Exhibit 10.2

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED, EXCEPT UPON SUCH REGISTRATION OR UPON
DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED FOR SUCH SALE OR TRANSFER.

THIS NOTE IS ISSUED PURSUANT TO, AND SUBJECT TO THE TERMS OF THE AGREEMENT OF
SALE AND PURCHASE DATED AS OF OCTOBER 15, 2007 (THE “PURCHASE AGREEMENT”), BY
AND AMONG PETROHAWK PROPERTIES, LP, PETROHAWK ENERGY CORPORATION, KCS RESOURCES,
INC., AND ONE TEC, LLC (COLLECTIVELY, AS SELLER), AND MILAGRO DEVELOPMENT I, LP,
AS PURCHASER, AND IS THE PARENT SENIOR UNSECURED NOTE, AS SUCH TERM IS DEFINED
IN THE PURCHASE AGREEMENT.

SENIOR SUBORDINATED UNSECURED NOTE

 

Date of Issuance: November 30, 2007 (“Effective Date”)    $125,000,000

FOR VALUE RECEIVED, MILAGRO MEZZ, LLC, a Delaware limited liability company (the
“Company”), hereby promises to pay to the order of PETROHAWK ENERGY CORPORATION,
a Delaware corporation (together with any subsequent holder or assigns of this
Note, the “Holder”) the principal amount of One Hundred Twenty Five Million and
No/100 Dollars ($125,000,000), on the Maturity Date, subject to earlier
redemption as provided herein, together with interest thereon calculated from
the date hereof in accordance with the provisions of this Note. The term
“Maturity Date” means March 1, 2013.

Section 1. Interest and Seniority. This Note shall bear interest on the unpaid
principal amount of this Note outstanding from time to time, from and including
the date hereof. Interest on this Note shall be payable in arrears on the last
Business Day of each calendar quarter during the term hereof and on the Maturity
Date (each, a “Payment Date”), commencing on March 31, 2008.

1.1 Payment of Interest. On each Payment Date, the Company shall pay the
interest accrued and unpaid on this Note. Interest on this Note shall accrue at
Twelve Percent (12%) per annum. Interest will be computed on the basis of four
90-day quarters and a 360-day year and, for any period shorter or longer than a
full calendar quarter, on the basis of the actual number of days elapsed in such
period, but shall never exceed the highest rate permitted by applicable law.
Notwithstanding any provision hereof to the contrary, at the Company’s option,
interest on this Note for any period may be paid by the Company (i) in cash, but
subject to Section 3 below, or (ii) in kind (“PIK”),with any such PIK interest
being added to the principal balance of this Note (“PIK Option”). Interest will
accrue from time to time on any principal balance of this Note (including
principal additions from the exercise of the PIK Option) then outstanding.
Failure to make cash interest payments when due will automatically convert such
interest to PIK interest. Any accrued interest on this Note that for any reason
has not theretofore been paid or converted to principal will be due and payable
in full on the Maturity Date.

 

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1.2 Seniority. This Note (i) shall be senior with respect to any and all
distributions, dividends, and redemptions (including but not limited to any
distribution or dividend in connection with dissolution or liquidation) with
respect to all equity interests of the Company, (ii) shall rank pari passu with
all Debt of the Company, other than the Senior Debt and (iii) shall rank junior
and subordinate to all Senior Debt to the extent and in the manner set forth
herein.

Section 2. Redemption.

2.1 Optional Redemption by the Company. Subject to Section 3 below, this Note
may be redeemed, in cash, at the option of the Company, in whole or in part at
any time after Effective Date and on a Redemption Date by giving the notices and
making the payment of the amount required hereby. The Company will send written
notice of its election to redeem this Note to the Holder of this Note by
registered or certified mail, return receipt requested, or shall deliver notice
of such election by hand delivery or by express delivery or other delivery
service at least five (5) days prior to the date of redemption (which date of
redemption must be at least 1 day prior to the Maturity Date) (the “Redemption
Date”). On the Redemption Date, the Company will deliver to the Holder of this
Note upon surrender of this Note an amount equal to (a)(i) the principal amount
of the Note being redeemed (which amount shall not be less than the lesser of
$10,000,000 or the remaining principal balance of the Note) plus (ii) accrued,
unpaid interest on the principal amount being redeemed to the date of redemption
(the “Redemption Price”). If less than the entire remaining principal amount of
this Note is to be redeemed, in addition to delivering the Redemption Price, on
the Redemption Date, the Company shall also deliver to and in the name of the
appropriate Person, a new Note dated the date of the payment of the Redemption
Price in a principal amount equal to the unredeemed portion of this Note and
having other terms identical to this Note, upon cancellation of this Note. On
and after any Redemption Date, unless the Company defaults in the payment of the
Redemption Price, interest shall cease to accrue on the portion of this Note
called for redemption.

