**Exhibit 10.7**

** **

Execution Version

 

 

 

**$120,000,000**

 

**AMENDEDAND RESTATED CREDIT AGREEMENT**

 

Among

 

**CANO PETROLEUM, INC.**

 

as Borrower,

 

**THE LENDERS PARTY HERETO FROM TIMETO TIME**

** **

as Lenders,

 

and

 

**UNION BANKOF CALIFORNIA, N.A.**

 

as Administrative Agent and as Issuing Lender

 

December 17, 2008

 

 

 

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**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            |     | 20 |
| Section 1.03 |                             | Accounting Terms; Changes in GAAP      |     | 20 |
| Section 1.04 |                             | Types of Advances                      |     | 20 |
| Section 1.05 |                             | Miscellaneous                          |     | 21 |
|              |                             |                                   |     |   |
| ARTICLE II        | CREDIT FACILITIES                |                                   | 21       |
|              |                             |                                   |     |   |
| Section 2.01 |                             | Commitment for Advances                |     | 21 |
| Section 2.02 |                             | Borrowing Base                         |     | 22 |
| Section 2.03 |                             | Method of Borrowing                    |     | 24 |
| Section 2.04 |                             | Reduction of the Commitments           |     | 27 |
| Section 2.05 |                             | Prepayment of Advances                 |     | 27 |
| Section 2.06 |                             | Repayment of Advances                  |     | 30 |
| Section 2.07 |                             | Letters of Credit                      |     | 30 |
| Section 2.08 |                             | Fees                                   |     | 34 |
| Section 2.09 |                             | Interest                               |     | 35 |
| Section 2.10 |                             | Payments and Computations              |     | 36 |
| Section 2.11 |                             | Sharing of Payments, Etc.              |     | 37 |
| Section 2.12 |                             | Breakage Costs                         |     | 38 |
| Section 2.13 |                             | Increased Costs                        |     | 38 |
| Section 2.14 |                             | Taxes                                  |     | 39 |
| Section 2.15 |                             | Replacement of Lender                  |     | 41 |
|              |                             |                                   |     |   |
| ARTICLE III       | CONDITIONS OF LENDING            |                                   | 42       |
|              |                             |                                   |     |   |
| Section 3.01 |                             | Conditions Precedent to Effectiveness  |     | 42 |
| Section 3.02 |                             | Conditions Precedent to All Borrowings |     | 45 |
|              |                             |                                   |     |   |
| ARTICLE IV        | REPRESENTATIONS AND WARRANTIES   |                                   | 46       |
|              |                             |                                   |     |   |
| Section 4.01 |                             | Existence; Subsidiaries                |     | 46 |
| Section 4.02 |                             | Power                                  |     | 46 |
| Section 4.03 |                             | Authorization and Approvals            |     | 47 |
| Section 4.04 |                             | Enforceable Obligations                |     | 47 |
| Section 4.05 |                             | Financial Statements                   |     | 47 |
| Section 4.06 |                             | True and Complete Disclosure           |     | 48 |
| Section 4.07 |                             | Litigation; Compliance with Laws       |     | 48 |
| Section 4.08 |                             | Use of Proceeds                        |     | 48 |
| Section 4.09 |                             | Investment Company Act                 |     | 48 |
| Section 4.10 |                             | Federal Power Act                      |     | 49 |
| Section 4.11 |                             | Taxes                                  |     | 49 |
| Section 4.12 |                             | Pension Plans                          |     | 49 |
|                   |                                  |                                        |          |  |  |  |

 

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| Section 4.13 |                  | Condition of Property; Casualties                           |   | 50     |
|-------------------|-----------------------|-------------------------------------------------------------|--------|--------|
| Section 4.14 |                  | No Burdensome Restrictions; No Defaults                     |   | 50     |
| Section 4.15 |                  | Environmental Condition                                     |   | 50     |
| Section 4.16 |                  | Permits, Licenses, Etc.                                     |   | 51     |
| Section 4.17 |                  | Gas Contracts                                               |   | 51     |
| Section 4.18 |                  | Liens; Titles, Leases, Etc.                                 |   | 52     |
| Section 4.19 |                  | Solvency and Insurance                                      |   | 52     |
| Section 4.20 |                  | Hedging Agreements                                          |   | 52     |
| Section 4.21 |                  | Material Agreements                                         |   | 52     |
|              |                  |                                                        |   |   |
| ARTICLE V         | AFFIRMATIVE COVENANTS |                                                        | 53     |
|              |                  |                                                        |   |   |
| Section 5.01 |                  | Compliance with Laws, Etc.                                  |   | 53     |
| Section 5.02 |                  | Maintenance of Insurance                                    |   | 53     |
| Section 5.03 |                  | Preservation of Corporate Existence, Etc.                   |   | 54     |
| Section 5.04 |                  | Payment of Taxes, Etc.                                      |   | 54     |
| Section 5.05 |                  | Visitation Rights                                           |   | 54     |
| Section 5.06 |                  | Reporting Requirements                                      |   | 54     |
| Section 5.07 |                  | Maintenance of Property                                     |   | 58     |
| Section 5.08 |                  | Agreement to Pledge                                         |   | 58     |
| Section 5.09 |                  | Use of Proceeds                                             |   | 58     |
| Section 5.10 |                  | Title Evidence and Opinions                                 |   | 58     |
| Section 5.11 |                  | Further Assurances; Cure of Title Defects                   |   | 59     |
| Section 5.12 |                  | Hedging Arrangements                                        |   | 59     |
| Section 5.13 |                  | Bank Accounts                                               |   | 59     |
|              |                  |                                                        |   |   |
| ARTICLE VI        | NEGATIVE COVENANTS    |                                                        | 60     |
|              |                  |                                                        |   |   |
| Section 6.01 |                  | Liens, Etc.                                                 |   | 60     |
| Section 6.02 |                  | Debts, Guaranties, and Other Obligations                    |   | 61     |
| Section 6.03 |                  | Agreements Restricting Liens and Distributions              |   | 62     |
| Section 6.04 |                  | Merger or Consolidation; Asset Sales                        |   | 62     |
| Section 6.05 |                  | Restricted Payments                                         |   | 63     |
| Section 6.06 |                  | Investments                                                 |   | 63     |
| Section 6.07 |                  | Affiliate Transactions                                      |   | 64     |
| Section 6.08 |                  | Compliance with ERISA                                       |   | 64     |
| Section 6.09 |                  | Sale-and-Leaseback                                          |   | 65     |
| Section 6.10 |                  | Change of Business                                          |   | 65     |
| Section 6.11 |                  | Organizational Documents, Name Change                       |   | 65     |
| Section 6.12 |                  | Use of Proceeds; Letters of Credit                          |   | 65     |
| Section 6.13 |                  | Gas Imbalances, Take-or-Pay or Other Prepayments            |   | 65     |
| Section 6.14 |                  | Limitation on Speculative Hedging                           |   | 66     |
| Section 6.15 |                  | Additional Subsidiaries; Additional Oil and Gas  Properties |   | 66     |
| Section 6.16 |                  | Account Payables                                            |   | 66     |
| Section 6.17 |                  | Current Ratio                                               |   | 66     |
| Section 6.18 |                  | Leverage Ratio                                              |   | 67     |
| Section 6.19 |                  | Interest Coverage Ratio                                     |   | 67     |
| Section 6.20 |                  | Subordinated Debt                                           |   | 67     |
|                   |                       |                                                             |        |        |  |

 

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| Section 6.21 |                                             | Non-Guarantor Subsidiary                          |   | 67     |
|-------------------|--------------------------------------------------|---------------------------------------------------|--------|--------|
| Section 6.22 |                                             | Equity Issuance                                   |   | 67     |
|              |                                             |                                              |   |   |
| ARTICLE VII       | EVENTS OF DEFAULT; REMEDIES                      |                                              | 67     |
|              |                                             |                                              |   |   |
| Section 7.01 |                                             | Events of Default                                 |   | 67     |
| Section 7.02 |                                             | Optional Acceleration of Maturity                 |   | 70     |
| Section 7.03 |                                             | Automatic Acceleration of Maturity                |   | 71     |
| Section 7.04 |                                             | Right of Set-off                                  |   | 71     |
| Section 7.05 |                                             | Non-exclusivity of Remedies                       |   | 71     |
| Section 7.06 |                                             | Application of Proceeds                           |   | 71     |
|              |                                             |                                              |   |   |
| ARTICLE VIII      | THE ADMINISTRATIVE AGENT AND THE  ISSUING LENDER |                                              | 72     |
|              |                                             |                                              |   |   |
| Section 8.01 |                                             | Authorization and Action                          |   | 72     |
| Section 8.02 |                                             | Administrative Agent’s Reliance, Etc.        |   | 72     |
| Section 8.03 |                                             | The Administrative Agent and Its Affiliates       |   | 73     |
| Section 8.04 |                                             | Lender Credit Decision                            |   | 73     |
| Section 8.05 |                                             | Indemnification                                   |   | 73     |
| Section 8.06 |                                             | Successor Administrative Agent and Issuing Lender |   | 74     |
| Section 8.07 |                                             | Collateral Matters                                |   | 75     |
|              |                                             |                                              |   |   |
| ARTICLE  IX       | MISCELLANEOUS                                    |                                              | 76     |
|              |                                             |                                              |   |   |
| Section 9.01 |                                             | Amendments, Etc.                                  |   | 76     |
| Section 9.02 |                                             | Notices, Etc.                                     |   | 77     |
| Section 9.03 |                                             | No Waiver; Remedies                               |   | 77     |
| Section 9.04 |                                             | Costs and Expenses                                |   | 77     |
| Section 9.05 |                                             | Binding Effect                                    |   | 78     |
| Section 9.06 |                                             | Lender Assignments and Participations             |   | 78     |
| Section 9.07 |                                             | Indemnification; Waiver                           |   | 80     |
| Section 9.08 |                                             | Execution in Counterparts                         |   | 81     |
| Section 9.09 |                                             | Survival of Representations, Etc.                 |   | 81     |
| Section 9.10 |                                             | Severability                                      |   | 81     |
| Section 9.11 |                                             | Business Loans                                    |   | 81     |
| Section 9.12 |                                             | Governing Law; Submission to Jurisdiction         |   | 82     |
| Section 9.13 |                                             | Subordination and Intercreditor Agreement         |   | 82     |
| Section 9.14 |                                             | USA Patriot Act                                   |   | 82     |
| Section 9.15 |                                             | WAIVER OF JURY TRIAL                              |   | 83     |
| Section 9.16 |                                             | ORAL AGREEMENTS                                   |   | 83     |
|                   |                                                  |                                                   |        |        |  |

 
| **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       |   |

 

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| 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         - | Pricing Grid                       |   |
| Schedule II       -            | Notice Information and Commitments |   |
| Schedule 4.01 -                                              | Subsidiaries of Borrower           |   |
| Schedule 4.05 -                                              | Existing Debt                      |   |
| Schedule 4.07 -                                              | Litigation                         |   |
| Schedule 4.14(a) -                                      | MAC Documents                      |   |
| Schedule 4.20 -                                              | Hedging Contracts                  |   |
| Schedule 4.21 -                                              | Material Agreements                |   |

 

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**AMENDEDAND RESTATED CREDIT AGREEMENT**

 

This Amendedand Restated Credit Agreement dated as of December 17, 2008 is among CanoPetroleum, Inc., a Delaware corporation (“Borrower”), the lenders partyhereto from time to time (“Lenders”), and Union Bank of California, N.A., asadministrative agent for such Lenders (in such capacity, the “AdministrativeAgent”) and as issuing lender for such Lenders (in such capacity, the “IssuingLender”).

 

**RECITALS**

 

A.            The Borrower, the AdministrativeAgent, the Issuing Lender, and the Lenders have previously executed anddelivered that certain Credit Agreement dated as of November 29, 2005, asheretofore amended (as so amended, the “Restated Agreement”).

 

B.            The Borrower, the AdministrativeAgent, the Issuing Lender, and the Lenders desire to amend and restate (but not extinguish) the Restated Agreement inits entirety as hereinafter set forth through the execution of thisAgreement.

 

C.            It is the intentionof the parties hereto that this Agreement is an amendment and restatement ofthe Restated Agreement, not a new or substitute credit agreement or novation ofthe Restated Agreement.

 

NOW,THEREFORE, in consideration of the premises and the agreements, provisions andcovenants herein contained, the Borrower, the Administrative Agent, the IssuingLender, and the Lenders, (i) do hereby agree that the Restated Agreementis amended and restated (but not substituted or extinguished) in its entiretyas set forth herein, and (ii) do hereby further agree as follows:

 

**ARTICLE I**

** **

**DEFINITIONS AND ACCOUNTING TERMS**

** **

Section 1.01           Certain Defined Terms.  As used in this Agreement, the terms definedabove shall have the meanings set forth therein and the following terms shallhave the following meanings (unless otherwise indicated, such meanings to beequally applicable to both the singular and plural forms of the terms defined):

 

“AcceptableSecurity Interest” in any Property means a Lien which (a) exists infavor of the Administrative Agent for the benefit of the Secured Parties, (b) issuperior to all Liens or rights of any other Person in the Property encumberedthereby, 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 oroperations or of stock (or other ownership interests) of a Person (other thanof a wholly-owned Subsidiary of the Borrower).

 

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“AdjustedReference Rate” means, for any day, the fluctuating rate per annum ofinterest equal to the greatest of (a) the Reference Rate in effect on suchday, (b) the Federal Funds Rate in effect on such day plus 1⁄2 of 1% and (c) theEurodollar Rate for an Interest Period of one month which begins on such dayplus 1.50%.

 

“AdministrativeAgent” means Union Bank of California, N.A., in its capacity as agentpursuant 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) aspart of a Borrowing and refers to a Reference Rate Advance or a Eurodollar RateAdvance.

 

“Affiliate”means, as to any Person, any other Person that, directly or indirectly, throughone or more intermediaries, controls, is controlled by, or is under commoncontrol with, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlledby” 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 ofa Person, whether through ownership of a Control Percentage, by contract, orotherwise.  Without limiting thegenerality of the foregoing, a Person shall be deemed to be controlled byanother Person if such other Person possesses, directly or indirectly, thepower to vote 10% or more of the securities having ordinary voting power forthe election of directors, managing general partners or the equivalent.

 

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

 

“ApplicableMargin” means, with respect to any Advance, (a) during any time whenan Event of Default exists, 3% per annum plus the rate per annum set forth inthe Pricing Grid for the relevant Type of such Advance based on the presentUtilization Level applicable from time to time, and (b) at any other time,the rate per annum set forth in the Pricing Grid for the relevant Type of suchAdvance based on the relevant Utilization Level applicable from time totime.  The Applicable Margin for anyAdvance shall change when and as the relevant Utilization Level changes and whenand as any such Event of Default commences or terminates.

 

“Assignmentand Acceptance” means an assignment and acceptance entered into by a Lenderand an Eligible Assignee, and accepted by the Administrative Agent, insubstantially the form of the attached Exhibit A.

 

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

 

“BorrowingBase” means at any particular time, the Dollar amount determined inaccordance with Section 2.02 on account of Proven Reserves attributable toOil and Gas Properties of the Borrower and its Subsidiaries subject to anAcceptable Security Interest and described in the most recent IndependentEngineering Report or Internal Engineering Report, as applicable, delivered tothe Administrative Agent and the Lenders pursuant to Section 2.02.

 

“BusinessDay” means a day of the year on which banks are not required or authorizedto close in Dallas, Texas and Los Angeles, California and, if the applicableBusiness Day relates to 

 

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any Eurodollar Rate Advances, on which dealings are carried on by banksin the London interbank market.

 

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

 

“CashCollateral Account” means a special interest bearing cash collateralaccount pledged by the Borrower to the Issuing Lender containing cash depositedpursuant to Sections 2.05(b), 7.02(b), or 7.03(b) to be maintained withthe Issuing Lender in accordance with Section 2.07(g) and bearinterest or be invested in the Issuing Lender’s reasonable discretion.

 

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

 

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

 

“Change inControl” shall mean the occurrence of any of the following events: (a) theBorrower ceases to own, either directly or indirectly, 100% of the EquityInterest in any Subsidiary other than as a result of a sale of assets or mergerpermitted under Section 6.04, (b) any “person” or “group” (as suchterms are used in Sections 13(d) and 14(d) of the Securities ExchangeAct of 1934) other than a Permitted Holder becomes the “beneficial owner” (asdefined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of1934, except that a person or group shall be deemed to have “beneficialownership” of all securities that such person or group has the right to acquire(such right, an “option right”), whether such right is exercisable immediatelyor only after the passage of time), directly or indirectly, of 33% or more ofthe Equity Interest of the Borrower entitled to vote for members of the boardof directors or equivalent governing body of the Borrower on a fully-dilutedbasis (and taking into account all such securities that such person or grouphas the right to acquire pursuant to any option right), or (c) during anyperiod of 12 consecutive months, a majority of the members of the board ofdirectors or other equivalent governing body of the Borrower cease to becomposed of individuals (i) who were members of that board or equivalentgoverning body on the first day of such period, (ii) whose election ornomination to that board or equivalent governing body was approved byindividuals referred to in clause (i) above constituting at the time ofsuch election or nomination at least a majority of that board or equivalentgoverning body or (iii) whose election or nomination to that board orother equivalent governing body was approved by individuals referred to in clauses(i) and (ii) above constituting at the time of such election ornomination at least a majority of that board or equivalent governing body.   For purposes of this definition, “PermittedHolder” means any of the following: (A) any Person that is the “beneficialowner” (as referred to above) of an Equity Interest in the Borrower on the datehereof, (B) any such Person’s estate, spouse and lineal descendants andthe legal representative of any of the foregoing, (C) the trustees of anybona fide trusts of which any of the foregoing are the sole beneficiaries andgrantors, and (D) any corporation, limited 

 

3

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partnership, limited liability company, or similar entity, all of theVoting 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”, “PledgedCollateral” and “Mortgaged Properties” (as defined in each of the Mortgages,the Security Agreements, and the Pledge Agreement, as applicable) or similarterms used in the Security Instruments, and (b) all amounts contained inthe Borrower’s and its Subsidiaries’ bank accounts.

 

“Commitment”means the amount set opposite such Lender’s name on the Schedule II hereof asits Commitment, or if such Lender has entered into any Assignment andAcceptance, as set forth for such Lender as its Commitment in the Registermaintained by the Administrative Agent pursuant to Section 9.06(c), assuch amount may be reduced or terminated pursuant to Section 2.04 or Article VIIor otherwise under this Agreement.  Theaggregate amount of the Commitments on the date hereof is $120,000,000.00.

 

“CommitmentFee Rate” means the per annum commitment fee rate set forth on the PricingGrid applicable from time to time.  TheCommitment Fee Rate shall change when and as the relevant Utilization Levelchanges.

 

“CommitmentTermination Date” means the earlier of (a) the Maturity Date and (b) theearlier termination in whole of the Commitments pursuant to Section 2.04or Article VII.

 

“ComplianceCertificate” means a compliance certificate in the form of the attached Exhibit Bsigned by a Responsible Officer of the Borrower.

 

“ConsolidatedNet Income” means, with respect to the Borrower and its consolidatedSubsidiaries, for any period, the net income for such period after taxes, asdetermined in accordance with GAAP, excluding, however, (a) extraordinaryitems, including (i) any net non-cash gain or loss during such period arisingfrom the sale, exchange, retirement or other disposition of capital assets(such term to include all fixed assets and all securities) other than in theordinary course of business, and (ii) any write-up or write-down of assetsand (b) the cumulative effect of any change in GAAP.

 

“ControlPercentage” means, with respect to any Person, the percentage of theoutstanding Equity Interest (including any options, warrants or similar rightsto purchase such Equity Interest) of such Person having ordinary voting powerwhich gives the direct or indirect holder of such Equity Interest the power toelect a majority of the board of directors (or other applicable governing body)of such Person.

 

“ControlledGroup” means all members of a controlled group of corporations and allbusinesses (whether or not incorporated) under common control which, togetherwith the Borrower, are treated as a single employer under Section 414 ofthe Code.

 

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

 

4

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“CreditExtensions” means (a) an Advance made by any Lender, and (b) theissuance, increase or extension of any Letter of Credit by the Issuing Lender.

 

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

 

(a)           indebtedness of such Person forborrowed money;

 

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

 

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

 

(d)           obligations of such Person as lesseeunder Capital Leases and obligations of such Person in respect of syntheticleases;

 

(e)           obligations of such Person underletters of credit and agreements relating to the issuance of letters of creditor acceptance financing

 

(f)            obligations of such Person under anyHedge Contract;

 

(g)           obligations of such Person owing inrespect of redeemable preferred stock or other preferred Equity Interest ofsuch Person;

 

(h)           any obligations of such Person owingin connection with any volumetric or production prepayments;

 

(i)            obligations of such Person underdirect or indirect guaranties in respect of, and obligations (contingent orotherwise) of such Person to purchase or otherwise acquire, or otherwise toassure a creditor against loss in respect of, indebtedness or obligations ofothers of the kinds referred to in clauses (a) through (h) above;

 

(j)            indebtedness or obligations ofothers of the kinds referred to in clauses (a) through (i) abovesecured by any Lien on or in respect of any Property of such Person; and

 

(k)           all liabilities of such Person inrespect of unfunded vested benefits under any Plan.

 

“DebtIssuance” means the issuance by the Borrower of Debt in the form ofconvertible notes.

 

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

 

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

 

“DefaultingLender” means any Lender that (a) has failed to fund its Pro RataShare of any Advance or participation in Letter of Credit Obligations requiredto be funded by it hereunder within one Business Day of the date required to befunded by it hereunder unless such failure has been cured within three BusinessDays (or such longer time period accepted by the Borrower and theAdministrative Agent), (b) has otherwise failed to pay over to theAdministrative Agent or any other Lender any other amount required to be paidby it hereunder within one Business Day of the date when due, unless thesubject of a good faith dispute or unless such failure has been cured withinthree Business Days (or such longer time period accepted by the AdministrativeAgent or such other Lender, as applicable), or (c) has, or has anAffiliate that has, been deemed insolvent or become the subject of a bankruptcyor insolvency proceeding.

 

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

 

“EBITDA”means, for any period, without duplication, (a) Consolidated Net Incomefor such period plus (b) to the extent deducted in determiningConsolidated Net Income, Interest Expense, taxes, depreciation, amortization,depletion and other non-cash charges for such period (including any provisionfor the reduction in the carrying value of assets recorded in accordance withGAAP and including non-cash charges resulting from the requirements of SFAS 133or 143) for such period minus (c) all non-cash items of incomewhich were included in determining such Consolidated Net Income (includingnon-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) shallonly apply for the financial covenant ratios calculated at, and as of, thefiscal quarter ending December 31, 2008, March 31, 2009, June 30,2009 and September 30, 2009, plus (e) without duplication, anyitems provided for in clause (a), (b) and (c) above associated withPantwist, LLC for any period that such Person was a wholly-owned Subsidiary ofthe Borrower; provided that, such EBITDA shall be subject to pro formaadjustments for the Acquisition and for acquisitions and non-ordinary courseasset sales assuming that such transactions had occurred on the first day ofthe determination period, which adjustments shall be made in accordance withthe guidelines for pro forma presentations set forth by the SEC or in a mannerotherwise acceptable to the Administrative Agent.

 

“EffectiveDate” means December 17, 2008.

 

“EligibleAssignee” means (a) any Lender, (b) any Subsidiary or Affiliateof a Lender, and (c) any commercial bank or other financial institution (i) approvedby the Administrative Agent and the Issuing Lender in their sole discretion,and (ii) unless an Event of Default has occurred and is continuing,reasonably acceptable to the Borrower.

 

“EngineeringReport” means either an Independent Engineering Report or an InternalEngineering Report.

 

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

 

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“EnvironmentalClaim” means any third party (including governmental agencies andemployees) action, lawsuit, claim, demand, regulatory action or proceeding,order, decree, consent agreement or notice of potential or actualresponsibility or violation (including claims or proceedings under theOccupational Safety and Health Acts or similar laws or requirements relating tohealth or safety of employees) which seeks to impose liability under anyEnvironmental Law.

 

“EnvironmentalLaw” means, as to the Borrower or its Subsidiaries, all Legal Requirementsor common law theories applicable to the Borrower or its Subsidiaries arisingfrom, 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 orrestoration of the air, surface water, groundwater, land surface or subsurfacestrata, or other natural resources; (b) solid, gaseous or liquid wastegeneration, treatment, processing, recycling, reclamation, cleanup, storage,disposal or transportation; (c) exposure to pollutants, contaminants,hazardous, or toxic substances, materials or wastes; (d) the safety orhealth of employees; or (e) the manufacture, processing, handling,transportation, distribution in commerce, use, storage or disposal of hazardousor toxic substances, materials or wastes.

 

“EnvironmentalPermit” means any permit, license, order, approval, registration or otherauthorization under Environmental Law.

 

“EquityInterest” 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 ownershipinterests) of such Person.

 

“EquityIssuance” means any issuance of equity securities or any other EquityInterests (including any preferred equity securities) by the Borrower or any ofits Subsidiaries other than equity securities issued (i) to the Borroweror one of its Subsidiaries, (ii) pursuant to employee or director andofficer stock option plans in the ordinary course of business, and (iii) theconversion of previously issued preferred, convertible Equity Interests orconvertible notes to the extent such Equity Interests and notes were issued incompliance with the terms hereof.

