Exhibit 10.8

Execution Version

 

 

$25,000,000

 

SUBORDINATED CREDIT AGREEMENT

 

Among

 

CANO PETROLEUM, INC.

 

as Borrower,

 

THE LENDERS PARTY HERETO FROM TIME TO TIME

 

as Lenders,

 

and

 

UNIONBANCAL EQUITIES, INC.

 

as Administrative Agent

 

December 17, 2008

 

 

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

 

TABLE OF CONTENTS

 

 

 

Page

ARTICLE I                                DEFINITIONS AND ACCOUNTING TERMS

1

 

 

 

Section 1.01

Certain Defined Terms

1

Section 1.02

Computation of Time Periods

19

Section 1.03

Accounting Terms; Changes in GAAP

19

Section 1.04

Types of Advances

20

Section 1.05

Miscellaneous

20

 

 

 

ARTICLE II                            CREDIT FACILITIES

20

 

 

 

Section 2.01

Commitment for Advances

20

Section 2.02

[Reserved]

21

Section 2.03

Method of Borrowing

21

Section 2.04

Reduction of the Commitment

23

Section 2.05

Prepayment of Advances

24

Section 2.06

Repayment of Advances

26

Section 2.07

Commitment Fees

26

Section 2.08

Fees

26

Section 2.09

Interest

26

Section 2.10

Payments and Computations

27

Section 2.11

Sharing of Payments, Etc

28

Section 2.12

Breakage Costs

29

Section 2.13

Increased Costs

29

Section 2.14

Taxes

30

Section 2.15

Replacement of Lender

32

Section 2.16

Increase in Commitments

33

 

 

 

ARTICLE III                        CONDITIONS OF LENDING

34

 

 

 

Section 3.01

Conditions Precedent to Initial Credit Extension

34

Section 3.02

Conditions Precedent to All Borrowings

37

 

 

 

ARTICLE IV                        REPRESENTATIONS AND WARRANTIES

37

 

 

 

Section 4.01

Existence; Subsidiaries

37

Section 4.02

Power

38

Section 4.03

Authorization and Approvals

38

Section 4.04

Enforceable Obligations

38

Section 4.05

Financial Statements

38

Section 4.06

True and Complete Disclosure

39

Section 4.07

Litigation; Compliance with Laws

39

Section 4.08

Use of Proceeds

40

Section 4.09

Investment Company Act

40

Section 4.10

Federal Power Act

40

 

i

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

 

Section 4.11

Taxes

40

Section 4.12

Pension Plans

41

Section 4.13

Condition of Property; Casualties

41

Section 4.14

No Burdensome Restrictions; No Defaults

41

Section 4.15

Environmental Condition

42

Section 4.16

Permits, Licenses, Etc

42

Section 4.17

Gas Contracts

43

Section 4.18

Liens; Titles, Leases, Etc

43

Section 4.19

Solvency and Insurance

43

Section 4.20

Hedging Agreements

43

Section 4.21

Material Agreements

43

 

 

 

ARTICLE V                            AFFIRMATIVE COVENANTS

44

 

 

 

Section 5.01

Compliance with Laws, Etc

44

Section 5.02

Maintenance of Insurance

44

Section 5.03

Preservation of Corporate Existence, Etc

45

Section 5.04

Payment of Taxes, Etc

45

Section 5.05

Visitation Rights

45

Section 5.06

Reporting Requirements

45

Section 5.07

Maintenance of Property

49

Section 5.08

Agreement to Pledge

49

Section 5.09

Use of Proceeds

49

Section 5.10

Title Evidence and Opinions

50

Section 5.11

Further Assurances; Cure of Title Defects

50

Section 5.12

Hedging Arrangements

50

Section 5.13

Bank Accounts

51

 

 

 

ARTICLE VI                        NEGATIVE COVENANTS

51

 

 

 

Section 6.01

Liens, Etc

51

Section 6.02

Debts, Guaranties, and Other Obligations

52

Section 6.03

Agreements Restricting Liens and Distributions

53

Section 6.04

Merger or Consolidation; Asset Sales

53

Section 6.05

Restricted Payments

54

Section 6.06

Investments

54

Section 6.07

Affiliate Transactions

55

Section 6.08

Compliance with ERISA

55

Section 6.09

Sale-and-Leaseback

56

Section 6.10

Change of Business

56

Section 6.11

Organizational Documents, Name Change

56

Section 6.12

Use of Proceeds

56

Section 6.13

Gas Imbalances, Take-or-Pay or Other Prepayments

57

Section 6.14

Limitation on Speculative Hedging

57

Section 6.15

Additional Subsidiaries; Additional Oil and Gas Properties

57

Section 6.16

Account Payables

57

Section 6.17

Current Ratio

57

 

ii

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

 

Section 6.18

Leverage Ratio

58

Section 6.19

Interest Coverage Ratio

58

Section 6.20

Senior Debt

58

Section 6.21

Non-Guarantor Subsidiary

58

Section 6.22

Equity Issuance

58

Section 6.23

Minimum Asset Coverage Ratio

59

 

 

 

ARTICLE VII                    EVENTS OF DEFAULT; REMEDIES

59

 

 

 

Section 7.01

Events of Default

59

Section 7.02

Optional Acceleration of Maturity

62

Section 7.03

Automatic Acceleration of Maturity

62

Section 7.04

Right of Set-off

63

Section 7.05

Non-exclusivity of Remedies

63

Section 7.06

Application of Proceeds

63

 

 

 

ARTICLE VIII                THE ADMINISTRATIVE AGENT

64

 

 

 

Section 8.01

Authorization and Action

64

Section 8.02

Administrative Agent’s Reliance, Etc

64

Section 8.03

The Administrative Agent and Its Affiliates

65

Section 8.04

Lender Credit Decision

65

Section 8.05

Indemnification

65

Section 8.06

Successor Administrative Agent

66

Section 8.07

Collateral Matters

67

 

 

 

ARTICLE IX                       MISCELLANEOUS

67

 

 

 

Section 9.01

Amendments, Etc

67

Section 9.02

Notices, Etc

68

Section 9.03

No Waiver; Remedies

68

Section 9.04

Costs and Expenses

68

Section 9.05

Binding Effect

69

Section 9.06

Lender Assignments and Participations

69

Section 9.07

Indemnification; Waiver

71

Section 9.08

Execution in Counterparts

72

Section 9.09

Survival of Representations, Etc

72

Section 9.10

Severability

72

Section 9.11

Business Loans

72

Section 9.12

Governing Law; Submission to Jurisdiction

72

Section 9.13

Subordination and Intercreditor Agreement

73

Section 9.14

USA Patriot Act

73

Section 9.15

WAIVER OF JURY TRIAL

73

Section 9.16

ORAL AGREEMENTS

73

 

iii

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

 

EXHIBITS:

 

 

 

 

Exhibit A

 

-

 

Form of Assignment and Acceptance

Exhibit B

 

-

 

Form of Compliance Certificate

Exhibit C

 

-

 

Form of Guaranty

Exhibit D

 

-

 

Form of Mortgage

Exhibit E

 

-

 

Form of Note

Exhibit F

 

-

 

Form of Notice of Borrowing

Exhibit G

 

-

 

Form of Notice of Conversion or Continuation

Exhibit H

 

-

 

Form of Pledge Agreement

Exhibit I

 

-

 

Form of Security Agreement

Exhibit J

 

-

 

Form of Transfer Letters

Exhibit K

 

-

 

Form of Borrower’s Counsel Opinion

 

SCHEDULES:

 

 

Schedule I      -

 

Notice Information and Commitments

Schedule 4.01 -

 

Subsidiaries of Borrower

Schedule 4.05 -

 

Existing Debt

Schedule 4.07 -

 

Litigation

Schedule 4.14(a) -

 

Material Debt Documents

Schedule 4.20 -

 

Hedging Contracts

Schedule 4.21 -

 

Material Agreements

 

iv

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

 

SUBORDINATED CREDIT AGREEMENT

 

This Subordinated Credit Agreement dated as of December 17, 2008 (the “Effective
Date”) is among Cano Petroleum, Inc., a Delaware corporation (“Borrower”), the
lenders party hereto from time to time (“Lenders”), and UnionBanCal
Equities, Inc. as administrative agent for such Lenders (in such capacity, the
“Administrative Agent”).

 

The parties hereto agree to as follows:

 

Section 1.

 

DEFINITIONS AND ACCOUNTING TERMS

 

(a)          Certain Defined Terms.  As used in this Agreement, the terms
defined above shall have the meanings set forth therein and the following terms
shall have the following meanings (unless otherwise indicated, such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):

 

“Acceptable Security Interest” in any Property means a Lien which (a) exists in
favor of the Administrative Agent for the benefit of the Secured Parties, (b) is
superior to all Liens or rights of any other Person in the Property encumbered
thereby, other than Permitted Prior Liens, (c) secures the Obligations, and
(d) is perfected and enforceable.

 

“Acquisition” means the purchase by the Borrower or any of its Subsidiaries of
any business, including the purchase of all or substantially all the associated
assets or operations or of stock (or other ownership interests) of a Person
(other than of a wholly-owned Subsidiary of the Borrower).

 

“Adjusted Reference Rate” means, for any day, the fluctuating rate per annum of
interest equal to the greatest of (a) the Reference Rate in effect on such day,
(b) the Federal Funds Rate in effect on such day plus ½ of 1% and (c) the
Eurodollar Rate for an Interest Period of one month which begins on such day
plus 1.50%.

 

“Administrative Agent” means UnionBanCal Equities, Inc., in its capacity as
agent pursuant to Article VIII, and any successor agent pursuant to
Section 8.06.

 

“Advance” means an advance by a Lender to the Borrower pursuant to
Section 2.01(a) as part of a Borrowing and refers to a Reference Rate Advance or
a Eurodollar Rate Advance.

 

“Affiliate” means, as to any Person, any other Person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person or any Subsidiary of such Person.  The
term “control” (including the terms “controlled by” or “under common control
with”) means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of a Control Percentage, by contract, or otherwise.  Without limiting
the generality of the foregoing, a Person shall be deemed to be controlled by
another Person if such other Person

 

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

 

possesses, directly or indirectly, the power to vote 10% or more of the
securities having ordinary voting power for the election of directors, managing
general partners or the equivalent.

 

“Agreement” means this Subordinated Credit Agreement, as the same may be
amended, supplemented, restated, and otherwise modified from time to time.

 

“Applicable Margin” means, (a) with respect to any Eurodollar Advance,
(i) during any time when an Event of Default exists, 8% per annum, and (ii) at
any other time, 6% per annum, and (b) with respect to any Reference Rate
Advance, (i) during any time when an Event of Default exists 6.875% per annum,
and (ii) at any other time, 4.875% per annum.  The Applicable Margin for any
Advance shall change when and as any such Event of Default commences or
terminates and subject to further adjustments as set forth in Section 2.8(d).

 

“Assignment and Acceptance” means an assignment and acceptance entered into by a
Lender and an Eligible Assignee, and accepted by the Administrative Agent, in
substantially the form of the attached Exhibit A.

 

“Availability” means, with respect to a Lender at any time, such Lender’s
Commitment (after giving effect to any increases thereto effected at such time)
at such time minus the aggregate principal amount of all Advances made by such
Lender under this Agreement (whether such Advances are outstanding or have been
paid); provided that, from and after the Commitment Termination Date,
Availability shall be $0.

 

“Borrowing” means a borrowing consisting of Advances made on the same day by the
Lenders pursuant to Section 2.01(a).

 

“Borrowing Base” shall have the definition given to such term in the Senior
Credit Agreement as in effect on the date hereof of as modified in accordance
with the Subordination and Intercreditor Agreement.

 

“Business Day” means a day of the year on which banks are not required or
authorized to close in Dallas, Texas and Los Angeles, California and, if the
applicable Business Day relates to any Eurodollar Rate Advances, on which
dealings are carried on by banks in the London interbank market.

 

“Capital Leases” means, as applied to any Person, any lease of any Property by
such Person as lessee which would, in accordance with GAAP, be required to be
classified and accounted for as a capital lease on the balance sheet of such
Person.

 

“CERCLA” means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, state and local analogs, and all rules and
regulations and requirements thereunder in each case as now or hereafter in
effect.

 

“Certificate of Designation” means the Certificate of Designations, Preferences
and Rights of Series D Convertible Preferred Stock of Cano Petroleum, Inc. which
is filed with the Secretary of State of Delaware on August 31, 2006 and which
has been acknowledged by the Senior Administrative Agent on August 25, 2006.

 

2

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

 

“Change in Control” shall mean the occurrence of any of the following events:
(a) the Borrower ceases to own, either directly or indirectly, 100% of the
Equity Interest in any Subsidiary other than as a result of a sale of assets or
merger permitted under Section 6.04, (b) any “person” or “group” (as such terms
are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934)
other than a Permitted Holder becomes the “beneficial owner” (as defined in
Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a
person or group shall be deemed to have “beneficial ownership” of all securities
that such person or group has the right to acquire (such right, an “option
right”), whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 33% or more of the Equity Interest of the
Borrower entitled to vote for members of the board of directors or equivalent
governing body of the Borrower on a fully-diluted basis (and taking into account
all such securities that such person or group has the right to acquire pursuant
to any option right), or (c) during any period of 12 consecutive months, a
majority of the members of the board of directors or other equivalent governing
body of the Borrower cease to be composed of individuals (i) who were members of
that board or equivalent governing body on the first day of such period,
(ii) whose election or nomination to that board or equivalent governing body was
approved by individuals referred to in clause (i) above constituting at the time
of such election or nomination at least a majority of that board or equivalent
governing body or (iii) whose election or nomination to that board or other
equivalent governing body was approved by individuals referred to in clauses
(i) and (ii) above constituting at the time of such election or nomination at
least a majority of that board or equivalent governing body.   For purposes of
this definition, “Permitted Holder” means any of the following: (A) any Person
that is the “beneficial owner” (as referred to above) of an Equity Interest in
the Borrower on the date hereof, (B) any such Person’s estate, spouse and lineal
descendants and the legal representative of any of the foregoing, (C) the
trustees of any bona fide trusts of which any of the foregoing are the sole
beneficiaries and grantors, and (D) any corporation, limited partnership,
limited liability company, or similar entity, all of the Voting Securities of
which is owned by any of the foregoing.

 

“Code” means the Internal Revenue Code of 1986, as amended, and any successor
statute.

 

“Collateral” means (a) all “Collateral”, “Pledged Collateral” and “Mortgaged
Properties” (as defined in each of the Mortgages, the Security Agreements, and
the Pledge Agreement, as applicable) or similar terms used in the Security
Instruments, and (b) all amounts contained in the Borrower’s and its
Subsidiaries’ bank accounts.

 

“Commitment” means the amount set opposite such Lender’s name on the Schedule I
hereof as its Commitment, or if such Lender has entered into any Assignment and
Acceptance, as set forth for such Lender as its Commitment in the Register
maintained by the Administrative Agent pursuant to Section 9.06(c), or if such
Lender has increased its Commitment under Section 2.16 below, as set forth in
the agreement increasing such Commitment or joinder agreement, as applicable, as
such amount may be reduced, increased or terminated pursuant to Section 2.04,
2.16 or Article VII or otherwise under this Agreement.  The aggregate amount of
the Commitments on the date hereof is $15,000,000.00.

 

“Commitment Termination Date” means earlier of (a) March 17, 2009 and (b) the
earlier termination in whole of the Commitments pursuant to Section 2.04 or
Article VII.

 

3

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

 

“Compliance Certificate” means a compliance certificate in the form of the
attached Exhibit B signed by a Responsible Officer of the Borrower.

 

“Consolidated Net Income” means, with respect to the Borrower and its
consolidated Subsidiaries, for any period, the net income for such period after
taxes, as determined in accordance with GAAP, excluding, however,
(a) extraordinary items, including (i) any net non-cash gain or loss during such
period arising from the sale, exchange, retirement or other disposition of
capital assets (such term to include all fixed assets and all securities) other
than in the ordinary course of business, and (ii) any write-up or write-down of
assets and (b) the cumulative effect of any change in GAAP.

 

“Control Percentage” means, with respect to any Person, the percentage of the
outstanding Equity Interest (including any options, warrants or similar rights
to purchase such Equity Interest) of such Person having ordinary voting power
which gives the direct or indirect holder of such Equity Interest the power to
elect a majority of the board of directors (or other applicable governing body)
of such Person.

 

“Controlled Group” means all members of a controlled group of corporations and
all businesses (whether or not incorporated) under common control which,
together with the Borrower, are treated as a single employer under Section 414
of the Code.

 

“Convert,” “Conversion,” and “Converted” each refers to a conversion of Advances
of one Type into Advances of another Type pursuant to Section 2.03(b).

 

“Credit Extension” means an Advance made by any Lender.

 

“Debt,” for any Person, means without duplication:

 

(i)                                     indebtedness of such Person for borrowed
money;

 

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

 

(iii)                               obligations of such Person to pay the
deferred purchase price of Property or services (including, without limitation,
obligations that are non-recourse to the credit of such Person but are secured
by the assets of such Person, but excluding trade accounts payable);

 

(iv)                              obligations of such Person as lessee under
Capital Leases and obligations of such Person in respect of synthetic leases;

 

(v)                                 obligations of such Person under letters of
credit and agreements relating to the issuance of letters of credit or
acceptance financing;

 

(vi)                              obligations of such Person under any Hedge
Contract;

 

(vii)                           obligations of such Person owing in respect of
redeemable preferred stock or other preferred Equity Interest of such Person;

 

4

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

 

(viii)                        any obligations of such Person owing in connection
with any volumetric or production prepayments;

 

(ix)                                obligations of such Person under direct or
indirect guaranties in respect of, and obligations (contingent or otherwise) of
such Person to purchase or otherwise acquire, or otherwise to assure a creditor
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clauses (a) through (h) above;

 

(x)                                   indebtedness or obligations of others of
the kinds referred to in clauses (a) through (i) above secured by any Lien on or
in respect of any Property of such Person; and

 

(xi)                                all liabilities of such Person in respect of
unfunded vested benefits under any Plan.

 

“Debt Issuance” means the issuance by the Borrower of Debt in the form of
convertible notes.

 

“Debt Issuance Proceeds” means, with respect to any Debt Issuance, all cash and
cash equivalent investments received by the Borrower from such Debt Issuance
after payment of, or provision for, all underwriter fees and expenses, SEC and
blue sky fees, printing costs, fees and expenses of accountants, lawyers and
other professional advisors, brokerage commissions and other out-of-pocket fees
and expenses actually incurred in connection with such Debt Issuance.

 

“Default” means (a) an Event of Default or (b) any event or condition which with
notice or lapse of time or both would become an Event of Default.

 

“Defaulting Lender” means any Lender that (a) has failed to fund its Pro Rata
Share of any Advance required to be funded by it hereunder within one Business
Day of the date required to be funded by it hereunder unless such failure has
been cured within three Business Days (or such longer time period accepted by
the Borrower and the Administrative Agent), (b) has otherwise failed to pay over
to the Administrative Agent or any other Lender any other amount required to be
paid by it hereunder within one Business Day of the date when due, unless the
subject of a good faith dispute or unless such failure has been cured within
three Business Days (or such longer time period accepted by the Administrative
Agent or such other Lender, as applicable), or (c) has, or has an Affiliate that
has, been deemed insolvent or become the subject of a bankruptcy or insolvency
proceeding.

 

“Dollars” and “$” means lawful money of the United States of America.

 

“EBITDA” means, for any period, without duplication, (a) Consolidated Net Income
for such period plus (b) to the extent deducted in determining Consolidated Net
Income, Interest Expense, taxes, depreciation, amortization, depletion and other
non-cash charges for such period (including any provision for the reduction in
the carrying value of assets recorded in accordance with GAAP and including
non-cash charges resulting from the requirements of SFAS 133 or 143) for such
period minus (c) all non-cash items of income which were included in determining
such Consolidated Net Income (including non-cash income resulting from the
requirements of SFAS 133 or 143) plus (d) the net gain on the Pantwist Sale;
provided that this clause (d) shall only apply for the financial covenant ratios
calculated at, and as of, the fiscal quarter ending

 

5

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

 

December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009, plus
(e) without duplication, any items provided for in clause (a), (b) and (c) above
associated with Pantwist, LLC for any period that such Person was a wholly-owned
Subsidiary of the Borrower; provided that, such EBITDA shall be subject to pro
forma adjustments for the Acquisition and for acquisitions and non-ordinary
course asset sales assuming that such transactions had occurred on the first day
of the determination period, which adjustments shall be made in accordance with
the guidelines for pro forma presentations set forth by the SEC or in a manner
otherwise acceptable to the Administrative Agent.

 

“Eligible Assignee” means (a) any Lender, (b) any Subsidiary or Affiliate of a
Lender, and (c) any commercial bank or other financial institution (i) approved
by the Administrative Agent in its sole discretion, and (ii) unless an Event of
Default has occurred and is continuing, reasonably acceptable to the Borrower.

 

“Engineering Report” means either an Independent Engineering Report or an
Internal Engineering Report.

 

“Environment” or “Environmental” shall have the meanings set forth in 42 U.S.C. 
9601(8) (1988).

 

“Environmental Claim” means any third party (including governmental agencies and
employees) action, lawsuit, claim, demand, regulatory action or proceeding,
order, decree, consent agreement or notice of potential or actual responsibility
or violation (including claims or proceedings under the Occupational Safety and
Health Acts or similar laws or requirements relating to health or safety of
employees) which seeks to impose liability under any Environmental Law.

 

“Environmental Law” means, as to the Borrower or its Subsidiaries, all Legal
Requirements or common law theories applicable to the Borrower or its
Subsidiaries arising from, relating to, or in connection with the Environment,
health, or safety, including without limitation CERCLA, relating to
(a) pollution, contamination, injury, destruction, loss, protection, cleanup,
reclamation or restoration of the air, surface water, groundwater, land surface
or subsurface strata, or other natural resources; (b) solid, gaseous or liquid
waste generation, treatment, processing, recycling, reclamation, cleanup,
storage, disposal or transportation; (c) exposure to pollutants, contaminants,
hazardous, or toxic substances, materials or wastes; (d) the safety or health of
employees; or (e) the manufacture, processing, handling, transportation,
distribution in commerce, use, storage or disposal of hazardous or toxic
substances, materials or wastes.

 

“Environmental Permit” means any permit, license, order, approval, registration
or other authorization under Environmental Law.

 

“Equity Interest” means with respect to any Person, any shares, interests,
participation, or other equivalents (however designated) of corporate stock,
membership interests or partnership interests (or any other ownership interests)
of such Person.

 

“Equity Issuance” means any issuance of equity securities or any other Equity
Interests (including any preferred equity securities) by the Borrower or any of
its Subsidiaries other than

 

6

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

 

equity securities issued (i) to the Borrower or one of its Subsidiaries,
(ii) pursuant to employee or director and officer stock option plans in the
ordinary course of business, and (iii) the conversion of previously issued
preferred, convertible Equity Interests or convertible notes to the extent such
Equity Interests and notes were issued in compliance with the terms hereof.

 

“Equity Issuance Proceeds” means, with respect to any Equity Issuance, all cash
and cash equivalent investments received by the Borrower or any of its
Subsidiaries from such Equity Issuance after payment of, or provision for, all
underwriter fees and expenses, SEC and blue sky fees, printing costs, fees and
expenses of accountants, lawyers and other professional advisors, brokerage
commissions and other out-of-pocket fees and expenses actually incurred in
connection with such Equity Issuance.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.

 

“Eurocurrency Liabilities” has the meaning assigned to that term in Regulation D
of the Federal Reserve Board (or any successor), as in effect from time to time.

 

“Eurodollar Rate” means, for the Interest Period for each Eurodollar Rate
Advance comprising the same Borrowing, the interest rate per annum (rounded
upward to the nearest whole multiple of 1/100 of 1% per annum) set forth on the
Reuters Reference LIBOR01 as the London Interbank Offered Rate, for deposits in
Dollars at 11:00 a.m. (London, England time) two Business Days before the first
day of such Interest Period and for a period equal to such Interest Period;
provided that, if no such quotation appears on the Reuters Reference LIBOR01,
the Eurodollar Rate shall be an interest rate per annum equal to the rate per
annum at which deposits in Dollars are offered by the principal office of Union
Bank of California, N.A.  in London, England to prime banks in the London
interbank market at 11:00 a.m.  (London, England time) two Business Days before
the first day of such Interest Period in an amount substantially equal to the
Eurodollar Rate Advance to be maintained by the Lender that is the
Administrative Agent in respect of such Borrowing and for a period equal to such
Interest Period.

 

“Eurodollar Rate Advance” means an Advance which bears interest as provided in
Section 2.09(b).

 

“Eurodollar Rate Reserve Percentage” of any Lender for the Interest Period for
any Eurodollar Rate Advance means the reserve percentage applicable during such
Interest Period (or if more than one such percentage shall be so applicable, the
daily average of such percentages for those days in such Interest Period during
which any such percentage shall be so applicable) under regulations issued from
time to time by the Federal Reserve Board for determining the maximum reserve
requirement (including, without limitation, any emergency, supplemental, or
other marginal reserve requirement) for such Lender with respect to liabilities
or assets consisting of or including Eurocurrency Liabilities having a term
equal to such Interest Period.

 

“Event of Default” has the meaning specified in Section 7.01.

 

“Federal Funds Rate” means, for any period, a fluctuating interest rate per
annum equal for each day during such period to the weighted average of the rates
on overnight Federal funds

 

7

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

 

transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day, the
average of the quotations for any such day on such transactions received by the
Administrative Agent from three Federal funds brokers of recognized standing
selected by it.

 

“Federal Reserve Board” means the Board of Governors of the Federal Reserve
System or any of its successors.

 

“Financial Statements” means the financial statements included in the Form 10-K
filed by the Borrower with the SEC on September 11, 2008, including the audited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as
of fiscal year ended June 30, 2008, and the related audited consolidated
statements of income, cash flow, and retained earnings of the Borrower and its
consolidated Subsidiaries for the fiscal year then ended, copies of which have
been delivered to the Administrative Agent and the Lenders.

 

“Fire Litigation” means those certain lawsuits and claims now pending or
hereafter filed against Borrower or any of its Subsidiaries related to or
arising from fires beginning on March 12, 2006 in the Texas panhandle.

 

“GAAP” means United States generally accepted accounting principles as in effect
from time to time, applied on a basis consistent with the requirements of
Section 1.03.

 

“Governmental Authority” means, as to any Person in connection with any subject,
any foreign, national, state or provincial governmental authority, or any
political subdivision of any state thereof, or any agency, department,
commission, board, authority or instrumentality, bureau or court, in each case
having jurisdiction over such Person or such Person’s Property in connection
with such subject.

 

“Guarantor” means each Subsidiary of the Borrower executing a Guaranty.

 

“Guaranty” means a Guaranty in substantially the form of the attached Exhibit C
and executed by a Guarantor, and “Guaranties” shall mean all such guaranties
collectively.

 

“Hazardous Substance” means the substances identified as such pursuant to CERCLA
and those regulated under any other Environmental Law, including without
limitation pollutants, contaminants, petroleum, petroleum products,
radionuclides, radioactive materials, and medical and infectious waste.

 

“Hazardous Waste” means the substances regulated as such pursuant to any
Environmental Law.

 

“Hedge Contract” means (a) any and all rate swap transactions, basis swaps,
credit derivative transactions, forward rate transactions, puts, commodity
swaps, commodity options, forward commodity contracts, equity or equity index
swaps or options, bond or bond price or bond index swaps or options or forward
bond or forward bond price or forward bond index transactions, interest rate
options, forward foreign exchange transactions, cap transactions, floor

 

8

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

 

transactions, collar transactions, currency swap transactions, cross-currency
rate swap transactions, currency options, spot contracts, or any other similar
transactions or any combination of any of the foregoing (including any options
to enter into any of the foregoing), whether or not any such transaction is
governed by or subject to any master agreement, and (b) any and all transactions
of any kind, and the related confirmations, which are subject to the terms and
conditions of, or governed by, any form of master agreement published by the
International Swaps and Derivatives Association, Inc., any International Foreign
Exchange Master Agreement, or any other master agreement (any such master
agreement, together with any related schedules, a “Master Agreement”), including
any such obligations or liabilities under any Master Agreement; provided that, a
“Hedge Contract” shall not include any “Master Agreement” that provides solely
for the sale by the Borrower or its Subsidiaries of physical Hydrocarbons in
exchange for cash in the ordinary course of its business.

 

“Hydrocarbon Hedge Agreement” means a Hedge Contract which is intended to reduce
or eliminate the risk of fluctuations in the price of Hydrocarbons.

 

“Hydrocarbons” means oil, gas, coal seam gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, and all other liquid and gaseous
hydrocarbons produced or to be produced in conjunction therewith from a well
bore and all products, by-products, and other substances derived therefrom or
the processing thereof, and all other minerals and substances produced in
conjunction with such substances, including, but not limited to, sulfur,
geothermal steam, water, carbon dioxide, helium, and any and all minerals, ores,
or substances of value and the products and proceeds therefrom.

 

“Independent Engineer” means (a) Forest Garb & Associates, (b) Miller and Lents,
Ltd., (c) Netherland, Sewell & Associates, Inc. or (d) any other engineering
firm acceptable to the Administrative Agent.

 

“Independent Engineering Report” means a report, in form and substance
satisfactory to the Administrative Agent and each of the Lenders, prepared by an
Independent Engineer, addressed to the Administrative Agent and the Lenders with
respect to the Oil and Gas Properties owned by the Borrower or its Subsidiaries
(or to be acquired by the Borrower or any of its Subsidiaries, as applicable)
which are or are to be included in the Borrowing Base, which report shall
(a) specify the location, quantity, and type of the estimated Proven Reserves
attributable to such Oil and Gas Properties, (b) contain a projection of the
rate of production of such Oil and Gas Properties, (c) contain an estimate of
the net operating revenues to be derived from the production and sale of
Hydrocarbons from such Proven Reserves based on product price and cost
escalation assumptions specified by the Administrative Agent and the Lenders,
and (d) contain such other information as is customarily obtained from and
provided in such reports or is otherwise reasonably requested by the
Administrative Agent or any Lender.

 

“Interest Expense” means, for the Borrower and its consolidated Subsidiaries for
any period, total interest, letter of credit fees, and other fees and expenses
incurred in connection with any Debt for such period, whether paid or accrued,
including, without limitation, (i) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers’ acceptance
financing, imputed interest under Capital Leases, and net costs under Interest
Hedge Agreements, all as determined in conformity with GAAP, and (ii) all
interests,

 

9

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

 

dividends, distributions, or other payments made in respect of preferred Equity
Interests or Debt Issuances; but excluding (A) dividends payable solely in
Equity Interests of the Borrower made in respect of preferred Equity Interests
and (B) the expensing of deferred amortized costs pertaining to the payment in
full of the Subordinated Debt and pertaining to the Obligations.

 

“Interest Hedge Agreement” means a Hedge Contract between the Borrower and one
or more financial institutions providing for the exchange of nominal interest
obligations between the Borrower and such financial institution or the cap of
the interest rate on any Debt of the Borrower.

 

“Interest Period” means, for each Eurodollar Rate Advance comprising part of the
same Borrowing, the period commencing on the date of such Eurodollar Rate
Advance or the date of the Conversion of any Reference Rate Advance into a
Eurodollar Rate Advance and ending on the last day of the period selected by the
Borrower pursuant to the provisions below and Section 2.03 and, thereafter, each
subsequent period commencing on the last day of the immediately preceding
Interest Period and ending on the last day of the period selected by the
Borrower pursuant to the provisions below and Section 2.03.  The duration of
each such Interest Period shall be three months (other than for purposes of the
definition of “Adjusted Reference Rate”); provided, however, that:

 

(i)                                     the Borrower may not select any Interest
Period which ends after the Maturity Date;

 

(ii)                                  Interest Periods commencing on the same
date for Advances comprising part of the same Borrowing shall be of the same
duration;

 

(iii)                               whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next succeeding Business Day,
provided that if such extension would cause the last day of such Interest Period
to occur in the next following calendar month, the last day of such Interest
Period shall occur on the next preceding Business Day; and

 

(iv)                              any Interest Period which begins on the last
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of the calendar month in which it would have
ended if there were a numerically corresponding day in such calendar month.

 

“Interim Financial Statements” means the financial statements included in the
Form 10 Q filed by the Borrower with the SEC on November 10, 2008 including the
unaudited consolidated balance sheet of the Borrower and its consolidated
Subsidiaries dated September 30, 2008, and the related unaudited consolidated
statements of income, cash flow, and retained earnings of the Borrower and its
consolidated Subsidiaries for the three months then ended, copies of which have
been delivered to the Administrative Agent and the Lenders.

 

“Internal Engineering Report” means a report, in form and substance satisfactory
to the Administrative Agent and each Lender, prepared by the Borrower and
certified by a Responsible Officer of the Borrower, addressed to the
Administrative Agent and the Lenders with respect to

 

10

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

 

the Oil and Gas Properties owned by the Borrower or any of its Subsidiaries (or
to be acquired by the Borrower or any of its Subsidiaries, as applicable) which
are or are to be included in the Borrowing Base, which report shall (a) specify
the location, quantity, and type of the estimated Proven Reserves attributable
to such Oil and Gas Properties, (b) contain a projection of the rate of
production of such Oil and Gas Properties, (c) contain an estimate of the net
operating revenues to be derived from the production and sale of Hydrocarbons
from such Proven Reserves based on product price and cost escalation assumptions
specified by the Administrative Agent and the Lenders, and (d) contain such
other information as is customarily obtained from and provided in such reports
or is otherwise reasonably requested by the Administrative Agent or any Lender.

 

“Junior Capital Issuance” means either (a) an Equity Issuance permitted under
Section 6.22 or (b) a Debt Issuance.

 

“Leases” means all oil and gas leases, oil, gas and mineral leases, oil, gas and
casinghead gas leases or any other instruments, agreements, or conveyances under
and pursuant to which the owner thereof has or obtains the right to enter upon
lands and explore for, drill, and develop such lands for the production of
Hydrocarbons.

 

“Legal Requirement” means, as to any Person, any law, statute, ordinance,
decree, requirement, order, judgment, rule, regulation (or official
interpretation of any of the foregoing) of, and the terms of any license or
permit issued by, any Governmental Authority, including, but not limited to,
Regulations D, T, U, and X, which is applicable to such Person.

 

“Lenders” means the lenders listed on the signature pages of this Agreement and
each Eligible Assignee that shall become a party to this Agreement pursuant to
Section 9.06.

 

“Lending Office” means, as to any Lender, the office or offices of such Lender
described as such in such Lender’s administrative questionnaire requested by the
Administrative Agent, or such other office or offices as a Lender may from time
to time notify the Borrower and the Administrative Agent.

 

“Leverage Ratio” means, as of the end of any fiscal quarter, the ratio of
(a) the consolidated Debt of the Borrower (other than obligations under Hedge
Contracts) as of such fiscal quarter end to (b) the consolidated EBITDA of the
Borrower for the four fiscal quarter period then ended.

 

“Lien” means any mortgage, lien, pledge, assignment, charge, deed of trust,
security interest, hypothecation, preference, deposit arrangement or encumbrance
(or other type of arrangement having the practical effect of the foregoing) to
secure or provide for the payment of any obligation of any Person, whether
arising by contract, operation of law, or otherwise (including, without
limitation, the interest of a vendor or lessor under any conditional sale
agreement, synthetic lease, Capital Lease, or other title retention agreement).

 

11

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

 

“Liquid Investments” means:

 

(i)                                     direct obligations of, or obligations
the principal of and interest on which are unconditionally guaranteed by, the
United States maturing within 180 days from the date of any acquisition thereof;

 

(ii)                                  (i) negotiable or nonnegotiable
certificates of deposit, time deposits, or other similar banking arrangements
maturing within 180 days from the date of acquisition thereof (“bank debt
securities”), issued by (A) any Lender or any Senior Lender (or any Affiliate of
any Lender or any Senior Lender) or (B) any other bank or trust company so long
as such certificate of deposit is pledged to secure the Borrower’s or any
Subsidiaries’ ordinary course of business bonding requirements, or any other
bank or trust company which has primary capital of not less than $500,000,000,
if at the time of deposit or purchase, such bank debt securities are rated not
less than “AA” (or the then equivalent) by the rating service of Standard &
Poor’s Ratings Group or of Moody’s Investors Service, Inc., and (ii) commercial
paper issued by (A) any Lender or any Senior Lender (or any Affiliate of any
Lender or any Senior Lender) or (B) any other Person if at the time of purchase
such commercial paper is rated not less than “A-1” (or the then equivalent) by
the rating service of Standard & Poor’s Ratings Group or not less than “P-1” (or
the then equivalent) by the rating service of Moody’s Investors Service, Inc.,
or upon the discontinuance of both of such services, such other nationally
recognized rating service or services, as the case may be, as shall be selected
by the Borrower with the consent of the Majority Lenders;

 

(iii)                               deposits in money market funds investing
exclusively in investments described in clauses (a) and (b) above;

 

(iv)                              repurchase agreements relating to investments
described in clauses (a) and (b) above with a market value at least equal to the
consideration paid in connection therewith, with any Person who regularly
engages in the business of entering into repurchase agreements and has a
combined capital surplus and undivided profit of not less than $500,000,000, if
at the time of entering into such agreement the debt securities of such Person
are rated not less than “AA” (or the then equivalent) by the rating service of
Standard & Poor’s Ratings Group or of Moody’s Investors Service, Inc.; and

 

(v)                                 such other instruments (within the meaning
of Article 9 of the Texas Business and Commerce Code) as the Borrower may
request and the Administrative Agent may approve in writing.

 

“Loan Documents” means this Agreement, the Notes, the Guaranties, the Security
Instruments, the Subordination and Intercreditor Agreement, and each other
agreement, instrument, or document executed by the Borrower, any Guarantor, or
any of the Borrower’s or a Guarantor’s Subsidiaries or any of their officers at
any time in connection with this Agreement.

 

“Maximum Note Amount” means $25,000,000.

 

“Majority Lenders” means, (a) if there are less than three Lenders, then all
Lenders and (b) at all other times, Lenders holding at least 50% of the then
aggregate unpaid principal amount of the Notes held by the Lenders at such time;
provided that, if no such principal amount is then outstanding, “Majority
Lenders” shall mean Lenders having at least 50% of the aggregate

 

12

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

 

amount of the Commitments at such time; provided further that, if there are two
or more Lenders, the Commitment of, and the portion of the Advances held or
deemed held by, any Defaulting Lender shall be excluded for purposes of making a
determination of Majority Lenders.

 

“Material Adverse Change” means (a) a material adverse change in the business,
assets (including the Oil and Gas Properties of the Borrower or any of its
Subsidiaries), condition (financial or otherwise), or results of operations of
the Borrower or any of its Subsidiaries, taken as a whole, or (b) a material
adverse effect on the Borrower’s or any Subsidiary’s ability to perform its
obligations under this Agreement, any Note, any Guaranty, or any other Loan
Document.

 

“Maturity Date” means June 17, 2013.

 

“Maximum Rate” means the maximum nonusurious interest rate under applicable law
(determined under such laws after giving effect to any items which are required
by such laws to be construed as interest in making such determination, including
without limitation if required by such laws, certain fees and other costs).

 

“Mortgage” means each of the Mortgages, Deeds of Trust, Security Agreements,
Assignment of Liens and Security Interests, Financing Statements and Assignments
of Production or any other mortgage or deed of trust executed by any one or more
of the Borrower, a Guarantor or any of their respective Subsidiaries in favor of
the Administrative Agent for the ratable benefit of the Secured Parties in
substantially the form of the attached Exhibit D or such other form as may be
requested by the Administrative Agent, together with any assumptions or
assignments of the obligations thereunder by the Borrower, any Guarantor or any
of their respective Subsidiaries, and “Mortgages” shall mean all of such
Mortgages collectively.

 

“Multiemployer Plan” means a “multiemployer plan” as defined in
Section 4001(a)(3) of ERISA.

 

“Net Cash Proceeds” shall mean, with respect to any Asset Sale, the proceeds
thereof in the form of cash, cash equivalents and marketable securities
(including any such proceeds received by way of deferred payment of principal
pursuant to a note or installment receivable or purchase price adjustment
receivable, or by the sale, transfer or other disposition of any non-cash
consideration received in connection therewith or otherwise, but only as and
when received) received by the Borrower or any Subsidiary (including cash
proceeds subsequently received (as and when received by the Borrower or any
Subsidiary) in respect of non-cash consideration initially received) net of
(i) reasonable and customary selling expenses (including reasonable brokers’
fees or commissions, legal, accounting and other professional and transactional
fees, transfer and similar taxes and Borrower’s good faith estimate of income
taxes paid or payable in connection with such sale (after taking into account
any available tax credits or deductions and any tax sharing arrangements)),
(ii) the principal amount, premium or penalty, if any, interest and other
amounts of the Senior Debt which are repaid with such proceeds, and (iii) the
principal amount, premium or penalty, if any, and interest of the Debt under the
Series D Preferred Shares which are required to be paid as a result of such
Asset Sale and which are repaid with such proceeds.

 

13

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

 

“Note” means a promissory note of the Borrower payable to the order of any
Lender, in substantially the form of the attached Exhibit E, evidencing
indebtedness of the Borrower to such Lender resulting from Advances owing to
such Lender and in an amount equal to such Lenders Pro Rata Share of the Maximum
Note Amount.

 

“Notice of Borrowing” means a notice of borrowing in the form of the attached
Exhibit F signed by a Responsible Officer of the Borrower.

 

“Notice of Conversion or Continuation” means a notice of conversion or
continuation in the form of the attached Exhibit G signed by a Responsible
Officer of the Borrower.

 

“NPV” means, with respect to any Proven Reserves expected to be produced from
any undivided interests in Oil and Gas Properties, the net present value,
discounted at 10% per annum, of the future net revenues expected to accrue to
the Borrower’s or any of its Subsidiary’s interests in such Proven Reserves
(after deducting all existing burdens) during the remaining expected economic
lives of such Proven Reserves.  Each calculation of such expected future net
revenues shall be made in accordance with the then existing standards of the
Society of Petroleum Engineers, provided that in any event (a) appropriate
deductions shall be made for severance and ad valorem taxes, and for operating
(including purchasing and injecting water), gathering, transportation and
marketing costs required for the production and sale of such reserves, (b) the
pricing assumptions and escalations used in determining NPV for any particular
reserves shall be based upon the Strip Price (or any other pricing assumptions
and escalations to which the Borrower and Majority Lenders may agree) and
(c) the cash-flows derived from the pricing assumptions set forth in clause
(b) above shall be further adjusted to account for the historical basis (i.e.
the differential that exists as of any time between the price at a pricing point
and the price at the point of sale) in a manner reasonably acceptable to the
Administrative Agent.  NPV shall be calculated hereunder in connection with each
Engineering Report, either by the Borrower, by Administrative Agent, or by the
third party engineering firm who prepares such Engineering Report; in the event
of any conflict, Administrative Agent’s calculation shall be conclusive and
final, absent manifest error.

 

“NYMEX Pricing” means, as of any date of determination with respect to any
month: (i) for crude oil, the closing settlement price for the Light, Sweet
Crude Oil futures contract for the first nearby month, and (ii) for natural gas,
the closing settlement price for the Henry Hub Natural Gas futures contract for
the first nearby month, in each case, as published by New York Mercantile
Exchange (NYMEX) on its website currently located at www.nymex.com, or any
successor thereto (as such price may be corrected or revised from time to time
by the NYMEX in accordance with its rules and regulations); provided that, if
the NYMEX no longer provides futures contract price quotes or has ceased to
operate, the comparable futures contract prices quoted on such other nationally
recognized commodities exchange as the Administrative Agent shall designate.

 

“Obligations” means all principal, interest, fees, reimbursements,
indemnifications, and other amounts payable by the Borrower, any Guarantor or
any of their respective Subsidiaries to the Administrative Agent, or the Lenders
under the Loan Documents.

 

14

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

 

“Oil and Gas Properties” means fee mineral interests, term mineral interests,
Leases, subleases, farm-outs, royalties, overriding royalties, net profit
interests, carried interests, production payments and similar mineral interests,
and all unsevered and unextracted Hydrocarbons in, under, or attributable to
such oil and gas Properties and interests.

 

“Pantwist Sale” means the sale of 100% of the Equity Interest held by the
Borrower in Pantwist LLC pursuant to the terms of the Purchase and Sale
Agreement dated as of September 5, 2008 among the Borrower, Pantwist LLC and
Legacy Reserves Operating LP without giving effect to any amendments,
modification or supplements thereto.

 

“Patriot Act” means the USA Patriot Act (Title III of Pub. L. 107-56 (signed
into law October 26, 2001)).

 

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding
to any or all of its functions under ERISA.

 

“PDP Reserves” means Proven Reserves which are categorized as both “Developed”
and “Producing” in the definitions promulgated by the Society of Petroleum
Evaluation Engineers and the World Petroleum Congress as in effect at the time
in question; “PDNP Reserves” means Proven Reserves which are categorized as both
“Developed” and “Non-Producing” in such definitions; and “PUD Reserves” means
Proved Reserves which are categorized as “Undeveloped” in such definitions.

 

“PDNP NPV” means the NPV attributable to all PDNP Reserves from the Oil and Gas
Properties of the Borrower and its Subsidiaries and based on an Engineering
Report or other applicable information relating to the Proven Reserves of the
Borrower and its Subsidiaries provided by Borrower.

 

“PDP Present Value” means the NPV attributable to all PDP Reserves from the Oil
and Gas Properties of the Borrower and its Subsidiaries and based on an
Engineering Report or other applicable information relating to the Proven
Reserves of the Borrower and its Subsidiaries provided by Borrower.

 

“Permit” means any approval, certificate of occupancy, consent, waiver,
exemption, variance, franchise, order, permit, authorization, right or license
of or from any Governmental Authority, including without limitation, an
Environmental Permit.

 

“Permitted Liens” means the Liens permitted under Section 6.01.

 

“Permitted Prior Liens” means the Liens securing the Senior Debt and Liens
permitted under paragraphs (c) through (i) of Section 6.01.

 

“Person” means an individual, partnership, corporation (including a business
trust), joint stock company, limited liability corporation or company, limited
liability partnership, trust, unincorporated association, joint venture or other
entity, or a government or any political subdivision or agency thereof or any
trustee, receiver, custodian or similar official.

 

15

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

 

“Plan” means an employee benefit plan (other than a Multiemployer Plan)
maintained for employees of the Borrower or any member of the Controlled Group
and covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code.

 

“Pledge Agreement” means a Pledge Agreement in substantially the form of the
attached Exhibit H, executed by the Borrower or any of its Subsidiaries or any
of the Guarantors.

 

“Projections” means, as to the Borrower and for a given period, the Borrower’s
forecasted consolidating balance sheets, profit and loss statements, and cash
flow statements, and including therein projections for anticipated income,
revenues, expenses, taxes, EBITDA and budgeted capital expenditures during such
period, all based on good faith estimates and utilizing the assumptions which
are set forth in such Projections and prepared in accordance with GAAP.

 

“Property” of any Person means any property or assets (whether real, personal,
or mixed, tangible or intangible) of such Person.

 

“Proven Reserves” means, at any particular time, the estimated quantities of
Hydrocarbons which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs attributable
to Oil and Gas Properties included or to be included in the Borrowing Base under
then existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made).

 

“PUD Present Value” means the NPV attributable to all PUD Reserves from the Oil
and Gas Properties of the Borrower and its Subsidiaries and based on an
Engineering Report or other applicable information relating to the Proven
Reserves of the Borrower and its Subsidiaries provided by Borrower.

 

“Pro Rata Share” means, with respect to any Lender, the ratio (expressed as a
percentage) of aggregate Commitments of such Lender to the aggregate Commitments
of all the Lenders (or if such Commitments have been terminated or cancelled,
the ratio (expressed as a percentage) of outstanding Advances owing to such
Lender to the aggregate outstanding Advances owing to all such Lenders.

 

“Reference Rate” means a fluctuating interest rate per annum as shall be in
effect from time to time equal to the rate of interest publicly announced by
Union Bank of California, N.A., as its reference rate, whether or not the
Borrower has notice thereof.

 

“Reference Rate Advance” means an Advance which bears interest as provided in
Section 2.09(a).

 

“Register” has the meaning set forth in paragraph (c) of Section 9.06.

 

“Regulations D, T, U, and X” mean Regulations D, T, U, and X of the Federal
Reserve Board, as the same is from time to time in effect, and all official
rulings and interpretations thereunder or thereof.

 

“Release” shall have the meaning set forth in CERCLA or under any other
Environmental Law.

 

16

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

 

“Response” shall have the meaning set forth in CERCLA or under any other
Environmental Law.

 

“Responsible Officer” means (a) with respect to any Person that is a
corporation, such Person’s Chief Executive Officer, President, Chief Financial
Officer, or Vice President, (b) with respect to any Person that is a limited
liability company, a manager or the Responsible Officer of such Person’s
managing member or manager, and (c) with respect to any Person that is a general
partnership or a limited liability partnership, the Responsible Officer of such
Person’s general partner or partners.

 

“Restricted Payment” means, with respect to any Person, (a) any direct or
indirect dividend or distribution (whether in cash, securities or other
Property) or any direct or indirect payment of any kind or character (whether in
cash, securities or other Property) in consideration for or otherwise in
connection with any retirement, purchase, redemption or other acquisition of any
Equity Interest of such Person, or any options, warrants or rights to purchase
or acquire any such Equity Interest of such Person or (b) principal or interest
payments (in cash, Property or otherwise) on,  or redemptions of, subordinated
debt of such Person; provided that the term “Restricted Payment” shall not
include any dividend or distribution payable solely in Equity Interests of the
Borrower or warrants, options or other rights to purchase such Equity Interests.

 

“SEC” means the United States Securities and Exchange Commission.

 

“Secured Parties” means the Administrative Agent and the Lenders.

 

“Security Agreements” means the Security Agreements, each in substantially the
form of the attached Exhibit I, executed by the Borrower, any of its
Subsidiaries, or any of the Guarantors.

 

“Security Instruments” means, collectively, (a) the Mortgages, (b) the Transfer
Letters, (c) the Pledge Agreements, (d) the Security Agreements, (e) each other
agreement, instrument or document executed at any time in connection with the
Pledge Agreements, the Security Agreements, or the Mortgages, and (f) each other
agreement, instrument or document executed at any time in connection with
securing the Obligations.

 

“Senior Administrative Agent” means Union Bank of California, N.A., in its
capacity as agent under the Senior Credit Agreement, and any successor agent
pursuant thereto.

 

“Senior Credit Agreement” means the Amended and Restated Credit Agreement dated
of even date herewith among the Borrower, the Senior Administrative Agent, and
the Senior Lenders, as heretofore amended and as hereafter amended, modified,
restated or supplemented in accordance with the terms of the Subordination and
Intercreditor Agreement.

 

“Senior Debt” means the “Obligations” as defined in the Senior Credit Agreement
as in effect on the date hereof of as modified in accordance with the
Subordination and Intercreditor Agreement.

 

“Senior Lenders” means the lenders from time to time parties to the Senior
Credit Agreement.

 

17

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

 

“Senior Loan Documents” means the Senior Credit Agreement, the promissory notes
executed and delivered pursuant to the Senior Credit Agreement, all agreements,
instruments, or documents executed at any time in connection with securing the
Senior Debt, and each other agreement, instrument, or document executed by the
Borrower or any of its Subsidiaries or any of their officers in connection with
the Senior Credit Agreement.

 

“Series D Preferred Shares” means the convertible, preferred Equity Interests of
the Borrower known as the “Series D Convertible Preferred Stock” issued on
August 25, 2006 and maturing on August 25, 2011, the terms of which are as set
forth in the Certificate of Designation.

 

“Solvent” means, with respect to any Person as of the date of any determination,
that on such date (a) the fair value of the Property of such Person (both at
fair valuation and at present fair saleable value) is greater than the total
liabilities, including contingent liabilities, of such Person, (b) the present
fair saleable value of the assets of such Person is not less than the amount
that will be required to pay the probable liability of such Person on its debts
as they become absolute and matured, (c) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations, and
other commitments as they mature in the normal course of business, (d) such
Person does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person’s ability to pay as such debts and liabilities
mature, and (e) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person’s
Property would constitute unreasonably small capital after giving due
consideration to current and anticipated future capital requirements and current
and anticipated future business conduct and the prevailing practice in the
industry in which such Person is engaged.  In computing the amount of contingent
liabilities at any time, such liabilities shall be computed at the amount which,
in light of the facts and circumstances existing at such time, represents the
amount that can reasonably be expected to become an actual or matured liability.

 

“Strip Price” shall mean, at any time, (a) for the remainder of the current
calendar year, the average NYMEX Pricing for the remaining contracts in the
current calendar year, (b) for each of the succeeding two complete calendar
years, the average NYMEX Pricing for the twelve months in each such calendar
year, and (c) for the succeeding third complete calendar year, and for each
calendar year thereafter, the average NYMEX Pricing for the twelve months in
such third calendar year.

 

“Subordination and Intercreditor Agreement” means that certain Subordination and
Intercreditor Agreement, which shall be in a form acceptable to the
Administrative Agent and the Lenders, dated as of the date hereof among the
Administrative Agent, the Borrower, the Guarantors, the Lenders, the Senior
Agent and the Senior Lenders.

 

“Subsidiary” means, with respect to any Person (the “parent”) at any date, any
other Person the accounts of which would be consolidated with those of the
parent in the parent’s consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as any
Person, a majority of whose outstanding Voting Securities (other than directors’
qualifying shares) shall at any time be owned by such parent or one or more
Subsidiaries of such parent.  Unless otherwise specified, all references herein
to a “Subsidiary”

 

18

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

 

or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the
Borrower; provided that Tri-Flow shall not be considered a Subsidiary of the
Borrower or any Guarantor.

 

“Termination Event” means (a) a Reportable Event described in Section 4043 of
ERISA and the regulations issued thereunder (other than a Reportable Event not
subject to the provision for 30-day notice to the PBGC under such regulations),
(b) the withdrawal of the Borrower or any of its Affiliates from a Plan during a
plan year in which it was a “substantial employer” as defined in
Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a
Plan or the treatment of a Plan amendment as a termination under Section 4041 of
ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or
(e) any other event or condition which constitutes grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan.

 

“Total Present Value” means an amount, based on the most recent Engineering
Report or other applicable information provided by Borrower as of the applicable
determination date, equal to the sum of (i) 100% of the PDP NPV plus (ii) 100%
of the PDNP NPV plus (iii) 100% of the PUD NPV; provided that, Total Present
Value will be limited to the extent that the amount determined under clause
(i) shall always constitute at least 60% of the Total Present Value.

 

“Transfer Letters” means, collectively, the letters in lieu of transfer orders
in substantially the form of the attached Exhibit J and executed by the
Borrower, any Guarantor or any of their respective Subsidiaries executing a
Mortgage.