2.2 Mandatory Redemption. This Note shall be redeemed by the Company, at the
option of the Holder, upon the occurrence of a Liquidity Event, but subject to
Section 3 below.

2.3 Special Optional Redemption by the Company. During the first 150 days after
the Effective Date but subject to Section 3 below, this Note may (or, in the
case of a redemption pursuant to Section 2.2 above, shall) be redeemed, in cash,
for an amount equal to $100,000,000. After such 150 days and before one year
from the Effective Date but subject to Section 3 below, this Note may (or, in
the case of a redemption pursuant to Section 2.2 above, shall) be redeemed for
the principal amount of this Note (including PIK interest), plus accrued and
unpaid interest minus $25,000,000.

Section 3. Subordination.

3.1.1. The Holder hereby subordinates any and all claims now or hereafter owing
to it by the Company under this Note to any and all Senior Debt (including,
without limitation, interest, fees, costs, reimbursements or other payments on
the Senior Debt paid or accrued after

 

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the commencement of an Insolvency Proceeding (as hereinafter defined) and
whether or not such claims are allowed or deemed allowed or recoverable in any
Insolvency Proceeding, and payment of or for adequate protection pursuant to any
Insolvency Proceeding), and agrees that, except as set forth in Section 3.1.2
below, Senior Payment in Full shall have occurred before any payment may be made
on this Note, whether of principal or interest or other indebtedness or other
obligations. Except with respect to the exercise of remedies by the Holder in
accordance with Section 3.1.4 hereof, the Holder agrees not to acquire any
security interests in, security titles to, and other liens and encumbrances on
any of the present or future collateral securing Senior Debt (the “Senior
Collateral”) or any other assets, properties or rights of the Company or its
subsidiaries. In the event that the Holder should acquire any security titles
to, and other liens and encumbrances on any of the present or future Senior
Collateral, the Holder hereby subordinates and makes inferior any and all of its
now existing or hereafter acquired security interests in such security titles
to, and other liens and encumbrances on any of the present or future Senior
Collateral, any security interests, security titles or other liens and
encumbrances on the Senior Collateral arising under any security agreement
created or existing in respect of the Senior Debt. In case any funds shall be
paid or delivered to the Holder in violation of this paragraph, such funds shall
be held in trust by the Holder for and immediately paid and delivered to the
Senior Creditors (in the form received endorsed over to the Senior Creditors)
for application to the payment of Senior Debt.

3.1.2. Notwithstanding anything to the contrary contained herein, so long as no
“Default” or “Event of Default” has occurred and is continuing under the Senior
Credit Facility or the Term Loan Facility and no “Default” or “Event of Default”
would immediately occur under the Senior Credit Facility and the Term Loan
Facility as a result of such payment, the Company may (i) make payments of PIK
interest and (ii) if the Senior Creditors or the administrative agents under
both the Senior Credit Facility and the Term Loan Facility shall expressly
consent thereto in writing, the Company may redeem this Note as provided in
Section 2 above and the Company may make distributions as provided in
Section 6.3 below.

3.1.3. The Holder agrees that the priority of the Senior Debt set forth above
shall continue during any insolvency, receivership, bankruptcy, dissolution,
liquidation, or reorganization proceeding, or in any other proceeding, whether
voluntary or involuntary, by or against the Company, under any bankruptcy or
insolvency law or other similar laws, including, without limitation, any federal
or state law relating to the relief of debtors of any jurisdiction, or involving
any custodian, liquidator or trustee whether now or hereafter in effect, and in
any out-of-court composition, assignment for the benefit of creditors,
readjustment of indebtedness, reorganization, extension or other debt
arrangement of any kind (collectively, an “Insolvency Proceeding”). In the event
of any payment, distribution, division or application, partial or complete,
voluntary or involuntary, by operation of law or otherwise, of all or any part
of the property, assets or business of the Company or any subsidiary, or the
proceeds thereof, or any securities of the Company, to the Holder, by reason of
any liquidation, dissolution or other winding up of the Company or its business
or by reason of any sale or Insolvency Proceeding, then any such payment or
distribution of any kind or character, whether in cash, property or securities,
which, but for the subordination provisions of this Section 3.1, would otherwise
be payable or deliverable upon or in respect of this Note, shall instead be paid
over or delivered directly to the Senior Creditors, for application to the
payment of the Senior Debt, to the extent necessary to make payment of the
Senior Debt remaining unpaid after giving effect to any

 

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concurrent payment or distribution to the Holder, and no holder of this Note
shall receive any such payment or distribution or any benefit therefrom until
the occurrence of the Senior Payment in Full after which such payments or
distributions may be applied to payment of the indebtedness evidenced by this
Note if and to the extent permitted by law.