 

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

 

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

 

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

 

“EurodollarRate” means, for the Interest Period for each Eurodollar Rate Advancecomprising the same Borrowing, the interest rate per annum (rounded upward tothe nearest 

 

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whole multiple of 1/100 of 1% per annum) set forth on the ReutersReference LIBOR01 as the London Interbank Offered Rate, for deposits in Dollarsat 11:00 a.m. (London, England time) two Business Days before thefirst day of such Interest Period and for a period equal to such InterestPeriod; provided that, if no such quotation appears on the ReutersReference LIBOR01, the Eurodollar Rate shall be an interest rate per annumequal to the rate per annum at which deposits in Dollars are offered by theprincipal office of Union Bank of California, N.A.  in London, England to prime banks in theLondon interbank market at 11:00 a.m. (London, England time) two Business Days before the first day of suchInterest Period in an amount substantially equal to the Eurodollar Rate Advanceto be maintained by the Lender that is the Administrative Agent in respect ofsuch Borrowing and for a period equal to such Interest Period.

 

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

 

“EurodollarRate Reserve Percentage” of any Lender for the Interest Period for anyEurodollar Rate Advance means the reserve percentage applicable during suchInterest Period (or if more than one such percentage shall be so applicable,the daily average of such percentages for those days in such Interest Periodduring which any such percentage shall be so applicable) under regulationsissued from time to time by the Federal Reserve Board for determining themaximum reserve requirement (including, without limitation, any emergency,supplemental, or other marginal reserve requirement) for such Lender withrespect to liabilities or assets consisting of or including EurocurrencyLiabilities having a term equal to such Interest Period.

 

“Event ofDefault” has the meaning specified in Section 7.01.

 

“Existing Letters of Credit” means the letters of credit issuedby Union Bank of California, N.A., as the issuing lender under the RestatedAgreement and which have not been terminated or expired as of the EffectiveDate.

 

“ExpirationDate” means, with respect to any Letter of Credit, the date on which suchLetter of Credit will expire or terminate in accordance with its terms.

 

“FederalFunds Rate” means, for any period, a fluctuating interest rate per annumequal for each day during such period to the weighted average of the rates onovernight Federal funds transactions with members of the Federal Reserve Systemarranged by Federal funds brokers, as published for such day (or, if such dayis not a Business Day, for the next preceding Business Day) by the FederalReserve Bank of New York, or, if such rate is not so published for any daywhich is a Business Day, the average of the quotations for any such day on suchtransactions received by the Administrative Agent from three Federal fundsbrokers of recognized standing selected by it.

 

“FederalReserve Board” means the Board of Governors of the Federal Reserve Systemor any of its successors.

 

“Fee Letter”means that certain letter agreement dated November 19, 2008 from UnionBank of California, N.A. to the Borrower.

 

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“FinancialStatements” means the financial statements included in the Form 10-KSBfiled by the Borrower with the SEC on September 11, 2008, including theaudited consolidated balance sheet of the Borrower and its consolidatedSubsidiaries as of fiscal year ended June 30, 2008, and the relatedaudited consolidated statements of income, cash flow, and retained earnings ofthe Borrower and its consolidated Subsidiaries for the fiscal year then ended,copies of which have been delivered to the Administrative Agent and theLenders.

 

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

 

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

 

“GovernmentalAuthority” means, as to any Person in connection with any subject, anyforeign, national, state or provincial governmental authority, or any politicalsubdivision of any state thereof, or any agency, department, commission, board,authority or instrumentality, bureau or court, in each case having jurisdictionover 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 andexecuted by a Guarantor, and “Guaranties” shall mean all such guarantiescollectively.

 

“HazardousSubstance” means the substances identified as such pursuant to CERCLA andthose regulated under any other Environmental Law, including without limitationpollutants, contaminants, petroleum, petroleum products, radionuclides,radioactive materials, and medical and infectious waste.

 

“HazardousWaste” means the substances regulated as such pursuant to any EnvironmentalLaw.

 

“HedgeContract” means (a) any and all rate swap transactions, basis swaps,credit derivative transactions, forward rate transactions, puts, commodityswaps, commodity options, forward commodity contracts, equity or equity indexswaps or options, bond or bond price or bond index swaps or options or forwardbond or forward bond price or forward bond index transactions, interest rateoptions, forward foreign exchange transactions, cap transactions, floortransactions, collar transactions, currency swap transactions, cross-currencyrate swap transactions, currency options, spot contracts, or any other similartransactions or any combination of any of the foregoing (including any optionsto enter into any of the foregoing), whether or not any such transaction isgoverned by or subject to any master agreement, and (b) any and alltransactions of any kind, and the related confirmations, which are subject tothe terms and conditions of, or governed by, any form of master agreementpublished by the International Swaps and Derivatives Association, Inc.,any International Foreign Exchange Master Agreement, or any other masteragreement (any such master agreement, together with any related schedules, a “MasterAgreement”), including any such obligations or liabilities under any MasterAgreement; provided that, a “Hedge Contract” shall not include any “MasterAgreement” that 

 

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provides solely for the sale by the Borrower or its Subsidiaries ofphysical Hydrocarbons in exchange for cash in the ordinary course of itsbusiness.

 

“HydrocarbonHedge Agreement” means a Hedge Contract which is intended to reduce oreliminate 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 producedor 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 suchsubstances, including, but not limited to, sulfur, geothermal steam, water,carbon dioxide, helium, and any and all minerals, ores, or substances of valueand the products and proceeds therefrom.

 

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

 

“IndependentEngineering Report” means a report, in form and substance satisfactory tothe Administrative Agent and each of the Lenders, prepared by an IndependentEngineer, addressed to the Administrative Agent and the Lenders with respect tothe Oil and Gas Properties owned by the Borrower or its Subsidiaries (or to beacquired by the Borrower or any of its Subsidiaries, as applicable) which areor are to be included in the Borrowing Base, which report shall (a) specifythe location, quantity, and type of the estimated Proven Reserves attributableto such Oil and Gas Properties, (b) contain a projection of the rate ofproduction of such Oil and Gas Properties, (c) contain an estimate of thenet operating revenues to be derived from the production and sale ofHydrocarbons from such Proven Reserves based on product price and costescalation assumptions specified by the Administrative Agent and the Lenders,and (d) contain such other information as is customarily obtained from andprovided in such reports or is otherwise reasonably requested by theAdministrative Agent or any Lender.

 

“InterestExpense” means, for the Borrower and its consolidated Subsidiaries for anyperiod, total interest, letter of credit fees, and other fees and expensesincurred in connection with any Debt for such period, whether paid or accrued,including, without limitation, (i) all commissions, discounts and otherfees and charges owed with respect to letters of credit and bankers’ acceptancefinancing, imputed interest under Capital Leases, and net costs under InterestHedge Agreements, all as determined in conformity with GAAP, and (ii) allinterests, dividends, distributions, or other payments made in respect ofpreferred Equity Interests or Debt Issuances; but excluding (A) dividendspayable solely in Equity Interests of the Borrower made in respect of preferredEquity Interests and (B) the expensing of deferred amortized costspertaining to the payment in full of the Subordinated Debt and pertaining tothe Obligations.

 

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

 

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“InterestPeriod” means, for each Eurodollar Rate Advance comprising part of the sameBorrowing, the period commencing on the date of such Eurodollar Rate Advance orthe date of the Conversion of any Reference Rate Advance into a Eurodollar RateAdvance and ending on the last day of the period selected by the Borrowerpursuant to the provisions below and Section 2.03 and, thereafter, eachsubsequent period commencing on the last day of the immediately precedingInterest Period and ending on the last day of the period selected by theBorrower pursuant to the provisions below and Section 2.03.  The duration of each such Interest Periodshall be one, two, three, or six months, or if available, nine or twelvemonths, in each case as the Borrower may, upon notice received by theAdministrative Agent not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (LosAngeles, California time) on the third Business Day prior to the first day ofsuch Interest Period, select; provided, however, that:

 

(a)           the Borrower may not select anyInterest Period which ends after the Commitment Termination Date;

 

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

 

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

 

(d)           any Interest Period which begins onthe last Business Day of a calendar month (or on a day for which there is nonumerically corresponding day in the calendar month at the end of such InterestPeriod) shall end on the last Business Day of the calendar month in which itwould have ended if there were a numerically corresponding day in such calendarmonth.

 

“InterimFinancial Statements” means the financial statements included in the Form 10-Qfiled by the Borrower with the SEC on November 10, 2008 including theunaudited consolidated balance sheet of the Borrower and its consolidatedSubsidiaries dated September 30, 2008, and the related unauditedconsolidated statements of income, cash flow, and retained earnings of theBorrower and its consolidated Subsidiaries for the three months then ended,copies of which have been delivered to the Administrative Agent and theLenders.

 

“InternalEngineering Report” means a report, in form and substance satisfactory tothe Administrative Agent and each Lender, prepared by the Borrower andcertified by a Responsible Officer of the Borrower, addressed to theAdministrative Agent and the Lenders with respect to the Oil and Gas Propertiesowned by the Borrower or any of its Subsidiaries (or to be acquired by theBorrower or any of its Subsidiaries, as applicable) which are or are to beincluded in the Borrowing Base, which report shall (a) specify thelocation, quantity, and type of the estimated Proven Reserves attributable tosuch Oil and Gas Properties, (b) contain a projection of the rate ofproduction of such Oil and Gas Properties, (c) contain an estimate of thenet operating revenues to be derived from the production and sale ofHydrocarbons from such Proven Reserves based on product price and costescalation assumptions specified by the Administrative Agent and the Lenders,and (d) contain such other information as is customarily obtained from and

 

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provided in such reports or is otherwise reasonably requested by theAdministrative Agent or any Lender.

 

“IssuingLender” means Union Bank of California, N.A., and any successor issuingbank pursuant to Section 8.06.

 

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

 

“Leases”means all oil and gas leases, oil, gas and mineral leases, oil, gas andcasinghead gas leases or any other instruments, agreements, or conveyancesunder and pursuant to which the owner thereof has or obtains the right to enterupon lands and explore for, drill, and develop such lands for the production ofHydrocarbons.

 

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

 

“Lenders”means a party hereto that (a) is a lender listed on the signature pages ofthis Agreement on the date hereof or (b) is an Eligible Assignee thatbecame a lender under this Agreement pursuant to Section 2.15 or 9.06.

 

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

 

“Letter ofCredit” means, individually, any standby letter of credit issued or deemedissued by the Issuing Lender for the account of the Borrower in connection withthe Commitments and that is subject to this Agreement, including the ExistingLetters of Credit, and “Letters of Credit” means all such letters ofcredit collectively.

 

“Letter ofCredit Application” means the Issuing Lender’s standard form letter ofcredit application for standby letters of credit that has been executed by theBorrower and accepted by the Issuing Lender in connection with the issuance ofa Letter of Credit.

 

“Letter ofCredit Documents” means all Letters of Credit, Letter of CreditApplications, and agreements, documents, and instruments entered into inconnection with or relating thereto.

 

“Letter ofCredit Exposure” means, at any time, the sum of (a) the aggregateundrawn maximum face amount of each Letter of Credit at such time plus (b) theaggregate unpaid amount of all Reimbursement Obligations at such time.

 

“Letter ofCredit Obligations” means any obligations of the Borrower under thisAgreement in connection with the Letters of Credit, including the ReimbursementObligations.

 

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

 

“Lien”means any mortgage, lien, pledge, assignment, charge, deed of trust, securityinterest, hypothecation, preference, deposit arrangement or encumbrance (orother type of arrangement having the practical effect of the foregoing) tosecure or provide for the payment of any obligation of any Person, whetherarising by contract, operation of law, or otherwise (including, withoutlimitation, the interest of a vendor or lessor under any conditional saleagreement, synthetic lease, Capital Lease, or other title retention agreement).

 

“LiquidInvestments” means:

 

(a)           direct obligations of, or obligationsthe principal of and interest on which are unconditionally guaranteed by, theUnited States maturing within 180 days from the date of any acquisitionthereof;

 

(b)           (i) negotiable or nonnegotiablecertificates of deposit, time deposits, or other similar banking arrangementsmaturing within 180 days from the date of acquisition thereof (“bank debtsecurities”), issued by (A) any Lender (or any Affiliate of any Lender) or(B) any other bank or trust company so long as such certificate of depositis pledged to secure the Borrower’s or any Subsidiaries’ ordinary course ofbusiness bonding requirements, or any other bank or trust company which hasprimary capital of not less than $500,000,000, if at the time of deposit orpurchase, such bank debt securities are rated not less than “AA” (or thethen equivalent) by the rating service of Standard & Poor’s RatingsGroup or of Moody’s Investors Service, Inc., and (ii) commercialpaper issued by (A) any Lender (or any Affiliate of any Lender) or (B) anyother Person if at the time of purchase such commercial paper is rated not lessthan “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 therating service of Moody’s Investors Service, Inc., or upon thediscontinuance of both of such services, such other nationally recognizedrating service or services, as the case may be, as shall be selected by theBorrower with the consent of the Majority Lenders;

 

(c)           deposits in money market fundsinvesting exclusively in investments described in clauses (a) and (b) above;

 

(d)           repurchase agreements relating toinvestments described in clauses (a) and (b) above with a marketvalue at least equal to the consideration paid in connection therewith, withany Person who regularly engages in the business of entering into repurchaseagreements and has a combined capital surplus and undivided profit of not lessthan $500,000,000, if at the time of entering into such agreement the debtsecurities 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’sInvestors Service, Inc.; and

 

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

 

“LiquidityDeposit Amount” means, at the time determination, the aggregate amount ofEquity Issuance Proceeds and Debt Issuance Proceeds which have been depositedinto a deposit account with the Administrative Agent or any Lender or any otherdepository bank that has executed an account control agreement reasonablyacceptable in form and substance to the Administrative Agent, as required underSection 5.13, regardless of whether such proceeds are, at such time, heldin such deposit account.

 

“LoanDocuments” means this Agreement, the Notes, the Letter of Credit Documents,the Guaranties, the Security Instruments, the Fee Letter, the Subordination andIntercreditor Agreement, and each other agreement, instrument, or documentexecuted by the Borrower, any Guarantor, or any of the Borrower’s or aGuarantor’s Subsidiaries or any of their officers at any time in connectionwith this Agreement.

 

“MajorityLenders” means, (a) at any time when there are more than two Lenders,Lenders holding at least 662/3%of the then aggregate unpaid principal amount of the Notes and outstandingLetter of Credit Obligations held by the Lenders at such time (with theaggregate amount of each Lender’s risk participation and funded participationin Letter of Credit Obligations being deemed to be “held” by such Lender forpurposes of this definition); provided that, if no such principal amountor Letter of Credit Obligation is then outstanding, “Majority Lenders” shallmean Lenders having at least 662/3% of the aggregate amount ofthe Commitments at such time and (b) at any time when there are one or twoLenders, all of the Lenders; provided further that, if there are two ormore Lenders, the Commitment of, and the portion of the Advances and Letter ofCredit Exposure held or deemed held by, any Defaulting Lender shall be excludedfor purposes of making a determination of Majority Lenders.

 

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

 

“MaturityDate” means December 17, 2012.

 

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

 

“Mortgage”means each of the Mortgages, Deeds of Trust, Security Agreements, Assignment ofLiens and Security Interests, Financing Statements and Assignments ofProduction or any other mortgage or deed of trust executed by any one or moreof the Borrower, a Guarantor or any of their respective Subsidiaries in favorof the Administrative Agent for the 

 

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ratable benefit of the Secured Parties in substantially the form of theattached Exhibit D or such other form as may be requested by theAdministrative Agent, together with any assumptions or assignments of theobligations thereunder by the Borrower, any Guarantor or any of theirrespective Subsidiaries, and “Mortgages” shall mean all of suchMortgages collectively.

 

“MultiemployerPlan” means a “multiemployer plan” as defined in Section 4001(a)(3) ofERISA.

 

“Note”means a promissory note of the Borrower payable to the order of any Lender, insubstantially the form of the attached Exhibit E, evidencing indebtednessof the Borrower to such Lender resulting from Advances owing to such Lender.

 

“Notice ofBorrowing” means a notice of borrowing in the form of the attached Exhibit Fsigned by a Responsible Officer of the Borrower.

 

“Notice ofConversion or Continuation” means a notice of conversion or continuation inthe form of the attached Exhibit G signed by a Responsible Officer of theBorrower.

 

“Obligations”means (a) all principal, interest, fees, reimbursements, indemnifications,and other amounts payable by the Borrower, any Guarantor or any of theirrespective Subsidiaries to the Administrative Agent, the Issuing Lender or theLenders under the Loan Documents, including without limitation, the Letter ofCredit Obligations, (b) all obligations of the Borrower, any Guarantor orany of their respective Subsidiaries owing to any Swap Counterparty under anyHedge Contract, and (c) all obligations of the Borrower, any Guarantor orany of their respective Subsidiaries owing to any Lender or any Affiliatethereof in connection with any letter of credit issued by such Lender or itsAffiliate for the account of the Borrower, any Guarantor or any of theirrespective Subsidiaries; provided that, (i) when any SwapCounterparty assigns or otherwise transfers any interest held by it under anyHedge Contract to any other Person pursuant to the terms of such agreement, theobligations thereunder shall constitute Obligations only if such assignee ortransferee is also then a Lender or an Affiliate of a Lender and (ii) if aSwap Counterparty ceases to be a Lender hereunder or an Affiliate of a Lenderhereunder, obligations owing to such Swap Counterparty shall be included asObligations only to the extent such obligations arise from transactions undersuch individual Hedge Contracts (and not the Master Agreement between suchparties) entered into at the time such Swap Counterparty was a Lender hereunderor an Affiliate of a Lender hereunder (or lender under the Restated Agreement,or an Affiliate thereof, at the time such Hedge Contract was entered into),without giving effect to any extension, increases, or modifications thereofwhich are made after such Swap Counterparty ceases to be a Lender hereunder oran Affiliate of a Lender hereunder.

 

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

 

“PantwistSale” means the sale of 100% of the Equity Interest held by the Borrower inPantwist LLC pursuant to the terms of the Purchase and Sale Agreement dated asof September 

 

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5, 2008 among the Borrower, Pantwist LLC and Legacy Reserves OperatingLP without giving effect to any amendments, modification or supplementsthereto.

 

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

 

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

 

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

 

“PermittedLiens” means the Liens permitted under Section 6.01.

 

“PermittedPrior Liens” means the Liens permitted under paragraphs (c) through (i) ofSection 6.01.

 

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

 

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

 

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

 

“PricingGrid” means the pricing information set forth in Schedule I.

 

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

 

“ProvenReserves” means, at any particular time, the estimated quantities ofHydrocarbons which geological and engineering data demonstrate with reasonablecertainty to be recoverable in future years from known reservoirs attributableto Oil and Gas Properties included or to be included in the Borrowing Baseunder then existing economic and operating conditions (i.e., prices and costsas of the date the estimate is made).

 

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

 

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“ReferenceRate” means a fluctuating interest rate per annum as shall be in effectfrom time to time equal to the rate of interest publicly announced by UnionBank of California, N.A., as its reference rate, whether or not the Borrowerhas notice thereof.

 

“ReferenceRate 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.

 

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

 

“ReimbursementObligations” means all of the obligations of the Borrower to reimburse theIssuing Lender for amounts paid by the Issuing Lender under Letters of Creditas established by the Letter of Credit Applications and Section 2.07(d).

 

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

 

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

 

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

 

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

 

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

 

“SecuredParties” means the Administrative Agent, the Lenders, the Issuing Lender,and the Swap Counterparties.

 

“SecurityAgreements” means the Security Agreements, each in substantially the formof the attached Exhibit I, executed by the Borrower, any of itsSubsidiaries, or any of the Guarantors.

 

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“SecurityInstruments” means, collectively, (a) the Mortgages, (b) theTransfer Letters, (c) the Pledge Agreements, (d) the SecurityAgreements, (e) each other agreement, instrument or document executed atany time in connection with the Pledge Agreements, the Security Agreements, orthe Mortgages, (f) each agreement, instrument or document executed inconnection with the Cash Collateral Account; and (g) each other agreement,instrument or document executed at any time in connection with securing theObligations.

 

“Series DPreferred Shares” means the convertible, preferred Equity Interests of theBorrower 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 forthin the Certificate of Designation.

 

“Solvent”means, with respect to any Person as of the date of any determination, that onsuch date (a) the fair value of the Property of such Person (both at fair valuationand at present fair saleable value) is greater than the total liabilities,including contingent liabilities, of such Person, (b) the present fairsaleable value of the assets of such Person is not less than the amount thatwill be required to pay the probable liability of such Person on its debts asthey become absolute and matured, (c) such Person is able to realize uponits assets and pay its debts and other liabilities, contingent obligations, andother commitments as they mature in the normal course of business, (d) suchPerson does not intend to, and does not believe that it will, incur debts orliabilities beyond such Person’s ability to pay as such debts and liabilitiesmature, 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’sProperty would constitute unreasonably small capital after giving dueconsideration to current and anticipated future capital requirements andcurrent and anticipated future business conduct and the prevailing practice inthe industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, suchliabilities shall be computed at the amount which, in light of the facts andcircumstances existing at such time, represents the amount that can reasonablybe expected to become an actual or matured liability.

 

“SubordinatedAgent” means UnionBanCal Equities Inc., or such other Subordinated Lenderserving in the capacity as the “subordinated agent” under the Subordinatedcredit Agreement to the extent permitted under the Subordinated CreditAgreement and the Subordination and Intercreditor Agreement.

 

“SubordinatedCredit Agreement” means the Subordinated Credit Agreement dated as of December 17,2008 among the Borrower, the Subordinated Agent and the Subordinated Lenders,as amended, restated, supplemented or otherwise modified but only to the extentpermitted under the terms of the Subordination and Intercreditor Agreement.

 

“SubordinatedDebt” means the “Obligations” as defined in the Subordinated CreditAgreement.

 

“SubordinatedDebt Maturity Date” means the “Maturity Date” as defined in theSubordinated Credit Agreement.

 

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“SubordinatedLenders” means the lenders party to the Subordinated Credit Agreement fromtime to time.

 

“SubordinatedLoan Documents” means the Subordinated Credit Agreement, the promissorynotes executed and delivered pursuant to the Subordinated Credit Agreement, andeach other agreement, instrument, or document executed by the Borrower or anyof its Subsidiaries or any of their Responsible Officers in connection with theSubordinated Credit Agreement.

 

“Subordinationand Intercreditor Agreement” means that certain Subordination andIntercreditor Agreement, which shall be in a form acceptable to theAdministrative Agent and the Lenders, dated as of the Effective Date among theAdministrative Agent, the Borrower, the Guarantors, the Lenders, the SubordinatedAgent and the Subordinated Lenders.

 

“Subsidiary”means, with respect to any Person (the “parent”) at any date, any otherPerson the accounts of which would be consolidated with those of the parent inthe parent’s consolidated financial statements if such financial statementswere prepared in accordance with GAAP as of such date, as well as any Person, amajority of whose outstanding Voting Securities (other than directors’qualifying shares) shall at any time be owned by such parent or one or moreSubsidiaries of such parent*. *Unless otherwise specified,all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to aSubsidiary or Subsidiaries of the Borrower; provided that Tri-Flow *shall not be considered a Subsidiary of theBorrower or any Guarantor.*

 

“SwapCounterparty” means (a) any Lender or Affiliate of a Lender that is acounterparty to any Hedge Contract with the Borrower or any Subsidiary listedon Schedule 4.20 and (b) any counterparty to any other Hedge Contract withthe Borrower or any Subsidiary; provided that such counterparty is a Lender oran Affiliate of a Lender at the time such Hedge Contract is entered into.  For the avoidance of doubt, “SwapCounterparty” shall not include any participant of a Lender pursuant to Section 9.06(e) otherthan to the extent such participant is otherwise a Lender or an Affiliate of aLender.

 

“TerminationEvent” means (a) a Reportable Event described in Section 4043 ofERISA and the regulations issued thereunder (other than a Reportable Event notsubject 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 Planduring a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) ofERISA, (c) the filing of a notice of intent to terminate a Plan or thetreatment of a Plan amendment as a termination under Section 4041 ofERISA, (d) the institution of proceedings to terminate a Plan by the PBGC,or (e) any other event or condition which constitutes grounds under Section 4042of ERISA for the termination of, or the appointment of a trustee to administer,any Plan.

 

“TransferLetters” means, collectively, the letters in lieu of transfer orders insubstantially the form of the attached Exhibit J and executed by theBorrower, any Guarantor or any of their respective Subsidiaries executing aMortgage.

 

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

 

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

 

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“UnusedCommitment Amount” means, with respect to a Lender at any time, the lesserof (a) such Lender’s Commitment at such time and (b) such Lender’sPro Rata Share of the Borrowing Base then in effect at such time minus,in each case the sum of (i) the aggregate outstanding principalamount of all Advances owed to such Lender at such time plus (ii) suchLender’s Pro Rata Share of the aggregate Letter of Credit Exposure at suchtime.

 

“UtilizationLevel” means the applicable category (being Level I, Level II, Level III orLevel IV) of pricing criteria contained in Schedule I, which is based on at anytime of its determination on the percentage obtained by dividing (a) theoutstanding principal amount of the Advances and the Letter of Credit Exposureat such time by (b) the lesser of the Commitments and the Borrowing Baseat such time.

 

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

 

Section 1.02           Computation of Time Periods.  In this Agreement, with respect to thecomputation 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” eachmeans “to but excluding”.

