Exhibit 10.1

 

 

CREDIT AGREEMENT

 

AMONG

 

EVOLUTION PETROLEUM CORPORATION

 

THE GUARANTORS SIGNATORY HERETO

 

AND

 

TEXAS CAPITAL BANK, N.A.

 

February 29, 2012

 

 

REVOLVING LINE OF CREDIT AND LETTER

OF CREDIT FACILITY OF UP TO $50,000,000

 

 

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TABLE OF CONTENTS

 

ARTICLE I

DEFINITIONS AND INTERPRETATION

1

1.1

Terms Defined Above

1

1.2

Additional Defined Terms

1

1.3

Undefined Financial Accounting Terms

15

1.4

References

15

1.5

Articles and Sections

15

1.6

Number and Gender

16

1.7

Incorporation of Schedules and Exhibits

16

1.8

Negotiated Transaction

16

 

 

 

ARTICLE II

TERMS OF FACILITY

16

2.1

Revolving Line of Credit

16

2.2

Letter of Credit Facility

17

2.3

Limitations on Interest Periods and Types of Loans

18

2.4

Use of Loan Proceeds and Letters of Credit

19

2.5

Interest

19

2.6

Repayment of Loans and Interest

20

2.7

Outstanding Amounts

20

2.8

Taxes and Time, Place, and Method of Payments

21

2.9

Borrowing Base and Monthly Reduction Amount

22

2.10

Mandatory Prepayments

23

2.11

Voluntary Prepayments and Conversions of Loans

24

2.12

Engineering Fees and Expenses

24

2.13

Commitment Fees

24

2.14

Additional Fees

24

2.15

Loans to Satisfy Obligations

25

2.16

General Provisions Relating to Interest

25

2.17

Yield Protection

26

2.18

Illegality

27

2.19

Regulatory Change

27

2.20

RESERVED

27

2.21

RESERVED

27

2.22

Right of Offset

27

 

 

 

ARTICLE III

CONDITIONS

28

3.1

Receipt of Loan Documents and Other Items

28

3.2

Each Loan

30

3.3

Issuance of Letters of Credit

31

 

 

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

32

4.1

Due Authorization

32

4.2

Existence

32

4.3

Valid and Binding Obligations

32

4.4

RESERVED

32

4.5

Title to Oil and Gas Properties

32

 

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4.6

Scope and Accuracy of Financial Statements

32

4.7

No Material Adverse Effect or Default

33

4.8

No Material Misstatements

33

4.9

Liabilities, Litigation and Restrictions

33

4.10

Authorizations; Consents

33

4.11

Compliance with Laws

33

4.12

ERISA

33

4.13

Environmental Laws

34

4.14

Compliance with Federal Reserve Regulations

34

4.15

Investment Company Act

34

4.16

Proper Filing of Tax Returns; Payment of Taxes Due

34

4.17

Refunds

34

4.18

Gas Contracts

34

4.19

Intellectual Property

35

4.20

Casualties or Taking of Property

35

4.21

Principal Location

35

4.22

Subsidiaries

35

4.23

Compliance with Anti-Terrorism Laws

35

4.24

Identification Numbers

36

4.25

Solvency

36

 

 

 

ARTICLE V

AFFIRMATIVE COVENANTS

37

5.1

Maintenance and Access to Records

37

5.2

Quarterly Financial Statements and Compliance Certificates

37

5.3

Annual Financial Statements and Compliance Certificate

37

5.4

Oil and Gas Reserve Reports and Production Reports

37

5.5

Title Information; Title Defects

38

5.6

Notices of Certain Events

38

5.7

RESERVED

39

5.8

RESERVED

39

5.9

Joinder of New Domestic Subsidiaries

39

5.10

Additional Information

39

5.11

Compliance with Laws

40

5.12

Payment of Assessments and Charges

40

5.13

Maintenance of Existence or Qualification and Good Standing

40

5.14

Payment of Note; Performance of Obligations

40

5.15

Further Assurances

40

5.16

Initial Expenses of Lender

40

5.17

Subsequent Expenses of Lender

40

5.18

Operation of Oil and Gas Properties

41

5.19

Maintenance and Inspection of Properties

41

5.20

Maintenance of Insurance

41

5.21

Environmental Indemnification

42

5.22

General Indemnification

43

5.23

Evidence of Compliance with Anti-Terrorism Laws

43

5.24

Deposit Account

43

 

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ARTICLE VI

NEGATIVE COVENANTS

44

6.1

Indebtedness

44

6.2

Contingent Obligations

44

6.3

Liens

45

6.4

Sales of Assets

45

6.5

Leasebacks

45

6.6

Sale or Discount of Receivables

45

6.7

Loans or Advances

45

6.8

Investments

46

6.9

Dividends and Distributions

46

6.10

Issuance of Equity; Changes in Structure

47

6.11

Transactions with Affiliates

47

6.12

Lines of Business

47

6.13

Plan Obligation

47

6.14

Current Ratio

47

6.15

Total Funded Indebtedness to EBITDA Ratio

47

6.16

Interest Coverage Ratio

48

6.17

Anti-Terrorism Laws

48

6.18

Commodity Hedging

48

 

 

 

ARTICLE VII

EVENTS OF DEFAULT

48

7.1

Enumeration of Events of Default

48

7.2

Remedies

51

 

 

 

ARTICLE VIII

MISCELLANEOUS

52

8.1

Assignments; Participations

52

8.2

Survival of Representations, Warranties, and Covenants

53

8.3

Notices and Other Communications

53

8.4

Parties in Interest

53

8.5

Renewals; Extensions

54

8.6

Rights of Third Parties

54

8.7

No Waiver; Rights Cumulative

54

8.8

Survival Upon Unenforceability

54

8.9

Amendments; Waivers

54

8.10

Controlling Agreement

54

8.11

RESERVED

54

8.12

Governing Law

54

8.13

Waiver of Rights to Jury Trial

55

8.14

Jurisdiction and Venue

55

8.15

Integration

55

8.16

Waiver of Punitive and Consequential Damages

55

8.17

Counterparts

56

8.18

USA Patriot Act Notice

56

8.19

Tax Shelter Regulations

56

8.20

Contribution and Indemnification

56

 

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LIST OF SCHEDULES

 

 

 

Schedule 4.9

-

Liabilities and Litigation

Schedule 4.13

-

Environmental Matters

Schedule 4.17

-

Refunds

Schedule 4.18

-

Gas Contracts

Schedule 4.20

-

Casualties

Schedule 4.22

-

Subsidiaries

Schedule 4.24

-

Taxpayer ID and Organization Numbers

 

 

 

LIST OF EXHIBITS

 

 

 

Exhibit I

-

Form of Note

Exhibit II

-

Form of Borrowing Request

Exhibit III

-

Form of Compliance Certificate

Exhibit IV

-

Form of Opinion of Counsel

 

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CREDIT AGREEMENT

 

This CREDIT AGREEMENT is made and entered into as of the 29th day of February,
2012, by and among EVOLUTION PETROLEUM CORPORATION, a Nevada corporation (the
“Borrower”), NGS SUB. CORP., a Delaware corporation (“NGS Sub”), TERTIAIRE
RESOURCES COMPANY, a Texas corporation (“Tertiaire”), NGS TECHNOLOGIES, INC., a
Delaware corporation (“NGS Technologies”), EVOLUTION OPERATING CO., INC., a
Texas corporation (“Evolution Operating,” and NGS Sub, Tertiaire, NGS
Technologies and Evolution Operating, collectively, the “Initial Guarantors”),
and TEXAS CAPITAL BANK, N.A., a national banking association (the “Lender”).

 

W I T N E S S E T H:

 

In consideration of the mutual covenants and agreements herein contained, the
parties hereto hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS AND INTERPRETATION

 

1.1          Terms Defined Above.  As used in this Credit Agreement, each of the
terms “Borrower,” “Evolution Operating,” “Initial Guarantors” and “Lender,” “NGS
Sub,” “NGS Technologies” and “Tertiaire” shall have the meaning assigned to such
term hereinabove.

 

1.2          Additional Defined Terms.  As used in this Credit Agreement, each
of the following terms shall have the meaning assigned thereto in this
Section 1.2 or in Sections referred to in this Section 1.2, unless the context
otherwise requires:

 

“Additional Amount” shall have the meaning assigned to such term in Section 2.8.

 

“Additional Costs” shall mean costs which are attributable to the obligation of
the Lender to make or its making or maintaining any LIBO Rate Loan, or any
reduction in any amount receivable by the Lender in respect of any such
obligation or any LIBO Rate Loan, resulting from any Regulatory Change which
(a) changes the basis of taxation of any amounts payable to the Lender under
this Agreement or the Note in respect of any LIBO Rate Loan (other than taxes
imposed on the overall net income of the Lender or its Applicable Lending Office
(including franchise or similar taxes) for any such LIBO Rate Loan), (b) imposes
or modifies any reserve, special deposit, minimum capital, capital ratio, or
similar requirements (other than the Reserve Requirement utilized in the
determination of the Adjusted LIBO Rate for such Loan) relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, the Lender (including LIBO Rate Loans and Dollar deposits in the
London interbank market in connection with LIBO Rate Loans), or the Commitment
of the Lender, or the London interbank market, or (c) imposes any other
condition affecting this Agreement or the Note or any of such extensions of
credit, liabilities, or Commitment.

 

“Adjusted Base Rate” shall mean, for any Loan, an interest rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Lender to be the greater of

 

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(a) the Base Rate and (b) the sum of (i) the Federal Funds Rate and (ii) one
half of one percent (0.50%).

 

“Adjusted LIBO Rate” shall mean, for any Interest Period for any LIBO Rate Loan,
an interest rate per annum (rounded upwards, if necessary, to the nearest 1/100
of 1%) determined by the Lender to be equal to the quotient of (a) the LIBO Rate
for such Interest Period for such Loan, divided by (b) the remainder of 1.00
minus the Reserve Requirement for such Loan for such Interest Period.

 

“Affiliate” shall mean, as to any Person, any other Person directly or
indirectly, controlling, or under common control with, such Person and includes
any “affiliate” of such Person within the meaning of Rule 12b-2 promulgated by
the Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, with “control,” as used in this definition, meaning possession,
directly or indirectly, of the power to direct or cause the direction of
management, policies or action through ownership of voting securities, contract,
voting trust, or membership in management or in the group appointing or electing
management or otherwise through formal or informal arrangements or business
relationships; provided, however, that in no event shall the Lender be deemed an
Affiliate of the Borrower or any of the Guarantors.

 

“Agreement” shall mean this Credit Agreement, as it may be amended,
supplemented, restated or otherwise modified from time to time.

 

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

 

“Applicable Lending Office” shall mean, for the Lender and type of Loan, the
lending office of the Lender (or an Affiliate of the Lender) designated for such
type of Loan on the signature pages hereof or such other office of the Lender
(or an Affiliate of the Lender) as the Lender may from time to time specify to
the Borrower as the office by which its Loans of such type are to be made and
maintained.

 

“Approved Fund” shall mean any (a) investment company, fund, trust,
securitization vehicle or conduit that is (or will be) engaged in making,
purchasing, holding or otherwise investing in commercial loans and similar
extensions of credit in the ordinary course of its business or (b) any Person
(other than a natural person) which temporarily warehouses loans for the Lender
or any entity described in the preceding clause (a) and that, with respect to
each of the preceding clauses (a) and (b), is administered or managed by (i) the
Lender, (ii) an Affiliate of the Lender or (iii) a Person (other than a natural
person) or an Affiliate of a Person (other than a natural person) that
administers or manages the Lender.

 

“Approved Hedge Counterparty” shall mean any counterparty proposed by the
Borrower and approved by the Lender (which approval shall not be unreasonably
withheld) under a Commodity Hedge Agreement or an Interest Rate Hedge Agreement
proposed to be entered into by the Borrower.

 

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“Available Commitment” shall mean, at any time, an amount equal to the
remainder, if any, of (a) the sum of the Revolving Commitment Amount in effect
at such time minus (b) the sum of the Loan Balance at such time plus the L/C
Exposure at such time.

 

“Base Rate” shall mean the interest rate announced by the Lender from time to
time as its prime rate or its general reference rate of interest, which Base
Rate shall change upon any change in such announced or published general
reference interest rate and which Base Rate may not be the lowest interest rate
charged by the Lender.

 

“Base Rate Loan” shall mean any Loan and any portion of the Loan Balance which
the Borrower has requested, in the initial Borrowing Request for such Loan or a
subsequent Borrowing Request for such portion of the Loan Balance, bear interest
on the basis of the Adjusted Base Rate, or which pursuant to the terms hereof is
otherwise required to bear interest on the basis of the Adjusted Base Rate.

 

“Blocked Person” shall have the meaning assigned to such term in Section 4.23.

 

“Borrowing Base” shall mean, at any time, the amount stated in
Section 2.9(a) and each other amount established and in effect from time to time
in accordance with the provisions of Section 2.9.

 

“Borrowing Request” shall mean each written request, substantially in the form
attached hereto as Exhibit II, by the Borrower to the Lender for a borrowing
pursuant to Section 2.1, each of which shall:

 

(a)           be signed by a Responsible Officer of the Borrower;

 

(b)           specify the amount and type of the Loan requested or to be
converted and the date of the borrowing or conversion (which shall be a Business
Day);

 

(c)           when requesting a Base Rate Loan, be delivered to the Lender no
later than 11:00 a.m., Central Standard or Central Daylight Savings Time, as the
case may be, on the Business Day preceding the requested borrowing or
conversion; and

 

(d)           when requesting a LIBO Rate Loan, be delivered to the Lender no
later than 11:00 a.m., Central Standard or Central Daylight Savings Time, as the
case may be, the third Business Day preceding the requested borrowing or
conversion and designate the Interest Period requested with respect to such Loan
and designate the Interest Period requested with respect to such LIBO Rate Loan.

 

“Business Day” shall mean a day other than a Saturday, Sunday, legal holiday for
commercial banks under the laws of the State of Texas, or any other day when
banking is suspended in the State of Texas and, with respect to all requests,
notices, and determinations in connection with, and payments of principal and
interest on, LIBO Rate Loans, which is also a day for trading by and between
banks in Dollar deposits in the London interbank market.

 

“Business Entity” shall mean a corporation, partnership, joint venture, limited
liability company, joint stock association, business trust or other business
entity.

 

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“Closing” shall mean the establishment of the credit facility which is the
subject of this Agreement.

 

“Closing Date” shall mean the date of this Agreement.

 

“Commitment” shall mean the obligation of the Lender to make Loans to or for the
benefit of the Borrower and to issue Letters of Credit pursuant to applicable
provisions of this Agreement.

 

“Commitment Fees” shall mean the fees payable to the Lender by the Borrower
pursuant to the provisions of Section 2.13.

 

“Commitment Period” shall mean the period from and including the Closing Date
to, but not including, the Commitment Termination Date.

 

“Commitment Termination Date” shall mean the earlier of (a) February 29, 2016
and (b) the date the Commitment is terminated pursuant to the provisions of
Section 7.2.

 

“Commodity Hedge Agreements” shall mean crude oil, natural gas, or other
hydrocarbon floor, collar, cap, price protection or hedge agreements.

 

“Commonly Controlled Entity” shall mean any Person which is under common control
with the Borrower or any of the Guarantors within the meaning of Section 4001 of
ERISA.

 

“Compliance Certificate” shall mean each certificate, substantially in the form
attached hereto as Exhibit III, executed by a Responsible Officer of the
Borrower and furnished to the Lender from time to time in accordance with the
provisions of Section 5.2 or Section 5.3, as the case may be.

 

“Contingent Obligation” shall mean, as to any Person, any obligation of such
Person guaranteeing or in effect guaranteeing any Indebtedness, 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 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.

 

“Current Assets” shall mean all assets which would, in accordance with GAAP, be
included as current assets on a consolidated balance sheet of the Borrower and
its consolidated

 

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Subsidiaries as of the date of calculation (provided, however, if cash or
securities deposited into and held in the registry of a court to enable the
Borrower or any of its consolidated Subsidiaries to pursue an appeal of an
adverse judgment would, in accordance with GAAP, otherwise be included in
current assets, such cash shall be excluded in the determination of Current
Assets), after deducting adequate reserves in each case in which a reserve is
proper in accordance with GAAP, plus the then current Available Commitment and,
if not already included, the amount of any cash on deposit with the Lender in
accordance with the provisions of Section 5.24, but excluding non-cash
derivative current assets arising from Commodity Hedge Agreements.

 

“Current Liabilities” shall mean all liabilities which would, in accordance with
GAAP, be included as current liabilities on a consolidated balance sheet of the
Borrower and its consolidated Subsidiaries (provided, however, if the amount of
any judgment against the Borrower or any of its consolidated Subsidiaries which
is on appeal and such appeal is being pursued on the basis of cash or securities
having been delivered into and held in the registry of a court would, in
accordance with GAAP, otherwise be included in current liabilities, the amount
of such judgment shall be excluded in the determination of Current Liabilities),
but excluding (a) current maturities in respect of the Obligations, both
principal and interest, and non-cash derivative current liabilities arising from
Commodity Hedge Agreements and (b) current obligations under operating leases.

 

“Default” shall mean any event or occurrence which with the lapse of time or the
giving of notice or both would become an Event of Default.

 

“Default Rate” shall mean a daily interest rate equal to the per annum interest
rate equal to the Adjusted Base Rate for each relevant day plus six and three
quarters percent (6.75%) converted to a daily rate on the basis of a year of 365
or 366 days, as the case may be, and the rate so determined for each relevant
day being applied on the basis of actual days elapsed (including the first day,
but excluding the last day) during the period for which interest is payable at
the Default Rate, but in no event shall the Default Rate exceed the Highest
Lawful Rate or be less than nine percent (9.00%).

 

“Deficiency” shall have the meaning assigned to such term in Section 2.10.

 

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

 

“Domestic Subsidiary” shall mean any Subsidiary of the Borrower that is
organized under the laws of the United States of America or any state thereof or
the District of Columbia.

 

“EBITDA” shall mean, for any period for which the amount thereof is to be
determined and on a consolidated basis for the Borrower and its consolidated
Subsidiaries, Net Income for such period, but excluding (i) unrealized gains or
losses or charges in respect of Commodity Hedge Agreements (including those
under GAAP arising from the application of FAS 133), (ii) extraordinary or
non-recurring income items and, to the extent acceptable to the Lender, expense
items and (iii) deferred financing costs written off, including equity
discounts, and premiums paid in connection with any early extinguishment of
Indebtedness permitted pursuant to this Agreement, minus cash dividends paid
with respect to the Preferred Stock, plus, in each case to the extent deducted
in the determination of Net Income for such period and without duplication

 

5

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of any item in more than one category, each of the following for such period:
(a) Interest Expense, (b) Taxes, (c) depreciation, depletion and amortization
expenses, (d) dry hole and exploration expenses and (f) other non-cash expenses,
including write-downs of non-current assets and unrealized non-cash losses
resulting from foreign currency balance sheet adjustments required under GAAP,
and minus, to the extent credited in the determination of Net Income for such
period, non-cash credits for such period.

 

“Environmental Complaint” shall mean any written 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 of the Guarantors, (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 of the Guarantors or the business conducted thereon.

 

“Environmental Laws” shall mean (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 Occupational Safety and Health Act, the Oil Pollution Act, the Resource
Conservation and Recovery 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 of the Guarantors
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.

 

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, and the
regulations thereunder and interpretations thereof.

 

“Event of Default” shall mean any of the events specified in Section 7.1.

 

“Excess Amount” shall have the meaning assigned to such term in Section 8.20.

 

“Excess Payments” shall have the meaning assigned to such term in Section 8.20.

 

“Excluded Taxes” shall mean, with respect to any and all payments to the Lender
or any other recipient of any payment to be made by or on account of any
Obligation, net income taxes, branch profits taxes, margin, franchise and excise
taxes (to the extent imposed in lieu of net income taxes), and all interest,
penalties and liabilities with respect thereto, imposed on the Lender.

 

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“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.

 

“Facility Amount” shall mean $50,000,000, as modified from time to time pursuant
to the terms hereof.