 

“Tri-Flow” means Tri-Flow, Inc., an Oklahoma corporation.

 

“Type” has the meaning set forth in Section 1.04.

 

“Voting Securities” means (a) with respect to any corporation (including any
unlimited liability company), capital stock of such corporation having general
voting power under ordinary circumstances to elect directors of such corporation
(irrespective of whether at the time stock of any other class or classes shall
have or might have special voting power or rights by reason of the happening of
any contingency), (b) with respect to any partnership, any partnership interest
or other ownership interest having general voting power to elect the general
partner or other management of the partnership or other Person, and (c) with
respect to any limited liability company, membership certificates or interests
having general voting power under ordinary circumstances to elect managers of
such limited liability company.

 

(b)         Computation of Time Periods.  In this Agreement, with respect to the
computation of periods of time from a specified date to a later specified date,
the word “from” means “from and including” and the words “to” and “until” each
means “to but excluding”.

 

(c)          Accounting Terms; Changes in GAAP.  Except as otherwise expressly
provided herein, all accounting terms used herein shall be interpreted, and all
financial statements and certificates and reports as to financial matters
required to be delivered to the Lenders hereunder shall (unless otherwise
disclosed to the Lenders in writing at the time of delivery thereof) be
prepared, in accordance with GAAP applied on a basis consistent with those used
in the preparation of the latest financial statements furnished to the Lenders
hereunder (which prior to the delivery of the first financial statements under
Section 5.06 hereof, shall mean the Financial

 

19

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

 

Statements and the Interim Financial Statements).  All calculations made for the
purposes of determining compliance with this Agreement shall (except as
otherwise expressly provided herein) be made by application of GAAP applied on a
basis consistent with those used in the preparation of the annual or quarterly
financial statements furnished to the Lenders pursuant to Section 5.06 hereof
most recently delivered prior to or concurrently with such calculations (or,
prior to the delivery of the first financial statements under Section 5.06
hereof, used in the preparation of the Financial Statements and the Interim
Financial Statements).  In addition, all calculations and defined accounting
terms used herein shall, unless expressly provided otherwise, when referring to
any Person, refer to such Person on a consolidated basis and mean such Person
and its consolidated subsidiaries.

 

(d)         Types of Advances.  Advances are distinguished by “Type.”  The
“Type” of an Advance refers to the determination whether such Advance is a
Eurodollar Rate Advance or Reference Rate Advance.

 

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

 

Section 2.

 

CREDIT FACILITIES

 

(a)          Commitment for Advances.

 

(i)                                     Advances.  Each Lender severally agrees,
on the terms and conditions set forth in this Agreement, to make Advances to the
Borrower from time to time on any Business Day during the period from the
Effective Date until the Commitment Termination Date in an amount for each
Lender not to exceed such Lender’s Availability at such time.  Each Borrowing
shall be in an aggregate amount not less than $5,000,000, and in integral
multiples of $500,000 in excess thereof, and shall consist of Advances of the
same Type made on the same day by the Lenders ratably according to their
respective Availability.  Any Advances which have been prepaid or repaid may not
be reborrowed.

 

(ii)                                  Advances upon Increase in Commitments. 
Each Lender that increases its Commitment under Section 2.16 (including any new
Lender that joins this Agreement as a Lender pursuant to a joinder agreement as
provided in Section 2.16) severally agrees, on the terms and conditions set
forth in this Agreement, to make a single advance term loan on the Increase
Effective Date on a non-revolving basis to the Borrower in an amount equal to
its

 

20

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

 

unfunded Commitment on such Increase Effective Date (after giving effect to such
increase).  Any Advances which have been prepaid or repaid may not be
reborrowed.

 

(iii)                               Notes.  The indebtedness of the Borrower to
each Lender resulting from the Advance owing to such Lender shall be evidenced
by a Note of the Borrower payable to the order of such Lender.

 

(b)         [Reserved].

 

(c)          Method of Borrowing.

 

(i)                                     Notice.  Each Borrowing shall be made
pursuant to a Notice of Borrowing (or by telephone notice promptly confirmed in
writing by a Notice of Borrowing), given not later than 10:00 a.m.  (Dallas,
Texas time) / 8:00 a.m. (Los Angeles, California time) (i) on the third Business
Day before the date of the proposed Borrowing, in the case of a Borrowing
comprised of Eurodollar Rate Advances (other than the initial Borrowing to be
made on the Effective Date) or (ii) on the Business Day of the proposed
Borrowing, in the case of a Borrowing comprised of Reference Rate Advances (or
Eurodollar Rate Advances in the case of the Borrowing to be made on the
Effective Date), by the Borrower to the Administrative Agent, which shall in
turn give to each Lender prompt notice of such proposed Borrowing by telecopier
or telex.  Each Notice of a Borrowing shall be given by telecopier or telex,
confirmed immediately in writing, specifying the information required therein. 
In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the
Administrative Agent shall promptly notify each Lender of the applicable
interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m. 
(Dallas, Texas time) / 10:00 a.m. (Los Angeles, California time) on the date of
such Borrowing, make available for the account of its Lending Office to the
Administrative Agent at its address referred to in Section 9.02, or such other
location as the Administrative Agent may specify by notice to the Lenders, in
same day funds, in the case of a Borrowing, such Lender’s Pro Rata Share of such
Borrowing.  After the Administrative Agent’s receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article III, the
Administrative Agent shall make such funds available to the Borrower at its
account with the Administrative Agent.

 

(ii)                                  Conversions and Continuations.  The
Borrower may elect to Convert or continue any Borrowing under this Section 2.03
by delivering an irrevocable Notice of Conversion or Continuation to the
Administrative Agent at the Administrative Agent’s office no later than
10:00 a.m.  (Dallas, Texas time) / 8:00 a.m.  (Los Angeles, California time)
(i) on the date which is at least three Business Days in advance of the proposed
Conversion or continuation date in the case of a Conversion to or a continuation
of a Borrowing comprised of Eurodollar Rate Advances and (ii) on the Business
Day of the proposed Conversion in the case of a Conversion to a Borrowing
comprised of Reference Rate Advances.  Each such Notice of Conversion or
Continuation shall be in writing or by telex or telecopier confirmed immediately
in writing specifying the information required therein.  Promptly after receipt
of a Notice of Conversion or Continuation under this Section, the Administrative
Agent shall provide each Lender with a copy thereof and, in the case of a
Conversion to or a continuation of a Borrowing comprised of Eurodollar Rate
Advances, notify each Lender of the applicable interest rate under
Section 2.09(b).

 

21

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

 

(iii)                               Certain Limitations.  Notwithstanding
anything to the contrary contained in paragraphs (a) and (b) above:

 

(i)                                     at no time shall there be more than one
Interest Period applicable to outstanding Eurodollar Rate Advances and the
Borrower may not select Eurodollar Rate Advances for any Borrowing at any time
that a Default has occurred and is continuing;

 

(ii)                                  if any Lender shall, at least one Business
Day before the date of any requested Borrowing, Conversion, or continuation,
notify the Administrative Agent that the introduction of or any change in or in
the interpretation of any law or regulation makes it unlawful, or that any
central bank or other Governmental Authority asserts that it is unlawful, for
such Lender or its Lending Office to perform its obligations under this
Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar
Rate Advances, the right of the Borrower to select Eurodollar Rate Advances from
such Lender shall be suspended until such Lender shall notify the Administrative
Agent that the circumstances causing such suspension no longer exist, and the
Advance made by such Lender in respect of such Borrowing, Conversion, or
continuation shall be a Reference Rate Advance;

 

(iii)                               if the Administrative Agent is unable to
determine the Eurodollar Rate for Eurodollar Rate Advances comprising any
requested Borrowing, the right of the Borrower to select Eurodollar Rate
Advances for such Borrowing or for any subsequent Borrowing shall be suspended
until the Administrative Agent shall notify the Borrower and the Lenders that
the circumstances causing such suspension no longer exist, and each Advance
comprising such Borrowing shall be a Reference Rate Advance;

 

(iv)                              if the Majority Lenders shall, at least one
Business Day before the date of any requested Borrowing, notify the
Administrative Agent that the Eurodollar Rate for Eurodollar Rate Advances
comprising such Borrowing will not adequately reflect the cost to such Lenders
of making or funding their respective Eurodollar Rate Advances, as the case may
be, for such Borrowing, the right of the Borrower to select Eurodollar Rate
Advances for such Borrowing or for any subsequent Borrowing shall be suspended
until the Administrative Agent shall notify the Borrower and the Lenders that
the circumstances causing such suspension no longer exist, and each Advance
comprising such Borrowing shall be a Reference Rate Advance; and

 

(v)                                 if the Borrower shall fail to select the
duration or continuation of any Interest Period for any Eurodollar Rate Advances
in accordance with the provisions contained in the definition of “Interest
Period” in Section 1.01 and paragraph (b) above, the Administrative Agent shall
forthwith so notify the Borrower and the Lenders and such Advances shall be made
available to the Borrower on the date of such Borrowing as Reference Rate
Advances or, if an existing Advance, Convert into Reference Rate Advances.

 

(iv)                              Notices Irrevocable.  Each Notice of Borrowing
and Notice of Conversion or Continuation shall be irrevocable and binding on the
Borrower.  In the case of any Borrowing for which the related Notice of
Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower
shall indemnify each Lender against any loss, out-of-pocket cost, or expense
incurred by such Lender as a result of any failure by the Borrower to fulfill on
or before

 

22

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

 

the date specified in such Notice of Borrowing for such Borrowing the applicable
conditions set forth in Article III including, without limitation, any loss
(including any loss of anticipated profits), cost, or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by such
Lender to fund the Advance to be made by such Lender as part of such Borrowing
when such Advance, as a result of such failure, is not made on such date.

 

(v)                                 Administrative Agent Reliance.  Unless the
Administrative Agent shall have received notice from a Lender before the date of
any Borrowing that such Lender shall not make available to the Administrative
Agent such Lender’s Pro Rata Share of a Borrowing, the Administrative Agent may
assume that such Lender has made its Pro Rata Share of such Borrowing available
to the Administrative Agent on the date of such Borrowing in accordance with
paragraph (a) of this Section 2.03 and the Administrative Agent may, in reliance
upon such assumption, make available to the Borrower on such date a
corresponding amount.  If and to the extent that such Lender shall not have so
made its Pro Rata Share of such Borrowing available to the Administrative Agent,
such Lender and the Borrower severally agree to immediately repay to the
Administrative Agent on demand such corresponding amount, together with interest
on such amount, for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Administrative Agent, at
(i) in the case of the Borrower, the interest rate applicable on such day to
Advances comprising such Borrowing and (ii) in the case of such Lender, the
Federal Funds Rate for such day.  If such Lender shall repay to the
Administrative Agent such corresponding amount and interest as provided above,
such corresponding amount so repaid shall constitute such Lender’s Advance as
part of such Borrowing for purposes of this Agreement even though not made on
the same day as the other Advances comprising such Borrowing.

 

(vi)                              Lender Obligations Several.  The failure of
any Lender to make the Advance to be made by it as part of any Borrowing shall
not relieve any other Lender of its obligation, if any, to make its Advance on
the date of such Borrowing.  No Lender shall be responsible for the failure of
any other Lender to make the Advance to be made by such other Lender on the date
of any Borrowing.

 

(d)         Reduction of the Commitment.

 

(i)                                     The Borrower shall have the right, upon
at least three Business Days’ notice to the Administrative Agent, to terminate
in whole or reduce ratably in part the unused portion of the Commitment;
provided that each partial reduction shall be in the aggregate amount of
$3,000,000 or in integral multiples of $1,000,000 in excess thereof.

 

(ii)                                  Other than as provided in
Section 2.04(c) below, any reduction and termination of the Commitments pursuant
to this Section 2.04 shall be applied ratably to each Lender’s Commitment and
shall be permanent, with no obligation of the Lenders to reinstate such
Commitments.

 

(iii)                               In the event of a Defaulting Lender, the
Borrower, at the Borrower’s election may (with the consent of the Administrative
Agent) elect to terminate such Defaulting Lender’s Commitment hereunder;
provided that (i) such termination must be of the Defaulting Lender’s entire
Commitment, (ii) the Borrower shall pay all amounts owed by the Borrower to

 

23

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

 

such Defaulting Lender under this Agreement and under the other Loan Documents
(including principal of and interest on the Advances owed to such Defaulting
Lender, accrued commitment fees, and letter of credit fees but specifically
excluding any amounts owing under Section 2.12 as result of such payment of
Advances), (iii) a Defaulting Lender’s Commitment may be terminated by the
Borrower under this Section 2.04(c) if and only if at such time, the Borrower
has elected, or is then electing, to terminate the Commitments of all then
existing Defaulting Lenders.  Upon written notice to the Defaulting Lender and
Administrative Agent of the Borrower’s election to terminate a Defaulting
Lender’s Commitment pursuant to this clause (c) and the payment and deposit of
amounts required to be made by the Borrower under clause (ii) above, (A) such
Defaulting Lender shall cease to be a “Lender” hereunder for all purposes except
that such Lender’s rights under Sections 2.13, 2.14, and 9.07 shall continue
with respect to events and occurrences occurring before or concurrently with its
ceasing to be a “Lender” hereunder, (B) such Defaulting Lender’s Commitment
shall be deemed terminated, and (C) such Defaulting Lender shall be relieved of
its obligations hereunder

 

(e)          Prepayment of Advances.

 

(i)                                     Optional.  The Borrower may prepay the
Advances, after giving by 10:00 a.m.  (Dallas, Texas, time) / 8:00 a.m. (Los
Angeles, California time): (i) in the case of Eurodollar Rate Advances, at least
three Business Days’ or (ii) in the case of Reference Rate Advances, same
Business Day’s, irrevocable prior written notice to the Administrative Agent
stating the proposed date and aggregate principal amount of such prepayment.  If
any such notice is given, the Borrower shall prepay the Advances in whole or
ratably in part in an aggregate principal amount equal to the amount specified
in such notice, together with (i) the accrued interest to the date of such
prepayment on the principal amount prepaid, (ii) the amounts, if any, required
to be paid pursuant to Section 2.12 as a result of such prepayment being made on
such date, (iii) if such prepayment is made on or prior to the first anniversary
of the Effective Date, a prepayment premium in an amount equal to 2.00% of the
principal amount being prepaid; and (iv) if such prepayment is after the first
anniversary of the Effective Date but on or prior to the second anniversary of
the Effective Date, a prepayment premium in an amount equal to 1.00% of the
principal amount being prepaid; provided, however, that each partial prepayment
shall be made in minimum amounts of $2,500,000 and in integral multiples of
$2,500,000 in excess thereof and full prepayments of any Borrowing are permitted
without restriction of amounts.  No prepayment premium will be due for any
optional prepayment made under this clause (a) after the second anniversary of
the Effective Date.

 

(ii)                                  Mandatory.

 

(i)                                     Change in Control.  If a Change in
Control shall occur and the Borrower has not optionally prepaid in full the
outstanding principal amount of the Advances concurrently with the consummation
of such Change in Control, at the Lenders’ option (which option may be exercised
in their sole discretion) the Borrower shall prepay the outstanding principal
amount of the Advances, in whole or in part as elected by the Lenders, together
with (A) the accrued interest to the date of such prepayment on the principal
amount prepaid, (B) the amounts, if any, required to be paid pursuant to
Section 2.12 as a result of such prepayment being made on such date, (C) if such
Change in Control occurs on or prior to the first anniversary of the Effective
Date, a prepayment premium in an amount equal to 2.00% of the principal amount
required to be

 

24

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

 

prepaid; and (D) if such Change in Control occurs after the first anniversary of
the Effective Date but on or prior to the second anniversary of the Effective
Date, a prepayment premium in an amount equal to 1.00% of the principal amount
required to be prepaid.  No prepayment premium will be due for any Change of
Control which occurs after the second anniversary of the Effective Date.  If the
Lenders require the Borrower to prepay the Advances as provided above, the
Administrative Agent shall so notify the Borrower in writing, which notice shall
specify the amount to be paid by the Borrower pursuant to this Section 2.05(b). 
The Borrower shall pay all such amounts in full within two Business Days of
receipt of such notice.  The foregoing will not be deemed to be a consent by
Lenders to any Change of Control or a waiver of any Default resulting therefrom.

 

(ii)                                  Asset Sales.  Subject to the terms of the
Subordination and Intercreditor Agreement, not later than one Business Day
following the receipt of any Net Cash Proceeds of any Asset Sale (regardless of
whether such Asset Sale was permitted herein), the Borrower shall apply 100% of
such Net Cash Proceeds and make a prepayment of the outstanding Advances,
together with (A) the accrued interest to the date of such prepayment on the
principal amount prepaid, (B) the amounts, if any, required to be paid pursuant
to Section 2.12 as a result of such prepayment being made on such date, (C) if
such Asset Sale occurs on or prior to the first anniversary of the Effective
Date, a prepayment premium in an amount equal to 2.00% of the principal amount
required to be prepaid; and (D) if such Asset Sale occurs after the first
anniversary of the Effective Date but on or prior to the second anniversary of
the Effective Date, a prepayment premium in an amount equal to 1.00% of the
principal amount required to be prepaid.  No prepayment premium will be due for
any Asset Sale which occurs after the second anniversary of the Effective
Date.   The foregoing will not be deemed to be a consent by Lenders to any Asset
Sale or a waiver of any Default resulting therefrom.

 

(iii)                               Illegality.  If any Lender shall notify the
Administrative Agent and the Borrower that the introduction of or any change in
or in the interpretation of any law or regulation makes it unlawful, or that any
central bank or other Governmental Authority asserts that it is unlawful for
such Lender or its Lending Office to perform its obligations under this
Agreement to maintain any Eurodollar Rate Advances of such Lender then
outstanding hereunder, (i) the Borrower shall, no later than 10:00 a.m. 
(Dallas, Texas time) / 8:00 a.m. (Los Angeles, California time) (A) if not
prohibited by law, on the last day of the Interest Period for each outstanding
Eurodollar Rate Advance made by such Lender or (B) if required by such notice,
on the second Business Day following its receipt of such notice, prepay all of
the Eurodollar Rate Advances made by such Lender then outstanding, together with
accrued interest on the principal amount prepaid to the date of such prepayment
and amounts, if any, required to be paid pursuant to Section 2.12 as a result of
such prepayment being made on such date, (ii) such Lender shall simultaneously
make a Reference Rate Advance to the Borrower on such date in an amount equal to
the aggregate principal amount of the Eurodollar Rate Advances prepaid to such
Lender, and (iii) the right of the Borrower to select Eurodollar Rate Advances
from such Lender for any subsequent Borrowing shall be suspended until such
Lender gives notice referred to above shall notify the Administrative Agent that
the circumstances causing such suspension no longer exist.

 

(iv)                              No Additional Right; Ratable Prepayment.  The
Borrower shall have no right to prepay any principal amount of any Advance
except as provided in this Section 2.05, and

 

25

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

 

all notices given pursuant to this Section 2.05 shall be irrevocable and binding
upon the Borrower.  Each payment of any Advance pursuant to this Section 2.05
shall be made in a manner such that all Advances comprising part of the same
Borrowing are paid in whole or ratably in part.

 

(f)            Repayment of Advances.  The Borrower shall repay to the
Administrative Agent for the ratable benefit of the Lenders the outstanding
principal amount of each Advance, together with any accrued interest thereon, on
the Maturity Date or such earlier date pursuant to Section 7.02 or Section 7.03.

 

(g)         Commitment Fees.  The Borrower agrees to pay to the Administrative
Agent for the account of each Lender having a Commitment a commitment fee equal
to 1.00% per annum of the daily Availability of such Lender, from the Effective
Date until the Commitment Termination Date; provided that, no Commitment Fee
shall accrue on the Commitment of a Defaulting Lender during the period such
Lender remains a Defaulting Lender.  The commitment fees shall be due and
payable quarterly in arrears on the last day of each March, June, September, and
December commencing on December 31, 2008 and continuing thereafter through and
including the Commitment Termination Date.

 

(h)         Fees.  The Borrower shall pay the fees as agreed to between the
Borrower and the Administrative Agent in that certain fee letter dated the date
hereof.

 

(i)             Interest.

 

(i)                                     Rates Based on Applicable Margin.  The
Borrower shall pay interest on the unpaid principal amount of each Advance made
by each Lender from the date of such Advance until such principal amount shall
be paid in full, at the following rates per annum:

 

(i)                                     Reference Rate Advances.  If such
Advance is a Reference Rate Advance, a rate per annum equal at all times to the
Adjusted Reference Rate in effect from time to time plus the Applicable Margin
in effect from time to time, payable quarterly in arrears on the last day of
each calendar quarter, commencing with the calendar quarter ending December 31,
2008 and on the date such Reference Rate Advance shall be paid.

 

(ii)                                  Eurodollar Rate Advances.  If such Advance
is a Eurodollar Rate Advance, a rate per annum equal at all times during the
Interest Period for such Advance to the Eurodollar Rate for such Interest Period
plus the Applicable Margin in effect from time to time, payable on the last day
of such Interest Period.

 

(ii)                                  Additional Interest on Eurodollar Rate
Advances.  The Borrower shall pay to each Lender, so long as any such Lender
shall be required under regulations of the Federal Reserve Board to maintain
reserves with respect to liabilities or assets consisting of or including
Eurocurrency Liabilities, additional interest on the unpaid principal amount of
each Eurodollar Rate Advance of such Lender, from the effective date of such
Advance until such principal amount is paid in full, at an interest rate per
annum equal at all times to the remainder obtained by subtracting (i) the
Eurodollar Rate for the Interest Period for such Advance from (ii) the rate
obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus
the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period,
payable on each date on which

 

26

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

 

interest is payable on such Advance.  Such additional interest payable to any
Lender shall be determined by such Lender and notified to the Borrower through
the Administrative Agent (such notice to include the calculation of such
additional interest, which calculation shall be conclusive in the absence of
manifest error).

 

(iii)                               [Reserved]

 

(iv)                              Usury Recapture.

 

(i)                                     If, with respect to any Lender, the
effective rate of interest contracted for under the Loan Documents, including
the stated rates of interest and fees contracted for hereunder and any other
amounts contracted for under the Loan Documents which are deemed to be interest,
at any time exceeds the Maximum Rate, then the outstanding principal amount of
the loans made by such Lender hereunder shall bear interest at a rate which
would make the effective rate of interest for such Lender under the Loan
Documents equal the Maximum Rate until the difference between the amounts which
would have been due at the stated rates and the amounts which were due at the
Maximum Rate (the “Lost Interest”) has been recaptured by such Lender.

 

(ii)                                  If, when the loans made hereunder are
repaid in full, the Lost Interest has not been fully recaptured by such Lender
pursuant to the preceding paragraph, then, to the extent permitted by law, for
the loans made hereunder by such Lender the interest rates charged under
Section 2.09 hereunder shall be retroactively increased such that the effective
rate of interest under the Loan Documents was at the Maximum Rate since the
effectiveness of this Agreement to the extent necessary to recapture the Lost
Interest not recaptured pursuant to the preceding sentence and, to the extent
allowed by law, the Borrower shall pay to such Lender the amount of the Lost
Interest remaining to be recaptured by such Lender.

 

(iii)                               NOTWITHSTANDING THE FOREGOING OR ANY OTHER
TERM IN THIS AGREEMENT AND THE LOAN DOCUMENTS TO THE CONTRARY, IT IS THE
INTENTION OF EACH LENDER AND THE BORROWER TO CONFORM STRICTLY TO ANY APPLICABLE
USURY LAWS.  ACCORDINGLY, IF ANY LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANY
CONSIDERATION WHICH CONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THEN ANY
SUCH EXCESS SHALL BE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALL AT
SUCH LENDER’S OPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE LOANS MADE
HEREUNDER BY SUCH LENDER OR BE REFUNDED TO THE BORROWER.

 

(j)             Payments and Computations.

 

(i)                                     Payment Procedures.  The Borrower shall
make each payment under this Agreement and under the Notes not later than
10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (Los Angeles, California time) on
the day when due in Dollars to the Administrative Agent at the location referred
to in the Notes (or such other location as the Administrative Agent shall
designate in writing to the Borrower) in same day funds without deduction,
setoff, or counterclaim of any kind, except as may be applicable to any
Defaulting Lender.  The Administrative Agent shall promptly thereafter cause to
be distributed like funds relating to the

 

27

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

 

payment of principal, interest or fees ratably (other than amounts payable
solely to the Administrative Agent or a specific Lender pursuant to
Section 2.08(c), 2.09(d), 2.12, 2.13, 2.14, 8.05, or 9.07, but after taking into
account payments effected pursuant to Section 9.04) in accordance with each
Lender’s Pro Rata Share to the Lenders for the account of their respective
Lending Offices, and like funds relating to the payment of any other amount
payable to any Lender to such Lender for the account of its Lending Office, in
each case to be applied in accordance with the terms of this Agreement.

 

(ii)                                  Computations.  All computations of
interest based on the Reference Rate and of fees shall be made by the
Administrative Agent on the basis of a year of 365 or 366 days, as the case may
be, and all computations of interest based on the Eurodollar Rate and the
Federal Funds Rate shall be made by the Administrative Agent, on the basis of a
year of 360 days, in each case for the actual number of days (including the
first day, but excluding the last day) occurring in the period for which such
interest or fees are payable.  Each determination by the Administrative Agent of
an interest rate or fee shall be conclusive and binding for all purposes, absent
manifest error.

 

(iii)                               Non-Business Day Payments.  Whenever any
payment shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of payment of interest or
fees, as the case may be; provided, however, that if such extension would cause
payment of interest on or principal of Eurodollar Rate Advances to be made in
the next following calendar month, such payment shall be made on the next
preceding Business Day.

 

(iv)                              Administrative Agent Reliance.  Unless the
Administrative Agent shall have received written notice from the Borrower prior
to the date on which any payment is due to the Lenders that the Borrower shall
not make such payment in full, the Administrative Agent may assume that the
Borrower has made such payment in full to the Administrative Agent on such date
and the Administrative Agent may, in reliance upon such assumption, cause to be
distributed to each Lender on such date an amount equal to the amount then due
such Lender.  If and to the extent the Borrower shall not have so made such
payment in full to the Administrative Agent, each Lender shall repay to the
Administrative Agent forthwith on demand such amount distributed to such Lender,
together with interest, for each day from the date such amount is distributed to
such Lender until the date such Lender repays such amount to the Administrative
Agent, at the Federal Funds Rate for such day.

 

(k)          Sharing of Payments, Etc.  If any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any right of set-off,
or otherwise) on account of the Advances made by it in excess of its Pro Rata
Share of payments on account of the Advances obtained by all the Lenders, such
Lender shall notify the Administrative Agent and forthwith purchase from the
other Lenders such participations in the Advances made or held by them as shall
be necessary to cause such purchasing Lender to share the excess payment ratably
with each of them; provided, however, that if all or any portion of such excess
payment is thereafter recovered from such purchasing Lender, such purchase from
each Lender shall be rescinded and such Lender shall repay to the purchasing
Lender the purchase price to the extent of such Lender’s ratable share
(according to the proportion of (a) the amount of the participation sold by such
Lender to the purchasing Lender as a result of such excess payment to (b) the
total amount

 

28

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

 

of such excess payment) of such recovery, together with an amount equal to such
Lender’s ratable share (according to the proportion of (i) the amount of such
Lender’s required repayment to the purchasing Lender to (ii) the total amount of
all such required repayments to the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the total amount
so recovered.  The Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section 2.11 may, to the fullest extent
permitted by law, exercise all its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrower in the amount of such participation.  If a
Lender fails to make an Advance with respect to a Borrowing as and when required
hereunder and the Borrower subsequently makes a repayment of any Advances, such
repayment shall be split among the non-defaulting Lenders ratably in accordance
with their respective Commitment percentages until each Lender (including the
Defaulting Lender) has its percentage of all of the outstanding Advances and the
balance of such repayment shall be applied among the Lenders in accordance with
their Pro Rata Share.

 

(l)             Breakage Costs.  If (a) any payment of principal of any
Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance, whether as a result of any payment pursuant to
Section 2.05, the acceleration of the maturity of the Notes pursuant to
Article VII, or otherwise, or (b) the Borrower fails to make a principal or
interest payment with respect to any Eurodollar Rate Advance on the date such
payment is due and payable, the Borrower shall, within 10 days of any written
demand sent by any Lender to the Borrower through the Administrative Agent, pay
to the Administrative Agent for the account of such Lender any amounts required
to compensate such Lender for any additional losses, out-of-pocket costs or
expenses which it may reasonably incur as a result of such payment or
nonpayment, including, without limitation, any loss (including loss of
anticipated profits), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by any Lender to fund or
maintain such Advance.

 

(m)       Increased Costs.

 

(i)                                     Eurodollar Rate Advances.  If, due to
either (i) the introduction of or any change (other than any change by way of
imposition or increase of reserve requirements included in the Eurodollar Rate
Reserve Percentage) in or in the interpretation of any law or regulation or
(ii) the compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), there shall be
any increase in the cost to any Lender of agreeing to make or making, funding,
or maintaining Eurodollar Rate Advances, then the Borrower shall from time to
time, upon demand by such Lender (with a copy of such demand to the
Administrative Agent), immediately pay to the Administrative Agent for the
account of such Lender additional amounts sufficient to compensate such Lender
for such increased cost.  A certificate as to the amount of such increased cost
and detailing the calculation of such cost submitted to the Borrower and the
Administrative Agent by such Lender shall be conclusive and binding for all
purposes, absent manifest error.

 

(ii)                                  Capital Adequacy.  If any Lender
determines in good faith that compliance with any law or regulation adopted or
changed after the date hereof or any guideline or request from any central bank
or other Governmental Authority (whether or not having the force of law) affects
or would affect the amount of capital required or expected to be maintained by
such

 

29

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

 

Lender or any corporation controlling such Lender and that the amount of such
capital is increased by or based upon the existence of such Lender’s commitment
to lend and other commitments of this type, then, upon 30 days’ prior written
notice by such Lender (with a copy of any such demand to the Administrative
Agent), the Borrower shall immediately pay to the Administrative Agent for the
account of such Lender, from time to time as specified by such Lender,
additional amounts sufficient to compensate such Lender, in light of such
circumstances, to the extent that such Lender reasonably determines such
increase in capital to be allocable to the existence of such Lender’s commitment
to lend under this Agreement.  A certificate as to such amounts and detailing
the calculation of such amounts submitted to the Borrower by such Lender shall
be conclusive and binding for all purposes, absent manifest error.

 

(iii)                               Reserved.

 

(iv)                              Mitigation.  Each Lender claiming compensation
pursuant to this Section 2.13 shall designate a different Lending Office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the sole discretion of such Lender, be otherwise
disadvantageous to such Lender.

 

(n)         Taxes.

 

(i)                                     No Deduction for Certain Taxes.  Any and
all payments by the Borrower shall be made, in accordance with Section 2.10,
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender and the Administrative
Agent, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender or the Administrative Agent (as
the case may be) is organized or any political subdivision of the jurisdiction
(all such non-excluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as “Taxes”) and, in the case of
each Lender, Taxes by the jurisdiction of such Lender’s Lending Office or any
political subdivision of such jurisdiction.  If the Borrower shall be required
by law to deduct any Taxes from or in respect of any sum payable to any Lender
or the Administrative Agent, (i) the sum payable shall be increased as may be
necessary so that, after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.14), such Lender or
the Administrative Agent (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made; provided, however,
that if the Borrower’s obligation to deduct or withhold Taxes is caused solely
by such Lender’s, or the Administrative Agent’s failure to provide the forms
described in paragraph (d) of this Section 2.14 and such Lender or the
Administrative Agent could have provided such forms, no such increase shall be
required; (ii) the Borrower shall make such deductions; and (iii) the Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.

 

(ii)                                  Other Taxes.  In addition, the Borrower
agrees to pay any present or future stamp or documentary taxes or any other
excise or property taxes, charges or similar levies which arise from any payment
made or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement, the Notes, or the other Loan Documents (hereinafter
referred to as “Other Taxes”).

 

30

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

 

(iii)                               Indemnification.  THE BORROWER INDEMNIFIES
EACH LENDER AND THE ADMINISTRATIVE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER
TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY
JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14) PAID BY SUCH LENDER OR
THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING
INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT
SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED.  EACH PAYMENT
REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE
MADE TO THE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH
INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN
DEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS
ADMINISTRATIVE AGENT OR ANY SUCH LENDER.  IF ANY LENDER OR THE ADMINISTRATIVE
AGENT RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE BORROWER UNDER THIS
PARAGRAPH (C), SUCH LENDER OR THE ADMINISTRATIVE AGENT, AS THE CASE MAY BE,
SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER’S SHARE OF SUCH REFUND.

 

(iv)                              Foreign Lender Withholding Exemption.  Each
Lender that is not incorporated under the laws of the United States of America
or a state thereof agrees that it shall deliver to the Borrower and the
Administrative Agent (i) two duly completed copies of United States Internal
Revenue Service Form W8-ECI or W8-BEN or successor applicable form, as the case
may be, certifying in each case that such Lender is entitled to receive payments
under this Agreement and the Notes payable to it, without deduction or
withholding of any United States federal income taxes, (ii) if applicable, an
Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the
case may be, to establish an exemption from United States backup withholding
tax, and (iii) any other governmental forms which are necessary or required
under an applicable tax treaty or otherwise by law to reduce or eliminate any
withholding tax, which have been reasonably requested by the Borrower.  Each
Lender which delivers to the Borrower and the Administrative Agent a Form W8-ECI
or W8-BEN and Form W-8 or W-9 pursuant to the next preceding sentence further
undertakes to deliver to the Borrower and the Administrative Agent two further
copies of the said letter and Form W8-ECI or W8-BEN and Form W-8 or W-9 , or
successor applicable forms, or other manner of certification, as the case may
be, on or before the date that any such letter or form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent letter and form previously delivered by it to the Borrower and the
Administrative Agent, and such extensions or renewals thereof as may reasonably
be requested by the Borrower and the Administrative Agent certifying in the case
of a Form W8-ECI or W8-BEN that such Lender is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes.  If an event (including without limitation any change in
treaty, law or regulation) has occurred prior to the date on which any delivery
required by the preceding sentence would otherwise be required which renders all
such forms inapplicable or which would prevent any Lender from duly completing
and delivering any such letter or form with respect to it and such Lender
advises the Borrower and the Administrative Agent that it is not capable of
receiving payments without any deduction or withholding of United States federal
income tax, and in the case of a Form W-8

 

31

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

 

or W-9, establishing an exemption from United States backup withholding tax,
such Lender shall not be required to deliver such letter or forms.  The Borrower
shall withhold tax at the rate and in the manner required by the laws of the
United States with respect to payments made to a Lender failing to timely
provide the requisite Internal Revenue Service forms.

 

(o)         Replacement of Lender.  If (i) any Lender requests compensation
under Section 2.13(a) or (b), (ii) any Lender suspends its obligation to
continue, or Convert Advances into, Eurodollar Rate Advances pursuant to
Section 2.03(c)(ii) or Section 2.11, or (iii) at any time prior to the
Commitment Termination Date, any Lender becomes a Defaulting Lender (any such
Lender, a “Subject Lender”), then (A) in the case of a Defaulting Lender, the
Administrative Agent may, upon notice to the Subject Lender and the Borrower,
require such Subject Lender to assign and delegate, without recourse (in
accordance with and subject to the restrictions contained in, and consents
required by, Section 9.06), all of its interests, rights and obligations under
this Agreement and the related Loan Documents to an Eligible Assignee that shall
assume such obligations (which Eligible Assignee may be another Lender, if a
Lender accepts such assignment) and (B) in the case of any Subject Lender,
including a Defaulting Lender, the Borrower may, upon notice to the Subject
Lender and the Administrative Agent and at the Borrower’s sole cost and expense,
require such Subject Lender to assign, without recourse (in accordance with and
subject to the restrictions contained in, and consents required by,
Section 9.06), all of its interests, rights and obligations under this Agreement
and the related Loan Documents to an assignee that shall assume such obligations
(which assignee may be another Lender, if a Lender accepts such assignment),
provided that:

 

(A)                              as to assignments required by the Borrower, the
Borrower shall have paid to the Administrative Agent the assignment fee
specified in Section 9.06;

 

(B)                                such Subject Lender shall have received
payment of an amount equal to the outstanding principal of its Advances and
participations in outstanding Letter of Credit Obligations, accrued interest
thereon, accrued fees and all other amounts payable to it hereunder and under
the other Loan Documents (including any amounts under Section 2.12) from the
assignee (to the extent of such outstanding principal and accrued interest and
fees) or the Applicable Borrower (in the case of all other amounts);

 

(C)                                in the case of any such assignment resulting
from a claim for compensation under Section 2.13, such assignment will result in
a reduction in such compensation or payments thereafter; and

 

(D)                               such assignment does not conflict with
applicable Legal Requirements.

A Lender shall not be required to make any such assignment or delegation if,
prior thereto, as a result of a waiver by such Lender or otherwise, the
circumstances entitling the Borrower to require such assignment and delegation
cease to apply.  Solely for purposes of effecting the assignment required for a
Defaulting Lender under this Section 2.15 and to the extent permitted under
applicable Legal Requirements, each Lender hereby designates and appoints the
Administrative Agent as true and lawful agent and attorney-in-fact, with full
power and authority, for and on behalf of and in the name of such Lender to
execute, acknowledge and deliver the Assignment and Acceptance required
hereunder if such Lender was a Defaulting

 

32

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

 

 

Lender and such Lender shall be bound thereby as fully and effectively as if
such Lender had personally executed, acknowledged and delivered the same.  In
lieu of the Borrower or the Administrative Agent replacing a Defaulting Lender
as provided in this Section 2.15, the Borrower may terminate such Defaulting
Lender’s Commitment as provided in Section 2.04.].

 

(p)   Increase in Commitments.

 

(i)            Request for Increase.  Provided there exists no Default and
subject to the Subordination and Intercreditor Agreement, upon notice to the
Administrative Agent (which shall promptly notify the Lenders), the Borrower may
at any time prior to the Maturity Date, request an increase in the aggregate
Commitments (each such increase being a “Commitment Increase”) by an amount (for
all such requests) not exceeding $10,000,000; provided that (i) any such request
for an increase shall be in a minimum amount of $5,000,000, (ii) the aggregate
Commitments, after giving effect to all Commitment Increases, shall not exceed
the Maximum Note Amount, (iii) the Company may make a maximum of two such
requests and (iv) all Commitments and Advances provided pursuant to a Commitment
Increase shall be available on the same terms as those applicable to the
existing Commitments and Advances.  At the time of sending such notice, the
Borrower (in consultation with the Administrative Agent) shall specify the time
period within which each Lender is requested to respond (which shall in no event
be less than ten Business Days from the date of delivery of such notice to the
Lenders).

 

(ii)           Lender Elections to Increase.  Each Lender shall notify the
Administrative Agent within such time period whether or not it agrees to
increase its Commitment and, if so, whether by an amount equal to, greater than,
or less than its Pro Rata Share of such requested increase.  Any Lender not
responding within such time period shall be deemed to have declined to increase
its Commitment.

 

(iii)          Notification by Administrative Agent; Additional Lenders.  The
Administrative Agent shall notify the Borrower and each Lender of the Lenders’
responses to each request made hereunder.  To achieve the full amount of a
requested increase and subject to the approval of the Administrative Agent, the
Borrower may also invite additional Eligible Assignees to become Lenders
pursuant to a joinder agreement in form and substance satisfactory to the
Administrative Agent and its counsel.

 

(iv)          Effective Date and Allocations.  If the Commitments are increased
in accordance with this Section, the Administrative Agent and the Borrower shall
determine the effective date (the “Increase Effective Date”) and the final
allocation of such increase.  The Administrative Agent shall promptly notify the
Borrower and the Lenders of the final allocation of such increase and the
Increase Effective Date.

 

(v)           Conditions to Effectiveness of Increase.  An increase of the
Commitments provided in this Section 2.16 shall become effective on the Increase
Effective Date only upon the satisfaction of the following conditions precedent
on or prior to such Increase Effective Date:  the receipt by the Administrative
Agent of (i) an agreement in form and substance reasonably satisfactory to the
Administrative Agent signed by the Borrower, each Lender and each new lender,
setting forth its Commitments, if any, increased pursuant to this Section 2.16
and setting forth the agreement of each new lender to become a party to this
Agreement and to be bound by

 

33

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

 

all the terms and provisions hereof binding upon each Lender, and (ii) a
certificate of each Guarantor and the Borrower dated as of the Increase
Effective Date (in sufficient copies for each Lender) signed by a Responsible
Officer of such Person certifying and attaching the resolutions adopted by such
Person approving or consenting to such increase, and in the case of the
Borrower, certifying that, before and after giving effect to such increase,
(A) the representations and warranties contained in Article IV and the other
Loan Documents are true and correct, in all material respects, on and as of the
Increase Effective Date, except to the extent that such representations and
warranties specifically refer to an earlier date, in which case they are true
and correct, in all material respects, as of such earlier date, and except that
for purposes of this Section 2.16, the representations and warranties contained
in subsections (b) and (c) of Section 4.05 shall be deemed to refer to the most
recent statements furnished pursuant to clauses (a) and (b), respectively, of
Section 5.06, and (B) no Default exists.

 

(vi)          No Commitment.  This Section 2.16 shall not be construed to create
any obligation on the Administrative Agent or any of the Lenders to advance or
to commit to advance any credit to the Borrower or to arrange for any other
Person to advance or to commit to advance any credit to the Borrower.

 

(vii)         Conflicting Provisions.  This Section shall supersede any
provisions in Section 2.11 or 9.01 to the contrary.

 

Section 3.

CONDITIONS OF LENDING

 

(a)   Conditions Precedent to Initial Credit Extension.  The obligation of each
Lender to make its Credit Extension on the Effective Date hereunder is subject
to satisfaction of the following conditions precedent:

 

(i)            Documentation.  The Administrative Agent shall have received the
following duly executed by all the parties thereto, in form and substance
satisfactory to the Administrative Agent and the Lenders, and, where applicable,
in sufficient copies for each Lender:

 

(i)            this Agreement, a Note payable to the order of each Lender in the
amount of its Commitment, the Guaranties, the Pledge Agreement, the Security
Agreements, and Mortgages encumbering substantially all of the Borrower’s and
its Subsidiaries’ Proven Reserves and Oil and Gas Properties in which the Senior
Administrative Agent has a Lien, and each of the other Loan Documents, and all
attached exhibits and schedules;

 

(ii)           a favorable opinion of the Borrower’s, its Subsidiaries’ and the
Guarantors’ counsel dated as of the date of this Agreement and substantially in
the form of the attached Exhibit K covering the matters discussed in such
Exhibit and such other matters as any Lender through the Administrative Agent
may reasonably request;

 

(iii)          copies, certified as of the date of this Agreement by a
Responsible Officer of the Borrower of (A) the resolutions of the Board of
Directors of the Borrower approving the Loan Documents to which the Borrower is
a party, (B) the certificate of incorporation of the

 

34

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

 

Borrower, (C) the bylaws of the Borrower, and (D) all other documents evidencing
other necessary corporate action and governmental approvals, if any, with
respect to this Agreement, the Note, and the other Loan Documents;

 

(iv)          certificates of a Responsible Officer of the Borrower certifying
the names and true signatures of the officers of the Borrower authorized to sign
this Agreement, the Notes, Notices of Borrowing, Notices of Conversion or
Continuation, and the other Loan Documents to which the Borrower is a party;

 

(v)           copies, certified as of the date of this Agreement by a
Responsible Officer or the secretary or an assistant secretary of each Guarantor
of (A) the resolutions of the Board of Directors (or other applicable governing
body) of such Guarantor approving the Loan Documents to which it is a party,
(B) the articles or certificate (as applicable) of incorporation (or
organization) and bylaws of such Guarantor, and (C) all other documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to the Guaranty, the Security Instruments, and the other Loan
Documents to which such Guarantor is a party;

 

(vi)          a certificate of the secretary or an assistant secretary of each
Guarantor certifying the names and true signatures of officers of such Guarantor
authorized to sign the Guaranty, Security Instruments and the other Loan
Documents to which such Guarantor is a party;

 

(vii)         a certificate dated as of the date of this Agreement from the
Responsible Officer of the Borrower stating that the conditions in this
Section 3.01 have been met;

 

(viii)        appropriate UCC-1 Financing Statements covering the Collateral for
filing with the appropriate authorities and any other documents, agreements or
instruments necessary to create an Acceptable Security Interest in such
Collateral;

 

(ix)           insurance certificates evidencing insurance which meets the
requirements of this Agreement and the Security Instruments, and which is
otherwise satisfactory to the Administrative Agent;

 

(x)            the initial Independent Engineer’s Report dated effective as of a
date acceptable to the Administrative Agent;

 

(xi)           the Subordination and Intercreditor Agreement; and

 

(xii)          such other documents, governmental certificates, agreements and
lien searches as the Administrative Agent or any Lender may reasonably request.

 

(ii)           Payment of Fees.  On or prior to the date of this Agreement, the
Borrower shall have paid the fees required by Section 2.08(c) and all costs and
expenses that have been invoiced and are payable pursuant to Section 9.04.

 

(iii)          Delivery of Financial Statements.  The Administrative Agent and
the Lenders shall have received true and correct copies of (i) the Financial
Statements, (ii) the Interim Financial Statements, (iii) Projections through
[June 30, 2012], (iv) pro forma unaudited

 

35

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

 

consolidating financial statements of the Borrower as of the Effective Date
after giving effect to the Advances made hereunder and any credit extensions
outstanding on the Effective Date under the Senior Credit Agreement, including
therein the Borrower’s consolidated balance sheet and statements of income, cash
flows, and retained earnings, (v) a sources and uses statement outlining the
uses to which the proceeds of the Advances will be applied on the Effective
Date, and (vi) such other financial information as the Lenders may reasonably
request.

 

(iv)          Security Instruments.  The Administrative Agent shall have
received all appropriate evidence required by the Administrative Agent and the
Lenders in their sole discretion necessary to determine that the Administrative
Agent (for its benefit and the benefit of the Secured Parties) shall have an
Acceptable Security Interest in the Collateral and that all actions or filings
necessary to protect, preserve and validly perfect such Liens have been made,
taken or obtained, as the case may be, and are in full force and effect.

 

(v)           Due Diligence on Title and Environmental.  The Administrative
Agent shall be satisfied with the condition of the Oil and Gas Properties with
respect to the Borrower’s and its Subsidiaries’ compliance with Environmental
Laws and the Borrower’s and its Subsidiaries’ title to such properties.

 

(vi)          No Default.  No Default shall have occurred and be continuing.

 

(vii)         Representations and Warranties.  The representations and
warranties contained in Article IV hereof and in each other Loan Document shall
be true and correct in all material respects.

 

(viii)        Material Adverse Change.  No event or circumstance that could
cause a Material Adverse Change shall have occurred.

 

(ix)           No Proceeding or Litigation; No Injunctive Relief.  No action,
suit, investigation or other proceeding (including, without limitation, the
enactment or promulgation of a statute or rule) by or before any arbitrator or
any Governmental Authority shall be threatened or pending and no preliminary or
permanent injunction or order by a state or federal court shall have been
entered (i) in connection with this Agreement or any transaction contemplated
hereby or (ii) which in the judgment of the Administrative Agent, could
reasonably be expected to result in a Material Adverse Change (other than the
developments under the litigation proceedings set forth on Schedule 4.07 which
have been disclosed to the Administrative Agent prior to the Effective Date).

 

(x)            Consents, Licenses, Approvals, etc.  The Administrative Agent
shall have received true copies (certified to be such by the Borrower or other
appropriate party) of all consents, licenses and approvals required in
accordance with applicable law, or in accordance with any document, agreement,
instrument or arrangement to which the Borrower, the Guarantors and their
respective Subsidiaries is a party, in connection with the execution, delivery,
performance, validity and enforceability of this Agreement and the other Loan
Documents.  In addition, the Borrower, the Guarantors and their respective
Subsidiaries shall have all such material consents, licenses and approvals
required in connection with the continued operation of the Borrower, the
Guarantors and respective Subsidiaries, and such approvals shall

 

36

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

 

be in full force and effect, and all applicable waiting periods shall have
expired without any action being taken or threatened by any competent authority
which would restrain, prevent or otherwise impose adverse conditions on this
Agreement and the actions contemplated hereby.

 

(xi)           Hedging Arrangements.  The Borrower shall have entered into the
Hydrocarbon Hedge Agreements required by Section 5.12.

 

(xii)          Material Contracts.  The Borrower shall have delivered to the
Administrative Agent copies of all material contracts, agreements or instruments
listed on the attached Schedule 4.21.

 

(xiii)         USA Patriot Act.  The Borrower has delivered to each Lender that
is subject to the Patriot Act such information requested by such Lender in order
to comply with the Patriot Act.

 

(b)   Conditions Precedent to All Borrowings.  The obligation of each Lender to
make an Advance on the occasion of each Borrowing shall be subject to the
further conditions precedent that on the date of such Borrowing:

 

(i)            the following statements shall be true (and each of the giving of
the applicable Notice of Borrowing and Notice of Conversion or Continuation and
the acceptance by the Borrower of the proceeds of such Borrowing shall
constitute a representation and warranty by the Borrower that on the date of
such Borrowing such statements are true):

 

(i)            the representations and warranties contained in Article IV of
this Agreement and the representations and warranties contained in the Security
Instruments, the Guaranties, and each of the other Loan Documents are true and
correct in all material respects on and as of the date of such Borrowing before
and after giving effect to such Borrowing and to the application of the proceeds
from such Borrowing, as though made on and as of such date except to the extent
that any such representation or warranty expressly relates solely to an earlier
date, in which case it shall have been true and correct in all material respects
as of such earlier date; and

 

(ii)           no Default has occurred and is continuing or would result from
such Borrowing or from the application of the proceeds therefrom, and

 

(ii)           the Administrative Agent shall have received such other
approvals, opinions, or documents reasonably deemed necessary or desirable by
any Lender as a result of circumstances occurring after the date of this
Agreement, as any Lender through the Administrative Agent may reasonably
request.

 

37

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

 

Section 4.

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and warrants as follows:

 

(a)   Existence; Subsidiaries.  The Borrower is a corporation duly organized,
validly existing and in good standing under the laws of Delaware and in good
standing and qualified to do business in each other jurisdiction where its
ownership or lease of Property or conduct of its business requires such
qualification except where the failure to be so qualified could not,
individually or in the aggregate, reasonably be expected to cause a Material
Adverse Change.  Each Subsidiary of the Borrower is duly organized, validly
existing, and in good standing under the laws of its jurisdiction of formation
and in good standing and qualified to do business in each jurisdiction where its
ownership or lease of Property or conduct of its business requires such
qualification except where the failure to be so qualified could not,
individually or in the aggregate, reasonably be expected to cause a Material
Adverse Change.  As of the date hereof, the Borrower has no Subsidiaries other
than those listed identified in Schedule 4.01.

 

(b)   Power.  The execution, delivery, and performance by the Borrower of this
Agreement, the Notes, and the other Loan Documents to which it is a party and by
the Guarantors of the Guaranties and the other Loan Documents to which they are
a party and the consummation of the transactions contemplated hereby and thereby
(a) are within the Borrower’s and such Guarantors’ governing powers, (b) have
been duly authorized by all necessary governing action, (c) do not contravene
(i) the Borrower’s or any Guarantor’s certificate or articles of incorporation,
bylaws, limited liability company agreement, or other similar governance
documents or (ii) any law or any contractual restriction binding on or affecting
the Borrower or any Guarantor, and (d) will not result in or require the
creation or imposition of any Lien prohibited by this Agreement.  At the time of
each Advance, such Advance and the use of the proceeds of such Advance, will be
within the Borrower’s governing powers, will have been duly authorized by all
necessary corporate action, will not contravene (i) the Borrower’s certificate
of incorporation and bylaws or other organizational documents or (ii) any law or
any contractual restriction binding on or affecting the Borrower and will not
result in or require the creation or imposition of any Lien prohibited by this
Agreement.

 

(c)   Authorization and Approvals.  No consent, order, authorization, or
approval or other action by, and no notice to or filing with, any Governmental
Authority or any other Person is required for the due execution, delivery, and
performance by the Borrower of this Agreement, the Notes, or the other Loan
Documents to which the Borrower is a party or by each Guarantor of its Guaranty
or the other Loan Documents to which it is a party or the consummation of the
transactions contemplated thereby.  At the time of each Borrowing, no
authorization or approval or other action by, and no notice to or filing with,
any Governmental Authority will be required for such Borrowing or the use of the
proceeds of such Borrowing.

 

(d)   Enforceable Obligations.  This Agreement, the Notes, and the other Loan
Documents to which the Borrower is a party have been duly executed and delivered
by the Borrower and the Guaranties and the other Loan Documents to which each
Guarantor is a party have been duly executed and delivered by the Guarantors. 
Each Loan Document is the legal,

 

38

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

 

valid, and binding obligation of the Borrower and each Guarantor which is a
party to it enforceable against the Borrower and each such Guarantor in
accordance with its terms, except as such enforceability may be limited by any
applicable bankruptcy, insolvency, reorganization, moratorium, or similar law
affecting creditors’ rights generally and by general principles of equity.

 

(e)   Financial Statements.

 

(i)            The Borrower has delivered to the Administrative Agent and the
Lenders copies of the Financial Statements and the Interim Financial Statements,
and the Financial Statements and the Interim Financial Statements are accurate
and complete in all material respects and present fairly the financial condition
of Borrower and its consolidated Subsidiaries for their respective period in
accordance with GAAP.  As of the date of the Financial Statements, there were no
material contingent obligations, liabilities for taxes, unusual forward or
long-term commitments, or unrealized or anticipated losses of the Borrower or
any Subsidiary, except as disclosed therein and adequate reserves for such items
have been made in accordance with GAAP.

 

(ii)           Since the date of the Financial Statements, no event or
circumstance that could cause a Material Adverse Change has occurred.

 

(iii)          As of the date hereof, the Borrower, the Guarantors and their
respective Subsidiaries have no Debt other than the Debt listed on Schedule
4.05.

 

(f)    True and Complete Disclosure.  All factual information (excluding
estimates) heretofore or contemporaneously furnished by or on behalf of the
Borrower or any of the Guarantors in writing to any Lender or the Administrative
Agent for purposes of or in connection with this Agreement, any other Loan
Document or any transaction contemplated hereby or thereby is, and all other
such factual information hereafter furnished by or on behalf of the Borrower and
the Guarantors in writing to the Administrative Agent or any of the Lenders was
or shall be, true and accurate in all material respects on the date as of which
such information was or is dated or certified and did not or does not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements contained therein not misleading at such time. 
All projections, estimates, and pro forma financial information furnished by the
Borrower were prepared on the basis of assumptions, data, information, tests, or
conditions believed to be reasonable at the time such projections, estimates,
and pro forma financial information were furnished.