3.1.4. Until the Senior Payment in Full has occurred, Holder shall not (a) take
any action or exercise any remedy against the Company to enforce the obligations
of the Company under this Note; (b) take any action or exercise any remedy
against any guarantor of, or pledgor securing, the Senior Debt in order to
collect any of the indebtedness evidenced by this Note; or (c) commence, or join
with any other creditor of the Company in commencing, any bankruptcy,
reorganization or Insolvency Proceeding against the Company; or (d) take any
action or exercise any remedy related to this Note against any property or
assets of any guarantor of, or pledgor securing, the Senior Debt; provided that,
if any Insolvency Proceedings shall be initiated by, or filed against, the
Company, or the Company violates the provisions set forth in Section 6.2 or
Section 6.3, then the Holder shall be permitted to accelerate the obligations
owing under this Note (but shall not be permitted to take any other action or
exercise any other remedy against the Company without the prior written consent
of the Senior Creditors). Any amounts collected by the Holder shall be subject
to Sections 3.1.1, 3.1.2, and 3.1.3. Notwithstanding anything contained in this
Note to the contrary, in no event shall the Holder be entitled to receive and
retain any securities, equity or otherwise, or other consideration in respect of
the indebtedness evidenced by this Note provided for in (x) a plan of
reorganization or otherwise in connection with any bankruptcy or Insolvency
Proceeding or (y) any other judicial or nonjudicial proceeding for the
liquidation, dissolution or winding up of the Company or the assets or
properties of the Company, in any case unless the Senior Payment in Full has
occurred.

3.1.5. The Holder agrees, solely for the benefit of the holders of Senior Debt,
that no consent of the Holder or any other holder of this Note shall be required
for any modification, renewal, extension, rearrangement, increase or refinancing
of any Senior Debt, or waiver of any guaranty therefor, or release of any
Collateral, or any other alteration of the relationship between the Company and
any holder of Senior Debt.

3.1.6. Until the Senior Payment in Full has occurred, the Holder waives all
rights of subrogation, reimbursement and any similar rights with respect to the
indebtedness evidenced by this Note. After the Senior Payment in Full has
occurred, to the extent permitted by law, the Holder shall be subrogated to the
rights of the Senior Creditors to receive distribution of assets of the Company,
or payments by or on behalf of the Company, made on the Senior Debt. No payments
to the Holder pursuant to any right of subrogation shall, as among the Company,
its creditors other than the Senior Creditors and the Holder, be deemed to be a
payment or distribution by the Company on account of the Senior Debt.

3.1.7. The Holder acknowledges and agrees that each Senior Creditor, whether the
Senior Debt held by such Senior Creditor is outstanding at the date of this Note
or incurred hereafter, shall have extended credit to the Company, or shall have
purchased or accepted or will purchase or accept such Senior Debt, in reliance
upon the subordination and standstill provisions contained in this Note.

 

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3.1.8. In the event (A) the Senior Payment in Full has not occurred, and (B) the
Holder and other holders of the indebtedness evidenced by this Note shall have
not promptly filed a claim or proof or claim in respect of the indebtedness
evidenced by this Note in connection with an Insolvency Proceeding, the Senior
Creditors and the administrative agent under the Senior Credit Facility and the
administrative agent under the Term Loan Facility, as applicable, shall each
have the right to act as attorney-in-fact for the Holder and other holders of
the indebtedness evidenced by this Note for the purposes of filing a claim or
proof of debt in respect of the indebtedness evidenced by this Note in the form
required in any such Insolvency Proceeding for and on behalf of the holders of
indebtedness evidenced by this Note.