 

“Federal Funds Rate” shall mean, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers on such day, as published by
the Federal Reserve Bank of Dallas, Texas, on the Business Day next succeeding
such day; provided that (a) if the day for which such rate is to be determined
is not a Business Day, the Federal Funds Rate for such day shall be such rate on
such transactions on the next preceding Business Day as so published on the next
succeeding Business Day, and (b) if such rate is not so published for any day,
the Federal Funds Rate for such day shall be the average rate charged to the
Lender by federal funds brokers of recognized standing on such day on such
transactions as determined by the Lender.

 

“Financial Statements” shall mean consolidated financial statements of the
Borrower and its consolidated Subsidiaries as at the point in time and for the
period indicated, including all notes thereto, and consisting of at least a
balance sheet and related statements of operations, members’, shareholders’ or
partners’ equity, and cash flows and, when required by applicable provisions of
this Agreement to be audited, accompanied by the unqualified certification of a
nationally-recognized or regionally-recognized firm of independent certified
public accountants or other independent certified public accountants acceptable
to the Lender and footnotes to any of the foregoing, all of which, unless
otherwise indicated, shall be prepared in accordance with GAAP consistently
applied and in comparative form with respect to the corresponding period of the
preceding fiscal year.

 

“GAAP” shall mean generally accepted accounting principles established by the
Financial Accounting Standards Board or the American Institute of Certified
Public Accountants and in effect in the United States from time to time.

 

“Governmental Authority” shall mean 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.

 

“Guaranties” shall mean, collectively, guarantees of payment and performance of
the Obligations, in form and substance acceptable to the Lender, provided from
time to time by the Guarantors in compliance with the provisions of Section 3.1
or Section 5.9, as the case may be.

 

“Guarantors” shall mean, collectively, the Initial Guarantors and any and all
Domestic Subsidiaries of the Borrower formed or acquired subsequent to the
Closing Date.

 

“Hazardous Substances” shall mean 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

 

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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, the Superfund Amendments and Reauthorization Act, the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act, the Toxic Substances Control Act, or any other Requirement of Law.

 

“Highest Lawful Rate” shall mean 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 under laws applicable to the Lender, 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.

 

“Indebtedness” shall mean, as to any Person, without duplication, (a) all
obligations of such Person evidenced by bonds, debentures, promissory notes, or
similar evidences of indebtedness, (b) all other indebtedness of such Person for
borrowed money, (c) all obligations of others, to the extent any such obligation
is secured by a Lien on the assets of such Person (whether or not such Person
has assumed or become liable for the obligation secured by such Lien), (d) all
direct or contingent obligations of such Person under letters of credit,
banker’s acceptances, surety bonds, and similar instruments and (e) net
obligations of such Person under any Commodity Hedge Agreements or Interest Rate
Hedge Agreements.

 

“Indemnified Obligor” shall have the meaning assigned to such term in
Section 8.20.

 

“Indemnified Outlay” shall have the meaning assigned to such term in
Section 8.20.

 

“Indemnifying Obligor” shall have the meaning assigned to such term in
Section 8.20.

 

“Indemnified Taxes” shall mean Taxes other than Excluded Taxes.

 

“Indemnitee” shall have the meaning assigned to such term in Section 5.21.

 

“Insolvency Proceeding” shall mean application (whether voluntary or instituted
by another Person) for or the consent to the appointment of a receiver, trustee,
conservator, custodian, or liquidator of any 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.

 

“Intellectual Property” shall mean patents, patent applications, trademarks,
tradenames, copyrights, technology, know how, and processes.

 

“Interest Expense” shall mean, for any period for which the amount thereof is to
be determined, any and all expenses relating to the accrual of interest on
Indebtedness of the Borrower, on a consolidated basis with its consolidated
Subsidiaries, including interest expense attributable to capitalized leases.

 

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“Interest Period” shall mean, subject to the limitations set forth in Section
2.3, with respect to any LIBO Rate Loan, a period commencing on the date such
Loan is made or converted from a Loan of another type pursuant to this Agreement
or the last day of the next preceding Interest Period with respect to such Loan
and ending on the numerically corresponding day in the calendar month that is
one, two, three or, if available, six months thereafter, as the Borrower may
request in the Borrowing Request for such Loan.

 

“Interest Rate Hedge Agreements” shall mean interest rate floor, collar, cap,
rate protection or hedge agreements.

 

“Investment” in any Person shall mean any stock, bond, note, or other evidence
of Indebtedness, or any other security (other than current trade and customer
accounts) of, investment or partnership interest in or loan to, such Person.

 

“Joinder Agreement” shall mean each agreement, in form and substance acceptable
to the Lender, pursuant to which a Domestic Subsidiary of the Borrower or any of
the Guarantors formed or acquired subsequent to the Closing Date, agrees to
become a party to and bound by this Agreement.

 

“L/C Exposure” shall mean, at any time, the sum of (a) the then aggregate
maximum amount available to be drawn under outstanding Letters of Credit plus
(b) prior to the making of any related Letter of Credit Payments in respect of
such Letters of Credit, the aggregate of all unpaid reimbursement obligations in
respect of such Letters of Credit.

 

“L/C Sublimit” shall mean $1,000,000.

 

“Letter of Credit” shall mean any standby letter of credit issued for the
account of the Borrower pursuant to Section 2.2.

 

“Letter of Credit Application” shall mean the standard letter of credit
application employed by the Lender, as the issuer of the Letters of Credit, from
time to time in connection with its issuance of letters of credit.

 

“Letter of Credit Payment” shall mean any payment made by the Lender under a
Letter of Credit, to the extent that such payment has not been repaid by the
Borrower.

 

“LIBO Rate” shall mean, with respect to any Interest Period for any LIBO Rate
Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of
1%) that appears on Reuters Reference LIBOR01 (or any successor thereto) for
Interest Periods of one month, two months, three months or six months,
respectively (or if such shall not be available, any successor or similar
service selected by the Lender and the Borrower) as of approximately 11:00 a.m.,
Central Standard or Central Daylight Savings Time, as the case may be, on the
day two Business Days prior to the first day of such Interest Period for Dollar
deposits in an amount comparable to the principal amount of such LIBO Rate Loan
and having a term comparable to the Interest Period for such LIBO Rate Loan.  If
neither Reuters nor any successor or similar service is available, the term
“LIBO Rate” shall mean, with respect to any Interest Period for any LIBO Rate
Loan, the rate per annum (rounded upwards if necessary, to the nearest 1/100 of
1%) quoted by the Lender at approximately 11:00 a.m., London time (or as soon
thereafter as practicable)

 

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two Business Days prior to the first day of the Interest Period for such LIBO
Rate Loan for the offering to the Lender by leading banks in the London
interbank market of Dollar deposits in an amount comparable to the principal
amount of such LIBO Rate Loan and having a term comparable to the Interest
Period for such LIBO Rate Loan.

 

“LIBO Rate Loan” shall mean any Loan and any portion of the Loan Balance which
the Borrower has requested, in the initial Borrowing Request for such Loan or a
subsequent Borrowing Request for such portion of the Loan Balance, bear interest
on the basis of the Adjusted LIBO Rate and which are permitted by the terms
hereof to bear interest on the basis of the Adjusted LIBO Rate.

 

“Lien” shall mean any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of such Property, whether such interest
is based on common law, statute, or contract, and including, but not limited to,
the lien or security interest arising from a mortgage, ship mortgage,
encumbrance, pledge, security agreement, conditional sale or trust receipt, or a
lease, consignment, or bailment for security purposes (other than true leases or
true consignments), liens of mechanics, materialmen, and artisans, maritime
liens and reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases, and other title exceptions and
encumbrances affecting Property which secure an obligation owed to, or a claim
by, a Person other than the owner of such Property; provided, however, for the
avoidance of doubt, the deposit of cash or securities into the registry of a
court to enable the pursuit of an appeal of an adverse judgment shall not be a
Lien.

 

“Limitation Period” shall mean any period while any amount remains owing on the
Note and 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” shall mean any loan made by the Lender to or for the benefit of the
Borrower pursuant to this Agreement and any payment made by the Lender under a
Letter of Credit.

 

“Loan Balance” shall mean, at any point in time, the aggregate outstanding
principal balance of the Note at such time.

 

“Loan Documents” shall mean this Agreement, the Note, the Letter of Credit
Applications, the Letters of Credit, the Guaranties, any Joinder Agreements 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, the Letters of Credit or any Joinder Agreement, 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.

 

“Material Adverse Effect” shall mean (a) any material and adverse effect on the
business, operations, assets, properties, liabilities, or financial condition of
the Borrower, on a consolidated basis with its consolidated Subsidiaries, (b)
any material and adverse effect upon the value or impairment of the Borrower or
its Subsidiary’s ownership of any of their Property taken as a whole, or (c) any
material and adverse effect on the ability of the Borrower and its Subsidiaries

 

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taken as a whole to carry out their business as at the Closing Date to be
conducted or meet their obligations under the Loan Documents on a timely basis.

 

“Monthly Reduction Amount” shall mean, at any time, the amount determined as
such by the Lender and then in effect in accordance with the provisions of
Section 2.9.

 

“Net Income” shall mean, for any relevant period, the net income available to
the Borrower, on a consolidated basis with its consolidated Subsidiaries, during
such period, determined in accordance with GAAP.

 

“Note” shall mean the promissory note of the Borrower payable to the Lender in
the face amount of up to the Aggregate Facility Amount in the form attached
hereto as Exhibit I with all blanks in such form completed appropriately,
together with all renewals, extensions for any period, increases and
rearrangements thereof.

 

“Obligations” shall mean, without duplication of the same amount in more than
one category, (a) all Indebtedness of the Borrower evidenced by the Note, (b)
the obligation of the Borrower to provide to or reimburse the Lender, as the
issuer of the Letters of Credit, as the case may be, for amounts payable, paid
or incurred with respect to Letters of Credit, (c) the undrawn, unexpired amount
of all outstanding Letters of Credit, (d) the obligation of the Borrower for the
payment of Commitment Fees and other fees pursuant to the provisions of this
Agreement and (e) 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 any Commodity Hedge Agreement or Interest
Rate Hedge Agreement with an Approved Hedge Counterparty and in compliance with
the provisions of Section 6.1, 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.

 

“Obligor” shall have the meaning assigned to such term in Section 8.20.

 

“Obligors” shall have the meaning assigned to such term in Section 8.20.

 

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

 

“Oil and Gas Properties” shall mean fee, leasehold, or other interests in or
under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon
leases, including undivided interests in any such property rights owned jointly
with others, with respect to Properties situated in the United States or
offshore from any State of the United States, including 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, including,
without limitation, gathering systems, oil field service equipment and
intellectual property related to or used in connection with any of the
foregoing.

 

“Other Taxes” shall mean any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made

 

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under any Loan Document or from the execution, delivery or enforcement of, or
otherwise with respect to, any Loan Document.

 

“Permitted Liens” shall mean (a) Liens for taxes, assessments, or other
governmental charges or levies not yet due or which (if foreclosure, distraint,
sale or other similar proceedings shall not have been initiated or, if
initiated, would not be reasonably expected to have a Material Adverse Effect)
are being contested in good faith by appropriate proceedings, and such reserve
as may be required by GAAP shall have been made therefor, (b) Liens in
connection with workers’ compensation, unemployment insurance or other social
security (other than Liens created by Section 4068 of ERISA), old age pension,
employee benefits, or public liability obligations which are not yet due or
which are being contested in good faith by appropriate proceedings, if such
reserve as may be required by GAAP shall have been made therefor, (c) Liens in
favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen,
materialmen, constructors, laborers, landlords or similar Liens arising by
operation of law in the ordinary course of business or incident to the
exploration, development, operation, and maintenance of Oil and Gas Properties
or statutory landlord’s liens, and liens at the wellhead, each of which is in
respect of obligations that are not yet due or which are being contested in good
faith by appropriate proceedings, if such reserve as may be required by GAAP
shall have been made therefor, (d) Liens in favor of operators and non-operators
under joint operating agreements or similar contractual arrangements arising in
the ordinary course of the business of the Borrower to secure amounts owing
(including Liens on leasehold interests to secure drilling and carried interest
obligations for the earning or retention of acreage rights), which amounts are
not yet due or are being contested in good faith by appropriate proceedings, if
such reserve as may be required by GAAP shall have been made therefor, (e) Liens
under production sales agreements, division orders, operating agreements, and
other agreements customary in the oil and gas business for processing,
producing, and selling hydrocarbons securing obligations not constituting
Indebtedness and provided that such Liens do not secure obligations to deliver
hydrocarbons at some future date without receiving full payment therefor within
90 days of delivery, (f) covenants, liens, rights, easements, rights of way,
restrictions and other similar encumbrances, and minor defects in the chain of
title which are customarily accepted in the oil and gas financing industry, none
of which interfere with the ordinary conduct of the business of the Borrower or
materially detract from the value or use of the Property to which they apply,
(g) Liens securing the purchase price of Property, including vehicles and
equipment, acquired by the Borrower in the ordinary course of business
(including Liens existing under conditional sale or title retention contracts),
provided that such Liens cover only the acquired Property and the aggregate
unpaid purchase price secured by such Liens does not exceed $100,000, (h) Liens
securing leases of equipment, provided that, as to any particular lease, the
Lien covers only the relevant leased equipment and secures only amounts which
are not yet due and payable under the relevant lease or are being contested in
good faith by appropriate proceedings and such reserve as may be required by
GAAP shall have been made therefor, (i) Liens in favor or for the benefit of the
Lender, (j) other Liens expressly permitted hereunder or in any other Loan
Document; (k) any Liens reserved in leases or farmout agreements for rent or
royalties and for compliance with the terms of the farmout agreements or leases
in the case of leasehold estates, to the extent that any such Lien referred to
in this clause does not materially impair the use of the Property covered by
such Lien for the purposes for which such Property is held by the Borrower or
any Subsidiary of the Borrower or materially impair the value of such Property
subject thereto; (l) encumbrances (other than to secure the payment of borrowed
money or the deferred purchase

 

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price of Property or services), easements, restrictions, servitudes, permits,
conditions, covenants, exceptions or reservations in any rights of way or other
Property of the Borrower or any Subsidiary of the Borrower for the purpose of
roads, pipelines, transmission lines, transportation lines, distribution lines
for the removal of gas, oil, coal or other minerals or timber, and other like
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, and defects, irregularities, zoning restrictions and
deficiencies in title of any rights of way or other Property which in the
aggregate do not materially impair the use of such rights of way or other
Property for the purposes for which such rights of way and other Property are
held by the Borrower or any Subsidiary of the Borrower or materially impair the
value of such Property subject thereto; and (m) deposits of cash or securities
to secure the performance of bids, trade contracts, leases, statutory
obligations, cash calls under joint operating or similar agreements and other
obligations of a like nature incurred in the ordinary course of business.

 

“Person” shall mean an individual, Business Entity, trust, unincorporated
organization, Governmental Authority or any other form of entity.

 

“Plan” shall mean, at any time, any employee benefit plan which is covered by
Title IV of ERISA and in respect of which the Borrower, any of the Guarantors or
any Commonly Controlled Entity of any is (or, if such plan were terminated at
such time, would under Section 4069 of ERISA be deemed to be) an “employer” as
defined in Section 3(5) of ERISA.

 

“Preferred Stock” shall mean the Borrower’s perpetual non-convertible 8.5%
Series A Cumulative Preferred Stock or other parity or junior preferred stock
with no mandatory redemption.

 

“Principal Office” shall mean the office of the Lender in Houston, Texas located
at One Riverway, Suite 2100, Houston, Texas 77056 or such other office as the
Lender may designate in writing to the Borrower from time to time.

 

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

 

“Proportionate Share” shall mean with respect to any Obligor the percentage
derived by dividing (a) the net worth of such Obligor by (b) the consolidated
net worth of all of the Obligors, all as of a particular time.

 

“Regulation D” shall mean Regulation D of the Board of Governors of the Federal
Reserve System (or any successor).

 

“Regulatory Change” shall mean, with respect to the Lender, the passage,
adoption, institution or amendment of any federal, state, local, or foreign
Requirement of Law (including Regulation D), or any interpretation, directive,
or request (whether or not having the force of law) of any Governmental
Authority or monetary authority charged with the enforcement, interpretation, or
administration thereof, occurring after the Closing Date and applying to a class
of lenders including the Lender or its Applicable Lending Office.

 

“Release of Hazardous Substances” shall mean any emission, spill, release,
disposal, or discharge, except in accordance with a valid permit, license,
certificate, or approval of the

 

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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 of the
Guarantors.

 

“Requirement of Law” shall mean, as to any Person, the certificate or articles
of incorporation and by-laws, the certificate or articles of organization and
regulations, operating agreement or limited liability company agreement, the
agreement of limited partnership, the partnership agreement, or other
organizational or governing documents of such Person, and any applicable law,
treaty, ordinance, order, judgment, rule, decree, regulation, or determination
of an arbitrator, court, or other Governmental Authority, including rules,
regulations, orders, and requirements for permits, licenses, registrations,
approvals, or authorizations, in each case as such now exist or may be hereafter
amended and are applicable to or binding upon such Person or any of its Property
or to which such Person or any of its Property is subject.

 

“Reserve Report” shall mean each report delivered to the Lender pursuant to the
provisions of Section 5.4.

 

“Reserve Requirement” shall mean, for any Interest Period for any LIBO Rate
Loan, the average maximum rate at which reserves (including any marginal,
supplemental, or emergency reserves) are required to be maintained during such
Interest Period under Regulation D by member banks of the Federal Reserve System
in Dallas, Texas, with deposits exceeding one billion Dollars against
“Eurocurrency liabilities” (as such term is used in Regulation D) and any other
reserves required by reason of any Regulatory Change to be maintained by such
member banks against (a) any category of liabilities which includes deposits by
reference to which the LIBO Rate is to be determined as provided herein in the
definition of the term “LIBO Rate” or (b) any category of extensions of credit
or other assets which include a LIBO Rate Loan.

 

“Responsible Officer” shall mean, as to any Business Entity, its President,
Chief Financial Officer, any Vice President, any of its Managers, any of its
Members with management authority or any other Person duly authorized in
accordance with the applicable organizational documents, bylaws, regulations or
resolutions to act on behalf of such Business Entity.

 

“Revolving Commitment Amount” shall mean, subject to the applicable provisions
of this Agreement and the right of the Borrower to reduce such amount on an
irrevocable basis by written notice to the Lender, at any time (provided,
however, the Borrower shall not be entitled to any reduction to an amount less
than the sum of the then existing Loan Balance and L/C Exposure), the lesser of
(a) the Facility Amount and (b) the Borrowing Base in effect at such time.

 

“Subsidiary” shall mean, as to any Person, any Business Entity of which shares
of stock or other equity interests having ordinary voting power (other than
stock or other equity interests having such power only by reason of the
happening of a contingency) to elect a majority of the board of directors or
other governing body or other managers of such Business Entity are at the time
owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by such Person.

 

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“Superfund Site” shall mean those sites listed on the Environmental Protection
Agency National Priority List and eligible for remedial action or any comparable
state registry or list in any state of the United States.

 

“Taxes” shall mean any and all present or future taxes, levies, imposts, duties,
fees, deductions, charges or withholdings imposed by any Governmental Authority,
but excluding taxes levied upon the income of the Lender.

 

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

 

“USA Patriot Act” shall mean 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.

 

1.3          Undefined Financial Accounting Terms.  Financial accounting terms
used in this Agreement without definition are used herein with the respective
meanings assigned thereto in accordance with GAAP at the time in effect.

 

1.4          References.  References in this Agreement to Schedule, Exhibit,
Article or Section numbers shall be to Schedules, Exhibits, Articles or Sections
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 Schedule, Exhibit, Article, or
Section in which such reference appears.  Specific enumeration herein shall not
exclude the general and, in such regard, the terms “includes” and “including”
used herein shall mean “includes, without limitation,” or “including, without
limitation,” as the case may be, where appropriate.  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 to “discretion” or “judgment,”
when used in the context of a party’s discretion or judgment shall mean the
reasonable discretion or judgment of such party.  References in this Agreement
to the word knowledge, when used in the context of a party’s knowledge, shall
mean such party’s actual knowledge, without any inquiry or investigation.