 

Section 1.03           Accounting Terms; Changes in GAAP.  Except as otherwise expressly providedherein, all accounting terms used herein shall be interpreted, and allfinancial statements and certificates and reports as to financial mattersrequired to be delivered to the Lenders hereunder shall (unless otherwisedisclosed to the Lenders in writing at the time of delivery thereof) beprepared, in accordance with GAAP applied on a basis consistent with those usedin the preparation of the latest financial statements furnished to the Lendershereunder (which prior to the delivery of the first financial statements under Section 5.06hereof, shall mean the Financial Statements and the Interim FinancialStatements).  All calculations made forthe purposes of determining compliance with this Agreement shall (except asotherwise expressly provided herein) be made by application of GAAP applied ona basis consistent with those used in the preparation of the annual orquarterly financial statements furnished to the Lenders pursuant to Section 5.06hereof most recently delivered prior to or concurrently with such calculations(or, prior to the delivery of the first financial statements under Section 5.06hereof, used in the preparation of the Financial Statements and the InterimFinancial Statements).  In addition, allcalculations and defined accounting terms used herein shall, unless expresslyprovided otherwise, when referring to any Person, refer to such Person on aconsolidated basis and mean such Person and its consolidated subsidiaries.

 

Section 1.04           Types of Advances.  Advances are distinguished by “Type.”  The “Type” of an Advance refers to thedetermination whether such Advance is a Eurodollar Rate Advance or ReferenceRate Advance.

 

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Section 1.05           Miscellaneous.  Article, Section, Schedule, and Exhibit referencesare to Articles and Sections of and Schedules and Exhibits to this Agreement,unless otherwise specified.  Allreferences to instruments, documents, contracts, and agreements are referencesto such instruments, documents, contracts, and agreements as the same may beamended, supplemented, and otherwise modified from time to time, unlessotherwise specified.  The words “hereof”,“herein”, and “hereunder” and words of similar import when used in thisAgreement shall refer to this Agreement as a whole and not to any particularprovision of this Agreement.  The term “including”means “including, without limitation,”. Paragraph headings have been inserted in this Agreement as a matter ofconvenience for reference only and it is agreed that such paragraph headingsare not a part of this Agreement and shall not be used in the interpretation ofany provision of this Agreement.

 

**ARTICLEII**

** **

**CREDITFACILITIES**

** **

Section 2.01           Commitment for Advances.

 

(a)           Advances.  Each Lender severally agrees, on the termsand conditions set forth in this Agreement, to make Advances to the Borrowerfrom time to time on any Business Day during the period from the date of thisAgreement until the Commitment Termination Date in an amount for each Lendernot to exceed such Lender’s Unused Commitment Amount.  Each Borrowing shall, in the case ofBorrowings consisting of Reference Rate Advances, be in an aggregate amount notless than $250,000 and in integral multiples of $100,000 in excess thereof, andin the case of Borrowings consisting of Eurodollar Rate Advances, be in anaggregate amount not less than $500,000 and in integral multiples of $100,000in excess thereof, and in each case shall consist of Advances of the same Typemade on the same day by the Lenders ratably according to their respectiveCommitments.  Within the limits of eachLender’s Commitment, and subject to the terms of this Agreement, the Borrowermay from time to time borrow, prepay, and reborrow Advances.

 

(b)           Outstanding Advances under theRestated Agreement.  Without anyfurther action on the part of the Borrower or the Lenders, the parties heretoacknowledge and agree that, effective as of the date hereof, (i) alloutstanding “Advances” which are “Eurodollar Rate Advances” under the RestatedAgreement shall be automatically deemed to be outstanding as Eurodollar RateAdvances under this Agreement with the same Interest Period but adjusted forthe Lenders’ pro rata share thereof based on the Lenders’ Commitments underthis Agreement and (b) all outstanding “Advances” which are “ReferenceRate Advances” under the Restated Agreement shall be automatically deemed to beoutstanding as Reference Rate Advances under this Agreement but adjusted forthe Lenders’ pro rata share thereof based on the Lenders’ Commitments underthis Agreement.  Such advances under theRestated Agreement shall be assigned, renewed, extended, and rearrangedpursuant to the terms of this Agreement and the Notes and shall, for allpurposes, be deemed a Borrowing hereunder. The Lenders shall make all appropriate adjustments and payments betweenand among themselves to account for the revised Pro Rata Shares resulting fromthe Lenders’ Commitments under this Agreement.

 

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(c)           Notes.  The indebtedness of the Borrower toeach Lender resulting from the Advances owing to such Lender shall be evidencedby a Note of the Borrower payable to the order of such Lender.

 

Section 2.02           Borrowing Base.

 

(a)           Borrowing Base.  The initial Borrowing Base in effect as ofEffective Date has been set by the Administrative Agent and the Lenders andacknowledged by the Borrower as $60,000,000. Such initial Borrowing Base shall remain in effect until the nextredetermination made pursuant to this Section 2.02.  The Borrowing Base shall be determined inaccordance with the standards set forth in Section 2.02(d) and issubject to periodic redetermination pursuant to Sections 2.02(b), 2.02(c) and2.02(e).

 

(b)           Calculation of Borrowing Base.

 

(i)            The Borrower shall deliver to theAdministrative Agent and each of the Lenders on or before each September 30,beginning September 30, 2009, an Independent Engineering Report datedeffective as of the immediately preceding July 1, and such otherinformation as may be reasonably requested by any Lender with respect to theOil and Gas Properties included or to be included in the Borrowing Base.  Within 30 days after the Administrative Agentand the Lenders’ receipt of such Independent Engineering Report and otherinformation, the Administrative Agent shall deliver to each Lender theAdministrative Agent’s recommendation for the redetermined Borrowing Base.  Within 15 days after the Lenders’ receipt ofthe Administrative Agent’s recommendation, the Administrative Agent and theLenders shall redetermine the Borrowing Base in accordance with Section 2.02(d),and the Administrative Agent shall promptly notify the Borrower in writing ofthe amount of the Borrowing Base as so redetermined.

 

(ii)           The Borrower shall deliver to theAdministrative Agent and each Lender (A) on or prior to May 1, 2009,and (B) on or before each March 31, beginning March 31, 2010, anInternal Engineering Report dated effective as of the immediately preceding January 1and such other information as may be reasonably requested by the AdministrativeAgent or any Lender with respect to the Oil and Gas Properties included or tobe included in the Borrowing Base. Within 30 days after the Administrative Agent and the Lenders’ receiptof such Internal Engineering Report and other information, the AdministrativeAgent shall deliver to each Lender the Administrative Agent’s recommendationfor the redetermined Borrowing Base. Within 15 days after the Lenders’ receipt of the Administrative Agent’srecommendation, the Administrative Agent and the Lenders shall redetermine theBorrowing Base in accordance with Section 2.02(d), and the AdministrativeAgent shall promptly notify the Borrower in writing of the amount of theBorrowing Base as so redetermined.

 

(iii)          In the event that the Borrower doesnot furnish to the Administrative Agent and the Lenders the IndependentEngineering Report, Internal Engineering Report or other information specifiedin clauses (i) and (ii) above by the date specified therein, theAdministrative Agent and the Lenders may nonetheless redetermine the BorrowingBase and redesignate the Borrowing Base from time-to-time thereafter in theirsole discretion until the Administrative Agent and the Lenders receive therelevant Independent Engineering Report, 

 

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Internal EngineeringReport, or other information, as applicable, whereupon the Administrative Agentand the Lenders shall redetermine the Borrowing Base as otherwise specified inthis Section 2.02.

 

(iv)          Each delivery of an Engineering Reportby the Borrower to the Administrative Agent and the Lenders shall constitute arepresentation and warranty by the Borrower to the Administrative Agent and theLenders that (A) the Borrower and its Subsidiaries, as applicable, own theOil and Gas Properties specified therein subject to an Acceptable SecurityInterest and free and clear of any Liens (except Permitted Liens), (B) onand as of the date of such Engineering Report each Oil and Gas Propertydescribed as “proved developed” therein was developed for oil and gas, and thewells pertaining to such Oil and Gas Properties that are described therein asproducing wells (“Wells”), were each producing oil and gas in payingquantities, except for Wells that were utilized as water or gas injectionwells, carbon dioxide wells or as water disposal wells (each as noted in suchEngineering Report), (C) the descriptions of quantum and nature of the record title interests ofthe Borrower and its Subsidiaries, as applicable, set forth in such EngineeringReport include the entire record title interests of the Borrower and itsSubsidiaries in such Oil and Gas Properties, are complete and accurate in allrespects, and take into account all Permitted Liens, (D) there are no “back-in”or “reversionary” interests held by third parties which could reduce theinterests of the Borrower or any of its Subsidiaries in such Oil and GasProperties as set forth in Engineering Report, and (E) no operating orother agreement to which the Borrower or any of its Subsidiaries is a party orby which the Borrower or any of its Subsidiaries is bound affecting any part ofsuch Oil and Gas Properties requires the Borrower or any of its Subsidiaries tobear any of the costs relating to such Oil and Gas Properties greater than therecord title interest of the Borrower or any of its Subsidiaries in suchportion of the such Oil and Gas Properties as set forth in such EngineeringReport, except in the event the Borrower or any of its Subsidiaries isobligated under an operating agreement to assume a portion of a defaultingparty’s share of costs.

 

(c)           Interim Redetermination.  In addition to the Borrowing Baseredeterminations provided for in Section 2.02(b), the Administrative Agentand the Lenders may, either in their sole discretion or at the request of theBorrower and based on such information as the Administrative Agent and theLenders deem relevant (but in accordance with Section 2.02(d)), make oneadditional redetermination of the Borrowing Base during any six-month period betweenscheduled redetermination.  Additionally,the Administrative Agent and the Lenders may request an additionalredetermination in connection with any sale or proposed sale of Oil and GasProperties of the Borrower or any of its Subsidiaries having a market value of$500,000 or more to the extent any such sale is permitted by thisAgreement.  The party requesting theredetermination shall give the other party at least 10 days’ prior writtennotice that a redetermination of the Borrowing Base pursuant to this paragraph (c) isto be performed.  In connection with anyredetermination of the Borrowing Base under this Section 2.02(c), theBorrower shall provide the Administrative Agent and the Lenders with suchinformation regarding the Borrower and its Subsidiaries’ business (including,without limitation, its Oil and Gas Properties, the Proven Reserves, andproduction relating thereto) as the Administrative Agent or any Lender mayrequest, including, in the case of requests for an increase to the Borrowing Baseof $1,000,000 or more, an updated Independent Engineering Report.  The Administrative Agent shall promptlynotify the Borrower in writing of each redetermination of 

 

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the Borrowing Basepursuant to this Section 2.02(c) and the amount of the Borrowing Baseas so redetermined.

 

(d)           Standards for Redetermination.  Each redetermination of the Borrowing Base bythe Administrative Agent and the Lenders pursuant to this Section 2.02shall be made (i) in the sole discretion of the Administrative Agent andthe Lenders (but in accordance with the other provisions of this Section 2.02(d)),(ii) in accordance with the Administrative Agent’s and the Lenders’customary internal standards and practices for valuing and redetermining thevalue of Oil and Gas Properties in connection with reserve based oil and gasloan transactions, (iii) in conjunction with the most recent IndependentEngineering Report or Internal Engineering Report, as applicable, or otherinformation received by the Administrative Agent and the Lenders relating tothe Proven Reserves of the Borrower and its Subsidiaries, and (iv) basedupon the estimated value of the Proven Reserves owned by the Borrower and itsSubsidiaries as determined by the Administrative Agent and the Lenders.  In valuing and redetermining the BorrowingBase, the Administrative Agent and the Lenders may also consider the business,financial condition, and Debt obligations of the Borrower and its Subsidiariesand such other factors as the Administrative Agent and the Lenders customarilydeem appropriate.  In that regard, theBorrower acknowledges that the determination of the Borrowing Base contains anequity cushion (market value in excess of loan value), which is essential forthe adequate protection of the Administrative Agent and the Lenders.  No Proven Reserves shall be included orconsidered for inclusion in the Borrowing Base unless the Administrative Agentand the Lenders shall have received, at the Borrower’s expense, evidence oftitle reasonably satisfactory in form and substance to the Administrative Agentthat the Administrative Agent has an Acceptable Security Interest in the Oiland Gas Properties relating thereto pursuant to the Security Instruments.  At all times after the Administrative Agenthas given the Borrower notification of a redetermination of the Borrowing Baseunder this Section 2.02, the Borrowing Base shall be equal to theredetermined amount or such lesser amount designated by the Borrower anddisclosed in writing to the Administrative Agent and the Lenders until theBorrowing Base is subsequently redetermined in accordance with this Section 2.02.

 

(e)           In addition to theBorrowing Base redeterminations provided for in Section 2.02(b) and Section 2.02(c),the Administrative Agent and the Lenders may in their sole discretion and basedon such information as the Administrative Agent and the Lenders deem relevant(but in accordance with Section 2.02(d)), redetermine the Borrowing Baseupon a Junior Capital Issuance by the Borrower.

 

Section 2.03           Method of Borrowing.

 

(a)           Notice.  Each Borrowing shall be made pursuantto a Notice of Borrowing (or by telephone notice promptly confirmed in writingby a Notice of Borrowing), given not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (LosAngeles, California time) (i) on the third Business Day before the date ofthe proposed Borrowing, in the case of a Borrowing comprised of Eurodollar RateAdvances or (ii) on the Business Day of the proposed Borrowing, in the caseof a Borrowing comprised of Reference Rate Advances, by the Borrower to theAdministrative Agent, which shall in turn give to each Lender prompt notice ofsuch 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 requiredtherein.  In the case of a proposed 

 

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Borrowing comprised ofEurodollar Rate Advances, the Administrative Agent shall promptly notify eachLender 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. (LosAngeles, California time) on the date of such Borrowing, make available for theaccount of its Lending Office to the Administrative Agent at its addressreferred to in Section 9.02, or such other location as the AdministrativeAgent may specify by notice to the Lenders, in same day funds, in the case of aBorrowing, such Lender’s Pro Rata Share of such Borrowing.  After the Administrative Agent’s receipt ofsuch 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 itsaccount with the Administrative Agent.

 

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

 

(c)           Certain Limitations.  Notwithstanding anything to the contrarycontained in paragraphs (a) and (b) above:

 

(i)            at no time shall there be more thansix Interest Periods applicable to outstanding Eurodollar Rate Advances and theBorrower may not select Eurodollar Rate Advances for any Borrowing at any timethat a Default has occurred and is continuing;

 

(ii)           if any Lender shall, at least oneBusiness Day before the date of any requested Borrowing, Conversion, orcontinuation, notify the Administrative Agent that the introduction of or anychange 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 isunlawful, for such Lender or its Lending Office to perform its obligationsunder this Agreement to make Eurodollar Rate Advances or to fund or maintainEurodollar Rate Advances, the right of the Borrower to select Eurodollar RateAdvances from such Lender shall be suspended until such Lender shall notify theAdministrative Agent that the circumstances causing such suspension no longerexist, 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 unableto determine the Eurodollar Rate for Eurodollar Rate Advances comprising anyrequested Borrowing, the right of the Borrower to select Eurodollar RateAdvances for such Borrowing or for any subsequent Borrowing shall be

 

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suspended until theAdministrative Agent shall notify the Borrower and the Lenders that thecircumstances causing such suspension no longer exist, and each Advancecomprising such Borrowing shall be a Reference Rate Advance;

 

(iv)          if the Majority Lenders shall, atleast one Business Day before the date of any requested Borrowing, notify theAdministrative Agent that the Eurodollar Rate for Eurodollar Rate Advancescomprising such Borrowing will not adequately reflect the cost to such Lendersof making or funding their respective Eurodollar Rate Advances, as the case maybe, for such Borrowing, the right of the Borrower to select Eurodollar RateAdvances for such Borrowing or for any subsequent Borrowing shall be suspendeduntil the Administrative Agent shall notify the Borrower and the Lenders thatthe circumstances causing such suspension no longer exist, and each Advancecomprising such Borrowing shall be a Reference Rate Advance; and

 

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

 

(d)           Notices Irrevocable.  Each Notice of Borrowing and Notice ofConversion or Continuation shall be irrevocable and binding on theBorrower.  In the case of any Borrowingfor which the related Notice of Borrowing specifies is to be comprised ofEurodollar Rate Advances, the Borrower shall indemnify each Lender against anyloss, out-of-pocket cost, or expense incurred by such Lender as a result of anyfailure by the Borrower to fulfill on or before the date specified in suchNotice of Borrowing for such Borrowing the applicable conditions set forth in Article IIIincluding, without limitation, any loss (including any loss of anticipatedprofits), cost, or expense incurred by reason of the liquidation orreemployment of deposits or other funds acquired by such Lender to fund theAdvance 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.

 

(e)           Administrative Agent Reliance.  Unless the Administrative Agent shall havereceived notice from a Lender before the date of any Borrowing that such Lendershall not make available to the Administrative Agent such Lender’s Pro RataShare of a Borrowing, the Administrative Agent may assume that such Lender hasmade its Pro Rata Share of such Borrowing available to the Administrative Agenton the date of such Borrowing in accordance with paragraph (a) ofthis Section 2.03 and the Administrative Agent may, in reliance upon suchassumption, make available to the Borrower on such date a correspondingamount.  If and to the extent that suchLender shall not have so made its Pro Rata Share of such Borrowing available tothe Administrative Agent, such Lender and the Borrower severally agree toimmediately repay to the Administrative Agent on demand such correspondingamount, together with interest on such amount, for each day from the date suchamount is made available to the Borrower until the date such amount is repaidto the Administrative Agent, at (i) in the case of the Borrower, theinterest rate applicable on such day to Advances comprising such Borrowing and (ii) inthe case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to theAdministrative Agent such corresponding amount and interest as provided above,such corresponding amount so 

 

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repaid shall constitutesuch Lender’s Advance as part of such Borrowing for purposes of this Agreementeven though not made on the same day as the other Advances comprising suchBorrowing.

 

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

 

Section 2.04           Reduction of the Commitments.

 

(a)           The Borrower shall have the right,upon at least three Business Days’ irrevocable notice to the AdministrativeAgent, to terminate in whole or reduce ratably in part the unused portion ofthe Commitments; provided that each partial reduction shall be in theaggregate amount of $500,000 or in integral multiples of $100,000 in excessthereof.

 

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

 

(c)           In the event of a Defaulting Lender,the Borrower, at the Borrower’s election may (with the consent of theAdministrative Agent) elect to terminate such Defaulting Lender’s Commitmenthereunder; provided that (i) such termination must be of theDefaulting Lender’s entire Commitment, (ii) the Borrower shall pay allamounts owed by the Borrower to such Defaulting Lender under this Agreement andunder the other Loan Documents (including principal of and interest on theAdvances owed to such Defaulting Lender, accrued commitment fees, and letter ofcredit fees but specifically excluding any amounts owing under Section 2.12as result of such payment of Advances) and shall deposit with theAdministrative Agent into the Cash Collateral Account cash collateral in theamount equal to such Defaulting Lender’s ratable share of the Letter of CreditExposure, (iii) a Defaulting Lender’s Commitment may be terminated by theBorrower under this Section 2.04(c) if and only if at suchtime, the Borrower has elected, or is then electing, to terminate theCommitments of all then existing Defaulting Lenders.  Upon written notice to the Defaulting Lenderand Administrative Agent of the Borrower’s election to terminate a DefaultingLender’s Commitment pursuant to this clause (c) and the payment anddeposit 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 allpurposes except that such Lender’s rights under Sections 2.13, 2.14, and 9.07shall continue with respect to events and occurrences occurring before orconcurrently with its ceasing to be a “Lender” hereunder, (B) suchDefaulting Lender’s Commitment shall be deemed terminated, and (C) suchDefaulting Lender shall be relieved of its obligations hereunder.

 

Section 2.05           Prepayment of Advances.

 

(a)           Optional.  The Borrower may prepay the Advances, aftergiving by 10:00 a.m.  (Dallas, Texastime) / 8:00 a.m. (Los Angeles, California time) (i) in the case ofEurodollar Rate 

 

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Advances, at least threeBusiness Days’ or (ii) in the case of Reference Rate Advances, sameBusiness Day’s, irrevocable prior written notice to the Administrative Agentstating the proposed date and aggregate principal amount of suchprepayment.  If any such notice is given,the Borrower shall prepay the Advances in whole or ratably in part in anaggregate principal amount equal to the amount specified in such notice,together with accrued interest to the date of such prepayment on the principalamount prepaid and amounts, if any, required to be paid pursuant to Section 2.12as a result of such prepayment being made on such date; provided,however, that each partial prepayment with respect to:  (A) any amounts prepaid in respect ofEurodollar Rate Advances shall be applied to Eurodollar Rate Advancescomprising part of the same Borrowing; (B) any prepayments made in respectof Reference Rate Advances shall be made in a minimum amounts of $250,000 andin integral multiples of $100,000 in excess thereof, and (C) anyprepayments made in respect of any Borrowing comprised of Eurodollar RateAdvances shall be made in an aggregate principal amount of at least $500,000and in integral multiples of $100,000 in excess thereof, and in an aggregateprincipal amount such that after giving effect thereto such Borrowing shallhave a remaining principal amount outstanding with respect to such Borrowing ofat least $500,000.  Full prepayments ofany Borrowing are permitted without restriction of amounts.

 

(b)           Borrowing Base Deficiency.  If the aggregate outstanding amount of theAdvances plus the Letter of Credit Exposure ever exceeds the lesser ofthe (i) Borrowing Base and (ii) the aggregate Commitments, theBorrower shall, after receipt of written notice from the Administrative Agentregarding such deficiency, deliver to the Administrative Agent within ten daysof receipt of such notice from the Administrative Agent, a written responseindicating which of the following actions it intends to take to remedy theBorrowing Base deficiency (and the failure of the Borrower to deliver such electionnotice or to perform the action chosen to remedy such Borrowing Base deficiencyshall constitute an Event of Default):

 

(i)            prepay Advances or, if the Advanceshave been repaid in full, make deposits into the Cash Collateral Account toprovide cash collateral for the Letter of Credit Exposure, such that theBorrowing Base deficiency is cured within 10 Business Days after the date suchdeficiency notice is received by the Borrower from the Administrative Agent;

 

(ii)           pledge as Collateral for the Obligationsadditional Oil and Gas Properties acceptable to the Administrative Agent andeach of Lenders such that the Borrowing Base deficiency is cured within 30 daysafter the date such deficiency notice is received by the Borrower from theAdministrative Agent; or

 

(iii)          (A) deliver, within 10 BusinessDays after the date such deficiency notice is received by the Borrower from theAdministrative Agent, written notice to the Administrative Agent indicating theBorrower’s election to repay the Advances and make deposits into the CashCollateral Account to provide cash collateral for the Letters of Credit, eachin six monthly installments equal to one-sixth of such Borrowing Basedeficiency with the first such installment due 30 days after the date suchdeficiency notice is received by the Borrower from the Administrative Agent andeach following installment due 30 days after the preceding installment and (B) makesuch payments and deposits within such time periods.

 

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Each prepayment pursuant to this Section 2.05(b) shall beaccompanied by accrued interest on the amount prepaid to the date of suchprepayment and amounts, if any, required to be paid pursuant to Section 2.12as a result of such prepayment being made on such date.  Each prepayment under clauses (i) and (iii) ofthis Section 2.05(b) shall be applied to the Advances as determinedby the Administrative Agent and agreed to by the Lenders in their solediscretion.

 

(c)           Reduction of Commitments.  On the date of each reduction of theaggregate Commitments pursuant to Section 2.04, the Borrower agrees tomake a prepayment in respect of the outstanding amount of the Advances to theextent, if any, that the aggregate unpaid principal amount of all Advances plusthe Letter of Credit Exposure exceeds the lesser of (A) the aggregateCommitments, as so reduced and (B) the Borrowing Base.  Each prepayment pursuant to this Section 2.05(c) shallbe accompanied by accrued interest on the amount prepaid to the date of suchprepayment and amounts, if any, required to be paid pursuant to Section 2.12as a result of such prepayment being made on such date.  Each prepayment under this Section 2.05(c) shallbe applied to the Advances as determined by the Administrative Agent and agreedto by the Lenders in their sole discretion; provided that, outstandingReference Rate Advances, if any, shall be paid in full first before any suchprepayments are applied to outstanding Eurodollar Rate Advances.

 

(d)           Illegality.  If any Lender shall notify the AdministrativeAgent and the Borrower that the introduction of or any change in or in theinterpretation of any law or regulation makes it unlawful, or that any centralbank or other Governmental Authority asserts that it is unlawful for suchLender or its Lending Office to perform its obligations under this Agreement tomaintain any Eurodollar Rate Advances of such Lender then outstandinghereunder, (i) the Borrower shall, no later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (LosAngeles, California time) (A) if not prohibited by law, on the last day ofthe Interest Period for each outstanding Eurodollar Rate Advance made by suchLender or (B) if required by such notice, on the second Business Dayfollowing its receipt of such notice, prepay all of the Eurodollar RateAdvances made by such Lender then outstanding, together with accrued intereston the principal amount prepaid to the date of such prepayment and amounts, ifany, required to be paid pursuant to Section 2.12 as a result of suchprepayment being made on such date, (ii) such Lender shall simultaneouslymake a Reference Rate Advance to the Borrower on such date in an amount equalto the aggregate principal amount of the Eurodollar Rate Advances prepaid tosuch Lender, and (iii) the right of the Borrower to select Eurodollar RateAdvances from such Lender for any subsequent Borrowing shall be suspended untilsuch Lender gives notice referred to above shall notify the AdministrativeAgent that the circumstances causing such suspension no longer exist.