3.1.9. All of the Senior Debt (or any commitments in respect of such Senior
Debt) shall be deemed to have been made or incurred in reliance upon this Note.
The Holder expressly waives all notice of the acceptance by any Senior Creditor
of the subordination and other provisions of this Note and all other notices not
specifically required pursuant to the terms of this Note whatsoever, and the
Holder expressly consents to reliance by the Senior Creditors upon the
subordination and other agreements as herein provided. The Holder agrees that
the Senior Creditors have not made warranties or representations with respect to
the due execution, legality, validity, completeness or enforceability of any
Senior Documents, the collectibility of the obligations thereunder; that the
Senior Creditors shall be entitled to manage and supervise their loans or other
extensions of credit in accordance with applicable law and their usual
practices, modified from time to time as they deem appropriate under the
circumstances; and that the Senior Creditors shall not have any liability to the
Holder for, and the Holder waives any claim (except with respect to gross
negligence or willful misconduct) which the Holder may now or hereafter have
against any Senior Creditor arising out of or relating to (i) any and all
actions which such Senior Creditor takes or omits to take (including, without
limitation, actions with respect to the creation, perfection or continuation of
liens or security interests in the Senior Debt, actions with respect to the
occurrence of a “Default” or “Event of Default” under any of the Senior Credit
Facility or the Term Loan Facility, actions with respect to the foreclosure
upon, sale, release, or depreciation of, or failure to realize upon, any
Collateral and actions with respect to the collection of any claim for all or
any part of the Senior Debt from any account debtor, guarantor or any other
party) with respect to the documents regarding the Senior Debt or any other
agreement related thereto or to the collection of the Senior Debt or the
valuation, use, protection or release of the Senior Collateral and/or other
security for the Senior Debt, (ii) such Senior Creditor’s election, in any
proceeding instituted under Chapter 11 of Title 11 of the United States Code (11
U.S.C. § 101 et seq.) (the “Bankruptcy Code”), of the application of
Section 1111(b)(2) of the Bankruptcy Code or any other Insolvency Proceeding,
and/or (iii) any making of loans to, or grant of a security interest under
Section 364 of the Bankruptcy Code by, the Company as debtor or
debtor-in-possession. In addition, if any Senior Creditor sells or otherwise
disposes of any Collateral, the Holder agrees that such Senior Creditor shall be
entitled to do so “AS-IS, WHERE-IS” without recourse or warranty or
representation of any kind.

3.1.10. The Holder hereby agrees that the Senior Creditors shall have absolute
power and discretion, without notice to the Holder in its capacity as a creditor
under this Note, to deal in any manner with the Senior Debt, including demanding
payment of interest, costs and expenses payable by the Company to the Senior
Creditors, and any security and guaranties therefor including, but not limited
to, release, surrender, extension, renewal, acceleration, compromise, or
substitution. The Holder hereby waives and agrees not to assert against any

 

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Senior Creditor any rights that a guarantor or surety could exercise, including
without limitation any and all rights to notice of the creation, renewal,
extension, modification, compromise or release of any of the Senior Debt or any
collateral therefor or guaranties thereof, in whole or in part; but nothing in
this Note shall constitute the Holder a guarantor or surety. If, at any time
hereafter, the Senior Creditors shall, in their own judgment, determine to
discontinue the extension of credit to or on behalf of the Company in compliance
with the Senior Documents, the Senior Creditors may do so. The Holder
acknowledges that, in accepting the subordinated claim provided for herein, it
did not and is not relying in any way upon the extensions of credit by the
Senior Creditors to the Company. This Note, the obligations of the Holder owing
to the Senior Creditors, and the Senior Creditors’ rights and privileges
hereunder shall continue until the Senior Payment in Full has occurred,
notwithstanding any action or non-action by the Senior Creditors with respect to
the Senior Debt or with respect to any Senior Collateral therefor or any
guaranties thereof. All rights, powers and remedies hereunder shall apply to all
past, present and future Senior Debt and commitments with respect thereto,
including under successive transactions, any of which may continue, renew,
increase, decrease or from time to time create new Senior Debt and
notwithstanding that from time to time the Senior Debt theretofore existing may
have been paid in full. Other than the restriction on total Funded Debt of the
Company set forth in Section 6.2 herein, any provision of any document,
instrument or agreement evidencing, securing or otherwise relating to the
indebtedness evidenced by this Note purporting to limit or restrict in any way
the Company’s ability to enter into any agreement with any Senior Creditor to
amend or modify any document, instrument or agreement evidencing, securing or
otherwise relating to the Senior Debt shall be deemed of no force or effect
until the Senior Payment in Full has occurred.

3.1.11. The obligations hereunder of the Holder or any other holders of
indebtedness evidenced by this Note shall continue to be effective, or be
reinstated, as the case may be, if at any time any payment in respect of any
Senior Debt is rescinded or must otherwise be restored or returned by a holder
of Senior Debt by reason of any Insolvency Proceeding or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Company or any substantial part of its property, or otherwise,
all as though such payment had not been made.

3.1.12. The Holder agrees to pay all costs, legal expenses and attorneys’,
paralegals’ and other professionals’ fees of every kind paid or incurred by the
administrative agents under both the Senior Credit Facility and the Term Loan
Facility and the Senior Creditors in successfully enforcing their rights
hereunder against the Holder, including, but not limited to, litigation
instituted in a state or federal court, as hereinafter provided (including,
without limitation, proceedings under the Bankruptcy Code or any Insolvency
Proceeding) to enforce the provisions of Section 3 or Section 9 of this Note.
After a final adjudication in favor of the Senior Creditors which is not subject
to appeal such payment shall be promptly paid on written demand of the Senior
Creditors or the administrative agents under both the Senior Credit Facility and
the Term Loan Facility.