 

1.5          Articles and Sections.  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

 

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aforesaid division into Articles and Sections and without regard to headings
prefixed to such Articles or Sections.

 

1.6          Number and Gender.  Whenever the context requires, reference herein
made to the single number shall be understood to include the plural; and
likewise, the 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.

 

1.7          Incorporation of Schedules and Exhibits.  The Schedules and
Exhibits attached to this Agreement are incorporated herein and shall be
considered a part of this Agreement for all purposes.

 

1.8          Negotiated Transaction.  Each party to this Agreement affirms to
the others that it has had the opportunity to consult, and discuss the
provisions of this Agreement with, independent counsel and fully understands the
legal effect of each provision.

 

ARTICLE II

 

TERMS OF FACILITY

 

2.1          Revolving Line of Credit.

 

(a)           Upon the terms and conditions (including the right of the Lender
to decline to make any Loan, other than a Letter of Credit Payment, so long as
any condition to the making of such Loan set forth in Section 3.2 has not been
satisfied) and relying on the representations and warranties contained in this
Agreement, the Lender agrees to make Loans during the Commitment Period to or
for the benefit of the Borrower in an aggregate outstanding principal amount not
to exceed at any time the Revolving Commitment Amount minus the then existing
L/C Exposure.  Loans shall be made from time to time on any Business Day
designated in a Borrowing Request.

 

(b)           Subject to the provisions of this Agreement, during the Commitment
Period, the Borrower may borrow, repay, and reborrow and convert Loans of one
type or with one Interest Period into Loans of another type or with a different
Interest Period.  Each borrowing or conversion of principal of (i) Base Rate
Loans shall be in an amount at least equal to $50,000 and a whole multiple of
$10,000 and (ii) LIBO Rate Loans shall be in an amount at least equal to
$100,000 and a whole multiple of $100,000 and, if any LIBO Rate Loan would
otherwise be in a lesser principal amount for any period, such Loan shall be a
Base Rate Loan during such period.  Except for prepayments made pursuant to the
provisions of Section 2.10, each prepayment of principal shall be in an amount
at least equal to $50,000 and a whole multiple of $10,000 or, if less, the
entire Loan Balance.  Each borrowing, conversion or prepayment of or into a Loan
of a different type or, in the case of a LIBO Rate Loan, having a different
Interest Period, shall be deemed a separate borrowing, conversion, and
prepayment for purposes of the foregoing, one for each type of Loan or Interest
Period.

 

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(c)                                  Proceeds of borrowings requested by the
Borrower shall, subject to the terms and conditions hereof, be made available to
the Borrower in immediately available funds at the Principal Office.  All Loans
shall be evidenced by the Note.

 

2.2                               Letter of Credit Facility.  (a) Upon the terms
and conditions (including the right of the Lender to decline to issue, renew or
extend any such Letter of Credit so long as any condition to the issuance,
renewal or extension of such Letter of Credit set forth in Section 3.3 has not
been satisfied) and relying on the representations and warranties contained in
this Agreement, the Lender agrees, from the date of this Agreement until the
date which is 30 days prior to the Commitment Termination Date, to issue Letters
of Credit under the Facility for the account of the Borrower or any Subsidiary
of the Borrower which is a Guarantor and to renew and extend such Letters of
Credit.  Such Letters of Credit shall be issued, renewed or extended from time
to time on any Business Day designated by the Borrower following the receipt in
accordance with the terms hereof by the Lender of the written (or oral,
confirmed promptly in writing) request by a Responsible Officer of the Borrower
therefor and a Letter of Credit Application.  Such Letters of Credit shall be
issued in such amounts as the Borrower may request; provided, however, that
(i) no Letter of Credit shall have any expiry date which is more than one year
after the date of issuance, renewal or extension thereof, although Letters of
Credit with an expiry date of one year after the date of issuance, renewal or
extension may provide for automatic one year extensions absent prior written
notice of non-extension of the relevant Letter of Credit from the Lender to the
beneficiary of such Letter of Credit at least the required period of time prior
to the expiry of such Letter of Credit provided in such Letter of Credit,
(ii) notwithstanding the provisions of the immediately preceding clause (i), no
such Letter of Credit shall have an expiration date which is less than five
Business Days prior to the Commitment Termination Date, (iii) the Loan Balance
plus the L/C Exposure, including that under any then requested Letter of Credit
to be issued under the Facility, shall not exceed at any time the Revolving
Commitment Amount, (iv) the L/C Exposure, including that under any then
requested Letter of Credit to be issued under the Facility, shall not exceed at
any time the L/C Sublimit and (iii) no such Letter of Credit shall be issued in
an amount less than $10,000.

 

(b)                                 In connection with the issuance, renewal or
extension by the Lender of any Letter of Credit, the Borrower shall pay to the
Lender a letter of credit fee in an amount equal to the greater of (i) the face
amount of such Letter of Credit multiplied by (i) three and one quarter percent
(3.25%) per annum or (ii) eight and one quarter percent (8.25%) per annum while
there exists an Event of Default, in either case calculated on the basis of a
year of 360 days and actual days elapsed (including the first day but excluding
the last day), on the amount of the L/C Exposure under such Letter of Credit and
for the period for which such Letter of Credit is issued or renewed or extended
and remains outstanding or (ii) $500.  Such fee with respect to each Letter of
Credit shall be payable quarterly in arrears commencing on the date which is 90
days after the date of issuance, renewal or extension of the relevant Letter of
Credit.  The Lender shall not have any obligation to refund any portion of any
such fee upon early cancellation of the relevant Letter of Credit.  The Borrower
also agrees to pay on demand to the Lender its customary letter of credit
transaction fees and expenses, including amendment fees, payable with respect to
each Letter of Credit.

 

(c)                                  The Borrower agrees that the Lender shall
not be responsible for, nor shall the Obligations be affected by, among other
things, (i) the validity or genuineness of documents

 

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or any endorsements thereon presented in connection with any Letter of Credit,
even if such documents shall in fact prove to be in any and all respects
invalid, fraudulent or forged, so long as the Lender has no actual knowledge of
any such invalidity, lack of genuineness, fraud or forgery prior to the
presentment for payment of a corresponding Letter of Credit or any draft
thereunder or (ii) any dispute between or among the Borrower and any beneficiary
of any Letter of Credit or any other Person to which any Letter of Credit may be
transferred, or any claims whatsoever of the Borrower against any beneficiary of
any Letter of Credit or any such transferee.  The Borrower further acknowledges
and agrees that the Lender shall be liable to the Borrower to the extent, but
only to the extent, of any direct, as opposed to consequential or punitive,
damages suffered by the Borrower as a result of the willful misconduct or gross
negligence of the Lender in determining whether documents presented under a
Letter of Credit complied with the terms of such Letter of Credit that resulted
in either a wrongful payment under such Letter of Credit or a wrongful dishonor
of a claim or draft properly presented under such Letter of Credit.  In the
absence of gross negligence or willful misconduct by the Lender, the Lender
shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit.  The Lender and the
Borrower agree that any action taken or omitted by the Lender under or in
connection with any Letter of Credit or the related drafts or documents, if done
in the absence of gross negligence or willful misconduct, shall be binding as
among the Lender and the Borrower and shall not put the Lender under any
liability to the Borrower.

 

(d)                                 Unless the Borrower provides to the Lender
funds sufficient to allow the Lender to pay any drawing by a beneficiary under a
Letter of Credit prior to the Lender being obligated to pay the relevant drawing
under a Letter of Credit, the Lender shall make a Letter of Credit Payment in
payment of such drawing.

 

(e)                                  Each Letter of Credit Payment shall be
deemed to be a Base Rate Loan by the Lender under and shall be evidenced by the
Note and shall be payable by the Borrower upon demand by the Lender.

 

2.3                               Limitations on Interest Periods and Types of
Loans.

 

(a)                                 Each Interest Period selected by the
Borrower (i) which commences on the last Business Day of a calendar month (or
any day for which there is no numerically corresponding day in the appropriate
subsequent calendar month) shall end on the last Business Day of the appropriate
subsequent calendar month, (ii) which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day (or, if such next
succeeding Business Day falls in the next succeeding calendar month, on the next
preceding Business Day), (iii) which would otherwise end after the Commitment
Termination Date shall end on the Commitment Termination Date or, if the
Commitment Termination Date is not the last Business Day of a calendar month, a
date prior thereto which is the last Business Day of a calendar month and
(iv) shall have a duration of not less than one month and, if any Interest
Period would otherwise be a shorter period, the relevant Loan shall be a Base
Rate Loan during such period.

 

(b)                                 Anything herein to the contrary
notwithstanding, no more than three separate LIBO Rate Loans shall be
outstanding at any one time, with, for purposes of this

 

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Section 2.3(b), all LIBO Rate Loans for the same Interest Period constituting
one LIBO Rate Loan.  Anything herein to the contrary notwithstanding, if, on or
prior to the determination of any interest rate for any LIBO Rate Loan for any
Interest Period therefor:

 

(i)                                     the Lender determines (which
determination shall be conclusive, absent manifest error) that quotations of
interest rates for the deposits referred to in the definition of “LIBO Rate” in
Section 1.2 are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining the rate of interest for such Loan as
provided in this Agreement; or

 

(ii)                                  the Lender determines (which determination
shall be conclusive, absent manifest error) that the rates of interest referred
to in the definition of “LIBO Rate” in Section 1.2 upon the basis of which the
rate of interest for such Loan for such Interest Period is to be determined do
not adequately cover the cost to the Lender of making or maintaining such Loan
for such Interest Period,

 

then the Lender shall give the Borrower notice thereof; and so long as such
condition remains in effect, the Lender shall be under no obligation to make
LIBO Rate Loans or to convert Base Rate Loans into LIBO Rate Loans, and the
Borrower shall, on the last day of the then current Interest Period for each
outstanding LIBO Rate Loan, either prepay such LIBO Rate Loan or convert such
Loan into a LIBO Rate Loan with amounts and maturities for which quotations are
provided or convert such Loan into a Base Rate Loan in accordance with the
provisions of Section 2.11.

 

2.4                               Use of Loan Proceeds and Letters of Credit.

 

(a)                                 Proceeds of all Loans shall be used solely
by the Borrower (i) to acquire and develop Oil and Gas Properties, (ii) for the
Borrower’s working capital and general business purposes and capital
expenditures not otherwise prohibited under applicable provisions of this
Agreement, (iii) to advance funds to Subsidiaries of the Borrower or any of the
Guarantors which are Guarantors for working capital and general business
purposes and capital expenditures not prohibited under the provisions of this
Agreement or to acquire and develop Oil and Gas Properties, (iv) to pay fees and
expenses incurred in connection with this Agreement and (v) for other general
business purposes of the Borrower not prohibited by the provisions of this
Agreement.

 

(b)                                 Letters of Credit shall be issued solely for
the account of the Borrower for general business purposes of the Borrower and
Subsidiaries of the Borrower which are Guarantors not otherwise prohibited under
applicable provisions of this Agreement.

 

2.5                               Interest.  Subject to applicable provisions of
this Agreement (including those of Section 2.16), (a) interest on Base Rate
Loans shall accrue and be payable at a daily interest rate based on the per
annum rate equal to the lesser of (i) the greater of (A) the Adjusted Base Rate

 

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for each relevant day plus one and three quarters percent (1.75%) and (B) four
and one half percent (4.50%), and (ii) the Highest Lawful Rate for each relevant
day, in any case converted to a daily rate on the basis of a year of 365 or 366
days, as the case may be, with such rates being applied on the basis of actual
days elapsed (including the first day, but excluding the last day) during the
period for which interest is payable at the relevant rate and (b) interest on
LIBO Rate Loans shall accrue during each relevant Interest Period and be payable
at a daily interest rate based on the per annum rate equal to the lesser of
(i) the greater of (A) the sum of the Adjusted LIBO Rate on the first day of the
relevant Interest Period plus three and one quarter percent (3.25%) and (B) four
and one half percent (4.50%) and (ii) the Highest Lawful Rate for the relevant
day, in either case converted to a daily rate on the basis of a year of 360
days, with such rates being applied on the basis of actual days elapsed
(including the first day, but excluding the last day) during the period for
which interest is payable at the relevant rate; provided, however, beginning
when the Lender provides to the Borrower written notice that a Deficiency exists
and so long as such Deficiency or any portion thereof continues to exist,
interest shall accrue on Base Rate Loans and LIBO Rate Loans at the Default
Rate.  Notwithstanding the foregoing, interest on past due principal and, to the
extent permitted by applicable law, past due interest and fees, shall accrue at
the Default Rate and shall be payable upon demand by the Lender at any time as
to all or any portion of such interest.  In the event that the Borrower fails to
select the duration of any Interest Period for any LIBO Rate Loan within the
time period and otherwise as provided herein, such Loan (if outstanding as a
LIBO Rate Loan) shall be automatically converted into a Base Rate Loan on the
last day of the then current Interest Period for such Loan or (if outstanding as
a Base Rate Loan) shall remain as, or (if not then outstanding) shall be made
as, a Base Rate Loan.  Interest provided for herein shall be calculated on
unpaid sums actually advanced and outstanding pursuant to the terms of this
Agreement and only for the period from the date or dates of such advances to,
but not including, the date or dates of repayment.

 

2.6                               Repayment of Loans and Interest.  Accrued and
unpaid interest on each outstanding Base Rate Loan shall be due and payable
monthly commencing on the first day of April, 2012 and continuing on the first
day of each calendar month thereafter while any Base Rate Loan remains
outstanding, the payment in each instance to be the amount of interest which has
accrued and remains unpaid in respect of the relevant Loan.  Accrued and unpaid
interest on each outstanding LIBO Rate Loan shall be due and payable on the
earlier of (a) the last day of the Interest Period for such LIBO Rate Loan or
(b) if any Interest Period is of a duration longer than three months, on the day
of the third month of the relevant Interest Period corresponding to the day
preceding the initial day of such Interest Period and on the last day of the
relevant Interest Period, the payment in each instance to be the amount of
interest which has accrued and remains unpaid in respect of the relevant Loan. 
The Loan Balance, together with all accrued and unpaid interest thereon as of
such date, shall be due and payable on the Commitment Termination Date.  At the
time of making each payment hereunder or under the Note, the Borrower shall
specify to the Lender the Loans or other amounts payable by the Borrower
hereunder to which such payment is to be applied.  In the event the Borrower
fails to so specify, or if an Event of Default has occurred, the Lender may
apply such payment as it may elect in its discretion and in accordance with the
terms hereof.

 

2.7                               Outstanding Amounts.  The outstanding
principal balance of the Note reflected by the notations of the Lender on its
records shall be deemed rebuttably presumptive evidence of the principal amount
owing on the Note.  The liability for payment of principal and interest

 

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evidenced by the Note shall be limited to principal amounts actually advanced
and outstanding pursuant to this Agreement and interest on such amounts
calculated in accordance with this Agreement.

 

2.8                               Taxes and Time, Place, and Method of Payments.

 

(a)                                 All payments required pursuant to this
Agreement or the Note shall be made without set-off or counterclaim in Dollars
and in immediately available funds free and clear of, and without deduction for,
any Indemnified Taxes or Other Taxes; provided, however that if the Borrower
shall be required to deduct any Indemnified Taxes or Other Taxes from such
payments, then (i) the sum payable shall be increased by the amount (the
“Additional Amount”) necessary so that after making all required deductions
(including deductions applicable to additional sums described in this paragraph)
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 and
(iii) the Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.  In addition, to the
extent not paid in accordance with the preceding sentence, the Borrower shall
pay any Other Taxes to the relevant Governmental Authority in accordance with
applicable law.

 

(b)                                 THE BORROWER SHALL INDEMNIFY THE LENDER FOR
INDEMNIFIED TAXES AND OTHER TAXES PAID BY THE LENDER, INCLUDING ANY INDEMNIFIED
TAXES OR OTHER TAXES ARISING FROM THE NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF
THE LENDER; PROVIDED, HOWEVER, THAT THE BORROWER SHALL NOT IN ANY EVENT BE
OBLIGATED TO MAKE PAYMENT TO THE LENDER IN RESPECT OF PENALTIES, INTEREST AND
OTHER SIMILAR LIABILITIES ATTRIBUTABLE TO SUCH INDEMNIFIED TAXES OR OTHER TAXES
IF SUCH PENALTIES, INTEREST OR OTHER SIMILAR LIABILITIES ARE ATTRIBUTABLE TO THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF, OR BREACH OF THIS AGREEMENT BY, THE
LENDER.

 

(c)                                  If the Lender shall become aware that it is
entitled to claim a refund from a Governmental Authority in respect of
Indemnified Taxes or Other Taxes paid by the Borrower pursuant to this
Section 2.8, including Indemnified Taxes or Other Taxes as to which it has been
indemnified by the Borrower, or with respect to which the Borrower has paid
Additional Amounts pursuant to the Loan Documents, it shall promptly notify the
Borrower of the availability of such refund claim and, if the Lender determines
in good faith that making a claim for refund will not have an adverse effect to
its taxes or business operations, shall, within 10 days after receipt of a
request by the Borrower, make a claim to such Governmental Authority for such
refund at the expense of the Borrower.  If the Lender receives a refund in
respect of any Indemnified Taxes or Other Taxes paid by the Borrower pursuant to
the Loan Documents, it shall within 30 days from the date of such receipt pay
over such refund to the Borrower (but only to the extent of Indemnified Taxes or
Other Taxes paid pursuant to the Loan Documents, including indemnity payments
made or Additional Amounts paid, by the Borrower under this Section 2.8 with
respect to the Indemnified Taxes or Other Taxes giving rise to such refund), net
of all reasonable out of pocket expenses of the Lender and without interest
(other than interest paid by the relevant Governmental Authority with respect to
such refund).

 

21

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(d)                                 If the Lender is or becomes eligible under
any applicable law, regulation, treaty or other rule to a reduced rate of
taxation, or a complete exemption from withholding, with respect to Indemnified
Taxes or Other Taxes on payments made to it or for its benefit by the Borrower,
the Lender shall, upon the request, and at the cost and expense, of the
Borrower, complete and deliver from time to time any certificate, form or other
document requested by the Borrower, the completion and delivery of which are a
precondition to obtaining the benefit of such reduced rate or exemption,
provided that the taking of such action by the Lender would not, in the
reasonable judgment of the Lender be disadvantageous or prejudicial to the
Lender or inconsistent with its internal policies or legal or regulatory
restrictions.  For any period with respect to which the Lender has failed to
provide any such certificate, form or other document requested by the Borrower,
the Lender shall not be entitled to any payment under this Section 2.8 in
respect of any Indemnified Taxes or Other Taxes that would not have been imposed
but for such failure.

 

(e)                                  The Lender, shall (i) deliver to the
Borrower, upon the written request of the Borrower, two original copies of
United States Internal Revenue Service Form W-9 or any successor form, properly
completed and duly executed by the Lender, certifying that the Lender is exempt
from United States backup withholding Tax on payments of interest made under the
Loan Documents and (ii) thereafter, at each time it is so reasonably requested
in writing by the Borrower, deliver within a reasonable time two original copies
of an updated United States Internal Revenue Service Form W-9 or any successor
form thereto.

 

(f)                                   All payments by the Borrower shall be
deemed received on (i) receipt or (ii) the next Business Day following receipt
if such receipt is after 2:00 p.m., Central Standard or Central Daylight Savings
Time, as the case may be, on any Business Day, and shall be made to the Lender
at the Principal Office.  Except as provided to the contrary herein, if the due
date of any payment hereunder or under the Note would otherwise fall on a day
which is not a Business Day, such date shall be extended to the next succeeding
Business Day, and interest shall be payable for any principal so extended for
the period of such extension; provided, however, that in the case of any LIBO
Rate Loan, if the result of such extension would be to extend such payment into
another calendar month, then the relevant payment shall be due on the
immediately preceding Business Day with interest accrued and payable to such
Business Day.