 

(e)           No Additional Right; RatablePrepayment.  The Borrower shall have no right to prepayany principal amount of any Advance except as provided in Section 2.04(c) andin this Section 2.05, and all notices given pursuant to this Section 2.05shall be irrevocable and binding upon the Borrower.  Each payment of any Advance pursuant to this Section 2.05shall be made in a manner such that all Advances comprising part of the sameBorrowing are paid in whole or ratably in part.

 

(f)            Debt Issuance.  If the Borrower or any Subsidiary of theBorrower receives Debt Issuance Proceeds, then immediately upon receipt of suchproceeds, the Borrower shall prepay the Advances or, if the Advances have beenrepaid in full, make deposits into the Cash Collateral 

 

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Account to provide cashcollateral for the Letter of Credit Exposure, in an amount equal to (A) 100%of such Debt Issuance Proceeds minus (B) the amount applied tosatisfy outstanding Subordinated Debt minus (C) the amount, if any,necessary to cause the Liquidity Deposit Amount at the time of such DebtIssuance to equal $2,500,000.  Theprepayment required pursuant to this Section 2.05(f) shall beaccompanied by accrued interest on the amount prepaid to the date of suchprepayment and amounts, if any, required to be paid pursuant to Section 2.12as a result of such prepayment being made on such date.  Such prepayment shall be applied to theAdvances as determined by the Administrative Agent and agreed to by the Lendersin their sole discretion.

 

(g)           Equity Issuance.  Ifthe Borrower or any Subsidiary of the Borrower receives Equity IssuanceProceeds, then immediately upon receipt of such proceeds, the Borrower shallprepay the Advances or, if the Advances have been repaid in full, make depositsinto the Cash Collateral Account to provide cash collateral for the Letter ofCredit Exposure, in an amount equal to (A) 100% of such Equity IssuanceProceeds minus (B) the amount applied to satisfy outstandingSubordinated Debt minus (C) the amount, if any, necessary to causethe Liquidity Deposit Amount at the time of such Equity Issuance to equal$2,500,000.  The prepayment requiredpursuant to this Section 2.05(g) shall be accompanied by accruedinterest on the amount prepaid to the date of such prepayment and amounts, ifany, required to be paid pursuant to Section 2.12 as a result of suchprepayment being made on such date.  Suchprepayment shall be applied to the Advances as determined by the AdministrativeAgent and agreed to by the Lenders in their sole discretion.

 

Section 2.06           Repayment of Advances.  The Borrower shall repay to theAdministrative Agent for the ratable benefit of the Lenders the outstandingprincipal 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.

 

Section 2.07           Letters of Credit***.***

 

(a)           Commitment.  From time to time from the date of thisAgreement until 30 days prior to the Maturity Date, at the request of theBorrower, the Issuing Lender shall, on the terms and conditions hereinafter setforth, issue, increase, or extend the Expiration Date of, Letters of Credit forthe account of the Borrower on any Business Day.  No Letter of Credit will be issued,increased, or extended:

 

(i)            if such issuance, increase, orextension would cause the Letter of Credit Exposure to exceed the lesser of (A) $3,000,000and (B) the aggregate Unused Commitment Amounts of the Lenders;

 

(ii)           if such Letter of Credit has anExpiration Date later than the earlier of (A) one year after the date ofissuance thereof and (B) the Maturity Date;

 

(iii)          unless such Letter of Credit Documentsare in form and substance acceptable to the Issuing Lender in its sole discretion;

 

(iv)          unless such Letter of Credit is astandby letter of credit not supporting the repayment of indebtedness forborrowed money of any Person;

 

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(v)           unless the Borrower has delivered tothe Issuing Lender a completed and executed Letter of Credit Application; provided that, if the terms of any suchLetter of Credit Application conflicts with the terms of this Agreement, theterms of this Agreement shall control;

 

(vi)          unless suchLetter of Credit is governed by (A) the Uniform Customs and Practice forDocumentary Credits (2007 Revision), International Chamber of CommercePublication No. 600, or (B) the International Standby Practices(ISP98), International Chamber of Commerce Publication No. 590, in eithercase, including any subsequent revisions thereof approved by a Congress of theInternational Chamber of Commerce and adhered to by the Issuing Lender;

 

(vii)         if any order, judgment or decree of anyGovernmental Authority or arbitrator shall by its terms purport to enjoin orrestrain the Issuing Lender from issuing such Letter of Credit, or any LegalRequirement applicable to the Issuing Lender or any request or directive(whether or not having the force of law) from any Governmental Authority withjurisdiction over the Issuing Lender shall prohibit, or request that theIssuing Lender refrain from, the issuance of letters of credit generally orsuch Letter of Credit in particular or shall impose upon the Issuing Lenderwith respect to such Letter of Credit any restriction, reserve or capitalrequirement (for which the Issuing Lender is not otherwise compensatedhereunder) not in effect on the date hereof, or shall impose upon the IssuingLender any unreimbursed loss, cost or expense which was not applicable on thedate hereof and which the Issuing Lender in good faith deems material to it;

 

(viii)        if the issuance of such Letter of Creditwould violate one or more policies of the Issuing Lender applicable to lettersof credit generally;

 

(ix)           except as otherwise agreed by theIssuing Lender, if Letter of Credit is to be denominated in a currency otherthan Dollars; or

 

(x)            a default of any Lender’sobligations to fund under Section 2.07(d) exists or any Lender is atsuch time a Defaulting Lender hereunder, unless the Issuing Lender has enteredinto satisfactory arrangements with the Borrower or such Lender to eliminatethe Issuing Lender’s risk with respect to such Lender.

 

(b)           Participations.  Upon (i) the date of the issuance orincrease of a Letter of Credit, and (ii) the Effective Date as to the deemed issuance of the Existing Letters ofCredit under Section 2.07(h), the Issuing Lender shall be deemed tohave sold to each other Lender having a Commitment and each other Lender havinga Commitment shall have been deemed to have purchased from the Issuing Lender aparticipation in the related Letter of Credit Obligations equal to such Lender’sPro Rata Share at such date and such sale and purchase shall otherwise be inaccordance with the terms of this Agreement. The Issuing Lender shall promptly notify each such participant Lenderhaving a Commitment by telephone or telecopy of each Letter of Credit issued,increased, or extended or converted and the actual dollar amount of such Lender’sparticipation in such Letter of Credit.

 

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(c)           Issuing.  Each Letter of Credit shall be issued,increased, or extended pursuant to a Letter of Credit Application (or bytelephone notice promptly confirmed in writing by a Letter of CreditApplication), given not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (LosAngeles, California time) on the fifth Business Day before the date of theproposed issuance, increase, or extension of the Letter of Credit, and theIssuing Lender shall give to each other Lender prompt notice thereof by telex,telephone, or telecopy.  Each Letter ofCredit Application shall be delivered by facsimile or by mail specifying theinformation required therein; provided that if such Letter of Credit Applicationis delivered by facsimile, the Borrower shall follow such facsimile with anoriginal by mail.  After the IssuingLender’s receipt of such Letter of Credit Application (by facsimile or by mail)and upon fulfillment of the applicable conditions set forth in Article III,the Issuing Lender shall issue, increase, or extend such Letter of Credit forthe account of the Borrower.  Each Letterof Credit Application shall be irrevocable and binding on the Borrower.

 

(d)           Reimbursement.  The Borrower hereby agrees to pay on demandto the Issuing Lender an amount equal to any amount paid by the Issuing Lenderunder any Letter of Credit.  In the eventthe Issuing Lender makes a payment pursuant to a request for draw presentedunder a Letter of Credit and such payment is not promptly reimbursed by theBorrower upon demand, the Issuing Lender shall give the Administrative Agentnotice of the Borrower’s failure to make such reimbursement and theAdministrative Agent shall promptly notify each Lender having a Commitment ofthe amount necessary to reimburse the Issuing Lender.  Upon such notice from the AdministrativeAgent, each Lender shall promptly reimburse the Issuing Lender for such Lender’sPro Rata Share of such amount, and such reimbursement shall be deemed for allpurposes of this Agreement to be an Advance to the Borrower transferred at theBorrower’s request to the Issuing Lender. If such reimbursement is not made by any Lender to the Issuing Lender onthe same day on which the Administrative Agent notifies such Lender to makereimbursement to the Issuing Lender hereunder, such Lender shall pay intereston its Pro Rata Share thereof to the Issuing Lender at a rate per annum equalto the Federal Funds Rate.  The Borrowerhereby unconditionally and irrevocably authorizes, empowers, and directs theAdministrative Agent and the Lenders to record and otherwise treat suchreimbursements to the Issuing Lender as Reference Rate Advances under aBorrowing requested by the Borrower to reimburse the Issuing Lender which havebeen transferred to the Issuing Lender at the Borrower’s request.

 

(e)           Obligations Unconditional.  The obligations of the Borrower under thisAgreement in respect of each Letter of Credit shall be unconditional andirrevocable, and shall be paid strictly in accordance with the terms of thisAgreement under all circumstances, including, without limitation, the followingcircumstances:

 

(i)            any lack of validity orenforceability of any Letter of Credit Documents;

 

(ii)           any amendment or waiver of, or anyconsent to or departure from, any Letter of Credit Documents;

 

(iii)          the existence of any claim, set-off,defense, or other right which the Borrower may have at any time against anybeneficiary or transferee of such Letter of Credit (or any Persons for whom anysuch beneficiary or any such transferee may be acting), the Issuing

 

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Lender, or any otherperson or entity, whether in connection with this Agreement, the transactionscontemplated in this Agreement or in any Letter of Credit Documents, or anyunrelated transaction;

 

(iv)          any statement or any other documentpresented under such Letter of Credit proving to be forged, fraudulent,invalid, or insufficient in any respect or any statement therein being untrueor inaccurate in any respect;

 

(v)           payment by the Issuing Lender undersuch Letter of Credit against presentation of a draft or certificate which doesnot comply with the terms of such Letter of Credit; or

 

(vi)          any other circumstance or happeningwhatsoever, whether or not similar to any of the foregoing.

 

provided, however, that nothingcontained in this paragraph (e) shall be deemed to constitute awaiver of any remedies of the Borrower in connection with the Letters of Creditor the Borrower’s rights under Section 2.07(f) below.

 

(f)            Liability of Issuing Lender.  The Borrower assumes all risks of the acts oromissions of any beneficiary or transferee of any Letter of Credit with respectto its use of such Letter of Credit. Neither the Issuing Lender nor any of its officers or directors shall beliable or responsible for:

 

(i)            the use which may be made of anyLetter of Credit or any acts or omissions of any beneficiary or transferee inconnection therewith;

 

(ii)           the validity, sufficiency, orgenuineness of documents, or of any endorsement thereon, even if such documentsshould prove to be in any or all respects invalid, insufficient, fraudulent, orforged;

 

(iii)          payment by the Issuing Lender againstpresentation of documents which do not comply with the terms of a Letter ofCredit, including failure of any documents to bear any reference or adequatereference to the relevant Letter of Credit; or

 

(iv)          any other circumstances whatsoever inmaking or failing to make payment under any Letter of Credit **(INCLUDING THE ISSUING LENDER’S OWN NEGLIGENCE)**,

 

except that the Borrower shall have a claimagainst the Issuing Lender, and the Issuing Lender shall be liable to theBorrower, to the extent of any direct, as opposed to consequential, damagessuffered by the Borrower which the Borrower proves were caused by theIssuing Lender’s willful misconduct or gross negligence in determining whetherdocuments presented under a Letter of Credit comply with the terms of suchLetter of Credit.  In furtherance and notin limitation of the foregoing, the Issuing Lender may accept documents thatappear on their face to be in order, without responsibility for furtherinvestigation, regardless of any notice or information to the contrary.

 

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(g)           Cash Collateral Account.

 

(i)            If the Borrower is required todeposit funds in the Cash Collateral Account pursuant to Sections 2.04(c), 2.05(b),7.02(b), or 7.03(b), then the Borrower and the Issuing Lender shall establishthe Cash Collateral Account and the Borrower shall execute any documents andagreements, including the Issuing Lender’s standard form assignment of depositaccounts, that the Issuing Lender requests in connection therewith to establishthe Cash Collateral Account and grant the Issuing Lender a first prioritysecurity interest in such account and the funds therein.  The Borrower hereby pledges to the IssuingLender and grants the Issuing Lender a security interest in the Cash CollateralAccount, whenever established, all funds held in the Cash Collateral Accountfrom time to time, and all proceeds thereof as security for the payment of theObligations.

 

(ii)           So long as no Default exists, (A) theIssuing Lender may apply the funds held in the Cash Collateral Account only tothe reimbursement of any Letter of Credit Obligations, and (B) the IssuingLender shall release to the Borrower at the Borrower’s written request anyfunds held in the Cash Collateral Account in an amount up to but not exceedingthe excess, if any (immediately prior to the release of any such funds), of thetotal amount of funds held in the Cash Collateral Account over the Letter ofCredit Exposure.  During the existence ofany Default, the Issuing Lender may apply any funds held in the Cash CollateralAccount to the Obligations in any order determined by the Issuing Lender,regardless of any Letter of Credit Exposure that may remain outstanding.  The Issuing Lender may in its sole discretionat any time release to the Borrower any funds held in the Cash CollateralAccount.

 

(iii)          The Issuing Lender shall exercisereasonable care in the custody and preservation of any funds held in the CashCollateral Account and shall be deemed to have exercised such care if suchfunds are accorded treatment substantially equivalent to that which the IssuingLender accords its own Property, it being understood that the Issuing Lendershall not have any responsibility for taking any necessary steps to preserverights against any parties with respect to any such funds.

 

(h)           Existing Letters of Credit.The Issuing Lender, the Lenders and the Borrower agree that effective as of theEffective Date, the Existing Letters of Credit shall be deemed to have beenissued and maintainedunder, and to be governed by the terms and conditions of, this Agreement.

 

Section 2.08           Fees.

 

(a)           Commitment Fees.  The Borrower agrees to pay to theAdministrative Agent for the account of each Lender a commitment fee at a perannum rate equal to the Commitment Fee Rate on the daily Unused CommitmentAmount of such Lender, from the Effective Date until the Commitment TerminationDate; provided that, no Commitment Fee shall accrue on the Commitment of aDefaulting Lender during the period such Lender remains a DefaultingLender.  The commitment fees shall be dueand payable quarterly in arrears on the last day of each March, June, September,and December commencing on December 31, 2008 and continuingthereafter through and including the Commitment Termination Date.

 

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(b)           Letter of Credit Fees.

 

(i)            The Borrower agrees to pay (A) tothe Administrative Agent for the pro rata benefit of the Lenders a per annumletter of credit fee for each Letter of Credit issued hereunder in an amountequal to the greater of (1) the Applicable Margin then in effect forEurodollar Rate Advances times the daily maximum amount available to be drawn undersuch Letter of Credit and (2) $1,000, and (B) to the Issuing Lender,a fronting fee for each Letter of Credit equal to the greater of (y) .125%per annum times the daily maximum amount available to be drawn under suchLetter of Credit and (z) $500.00, each payable quarterly in arrears on thelast day of each March, June, September, and December commencing on December 31,2008 and continuing thereafter through and including the Commitment TerminationDate.

 

(ii)           The Borrower also agrees to pay tothe Issuing Lender such other usual and customary fees associated with anytransfers, amendments, drawings, negotiations or reissuances of any Letters ofCredit.

 

(c)           Other Fees.  The Borrower agrees to pay to Union Bank ofCalifornia, N.A. the fees provided for in the Fee Letter.

 

(d)           Borrowing Base Increase Fees.  The Borrower agrees to pay to theAdministrative Agent for the account of the Lenders in connection with anyincrease of the Borrowing Base, a borrowing base increase fee on the amount ofsuch increase.  The borrowing baseincrease fee shall be in an amount equal to 0.50% multiplied by the amount ofthe increase and shall be due and payable on the date of the initial Advance ofsuch additional Borrowing Base.

 

Section 2.09           Interest.  The Borrower shall pay interest on the unpaidprincipal amount of each Advance made by each Lender from the date of suchAdvance until such principal amount shall be paid in full, at the followingrates per annum:

 

(a)           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 effectfrom time to time plus the Applicable Margin in effect from time totime, payable monthly in arrears on the last day of each month and on the datesuch Reference Rate Advance shall be paid in full.

 

(b)           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 Advanceto the Eurodollar Rate for such Interest Period plus the ApplicableMargin in effect from time to time, payable on the last day of such InterestPeriod, and, in the case of six, nine or twelve month Interest Periods, on (i) theday which occurs during such Interest Period three months from the first day ofsuch Interest Period, (ii) the day which occurs during such InterestPeriod six months from the first day of such Interest Period, and (iii) theday which occurs during such Interest Period nine months from the first day ofsuch Interest Period.

 

(c)           Additional Interest on EurodollarRate Advances.  The Borrower shallpay to each Lender, so long as any such Lender shall be required underregulations of the Federal Reserve Board to maintain reserves with respect toliabilities or assets consisting of or including Eurocurrency Liabilities,additional interest on the unpaid principal amount of each Eurodollar RateAdvance of such Lender, from the effective date of such Advance until suchprincipal 

 

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amount is paid in full,at an interest rate per annum equal at all times to the remainder obtained bysubtracting (i) the Eurodollar Rate for the Interest Period for suchAdvance from (ii) the rate obtained by dividing such Eurodollar Rate by apercentage equal to 100% minus the Eurodollar Rate Reserve Percentage of suchLender for such Interest Period, payable on each date on which interest ispayable on such Advance.  Such additionalinterest payable to any Lender shall be determined by such Lender and notifiedto the Borrower through the Administrative Agent (such notice to include thecalculation of such additional interest, which calculation shall be conclusivein the absence of manifest error).

 

(d)           Usury Recapture.

 

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

 

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

 

(iii)          **NOTWITHSTANDING THEFOREGOING OR ANY OTHER TERM IN THIS AGREEMENT AND THE LOAN DOCUMENTS TO THECONTRARY, IT IS THE INTENTION OF EACH LENDER AND THE BORROWER TO CONFORM STRICTLYTO ANY APPLICABLE USURY LAWS. ACCORDINGLY, IF ANY LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANYCONSIDERATION WHICH CONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THENANY SUCH EXCESS SHALL BE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALLAT SUCH LENDER’S OPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE LOANS MADEHEREUNDER BY SUCH LENDER OR BE REFUNDED TO THE BORROWER**.

 

Section 2.10           Payments and Computations.

 

(a)           Payment Procedures.  The Borrower shall make each payment underthis Agreement and under the Notes not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (LosAngeles, California time) on the day when due in Dollars to the AdministrativeAgent at the location referred to in the Notes (or such other location as theAdministrative Agent shall designate in writing to the Borrower) in same dayfunds without deduction, setoff, or 

 

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counterclaim of any kind,except as may be applicable to any Defaulting Lender.  The Administrative Agent shall promptlythereafter cause to be distributed like funds relating to the payment ofprincipal, interest or fees ratably (other than amounts payable solely to theAdministrative Agent, the Issuing Lender, or a specific Lender pursuant to Section 2.08(c),2.09(c), 2.09(d), 2.12, 2.13, 2.14, 8.05, or 9.07, but after taking intoaccount payments effected pursuant to Section 9.04) in accordance witheach Lender’s Pro Rata Share to the Lenders for the account of their respectiveLending Offices, and like funds relating to the payment of any other amountpayable to any Lender or the Issuing Lender to such Lender for the account ofits Lending Office, in each case to be applied in accordance with the terms ofthis Agreement.

 

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

 

(c)           Non-Business Day Payments.  Whenever any payment shall be stated to bedue on a day other than a Business Day, such payment shall be made on the nextsucceeding Business Day, and such extension of time shall in such case beincluded in the computation of payment of interest or fees, as the case may be;provided, however, that if such extension would cause payment ofinterest on or principal of Eurodollar Rate Advances to be made in the nextfollowing calendar month, such payment shall be made on the next precedingBusiness Day.

 

(d)           Administrative Agent Reliance.  Unless the Administrative Agent shall havereceived written notice from the Borrower prior to the date on which anypayment is due to the Lenders that the Borrower shall not make such payment infull, the Administrative Agent may assume that the Borrower has made such paymentin full to the Administrative Agent on such date and the Administrative Agentmay, in reliance upon such assumption, cause to be distributed to each Lenderon such date an amount equal to the amount then due such Lender.  If and to the extent the Borrower shall nothave so made such payment in full to the Administrative Agent, each Lendershall repay to the Administrative Agent forthwith on demand such amountdistributed to such Lender, together with interest, for each day from the datesuch amount is distributed to such Lender until the date such Lender repayssuch amount to the Administrative Agent, at the Federal Funds Rate for suchday.

 

Section 2.11           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 or Letter of Credit Obligations madeby it in excess of its Pro Rata Share of payments on account of the Advances orLetter of Credit Obligations obtained by all the Lenders (other than as a result of a termination of aDefaulting Lender’s Commitment under Section 2.04(c)), such Lendershall notify the Administrative Agent and forthwith purchase from the otherLenders such participations in the Advances made by them or Letter of CreditObligations held by them as shall be necessary to cause such purchasing Lenderto share the excess payment ratably with each of them; provided,however, that if all or any portion of such 

 

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excess payment isthereafter recovered from such purchasing Lender, such purchase from eachLender shall be rescinded and such Lender shall repay to the purchasing Lenderthe purchase price to the extent of such Lender’s ratable share (according tothe proportion of (a) the amount of the participation sold by such Lenderto the purchasing Lender as a result of such excess payment to (b) thetotal amount of such excess payment) of such recovery, together with an amountequal to such Lender’s ratable share (according to the proportion of (i) theamount of such Lender’s required repayment to the purchasing Lender to (ii) thetotal amount of all such required repayments to the purchasing Lender) of anyinterest or other amount paid or payable by the purchasing Lender in respect ofthe total amount so recovered.  TheBorrower agrees that any Lender so purchasing a participation from anotherLender pursuant to this Section 2.11 may, to the fullest extent permittedby 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 directcreditor of the Borrower in the amount of such participation.  If a Lender fails to make an Advance withrespect to a Borrowing as and when required hereunder and the Borrowersubsequently makes a repayment of any Advances, such repayment shall be splitamong the non-defaulting Lenders ratably in accordance with their respectiveCommitment percentages until each Lender (including the Defaulting Lender) has itspercentage of all of the outstanding Advances and the balance of such repaymentshall be applied among the Lenders in accordance with their Pro Rata Share.

 

Section 2.12           Breakage Costs.  If (a) any payment of principal of anyEurodollar Rate Advance is made other than on the last day of the InterestPeriod 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, orotherwise, or (b) the Borrower fails to make a principal or interestpayment with respect to any Eurodollar Rate Advance on the date such payment isdue and payable, the Borrower shall, within 10 days of any written demand sentby any Lender to the Borrower through the Administrative Agent, pay to the AdministrativeAgent for the account of such Lender any amounts required to compensate suchLender for any additional losses, out-of-pocket costs or expenses which it mayreasonably incur as a result of such payment or nonpayment, including, withoutlimitation, any loss (including loss of anticipated profits), cost or expenseincurred by reason of the liquidation or reemployment of deposits or otherfunds acquired by any Lender to fund or maintain such Advance.

 

Section 2.13           Increased Costs.

 

(a)           Eurodollar Rate Advances.  If, due to either (i) the introductionof or any change (other than any change by way of imposition or increase ofreserve requirements included in the Eurodollar Rate Reserve Percentage) in orin the interpretation of any law or regulation or (ii) the compliance withany 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 thecost to any Lender of agreeing to make or making, funding, or maintainingEurodollar Rate Advances, then the Borrower shall from time to time, upondemand by such Lender (with a copy of such demand to the Administrative Agent),immediately pay to the Administrative Agent for the account of such Lenderadditional amounts sufficient to compensate such Lender for such increasedcost.  A certificate as to the amount ofsuch increased cost and detailing the calculation of such cost submitted to theBorrower and the Administrative Agent by such Lender shall be conclusive andbinding for all purposes, absent manifest error.

 

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(b)           Capital Adequacy.  If any Lender or the Issuing Lenderdetermines in good faith that compliance with any law or regulation adopted orchanged after the date hereof or any guideline or request from any central bankor other Governmental Authority (whether or not having the force of law)affects or would affect the amount of capital required or expected to bemaintained by such Lender or the Issuing Lender or any corporation controllingsuch Lender or the Issuing Lender and that the amount of such capital isincreased by or based upon the existence of such Lender’s commitment to lend orthe Issuing Lender’s commitment to issue the Letters of Credit and other commitmentsof this type, then, upon 30 days’ prior written notice by such Lender or theIssuing Lender (with a copy of any such demand to the Administrative Agent),the Borrower shall immediately pay to the Administrative Agent for the accountof such Lender or to the Issuing Lender, as the case may be, from time to timeas specified by such Lender or the Issuing Lender, additional amountssufficient to compensate such Lender or the Issuing Lender, in light of suchcircumstances, (i) with respect to such Lender, to the extent that suchLender reasonably determines such increase in capital to be allocable to theexistence of such Lender’s commitment to lend under this Agreement and (ii) withrespect to the Issuing Lender, to the extent that the Issuing Lender reasonablydetermines such increase in capital to be allocable to the issuance ormaintenance of the Letters of Credit.  Acertificate as to such amounts and detailing the calculation of such amountssubmitted to the Borrower by such Lender or the Issuing Lender shall beconclusive and binding for all purposes, absent manifest error.