3.1.13. The Company agrees to pay all costs, legal expenses and attorneys’,
paralegals’ and other professionals’ fees of every kind paid or incurred by the
Holder in enforcing its rights hereunder against the Company, including, but not
limited to, litigation instituted in a State or Federal Court, as hereinafter
provided (including, without limitation, proceedings under the Bankruptcy Code
or any Insolvency Proceeding) in enforcing this Note, promptly on demand of the
Holder or other person paying or incurring the same.

 

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Section 4. Events of Default. For purposes of this Note, an “Event of Default”
under this Note shall be deemed to have occurred if:

(a) the Company fails to pay at maturity (stated or by acceleration) the full
amount of the principal of this Note plus accrued and unpaid interest;

(b) the Company breaches or otherwise fails to perform or observe the covenants,
agreements and restrictions in Section 6 hereof and such breach or failure to
perform or observe a covenant, agreement or restriction is not cured within
sixty (60) days after the receipt of notice thereof delivered to the Company by
the holder of this Note; provided, however, that if such breach or failure is of
a type which cannot reasonably be cured within such sixty (60) day period, such
breach or failure shall not be deemed to constitute an Event of Default so long
as the Company shall promptly commence action during such sixty (60) day period,
and shall diligently pursue such actions as may be reasonably required, to cure
such breach or failure.

(c) the Company commences an Insolvency Proceeding; or any order for relief with
respect to the Company is entered under the Bankruptcy Code and the Company
consents to the order or the order is not dismissed within sixty (60) days after
it is entered; or any such petition or application is filed, or any Insolvency
Proceeding is commenced, against the Company and (i) the Company does not
contest the petition, application or Insolvency Proceeding, or (ii) such
petition, application or Insolvency Proceeding is not dismissed or withdrawn
within sixty (60) days after it is filed or commenced; or

(d) the Company defaults on the obligation to pay the principal amount of any
Senior Debt at final maturity or any other event of default occurs with respect
to Senior Debt and, as a result of such other event of default, the maturity of
such Senior Debt shall have been accelerated and such Senior Debt shall have
become due and payable prior to its stated maturity and such acceleration shall
not have been rescinded or annulled.

Section 5. Consequences of Events of Default.

5.1 If any Event of Default of the type described in Section 4(c) hereof occurs,
the entire outstanding principal amount of this Note (plus all accrued interest
thereon) will automatically accelerate and become immediately due and payable
without any notice to the Company or action by the Holder of this Note.

5.2 If any other Event of Default has occurred and is continuing, the Holder of
this Note may demand immediate payment of all or any portion of the outstanding
principal amount of this Note; provided however, that the Holder will have no
right to accelerate any amount owing under this Note for an Event of Default
under this Section 5.2 until the Senior Payment in Full has occurred.

 

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5.3 If any Event of Default occurs the interest on the Note shall accrue at
15% per annum, from and after the date of the Event of Default up to and until
such Event of Default is cured, waived or rescinded.

Section 6. Covenants, Agreements and Restrictions. For so long as the Holder
owns any portion of this Note:

6.1 Financial Information. The Company will furnish the Holder with a copy of
the following financial information:

6.1.1. as soon as available and in any event within 45 days after the end of
each of the first three fiscal quarters of each fiscal year, an unaudited
consolidated balance sheet of the Company and its consolidated subsidiaries as
of the end of such fiscal quarter and consolidated statements of income and cash
flows of the Company and its consolidated subsidiaries for such fiscal quarter
and for the period commencing at the end of the previous fiscal year and ending
with the end of such fiscal quarter, and including (in each case), in
comparative form the figures for the corresponding fiscal quarter in, and year
to date portion of, the immediately preceding fiscal year (provided that such
comparative figures will not be required until the fiscal quarter ending on
March 31, 2009), in each case, certified by the chief financial or accounting
officer of the Company as complete and correct in all material respects and as
fairly presenting the financial condition, results of operations and cash flows
of the Company and its consolidated subsidiaries in accordance with GAAP,
subject only to normal year-end audit adjustments and the absence of footnotes;

6.1.2. as soon as available and in any event within 120 days after the end of
each fiscal year, a copy of the audited, consolidated balance sheet of the
Company and its consolidated subsidiaries, and the related consolidated
statements of income and cash flows of the Company and its consolidated
subsidiaries for such fiscal year, setting forth in comparative form the figures
for the immediately preceding fiscal year.