 

2.9                               Borrowing Base and Monthly Reduction Amount.

 

(a)                                 The Borrowing Base as of the Closing Date is
acknowledged by the Borrower and the Lender to be $5,000,000.  Commencing on
March 1, 2012, and continuing thereafter on the first day of each calendar month
through the Commitment Termination Date, the amount of the Borrowing Base then
in effect shall be reduced by the Monthly Reduction Amount, which Monthly
Reduction Amount as of the Closing Date is acknowledged to be $0.

 

(b)                                 The Borrowing Base and the Monthly Reduction
Amount shall be redetermined semi-annually as soon as practicable following each
receipt of Reserve Reports pursuant to the provisions of Section 5.4, and all
other information available to the Lender.  In addition, the Lender shall, in
the normal course of business following a request of the Borrower, redetermine
the Borrowing Base and the Monthly Reduction Amount; provided, however, the
Lender shall not be obligated to respond to more than one such request during
the period

 

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between the scheduled semi-annual redeterminations provided for above.  The
Lender may redetermine the Borrowing Base and the Monthly Reduction Amount at
any time at its election; provided, however, the Lender may not do so more than
once during the period between the scheduled semi-annual redeterminations
provided for above.

 

(c)                                  Upon each determination of the Borrowing
Base and the Monthly Reduction Amount, the Lender shall notify the Borrower
orally (confirming such notice promptly in writing) of such determination, and,
subject to the operation of the Monthly Reduction Amount, the Borrowing Base and
the Monthly Reduction Amount so communicated to the Borrower shall become
effective upon such oral notification and shall remain in effect until the next
subsequent determination of the Borrowing Base and the Monthly Reduction Amount.

 

(d)                                 The Borrowing Base in effect from time to
time shall represent the determination by the Lender, in accordance with the
applicable definitions and provisions herein contained and the customary lending
practices of the Lender for loans of this nature (but taking into account floor
and cap prices or other price protection under Commodity Hedge Agreements), of
the value, for purposes of a secured credit facility, of the Oil and Gas
Properties of the Borrower and its Domestic Subsidiaries acceptable to the
Lender, subject, in the case of any increase in the Borrowing Base, to the
credit approval processes of the Lender.  Notwithstanding the preceding
sentence, so long as the credit facility governed by this Agreement remains
unsecured, the Borrowing Base in effect from time to time shall not exceed
twenty five percent (25%) of the value of the Oil and Gas Properties of the
Borrower and the Guarantors established by the Lender in connection with the
most recent determination or redetermination of the Borrowing Base in accordance
with the provisions of this Section 2.9.  Furthermore, the Borrower acknowledges
that the determination of the Borrowing Base contains an equity cushion (market
value in excess of loan value), which is acknowledged by the Borrower to be
essential for the adequate protection of the Lender.

 

2.10                        Mandatory Prepayments.  If at any time the sum of
the Loan Balance and the L/C Exposure exceeds the Borrowing Base then in effect
(such excess, a “Deficiency”), the Borrower shall, at the option of the
Borrower, within 30 days of notice from the Lender of such occurrence,
(i) prepay the amount of the Deficiency for application on the Loan Balance and
then to provide cash as collateral for the L/C Exposure in the manner provided
below in this Section 2.10, (ii) provide, within 30 days of such election of the
Borrower, collateral, of character and value satisfactory to the Lender in its
sole discretion, and/or cash as collateral to secure the Deficiency, by way of
the execution and delivery to the Lender of security documents in form and
substance satisfactory to the Lender, or (iii) affect any combination of the
alternatives described in clauses (i) and (ii) of this sentence and acceptable
to the Lender in its reasonable discretion.  Any prepayment pursuant to the
provisions of this Section 2.10 shall be without premium or penalty, except as
provided in Section 2.17, and the amount of any such prepayment may be
reborrowed if otherwise available to the Borrower pursuant to the terms of this
Agreement.  In the event that a mandatory prepayment is to be made under this
Section 2.10 or any other applicable provision of this Agreement and the Loan
Balance is less than the amount required to be prepaid, the Borrower shall repay
the entire Loan Balance and, in accordance with the provisions of the relevant
Letter of Credit Applications executed by the Borrower or otherwise to the
satisfaction of the Lender, deposit with the Lender, as collateral securing the
Obligations, an amount of cash,

 

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in immediately available funds, equal to the L/C Exposure minus the Revolving
Commitment Amount.  The cash deposited with the Lender in satisfaction of the
requirement provided in this Section 2.10 shall be invested, at the express
direction of the Borrower as to investment vehicle and maturity (which shall be
no later than the latest expiry date of any then outstanding Letter of Credit),
for the account of the Borrower in cash or cash equivalent investments offered
by or through the Lender.

 

2.11                        Voluntary Prepayments and Conversions of Loans. 
Subject to applicable provisions of this Agreement, the Borrower shall have the
right at any time or from time to time to prepay all or any portion of the Loan
Balance without prepayment penalty and to convert Loans of one type or with one
Interest Period into Loans of a different type or with a different Interest
Period; provided, however, that (a) the Borrower shall give the Lender notice of
each such prepayment or conversion of (i) all or any portion of a LIBO Rate Loan
no less than three Business Days prior to prepayment or conversion and (ii) all
or any portion of a Base Rate Loan no less than one Business Day prior to
prepayment or conversion, (b) any prepayment of any portion of any Base Rate
Loan or LIBO Rate Loan shall be in an amount of at least equal to $10,000 and a
whole multiple of $10,000, (c) the Borrower shall pay all accrued and unpaid
interest on the amounts prepaid or converted, (d) no such prepayment shall serve
to postpone or satisfy the repayment when due, pursuant to the provisions of
this Agreement or the Note, of any Obligation or any installments thereof and
(e) the Borrower shall reimburse the Lender for any losses, expenses or costs
reasonably incurred by the Lender as a result of the failure of the Borrower to
make such prepayment.  Except as provided in the immediately preceding sentence,
any prepayment pursuant to the provisions of this Section 2.11 shall be without
premium or penalty and the amount of any such prepayment may be reborrowed if
otherwise available to the Borrower pursuant to the terms of this Agreement.

 

2.12                        Engineering Fees and Expenses.  The Borrower shall
pay the Lender an engineering fee in the amount of $1,500 within ten days of
receipt by the Borrower of an invoice therefor or statement thereof in
connection with each redetermination of the Borrowing Base in accordance with
the provisions of Section 2.9.

 

2.13                        Commitment Fees.  In addition to interest on the
Note as provided herein and other fees payable hereunder, and to compensate the
Lender for maintaining funds available under the Facilities, the Borrower shall
pay to the Lender, in immediately available funds, following the first day of
each calendar quarter during the Commitment Period, commencing on the first day
of April, 2012, and on the Commitment Termination Date, a fee equal to a per
annum rate of one half of one percent (0.50%), calculated on the basis of a year
of 365 or 366 days, as the case may be, and actual days elapsed (including the
first day, but excluding the last day), multiplied by the average daily amount
of the Available Commitment during the preceding quarterly or shorter period, as
the case may be.  Commitment Fees shall be payable by the Borrower within ten
days of receipt of an invoice therefor or statement thereof delivered by the
Lender.

 

2.14                        Additional Fees.  In addition to interest on the
Note as provided herein and other fees payable hereunder, and to compensate the
Lenders for the costs of the extension of credit hereunder, the Borrower shall
pay to the Lender, on the Closing Date, in immediately available funds, a fee in
the amount of $50,000.  Additionally, the Borrower shall pay a fee to the Lender

 

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at any time the Borrowing Base is increased, with the agreement of the Borrower,
above the highest Borrowing Base previously in effect, equal to one percent
(1.00%) of such increased Borrowing Base.

 

2.15                        Loans to Satisfy Obligations.  Upon a Default, the
Lender may, but shall not be obligated to, make Loans for the benefit of the
Borrower and apply proceeds thereof to the satisfaction of any condition,
warranty, representation or covenant of the Borrower or any of the Guarantors
contained in this Agreement or any other Loan Document.  Such Loans shall be
evidenced by the Note and shall bear interest at the Adjusted Base Rate in the
manner provided in Section 2.5, subject, however, to the provisions of Section
2.5 regarding the accrual of interest at the Default Rate in certain
circumstances.

 

2.16                        General Provisions Relating to Interest.

 

(a)                                 It is the intention of the parties hereto to
comply strictly with the usury laws of the State of Texas and the United States
of America.  In this connection, there shall never be collected, charged, or
received on the sums advanced hereunder interest in excess of that which would
accrue at the Highest Lawful Rate.  The Borrower agrees that, to the extent the
Highest Lawful Rate is determined with reference to the laws of the State to
Texas, the Highest Lawful Rate shall be the “weekly” rate as defined in Chapter
303 of the Texas Finance Code, provided, however, that the Lender may, at its
election, substitute for the “weekly” rate the “annualized” or “quarterly” rate,
as such terms are defined in the aforesaid statute, upon the giving of notices
provided for in such statute and effective upon the giving of such notices.  The
Lender may also rely, to the extent permitted by applicable laws of the State of
Texas or the United States of America, on alternative maximum rates of interest
under other laws of the State of Texas or the United States of America
applicable to the Lender, if greater.

 

(b)                                 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 on amounts evidenced by the Note 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) all
interest and fees otherwise payable to the Lender but for the effect of such
Limitation Period.

 

(c)                                  If, under any circumstances, the aggregate
amounts paid on the Note or under this Agreement or any other Loan Document
include amounts which by law are deemed interest and which would exceed the
amount permitted if the Highest Lawful Rate were in effect, the Borrower
stipulates that such payment and collection will have been and will be deemed to
have been, to the extent permitted by applicable laws of the State of Texas or
the United States of America, the result of mathematical error on the part of
the Borrower and the Lender; and the Lender shall promptly refund the amount of
such excess (to the extent only of such interest payments in excess of that
which would have accrued and been payable on the basis of the

 

25

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Highest Lawful Rate) upon discovery of such error by the Lender or notice
thereof from the Borrower.  In the event that the maturity of any Obligation is
accelerated, by reason of an election by the Lender or otherwise, or in the
event of any required or permitted prepayment, then the consideration
constituting interest under applicable laws may never exceed that payable on the
basis of the Highest Lawful Rate, and excess amounts paid which by law are
deemed interest, if any, shall be credited by the Lender on the principal amount
of the Obligations, or if the principal amount of the Obligations shall have
been paid in full, refunded to the Borrower.

 

(d)                                 All sums paid, or agreed to be paid, to the
Lender for the use, forbearance and detention of the proceeds of any advance
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term hereof until paid in
full so that the actual rate of interest is uniform but does not exceed the
Highest Lawful Rate throughout the full term hereof.

 

2.17                        Yield Protection.

 

(a)                                 Without limiting the effect of the other
provisions of this Section 2.17 (but without duplication), the Borrower shall
pay to the Lender from time to time on request such amounts as the Lender may
reasonably determine are necessary to compensate the Lender or the Lender’s
holding company for any costs attributable to the maintenance by the Lender,
pursuant to any Regulatory Change, of capital in respect of its Commitment, such
compensation to include (i) an amount equal to any reduction of the rate of
return on assets or equity of the Lender or the Lender’s holding company to a
level below that which the Lender or the Lender’s holding company could have
achieved but for such Regulatory Change and (ii) any Additional Costs incurred
by the Lender.

 

(b)                                 Without limiting the effect of the other
provisions of this Section 2.17 (but without duplication), in the event that any
Requirement of Law or Regulatory Change or the compliance by the Lender
therewith shall (i) impose, modify or hold applicable any reserve, special
deposit or similar requirement against any Letter of Credit or obligation to
issue Letters of Credit or (ii) impose upon the Lender any other condition
regarding any Letter of Credit or obligation to issue Letters of Credit, and the
result of any such event shall be to increase the cost to the Lender of issuing
or maintaining any Letter of Credit or obligation to issue Letters of Credit or
any liability with respect to Letter of Credit Payments, or to reduce any amount
receivable in connection therewith, then upon demand by the Lender, the Borrower
shall pay to the Lender, from time to time as specified by the Lender in the
exercise of its reasonable judgment, additional amounts which shall be
sufficient to compensate the Lender for such increased cost or reduced amount
receivable.

 

(c)                                  Determinations by the Lender for purposes
of this Section 2.17 of the effect of any Regulatory Change on capital
maintained, its costs or rate of return, its obligation to make and maintain
Loans, issuing or participating in Letters of Credit, or on amounts receivable
by it in respect of Loans, Letters of Credit or such other obligations, and the
additional amounts required to compensate the Lender under this Section 2.17
shall be conclusive, absent manifest error.  The Lender shall furnish the
Borrower with a certificate setting forth in reasonable detail the basis and
amount of any loss, cost or expense incurred as a result of any such event, and
the statements set forth therein shall be conclusive, absent manifest error. 
The Lender shall notify

 

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the Borrower, as promptly as practicable after the Lender obtains knowledge of
any sums payable pursuant to this Section 2.17 and determines to request
compensation therefor, of any event occurring after the Closing Date which will
entitle the Lender to compensation pursuant to this Section 2.17.  Any
compensation requested by the Lender pursuant to this Section 2.17 shall be due
and payable within 30 days of receipt by the Borrower of any such notice.

 

(d)                                 The Lender agrees not to request, and the
Borrower shall not be obligated to pay, any sums payable pursuant to this
Section 2.17 unless similar sums are also generally assessed by the Lender
against other customers similarly situated where such customers are subject to
documents providing for such assessment.

 

2.18                        Illegality.  Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for the Lender or its
Applicable Lending Office to (a) honor its obligation to make LIBO Rate Loans or
(b) maintain LIBO Rate Loans, then the Lender shall promptly notify the Borrower
thereof.  The obligation of the Lender to make LIBO Rate Loans and convert Base
Rate Loans into LIBO Rate Loans shall then be suspended until such time as the
Lender may again make and maintain LIBO Rate Loans, and the outstanding LIBO
Rate Loans shall be converted into Base Rate Loans.

 

2.19                        Regulatory Change.  In the event that by reason of
any Regulatory Change or any other circumstance arising after the Closing Date
affecting the Lender, the Lender (a) incurs Additional Costs based on or
measured by the excess above a level, as prescribed from time to time by any
Governmental Authority with jurisdiction, of the amount of a category of
deposits or other liabilities of the Lender which includes deposits by reference
to which the interest rate on any LIBO Rate Loan is determined as provided in
this Agreement or a category of extensions of credit or other assets of the
Lender which includes any LIBO Rate Loan or (b) becomes subject to restrictions
on the amount of such a category of liabilities or assets which it may hold,
then, at the election of the Lender with notice to the Borrower, the obligation
of the Lender to make LIBO Rate Loans and to convert Base Rate Loans into LIBO
Rate Loans shall be suspended until such time as such Regulatory Change or other
circumstance ceases to be in effect, and all such outstanding LIBO Rate Loans
shall be converted into Base Rate Loans.

 

2.20                        RESERVED

 

2.21                        RESERVED

 

2.22                        Right of Offset.  The Borrower hereby grants to the
Lender the right, exercisable at such time as any Obligation shall mature,
whether by acceleration of maturity or otherwise, of offset or banker’s lien
against all of its funds now or hereafter or from time to time on deposit with
the Lender, regardless of whether the exercise of any such remedy would result
in any penalty or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity thereof.  The
Lender shall notify the Borrower promptly of the exercise of any such right of
offset or banker’s lien.

 

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ARTICLE III

 

CONDITIONS

 

The obligations of the Lender to enter into this Agreement and to make Loans or
issue Letters of Credit are subject to the satisfaction of the following
conditions precedent:

 

3.1                               Receipt of Loan Documents and Other Items. 
The Lender shall have no obligation under this Agreement unless and until all
matters incident to the consummation of the transactions contemplated herein
shall be satisfactory to the Lender and the Lender shall have received, reviewed
and approved the following documents and other items, appropriately executed
when necessary and, where applicable, acknowledged by one or more Responsible
Officers of the Borrower or other Persons, as the case may be, all in form and
substance reasonably satisfactory to the Lender and dated, where applicable, of
even date herewith or a date prior thereto or thereafter and acceptable to the
Lender:

 

(a)                                 multiple counterparts of this Agreement as
requested by the Lender;

 

(b)                                 the Note;

 

(c)                                  copies of the organizational documents of
the Borrower and each of the Initial Guarantors and all amendments to any of
such documents, accompanied by a certificate dated the Closing Date issued by
the secretary or an assistant secretary or another authorized representative of
the Borrower or the relevant Initial Guarantor to the effect that each such copy
is correct and complete;

 

(d)                                 a certificate of incumbency dated the
Closing Date, including specimen signatures of all officers or other
representatives of the Borrower and each of the Initial Guarantors who are
authorized to execute Loan Documents on behalf of the Borrower, each such
certificate being executed by the secretary or an assistant secretary or another
authorized representative of the Borrower or the relevant Initial Guarantor;

 

(e)                                  copies of resolutions adopted by governing
body of the Borrower and each of the Initial Guarantors approving the Loan
Documents to which the Borrower or the relevant Initial Guarantor is a party and
authorizing the transactions contemplated herein and therein, accompanied by a
certificate dated the Closing Date issued by the secretary or an assistant
secretary or another authorized representative of the Borrower or the relevant
Initial Guarantor to the effect that such copies are true and correct copies of
resolutions duly adopted and that such resolutions constitute all the
resolutions adopted with respect to such transactions, have not been amended,
modified or rescinded in any respect, and are in full force and effect as of the
date of such certificate;

 

(f)                                   a Guaranty from the Initial Guarantors;

 

(g)                                  audited consolidated Financial Statements
of the Borrower and its consolidated Subsidiaries as of June 30, 2011 and for
the year then ended and unaudited consolidated Financial Statements of the
Borrower and its consolidated Subsidiaries as of December 31, 2011, such
unaudited consolidated Financial Statements to be certified by a

 

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Responsible Officer of the Borrower as having been prepared in accordance with
GAAP consistently applied and as a fair presentation of the condition of the
Borrower, subject to changes resulting from normal year-end audit adjustments
(by execution of this Agreement, the Lender acknowledges and agrees that this
condition has been satisfied);

 

(h)                                 certificates dated as of a recent date from
the Secretary of State or other appropriate Governmental Authority evidencing
the existence or qualification and, if applicable, good standing of the Borrower
and each of the Initial Guarantors in its jurisdiction of organization and in
any other jurisdictions where it owns property or does business;

 

(i)                                     results of a search of the uniform
commercial code records of the Secretary of State of the state of organization
in the name of the Borrower or the relevant Initial Guarantor, such search
report to be from a source or sources acceptable to the Lender and reflecting no
Liens, other than Permitted Liens, as to which perfection of a Lien is
accomplished by the filing of a financing statement;

 

(j)                                    confirmation, reasonably acceptable to
the Lender, of the title of the Borrower, free and clear of Liens other than
Permitted Liens, to its Oil and Gas Properties constituting at least eighty
percent (80%) of the discounted present value, as determined by the Lender in
its reasonable discretion, of the proved reserves attributable to such Oil and
Gas Properties (by execution of this Agreement, the Lender acknowledges and
agrees that this condition has been satisfied);

 

(k)                                 confirmation acceptable to the Lender that
the Oil and Gas Properties of the Borrower are in compliance, in all material
respects, with applicable Environmental Laws;

 

(l)                                     copies of executed counterparts of all
operating, lease, sublease, royalty, sales, exchange, processing, farmout,
bidding, pooling, unitization, communitization and other agreements relating to
the Oil and Gas Properties of the Borrower as of the Closing Date, as requested
by the Lender (by execution of this Agreement, the Lender acknowledges and
agrees that this condition has been satisfied);

 

(m)                             engineering information regarding the Oil and
Gas Properties of the Borrower, as requested by the Lender (by execution of this
Agreement, the Lender acknowledges and agrees that this condition has been
satisfied);

 

(n)                                 the opinion of Adams and Reese LLP, as
counsel to the Borrower and the Initial Guarantors in connection with this
Agreement and the other Loan Documents to which any of the Borrower and the
Initial Guarantors is a party, substantially in the form attached hereto as
Exhibit IV, with such changes thereto as may be approved by the Lender;

 

(o)                                 certificates evidencing the insurance
coverage required by the provisions of Section 5.20 (by execution of this
Agreement, the Lender acknowledges and agrees that this condition has been
satisfied);

 

(p)                                 payment of any fees due as of the Closing
Date pursuant to this Agreement;

 

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(q)                                 copies of all Commodity Hedge Agreements to
which the Borrower is a party as of the Closing Date (by execution of this
Agreement, the Lender acknowledges and agrees that there are none);

 

(r)                                    a certificate of a Responsible Officer of
the Borrower and each of the Initial Guarantors to the effect that all
representations and warranties made by the Borrower or the relevant Initial
Guarantor in this Agreement or any other Loan Document in place on the Closing
Date are true and correct in all material respects as of the Closing Date and
that no Default or Event of Default exists as of the Closing Date;

 

(s)                                   confirmation acceptable to the Lender that
no event or circumstance, including any action, suit, investigation or
proceeding pending, or, to the knowledge of the Borrower, threatened in any
court or before any arbitrator or Governmental Authority, shall have occurred
which could reasonably be expected to have a Material Adverse Effect; and

 

(t)                                    such other agreements, documents,
instruments, opinions, certificates, waivers, consents and evidence as the
Lender may reasonably request.