 

(c)           Letters of Credit.  If any change adopted after the date hereofin any law or regulation or in the interpretation thereof by any court oradministrative or Governmental Authority charged with the administrationthereof shall either (i) impose, modify, or deem applicable any reserve,special deposit, or similar requirement against letters of credit issued by, orassets held by, or deposits in or for the account of, the Issuing Lender or (ii) imposeon the Issuing Lender any other condition regarding the provisions of thisAgreement relating to the Letters of Credit or any Letter of CreditObligations, and the result of any event referred to in the precedingclause (i) or (ii) shall be to increase the cost to the IssuingLender of issuing or maintaining any Letter of Credit (which increase in costshall be determined by the Issuing Lender’s reasonable allocation of theaggregate of such cost increases resulting from such event), then, upon demandby the Issuing Lender, the Borrower shall pay to the Issuing Lender, from timeto time as specified by the Issuing Lender, additional amounts which shall besufficient to compensate the Issuing Lender for such increased cost.  A certificate as to such increased costincurred by the Issuing Lender, as a result of any event mentioned inclause (i) or (ii) above, and detailing the calculation of suchincreased costs submitted by the Issuing Lender to the Borrower, shall beconclusive and binding for all purposes, absent manifest error.

 

(d)           Mitigation.  Each Lender claiming compensation pursuant tothis Section 2.13 shall designate a different Lending Office if suchdesignation will avoid the need for, or reduce the amount of, such compensationand will not, in the sole discretion of such Lender, be otherwisedisadvantageous to such Lender.

 

Section 2.14           Taxes.

 

(a)           No Deduction for Certain Taxes.  Any and all payments by the Borrower shall bemade, in accordance with Section 2.10, free and clear of and withoutdeduction for any and all present or future taxes, levies, imposts, deductions,charges or withholdings, and all liabilities 

 

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with respect thereto,excluding, in the case of each Lender, the Issuing Lender, and theAdministrative Agent, taxes imposed on its income, and franchise taxes imposedon it, by the jurisdiction under the laws of which such Lender, the IssuingLender, or the Administrative Agent (as the case may be) is organized or anypolitical subdivision of the jurisdiction (all such non-excluded taxes, levies,imposts, deductions, charges, withholdings and liabilities being hereinafterreferred to as “Taxes”) and, in the case of each Lender and the Issuing Lender,Taxes by the jurisdiction of such Lender’s Lending Office or any politicalsubdivision of such jurisdiction.  If theBorrower shall be required by law to deduct any Taxes from or in respect of anysum payable to any Lender, the Issuing Lender, or the Administrative Agent, (i) thesum payable shall be increased as may be necessary so that, after making allrequired deductions (including deductions applicable to additional sums payableunder this Section 2.14), such Lender, the Issuing Lender, or theAdministrative Agent (as the case may be) receives an amount equal to the sumit would have received had no such deductions been made; provided,however, that if the Borrower’s obligation to deduct or withhold Taxes iscaused solely by such Lender’s, the Issuing Lender’s, or the AdministrativeAgent’s failure to provide the forms described in paragraph (d) ofthis Section 2.14 and such Lender, the Issuing Lender, or theAdministrative Agent could have provided such forms, no such increase shall berequired; (ii) the Borrower shall make such deductions; and (iii) theBorrower shall pay the full amount deducted to the relevant taxation authorityor other authority in accordance with applicable law.

 

(b)           Other Taxes.  In addition, the Borrower agrees to pay anypresent or future stamp or documentary taxes or any other excise or propertytaxes, charges or similar levies which arise from any payment made or from theexecution, delivery or registration of, or otherwise with respect to, thisAgreement, the Notes, or the other Loan Documents (hereinafter referred to as “OtherTaxes”).

 

(c)           Indemnification.  **THE BORROWER INDEMNIFIESEACH LENDER, THE ISSUING LENDER, AND THE ADMINISTRATIVE AGENT FOR THE FULLAMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OROTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14)PAID BY SUCH LENDER, THE ISSUING LENDER, OR THE ADMINISTRATIVE AGENT (AS THECASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISINGTHEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXESWERE CORRECTLY OR LEGALLY ASSERTED.  EACHPAYMENT REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATIONSHALL BE MADE TO THE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMINGSUCH INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTENDEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF ASADMINISTRATIVE AGENT, THE ISSUING LENDER, OR ANY SUCH LENDER.  IF ANY LENDER, THE ADMINISTRATIVE AGENT, ORTHE ISSUING LENDER RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THEBORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER, THE ADMINISTRATIVE AGENT,OR THE ISSUING LENDER, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THEBORROWER THE BORROWER’S SHARE OF SUCH REFUND.**

 

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(d)           Foreign Lender WithholdingExemption.  Each Lender and IssuingLender that is not incorporated under the laws of the United States of Americaor a state thereof agrees that it shall deliver to the Borrower and theAdministrative Agent (i) two duly completed copies of United StatesInternal Revenue Service Form W8-ECI or W8-BEN or successor applicableform, as the case may be, certifying in each case that such Lender is entitledto receive payments under this Agreement and the Notes payable to it, withoutdeduction or withholding of any United States federal income taxes, (ii) ifapplicable, an Internal Revenue Service Form W-8 or W-9 or successorapplicable form, as the case may be, to establish an exemption from UnitedStates backup withholding tax, and (iii) any other governmental formswhich are necessary or required under an applicable tax treaty or otherwise bylaw to reduce or eliminate any withholding tax, which have been reasonablyrequested by the Borrower.  Each Lenderwhich delivers to the Borrower and the Administrative Agent a Form W8-ECIor W8-BEN and Form W-8 or W-9 pursuant to the next preceding sentencefurther undertakes to deliver to the Borrower and the Administrative Agent twofurther copies of the said letter and Form W8-ECI or W8-BEN and Form W-8or W-9 , or successor applicable forms, or other manner of certification, asthe case may be, on or before the date that any such letter or form expires orbecomes obsolete or after the occurrence of any event requiring a change in themost recent letter and form previously delivered by it to the Borrower and theAdministrative Agent, and such extensions or renewals thereof as may reasonablybe requested by the Borrower and the Administrative Agent certifying in thecase of a Form W8-ECI or W8-BEN that such Lender is entitled to receivepayments under this Agreement without deduction or withholding of any UnitedStates federal income taxes.  If an event(including without limitation any change in treaty, law or regulation) hasoccurred prior to the date on which any delivery required by the precedingsentence would otherwise be required which renders all such forms inapplicableor which would prevent any Lender from duly completing and delivering any suchletter or form with respect to it and such Lender advises the Borrower and theAdministrative Agent that it is not capable of receiving payments without anydeduction or withholding of United States federal income tax, and in the caseof a Form W-8 or W-9, establishing an exemption from United States backupwithholding tax, such Lender shall not be required to deliver such letter orforms.  The Borrower shall withhold taxat the rate and in the manner required by the laws of the United States withrespect to payments made to a Lender failing to timely provide the requisiteInternal Revenue Service forms.

 

Section 2.15           Replacement of Lender.  If (i) any Lender requests compensationunder Section 2.13(a) or (b), (ii) any Lender suspends itsobligation to continue, or Convert Advances into, Eurodollar Rate Advancespursuant to Section 2.03(c)(ii) or Section 2.11, or (iii) anyLender 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 Lenderto assign and delegate, without recourse (in accordance with and subject to therestrictions contained in, and consents required by, Section 9.06), all ofits interests, rights and obligations under this Agreement and the related LoanDocuments to an Eligible Assignee that shall assume such obligations (whichEligible 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 AdministrativeAgent and at the Borrower’s sole cost and expense, require such Subject Lenderto assign, without recourse (in accordance with and subject to the restrictionscontained in, and consents required by, Section 9.06), all of itsinterests, rights and obligations under this 

 

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Agreement and the relatedLoan Documents to an assignee that shall assume such obligations (whichassignee may be another Lender, if a Lender accepts such assignment), providedthat:

 

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

 

(B)                                                        such Subject Lender shall have receivedpayment of an amount equal to the outstanding principal of its Advances andparticipations in outstanding Letter of Credit Obligations, accrued interestthereon, accrued fees and all other amounts payable to it hereunder and underthe other Loan Documents (including any amounts under Section 2.12) fromthe assignee (to the extent of such outstanding principal and accrued interestand fees) or the Applicable Borrower (in the case of all other amounts);

 

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

 

(D)                                                       such assignment does not conflict withapplicable Legal Requirements.

 

A Lender shall not berequired to make any such assignment or delegation if, prior thereto, as aresult of a waiver by such Lender or otherwise, the circumstances entitling theBorrower to require such assignment and delegation cease to apply.  Solely for purposes of effecting theassignment required for a Defaulting Lender under this Section 2.15 and tothe extent permitted under applicable Legal Requirements, each Lender herebydesignates and appoints the Administrative Agent as true and lawful agent andattorney-in-fact, with full power and authority, for and on behalf of and inthe name of such Lender to execute, acknowledge and deliver the Assignment andAcceptance required hereunder if such Lender was a Defaulting Lender and such Lendershall be bound thereby as fully and effectively as if such Lender hadpersonally executed, acknowledged and delivered the same.  In lieu of the Borrower or the AdministrativeAgent replacing a Defaulting Lender as provided in this Section 2.15, theBorrower may terminate such Defaulting Lender’s Commitment as provided in Section 2.04.

 

**ARTICLE III**

** **

**CONDITIONS OF LENDING**

** **

Section 3.01           Conditions Precedent to Effectiveness.  Theeffectiveness of this Agreement and the amendment and restatement of the ExistingCredit Agreement is subject to the conditions precedent that:

 

(a)           Documentation.  The Administrative Agent shall have receivedthe following duly executed by all the parties thereto, in form and substancesatisfactory to the Administrative Agent, the Issuing Lender and the Lenders,and, where applicable, in sufficient copies for each Lender:

 

(i)            this Agreement, a Note payable tothe order of each Lender in the amount of its Commitment, the Guaranties, thePledge Agreement, the Security Agreements, and Mortgages encumberingsubstantially all of the Borrower’s and its Subsidiaries’ Proven Reserves 

 

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and Oil and GasProperties in connection therewith, 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 thisAgreement and substantially in the form of the attached Exhibit K coveringthe matters discussed in such Exhibit and such other matters as any Lenderthrough the Administrative Agent may reasonably request;

 

(iii)          copies, certified as of the date ofthis Agreement by a Responsible Officer of the Borrower of (A) theresolutions of the Board of Directors of the Borrower approving the LoanDocuments to which the Borrower is a party, (B) the certificate ofincorporation of the Borrower, (C) the bylaws of the Borrower and (D) allother documents evidencing other necessary corporate action and governmentalapprovals, if any, with respect to this Agreement, the Note, and the other LoanDocuments;

 

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

 

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

 

(vi)          a certificate of the secretary or anassistant secretary of each Guarantor certifying the names and true signaturesof officers of such Guarantor authorized to sign the Guaranty, SecurityInstruments and the other Loan Documents to which such Guarantor is a party;

 

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

 

(viii)        appropriate UCC-1 and UCC-3, asapplicable, Financing Statements covering the Collateral for filing with theappropriate authorities and any other documents, agreements or instrumentsnecessary to create an Acceptable Security Interest in such Collateral;

 

(ix)           stock certificates required inconnection with the Pledge Agreements and stock powers executed in blank foreach such stock certificate;

 

(x)            insurance certificates naming theAdministrative Agent loss payee or additional insured, as applicable, andevidencing insurance which meets the requirements of this Agreement and theSecurity Instruments, and which is otherwise satisfactory to the AdministrativeAgent;

 

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(xi)           the initial Independent Engineer’sReport dated effective as of a date acceptable to the Administrative Agent;

 

(xii)          the Subordination and IntercreditorAgreement;

 

(xiii)         such other documents, governmentalcertificates, agreements and lien searches as the Administrative Agent or anyLender may reasonably request.

 

(b)           Payment of Fees.  On the date of this Agreement, the Borrowershall have paid the fees required by Section 2.08(c) and all costsand expenses that have been invoiced and are payable pursuant to Section 9.04.

 

(c)           Delivery of Financial Statements.  The Administrative Agent and the Lenders shallhave received true and correct copies of (i) the Financial Statements, (ii) theInterim Financial Statements and (iii) such other financial information asthe Lenders may reasonably request.

 

(d)           Security Instruments.  The Administrative Agent shall have receivedall appropriate evidence required by the Administrative Agent and the Lendersin their sole discretion necessary to determine that the Administrative Agent(for its benefit and the benefit of the Secured Parties) shall have anAcceptable Security Interest in the Collateral and that all actions or filingsnecessary 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.

 

(e)           Title.  The Administrative Agent shall be satisfiedin its sole discretion with the title to the Oil and Gas Properties included inthe Borrowing Base and that such Oil and Gas Properties constitute a percentageof such Collateral reasonably satisfactory to the Administrative Agent.

 

(f)            Environmental.  The Administrative Agent shall have receivedsuch Phase I environmental assessments or other reports as it may reasonablyrequire and shall be satisfied with the condition of the Oil and Gas Propertieswith respect to the Borrower’s and its Subsidiaries’ compliance withEnvironmental Laws.

 

(g)           No Default.  No Default shall have occurred and becontinuing.

 

(h)           Representations and Warranties.  The representations and warranties containedin Article IV hereof and in each other Loan Document shall be true andcorrect in all material respects.

 

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

 

(j)            No Proceeding or Litigation; NoInjunctive Relief.  No action, suit,investigation or other proceeding (including, without limitation, the enactmentor promulgation of a statute or rule) by or before any arbitrator or anyGovernmental Authority shall be threatened or pending and no preliminary orpermanent injunction or order by a state or federal court shall have beenentered (i) in connection with this Agreement or any transactioncontemplated hereby or (ii)

 

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which, in any case, in the judgment of theAdministrative Agent, could reasonably be expected to result in a MaterialAdverse Change (other than the developments under the litigation proceedingsset forth on Schedule 4.07 which have been disclosed to the AdministrativeAgent prior to the Effective Date).

 

(k)           Consents, Licenses, Approvals, etc.  TheAdministrative Agent shall have received true copies (certified to be such bythe Borrower or other appropriate party) of all consents, licenses andapprovals required in accordance with applicable law, or in accordance with anydocument, agreement, instrument or arrangement to which the Borrower, theGuarantors and their respective Subsidiaries is a party, in connection with theexecution, delivery, performance, validity and enforceability of thisAgreement, and the other Loan Documents. In addition, the Borrower, the Guarantors and their respectiveSubsidiaries shall have all such material consents, licenses and approvalsrequired in connection with the continued operation of the Borrower, theGuarantors and respective Subsidiaries, and such approvals shall be in fullforce and effect, and all applicable waiting periods shall have expired withoutany action being taken or threatened by any competent authority which wouldrestrain, prevent or otherwise impose adverse conditions on this Agreement andthe actions contemplated hereby.

 

(l)            Hedging Arrangements.  The Borrower shall have entered into theHydrocarbon Hedge Agreements required by Section 5.12.

 

(m)          Material Contracts.  The Borrower shall have delivered to theAdministrative Agent copies of all material contracts, agreements orinstruments listed on the attached Schedule 4.21.

 

(n)           Subordinated Debt.  The Borrower shall have entered into theSubordinated Credit Agreement, the terms and conditions thereof shall bereasonably satisfactory to the Administrative Agent and the Lenders and theconditions precedent set forth in Section 3.01 of the Subordinated CreditAgreement shall contemporaneously herewith have been satisfied or waived inwriting as of the date hereof.  TheBorrower shall have delivered copies of the Subordinated Credit Agreement andeach other agreement, instrument, or document executed by the Borrower or anyof its Subsidiaries or any of their Responsible Officers at any time inconnection with the Subordinated Credit Agreement on or before the date hereof.

 

(o)           USA Patriot Act.  The Borrower has delivered to each Lenderthat is subject to the Patriot Act such information requested by such Lender inorder to comply with the Patriot Act.

 

Section 3.02           Conditions Precedent to AllBorrowings.  The obligation of eachLender to make an Advance on the occasion of each Borrowing and of the IssuingLender to issue, increase, or extend any Letter of Credit shall be subject tothe further conditions precedent that on the date of such Borrowing or the dateof the issuance, increase, or extension of such Letter of Credit:

 

(a)           the following statements shall betrue (and each of the giving of the applicable Notice of Borrowing, Notice ofConversion or Continuation, or Letter of Credit Application and the acceptanceby the Borrower of the proceeds of such Borrowing or the issuance, increase, orextension of such Letter of Credit shall constitute a representation andwarranty by the Borrower 

 

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that on the date of suchBorrowing or on the date of such issuance, increase, or extension of suchLetter of Credit, as applicable, such statements are true):

 

(i)            the representations and warrantiescontained in Article IV of this Agreement and the representations andwarranties contained in the Security Instruments, the Guaranties, and each ofthe other Loan Documents are true and correct in all material respects on andas of the date of such Borrowing or the date of the issuance, increase, orextension of such Letter of Credit, before and after giving effect to suchBorrowing or to the issuance, increase, or extension of such Letter of Creditand to the application of the proceeds from such Borrowing, as though made onand as of such date except to the extent that any such representation orwarranty expressly relates solely to an earlier date, in which case it shallhave been true and correct in all material respects as of such earlier date;and

 

(ii)           no Default has occurred and iscontinuing or would result from such Borrowing or from the application of theproceeds therefrom, or would result from the issuance, increase, or extensionof such Letter of Credit; and

 

(b)           the Administrative Agent shall havereceived such other approvals, opinions, or documents reasonably deemednecessary or desirable by any Lender as a result of circumstances occurringafter the date of this Agreement, as any Lender through the AdministrativeAgent may reasonably request.

 

**ARTICLE IV**

**REPRESENTATIONS AND WARRANTIES**

** **

The Borrower represents and warrants as follows:

 

Section 4.01           Existence; Subsidiaries.  The Borrower is a corporation duly organized,validly existing and in good standing under the laws of Delaware and in goodstanding and qualified to do business in each other jurisdiction where itsownership or lease of Property or conduct of its business requires suchqualification except where the failure to be so qualified could not, individuallyor in the aggregate, reasonably be expected to cause a Material AdverseChange.  Each Subsidiary of the Borroweris duly organized, validly existing, and in good standing under the laws of itsjurisdiction of formation and in good standing and qualified to do business ineach jurisdiction where its ownership or lease of Property or conduct of itsbusiness requires such qualification except where the failure to be soqualified could not, individually or in the aggregate, reasonably be expectedto cause a Material Adverse Change.  Asof the date hereof, the Borrower has no Subsidiaries other than those listedidentified in Schedule 4.01.

 

Section 4.02           Power.  The execution, delivery, and performance bythe Borrower of this Agreement, the Notes, and the other Loan Documents towhich it is a party and by the Guarantors of the Guaranties and the other LoanDocuments to which they are a party and the consummation of the transactionscontemplated hereby and thereby (a) are within the Borrower’s and suchGuarantors’ governing powers, (b) have been duly authorized by allnecessary governing action, (c) do not contravene (i) the Borrower’sor any Guarantor’s certificate or articles of incorporation, bylaws, limitedliability company agreement, or other similar 

 

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governance documents or (ii) anylaw or any contractual restriction binding on or affecting the Borrower or anyGuarantor, and (d) will not result in or require the creation orimposition of any Lien prohibited by this Agreement.  At the time of each Advance and the issuance,extension or increase of a Letter of Credit, such Advance and such Letter ofCredit, and the use of the proceeds of such Advance and such Letter of Credit,will be within the Borrower’s governing powers, will have been duly authorizedby all necessary corporate action, will not contravene (i) the Borrower’scertificate of incorporation and bylaws or other organizational documents or (ii) anylaw or any contractual restriction binding on or affecting the Borrower andwill not result in or require the creation or imposition of any Lien prohibitedby this Agreement.

 

Section 4.03           Authorization and Approvals.  No consent, order, authorization, or approvalor other action by, and no notice to or filing with, any Governmental Authorityor any other Person is required for the due execution, delivery, andperformance by the Borrower of this Agreement, the Notes, or the other LoanDocuments to which the Borrower is a party or by each Guarantor of its Guarantyor the other Loan Documents to which it is a party or the consummation of thetransactions contemplated thereby.  Atthe time of each Borrowing and each issuance, increase or extension of a Letterof Credit, no authorization or approval or other action by, and no notice to orfiling with, any Governmental Authority will be required for such Borrowing orsuch issuance, increase or extension of such Letter of Credit or the use of theproceeds of such Borrowing or such Letter of Credit.

 

Section 4.04           Enforceable Obligations.  This Agreement, the Notes, and the other LoanDocuments to which the Borrower is a party have been duly executed anddelivered by the Borrower and the Guaranties and the other Loan Documents towhich each Guarantor is a party have been duly executed and delivered by theGuarantors.  Each Loan Document is thelegal, valid, and binding obligation of the Borrower and each Guarantor whichis a party to it enforceable against the Borrower and each such Guarantor inaccordance with its terms, except as such enforceability may be limited by anyapplicable bankruptcy, insolvency, reorganization, moratorium, or similar lawaffecting creditors’ rights generally and by general principles of equity.

 

Section 4.05           Financial Statements.

 

(a)           The Borrower hasdelivered to the Administrative Agent and the Lenders copies of the FinancialStatements and the Interim Financial Statements, and the Financial Statements and theInterim Financial Statements areaccurate and complete in all material respects and present fairly the financialcondition of Borrower and its consolidated Subsidiaries for their respectiveperiod in accordance with GAAP.  As ofthe date of the Financial Statements, there were no material contingentobligations, liabilities for taxes, unusual forward or long-term commitments,or unrealized or anticipated losses of the Borrower or any Subsidiary, exceptas disclosed therein and adequate reserves for such items have been made inaccordance with GAAP.

 

(b)           Since the date ofthe Financial Statements, no event or circumstance that could cause a MaterialAdverse Change has occurred.

 

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(c)           As of the datehereof, the Borrower, the Guarantors and their respective Subsidiaries have noDebt other than the Debt listed on Schedule 4.05.

 

Section 4.06           True and Complete Disclosure.  All factual information (excluding estimates)heretofore or contemporaneously furnished by or on behalf of the Borrower orany of the Guarantors in writing to any Lender or the Administrative Agent forpurposes of or in connection with this Agreement, any other Loan Document orany transaction contemplated hereby or thereby is, and all other such factualinformation hereafter furnished by or on behalf of the Borrower and theGuarantors in writing to the Administrative Agent or any of the Lenders was orshall be, true and accurate in all material respects on the date as of whichsuch information was or is dated or certified and did not or does not containany untrue statement of a material fact or omit to state any material factnecessary to make the statements contained therein not misleading at suchtime.  All projections, estimates, andpro forma financial information furnished by the Borrower were prepared on thebasis of assumptions, data, information, tests, or conditions believed to bereasonable at the time such projections, estimates, and pro forma financialinformation were furnished.

 

Section 4.07           Litigation; Compliance with Laws.

 

(a)           There is no pending or, to the bestknowledge of the Borrower, threatened action or proceeding affecting theBorrower or any of the Guarantors before any court, Governmental Authority orarbitrator which could reasonably be expected to cause a Material AdverseChange other than as set forth in Schedule 4.07 or which purports to affect thelegality, validity, binding effect or enforceability of this Agreement, anyNote, or any other Loan Document. Additionally, there is no pending or, to the best of the knowledge ofthe Borrower, threatened action or proceeding instituted against the Borroweror any of the Guarantors which seeks to adjudicate the Borrower or any of theGuarantors as bankrupt or insolvent, or seeking liquidation, winding up,reorganization, arrangement, adjustment, protection, relief, or composition ofit or its debts under any law relating to bankruptcy, insolvency orreorganization or relief of debtors, or seeking the entry of an order forrelief or the appointment of a receiver, trustee or other similar official forit or for any substantial part of its Property.

 

(b)           The Borrower and its Subsidiarieshave complied in all material respects with all material statutes, rules,regulations, orders and restrictions of any Governmental Authority havingjurisdiction over the conduct of their respective businesses or the ownershipof their respective Property

 

Section 4.08           Use of Proceeds.  The proceeds of the Advances will be used bythe Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the businessof 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 marginstock in violation of Regulation T, U or X.

 

Section 4.09           Investment Company Act.  Neither the Borrower nor any of theGuarantors is an “investment company” or a company “controlled” by an “investmentcompany” within the meaning of the Investment Company Act of 1940, as amended.

 

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Section 4.10           Federal Power Act.  Neither the Administrative Agent, the IssuingLender nor any of the Lenders, solely by virtue of the execution, delivery andperformance of, and the consummation of the transactions contemplated by, theLoan Documents shall be or become subject to regulation (a) under theFederal Power Act, as amended, (b) as a “public utility” or “publicservice corporation” or the equivalent under the applicable law of any state,or (c) under the applicable laws of any state relating to public utilitiesor public service corporations.

 

Section 4.11           Taxes.

 

(a)           Reports and Payments.  All Returns (as defined below in clause (c) ofthis Section) required to be filed by or on behalf of the Borrower, theGuarantors, or any member of the Controlled Group (hereafter collectivelycalled the “Tax Group”) have been duly filed on a timely basis or appropriateextensions have been obtained and such Returns are and will be true, completeand correct, except where the failure to so file would not be reasonablyexpected to cause a Material Adverse Change; and all Taxes shown to be payableon the Returns or on subsequent assessments with respect thereto will have beenpaid in full on a timely basis, and no other Taxes will be payable by the TaxGroup with respect to items or periods covered by such Returns, except in eachcase to the extent of (i) reserves reflected in the Financial Statementsand the Interim Financial Statements, or (ii) taxes that are beingcontested in good faith.  The reservesfor accrued Taxes reflected in the financial statements delivered to theLenders under this Agreement are adequate in the aggregate for the payment ofall unpaid Taxes, whether or not disputed, for the period ended as of the datethereof and for any period prior thereto, and for which the Tax Group may beliable in its own right, as withholding agent or as a transferee of the assetsof, or successor to, any Person.