 

(g)   Litigation; Compliance with Laws.

 

(i)            There is no pending or, to the best knowledge of the Borrower,
threatened action or proceeding affecting the Borrower or any of the Guarantors
before any court, Governmental Authority or arbitrator which could reasonably be
expected to cause a Material Adverse Change other than as set forth in Schedule
4.07 or which purports to affect the legality, validity, binding effect or
enforceability of this Agreement, any Note, or any other Loan Document. 
Additionally, there is no pending or, to the best of the knowledge of the
Borrower, threatened action or proceeding instituted against the Borrower or any
of the Guarantors which

 

39

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

 

seeks to adjudicate the Borrower or any of the Guarantors as bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for it or for any substantial part of its
Property.

 

(ii)           The Borrower and its Subsidiaries have complied in all material
respects with all material statutes, rules, regulations, orders and restrictions
of any Governmental Authority having jurisdiction over the conduct of their
respective businesses or the ownership of their respective Property

 

(h)   Use of Proceeds.  The proceeds of the Advances will be used by the
Borrower for the purposes described in Section 5.09.  The Borrower is not
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U).  No proceeds of any
Advance will be used to purchase or carry any margin stock in violation of
Regulation T, U or X.

 

(i)    Investment Company Act.  Neither the Borrower nor any of the Guarantors
is an “investment company” or a company “controlled” by an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.

 

(j)    Federal Power Act.  Neither the Administrative Agent nor any of the
Lenders, solely by virtue of the execution, delivery and performance of, and the
consummation of the transactions contemplated by, the Loan Documents shall be or
become subject to regulation (a) under the Federal Power Act, as amended, (b) as
a “public utility” or “public service corporation” or the equivalent under the
applicable law of any state, or (c) under the applicable laws of any state
relating to public utilities or public service corporations.

 

(k)   Taxes.

 

(i)            Reports and Payments.  All Returns (as defined below in clause
(c) of this Section) required to be filed by or on behalf of the Borrower, the
Guarantors, or any member of the Controlled Group (hereafter collectively called
the “Tax Group”) have been duly filed on a timely basis or appropriate
extensions have been obtained and such Returns are and will be true, complete
and correct, except where the failure to so file would not be reasonably
expected to cause a Material Adverse Change; and all Taxes shown to be payable
on the Returns or on subsequent assessments with respect thereto will have been
paid in full on a timely basis, and no other Taxes will be payable by the Tax
Group with respect to items or periods covered by such Returns, except in each
case to the extent of (i) reserves reflected in the Financial Statements and the
Interim Financial Statements, or (ii) taxes that are being contested in good
faith.  The reserves for accrued Taxes reflected in the financial statements
delivered to the Lenders under this Agreement are adequate in the aggregate for
the payment of all unpaid Taxes, whether or not disputed, for the period ended
as of the date thereof and for any period prior thereto, and for which the Tax
Group may be liable in its own right, as withholding agent or as a transferee of
the assets of, or successor to, any Person.

 

40

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

 

(ii)           Taxes Definition.  “Taxes” in this Section 4.11 shall mean all
taxes, charges, fees, levies, or other assessments imposed by any federal,
state, local, or foreign taxing authority, including without limitation, income,
gross receipts, excise, real or personal property, sales, occupation, use,
service, leasing, environmental, value added, transfer, payroll, and franchise
taxes (and including any interest, penalties, or additions to tax attributable
to or imposed on with respect to any such assessment).

 

(iii)          Returns Definition.  “Returns” in this Section 4.11 shall mean
any federal, state, local, or foreign report, estimate, declaration of estimated
Tax, information statement or return relating to, or required to be filed in
connection with, any Taxes, including any information return or report with
respect to backup withholding or other payments of third parties.

 

(l)    Pension Plans.  All Plans are in compliance in all material respects with
all applicable provisions of ERISA.  No Termination Event has occurred with
respect to any Plan, and each Plan has complied with and been administered in
all material respects in accordance with applicable provisions of ERISA and the
Code.  No “accumulated funding deficiency” (as defined in Section 302 of ERISA)
has occurred and there has been no excise tax imposed under Section 4971 of the
Code.  No Reportable Event under Section 4043 of ERISA and the regulations
issued thereunder has occurred with respect to any Multiemployer Plan, and each
Multiemployer Plan has complied with and been administered in all material
respects with applicable provisions of ERISA and the Code.  The present value of
all benefits vested under each Plan (based on the assumptions used to fund such
Plan) did not, as of the last annual valuation date applicable thereto, exceed
the value of the assets of such Plan allocable to such vested benefits.  Neither
the Borrower nor any member of the Controlled Group has had a complete or
partial withdrawal from any Multiemployer Plan for which there is any withdrawal
liability.  As of the most recent valuation date applicable thereto, neither the
Borrower nor any member of the Controlled Group would become subject to any
liability under ERISA if the Borrower or any member of the Controlled Group has
received notice that any Multiemployer Plan is insolvent or in reorganization. 
Based upon GAAP existing as of the date of this Agreement and current factual
circumstances, the Borrower has no reason to believe that the annual cost during
the term of this Agreement to the Borrower or any member of the Controlled Group
for post-retirement benefits to be provided to the current and former employees
of the Borrower or any member of the Controlled Group under Plans that are
welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the
aggregate, reasonably be expected to cause a Material Adverse Change.

 

(m)  Condition of Property; Casualties.  Each of the Borrower and the Guarantors
has good and marketable title to all of its Oil and Gas Properties as is
customary in the oil and gas industry in all material respects, free and clear
of all Liens except for Permitted Liens.  Each of the Borrower and the
Guarantors has good and indefeasible title to all of its other Properties, free
and clear of all Liens except for Permitted Liens.  The material Properties used
or to be used in the continuing operations of the Borrower and each of the
Guarantors are in good repair, working order and condition.  Since the date of
the Financial Statements, neither the business nor the material Properties of
the Borrower and each of the Guarantors, taken as a whole, has been materially
and adversely affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property

 

41

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

 

or cancellation of contracts, Permits, or concessions by a Governmental
Authority, riot, activities of armed forces, or acts of God or of any public
enemy.

 

(n)   No Burdensome Restrictions; No Defaults.

 

(i)            Other than those identified on Schedule 4.14(a), neither the
Borrower nor any Guarantor is a party to any indenture, loan, or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction or provision of applicable law or governmental
regulation that could reasonably be expected to cause a Material Adverse
Change.  Neither the Borrower nor any of its Subsidiaries is in default under or
with respect to any contract, agreement, lease, or other instrument to which the
Borrower or any Subsidiary is a party and which could reasonably be expected to
cause a Material Adverse Change or under any agreement in connection with any
Debt.  Neither the Borrower nor any of its Subsidiaries has received any notice
of default under any material contract, agreement, lease, or other instrument to
which the Borrower or such Subsidiary is a party a copy of which has not been
delivered to the Administrative Agent.

 

(ii)           No Default has occurred and is continuing.

 

(o)   Environmental Condition.

 

(i)            Permits, Etc.  The Borrower and the Guarantors (i) have obtained
all Environmental Permits necessary for the ownership and operation of their
respective Properties and the conduct of their respective businesses; (ii) have
at all times been and are in material compliance with all terms and conditions
of such Permits and with all other material requirements of applicable
Environmental Laws; (iii) have not received notice of any material violation or
alleged violation of any Environmental Law or Permit; and (iv) are not subject
to any actual or contingent Environmental Claim, which could reasonably be
expected to cause a Material Adverse Change.

 

(ii)           Certain Liabilities.  To the Borrower’s actual knowledge, none of
the present or previously owned or operated Property of the Borrower or any
Guarantor or of any of their former Subsidiaries, wherever located, (i) has been
placed on or proposed to be placed on the National Priorities List, the
Comprehensive Environmental Response Compensation Liability Information System
list, or their state or local analogs, or have been otherwise investigated,
designated, listed, or identified as a potential site for removal, remediation,
cleanup, closure, restoration, reclamation, or other response activity under any
Environmental Laws; (ii) is subject to a Lien, arising under or in connection
with any Environmental Laws, that attaches to any revenues or to any Property
owned or operated by the Borrower or any of the Guarantors, wherever located,
which could reasonably be expected to cause a Material Adverse Change; or
(iii) has been the site of any Release of Hazardous Substances or Hazardous
Wastes from present or past operations which has caused at the site or at any
third-party site any condition that has resulted in or could reasonably be
expected to result in the need for Response that would cause a Material Adverse
Change.

 

(iii)          Certain Actions.  Without limiting the foregoing, (i) all
necessary notices have been properly filed, and no further action is required
under current Environmental Law as

 

42

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

 

to each Response or other restoration or remedial project undertaken by the
Borrower or the Guarantors or any of their former Subsidiaries on any of their
presently or formerly owned or operated Property and (ii) the present and, to
the Borrower’s best knowledge, future liability, if any, of the Borrower and the
Guarantors which could reasonably be expected to arise in connection with
requirements under Environmental Laws will not result in a Material Adverse
Change.

 

(p)   Permits, Licenses, Etc.  The Borrower and the Guarantors possess all
authorizations, Permits, licenses, patents, patent rights or licenses,
trademarks, trademark rights, trade names rights and copyrights which are
material to the conduct of their business.  The Borrower and the Guarantors
manage and operate their business in all material respects in accordance with
all applicable Legal Requirements and good industry practices.

 

(q)   Gas Contracts.  Neither the Borrower nor any of the Guarantors, as of the
date hereof, (a) is 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 Borrower’s and its Subsidiaries’ Oil and Gas
Properties at some future date without receiving full payment therefor at the
time of delivery, or (b) except as has been disclosed to the Administrative
Agent, has produced gas, in any material amount, subject to, and none of the
Borrower’s and the Guarantors’ Oil and Gas Properties is subject to, balancing
rights of third parties or subject to balancing duties under governmental
requirements.

 

(r)    Liens; Titles, Leases, Etc.  None of the Property of the Borrower or any
of the Guarantors is subject to any Lien other than Permitted Liens.  On the
date of this Agreement, all governmental actions and all other filings,
recordings, registrations, third party consents and other actions which are
necessary to create and perfect the Liens provided for in the Security
Instruments will have been made, obtained and taken in all relevant
jurisdictions.  All leases and agreements for the conduct of business of the
Borrower and the Guarantors are valid and subsisting, in full force and effect
and there exists no default or event of default or circumstance which with the
giving of notice or lapse of time or both would give rise to a default under any
such leases or agreements which could reasonably be expected to cause a Material
Adverse Change.  Neither the Borrower nor any of the Guarantors is a party to
any agreement or arrangement (other than this Agreement and the Security
Instruments), or subject to any order, judgment, writ or decree, which either
restricts or purports to restrict its ability to grant Liens to secure the
Obligations against their respective assets or Properties.

 

(s)   Solvency and Insurance.  Before and after giving effect to the making of
the initial Advances, each of the Borrower and its Subsidiaries is Solvent. 
Additionally, each of the Borrower and its Subsidiaries carry insurance required
under Section 5.02 of this Agreement.

 

(t)    Hedging Agreements.  Schedule 4.20 sets forth, as of the date hereof, a
true and complete list of all Interest Hedge Agreements, Hydrocarbon Hedge
Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, the
material terms thereof (including the type, term, effective date, termination
date and notional amounts or volumes), the net mark to market value thereof, all
credit support agreements relating thereto (including any margin required or
supplied), and the counterparty to each such agreement.

 

43

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

 

(u)   Material Agreements.  Schedule 4.21 sets forth a complete and correct list
of all material agreements, leases, indentures, purchase agreements, obligations
in respect of letters of credit, guarantees, joint venture agreements, and other
instruments in effect or to be in effect as of the date hereof (other than the
agreements set forth in Schedule 4.20) providing for, evidencing, securing or
otherwise relating to any Debt of the Borrower or any of the Guarantors, and all
obligations of the Borrower or any of the Guarantors to issuers of surety or
appeal bonds issued for account of the Borrower or any such Guarantor, and such
list correctly sets forth the names of the debtor or lessee and creditor or
lessor with respect to the Debt or lease obligations outstanding or to be
outstanding and the Property subject to any Lien securing such Debt or lease
obligation.  Also set forth on Schedule 4.21 hereto is a complete and correct
list of all material agreements and other instruments of the Borrower and the
Guarantors relating to the purchase, transportation by pipeline, gas processing,
marketing, sale and supply of natural gas and other Hydrocarbons.  The Borrower
has heretofore delivered to the Administrative Agent and the Lenders a complete
and correct copy of all such material credit agreements, indentures, purchase
agreements, contracts, letters of credit, guarantees, joint venture agreements,
or other instruments, including any modifications or supplements thereto, as in
effect on the date hereof.

 

Section 5.

 

AFFIRMATIVE COVENANTS

 

So long as any Note or any amount under any Loan Document shall remain unpaid,
or any Lender shall have any Commitment hereunder, the Borrower agrees, unless
the Majority Lenders shall otherwise consent in writing, to comply with the
following covenants.

 

(a)   Compliance with Laws, Etc.  The Borrower shall comply, and cause each of
its Subsidiaries to comply, in all material respects with all material Legal
Requirements.  Without limiting the generality and coverage of the foregoing,
the Borrower shall comply, and shall cause each of its Subsidiaries to comply,
in all material respects, with all material Environmental Laws and all laws,
regulations, or directives with respect to equal employment opportunity and
employee safety in all jurisdictions in which the Borrower, or any of its
Subsidiaries do business; provided, however, that this Section 5.01 shall not
prevent the Borrower or any of its Subsidiaries from, in good faith and with
reasonable diligence, contesting the validity or application of any such laws or
regulations by appropriate legal proceedings.  Without limitation of the
foregoing, the Borrower shall, and shall cause each of its Subsidiaries to,
(a) maintain and possess all authorizations, Permits, licenses, trademarks,
trade names, rights and copyrights which are necessary to the conduct of its
business and (b) obtain, as soon as practicable, all consents or approvals
required from any states of the United States (or other Governmental
Authorities) necessary to grant the Administrative Agent an Acceptable Security
Interest in the Borrower’s and its Subsidiaries’ Oil and Gas Properties.

 

(b)   Maintenance of Insurance.

 

(i)            The Borrower shall, and shall cause each of its Subsidiaries to,
procure and maintain or shall cause to be procured and maintained continuously
in effect policies of insurance in form and amounts and issued by companies,
associations or organizations reasonably satisfactory to the Administrative
Agent covering such casualties, risks, perils,

 

44

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

 

liabilities and other hazards reasonably required by the Administrative Agent. 
In addition, the Borrower shall, and shall cause each of its Subsidiaries to,
comply with all requirements regarding insurance contained in the Security
Instruments.

 

(ii)           All certified copies of policies or certificates thereof, and
endorsements and renewals thereof shall be delivered to and retained by the
Administrative Agent.  Unless the Senior Credit Agreement requires otherwise,
all policies of insurance shall either have attached thereto a Lender’s loss
payable endorsement for the benefit of the Administrative Agent, as loss payee
in form reasonably satisfactory to the Administrative Agent or shall name the
Administrative Agent as an additional insured, as applicable.  The Borrower
shall furnish the Administrative Agent with a certificate of insurance or a
certified copy of all policies of insurance required.  All policies or
certificates of insurance shall set forth the coverage, the limits of liability,
the name of the carrier, the policy number, and the period of coverage.  Unless
the Senior Credit Agreement requires otherwise, all policies of insurance
required under the terms hereof shall contain an endorsement or agreement by the
insurer that any loss shall be payable in accordance with the terms of such
policy notwithstanding any act of negligence of the Borrower, or a Subsidiary or
any party holding under the Borrower or a Subsidiary which might otherwise
result in a forfeiture of the insurance and the further agreement of the insurer
waiving all rights of setoff, counterclaim or deductions against the Borrower
and its Subsidiaries.  Unless the Senior Credit Agreement requires otherwise,
all such policies shall contain a provision that notwithstanding any contrary
agreements between the Borrower, its Subsidiaries, and the applicable insurance
company, such policies will not be canceled, allowed to lapse without renewal,
surrendered or amended (which provision shall include any reduction in the scope
or limits of coverage) without at least 30 days’ prior written notice to the
Administrative Agent.  In the event that, notwithstanding the “lender’s loss
payable endorsement” requirement of this Section 5.02, the proceeds of any
insurance policy described above are paid to the Borrower or a Subsidiary, any
Obligations are outstanding and the Senior Debt has been indefeasibly paid in
full, the Borrower shall deliver such proceeds to the Administrative Agent
immediately upon receipt.

 

(c)   Preservation of Corporate Existence, Etc.  The Borrower shall preserve and
maintain, and cause each of its Subsidiaries to preserve and maintain, its
corporate or limited liability company, as applicable, existence, rights,
franchises, and privileges in the jurisdiction of its incorporation or
organization, as applicable, and qualify and remain qualified, and cause each
such Subsidiary to qualify and remain qualified, as a foreign corporation in
each jurisdiction in which qualification is necessary or desirable in view of
its business and operations or the ownership of its Properties, and, in each
case, where failure to qualify or preserve and maintain its rights and
franchises could reasonably be expected to cause a Material Adverse Change.

 

(d)   Payment of Taxes, Etc.  The Borrower shall pay and discharge, and cause
each of its Subsidiaries to pay and discharge, before the same shall become
delinquent, (a) all taxes, assessments, and governmental charges or levies
imposed upon it or upon its income or profits or Property that are material in
amount, prior to the date on which penalties attach thereto and (b) all lawful
claims that are material in amount which, if unpaid, might by law become a Lien
upon its Property; provided, however, that neither the Borrower nor any such
Subsidiary shall be required to pay or discharge any such tax, assessment,
charge, levy, or claim which is being

 

45

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

 

contested in good faith and by appropriate proceedings, and with respect to
which reserves in conformity with GAAP have been provided.

 

(e)   Visitation Rights.  At any reasonable time and from time to time, upon
reasonable notice, the Borrower shall, and shall cause its Subsidiaries to,
permit the Administrative Agent and any Lender or any of their respective agents
or representatives thereof, to (a) examine and make copies of and abstracts from
the records and books of the account of, and visit and inspect at their
reasonable discretion the Properties of, the Borrower and any such Subsidiary,
and (b) discuss the affairs, finances and accounts of the Borrower and any such
Subsidiary with any of their respective officers or directors.

 

(f)    Reporting Requirements.  The Borrower shall furnish to the Administrative
Agent and each Lender:

 

(i)            Annual Financials.  As soon as available and in any event not
later than 90 days after the end of each fiscal year of the Borrower and its
consolidated Subsidiaries, commencing with fiscal year ending June 30, 2009,
(i) to the extent not otherwise provided in the Form 10-K filed by the Borrower
with the SEC for such fiscal year end, a copy of the annual audit report for
such year for the Borrower and its consolidated Subsidiaries, including therein
the Borrower’s and its consolidated Subsidiaries’ balance sheets as of the end
of such fiscal year and the Borrower’s and its consolidated Subsidiaries’
statements of income, cash flows, and retained earnings, in each case certified
by an independent certified public accountants of national standing reasonably
acceptable to the Administrative Agent and including any management letters
delivered by such accountants to the Borrower or any Subsidiary in connection
with such audit, (ii) any management letters delivered by such accountants to
the Borrower, (iii) the Form 10-K filed with the SEC for such fiscal year end,
(iv) a Compliance Certificate executed by a Responsible Officer of the Borrower
and (v) a copy of the unaudited annual consolidating financial statements of
each of its Subsidiaries, including therein such Subsidiary’s balance sheet and
statements of income, cash flows, and retained earnings for such fiscal year;

 

(ii)           Quarterly Financials.  As soon as available and in any event not
later than 45 days after the end of each of the first three fiscal quarters of
each fiscal year of the Borrower and its consolidated Subsidiaries, commencing
with the fiscal quarter ending December 31, 2008, (i) to the extent not
otherwise provided in the Form 10-Q for such fiscal quarter end, the unaudited
balance sheet and the statements of income, cash flows, and retained earnings of
each such Person for the period commencing at the end of the previous year and
ending with the end of such fiscal quarter, all in reasonable detail and duly
certified with respect to such consolidated statements (subject to year-end
audit adjustments) by a Responsible Officer of the Borrower as having been
prepared in accordance with GAAP, (ii) the Form 10-Q filed with the SEC for such
fiscal quarter end, and (iii) a Compliance Certificate executed by the
Responsible Officer of the Borrower;

 

46

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

 

(iii)          Oil and Gas Reserve Reports.

 

(i)            As soon as available but in any event on or before each
September 30 of each year, an Independent Engineering Report dated effective as
of July 1 for such year;

 

(ii)           As soon as available but in any event on or before (A) May 1,
2009, and (b) March 31 of each year, commencing with March 31, 2010, an Internal
Engineering Report dated effective as of the immediately preceding January 1;

 

(iii)          Such other information as may be reasonably requested by the
Administrative Agent or any Lender with respect to the Oil and Gas Properties
included or to be included in the Borrowing Base;

 

With the delivery of each Engineering Report, a certificate from a Responsible
Officer of the Borrower certifying that, to the best of his knowledge and in all
material respects: (A) the information contained in the Engineering Report and
any other information delivered in connection therewith is true and correct,
(B) the Borrower or its Subsidiary, as applicable, owns good and marketable
title to the Oil and Gas Properties evaluated in such Engineering Report, as is
customary in the oil and gas industry, and such Oil and Gas Properties are
subject to an Acceptable Security Interest and free of all Liens except for
Permitted Liens, (C) except as set forth on an exhibit to the certificate, on a
net basis there are no gas imbalances, take or pay or other prepayments with
respect to its Oil and Gas Properties evaluated in such Engineering Report which
would require the Borrower or any of its Subsidiaries to deliver Hydrocarbons
produced from such Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor, (D) none of its Oil and Gas
Properties have been sold since the date of the last Borrowing Base
determination except as set forth on an exhibit to the certificate, which
certificate shall list all of its Oil and Gas Properties sold and in such detail
as reasonably required by the Majority Lenders, (E) attached to the certificate
is a list of its Oil and Gas Properties added to and deleted from the
immediately prior Engineering Report and a list showing any change in working
interest or net revenue interest in its Oil and Gas Properties occurring and the
reason for such change, (F) attached to the certificate is a list of all Persons
disbursing proceeds to the Borrower or to its Subsidiary, as applicable, from
its Oil and Gas Properties, (G) except as set forth on a schedule attached to
the certificate, all of the Oil and Gas Properties evaluated by such Engineering
Report are pledged as Collateral for the Obligations, and (H) attached to the
certificate is a quarterly cash flow budget for the four quarters following the
delivery of such certificate setting forth the Borrower’s projections for
production volumes, revenues, expenses, taxes and budgeted capital expenditures
during such period.

 

(iv)          Production and Hedging Reports.  As soon as available and in any
event within 45 days after the end of each quarter, commencing with the quarter
ending December 31, 2008, a report certified by a Responsible Officer of the
Borrower in form and substance satisfactory to the Administrative Agent prepared
by the Borrower (i) covering each of the Oil and Gas Properties of the Borrower
and its Subsidiaries and detailing on a quarterly basis (A) the production,
revenue, and price information and associated operating expenses for each such
quarter, (B) any changes to any producing reservoir, production equipment, or
producing well during each such quarter, which changes could cause a Material
Adverse Change, and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and
Gas Properties during each such quarter,

 

47

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

 

(ii) setting forth a true and complete list of all Hedge Contracts of the
Borrower and its Subsidiaries and detailing the material terms thereof
(including the type, term, effective date, termination date and notional amounts
or volumes), the net mark to market value thereof, all credit support agreements
relating thereto (including any margin required or supplied), and the
counterparty to each such agreement, and (iii) certifying the Borrower’s
compliance with Section 5.12 hereof;

 

(v)           Defaults.  As soon as possible and in any event within five days
after (i) the occurrence of any Default or (ii) the occurrence of any default
under any instrument or document evidencing Debt of the Borrower or any
Subsidiary, in each case known to any officer of the Borrower or any of its
Subsidiaries which is continuing on the date of such statement, a statement of a
Responsible Officer of the Borrower setting forth the details of such Default or
default, as applicable, and the actions which the Borrower or such Subsidiary
has taken and proposes to take with respect thereto;

 

(vi)          Termination Events.  As soon as possible and in any event
(i) within 30 days after the Borrower or any member of the Controlled Group
knows or has reason to know that any Termination Event described in clause
(a) of the definition of Termination Event with respect to any Plan has
occurred, and (ii) within 10 days after the Borrower or any of its Affiliates
knows or has reason to know that any other Termination Event with respect to any
Plan has occurred, a statement of a Responsible Officer of the Borrower
describing such Termination Event and the action, if any, which the Borrower or
such Affiliate proposes to take with respect thereto;

 

(vii)         Termination of Plans.  Promptly and in any event within two
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from the PBGC, copies of each notice received by the Borrower
or any such member of the Controlled Group of the PBGC’s intention to terminate
any Plan or to have a trustee appointed to administer any Plan;

 

(viii)        Other ERISA Notices.  Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from a Multiemployer Plan sponsor, a copy of each notice
received by the Borrower or any member of the Controlled Group concerning the
imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA;

 

(ix)           Environmental Notices.  Promptly upon the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any form of request, notice,
summons or citation received from the Environmental Protection Agency, or any
other Governmental Authority, concerning (i) violations or alleged violations of
Environmental Laws, which seeks to impose liability therefor and could cause a
Material Adverse Change, (ii) any action or omission on the part of the Borrower
or any Subsidiary or any of their former Subsidiaries in connection with
Hazardous Waste or Hazardous Substances which could reasonably result in the
imposition of liability therefor that could cause a Material Adverse Change,
including without limitation any information request related to, or notice of,
potential responsibility under CERCLA, or (iii) concerning the filing of a Lien
upon, against or in connection with the Borrower or any Subsidiary or their
former Subsidiaries, or any of their leased or owned Property, wherever located;

 

48

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

 

(x)            Other Governmental Notices.  Promptly and in any event within
five Business Days after receipt thereof by the Borrower or any Subsidiary, a
copy of any notice, summons, citation, or proceeding seeking to modify in any
material respect, revoke, or suspend any material contract, license, permit or
agreement with any Governmental Authority;

 

(xi)           Material Changes.  Prompt written notice of any condition or
event of which the Borrower has knowledge, which condition or event has resulted
or may reasonably be expected to result in (i) a Material Adverse Change or
(ii) a breach of or noncompliance with any material term, condition, or covenant
of any material contract to which the Borrower or any of its Subsidiaries is a
party or by which they or their Properties may be bound;

 

(xii)          Disputes, Etc.  Prompt written notice of (i) any claims, legal or
arbitration proceedings, proceedings before any Governmental Authority, or
disputes pending, or to the knowledge of the Borrower threatened, or affecting
the Borrower, or any of its Subsidiaries which, if adversely determined, could
reasonably be expected to cause a Material Adverse Change, or any material labor
controversy of which the Borrower or any of its Subsidiaries has knowledge
resulting in or reasonably considered to be likely to result in a strike against
the Borrower or any of its Subsidiaries and (ii) any claim, judgment, Lien or
other encumbrance (other than a Permitted Lien) affecting any Property of the
Borrower or any Subsidiary if the value of the claim, judgment, Lien, or other
encumbrance affecting such Property shall exceed $500,000.

 

(xiii)         Other Accounting Reports.  Promptly upon receipt thereof, a copy
of each other report or letter submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and its Subsidiaries, and a copy of
any response by the Borrower or any Subsidiary of the Borrower, or the Board of
Directors (or other applicable governing body) of the Borrower or any Subsidiary
of the Borrower, to such letter or report;

 

(xiv)        Notices Under Other Loan Agreements.  Promptly after the furnishing
thereof, copies of any statement, report or notice furnished to any Person
pursuant to the terms of any indenture, loan or credit or other similar
agreement, other than this Agreement and not otherwise required to be furnished
to the Lenders pursuant to any other provision of this Section 5.06;

 

(xv)         SEC Filings.  Promptly after the sending or filing thereof, copies
of all proxy material, reports and other information which the Borrower or any
of its Subsidiaries sends to or files with the SEC or sends to any shareholder
of the Borrower or of any of its Subsidiaries;

 

(xvi)        USA Patriot Act.  Promptly, following a request by any Lender, all
documentation and other information that such Lender reasonably requests in
order to comply with its ongoing obligations under applicable “know your
customer” and anti-money laundering rules and regulations, including the Patriot
Act; and

 

(xvii)       Other Information.  Such other information respecting the business
or Properties, or the condition or operations, financial or otherwise, of the
Borrower or any of its

 

49

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

 

Subsidiaries, as any Lender through the Administrative Agent may from time to
time reasonably request.  The Administrative Agent agrees to provide the Lenders
with copies of any material notices and information delivered solely to the
Administrative Agent pursuant to the terms of this Agreement.

 

(g)   Maintenance of Property.  The Borrower shall, and shall cause each of its
Subsidiaries to, maintain their owned, leased, or operated Property in good
condition and repair; and shall abstain, and cause each of its Subsidiaries to
abstain from, knowingly or willfully permitting the commission of waste or other
injury, destruction, or loss of natural resources, or the occurrence of
pollution, contamination, or any other condition in, on or about the owned or
operated Property involving the Environment that could reasonably be expected to
result in Response activities and that could reasonably be expected to cause a
Material Adverse Change.

 

(h)   Agreement to Pledge.  The Borrower shall, and shall cause each Subsidiary
to, grant to the Administrative Agent an Acceptable Security Interest in any
Property of the Borrower or any Subsidiary now owned or hereafter acquired
promptly after receipt of a written request from the Administrative Agent.

 

(i)    Use of Proceeds.  The Borrower shall use the proceeds of the Advances
(a) to pay to the Senior Lenders a portion of the Senior Debt outstanding under
the Senior Credit Agreement, (b) for capital expenditures, and (c) for working
capital and other general corporate purposes.

 

(j)    Title Evidence and Opinions.  The Borrower shall from time to time upon
the reasonable request of the Administrative Agent, take such actions and
execute and deliver such documents and instruments as the Administrative Agent
shall require to ensure that the Administrative Agent shall, at all times, have
received satisfactory title evidence, which title evidence shall be in form and
substance acceptable to the Administrative Agent in its sole discretion and
shall include information regarding the before payout and after payout ownership
interests held by the Borrower and the Borrower’s Subsidiaries, for all wells
located on the Oil and Gas Properties, covering at least 80% of the present
value of the Proven Reserves of the Borrower and its Subsidiaries and at least
80% of the present value of the proved developed producing reserves of the
Borrower and its Subsidiaries as determined by the Administrative Agent.  Within
60 days after the date hereof, the Borrower shall have delivered to the
Administrative Agent title and lien searches from the county recording offices
of (a) Chavez and Roosevelt counties of New Mexico, (b) Lincoln and Nowata
counties of Oklahoma, and (c) Erath, Comanche, Eastland, Carson, Gray and
Hutchinson counties of Texas.

 

(k)   Further Assurances; Cure of Title Defects.  The Borrower shall, and shall
cause each Subsidiary to, cure promptly any defects in the creation and issuance
of the Notes and the execution and delivery of the Security Instruments and this
Agreement.  The Borrower hereby authorizes the Administrative Agent to file any
financing statements without the signature of the Borrower to the extent
permitted by applicable law in order to perfect or maintain the perfection of
any security interest granted under any of the Loan Documents.  The Borrower at
its expense will, and will cause each Subsidiary to, promptly execute and
deliver to the Administrative Agent upon request all such other documents,
agreements and instruments to comply with or accomplish the covenants and
agreements of the Borrower or any Subsidiary, as the case may be,

 

50

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

 

in the Security Instruments and this Agreement, or to further evidence and more
fully describe the collateral intended as security for the Notes, or to correct
any omissions in the Security Instruments, or to state more fully the security
obligations set out herein or in any of the Security Instruments, or to perfect,
protect or preserve any Liens created pursuant to any of the Security
Instruments, or to make any recordings, to file any notices or obtain any
consents, all as may be necessary or appropriate in connection therewith or to
enable the Administrative Agent to exercise and enforce its rights and remedies
with respect to any Collateral.  Within 30 days after a request by the
Administrative Agent or the Lenders to cure any title defects or exceptions
which are not Permitted Liens raised by such information, the Borrower shall
(i) cure such title defects or exceptions which are not Permitted Liens or
substitute acceptable Oil and Gas Properties with no title defects or exceptions
except for Permitted Liens covering Collateral of an equivalent value and
(ii) deliver to the Administrative Agent satisfactory title evidence (including
supplemental or new title opinions meeting the foregoing requirements) in form
and substance acceptable to the Administrative Agent in its reasonable business
judgment as to the Borrower’s and its Subsidiaries’ ownership of such Oil and
Gas Properties and the Administrative Agent’s Liens and security interests
therein as are required to maintain compliance with Section 5.10.

 

(l)    Hedging Arrangements.  The Borrower shall maintain each Hydrocarbon Hedge
Agreement described in Schedule 4.20 until the stated maturity of such
Hydrocarbon Hedge Agreement.  Other than such Hydrocarbon Hedge Agreements, no
other Hedge Contracts are required on the date hereof.

 

(m)  Bank Accounts.  The Borrower shall, and shall cause each of its
Subsidiaries to, (a) maintain their principal operating accounts and other
deposit accounts with the Senior Administrative Agent or any Senior Lender or
any other bank that has executed an account control agreement reasonably
acceptable in form and substance to the Senior Administrative Agent, or
(b) within 30 days from the date hereof, provide an account control agreement
reasonably acceptable in form and substance to the Senior Administrative Agent
and executed by each depository bank that holds any operating accounts or
deposit accounts of the Borrower or any Guarantor and in existence on the date
hereof.

 

Section 6.

 

NEGATIVE COVENANTS

 

So long as any Note or any amount under any Loan Document shall remain unpaid or
any Lender shall have any Commitment, the Borrower agrees, unless the Majority
Lenders otherwise consent in writing, to comply with the following covenants.

 

(a)   Liens, Etc.  The Borrower shall not create, assume, incur, or suffer to
exist, or permit any of its Subsidiaries to create, assume, incur, or suffer to
exist, any Lien on or in respect of any of its Property whether now owned or
hereafter acquired, or assign any right to receive income, except that the
Borrower and its Subsidiaries may create, incur, assume, or suffer to exist:

 

(i)            Liens created by the Security Instruments;

 

51

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

 

(ii)           purchase money Liens or purchase money security interests upon or
in any equipment acquired or held by the Borrower or any of its Subsidiaries in
the ordinary course of business prior to or at the time of the Borrower’s or
such Subsidiary’s acquisition of such equipment; provided that, the Debt secured
by such Liens (i) was incurred solely for the purpose of financing the
acquisition of such equipment, and does not exceed the aggregate purchase price
of such equipment, (ii) is secured only by such equipment and not by any other
assets of the Borrower and its Subsidiaries, and (iii) is not increased in
amount;

 

(iii)          Liens for taxes, assessments, or other governmental charges or
levies not yet due or that (provided foreclosure, sale, or other similar
proceedings shall not have been initiated) are being contested in good faith by
appropriate proceedings, and such reserve as may be required by GAAP shall have
been made therefor;

 

(iv)          Liens in favor of vendors, carriers, warehousemen, repairmen,
mechanics, workmen, materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in respect of obligations
that are not yet due or that are being contested in good faith by appropriate
proceedings, provided such reserve as may be required by GAAP shall have been
made therefor;

 

(v)           Liens to operators and non-operators under joint operating
agreements arising in the ordinary course of the business of the Borrower or the
relevant Subsidiary to secure amounts owing, 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;

 

(vi)          royalties, overriding royalties, net profits interests, production
payments, reversionary interests, calls on production, preferential purchase
rights and other burdens on or deductions from the proceeds of production, that
do not secure Debt for borrowed money and that are taken into account in
computing the net revenue interests and working interests of the Borrower or any
of its Subsidiaries warranted in the Security Instruments or in the Senior
Credit Agreement;

 

(vii)         Liens arising in the ordinary course of business out of pledges or
deposits under workers’ compensation laws, unemployment insurance, old age
pensions or other social security or retirement benefits, or similar legislation
or to secure public or statutory obligations of the Borrower;

 

(viii)        operating agreements, unitization and pooling agreements and
orders, farmout agreements, gas balancing agreements and other agreements, in
each case that are customary in the oil, gas and mineral production business and
that are entered into in the ordinary course of business that are taken into
account in computing the net revenue interests and working interests of the
Borrower or any of its Subsidiaries warranted in the Security Instruments or in
the Senior Credit Agreement, to the extent that any such Lien referred to in
this clause does not materially impair the use of the Property covered by such
Lien for the purposes for which such Property is held by the Borrower or any
Subsidiary or materially impair the value of such Property subject thereto;

 

52

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

 

(ix)           easements, rights-of-way, restrictions, and other similar
encumbrances, and minor defects in the chain of title that are customarily
accepted in the oil and gas financing industry, none of which interfere with the
ordinary conduct of the business of Borrower or any Subsidiary or materially
detract from the value or use of the Property to which they apply; and

 

(x)            Liens securing the Senior Debt.

 

(b)   Debts, Guaranties, and Other Obligations.  The Borrower shall not, and
shall not permit any of its Subsidiaries to, create, assume, suffer to exist, or
in any manner become or be liable in respect of, any Debt except:

 

(i)            Debt of the Borrower and its Subsidiaries under the Loan
Documents;

 

(ii)           Senior Debt;

 

(iii)          Debt in the form of obligations for the deferred purchase price
of Property or services incurred in the ordinary course of business which are
not yet due and payable or are being contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP have been
established;

 

(iv)          Debt secured by the Liens permitted under paragraph (b) of
Section 6.01 in an aggregate amount not to exceed $3,000,000 at any time;

 

(v)           Debt under Hydrocarbon Hedge Agreements which are not prohibited
by the terms of Section 6.14; provided that (i) such Debt shall not be secured,
other than such Debt owing to Swap Counerparties (as defined in the Senior
Credit Agreement) which are secured under the Senior Loan Documents, (ii) such
Debt shall not obligate the Borrower or any of its Subsidiaries to any margin
call requirements, and (iii) the deferred premium payments associated with such
Hedge Contracts shall be limited to the deferred premium payments for put option
contracts which are secured under the Loan Documents; provided that, the
aggregate outstanding amount of such deferred premium payments shall not exceed
$500,000;

 

(vi)          Debt consisting of sureties or bonds provided to any Governmental
Authority or other Person and assuring payment of contingent liabilities of the
Borrower in connection with the operation of the Oil and Gas Properties,
including with respect to plugging, facility removal and abandonment of its Oil
and Gas Properties;

 

(vii)         Debt of the Borrower or any Subsidiary owing to the Borrower or to
any other Subsidiary; provided that such Debt is subordinated to the Obligations
on terms acceptable to the Administrative Agent in its sole discretion;

 

(viii)        Debt that constitutes a renewal, refinancing or extension of any
Debt referred to clause (d) of this Section 6.02; provided that (i) no Lien
existing at the time of such renewal, refinancing or extension shall be extended
to cover any property not already subject to such Lien, and (ii) the principal
amount of any Debt renewed, refinanced or extended shall not exceed the amount
of such Debt outstanding immediately prior to such renewal, refinancing or
extension; and

 

53

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

 

(ix)           Debt under the Series D Preferred Shares; provided that,
(A) other than the extension of the maturity date thereof, the terms, conditions
and provisions of such Debt (including but not limited to, the subordination
terms thereof) shall not be amended, supplemented, restated or otherwise
modified in any way without the consent of the Majority Lenders, and (B) the
amount of such Debt shall not increase other than as a result of dividend
payments which have been added to the principal amount thereof as elected by
certain holders of the Series D Preferred Shares.

 

(c)   Agreements Restricting Liens and Distributions.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, create, incur, assume or permit
to exist any contract, agreement or understanding (other than this Agreement,
the Senior Loan Documents and the Security Instruments) which in any way
prohibits or restricts the granting, conveying, creation or imposition of any
Lien on any of its Property, whether now owned or hereafter acquired, to secure
the Obligations or restricts any Subsidiary from paying dividends to the
Borrower, or which requires the consent of or notice to other Persons in
connection therewith.

 

(d)   Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall
it permit any of its Subsidiaries to:

 

(a)           merge or consolidate with or into any other Person without the
prior consent of all of the Lenders; provided that the Borrower or any
Subsidiary may merge or may be consolidated into the Borrower or any Guarantor
if the Borrower or such Guarantor is the surviving entity; or

 

(b)           sell, lease, transfer, assign, farm-out, convey, or otherwise
dispose of any of its Property (including, without limitation, any working
interest, overriding royalty interest, production payments, net profits
interest, royalty interest, or mineral fee interest) other than:

 

(i)            the sale of Hydrocarbons in the ordinary course of business,

 

(ii)           the sale or transfer of equipment that is (A) obsolete, worn out,
depleted or uneconomic and disposed of in the ordinary course of business,
(B) no longer necessary for the business of such Person or (C) contemporaneously
replaced by equipment of at least comparable value and use, and

 

(iii)          the sale, lease, transfer, assignment, farm-out, conveyance, or
other disposition of Property; provided that, (A) 100% of the consideration
received in respect of such disposition shall be cash or cash equivalents,
(B) the consideration received in respect of such disposition shall be equal to
or greater than the fair market value of the such Property, interest therein or
Subsidiary subject of such disposition (as reasonably determined by the board of
directors or the equivalent governing body of the Borrower and, if requested by
the Administrative Agent, the Borrower shall deliver a certificate of a
Responsible Officer of the Borrower certifying to that effect), (C) if any such
disposition is of a Subsidiary owning Oil and Gas Properties, such disposition
shall include all the Equity Interests of such Subsidiary; and (D) the aggregate
fair market value of Properties subject to such dispositions consummated during
any consecutive twelve month period shall not exceed $4,000,000.

 

54

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

 

(e)   Restricted Payments.  The Borrower shall not, nor shall it permit any of
its Subsidiaries to, make any Restricted Payments except that if no Default has
occurred both before and after giving effect to the making of such Restricted
Payment, (a) the Subsidiaries may make Restricted Payments to the Borrower,
(b) the Borrower may make Restricted Payments to officers, directors,
consultants and employees of the Borrower or any Guarantor in any form other
than cash or other assets of the Borrower, (c) the Borrower may make Restricted
Payments to officers, directors, consultants and employees of the Borrower or
any Guarantor in the form of cash in an aggregate amount not to exceed
$1,000,000 per fiscal year, and (d) with respect to the Series D Preferred
Shares and to the extent such payments would be permitted under the
subordination terms in effect in favor of the Obligations and covering such
Series D Preferred Shares, the Borrower may make Restricted Payments which are
mandatory pursuant to the terms thereof.

 

(f)    Investments.  The Borrower shall not, nor shall it permit any of its
Subsidiaries to, make or permit to exist any loans, advances, or capital
contributions to, or make any investment in (including, without limitation, the
making of any Acquisition), or purchase or commit to purchase any stock or other
securities or evidences of indebtedness of or interests in any Person or any Oil
and Gas Properties or activities related to Oil and Gas Properties, except:

 

(i)            Liquid Investments;

 

(ii)           trade and customer accounts receivable which are for goods
furnished or services rendered in the ordinary course of business and are
payable in accordance with customary trade terms;

 

(iii)          creation of any additional Subsidiaries or acquisition of Oil and
Gas Properties in compliance with Section 6.15;

 

(iv)          the loans, advances, capital contributions, investments, and
commitments made prior to the date hereof and identified in the Interim
Financial Statements; provided that, the respective amounts of such loans,
advances, capital contributions, investments, and commitments shall not be
increased (other than by appreciation);

 

(v)           investments received in connection with the bankruptcy or
reorganization of, or settlement of delinquent accounts and disputes with,
customers and suppliers, in each case in the ordinary course of business;
provided that, the aggregate amount of such investment shall not exceed
$1,000,000 (other than by appreciation); and

 

(vi)          investments consisting of any deferred portion of the sales price
received by the Borrower or any Subsidiary in connection with any sale of assets
permitted hereunder.

 

(g)   Affiliate Transactions.  The Borrower shall not, nor shall it permit any
of its Subsidiaries to, directly or indirectly, enter into or permit to exist
any transaction or series of transactions (including, but not limited to, the
purchase, sale, lease or exchange of Property, the making of any investment, the
giving of any guaranty, the assumption of any obligation or the rendering of any
service) with any of their Affiliates unless such transaction or series of
transactions is on terms no less favorable to the Borrower or the Subsidiary, as
applicable, than

 

55

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

 

those that could be obtained in a comparable arm’s length transaction with a
Person that is not such an Affiliate.

 

(h)   Compliance with ERISA.  The Borrower shall not, nor shall it permit any of
its Subsidiaries to, directly or indirectly, (a) engage in, or permit any
Subsidiary or ERISA Affiliate to engage in, any transaction in connection with
which the Borrower, any Subsidiary or any ERISA Affiliate could be subjected to
either a civil penalty assessed pursuant to section 502(c), (i) or (l) of ERISA
or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) terminate, or
permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner, or
take any other action with respect to any Plan, which could result in any
liability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC;
(c) fail to make, or permit any Subsidiary or ERISA Affiliate to fail to make,
full payment when due of all amounts which, under the provisions of any Plan,
agreement relating thereto or applicable law, the Borrower, a Subsidiary or any
ERISA Affiliate is required to pay as contributions thereto; (d) permit to
exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any
accumulated funding deficiency within the meaning of Section 302 of ERISA or
section 412 of the Code, whether or not waived, with respect to any Plan;
(e) permit, or allow any Subsidiary or ERISA Affiliate to permit, the actuarial
present value of the benefit liabilities (as “actuarial present value of the
benefit liabilities” shall have the meaning specified in section 4041 of ERISA)
under any Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate
which is regulated under Title IV of ERISA to exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities; (f) contribute to or
assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
Multiemployer Plan; (g) acquire, or permit any Subsidiary or ERISA Affiliate to
acquire, an interest in any Person that causes such Person to become an ERISA
Affiliate with respect to the Borrower, any Subsidiary or any ERISA Affiliate if
such Person sponsors, maintains or contributes to, or at any time in the
six-year period preceding such acquisition has sponsored, maintained, or
contributed to, (1) any Multiemployer Plan, or (2) any other Plan that is
subject to Title IV of ERISA under which the actuarial present value of the
benefit liabilities under such Plan exceeds the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities; (h) incur, or permit any
Subsidiary or ERISA Affiliate to incur, a liability to or on account of a Plan
under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) contribute to
or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
employee welfare benefit plan, as defined in section 3(1) of ERISA, including,
without limitation, any such plan maintained to provide benefits to former
employees of such entities, that may not be terminated by such entities in their
sole discretion at any time without any material liability; (j) amend or permit
any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an increase in
current liability such that the Borrower, any Subsidiary or any ERISA Affiliate
is required to provide security to such Plan under section 401(a)(29) of the
Code; or (k) permit to exist any occurrence of any Reportable Event (as defined
in Title IV of ERISA), or any other event or condition, which presents a
material (in the opinion of the Majority Lenders) risk of such a termination by
the PBGC of any Plan.

 

(i)    Sale-and-Leaseback.  The Borrower shall not, nor shall it permit any of
its Subsidiaries to, sell or transfer to a Person any Property, whether now
owned or hereafter

 

56

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

 

acquired, if at the time or thereafter the Borrower or a Subsidiary shall lease
as lessee such Property or any part thereof or other Property which the Borrower
or a Subsidiary intends to use for substantially the same purpose as the
Property sold or transferred.

 

(j)    Change of Business.  The Borrower shall not, nor shall it permit any of
its Subsidiaries to, make any material change in the character of its business
as an independent oil and gas exploration and production company, nor will the
Borrower or any Subsidiary operate any business in any jurisdiction other than
the United States, including the Gulf of Mexico.

 

(k)   Organizational Documents, Name Change.  The Borrower shall not, nor shall
it permit any of its Subsidiaries to, amend, supplement, modify or restate their
articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent organizational documents where such amendment,
supplement, modification or restatement could have an adverse effect on the
Lenders as determined by the Administrative Agent in its sole reasonable
discretion, or amend its name or change its jurisdiction of incorporation,
organization or formation without prior written notice to, and prior consent of,
the Administrative Agent.

 

(l)    Use of Proceeds.  The Borrower will not permit the proceeds of any
Advance to be used for any purpose other than those permitted by Section 5.09. 
The Borrower will not engage in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulation U). 
Neither the Borrower nor any Person acting on behalf of the Borrower has taken
or shall take, nor permit any of the Borrower’s Subsidiaries to take any action
which might cause any of the Loan Documents to violate Regulation T, U or X or
any other regulation of the Board of Governors of the Federal Reserve System or
to violate Section 7 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect, including without limitation, the use of the proceeds
of any Advance to purchase or carry any margin stock in violation of
Regulation T, U or X.

 

(m)  Gas Imbalances, Take-or-Pay or Other Prepayments.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, allow gas imbalances,
take-or-pay or other prepayments with respect to the Oil and Gas Properties of
the Borrower or any Subsidiary which would require the Borrower or any
Subsidiary to deliver their respective Hydrocarbons produced on a monthly basis
from such Oil and Gas Properties at some future time without then or thereafter
receiving full payment therefor.

 

(n)   Limitation on Speculative Hedging.  Other than the Hedge Contracts
required to be entered into and maintained pursuant to Section 5.12 hereof, the
Borrower shall not, nor shall it permit any of its Subsidiaries to,
(a) purchase, assume, or hold a speculative position in any commodities market
or futures market or enter into any Hydrocarbon Hedge Agreement, Interest Hedge
Agreement or similar hedge arrangement for speculative purposes, or (b) be party
to or otherwise enter into any Hedge Contract which (i) is entered into for
reasons other than as a part of its normal business operations as a risk
management strategy and/or hedge against changes resulting from market
conditions related to the Borrower’s operations, (ii) covers notional volumes in
excess of 85% of the anticipated production volumes attributable to Proven
Reserves

 

57

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

 

of the Borrower and its Subsidiaries during the period such hedge arrangement is
in effect, or (iii) is longer than three years in duration.

 

(o)   Additional Subsidiaries; Additional Oil and Gas Properties.  The Borrower
shall not, nor shall it permit any of its Subsidiaries to, create or acquire any
additional Subsidiaries or acquire any additional Oil and Gas Properties without
(a) such new Subsidiary executing and delivering to the Administrative Agent, at
its request, a Guaranty, a Pledge Agreement, a Security Agreement and a
Mortgage, and such other Security Instruments as the Administrative Agent or the
Majority Lenders may reasonably request, (b) the delivery by the Borrower of any
certificates, opinions of counsel, title opinions or other documents as the
Administrative Agent may reasonably request, and (c) the Borrower or such
Subsidiary acquiring such Oil and Gas Properties executing and delivering to the
Administrative Agent a new Mortgage or a supplement to an existing Mortgage
encumbering such Oil and Gas Properties; provided that, in any event, no
Subsidiary may be created or acquired and no Oil and Gas Properties may be
acquired if a Default has occurred before or after giving effect to such
creation or acquisition of the new Subsidiary or the acquisition of the
additional Oil and Gas Properties.

 

(p)   Account Payables.  The Borrower shall not, nor shall it permit any of its
Subsidiaries to, allow (a) any of its trade payables or other accounts payable
to be outstanding for more than 90 days (except in cases where any such trade
payable is being disputed in good faith and adequate reserves under GAAP have
been established) and (b) the weighted average maturity of all such trade
payables to exceed 120 days.

 

(q)   Current Ratio.  The Borrower shall not permit the ratio of, as of the end
of each fiscal quarter of the Borrower, beginning with the fiscal quarter ending
December 31, 2008, (a) its current assets to (b) its current liabilities, to be
less 1.00 to 1.00.  For purposes of this calculation (i) “current assets” shall
include, as of the date of calculation, the aggregate Unused Commitment Amounts
(as defined under the Senior Credit Agreement) and Availability under this
Agreement but shall exclude (A) any cash deposited with or at the request of a
counterparty to any Hedge Contract or any other similar hedge arrangement and
(B) any assets representing a valuation account arising from the application of
SFAS 133 and 143, and (ii) “current liabilities” shall exclude, as of the date
of calculation, the current portion of long-term Debt existing under this
Agreement and the current portion of long-term Debt existing under the Senior
Credit Agreement, and any liabilities representing a valuation account arising
from the application of SFAS 133 and 143.  For the avoidance of doubt, the
parties hereto acknowledge that “current liabilities” includes the current
portion of the Series D Preferred Shares.

 

(r)    Leverage Ratio.  The Borrower shall not permit the Leverage Ratio for
each fiscal quarter period ending on or after December 31, 2008, to be greater
than 4.50 to 1.00; solely for purposes of calculating Leverage Ratio under this
clause, “consolidated Debt” shall not include Debt outstanding under preferred
Equity Interests issued in compliance with Section 6.22.

 

(s)   Interest Coverage Ratio.  The Borrower shall not permit the ratio of, as
of the end of each fiscal quarter ending on or after December 31, 2008, (a) the
consolidated EBITDA of the Borrower calculated for the four fiscal quarters then
ended, to (b) the consolidated Interest Expense of the Borrower for the four
fiscal quarters then ended, to be less than 2.50 to 1.00.

 

58

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

 

(t)    Senior Debt.  Except as otherwise permitted by the terms of the
Subordination and Intercreditor Agreement none of the Borrower or any of its
Subsidiaries shall amend, supplement or otherwise modify the terms of the Senior
Debt unless otherwise consented to by the Majority Lender, including but not
limited to, any increases in the Borrowing Base above $120,000,000.

 

(u)   Non-Guarantor Subsidiary.  Notwithstanding anything to the contrary
contained herein, including any provision of this Article VI, the Borrower shall
not, nor shall it permit any of its Subsidiaries to, (a) create, assume, incur
or suffer to exist any Lien on or in respect of any of its Property for the
benefit of Tri-Flow, (b) sell, assign, pledge, or otherwise transfer any of its
Properties to Tri-Flow, or (c) make or permit to exist any loans, advances, or
capital contributions to, or make any investment in, or purchase or commit to
purchase any stock or other securities or evidences of indebtedness of or
interests in, Tri-Flow or in any Properties of Tri-Flow other than the loans,
advances, capital contributions, investments, and commitments made prior to the
date hereof in Tri-Flow; provided that, the respective amounts of such loans,
advances, capital contributions, investments, and commitments shall not be
increased (other than by appreciation).

 

(v)   Equity Issuance.  The Borrower shall not, nor shall it permit any of its
Subsidiaries to, issue any preferred, convertible equity securities or other
Equity Interests other than common Equity Interests of the Borrower.

 

(w)  Minimum Asset Coverage Ratio.

 

(i)            The Borrower shall not permit at any time the ratio of (i) the
Total Present Value as of such date to (ii) the consolidated Debt of the
Borrower (other than obligations under Hedge Contracts) as of the applicable
determination date to be less than 1.50 to 1.00.