 

3.2                               Each Loan.  In addition to the conditions
precedent stated elsewhere herein, the Lender shall not be obligated to make any
Loan, other than in connection with a Letter of Credit Payment, unless:

 

(a)                                 at least the requisite time prior to the
requested date for the relevant Loan, the Borrower shall have delivered to the
Lender a Borrowing Request and a funding direction advising the Lender whether
the requested Loan should be funded to an account of the Borrower at the Lender
or should be funded by wire transfer to an account of another Person (in which
case wire transfer instructions shall be included) and each statement or
certification made in such Borrowing Request shall be true and correct in all
material respects on the requested date for such Loan;

 

(b)                                 no Event of Default or Default shall exist
or will occur as a result of the making of the requested Loan;

 

(c)                                  if requested by the Lender, the Borrower
shall have delivered evidence reasonably satisfactory to the Lender
substantiating any of the matters contained in this Agreement which are
necessary to enable the Borrower to qualify for such Loan;

 

(d)                                 the Lender shall have received, reviewed and
approved such additional documents and items as described in Section 3.1 as may
be requested by the Lender with respect to such Loan;

 

(e)                                  each of the representations and warranties
of the Borrower or any of the Guarantors contained in this Agreement and the
other Loan Documents shall be true and correct in all material respects and
shall be deemed to be repeated by the relevant entity as if made on the
requested date for such Loan (except to the extent that such representations and
warranties expressly relate to an earlier date, in which they are true and
correct in all material respects as of such earlier date);

 

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(f)                                   neither the consummation of the
transactions contemplated hereby nor the making of such Loan shall contravene,
violate or conflict with any Requirement of Law applicable to the Lender, the
Borrower or any of the Guarantors, if the effect of which could reasonably be
expected to result in a Material Adverse Effect; and

 

(g)                                  the Borrower shall hold full legal title to
its Oil and Gas Properties and be the sole beneficial owner thereof, subject to
Permitted Liens and other Liens permitted hereunder.

 

3.3                               Issuance of Letters of Credit.  The obligation
of the Lender to issue, renew or extend any Letter of Credit is subject to the
satisfaction of the following additional conditions precedent:

 

(a)                                 the Borrower shall have delivered to the
Lender a written (or oral, confirmed promptly in writing) request for the
issuance, renewal or extension of a Letter of Credit at least three Business
Days prior to the requested issuance, renewal or extension date and a Letter of
Credit Application at least one Business Day prior to the requested issuance
date, and each statement or certification made in such Letter of Credit
Application shall be true and correct in all material respects on the requested
date for the issuance of such Letter of Credit;

 

(b)                                 no Event of Default or Default shall exist
or will occur as a result of the issuance, renewal, or extension of such Letter
of Credit;

 

(c)                                  if requested by the Lender, the Borrower
shall have delivered evidence reasonably satisfactory to the Lender
substantiating any of the matters contained in this Agreement which are
necessary to enable the Borrower to qualify for the issuance, renewal or
extension of such Letter of Credit;

 

(d)                                 each of the representations and warranties
of the Borrower contained in this Agreement and the other Loan Documents shall
be true and correct in all material respects and shall be deemed to be repeated
by the Borrower as if made on the requested date for the issuance, renewal or
extension of such Letter of Credit (except to the extent that such
representations and warranties expressly relate to an earlier date, in which
they are true and correct in all material respects as of such earlier date);

 

(e)                                  neither the consummation of the
transactions contemplated hereby nor the issuance, renewal or extension of such
Letter of Credit shall contravene, violate or conflict with any Requirement of
Law applicable to the Lender, the Borrower or any of the Guarantors;

 

(f)                                   except for Permitted Liens and other Liens
permitted hereunder, the Borrower shall hold full legal title to its Oil and Gas
Properties and be the sole beneficial owner thereof; and

 

(g)                                  the terms, provisions and beneficiary of
the Letter of Credit or such renewal or extension shall be satisfactory to the
Lender in its reasonable discretion.

 

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ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

To induce the Lender to enter into this Agreement and to make the Loans and
issue and renew Letters of Credit, the Borrower and each Subsidiary of the
Borrower which is a Guarantor represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note) that:

 

4.1                               Due Authorization.  The execution and delivery
by it of this Agreement and the borrowings by the Borrower hereunder, the
execution and delivery by the Borrower of the Note, the repayment by the
Borrower of the Note and interest and fees provided for in the Note and this
Agreement and the performance by it of its obligations under the Loan Documents
to which it is a party are within the power of the Borrower or such Person as
the case may be, have been duly authorized by all necessary action by the
Borrower or such Person, as the case may be, and do not and will not (except to
the extent that noncompliance thereof could not reasonably be expected to result
in a Material Adverse Effect) (a) require the consent of any Governmental
Authority, (b) contravene or conflict with any applicable Requirement of Law,
(c) contravene or conflict in any material respect with any material indenture,
instrument or other agreement to which it is a party or by which any of its
Property may be presently bound or encumbered or (d) result in or require the
creation or imposition of any Lien in, upon or on any of its Property under any
such indenture, instrument, or other agreement, other than under any of the Loan
Documents.

 

4.2                               Existence.  It is a corporation, a limited
partnership, a limited liability company or other Business Entity, as the case
may be, duly incorporated or formed, legally existing and, if applicable, in
good standing under the laws of the state of its organization or formation and
is duly qualified as a foreign corporation, limited partnership, limited
liability company or other Business Entity and, if applicable, in good standing
in all jurisdictions wherein the ownership of its Property or the operation of
its business necessitates same and where the failure to so qualify would have a
Material Adverse Effect.

 

4.3                               Valid and Binding Obligations.  Each Loan
Document to which it is a party, when duly executed and delivered by it,
constitutes its legal, valid and binding obligation enforceable against it in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, receivership, moratorium, fraudulent conveyance, fraudulent
transfer or other similar laws affecting the rights and remedies of creditors
generally.

 

4.4                               RESERVED

 

4.5                               Title to Oil and Gas Properties.  It has good
and defensible title to all of its Oil and Gas Properties, free and clear of all
Liens except Permitted Liens.  No Person other than it has any ownership
interest, whether legal or beneficial, in its interest in any of its Oil and Gas
Properties.

 

4.6                               Scope and Accuracy of Financial Statements. 
The Financial Statements provided to the Lender in satisfaction of the condition
set forth in Section 3.1(g) present fairly (subject to

 

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normal year-end audit adjustments) the financial position and results of
operations and cash flows of the Borrower in accordance with GAAP as at the
relevant point in time or for the period indicated, as applicable.

 

4.7                               No Material Adverse Effect or Default.  No
event or circumstance has occurred between December 31, 2011 and the Closing
Date which could reasonably be expected to have a Material Adverse Effect, and,
to its best knowledge, no Default has occurred and is continuing.

 

4.8                               No Material Misstatements.  No written
information, exhibit, statement or report furnished to the Lender by it or at
its direction in connection with this Agreement or any other Loan Document
contains any material misstatement of fact or omits to state a material fact or
any fact necessary to make the statements contained therein not materially
misleading as of the date made or deemed made.

 

4.9                               Liabilities, Litigation and Restrictions.  As
of the Closing Date, other than as reflected in the Financial Statements
provided to the Lender in satisfaction of the condition set forth in
Section 3.1(g) for liabilities incurred in the ordinary course of business
consistent with past practice or listed on Schedule 4.9 under the heading
“Liabilities”, it has no liabilities, direct or contingent, which may reasonably
be expected to materially and adversely affect its business or operations or its
ownership of any of its Property.  As of the Closing Date, except as set forth
under the heading “Litigation” on Schedule 4.9 or disclosed as set forth in the
Financial Statements, no litigation or other action of any nature affecting it
is pending before any Governmental Authority or, to the best of its knowledge,
threatened against or affecting it or any of its Subsidiaries which are
Guarantors which could, if adversely determined, reasonably be expected to have
a Material Adverse Effect.  No unusual or unduly burdensome restriction,
restraint or hazard exists by contract, Requirement of Law or otherwise relative
to its business or operations or its ownership and operation of its material
Property other than such as relate generally to Persons engaged in business
activities similar to those conducted by it or as could not reasonably be
expected to have a Material Adverse Effect.

 

4.10                        Authorizations; Consents.  Except as expressly
contemplated by this Agreement or as could not reasonably be expected to have a
Material Adverse Effect, no authorization, consent, approval, exemption,
franchise, permit or license of, or filing with, any Governmental Authority or
any other Person is required to authorize, or is otherwise required in
connection with, the valid execution and delivery by it of the Loan Documents to
which it is a party or any instrument contemplated hereby, the repayment of the
Note and interest and fees provided in the Note and this Agreement or the
performance of the Obligations.

 

4.11                        Compliance with Laws.  It and its Properties,
including any Oil and Gas Properties owned by it, are in compliance with all
applicable Requirements of Law, except to the extent any such failure to comply
could not reasonably be expected to have a Material Adverse Effect.

 

4.12                        ERISA.  It does not maintain, nor has it maintained,
any Plan.  It does not currently contribute to or have any obligation to
contribute to or otherwise have any liability with respect to any Plan.

 

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4.13                        Environmental Laws.  Except as described on Schedule
4.13:

 

(a)                                 no Property owned by it, or, to its
knowledge, Property of others adjacent to Property owned by it, is currently on
or has, to its knowledge, ever been on any federal or state list of Superfund
Sites;

 

(b)                                 no Hazardous Substances have been generated,
transported and/or disposed of by it at a site which was, at the time of such
generation, transportation and/or disposal, or to its knowledge has since
become, a Superfund Site;

 

(c)                                  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 it or to its knowledge from, affecting or related to any Property
owned by it has occurred which could reasonably be expected to have a Material
Adverse Effect; and

 

(d)                                 no Environmental Complaint has been received
by it that has not been resolved in full or which could not reasonably be
expected to have a Material Adverse Effect.

 

4.14                        Compliance with Federal Reserve Regulations.  No
transaction contemplated by the Loan Documents is in violation of, and it has
not taken any action that would result in any transaction contemplated by the
Loan Documents being in violation of, in any material respect, any regulations
promulgated by the Board of Governors of the Federal Reserve System, including
Regulations T, U or X.

 

4.15                        Investment Company Act.  It is not, nor is it
directly or indirectly controlled by or acting on behalf of any Person which is
an “investment company” or an “affiliated person” subject to regulation as an
“investment company” within the meaning of the Investment Company Act of 1940.

 

4.16                        Proper Filing of Tax Returns; Payment of Taxes Due. 
It has filed its United States income tax returns and all other tax returns
which are required to be filed and has paid all taxes shown as due from it
thereon, except such as are being contested in good faith and as to which
adequate provisions and disclosures have been made.  The respective charges and
reserves on its books with respect to taxes and other governmental charges are
adequate.

 

4.17                        Refunds.  As of the Closing Date, except as
described on Schedule 4.17, no orders of, proceedings pending before, or other
requirements of any Governmental Authority exist which could result in it being
required to refund any portion of the proceeds received or to be received by it
from the sale of hydrocarbons constituting part of the Oil and Gas Properties
owned by it.

 

4.18                        Gas Contracts.  As of the Closing Date, except as
described on Schedule 4.18, (a) it 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 Oil and Gas Properties owned by it at
some future date without receiving full payment therefor within 90 days of
delivery, and (b) it has not produced gas, in any material amount, subject to,
and neither it nor any of the Oil and

 

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Gas Properties owned by it is subject to, balancing rights of third parties or
subject to balancing duties under Requirements of Law, except as to such matters
for which it has either (i) established monetary reserves adequate in amount to
satisfy such obligations and segregated such reserves from other accounts or
(ii) adjusted its Reserve Reports provided to the Lender pursuant to applicable
provisions of this Agreement for such over or under balanced natural gas
quantities.

 

4.19                        Intellectual Property.  It owns or is licensed to
use all Intellectual Property necessary to conduct its business as currently
conducted, except where the failure to own or license such property could not
reasonably be expected to have a Material Adverse Effect.  No claim is pending,
or to its knowledge has been asserted, by any Person with respect to the use of
any such Intellectual Property or challenging or questioning the validity or
effectiveness of any such Intellectual Property; and it knows of no valid basis
for any such claim.  To its knowledge, the use of such Intellectual Property by
it does not infringe on the rights of any Person, except for such claims and
infringements as do not, in the aggregate, give rise to any material liability
on its part.

 

4.20                        Casualties or Taking of Property.  Except as
disclosed on Schedule 4.20, since the later of (a) December 31, 2011, or (b) the
date of the most recent Financial Statements furnished to the Lender pursuant to
either Section 5.2 or Section 5.3, neither its business nor any of its Property
has been affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property, or cancellation of contracts, permits or
concessions by any Governmental Authority, riot, activities of armed forces or
acts of God, except as could not reasonably be expected to have a Material
Adverse Effect.

 

4.21                        Principal Location.  Its principal place of business
and chief executive office is located at its address set forth in Section 8.3 or
at such other location as it may have, by proper written notice hereunder,
advised the Lender.

 

4.22                        Subsidiaries.  It has no Subsidiaries other than as
set forth on Schedule 4.22 or as otherwise disclosed to the Lender in writing
from time to time and Arkla Petroleum, LLC, a Louisiana limited liability
company, conducts no material business and owns no material Property.

 

4.23                        Compliance with Anti-Terrorism Laws.

 

(a)                                 Neither it nor any of its Affiliates is in
violation in any material respect of any applicable 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 applicable Anti-Terrorism Law.

 

(b)                                 Neither it nor any of its Affiliates is any
of the following (each a “Blocked Person”):

 

(i)                                     a Person that is listed in the annex,
to, or is otherwise subject to the provisions of, Executive Order No. 13224;

 

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(ii)                                  a Person owned or controlled by, or acting
for or on behalf of, any Person that is listed in the annex to, or is otherwise
subject to the provisions of, Executive Order No. 13224;

 

(iii)                               a Person with which any bank or other
financial institution is prohibited from dealing or otherwise engaging in any
transaction by any Anti-Terrorism Law;

 

(iv)                              a Person that commits, threatens or conspires
to commit or supports “terrorism” as defined in Executive Order No. 13224;

 

(v)                                 a Person that is named as a “specially
designated national” on the most current list published by OFAC at its official
website or any replacement website or other replacement official publication of
such list; or

 

(vi)                              an Affiliate of a Person or entity listed
above.

 

(c)                                  Neither it nor any of its Affiliates
(i) conducts any business or engages in making or receiving any contribution of
funds, goods or services to or for the benefit of any Blocked Person or
(ii) deals in, or otherwise engages in any transaction relating to, any property
or interests in property blocked pursuant to Executive Order No. 13224.

 

(d)                                 Neither it nor any of its Affiliates is in
violation in any material respect of any rules or regulations promulgated by
OFAC or of any economic or trade sanctions administered and enforced by OFAC or
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 rules or regulations promulgated by OFAC.

 

4.24                        Identification Numbers.  Its federal taxpayer
identification number and organizational number with the Secretary of State of
the state of its organization or formation are as set out on Schedule 4.24 or as
otherwise provided to the Lender in writing.

 

4.25                        Solvency.  Immediately after the Closing and
immediately following the making of each Loan made on the Closing Date and
following the making of any Loan made after the Closing Date, after giving
effect to the application of the proceeds of each such Loan, but without giving
effect to any of the Guaranties or any amounts that any Guarantor is required to
pay pursuant to the provisions of Section 8.20, (a) the fair value of its
assets, at a fair valuation, will exceed its debts and liabilities,
subordinated, contingent or otherwise, at a fair valuation; (b) the present fair
saleable value of its assets, at a fair valuation, will be greater than the
amount that will be required to pay the probable liability of its debts and
other liabilities, subordinated, contingent or otherwise, as such debts and
other liabilities become absolute and matured considering all financing
alternatives and potential asset sales reasonably available to it; (c) it will
be able to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become absolute and matured; and (d) it will not
have unreasonably small capital with which to conduct the business in which it
is engaged as such business is now conducted and are proposed to be conducted
following the Closing Date.

 

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ARTICLE V

 

AFFIRMATIVE COVENANTS

 

So long as any Obligation remains outstanding or unpaid or any Commitment
exists, each of the Borrower and each Subsidiary of the Borrower or any of the
Guarantors which is a Guarantor shall (provided, however, that Section 5.14
shall apply only to the Borrower):

 

5.1          Maintenance and Access to Records.  Keep adequate records, in
accordance with GAAP, of all its transactions so that at any time, and from time
to time, its financial condition (subject to normal year-end audit adjustments)
may be readily determined, and promptly following the reasonable request of the
Lender, make such records available for inspection by the Lender and, at the
expense of the Borrower allow Lender to make and take away copies thereof.

 

5.2          Quarterly Financial Statements and Compliance Certificates. 
Deliver to the Lender, on or before the 45th day after the close of each of the
first three quarterly periods of each fiscal year of the Borrower, commencing
with that ending March 31, 2012, (a) a copy of the unaudited consolidated
Financial Statements of the Borrower and its consolidated Subsidiaries as at the
close of such quarterly period and from the beginning of such fiscal year to the
end of such period, such Financial Statements to be certified by a Responsible
Officer of the Borrower as having been prepared in accordance with GAAP
consistently applied and as a fair presentation of the financial condition, as
of the date and for the period indicated therein, of the Borrower, on a
consolidated basis with its consolidated Subsidiaries, subject to changes
resulting from normal year end audit adjustments; provided, however, if any such
Financial Statements are provided in electronic form or other form without such
certification, they shall be deemed so certified, and (b) a Compliance
Certificate prepared as of the close of such quarterly period.

 

5.3          Annual Financial Statements and Compliance Certificate.  Deliver to
the Lender, on or before the 90th day after the close of each fiscal year of the
Borrower, commencing with that ending on June 30, 2012, (a) a copy of the annual
audited Financial Statements of the Borrower and its consolidated Subsidiaries,
including footnotes thereto, such Financial Statements to be accompanied by
unqualified certification of a nationally-recognized or regionally-recognized
firm of independent certificated public accounts or other independent certified
accountants acceptable to the Lender certifying such Financial Statements as
having been prepared in accordance with GAAP consistently applied and as a fair
presentation of the financial condition, as of the date and for the period
indicated therein, of the Borrower on a consolidated basis with its consolidated
Subsidiaries and (b) a Compliance Certificate prepared as of the close of the
relevant fiscal year.