 

(b)           Taxes Definition.  “Taxes” in this Section 4.11 shall meanall 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, andfranchise taxes (and including any interest, penalties, or additions to taxattributable to or imposed on with respect to any such assessment).

 

(c)           Returns Definition.  “Returns” in this Section 4.11 shallmean any federal, state, local, or foreign report, estimate, declaration ofestimated Tax, information statement or return relating to, or required to befiled in connection with, any Taxes, including any information return or reportwith respect to backup withholding or other payments of third parties.

 

Section 4.12           Pension Plans.  All Plans are in compliance in all materialrespects with all applicable provisions of ERISA.  No Termination Event has occurred withrespect to any Plan, and each Plan has complied with and been administered inall material respects in accordance with applicable provisions of ERISA and theCode.  No “accumulated funding deficiency”(as defined in Section 302 of ERISA) has occurred and there has been noexcise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043of ERISA and the regulations issued thereunder has occurred with respect to anyMultiemployer Plan, and each Multiemployer Plan has complied with and beenadministered in all material respects with applicable provisions of ERISA andthe Code.  The present value of allbenefits vested under each Plan (based on the assumptions used to fund suchPlan) did not, as of the last annual 

 

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valuation date applicablethereto, exceed the value of the assets of such Plan allocable to such vestedbenefits.  Neither the Borrower nor anymember of the Controlled Group has had a complete or partial withdrawal fromany Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation dateapplicable thereto, neither the Borrower nor any member of the Controlled Groupwould become subject to any liability under ERISA if the Borrower or any memberof the Controlled Group has received notice that any Multiemployer Plan isinsolvent or in reorganization.  Basedupon GAAP existing as of the date of this Agreement and current factualcircumstances, the Borrower has no reason to believe that the annual costduring the term of this Agreement to the Borrower or any member of theControlled Group for post-retirement benefits to be provided to the current andformer employees of the Borrower or any member of the Controlled Group underPlans that are welfare benefit plans (as defined in Section 3(1) ofERISA) could, in the aggregate, reasonably be expected to cause a MaterialAdverse Change.

 

Section 4.13           Condition of Property; Casualties.  Each of the Borrower and the Guarantors hasgood and marketable title to all of its Oil and Gas Properties as is customaryin the oil and gas industry in all material respects, free and clear of allLiens except for Permitted Liens.  Eachof the Borrower and the Guarantors has good and indefeasible title to all ofits other Properties, free and clear of all Liens except for Permitted Liens.  The material Properties used or to be used inthe continuing operations of the Borrower and each of the Guarantors are ingood repair, working order and condition. Since the date of the Financial Statements, neither the business nor thematerial Properties of the Borrower and each of the Guarantors, taken as awhole, has been materially and adversely affected as a result of any fire,explosion, earthquake, flood, drought, windstorm, accident, strike or otherlabor disturbance, embargo, requisition or taking of Property or cancellationof contracts, Permits, or concessions by a Governmental Authority, riot,activities of armed forces, or acts of God or of any public enemy.

 

Section 4.14           No Burdensome Restrictions; NoDefaults.

 

(a)           Other than those identified onSchedule 4.14(a), neither the Borrower nor any Guarantor is a party to anyindenture, loan, or credit agreement or any lease or other agreement orinstrument or subject to any charter or corporate restriction or provision ofapplicable law or governmental regulation that could reasonably be expected tocause a Material Adverse Change.  Neitherthe Borrower nor any of its Subsidiaries is in default under or with respect toany contract, agreement, lease, or other instrument to which the Borrower orany Subsidiary is a party and which could reasonably be expected to cause aMaterial Adverse Change or under any agreement in connection with any Debt,including, without limitation, the Subordinated Loan Documents.  Neither the Borrower nor any of itsSubsidiaries has received any notice of default under any material contract,agreement, lease, or other instrument to which the Borrower or such Subsidiaryis a party a copy of which has not been delivered to the Administrative Agent.

 

(b)           No Default has occurred and iscontinuing.

 

Section 4.15           EnvironmentalCondition.

 

(a)           Permits, Etc.  TheBorrower and the Guarantors (i) have obtained all Environmental Permitsnecessary for the ownership and operation of their respective Properties 

 

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and the conduct of theirrespective businesses; (ii) have at all times been and are in materialcompliance with all terms and conditions of such Permits and with all othermaterial requirements of applicable Environmental Laws; (iii) have notreceived notice of any material violation or alleged violation of anyEnvironmental Law or Permit; and (iv) are not subject to any actual orcontingent Environmental Claim, which could reasonably be expected to cause aMaterial Adverse Change.

 

(b)           Certain Liabilities.  To the Borrower’s actual knowledge, none ofthe present or previously owned or operated Property of the Borrower or anyGuarantor or of any of their former Subsidiaries, wherever located, (i) hasbeen placed on or proposed to be placed on the National Priorities List, theComprehensive Environmental Response Compensation Liability Information Systemlist, 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 underany Environmental Laws; (ii) is subject to a Lien, arising under or inconnection with any Environmental Laws, that attaches to any revenues or to anyProperty owned or operated by the Borrower or any of the Guarantors, whereverlocated, which could reasonably be expected to cause a Material Adverse Change;or (iii) has been the site of any Release of Hazardous Substances orHazardous Wastes from present or past operations which has caused at the siteor at any third-party site any condition that has resulted in or couldreasonably be expected to result in the need for Response that would cause aMaterial Adverse Change.

 

(c)           Certain Actions.  Without limiting the foregoing, (i) allnecessary notices have been properly filed, and no further action is requiredunder current Environmental Law as to each Response or other restoration orremedial project undertaken by the Borrower or the Guarantors or any of theirformer Subsidiaries on any of their presently or formerly owned or operatedProperty and (ii) the present and, to the Borrower’s best knowledge,future liability, if any, of the Borrower and the Guarantors which couldreasonably be expected to arise in connection with requirements underEnvironmental Laws will not result in a Material Adverse Change.

 

Section 4.16           Permits, Licenses, Etc.  TheBorrower and the Guarantors possess all authorizations, Permits, licenses,patents, patent rights or licenses, trademarks, trademark rights, trade namesrights and copyrights which are material to the conduct of their business.  The Borrower and the Guarantors manage andoperate their business in all material respects in accordance with allapplicable Legal Requirements and good industry practices.

 

Section 4.17           Gas Contracts.  Neither the Borrower nor any of theGuarantors, as of the date hereof, (a) is obligated in any materialrespect by virtue of any prepayment made under any contract containing a “take-or-pay”or “prepayment” provision or under any similar agreement to deliverhydrocarbons produced from or allocated to any of the Borrower’s and itsSubsidiaries’ Oil and Gas Properties at some future date without receiving fullpayment therefor at the time of delivery, or (b) except as has beendisclosed to the Administrative Agent, has produced gas, in any materialamount, subject to, and none of the Borrower’s and the Guarantors’ Oil and GasProperties is subject to, balancing rights of third parties or subject tobalancing duties under governmental requirements.

 

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Section 4.18           Liens; Titles, Leases, Etc.  Noneof the Property of the Borrower or any of the Guarantors is subject to any Lienother than Permitted Liens.  On the dateof this Agreement, all governmental actions and all other filings, recordings,registrations, third party consents and other actions which are necessary tocreate and perfect the Liens provided for in the Security Instruments will havebeen made, obtained and taken in all relevant jurisdictions.  All leases and agreements for the conduct ofbusiness of the Borrower and the Guarantors are valid and subsisting, in fullforce and effect and there exists no default or event of default or circumstancewhich with the giving of notice or lapse of time or both would give rise to adefault under any such leases or agreements which could reasonably be expectedto cause a Material Adverse Change. Neither the Borrower nor any of the Guarantors is a party to anyagreement or arrangement (other than this Agreement and the SecurityInstruments), or subject to any order, judgment, writ or decree, which eitherrestricts or purports to restrict its ability to grant Liens to secure theObligations against their respective assets or Properties.

 

Section 4.19           Solvency and Insurance.  Before and after giving effect to the makingof the initial Advances (or deemed issuance thereof under Section 2.01(b)), each of the Borrower and itsSubsidiaries is Solvent.  Additionally,each of the Borrower and its Subsidiaries carry insurance required under Section 5.02of this Agreement.

 

Section 4.20           Hedging Agreements.  Schedule 4.20 sets forth, as of the datehereof, a true and complete list of all Interest Hedge Agreements, HydrocarbonHedge Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, thematerial terms thereof (including the type, term, effective date, terminationdate and notional amounts or volumes), the net mark to market value thereof, allcredit support agreements relating thereto (including any margin required orsupplied), and the counterparty to each such agreement.

 

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

 

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**ARTICLE V**

** **

**AFFIRMATIVE COVENANTS**

** **

So long as anyNote or any amount under any Loan Document shall remain unpaid, any Letter ofCredit shall remain outstanding, or any Lender shall have any Commitmenthereunder, the Borrower agrees, unless the Majority Lenders shall otherwiseconsent in writing, to comply with the following covenants.

 

Section 5.01           Compliance with Laws, Etc.  The Borrower shall comply, and cause each ofits Subsidiaries to comply, in all material respects with all material LegalRequirements.  Without limiting thegenerality and coverage of the foregoing, the Borrower shall comply, and shallcause each of its Subsidiaries to comply, in all material respects, with allmaterial Environmental Laws and all laws, regulations, or directives withrespect to equal employment opportunity and employee safety in all jurisdictionsin which the Borrower, or any of its Subsidiaries do business; provided,however, that this Section 5.01 shall not prevent the Borrower or any ofits Subsidiaries from, in good faith and with reasonable diligence, contestingthe validity or application of any such laws or regulations by appropriatelegal proceedings.  Without limitation ofthe 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 theconduct of its business and (b) obtain, as soon as practicable, allconsents or approvals required from any states of the United States (or otherGovernmental Authorities) necessary to grant the Administrative Agent anAcceptable Security Interest in the Borrower’s and its Subsidiaries’ Oil andGas Properties.

 

Section 5.02           Maintenance of Insurance.

 

(a)           The Borrower shall, and shall causeeach of its Subsidiaries to, procure and maintain or shall cause to be procuredand maintained continuously in effect policies of insurance in form and amountsand issued by companies, associations or organizations reasonably satisfactoryto the Administrative Agent covering such casualties, risks, perils, liabilitiesand other hazards reasonably required by the Administrative Agent.  In addition, the Borrower shall, and shallcause each of its Subsidiaries to, comply with all requirements regardinginsurance contained in the Security Instruments.

 

(b)           All certified copies of policies orcertificates thereof, and endorsements and renewals thereof shall be deliveredto and retained by the Administrative Agent. All policies of insurance shall either have attached thereto a Lender’sloss payable endorsement for the benefit of the Administrative Agent, as losspayee in form reasonably satisfactory to the Administrative Agent or shall namethe Administrative Agent as an additional insured, as applicable.  The Borrower shall furnish the AdministrativeAgent with a certificate of insurance or a certified copy of all policies ofinsurance required.  All policies orcertificates of insurance shall set forth the coverage, the limits ofliability, the name of the carrier, the policy number, and the period ofcoverage.  In addition, all policies ofinsurance required under the terms hereof shall contain an endorsement oragreement by the insurer that any loss shall be payable in accordance with theterms of such policy notwithstanding any act of negligence of the Borrower, ora Subsidiary or any party holding under the Borrower or a Subsidiary whichmight otherwise result in a forfeiture of the insurance and the furtheragreement of the insurer waiving all rights of setoff, counterclaim ordeductions against the Borrower and its Subsidiaries.  All such policies shall contain a provisionthat notwithstanding any contrary agreements between the Borrower, itsSubsidiaries, and the applicable insurance company, such policies will not becanceled, allowed 

 

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to lapse without renewal,surrendered or amended (which provision shall include any reduction in thescope or limits of coverage) without at least 30 days’ prior written notice tothe Administrative Agent.  In the eventthat, notwithstanding the “lender’s loss payable endorsement” requirement ofthis Section 5.02, the proceeds of any insurance policy described aboveare paid to the Borrower or a Subsidiary, the Borrower shall deliver suchproceeds to the Administrative Agent immediately upon receipt.

 

Section 5.03           Preservation of CorporateExistence, Etc.  The Borrower shallpreserve and maintain, and cause each of its Subsidiaries to preserve andmaintain, its corporate or limited liability company, as applicable, existence,rights, franchises, and privileges in the jurisdiction of its incorporation ororganization, as applicable, and qualify and remain qualified, and cause eachsuch Subsidiary to qualify and remain qualified, as a foreign corporation ineach jurisdiction in which qualification is necessary or desirable in view ofits business and operations or the ownership of its Properties, and, in eachcase, where failure to qualify or preserve and maintain its rights andfranchises could reasonably be expected to cause a Material Adverse Change.

 

Section 5.04           Payment of Taxes, Etc.  The Borrower shall pay and discharge, andcause each of its Subsidiaries to pay and discharge, before the same shallbecome delinquent, (a) all taxes, assessments, and governmental charges orlevies imposed upon it or upon its income or profits or Property that arematerial in amount, prior to the date on which penalties attach thereto and (b) alllawful claims that are material in amount which, if unpaid, might by law becomea Lien upon its Property; provided, however, that neither the Borrowernor any such Subsidiary shall be required to pay or discharge any such tax,assessment, charge, levy, or claim which is being contested in good faith andby appropriate proceedings, and with respect to which reserves in conformitywith GAAP have been provided.

 

Section 5.05           Visitation Rights.  At any reasonable time and from time to time,upon reasonable notice, the Borrower shall, and shall cause its Subsidiariesto, permit the Administrative Agent and any Lender or any of their respectiveagents or representatives thereof, to (a) examine and make copies of andabstracts from the records and books of account of, and visit and inspect attheir reasonable discretion the Properties of, the Borrower and any suchSubsidiary, and (b) discuss the affairs, finances and accounts of theBorrower and any such Subsidiary with any of their respective officers ordirectors.

 

Section 5.06           Reporting Requirements.  The Borrower shall furnish to theAdministrative Agent and each Lender:

 

(a)           Annual Financials.  As soon as available and in any event notlater 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 extentnot otherwise provided in the Form 10-K filed by the Borrower with the SECfor such fiscal year end, a copy of the annual audit report for such year forthe Borrower and its consolidated Subsidiaries, including therein the Borrower’sand its consolidated Subsidiaries’ balance sheets as of the end of suchfiscal year and the Borrower’s and its consolidated Subsidiaries’ statements ofincome, cash flows, and retained earnings, in each case certified by anindependent certified public accountants of national standing reasonablyacceptable to the Administrative Agent and including any management lettersdelivered by such accountants to the Borrower or any Subsidiary in connectionwith such 

 

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audit, (ii) anymanagement letters delivered by such accountants to the Borrower, (iii) theForm 10-K filed with the SEC for such fiscal year end, (iv) aCompliance Certificate executed by a Responsible Officer of the Borrower and (v) acopy of the unaudited annual consolidating financial statements of each of itsSubsidiaries, including therein such Subsidiary’s balance sheet and statementsof income, cash flows, and retained earnings for such fiscal year;

 

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

 

(c)           Oil and Gas Reserve Reports.

 

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

 

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

 

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

 

With the delivery of each Engineering Report, acertificate from a Responsible Officer of the Borrower certifying that, to thebest of his knowledge and in all material respects: (A) the informationcontained in the Engineering Report and any other information delivered inconnection therewith is true and correct, (B) the Borrower or itsSubsidiary, as applicable, owns good and marketable title to the Oil and GasProperties evaluated in such Engineering Report, as is customary in the oil andgas industry, and such Oil and Gas Properties are subject to an AcceptableSecurity Interest and free of all Liens except for Permitted Liens, (C) exceptas set forth on an exhibit to the certificate, on a net basis there are no gasimbalances, take or pay or other prepayments with respect to its Oil and GasProperties evaluated in such Engineering Report which would require theBorrower or any of its Subsidiaries to deliver Hydrocarbons produced from suchOil and Gas Properties at some future time without then or thereafter receivingfull payment therefor, (D) none of its Oil and Gas Properties have beensold since the date of the last Borrowing Base determination except as setforth on an exhibit to the certificate, which certificate shall list all of itsOil and Gas Properties sold and in such detail as reasonably required by theMajority Lenders, (E) attached to the certificate is a list of its Oil andGas Properties added to and deleted from the immediately prior EngineeringReport and a list 

 

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showing any change in working interest or net revenueinterest in its Oil and Gas Properties occurring and the reason for suchchange, (F) attached to the certificate is a list of all Personsdisbursing proceeds to the Borrower or to its Subsidiary, as applicable, from itsOil and Gas Properties, (G) except as set forth on a schedule attached tothe certificate, all of the Oil and Gas Properties evaluated by suchEngineering Report are pledged as Collateral for the Obligations, and (H) attachedto the certificate is a quarterly cash flow budget for the four quartersfollowing the delivery of such certificate setting forth the Borrower’sprojections for production volumes, revenues, expenses, taxes and budgetedcapital expenditures during such period.

 

(d)           Production and Hedging Reports.  Assoon as available and in any event within 45 days after the end of eachquarter, commencing with the quarter ending December 31, 2008, a reportcertified by a Responsible Officer of the Borrower in form and substancesatisfactory to the Administrative Agent prepared by the Borrower (i) coveringeach of the Oil and Gas Properties of the Borrower and its Subsidiaries anddetailing on a quarterly basis (A) the production, revenue, and priceinformation and associated operating expenses for each such quarter, (B) anychanges to any producing reservoir, production equipment, or producing wellduring each such quarter, which changes could cause a Material Adverse Change,and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and GasProperties during each such quarter, (ii) setting forth a true andcomplete list of all Hedge Contracts of the Borrower and its Subsidiaries anddetailing the material terms thereof (including the type, term, effective date,termination date and notional amounts or volumes), the net mark to market valuethereof, all credit support agreements relating thereto (including any marginrequired or supplied), and the counterparty to each such agreement, and (iii) certifyingthe Borrower’s compliance with Section 5.12 hereof;

 

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

 

(f)            Termination Events.  As soon as possible and in any event (i) within30 days after the Borrower or any member of the Controlled Group knows or hasreason to know that any Termination Event described in clause (a) of thedefinition of Termination Event with respect to any Plan has occurred, and (ii) within10 days after the Borrower or any of its Affiliates knows or has reason to knowthat any other Termination Event with respect to any Plan has occurred, astatement of a Responsible Officer of the Borrower describing such TerminationEvent and the action, if any, which the Borrower or such Affiliate proposes totake with respect thereto;

 

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

 

(h)           Other ERISA Notices.  Promptly and in any event within fiveBusiness Days after receipt thereof by the Borrower or any member of theControlled Group from a Multiemployer

 

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Plan sponsor, a copy ofeach notice received by the Borrower or any member of the Controlled Groupconcerning the imposition or amount of withdrawal liability pursuant to Section 4202of ERISA;

 

(i)            Environmental Notices.  Promptly upon the receipt thereof by theBorrower or any of its Subsidiaries, a copy of any form of request, notice,summons or citation received from the Environmental Protection Agency, or anyother Governmental Authority, concerning (i) violations or allegedviolations of Environmental Laws, which seeks to impose liability therefor andcould cause a Material Adverse Change, (ii) any action or omission on thepart of the Borrower or any Subsidiary or any of their former Subsidiaries inconnection with Hazardous Waste or Hazardous Substances which could reasonablyresult in the imposition of liability therefor that could cause a MaterialAdverse Change, including without limitation any information request relatedto, or notice of, potential responsibility under CERCLA, or (iii) concerningthe filing of a Lien upon, against or in connection with the Borrower or anySubsidiary or their former Subsidiaries, or any of their leased or ownedProperty, wherever located;

 

(j)            Other Governmental Notices.  Promptly and in any event within five BusinessDays after receipt thereof by the Borrower or any Subsidiary, a copy of anynotice, summons, citation, or proceeding seeking to modify in any materialrespect, revoke, or suspend any material contract, license, permit or agreementwith any Governmental Authority;

 

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

 

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

 

(m)          Other Accounting Reports.  Promptly upon receipt thereof, a copy of eachother report or letter submitted to the Borrower or any Subsidiary byindependent accountants in connection with any annual, interim or special auditmade by them of the books of the Borrower and its Subsidiaries, and a copy ofany response by the Borrower or any Subsidiary of the Borrower, or the Board ofDirectors (or other applicable governing body) of the Borrower or anySubsidiary of the Borrower, to such letter or report;

 

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(n)           Notices Under Other LoanAgreements.  Promptly after thefurnishing thereof, copies of any statement, report or notice furnished to anyPerson pursuant to the terms of any indenture, loan or credit or other similaragreement, other than this Agreement and not otherwise required to be furnishedto the Lenders pursuant to any other provision of this Section 5.06;

 

(o)           SEC Filings.  Promptly after the sending orfiling thereof, copies of all proxy material, reports and other informationwhich the Borrower or any of its Subsidiaries sends to or files with the SEC orsends to any shareholder of the Borrower or of any of its Subsidiaries;

 

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

 

(q)           Other Information.  Such other information respecting thebusiness or Properties, or the condition or operations, financial or otherwise,of the Borrower or any of its Subsidiaries, as any Lender through theAdministrative Agent may from time to time reasonably request.  The Administrative Agent agrees to providethe Lenders with copies of any material notices and information deliveredsolely to the Administrative Agent pursuant to the terms of this Agreement.

 

Section 5.07           Maintenance of Property.  The Borrower shall, and shall cause each ofits Subsidiaries to, maintain their owned, leased, or operated Property in goodcondition and repair; and shall abstain, and cause each of its Subsidiaries toabstain from, knowingly or willfully permitting the commission of waste orother injury, destruction, or loss of natural resources, or the occurrence ofpollution, contamination, or any other condition in, on or about the owned oroperated Property involving the Environment that could reasonably be expectedto result in Response activities and that could reasonably be expected to causea Material Adverse Change.

 

Section 5.08           Agreement to Pledge.  The Borrower shall, and shall cause eachSubsidiary to, grant to the Administrative Agent an Acceptable SecurityInterest in any Property of the Borrower or any Subsidiary now owned orhereafter acquired promptly after receipt of a written request from theAdministrative Agent.

 

Section 5.09           Use of Proceeds.  The Borrower shall use the proceeds of the Advances and Letters ofCredit (a) to develop and acquire Oil and Gas Properties, (b) forworking capital purposes and (c) for general corporate purposes.

 

Section 5.10           Title Evidence and Opinions.  The Borrower shall from time to time upon thereasonable request of the Administrative Agent, take such actions and executeand deliver such documents and instruments as the Administrative Agent shallrequire to ensure that the Administrative Agent shall, at all times, havereceived satisfactory title evidence, which title evidence shall be in form andsubstance acceptable to the Administrative Agent in its sole discretion andshall include information regarding the before payout and after payoutownership interests held by the Borrower and the Borrower’s Subsidiaries, forall wells located on the Oil and Gas Properties, covering at least 80% of thepresent value of the Proven Reserves of the Borrower and its Subsidiaries andat least 80% of the present value of the proved developed 

 

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producing reserves of theBorrower and its Subsidiaries as determined by the Administrative Agent.  Within 60 days after the date hereof, theBorrower shall have delivered to the Administrative Agent title and lien searchesfrom the county recording offices of (a) Chavez and Roosevelt counties ofNew Mexico, (b) Lincoln and Nowata counties of Oklahoma, and (c) Erath,Comanche, Eastland, Carson, Gray and Hutchinson counties of Texas.

 

Section 5.11           Further Assurances; Cure of TitleDefects.  The Borrower shall, andshall cause each Subsidiary to, cure promptly any defects in the creation andissuance of the Notes and the execution and delivery of the SecurityInstruments and this Agreement.  TheBorrower hereby authorizes the Administrative Agent to file any financingstatements without the signature of the Borrower to the extent permitted byapplicable law in order to perfect or maintain the perfection of any securityinterest granted under any of the Loan Documents.  The Borrower at its expense will, and willcause each Subsidiary to, promptly execute and deliver to the AdministrativeAgent upon request all such other documents, agreements and instruments tocomply with or accomplish the covenants and agreements of the Borrower or anySubsidiary, as the case may be, in the Security Instruments and this Agreement,or to further evidence and more fully describe the collateral intended assecurity for the Notes, or to correct any omissions in the SecurityInstruments, or to state more fully the security obligations set out herein orin any of the Security Instruments, or to perfect, protect or preserve anyLiens created pursuant to any of the Security Instruments, or to make anyrecordings, to file any notices or obtain any consents, all as may be necessaryor appropriate in connection therewith or to enable the Administrative Agent toexercise and enforce its rights and remedies with respect to anyCollateral.  Within 30 days after (a) arequest by the Administrative Agent or the Lenders to cure any title defects orexceptions which are not Permitted Liens raised by such information or (b) anotice by the Administrative Agent that the Borrower has failed to comply with Section 5.10above, the Borrower shall (i) cure such title defects or exceptions whichare not Permitted Liens or substitute acceptable Oil and Gas Properties with notitle defects or exceptions except for Permitted Liens covering Collateral ofan equivalent value and (ii) deliver to the Administrative Agentsatisfactory title evidence (including supplemental or new title opinionsmeeting the foregoing requirements) in form and substance acceptable to theAdministrative Agent in its reasonable business judgment as to the Borrower’sand its Subsidiaries’ ownership of such Oil and Gas Properties and the AdministrativeAgent’s Liens and security interests therein as are required to maintaincompliance with Section 5.10.