 

(ii)           Upon any change to Total Present Value pursuant to a Scheduled
Redetermination or an Interim Redetermination (as such terms are defined below),
the Borrower will promptly, but in any event within fifteen (15) days after any
such redetermination, deliver to the Administrative Agent a certificate of a
Responsible Officer of the Borrower setting forth the consolidated Debt of the
Borrower and the Total Present Value and demonstrating compliance with
Section 6.23(a).

 

(iii)          The Total Present Value shall be calculated semi-annually in
accordance with this Section 6.23 on or about April 15th and October 15th of
each year, commencing April 15, 2009 (each such semi-annual calculation, a
“Scheduled Redetermination”).  In addition, the Total Present Value shall be
calculated between Scheduled Redeterminations at the time of any interim or
additional redetermination of the Borrowing Base under the Senior Credit
Agreement (each such interim or additional calculation, an “Interim
Redetermination”) in accordance with this Section 6.23.  Promptly after
receiving each Engineering Report or other applicable information relating to
the Proven Reserves of the Borrower and its Subsidiaries delivered in connection
with a Scheduled Redetermination or Interim Redetermination, and using the
calculations of PDP NPV, PDNP NPV and PUD NPV contained therein (as well as any
recalculations thereof made by Administrative Agent as provided for in the
definitions of PDP NPV, PDNP NPV and PUD NPV) the Administrative Agent shall
notify the Borrower and each Lender of the resulting Total Present Value.  Such
Total Present Value shall thereupon be used

 

59

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

 

for the purposes of Section 6.23(a) until a new Total Present Value is
calculated or estimated pursuant to this Section 6.23.  Each determination of
Total Present Value shall be made as of the date of the applicable Engineering
Report or other applicable information delivered in connection with a Scheduled
Redetermination or Interim Redetermination.

 

(iv)          In the event that the Borrower does not furnish to the
Administrative Agent and the Lenders the Independent Engineering Report,
Internal Engineering Report or other information specified in Sections
5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by the date specified
in such clauses, the Administrative Agent may, based on the information
available to it, estimate in good faith the Total Present Value from time to
time thereafter until the Administrative Agent and the Lenders receive the
relevant Independent Engineering Report, Internal Engineering Report, or other
information, as applicable.  Such estimated Total Present Value shall thereupon
be used for the purposes of Section 6.23(a) until a new Total Present Value is
calculated or estimated pursuant to this Agreement.

 

Section 7.

 

EVENTS OF DEFAULT; REMEDIES

 

(a)   Events of Default.  The occurrence of any of the following events shall
constitute an “Event of Default” under any Loan Document:

 

(i)            Payment.  The Borrower shall (i) fail to pay when due any
principal or interest payable hereunder or under the Notes or (ii) fail to pay,
within 3 Business Days of when due, any other amounts (including fees,
reimbursements, and indemnifications) payable hereunder, under the Notes, or
under any other Loan Document;

 

(ii)           Representation and Warranties.  Any representation or warranty
made or deemed to be made (i) by the Borrower, any Guarantor or any of their
respective Subsidiaries (or any of their respective officers) in this Agreement
or in any other Loan Document, or (ii) by the Borrower, any Guarantor or any of
their respective Subsidiaries (or any of their respective officers) in
connection with this Agreement or any other Loan Document, shall prove to have
been incorrect in any material respect when made or deemed to be made;

 

(iii)          Covenant Breaches.  The Borrower, any Guarantor or any of their
respective Subsidiaries shall fail to (i) perform or observe any covenant
contained in Section 5.02(a), Section 5.03, Section 5.06(e), Section 5.09,
Section 5.12, or Article VI of this Agreement or (ii) fail to perform or observe
any other term or covenant set forth in this Agreement or in any other Loan
Document which is not covered by clause (i) above or any other provision of this
Section 7.01 if such failure shall remain unremedied for 30 days after the
occurrence of such breach or failure;

 

(iv)          Cross-Defaults.  (i) The Borrower, any Guarantor or any of their
respective Subsidiaries shall fail to pay any principal of or premium or
interest on its Debt which is outstanding in a principal amount of at least
$1,000,000 individually or when aggregated with all such Debt of the Borrower,
any Guarantor or any of their respective Subsidiaries so in default (but
excluding Debt evidenced by the Notes) when the same becomes due and payable
(whether

 

60

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

 

by scheduled maturity, required prepayment, acceleration, demand or otherwise),
and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Debt; (ii) any other
event shall occur or condition shall exist under any agreement or instrument
relating to Debt (including, without limitation, the Senior Credit Agreement)
which is outstanding in a principal amount of at least $1,000,000 individually
or when aggregated with all such Debt of the Borrower, such Subsidiary, or such
Guarantor so in default, and shall continue after the applicable grace period,
if any, specified in such agreement or instrument, if the effect of such event
or condition is to accelerate, or to permit the acceleration of, the maturity of
such Debt; or (iii) any such Debt shall be declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; provided that, for purposes
of this subsection 7.01(d), the “principal amount” of the obligations in respect
of any Hedging Contracts at any time shall be the maximum aggregate amount
(giving effect to any netting agreements) that would be required to be paid if
such Hedging Contracts were terminated at such time;

 

(v)           Insolvency.  The Borrower, any Guarantor or any of their
respective Subsidiaries shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Borrower, any of its Subsidiaries, or any
Guarantor seeking to adjudicate it as bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of an
order for relief or the appointment of a receiver, trustee or other similar
official for it or for any substantial part of its Property and, in the case of
any such proceeding instituted against the Borrower, any such Subsidiary or any
such Guarantor either such proceeding shall remain undismissed for a period of
60 days or any of the actions sought in such proceeding shall occur; or the
Borrower, any of its Subsidiaries, or any Guarantor shall take any corporate
action to authorize any of the actions set forth above in this paragraph (e);

 

(vi)          Judgments.  Any judgment or order for the payment of money in
excess of $1,000,000 shall be rendered against the Borrower, any Guarantor or
any of their respective Subsidiaries and either (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order or
(ii) there shall be any period of 30 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect;

 

(vii)         Termination Events.  Any Termination Event with respect to a Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
the Borrower by the Administrative Agent, (i) such Termination Event shall not
have been corrected and (ii) the then present value of such Plan’s vested
benefits exceeds the then current value of assets accumulated in such Plan by
more than the amount of $1,000,000 (or in the case of a Termination Event
involving the withdrawal of a “substantial employer” (as defined in
Section 4001(a)(2) of ERISA), the withdrawing employer’s proportionate share of
such excess shall exceed such amount);

 

61

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

 

(viii)        Plan Withdrawals.  The Borrower or any member of the Controlled
Group as employer under a Multiemployer Plan shall have made a complete or
partial withdrawal from such Multiemployer Plan and the plan sponsor of such
Multiemployer Plan shall have notified such withdrawing employer that such
employer has incurred a withdrawal liability in an annual amount exceeding
$1,000,000.

 

(ix)           Change in Control.  The Borrower shall have discontinued its
usual business or a Change in Control shall have occurred;

 

(x)            Reserved.

 

(xi)           Loan Documents.  Any material provision of any Loan Document
shall for any reason cease to be valid and binding on the Borrower or a
Guarantor or any of their respective Subsidiaries or any such Person shall so
state in writing;

 

(xii)          Security Instruments.  (i) The Administrative Agent shall fail to
have an Acceptable Security Interest in any material portion of the Collateral
as determined in the sole discretion of the Administrative Agent, (ii) the
Administrative Agent shall fail to have an Acceptable Security Interest in any
immaterial portion of the Collateral as determined in the sole discretion of the
Administrative Agent and such failure continues for more than 30 days after the
Administrative Agent shall have given notice thereof, and a request to cure such
failure, to the Borrower, or (iii) any Security Instrument shall at any time and
for any reason cease to create the Lien on the Property purported to be subject
to such agreement in accordance with the terms of such agreement, or cease to be
in full force and effect, or shall be contested by the Borrower, any Guarantor
or any of their respective Subsidiaries;

 

(xiii)         Potential Failure of Title.  The title of the Borrower, any
Guarantor or any of their respective Subsidiaries to any of the Oil and Gas
Properties subject to the Mortgages, or any material part thereof, shall become
the subject matter of litigation before any Governmental Authority or arbitrator
which could reasonably be expected to result in a Material Adverse Change with
respect to the Borrower’s, such Guarantor’s or such Subsidiary’s title to such
Oil and Gas Properties;

 

(xiv)        Material Adverse Change.  An event resulting in a Material Adverse
Change shall have occurred;

 

(xv)         Casualty.  Loss, theft, substantial damage or destruction of a
material portion of the Collateral the subject of any Security Instrument and
not fully covered by insurance (except for deductibles and allowing for the
depreciated value of such Collateral) shall have occurred; or

 

(b)   Optional Acceleration of Maturity.  If any Event of Default (other than an
Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred
and be continuing, then, and in any such event,

 

(i)            the Administrative Agent (i) shall at the request, or may with
the consent, of the Majority Lenders, by notice to the Borrower, declare the
obligation, if any, of each Lender to make extensions of credit hereunder to be
terminated, whereupon the same shall forthwith

 

62

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

 

terminate, and (ii) shall at the request, or may with the consent, of the
Majority Lenders, by notice to the Borrower, declare all principal, interest,
fees, reimbursements, indemnifications, and all other amounts payable under this
Agreement, the Notes, and the other Loan Documents to be forthwith due and
payable, whereupon all such amounts shall become and be forthwith due and
payable in full, without notice of intent to demand, demand, presentment for
payment, notice of nonpayment, protest, notice of protest, grace, notice of
dishonor, notice of intent to accelerate, notice of acceleration, and all other
notices, all of which are hereby expressly waived by the Borrower; and

 

(ii)           the Administrative Agent shall at the request of, or may with the
consent of, the Majority Lenders (but subject to the Subordination and
Intercreditor Agreement) proceed to enforce its rights and remedies under the
Security Instruments, the Guaranties, and any other Loan Documents for the
ratable benefit of the Secured Parties by appropriate proceedings.

 

(c)   Automatic Acceleration of Maturity.  If any Event of Default pursuant to
paragraph (e) of Section 7.01 shall occur,

 

(i)            (i) the obligation, if any, of each Lender to make extensions of
credit hereunder shall terminate, and (ii) all principal, interest, fees,
reimbursements, indemnifications, and all other amounts payable under this
Agreement, the Notes, and the other Loan Documents shall become and be forthwith
due and payable in full, without notice of intent to demand, demand, presentment
for payment, notice of nonpayment, protest, notice of protest, grace, notice of
dishonor, notice of intent to accelerate, notice of acceleration, and all other
notices, all of which are hereby expressly waived by the Borrower; and

 

(ii)           the Administrative Agent shall at the request of, or may with the
consent of, the Majority Lenders (but subject to the Subordination and
Intercreditor Agreement) proceed to enforce its rights and remedies under the
Security Instruments, the Guaranties, and any other Loan Document for the
ratable benefit of the Secured Parties by appropriate proceedings.

 

(d)   Right of Set-off.  Upon the occurrence and during the continuance of any
Event of Default, the Administrative Agent and each Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Administrative Agent or such Lender to or for the credit or the account
of the Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement, the Notes held by the Administrative
Agent or such Lender, and the other Loan Documents, irrespective of whether or
not the Administrative Agent or such Lender shall have made any demand under
this Agreement, such Notes, or such other Loan Documents, and although such
obligations may be unmatured.  The Administrative Agent and each Lender agrees
to promptly notify the Borrower after any such set-off and application made by
the Administrative Agent or such Lender, provided that the failure to give such
notice shall not affect the validity of such set-off and application.  The
rights of the Administrative Agent and each Lender under this Section 7.04 are
in addition to any other rights and remedies (including, without limitation,
other rights of set-off) that the Administrative Agent or such Lender may have.

 

63

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

 

(e)   Non-exclusivity of Remedies.  No remedy conferred upon the Administrative
Agent and the Lenders is intended to be exclusive of any other remedy, and each
remedy shall be cumulative of all other remedies existing by contract, at law,
in equity, by statute or otherwise.

 

(f)    Application of Proceeds.

 

(i)            Prior to the Payment in Full of Senior Debt (as defined in the
Subordination and Intercreditor Agreement) and other than as otherwise permitted
by the Subordination and Intercreditor Agreement, any monies or Property
actually received by the Administrative Agent pursuant to this Agreement or any
other Loan Document as a result of the exercise of any rights or remedies under
any Security Instrument or any other agreement with the Borrower, any Guarantor
or any of their respective Subsidiaries which secures any of the Obligations,
shall in any event be held in trust by the Administrative Agent for the benefit
of Senior Agent and Senior Secured Parties (as defined in the Subordination and
Intercreditor Agreement) and promptly paid or delivered to Senior Agent in the
form received; and

 

(ii)           after the Payment in Full of Senior Debt and the termination of
the Subordination and Intercreditor Agreement, any monies or Property actually
received by the Administrative Agent pursuant to this Agreement or any other
Loan Document as a result of the exercise of any rights or remedies under any
Security Instrument or any other agreement with the Borrower, any Guarantor or
any of their respective Subsidiaries which secures any of the Obligations, shall
be applied in the following order:

 

(i)            First, to the payment of all amounts, including costs and
expenses incurred in connection with the collection of such proceeds and the
payment of any part of the Obligations, due to the Administrative Agent under
any of the expense reimbursement or indemnity provisions of this Agreement or
any other Loan Document, any Security Instrument or other collateral documents,
and any applicable law;

 

(ii)           Second, ratably, according to the then unpaid amounts thereof,
without preference or priority of any kind among them, to the payment of the
Obligations then due and payable; and

 

(iii)          Third, the remainder, if any, to the Borrower, its Subsidiaries,
their respective successors or assigns, or such other Person as may be lawfully
entitled to receive the same or as a court of competent jurisdiction may direct.

 

(iii)          All rights of the Administrative Agent and the Lenders in this
Article VII shall be subject to the terms and conditions of the Subordination
and Intercreditor Agreement.  In the event of a conflict between the terms of
this Article VII and the Subordination and Intercreditor Agreement, the
Subordination and Intercreditor Agreement shall control.

 

Section 8.

 

THE ADMINISTRATIVE AGENT

 

(a)   Authorization and Action.  Each Lender hereby appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers

 

64

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

 

under this Agreement as are delegated to the Administrative Agent by the terms
hereof and of the other Loan Documents, together with such powers as are
reasonably incidental thereto.  As to any matters not expressly provided for by
this Agreement or any other Loan Document (including, without limitation,
enforcement or collection of the Notes), the Administrative Agent shall not be
required to exercise any discretion or take any action, but shall be required to
act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Majority Lenders, and such
instructions shall be binding upon all Lenders and all holders of Notes;
provided, however, that the Administrative Agent shall not be required to take
any action which exposes the Administrative Agent to personal liability or which
is contrary to this Agreement, any other Loan Document, or applicable law.

 

(b)   Administrative Agent’s Reliance, Etc.  Neither the Administrative Agent
nor any of its directors, officers, agents, or employees shall be liable for any
action taken or omitted to be taken (INCLUDING THE ADMINISTRATIVE AGENT’S OWN
NEGLIGENCE) by it or them under or in connection with this Agreement or the
other Loan Documents, except for its or their own gross negligence or willful
misconduct.  Without limitation of the generality of the foregoing, the
Administrative Agent:  (a) may treat the payee of any Note as the holder thereof
until the Administrative Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to the
Administrative Agent; (b) may consult with legal counsel (including counsel for
the Borrower), independent public accountants, and other experts selected by it
and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants, or
experts; (c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties, or representations
made in or in connection with this Agreement or the other Loan Documents;
(d) shall not have any duty to ascertain or to inquire as to the performance or
observance of any of the terms, covenants or conditions of this Agreement or any
other Loan Document on the part of the Borrower or its Subsidiaries or to
inspect the Property (including the books and records) of the Borrower or its
Subsidiaries; (e) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency, or value of this
Agreement or any other Loan Document; and (f) shall incur no liability under or
in respect of this Agreement or any other Loan Document by acting upon any
notice, consent, certificate, or other instrument or writing (which may be by
telecopier or telex) believed by it to be genuine and signed or sent by the
proper party or parties.

 

(c)   The Administrative Agent and Its Affiliates.  With respect to its
Commitment, the Advances made by it and the Notes issued to it, the
Administrative Agent shall have the same rights and powers under this Agreement
as any other Lender and may exercise the same as though it were not the
Administrative Agent.  The term “Lender” or “Lenders” shall, unless otherwise
expressly indicated, include the Administrative Agent in its individual
capacity.  The Administrative Agent and its Affiliates may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower or any of its Subsidiaries, and any Person
who may do business with or own securities of the Borrower or any such
Subsidiary, all as if the Administrative Agent were not an agent hereunder and
without any duty to account therefor to the Lenders.

 

(d)   Lender Credit Decision.  Each Lender acknowledges that it has,
independently and without reliance upon the Administrative Agent or any other
Lender and based on the

 

65

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

 

Financial Statements and the Interim Financial Statements and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement.  Each Lender also
acknowledges that it shall, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.

 

(e)   Indemnification.  THE LENDERS SEVERALLY AGREE TO INDEMNIFY THE
ADMINISTRATIVE AGENT AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER),
ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS,
COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE
IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY
RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY
THE ADMINISTRATIVE AGENT UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
(INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE), AND INCLUDING, WITHOUT
LIMITATION, ENVIRONMENTAL LIABILITIES, PROVIDED THAT NO LENDER SHALL BE LIABLE
FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE
ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  WITHOUT
LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE
AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES
(INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH
THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT,
OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE)
OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THE EXTENT THAT THE ADMINISTRATIVE
AGENT IS NOT REIMBURSED FOR SUCH BY THE BORROWER.

 

(f)    Successor Administrative Agent.  The Administrative Agent may resign at
any time by giving written notice thereof to the Lenders and the Borrower and
may be removed at any time with or without cause by the Majority Lenders upon
receipt of written notice from the Majority Lenders to such effect.  Upon
receipt of notice of any such resignation or removal, the Majority Lenders shall
have the right to appoint a successor Administrative Agent with, if any Event of
Default has not occurred and is not continuing, the consent of the Borrower,
which consent shall not be unreasonably withheld.  If no successor
Administrative Agent shall have been so appointed by the Majority Lenders with
the consent of the Borrower, and shall have accepted such appointment, within 30
days after the retiring Administrative Agent’s giving of notice of resignation
or the Majority Lenders’ removal of the retiring Administrative Agent then the
retiring Administrative Agent may, on behalf of the Lenders and the Borrower,
appoint a

 

66

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

 

successor Administrative Agent, which shall be, in the case of a successor
agent, a commercial bank organized under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of at
least $500,000,000.00; provided that, if the Administrative Agent shall notify
the Borrower and the Lenders that no qualifying Person has accepted such
appointment, then such resignation shall nonetheless become effective in
accordance with such notice and (1) the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder and under the other Loan
Documents (except that in the case of any collateral security held by the
Administrative Agent on behalf of the Lenders under any of the Loan Documents,
the retiring Administrative Agent shall continue to hold such collateral
security until such time as a successor Administrative Agent is appointed) and
(2) all payments, communications and determinations provided to be made by, to
or through the retiring Administrative Agent shall instead be made by or to each
Lender directly, until such time as the Majority Lenders appoint a successor
Administrative Agent as provided for above in this paragraph.  Upon the
acceptance of any appointment as Administrative Agent by a successor
Administrative Agent, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges, and duties
of the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations under this Agreement and the
other Loan Documents.  After any retiring Administrative Agent’s resignation or
removal hereunder as Administrative Agent, the provisions of this Article VIII
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Administrative Agent under this Agreement and the other Loan
Documents.

 

(g)   Collateral Matters.

 

(i)            Administrative Agent is authorized on behalf of the Secured
Parties, without the necessity of any notice to or further consent from the
Secured Parties, from time to time, to take any actions with respect to any
Collateral or Security Instruments which may be necessary to perfect and
maintain Acceptable Security Interests in and Liens upon the Collateral granted
pursuant to the Security Instruments.  Administrative Agent is further
authorized on behalf of the Secured Parties, without the necessity of any notice
to or further consent from the Secured Parties, from time to time, to take any
action (other than enforcement actions requiring the consent of, or request by,
the Majority Lenders as set forth in Section 7.02 or Section 7.03 above) in
exigent circumstances as may be reasonably necessary to preserve any rights or
privileges of the Secured Parties under the Loan Documents or applicable law.

 

(ii)           Each Secured Party irrevocably authorizes Administrative Agent to
release any Lien granted to or held by the Administrative Agent upon any
Collateral: (i) upon termination of the Commitments and payment in full of all
Obligations; (ii) constituting Property sold or to be sold or otherwise disposed
of as part of or in connection with any disposition permitted under this
Agreement or the other Loan Documents; (iii) constituting Property in which the
Borrower or any Subsidiary owned no interest at the time the Lien was granted or
at any time thereafter; (iv) constituting Property leased to the Borrower or any
Subsidiary under a lease which has expired or has been terminated in a
transaction permitted under this Agreement or is about to expire and which has
not been, and is not intended by the Borrower or such Subsidiary to be, renewed
or extended; or (v) if approved, authorized or ratified in writing by the
applicable Majority Lenders or all the Lenders, as the case may be, as required
by Section 9.01.  Upon the request of the Administrative Agent at any time, the
Secured Parties will confirm in

 

67

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

 

writing the Administrative Agent’s authority to release particular types or
items of Collateral pursuant to this Section 8.07.

 

(iii)          Notwithstanding anything contained in any of the Loan Documents
to the contrary, the Borrower, the Administrative Agent, and each Secured Party
hereby agree that no Secured Party shall have any right individually to realize
upon any of the Collateral or to enforce the Guaranties, it being understood and
agreed that all powers, rights and remedies hereunder and under the Security
Instruments may be exercised solely by Administrative Agent on behalf of the
Secured Parties in accordance with the terms hereof.

 

Section 9.

MISCELLANEOUS

 

(a)   Amendments, Etc.  No amendment or waiver of any provision of this
Agreement, the Notes, or any other Loan Document, nor consent to any departure
by the Borrower or any Subsidiary therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Majority Lenders and the
Borrower, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; provided,
however, that no amendment, waiver, or consent shall, unless in writing and
signed by all the Lenders, do any of the following:  (a) waive any of the
conditions specified in Section 3.01, (b) increase the Commitments of the
Lenders other than as provide in Section 2.16, (c) reduce the principal of, or
interest on, the Notes or any fees or other amounts payable hereunder or under
any other Loan Document, (d) postpone any date fixed for any payment of
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or extend the Maturity Date (other than as provided in Section 2.15),
(e) change the percentage of Lenders which shall be required for the Lenders or
any of them to take any action hereunder or under any other Loan Document,
(f) amend Section 2.11 or this Section 9.01, (g) amend the definition of
“Majority Lenders,” (h) release any Guarantor from its obligations under any
Guaranty, (i) permit the Borrower or any Subsidiary to enter into any merger or
consolidation with or into any other Person or amend Section 6.04(a),
(j) release any Collateral securing the Obligations, except for releases of
Collateral sold as permitted by this Agreement except for releases of Collateral
as permitted under Section 8.08(b), or (k) amend or waive any provision of, nor
consent to any departure by any party thereto from, the Collateral Trust and
Intercreditor Agreement; and provided, further, that no amendment, waiver or
consent shall, unless in writing and signed by the Administrative Agent in
addition to the Lenders required above to take such action, affect the rights or
duties of the Administrative Agent under this Agreement or any other Loan
Document.

 

(b)   Notices, Etc.  All notices and other communications shall be in writing
(including, without limitation, telecopy or telex) and mailed by certified mail,
return receipt requested, telecopied, telexed, hand delivered, or delivered by a
nationally recognized overnight courier, at the address for the appropriate
party specified in Schedule I or at such other address as shall be designated by
such party in a written notice to the other parties.  All such notices and
communications shall, when so mailed, telecopied, telexed, or hand delivered or
delivered by a nationally recognized overnight courier, be effective when
received if mailed, when telecopy transmission is completed, when confirmed by
telex answer-back, or when delivered by such messenger or courier, respectively,
except that notices and communications to the Administrative

 

68

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

 

Agent pursuant to Article II or VIII shall not be effective until received by
the Administrative Agent.

 

(c)   No Waiver; Remedies.  No failure on the part of any Lender, or the
Administrative Agent, to exercise, and no delay in exercising, any right
hereunder or under any Note shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right.  The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.

 

(d)   Costs and Expenses.  The Borrower agrees to pay on demand (a) all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, execution, delivery, administration,
modification, and amendment of this Agreement, the Notes, the Guaranties, and
the other Loan Documents including the reasonable fees and out-of-pocket
expenses of counsel for the Administrative Agent with respect to advising the
Administrative Agent as to its rights and responsibilities under this Agreement
and (b) all out-of-pocket costs and expenses, if any, of the Administrative
Agent and each Lender (including, without limitation, reasonable counsel fees
and expenses of the Administrative Agent and each Lender) in connection with the
enforcement (whether through negotiations, legal proceedings, or otherwise) of
this Agreement, the Notes, the Guaranties, and the other Loan Documents.

 

(e)   Binding Effect.  This Agreement shall become effective when it shall have
been executed by the Borrower and the Administrative Agent, and when the
Administrative Agent shall have, as to each Lender, either received a
counterpart hereof executed by such Lender or been notified by such Lender that
such Lender has executed it and thereafter shall be binding upon and inure to
the benefit of the Borrower, the Administrative Agent and each Lender and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights or delegate its duties under this Agreement or any
interest in this Agreement without the prior written consent of each Lender.

 

(f)    Lender Assignments and Participations.

 

(i)            Assignments.  Any Lender may assign to one or more Eligible
Assignees all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitments, if any, the
Advances owing to it, and the Notes held by it); provided, however, that
(i) each such assignment shall be of a constant, and not a varying,
percentage of such Lender’s rights and obligations assigned under this Agreement
and shall be an equal percentage with respect to both its obligations owing in
respect of the Commitments, if any, and the related Advances, (ii) the amount of
the Commitments and Advances of such Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall be, if to an entity other than a Lender, not
less than $5,000,000 and shall be an integral multiple of $1,000,000 in excess
thereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) the
parties to each such assignment shall execute and deliver to the Administrative
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with the Notes subject to such assignment, and (v) each
Eligible Assignee (other than the Eligible Assignee of the Administrative Agent
or an Affiliate of a Lender) shall pay to the Administrative Agent a $3,500
administrative fee.  Upon such execution, delivery, acceptance and recording,
from and after the

 

69

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

 

effective date specified in each Assignment and Acceptance, which effective date
shall be at least three Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto for all purposes and, to the extent
that rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, have the rights and obligations of a Lender hereunder
and (B) such Lender thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights and be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of such Lender’s rights and obligations under this Agreement, such
Lender shall cease to be a party hereto).

 

(ii)           Terms of Assignments.  By executing and delivering an Assignment
and Acceptance, the Lender thereunder and the assignee thereunder confirm to and
agree with each other and the other parties hereto as follows:  (i) other than
as provided in such Assignment and Acceptance, such Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition of the
Borrower or its Subsidiaries or the performance or observance by the Borrower or
its Subsidiaries of any of their obligations under this Agreement or any other
instrument or document furnished pursuant hereto; (iii) such assignee confirms
that it has received a copy of this Agreement, together with copies of the
Financial Statements and Interim Financial Statements referred to in
Section 4.05 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and without
reliance upon the Administrative Agent, such Lender or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (v) such assignee appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Administrative Agent by
the terms hereof, together with such powers as are reasonably incidental
thereto; and (vi) such assignee agrees that it will perform in accordance with
their terms all of the obligations which by the terms of this Agreement are
required to be performed by it as a Lender.

 

(iii)          The Register.  The Administrative Agent shall maintain at its
address referred to in Section 9.02 a copy of each Assignment and Acceptance
delivered to and accepted by it and a register for the recordation of the names
and addresses of the Lenders and the Commitments of, and principal amount of the
Advances owing to, each Lender from time to time (the “Register”).  The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Administrative Agent and the Lenders may
treat each Person whose name is recorded in the Register as a Lender hereunder
for all purposes of this Agreement.  The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.

 

(iv)          Procedures.  Upon its receipt of an Assignment and Acceptance
executed by a Lender and an Eligible Assignee, together with the Notes subject
to such assignment, the Administrative Agent shall, if such Assignment and
Acceptance has been completed and is in

 

70

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

 

substantially the form of the attached Exhibit A, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register, and
(iii) give prompt notice thereof to the Borrower.  Within five Business Days
after its receipt of such notice, the Borrower shall execute and deliver to the
Administrative Agent in exchange for the surrendered Notes (A) a new Note to the
order of such Eligible Assignee in an amount equal to the Advances purchased by
it pursuant to such Assignment and Acceptance and (B) if such Lender has
retained any portion of the Advances owing to it, a new Note to the order of
such Lender in an amount equal to the portion retained by it hereunder.  Such
new Notes shall be dated the effective date of such Assignment and Acceptance
and shall otherwise be in substantially the form of the attached Exhibit E.

 

(v)           Participations.  Each Lender may sell participations to one or
more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Advances owing to it); provided, however, that (i) such Lender’s
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations, (iii) such Lender shall remain the holder of any such Notes
for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent
and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender’s rights and obligations under this
Agreement, and (v) such Lender shall not require the participant’s consent to
any matter under this Agreement, except for change in the principal amount of
the Notes, reductions in fees or interest, releasing all or substantially all of
any Collateral, permitting the Borrower or any Subsidiary to enter into any
merger or consolidation with or into any other,  postponement of any date fixed
for any payment of principal of, or interest on, the Notes or any fees or other
amounts payable hereunder, or extensions of the Maturity Date (other than as
provided in Section 2.15).  The Borrower hereby agrees that participants shall
have the same rights under Sections 2.12, 2.13, 2.14(c), and 9.07 as a Lender to
the extent of their respective participations.

 

(g)   Indemnification; Waiver.

 

(a)           Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY,
THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT THEREOF), EACH LENDER AND EACH
OFFICER, DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE OF ANY OF THE
FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND
HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES,
LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS
OF ANY COUNSEL FOR ANY INDEMNITEE), INCURRED BY ANY INDEMNITEE OR ASSERTED
AGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARY
OF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE
EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY
AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE
PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE CASE
OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR, EMPLOYEE,
AGENT, ATTORNEY-IN-FACT

 

71

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

 

AND AFFILIATE THEREOF) THE ADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, (II) ANY ADVANCE OR THE USE OR PROPOSED USE OF THE PROCEEDS
THEREFROM, (III) ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS
MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF
ITS SUBSIDIARIES, OR ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE
BORROWER OR ANY OF ITS SUBSIDIARIES, OR (IV) ANY ACTUAL OR PROSPECTIVE CLAIM,
LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING,
WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD
PARTY OR BY THE BORROWER OR ANY GUARANTOR, AND REGARDLESS OF WHETHER ANY
INDEMNITEE IS A PARTY THERETO, IN ALL CASES, WHETHER OR NOT CAUSED BY OR
ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE
NEGLIGENCE OF THE INDEMNITEE; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY
INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES,
LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT
JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.

 

(b)           Waiver of Damages.  To the fullest extent permitted by applicable
law, the Borrower shall not assert, and hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement, any other Loan Document or
any agreement or instrument contemplated hereby, the transactions contemplated
hereby or thereby, any Advance or the use of the proceeds thereof.  No
Indemnitee referred to in subsection (a) above shall be liable for any damages
arising from the use by unintended recipients of any information or other
materials distributed by it through telecommunications, electronic or other
information transmission systems in connection with this Agreement or the other
Loan Documents or the transactions contemplated hereby or thereby.

 

(h)   Execution in Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.  Delivery of an
executed counterpart signature page of this Agreement by facsimile is as
effective as executing and delivering this Agreement in the presence of the
other parties to this Agreement.

 

(i)    Survival of Representations, Etc.  All representations and warranties
contained in this Agreement or made in writing by or on behalf of the Borrower
in connection herewith shall survive the execution and delivery of this
Agreement and the Loan Documents, the making of the Advances and any
investigation made by or on behalf of the Lenders, none of which investigations
shall diminish any Lender’s right to rely on such representations and
warranties.  All obligations of the Borrower provided for in Sections 2.12,
2.13, 2.14(c), 9.04, and 9.07 and all of the obligations of the Lenders in
Section 8.05 shall survive any termination of this Agreement and repayment in
full of the Obligations.

 

72

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

 

(j)    Severability.  In case one or more provisions of this Agreement or the
other Loan Documents shall be invalid, illegal or unenforceable in any respect
under any applicable law, the validity, legality, and enforceability of the
remaining provisions contained herein or therein shall not be affected or
impaired thereby.

 

(k)   Business Loans.  The Borrower warrants and represents that the Loans
evidenced by the Notes are and shall be for business, commercial, investment, or
other similar purposes and not primarily for personal, family, household, or
agricultural use, as such terms are used in Chapter One (“Chapter One”) of the
Texas Credit Code.  At all such times, if any, as Chapter One shall establish a
Maximum Rate, the Maximum Rate shall be the “indicated rate ceiling” (as such
term is defined in Chapter One) from time to time in effect.

 

(l)    Governing Law; Submission to Jurisdiction.  This Agreement, the Notes and
the other Loan Documents shall be governed by, and construed and enforced in
accordance with, the laws of the State of Texas.  Without limiting the intent of
the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as
amended (relating to revolving loans and revolving tri-party accounts (formerly
Tex.  Rev. Civ.  Stat.  Ann.  Art.  5069, Ch.  15)), shall not apply to this
Agreement, the Notes, or the transactions contemplated hereby and (b) to the
extent that any Lender may be subject to Texas law limiting the amount of
interest payable for its account, such Lender shall utilize the indicated
(weekly) rate ceiling from time to time in effect.  The Borrower hereby
irrevocably submits to the jurisdiction of any Texas state or federal court
sitting in Dallas, Texas in any action or proceeding arising out of or relating
to this Agreement or the other Loan Documents, and the Borrower hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such court.  The Borrower hereby unconditionally and
irrevocably waives, to the fullest extent it may effectively do so, any right it
may have to the defense of an inconvenient forum to the maintenance of such
action or proceeding.  The Borrower hereby agrees that service of copies of the
summons and complaint and any other process which may be served in any such
action or proceeding may be made by mailing or delivering a copy of such process
to such Borrower at its address set forth in this Agreement.  The Borrower
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.  Nothing in this Section shall affect the
rights of any Lender to serve legal process in any other manner permitted by the
law or affect the right of any Lender to bring any action or proceeding against
the Borrower or its Property in the courts of any other jurisdiction.

 

(m)  Subordination and Intercreditor Agreement.  The Administrative Agent is
hereby authorized on behalf of the Lenders for the Lenders to enter into the
Subordination and Intercreditor Agreement.  A copy of such Subordination and
Intercreditor Agreement will be made available to each Lender on the Effective
Date and thereafter upon request.  Each Lender agrees to the terms of such
Subordination and Intercreditor Agreement and agrees that the terms thereof
shall be binding on such Lender and its successors and assigns, as if it were a
party thereto.

 

(n)   USA Patriot Act.  Each Lender that is subject to the Patriot Act and the
Administrative Agent (for itself and not on behalf of any Lender) hereby
notifies the Borrower that pursuant to the requirements of the Patriot Act it is
required to obtain, verify and record information that identifies the Borrower,
which information includes the name and address of the

 

73

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

 

Borrower and other information that will allow such Lender or the Administrative
Agent, as applicable, to identify the Borrower in accordance with the Patriot
Act.

 

(o)   WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS AND THE ADMINISTRATIVE
AGENT HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED BY AND HAVE CONSULTED
WITH COUNSEL OF THEIR CHOICE, AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY,
AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

(p)   ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS
DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.  Signature page follows.]

 

74

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

 

EXECUTED as of the date first above written.

 

 

BORROWER:

 

 

 

CANO PETROLEUM, INC. a Delaware corporation

 

 

 

 

 

By:

/s/ Benjamin Daitch

 

 

Benjamin Daitch

 

 

Senior Vice President and

 

 

Chief Financial Officer

 

Signature page to Subordinated Credit Agreement
(Cano Petroleum, Inc.)

 

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

 

 

ADMINISTRATIVE AGENT/LENDERS:

 

 

 

UNIONBANCAL EQUITIES, INC.,
as Administrative Agent and Lender

 

 

 

 

 

By:

/s/ Ted A. McNulty

 

Name:

Ted A. McNulty

 

Title:

Senior Vice President

 

 

 

 

 

By:

 

/s/ Derrick Pan

 

Name:

Derrick Pan

 

Title:

Vice President

 

Signature page to Subordinated Credit Agreement
(Cano Petroleum, Inc.)

 

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

 

SCHEDULE I

NOTICE INFORMATION AND COMMITMENTS

 

Each of the commitments to lend set forth herein is governed by the terms of the
Credit Agreement which provides for, among other things, borrowing base
limitations which may restrict the Borrower’s ability to request (and the
Lenders’ obligation to provide) Credit Extensions to a maximum amount which is
less than the commitments set forth in this Schedule I.

 

Administrative Agent:

 

UnionBanCal Equities, Inc.

445 South Figueroa Street, 21st Floor

Los Angeles, California 90071

Attention:  Maggie Elower

Phone:  213-236-7881

Fax:  213-236-7619

 

Borrower:

 

Cano Petroleum, Inc.

Burnett Plaza

801 Cherry Street, Suite 3200

Fort Worth, Texas 76102

Attention: Benjamin Daitch, CFO

Facsimile: (817) 334-0222

 

Lenders:

 

Commitment

 

UnionBanCal Equities, Inc.

 

$15,000,000.00

 

Total:

 

$15,000,000.00

 

 

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

 

SCHEDULE 4.01

 

SUBSIDIARIES OF BORROWER

 

Ladder Companies, Inc.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Delaware

Type of Organization:Corporation

 

 

 

 

 

Square One Energy, Inc.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

Type of Organization:Corporation

 

 

 

 

 

W.O. Energy of Nevada, Inc.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Nevada

Type of Organization:Corporation

 

 

 

 

 

WO Energy, Inc.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

Type of Organization:Corporation

 

 

 

 

 

W.O. Operating Company, Ltd.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

Type of Organization:Limited Partnership

 

 

 

 

 

W.O. Production Company, Ltd.

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

Type of Organization:Limited Partnership

 

 

 

 

 

Cano Petro of New Mexico

 

 

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

Type of Organization:Corporation

 

 

 

1

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

 

SCHEDULE 4.05

 

EXISTING DEBT

 

Cano Petroleum, Inc.

 

Senior Debt as presented below, as of 12/17/08.

 

$27,000,000

 

The balances due for the Series D convertible preferred stock, as of 12/17/08,
are as follows:

 

D.E. Shaw Laminar Portfolios, L.L.C.

 

$

11,804,024.06

 

Investcorp Interlachen Multi-Strategy Master Fund Limited

 

1,479,484.90

 

Kellogg Capital Group LLC

 

2,046,906.46

 

William Herbert Hunt Trust Estate

 

3,391,960.94

 

Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover
Segregated Portfolio

 

2,046,906.46

 

Touradji DeepRock Master Fund, Ltd.

 

1,016,843.75

 

Trapeze Capital Corp.

 

3,492,858.29

 

O’Connor PIPEs Corporate Strategies Master Limited

 

1,275,122.07

 

Total Convertible Preferred Stock

 

$

26,554,106.93

 

 

Ladder Companies, Inc. (d/b/a Ladder Energy Company)

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

Square One Energy, Inc.

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

W.O. Energy of Nevada, Inc.

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

WO Energy, Inc.

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

W.O. Operating Company, Ltd.

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

1

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

 

W.O. Production Company, Ltd.

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

Cano Petro of New Mexico

 

Senior Debt — refer to detail under Cano Petroleum, Inc.

 

2

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

 

Schedule 4.07

 

LITIGATION

 

Burnett:

 

On March 23, 2006, the following lawsuit was filed in the 100th Judicial
District Court in Carson County, Texas; Cause No. 9840, The Tom L. and Anne
Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,
George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne Burnett Windfohr; and
Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.
O. Operating Company, Ltd, and WO Energy, Inc.  The plaintiffs claim that the
electrical wiring and equipment of Cano or certain of its subsidiaries relating
to oil and gas operations started a wildfire that began on March 12, 2006 in
Carson County.  The owner of the remainder of the mineral estate, Texas
Christian University, has intervened in the suit joining the plaintiffs’ request
to terminate certain oil and natural gas leases.

 

The plaintiffs in the above action (i) allege negligence and (ii) seek damages,
including, but not limited to, damages for damage to their land and livestock,
certain expenses related to fighting the fire and certain remedial expenses
totaling approximately $1.7 million to $1.8 million.  In addition, the
plaintiffs seek (i) termination of certain oil and natural gas leases,
(ii) reimbursement for their attorney’s fees (in the amount of at least
$549,000) and (iii) exemplary damages.  The plaintiffs also claim that Cano and
its subsidiaries are jointly and severally liable as a single business
enterprise and/or a general partnership or de facto partnership.

 

On June 21, 2007, the Judge of the 100th Judicial District Court issued a Final
Judgment (a) granting motions for summary judgment in favor of Cano and certain
of its subsidiaries on plaintiffs’ claims for (i) breach of contract/termination
of an oil and gas lease; and (ii) negligence; and (b) granting the plaintiffs’
no-evidence motion for summary judgment on contributory negligence, assumption
of risk, repudiation and estoppel affirmative defenses asserted by Cano and
certain of its subsidiaries.  The Final Judgment has been appealed.

 

SPS:

 

On March 14, 2007, the following lawsuit was filed in 100th Judicial District
Court in Carson County, Texas; Cause No. 9994, Southwestern Public Service
Company d/b/a Xcel Energy v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W. O. Operating Company, Ltd, and WO Energy, Inc. (“SPS”). The plaintiff claims
that the electrical wiring and equipment of Cano or certain of its subsidiaries
relating to oil and gas operations started a wildfire that began on March 12,
2006 in Carson County.  The plaintiff (i) alleges negligence and breach of
contract and (ii) seeks $1,876,000 in damages for loss and damage to
transmission and distribution equipment, utility poles, lines and other
equipment.  In addition, the plaintiff seeks reimbursement for its attorney’s
fees.

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating
Company, Ltd, and WO Energy, Inc.’s motion to transfer and transferred the SPS
case to the Honorable Paul Davis, retired judge of the 200th District Court of
Travis County, Texas (the “MDL Court”).

 

1

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

 

On September 11, 2008, the MDL Court signed a Partial Order of Remand remanding
this case to the trial court.  This case has been set for trial before the
100th Judicial District Court of Carson County, Texas on February 16, 2009.

 

MDL Case:

 

On September 25, 2007, the Texas Judicial Panel on Multidistrict
Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s Motion to Transfer Related Cases
to Pretrial Court pursuant to Texas Rule of Judicial Administration 13.  The
Panel transferred to a single pretrial court for consideration of pretrial
matters of Southwestern Public Service Company d/b/a Xcel Energy, identified
above, and Valenzuela, identified below, that assert claims against the Company
and its subsidiaries related to wildfires beginning on March 12, 2006.  On
September 11, 2008, the MDL Court signed a Partial Order of Remand remanding the
SPS case and setting it for trial before the 100th Judicial District Court of
Carson County, Texas on February 16, 2009.

 

Valenzuela:

 

On December 18, 2007, the following lawsuit was filed in the 348th Judicial
District Court of Tarrant County, Texas, Cause No. 348-227907-07, Norma
Valenzuela, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. (“Valenzuela”).  Six plaintiffs, including
the two plaintiffs and intervenor from the nonsuited Martinez case, claim that
the electrical wiring and equipment of Cano or certain of its subsidiaries
relating to oil and gas operations started a wildfire that began on March 12,
2006 in Carson County.  The plaintiffs (i) allege negligence and (ii) seek
undisclosed damages for the wrongful death of four relatives, Manuel Dominguez,
Roberto Chavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a
result of the fire.  In addition, plaintiffs seek (i) reimbursement for their
attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano
and its subsidiaries are jointly and severally liable as a single business
enterprise and/or as a partnership or de facto partnership.

 

The Company filed a Motion to Transfer Venue and a Notice of Tag Along
transferring the case to the MDL Matter in the 200th Judicial District Court of
Travis County, Texas (the “MDL Court”).  No further action will be taken in the
348th District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 348th District Court for trial.  A Motion
to transfer Venue has been heard and taken under advisement by the Court.  The
MDL Court has not yet remanded this case for trial.

 

Securities Litigation:

 

On October 2, 2008, a lawsuit was filed in the United States District Court for
the Southern District of New York against David W. Wehlmann; Gerald W. Haddock;
Randall Boyd; Donald W. Niemiec; Robert L. Gaudin; William O. Powell, III, and
the underwriters alleging violations of the federal securities laws.  The
plaintiff seeks to certify the lawsuit as a class action.  The lawsuit alleges
that the prospectus for the June 26, 2008 public offering of Cano common stock
contained statements regarding Cano’s proved reserve amounts and standards that
were

 

2

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

 

materially false and overstated Cano’s proved reserves.  Messrs. Wehlmann,
Haddock, Boyd, Niemiec, Gaudin and Powell were Cano outside directors on
June 26, 2008.  The lawsuit seeks an unspecified amount of damages for the class
if the lawsuit is certified as a class action.

 

3

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

 

SCHEDULE 4.14(a)

 

AGREEMENTS WHICH COULD CREATE A MATERIAL ADVERSE CHANGE

 

Amended and Restated Credit Agreement among Cano Petroleum, Inc. as Borrower,
The Lenders Party hereto from time to time, as Lenders, and Union Bank of
California, N.A., as Administrative Agent and as issuing Lender, dated
December 17, 2008, and all associated agreements.

 

Securities Purchase Agreement dated August 25, 2006 by and among Cano
Petroleum, Inc. and the Buyers listed therein.

 

Certificate of Designations, Preferences and Rights of Series D Convertible
Preferred Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware
Secretary of State.

 

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

 

SCHEDULE 4.20

 

HEDGING CONTRACTS

 

Time Period

 

Floor
Oil Price

 

Ceiling
Oil Price

 

Barrels
Per Day

 

Floor
Gas Price

 

Ceiling
Gas Price

 

Mcf
per Day

 

Barrels of
Equivalent
Oil per Day

 

4/1/08 - 12/31/08

 

$

80.00

 

$

117.50

 

367

 

$

7.75

 

$

11.40

 

1,867

 

678

 

1/1/09 - 12/31/09

 

$

80.00

 

$

110.90

 

367

 

$

7.75

 

$

10.60

 

1,667

 

644

 

1/1/10 - 12/31/10

 

$

80.00

 

$

108.20

 

333

 

$

7.75

 

$

9.85

 

1,567

 

594

 

1/1/11 - 3/31/11

 

$

80.00

 

$

107.30

 

333

 

$

7.75

 

$

11.60

 

1,467

 

578

 

4/1/08 - 12/31/08

 

$

85.00

 

$

110.60

 

267

 

$

8.00

 

$

10.90

 

1,233

 

472

 

1/1/09 - 12/31/09

 

$

85.00

 

$

104.40

 

233

 

$

8.00

 

$

10.15

 

1,133

 

422

 

1/1/10 - 12/31/10

 

$

85.00

 

$

101.50

 

233

 

$

8.00

 

$

9.40

 

1,033

 

406

 

1/1/11 - 3/31/11

 

$

85.00

 

$

100.50

 

200

 

$

8.00

 

$

11.05

 

967

 

361

 

 

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

 

SCHEDULE 4.21

 

MATERIAL AGREEMENTS

 

Description

 

Certificate of Designations, Preferences and Rights of Series D Convertible
Preferred Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware
Secretary of State.

 

Crude Oil Purchase Contract between Cano Petro of New Mexico Inc and Plains
Marketing L.P. dated January 21, 2008, Contract No. 7405-1001.

 

Crude Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock
Transportation dated February 28, 2008.

 

Gas Purchase Agreement between Scissortail Energy, Inc. and Ladder Energy Co.
dated September 4, 2004.

 

Amendment to Gas Purchase Contract between GPM Gas Corporation and Rio
Petroleum, Inc. dated June 1, 1999.

 

Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals, LP
and Ladder Energy Company dated February 1, 2000.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated December 1, 2004.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated June 2, 2005.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated September 2, 2005.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated September 26, 2006.

 

Amendment to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated September 11, 2008.

 

Gas Purchase and Sales Contract between Arrow Oil & Gas Inc and STP, Inc. dated
August 15, 2002.

 

Gas Purchase Contract between Union Texas Products Corporation and Gemini Oil
Company dated June 1, 1985.

 

Gas Sales & Purchase Agreement between Alliant Energy Desdemona and Square One
Energy dated June 20, 2006.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and
Square One Energy dated January 1, 2007.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and
Square One Energy dated March 20, 2007.

 

Gas Sales & Purchase Agreement Amendment between Alliant Energy Desdemona and
Square One Energy dated November 1, 2007.

 

Gas Purchase Contract between Enbridge G & P (North Texas) L. P. and Square One
Energy, Inc. contract number 5409 dated March 1, 2007.

 

Crude Oil Purchase Contract between Plains Marketing, LP (PMLP) and Square One
Energy contract number 7062-1001 dated March 1, 2007.

 

1

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

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated June 1, 2003.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated March 1,
2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated November 1,
2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated September 1,
2006.

 

Crude Oil Purchase Agreement between Sunoco Partners Marketing & Terminals L.P.
and Square One Energy Reference Number 521329 dated November 1, 2006.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated November 1,
2006.

 

Crude Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated April 7,
2004.

 

Gas Purchase Contract between Duke Energy Field Services and W. O. Operating
dated November 1, 2003.

 

Gas Purchase Contract Amendment between Duke Energy Field Services and W. O.
Operating dated September 1, 2005.

 

Gas Purchase Contract between Duke Energy Field Services and W. O. Operating
dated August 1, 2005.

 

Crude Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and
W. O. Operating Company Contract number 01-0838 dated May 1, 2001

 

Crude Oil Purchase Agreement Amendment 13 between Diamond Shamrock Refining
Company, L. P. and W. O. Operating Company Contract number 01-0838 dated
August 1, 2007 and Exhibit A.

 

Gas Purchase Contract between W. O. Operating Company and GPM Corporation dated
March 15, 1994.

 

Gas Purchase Agreement between ONEOK Texas Field Services, L. P. and W. O.
Operating Company, LTD dated January 1, 2005.

 

Crude Oil Purchase Agreement Amendment 14 between Valero Marketing and Supply
Company and W. O. Operating Company dated December 1, 2007.

 

Crude Oil Purchase Agreement Amendment 15 between Valero Marketing and Supply
Company and W. O. Operating Company dated June 1, 2008.

 

Crude Oil Purchase Agreement Amendment between Blackrock Transportation and Cano
Petro Of New Mexico, Inc. dated February 1, 2008.

 

Gas Services and/or Purchase Agreement between Versado Gas Processors, L.L.C.
acting through Dynegy Midstream Services, Limited Partnership, its operator and
UHC New Mexico Corporation, Owner dated June 1, 2000.

 

Amendment to Gas Services and/or Purchase Agreement between Cano Petroleum, Inc,
Owner and Versado Gas Processors, L.L.C. acting through Targa Midstream Services
Limited Partnership, its operator

 

Pipeline Lease Agreement dated effective June 19, 2007, between Meyer Land and
Cattle Co., Inc., Meyer Farms, Inc. and W.O. Operating Company, Ltd.

 

Unit Agreement — Cockrell Ranch Unit — Hutchinson County, Texas, dated
January 8, 2007 executed by W.O. Operating Company, Ltd.

 

Unit Operating Agreement — Cano Unit dated May 1, 1989.

 

2

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

 

Unit Agreement for the Development and Operation for the Cato Unit — Chaves
County, New Mexico dated May 1, 1989.

 

Amended and Restated Credit Agreement among Cano Petroleum, Inc. as Borrower,
The Lenders Party hereto from time to time, as Lenders, and Union Bank of
California, N.A., as Administrative Agent and as issuing Lender, dated
December 17, 2008 and all associated agreements.

 

3

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

 

EXHIBIT A

 

FORM OF ASSIGNMENT AND ACCEPTANCE

 

This Assignment and Acceptance (the “Assignment and Acceptance”) is dated as of
the Effective Date set forth below and is entered into by and between
[the][each](2) Assignor identified in item 1 below ([the][each, an] “Assignor”)
and [the][each](1) Assignee identified in item 2 below ([the][each, an]
“Assignee”).  [It is understood and agreed that the rights and obligations of
[the Assignors][the Assignees](3) hereunder are several and not joint.](4)
Capitalized terms used but not defined herein shall have the meanings given to
them in the Credit Agreement identified below (as amended, the “Credit
Agreement”), receipt of a copy of which is hereby acknowledged by [the][each]
Assignee.  The Standard Terms and Conditions set forth in Annex 1 attached
hereto are hereby agreed to and incorporated herein by reference and made a part
of this Assignment and Acceptance as if set forth herein in full.

 

For an agreed consideration, [the][each] Assignor hereby irrevocably sells and
assigns to [the Assignee][the respective Assignees], and [the][each] Assignee
hereby irrevocably purchases and assumes from [the Assignor][the respective
Assignors], subject to and in accordance with the Standard Terms and Conditions
and the Credit Agreement, as of the Effective Date inserted by the
Administrative Agent as contemplated below (i) all of [the Assignor’s][the
respective Assignors’] rights and obligations in [its capacity as a
Lender][their respective capacities as Lenders] under the Credit Agreement and
any other documents or instruments delivered pursuant thereto to the extent
related to the amount and percentage interest identified below of all of such
outstanding rights and obligations of [the Assignor][the respective Assignors]
under the respective facilities identified below (including without limitation
any letters of credit, guarantees, and swingline loans included in such
facilities) and (ii) to the extent permitted to be assigned under applicable
law, all claims, suits, causes of action and any other right of [the Assignor
(in its capacity as a Lender)][the respective Assignors (in their respective
capacities as Lenders)] against any Person, whether known or unknown, arising
under or in connection with the Credit Agreement, any other documents or
instruments delivered pursuant thereto or the loan transactions governed thereby
or in any way based on or related to any of the foregoing, including, but not
limited to, contract claims, tort claims, malpractice claims, statutory claims
and all other claims at law or in equity related to the rights and obligations
sold and assigned pursuant to clause (i) above (the rights and obligations sold
and assigned by [the][any] Assignor to [the][any] Assignee pursuant to clauses
(i) and (ii) above being referred to herein collectively as [the][an] “Assigned
Interest”).  Each such sale and assignment is without recourse to

 

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

(1) For bracketed language here and elsewhere in this form relating to the
Assignor(s), if the assignment is from a single Assignor, choose the first
bracketed language.  If the assignment is from multiple Assignors, choose the
second bracketed language.