 

5.4          Oil and Gas Reserve Reports and Production Reports.

 

(a)           Deliver to the Lender, no later than each October 1 during the
term of this Agreement, commencing with October 1, 2012, an engineering report
in form satisfactory to the Lender covering the Borrower’s Delhi Field Oil and
Gas Properties (and such other Oil and Gas Properties as reasonably requested by
the Lender), prepared as of the preceding July 1 and certified by a nationally
or regionally-recognized firm of independent consulting petroleum engineers or
other firm of independent consulting petroleum engineers acceptable to the
Lender

 

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as fairly and accurately setting forth (i) the proved and producing,
non-producing, shut-in, behind-pipe and undeveloped oil and gas reserves
(separately classified as such) attributable to the Oil and Gas Properties of
the Borrower and its Subsidiaries as of the most recent practicable date, (ii)
the aggregate present value of the future net income with respect to proved and
producing reserves attributable to the Oil and Gas Properties of the Borrower
and its Subsidiaries, discounted at a stated per annum discount rate, (iii)
projections of the annual rate of production, gross income and net income with
respect to such proved and producing reserves, (iv) information with respect to
the “take-or-pay,” “prepayment” and gas-balancing liabilities of the Borrower
and its Subsidiaries with respect to such reserves, and (v) general economic
assumptions.

 

(b)           Deliver to the Lender, no later than each April 1 during the term
of this Agreement, commencing with April 1, 2012, an engineering report, in
substantially the format of and providing the information provided in the
engineering reports provided pursuant to Section 5.4(a), prepared as of the
preceding January 1 and certified, at the election of the Borrower, by either
the Vice President of Operations or senior petroleum engineer of the Borrower or
a nationally or regionally-recognized firm of independent consulting petroleum
engineers acceptable to the Lender or other firm of independent consulting
petroleum engineers acceptable to the Lender as fairly and accurately setting
forth the information provided therein.

 

(c)           Deliver to the Lender, no later than the 60th day following the
end of each calendar quarter, a report, in form satisfactory to the Lender,
setting forth information as to quantities of production from its Oil and Gas
Properties, volumes of production sold, volumes of production committed to
Commodity Hedge Agreements, pricing, purchasers of production, gross revenues,
lease operating expenses, and such other information as the Lender may
reasonably request with respect to the relevant quarterly period.

 

5.5          Title Information; Title Defects.

 

(a)           Promptly upon the request of the Lender, furnish to the Lender
title information, in form and substance reasonably satisfactory to the Lender,
covering Oil and Gas Properties of the Borrower and its Subsidiaries the
discounted present value of the proved reserves attributable to which, in the
aggregate, equals no less than eighty percent (80%) of the aggregate discounted
present value of the proved reserves attributable to the combined Oil and Gas
Properties of the Borrower and its Domestic Subsidiaries.

 

(b)           Promptly, but in any event within 30 days after notice by the
Lender of any defect having a Material Adverse Effect, either clear such title
defect or diligently pursue clearing such title defect.

 

5.6          Notices of Certain Events.  Deliver to the Lender, promptly, but in
no event later than the fifth Business Day after having knowledge of the
occurrence of any of the following events or circumstances, a written statement
with respect thereto, signed by a Responsible Officer of the relevant Business
Entity or its general partner and setting forth the relevant event or
circumstance and the steps being taken by the relevant Business Entity with
respect to such event or circumstance:

 

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(a)           any Default or Event of Default;

 

(b)           any default by it under any contractual obligation or any
litigation, investigation or proceeding between it and any Governmental
Authority which, in either case, if not cured or if adversely determined, as the
case may be, could reasonably be expected to have a Material Adverse Effect;

 

(c)           any litigation or proceeding involving it as a defendant or in
which any of its Property is subject to a claim and in which the amount involved
is $100,000 or more and which is not covered by insurance or in which injunctive
or similar relief is sought;

 

(d)           the receipt by it of any Environmental Complaint, which if
adversely determined could reasonably be expected to have a Material Adverse
Effect;

 

(e)           any actual, proposed, or threatened testing or other investigation
by any Governmental Authority or other Person concerning the environmental
condition of, or relating to, any of its Property following any allegation of a
material violation of any Requirement of Law;

 

(f)            any Release of Hazardous Substances by it or from, affecting, or
related to any of its Property or Property of others adjacent to any of its
Property which could reasonably be expected to have a Material Adverse Effect,
except in accordance with applicable Requirements of Law or the terms of a valid
permit, license, certificate, or approval of the relevant Governmental
Authority, or the violation of any Environmental Law in any material respect, or
the revocation, suspension, or forfeiture of or failure to renew, any permit,
license, registration, approval, or authorization which could reasonably be
expected to have a Material Adverse Effect;

 

(g)           any change in its senior management;

 

(h)           any material change in its accounting or financial reporting
practices; and

 

(i)            any other event or condition which could reasonably be expected
to have a Material Adverse Effect.

 

5.7          RESERVED

 

5.8          RESERVED

 

5.9          Joinder of New Domestic Subsidiaries.  Cause each Domestic
Subsidiary of the Borrower or any of the Guarantors formed or acquired after the
Closing Date to execute and deliver Joinder Agreements and Guaranties, as
requested by the Lender, and take all such other action reasonably requested by
the Lender in connection with such Guaranties and Joinder Agreements.

 

5.10        Additional Information.  Furnish to the Lender, promptly upon the
request of the Lender, such additional financial or other information concerning
its assets, liabilities, operations and transactions as the Lender may from time
to time reasonably request.

 

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5.11        Compliance with Laws.  Except to the extent the failure to comply or
cause compliance could not reasonably be expected to have a Material Adverse
Effect, comply in all material respects with all applicable Requirements of Law,
including (a) ERISA, (b) Environmental Laws and (c) all permits, licenses,
registrations, approvals, and authorizations (i) related to any natural or
environmental resource or media located on, above, within, related to or
affected by any of its Property, (ii) required for the performance of its
operations, or (iii) applicable to the use, generation, handling, storage,
treatment, transport or disposal of any Hazardous Substances; and use
commercially reasonable efforts to cause all of its employees, crew members,
agents, contractors, subcontractors and future lessees (pursuant to appropriate
lease provisions), while such Persons are acting within the scope of their
relationship with it, to comply with all such Requirements of Law as may be
necessary or appropriate to enable it to so comply.

 

5.12        Payment of Assessments and Charges.  Pay all taxes, assessments,
governmental charges, rent and other Indebtedness which, if unpaid, might become
a Lien against any of its Property, except any of the foregoing that are being
contested in good faith and as to which an adequate reserve in accordance with
GAAP has been established or unless failure to pay would not have a Material
Adverse Effect.

 

5.13        Maintenance of Existence or Qualification and Good Standing. 
Maintain its separate corporate, limited partnership or limited liability
company existence and identity, as the case may be, and, if applicable, good
standing and qualification in its jurisdiction of organization and in all
jurisdictions wherein the Property now owned or hereafter acquired or business
now or hereafter conducted by it necessitates same, except where the failure to
so qualify would not reasonably be expected to have a Material Adverse Effect.

 

5.14        Payment of Note; Performance of Obligations.  Pay the Note according
to the reading, tenor and effect thereof, as modified hereby, and do and perform
every act and discharge all of the other Obligations in all material respects.

 

5.15        Further Assurances.  Promptly cure any defects in the execution and
delivery of any of the Loan Documents to which it is a party and all agreements
contemplated thereby, and execute, acknowledge and deliver to the Lender such
other assurances and instruments as shall, in the reasonable opinion of the
Lender, be necessary to fulfill the terms of the Loan Documents to which it is a
party.

 

5.16        Initial Expenses of Lender.  Upon request by the Lender, promptly
reimburse the Lender for, or pay directly to such special counsel, all
reasonable fees and expenses of Jackson Walker L.L.P., special counsel to the
Lender, in connection with the preparation of this Agreement and all
documentation contemplated hereby, the satisfaction of the conditions precedent
set forth herein and the consummation of the transactions contemplated in this
Agreement.

 

5.17        Subsequent Expenses of Lender.  Upon request by the Lender, promptly
reimburse the Lender (to the fullest extent permitted by law) for all amounts
reasonably expended, advanced or incurred by or on behalf of the Lender to
evaluate the Oil and Gas Properties of the Borrower or to satisfy any of the
Borrower’s or any Guarantor’s obligations

 

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under any of the Loan Documents; to collect the Obligations; to ratify, amend,
restate or prepare additional Loan Documents, as the case may be; to enforce the
rights of the Lender under any of the Loan Documents; and to protect the
relevant Person’s Properties or business, which amounts shall be deemed
compensatory in nature and liquidated as to amount upon notice to the relevant
Person by the Lender and which amounts shall include (a) all court costs, (b)
reasonable attorneys’ fees, (c) reasonable fees and expenses of auditors,
accountants and independent petroleum engineers incurred to protect the
interests of the Lender, (d) fees and expenses incurred in connection with the
participation by the Lender as members of the creditors’ committee in any
Insolvency Proceeding, (e) fees and expenses incurred in connection with lifting
the automatic stay prescribed in §362 Title 11 of the United States Code, and
(f) fees and expenses reasonably incurred in connection with any action pursuant
to §1129 Title 11 of the United States Code all 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 Adjusted Base
Rate 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 this Section 5.17 surviving the
non-assumption of this Agreement in any Insolvency Proceeding and being binding
upon it and/or a trustee, receiver, custodian, or liquidator of it appointed in
any such case.

 

5.18        Operation of Oil and Gas Properties.  Develop, maintain and operate
or, to the extent that the right or obligation to do so rests with another
Person, exercise commercially reasonable efforts to cause such other Person to
develop, maintain and operate its Oil and Gas Properties in a prudent and
workmanlike manner and in accordance with customary industry standards.

 

5.19        Maintenance and Inspection of Properties.  Maintain or, to the
extent that the right or obligation to do so rests with another Person, exercise
commercially reasonable efforts to cause such other Person to maintain all of
its material tangible Properties necessary to operate its business as currently
conducted in good repair and condition, ordinary wear and tear excepted; make
or, to the extent that the right or obligation to do so rests with another
Person, exercise commercially reasonable efforts to cause such other Person to
make all necessary replacements thereof and operate such Properties in a good
and workmanlike manner; and permit any authorized representative of the Lender,
upon prior notice to visit and inspect, at reasonable times, any of its tangible
Property.

 

5.20        Maintenance of Insurance.  Maintain insurance with respect to its
Properties and businesses against such liabilities, casualties, risks and
contingencies as is customary in the relevant industry and sufficient to prevent
a Material Adverse Effect, all such insurance to be in amounts and from insurers
reasonably acceptable to the Lender, name the Lender as an additional insured
(in the case of liability insurance) and co-loss payee (in the case of physical
damage insurance), and, upon any renewal of any such insurance and at other
times upon request by the Lender, furnish to the Lender evidence, satisfactory
to the Lender, of the maintenance of such insurance.  Subject to the provisions
of the following sentences of this Section 5.20, the Lender shall have the right
to collect, and each of the Borrower and the Guarantors hereby assigns to the
Lender, any and all monies that may become payable under any policies of
insurance relating to business interruption or by reason of damage, loss or
destruction of any of the collateral at any time subject to a Lien to secure the
Obligations.  In the event of any damage,

 

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loss or destruction, of any of such collateral, and provided that no Default or
Event of Default has occurred and is continuing, the Borrower or applicable
Guarantor shall have 90 days either (a) to replace or repair such Property or
(b) to the extent such Property cannot be replaced or repaired within such 90
day period using commercially reasonable efforts, to commence repair or
replacement of such Property and continue to pursue diligently such repair or
replacement until completed.  If the Borrower or applicable Guarantor does not
comply with clause (a) or (b) of the immediately proceeding sentence, the
Borrower shall promptly transfer to the Lender all unused insurance proceeds
attributable to such collateral and, 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 fees,
then to interest and then to principal, and shall deliver to the Borrower or the
relevant Guarantor, as the case may be, the balance, if any, after such
application has been made.  In the event of any other damage, loss or
destruction for which insurance proceeds are received, and provided that no
Default or Event of Default has occurred and is continuing, the Lender shall
deliver any such proceeds received by it to the Borrower or the relevant
Guarantor, as the case may be, for use to repair or replace the damaged,
destroyed or lost Property.  In the event the Lender receives insurance proceeds
not attributable to damage, destruction or loss of Property or business
interruption, the Lender shall deliver any such proceeds to the Borrower or the
relevant Guarantor, as the case may be.

 

5.21        Environmental Indemnification.  INDEMNIFY AND HOLD THE LENDER AND
ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES AND
EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY DOCUMENT (EACH OF
THE FOREGOING AN “INDEMNITEE”) HARMLESS 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 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 OF ITS PROPERTY, WHETHER PRIOR
TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON ANY
OF ITS PROPERTY, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY IT
OR ANY OF ITS PREDECESSORS IN TITLE, EMPLOYEES, AGENTS, CONTRACTORS OR
SUBCONTRACTORS 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 OF ITS PROPERTY, (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 IT OR ANY OF ITS EMPLOYEES, AGENTS, CONTRACTORS, OR SUBCONTRACTORS WHILE SUCH
PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH IT, IRRESPECTIVE
OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY
LOAN DOCUMENT OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING ANY SUCH
CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, ADMINISTRATIVE OR
JUDICIAL PROCEEDING, ORDER, JUDGMENT, REMEDIAL ACTION, REQUIREMENT, ENFORCEMENT
ACTION,

 

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COST OR EXPENSE, ARISING FROM THE NEGLIGENCE (BUT NOT THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT), WHETHER SOLE OR CONCURRENT, OF ANY INDEMNITEE; WITH THE
FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN SATISFIED
WHOLLY IN CASH AND NOT BY WAY OF THE CONVEYANCE OF ANY PROPERTY, PROVIDED,
HOWEVER, THAT SUCH INDEMNITY SHALL NOT EXTEND TO (A) ANY ACT OR OMISSION BY THE
LENDER WITH RESPECT TO ANY PROPERTY SUBSEQUENT TO THE LENDER BECOMING THE OWNER
OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH CLAIM, LOSS, DAMAGE,
LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION OR
REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE THERETO BY THE LENDER
OR (B) TO ANY INDEMNITEE, TO THE EXTENT SUCH CLAIM, LOSS, DAMAGE, LIABILITY,
FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION OR REQUIREMENT
RESULTED FROM SUCH INDEMNITEE’S BREACH OF ANY OF ITS OBLIGATIONS UNDER ANY LOAN
DOCUMENT OR FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE. 
ALL AMOUNTS DUE UNDER THIS SECTION 5.21 SHALL BE PAYABLE ON WRITTEN DEMAND
THEREFOR.

 

5.22        General Indemnification.  INDEMNIFY AND HOLD EACH INDEMNITEE
HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND
RELATED EXPENSES, INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES (INCLUDING
THE ALLOCATED COST OF INTERNAL COUNSEL IF ALLOWED BY LAW), INCURRED BY OR
ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN ANY WAY CONNECTED WITH, OR AS
A RESULT OF (A) THE EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, THE PERFORMANCE BY THE PARTIES HERETO AND THERETO OF THEIR RESPECTIVE
OBLIGATIONS HEREUNDER AND THEREUNDER AND CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY, (B) THE USE OF PROCEEDS OF THE LOANS OR LETTERS
OF CREDIT, OR (C) ANY CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO
ANY OF THE FOREGOING, WHETHER OR NOT ANY INDEMNITEE IS A PARTY THERETO,
INCLUDING ANY SUCH LOSS, CLAIM, DAMAGE, LIABILITY OR EXPENSE ARISING FROM THE
NEGLIGENCE (BUT NOT THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT), WHETHER SOLE OR
CONCURRENT, OF ANY INDEMNITEE; PROVIDED, HOWEVER, THAT SUCH INDEMNITY SHALL NOT
EXTEND TO ANY INDEMNITEE, TO THE EXTENT SUCH LOSS, CLAIMS, DAMAGES, LIABILITIES
AND RELATED EXPENSES RESULTED FROM SUCH INDEMNITEE’S BREACH OF ANY OF ITS
OBLIGATIONS UNDER ANY LOAN DOCUMENT OR FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF SUCH INDEMNITEE; WITH THE FOREGOING INDEMNITY SURVIVING
SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.  ALL
AMOUNTS DUE UNDER THIS SECTION 5.22 SHALL BE PAYABLE ON WRITTEN DEMAND THEREFOR.

 

5.23        Evidence of Compliance with Anti-Terrorism Laws.  Deliver to the
Lender any certification or other evidence requested from time to time by the
Lender confirming its compliance with the provisions of Section 6.17.

 

5.24        Deposit Account.  Open and maintain with the Lender an operating
account of the Borrower or one of the Guarantors.

 

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ARTICLE VI

 

NEGATIVE COVENANTS

 

So long as any Obligation remains outstanding or unpaid or any Commitment
exists, neither the Borrower nor any of its Subsidiaries which is a Guarantor
will:

 

6.1          Indebtedness.  Create, incur, assume or suffer to exist any
Indebtedness, whether by way of loan or otherwise; provided, however, the
foregoing restriction shall not apply to (a) the Obligations, (b) unsecured
accounts payable, taxes and other assessments, in each case incurred in the
ordinary course of business and which are not unpaid in excess of 90 days beyond
invoice date or are being contested in good faith and as to which such reserve
as is required by GAAP has been made, (c) Indebtedness under Commodity Hedge
Agreements, including reimbursement obligations under letters of credit securing
or supporting such Indebtedness, with any Approved Hedge Counterparty, provided
that (i) such agreements shall not be for a term in excess of four years and
shall not, except as to floors, be entered into with respect to more than
seventy five percent (75%) of the projected production of proved developed
producing volumes of each commodity category, as determined by the Lender in
connection with each determination of the Borrowing Base during the term of the
relevant agreement, and (ii) the floor prices in such agreements are not less
than the prices used by the Lender in its most recent Borrowing Base
determination as of the time the relevant agreement is entered into, (d)
Indebtedness under Interest Rate Hedge Agreements with any Approved Hedge
Counterparty, provided that such agreements shall not be entered into with
respect to notional principal amounts in excess of seventy five percent (75%) of
the Loan Balance, (e) Indebtedness incurred with respect to all or a portion of
the purchase price of Property acquired in the ordinary course of business not
exceeding $100,000 in the aggregate for the Borrower on a consolidated basis
with its consolidated Subsidiaries, (f) Indebtedness from time to time owing by
any Guarantor to or due from the Borrower or any other Guarantor with respect to
loans or advances not prohibited by the provisions of Section 6.7, (g)
Indebtedness secured by Permitted Liens, (h) other unsecured Indebtedness not
exceeding, in the aggregate at any time, $1,000,000 for the Borrower on a
consolidated basis with its consolidated Subsidiaries, (i) Indebtedness under
leases, other than oil and gas leases which Indebtedness is covered under clause
(j) hereinbelow, (as required to be reported on the financial statements of the
Borrower or any of its Subsidiaries which is a Guarantor pursuant to
requirements of GAAP as it exists on the Closing Date not to exceed $500,000 in
the aggregate, (j) Indebtedness under oil and gas leases and any Indebtedness
associated therewith such as Indebtedness associated with bonds or surety
obligations required by Governmental Authorities in connection with the
operation of Oil and Gas Properties and (k) accrued and unpaid dividends on any
Preferred Stock.

 

6.2          Contingent Obligations.  Create, incur, assume or suffer to exist
any Contingent Obligation; provided, however, the foregoing restriction shall
not apply to (a) performance guarantees, performance surety or other bonds or
endorsements of items deposited for collection, in each case provided in the
ordinary course of business, (b) trade credit incurred or operating leases
entered into in the ordinary course of business, (c) the Guaranties or (d)
Indebtedness permitted by Section 6.1.

 

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6.3          Liens.  Create, incur, assume or suffer to exist any Lien on any of
its Oil and Gas Properties or any other Property, whether now owned or hereafter
acquired; provided, however, the foregoing restriction shall not apply to:

 

(a)           Permitted Liens,

 

(b)           Liens securing leases allowed under clause (i) of the proviso in
Section 6.1, but only on the Property under lease;

 

(c)           Liens on cash or securities of the Borrower or any Subsidiaries
securing the Indebtedness associated with bonds or surety obligations required
by Governmental Authorities in connection with the operation of Oil and Gas
Properties.