 

Section 5.12           Hedging Arrangements.  The Borrower shall maintain each Hydrocarbon Hedge Agreement describedin Schedule 4.20 until the statedmaturity of such Hydrocarbon Hedge Agreement. Other than such Hydrocarbon Hedge Agreements, no other Hedge Contractsare required on the date hereof.

 

Section 5.13           Bank Accounts.  The Borrower shall, and shall cause each ofits Subsidiaries to, (a) maintain their principal operating accounts andother deposit accounts with the Administrative Agent or any Lender or any otherbank that has executed an account control agreement reasonably acceptable inform and substance to the Administrative Agent, or (b) within 30 days fromthe date hereof, provide an account control agreement reasonably acceptable inform and substance to the Administrative Agent and executed by each depositorybank that holds any operating accounts or deposit accounts of the Borrower orany Guarantor and in existence on the date hereof.

 

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**ARTICLE VI**

**NEGATIVE COVENANTS**

** **

So long as anyNote or any amount under any Loan Document shall remain unpaid, any Letter ofCredit shall remain outstanding, or any Lender shall have any Commitment, theBorrower agrees, unless the Majority Lenders otherwise consent in writing, tocomply with the following covenants.

 

Section 6.01           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 whethernow owned or hereafter acquired, or assign any right to receive income, exceptthat the Borrower and its Subsidiaries may create, incur, assume, or suffer toexist:

 

(a)           Liens securing the Obligations andLiens securing the Subordinated Debt to the extent permitted under theSubordination and Intercreditor Agreement;

 

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

 

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

 

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

 

(e)           Liens to operators and non-operatorsunder joint operating agreements arising in the ordinary course of the businessof the Borrower or the relevant Subsidiary to secure amounts owing, whichamounts are not yet due or are being contested in good faith by appropriateproceedings, if such reserve as may be required by GAAP shall have been madetherefor;

 

(f)            royalties, overriding royalties, netprofits interests, production payments, reversionary interests, calls onproduction, preferential purchase rights and other burdens on or deductionsfrom the proceeds of production, that do not secure Debt for borrowed money andthat are taken into account in computing the net revenue interests and workinginterests of the Borrower or any of its Subsidiaries warranted in the SecurityInstruments or in this Agreement;

 

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(g)           Liens arising in the ordinary courseof business out of pledges or deposits under workers’ compensation laws,unemployment insurance, old age pensions or other social security or retirementbenefits, or similar legislation or to secure public or statutory obligationsof the Borrower;

 

(h)           operating agreements, unitization andpooling agreements and orders, farmout agreements, gas balancing agreements andother agreements, in each case that are customary in the oil, gas and mineralproduction business and that are entered into in the ordinary course ofbusiness that are taken into account in computing the net revenue interests andworking interests of the Borrower or any of its Subsidiaries warranted in theSecurity Instruments or this Agreement, to the extent that any such Lienreferred to in this clause does not materially impair the use of the Propertycovered by such Lien for the purposes for which such Property is held by theBorrower or any Subsidiary or materially impair the value of such Propertysubject thereto; and

 

(i)            easements, rights-of-way,restrictions, and other similar encumbrances, and minor defects in the chain oftitle that are customarily accepted in the oil and gas financing industry, noneof which interfere with the ordinary conduct of the business of Borrower or anySubsidiary or materially detract from the value or use of the Property to whichthey apply.

 

Section 6.02           Debts, Guaranties, and OtherObligations.  The Borrower shall not,and shall not permit any of its Subsidiaries to, create, assume, suffer toexist, or in any manner become or be liable in respect of, any Debt except:

 

(a)           Debt of the Borrower and itsSubsidiaries under the Loan Documents;

 

(b)           the Subordinated Debt;

 

(c)           Debt in the form of obligations forthe deferred purchase price of Property or services incurred in the ordinarycourse of business which are not yet due and payable or are being contested ingood faith by appropriate proceedings and for which adequate reserves inaccordance with GAAP have been established;

 

(d)           Debt secured by the Liens permittedunder paragraph (b) of Section 6.01 in an aggregate amount notto exceed $3,000,000 at any time;

 

(e)           Debt under Hydrocarbon HedgeAgreements which are not prohibited by the terms of Section 6.14; provided that (i) such Debt shall not besecured, other than such Debt owing to Swap Counerparties which are securedunder the Loan Documents, (ii) such Debt shall not obligate theBorrower or any of its Subsidiaries to any margin call requirements, and (iii) thedeferred premium payments associated with such Hedge Contracts shall be limitedto the deferred premium payments for put option contracts which are securedunder the Loan Documents; provided that, the aggregate outstanding amount ofsuch deferred premium payments shall not exceed $500,000;

 

(f)            Debt consisting of sureties or bondsprovided to any Governmental Authority or other Person and assuring payment ofcontingent liabilities of the Borrower in connection with 

 

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the operation of the Oiland Gas Properties, including with respect to plugging, facility removal andabandonment of its Oil and Gas Properties;

 

(g)           Debt of the Borrower or anySubsidiary owing to the Borrower or to any other Subsidiary; provided that suchDebt is subordinated to the Obligations on terms acceptable to theAdministrative Agent in its sole discretion;

 

(h)           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 alreadysubject to such Lien, and (ii) the principal amount of any Debt renewed,refinanced or extended shall not exceed the amount of such Debt outstandingimmediately prior to such renewal, refinancing or extension; and

 

(i)            Debt underthe Series D Preferred Shares; provided that, (A) other than theextension of the maturity date thereof, the terms, conditions and provisions ofsuch Debt (including but not limited to, the subordination terms thereof) shallnot be amended, supplemented, restated or otherwise modified in any way withoutthe consent of the Majority Lenders, and (B) the amount of such Debt shallnot increase other than as a result of dividend payments which have been addedto the principal amount thereof as elected by certain holders of the Series DPreferred Shares.

 

Section 6.03           Agreements Restricting Liens andDistributions.  The Borrower shallnot, nor shall it permit any of its Subsidiaries to, create, incur, assume orpermit to exist any contract, agreement or understanding (other than thisAgreement, the Security Instruments or the Subordinated Loan Documents) whichin any way prohibits or restricts the granting, conveying, creation orimposition of any Lien on any of its Property, whether now owned or hereafteracquired, to secure the Obligations or restricts any Subsidiary from payingdividends to the Borrower, or which requires the consent of or notice to otherPersons in connection therewith.

 

Section 6.04           Merger or Consolidation; AssetSales.  The Borrower shall not, norshall it permit any of its Subsidiaries to:

 

(a)           merge or consolidate with or into anyother Person without the prior consent of all of the Lenders; provided that theBorrower or any Subsidiary may merge or may be consolidated into the Borroweror 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 feeinterest) other than:

 

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

 

(ii)           thesale or transfer of equipment that is (A) obsolete, worn out, depleted oruneconomic and disposed of in the ordinary course of business, (B) nolonger necessary for the business of such Person or (C) contemporaneouslyreplaced by equipment of at least comparable value and use, and

 

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(iii)          thesale, lease, transfer, assignment, farm-out, conveyance, or other dispositionof Property; provided that, (A) 100% of the consideration received inrespect of such disposition shall be cash or cash equivalents, (B) theconsideration received in respect of such disposition shall be equal to or greaterthan the fair market value of the such Property, interest therein or Subsidiarysubject of such disposition (as reasonably determined by the board of directorsor the equivalent governing body of the Borrower and, if requested by theAdministrative Agent, the Borrower shall deliver a certificate of a ResponsibleOfficer of the Borrower certifying to that effect), (C) if any suchdisposition is of a Subsidiary owning Oil and Gas Properties, such dispositionshall include all the Equity Interests of such Subsidiary; and (D) theaggregate fair market value of Properties subject to such dispositionsconsummated during any consecutive twelve month period shall not exceed$4,000,000.

 

Section 6.05           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 beforeand after giving effect to the making of such Restricted Payment, (a) theSubsidiaries may make Restricted Payments to the Borrower, (b) the Borrowermay make Restricted Payments to officers, directors, consultants and employeesof the Borrower or any Guarantor in any form other than cash or other assets ofthe Borrower, (c) the Borrower may make Restricted Payments to officers,directors, consultants and employees of the Borrower or any Guarantor in theform 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 theextent such payments would be permitted under the subordination terms in effectin favor of the Obligations and covering such Series D Preferred Shares,the Borrower may make Restricted Payments which are mandatory pursuant to theterms thereof.

 

Section 6.06           Investments.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, make or permit to exist any loans, advances, orcapital contributions to, or make any investment in (including, withoutlimitation, the making of any Acquisition), or purchase or commit to purchaseany stock or other securities or evidences of indebtedness of or interests inany Person or any Oil and Gas Properties or activities related to Oil and GasProperties, except:

 

(a)           Liquid Investments;

 

(b)           trade and customer accountsreceivable which are for goods furnished or services rendered in the ordinarycourse of business and are payable in accordance with customary trade terms;

 

(c)           creation of any additionalSubsidiaries or acquisition of Oil and Gas Properties in compliance with Section 6.15;

 

(d)           the loans, advances, capitalcontributions, investments, and commitments**made prior tothe date hereof and identified in the Interim Financial Statements; providedthat, the respective amounts of such loans, advances, capital contributions,investments, and commitments shall not be increased (other than byappreciation);

 

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(e)           investments received in connectionwith the bankruptcy or reorganization of, or settlement of delinquent accountsand disputes with, customers and suppliers, in each case in the ordinary courseof business; provided that, the aggregate amount of such investment shall notexceed $1,000,000 (other than by appreciation); and

 

(f)            investments consisting of anydeferred portion of the sales price received by the Borrower or any Subsidiaryin connection with any sale of assets permitted hereunder.

 

Section 6.07           Affiliate Transactions.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, directly or indirectly, enter into or permit toexist any transaction or series of transactions (including, but not limited to,the purchase, sale, lease or exchange of Property, the making of anyinvestment, the giving of any guaranty, the assumption of any obligation or therendering of any service) with any of their Affiliates unless such transactionor series of transactions is on terms no less favorable to the Borrower or theSubsidiary, as applicable, than those that could be obtained in a comparablearm’s length transaction with a Person that is not such an Affiliate.

 

Section 6.08           Compliance with ERISA.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, directly or indirectly, (a) engage in, orpermit any Subsidiary or ERISA Affiliate to engage in, any transaction inconnection with which the Borrower, any Subsidiary or any ERISA Affiliate couldbe 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 anyliability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) failto make, or permit any Subsidiary or ERISA Affiliate to fail to make, fullpayment when due of all amounts which, under the provisions of any Plan,agreement relating thereto or applicable law, the Borrower, a Subsidiary or anyERISA Affiliate is required to pay as contributions thereto; (d) permit toexist, or allow any Subsidiary or ERISA Affiliate to permit to exist, anyaccumulated funding deficiency within the meaning of Section 302 of ERISAor 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 presentvalue of the benefit liabilities (as “actuarial present value of the benefitliabilities” shall have the meaning specified in section 4041 of ERISA) underany Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliatewhich is regulated under Title IV of ERISA to exceed the current value of theassets (computed on a plan termination basis in accordance with Title IV ofERISA) of such Plan allocable to such benefit liabilities; (f) contributeto or assume an obligation to contribute to, or permit any Subsidiary or ERISAAffiliate to contribute to or assume an obligation to contribute to, anyMultiemployer Plan; (g) acquire, or permit any Subsidiary or ERISAAffiliate to acquire, an interest in any Person that causes such Person tobecome an ERISA Affiliate with respect to the Borrower, any Subsidiary or anyERISA Affiliate if such Person sponsors, maintains or contributes to, or at anytime in the six-year period preceding such acquisition has sponsored,maintained, or contributed to, (1) any Multiemployer Plan, or (2) anyother Plan that is subject to Title IV of ERISA under which the actuarialpresent value of the benefit liabilities under such Plan exceeds the currentvalue of the assets (computed on a plan termination basis in accordance withTitle 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 onaccount of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 

 

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of ERISA; (i) contributeto or assume an obligation to contribute to, or permit any Subsidiary or ERISAAffiliate to contribute to or assume an obligation to contribute to, anyemployee welfare benefit plan, as defined in section 3(1) of ERISA,including, without limitation, any such plan maintained to provide benefits toformer employees of such entities, that may not be terminated by such entitiesin their sole discretion at any time without any material liability; (j) amendor permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in anincrease in current liability such that the Borrower, any Subsidiary or anyERISA Affiliate is required to provide security to such Plan under section401(a)(29) of the Code; or (k) permit to exist any occurrence of anyReportable Event (as defined in Title IV of ERISA), or any other event orcondition, which presents a material (in the opinion of the Majority Lenders)risk of such a termination by the PBGC of any Plan.

 

Section 6.09           Sale-and-Leaseback.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, sell or transfer to a Person any Property, whethernow owned or hereafter acquired, if at the time or thereafter the Borrower or aSubsidiary shall lease as lessee such Property or any part thereof or otherProperty which the Borrower or a Subsidiary intends to use for substantiallythe same purpose as the Property sold or transferred.

 

Section 6.10           Change of Business.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, make any material change in the character of itsbusiness as an independent oil and gas exploration and production company, norwill the Borrower or any Subsidiary operate any business in any jurisdictionother than the United States, including the Gulf of Mexico.

 

Section 6.11           Organizational Documents, NameChange.  The Borrower shall not, norshall it permit any of its Subsidiaries to, amend, supplement, modify or restatetheir articles or certificate of incorporation, bylaws, limited liabilitycompany agreements, or other equivalent organizational documents where suchamendment, supplement, modification or restatement could have an adverse effecton the Lenders as determined by the Administrative Agent in its sole reasonablediscretion, or amend its name or change itsjurisdiction of incorporation, organization or formation without priorwritten notice to, and prior consent of, the Administrative Agent.

 

Section 6.12           Use of Proceeds; Letters of Credit.  The Borrower will not permit the proceeds ofany Advance or Letters of Credit to be used for any purpose other than thosepermitted by Section 5.09.  TheBorrower will not engage in the business of extending credit for the purpose ofpurchasing or carrying margin stock (within the meaning ofRegulation U).  Neither the Borrowernor any Person acting on behalf of the Borrower has taken or shall take, norpermit any of the Borrower’s Subsidiaries to take any action which might causeany of the Loan Documents to violate Regulation T, U or X or any otherregulation of the Board of Governors of the Federal Reserve System or toviolate Section 7 of the Securities Exchange Act of 1934 or any rule orregulation thereunder, in each case as now in effect or as the same mayhereinafter be in effect, including without limitation, the use of the proceedsof any Advance or Letters of Credit to purchase or carry any margin stock inviolation of Regulation T, U or X.

 

Section 6.13           Gas Imbalances, Take-or-Pay orOther Prepayments.  The Borrowershall not, nor shall it permit any of its Subsidiaries to, allow gasimbalances, take-or-pay or other prepayments with respect to the Oil and GasProperties of the Borrower or any Subsidiary which 

 

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would require theBorrower or any Subsidiary to deliver their respective Hydrocarbons produced ona monthly basis from such Oil and Gas Properties at some future time withoutthen or thereafter receiving full payment therefor.

 

Section 6.14           Limitation on Speculative Hedging.  Other than the Hedge Contracts required to beentered into and maintained pursuant to Section 5.12 hereof, the Borrowershall not, nor shall it permit any of its Subsidiaries to, (a) purchase,assume, or hold a speculative position in any commodities market or futuresmarket or enter into any Hydrocarbon Hedge Agreement, Interest Hedge Agreementor similar hedge arrangement for speculative purposes, or (b) be party toor otherwise enter into any Hedge Contract which (i) is entered into forreasons other than as a part of its normal business operations as a riskmanagement strategy and/or hedge against changes resulting from marketconditions related to the Borrower’s operations, (ii) covers notionalvolumes in excess of 85% of the anticipated production volumes attributable toProven Reserves of the Borrower and its Subsidiaries during the period suchhedge arrangement is in effect, or (iii) is longer than three years induration.

 

Section 6.15           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 andGas Properties without (a) such new Subsidiary executing and delivering tothe Administrative Agent, at its request, a Guaranty, a Pledge Agreement, aSecurity Agreement and a Mortgage, and such other Security Instruments as theAdministrative Agent or the Majority Lenders may reasonably request, (b) thedelivery by the Borrower of any certificates, opinions of counsel, titleopinions or other documents as the Administrative Agent may reasonably request,and (c) the Borrower or such Subsidiary acquiring such Oil and GasProperties executing and delivering to the Administrative Agent a new Mortgageor a supplement to an existing Mortgage encumbering such Oil and GasProperties; provided that, in any event, no Subsidiary may be created oracquired and no Oil and Gas Properties may be acquired if a Default hasoccurred before or after giving effect to such creation or acquisition of thenew Subsidiary or the acquisition of the additional Oil and Gas Properties.

 

Section 6.16           Account Payables.  The Borrower shall not, nor shall it permitany of its Subsidiaries to, allow (a) any of its trade payables or otheraccounts payable to be outstanding for more than 90 days (except in cases whereany such trade payable is being disputed in good faith and adequate reservesunder GAAP have been established) and (b) the weighted average maturity ofall such trade payables to exceed 120 days.

 

Section 6.17           Current Ratio.  The Borrower shall not permit the ratio of,as of the end of each fiscal quarter of the Borrower, beginning with the fiscalquarter ending December 31, 2008, (a) its current assets to (b) itscurrent liabilities, to be less 1.00 to 1.00. For purposes of this calculation (i) “current assets” shallinclude, as of the date of calculation, the aggregate Unused Commitment Amountsof the Lenders and the aggregate Availability under, and as defined in, theSubordinated Credit Agreement but shall exclude (A) any cash depositedwith or at the request of a counterparty to any Hedge Contract or any othersimilar hedge arrangement and (B) any assets representing a valuationaccount 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-termDebt existing under this Agreement, the current portion of long-term Debtexisting under the Subordinated Credit Agreement and any liabilitiesrepresenting a valuation account 

 

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arising from theapplication of SFAS 133 and 143.  For theavoidance of doubt, the parties hereto acknowledge that “current liabilities”includes the current portion of the Series D Preferred Shares.

 

Section 6.18           Leverage Ratio.  The Borrower shall not permit the Leverage Ratio for each fiscal quarterperiod ending on or after December 31, 2008, to be greater than 4.00 to1.00; solely for purposes ofcalculating Leverage Ratio under this clause, “consolidated Debt” shall notinclude Debt outstanding under preferred Equity Interests issued in compliancewith Section 6.22.

 

Section 6.19           InterestCoverage Ratio.  The Borrower shallnot permit the ratio of, as of the end of each fiscal quarter ending on orafter December 31, 2008, (a) the consolidated EBITDA of the Borrowercalculated for the four fiscal quarters then ended, to (b) theconsolidated Interest Expense of the Borrower for the four fiscal quarters thenended, to be less than 3.00 to 1.00.

 

Section 6.20           Subordinated Debt.  Except as otherwise permitted by the terms ofthe Subordination and Intercreditor Agreement, neither the Borrower nor any of itsSubsidiaries shall (a) make any optional, mandatory or scheduled paymentson account of principal (whether by redemption, purchase, retirement,defeasance, set-off or otherwise), interest, premiums and fees in respect ofthe Subordinated Debt, or (b) amend, supplement or otherwise modify theterms of the Subordinated Debt.

 

Section 6.21           Non-Guarantor Subsidiary.  Notwithstanding anything to the contrarycontained herein, including any provision of this Article VI, the Borrowershall 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 itsProperty for the benefit of Tri-Flow, (b) sell, assign, pledge, orotherwise transfer any of its Properties to Tri-Flow, or (c) make or permitto exist any loans, advances, or capital contributions to, or make anyinvestment in, or purchase or commit to purchase any stock or other securitiesor evidences of indebtedness of or interests in, Tri-Flow or in any Propertiesof Tri-Flow other than the loans, advances, capital contributions, investments,and commitments made prior to the date hereof in Tri-Flow; providedthat, the respective amounts of such loans, advances, capital contributions,investments, and commitments shall not be increased (other than byappreciation).

 

Section 6.22           Equity Issuance.  The Borrower shall not, nor shall it permit any of its Subsidiaries to,issue any preferred, convertible equity securities or other Equity Interestsother than common Equity Interests of the Borrower.

 

**ARTICLE VII**

** **

**EVENTS OF DEFAULT; REMEDIES**

** **

Section 7.01           Events of Default.  The occurrence of any of the following eventsshall constitute an “Event of Default” under any Loan Document:

 

(a)           Payment.  The Borrower shall (i) fail to pay whendue any principal or interest payable hereunder or under the Notes or (ii) failto pay, within 3 Business Days of when due, any 

 

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other amounts (includingfees, reimbursements, and indemnifications) payable hereunder, under the Notes,or under any other Loan Document;

 

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

 

(c)           Covenant Breaches.  The Borrower, any Guarantor or any of theirrespective Subsidiaries shall fail to (i) perform or observe any covenantcontained 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 toperform or observe any other term or covenant set forth in this Agreement or inany other Loan Document which is not covered by clause (i) above orany other provision of this Section 7.01 if such failure shall remainunremedied for 30 days after the occurrence of such breach or failure;

 

(d)           Cross-Defaults.  (i) The Borrower, any Guarantor or anyof their respective Subsidiaries shall fail to pay any principal of or premiumor 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 (butexcluding Debt evidenced by the Notes) when the same becomes due and payable(whether by scheduled maturity, required prepayment, acceleration, demand orotherwise), and such failure shall continue after the applicable grace period,if any, specified in the agreement or instrument relating to such Debt; (ii) anyother event shall occur or condition shall exist under any agreement orinstrument relating to Debt (including, without limitation, the SubordinatedCredit 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 theapplicable grace period, if any, specified in such agreement or instrument, ifthe effect of such event or condition is to accelerate, or to permit theacceleration of, the maturity of such Debt; or (iii) any such Debt shallbe declared to be due and payable, or required to be prepaid (other than by aregularly scheduled required prepayment), prior to the stated maturity thereof;provided that, for purposes of this subsection7.01(d), the “principal amount” of the obligations in respect of any HedgingContracts at any time shall be the maximum aggregate amount (giving effect toany netting agreements) that would be required to be paid if such HedgingContracts were terminated at such time;

 

(e)           Insolvency.  The Borrower, any Guarantor or any of theirrespective Subsidiaries shall generally not pay its debts as such debts becomedue, or shall admit in writing its inability to pay its debts generally, orshall make a general assignment for the benefit of creditors; or any proceedingshall be instituted by or against the Borrower, any of its Subsidiaries, or anyGuarantor seeking to adjudicate it as bankrupt or insolvent, or seekingliquidation, 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 anorder for relief or the appointment of a receiver, trustee or other similarofficial for it or for any substantial part of its Property and, in the case ofany such proceeding instituted 

 

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against the Borrower, anysuch Subsidiary or any such Guarantor either such proceeding shall remainundismissed for a period of 60 days or any of the actions sought in suchproceeding shall occur; or the Borrower, any of its Subsidiaries, or anyGuarantor shall take any corporate action to authorize any of the actions setforth above in this paragraph (e);

 

(f)            Judgments.  Any judgment or order for the payment ofmoney in excess of $1,000,000 shall be rendered against the Borrower, anyGuarantor or any of their respective Subsidiaries and either (i) enforcementproceedings shall have been commenced by any creditor upon such judgment ororder or (ii) there shall be any period of 30 consecutive days duringwhich a stay of enforcement of such judgment or order, by reason of a pendingappeal or otherwise, shall not be in effect;

 

(g)           Termination Events.  Any Termination Event with respect to a Planshall have occurred, and, 30 days after notice thereof shall have been given tothe Borrower by the Administrative Agent, (i) such Termination Event shallnot have been corrected and (ii) the then present value of such Plan’svested benefits exceeds the then current value of assets accumulated in suchPlan by more than the amount of $1,000,000 (or in the case of a TerminationEvent involving the withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) ofERISA), the withdrawing employer’s proportionate share of such excess shallexceed such amount);

 

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

 

(i)            Change in Control.  The Borrower shall have discontinued itsusual business or a Change in Control shall have occurred;

 

(j)            Borrowing Base.  Any failure to cure any Borrowing Basedeficiency in accordance with Section 2.05;

 

(k)           Loan Documents.  Any material provision of any Loan Documentshall for any reason cease to be valid and binding on the Borrower or aGuarantor or any of their respective Subsidiaries or any such Person shall sostate in writing;

 

(l)            Security Instruments.  (i) The Administrative Agent shall failto have an Acceptable Security Interest in any material portion of theCollateral as determined in the sole discretion of the Administrative Agent, (ii) theAdministrative Agent shall fail to have an Acceptable Security Interest in anyimmaterial portion of the Collateral as determined in the sole discretion ofthe Administrative Agent and such failure continues for more than 30 days afterthe Administrative Agent shall have given notice thereof, and a request to curesuch failure, to the Borrower, or (iii) any Security Instrument shall atany time and for any reason cease to create the Lien on the Property purportedto 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;

 

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(m)          Potential Failure of Title.  The title of the Borrower, any Guarantor orany of their respective Subsidiaries to any of the Oil and Gas Propertiessubject to the Mortgages, or any material part thereof, shall become thesubject matter of litigation before any Governmental Authority or arbitratorwhich could reasonably be expected to result in a Material Adverse Change withrespect to the Borrower’s, such Guarantor’s or such Subsidiary’s title to suchOil and Gas Properties;

 

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

 

(o)           Casualty.  Loss, theft, substantial damage ordestruction of a material portion of the Collateral the subject of any SecurityInstrument and not fully covered by insurance (except for deductibles andallowing for the depreciated value of such Collateral) shall have occurred;

 

(p)           Subordinated Credit Agreement.  An “Event of Default” under the SubordinatedCredit Agreement shall have occurred;

 

(q)           Subordination and IntercreditorAgreement.  The subordinationprovisions of the Subordination and Intercreditor Agreement shall beinvalidated or otherwise cease to be in full force and effect; or

 

Section 7.02           Optional Acceleration of Maturity.  If any Event of Default (other than an Eventof Default pursuant to paragraph (e) of Section 7.01) shall haveoccurred and be continuing, then, and in any such event,

 

(a)           the Administrative Agent (i) shallat the request, or may with the consent, of the Majority Lenders, by notice tothe Borrower, declare the obligation of each Lender and the Issuing Lender tomake extensions of credit hereunder, including making Advances and issuing,increasing or extending Letters of Credit, to be terminated, whereupon the sameshall forthwith terminate, and (ii) shall at the request, or may with theconsent, of the Majority Lenders, by notice to the Borrower, declare allprincipal, interest, fees, reimbursements, indemnifications, and all otheramounts payable under this Agreement, the Notes, and the other Loan Documentsto be forthwith due and payable, whereupon all such amounts shall become and beforthwith 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 ofacceleration, and all other notices, all of which are hereby expressly waivedby the Borrower;

 

(b)           the Borrower shall, on demand of theAdministrative Agent at the request or with the consent of the MajorityLenders, deposit with the Administrative Agent into the Cash Collateral Accountan amount of cash equal to the Letter of Credit Exposure as security for theObligations; and

 

(c)           the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders proceed to enforceits rights and remedies under the Security Instruments, the Guaranties, and anyother Loan Documents for the ratable benefit of the Secured Parties byappropriate proceedings.