6.2 Total Debt. The Company shall not permit the total Funded Debt of the
Company and its subsidiaries (other than the Funded Debt evidenced by this Note
and other Funded Debt that is subordinated to this Note to at least the extent
that this Note is subordinated to Senior Debt), to exceed $550,000,000; provided
that, such total Funded Debt may exceed $550,000,000 if such additional Funded
Debt is incurred or assumed in connection with one or more acquisitions by the
Company or its subsidiaries of oil and gas properties from unrelated third
parties so long as before and after giving effect to the incurrence of such
additional Funded Debt no Event of Default shall exist and the Company’s total
Funded Debt does not exceed 2.15 times the Company’s total stockholder’s equity
determined in accordance with GAAP.

6.3 Restriction on Restricted Payments. Without the prior written consent of the
Holder of this Note, the Company shall not, and shall not permit any Subsidiary
to, repurchase or redeem any equity of the Company or make any distributions or
pay any dividends to any equity holder of the Company, except for
(a) distributions to pay income taxes imposed by any

 

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Governmental Authority attributable to income generated by the Company and its
subsidiaries, (b) distributions to pay tax, accounting and other general and
administrative activities conducted by such equity holder, including without
limitation, the “Monitoring Fee” under and as defined in the Senior Credit
Facility and the Term Loan Facility, and (c) other distributions or dividends to
the extent permitted under the Senior Documents, provided the Holder has
provided written approval of such distributions or dividends under this clause
(c) in advance.

6.4 Guarantees. The Company shall cause the Guarantors in existence on the date
hereof to execute and deliver the Guaranty on the date hereof and shall cause
any future subsidiaries formed or acquired by the Company to join in, and be
bound by, the terms of the Guaranty by execution and delivery to the Holder of a
guarantor joinder agreement substantially in the form of the guarantor joinder
agreement attached as Exhibit A to the Guaranty.

Section 7. Definitions. For purposes of this Note:

“Affiliate” means, (i) with respect to any natural Person, (A) a member of such
Person’s Family Group or (B) any trust or family partnership or other entity
whose beneficiaries shall solely be a member or members of such Person’s Family
Group, any (ii) with respect to any Person who is not a natural Person, any
other Person that directly or indirectly controls, is controlled by, or is under
common control with, such person. For these purposes, “control” shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.

“Business Day” means any day which is not a Saturday, Sunday or another day on
which national banking institutions in Houston, Texas are closed as authorized
or required by law.

“Company” has the meaning given such term on page 1 hereof.

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

(a) indebtedness of such Person for borrowed money;

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

(c) 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);

(d) obligations of such Person as lessee under capital leases and obligations of
such Person in respect of synthetic leases;

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

(f) obligations of such Person owing in respect of redeemable preferred stock or
other preferred equity interest of such Person;

 

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

(h) 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 (g) above; and

(i) indebtedness or obligations of others of the kinds referred to in
clauses (a) through (h) above secured by any lien on or in respect of any
property of such Person.

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

“Effective Date” has the meaning given such term on page 1 of this Note.

“Event of Default” has the meaning given such term in Section 4 hereof.

“Family Group” means, with respect to any natural Person, such natural Person’s
spouse, domestic partners, sister, brother, stepchild and/or lineal descendants,
grandparent, father, mother (whether by blood relationship or adoption), and any
other Person as to which such natural person is a lineal descendant (whether by
blood relationship or adoption), and any trust or other entity solely for the
benefit of such Person and/or any of the foregoing.

“Funded Debt” means, as of any date of determination, for the Company and its
subsidiaries on a consolidated basis, the sum of (a) the outstanding principal
amount of all obligations, whether current or long-term, for borrowed money and
all outstanding obligations evidenced by bonds, debentures, notes, loan
agreements or other similar instruments, (b) all Debt in respect of the deferred
purchase price of property (other than accounts payable arising in the ordinary
course of business), (c) the capitalized amount that, in accordance with GAAP
would appear on a consolidated balance sheet of the Company and its subsidiaries
as of such date with respect to capitalized leases, (d) without duplication, all
guarantees with respect to outstanding Debt of the types specified in clauses
(a) through (c) above of Persons other than the Company, and (e) all obligations
of the types specified in clauses (a) through (c) above of Persons other than
the Company that are secured by liens upon the property of the Company. The
amount of Funded Debt of the type specified in clause (d) above shall be the
outstanding amount of Debt guaranteed, and the amount of Funded Debt of the type
specified in clause (e) above shall be the lesser of the outstanding amount of
Debt or the value of the Company’s property securing such Debt.

“GAAP” means generally accepted accounting principles in effect at the relevant
time in the United States of America.

“Governmental Authority” means any nation or government, any state or political
subdivision thereof, any federal or state court and any other agency, body,
authority or entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.

 

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“Guarantors” means any subsidiary of the Company now existing or hereafter
created or acquired by the Company. On the date hereof, the Guarantors are
Milagro Exploration, LLC, a Delaware limited liability company, and Milagro
Producing, LLC, a Delaware limited liability company.