 

6.4          Sales of Assets.  Sell, transfer or otherwise dispose of, in one or
any series of transactions, any of its Property, whether now owned or hereafter
acquired, or enter into any agreement to do so; provided, however, the foregoing
restriction shall not apply to (a) the sale of hydrocarbons or inventory in the
ordinary course of business, provided, however, that no contract for the sale of
hydrocarbons shall obligate the relevant Person to deliver hydrocarbons produced
from any of its Oil and Gas Properties at some future date without receiving
full payment therefor within 90 days of delivery, (b) the sale or other
disposition of Property destroyed, lost, worn out, damaged or having only
salvage value or no longer used or useful in the business in which it is used,
(c) the sale, transfer or other disposition of Property from the Borrower to its
Domestic Subsidiaries or from the Subsidiaries of the Borrower or any of the
Guarantors to the Borrower or any of the Guarantors, (d) if no Default or
Deficiency exists or would result therefrom, sales of Oil and Gas Properties of
the Borrower on a consolidated basis with its consolidated Subsidiaries (other
than Oil and Gas Properties located in the Giddings Field in Brazos, Burleson,
Brazos, Washington, Lee, Fayette and Grimes Counties, Texas) between
redeterminations of the Borrowing Base in accordance with the provisions of
Section 2.9 not exceeding in the aggregate five percent (5.00%) of the Borrowing
Base in effect during the relevant period of time or (e) if no default or
Deficiency exists or would result therefrom, sales of Oil and Gas Properties of
the Borrower or one of the Initial Guarantors (i) located in the Giddings Field
in Burleson, Brazos, Washington, Lee, Fayette, and Grimes Counties, Texas, (ii)
located in Haskell and Wagoner Counties, Oklahoma and/or (iii) assigned no value
by the Lender in the Borrowing Base in effect under the provisions of this
Agreement at the time of the sale thereof.

 

6.5          Leasebacks.  Enter into any agreement to sell or transfer any
Property and thereafter rent or lease as lessee such Property or other Property
intended for the same use or purpose as the Property sold or transferred.

 

6.6          Sale or Discount of Receivables.  Except to minimize losses on bona
fide debts previously contracted, discount or sell with recourse, or sell for
less than the greater of the face or market value thereof, any of its notes
receivable or accounts receivable.

 

6.7          Loans or Advances.  Make or agree to make or allow to remain
outstanding any loans or advances to any Person; provided, however, the
foregoing restriction shall not apply to (a) advances or extensions of credit in
the form of accounts receivable incurred in the ordinary

 

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course of business and upon terms common in the industry for such accounts
receivable (including cash call advances made pursuant to the provisions of
joint operating agreements to secure obligations of the Borrower or any
Guarantor thereunder), (b) advances to employees for the payment of expenses in
the ordinary course of business not exceeding $50,000 in the aggregate for the
Borrower on a consolidated basis with its consolidated Subsidiaries, (c) loans
or advances by or to the Borrower or any Domestic Subsidiary of the Borrower or
any of the Guarantors which is a Guarantor to the Borrower or any other Domestic
Subsidiary of the Borrower or any of the Guarantors which is a Guarantor or (d)
other loans or advances so long as not exceeding, in the aggregate outstanding
principal balance for the Borrower on a consolidated basis with its consolidated
Subsidiaries at any time, $50,000.

 

6.8          Investments.  Make or acquire Investments in, or purchase or
otherwise acquire all or substantially all of the assets of, any Person;
provided, however, the foregoing restriction shall not apply to the purchase or
acquisition of (a) Oil and Gas Properties (whether through direct acquisition or
acquisition of a Business Entity owning Oil and Gas Properties), (b) Investments
in the form of (i) debt securities issued or directly and fully guaranteed or
insured by the United States Government or any agency or instrumentality
thereof, with maturities of no more than one year, (ii) commercial paper of a
domestic issuer rated at the date of acquisition at least P-2 by Moody’s
Investors Service, Inc. or A-2 by Standard & Poor’s Corporation and with
maturities of no more than one year from the date of acquisition, or (iii)
repurchase agreements covering debt securities or commercial paper of the type
permitted in this Section 6.8, certificates of deposit, demand deposits,
eurodollar time deposits, overnight bank deposits and bankers’ acceptances, with
maturities of no more than 180 days from the date of acquisition (or longer, if
with the Lender or insured by the Federal Deposit Insurance Corporation or the
Securities Investor Protection Corporation), issued by or acquired from or
through the Lender or any bank or trust company organized under the laws of the
United States of America or any state thereof and having capital surplus and
undivided profits aggregating at least $100,000,000, (c) other short-term
Investments similar in nature and degree of risk to those described in clause
(b) of this Section 6.8, (d) Investments in money-market funds sponsored or
administered by Persons acceptable to the Lender and which funds invest in
short-term Investments similar in nature and degree of risk to those described
in clause (b) of this Section 6.8, (e) evidences of loans or advances not
prohibited by the provisions of Section 6.7 or (f) Investments by the Borrower
or any Domestic Subsidiary of the Borrower or any of the Guarantors which is a
Guarantor in any Domestic Subsidiary of the Borrower or any of the Guarantors
which is a Guarantor or (g) other Investments not to exceed $150,000 in the
aggregate at any time.

 

6.9          Dividends and Distributions.  Declare, pay or make, whether in cash
or Property of the Borrower, any dividend or distribution on, or purchase,
redeem or otherwise acquire for value, any of its equity interests; provided,
however, that, so long as no Default or Event of Default exists or would result
therefrom, the foregoing restriction shall not apply to (a) dividends paid in
common equity or, so long as the terms thereof are approved in writing by the
Lender, preferred equity interests, (b) dividends or distributions made to the
Borrower or any of the Guarantors by any of its Subsidiaries, (c) cash dividends
payable in accordance with the terms of the Preferred Stock or (d) so long as no
Default or Event of Default exists at the time thereof or would result therefrom
and, giving effect thereto, the Borrower and the Guarantors are in pro forma
compliance with the requirements of Section 6.14, Section 6.15 and Section 6.16
based on the most recently provided Compliance Certificate, repurchases of
shares of the common stock

 

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of the Borrower or any Preferred Stock made with a source of funds other than
proceeds of one or more Loans.

 

6.10        Issuance of Equity; Changes in Structure.  Issue or agree to issue
any additional equity interests; enter into any transaction of consolidation,
merger or amalgamation; or liquidate, wind up or dissolve (or suffer any
liquidation or dissolution); provided, however, the foregoing shall not restrict
(a) the issuance of common equity of the Borrower or any Preferred Stock, (b)
transactions of merger, consolidation or amalgamation among any of the Domestic
Subsidiaries of the Borrower or any of the Guarantors or, if the Borrower or any
of the Guarantors is the surviving entity, between the Borrower and any Domestic
Subsidiary of the Borrower or (c) any liquidation, winding up or dissolution of
a Domestic Subsidiary of the Borrower or any of the Guarantors.

 

6.11        Transactions with Affiliates.  Directly or indirectly, enter into
any transaction (including the sale, lease or exchange of Property or the
rendering of service) with any of its Affiliates (other than transactions
entered into in the normal course of business between the Borrower or a Domestic
Subsidiary of the Borrower or any of the Guarantors with another Domestic
Subsidiary of the Borrower or any of the Guarantors not otherwise prohibited
hereunder), other than upon fair and reasonable terms no less favorable than
could be obtained in an arm’s length transaction with a Person which was not an
Affiliate.

 

6.12        Lines of Business.  Change its principal line of business from that
in which it is engaged as of the date hereof.

 

6.13        Plan Obligation.  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.

 

6.14        Current Ratio.  Permit, as of the close of any quarterly period of
any fiscal year of the Borrower, commencing with the quarterly period ending
March 31, 2012, the ratio of Current Assets to Current Liabilities to be less
than 1.50 to 1.00.

 

6.15        Total Funded Indebtedness to EBITDA Ratio.  Permit the ratio,
determined as of the close of any quarterly period of any fiscal year of the
Borrower, commencing with the quarterly period ending March 31, 2012, of (a)
Indebtedness of the Borrower in respect of funded borrowed money, including the
Loan Balance (exclusive, for the avoidance of doubt, of trade accounts payable
and accrued liabilities, surety bonds, net unrealized losses or charges in
respect of Commodity Hedge Agreements or Interest Rate Hedge Agreements and the
undrawn, unexpired amount of all outstanding Letters of Credit, if such would
otherwise be included) to (b) EBITDA determined as follows:

 

Quarterly Period

 

EBITDA

Ending March 31, 2012

 

EBITDA for the quarterly period January 1, 2012 through March 31, 2012
multiplied by four

 

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Ending June 30, 2012

 

EBITDA for the period January 1, 2012 through June 30, 2012 multiplied by two

Ending September 30, 2012

 

EBITDA for the period January 1, 2012 through September 30, 2012 multiplied by
one and one third

Ending December 31, 2012 and thereafter

 

EBITDA for the twelve-month period ending on the last day of the relevant
quarterly period

 

(provided that for any calendar quarter in which any acquisitions or
divestitures occur, EBITDA shall be determined on a pro forma basis as if the
relevant acquisitions or divestitures were consummated on the first day of the
relevant calendar quarter) to be greater than 2.50 to 1.00.

 

6.16        Interest Coverage Ratio.  Permit, as of the close of any quarterly
period of any fiscal year of the Borrower, commencing with the quarterly period
ending March 31, 2012, the ratio of (a) EBITDA for the quarterly period then
ended to (b) Interest Expense for the quarterly period then ended to be less
than 3.00 to 1.00.

 

6.17        Anti-Terrorism Laws.  Conduct any business or engage in any
transaction or dealing with any Blocked Person, including the making or
receiving of any contribution of funds, goods or services to or for the benefit
of any Blocked Person; deal in, or otherwise engage in any transaction relating
to, any Property or interests in Property blocked pursuant to Executive Order
No. 13224; or 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 by OFAC or any sanctions against targeted foreign countries, terrorism
sponsoring organizations, and international narcotics traffickers based on
United States foreign policy.

 

6.18        Commodity Hedging.  Liquidate, terminate or fail to be in
compliance, in all material respects, with any Commodity Hedge Agreement or
Interest Rate Hedge Agreement to which it is a party as of the Closing Date or
to which it becomes a party subsequent to the Closing Date and not in violation
of the provisions of Section 6.1.

 

ARTICLE VII

 

EVENTS OF DEFAULT

 

7.1          Enumeration of Events of Default.  Any of the following events
shall constitute an Event of Default:

 

(a)           default shall be made in the payment when due of (i) any
installment of principal under this Agreement or the Note and such default shall
remain unremedied in excess of three Business Days, (ii) accrued interest or any
fee or other sum payable under any Loan Document and such default shall remain
unremedied in excess of three days or (iii) any

 

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Indebtedness of the Borrower under any Commodity Hedge Agreement or Interest
Rate Hedge Agreement permitted or required under applicable provisions of this
Agreement and such default shall remain unremedied for in excess of the period
of grace, if any, with respect thereto;

(b)           default shall be made by the Borrower or any Subsidiary of the
Borrower which is a Guarantor in the due observance or performance of any of its
obligations, covenants or agreements (except payment obligations which are
addressed in the immediately preceding clause (a)) under (i) the Note, (ii)
Section 4.6 or Article VI or (iii) any material provision of any Loan Documents,
other than this Agreement, and such default shall continue beyond any applicable
grace or cure period or default shall be made by the Borrower or any of the
Guarantors in the due observance or performance of any of its obligations,
covenants or agreements under any other provision of any Loan Document and such
default shall continue for 30 days after the earlier of notice thereof by the
Lender or knowledge thereof by the Borrower or the relevant Guarantor, as the
case may be;

 

(c)           any material representation or warranty made by or on behalf of
the Borrower or any Subsidiary of the Borrower or any of the Subsidiaries which
is a Guarantor in any of the Loan Documents proves to have been untrue in any
material respect or any Financial Statements delivered pursuant to this
Agreement prove, or any certificate or data furnished or made to the Lender in
connection herewith proves, to have been untrue in any material respect as of
the date the facts therein set forth were stated or certified;

 

(d)           default shall be made by the Borrower or any Subsidiary of the
Borrower or any of the Guarantors which is a Guarantor (as principal or
guarantor or other surety) in the payment or performance of any bond, debenture,
note or other Indebtedness in excess of $100,000 in the aggregate or under any
credit agreement, loan agreement, indenture, promissory note or similar
agreement or instrument executed in connection with any of the foregoing, and
such default shall remain unremedied for in excess of the period of grace, if
any, with respect thereto or there shall occur any event or condition in respect
of any such Indebtedness which would allow the holders thereof to require such
Indebtedness to be repaid, repurchased or redeemed;

 

(e)           the Borrower shall be unable to satisfy any condition or cure any
circumstance specified in Article III, the satisfaction or curing of which is
precedent to the right of the Borrower to obtain a Loan or the issuance, renewal
or extension of a Letter of Credit, and such inability shall continue for a
period in excess of 60 days;

 

(f)            the Borrower or any Subsidiary of the Borrower or any of the
Guarantors which is a Guarantor shall (i) apply for or consent to the
appointment of a receiver, trustee, or liquidator of it or all or a substantial
part of its assets, (ii) file a voluntary petition commencing an Insolvency
Proceeding, (iii) make a general assignment for the benefit of creditors of all
or substantially all of its assets, (iv) be unable, or admit in writing its
inability, to pay its debts generally as they become due, or (v) file an answer
admitting the material allegations of a petition filed against it in any
Insolvency Proceeding;

 

(g)           an order, judgment or decree shall be entered against the Borrower
or any Subsidiary of the Borrower which is a Guarantor by any court of competent
jurisdiction or by

 

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any other duly authorized authority, on the petition of a creditor or otherwise,
granting relief in any Insolvency Proceeding or approving a petition seeking
reorganization or an arrangement of its debts or appointing a receiver, trustee,
conservator, custodian, or liquidator of it or all or any substantial part of
its assets, and such order, judgment, or decree shall not be dismissed or stayed
within 60 days;

 

(h)           the levy against any significant portion of the Property of the
Borrower or any Subsidiary of the Borrower which is a Guarantor on a
consolidated basis of any execution, garnishment, attachment, sequestration or
other writ or similar proceeding in an amount in excess of $250,000 which is not
(i) permanently dismissed or discharged within 60 days after the levy or (ii)
being contested in good faith by appropriate proceedings and with establishment
of such reserve as may be required by GAAP;

 

(i)            a final and non-appealable order, judgment or decree shall be
entered against the Borrower or any Subsidiary of the Borrower which is a
Guarantor for money damages and/or Indebtedness due in an amount in excess of
$250,000, and such order, judgment, or decree shall not be dismissed or stayed
within 60 days or is not fully covered by insurance (excluding any deductible or
supported by such reserve as may be required by GAAP);

 

(j)            any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower or any Subsidiary
of the Borrower or any of the Guarantors which is a Guarantor under the
Racketeering Influence and Corrupt Organizations Statute (18 U.S.C. §1961 et
seq.), the result of which could reasonably be expected to result in the
forfeiture or transfer of any material Property of the Borrower or any
Subsidiary of the Borrower which is a Guarantor;

 

(k)           the Borrower or any Subsidiary of the Borrower which is a
Guarantor shall have (i) concealed, removed or diverted, or permitted to be
concealed, removed or diverted, any part of its Property, with intent to hinder,
delay or defraud its creditors or any of them, (ii) made or suffered a transfer
of any of its Property which is fraudulent under any bankruptcy, fraudulent
conveyance, or similar law with intent to hinder, delay or defraud its
creditors, (iii) made any transfer of its Property to or for the benefit of a
creditor at a time when other creditors similarly situated have not been paid
with intent to hinder, delay or defraud its creditors, or (iv) shall have
suffered or permitted, while insolvent, any creditor to obtain a Lien upon any
of its Property through legal proceedings or distraint which is not vacated
within 60 days from the date thereof;

 

(l)            both Robert Herlin and Sterling McDonald cease to serve in the
senior management of the Borrower;

 

(m)          any Guarantor ceases to be a wholly-owned Subsidiary of the
Borrower or another Guarantor;

 

(n)           any Loan Document, at any time after its execution and delivery
and for any reason other than as expressly permitted hereunder or thereunder or
satisfaction in full of all Obligations and termination of the Commitments and
this Agreement, ceases to be in full force and effect, and the result of which
could reasonably be expected to result in a Material Adverse Effect; or

 

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(o)           the Borrower or any Subsidiary of the Borrower which is a
Guarantor purports to revoke, terminate or rescind any Loan Document to which it
is a party or any provision of any Loan Document to which it is a party, and the
result of which could reasonably be expected to result in a Material Adverse
Effect.

 

7.2          Remedies.

 

(a)           Upon the occurrence of an Event of Default specified in Section
7.1(f) or Section 7.1(g), immediately and without notice, (i) all Obligations
under the Loan Documents shall automatically become immediately due and payable,
without presentment, demand, protest, notice of protest, default, or dishonor,
notice of intent to accelerate maturity, notice of acceleration of maturity, or
other notice of any kind, except as may be provided to the contrary elsewhere
herein, all of which are hereby expressly waived by the Borrower and the
Guarantors and (ii) the Commitment shall immediately cease and terminate unless
and until reinstated by the Lender in writing.

 

(b)           Upon the occurrence of any Event of Default other than those
specified in Section 7.1(f) or Section 7.1(g), (i) the Lender may, by notice in
writing to the Borrower, declare all Obligations under the Loan Documents
immediately due and payable, without presentment, demand, protest, notice of
protest, default, or dishonor, notice of intent to accelerate maturity, notice
of acceleration of maturity, or other notice of any kind, except as may be
provided to the contrary elsewhere herein, all of which are hereby expressly
waived by the Borrower and the Guarantors and (ii) the Lender may declare the
Commitment terminated, whereupon the Commitment shall immediately cease and
terminate unless and until reinstated by the Lender in writing.

 

(c)           Upon the occurrence of any Event of Default, the Lender may, in
addition to the foregoing in this Section 7.2, exercise any or all of the rights
and remedies provided by law or pursuant to the Loan Documents.

 

(d)           Should the Obligations under the Loan Documents become immediately
due and payable in accordance with any of the preceding subsections of this
Section 7.2, the obligation of the Borrower with respect to the L/C Exposure
shall be to provide cash as collateral therefor, to be held and administered by
the Lender as provided in Section 2.10 with respect to mandatory prepayments
and, failing receipt by the Lender of immediate payment in full of the Loan
Balance, any additional Obligations then due and payable, and all accrued and
unpaid interest and fees and such cash to serve as collateral for the L/C
Exposure, the Lender shall be entitled to exercise remedies based on the
existence of an Event of Default.

 

(e)           Funds received by the Lender from the Borrower or any of the
Guarantors when an Event of Default has occurred shall be applied (i) first, to
fees and expenses due pursuant to the terms of this Agreement or any other Loan
Document, (ii) second, to accrued interest on the Obligations under the Loan
Documents, (iii) third, to the Loan Balance, in any manner elected by the
Lender, and any other Obligations then due and payable, pro rata in accordance
with the ratio of the Loan Balance or such other Obligations, as the case may
be, to the sum of the Loan Balance and such other Obligations and (iv) as
provided in subsection (d) immediately above, if applicable.

 

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ARTICLE VIII

 

MISCELLANEOUS

 

8.1          Assignments; Participations.

 

(a)           Neither the Borrower nor any of the Guarantors may assign any of
its rights or delegate any of its obligations under any Loan Document without
the prior consent of the Lender.

 

(b)           Except when a Default or an Event of Default shall have occurred
and is continuing, with the consent of the Borrower (which shall not be
unreasonably withheld or delayed in either case), the Lender or any assignee of
the Lender may assign to one or more assignees all or a portion of its rights
and obligations under this Agreement; provided, however, (i) such consent shall
not be required with respect to an assignment from the Lender to one or more
Affiliates of the Lender and (ii) such consent shall not be required with
respect to an assignment from the Lender to one or more Approved Funds or
Affiliates of Approved Funds.  Upon the effectiveness of any assignment pursuant
to this Section 8.1(b), the assignee will become a “Lender,” if not already a
“Lender,” for all purposes of the Loan Documents, and the assignor shall be
relieved of its obligations hereunder to the extent of such assignment.  If the
assignor no longer holds any rights or obligations under this Agreement, such
assignor shall cease to be a “Lender” hereunder, except that its rights under
Section 5.17, Section 5.21 and Section 5.22, shall not be affected.

