Federal Tax Identification Number:

20-8564572

 

 

Prior Names:

None.

 

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

 

Annex 1 to the

Security Agreement

 

SUPPLEMENT NO.  [          ]  dated as of [               ] (the “Supplement”),
to the Amended and Restated Security Agreement dated as of December 17, 2008 (as
amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation
(“Borrower”), each subsidiary of Borrower signatory thereto (together with the
Borrower, the “Grantors” and individually, a “Grantor”) and Union Bank of
California, N.A. as administrative agent under the Credit Agreement (as
hereinafter defined) for the benefit of itself and the Secured Parties (as
hereinafter defined).

 

A.                                   Reference is made to the following
documents related to extension of credit to the Borrower:

 

(i)                                     that certain Amended and Restated Credit
Agreement dated as of December 17, 2008 (as it may be amended, restated or
otherwise modified from time to time, the “Credit Agreement”) by and among the
Borrower, the lenders party thereto from time to time (the “Lenders”), and Union
Bank of California, N.A., as administrative agent for such Lenders (in such
capacity, the “Administrative Agent”), and as issuing lender (in such capacity,
the “Issuing Lender”);

 

(ii)                                  those Hedge Contracts (as defined in the
Credit Agreement) that the Borrower, the Guarantors (as defined in the Credit
Agreement), or any of their Subsidiaries may from time to time enter into one or
more with a Swap Counterparty (as defined in the Credit Agreement), and together
with the Administrative Agent, the Issuing Lender, and the Lenders, the “Secured
Parties”).

 

B.                                     Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to such terms in the
Security Agreement and the Credit Agreement.

 

C.                                     The Grantors have entered into the
Security Agreement in order to induce the Lenders to make loans and the Issuing
Lender to issue letters of credit under the Credit Agreement.  Pursuant to
Section 6.15 of the Credit Agreement, each Subsidiary of the Borrower that was
not in existence on the date of the Credit Agreement is required to enter into
the Security Agreement as a Grantor upon becoming a Subsidiary. 
Section 17(j) of the Security Agreement provides that additional Subsidiaries of
the Borrower may become Grantors under the Security Agreement by execution and
delivery of an instrument in the form of this Supplement.  The undersigned
Subsidiary of the Borrower (the “New Grantor”) is executing this Supplement in
accordance with the requirements of the Credit Agreement to become a Grantor
under the Security Agreement in order to induce the Lenders to make additional
loans and the Issuing Lender to issue additional letters of credit and as
consideration for loans previously made and letters of credit previously issued.

 

Accordingly, the Administrative Agent and the New Grantor agree as follows:

 

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SECTION 1.                                In accordance with Section 17(j) of
the Security Agreement, the New Grantor by its signature below becomes a Grantor
under the Security Agreement with the same force and effect as if originally
named therein as a Grantor and the New Grantor hereby agrees (a) to all the
terms and provisions of the Security Agreement applicable to it as a Grantor
thereunder and (b) represents and warrants that the representations and
warranties made by it as a Grantor thereunder are true and correct on and as of
the date hereof in all material respects.  In furtherance of the foregoing, the
New Grantor, as security for the payment and performance in full of the Secured
Obligations (as defined in the Security Agreement), does hereby create and grant
to the Administrative Agent, its successors and assigns, for the benefit of the
Secured Parties, their successors and assigns, a continuing security interest in
and lien on all of the New Grantor’s right, title and interest in and to the
Collateral (as defined in the Security Agreement) of the New Grantor.  Each
reference to a “Grantor” in the Security Agreement shall be deemed to include
the New Grantor.  The Security Agreement is hereby incorporated herein by
reference.

 

SECTION 2.                                The New Grantor represents and
warrants to the Administrative Agent and the other Secured Parties that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally and
subject, as to enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding in equity or at
law)).

 

SECTION 3.                                This Supplement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract.  This Supplement shall become
effective when the Administrative Agent shall have received counterparts of this
Supplement that, when taken together, bear the signatures of the New Grantor and
the Administrative Agent.  Delivery of an executed signature page to this
Supplement by facsimile transmission shall be as effective as delivery of a
manually signed counterpart of this Supplement.

 

SECTION 4.                                The New Grantor hereby represents and
warrants that set forth on Schedule 1 attached hereto are (a) its sole
jurisdiction of formation and type of organization, (b) the location of all
records concerning its Accounts, General Intangibles, or any other Collateral,
(c) its federal tax identification number and the organizational number, and
(d) all names used by it during the last five years prior to the date of this
Supplement.

 

SECTION 5.                                Except as expressly supplemented
hereby, the Security Agreement shall remain in full force and effect.

 

SECTION 6.                                THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS.

 

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SECTION 7.                                In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid, illegal
or unenforceable, but the validity, legality and enforceability of the remaining
provisions contained herein and in the Security Agreement shall not in any way
be affected or impaired.  The parties hereto shall endeavor in good-faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.

 

SECTION 8.                                All communications and notices
hereunder shall be in writing and given as provided in the Security Agreement. 
All communications and notices hereunder to the New Grantor shall be given to it
at the address set forth under its signature hereto.

 

SECTION 9.                                The New Grantor agrees to reimburse
the Administrative Agent for its reasonable out-of-pocket expenses in connection
with this Supplement, including the reasonable fees, other charges and
disbursements of counsel for the Administrative Agent.

 

THIS SUPPLEMENT, THE SECURITY AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

IN WITNESS WHEREOF, the New Grantor and the Administrative Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.

 

 

[Name of New Grantor],

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

Address:

 

 

 

 

 

 

 

 

[ADMINISTRATIVE AGENT]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

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Schedule 1

Supplement No.      

to the Security Agreement

 

New Grantor:

[GRANTOR]

 

 

Jurisdiction of Formation / Filing:

[STATE]

 

 

Type of Organization:

[ENTITY TYPE]

 

 

Address where records for Collateral are kept:

[ADDRESS]

 

[CITY, STATE ZIP]

 

 

Organizational Number:

 

 

 

Federal Tax Identification Number:

 

 

 

Prior Names:

 

 

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