“Guaranty” means the Guaranty dated the date hereof executed by the Guarantors
in existence on the date hereof in favor of the Holder.

“Insolvency Proceeding” has the meaning given such term in Section 3.1.3 hereof.

“Liquidity Event” means the occurrence of (i) the distribution of the assets of
the Company in liquidation or dissolution, (ii) the sale of all or substantially
all the assets of the Company and the Guarantors, (iii) the issuance or sale, in
one transaction, or one or more related and substantially contemporaneous
transactions, to any Person that is not a Permitted Holder if, as a result of
such issuance or sale, Persons who are not Permitted Holders acquire a majority
of the equity interests of the Company that are entitled to vote at all times
for the election of directors or managers of, or others serving an equivalent
function for, the Company.

“Note” means this Senior Subordinated Unsecured Note or any notes issued by the
Company upon the partial transfer or redemption of a portion of any portion
hereof.

“Parent” means Milagro Holdings, LLC, a Delaware limited liability company.

“Payment Date” has the meaning given such term in Section 1 hereof.

“Permitted Holder” means (a) any Person that, on the Closing Date, owns equity
securities or options or other rights to acquire equity securities, of the
Parent, 9(b) the Affiliates of any such Person and (c) any fund, investment
account, other account or other investment vehicle managed by any such Person or
any such Person’s investment manager or an Affiliate of any such manager.

“Person” means any individual, corporation, limited liability company,
partnership, association, trust or any other entity or organization of any kind
or character, including any Governmental Authority.

“Redemption Date” has the meaning given such term in Section 2.1 hereof.

“Redemption Price” has the meaning given such term in Section 2.1 hereof.

“Senior Collateral” has the meaning given such term in Section 3.1.1 hereof.

“Senior Credit Facility” means the First Lien Credit Agreement dated as of
November 30, 2007, among the Company, the Guarantors, Wells Fargo Bank, N.A., as
administrative agent, lead arranger and sole bookrunner, the co-documentation
agents named therein and the lenders from time to time parties thereto, as such
First Lien Credit Agreement is now or at any time hereafter may be amended,
restated, supplemented, modified, renewed, refunded, replaced or refinanced from
time to time.

 

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“Senior Creditor” means any Person to whom the Company is indebted pursuant to
the Senior Credit Facility or the Term Loan Facility or any other Person who
benefits from the liens granted pursuant thereto.

“Senior Debt” means all now existing or hereafter arising obligations (monetary
or otherwise, whether absolute or contingent, matured or unmatured) of the
Borrower or any of the Guarantors, whether for principal, interest, fees,
expenses, indemnities, reimbursement obligations with respect to letters of
credit, obligations arising out of or relating to or in connection with the
hedging of interest rates, commodities or other contingencies or with respect to
other services provided by any Senior Creditor which obligations arise under or
pursuant to, or are secured under or pursuant to, the Senior Documents
(including any interest, fees or expenses accruing on or after the date any
Proceeding is commenced, whether such interest is allowed in such Proceeding).

“Senior Document” means each now existing or hereafter arising loan agreement,
credit agreement, note, security agreement, pledge, guaranty agreement and any
other document or instrument executed in connection with or related to the
Senior Credit Facility or the Term Loan Facility.

“Senior Payment in Full” shall mean the occurrence of all of the following:
(1) the payment in full in cash of all Senior Debt, (2) the termination, return
or cash collateralization of all letters of credit issued under the Senior
Credit Facility and (3) the termination or expiration of all commitments to
advance or create Senior Debt.

“Term Loan Facility” means the Second Lien Credit Agreement dated as of
November 30, 2007, among the Guarantors, the Company, Wells Fargo Energy
Capital, Inc., as administrative agent, and Wells Fargo Bank, N.A. and
Guggenheim Corporate Funding, LLC, as co-lead arrangers, Wells Fargo, Bank,
N.A., as sole bookrunner, and the lenders parties thereto, as such Second Lien
Credit Agreement is now or at any time hereafter may be amended, restated,
supplemented, modified, renewed, refunded, replaced or refinanced from time to
time.

Section 8. Payments. If any payment of principal or interest on this Note
becomes due on a day that is not a Business Day, such payment will be made on
the next succeeding Business Day and such extension of time will in such case be
included in computing interest in connection with such payment. Any payment to
be made hereunder will be made at the direction of the Holder hereof by wire
transfer of immediately available federal funds to an account designated by the
Holder.

Section 9. Amendment and Waiver. Except as otherwise expressly provided herein,
the provisions of this Note may not be amended, and the Company may not take any
action herein prohibited, without the prior written consent of the Holder and
the Senior Creditors.