 

(c)           The Lender or any assignee of the Lender may transfer, grant, or
assign participations in all or any portion of its interests hereunder to any
Person pursuant to this Section 8.1(c), provided, however, that, in such event,
the Lender shall remain the “Lender” for all purposes of this Agreement and the
transferee of such participation shall not constitute a “Lender” hereunder.  In
the case of any such participation, the participant shall not have any rights
under any Loan Document, the rights of the participant in respect of such
participation to be against the granting Lender as set forth in the agreement
with such Lender creating such participation, and all amounts payable by the
Borrower hereunder shall be determined as if such Lender had not sold such
participation.

 

(d)           The Lender may furnish any information concerning the Borrower or
any of the Guarantors in the possession of the Lender from time to time to its
permitted assignees and participants and prospective assignees and
participants.  The Lender shall require any Person receiving any such
information to agree, in writing, to keep all such information confidential.

 

(e)           Notwithstanding anything in this Section 8.1 to the contrary, the
Lender may assign and pledge the Note or any interest therein to any Federal
Reserve Bank or the United States Treasury as collateral security pursuant to
Regulation A of the Board of Governors of the Federal Reserve System and any
operating circular issued by such Federal Reserve System and/or such Federal
Reserve Bank.  No such assignment or pledge shall release the Lender from its
obligations hereunder.

 

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(f)            Notwithstanding any other provisions of this Section 8.1, no
transfer or assignment of the interests or obligations of the Lender or grant of
participations therein shall be permitted if such transfer, assignment or grant
would require the Borrower to file a registration statement with the Securities
and Exchange Commission or any successor Governmental Authority or qualify the
Loans under the “Blue Sky” laws of any state.

 

8.2          Survival of Representations, Warranties, and Covenants.  All
representations and warranties of the Borrower and the Guarantors and all
covenants and agreements of the Borrower and the Guarantors herein made shall
survive the execution and delivery of the Note and the other Loan Documents and
shall remain in force and effect so long as any Obligation is outstanding or any
Commitment exists.

 

8.3          Notices and Other Communications.  Except as to oral notices
expressly authorized herein, which oral notices shall be confirmed in writing,
all notices, requests, and communications hereunder shall be in writing
(including by facsimile, electronic mail or other electronic form).  Unless
otherwise expressly provided herein, any such notice, request, demand, or other
communication shall be deemed to have been duly given or made when delivered by
hand or by a nationally-recognized overnight courier service, or, in the case of
delivery by mail, five days after being deposited in the mail, certified mail,
return receipt requested, postage prepaid, or, in the case of facsimile notice,
when receipt thereof is acknowledged orally or by written confirmation report,
or, in the case of electronic mail, when received, addressed as follows:

 

(a)

if to the Lender, to:

 

 

 

Texas Capital Bank, N.A.

 

One Riverway, Suite 2100

 

Houston, Texas 77056

 

Attention: Energy Banking

 

Facsimile: (832) 308-7042

 

E-mail: david.mccarver@texascapitalbank.com

 

 

(b)

if to the Borrower or any Guarantor, to:

 

 

 

2500 City West Blvd.

 

Suite 1300

 

Houston, Texas 77042

 

Attention: Sterling McDonald

 

Facsimile: (713) 935-0199

 

E-mail: smcdonald@evolutionpetroleum.com

 

Any party may, by proper written notice hereunder to the others, change the
individuals or addresses to which such notices to it shall thereafter be sent.

 

8.4          Parties in Interest.  Subject to the restrictions on changes in
structure set forth in Section 6.10 and other applicable restrictions contained
herein, all covenants and agreements herein contained by or on behalf of the
Borrower, any of the other Guarantors, or the Lender

 

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shall be binding upon and inure to the benefit of the Borrower, any of the other
Guarantors, or the Lender, as the case may be, and their respective legal
representatives, successors, and permitted assigns.

 

8.5          Renewals; Extensions.  All provisions of this Agreement relating to
the Note shall apply with equal force and effect to each promissory note
hereafter executed which in whole or in part represents a renewal, extension,
rearrangement, modification, replacement, restatement, and/or increase of all or
any part of the Indebtedness of the Borrower under this Agreement, the Note or
any other Loan Document.

 

8.6          Rights of Third Parties.  All provisions herein are imposed solely
and exclusively for the benefit of the Lender, the Borrower and the Guarantors. 
No other Person shall have any right, benefit, priority, or interest hereunder
or as a result hereof or have standing to require satisfaction of provisions
hereof in accordance with their terms.

 

8.7          No Waiver; Rights Cumulative.  No course of dealing on the part of
the Lender or its officers or employees, nor any failure or delay by the Lender
with respect to exercising any of its rights under any Loan Document shall
operate as a waiver thereof.  The rights of the Lender under the Loan Documents
shall be cumulative and the exercise or partial exercise of any such right shall
not preclude the exercise of any other right.  Neither the making of any Loan
nor the issuance of any Letter of Credit shall constitute a waiver of any of the
covenants, warranties or conditions of the Borrower contained herein.  In the
event the Borrower is unable to satisfy any such covenant, warranty or
condition, neither the making of any Loan nor the issuance of any Letter of
Credit shall have the effect of precluding the Lender from thereafter declaring
such inability to be an Event of Default as hereinabove provided.

 

8.8          Survival Upon Unenforceability.  In the event any one or more of
the provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.

 

8.9          Amendments; Waivers.  Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
amendment, waiver, discharge or termination is sought.  Subject to the preceding
sentence, any provision of this Agreement or any other Loan Document may be
amended, modified or waived by the Borrower, the Guarantors and the Lender.

 

8.10        Controlling Agreement.  In the event of a conflict between the
provisions of this Agreement and those of any other Loan Document, the
provisions of this Agreement shall control.

 

8.11        RESERVED

 

8.12        Governing Law.  THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE
CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED

 

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BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAW.

 

8.13        Waiver of Rights to Jury Trial.  THE BORROWER, THE GUARANTORS AND
THE LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY AND
UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT,
PROCEEDING, COUNTERCLAIM OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT 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.  THE PROVISIONS OF THIS
SECTION 8.13 ARE A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS
AGREEMENT.

 

8.14        Jurisdiction and Venue.  SUBJECT TO THE PROVISIONS OF SECTION 8.13,
ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN
CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN
COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS.  IN SUCH REGARD, THE
BORROWER AND EACH OF THE GUARANTORS HEREBY SUBMITS TO THE JURISDICTION OF ANY
LOCAL, STATE OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND
HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR
VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS
SECTION 8.14.

 

8.15        Integration.  THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE
THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO AND THERETO WITH RESPECT TO THE
SUBJECT HEREOF AND THEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE
PARTIES HERETO AND THERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT
HEREOF AND THEREOF, INCLUDING ANY TERM SHEET PROVIDED TO THE BORROWER BY THE
LENDER.  FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN
DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN 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 BETWEEN SUCH PARTIES.

 

8.16        Waiver of Punitive and Consequential Damages.  EACH OF THE BORROWER,
THE GUARANTORS AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND
IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT IT MAY LAWFULLY AND EFFECTIVELY DO
SO, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY DISPUTE BASED HEREON, OR
DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH
THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED
THEREWITH, BEFORE OR AFTER MATURITY, ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES
AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
SECTION 8.16.

 

55

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

 

8.17        Counterparts.  For the convenience of the parties, this Agreement
may be executed in multiple counterparts and by different parties hereto in
separate counterparts, each of which for all purposes shall be deemed to be an
original, and all such counterparts shall together constitute but one and the
same Agreement and shall be enforceable as of the date hereof upon the execution
of one or more counterparts hereof by each of the parties hereto.  In this
regard, each of the parties hereto acknowledges that a counterpart of this
Agreement containing a set of counterpart execution pages reflecting the
execution of each party hereto shall be sufficient to reflect the execution of
this Agreement by each party hereto and shall constitute one instrument.

 

8.18        USA Patriot Act Notice.  The Lender hereby notifies the Borrower
that, pursuant to the requirements of the USA Patriot Act, it is required to
obtain, verify and record information that identifies the Borrower, which
information includes the name and address of the Borrower and other information
that will allow the Lender to identify the Borrower in accordance with the USA
Patriot Act.

 

8.19        Tax Shelter Regulations.  The Borrower does not intend to treat the
Loans and related transactions hereunder and under the other Loan Documents as a
“reportable transaction” (within the meanings under current Treasury Regulation
Section 1.6011-4 and Proposed Treasury Regulation Section 1.6011-4, promulgated
on November 1, 2006).  In the event the Borrower determines to take any action
inconsistent with the foregoing statement, it will promptly notify the Lender
thereof.  If the Borrower so notifies the Lender, the Borrower acknowledges that
the Lender may treat the Loans and related transactions hereunder and under the
other Loan Documents as part of a transaction that is subject to current
Treasury Regulation Section 301.6112-1 or Proposed Treasury Regulation
Section 301.6112-1, promulgated on November 1, 2006, and, in such case, the
Lender will maintain the lists and other records required, if any, by such
Treasury Regulations.

 

8.20        Contribution and Indemnification.  The Borrower and each Guarantor
(collectively the “Obligors” and each an “Obligor”) agree that while their
respective obligations to the Lender under the Loan Documents are joint and
several as to the Lender, each of the Obligors shall be liable as among other
Obligors only for its Proportionate Share of the indebtedness guaranteed or
secured or otherwise assumed pursuant to the applicable Loan Document calculated
as of the time the applicable portion of such indebtedness was incurred.  If at
any time any Obligor (an “Indemnified Obligor”) makes any payment to the Lender
or otherwise incurs any other expenses (collectively, the “Indemnified Outlay”)
under the Loan Documents, the Indemnified Obligor shall have the right to make
demand on any or all of the other Obligors (each an “Indemnifying Obligor”) for
the payment to the Indemnified Obligor of the amount (the “Excess Amount”) by
which the Indemnified Outlay exceeds the Indemnified Obligor’s Proportionate
Share of the Indemnified Outlay and thereupon the Indemnifying Obligors upon
which demand has been so made shall pay to the Indemnified Obligor the Excess
Amount; provided, however, that no Indemnifying Obligor shall be liable to pay
to any Indemnified Obligor for more than the Proportionate Share of the
Indemnifying Obligor of the Excess Amount.  The remedies available to any
Guarantor pursuant to the provisions of this Section 8.20 are not exclusive. 
All rights and claims of contribution and reimbursement under this Section 8.20
shall be subordinate in right of payment to the prior payment in full of the
Obligations.  The provisions of this Section 8.20 shall, to the extent expressly
inconsistent with any provision in any Loan Document, supersede such
inconsistent provision.

 

56

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

 

IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.

 

 

BORROWER:

 

 

 

EVOLUTION PETROLEUM

 

CORPORATION

 

 

 

 

 

By:

/s/

 

 

Sterling H. McDonald

 

 

Vice President

 

 

 

 

 

INITIAL GUARANTORS:

 

 

 

NGS SUB. CORP.

 

 

 

 

 

By:

/s/

 

 

Sterling H. McDonald

 

 

Chief Financial Officer

 

 

 

 

 

TERTIAIRE RESOURCES COMPANY

 

 

 

 

 

By:

/s/

 

 

Sterling H. McDonald

 

 

Vice President

 

 

 

 

 

NGS TECHNOLOGIES, INC.

 

 

 

 

 

By:

/s/

 

 

Sterling H. McDonald

 

 

Chief Financial Officer

 

 

 

 

 

EVOLUTION OPERATING CO., INC.

 

 

 

 

 

By:

/s/

 

 

Sterling H. McDonald

 

 

Vice President

 

(Signatures continue on following page)

 

57

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

 

 

LENDER:

 

 

 

TEXAS CAPITAL BANK, N.A.

 

 

 

 

 

By:

/s/

 

 

W. David McCarver IV

 

 

Senior Vice President

 

 

 

Applicable Lending Office

 

for Base Rate Loans and

 

LIBO Rate Loans:

 

 

 

One Riverway, Suite 2100

 

Houston, Texas 77056

 

58

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

 

Schedule 4.9

 

LIABILITIES AND LITIGATION

 

Liabilities:

 

None.

 

Litigation:

 

None.

 

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

 

Schedule 4.13

 

ENVIRONMENTAL MATTERS

 

None.

 

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

 

Schedule 4.17

 

REFUNDS

 

None.

 

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

 

Schedule 4.18

 

GAS CONTRACTS

 

None.

 

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

 

Schedule 4.20

 

CASUALTIES

 

None.

 

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

 

Schedule 4.22

 

SUBSIDIARIES

 

Subsidiaries of Borrower

 

NGS Sub
Tertiaire
NGS Technologies
Evolution Operating
Arkla Petroleum, LLC

 

Subsidiaries of NGS Sub

 

Arkla Petroleum, LLC

 

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

 

Schedule 4.24

 

TAXPAYER I.D. AND ORGANIZATION NUMBERS

 

Entity

 

Taxpayer I.D. No.

 

Organization No.

 

 

 

 

 

Borrower

 

41-1781991

 

C1747-2002

NGS Sub

 

80-0076903

 

3706728

Tertiaire

 

80-0979330

 

800979300

NGS Technologies

 

59-3818771

 

3993400

Evolution Operating

 

26-0604132

 

800821132

 

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

 

EXHIBIT I

 

[FORM OF NOTE]

 

PROMISSORY NOTE

 

(this “Note”)

 

$50,000,000.00

 

Houston, Texas

 

February 29, 2012

 

FOR VALUE RECEIVED and WITHOUT GRACE (except to the extent, if any, provided in
the Credit Agreement referred to hereinafter), the undersigned (“Maker”)
promises to pay to the order of Texas Capital Bank, N.A. (“Payee”), at the
Principal Office (as such term is defined in the Credit Agreement referred to
hereinafter) of Payee, FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00) or so
much thereof as may be advanced against this Note and remains unpaid pursuant to
the Credit Agreement dated as of February 29, 2012 by and between Maker and
Payee (as amended, supplemented, restated or otherwise modified from time to
time, the “Credit Agreement”), together with interest at the rates and
calculated as provided in the Credit Agreement.

 

Reference is hereby made to the Credit Agreement for matters governed thereby,
including, without limitation, certain events which will entitle the holder
hereof to accelerate the maturity of all amounts due hereunder.  Capitalized
terms used but not defined in this Note shall have the respective meanings
assigned to such terms in the Credit Agreement.

 

This Note is issued pursuant to, is the “Note” under, and is payable as provided
in the Credit Agreement.  Subject to compliance with applicable provisions of
the Credit Agreement, Maker may at any time pay the full amount or any part of
this Note without the payment of any premium or fee, but such payment shall not,
until this Note is fully paid and satisfied, excuse the payment as it becomes
due of any payment on this Note provided for in the Credit Agreement.

 

THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS,
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW.

 

 

EVOLUTION PETROLEUM CORPORATION

 

 

 

 

 

By:

 

 

 

Sterling H. McDonald

 

 

Vice President

 

Exhibit I-i

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

 

EXHIBIT II

 

[FORM OF BORROWING REQUEST]

 

[Date]

 

Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas 77056
Attention:  Energy Banking

 

Re:                             Credit Agreement dated as of February 29, 2012,
initially by and among Evolution Petroleum Corporation, a Nevada corporation,
the parties identified therein as the “Initial Guarantors”, and Texas Capital
Bank, N.A., a national banking association (as amended, supplemented, restated
or otherwise modified from time to time, the “Credit Agreement”)

 

Ladies and Gentlemen:

 

Pursuant to the Credit Agreement, the undersigned hereby makes the requests
indicated below:

 

1.                                      Loans

 

(a)                                 Amount of new Loan:  $                 

 

(b)                                 Requested funding date: 
                            , 20     

 

(c)                                  $                             of such Loan
is to be a Base Rate Loan; and

$                             of such Loan is to be a LIBO Rate Loan.

 

(d)                                 Requested Interest Period for LIBO Rate
Loan:          months.

 

2.                                      Continuation or conversion of LIBO Rate
Loan maturing on                       :

 

(a)                                 Amount to be continued as a LIBO Rate Loan
is $                            , with an Interest Period of
                             months; and

 

(b)                                 Amount to be converted to a Base Rate Loan
is $                            .

 

3.                                      Conversion of Base Rate Loan:

 

(a)                                 Requested conversion date:
                        , 20      .

 

(b)                                 Amount to be converted to a LIBO Rate Loan
is $                      , with an Interest Period of            months.

 

Exhibit II-i

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

 

4.                                      Certification

 

The undersigned individual certifies that [s]he is the                      of
the Borrower, has obtained all consents necessary, and as such [s]he is
authorized to execute this request on behalf of the Borrower.  The undersigned
officer further certifies, represents and warrants, on behalf of the Borrower,
in the capacity indicated below and not as an individual, that the Borrower is
entitled to receive the requested borrowing under the terms and conditions of
the Credit Agreement and that, to the knowledge of such undersigned individual,
there exists, as of the date hereof, neither a Default nor an Event of Default
under the Credit Agreement.

 

Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

 

 

Very truly yours,

 

 

 

EVOLUTION PETROLEUM CORPORATION

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

Exhibit II-ii

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

 

EXHIBIT III

 

[FORM OF COMPLIANCE CERTIFICATE]

 

[Date]

 

Texas Capital Bank, N.A.
One Riverway, Suite 2100
Houston, Texas 77056
Attention:  Energy Banking

 

Re:                             Credit Agreement dated as of February 29, 2012,
initially by and among Evolution Petroleum Corporation, a Nevada corporation,
the parties identified therein as the “Initial Guarantors”, and Texas Capital
Bank, N.A., a national banking association (as amended, supplemented, restated
or otherwise modified from time to time, the “Credit Agreement”)

 

Ladies and Gentlemen:

 

Pursuant to applicable requirements of the Credit Agreement, the undersigned, as
a Responsible Officer of the Borrower, in his capacity as such and not
individually, hereby certifies to you the following information as true and
correct as of the date hereof or for the period indicated, as the case may be:

 

1.                                      [To the knowledge of the undersigned, no
Default or Event of Default (including, but not limited to, any arising from any
violation or alleged violation of any Environmental Law) exists as of the date
hereof or has occurred since the date of our previous certification to you, if
any.]

 

[To the knowledge of the undersigned, the following Defaults or Events of
Default (including, but not limited to, any arising from any violation or
alleged violation of any Environmental Law) exist as of the date hereof or have
occurred since the date of our previous certification to you, if any, and the
actions set forth below are being taken to remedy such circumstances:]

 

2.                                      The compliance of the Borrower, on a
consolidated basis with its consolidated Subsidiaries, with the financial
covenants of the Credit Agreement, as of the close of business on
                                                  , is evidenced by the
following:

 

(a)                                 Section 6.14:   Current Ratio

 

Required

 

Actual

Not less than 1.50 to 1.00

 

      to 1.00

 

(b)                                 Section 6.15:   Total Funded Indebtedness to
EBITDA Ratio

 

Required

 

Actual

Not greater than 2.50 to 1.00

 

      to 1.00

 

Exhibit III-i

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

 

(c)                                  Section 6.16:   Interest Coverage Ratio

 

Required

 

Actual

Not less than 3.00 to 1.00

 

      to 1.00

 

(See attached detailed calculation of the above)

 

3.             The Borrower and the Subsidiaries of the Borrower which are
Guarantors, if any, [are] [are not] in compliance with the provisions of
Section 6.1 of the Credit Agreement relating to Commodity Hedge Agreements.

 

4.             No Material Adverse Effect has occurred since the date of the
consolidated Financial Statements of the Borrower as of
[                          ] and for the period then ended.

 

Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

 

 

Very truly yours,

 

 

 

EVOLUTION PETROLEUM CORPORATION

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

Exhibit III-ii

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

 

EXHIBIT IV

 

[FORM OF OPINION OF COUNSEL]

 

(See following pages)

 

Exhibit IV-i

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