 

(2) For bracketed language here and elsewhere in this form relating to the
Assignee(s), if the assignment is to a single Assignee, choose the first
bracketed language.  If the assignment is to multiple Assignees, choose the
second bracketed language.

 

(3) Select as appropriate.

 

(4) Include bracketed language if there are either multiple Assignors or
multiple Assignees.

 

A-1

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

 

[the][any] Assignor and, except as expressly provided in this Assignment and
Acceptance, without representation or warranty by [the][any] Assignor.

 

1.

 

Assignor[s]:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.

 

Assignee[s]:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]

 

 

 

 

 

3.

 

Borrower:

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

 

 

4.

 

Administrative Agent:

 

UNIONBANCAL EQUITIES, INC., as the administrative agent under the Credit
Agreement

 

 

 

 

 

5.

 

Credit Agreement:

 

The Subordinated Credit Agreement dated as of December 17, 2008 among Borrower,
the Lenders party thereto from time to time, and UnionBanCal Equities, Inc. as
Administrative Agent.

 

 

 

 

 

6.

 

Assigned Interest[s]:

 

 

 

Assignor[s]

 

Assignee[s]

 

Facility
Assigned

 

Aggregate Amount
of Commitment
/Advance for all
Lenders

 

Amount of
Commitment / 
Advances
Assigned(5)

 

Percentage Assigned
of Commitment / 
Advances(6)

 

CUSIP
Number

 

 

 

 

 

 

 

$

 

 

$

 

 

 

%

 

 

 

 

 

 

 

 

$

 

 

$

 

 

 

%

 

 

 

 

 

 

 

 

$

 

 

$

 

 

 

%

 

 

 

7.

 

Trade Date:

                              (7)

 

Effective Date:                                  , 20       [TO BE INSERTED BY
ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF
TRANSFER IN THE REGISTER THEREFOR.]

 

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

(5) Amount to be adjusted by the counterparties to take into account any
payments or prepayments made between the Trade Date and the Effective Date.

 

(6) Set forth, to at least 9 decimals, as a percentage of the Commitment /
Advances of all Lenders thereunder.

 

(7) To be completed if the Assignor(s) and the Assignee(s) intend that the
minimum assignment amount is to be determined as of the Trade Date.

 

A-2

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

 

The terms set forth in this Assignment and Acceptance are hereby agreed to:

 

 

ASSIGNOR[S](8)

 

[NAME OF ASSIGNOR]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

[NAME OF ASSIGNOR]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

ASSIGNEE[S]

 

[NAME OF ASSIGNEE]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

[NAME OF ASSIGNEE]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

[Consented to and](9) Accepted:

 

 

 

UNIONBANCAL EQUITIES, INC., as

 

 Administrative Agent

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

By:

 

 

 

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

(8) Add additional signature blocks as needed.

 

(9) To be added only if the consent of the Administrative Agent is required by
the terms of the Credit Agreement.

 

A-3

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

 

Name:

 

 

Title:

 

 

 

[Consented to:](10)

 

CANO PETROLEUM, INC., a Delaware corporation

 

By:

 

 

Name:

 

 

Title:

 

 

 

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

(10)To be added only if the consent of the Borrower is required by the terms of
the Credit Agreement.

 

A-4

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

 

Annex 1

To Exhibit A — Assignment and Acceptance

 

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ACCEPTANCE

 

1.  Representations and Warranties.

 

1.1 Assignor[s].  [The][Each] Assignor (a) represents and warrants that (i) it
is the legal and beneficial owner of [the][the relevant] Assigned Interest,
(ii) [the][such] Assigned Interest is free and clear of any lien, encumbrance or
other adverse claim and (iii) it has full power and authority, and has taken all
action necessary, to execute and deliver this Assignment and Acceptance and to
consummate the transactions contemplated hereby; and (b) assumes no
responsibility with respect to (i) any statements, warranties or representations
made in or in connection with the Credit Agreement or any other Loan Document,
(ii) the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Loan Documents or any collateral thereunder, (iii) the financial
condition of the Borrower, any of its Subsidiaries or Affiliates or any other
Person obligated in respect of any Loan Document or (iv) the performance or
observance by the Borrower, any of its Subsidiaries or Affiliates or any other
Person of any of their respective obligations under any Loan Document.

 

1.2. Assignee[s].  [The][Each] Assignee (a) represents and warrants that (i) it
has full power and authority, and has taken all action necessary, to execute and
deliver this Assignment and Acceptance and to consummate the transactions
contemplated hereby and to become a Lender under the Credit Agreement, (ii) it
meets all the requirements to be an Eligible Assignee under Section 9.06 of the
Credit Agreement (subject to such consents, if any, as may be required under
Section 9.06 of the Credit Agreement), (iii) from and after the Effective Date,
it shall be bound by the provisions of the Credit Agreement as a Lender
thereunder and, to the extent of [the][the relevant] Assigned Interest, shall
have the obligations of a Lender thereunder, (iv) it is sophisticated with
respect to decisions to acquire assets of the type represented by the Assigned
Interest and either it, or the person exercising discretion in making its
decision to acquire the Assigned Interest, is experienced in acquiring assets of
such type, (v) it has received a copy of the Credit Agreement, and has received
or has been accorded the opportunity to receive copies of the most recent
financial statements delivered pursuant to Section 3.01(c) thereof, as
applicable, and such other documents and information as it deems appropriate to
make its own credit analysis and decision to enter into this Assignment and
Acceptance and to purchase [the][such] Assigned Interest, (vi) it has,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Assignment and
Acceptance and to purchase [the][such] Assigned Interest, and (vii) if it is a
Person that is organized under the laws of a jurisdiction other than that in
which the Borrower is resident for tax purposes, attached to the Assignment and
Acceptance is any documentation required to be delivered by it pursuant to the
terms of the Credit Agreement, duly completed and executed by [the][such]
Assignee; and (b) agrees that (i) it will, independently and without reliance on
the Administrative Agent, [the][any] Assignor or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action

 

A-5

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

 

under the Loan Documents, and (ii) it will perform in accordance with their
terms all of the obligations which by the terms of the Loan Documents are
required to be performed by it as a Lender.

 

2.  Payments.  From and after the Effective Date, the Administrative Agent shall
make all payments in respect of [the][each] Assigned Interest (including
payments of principal, interest, fees and other amounts) to [the][the relevant]
Assignee whether such amounts have accrued prior to, on or after the Effective
Date.  The Assignor[s] and the Assignee[s] shall make all appropriate
adjustments in payments by the Administrative Agent for periods prior to the
Effective Date or with respect to the making of this assignment directly between
themselves.

 

3.               General Provisions.  This Assignment and Acceptance shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.  This Assignment and Acceptance may be
executed in any number of counterparts, which together shall constitute one
instrument.  Delivery of an executed counterpart of a signature page of this
Assignment and Acceptance by telecopy shall be effective as delivery of a
manually executed counterpart of this Assignment and Acceptance.  This
Assignment and Acceptance shall be governed by, and construed in accordance
with, the law of the State of Texas.

 

A-6

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

 

EXHIBIT B

 

FORM OF COMPLIANCE CERTIFICATE

 

FOR THE PERIOD FROM _______, 200__ TO ________, 200__

 

This certificate dated as of ___________ ___, _____ is prepared pursuant to the
Subordinated Credit Agreement dated as of December 17, 2008 (as amended,
supplemented or otherwise modified from time to time, the “Credit Agreement”)
among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”), the lenders
party thereto (the “Lenders”), and UNIONBANCAL EQUITIES, INC. as administrative
agent for such Lenders (in such capacity, the “Administrative Agent”).  Unless
otherwise defined in this certificate, capitalized terms that are defined in the
Credit Agreement shall have the meanings assigned to them by the Credit
Agreement.

 

The undersigned hereby certifies that:

 

(a)                                  all of the representations and warranties
made by the Borrower in the Credit Agreement and the other Loan Documents are
true and correct in all material respects as if made on this date, except to the
extent that any such representation or warranty expressly relates solely to an
earlier date, in which case it shall have been true and correct in all material
respects as of such earlier date;

 

[(b)          that no Default or Event of Default has occurred and is
continuing; and]

 

[(b)          the following Default[s] or Event[s] of Default exist as of the
date hereof or have occurred since the date of the Borrower’s previous
certification to the Administrative Agent, if any, and the actions set forth
below have been or are being taken to remedy such circumstances:

 

____________________________________; and]

 

(c) that as of the last day of the previous quarter the following statements,
amounts, and calculations were true and correct:

 

I.                                         Current Ratio—Section 6.17.

 

(a)

consolidated current assets(11)

 

$

 

 

 

 

 

 

 

(b)

consolidated current liabilities(12)

 

$

 

 

 

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

(11) “current assets” shall include the aggregate Unused Commitment Amounts (as
defined in the Senior Credit Agreement), but shall exclude (A) any cash
deposited with or at the request of a counterparty to any Hedge Contract or any
other similar hedge arrangement and (B) any assets representing a valuation
account arising from the application of SFAS 133 and 143.

 

 (12) “current liabilities” shall exclude, as of the date of calculation, the
current portion of long-term Debt existing under the Senior Credit Agreement,
the current portion of long-term Debt existing under the Credit Agreement and
any liabilities representing a valuation account arising from the application of
SFAS 133 and 143.

 

B-1

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

 

Current Ratio = (a) to (b) =

 

 

 

 

 

 

Minimum Current Ratio not less than:

 

1.00 to 1.00

 

 

 

COMPLIANCE?

 

YES  o NO  o

 

II.            Leverage Ratio—Section 6.18.

 

(a)

consolidated Debt(13)

 

 

 

 

 

 

 

 

(b)

consolidated EBITDA(14) = (i) + [(ii) + (iii) + (iv)](15) — (v) + (vi) + (vii) =

 

$

 

 

 

 

 

 

 

 

(i)  Consolidated Net Income

 

$

 

 

 

 

 

 

 

 

(ii)  consolidated Interest Expense

 

$

 

 

 

 

 

 

 

 

(iii)  taxes

 

$

 

 

 

 

 

 

 

 

(iv)  depreciation, amortization, depletion & other non-cash items(16)

 

$

 

 

 

 

 

 

 

 

(v)  all non-cash items of income included in determining Consolidated Net
Income(17)

 

$

 

 

 

 

 

 

 

 

(vi)  net gain on Pantwist Sale(18)

 

$

 

 

 

 

 

 

 

 

(vii)  Items (i) — (v) associated with Pantwist, LLC(19)

 

$

 

 

 

Leverage Ratio = (a) to (b) =

 

 

 

 

 

 

 

Maximum Leverage Ratio:

 

4.50 to 1.00

 

 

COMPLIANCE?

 

YES  o NO  o

 

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

(13) “consolidated Debt” shall not include Debt outstanding under preferred
Equity Interests issued in compliance with Section 6.22 of the Credit Agreement.

 

(14) EBITDA shall be measured for the four fiscal quarter period then ended.

 

(15) Items (ii) — (iv) shall be included to the extent deducted in determining
Consolidated Net Income.

 

(16) Other non-cash items should include any provisions for the reduction in the
carrying value of assets recorded in accordance with GAAP and including non-cash
charges resulting from the requirements of SFAS 133 or 143.

 

(17) Non-cash items of income should include any items resulting from the
requirements of SFAS 133 or 143.

 

(18) Item (vi) only applies to the calculation of EBITDA for the fiscal quarters
ending December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009.

 

(19) Item (vii) only applies to any period during which Pantwist, LLC was a
wholly-owned Subsidiary of Borrower and only to the extent such are not
duplicative of any portions of Items (i) — (v).

 

B-2

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

 

III.           Interest Coverage Ratio—Section 6.19.

 

(a)

consolidated EBITDA = See II(b) above =

 

$

 

 

 

 

 

 

 

(b)

consolidated Interest Expense =

 

$

 

 

 

Interest Coverage Ratio = (a) to (b) =

 

 

 

 

 

 

 

Minimum Interest Coverage Ratio =

 

2.50 to 1.00

 

 

 

 

 

COMPLIANCE?

 

 

 

 

IV.           Minimum Asset Coverage Ratio - Section 6.23.

 

(a)

PDP NPV =

 

$

 

 

 

 

 

 

 

(b)

PDNP NPV =

 

$

 

 

 

 

 

 

 

(c)

PUD NPV =

 

$

 

 

 

 

 

 

 

(d)

= (a) divided by sum of (a) plus (b) plus (c)

 

 

%

 

 

 

 

 

(e)

= (a) divided by .60

 

$

 

 

 

 

 

 

 

(f)

= (a) plus (b) plus (c)

 

$

 

 

 

 

 

 

 

(g)

Total Present Value = either (f), or if (d) is less than 60%, then Total Present
Value equals (e)=

 

$

 

 

 

 

 

 

 

(h)

consolidated Debt = see II(a) above =

 

$

 

 

 

Minimum Reserve Ratio = (g) to (h)

 

 

 

 

 

 

 

Minimum Interest Coverage Ratio:

 

1.50 to 1.00

 

 

 

 

 

COMPLIANCE?

 

YES  o NO  o

 

 

IN WITNESS THEREOF, I have hereto signed my name to this Compliance Certificate
as of _________________, 20____.

 

B-3

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

 

 

CANO PETROLEUM, INC., a Delaware
corporation

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

B-4

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

 

EXHIBIT C

 

FORM OF GUARANTY AGREEMENT

 

This Subordinated Guaranty Agreement dated as of December 17, 2008 (this
“Guaranty”) is executed by each of the undersigned (individually a “Guarantor”
and collectively, the “Guarantors”), in favor of UnionBanCal Equities, Inc., as
Administrative Agent for the ratable benefit of itself, the Lenders (as defined
below) (together with the Administrative Agent and the Lenders, individually a
“Beneficiary”, and collectively, the “Beneficiaries”).

 

INTRODUCTION

 

A.            This Guaranty is given in connection with that certain
Subordinated Credit Agreement dated as of December 17, 2008 (as it has been or
may be amended, supplemented, restated or otherwise modified from time to time,
the “Credit Agreement”), among Cano Petroleum, Inc., a Delaware corporation (the
“Borrower”), the lenders party thereto from time to time (individually a
“Lender” and collectively, the “Lenders”), and UnionBanCal Equities, Inc. as
administrative agent (“Administrative Agent”) for such Lenders.

 

B.            Each Guarantor is a subsidiary of the Borrower and will derive
substantial direct and indirect benefit from the transactions contemplated by
the Credit Agreement and the other Loan Documents (as defined in the Credit
Agreement).

 

C.            Each Guarantor is executing and delivering this Guaranty (i) to
induce the Lenders to provide the Advances and the other considerations under
the Credit Agreement, and (ii) intending it to be a legal, valid, binding,
enforceable and continuing obligation of such Guarantor, whether or not such
Guarantor derives any benefit from the Credit Agreement or from any other Loan
Document.

 

NOW, THEREFORE, in consideration of the premises, each Guarantor hereby agrees
as follows:

 

Section 1.              Definitions.  All capitalized terms not otherwise
defined in this guaranty that are defined in the credit agreement shall have the
meanings assigned to such terms by the credit agreement.

 

Section 2.              Guaranty.

 

(a)           Each Guarantor hereby absolutely, unconditionally and irrevocably
guarantees the punctual payment and performance, when due, whether at stated
maturity, by acceleration or otherwise, of all Obligations, whether absolute or
contingent and whether for principal, interest (including, without limitation,
interest that but for the existence of a bankruptcy, reorganization or similar
proceeding would accrue), fees, amounts required to be provided as collateral,
indemnities, expenses or otherwise (collectively, the “Guaranteed Obligations”).
Without limiting the generality of the foregoing, each Guarantor’s liability
shall extend to all amounts that constitute part of the Guaranteed Obligations
and would be owed by the Borrower to the Administrative Agent or any Lender
under the Loan Documents and by the Borrower or any of its Subsidiaries but for
the fact that they are unenforceable or not allowable due to insolvency or

 

C-1

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

 

the existence of a bankruptcy, reorganization or similar proceeding involving
the Borrower or such other Subsidiary.

 

(b)           It is the intention of the Guarantors and each Beneficiary that
the amount of the Guaranteed Obligations guaranteed by each Guarantor shall be
in, but not in excess of, the maximum amount permitted by fraudulent conveyance,
fraudulent transfer or similar Legal Requirements applicable to such Guarantor.
Accordingly, notwithstanding anything to the contrary contained in this Guaranty
or in any other agreement or instrument executed in connection with the payment
of any of the Guaranteed Obligations, the amount of the Guaranteed Obligations
guaranteed by a Guarantor under this Guaranty shall be limited to an aggregate
amount equal to the largest amount that would not render such Guarantor’s
obligations hereunder subject to avoidance under Section 548 of the United
States Bankruptcy Code or any comparable provision of any other applicable law.

 

Section 3.              Guaranty Absolute.  Each guarantor guarantees that the
guaranteed obligations will be paid strictly in accordance with the terms of the
loan documents, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
administrative agent or any lender with respect thereto but subject to section
2(b) above.  The obligations of each guarantor under this guaranty are
independent of the guaranteed obligations or any other obligations of any other
person under the loan documents, and a separate action or actions may be brought
and prosecuted against any guarantor to enforce this guaranty, irrespective of
whether any action is brought against the borrower, any other guarantor or any
other person or whether the borrower, any other guarantor or any other person is
joined in any such action or actions. The liability of each guarantor under this
guaranty shall be irrevocable, absolute and unconditional irrespective of, and
each guarantor hereby irrevocably waives any defenses it may now or hereafter
have in any way relating to, any or all of the following:

 

(a)           any lack of validity or enforceability of any Loan Document or any
agreement or instrument relating thereto or any part of the Guaranteed
Obligations being irrecoverable;

 

(b)           any change in the time, manner or place of payment of, or in any
other term of, all or any of the Guaranteed Obligations or any other obligations
of any Person under the Loan Documents, or any other amendment or waiver of or
any consent to departure from any Loan Document, including, without limitation,
any increase in the Guaranteed Obligations resulting from the extension of
additional credit to the Borrower or otherwise;

 

(c)           any taking, exchange, release or non-perfection of any collateral,
or any taking, release or amendment or waiver of or consent to departure from
any other guaranty, for all or any of the Guaranteed Obligations;

 

(d)           any manner of application of collateral, or proceeds thereof, to
all or any of the Guaranteed Obligations, or any manner of sale or other
disposition of any collateral for all or any of the Guaranteed Obligations or
any other obligations of any other Person under the Loan Documents or any other
assets of the Borrower or any of its Subsidiaries;

 

C-2

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

 

(e)           any change, restructuring or termination of the corporate
structure or existence of the Borrower or any of its Subsidiaries;

 

(f)            any failure of any Beneficiary to disclose to the Borrower or any
Guarantor any information relating to the business, condition (financial or
otherwise), operations, properties or prospects of any Person now or in the
future known to any Beneficiary (and each Guarantor hereby irrevocably waives
any duty on the part of any Beneficiary to disclose such information);

 

(g)           any signature of any officer of the Borrower or any other Person
being mechanically reproduced in facsimile or otherwise; or

 

(h)           any other circumstance or any existence of or reliance on any
representation by any Beneficiary that might otherwise constitute a defense
available to, or a discharge of, the Borrower, any Guarantor or any other
guarantor, surety or other Person.

 

Section 4.              Continuation And Reinstatement, Etc.  Each guarantor
agrees that, to the extent that payments of any of the guaranteed obligations
are made, or any lender or the administrative agent receives any proceeds of
collateral, and such payments or proceeds or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, or otherwise
required to be repaid, then to the extent of such repayment the guaranteed
obligations shall be reinstated and continued in full force and effect as of the
date such initial payment or collection of proceeds occurred.  EACH GUARANTOR
SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM AND AGAINST ANY CLAIM, DAMAGE,
LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4 (INCLUDING REASONABLE
ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT
INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A
RESULT OF THE INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL,
NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED
FROM SUCH INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Section 5.              Waivers And Acknowledgments.

 

(a)           Each Guarantor hereby waives promptness, diligence, presentment,
notice of acceptance and any other notice with respect to any of the Guaranteed
Obligations and this Guaranty and any requirement that any Beneficiary protect,
secure, perfect or insure any Lien or any Property or exhaust any right or take
any action against the Borrower or any other Person or any collateral.

 

(b)           Each Guarantor hereby irrevocably waives any right to revoke this
Guaranty, and acknowledges that this Guaranty is continuing in nature and
applies to all Guaranteed Obligations, whether existing now or in the future.

 

(c)           Each Guarantor acknowledges that it will receive substantial
direct and indirect benefits from the financing arrangements involving the
Borrower and its Subsidiaries contemplated by the Loan Documents and that the
waivers set forth in this Guaranty are knowingly made in contemplation of such
benefits.

 

C-3

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

 

Section 6.              Subrogation.  No guarantor will exercise any rights that
it may now have or hereafter acquire against the borrower or any other person to
the extent that such rights arise from the existence, payment, performance or
enforcement of such guarantor’s obligations under this guaranty or any other
loan document, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of any beneficiary against the borrower or
any other person, whether or not such claim, remedy or right arises in equity or
under contract, statute or common law, including, without limitation, the right
to take or receive from the borrower or any other person, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right, unless and until
all of the guaranteed obligations and any and all other amounts payable by the
guarantors under this guaranty shall have been paid in full in cash, all
commitments shall have expired or terminated, and the credit agreement has been
terminated in writing.  If any amount shall be paid to a guarantor in violation
of the preceding sentence at any time prior to (a) the payment in full in cash
of the guaranteed obligations and any and all other amounts payable by the
guarantors under this guaranty, and (b) the termination of the commitments, such
amount shall be held in trust for the benefit of the beneficiaries and shall
forthwith be paid to the administrative agent to be credited and applied to the
guaranteed obligations and any and all other amounts payable by the guarantors
under this guaranty, whether matured or unmatured, in accordance with the terms
of the loan documents.

 

Section 7.              Representations And Warranties.  Each guarantor hereby
represents and warrants as follows:

 

(a)           There are no conditions precedent to the effectiveness of this
Guaranty.  Such Guarantor benefits from executing this Guaranty.

 

(b)           Such Guarantor has, independently and without reliance upon the
Administrative Agent or any Lender and based on such documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter
into this Guaranty, and such Guarantor has established adequate means of
obtaining from the Borrower and each other relevant Person on a continuing basis
information pertaining to, and is now and on a continuing basis will be
completely familiar with, the business, condition (financial and otherwise),
operations, properties and prospects of the Borrower and each other relevant
Person.

 

(c)           The obligations of such Guarantor under this Guaranty are the
valid, binding and legally enforceable obligations of such Guarantor, and the
execution and delivery of this Guaranty by such Guarantor has been duly and
validly authorized in all respects by such Guarantor, and the Person who is
executing and delivering this Guaranty on behalf of such Guarantor has full
power, authority and legal right to so do, and to observe and perform all of the
terms and conditions of this Guaranty on such Guarantor’s part to be observed or
performed.

 

Section 8.              Right Of Set-Off.  Upon the occurrence and during the
continuance of any event of default, any beneficiary is hereby authorized at any
time, to the fullest extent permitted by law, to set off and apply any deposits
(general or special, time or demand, provisional or final) and other
indebtedness owing by such beneficiary to the account of each guarantor against
any and all of the obligations of the guarantors under this guaranty,
irrespective of whether or not such beneficiary shall have made any demand under
this guaranty and although such obligations

 

C-4

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

 

may be contingent and unmatured.  Such beneficiary shall promptly notify the
affected guarantor after any such set-off and application is made, provided that
the failure to give such notice shall not affect the validity of such set-off
and application.  The rights of the beneficiaries under this section 8 are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which any beneficiary may have.

 

Section 9.              Amendments, Etc.  No amendment or waiver of any
provision of this guaranty and no consent to any departure by any guarantor
therefrom shall in any event be effective unless the same shall be in writing
and signed by the affected guarantor, the administrative agent and the majority
lenders, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided that no
amendment, waiver or consent shall, unless in writing and signed by all of the
lenders, (a) other than to the extent expressly provided in such amendment,
waiver or consent, limit the liability of any guarantor hereunder (it being
understood that waivers and amendments permitted to be made under the credit
agreement by the majority lenders with respect to any of the underlying
obligations guaranteed hereunder shall not be deemed to limit the liability of
any guarantor within the meaning of this clause (a)), (b) postpone any date
fixed for payment hereunder in respect of any of the guaranteed obligations that
is principal of, or interest on, the notes or any fees, or (c) change the
percentage of the commitments or of the aggregate unpaid principal amount of the
notes required to take any action hereunder.

 

Section 10.            Notices, Etc.  All notices and other communications
provided for hereunder shall be sent in the manner provided for in section 9.02
of the credit agreement and if to a guarantor, at its address specified on the
signature page hereto and if to the administrative agent or any lender, at its
address specified in or pursuant to the credit agreement.  All such notices and
communications shall be effective when delivered, except that notices and
communications to the administrative agent shall not be effective until received
by the administrative agent.

 

Section 11.            No Waiver: Remedies.  No failure on the part of any
beneficiary to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.

 

Section 12.            Continuing Guaranty: Assignments Under The Credit
Agreement.  This guaranty is a continuing guaranty and shall (a) remain in full
force and effect until the payment in full of all guaranteed obligations and all
other amounts payable under the loan documents and the termination of all the
commitments, (b) be binding upon each guarantor and its successors and assigns,
and (c) inure to the benefit of and be enforceable by the administrative agent
and each lender, and, in the case of transfers and assignments made in
accordance with the credit agreement, transferees and assigns.  Without limiting
the generality of the foregoing clause (c), subject to section 9.06 of the
credit agreement, any lender may assign or otherwise transfer all or any portion
of its rights and obligations under the credit agreement (including, without
limitation, all or any portion of its commitment, the advances owing to it and
the note or notes held by it) to any other person, and such other person shall
thereupon become vested with all the benefits in respect thereof granted to such
lender herein or otherwise, subject, however, in all

 

C-5

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

 

respects to the provisions of the credit agreement.  Each guarantor acknowledges
that upon any person becoming a lender, the administrative agent in accordance
with the credit agreement, such person shall be entitled to the benefits hereof.

 

Section 13.            Governing Law.  This guaranty shall be governed by, and
construed and enforced in accordance with, the laws of the state of texas.  Each
guarantor hereby irrevocably submits to the jurisdiction of any texas state or
federal court sitting in dallas, texas in any action or proceeding arising out
of or relating to this guaranty and the other loan documents, and each guarantor
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such court.  Each guarantor hereby
irrevocably waives, to the fullest extent it may effectively do so, any right it
may have to the defense of an inconvenient forum to the maintenance of such
action or proceeding.  Each guarantor hereby agrees that service of copies of
the summons and complaint and any other process which may be served in any such
action or proceeding may be made by mailing or delivering a copy of such process
to such guarantor at its address set forth in the credit agreement or set forth
on the signature page of this guaranty.  Each guarantor agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.  Nothing in this section shall affect the rights of any
beneficiary to serve legal process in any other manner permitted by the law or
affect the right of any beneficiary to bring any action or proceeding against
any guarantor or its property in the courts of any other jurisdiction.

 

Section 14.            Indemnification.  EACH GUARANTOR SHALL INDEMNIFY EACH OF
THE BENEFICIARIES, AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY
AND ALL LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY
KIND OR NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO OR
ARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,
CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY ACTUAL OR
PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE BORROWER OR
ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH BY THE BORROWER OR
ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR ANY OTHER LOAN
DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY
THREATENED INVESTIGATION OR PROCEEDING) RELATING TO THE FOREGOING, (D) ANY
ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATING
TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED PROPERTIES OF THE BORROWER, ANY
GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE BORROWER OR ANY GUARANTOR
INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT AGREEMENT, OR (E) ANY
ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATED
TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND EACH GUARANTOR SHALL
REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING
REASONABLE OUTSIDE LEGAL FEES)

 

C-6

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

 

INCURRED IN CONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER
PROCEEDING; AND EXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,
DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN
NEGLIGENCE, BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR
EXPENSES THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF
COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Section 15.            Waiver Of Jury Trial.  EACH GUARANTOR HEREBY ACKNOWLEDGES
THAT IT HAS BEEN REPRESENTED BY AND HAS CONSULTED WITH COUNSEL OF ITS CHOICE,
AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS GUARANTY, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.

 

Section 16.            Additional Guarantors.  Pursuant to section 6.15 of the
credit agreement, each subsidiary of the borrower that was not in existence on
the date of the credit agreement is required to enter into this guaranty as a
guarantor upon becoming a subsidiary.  After the date hereof, upon execution and
delivery after the date hereof by the administrative agent and such subsidiary
of an instrument in the form of annex 1, such subsidiary shall become a
guarantor hereunder with the same force and effect as if originally named as a
guarantor herein.  The execution and delivery of any instrument adding an
additional guarantor as a party to this guaranty shall not require the consent
of any other guarantor hereunder.  The rights and obligations of each guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any new guarantor as a party to this guaranty.

 

Section 17.            Subordination And Intercreditor Agreement.  Reference is
made to the subordination and intercreditor agreement dated as of december 17,
2008 (as amended, restated, supplemented or otherwise modified from time to
time, the “subordination and intercreditor agreement”), among union bank of
california, n.a., as senior agent, and unionbancal equities, inc., as
subordinated agent, and certain other persons, party or that may become party
thereto from time to time.  Notwithstanding anything herein to the contrary,
this guaranty, the obligations of the guarantors hereunder and the rights and
remedies of the beneficiaries hereunder are subject to the provisions of the
subordination and intercreditor agreement.  In the event of any conflict between
the terms of the subordination and intercreditor agreement and this guaranty,
the terms of the subordination and intercreditor agreement shall govern and
control.

 

Section 18.            Notice Of Final Agreements.  PURSUANT TO SECTION 26.02 OF
THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED
IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS
IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED
REPRESENTATIVE.

 

THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE
PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY

 

C-7

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

 

FROM THE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES
ARE SUPERSEDED BY AND MERGED INTO THIS GURANTY.  THIS GUARANTY AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO
THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.]

 

C-8

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

 

Each Guarantor has caused this Guaranty to be duly executed as of the date first
above written.

 

Address for each Guarantor:

GUARANTORS:

c/o Cano Petroleum, Inc.

 

801 Cherry Street, Suite 3200

SQUARE ONE ENERGY, INC.

Forth Worth, Texas 76102

LADDER COMPANIES, INC.

Attention: Ben Daitch, CFO

W.O. ENERGY OF NEVADA, INC.

Facsimile: (817) 334-0222

WO ENERGY, INC.

 

CANO PETRO OF NEW MEXICO, INC.

 

 

 

 

 

Each By:

 

 

 

Benjamin Daitch

 

 

Vice President and Chief Financial

 

 

Officer

 

 

 

 

 

W.O. OPERATING COMPANY, LTD.

 

W.O. PRODUCTION COMPANY, LTD.

 

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

 

 

 

 

 

By:

 

 

 

  Benjamin Daitch

 

 

  Vice President and Chief Financial

 

 

  Officer

 

C-9

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

 

Annex 1 to the

Subordinated Guaranty Agreement

 

SUPPLEMENT NO.        dated as of                    (the “Supplement”), to the
Subordinated Guaranty Agreement dated as of December 17, 2008 (as amended,
supplemented or otherwise modified from time to time, the “Guaranty Agreement”),
among each of the subsidiaries party thereto (each such subsidiary individually,
a “Guarantor” and collectively, the “Guarantors”) of CANO PETROLEUM, INC., a
Delaware corporation (the “Borrower”) in favor of UNIONBANCAL EQUITIES, INC., as
Administrative Agent (the “Administrative Agent”) for the benefit of the
Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made to the Subordinated Credit Agreement dated as of
December 17, 2008 (as amended, supplemented or otherwise modified from time to
time, the “Credit Agreement”), among the Borrower, the lenders from time to time
party thereto (the “Lenders”), and the Administrative Agent.

 

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

 

C.            The Guarantors have entered into the Guaranty Agreement in order
to induce the Lenders to make Advances.  Pursuant to Section 6.15 of the Credit
Agreement, the Subsidiaries of the Borrower are required to enter into the
Guaranty Agreement as Guarantors.  Section 16 of the Guaranty Agreement provides
that additional Subsidiaries of the Borrower may become Guarantors under the
Guaranty Agreement by execution and delivery of an instrument in the form of
this Supplement.  The undersigned Subsidiary of the Borrower (the “New
Guarantor”) is executing this Supplement in accordance with the requirements of
the Credit Agreement to become a Guarantor under the Guaranty Agreement.

 

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

 

SECTION 1.           In accordance with Section 16 of the Guaranty Agreement,
the New Guarantor by its signature below becomes a Guarantor under the Guaranty
Agreement with the same force and effect as if originally named therein as a
Guarantor and the New Guarantor hereby (a) agrees to all the terms and
provisions of the Guaranty Agreement applicable to it as a Guarantor thereunder
and (b) represents and warrants that the representations and warranties made by
it as a Guarantor thereunder are true and correct in all material respects on
and as of the date hereof.  Each reference to a “Guarantor” in the Guaranty
Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement
is hereby incorporated herein by reference.

 

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

 

C-10

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

 

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

 

SECTION 4.           Except as expressly supplemented hereby, the Guaranty
Agreement shall remain in full force and effect.

 

SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor
hereby irrevocably submits to the jurisdiction of any Texas state or federal
court sitting in Dallas, Texas in any action or proceeding arising out of or
relating to this Supplement or the Guaranty Agreement and the other Loan
Documents, and the New Guarantor hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such court. 
The New Guarantor hereby irrevocably waives, to the fullest extent it may
effectively do so, any right it may have to the defense of an inconvenient forum
to the maintenance of such action or proceeding.  The New Guarantor hereby
agrees that service of copies of the summons and complaint and any other process
which may be served in any such action or proceeding may be made by mailing or
delivering a copy of such process to such Guarantor at its address set forth on
the signature page hereof.  The New Guarantor agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law. 
Nothing in this Section shall affect the rights of any Beneficiary to serve
legal process in any other manner permitted by the law or affect the right of
any Beneficiary to bring any action or proceeding against the New Guarantor or
its Property in the courts of any other jurisdiction.

 

SECTION 6.           In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and in the Guaranty Agreement shall not in any way be affected or
impaired thereby (it being understood that the invalidity of a particular
provision hereof in a particular jurisdiction shall not in and of itself affect
the validity of such provision in any other jurisdiction).  The parties hereto
shall endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.

 

SECTION 7.           All communications and notices hereunder shall be in
writing and given as provided in Section 10 of the Guaranty Agreement.  All
communications and notices hereunder to the New Guarantor shall be given to it
at the address set forth under its signature below.

 

SECTION 8.           The New Guarantor agrees to reimburse the Administrative
Agent for its reasonable out-of-pocket expenses in connection with this
Supplement, including the fees, disbursements and other charges of counsel for
the Administrative Agent.

 

C-11

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

 

SECTION 9.           PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND
COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS
$50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND
SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.

 

THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE
PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN AGREEMENT, AND
ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO
THIS GURANTY.  THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

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

 

 

[Name of New Guarantor]

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

Address of Guarantor:

 

 

 

 

 

 

 

C-12

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

 

 

ADMINISTRATIVE AGENT:

 

 

 

 

 

UNIONBANCAL EQUITIES, INC., as
Administrative Agent

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

C-13

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

 

EXHIBIT D

 

FORM OF MORTGAGE

 

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT,
FIXTURE FILING, AND FINANCING STATEMENT

 

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCE PROVISIONS.

 

THIS INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN MINERALS OR THE LIKE
(INCLUDING OIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTEREST CREATED BY
THIS INSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THE ACCOUNTS
RESULTING FROM THE SALE THEREOF AT THE WELLHEAD.  THIS INSTRUMENT COVERS THE
INTEREST OF MORTGAGOR IN FIXTURES.  THIS FINANCING STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS.  PRODUCTS OF THE
COLLATERAL ARE ALSO COVERED.

 

NOTICE TO MORTGAGOR:

 

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

 

FROM

 

CANO PETROLEUM, INC.

(Mortgagor, Debtor and Grantor)

 

TO

 

UNIONBANCAL EQUITIES, INC., as Administrative Agent

(Mortgagee, Secured Party and Grantee)

 

December 17, 2008

 

For purposes of filing this Mortgage as a financing statement, the mailing
address of Mortgagor is 801 Cherry Street, Suite 3200, Fort Worth, Texas 76102. 
Mortgagor is a corporation organized under the laws of the State of Delaware and
the Mortgagor’s organizational number is 3664494 the mailing address of
Mortgagee is 445 South Figueroa Street, 21st Floor, Los Angeles, California
90071.

 

D-1

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

 

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

 

This instrument, prepared by Sommer N. Louie, Bracewell & Giuliani LLP, 711
Louisiana, South Tower Pennzoil Place, Suite 2300, Houston, Texas 77002, (713)
221-1363, contains after-acquired property provisions and covers future advances
and proceeds to the fullest extent allowed by applicable law.

 

ATTENTION RECORDING OFFICER: This instrument is a mortgage of both real and
personal property insofar as the same covers or relates to the Oil and Gas
Properties and is, among other things, a Security Agreement and Financing
Statement under the Uniform Commercial Code in effect in Oklahoma.  This
instrument creates a lien on rights in or relating to lands of Mortgagor which
are described in Exhibit A hereto or in documents described in such Exhibit A.

 

RECORDED DOCUMENT SHOULD BE RETURNED TO:

 

BRACEWELL & GIULIANI LLP

711 Louisiana, South Tower Pennzoil Place, Suite 2300

Houston, Texas 77002

Attn: Sommer N. Louie

 

D-2

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

 

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT,
FIXTURE FILING, AND FINANCING STATEMENT

 

THE STATE OF OKLAHOMA

§

 

§

COUNTY OF

§

 

§

 

WHEREAS, this instrument (the “Mortgage”) is made as of December 17, 2008 (the
“Effective Date”) and executed and delivered by CANO PETROLEUM, INC., a Delaware
corporation (“Mortgagor”), to and in favor of UnionBanCal Equities, Inc. (the
“Mortgagee”) in its capacity as the Administrative Agent under the Credit
Agreement (as hereinafter defined) and on behalf of the Credit Parties (as
hereinafter defined).  The addresses of Mortgagor and the Mortgagee appear in
Section 7.12 of this Mortgage.

 

WHEREAS, this Mortgage is executed in connection with, and pursuant to the terms
of that certain Subordinated Credit Agreement dated as of December 17, 2008 (as
the same may be renewed, extended, amended, supplemented and/or restated from
time-to-time, the “Credit Agreement”), among Mortgagor, the lenders party
thereto from time to time (the “Lenders”) and the Mortgagee (the Mortgagee and
the Lenders collectively referred to herein as the “Credit Parties”).

 

WHEREAS, it is a condition precent to the extension of credit to Mortgagor under
the Credit Agreement that the Mortgagor and the Mortgagee on behalf of the
Credit Parties execute and deliver this Mortgage.

 

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Mortgagor (a) wishes to make this Mortgage in favor of
Mortgagee to secure the Obligations (as defined herein), and (b) hereby agrees
as follows:

 

ARTICLE I

Definitions

 

1.1           “Collateral” means the Realty Collateral, Personalty Collateral
and Fixture Collateral.

 

1.2           “Contracts” means all contracts, agreements, operating agreements,
farm-out or farm-in agreements, sharing agreements, mineral purchase agreements,
contracts for the purchase, exchange, transportation, processing or sale of
Hydrocarbons, rights-of-way, easements, surface leases, equipment leases,
permits, franchises, licenses, pooling or unitization agreements, and unit or
pooling designations and orders now or hereafter affecting any of the Oil and
Gas Properties, Operating Equipment, Fixture Operating Equipment, or
Hydrocarbons now or hereafter covered hereby, or which are useful or appropriate
in drilling for, producing,

 

D-3

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

 

treating, handling, storing, transporting or marketing oil, gas or other
minerals produced from any of the Oil and Gas Properties, and all as such
contracts and agreements as they may be amended, restated, modified, substituted
or supplemented from time-to-time.

 

1.3           “Event of Default” shall have the meaning set forth in Article V
hereof.

 

1.4           “Fixture Collateral” means all of Mortgagor’s interest now owned
or hereafter acquired in and to all Fixture Operating Equipment and all
proceeds, products, renewals, increases, profits, substitutions, replacements,
additions, amendments and accessions thereof, thereto or therefor.

 

1.5           “Fixture Operating Equipment” means any of the items described in
the first sentence of the definition of “Operating Equipment” below which as a
result of being incorporated into realty or structures or improvements located
therein or thereon, with the intent that they remain there permanently,
constitute fixtures under the laws of the state in which such equipment is
located.

 

1.6           “Governmental Authority” shall have the meaning assigned to such
term in the Credit Agreement.

 

1.7           “Hydrocarbons” means oil, gas, coal seam gas, casinghead gas, drip
gasoline, natural gasoline, condensate, distillate, and all other liquid and
gaseous hydrocarbons produced or to be produced in conjunction therewith from a
well bore and all products, by-products, and other substances derived therefrom
or the processing thereof, and all other minerals and substances produced in
conjunction with such substances, including sulfur, geothermal steam, water,
carbon dioxide, helium, and any and all minerals, ores, or substances of value
and the products and proceeds therefrom.

 

1.8           “Legal Requirement” shall have the meaning assigned to such term
in the Credit Agreement.

 

1.9           “Notes” means the “Notes” as that term is defined in the Credit
Agreement.

 

1.10         “Obligations” means

 

(a)           The “Obligations”, as that term is defined in the Credit
Agreement, including all indebtedness evidenced by the Notes;

 

(b)           All other indebtedness, obligations, and liabilities of Mortgagor
or any of its Subsidiaries arising under the Credit Agreement, the Security
Documents, this Mortgage, or any of the other Loan Documents;

 

(c)           All other indebtedness, obligations and liabilities of any kind of
Mortgagor owing to any of the Credit Parties now existing or hereafter arising
under or pursuant to any Loan Document, whether fixed or contingent, joint or
several, direct or indirect, primary or secondary, and regardless of how created
or evidenced;

 

D-4

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

 

(d)           All sums advanced or costs or expenses incurred by Mortgagee or
any of the other Credit Parties, which are made or incurred pursuant to, or
allowed by, the terms of this Mortgage plus interest thereon from the date of
the advance or incurrence until reimbursement of Mortgagee or such Credit Party
charged at the Reimbursement Rate;

 

(e)           All future advances or other value, of whatever class or for
whatever purpose, at any time hereafter made or given by Mortgagee or any of the
other Credit Parties to Mortgagor under or pursuant to the Credit Agreement or
any other Loan Document, whether or not the advances or value are given pursuant
to a commitment, whether or not the advances or value are presently contemplated
by the parties hereto, and whether or not Mortgagor is indebted to Mortgagee or
any Credit Party at the time of such events; and

 

(f)            All renewals, extensions, modifications, amendments,
rearrangements and substitutions of all or any part of the above whether or not
Mortgagor executes any agreement or instrument.

 

1.11         “Oil and Gas Property” or “Oil and Gas Properties” means (a) the
oil and gas and/or oil, gas and mineral leases and leasehold interests, fee
mineral interests, term mineral interests, participation interests, back-in or
carried working interests, rights of first refusal, options, subleases,
farmouts, royalties, overriding royalties, net profits interests, production
payments and similar interests or estates described in Exhibit A attached hereto
and made a part hereof for all purposes including the net revenue interests
warranted in Exhibit A and any reversionary or carried interests relating to any
of the foregoing, (b) all production units, and drilling and spacing units (and
the Properties covered thereby) which may affect all or any portion of such
interests including those units which may be described or referred to on
Exhibit A and any units created by agreement or designation or under orders,
regulations, rules or other official acts of any Federal, state or other
governmental body or agency having jurisdiction, (c) the surface leases
described in Exhibit A, (d) any and all non-consent interests owned or held by,
or otherwise benefiting, Mortgagor and arising out of, or pursuant to, any of
the Contracts, (e) any other interest in, to or relating to (i) all or any part
of the land described in Exhibit A, the land relating to the leases set forth in
Exhibit A or in the documents described in Exhibit A, or (ii) any of the
estates, property rights or other interests referred to above, (f) any
instrument executed in amendment, correction, modification, confirmation,
renewal or extension of the same, (g) any and all rights, titles and interests
of Mortgagor (which are similar in nature to any of the rights, titles and
interests described in (a) through (f) above) which are located on or under or
which concern any Property or Properties located in counties referenced in
Exhibit A hereto or counties in which a counterpart of this Mortgage is filed of
record in the real property records of such county, and (h) all tenements,
hereditaments and appurtenances now existing or hereafter obtained in connection
with any of the aforesaid, including any rights arising under unitization
agreements, orders or other arrangements, communitization agreements, orders or
other arrangements or pooling orders, agreements or other arrangements,
including without limitation pooling orders of the Oklahoma Corporation
Commission.

 

1.12         “Operating Equipment” means all surface or subsurface machinery,
equipment, facilities, supplies or other Property of whatsoever kind or nature
now or hereafter located on any

 

D-5

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

 

of the Property affected by the Oil and Gas Properties which are useful for the
production, treatment, storage or transportation of Hydrocarbons, including all
oil wells, gas wells, water wells, injection wells, casing, tubing, rods,
pumping units and engines, christmas trees, derricks, separators, gun barrels,
flow lines, pipelines, tanks, gas systems (for gathering, treating and
compression), water systems (for treating, disposal and injection), supplies,
derricks, wells, power plants, poles, cables, wires, meters, processing plants,
compressors, dehydration units, lines, transformers, starters and controllers,
machine shops, tools, storage yards and equipment stored therein, buildings and
camps, telegraph, telephone and other communication systems, roads, loading
racks, shipping facilities and all additions, substitutes and replacements for,
and accessories and attachments to, any of the foregoing.  Operating Equipment
shall not include any items incorporated into realty or structures or
improvements located therein or thereon in such a manner that they no longer
remain personalty under the laws of the state in which such equipment is
located.

 

1.13         “Permitted Liens” means the Liens permitted under the Credit
Agreement.

 

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

 

1.15         “Personalty Collateral” means all of Mortgagor’s interest now owned
or hereafter acquired in and to (a) all Operating Equipment, (b) all
Hydrocarbons severed and extracted from or attributable to the Oil and Gas
Properties, including oil in tanks and all other “as-extracted” collateral from
or attributable to the Oil and Gas Properties, (c) all accounts (including
accounts resulting from the sale of Hydrocarbons at the wellhead), contract
rights and general intangibles, including all accounts, contract rights and
general intangibles now or hereafter arising regardless of whether any of the
foregoing is in connection with the sale or other disposition of any
Hydrocarbons or otherwise, including all liens securing the same, (d) all
accounts, contract rights and general intangibles now or hereafter arising
regardless of whether any of the foregoing is in connection with or resulting
from any of the Contracts, including all liens security the same, (e) all
proceeds and products of the Realty Collateral and any other contracts or
agreements, (f) all information concerning the Oil and Gas Properties and all
wells located thereon, including abstracts of title, title opinions, geological
and geophysical information and logs, lease files, well files, and other books
and records (including computerized records and data), (g) any deposit or time
accounts with Mortgagee or any Lender, (h) any options or rights of first
refusal to acquire any Realty Collateral, and (i) all proceeds, products,
renewals, increases, profits, substitutions, replacements, additions, amendments
and accessions of, to or for any of the foregoing.

 

1.16         “Property” means any property of any kind, whether real, personal,
or mixed and whether tangible or intangible.

 

1.17         “Realty Collateral” means all of Mortgagor’s interest now owned or
hereafter acquired in and to the Oil and Gas Properties, including any access
rights, water and water rights, and all unsevered and unextracted Hydrocarbons
(even though Mortgagor’s interest therein may be incorrectly described in, or a
description of a part or all of such interest may be omitted from, Exhibit A).

 

D-6

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

 

1.18         “Reimbursement Rate” means a per annum rate equal to the lesser of
(a) the Maximum Rate (as defined in the Credit Agreement) and (b) the Adjusted
Reference Rate (as defined in the Credit Agreement) in effect from time to time
plus the Applicable Margin for Reference Rate Advances (as such terms are
defined in the Credit Agreement) in effect during an Event of Default.

 

1.19         All other capitalized terms defined in the Credit Agreement which
are used in this Mortgage and which are not otherwise defined herein shall have
the meanings assigned to such terms in the Credit Agreement.  All meanings to
defined terms, unless otherwise indicated, are to be equally applicable to both
the singular and plural forms of the terms defined.  Article, Section, Schedule,
and Exhibit references are to Articles and Sections of and Schedules and
Exhibits to this Mortgage, unless otherwise specified.  All references to
instruments, documents, contracts, and agreements are references to such
instruments, documents, contracts, and agreements as the same may be amended,
supplemented, and otherwise modified from time to time, unless otherwise
specified.  The words “hereof”, “herein” and “hereunder” and words of similar
import when used in this Mortgage shall refer to this Mortgage as a whole and
not to any particular provision of this Mortgage.  As used herein, the term
“including” means “including, without limitation,”.

 

ARTICLE II

Creation of Security

 

2.1           Conveyance and Grant of Lien.  In consideration of the advances or
extensions by the Credit Parties to Mortgagor of the funds or credit
constituting the Obligations, and in further consideration of the mutual
covenants contained herein, Mortgagor, by this Mortgage does hereby GRANT,
MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, AND ASSIGN with a general warranty of
title, for the uses, purposes and conditions hereinafter set forth all of its
right, title and interest in and to the Realty Collateral, the Personalty
Collateral and the Fixture Collateral unto Mortgagee, its successors and
assigns, with power of sale, to secure the payment and performance of the
Obligations for the benefit of Mortgagee and the ratable benefit of the Credit
Parties.

 

MORTGAGOR FURTHER GRANTS TO MORTGAGEE, ITS SUCCESSORS AND ASSIGNS, THE RIGHT AND
POWER TO FORECLOSE THIS MORTGAGE UNDER THE OKLAHOMA POWER OF SALE MORTGAGE
FORECLOSURE ACT, 46. O.S. § 40 ET SEQ.

 

TO HAVE AND TO HOLD the Realty Collateral, the Personalty Collateral and Fixture
Collateral unto the Mortgagee and its successors and assigns forever for the
benefit of the Credit Parties, together with all and singular the rights,
hereditaments and appurtenances thereto in anywise appertaining or belonging, to
secure payment of the Obligations and the performance of the covenants of
Mortgagor contained in this Mortgage.  Mortgagor does hereby bind itself, its
successors and permitted assigns, to warrant and forever defend all and singular
the Realty Collateral, the Personalty Collateral and the Fixture Collateral unto
the Mortgagee and its successors and assigns, against every Person whomsoever
lawfully claiming or to claim the same, or any part thereof.

 

D-7

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

 

Subject, however, to the condition that none of the Mortgagee or the Credit
Parties shall be liable in any respect for the performance of any covenant or
obligation of the Mortgagor in respect of the Collateral.  Any reference in
Exhibit A to the name of a well shall not be construed to limit the Collateral
to the well bore of such well or in the pro rata units.  It is Mortgagor’s
intention that this instrument cover Mortgagor’s entire interest in the lands,
leases, units and other interests set forth in Exhibit A.

 

2.2           Security Interest.  For the same consideration and to further
secure the Obligations, Mortgagor hereby grants to Mortgagee for its benefit and
the ratable benefit of the other Credit Parties a security interest in and to
the Collateral.

 

2.3           Assignment of Liens and Security Interests.  For the same
consideration and to further secure the Obligations, Mortgagor hereby assigns
and conveys to Mortgagee for its benefit and the benefit of the other Credit
Parties any security interests held by Mortgagor arising under, and any liens
granted to the Mortgagor pursuant to, Title 12A of the Oklahoma Statutes (as
amended from time to time).

 

ARTICLE III

Proceeds from Production

 

3.1           Assignment of Production.

 

(a)           In order to further secure the Obligations, Mortgagor has
assigned, transferred, conveyed and delivered and does hereby assign, transfer,
convey and deliver unto Mortgagee, subject to Permitted Prior Liens, effective
as of the Effective Date at 7:00 a.m. Dallas, Texas time, all Hydrocarbons
produced from, and which are attributable to, Mortgagor’s interest, now owned or
hereafter acquired, in and to the Oil and Gas Properties, or are allocated
thereto pursuant to pooling or unitization orders, agreements or designations,
and all proceeds therefrom.

 

(b)           Subject to the provisions of subsection (f) below, all parties
producing, purchasing, taking, possessing, processing or receiving any
production from the Oil and Gas Properties, or having in their possession any
such production, or the proceeds therefrom, for which they or others are
accountable to Mortgagee by virtue of the provisions of this Section 3.1, are
authorized and directed by Mortgagor to treat and regard Mortgagee as the
assignee and transferee of Mortgagor and entitled in its place and stead to
receive such Hydrocarbons and the proceeds therefrom.

 

(c)           Mortgagor directs and instructs each of such parties to pay to
Mortgagee, for its benefit and the ratable benefit of the other Credit Parties,
all of the proceeds of such Hydrocarbons until such time as such party has been
furnished evidence that all of the Obligations have been paid and that the Lien
evidenced hereby has been released; provided, however, that until Mortgagee
shall have exercised the rights as herein to instruct such parties to deliver
such Hydrocarbons and all proceeds therefrom directly to Mortgagee, such parties
shall be entitled to deliver such Hydrocarbons and all proceeds therefrom to
Mortgagor for

 

D-8

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

 

Mortgagor’s use and enjoyment, and Mortgagor shall be entitled to execute
division orders, transfer orders and other instruments as may be required to
direct all proceeds to Mortgagor without the necessity of joinder by Mortgagee
in such division orders, transfer orders or other instruments. Mortgagor agrees
to perform all such acts, and to execute all such further assignments, transfers
and division orders, and other instruments as may be reasonably required or
desired by Mortgagee or any party in order to have said revenues and proceeds so
paid to Mortgagee.  None of such parties shall have any responsibility for the
application of any such proceeds received by Mortgagee.  Subject to the
provisions of subsection (f) below, Mortgagor authorizes Mortgagee to receive
and collect all proceeds of such Hydrocarbons.

 

(d)           Subject to the provisions of subsection (f) below, Mortgagor will
execute and deliver to Mortgagee any instruments Mortgagee may from time to time
reasonably request for the purpose of effectuating this assignment and the
payment to Mortgagee of the proceeds assigned.

 

(e)           Neither the foregoing assignment nor the exercise by Mortgagee of
any of its rights herein shall be deemed to make Mortgagee a
“mortgagee-in-possession” or otherwise responsible or liable in any manner with
respect to the Oil and Gas Properties or the use, occupancy, enjoyment or
operation of all or any portion thereof, unless and until Mortgagee, in person
or by agent, assumes actual possession thereof, nor shall appointment of a
receiver for the Oil and Gas Properties by any court at the request of Mortgagee
or by agreement with Mortgagor or the entering into possession of the Oil and
Gas Properties or any part thereof by such receiver be deemed to make Mortgagee
a “mortgagee-in-possession” or otherwise responsible or liable in any manner
with respect to the Oil and Gas Properties or the use, occupancy, enjoyment or
operation of all or any portion thereof.