Section 10. Place of Payment and Notices. Payments of principal and interest,
and notices hereunder, are to be delivered to the Holder at the following
address:

Petrohawk Energy Corporation

1000 Louisiana, Suite 5810

Houston, Texas 77002

 

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Attention: Mark J. Mize

Telephone: 832-207-2732

Facsimile: 832-204-2832

And notices to the Company at the following address:

Milagro Development I, LP

1401 McKinney, Suite 925

Houston, Texas 77010

Attention: Richard W. Piacenti

Telephone: (713) 307-7070

Facsimile: (713) 307-7071

Either the Holder or the Company may change its address for notices hereunder by
notice to the other as provided in this Section 10.

Section 11. Usury Laws. It is the intention of the Company and the Holder of
this Note to conform strictly to all applicable usury laws now or hereafter in
force, and any interest payable under this Note will be subject to reduction to
the amount not in excess of the maximum legal amount allowed under the
applicable usury laws as now or hereafter construed by the courts having
jurisdiction over such matters. The aggregate of all interest (whether
designated as interest, service charges, points or otherwise) contracted for,
chargeable or receivable under this Note will under no circumstances exceed the
maximum legal rate upon the unpaid principal balance of this Note remaining
unpaid from time to time. If such interest does exceed the maximum legal rate,
it will be deemed a mistake and such excess will be canceled automatically and,
if theretofore paid, rebated to the Company or credited on the principal amount
of this Note, or if this Note has been repaid, then such excess will be rebated
to the Company.

Section 12. Severability; Waiver of Notice. Whenever possible, each provision of
this Note will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Note is held to be prohibited by or
invalid under applicable law in any jurisdiction, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating any other provision of this Note. To the extent permitted by law,
the Company hereby waives presentment, demand, notice of intent to accelerate,
notice of protest and all other demands and notices, in connection with the
delivery, acceptance, performance, default or enforcement of this Note.

Section 13. Transferability of the Note. Neither this Note, nor any rights of
the Holder hereunder, may be transferred or assigned, in whole or in part,
during the first 150 days after the Effective Date. Commencing with the first
day following the expiration of the 150-day period referred to in the
immediately preceding sentence, this Note may be transferred or assigned, in
whole or in part, by the Holder without the prior written consent of the
Company; provided however, the Holder must first give written notice of such
intended transfer or assignment to the Company and to the administrative agents
under the Senior Credit Facility and the Term Loan Facility, and the Company
shall have 10 days to notify the Holder and to the administrative agents under
the Senior Credit Facility and the Term Loan Facility, in writing that it wishes
to acquire the entire Note. If the Company so notifies the Holder, the Company
shall have 30 days

 

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from the date of such notice (from the Company to the Holder to consummate the
acquisition of the Note. If the Company gives notice of its intent to purchase
this Note and fails to purchase the Note during such 30-day period (other than
through the fault of the Holder), the Holder shall no longer be obligated to
notify the Company of the Holder’s intent to transfer or assign the Note. If the
Note is acquired by the Company after the first 150 days after the Effective
Date but on or prior to the first anniversary of the Effective Date, the
acquisition price of the Note shall be the unpaid principal amount of the Note
(including PIK interest) plus accrued and unpaid interest minus $25,000,000. If
the Note is acquired by the Company after the first anniversary of the Effective
Date, the acquisition price of the Note shall be the then outstanding principal
amount of the Note (including PIK interest) plus accrued and unpaid interest.
The Company may freely assign its rights under this paragraph to any Person that
is an Affiliate of the Company, a Permitted Holder or any other equity investor
in the Company, any affiliate of any such equity investor or any fund,
investment account, other account or other investment vehicle managed by any
such equity investor or by any such equity investor’s investment manager upon
notice to the administrative agents under the Senior Credit Facility and the
Term Loan Facility.

Except as expressly set forth in the preceding paragraph, the Company may not
transfer or assign, in whole or in part, its rights and obligations hereunder
without the prior written consent of the Holder (which consent may be withheld
in the Holder’s sole discretion). This Note is not intended to confer any rights
or remedies upon any person except the Company, the Holder and the Senior
Creditors.

Section 14. GOVERNING LAW. THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF
TEXAS AND WILL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF SUCH
STATE.

 

      MILAGRO MEZZ, LLC       By:  

/s/ ROBERT L. CAVNAR

      Name:   Robert L. Cavnar       Its:   President and Chief Executive
Officer ACKNOWLEDGED AND AGREED
AS TO THE SUBORDINATION PROVISIONS
UNDER THIS NOTE:      

HOLDER:

     

PETROHAWK ENERGY CORPORATION

      By:  

/s/ FLOYD C. WILSON

      Name:   Floyd C. Wilson       Title:   President and Chief Executive
Officer      

 

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