 

(f)            Notwithstanding anything to the contrary contained herein, so
long as no Event of Default shall have occurred and is continuing, Mortgagor
shall have the right to collect all revenues and proceeds attributable to the
Hydrocarbons that accrue to the Oil and Gas Properties or the products obtained
or processed therefrom, as well as any Liens and security interests securing any
sales of said Hydrocarbons and to retain, use and enjoy same.

 

(g)           Mortgagee may endorse and cash any and all checks and drafts
payable to the order of Mortgagor or Mortgagee for the account of Mortgagor,
received from or in connection with the proceeds of the Hydrocarbons affected
hereby, and the same may be applied as provided herein.  Mortgagee may execute
any transfer or division orders in the name of Mortgagor or otherwise, with
warranties and indemnities binding on Mortgagor; provided that Mortgagee shall
not be held liable to Mortgagor for, nor be required to verify the accuracy of,
Mortgagor’s interests as represented therein.

 

(h)           Mortgagee shall have the right at Mortgagee’s election and in the
name of Mortgagor, or otherwise, to prosecute and defend any and all actions or
legal proceedings deemed advisable by Mortgagee in order to collect such
proceeds and to protect the interests of Mortgagee or Mortgagor, with all costs,
expenses and attorneys fees incurred in connection therewith being paid by
Mortgagor.  In addition, should any purchaser taking production from the Oil and
Gas Properties fail to pay promptly to Mortgagee in accordance with this
Article,

 

D-9

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

 

Mortgagee shall have the right to demand a change of connection and to designate
another purchaser with whom a new connection may be made without any liability
on the part of Mortgagee in making such election, so long as ordinary care is
used in the making thereof, and upon failure of Mortgagor to consent to such
change of connection, the entire amount of all the Obligations may, at the
option of Mortgagee, be immediately declared to be due and payable and subject
to foreclosure hereunder.

 

(i)            Without in any way limiting the effectiveness of the foregoing
provisions, if Mortgagor receives any proceeds which under this Section 3.1 are
payable to Mortgagee, Mortgagor shall hold the same in trust and remit such
proceeds, or cause them to be remitted, immediately, to Mortgagee.

 

3.2           Application of Proceeds.  All payments received by Mortgagee
pursuant to this Article III attributable to the interest of Mortgagor in and to
the Hydrocarbons shall be applied in the order set forth in Section 7.06 of the
Credit Agreement.

 

3.3           Mortgagor’s Payment Duties.  Except as provided in Section 7.16
hereof, nothing contained herein will limit Mortgagor’s absolute duty to make
payment of the Obligations regardless of whether the proceeds assigned by this
Article III are sufficient to pay the same, and the receipt by Mortgagee of
proceeds from Hydrocarbons under this Mortgage will be in addition to all other
security now or hereafter existing to secure payment of the Obligations.

 

3.4           Liability of Mortgagee.  Mortgagee is hereby absolved from all
liability for failure to enforce collection of any of such proceeds, and from
all other responsibility in connection therewith except the responsibility to
account to Mortgagor for proceeds actually received by Mortgagee.

 

3.5           Actions to Effect Assignment.  Subject to the provisions of
Section 3.1(f), Mortgagor covenants to cause all operators, pipeline companies,
production purchasers and other remitters of said proceeds to pay promptly to
Mortgagee the proceeds from such Hydrocarbons in accordance with the terms of
this Mortgage, and to execute, acknowledge and deliver to said remitters such
division orders, transfer orders, certificates and other documents as may be
necessary, requested or proper to effect the intent of this assignment; and
Mortgagee shall not be required at any time, as a condition to its right to
obtain the proceeds of such Hydrocarbons, to warrant its title thereto or to
make any guaranty whatsoever.  In addition, Mortgagor covenants to provide to
Mortgagee the name and address of every such remitter of proceeds from such
Hydrocarbons, together with a copy of the applicable division orders, transfer
orders, sales contracts and governing instruments.  All expenses incurred by the
Mortgagee in the collection of said proceeds shall be repaid promptly by
Mortgagor; and prior to such repayment, such expenses shall be a part of the
Obligations secured hereby.  If under any existing Contracts for the sale of
Hydrocarbons, other than division orders or transfer orders, any proceeds of
Hydrocarbons are required to be paid by the remitter direct to Mortgagor so that
under such existing agreements payment cannot be made of such proceeds to
Mortgagee in the absence of foreclosure, Mortgagor’s interest in all proceeds of
Hydrocarbons under such existing Contracts

 

D-10

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

 

shall, when received by Mortgagor, constitute trust funds in Mortgagor’s hands
and shall be immediately paid over to Mortgagee.

 

3.6           Power of Attorney.  Without limitation upon any of the foregoing,
Mortgagor hereby designates and appoints Mortgagee as true and lawful agent and
attorney-in-fact (with full power of substitution, either generally or for such
periods or purposes as Mortgagee may from time to time prescribe), with full
power and authority, for and on behalf of and in the name of Mortgagor, to
execute, acknowledge and deliver all such division orders, transfer orders,
certificates and other documents of every nature, with such provisions as may
from time to time, in the opinion of Mortgagee, be necessary or proper to effect
the intent and purpose of the assignment contained in this Article III; and
Mortgagor shall be bound thereby as fully and effectively as if Mortgagor had
personally executed, acknowledged and delivered any of the foregoing orders,
certificates or documents.  The powers and authorities herein conferred on
Mortgagee may be exercised by Mortgagee through any person who, at the time of
exercise, is the president, a senior vice president or a vice president of
Mortgagee.  The power of attorney conferred by this Section 3.6 is granted for
valuable consideration and coupled with an interest and is irrevocable until all
of the Obligations have been fully and finally paid and discharged in full, all
Commitments have been terminated or expired and the Credit Agreement has been
terminated in writing.  All persons dealing with Mortgagee, or any substitute,
shall be fully protected in treating the powers and authorities conferred by
this Section 3.6 as continuing in full force and effect until advised by
Mortgagee that the Obligations are fully and finally paid and the Liens granted
hereunder have been released.

 

3.7          INDEMNIFICATION.  MORTGAGOR AGREES TO INDEMNIFY MORTGAGEE AND THE
OTHER CREDIT PARTIES, AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, AND AGENTS (COLLECTIVELY, THE “INDEMNIFIED PARTIES”) FROM, AND
DISCHARGE, RELEASE AND HOLD EACH OF THEM HARMLESS AGAINST ALL LOSSES, DAMAGES,
CLAIMS, ACTIONS, LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS FEES OR OTHER CHARGES
OF WHATSOEVER KIND OR NATURE (HEREAFTER REFERRED TO AS “CLAIMS”) MADE AGAINST,
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM IN ANY AS A CONSEQUENCE
OF THE ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OF THE OBLIGATIONS
THAT ANY OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS OR PROCEEDS PURSUANT
TO THIS MORTGAGE OR PURSUANT TO ANY RIGHT TO COLLECT PROCEEDS DIRECTLY FROM
ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE INDEMNIFIED PARTIES
WILL HAVE THE RIGHT TO EMPLOY ATTORNEYS AND TO DEFEND AGAINST ANY SUCH CLAIMS
AND UNLESS FURNISHED WITH REASONABLE INDEMNITY, THE INDEMNIFIED PARTIES WILL
HAVE THE RIGHT TO PAY OR COMPROMISE AND ADJUST ALL SUCH CLAIMS.  MORTGAGOR WILL
INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCH AMOUNTS AS MAY BE PAID IN
RESPECT THEREOF, OR AS MAY BE SUCCESSFULLY ADJUDICATED AGAINST ANY OF THE
INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION SHALL APPLY TO CLAIMS
ARISING OR INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE
BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING
INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  THE LIABILITIES OF
MORTGAGOR AS SET FORTH IN THIS SECTION 3.7 SHALL SURVIVE THE TERMINATION OF THIS
MORTGAGE.

 

D-11

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

 

ARTICLE IV

Mortgagor’s Warranties and Covenants

 

4.1           Payment of Obligations.  Mortgagor covenants that Mortgagor shall
timely pay and perform the Obligations secured by this Mortgage.

 

4.2           Representations and Warranties.  Mortgagor represents and warrants
as follows:

 

(a)           Incorporation of Representations and Warranties from the Credit
Agreement.  The representations and warranties applicable to the Mortgagor and
to its Properties contained in Article IV of the Credit Agreement are hereby
confirmed and restated, each such representation and warranty, together with all
related definitions and ancillary provisions, being hereby incorporated into
this Mortgage by reference as though specifically set forth in this Section.

 

(b)           Title to Collateral.  Mortgagor has good and marketable title to
the Collateral as is customary in the oil and gas industry in all material
respects and free from all Liens, security interests or other encumbrances
except as permitted by the provisions of Section 4.4(i) below.  The descriptions
set forth in Exhibit A of the quantum and nature of the interests of Mortgagor
in and to the Oil and Gas Properties include the entire interests of Mortgagor
in the Oil and Gas Properties and are complete and accurate in all material
respects.  There are no “back-in” or “reversionary” interests held by third
parties which could reduce the interests of Mortgagor in the Oil and Gas
Properties except as set forth on Exhibit A.  No operating or other agreement to
which Mortgagor is a party or by which Mortgagor is bound affecting any part of
the Collateral requires Mortgagor to bear any of the costs relating to the
Collateral greater than the leasehold interest of Mortgagor in such portion of
the Collateral, except in the event Mortgagor is obligated under an operating
agreement to assume a portion of a defaulting party’s share of costs.

 

(c)           Status of Leases, Term Mineral Interests and Contracts.  All of
the leases and term mineral interests in the Oil and Gas Properties are valid,
subsisting and in full force and effect, and Mortgagor has no knowledge that a
default exists under any of the terms or provisions, express or implied, of any
of such leases or interests or under any agreement to which the same are
subject.  All of the Contracts and obligations of Mortgagor that relate to the
Oil and Gas Properties are in full force and effect and constitute legal, valid
and binding obligations of Mortgagor.  Neither Mortgagor nor, to the knowledge
of Mortgagor, any other party to any leases or term mineral interests in the Oil
and Gas Properties or any Contract (A) is in breach of or default, or with the
lapse of time or the giving of notice, or both, would be in breach or default,
with respect to any obligations thereunder, whether express or implied, or
(B) has given or threatened to give notice of any default under or inquiry into
any possible default under, or action to alter, terminate, rescind or procure a
judicial reformation of, any lease in the Oil and Gas Properties or any
Contract.

 

(d)           Production Burdens, Taxes, Expenses and Revenues.  All rentals,
royalties, overriding royalties, shut-in royalties and other payments due under
or with respect to

 

D-12

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

 

the Oil and Gas Properties have been properly and timely paid, except for
payments held in suspense in the ordinary course of business or remitted to
state agencies responsible for handling unclaimed property.  All taxes have been
properly and timely paid except to the extent such taxes are being contested in
good faith and for which reserves in accordance with GAAP have been made as
reflected in the Financial Statements.  All expenses payable under the terms of
the Contracts have been properly and timely paid except for such expenses being
contested in good faith by appropriate proceedings, and for which reserves shall
have been made therefore and except for such expenses as are being currently
paid prior to delinquency in the ordinary course of business.  Except for
Mortgagor’s interests in certain Oil and Gas Properties, which Mortgagor
represents do not constitute a material portion (with 2% or more being deemed
material) of the value of the Collateral and all other Properties of Mortgagor
securing the Obligations, all of the proceeds from the sale of Hydrocarbons
produced from the Realty Collateral are being properly and timely paid to
Mortgagor by the purchasers or other remitters of production proceeds without
suspense.  Mortgagor’s ownership of the Hydrocarbons and the undivided interests
therein as specified on attached Exhibit A will, after giving full effect to all
Liens permitted hereby and after giving full effect to the agreements or
instruments set forth on Exhibit A and any other instruments or agreements
affecting Mortgagor’s ownership of the Hydrocarbons, afford Mortgagor not less
than those net interests (expressed as a fraction, percentage or decimal) in the
production from or which is allocated to such Hydrocarbons specified as net
revenue interest on attached Exhibit A and will cause Mortgagor to bear not more
than that portion (expressed as a fraction, percentage or decimal), specified as
working interest on attached Exhibit A, of the costs of drilling, developing and
operating the wells identified on Exhibit A.

 

(e)           Pricing.  The prices being received for the production of
Hydrocarbons do not violate any Contract or any law or regulation.  Where
applicable, all of the wells located on the Oil and Gas Properties and
production of Hydrocarbons therefrom have been properly classified under
appropriate governmental regulations.

 

(f)            Gas Regulatory Matters.  Mortgagor has filed with the appropriate
state and federal agencies all necessary rate and collection filings and all
necessary applications for well determinations under the Natural Gas Act of
1938, as amended, the Natural Gas Policy Act of 1978, as amended, and the
rules and regulations of the Federal Energy Regulatory Commission (the “FERC”)
thereunder, and each such application has been approved by or is pending before
the appropriate state or federal agency.

 

(g)           Production Balances.  Except as set forth below or permitted by
the Credit Agreement, none of the purchasers under any production sales
contracts are entitled to “make-up” or otherwise receive deliveries of
Hydrocarbons at any time after the date hereof without paying at such time the
full contract price therefor.  Except as set forth below, no person is entitled
to receive any portion of the interest of Mortgagor in any Hydrocarbons or to
receive cash or other payments to “balance” any disproportionate allocation of
Hydrocarbons under any operating agreement, gas balancing and storage agreement,
gas processing or dehydration agreement, or other similar agreements.  Mortgagor
believes that certain third parties may be entitled to receive “make-up”
deliveries of Hydrocarbons or cash or other payments to “balance” a
disproportionate allocation of Hydrocarbons produced from certain Oil and Gas
Properties; provided, however, Mortgagor represents and warrants that such
deliveries or payments are not

 

D-13

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

 

material (with 2% or more being deemed material) in aggregate amount when
compared to the value of the Collateral and all other Properties of Mortgagor
securing the Obligations.

 

(h)           Drilling Obligations.  There are no obligations under any Oil and
Gas Property or Contract which require the drilling of additional wells or
operations to earn or to continue to hold any of the Oil and Gas Properties in
force and effect, except for oil and gas leases that are still within their
primary term (each of which will require drilling operations to perpetuate it
beyond its primary term) and the standard provision in certain oil and gas
leases that requires either production or operations to perpetuate each
respective lease after the expiration of its primary term.

 

(i)            Compliance With Laws.  All wells on or attributable to the Oil
and Gas Properties have been drilled, completed and operated, and all production
therefrom has been accounted for and paid to the persons entitled thereto, in
compliance in all material respects with all applicable federal, state and local
laws and applicable rules and regulations of the federal, state and local
regulatory authorities having jurisdiction thereof.

 

(j)            Regulatory Filings and Compliance.  All necessary regulatory
filings have been properly made, and all regulatory (including Environmental)
processes have been complied with, in connection with the drilling, completion
and operation of the wells on or attributable to the Oil and Gas Properties, and
the issuance of all rights of way and other surface uses necessary for the
exploration, development and transportation to and from such wells, and all
other operations related thereto.

 

(k)           Allowables.  All production and sales of Hydrocarbons produced or
sold from the Oil and Gas Properties have been made in accordance with any
applicable allowables (plus permitted tolerances) imposed by any Governmental
Authorities.

 

(l)            Refund Obligations.  Mortgagor has not collected any proceeds
from the sale of Hydrocarbons produced from the Oil and Gas Properties which are
subject to any refund obligation.

 

(m)          The address of Mortgagor’s place of business, residence, chief
executive office and office where Mortgagor keeps its records concerning
accounts, contract rights and general intangibles is as set forth in
Section 7.12, and there has been no change in the location of Mortgagor’s place
of business, residence, chief executive office and office where it keeps such
records and no change of Mortgagor’s name during the four months immediately
preceding the Effective Date.  Mortgagor hereby represents and warrants that its
organizational number is 3664494, the state of its formation is Delaware and the
correct spelling of Mortgagor’s name is as set forth in its signature block
below.

 

4.3           Further Assurances.

 

(a)           Mortgagor covenants that Mortgagor shall execute and deliver such
other and further instruments, and shall do such other and further acts as in
the opinion of Mortgagee may be necessary or desirable to carry out more
effectively the purposes of this Mortgage,

 

D-14

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

 

including without limiting the generality of the foregoing, (i) prompt
correction of any defect in the execution or acknowledgment of this Mortgage,
any written instrument comprising part or all of the Obligations, or any other
document used in connection herewith; (ii) prompt correction of any defect which
may hereafter be discovered in the title to the Collateral; (iii) prompt
execution and delivery of all division or transfer orders or other instruments
which in Mortgagee’s opinion are required to transfer to Mortgagee, for its
benefit and the ratable benefit of the other Credit Parties, the assigned
proceeds from the sale of Hydrocarbons from the Oil and Gas Properties; and
(iv) prompt payment when due and owing of all taxes, assessments and
governmental charges imposed on this Mortgage, upon the interest of Mortgagee or
upon the income and profits from any of the above.

 

(b)           Mortgagor covenants that Mortgagor shall maintain and preserve the
Lien and security interest herein created as an Acceptable Security Interest
until all of the Obligations have been fully and finally paid and discharged in
full, all Commitments have been terminated or expired and the Credit Agreement
has been terminated in writing.

 

(c)           Mortgagor shall immediately notify Mortgagee of any discontinuance
of or change in the address of Mortgagor’s place of business, residence, chief
executive office or office where it keeps records concerning accounts, contract
rights and general intangibles.

 

4.4           Operation of Oil and Gas Properties.  Until all of the Obligations
have been fully and finally paid and discharged in full, all Commitments have
been terminated or expired, and the Credit Agreement has been terminated in
writing, Mortgagor shall (at Mortgagor’s own expense):

 

(a)           not enter into any operating agreement, contract or agreement
which materially adversely affects the Collateral;

 

(b)           do all things necessary and within the reasonable control of
Mortgagor to keep, or cause to be kept, in full force and effect the Oil and Gas
Properties and Mortgagor’s interests therein;

 

(c)           neither abandon, forfeit, surrender, release, sell, assign,
sublease, farmout or convey, nor agree to sell, assign, sublease, farmout or
convey, nor mortgage or grant security interests in, nor otherwise dispose of or
encumber any of the Collateral or any interest therein, except as permitted by
the Credit Agreement;

 

(d)           operate the Oil and Gas Properties or, to the extent that the
right of operation is vested in others, will exercise its best efforts to cause
the operator to operate the Oil and Gas Properties, in each case in such a
manner as to cause the Collateral to be maintained, developed and protected
against drainage and continuously operated for the production and marketing of
Hydrocarbons in a good and workmanlike manner as a prudent operator would in
accordance with (i) generally accepted practices, (ii) applicable oil and gas
leases and Contracts, and (iii) all applicable Federal, state and local laws,
rules and regulations;

 

D-15

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

 

(e)           promptly pay or cause to be paid when due and owing (i) all
rentals and royalties payable in respect of the Collateral; (ii) all expenses
incurred in or arising from the operation or development of the Collateral;
(iii) all taxes, assessments and governmental charges imposed upon the
Collateral, upon the income and profits from any of the Collateral, or upon
Mortgagee because of its interest therein; and (iv) all local, state and federal
taxes, payments and contributions for which Mortgagor may be liable except to
the extent disputed as permitted under the Credit Agreement; and indemnify
Mortgagee from all liability in connection with any of the foregoing;

 

(f)            promptly take all action necessary to enforce or secure the
observance or performance of any term, covenant, agreement or condition to be
observed or performed by third parties under any Contract, or any part thereof,
or to exercise any of its rights, remedies, powers and privileges under any
Contract, all in accordance with the respective terms thereof;

 

(g)           other than as otherwise permitted under the terms of the Credit
Agreement, cause the Operating Equipment and the Fixture Operating Equipment to
be kept in good and effective operating condition, ordinary wear and tear
excepted, and cause to be made all repairs, renewals, replacements, additions
and improvements thereof or thereto, necessary or appropriate in connection with
the production of Hydrocarbons from the Oil and Gas Properties;

 

(h)           permit and do all things necessary or proper to enable the
Mortgagee (through any of their respective agents and employees) to enter upon
the Oil and Gas Properties for the purpose of investigating and inspecting the
condition and operations of the Collateral in accordance with the terms of the
Credit Agreement;

 

(i)            cause the Collateral to be kept free and clear of Liens, charges,
security interests and encumbrances of every character other than (i) the Liens
and security interests created and assigned by this Mortgage and (ii) the
Permitted Liens;

 

(j)            carry and maintain the insurance required by the Credit
Agreement;

 

(k)           furnish to Mortgagee, upon request, copies of any Contracts; and

 

(l)            promptly perform all covenants express or implied in any
Contract.

 

4.5           Recording.  Mortgagor shall promptly (at Mortgagor’s own expense)
record, register, deposit and file this Mortgage and every other instrument in
addition or supplement hereto, including applicable financing statements, in
such offices and places within the state where the Collateral is located and in
the state where the Mortgagor is registered as a limited liability company and
at such times and as often as may be necessary to preserve, protect and renew
the Lien and security interest herein created as an Acceptable Security Interest
on real or personal property as the case may be, and otherwise shall do and
perform all matters or things necessary or expedient to be done or observed by
reason of any Legal Requirement for the purpose of effectively creating,
perfecting, maintaining and preserving the Lien and security interest created
hereby in and on the Collateral.

 

D-16

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

 

4.6           Records, Statements and Reports. Mortgagor shall keep proper books
of record and account in which complete and correct entries shall be made of
Mortgagor’s transactions in accordance with the method of accounting required in
the Credit Agreement and shall furnish or cause to be furnished to Mortgagee the
reports required to be delivered pursuant to the terms of the Credit Agreement.

 

4.7           Insurance.  To the extent that insurance is carried by a
third-party operator on behalf of Mortgagor, upon request by Mortgagee,
Mortgagor shall obtain and provide Mortgagee with copies of certificates of
insurance showing Mortgagor as a named insured.  Mortgagor hereby assigns to
Mortgagee for its benefit and the benefit of the other Credit Parties any and
all monies that may become payable under any such policies of insurance by
reason of damage, loss or destruction of any of the Collateral and Mortgagee may
receive such monies and apply all or any part of the sums so collected, at its
election, toward payment of the Obligations, whether or not such Obligations are
then due and payable, in such manner as Mortgagee may elect. Any insurance
proceeds received by Mortgagor shall be held in trust for the benefit of
Mortgagee, shall be segregated from other funds of Mortgagor and shall be
forthwith paid over to Mortgagee.

 

ARTICLE V

Default

 

5.1           Events of Default.  An Event of Default under the terms of the
Credit Agreement shall constitute an “Event of Default” under this Mortgage.

 

5.2           Acceleration Upon Default.  Upon the occurrence and during the
continuance of any Event of Default, Mortgagee may (or shall at the request of
the Majority Lenders), declare the entire unpaid principal of, and the interest
accrued on, and all other amounts owed in connection with, the Obligations to be
forthwith due and payable, whereupon the same shall become immediately due and
payable without any protest, presentment, demand, notice of intent to
accelerate, notice of acceleration or further notice of any kind, all of which
are hereby expressly waived by Mortgagor.  Whether or not Mortgagee or the
Majority Lenders elect to accelerate as herein provided, Mortgagee may
simultaneously, or thereafter, without any further notice to Mortgagor, exercise
any other right or remedy provided in this Mortgage or otherwise existing under
the Credit Agreement or any other Loan Documents or any other agreement,
document, or instrument evidencing obligations owing from the Mortgagor to any
of the Credit Parties.

 

ARTICLE VI

Mortgagee’s Rights

 

6.1           Rights to Realty Collateral Upon Default.

 

(a)           Operation of Property by Mortgagee.  Upon the occurrence and
during the continuance of an Event of Default, and in addition to all other
rights of Mortgagee, Mortgagee shall have the following rights and powers (but
no obligation):

 

D-17

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

 

(i)  To enter upon and take possession of any of the Realty Collateral and
exclude Mortgagor therefrom;

 

(ii)  To hold, use, administer, manage and operate the Realty Collateral to the
extent that Mortgagor could do so, and without any liability to Mortgagor in
connection with such operations; and

 

(iii) To the extent that Mortgagor could do so, to collect, receive and receipt
for all Hydrocarbons produced and sold from the Realty Collateral, to make
repairs, to purchase machinery and equipment, to conduct workover operations, to
drill additional wells, and to exercise every power, right and privilege of
Mortgagor with respect to the Realty Collateral.

 

Mortgagee may designate any person, firm, corporation or other entity to act on
its behalf in exercising the foregoing rights and powers.  When and if the
expenses of such operation and development (including costs of unsuccessful
workover operations or additional wells) have been paid and all of the
Obligations have been fully and finally paid and discharged in full, all of the
Commitments have terminated or expired, and the Credit Agreement has been
terminated in writing, the Realty Collateral shall be returned to Mortgagor
(providing there has been no foreclosure sale).

 

(b)           Judicial Proceedings.  Upon the occurrence and during the
continuance of an Event of Default, the Mortgagee, in lieu of or in addition to
exercising the power of sale hereafter given, may proceed by a suit or suits, in
equity or at law (i) for the specific performance of any covenant or agreement
herein contained or in aid of the execution of any power herein granted,
(ii) for the appointment of a receiver whether there is then pending any
foreclosure hereunder or the sale of the Realty Collateral, or (iii) for the
enforcement of any other appropriate legal or equitable remedy.  Furthermore, if
an action is filed to foreclose this Mortgage, or if Mortgagee seeks to
foreclose this Mortgage by power of sale under the Oklahoma Power of Sale
Mortgage Foreclosure Act, Mortgagee shall be entitled to the immediate
appointment of a receiver pursuant to 12 O.S. §1551(2)(c) without the necessity
of further proof.

 

(c)           Intentionally omitted.

 

(d)           Certain Aspects of Sale.  Mortgagee will have the right to become
the purchaser at any foreclosure sale and to credit the then outstanding balance
of the Obligations against the amount payable by Mortgagee as purchaser at such
sale.  Statements of fact or other recitals contained in any conveyance to any
purchaser or purchasers at any sale made hereunder will conclusively establish
the occurrence of an Event of Default, any acceleration of the maturity of the
Obligations, the advertisement and conduct of such sale in the manner provided
herein and the truth and accuracy of all other matters stated therein. 
Mortgagor does hereby ratify and confirm all legal acts that the Mortgagee may
do in carrying out the Mortgagee’s duties and obligations under this Mortgage,
and Mortgagor hereby irrevocably appoints Mortgagee to be the attorney-in-fact
of Mortgagor and in the name and on behalf of Mortgagor to execute and deliver
any deeds, transfers, conveyances, assignments, assurances and notices which
Mortgagor

 

D-18

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

 

ought to execute and deliver and do and perform any and all such acts and things
which Mortgagor ought to do and perform under the covenants herein contained and
generally to use the name of Mortgagor in the exercise of all or any of the
powers hereby conferred on Mortgagee.  Upon any sale, whether under the power of
sale hereby given or by virtue of judicial proceedings, it shall not be
necessary for Mortgagee or any public officer acting under execution or by order
of court, to have physically present or constructively in his possession any of
the Collateral, and Mortgagor hereby agrees to deliver to the purchaser or
purchasers at such sale on the date of sale the Collateral purchased by such
purchasers at such sale and if it should be impossible or impracticable to make
actual delivery of such Collateral, then the title and right of possession to
such Collateral shall pass to the purchaser or purchasers at such sale as
completely as if the same had been actually present and delivered.

 

(e)           Effect of Sale.  Any sale or sales of the Realty Collateral will
operate to divest all right, title, interest, claim and demand whatsoever,
either at law or in equity, of Mortgagor in and to the premises and the Realty
Collateral sold, and will be a perpetual bar, both at law and in equity, against
Mortgagor, Mortgagor’s successors or assigns, and against any and all persons
claiming or who shall thereafter claim all or any of the Realty Collateral sold
by, through or under Mortgagor, or Mortgagor’s successors or assigns. 
Nevertheless, if requested by the Mortgagee so to do, Mortgagor shall join in
the execution and delivery of all proper conveyances, assignments and transfers
of the Property so sold.  The purchaser or purchasers at the foreclosure sale
will receive as incident to his, her, its or their own ownership, immediate
possession of the Realty Collateral purchased and Mortgagor agrees that if
Mortgagor retains possession of the Realty Collateral or any part thereof
subsequent to such sale, Mortgagor will be considered a tenant at sufferance of
the purchaser or purchasers and will be subject to eviction and removal by any
lawful means, with or without judicial intervention, and all damages by reason
thereof are hereby expressly waived by Mortgagor.

 

(f)            Provisions with Respect to the Power of Sale.  Notwithstanding
any other provisions in this Mortgage, if Mortgagee sells the Collateral under
the power of sale granted by this Mortgage, the following provisions shall
apply:

 

(i)            The notices described in Title 46 Okla. Stat. Sec. 40 and
following, as amended (the “Act”), shall be given as and when required therein;

 

(ii)           All notices which are required to be given Mortgagor under the
Act may be given to Mortgagor at the address which is set forth in the first
paragraph of this Mortgage, or if such address has been changed pursuant to this
Mortgage, to that changed address;

 

(iii)          Mortgagee may purchase part or all of the Collateral at any such
sale;

 

(iv)          Mortgagor stipulates the total amounts owing under this Mortgage
will have benefited Mortgagor substantially and are not unconscionable in
amount, and therefore the total amount of the Obligations, less the fair market
value of the Collateral sold under such Act, and any prior indebtedness, shall
be available as a deficiency judgment against Mortgagor;

 

D-19

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

 

(v)           The purchaser under such sale may seek and obtain a writ of
assistance by application to the District Court in the county in Oklahoma in
which any part of the Realty Collateral is located, or the United States
District Court having venue for actions arising in such county;

 

(vi)          Mortgagee may, at its option, proceed with foreclosure under
judicial proceedings instead of exercising the rights of this Power of Sale;

 

(vii)         All other procedures and requirements of such Act shall be
followed;

 

(viii)        After the completion of the sale as contemplated by such Act, the
purchaser shall have all of Mortgagor’s right, title and interest in and to the
Collateral, free and clear of all rights of Mortgagor, and free and clear of all
rights of any person with a priority which is subordinate to the lien of this
Mortgage, except any right which may be reserved under such Act;

 

(ix)           Any recitation in any notice, publication thereof, recordation
thereof, or deed, of the existence of an event of default, giving, publication,
service and recordation of notice, occurrence of the sale at the time and place
set forth in such notice or any postponement authorized and effective under such
Act, circumstances of sale and bidding, and compliance with the terms of such
Act, shall be presumed to be statements of fact and no person shall be required
to investigate the truthfulness or accuracy of any such recitation; and

 

(x)            The proceeds of any such sale shall be applied first to the
costs, attorney fees, and expenses of sale, next to the Obligations; except that
if such application of proceeds conflicts with the requirements of such Act, the
proceeds shall be applied as provided under such Act only to the extent of any
such conflict.

 

(g)           Application of Proceeds.  The proceeds of any sale of the Realty
Collateral or any part thereof, whether under the power of sale herein granted
and conferred or by virtue of judicial proceedings, shall either be, at the
option of Mortgagee, applied at the time of receipt, or held by Mortgagee in the
Collateral Account as additional Collateral, and in either case, applied in the
order set forth in Section 7.06 of the Credit Agreement.

 

(h)           Appraisement and Marshalling.  Mortgagor agrees, to the full
extent that Mortgagor may lawfully so agree, that Mortgagor will not at any time
insist upon or plead or in any manner whatever claim the benefit of any
appraisement, valuation, stay, extension or redemption law, now or hereafter in
force, in order to prevent or hinder the enforcement or foreclosure of this
Mortgage, the absolute sale of the Collateral, including the Realty Collateral,
or the possession thereof by any purchaser at any sale made pursuant to this
Mortgage or pursuant to the decree of any court of competent jurisdiction. 
Mortgagee hereby waives or does not waive appraisement, such election to be made
at or before entry of judgment in any action to foreclose this Mortgage, and
Mortgagor, for Mortgagor and all who may claim through or under Mortgagor,
hereby waives, to the extent that Mortgagor may lawfully do so under any
applicable

 

D-20

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

 

law, any and all rights to have the Collateral, including the Realty Collateral,
marshaled upon any foreclosure of the Lien hereof or sold in inverse order of
alienation.  Mortgagor agrees that, in the event of a judicial foreclosure or a
sale under the power of sale provisions of this Mortgage, the Collateral,
including the Realty Collateral, may be sold in part, in parcels or as an
entirety as directed by Mortgagee.

 

6.2           Rights to Personalty Collateral Upon Default.  Upon the occurrence
of an Event of Default, or at any time thereafter, Mortgagee may proceed against
the Personalty Collateral in accordance with the rights and remedies granted
herein with respect to the Realty Collateral, or will have all rights and
remedies granted by the Uniform Commercial Code as in effect in Oklahoma and
this Mortgage.  Mortgagee shall have the right to take possession of the
Personalty Collateral, and for this purpose Mortgagee may enter upon any
premises on which any or all of the Personalty Collateral is situated and, to
the extent that Mortgagor could do so, take possession of and operate the
Personalty Collateral or remove it therefrom.  Mortgagee may require Mortgagor
to assemble the Personalty Collateral and make it available to Mortgagee at a
place to be designated by Mortgagee which is reasonably convenient to both
parties.  Unless the Personalty Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Mortgagee will send Mortgagor reasonable notice of the time and place of any
public sale or of the time after which any private sale or other disposition of
the Personalty Collateral is to be made.  This requirement of sending reasonable
notice will be met if such notice is mailed, postage prepaid, to Mortgagor at
the address designated in Section 7.12 hereof (or such other address as has been
designated as provided herein) at least ten days before the time of the sale or
disposition.  In addition to the expenses of retaking, holding, preparing for
sale, selling and the like, Mortgagee will be entitled to recover attorney’s
fees and legal expenses as provided for in this Mortgage and in the writings
evidencing the Obligations before applying the balance of the proceeds from the
sale or other disposition toward satisfaction of the Obligations.  Mortgagor
will remain liable for any deficiency remaining after the sale or other
disposition.

 

6.3           Rights to Fixture Collateral Upon Default.  Upon the occurrence of
an Event of Default, or at any time thereafter, Mortgagee may elect to treat the
Fixture Collateral as either Realty Collateral or as Personalty Collateral (but
not both) and proceed to exercise such rights as apply to the type of Collateral
selected.

 

6.4           Account Debtors.  Mortgagee may, in its discretion, after the
occurrence and during the continuance of an Event of Default, notify any account
debtor to make payments directly to Mortgagee and contact account debtors
directly to verify information furnished by Mortgagor.  Mortgagee shall not have
any obligation to preserve any rights against prior parties.

 

6.5           Costs and Expenses.  All sums advanced or costs or expenses
incurred by Mortgagee (either by it directly or on its behalf by any receiver
appointed hereunder) in protecting and enforcing its rights hereunder shall
constitute a demand obligation owing by Mortgagor to Mortgagee as part of the
Obligations.  Mortgagor hereby agrees to repay such sums on demand plus interest
thereon from the date of the advance or incurrence until reimbursement of
Mortgagee at the Reimbursement Rate.

 

D-21

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

 

6.6           Set-Off.  Upon the occurrence and during the continuance of any
Event of Default, Mortgagee shall have the right to set-off any funds of
Mortgagor in the possession of Mortgagee against any amounts then due by
Mortgagor to Mortgagee pursuant to this Mortgage.

 

ARTICLE VII

Miscellaneous

 

7.1           Advances by Mortgagee.  Each and every covenant of Mortgagor
herein contained shall be performed and kept by Mortgagor solely at Mortgagor’s
expense.  If Mortgagor fails to perform or keep any of the covenants of
whatsoever kind or nature contained in this Mortgage, Mortgagee (either by it
directly or on its behalf by any receiver appointed hereunder) may, but will not
be obligated to, make advances to perform the same on Mortgagor’s behalf, and
Mortgagor hereby agrees to repay such sums and any attorneys’ fees incurred in
connection therewith on demand plus interest thereon from the date of the
advance until reimbursement of Mortgagee at the Reimbursement Rate.  In
addition, Mortgagor hereby agrees to repay on demand any costs, expenses and
attorney’s fees incurred by Mortgagee which are to be obligations of Mortgagor
pursuant to, or allowed by, the terms of this Mortgage, including such costs,
expenses and attorney’s fees incurred pursuant to Section 3.1(h), Section 6.5 or
Section 7.2 hereof, plus interest thereon from the date of the advance by
Mortgagee until reimbursement of Mortgagee at the Reimbursement Rate.  Such
amounts will be in addition to any sum of money which may, pursuant to the terms
and conditions of the written instruments comprising part of the Obligations, be
due and owing.  No such advance will be deemed to relieve Mortgagor from any
default hereunder.

 

7.2           Defense of Claims.  Mortgagor shall promptly notify Mortgagee in
writing of the commencement of any legal proceedings affecting Mortgagor’s title
to the Collateral or Mortgagee’s Lien or security interest in the Collateral, or
any part thereof, and shall take such action, employing attorneys agreeable to
Mortgagee, as may be necessary to preserve Mortgagor’s and Mortgagee’s rights
affected thereby.  If Mortgagor fails or refuses to adequately or vigorously, in
the sole judgment of Mortgagee, defend Mortgagor’s or Mortgagee’s rights to the
Collateral, the Mortgagee may take such action on behalf of and in the name of
Mortgagor and at Mortgagor’s expense.  Moreover, Mortgagee may take such
independent action in connection therewith as it may in its discretion deem
proper, including the right to employ independent counsel and to intervene in
any suit affecting the Collateral.  All costs, expenses and attorneys’ fees
incurred by Mortgagee pursuant to this Section 7.2 or in connection with the
defense by Mortgagee of any claims, demands or litigation relating to Mortgagor,
the Collateral or the transactions contemplated in this Mortgage shall be paid
by Mortgagor on demand plus interest thereon from the date of such demand by
Mortgagee until reimbursement of Mortgagee at the Reimbursement Rate.

 

7.3           Termination.  If all of the Obligations have been fully and
finally paid and discharged in full, all Commitments have been terminated or
expired, and the Credit Agreement has been terminated in writing, then all of
the Collateral (to the extent not sold, assigned or otherwise transferred as
permitted herein or under applicable law) will revert to Mortgagor and the
entire estate, right, title and interest of the Mortgagee will thereupon cease;
and Mortgagee in

 

D-22

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

 

such case shall, upon the request of Mortgagor and the payment by Mortgagor of
all attorneys’ fees and other expenses, deliver to Mortgagor proper instruments
acknowledging satisfaction of this Mortgage.

 

7.4           Renewals, Amendments and Other Security.  Without notice or
consent of Mortgagor, renewals and extensions of the written instruments
constituting part or all of the Obligations may be given at any time and
amendments may be made to agreements relating to any part of such written
instruments or the Collateral.  Mortgagee may take or hold other security for
the Obligations without notice to or consent of Mortgagor.  The acceptance of
this Mortgage by Mortgagee shall not waive or impair any other security
Mortgagee may have or hereafter acquire to secure the payment of the Obligations
nor shall the taking of any such additional security waive or impair the Lien
and security interests herein granted.  The Mortgagee may resort first to such
other security or any part thereof, or first to the security herein given or any
part thereof, or from time to time to either or both, even to the partial or
complete abandonment of either security, and such action will not be a waiver of
any rights conferred by this Mortgage.  This Mortgage may not be amended, waived
or modified except in a written instrument executed by both Mortgagor and
Mortgagee.

 

7.5           Security Agreement, Financing Statement and Fixture Filing.  This
Mortgage will be deemed to be and may be enforced from time to time as an
assignment, chattel mortgage, contract, deed of trust, financing statement, real
estate mortgage, or security agreement, and from time to time as any one or more
thereof if appropriate under applicable state law.  As a financing statement,
this Mortgage is intended to cover all Personalty Collateral including
Mortgagor’s interest in all Hydrocarbons as and after they are extracted and all
accounts arising from the sale thereof at the wellhead.  THIS MORTGAGE SHALL BE
EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TO
FIXTURE COLLATERAL INCLUDED WITHIN THE COLLATERAL.   This Mortgage shall be
filed in the real estate records or other appropriate records of the county or
counties in the state in which any part of the Realty Collateral and Fixture
Collateral is located as well as the Uniform Commercial Code records of the
Secretary of State or other appropriate office of the state in which any
Collateral or Mortgagor is located.  At Mortgagee’s request Mortgagor shall
deliver financing statements covering the Personalty Collateral, including all
Hydrocarbons sold at the wellhead, and Fixture Collateral, which financing
statements may be filed in the Uniform Commercial Code records of the Secretary
of State or other appropriate office of the state in which any of the Collateral
or Mortgagor is located or in the county where any of the Collateral is
located.  Furthermore, Mortgagor hereby irrevocably authorizes Mortgagee and any
affiliate, employee or agent thereof, at any time and from time to time, to file
in any Uniform Commercial Code jurisdiction any financing statement or document
and amendments thereto, without the signature of Mortgagor where permitted by
law, in order to perfect or maintain the perfection of any security interest
granted under this Mortgage.  A photographic or other reproduction of this
Mortgage shall be sufficient as a financing statement.

 

7.6           Unenforceable or Inapplicable Provisions.  If any term, covenant,
condition or provision hereof is invalid, illegal or unenforceable in any
respect, the other provisions hereof will remain in full force and effect and
will be liberally construed in favor of the Mortgagee in order to carry out the
provisions hereof.

 

D-23

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

 

7.7           Rights Cumulative.  Each and every right, power and remedy herein
given to the Mortgagee will be cumulative and not exclusive, and each and every
right, power and remedy whether specifically herein given or otherwise existing
may be exercised from time to time and as often and in such order as may be
deemed expedient by the Mortgagee, as the case may be, and the exercise, or the
beginning of the exercise, of any such right, power or remedy will not be deemed
a waiver of the right to exercise, at the same time or thereafter, any other
right, power or remedy.  No delay or omission by Mortgagee in the exercise of
any right, power or remedy will impair any such right, power or remedy or
operate as a waiver thereof or of any other right, power or remedy then or
thereafter existing.

 

7.8           Waiver by Mortgagee.  Any and all covenants in this Mortgage may
from time to time by instrument in writing by Mortgagee, be waived to such
extent and in such manner as the Mortgagee may desire, but no such waiver will
ever affect or impair the Mortgagee’s rights hereunder, except to the extent
specifically stated in such written instrument.

 

7.9           Terms.  The term “Mortgagor” as used in this Mortgage will be
construed as singular or plural to correspond with the number of persons
executing this Mortgage as Mortgagor.  If more than one person executes this
Mortgage as Mortgagor, his, her, its, or their duties and liabilities under this
Mortgage will be joint and several.  The terms “Mortgagee” and “Mortgagor” as
used in this Mortgage include the heirs, executors or administrators,
successors, representatives, receiver, trustees and assigns of those parties. 
Unless the context otherwise requires, terms used in this Mortgage which are
defined in the Uniform Commercial Code of Oklahoma are used with the meanings
therein defined.

 

7.10         Counterparts.  This Mortgage may be executed in any number of
counterparts, each of which will for all purposes be deemed to be an original,
and all of which are identical except that, to facilitate recordation, in any
particular counties counterpart portions of Exhibit A hereto which describe
Properties situated in counties other than the counties in which such
counterpart is to be recorded may have been omitted.

 

7.11         Governing Law.  This Mortgage shall be governed by and construed in
accordance with the laws of the State of Oklahoma.

 

7.12         Notice.  All notices required or permitted to be given by Mortgagor
or Mortgagee shall be made in the manner set forth in the Credit Agreement and
shall be addressed as follows:

 

Mortgagor:

 

c/o Cano Petroleum, Inc.

 

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

Attention: Ben Daitch, CFO

 

 

Facsimile: (817) 334-0222

 

 

 

Mortgagee:

 

UnionBanCal Equities, Inc.

 

 

445 South Figueroa Street, 21st Floor

 

 

Los Angeles, California 90071

 

 

Attention: Maggie Elower

 

 

Facsimile: 213-236-7619

 

D-24

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

 

7.13         Condemnation.  All awards and payments heretofore and hereafter
made for the taking of or injury to the Collateral or any portion thereof
whether such taking or injury be done under the power of eminent domain or
otherwise, are hereby assigned, and shall be paid to Mortgagee.  Mortgagee is
hereby authorized to collect and receive the proceeds of such awards and
payments and to give proper receipts and acquittances therefor.  Mortgagor
hereby agrees to make, execute and deliver, upon request, any and all
assignments and other instruments sufficient for the purpose of confirming this
assignment of the awards and payments to Mortgagee free and clear of any
encumbrances of any kind or nature whatsoever.  Any such award or payment may,
at the option of Mortgagee, be retained and applied by Mortgagee after payment
of attorneys’ fees, costs and expenses incurred in connection with the
collection of such award or payment toward payment of all or a portion of the
Obligations, whether or not the Obligations are then due and payable, or be paid
over wholly or in part to Mortgagor for the purpose of altering, restoring or
rebuilding any part of the Collateral which may have been altered, damaged or
destroyed as a result of any such taking, or other injury to the Collateral.

 

7.14         Successors and Assigns.

 

(a)           This Mortgage is binding upon Mortgagor, Mortgagor’s successors
and assigns, and shall inure to the benefit of each Credit Party and each of its
successors and assigns, and the provisions hereof shall likewise be covenants
running with the land.

 

(b)           This Mortgage shall be transferable and negotiable, with the same
force and effect and to the same extent as the Obligations may be transferable,
it being understood that, upon the transfer or assignment by the Credit Parties
(or any of them) of any of the Obligations, the legal transfer or assignment by
the Credit Parties (or any of them) of any of the Obligations, the legal holder
of such Obligations shall have all of the rights granted to the Mortgagee for
the benefit of the Credit Parties under this Mortgage.  The Mortgagor
specifically agrees that upon any transfer of all or any portion of the
Obligations, this Mortgage shall secure with retroactive rank the existing
Obligations of the Mortgagor to the transferee and any and all Obligations to
such transferee thereafter arising.

 

(c)           The Mortgagor hereby recognizes and agrees that the Credit Parties
(or any of them) may, from time to time, one or more times, transfer all or any
portion of the Obligations to one or more third parties.  Such transfers may
include, but are not limited to, sales of participation interests in such
Obligations in favor of one or more third parties.  Upon any transfer of all or
any portion of the Obligations, the Mortgagee may transfer and deliver any
and/or all of the Collateral to the transferee of such Obligations and such
Collateral shall secure any and all of the Obligations in favor of such a
transferee then existing and thereafter arising, and after any such transfer has
taken place, the Mortgagee shall be fully discharged from any and all future
liability and responsibility to the Mortgagor with respect to such Collateral,
and transferee thereafter shall be vested with all the powers, rights and duties
with respect such Collateral.

 

D-25

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

 

7.15         Article and Section Headings.  The article and section headings in
this Mortgage are inserted for convenience of reference and shall not be
considered a part of this Mortgage or used in its interpretation.

 

7.16         Usury Not Intended.  It is the intent of Mortgagor and Mortgagee in
the execution and performance of this Mortgage, the Credit Agreement and the
other Loan Documents to contract in strict compliance with applicable usury laws
governing the Obligations including such applicable usury laws of the State of
Texas and the United States of America as are from time-to-time in effect.  In
furtherance thereof, Mortgagee and Mortgagor stipulate and agree that none of
the terms and provisions contained in this Mortgage, the Credit Agreement or the
other Loan Documents shall ever be construed to create a contract to pay, as
consideration for the use, forbearance or detention of money, interest at a rate
in excess of the maximum non-usurious rate permitted by applicable law and that
for purposes hereof “interest” shall include the aggregate of all charges which
constitute interest under such laws that are contracted for, charged or received
under this Mortgage, the Credit Agreement and the other Loan Documents; and in
the event that, notwithstanding the foregoing, under any circumstances the
aggregate amounts taken, reserved, charged, received or paid on the Obligations,
include amounts which by applicable law are deemed interest which would exceed
the maximum non-usurious rate permitted by applicable law, then such excess
shall be deemed to be a mistake and Mortgagee shall credit the same on the
principal of the Obligations (or if the Obligations shall have been paid in
full, refund said excess to Mortgagor).  In the event that the maturity of the
Obligations is accelerated by reason of any election of Mortgagee resulting from
any Event of Default, or in the event of any required or permitted prepayment,
then such consideration that constitutes interest may never include more than
the maximum non-usurious rate permitted by applicable law and excess interest,
if any, provided for in this Mortgage, the Credit Agreement or other Loan
Documents shall be canceled automatically as of the date of such acceleration
and prepayment and, if theretofore paid, shall be credited on the Obligations
or, if the Obligations shall have been paid in full, refunded to Mortgagor.  In
determining whether or not the interest paid or payable under any specific
contingencies exceeds the maximum non-usurious rate permitted by applicable law,
Mortgagor and Mortgagee shall to the maximum extent permitted under applicable
law amortize, prorate, allocate and spread in equal part during the period of
the full stated term of the Obligations, all amounts considered to be interest
under applicable law of any kind contracted for, charged, received or reserved
in connection with the Obligation.

 

7.17         Credit Agreement.  To the fullest extent possible, the terms and
provisions of the Credit Agreement shall be read together with the terms and
provisions of this Mortgage so that the terms and provisions of this Mortgage do
not conflict with the terms and provisions of the Credit Agreement; provided,
however, notwithstanding the foregoing, in the event that any of the terms or
provisions of this Mortgage conflict with any terms or provisions of the Credit
Agreement, the terms or provisions of the Credit Agreement shall govern and
control for all purposes; provided that the inclusion in this Mortgage of terms
and provisions, supplemental rights or remedies in favor of the Secured Party
not addressed in the Credit Agreement shall not be deemed to be a conflict with
the Credit Agreement and all such additional terms, provisions, supplemental
rights or remedies contained herein shall be given full force and effect.

 

D-26

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

 

7.18        Due Authorization.  Mortgagor hereby represents, warrants and
covenants to Mortgagee that the obligations of Mortgagor under this Mortgage are
the valid, binding and legally enforceable obligations of Mortgagor, that the
execution, ensealing and delivery of this Mortgage by Mortgagor has been duly
and validly authorized in all respects by Mortgagor, and that the persons who
are executing and delivering this Mortgage on behalf of Mortgagor have full
power, authority and legal right to so do, and to observe and perform all of the
terms and conditions of this Mortgage on Mortgagor’s part to be observed or
performed.

 

7.19        No Offsets, Etc.  Mortgagor hereby represents, warrants and
covenants to Mortgagee that there are no offsets, counterclaims or defenses at
law or in equity against this Mortgage or the indebtedness secured hereby.

 

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

 

7.21        Subordination and Intercreditor Agreement.  Reference is made to the
Subordination and Intercreditor Agreement, dated as of December 17, 2008 (as
amended, restated, supplemented or otherwise modified from time to time, the
“Subordination and Intercreditor Agreement”), among Union Bank of California,
N.A., as Senior Agent, and UnionBanCal Equities, Inc., as Subordinated Agent,
and certain other persons, party or that may become party thereto from time to
time.  Notwithstanding anything herein to the contrary, this Mortgage, the Liens
granted to the Mortgagee pursuant to this Mortgage and the exercise of any right
or remedy by the Mortgagee or any of the Lenders hereunder are subject to the
provisions of the Subordination and Intercreditor Agreement.  In the event of
any conflict between the terms of the Subordination and Intercreditor Agreement
and this Mortgage, the terms of the Subordination and Intercreditor Agreement
shall govern and control.

 

THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS DEFINED IN THIS
MORTGAGE, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.]

 

D-27

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

 

NOTICE TO MORTGAGOR:

 

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

 

EXECUTED AND DELIVERED effective as of the date first written above.

 

 

MORTGAGOR:

 

 

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

 

 

By:

 

 

 

Benjamin Daitch

 

 

Senior Vice President and Chief Financial Officer

 

 

 

 

 

MORTGAGEE:

 

 

 

UNIONBANCAL EQUITIES, INC.

 

 

 

as Administrative Agent

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

D-28

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

 

THE STATE OF TEXAS

 

§

 

 

§

COUNTY OF TARRANT

 

§

 

This instrument was acknowledged before me on this         day of December,
2008, by Benjamin Daitch as Senior Vice President and Chief Financial Officer of
Cano Petroleum, Inc., on behalf of said corporation.

 

 

 

 

 

Notary Public in and for

 

the State of Texas

 

STATE OF CALIFORNIA

)

 

)

COUNTY OF                    

)

 

On December    , 2008, before me,                 , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person whose name
is subscribed to the within instrument and acknowledged to me that he executed
the same in his authorized capacity, and that by his signature on the instrument
the person, or the entity upon behalf of which the person acted, executed the
instrument.

 

WITNESS my hand and official seal.

 

 

Signature

 

(Seal)

 

 

STATE OF CALIFORNIA

)

 

)

COUNTY OF                    

)

 

On December    , 2008, before me,                , personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person whose name
is subscribed to the within instrument and acknowledged to me that he executed
the same in his authorized capacity, and that by his signature on the instrument
the person, or the entity upon behalf of which the person acted, executed the
instrument.

 

WITNESS my hand and official seal.

 

 

Signature

 

(Seal)

 

D-29

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

 

EXHIBIT A

TO

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT,
FIXTURE FILING, AND FINANCING STATEMENT

 

The designation “Working Interest” or “WI” or “GWI” when used in this
Exhibit means an interest owned in an oil, gas, and mineral lease that
determines the cost-bearing percentage of the owner of such interest.  The
designation “Net Revenue Interest” or “NRI” or “NRIO” or “NRIG” means that
portion of the production attributable to the owner of a working interest after
deduction for all royalty burdens, overriding royalty burdens or other burdens
on production, except severance, production, and other similar taxes.  The
designation “Overriding Royalty Interest” “ORRI” means an interest in production
which is free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the overriding
royalty interest so provides, costs associated with compression, dehydration,
other treating or processing, or transportation of production of oil, gas, or
other minerals relating to the marketing of such production.  The designation
“Royalty Interest” or “RI” means an interest in production which results from an
ownership in the mineral fee estate or royalty estate in the relevant land and
which is free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the royalty interest
so provides, costs associated with compression, dehydration, other treating or
processing or transportation of production of oil, gas, or other minerals
relating to the marketing of such production.  Each amount set forth as “Working
Interest” or “WI” or “GWI” or “Net Revenue Interest” or “NRI” or “NRIO” or
“NRIG” is the Mortgagor’s interest after giving full effect to, among other
things, all Liens permitted by the Credit Agreement and after giving full effect
to the agreements or instruments set forth in this Exhibit A and any other
instruments or agreements affecting Mortgagor’s ownership of the Hydrocarbons.

 

Any reference in this Exhibit A to wells or units is for warranty of interest,
administrative convenience, and identification and shall not limit or restrict
the right, title, interest, or Properties covered by this Mortgage.  All right,
title, and interest of Mortgagor in the Properties described herein and in
Exhibit A are and shall be subject to this Mortgage, regardless of the presence
of any units or wells not described herein.

 

The reference to book or volume and page herein and in Exhibit A refer to the
recording location of each respective Realty Collateral described herein and in
Exhibit A in the county where the land covered by the Realty Collateral is
located.

 

D-30

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

 

EXHIBIT E

 

FORM OF NOTE

 

THE OBLIGATIONS OF THE BORROWER UNDER THIS NOTE ARE SUBORDINATED TO THE PAYMENT
OF CERTAIN SENIOR DEBT AS SET FORTH IN THE SUBORDINATION AND INTERCREDITOR
AGREEMENT REFERRED TO BELOW.

SUBORDINATED NOTE

 

$________________

____________, 20__

 

 

For value received, the undersigned Cano Petroleum, Inc., a Delaware corporation
(“Borrower”), hereby promises to pay to the order of _______________________
(“Bank”), the principal amount of
_______________________________________ Dollars ($______________) or, if less,
the aggregate outstanding principal amount of the Advances (as defined in the
Credit Agreement referred to below) made by the Bank to the Borrower, together
with interest on the unpaid principal amount of the Advances from the date of
such Advances until such principal amount is paid in full, at such interest
rates, and at such times, as are specified in the Credit Agreement.

 

This Note is one of the Notes referred to in, and is entitled to the benefits
of, and is subject to the terms of, the Subordinated Credit Agreement dated as
of December 17, 2008 (as the same may be amended, restated, or modified from
time to time, the “Credit Agreement”), among the Borrower, the lenders party
thereto (the “Lenders”), and UnionBanCal Equities, Inc., as administrative agent
for the Lenders (the “Administrative Agent”).  Capitalized terms used in this
Note that are defined in the Credit Agreement and not otherwise defined in this
Note have the meanings assigned to such terms in the Credit Agreement.  The
Credit Agreement, among other things, (a) provides for the making of the
Advances by the Bank to the Borrower in an aggregate amount not to exceed at any
time outstanding the Dollar amount first above mentioned, the indebtedness of
the Borrower resulting from each such Advance being evidenced by this Note and
(b) contains provisions for acceleration of the maturity of this Note upon the
happening of certain events stated in the Credit Agreement and for optional and
mandatory prepayments of principal prior to the maturity of this Note upon the
terms and conditions specified in the Credit Agreement.

 

Both principal and interest are payable in lawful money of the United States of
America to the Administrative Agent at the place and in the manner specified in
the Credit Agreement.  The Bank shall record payments of principal made under
this Note, but no failure of the Bank to make such recordings shall affect the
Borrower’s repayment obligations under this Note.

 

Without being limited thereto or thereby, this Note is secured by the Security
Instruments and guaranteed under the Guaranties.

 

E-1

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

 

Except as specifically provided in the Credit Agreement, the Borrower hereby
waives presentment, demand, protest, notice of intent to accelerate, notice of
acceleration, and any other notice of any kind.  No failure to exercise, and no
delay in exercising, any rights hereunder on the part of the holder of this Note
shall operate as a waiver of such rights.

 

This Note is also subject to the terms and provisions of the Subordination and
Intercreditor Agreement dated as of December 17, 2008 (as the same may be
modified from time to time, the “Subordination and Intercreditor Agreement”),
among the Borrower, the Administrative Agent, the Guarantors, the Lenders, the
Senior Agent and the Senior Lenders.  The Subordination and Intercreditor
Agreement, among other things, contains subordination provisions that
subordinate the rights of the Bank to obtain payment of and exercise remedies
with respect to this Note.

 

This Note shall be governed by, and construed and enforced in accordance with,
the laws of the state of Texas (except that Chapter 346 of the Texas Finance
Code Chapter, which regulates certain revolving credit loan accounts shall not
apply to this Note).

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

 

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

E-2

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

 

EXHIBIT F

 

FORM OF NOTICE OF BORROWING

 

[Date]

 

UnionBanCal Equities, Inc., as Administrative Agent

601 Potrero Grande Dr.

Monterey Park, CA 91754

 

Attention:    Vanna HuaTham

 

Ladies and Gentlemen:

 

The undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated Credit Agreement dated as of December 17, 2008 (as
the same has been and may be amended, restated or modified from time-to-time,
the “Credit Agreement,” the defined terms of which are used in this Notice of
Borrowing unless otherwise defined in this Notice of Borrowing) among the
Borrower, the lenders party thereto (the “Lenders”), and UnionBanCal
Equities, Inc., as administrative agent for the Lenders (the “Administrative
Agent”), and hereby gives you irrevocable notice pursuant to Section 2.03(a) of
the Credit Agreement that the undersigned hereby requests a Borrowing, and in
connection with that request sets forth below the information relating to such
Borrowing (the “Proposed Borrowing”) as required by Section 2.03(a) of the
Credit Agreement:

 

(a)           The Business Day of the Proposed Borrowing is _____________,
_____.

 

(b)           The Proposed Borrowing will be composed of [Reference Rate
Advances] [Eurodollar Rate Advances].

 

(c)           The aggregate amount of the Proposed Borrowing is $____________.

 

(d)           [The Interest Period for each Eurodollar Rate Advance made as part
of the Proposed Borrowing is [_____ month[s]].]

 

The Borrower hereby certifies that the following statements are true on the date
hereof, and will be true on the date of the Proposed Borrowing:

 

(1)           the representations and warranties contained in Article IV of the
Credit Agreement and the representations and warranties contained in the
Security Instruments, the Guaranties, and each of the other Loan Documents are
true and correct in all material respects on and as of the date of the Proposed
Borrowing, before and after giving effect to the Proposed Borrowing and to the
application of the proceeds from the Proposed Borrowing, as though made on and
as of such date, except to the extent that any such representation or warranty
expressly relates solely to an earlier date, in which case it shall have been
true and correct in all material respects as of such earlier date; and

 

F-1

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

 

(2)           no Default has occurred and is continuing or would result from the
Proposed Borrowing or from the application of the proceeds therefrom.

 

 

Very truly yours,

 

 

 

 

 

CANO PETROLEUM, INC., a Delaware
corporation

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

F-2

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

 

EXHIBIT G

 

FORM OF NOTICE OF CONVERSION OR CONTINUATION

 

[Date]

 

UnionBanCal Equities, Inc., as Administrative Agent

601 Potrero Grande Dr.

Monterey Park, CA 91754

 

Attention:  Vanna HuaTham

 

Ladies and Gentlemen:

 

The undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated Credit Agreement dated as of December 17, 2008 (as
the same may be amended, restated or modified from time-to-time, the “Credit
Agreement,” the defined terms of which are used in this Notice of Conversion or
Continuation unless otherwise defined in this Notice of Conversion or
Continuation) among the Borrower, the lenders party thereto (the “Lenders”), and
UnionBanCal Equities, Inc., as administrative agent for the Lenders (the
“Administrative Agent”), and hereby gives you irrevocable notice pursuant to
Section 2.03(b) of the Credit Agreement that the undersigned hereby requests a
Conversion or continuation of an outstanding Borrowing, and in connection with
that request sets forth below the information relating to such Conversion or
continuation (the “Proposed Borrowing”) as required by Section 2.03(b) of the
Credit Agreement:

 

(e)           The Business Day of the Proposed Borrowing is _______________,
20__.

 

(f)            The Proposed Borrowing consists of [a Conversion to [Reference
Rate Advances] [Eurodollar Rate Advances]] [a continuation of Eurodollar Rate
Advances].

 

(g)           The aggregate amount of the Borrowing to be [Converted]
[continued] is $______ and consists of [Reference Rate Advances] [Eurodollar
Rate Advances].

 

(h)           The Interest Period for each Eurodollar Rate Advance made as part
of the Proposed Borrowing is three (3) months.

 

The Borrower hereby certifies that the following statements are true on the date
hereof, and will be true on the date of the Proposed Borrowing:

 

(i)            the representations and warranties contained in Article IV of the
Credit Agreement and the representations and warranties contained in the
Security Instruments, the Guaranties, and each of the other Loan Documents are
true and correct in all material respects on and as of the date of the Proposed
Borrowing, before and after giving effect to the Proposed Borrowing and to the
application of the proceeds from the Proposed Borrowing, as though made on and
as of such date, except to the extent that any such representation or warranty
expressly relates solely to an earlier date, in which case it shall have been
true and correct in all material respects as of such earlier date; and

 

G-1

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

 

(j)            no Default has occurred and is continuing or would result from
the Proposed Borrowing or from the application of the proceeds therefrom.

 

 

Very truly yours,

 

 

 

 

 

CANO PETROLEUM, INC., a Delaware corporation

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

G-2

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

 

EXHIBIT H

 

FORM OF PLEDGE AGREEMENT

 

THIS SUBORDINATED PLEDGE AGREEMENT dated as of December 17, 2008 (this “Pledge
Agreement”) is by and among CANO PETROLEUM, INC., a Delaware corporation
(“Borrower”), each subsidiary of the Borrower signatory hereto (together with
the Borrower, the “Pledgors” and individually, each a “Pledgor”) and UnionBanCal
Equities, Inc. as Administrative Agent (in such capacity the “Administrative
Agent”) under the Credit Agreement (as hereinafter defined), for its benefit and
the benefit of the Lenders (as hereinafter defined).

RECITALS

 

A.            The Borrower, the lenders party thereto from time to time (the
“Lenders”; together with the Administrative Agent, the “‘Secured Parties”), and
the Administrative Agent have entered into that certain Subordinated Credit
Agreement dated of even date herewith (as it may be amended, restated,
supplemented or otherwise modified from time to time, the “Credit Agreement”).

 

B.            It is a condition precedent to the extension of credit to the
Borrower under the Credit Agreement that the Pledgors and the Administrative
Agent, on behalf of the Lenders, execute and deliver this Pledge Agreement.

 

C.            Each Pledgor (other than the Borrower) is a subsidiary of the
Borrower, and therefore shall derive direct and indirect benefits from the
transactions contemplated by the Credit Agreement.

 

AGREEMENT

 

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

 

Section 1.              Definitions.  All capitalized terms not otherwise
defined in this pledge agreement that are defined in the credit agreement shall
have the meanings assigned to such terms by the credit agreement.  Any terms
used in this pledge agreement that are defined in the uniform commercial code in
effect in the state of texas from time to time (the “ucc”) and not otherwise
defined herein or in the credit agreement, shall have the meanings assigned to
those terms by the ucc.  All meanings to defined terms, unless otherwise
indicated, are to be equally applicable to both the singular and plural forms of
the terms defined.  Article, section, schedule, and exhibit references are to
articles and sections of and schedules and exhibits to this pledge agreement,
unless otherwise specified.  All references to instruments, documents,
contracts, and agreements are references to such instruments, documents,
contracts, and agreements as the same may be amended, supplemented, and
otherwise modified from time to time, unless otherwise specified.  The words
“hereof”, “herein” and “hereunder” and words of similar import when used in this
pledge agreement shall refer to this pledge agreement as a whole and not to any
particular provision of this pledge agreement.  As used herein, the term
“including” means “including,

 

H-1

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

 

without limitation,”. Paragraph headings have been inserted in this pledge
agreement as a matter of convenience for reference only and it is agreed that
such paragraph headings are not a part of this pledge agreement and shall not be
used in the interpretation of any provision of this pledge agreement.

 

Section 2.              Pledge.

 

2.01         Grant of Pledge.

 

(a)           Each Pledgor hereby pledges to the Administrative Agent, and
grants to the Administrative Agent, for the benefit of the Secured Parties, a
continuing security interest in, the Pledged Collateral, as defined in
Section 2.02 below.  This Pledge Agreement shall secure (i) all Obligations (as
defined in the Credit Agreement) now or hereafter existing (ii) all other
amounts now or hereafter owed by the Borrower, any Pledgor, or any of their
respective Subsidiaries under this Pledge Agreement or the other Loan Documents
to the Administrative Agent or any other Lender, and (iii) any increases,
extensions, modifications, substitutions, amendments, restatements and renewals
of any of the foregoing obligations, whether for principal, interest, fees,
expenses, indemnification or otherwise.  All such obligations shall be referred
to in this Pledge Agreement as the “Secured Obligations”.

 

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

 

2.02         Pledged Collateral.  “Pledged Collateral” shall mean all of each
Pledgor’s right, title, and interest in the following, whether now owned or
hereafter acquired:

 

(a)           (i) all of the membership interests listed in the attached
Schedule 2.02(a) issued to such Pledgor and all such additional membership
interests of any issuer of such interests hereafter acquired by such Pledgor
(the “Membership Interests”), (ii) the certificates representing the Membership
Interests, if any, and (iii) all rights to money or Property which such Pledgor
now has or hereafter acquires in respect of the Membership Interests, including,
without limitation, (A) any proceeds from a sale by or on behalf of such Pledgor
of any of the Membership Interests, and (B) any distributions, dividends,

 

H-2

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

 

cash, instruments and other property from time-to-time received or otherwise
distributed in respect of the Membership Interests, whether regular, special or
made in connection with the partial or total liquidation of the issuer and
whether attributable to profits, the return of any contribution or investment or
otherwise attributable to the Membership Interests or the ownership thereof
(collectively, the “Membership Interests Distributions”);

 

(b)           (i) all of the general and limited partnership interests listed in
the attached Schedule 2.02(b) issued to such Pledgor and all such additional
limited or general partnership interests of any issuer of such interests
hereafter acquired by such Pledgor (the “Partnership Interests”), and (ii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Partnership Interests, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Partnership
Interests, and (B) any distributions, dividends, cash, instruments and other
property from time-to-time received or otherwise distributed in respect of the
Partnership Interests, whether regular, special or made in connection with the
partial or total liquidation of the issuer and whether attributable to profits,
the return of any contribution or investment or otherwise attributable to the
Partnership Interests or the ownership thereof (collectively, the “Partnership
Interests Distributions”);

 

(c)           (i) all of the shares of stock listed in the attached Schedule
2.02(c) issued to such Pledgor and all such additional shares of stock of any
issuer of such shares of stock hereafter issued to such Pledgor (the “Pledged
Shares”), (ii) the certificates representing the Pledged Shares, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Pledged Shares, including, without limitation, (A) any proceeds
from a sale by or on behalf of such Pledgor of any of the Pledged Shares, and
(B) any distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Pledged Shares,
whether regular, special or made in connection with the partial or total
liquidation of the issuer and whether attributable to profits, the return of any
contribution or investment or otherwise attributable to the Pledged Shares or
the ownership thereof (collectively, the “Pledged Shares Distributions”;
together with the Membership Interests Distributions and the Partnership
Interest Distributions, the “Distributions”); and

 

(d)           all proceeds from the Pledged Collateral described in paragraphs
(a), (b) and (c) of this Section 2.02.

 

2.03         Delivery of Pledged Collateral.  All certificates or instruments,
if any, representing the Pledged Collateral shall be delivered to the
Administrative Agent and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or assignment in
blank, all in form and substance reasonably satisfactory to the Administrative
Agent.  After the occurrence and during the continuance of an Event of Default,
the Administrative Agent shall have the right, upon prior written notice to the
applicable Pledgor, to transfer to or to register in the name of the
Administrative Agent or any of its nominees any of the Pledged Collateral,
subject to the rights specified in Section 2.04.  In addition, after the
occurrence and during the continuance of an Event of Default, the Administrative
Agent shall

 

H-3

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

 

have the right at any time to exchange the certificates or instruments
representing the Pledged Collateral for certificates or instruments of smaller
or larger denominations.

 

2.04         Rights Retained by Pledgor.  Notwithstanding the pledge in
Section 2.01,

 

(a)           so long as no Event of Default shall have occurred and remain
uncured or unwaived and except as otherwise provided in the Credit Agreement,
(i) each Pledgor shall be entitled to receive and retain any dividends and other
Distributions paid on or in respect of the Pledged Collateral and the proceeds
of any sale of the Pledged Collateral; and (ii) each Pledgor shall be entitled
to exercise any voting and other consensual rights pertaining to its Pledged
Collateral for any purpose not inconsistent with the terms of this Pledge
Agreement or the Credit Agreement; provided, however, that no Pledgor shall
exercise nor shall it refrain from exercising any such right if such action or
inaction, as applicable, would have a materially adverse effect on the value of
the Pledged Collateral; and

 

(b)           if an Event of Default shall have occurred and remain uncured or
unwaived,

 

(i)            until such time thereafter as the Administrative Agent gives
written notice of its election to exercise such voting and other consensual
rights pursuant to Section 5.02 hereof, each Pledgor shall be entitled to
exercise any voting and other consensual rights pertaining to its Pledged
Collateral for any purpose not inconsistent with the terms of this Pledge
Agreement or the Credit Agreement; provided, however, that no Pledgor shall
exercise nor shall it refrain from exercising any such right if such action or
inaction, as applicable, would have a materially adverse effect on the value of
the Pledged Collateral; and

 

(ii)           at and after such time as the Administrative Agent gives written
notice of its election to exercise such voting and other consensual rights
pursuant to Section 5.02 hereof, each Pledgor shall execute and deliver (or
cause to be executed and delivered) to the Administrative Agent all proxies and
other instruments as the Administrative Agent may reasonably request to enable
the Administrative Agent to (A) exercise the voting and other rights which such
Pledgor is entitled to exercise pursuant to paragraph (a) or paragraph (b)(i) of
this Section 2.04, and (B) receive any Distributions and proceeds of sale of the
Pledged Collateral which such Pledgor is authorized to receive and retain
pursuant to paragraph (a)(i) of this Section 2.04.

 

Section 3.              Pledgor’s Representations And Warranties.  Each pledgor
represents and warrants to the administrative agent and the lenders as follows:

 

(a)           The Pledged Collateral applicable to such Pledgor listed on the
attached Schedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorized and
validly issued to such Pledgor and are fully paid and nonassessable.

 

(b)           Such Pledgor is the legal and beneficial owner of the Pledged
Collateral free and clear of any Lien or option, except for (i) the security
interest created by this

 

H-4

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

 

Pledge Agreement and (ii) other Liens permitted under the Credit Agreement ( the
“Permitted Liens”).

 

(c)           No authorization, authentication, approval, or other action by,
and no notice to or filing with, any Governmental Authority or regulatory body
is required either (a) for the pledge by such Pledgor of the Pledged Collateral
pursuant to this Pledge Agreement or for the execution, delivery, or performance
of this Pledge Agreement by such Pledgor or (b) for the exercise by the
Administrative Agent or any Secured Party of the voting or other rights provided
for in this Pledge Agreement or the remedies in respect of the Pledged
Collateral pursuant to this Pledge Agreement (except as may be required in
connection with such disposition by laws affecting the offering and sale of
securities generally).

 

(d)           Such Pledgor has the full right, power and authority to deliver,
pledge, assign and transfer the Pledged Collateral to the Administrative Agent.

 

(e)           The Membership Interests listed on the attached Schedule
2.02(a) constitute the percentage of the issued and outstanding membership
interests of the respective issuer thereof set forth on Schedule 2.02(a) and all
of the Equity Interest in such issuer in which the Pledgor has any ownership
interest.

 

(f)            The Partnership Interests listed on the attached Schedule
2.02(b) constitute the percentage of the issued and outstanding general and
limited partnership interests of the respective issuer thereof set forth on
Schedule 2.02(b) and all of the Equity Interest in such issuer in which the
Pledgor has any ownership interest.

 

(g)           The Pledged Shares list on the attached Schedule
2.02(c) constitute the percentage of the issued and outstanding shares of
capital stock of the respective issuer thereof set forth on Schedule 2.02(c) and
all of the Equity Interest in such issuer in which the Pledgor has any ownership
interest.

 

(h)           Schedule 3 sets forth its sole jurisdiction of formation, type of
organization, federal tax identification number, the organizational number, and
all names used by it during the last five years prior to the date of this Pledge
Agreement.

 

Section 4.              Pledgor’s Covenants.  During the term of this pledge
agreement and until all of the secured obligations have been fully and finally
paid and discharged in full, the commitments under the credit agreement have
been terminated or expired, and the credit agreement has been terminated in
writing, each pledgor covenants and agrees with the administrative agent that:

 

4.01         Protect Collateral; Further Assurances.  Each Pledgor will warrant
and defend the rights and title herein granted unto the Administrative Agent in
and to the Pledged Collateral (and all right, title, and interest represented by
the Pledged Collateral) against the claims and demands of all Persons
whomsoever.  Each Pledgor agrees that, at the expense of such Pledgor, such
Pledgor will promptly execute and deliver all further instruments and documents,
and take all further action, that may be reasonably necessary and that the
Administrative Agent or any Secured Party may reasonably request, in order to
perfect and

 

H-5

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

 

protect any security interest granted or purported to be granted hereby or to
enable the Administrative Agent or any Secured Party to exercise and enforce its
rights and remedies hereunder with respect to any Pledged Collateral.  Each
Pledgor hereby authorizes the Administrative Agent to file any financing
statements, amendments or continuations without the signature of such Pledgor to
the extent permitted by applicable law in order to perfect or maintain the
perfection of any security interest granted under this Pledge Agreement.

 

4.02         Transfer, Other Liens, and Additional Shares.  Each Pledgor agrees
that it will not (a) except as otherwise permitted by the Credit Agreement, sell
or otherwise dispose of, or grant any option with respect to, any of the Pledged
Collateral or (b) create or permit to exist any Lien upon or with respect to any
of the Pledged Collateral, except for Permitted Liens.  Each Pledgor agrees that
it will (i) cause each issuer of the Pledged Collateral that is a Subsidiary of
such Pledgor not to issue any other Equity Interests in addition to or in
substitution for the Pledged Collateral issued by such issuer, except to such
Pledgor or any other Pledgor and (ii) pledge hereunder, immediately upon its
acquisition (directly or indirectly) thereof, any additional Equity Interests of
an issuer acquired by such Pledgor.  No Pledgor shall approve any amendment or
modification of any of the Pledged Collateral without the Administrative Agent’s
prior written consent.

 

4.03         Jurisdiction of Formation; Name Change.  Each Pledgor shall give
the Administrative Agent at least 30 days’ prior written notice before it (i) in
the case of a Pledgor that is not a “registered organization” (as defined in
Section 9-102 of the UCC) changes the location of its principal place of
business and chief executive office, or (ii) uses a trade name other than its
current name used on the date hereof.  Other than as permitted by Section 6.11
of the respective Credit Agreement, no Pledgor shall amend, supplement, modify
or restate its articles or certificate of incorporation, bylaws, limited
liability company agreements, or other equivalent organizational documents, nor
amend its name or change its jurisdiction of incorporation, organization or
formation.

 

Section 5.              Remedies Upon Default.  If any event of default shall
have occurred and be continuing:

 

5.01         UCC Remedies.  To the extent permitted by law, the Administrative
Agent may exercise in respect of the Pledged Collateral, in addition to other
rights and remedies provided for in this Pledge Agreement or otherwise available
to it, all the rights and remedies of a Administrative Agent under the UCC
(whether or not the UCC applies to the affected Pledged Collateral).

 

5.02         Dividends and Other Rights.

 

(a)           All rights of the Pledgors to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise pursuant to
Section 2.04(a) may be exercised by the Administrative Agent if the
Administrative Agent so elects and gives written notice of such election to the
affected Pledgor and all rights of the Pledgors to receive any Distributions on
or in respect of the Pledged Collateral and the proceeds of sale of the Pledged
Collateral which it would otherwise be authorized to receive and retain pursuant
to Section 2.04(b) shall cease.

 

H-6

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

 

(b)           All Distributions on or in respect of the Pledged Collateral and
the proceeds of sale of the Pledged Collateral which are received by any Pledgor
shall be received in trust for the benefit of the Administrative Agent, shall be
segregated from other funds of such Pledgor, and shall be promptly paid over to
the Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary indorsement).

 

5.03         Sale of Pledged Collateral. The Administrative Agent may sell all
or part of the Pledged Collateral at public or private sale, at any of the
Administrative Agent’s offices or elsewhere, for cash, on credit, or for future
delivery, and upon such other terms as the Administrative Agent may deem
commercially reasonable in accordance with applicable laws.  Each Pledgor agrees
that to the extent permitted by law such sales may be made without notice.  If
notice is required by law, each Pledgor hereby deems 10 days’ advance notice of
the time and place of any public sale or the time after which any private sale
is to be made reasonable notification, recognizing that if the Pledged
Collateral threatens to decline speedily in value or is of a type customarily
sold on a recognized market shorter notice may be reasonable.  The
Administrative Agent shall not be obligated to make any sale of the Pledged
Collateral regardless of notice of sale having been given.  The Administrative
Agent may adjourn any public or private sale from time-to-time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned.  Each Pledgor shall
fully cooperate with Administrative Agent in selling or realizing upon all or
any part of the Pledged Collateral.  In addition, each Pledgor shall fully
comply with the securities laws of the United States, the State of Texas, and
other states and take such actions as may be necessary to permit Administrative
Agent to sell or otherwise dispose of any securities representing the Pledged
Collateral in compliance with such laws.

 

5.04         Exempt Sale.  If, in the opinion of the Administrative Agent, there
is any question that a public or semipublic sale or distribution of any Pledged
Collateral will violate any state or federal securities law, the Administrative
Agent in its reasonable discretion (a) may offer and sell securities privately
to purchasers who will agree to take them for investment purposes and not with a
view to distribution and who will agree to imposition of restrictive legends on
the certificates representing the security, or (b) may sell such securities in
an intrastate offering under Section 3(a)(11) of the Securities Act of 1933, as
amended, and no sale so made in good faith by the Administrative Agent shall be
deemed to be not “commercially reasonable” solely because so made.  Each Pledgor
shall cooperate fully with the Administrative Agent in selling or realizing upon
all or any part of the Pledged Collateral.

 

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

 

5.06         Cumulative Remedies.  Each right, power and remedy herein
specifically granted to the Administrative Agent or otherwise available to it
shall be cumulative, and shall be in addition to every other right, power and
remedy herein specifically given or now or hereafter existing at law, in equity,
or otherwise, and each such right, power and remedy, whether specifically
granted herein or otherwise existing, may be exercised at any time and from
time-to-time as often and in such order as may be deemed expedient by the
Administrative Agent in its

 

H-7

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

 

sole discretion.  No failure on the part of the Administrative Agent to
exercise, and no delay in exercising, and no course of dealing with respect to,
any such right, power or remedy, shall operate as a waiver thereof, nor shall
any single or partial exercise of any such rights, power or remedy preclude any
other or further exercise thereof or the exercise of any other right.

 

Section 6.              Administrative Agent As Attorney-In-Fact For Pledgor.

 

6.01         Administrative Agent Appointed Attorney-in-Fact.  Each Pledgor
hereby irrevocably appoints the Administrative Agent as such Pledgor’s
attorney-in-fact, with full authority after the occurrence and during the
continuance of an Event of Default to act for such Pledgor and in the name of
such Pledgor, and, in the Administrative Agent’s discretion, to take any action
and to execute any instrument which the Administrative Agent may deem reasonably
necessary or advisable to accomplish the purposes of this Pledge Agreement,
including, without limitation, to receive, indorse, and collect all instruments
made payable to such Pledgor representing any dividend, or the proceeds of the
sale of the Pledged Collateral, or other distribution in respect of the Pledged
Collateral and to give full discharge for the same.  Each Pledgor hereby
acknowledges, consents and agrees that the power of attorney granted pursuant to
this Section is irrevocable and coupled with an interest.

 

6.02         Administrative Agent May Perform. The Administrative Agent may from
time-to-time, at its option but at the Pledgors’ expense, perform any act which
any Pledgor agrees hereunder to perform and which such Pledgor shall fail to
perform after being requested in writing so to perform (it being understood that
no such request need be given after the occurrence and during the continuance of
any Event of Default and after notice thereof by the Administrative Agent to the
affected Pledgor) and the Administrative Agent may from time-to-time take any
other action which the Administrative Agent reasonably deems necessary for the
maintenance, preservation or protection of any of the Pledged Collateral or of
its security interest therein.  The Administrative Agent shall provide notice to
the affected Pledgor of any action taken hereunder; provided however, the
failure to provide such notice shall not be construed as a waiver of any rights
of the Administrative Agent provided under this Pledge Agreement or under
applicable law.

 

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

 

6.04         Reasonable Care.  The Administrative Agent shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
property, it being understood that the Administrative Agent shall have no
responsibility for (a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders, or other matters relative to any
Pledged Collateral, whether or not the Administrative Agent has or is deemed to
have knowledge of such matters, or

 

H-8

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

 

(b) taking any necessary steps to preserve rights against any parties with
respect to any Pledged Collateral.

 

Section 7.              Miscellaneous.

 

7.01         Expenses.  The Pledgors will upon demand pay to the Administrative
Agent for its benefit and the benefit of the other Secured Parties the amount of
any reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of its counsel and of any experts, which the Administrative Agent
and the other Lenders may incur in connection with (a) the custody,
preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Pledged Collateral, (b) the exercise or enforcement
of any of the rights of the Administrative Agent or any Lender or any other
Lenders hereunder, and (c) the failure by any Pledgor to perform or observe any
of the provisions hereof.

 

7.02         Amendments, Etc.  No amendment or waiver of any provision of this
Pledge Agreement nor consent to any departure by any Pledgor herefrom shall be
effective unless made in writing and executed by the affected Pledgor and the
Administrative Agent, and such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.

 

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

 

7.04         Continuing Security Interest; Transfer of Interest.

 

(a)           This Pledge Agreement shall create a continuing security interest
in the Pledged Collateral and, unless expressly released by the Administrative
Agent, shall (i) remain in full force and effect until the indefeasible payment
in full in cash of, and termination of, the Secured Obligations and the
termination of the Commitments under the Credit Agreement, (ii) be binding upon
the Pledgors, the Administrative Agent, the Lenders and their successors, and
assigns, and (iii) inure, together with the rights and remedies of the
Administrative Agent hereunder, to the benefit of and be binding upon, the
Administrative Agent, and the Lenders and their respective successors,
transferees, and assigns.  Without limiting the generality of the foregoing
clause, when any Secured Party assigns or otherwise transfers any interest held
by it under either the Credit Agreement or other Loan Document to any other
Person pursuant to the terms of the Credit Agreement or such other Loan
Document, that other Person shall thereupon become vested with all the benefits
held by such Secured Party under this Pledge Agreement.

 

(b)           Upon the indefeasible payment in full and termination of the
Secured Obligations, the termination of all Commitments under the Credit
Agreement, and the termination of the Credit Agreement in writing, the security
interest granted hereby shall terminate and all rights to the Pledged Collateral
shall revert to the applicable Pledgor to the extent such Pledged Collateral
shall not have been sold or otherwise applied pursuant to the terms hereof. 
Upon any such termination, the Administrative Agent will, at the Pledgors’
expense, deliver all Pledged Collateral to the applicable Pledgor, execute and

 

H-9

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

 

deliver to the applicable Pledgor such documents as such Pledgor shall
reasonably request and take any other actions reasonably requested to evidence
or effect such termination.

 

7.05         Waivers.  Each Pledgor hereby waives:

 

(a)           promptness, diligence, notice of acceptance, and any other notice
with respect to any of the Secured Obligations and this Pledge Agreement;

 

(b)           any requirement that the Administrative Agent or any Secured Party
protect, secure, perfect, or insure any Lien or any Property subject thereto or
exhaust any right or take any action against any Pledgor, any Guarantor, or any
other Person or any collateral; and

 

(c)           any duty on the part of the Administrative Agent to disclose to
any Pledgor any matter, fact, or thing relating to the business, operation, or
condition of any Pledgor, any Guarantor, or any other Person and their
respective assets now known or hereafter known by such Person.

 

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

 

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

 

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

 

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

 

7.10         Reinstatement.  If, at any time after payment in full of all
Secured Obligations and termination of the Administrative Agent’s security
interest, any payments on the Secured Obligations previously made must be
disgorged by any Secured Party for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any Pledgor or any
other Person, this Pledge Agreement and the Administrative Agent’s security

 

H-10

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

 

interests herein shall be reinstated as to all disgorged payments as though such
payments had not been made, and each Pledgor shall sign and deliver to the
Administrative Agent all documents, and shall do such other acts and things, as
may be necessary to reinstate and perfect the Administrative Agent’s security
interest.  EACH PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND
EACH OTHER SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY,
COST OR EXPENSE UNDER THIS SECTION 7.10 (INCLUDING REASONABLE ATTORNEYS’ FEES
AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE INDEMNIFIED
SECURED PARTY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS,
LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY
A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED SECURED
PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

7.11         Conflicts.  In the event of any explicit or implicit conflict
between any provisions of this Pledge Agreement and any provision of the Credit
Agreement, the terms of the Credit Agreement shall be controlling.

 

7.12         Additional Pledgors.  Pursuant to Section 6.15 of the Credit
Agreement, certain Subsidiaries of the Borrower that were not in existence on
the date of the Credit Agreement are required to enter into this Pledge
Agreement as Pledgors.  Upon execution and delivery after the date hereof by the
Administrative Agent and such Subsidiary of an instrument in the form of
Annex 1, such Subsidiary shall become a Pledgor hereunder with the same force
and effect as if originally named as a Pledgor herein.  The execution and
delivery of any instrument adding an additional Pledgor as a party to this
Pledge Agreement shall not require the consent of any other Pledgor hereunder. 
The rights and obligations of each Pledgor hereunder shall remain in full force
and effect notwithstanding the addition of any new Pledgor as a party to this
Pledge Agreement.

 

7.13         Subordination and Intercreditor Agreement.  Reference is made to
the Subordination and Intercreditor Agreement, dated as of December 17, 2008 (as
amended, restated, supplemented or otherwise modified from time to time, the
“Subordination and Intercreditor Agreement”), among Union Bank of California,
N.A., as Senior Agent, and UnionBanCal Equities, Inc., as Subordinated Agent,
and certain other persons, party or that may become party thereto from time to
time.  Notwithstanding anything herein to the contrary, this Pledge Agreement,
the Liens granted to the Administrative Agent pursuant to this Pledge Agreement
and the exercise of any right or remedy by the Administrative Agent or any of
the Lenders hereunder are subject to the provisions of the Subordination and
Intercreditor Agreement.  In the event of any conflict between the terms of the
Subordination and Intercreditor Agreement and this Pledge Agreement, the terms
of the Subordination and Intercreditor Agreement shall govern and control.

 

7.14         Entire Agreement.  THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY

 

H-11

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

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

H-12

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

 

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

 

 

PLEDGORS:

 

 

 

CANO PETROLEUM, INC.

 

 

 

By:

 

 

 

Ben Daitch

 

 

Senior Vice President and Chief Financial
Officer

 

 

 

 

 

W.O. ENERGY, INC.

 

W.O. ENERGY OF NEVADA, INC.

 

 

 

 

 

Each by:

 

 

 

Ben Daitch

 

 

Vice President and Chief Financial
Officer

 

H-13

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

 

 

ADMINISTRATIVE AGENT:

 

 

 

UNIONBANCAL EQUITIES, INC.

 

 

 

 

 

By:

 

 

Ted A. McNulty

 

Senior Vice President

 

 

 

 

 

By:

 

 

Derrick Pan

 

Vice President

 

H-14

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

 

SCHEDULE 2.02(a)

 

PLEDGED COLLATERAL

 

Attached to and forming a part of that certain Subordinated Pledge Agreement
dated December 17, 2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
and WO Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

Pledgor

 

Issuer

 

Type of Membership
Interest

 

% of Membership Interest
Owned

None

 

 

 

 

 

 

 

H-15

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

 

SCHEDULE 2.02(B)

 

PLEDGED COLLATERAL

 

Attached to and forming a part of that certain Subordinated Pledge Agreement
dated December 17, 2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
and WO Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

Pledgor

 

Issuer

 

Type of Partnership
Interest

 

% of Partnership Interest
Owned

W.O. Energy of Nevada, Inc.

 

W.O. Operating Company, Ltd.

 

Limited Partnership Interest

 

95% Limited Partnership Interest

W.O. Energy of Nevada, Inc.

 

W.O. Production Company, Ltd.

 

Limited Partnership Interest

 

95% Limited Partnership Interest

WO Energy, Inc.

 

W.O. Operating Company, Ltd.

 

General Partnership Interest

 

5% General Partnership Interest

WO Energy, Inc.

 

W.O. Production Company, Ltd.

 

General Partnership Interest

 

5% General Partnership Interest

 

H-16

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

 

SCHEDULE 2.02(C)

 

PLEDGED COLLATERAL

 

Attached to and forming a part of that certain Subordinated Pledge Agreement
dated December 17, 2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
and WO Energy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as the
Administrative Agent.

 

Pledgor

 

Issuer

 

Type of Shares

 

Number of
Shares

 

% of
Shares
Owned

 

Certificate
No.

 

Cano Petroleum, Inc.

 

Square One Energy, Inc.

 

Common Stock

 

1,500

 

100

%

4

 

Cano Petroleum, Inc.

 

Ladder Companies, Inc.

 

Common Stock

 

1,000

 

100

 

7

 

Cano Petroleum, Inc.

 

W.O. Energy of Nevada, Inc.

 

Common Stock

 

1,200

 

100

%

5

 

W.O. Energy of Nevada, Inc.

 

WO Energy, Inc.

 

Common Stock

 

1,100

 

100

%

6

 

Cano Petroleum Inc.

 

Cano Petro of New Mexico, Inc.

 

Common Stock

 

100

 

100

%

1

 

 

H-17

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

 

SCHEDULE 3

 

PLEDGOR INFORMATION

 

Grantor:

 

Cano Petroleum, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Delaware

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

3664494

 

 

 

Federal Tax Identification Number:

 

77-0635673

 

 

 

Prior Names:

 

Huron Ventures, Inc.

 

 

 

Grantor:

 

WO Energy, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

113518200

 

 

 

Federal Tax Identification Number:

 

75-2303966

 

 

 

Prior Names:

 

None.

 

 

 

Grantor:

 

W.O. Energy of Nevada, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Nevada

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

H-18

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

 

Organizational Number:

 

C20757-1996-001

 

 

 

Federal Tax Identification Number:

 

88-0369151

 

 

 

Prior Names:

 

None.

 

H-19

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

 

Annex 1 to the

Subordinated Pledge Agreement

 

SUPPLEMENT NO.  [            ]  dated as of [               ] (the
“Supplement”), to the Subordinated Pledge Agreement dated as of December 17,
2008 (as amended, supplemented or otherwise modified from time to time, the
“Pledge Agreement”) by and among CANO PETROLEUM, INC., a Delaware corporation
(“Borrower”), each other party signatory hereto (together with the Borrower, the
“Pledgors” and individually, each a “Pledgor”) and UnionBanCal Equities, Inc. as
Administrative Agent (in such capacity, the “Administrative Agent”) under the
Credit Agreement (as hereinafter defined) for the benefit of the Lenders (as
hereinafter defined).

 

RECITALS

 

D.            Reference is made to that certain Subordinated Credit Agreement
dated as of December 17, 2008 (as it may be amended, restated or otherwise
modified from time to time, the “Credit Agreement”, among the Borrower, the
lenders party thereto from time to time (the “Lenders”), and the Administrative
Agent; and

 

B.            The Pledgors have entered into the Pledge Agreement in order to
induce the Lenders to make the Advances under the Credit Agreement.  Pursuant to
Section 6.15 of the Credit Agreement, each Subsidiary of the Borrower that was
not in existence on the date of the respective Master Debt Agreement is required
to enter into the Pledge Agreement as a Pledgor upon becoming a Subsidiary. 
Section 7.12 of the Pledge Agreement provides that additional Subsidiaries of
the Borrower may become Pledgors under the Pledge Agreement by execution and
delivery of an instrument in the form of this Supplement.  The undersigned
Subsidiary of the Borrower (the “New Pledgor”) is executing this Supplement in
accordance with the requirements of the Senior Credit Agreement to become a
Pledgor under the Pledge Agreement.

 

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

 

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

 

(a)           In accordance with Section 7.12 of the Pledge Agreement, the New
Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with
the same force and effect as if originally named therein as a Pledgor and the
New Pledgor hereby agrees (a) to all the terms and provisions of the Pledge
Agreement applicable to it as a Pledgor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Pledgor
thereunder are true and correct on and as of the date hereof in all material
respects.  In furtherance of the foregoing, the New Pledgor, as security for the
payment and performance in full of the Secured Obligations, does hereby create
and grant to the Administrative Agent, its successors and assigns, for the
benefit of the Secured Parties, their successors and assigns, a continuing
security interest in and lien on all of the New Pledgor’s right, title and
interest in and to the Pledged Collateral of the New Pledgor.  Each reference to
a “Pledgor” in the Pledge Agreement shall be deemed to include the New Pledgor. 
The Pledge Agreement is hereby incorporated herein by reference.

 

H-20

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

 

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

 

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

 

(d)           The New Pledgor hereby represents and warrants that (a) set forth
on Schedules 2.02(a), 2.02(b), and 2.02(c) attached hereto are true and correct
schedules of all its Membership Interests, Partnership Interests and Pledged
Shares, as each term is defined in the Pledge Agreement, and (b) set forth on
Schedule 3 attached hereto are its sole jurisdiction of formation, type of
organization, its federal tax identification number and the organizational
number, and all names used by it during the last five years prior to the date of
this Supplement.

 

(e)           Except as expressly supplemented hereby, the Pledge Agreement
shall remain in full force and effect.

 

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

 

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

 

(h)           All communications and notices hereunder shall be in writing and
given as provided in the Pledge Agreement.  All communications and notices
hereunder to the New Pledgor shall be given to it at the address set forth under
its signature hereto.

 

H-21

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

 

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

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURES PAGES FOLLOW]

 

H-22

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

 

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

 

 

NEW PLEDGOR:

 

 

 

[                                                                                                        ]

 

 

 

 

 

By:

 

 

Name:

 

 

Title

 

 

 

 

 

 

ADMINISTRATIVE AGENT:

 

 

 

UNIONBANCAL EQUITIES, INC.

 

 

 

 

 

By:

 

 

Name:

 

 

Title

 

 

 

 

 

 

By:

 

 

Name

 

 

Title

 

 

H-23

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

 

Schedules

Supplement No.      

to the Pledge Agreement

 

PLEDGED COLLATERAL OF THE NEW PLEDGOR

 

SCHEDULE 2.02(A)

 

Issuer

 

Type of Membership
Interest

 

% of Membership Interest
Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SCHEDULE 2.02(B)

 

Issue

 

Type of Partnership Interest

 

% of Partnership Interest
Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SCHEDULE 2.02(c)

 

Issuer

 

Type of Shares

 

Number of
Shares

 

% of Shares
Owned

 

Certificate No.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SCHEDULE 3

 

New Pledgor:

                                                                             

 

 

Sole Jurisdiction of Formation / Filing:

                                                                             

 

 

Type of Organization:

                                                                             

 

 

Organizational Number:

                                                                             

 

 

Federal Tax Identification Number:

                                                                             

 

 

 

Prior Names:

                                                                             

 

H-24

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

 

EXHIBIT I

 

FORM OF SECURITY AGREEMENT

 

THIS SUBORDINATED SECURITY AGREEMENT dated as of December 17, 2008 (this
“Security Agreement”) is by and among CANO PETROLEUM, INC., a Delaware
corporation (“Borrower”), each subsidiary of the Borrower party hereto from time
to time (together with the Borrower, the “Grantors” and individually, each a
“Grantor”) and UnionBanCal Equities, Inc. as administrative agent (in such
capacity the “Administrative Agent”) for the ratable benefit of itself and the
Lenders (as defined below) (together with the Lenders, individually a “Secured
Party”, and collectively, the “Secured Parties”).

 

RECITALS

 

A.            Reference is made to that certain Subordinated Credit Agreement
dated as of December 17, 2008 among the Borrower, the lenders party thereto from
time to time (the “Lenders”) and the Administrative Agent (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
“Credit Agreement”).

 

B.            Each Grantor (other than Borrower) is a subsidiary of the Borrower
and will derive substantial direct and indirect benefit from the transactions
contemplated by the Credit Agreement and the other Loan Documents (as defined in
the Credit Agreement).

 

C.            It is a condition precedent to the extension of credit to the
Borrower under the Credit Agreement that the Grantors and the Administrative
Agent, on behalf of the Lenders, execute and deliver this Security Agreement.

 

AGREEMENT

 

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

 

Section 1.              Definitions; Interpretation.  (a) all capitalized terms
not otherwise defined in this security agreement that are defined in the credit
agreement shall have the meanings assigned to such terms by the credit
agreement.  Any terms used in this security agreement that are defined in the
ucc (as defined below) and not otherwise defined herein or in the credit
agreement, shall have the meanings assigned to those terms by the ucc.  The
following terms shall have the meanings specified below:

 

“Accounts” means an “account” as defined in the UCC, including, without
limitation, all of any Grantor’s rights to payment for goods sold or leased,
services performed, or otherwise, whether now in existence or arising from time
to time hereafter, including, without limitation, rights arising under any of
the Contracts or evidenced by an account, note, contract, security agreement,
Chattel Paper (including, without limitation, tangible Chattel Paper and
electronic Chattel Paper), or other evidence of indebtedness or security,
together with all of the right, title and interest of any Grantor in and to
(i) all security

 

I-1

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

 

pledged, assigned, hypothecated or granted to or held by any Grantor to secure
the foregoing, (ii) all of any Grantor’s right, title and interest in and to any
goods or services, the sale of which gave rise thereto, (iii) all guarantees,
endorsements and indemnifications on, or of, any of the foregoing, (iv) all
powers of attorney granted to any Grantor for the execution of any evidence of
indebtedness or security or other writing in connection therewith, (v) all
books, correspondence, credit files, records, ledger cards, invoices, and other
papers relating thereto, including without limitation all similar information
stored on a magnetic medium or other similar storage device and other papers and
documents in the possession or under the control of any Grantor or any computer
bureau from time to time acting for any Grantor, (vi) all evidences of the
filing of financing statements and other statements granted to any Grantor and
the registration of other instruments in connection therewith and amendments
thereto, notices to other creditors or secured parties, and certificates from
filing or other registration officers, (vii) all credit information, reports and
memoranda relating thereto, and (viii) all other writings related in any way to
the foregoing.

 

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

 

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

 

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

 

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

 

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

 

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

 

I-2

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

 

Contract Document, to enforce or execute any checks, or other instruments or
orders, to file any claims and to take any action which, in the opinion of any
Secured Party, may be necessary or advisable in connection with any of the
foregoing.

 

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

 

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

 

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

 

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

 

“Hedge Contract” has the meaning set forth in the Senior Credit Agreement.

 

“Instrument” means an “instrument” as defined in the UCC, including, without
limitation, any Negotiable Instrument, or any other writing which evidences a
right to the payment

 

I-3

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

 

of money and is not itself a security agreement or lease and is of a type which
is in the ordinary course of business transferred by delivery with any necessary
endorsement or assignment (other than Instruments constituting Chattel Paper).

 

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

 

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

 

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

 

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

 

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

 

“Secured Obligations” means all Obligations now or hereafter owed by the
Borrower, any Guarantor, or any of their respective Subsidiaries to the Secured
Parties, including any extensions, modifications, substitutions, amendments and
renewals thereof, whether for principal, interest, fees, expenses,
indemnification, or otherwise.

 

I-4

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

 

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

 

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

 

(b)           All meanings to defined terms, unless otherwise indicated, are to
be equally applicable to both the singular and plural forms of the terms
defined.  Article, Section, Schedule, and Exhibit references are to Articles and
Sections of and Schedules and Exhibits to this Security Agreement, unless
otherwise specified.  All references to instruments, documents, contracts, and
agreements are references to such instruments, documents, contracts, and
agreements as the same may be amended, supplemented, and otherwise modified from
time to time, unless otherwise specified.  The words “hereof”, “herein” and
“hereunder” and words of similar import when used in this Security Agreement
shall refer to this Security Agreement as a whole and not to any particular
provision of this Security Agreement.  As used herein, the term “including”
means “including, without limitation,”. Paragraph headings have been inserted in
this Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.

 

Section 2.              Assignment, Pledge And Grant Of Security Interest.

 

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

 

(i)

 

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

 

 

 

(ii)

 

all Accounts;

 

 

 

(iii)

 

all Inventory;

 

 

 

(iv)

 

all Equipment;

 

 

 

(v)

 

all General Intangibles;

 

 

 

(vi)

 

all Investment Property;

 

I-5

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

 

(vii)

 

all Fixtures;

 

 

 

(viii)

 

all Cash Collateral;

 

 

 

(ix)

 

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

 

 

 

(x)

 

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

 

 

 

(xi)

 

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

 

 

 

(xii)

 

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

 

 

 

(xiii)

 

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

 

 

 

(xiv)

 

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

 

 

 

(xv)

 

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

 

(b)           Notwithstanding anything contained herein to the contrary, it is
the intention of each Grantor, the Administrative Agent, and the other Secured
Parties that the amount of the Secured Obligation secured by each Grantor’s
interests in any of its Property shall be in, but not in excess of, the maximum
amount permitted by fraudulent conveyance, fraudulent transfer and other similar
law, rule or regulation of any Governmental Authority applicable to such
Grantor. Accordingly, notwithstanding anything to the contrary contained in this
Security Agreement in any other agreement or instrument executed in connection
with the payment of any of the

 

I-6

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

 

Secured Obligations, the amount of the Secured Obligations secured by each
Grantor’s interests in any of its Property pursuant to this Security Agreement
shall be limited to an aggregate amount equal to the largest amount that would
not render such Grantor’s obligations hereunder or the liens and security
interest granted to the Administrative Agent hereunder subject to avoidance
under Section 548 of the United States Bankruptcy Code or any comparable
provision of any other applicable law.

 

Section 3.              Representations And Warranties.  Each grantor hereby
represents and warrants the following to the administrative agent and the other
secured parties:

 

(i)            Records.  Such Grantor’s sole jurisdiction of formation and type
of organization are as set forth in Schedule 1 attached hereto.  All records
concerning the Accounts, General Intangibles, or any other Collateral applicable
to such Grantor are located at the address for such Grantor on such Schedule 1. 
None of the Accounts is evidenced by a promissory note or other instrument.

 

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

 

(iii)          Lien Priority and Perfection.

 

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

 

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

 

I-7

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

 

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

 

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

 

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

 

Section 4.              Covenants.

 

(i)            Further Assurances.

 

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

 

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

 

I-8

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

 

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

 

(ii)           Change of Name; State of Formation.  Each Grantor shall give the
Administrative Agent at least 30 days’ prior written notice before it (i) in the
case of any Grantor that is not a “registered organization” (as such term is
defined in Section 9-102 of the UCC), changes the location of its principal
place of business and chief executive office, (ii) changes the location of its
jurisdiction of formation or organization, (iii) changes the location of the
Equipment, Inventory, or original copies of any Chattel Paper evidencing
Accounts, or (iv) uses a trade name other than its current name used on the date
hereof.  Other than as permitted by Section 6.11 of the Credit Agreement, no
Grantor shall amend, supplement, modify or restate its articles or certificate
of incorporation, bylaws, limited liability company agreements, or other
equivalent organizational documents, nor amend its name or change its
jurisdiction of incorporation, organization or formation.

 

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

 

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

 

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

 

(vi)          Accounts.  Each Grantor agrees that it will use commercially
reasonable efforts to ensure that each Account (i) is and will be, in all
material respects, the genuine, legal, valid, and

 

I-9

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

 

binding obligations of the account debtor in respect thereof, representing an
unsatisfied obligation of such account debtor, (ii) is and will be, in all
material respects, enforceable in accordance with its terms, (iii) is not and
will not be subject to any setoffs, defenses, taxes, counterclaims, except in
the ordinary course of business, (iv) is and will be, in all material respects,
in compliance with all applicable laws, whether federal, state, local or
foreign, and (v) which if evidenced by Chattel Paper, will not require the
consent of the account debtor in respect thereof in connection with its
assignment hereunder.

 

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

 

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

 

Section 5.              Termination Of Security Interest.  Upon the indefeasible
payment in full in cash of the secured obligations, the termination or
expiration of all commitments and the termination of the credit agreement in
writing, the security interest granted hereby shall terminate and all rights to
the collateral shall revert to the applicable grantor to the extent such
collateral shall not have been sold or otherwise applied pursuant to the terms
hereof.  Upon any such termination, the administrative agent will, at the
grantors’ expense, execute and deliver to the applicable grantor such documents
(including, without limitation, ucc-3 termination statements) as such grantor
shall reasonably request to evidence such termination.

 

Section 6.              Reinstatement.  If, at any time after payment in full of
all secured obligations and termination of the administrative agent’s security
interest, any payments on the secured obligations previously made must be
disgorged by the administrative agent for any reason whatsoever, including,
without limitation, the insolvency, bankruptcy or reorganization of any grantor
or any other person, this security agreement and the administrative agent’s
security interests herein shall be reinstated as to all disgorged payments as
though such payments had not been made, and each grantor shall sign and deliver
to the administrative agent all documents, and shall do such other acts and
things, as may be necessary to reinstate and perfect the administrative agent’s
security interest.  EACH GRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE
AGENT AND EACH OTHER ADMINISTRATIVE AGENT FROM AND AGAINST ANY CLAIM, DAMAGE,
LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE
ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT
INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY,

 

I-10

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

 

COST, OR EXPENSE ARISING AS A RESULT OF THE INDEMNIFIED ADMINISTRATIVE AGENT’S
OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR
EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF
COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED ADMINISTRATIVE
AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Section 7.              Remedies Upon Event Of Default.

 

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

 

I-11

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

 

each Grantor hereby agrees that it will at its expense and upon request of the
Administrative Agent forthwith, assemble all or part of the Collateral as
directed by the Administrative Agent and make it available to the Administrative
Agent at a place to be designated by the Administrative Agent which is
reasonably convenient to both parties; (ix) exercise any other or additional
rights or remedies granted to a Administrative Agent under the UCC; or
(x) occupy any premises owned or leased by any Grantor where the Collateral or
any part thereof is assembled for a reasonable period in order to effectuate its
rights and remedies hereunder or under law, without obligation to any Grantor in
respect of such occupation.  If, pursuant to applicable law, prior notice of
sale of the Collateral under this Section is required to be given to any
Grantor, each Grantor hereby acknowledges that the minimum time required by such
applicable law, or if no minimum time is specified, 10 days, shall be deemed a
reasonable notice period.   The Administrative Agent shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given.  The
Administrative Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.

 

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

 

Section 8.              Remedies Cumulative; Delay Not Waiver.

 

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

 

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

 

Section 9.              Contract Rights.  After the occurrence and during the
continuance of an event of default, the administrative agent may exercise any of
the contract rights and remedies of any grantor under or in connection with the
instruments, chattel paper, or contracts which represent

 

I-12

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

 

accounts, the general intangibles, or which otherwise relate to the collateral,
including, without limitation, any rights of any grantor to demand or otherwise
require payment of any amount under, or performance of any provisions of, the
instruments, chattel paper, or contracts which represent accounts, or the
general intangibles.

 

Section 10.            Accounts.

 

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

 

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

 

Section 11.            Application Of Collateral.  The proceeds of any sale, or
other realization (other than that received from a sale or other realization
permitted by the senior credit agreement) upon all or any part of the collateral
pledged by any grantor shall be applied by the administrative agent as set forth
in section 7.06 of the credit agreement.

 

Section 12.            Administrative Agent As Attorney-In-Fact For Grantor. 
Each grantor hereby constitutes and irrevocably appoints the administrative
agent, acting for and on behalf of itself and the secured parties and each
successor or assign of the administrative agent and the secured parties, the
true and lawful attorney-in-fact of such grantor, with full power and authority
in the place and stead of such grantor and in the name of such grantor, the
administrative agent or otherwise to, following the occurrence and during the
continuation of an event of default, take any action and execute any instrument
at the written direction of the secured parties and enforce all rights,
interests and remedies of such grantor with respect to the collateral, including
the right:

 

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

 

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

 

I-13

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

Section 16.            Payments Held In Trust.  During the continuance of an
event of default, all payments received by any grantor under or in connection
with any collateral shall be received in trust for the benefit of the
administrative agent, and shall be segregated from other funds of such grantor
and shall be forthwith paid over to the administrative agent in the same form as
received (with any necessary endorsement).

 

Section 17.            Miscellaneous.

 

(vi)          Expenses.  Each Grantor will upon demand pay to the Administrative
Agent for its benefit and the benefit of the Secured Parties the amount of any
reasonable out-of-pocket

 

I-14

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

 

expenses, including the reasonable fees and disbursements of its counsel and of
any experts, which the Administrative Agent may incur in connection with (i) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Collateral, (ii) the exercise or enforcement of any
of the rights of the Administrative Agent hereunder, and (iii) the failure by
any Grantor to perform or observe any of the provisions hereof.

 

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

 

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

 

(ix)           Continuing Security Interest; Transfer of Interest.  This
Security Agreement shall create a continuing security interest in the Collateral
and, unless expressly released by the Administrative Agent, shall (a)  remain in
full force and effect until the indefeasible payment in full in cash of the
Secured Obligations, the termination or expiration of all Commitments, and the
termination of the Credit Agreement in writing, (b) be binding upon each Grantor
and its successors, tranferees and assigns, and (c) inure, together with the
rights and remedies of the Administrative Agent hereunder, to the benefit of and
be binding upon, the Administrative Agent, the Lenders and their respective
successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Lender assigns or otherwise transfers any interest
held by it under the Credit Agreement or other Loan Document to any other Person
pursuant to the terms of the Credit Agreement or such other Loan Document, that
other Person shall thereupon become vested with all the benefits held by such
Lender under this Security Agreement.

 

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

 

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

 

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

 

I-15

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

 

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

 

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

 

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

 

(xvi)        Subordination and Intercreditor Agreement.  Reference is made to
the Subordination and Intercreditor Agreement, dated as of December 17, 2008 (as
amended, restated, supplemented or otherwise modified from time to time, the
“Subordination and Intercreditor Agreement”), among Union Bank of California,
N.A., as Senior Agent, and UnionBanCal Equities, Inc., as Subordinated Agent,
and certain other persons, party or that may become party thereto from time to
time.  Notwithstanding anything herein to the contrary, this Security Agreement,
the Liens granted to the Administrative Agent pursuant to this Security
Agreement and the exercise of any right or remedy by the Administrative Agent or
any of the Lenders hereunder are subject to the provisions of the Subordination
and Intercreditor Agreement.  In the event of any conflict between the terms of
the Subordination and Intercreditor Agreement and this Security Agreement, the
terms of the Subordination and Intercreditor Agreement shall govern and control.

 

(xvii)       Entire Agreement.  THIS SECURITY AGREEMENT AND THE OTHER LOAN
DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

I-16

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

 

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

 

 

GRANTORS:

 

 

 

CANO PETROLEUM, INC.

 

 

 

By:

 

 

 

Ben Daitch

 

 

Senior Vice President and Chief Financial

 

 

Officer

 

 

 

 

 

 

 

LADDER COMPANIES, INC.

 

SQUARE ONE ENERGY, INC.

 

W.O. ENERGY, INC.

 

W.O. ENERGY OF NEVADA, INC.

 

CANO PETRO OF NEW MEXICO, INC.

 

 

 

 

 

 

Each by:

 

 

 

Ben Daitch

 

 

Vice President and Chief Financial
Officer

 

 

 

 

 

 

 

W.O. OPERATING COMPANY, LTD.

 

By: WO Energy, Inc., its general partner

 

 

 

 

 

By:

 

 

 

Ben Daitch

 

 

Vice President and Chief Financial

 

 

Officer

 

 

 

 

 

 

 

W.O. PRODUCTION COMPANY, LTD.

 

By: WO Energy, Inc., its general partner

 

 

 

 

 

By:

 

 

 

Ben Daitch

 

 

Vice President and Chief Financial

 

 

Officer

 

I-17

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

 

 

ADMINISTRATIVE AGENT:

 

 

 

UNIONBANCAL EQUITIES, INC.

 

 

 

 

 

By:

 

 

 

Ted A. McNulty

 

 

Senior Vice President

 

 

 

 

 

 

By:

 

 

 

Derrick Pan

 

 

Vice President

 

I-18

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

 

SCHEDULE 1

to Security Agreement

 

Grantor:

 

Cano Petroleum, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Delaware

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

3664494

 

 

 

Federal Tax Identification Number:

 

77-0635673

 

 

 

Prior Names:

 

Huron Ventures, Inc.

 

 

 

Grantor:

 

Ladder Companies, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Delaware

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

2097505

 

 

 

Federal Tax Identification Number:

 

73-1282131

 

 

 

Prior Names:

 

d/b/a Ladder Energy Company

 

 

 

Grantor:

 

Square One Energy, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

I-19

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

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

800262012

 

 

 

Federal Tax Identification Number:

 

81-0639886

 

 

 

Prior Names:

 

None.

 

 

 

Grantor:

 

WO Energy, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

113518200

 

 

 

Federal Tax Identification Number:

 

75-2303966

 

 

 

Prior Names:

 

None.

 

 

 

Grantor:

 

W.O. Energy of Nevada, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Nevada

 

 

 

Type of Organization:

 

Corporation

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

C20757-1996-001

 

 

 

Federal Tax Identification Number:

 

88-0369151

 

I-20

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

 

Prior Names:

 

None.

 

 

 

Grantor:

 

W.O. Operating Company, Ltd.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

 

 

Type of Organization:

 

Limited Partnership

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

9373210

 

 

 

Federal Tax Identification Number:

 

75-2675224

 

 

 

Prior Names:

 

None.

 

 

 

Grantor:

 

W.O. Production Company, Ltd.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

 

 

Type of Organization:

 

Limited Partnership

 

 

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

9295410

 

 

 

Federal Tax Identification Number:

 

75-2675222

 

 

 

Prior Names:

 

None.

 

 

 

Grantor:

 

Cano Petro of New Mexico, Inc.

 

 

 

Sole Jurisdiction of Formation / Filing:

 

Texas

 

 

 

Type of Organization:

 

Corporation

 

I-21

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

 

Address where records for Collateral are kept:

 

801 Cherry Street, Suite 3200

 

 

Fort Worth, Texas 76102

 

 

 

Organizational Number:

 

TX 800782069

 

 

 

Federal Tax Identification Number:

 

20-8564572

 

 

 

Prior Names:

 

None.

 

I-22

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

 

Annex 1 to the

Security Agreement

 

SUPPLEMENT NO.  [            ]  dated as of [               ] (the
“Supplement”), to the Subordinated Security Agreement dated as of December 17,
2008 (as amended, supplemented or otherwise modified from time to time, the
“Security Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation
(“Borrower”), each subsidiary of Borrower signatory thereto (together with the
Borrower, the “Grantors” and individually, a “Grantor”) and UnionBanCal
Equities, Inc., as administrative agent (the “Administrative Agent”) for the
ratable benefit of itself, the Lenders (as defined below) (together with the
Lenders, individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

E.             Reference is made to that certain Subordinated Credit Agreement
dated as of December 17, 2008 by and among the Borrower, the lenders party
thereto from time to time (individually, a “Lender”, and collectively, the
“Lenders”), and the Administrative Agent (as it may be amended, restated or
otherwise modified from time to time, the “Credit Agreement”).

 

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

 

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

 

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

 

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

 

I-23

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

 

of the New Grantor.  Each reference to a “Grantor” in the Security Agreement
shall be deemed to include the New Grantor.  The Security Agreement is hereby
incorporated herein by reference.

 

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

 

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

 

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

 

(n)           Except as expressly supplemented hereby, the Security Agreement
shall remain in full force and effect.

 

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

 

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

 

I-24

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

 

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

 

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

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

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

 

 

 

[Name of New Grantor],

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

 

 

 

 

Address:

 

 

 

 

 

 

 

 

[ADMINISTRATIVE AGENT]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

I-25

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

 

Schedule 1

Supplement No.     

to the Security Agreement

 

New Grantor:

[GRANTOR]

 

 

Jurisdiction of Formation / Filing:

[STATE]

 

 

Type of Organization:

[ENTITY TYPE]

 

 

Address where records for Collateral are kept:

[ADDRESS]

 

[CITY, STATE ZIP]

 

 

Organizational Number:

                                                    

 

 

 

Federal Tax Identification Number:

                                                    

 

 

 

Prior Names:

                                                    

 

 

I-26

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

 

EXHIBIT J

 

FORM OF TRANSFER LETTERS

 

_________________, 20__

 

 

 

 

 

 

 

 

 

 

 

Re:          Agreement dated _____________, by and between_______________, as
Seller, and_______________________, as Buyer (the “Contract”).

 

Ladies and Gentlemen:

 

Cano Petroleum, Inc., a Delaware corporation (“Mortgagor”), has executed a
mortgage or deed of trust dated effective as of December 17, 2008 (“Mortgage”)
for the benefit of UnionBanCal Equities, Inc., as Administrative Agent for the
ratable benefit of itself and the Lenders (as defined in the Mortgage), which
Mortgage has been recorded in the Real Property Records of the Counties listed
on the attached Exhibit A. A copy of the Mortgage is enclosed. The properties
covered by the Mortgage include all of the oil, gas and other hydrocarbons
and/or other minerals attributable to the above-referenced Contract to which we
understand you are currently a party and includes the well or wells listed on
the attached Exhibit A with respect to which you are remitting proceeds of
production to the Mortgagor. Your division order or lease numbers for such well
or wells are set forth on the attached Exhibit A.

 

Pursuant to Article III of the Mortgage, the Administrative Agent is entitled to
receive all of Mortgagor’s interest in all Hydrocarbons (as defined in the
Mortgage), which are covered by the above-referenced Contract, all products
obtained or processed therefrom, and the revenues and proceeds attributable
thereto. The assignment of the Hydrocarbons, products and proceeds was effective
as of 7:00 A.M., (Dallas, Texas Time), on December 17, 2008 (“Effective Date”).
The Lenders and the Administrative Agent, however, as provided in Article III,
have permitted Mortgagor to collect the Hydrocarbons and the revenues and
proceeds attributable thereto until the Administrative Agent or the Mortgagor
shall have instructed the seller or purchaser of production to deliver such
Hydrocarbons and all proceeds therefrom directly to the Administrative Agent.
The purpose of this letter is to notify you that, commencing immediately upon
the receipt hereof, and in accordance with the terms and conditions of the
Mortgage, you are to deliver all proceeds attributable to the sale of such
Hydrocarbons pursuant to the above-referenced Contract directly to the
Administrative Agent at its office at 445 South Figueroa Street, 21st Floor, Los
Angeles, California 90071, Telephone (213) 236-7881, Facsimile: (213) 236-7619,
Attention: Maggie Elower, or to such other address of which we may subsequently
notify you in writing. If you require the execution of transfer or division
orders, please forward the transfer or division orders to the Administrative
Agent at its address at indicated above, Attention: Maggie Elower.

 

J-1

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

 

Should you have any questions in connection with any of the foregoing, please do
not hesitate to contact us.

 

 

Very truly yours,

 

 

 

 

 

UNIONBANCAL EQUITIES, INC., as
Administrative Agent

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

 

 

 

 

CANO PETROLEUM, INC., a Delaware
corporation

 

 

 

 

 

By:

 

 

 

 

Name:

 

 

 

 

Title:

 

 

J-2

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

 

EXHIBIT A

 

Name and Location of Well

 

Division Order or Lease No.

 

 

 

 

 

 

 

 

 

 

J-3

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

 

Exhibit K — Form of Borrower’s Counsel Opinion

 

December 17, 2008

 

UnionBanCal Equities, Inc.

 Administrative Agent and a Lender, and all the

 other Lenders party to the Subordinated Credit Agreement

 described below

445 South Figueroa Street

21st Floor

Los Angeles, California 90071

 

Ladies and Gentlemen:

 

We have acted as Texas counsel to Cano Petroleum, Inc., a Delaware corporation
(“Borrower”), Ladder Companies, Inc., a Delaware corporation (“Ladder”), Square
One Energy, Inc., a Texas corporation (“Square One”), W.O. Energy of
Nevada, Inc., a Nevada corporation (“WOEN”), WO Energy, Inc., a Texas
corporation (“WOE”), W.O. Operating Company, Ltd., a Texas limited partnership
(“Operating”), W.O. Production Company, Ltd., a Texas limited partnership
(“Production”) and Cano Petro of New Mexico, Inc., a Texas corporation (“CPNM”,
and together with Ladder, Square One, WOEN, WOE, Operating and Production, the
“Guarantors”; Borrower and the Guarantors are each a “Loan Party” and
collectively, the “Loan Parties”; Borrower and Ladder are collectively, the
“Delaware Loan Parties”; and Square One, WOE, Operating, Production and CPNM are
collectively, the “Texas Loan Parties”) in connection with that certain
Subordinated Credit Agreement (herein so called) dated as of even date herewith,
executed by Borrower, UnionBanCal Equities, Inc., as Administrative Agent (in
such capacity, the “Administrative Agent”), and each financial institution party
thereto as a Lender (collectively, the “Lenders”). Capitalized terms used herein
shall, unless otherwise provided herein, have the respective meanings set forth
in the Subordinated Credit Agreement.

 

For the purpose of rendering the opinions set forth herein, we have been
furnished with and have reviewed the following documents each dated of even date
with the Subordinated Credit Agreement unless otherwise indicated (collectively,
the “Transaction Documents”):

 

(a)           the Subordinated Credit Agreement;

 

(b)           the Subordinated Note, executed by Borrower and payable to the
order of the Administrative Agent in the original principal amount of
$25,000,000;

 

(c)           the Subordinated Security Agreement, executed by the Loan Parties,
in favor of the Administrative Agent (the “Security Agreement”);

 

K-1

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

 

(d)           the Subordinated Guaranty, executed by the Guarantors, in favor of
the Administrative Agent, for the benefit of the Beneficiaries (as defined
therein);

 

(e)           the Subordinated Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Production dated December 17, 2008,
executed by Square One, WOEN, WOE, Operating and Production as Mortgagors made
to Ted A. McNulty as the Trustee for the benefit of the Administrative Agent as
the Mortgagee (the “Texas Mortgage”);

 

(f)            the Subordinated Mortgage, Line of Credit Mortgage, Assignment,
Security Agreement, Fixture Filing and Financing Statement dated December 17,
2008, executed by Borrower and Ladder as Mortgagors in favor of the
Administrative Agent as the Mortgagee (the “Oklahoma Mortgage”);

 

(g)           the Subordinated Mortgage, Line of Credit Mortgage, Assignment,
Security Agreement, Fixture Filing and Financing Statement dated December 17,
2008, executed by CPNM as Mortgagor in favor of the Administrative Agent as the
Mortgagee (the “New Mexico Mortgage”);

 

(h)           the Subordinated Pledge Agreement, executed by Borrower, WOEN, and
WOE in favor of the Administrative Agent (the “Pledge Agreement”);

 

(j)            the Subordination and Intercreditor Agreement;

 

(j)            the UCC-1 Financing Statement reflecting Borrower as debtor and
the Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Delaware (the “Borrower Financing Statement”);

 

(k)           the UCC-1 Financing Statement reflecting Ladder as debtor and the
Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Delaware (the “Ladder Financing Statement”, and together
with the Borrower Financing Statement, the “Delaware Financing Statements”);

 

(l)            the UCC-1 Financing Statement reflecting Square One as debtor and
the Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Texas (the “Square One Financing Statement”);

 

(m)          the UCC-1 Financing Statement reflecting WOE as debtor and the
Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Texas (the “WOE Financing Statement”);

 

(n)           the UCC-1 Financing Statement reflecting Operating as debtor and
the Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Texas (the “Operating Financing Statement”);

 

K-2

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

 

(o)           the UCC-1 Financing Statement reflecting Production as debtor and
the Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Texas (the “Production Financing Statement”);

 

(p)           the UCC-1 Financing Statement reflecting CPNM as debtor and the
Administrative Agent as secured party, to be filed in the Office of the
Secretary of State of Texas (the “CPNM Financing Statement”, and together with
the Square One Financing Statement, the WOE Financing Statement, the Operating
Financing Statement and the Production Financing Statement, the “Texas Financing
Statements”; the Delaware Financing Statements and the Texas Financing
Statements are collectively, the “Financing Statements”).

 

(q)           the UCC-1 Financing Statement reflecting Borrower as debtor and
the Administrative Agent as secured party, to be filed in certain Oklahoma
county filing offices (the “Borrower County Financing Statement”);

 

(r)            the UCC-1 Financing Statement reflecting Ladder as debtor and the
Administrative Agent as secured party, to be filed in certain Oklahoma county
filing offices (the “Ladder County Financing Statement”);

 

(s)           the UCC-1 Financing Statement reflecting CPNM as debtor and the
Administrative Agent as secured party, to be filed in certain New Mexico county
filing offices (the “CPNM County Financing Statement”);

 

(t)            the UCC-1 Financing Statement reflecting Square One as debtor and
the Administrative Agent as secured party, to be filed in the County Filing
Offices, as defined below (the “Square One County Financing Statement”);

 

(u)           the UCC-1 Financing Statement reflecting WOE as debtor and the
Administrative Agent as secured party, to be filed in the County Filing Offices
(the “WOE County Financing Statement”);

 

(v)           the UCC-1 Financing Statement reflecting Operating as debtor and
the Administrative Agent as secured party, to be filed in the County Filing
Offices (the “Operating County Financing Statement”);

 

(w)          the UCC-1 Financing Statement reflecting Production as debtor and
the Administrative Agent as secured party, to be filed in the County Filing
Offices (the “Production County Financing Statement”, and together with the
Square One County Financing Statement, the WOE County Financing Statement, the
Operating County Financing Statement, the Borrower County Financing Statement,
the Ladder County Financing Statement and the CPNM County Financing Statement,
collectively, the “County Financing Statements”).

 

As used herein, the term “Collateral” shall mean the non-fixture equipment,
accounts, inventory, and general intangibles and other personal property that is
“Collateral” (as defined in the Security Agreement); provided that the
Collateral shall exclude all real property, real estate, leases, and fixtures
that are not personal property. As used herein, the term “Real Property

 

K-3

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

 

Collateral” shall mean the real property, real estate, leases, and fixtures
described in the Texas Mortgage. As used herein, the term “Pledged Collateral”
shall mean the “Pledged Collateral” as defined in the Pledge Agreement.

 

In addition to the Transaction Documents, other documents we have reviewed in
rendering this opinion, and upon which we have relied, include the following:

 

(a)           the Certificate of Incorporation of Borrower, certified by the
Secretary of State of the State of Delaware on November 25, 2008;

 

(b)           an Officer’s Certificate of Borrower (the “Borrower’s Officer’s
Certificate”) dated as of December 17, 2008, certifying (i) the Certificate of
Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutions
adopted by the Board of Directors of Borrower authorizing the execution,
delivery, and performance of the Transaction Documents executed by Borrower, and
(iv) the incumbency of officers of Borrower;

 

(c)           a certificate from the Secretary of State of the State of Delaware
indicating that Borrower is in existence and good standing as of November 25,
2008 (the “Borrower’s Existence and Good Standing Certificate”);

 

(d)           the Certificate of Incorporation of Ladder, certified by the
Secretary of State of the State of Delaware on November 25, 2008;

 

(e)           an Officer’s Certificate of Ladder (“Ladder’s Officer’s
Certificate”) dated as of December 17, 2008 certifying (i) the Certificate of
Incorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutions adopted by
the Board of Directors of Ladder authorizing the execution, delivery, and
performance of the Transaction Documents executed by Ladder, and (iv) the
incumbency of officers of Ladder;

 

(f)            a certificate from the Secretary of State of the State of
Delaware indicating that Ladder is in existence and good standing as of
November 25, 2008 (“Ladder’s Existence and Good Standing Certificate”);

 

(g)           the Articles of Incorporation of Square One, certified by the
Secretary of State of the State of Texas on November 25, 2008;

 

(h)           an Officer’s Certificate of Square One (“Square One’s Officer’s
Certificate”) dated as of December 17, 2008 certifying (i) the Articles of
Incorporation of Square One, (ii) the Bylaws of Square One, (iii) Resolutions
adopted by the Board of Directors of Square One authorizing the execution,
delivery, and performance of the Transaction Documents executed by Square One,
and (iv) the incumbency of officers of Square One;

 

(i)            a certificate from the Secretary of State of the State of Texas
indicating that Square One is in existence as of November 25, 2008 (“Square
One’s Existence Certificate”);

 

K-4

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

 

(j)            a certificate, dated November 25, 2008, from the Comptroller of
Public Accounts of the State of Texas, attesting to the current payment by
Square One of all franchise and similar taxes (“Square One’s Good Standing
Certificate”);

 

(k)           the Articles of Incorporation of WOEN, certified by the Secretary
of State of the State of Nevada on November 25, 2008;

 

(l)            an Officer’s Certificate of WOEN (“WOEN’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Articles of Incorporation of
WOEN, (ii) the Bylaws of WOEN, (iii) Resolutions adopted by the Board of
Directors of WOEN authorizing the execution, delivery, and performance of the
Transaction Documents executed by WOEN, and (iv) the incumbency of officers of
WOEN;

 

(m)          a certificate from the Secretary of State of the State of Nevada
indicating that WOEN is in existence and good standing as of November 25, 2008
(“WOEN’s Existence and Good Standing Certificate”);

 

(n)           the Articles of Incorporation of WOE, certified by the Secretary
of State of the State of Texas on November 25, 2008;

 

(o)           an Officer’s Certificate of WOE (“WOE’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Articles of Incorporation of
WOE, (ii) the Bylaws of WOE, (iii) Resolutions adopted by the Board of Directors
of WOE authorizing the execution, delivery, and performance of the Transaction
Documents executed by WOE, and (iv) the incumbency of officers of WOE;

 

(p)           a certificate from the Secretary of State of the State of Texas
indicating that WOE is in existence as of November 25, 2008 (“WOE’s Existence
Certificate”);

 

(q)           a certificate, dated November 25, 2008, from the Comptroller of
Public Accounts of the State of Texas, attesting to the current payment by WOE
of all franchise and similar taxes (“WOE’s Good Standing Certificate”);

 

(r)            the Certificate of Limited Partnership of Operating, certified by
the Secretary of State of the State of Texas on November 25, 2008;

 

(s)           an Officer’s Certificate of WOE, acting in its capacity as the
sole General Partner of Operating (“Operating’s Officer’s Certificate”) dated as
of December 17, 2008 certifying (i) the Certificate of Limited Partnership of
Operating, (ii) the Agreement of Limited Partnership of Operating,
(iii) Resolutions adopted by Board of Directors of WOE, acting in its capacity
as the sole General Partner of Operating, authorizing the execution, delivery,
and performance of the Transaction Documents executed by the officers of WOE
acting in its capacity as the sole General Partner of Operating, and (iv) the
incumbency of officers of WOE;

 

(t)            a certificate from the Secretary of State of the State of Texas
indicating that Operating is in existence as of November 25, 2008 (“Operating’s
Existence Certificate”);

 

K-5

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

 

(u)           the Certificate of Limited Partnership of Production, certified by
the Secretary of State of the State of Texas on November 25, 2008;

 

(v)           an Officer’s Certificate of WOE, acting in its capacity as the
sole General Partner of Production (“Production’s Officer’s Certificate”) dated
as of December 17, 2008 certifying (i) the Certificate of Limited Partnership of
Production, (ii) the Agreement of Limited Partnership of Production,
(iii) Resolutions adopted by Board of Directors of WOE, acting in its capacity
as the sole General Partner of Production, authorizing the execution, delivery,
and performance of the Transaction Documents executed by the officers of WOE,
acting in its capacity as the sole General Partner of Production, and (iv) the
incumbency of officers of WOE;

 

(w)          a certificate from the Secretary of State of the State of Texas
indicating that Production is in existence as of November 25, 2008
(“Production’s Existence Certificate”);

 

(x)            the Certificate of Formation of CPNM, certified by the Secretary
of State of the State of Texas on November 25, 2008;

 

(y)           an Officer’s Certificate of CPNM (“CPNM’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Certificate of Formation of
CPNM, (ii) the Bylaws of CPNM, (iii) Resolutions adopted by the Board of
Directors of CPNM authorizing the execution, delivery, and performance of the
Transaction Documents executed by CPNM, and (iv) the incumbency of officers of
CPNM;

 

(z)            a certificate from the Secretary of State of the State of Texas
indicating that CPNM is in existence as of November 25, 2008 (“CPNM’s Existence
Certificate”);

 

(aa)         a certificate, dated November 25, 2008, from the Comptroller of
Public Accounts of the State of Texas, attesting to the current payment by CPNM
of all franchise and similar taxes (“CPNM’s Good Standing Certificate”);

 

(bb)         a certificate from the officer of the Borrower, Ladder, Square One,
WOEN, WOE, CPNM and WOE as general partner of Operating and Production dated as
of December 17, 2008, certifying as to certain factual matters, including the
Material Agreements.

 

Scope of Examination and General

Assumptions and Qualifications

 

We have been furnished with and examined originals or copies, certified or
otherwise identified to our satisfaction, of all such records of the Loan
Parties, agreements and other instruments, certificates of officers and
representatives of the Loan Parties, certificates of public officials, and other
documents as we have deemed necessary or desirable as a basis for the opinions
hereinafter expressed. As to questions of fact material to such opinions, we
have, without independent verification of their accuracy, relied to the extent
we deem reasonably appropriate upon the representations and warranties of the
Loan Parties made in the Transaction Documents and upon their respective
Officer’s Certificates.

 

K-6

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

 

In making such examinations, we have assumed, with your consent (a) the
genuineness of all signatures (other than the signatures of officers of the Loan
Parties), (b) the authenticity of all documents submitted to us as originals,
(c) the conformity to original documents of all documents submitted to us as
certified or photostatic copies, (d) the authenticity of the originals of the
documents referred to in the immediately preceding clause (c), (e) the prompt
and proper recordation of any Transaction Documents in which recordation is
anticipated, (f) that each party to the Transaction Documents (other than the
Delaware Loan Parties and the Texas Loan Parties) has full power, authority, and
legal right to enter into and perform all agreements to which it is a party and
has duly authorized, executed, and delivered each such Transaction Document,
(g) that the Transaction Documents (other than the Oklahoma and New Mexico
Mortgages) constitute the valid, binding, and enforceable agreement of all the
parties thereto (other than the Loan Parties), and (h) the correctness and
accuracy of all the facts set forth in all certificates and reports identified
in this opinion.

 

We have been advised by officers of the Loan Parties (and with your consent have
relied on that advice) that the agreements described on Exhibit A attached
hereto (the “Material Agreements”) are the only agreements and there are no
orders, writs, judgments, or decrees that are material to Borrower or applicable
Loan Party and which, if violated by the execution, delivery, or performance of
the Transaction Documents, could reasonably be expected to have a material
adverse effect on the validity, performance, or enforceability of any
Transaction Document or the ability of any Loan Party to fulfill its material
obligations under the Transaction Documents. We advise you that we have not
reviewed, and have not devoted substantive attention to, any other agreements
(other than those described on Exhibit A) for the purposes of rendering the
opinion set forth in Paragraph 13 below. We have made no examination of, and
express no opinion with respect to, any financial, accounting, or similar
covenant or provision contained in the Material Agreements to the extent that
any such covenant or provision would require a determination as to any financial
or accounting matters. In addition, we express no opinion as to any breach of
any confidentiality provision contained in any Material Agreement caused by any
Transaction Document or Borrower’s or applicable Loan Party’s actions pursuant
thereto or in contemplation thereof. We note that some of the Material
Agreements are not governed by Texas law. Therefore, we have assumed that a
court would enforce the Material Agreements as written, and we have limited our
opinion to matters readily ascertainable from the face of the Material
Agreements. We also note that some of the Material Agreements are not assignable
by Borrower or applicable Loan Party (the “Non-Assignable Material Agreements”).
As a result, to the extent that the Collateral includes Borrower’s or applicable
Loan Party’s rights under the Material Agreements, we have relied upon
Section 9.408(a) of the UCC (defined below). We note that any assignment of
Non-Assignable Material Agreements is subject to the limitations set forth in
Section 9.408(d) of the UCC.

 

Our opinions set forth below are limited solely to matters governed by the laws
of the State of Texas, the federal laws of the United States of America, and the
General Corporation Law of the State of Delaware (collectively, “Applicable
Law”) and we express no opinion as to questions concerning the laws of any other
jurisdiction. The opinions expressed herein are limited to the Uniform
Commercial Code as adopted in the State of Texas (the “Texas UCC”) and the State
of

 

K-7

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

 

Delaware (the “Delaware UCC”) in effect on the date hereof (the Texas UCC and
the Delaware UCC are collectively, the “UCC”).

 

Specific Limitations and Qualifications on

Opinions Regarding Enforceability

 

With respect to our opinion set forth in Paragraph 12 under the heading
“Opinions” below, we advise you that:

 

1.             The enforceability of the Transaction Documents is subject to
(a) the effects of (i) applicable bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium, rearrangement, liquidation, conservatorship, or
similar laws of general application now or hereafter in effect relating to or
affecting the rights of creditors generally, (ii) general equity principles, and
(iii) statutory provisions of the Federal Bankruptcy Code and the Uniform
Fraudulent Transfer Act as adopted by the State of Texas (and related court
decisions) pertaining to the voidability of preferential or fraudulent
transfers, conveyances, and obligations, (b) the application of a standard of
“good faith” such as that imposed by Section 1.304 of the Texas UCC, and (c) the
rights of the United States under the Federal Tax Lien Act of 1966, as amended;
provided, however, that any limitations referred to under clauses (a)(ii) and
(a)(iii) of this paragraph imposed by such laws on the enforceability of any
Transaction Document will not render any Transaction Document invalid as a whole
or prevent you from the ultimate realization of the practical benefits of such
Transaction Document, except for the economic consequences of any judicial,
administrative, or other procedural delay which may result from such laws.

 

2.             The opinion that the Transaction Documents are enforceable is
also subject to the qualification that certain of the remedial, waiver, and
other provisions of the Transaction Documents may not be enforceable; but such
unenforceability will not, in our judgment, render the Transaction Documents
invalid as a whole or substantially interfere with the realization of the
principal legal benefits and/or security intended to be provided by the
Transaction Documents, except to the extent of any procedural delay which may
result therefrom.

 

3.             We express no opinion as to: (a) the enforceability of provisions
of the Transaction Documents to the extent that such provisions: (i) purport to
waive or affect any rights to notices required by law and that are not subject
to waiver under Section 9.602 of the Texas UCC; (ii) purport to waive trial by
jury; (iii) state that any Lender’s failure or delay in exercising rights,
powers, privileges or remedies under the Transaction Documents shall not operate
as a waiver thereof; (iv) purport to indemnify any Lender for such Lender’s
violations of federal or state securities laws or environmental laws, or any
obligation to the extent such obligation arises from or is a result of such
Lender’s own fraud, negligence, or willful misconduct or to the extent that such
indemnification is inconsistent with public policy; (v) purport to establish or
satisfy certain factual standards or conditions (e.g., standards of “commercial
reasonableness” or “reasonable care” under Article 9 of the Texas UCC) in a
manner not permitted by Sections 9.602 and 9.603 of the Texas UCC; (vi) purport
to sever unenforceable provisions from the Transaction Documents, to the extent
that the enforcement of remaining provisions would frustrate the fundamental
intent of the parties to such documents; (vii) restrict access to legal or
equitable remedies; (viii) purport to waive any claim of any Loan

 

K-8

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

 

Party against any Lender arising out of, or in any way related to, the
Transaction Documents; (ix) purport to provide remedies inconsistent with
applicable law; or (x) providing that decisions by a party are conclusive or may
be made in its sole discretion; (b) whether a court would grant specific
performance or any other equitable remedy with respect to enforcement of any
provision contained in the Transaction Documents; (c) the enforceability of any
provision in the Transaction Documents that purports to appoint an agent for
service of process or establish or otherwise affect jurisdiction, venue,
evidentiary standards, or limitation periods, or procedural rights in any suit
or other proceeding; (d) the enforceability of any provision in the Transaction
Documents that purports to waive, subordinate, or otherwise restrict or deny
access to rights, benefits, claims, causes of action, or remedies that cannot be
waived, subordinated, or otherwise restricted or denied; (e) the enforceability
of any provision in the Transaction Documents that allows any Lender to
accelerate the maturity date of the obligations evidenced by the Transaction
Documents, to institute foreclosure proceedings, or to exercise any similar
right, without notice to the person or entity signatory thereto or bound
thereby; or (f) the enforceability of any provision contained in the Transaction
Documents relating to the appointment of a receiver, to the extent that
appointment of a receiver is governed by applicable statutory requirements, and
to the extent that such provision may not be in compliance with such
requirements.

 

4.             We express no opinion on any Lender’s ability to foreclose on,
become the owner of, or validly transfer or assume, all of the rights and duties
of any Loan Party (other than the right to receive payments thereunder and the
right to receive an assignment of accounts receivable arising thereunder) as a
party to the Non-Assignable Material Agreements, under which such Loan Party’s
rights, obligations, or duties are not freely assignable or transferable.

 

5.             We express no opinion regarding the enforceability of any
documents or agreements referenced in the Transaction Documents (other than the
Transaction Documents).

 

6.             We express no opinion regarding any Lender’s ability to exercise
any rights or remedies against any collateral that is personal property pursuant
to the Transaction Documents other than in accordance with the Texas UCC or the
Delaware UCC.

 

7.             We express no opinion regarding (a) the enforceability of
provisions of the Texas Mortgage that grant the right to become a mortgagee in
possession of the Real Property Collateral prior to a foreclosure of the lien of
the Transaction Documents or provide for the collection of (or the perfection or
effectiveness of your lien in) rents and profits prior to actual or constructive
possession of the Real Property Collateral, (b) the enforceability of any waiver
of any right to an appraisal of the Real Property Collateral, to the extent one
is provided pursuant to Texas Property Code Annotated Sections 51.003-51.005,
which rights are not waivable under Texas law, or (c) compliance with, or the
effect of land use, zoning, building, sanitation, environmental, or ecological
laws or regulations affecting the Real Property Collateral.

 

K-9

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

 

Specific Limitations and Qualifications on

Opinions Regarding Texas Usury Laws

 

The opinions expressed in Paragraphs 12 and 14 under the heading “Opinions”
below are also subject to the following:

 

1.             We have assumed that (a) no fees, charges, or other compensation
will be paid to Lenders, or for their benefit, except as specified in the
Transaction Documents, and (b) no interest will accrue on the unfunded portion
of the indebtedness evidenced by the Transaction Documents.

 

2.             We have assumed that Lenders will comply with and give effect to
all of the provisions of the Transaction Documents with respect to the
computation of the interest rate and the charging and collection of interest
thereunder, including without limitation, the “Savings Clause” (herein so
called) (i.e., a clause to the effect that Borrower shall never be required to
pay, and Lenders shall never be entitled to collect or receive, interest on the
loans evidenced by the Subordinated Credit Agreement at a rate in excess of the
maximum rate permitted by applicable law).  We advise Lenders that, if Borrower
repays, or Lenders accelerate or otherwise demand payment of, the loans made
under the Subordinated Credit Agreement prior to the scheduled maturity date
thereof, then Lenders will have to return any excessive interest received as the
result of such prepayment in order to give effect to the Savings Clause.

 

3.             We express no opinion as to whether the fees denominated in the
Subordinated Credit Agreement as “commitment fees” or other fees and expenses
(other than those explicitly designated as interest) payable to Lenders under
the Transaction Documents are interest or in certain cases, whether any fees
should be deducted from the principal of the loan evidenced by the Transaction
Documents in determining interest chargeable under such loan.  We assume that
Lenders will comply with applicable law in the treatment of such items under
such loan.

 

4.             Section 2.09(d) of the Subordinated Credit Agreement limits the
reduction in the contract rate of interest in certain circumstances in order to
recoup the contracted rate of interest for the prior period where the contracted
rate was capped at a lower rate by the maximum lawful rate.  While there is a
Texas statute and established precedent for the spreading of interest forward
over the anticipated life of a loan, we are aware of no cases permitting
“backward” spreading.  Notwithstanding the lack of case law, however, backward
spreading, we believe, is consistent with the principles underlying forward
spreading and should be permissible under Texas law.

 

Specific Limitations and Qualifications on

Opinions Regarding Laws and Consents

 

With respect to our opinions in Paragraphs 14 and 15 under the heading
“Opinions” below with respect to no violation of any applicable law and as to
the lack of any required consents, approvals, or authorizations of governmental
authorities, our opinions are expressed only with respect to statutes or
regulations that a lawyer in Texas or Delaware, as applicable, exercising
customary professional diligence would reasonably recognize as being applicable
to the Loan

 

K-10

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

 

Parties or the transactions contemplated by the Transaction Documents.  In
addition, we express no opinion as to the following: (a) federal securities laws
and regulations administered by the Securities and Exchange Commission, State of
Texas “Blue Sky” laws and regulations, and laws and regulations relating to
commodity (and other) futures and indices and other similar instruments; or
(b) the statutes and ordinances, the administrative decisions, and the rules and
regulations of counties, towns, municipalities, and special political
subdivisions (whether created or enabled through legislative action at the
federal, state, or regional level), and any judicial decisions to the extent
they deal with any of the foregoing.

 

Specific Limitations and Qualifications on

Opinions Regarding Perfection of Liens

and Security Interests in the Collateral

 

With respect to the opinions expressed below regarding the perfection of the
Administrative Agent’s liens and security interests in the Collateral, we advise
you that:

 

1.             We express no opinion regarding (a) the accuracy or completeness
of any property descriptions contained in the Transaction Documents; however
such descriptions are in sufficient form, assuming accuracy and completeness,
(b) title to the Collateral, (c) the creation or perfection of the
Administrative Agent’s liens and security interests in the Collateral insofar as
the laws of a jurisdiction other than the State of Texas (with respect to
creation) or the States of Texas and Delaware (with respect to perfection)
govern the creation or perfection of such liens and security interests, or
(d) the creation or perfection of the Administrative Agent’s liens and security
interests in Collateral that is not described in the Transaction Documents.

 

2.             We have assumed, with your permission, the following facts:
(a) the Loan Parties, as applicable, have good and sufficient title to the
Collateral; (b) the Loan Parties, as applicable, have “rights in the collateral”
as that term is used in Section 9.203 of the Texas UCC; (c) value has been given
within the meaning of Section 9.203 of the Texas UCC; (d) the Delaware Loan
Parties are each solely incorporated, formed, or organized, as the case may be,
under the laws of the State of Delaware, the Texas Loan Parties are each solely
incorporated, formed, or organized, as the case may be, under the laws of the
State of Texas and WOEN is solely incorporated under the laws of the State of
Nevada; and (e) the Administrative Agent’s address is correctly set forth on the
Financing Statements and the County Financing Statements.

 

3.             The opinions given in Paragraphs 16, 17, and 18 under the heading
“Opinions” below as to the creation and perfection of security interests do not
cover real property and other property transactions excluded from the coverage
of the Texas UCC pursuant to Section 9.109 of the Texas UCC.

 

4.             We advise you that (a) in the case of Collateral consisting of
motor vehicles for which certificates of title have been issued and for which
the exclusive manner of perfecting a security interest is by noting the
Administrative Agent’s security interests on the certificate of title in
accordance with the Texas Certificate of Title Act or other comparable law of
other states, the Administrative Agent’s security interest therein cannot be
perfected by the filing of the Financing Statements, but will be perfected only
if the Administrative Agent’s security interests

 

K-11

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

 

are so noted, (b) the continuation of any security interests and perfection of
any security interests in Collateral consisting of proceeds is limited to the
extent set forth in the UCC, (c) continuation statements complying with the UCC
must be filed not more than six (6) months prior to the expiration of a five
(5) year period dating from the date of filing of the Financing Statements (or
otherwise within the time permitted by the UCC) and subsequent continuation
statements must be filed within six (6) months prior to the end of each
subsequent five (5) year period and amendments or supplements to the Financing
Statements and/or additional financing statements may be required to be filed in
the event of a change of name, identity, or corporate structure of any of the
Delaware Loan Parties or any of the Texas Loan Parties, or if any of the
Delaware Loan Parties or any of the Texas Loan Parties changes the jurisdiction
of its incorporation, organization, or formation, as the case may be, (d) in the
case of property which becomes Collateral after the date hereof, Section 552 of
the Federal Bankruptcy Code limits the extent to which property acquired by a
debtor after the commencement of a case under the Federal Bankruptcy Code may be
subject to a security interest arising from a security agreement entered into by
the debtor before the commencement of the case, (e) although the filing of a
financing statement will perfect a security interest in chattel paper,
negotiable documents, instruments, and investment property, (i) such a perfected
security interest in chattel paper, negotiable documents, and instruments is
subject to rights of prior or subsequent holders who obtain possession of such
Collateral, and (ii) such a perfected security interest in investment property
is subject to rights of prior or subsequent holders who obtain “control” (as
such term is defined in the UCC) of such Collateral, unless the secured party
obtains “control” of such Collateral in accordance with the UCC, and (f) as
against third parties having or acquiring an interest in or a lien on the real
property to which any fixtures are attached, the rights and duties of the law of
the state relating to real property and fixtures may apply.

 

5.             We express no opinion as to the perfection of liens and security
interests in the Collateral constituting general intangibles consisting of
copyrights, patents, trademarks, and tradenames to the extent security interests
in such property may be perfected only by the filing of the appropriate
documents in the United States Copyright Office and the United States Patent and
Trademark Office.

 

6.             We have assumed that none of the Collateral consists or will
consist of consumer goods, farm products, crops, or timber, or accounts
resulting from the sale of timber.

 

7.             We also note that a security interest in after-acquired property
may attach and become enforceable and may become perfected only when the debtor
has obtained rights in such Collateral.

 

8.             We express no opinion regarding the priority of any liens and
security interests created by the Transaction Documents, except as explicitly
set forth in Paragraph 18 under the heading “Opinions” below.  We express no
opinion as to the priority of any security interest in the Pledged Collateral or
portions thereof that are or become subject to liens for taxes, assessments,
levies, fees and other governmental and similar charges, and other claims of any
type of any governmental authority, in each case that may be afforded priority
over the security interests of Lender by Applicable Law.

 

K-12

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

 

9.             We have made no review of the Collateral, the books and records
relating to the Collateral, or any compliance by any of the Loan Parties with
applicable rules and regulations governing the ownership, use, leasing,
maintenance, or charter of the Collateral, and therefore we give no opinion
concerning same.

 

10.           We have assumed, with your permission, that (a) that no party
executing the Security Agreement is a broker or securities intermediary, as such
terms are defined in the UCC, and (b) any original certificates evidencing the
Pledged Collateral have been delivered to, and possession thereof will be held
by, the Administrative Agent in the State of Texas.

 

11.           We note that in order to enforce Lenders’ remedies and rights of
foreclosure by sale, after default, of the Pledged Collateral, Lenders will be
required to comply with applicable federal and state securities laws.

 

Opinions

 

Based upon the foregoing, and subject to the qualifications set forth below, we
are of the opinion that:

 

1.             Borrower is, based solely upon, and as of the date of, the
Borrower’s Existence and Good Standing Certificate, validly existing and in good
standing under the laws of the State of Delaware.

 

2.             Ladder is, based solely upon, and as of the date of, Ladder’s
Existence and Good Standing Certificate, validly existing and in good standing
under the laws of the State of Delaware.

 

3.             Square One is, based solely upon, and as of the date of, Square
One’s Existence Certificate and Square One’s Good Standing Certificate, validly
existing and in good standing under the laws of the State of Texas.

 

4.             WOEN is, based solely upon, and as of the date of, WOEN’s
Existence and Good Standing Certificate, validly existing and in good standing
under the laws of the State of Nevada.

 

5.             WOE is, based solely upon, and as of the date of, WOE’s Existence
Certificate and WOE’s Good Standing Certificate, validly existing and in good
standing under the laws of the State of Texas.

 

6.             Operating is, based solely upon, and as of the date of,
Operating’s Existence Certificate, validly existing under the laws of the State
of Texas.

 

7.             Production is, based solely upon, and as of the date of,
Production’s Existence Certificate, validly existing under the laws of the State
of Texas.

 

K-13

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

 

8.             CPNM is, based solely upon, and as of the date of, CPNM’s
Existence Certificate and CPNM’s Good Standing Certificate, validly existing and
in good standing under the laws of the State of Texas.

 

9.             Borrower and Ladder each have the corporate power and authority
under the General Corporation Law of the State of Delaware and their respective
Certificates of Incorporation and Bylaws to execute, deliver, and perform their
obligations under the Transaction Documents.  The Transaction Documents to which
Borrower and/or Ladder is a party have been duly authorized by all necessary
corporate action on the part of Borrower and/or Ladder, as appropriate, and have
been duly executed and delivered by Borrower and/or Ladder, as appropriate.

 

10.           Square One, WOE and CPNM each have the corporate power and
authority under the Texas Business Corporation Act or the Texas Business
Organizations Code and their respective Articles of Incorporation and Bylaws to
execute, deliver, and perform their obligations under the Transaction
Documents.  The Transaction Documents to which Square One, WOE and/or CPNM is a
party have been duly authorized by all necessary corporate action on the part of
Square One, WOE and/or CPNM, as appropriate, and have been duly executed and
delivered by Square One, WOE and/or CPNM, as appropriate.

 

11.           Operating and Production each have the partnership power and
authority under the Texas Revised Limited Partnership Act and their respective
Certificates of Limited Partnership and Limited Partnership Agreements to
execute, deliver, and perform their obligations under the Transaction
Documents.  The Transaction Documents to which Operating and/or Production is a
party have been duly authorized by all necessary partnership action on the part
of Operating and/or Production and their general partners, as appropriate, and
have been duly executed and delivered by Operating and/or Production (or their
general partners on their behalf), as appropriate.

 

12.           The Transaction Documents (other than the Oklahoma and New Mexico
Mortgages) to which any Loan Party is a party are enforceable against such Loan
Party in accordance with their respective terms.

 

13.           The execution and delivery by each Loan Party of, and performance
of its agreements in, the Transaction Documents do not (a) violate the
Certificate of Incorporation, Articles of Incorporation, Bylaws, Certificate of
Limited Partnership or Limited Partnership Agreement, each as applicable, of any
Loan Party, or (b) breach or result in a default under any obligation of any
Loan Party under, or require a consent under, or result in the creation of any
Lien (except for the Liens created pursuant to the Transaction Documents) upon
any of the properties, revenues, or other assets of any Loan Party pursuant to,
any Material Agreement.

 

14.           The execution and delivery of the Transaction Documents, the
consummation of the transactions contemplated thereby, and compliance by the
Loan Parties with the provisions thereof will not violate any Applicable Law.

 

K-14

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

 

15.           No consent, approval, waiver, license, or authorization or any
other action by or filing with any governmental authority is required under
Applicable Law in connection with the execution and delivery by the Loan Parties
of the Transaction Documents, except for those already obtained or completed.

 

16.           The Security Agreement creates in favor of the Administrative
Agent, for the benefit of the Secured Parties (as defined therein), a valid
security interest in all of the Loan Parties’ right, title, and interest in and
to that portion of the Collateral in which a security interest may be created
under the Texas UCC.  Under the Texas UCC and the Delaware UCC, upon the
acceptance of filing of the Financing Statements in the Office of the Secretary
of State of Texas or the Office of the Secretary of State of Delaware, as
appropriate, the Administrative Agent shall have a perfected security interest,
for the benefit of the Secured Parties (as defined in the Security Agreement) in
the Collateral in which a security interest may be perfected by filing of
financing statements under the Texas UCC or Delaware UCC, as appropriate.

 

17.           The Pledge Agreement creates in favor of the Administrative Agent
for the benefit of the Secured Parties (as defined therein) a valid security
interest in all right, title, and interest of each Loan Party a party thereto in
the Pledged Collateral enforceable against each such Loan Party, securing the
Secured Obligations (as defined in the Pledge Agreement).

 

18.           Upon the filing of the Delaware Financing Statements in the Office
of the Secretary of State of Delaware and the Texas Financing Statements in the
Office of the Secretary of State of Texas, the Administrative Agent shall have a
perfected security interest in the Pledged Collateral.

 

19.           The form of the Texas Mortgage and the form of the description of
the Mortgaged Property (as such term is defined therein and so used herein)
situated in the State of Texas are in satisfactory form for filing and recording
in the offices described in Paragraph 20 below.

 

20.           Upon filing and recording of the Texas Mortgage with the real
property records of the Texas counties, as applicable, the Texas Mortgage will
create a valid and binding perfected mortgage lien in favor of the
Administrative Agent on the Real Property Collateral.  The proper recordings of
the Texas Mortgage in the real property records of the respective Texas counties
identified therein (the “County Filing Offices”) are the only filings,
recordings, and registrations necessary to publish notice and preserve the liens
of the Texas Mortgage in the Real Property Collateral.  The Texas Mortgage
creates a valid security interest in favor of the Administrative Agent to the
extent provided therein in all right, title and interest of each Loan Party
thereto in that portion of the “Collateral” (as defined therein) (other than the
Real Property Collateral) which constitutes personal property.  Upon the proper
filing in the real property records of the County Filing Offices of the County
Financing Statements, the Administrative Agent will have a perfected security
interest within the meaning of Chapter 9 of the Texas UCC in that portion of the
Collateral (as defined in the Texas Mortgage) that is personal property and
constitutes fixtures located on the Real Property Collateral or as-extracted
collateral from such Real Property Collateral in which a security interest may
be perfected by filing a financing statement subject, however, with respect to
proceeds, to Section 9.315 of the Texas UCC.

 

K-15

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

 

21.           No state or local mortgage registration tax, stamp tax, or other
similar fee, tax, or governmental charge (other than filing and recording fees
to be paid upon filing) is required to be paid to the State of Texas or any
subdivision thereof in connection with the execution, delivery, filing, or
recording of the Texas Mortgage or the consummation of the transactions
contemplated therein.  Except for the payment of recording or filing fees and
taxes associated with filings made with respect to the Financing Statements and
the Texas Mortgage, no other taxes or governmental fees or charges are required
under Applicable Law in connection with (a) the creation, perfection, or the
recording of the Liens purported to be created by the Transaction Documents,
(b) the execution and delivery of any of the Transaction Documents, or (c) the
obtaining of credit under the Subordinated Credit Agreement.

 

22.           The Advances to be made on the date hereof and the application of
the proceeds thereof as provided for in the Subordinated Credit Agreement do not
violate Regulation U or X of the Board of Governors of the Federal Reserve
System.

 

23.           No Loan Party is an “investment company” or a company “controlled
by” an “investment company” within the meaning of the Investment Company Act of
1940, as amended.

 

This opinion (a) has been furnished to you at your request, and we consider it
to be a confidential communication that may not be furnished, reproduced,
distributed or disclosed to anyone (other than your permitted successors and
assigns under the Subordinated Credit Agreement) without our prior written
consent, (b) is rendered solely for your information and assistance in
connection with the above transaction, and may not be relied upon by any other
person (other than your permitted successors and assigns under the Subordinated
Credit Agreement) or for any other purpose without our prior written consent,
(c) is rendered as of the date hereof, and we undertake no, and hereby disclaim
any kind of obligation to advise you of any changes for any new developments
that might affect any matters or opinions set forth herein, and (d) is limited
to the matters stated herein and no opinions may be inferred or implied beyond
the matters expressly stated herein.

 

Sincerely,

 

HAYNES AND BOONE, LLP

 

K-16

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

 

EXHIBIT A

 

MATERIAL AGREEMENTS

 

Securities Purchase Agreement dated August 25, 2006 by and among Cano
Petroleum, Inc. and the Buyers listed therein.

 

Registration Rights Agreement dated August 25, 2006 by and among Cano
Petroleum, Inc. and the Buyers listed therein.

 

Certificate of Designations, Preferences and Rights of Series D Convertible
Preferred Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware
Secretary of State.

 

Cano Petroleum, Inc. 2005 Long-Term Incentive Plan dated December 7, 2005,
incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K
filed on December 9, 2005.

 

Amendment No. 1 to the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan
effective December 28, 2006.

 

Employment Agreement between Cano Petroleum, Inc. and S. Jeffrey Johnson dated
effective January 1, 2006.

 

First Amendment to Employment Agreement between Cano Petroleum, Inc. and S.
Jeffrey Johnson dated effective May 31, 2008.

 

Employment Agreement of Michael J. Ricketts effective July 1, 2006.

 

First Amendment to Employment Agreement of Michael J. Ricketts effective
June 29, 2007.

 

Fourth Amendment to Employment Agreement of Michael J. Ricketts effective
May 31, 2008.

 

Employment Agreement of Patrick McKinney effective June 1, 2006.

 

First Amendment to Employment Agreement of Patrick McKinney dated November 9,
2006.

 

Second Amendment to Employment Agreement of Patrick McKinney dated June 29,
2007.

 

Third Amendment to Employment Agreement of Patrick McKinney dated May 31, 2008.

 

Employment Agreement of Phillip Feiner dated May 31, 2008.

 

First Amendment to Employment Agreement of Phillip Feiner dated September 8,
2008.

 

Employment Agreement of Benjamin Daitch dated June 23, 2008.

 

Securities Purchase Agreement dated November 2, 2007 between Cano
Petroleum, Inc. and the investors listed therein.

 

Registration Rights Agreement dated November 2, 2007 between Cano
Petroleum, Inc. and the investors listed therein.

 

Amended and Restated Credit Agreement among Cano Petroleum, Inc. as Borrower,
The Lenders Party hereto from time to time, as Lenders, and Union Bank of
California, N.A., as Administrative Agent and as issuing Lender, dated
December 17, 2008, including all associated agreements.

 

K-17

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