 

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Section 7.03           Automatic Acceleration of Maturity.  If any Event of Default pursuant toparagraph (e) of Section 7.01 shall occur,

 

(a)           (i) the obligation of eachLender and the Issuing Lender to make extensions of credit hereunder, includingmaking Advances and issuing, increasing or extending Letters of Credit, shallterminate, and (ii) all principal, interest, fees, reimbursements,indemnifications, and all other amounts payable under this Agreement, theNotes, and the other Loan Documents shall become and be forthwith due andpayable in full, without notice of intent to demand, demand, presentment forpayment, notice of nonpayment, protest, notice of protest, grace, notice ofdishonor, notice of intent to accelerate, notice of acceleration, and all othernotices, all of which are hereby expressly waived by the Borrower;

 

(b)           the Borrower shall deposit with theAdministrative Agent into the Cash Collateral Account an amount of cash equalto the outstanding Letter of Credit Exposure as security for the Obligations;and

 

(c)           the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders proceed to enforceits rights and remedies under the Security Instruments, the Guaranties, and anyother Loan Document for the ratable benefit of the Secured Parties byappropriate proceedings.

 

Section 7.04           Right of Set-off.  Upon the occurrence and during thecontinuance of any Event of Default, the Administrative Agent, the IssuingLender 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 alldeposits (general or special, time or demand, provisional or final) at any timeheld and other indebtedness at any time owing by the Administrative Agent, theIssuing Lender or such Lender to or for the credit or the account of theBorrower against any and all of the obligations of the Borrower now orhereafter existing under this Agreement, the Notes held by the AdministrativeAgent, the Issuing Lender or such Lender, and the other Loan Documents,irrespective of whether or not the Administrative Agent, the Issuing Lender orsuch Lender shall have made any demand under this Agreement, such Notes, orsuch other Loan Documents, and although such obligations may be unmatured.  The Administrative Agent, the Issuing Lenderand each Lender agrees to promptly notify the Borrower after any such set-offand application made by the Administrative Agent, the Issuing Lender or suchLender, provided that the failure to give such notice shall not affect thevalidity of such set-off and application. The rights of the Administrative Agent, the Issuing Lender and eachLender under this Section 7.04 are in addition to any other rights andremedies (including, without limitation, other rights of set-off) that theAdministrative Agent, the Issuing Lender or such Lender may have.

 

Section 7.05           Non-exclusivity of Remedies.  No remedy conferred upon the AdministrativeAgent, the Issuing Lender and the Lenders is intended to be exclusive of anyother remedy, and each remedy shall be cumulative of all other remediesexisting by contract, at law, in equity, by statute or otherwise.

 

Section 7.06           Application of Proceeds.  From and during the continuance of any Eventof Default, any monies or Property actually received by the AdministrativeAgent pursuant to this Agreement or any other Loan Document, the exercise ofany rights or remedies under any 

 

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Security Instrument orany other agreement with the Borrower, any Guarantor or any of their respectiveSubsidiaries which secures any of the Obligations, shall be applied in thefollowing order:

 

(a)           First, to the payment of all amounts,including costs and expenses incurred in connection with the collection of suchproceeds and the payment of any part of the Obligations, due to theAdministrative Agent under any of the expense reimbursement or indemnityprovisions of this Agreement or any other Loan Document, any SecurityInstrument or other collateral documents, and any applicable law;

 

(b)           Second, ratably, according to thethen unpaid amounts thereof, without preference or priority of any kind amongthem, to the payment of the Obligations then due and payable, includingObligations with respect to Letters of Credit and any obligations of theBorrower or its Subsidiaries owing to any Swap Counterparty under any HedgeContract; and

 

(c)           Third, the remainder, if any, to theSubordinated Agent as required under the Subordination and Intercreditor Agreementand if such Subordination and Intercreditor Agreement has been terminated, thento the Borrower, its Subsidiaries, their respective successors or assigns, orsuch other Person as may be lawfully entitled to receive the same or as a courtof competent jurisdiction may direct.

 

**ARTICLE VIII**

** **

**THE ADMINISTRATIVE AGENT AND THEISSUING LENDER**

** **

Section 8.01           Authorization and Action.  Each Lender hereby appoints and authorizesthe Administrative Agent to take such action as agent on its behalf and toexercise such powers under this Agreement as are delegated to theAdministrative 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 forby this Agreement or any other Loan Document (including, without limitation,enforcement or collection of the Notes), the Administrative Agent shall not berequired to exercise any discretion or take any action, but shall be requiredto act or to refrain from acting (and shall be fully protected in so acting orrefraining from acting) upon the instructions of the Majority Lenders, and suchinstructions shall be binding upon all Lenders and all holders of Notes; provided,however, that the Administrative Agent shall not be required to take any actionwhich exposes the Administrative Agent to personal liability or which iscontrary to this Agreement, any other Loan Document, or applicable law.

 

Section 8.02           Administrative Agent’s Reliance,Etc.  Neither the Administrative Agentnor any of its directors, officers, agents, or employees shall be liable forany action taken or omitted to be taken **(INCLUDING THEADMINISTRATIVE AGENT’S OWN NEGLIGENCE)** by it or them under or inconnection with this Agreement or the other Loan Documents, except for its ortheir own gross negligence or willful misconduct.  Without limitation of the generality of theforegoing, the Administrative Agent:  (a) maytreat the payee of any Note as the holder thereof until the AdministrativeAgent receives written notice of the assignment or transfer thereof signed bysuch payee and in form satisfactory to the Administrative Agent; (b) mayconsult with legal counsel (including counsel for the Borrower), 

 

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independent publicaccountants, and other experts selected by it and shall not be liable for anyaction taken or omitted to be taken in good faith by it in accordance with theadvice of such counsel, accountants, or experts; (c) makes no warranty orrepresentation to any Lender and shall not be responsible to any Lender for anystatements, warranties, or representations made in or in connection with thisAgreement or the other Loan Documents; (d) shall not have any duty toascertain or to inquire as to the performance or observance of any of theterms, covenants or conditions of this Agreement or any other Loan Document onthe part of the Borrower or its Subsidiaries or to inspect the Property(including the books and records) of the Borrower or its Subsidiaries; (e) shallnot be responsible to any Lender for the due execution, legality, validity,enforceability, genuineness, sufficiency, or value of this Agreement or anyother Loan Document; and (f) shall incur no liability under or in respectof this Agreement or any other Loan Document by acting upon any notice,consent, certificate, or other instrument or writing (which may be bytelecopier or telex) believed by it to be genuine and signed or sent by theproper party or parties.

 

Section 8.03           The Administrative Agent and ItsAffiliates.  With respect to itsCommitment, the Advances made by it and the Notes issued to it, theAdministrative Agent shall have the same rights and powers under this Agreementas any other Lender and may exercise the same as though it were not theAdministrative Agent.  The term “Lender”or “Lenders” shall, unless otherwise expressly indicated, include theAdministrative Agent in its individual capacity.  The Administrative Agent and its Affiliatesmay 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 itsSubsidiaries, and any Person who may do business with or own securities of theBorrower or any such Subsidiary, all as if the Administrative Agent were not anagent hereunder and without any duty to account therefor to the Lenders.

 

Section 8.04           Lender Credit Decision.  Each Lender acknowledges that it has,independently and without reliance upon the Administrative Agent or any otherLender and based on the Financial Statements and the Interim FinancialStatements and such other documents and information as it has deemedappropriate, made its own credit analysis and decision to enter into thisAgreement.  Each Lender also acknowledgesthat it shall, independently and without reliance upon the Administrative Agentor any other Lender and based on such documents and information as it shalldeem appropriate at the time, continue to make its own credit decisions intaking or not taking action under this Agreement.

 

Section 8.05           Indemnification.  **THE LENDERS SEVERALLYAGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND THE ISSUING LENDER AND EACHAFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ANDAGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIRRESPECTIVE 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 AND THE ISSUINGLENDER IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTIONTAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT OR THE ISSUING LENDER UNDER THISAGREEMENT**

 

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**OR ANY OTHER LOAN DOCUMENT(INCLUDING THE ADMINISTRATIVE AGENT’S AND THE ISSUING LENDER’S OWN NEGLIGENCE),AND INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES, PROVIDED THAT NOLENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS,LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, ORDISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT’S OR THE ISSUING LENDER’SGROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THEADMINISTRATIVE AGENT AND THE ISSUING LENDER PROMPTLY UPON DEMAND FOR ITS RATABLESHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVEAGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION,MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGALPROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIESUNDER, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THE EXTENT THAT THEADMINISTRATIVE AGENT OR THE ISSUING LENDER IS NOT REIMBURSED FOR SUCH BY THEBORROWER. **To the extent that the indemnity obligationsprovided in this Section 8.05 are for the benefit of the AdministrativeAgent as the named secured party under the Liens granted under the SecurityInstruments, each Lender hereby agrees that if such Lender ceases to be aLender hereunder but Obligations owing to such Lender or an Affiliate of suchLender continue to be secured by such Liens, then such Lender shall continue tobe bound by the provisions of this Section 8.05 until such time as suchObligations have been satisfied or terminated in full and subject to the termsof the last sentence of Section 9.09.   In such event, in determining the pro rata shares under this Section 8.05,the Lenders shall include the aggregateamount (giving effect to any netting agreements) that would be owing to suchSwap Counterparty if such Hedge Contracts were terminated at the time of determination.

 

Section 8.06           Successor Administrative Agent andIssuing Lender.  The AdministrativeAgent or the Issuing Lender may resign at any time by giving written noticethereof to the Lenders and the Borrower and may be removed at any time with orwithout cause by the Majority Lenders upon receipt of written notice from theMajority Lenders to such effect.  Uponreceipt of notice of any such resignation or removal, the Majority Lendersshall have the right to appoint a successor Administrative Agent or IssuingLender with, if any Event of Default has not occurred and is not continuing,the consent of the Borrower, which consent shall not be unreasonablywithheld.  If no successor AdministrativeAgent or Issuing Lender shall have been so appointed by the Majority Lenderswith the consent of the Borrower, and shall have accepted such appointment,within 30 days after the retiring Administrative Agent’s or Issuing Lender’sgiving of notice of resignation or the Majority Lenders’ removal of theretiring Administrative Agent or Issuing Lender, then the retiringAdministrative Agent or Issuing Lender may, on behalf of the Lenders and theBorrower, appoint a successor Administrative Agent or Issuing Lender, whichshall be, in the case of a successor agent, a commercial bank organized underthe laws of the United States of America or of any State thereof and having acombined capital and surplus of at least $500,000,000.00 and, in the case ofthe Issuing Lender, a Lender; provided that, if the Administrative Agent or Issuing Lender shallnotify the Borrower and the Lenders that no qualifying Person has accepted suchappointment, then such resignation shall nonetheless 

 

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becomeeffective in accordance with such notice and (1) the retiringAdministrative Agent or Issuing Lender shall be discharged from its duties andobligations hereunder and under the other Loan Documents (except that (A) inthe case of any collateral security held by the Administrative Agent on behalfof the Lenders or the Issuing Lender under any of the Loan Documents, theretiring Administrative Agent shall continue to hold such collateral securityuntil such time as a successor Administrative Agent is appointed and (B) theretiring Issuing Lender shall remain the Issuing Lender with respect to anyLetters of Credit outstanding on the effective date of its resignation orremoval and the provisions affecting the Issuing Lender with respect to suchLetters of Credit shall inure to the benefit of the retiring Issuing Lenderuntil the termination of all such Letters of Credit) and (2) all payments,communications and determinations provided to be made by, to or through theretiring Administrative Agent shall instead be made by or to each Lender andthe Issuing Lender directly, until such time as the Majority Lenders appoint asuccessor Administrative Agent or Issuing Lender, as applicable, as providedfor above in this paragraph.  Uponthe acceptance of any appointment as Administrative Agent or Issuing Lender bya successor Administrative Agent or Issuing Lender, such successorAdministrative Agent or Issuing Lender shall thereupon succeed to and becomevested with all the rights, powers, privileges, and duties of the retiringAdministrative Agent or Issuing Lender, and the retiring Administrative Agentor Issuing Lender shall be discharged from its duties and obligations underthis Agreement and the other Loan Documents, except that the retiring IssuingLender shall remain the Issuing Lender with respect to any Letters of Creditoutstanding on the effective date of its resignation or removal and theprovisions affecting the Issuing Lender with respect to such Letters of Creditshall inure to the benefit of the retiring Issuing Lender until the terminationof all such Letters of Credit.  After anyretiring Administrative Agent’s or Issuing Lender’s resignation or removalhereunder as Administrative Agent or Issuing Lender, the provisions of this Article VIIIshall inure to its benefit as to any actions taken or omitted to be taken by itwhile it was Administrative Agent or Issuing Lender under this Agreement andthe other Loan Documents.

 

Section 8.07           Collateral Matters.

 

(a)           Administrative Agent is authorized onbehalf of the Secured Parties, without the necessity of any notice to orfurther consent from the Secured Parties, from time to time, to take anyactions with respect to any Collateral or Security Instruments which may benecessary to perfect and maintain Acceptable Security Interests in and Liensupon the Collateral granted pursuant to the Security Instruments.  Administrative Agent is further authorized onbehalf of the Secured Parties, without the necessity of any notice to orfurther consent from the Secured Parties, from time to time, to take any action(other than enforcement actions requiring the consent of, or request by, theMajority Lenders as set forth in Section 7.02 or Section 7.03 above)in exigent circumstances as may be reasonably necessary to preserve any rightsor privileges of the Secured Parties under the Loan Documents or applicablelaw.  By accepting the benefit of the Liens grantedpursuant to the Security Instruments, each Secured Party not party heretohereby agrees to the terms of thisparagraph (a).

 

(b)           Each SecuredParty irrevocably authorizes Administrative Agent to release any Lien grantedto or held by the Administrative Agent upon any Collateral: (i) upontermination of the Commitments, termination or expiration of all Letters ofCredit (other than Letters of Credit as to which other arrangementssatisfactory to the Administrative Agent and the Issuing Lender 

 

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have been made),termination of all Hedge Contracts with Swap Counterparties that are secured bythe Liens on the Collateral (other than Hedge Contracts with any SwapCounterparty with respect to which other arrangements satisfactory to the SwapCounterparty and the Borrower have been made; provided that, unless aSwap Counterparty notifies the Administrative Agent in writing at least 2Business Days prior to the expected termination of the Commitments that sucharrangements have not been made, then solely for purposes of this clause (b),it shall be deemed that such satisfactory arrangements have been made), andpayment in full of all Obligations (other than Obligations arising under HedgeContracts with any Swap Counterparty with respect to which other arrangementssatisfactory to the Swap Counterparty and the Borrower have been made; providedthat, unless a Swap Counterparty notifies the Administrative Agent in writingat least 2 Business Days prior to the expected termination of the Commitmentsthat such arrangements have not been made, then solely for purposes of thisclause (b), it shall be deemed that such satisfactory arrangements have beenmade); (ii) constituting Property sold or to be sold or otherwise disposedof as part of or in connection with any disposition permitted under thisAgreement or the other Loan Documents; (iii) constituting Property inwhich the Borrower or any Subsidiary owned no interest at the time the Lien wasgranted or at any time thereafter; (iv) constituting Property leased tothe Borrower or any Subsidiary under a lease which has expired or has beenterminated in a transaction permitted under this Agreement or is about toexpire and which has not been, and is not intended by the Borrower or suchSubsidiary to be, renewed or extended; or (v) if approved, authorized orratified in writing by the applicable Majority Lenders or all the Lenders, asthe case may be, as required by Section 9.01.  Upon the request of the Administrative Agentat any time, the Secured Parties will confirm in writing the AdministrativeAgent’s authority to release particular types or items of Collateral pursuantto this Section 8.07.  By accepting the benefit of the Liens grantedpursuant to the Security Instruments, each Secured Party not party heretohereby agrees to the terms of this paragraph (b).

 

(c)           Notwithstanding anything contained inany of the Loan Documents to the contrary, the Borrower, the AdministrativeAgent, and each Secured Party hereby agree that no Secured Party shall have anyright individually to realize upon any of the Collateral or to enforce theGuaranties, it being understood and agreed that all powers, rights and remedieshereunder and under the Security Instruments may be exercised solely by Administrative Agent onbehalf of the Secured Parties in accordance with the terms hereof.  Byaccepting the benefit of the Liens granted pursuant to the SecurityInstruments, each Secured Party not party hereto hereby agrees to the terms ofthis paragraph (c).

 

**ARTICLEIX**

** **

**MISCELLANEOUS**

** **

Section 9.01           Amendments, Etc.  Noamendment or waiver of any provision of this Agreement, the Notes, or any otherLoan Document (other than the Fee Letter), nor consent to any departure by theBorrower or any Subsidiary therefrom, shall in any event be effective unlessthe same shall be in writing and signed by the Majority Lenders and theBorrower, and then such waiver or consent shall be effective only in thespecific instance and for the specific purpose for which given; provided,however, that no amendment, waiver, or consent shall, unless in writing andsigned by all the Lenders, do any of the following:  (a) waive any of the conditionsspecified in Section 3.01, (b) increase the Borrowing Base or theCommitments of the Lenders, (c) reduce 

 

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the principal of, orinterest on, the Notes or any fees or other amounts payable hereunder or underany other Loan Document, (d) postpone any date fixed for any payment ofprincipal of, or interest on, the Notes or any fees or other amounts payablehereunder or extend the Maturity Date or the Commitment Termination Date, (e) changethe percentage of Lenders which shall be required for the Lenders or any ofthem to take any action hereunder or under any other Loan Document, (f) amendSection 2.11 or this Section 9.01, (g) amend the definition of “MajorityLenders,” (h) release any Guarantor from its obligations under anyGuaranty, (i) permit the Borrower or any Subsidiary to enter into anymerger or consolidation with or into any other Person or amend Section 6.04(a),(j) release any Collateral securing the Obligations, except for releasesof Collateral sold as permitted by this Agreement except for releases ofCollateral as permitted under Section 8.08(b) or (k) amend orwaive any provision of, nor consent to any departure by any party thereto from,the Subordination and Intercreditor Agreement; and provided, further,that no amendment, waiver or consent shall, unless in writing and signed by theAdministrative Agent or the Issuing Lender in addition to the Lenders requiredabove to take such action, affect the rights or duties of the AdministrativeAgent or the Issuing Lender, as the case may be, under this Agreement or anyother Loan Document.  No Lender or anyAffiliate of a Lender shall have any voting rights under any Loan Document as aresult of the existence of obligations owed to it under Hedge Contracts.

 

Section 9.02           Notices, Etc.  All notices and other communications shall bein writing (including, without limitation, telecopy or telex) and mailed bycertified mail, return receipt requested, telecopied, telexed, hand delivered,or delivered by a nationally recognized overnight courier, at the address forthe appropriate party specified in Schedule 1 or at such other address as shallbe 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 anationally 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 thatnotices and communications to the Administrative Agent pursuant to Article IIor VIII shall not be effective until received by the Administrative Agent.

 

Section 9.03           No Waiver; Remedies.  No failure on the part of any Lender, theAdministrative Agent, or the Issuing Lender to exercise, and no delay inexercising, any right hereunder or under any Note shall operate as a waiverthereof; nor shall any single or partial exercise of any such right precludeany other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulativeand not exclusive of any remedies provided by law.

 

Section 9.04           Costs and Expenses.  The Borrower agrees to pay on demand (a) allreasonable out-of-pocket costs and expenses of the Administrative Agent inconnection with the preparation, execution, delivery, administration,modification, and amendment of this Agreement, the Notes, the Guaranties, andthe other Loan Documents including the reasonable fees and out-of-pocketexpenses of counsel for the Administrative Agent with respect to advising theAdministrative Agent as to its rights and responsibilities under this Agreementand (b) all out-of-pocket costs and expenses, if any, of theAdministrative Agent, the Issuing Lender, and each Lender (including, withoutlimitation, reasonable counsel fees and expenses of the Administrative Agent,the Issuing Lender, and each Lender) in connection with the enforcement 

 

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(whether throughnegotiations, legal proceedings, or otherwise) of this Agreement, the Notes,the Guaranties, and the other Loan Documents.

 

Section 9.05           Binding Effect.  This Agreement shall become effective when itshall have been executed by the Borrower and the Administrative Agent, and whenthe Administrative Agent shall have, as to each Lender, either received acounterpart hereof executed by such Lender or been notified by such Lender thatsuch Lender has executed it and thereafter shall be binding upon and inure tothe benefit of the Borrower, the Administrative Agent, the Issuing Lender, andeach Lender and their respective successors and assigns, except that theBorrower shall not have the right to assign its rights or delegate its dutiesunder this Agreement or any interest in this Agreement without the priorwritten consent of each Lender.

 

Section 9.06           Lender Assignments andParticipations.

 

(a)           Assignments.  Any Lender may assign to one or more EligibleAssignees all or any portion of its rights and obligations under this Agreement(including, without limitation, all or a portion of its Commitments, theAdvances owing to it, the Notes held by it, and the participation interest inthe Letter of Credit Obligations held by it); provided, however, that (i) eachsuch assignment shall be of a constant, and not a varying, percentage ofsuch Lender’s rights and obligations assigned under this Agreement and shall bean equal percentage with respect to both its obligations owing in respect ofthe Commitments and the related Advances and Letters of Credit, (ii) theamount of the Commitments and Advances of such Lender being assigned pursuantto each such assignment (determined as of the date of the Assignment andAcceptance with respect to such assignment) shall be, if to an entity otherthan 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 anEligible Assignee, (iv) the parties to each such assignment shall executeand deliver to the Administrative Agent, for its acceptance and recording inthe Register, an Assignment and Acceptance, together with the Notes subject tosuch assignment, and (v) each Eligible Assignee (other than the Eligible Assigneeof the Administrative Agent or an Affiliate of a Lender) shall pay to theAdministrative Agent a $3,500 administrative fee.  Upon such execution, delivery, acceptance andrecording, from and after the effective date specified in each Assignment andAcceptance, which effective date shall be at least three Business Days afterthe execution thereof, (A) the assignee thereunder shall be a party heretofor all purposes and, to the extent that rights and obligations hereunder havebeen assigned to it pursuant to such Assignment and Acceptance, have the rightsand obligations of a Lender hereunder and (B) such Lender thereundershall, to the extent that rights and obligations hereunder have been assignedby it pursuant to such Assignment and Acceptance, relinquish its rights and bereleased from its obligations under this Agreement (and, in the case of anAssignment and Acceptance covering all or the remaining portion of such Lender’srights and obligations under this Agreement, such Lender shall cease to be aparty hereto).

 

(b)           Terms of Assignments.  By executing and delivering an Assignment andAcceptance, the Lender thereunder and the assignee thereunder confirm to andagree with each other and the other parties hereto as follows:  (i) other than as provided in suchAssignment and Acceptance, such Lender makes no representation or warranty andassumes no responsibility with respect to any statements, warranties orrepresentations made in or in connection with this Agreement or the execution,legality, validity, enforceability, genuineness, sufficiency of value 

 

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of this Agreement or anyother instrument or document furnished pursuant hereto; (ii) such Lendermakes no representation or warranty and assumes no responsibility with respectto the financial condition of the Borrower or its Subsidiaries or theperformance or observance by the Borrower or its Subsidiaries of any of theirobligations under this Agreement or any other instrument or document furnishedpursuant hereto; (iii) such assignee confirms that it has received a copyof this Agreement, together with copies of the Financial Statements and InterimFinancial Statements referred to in Section 4.05 and such other documentsand information as it has deemed appropriate to make its own credit analysisand decision to enter into such Assignment and Acceptance; (iv) suchassignee will, independently and without reliance upon the AdministrativeAgent, such Lender or any other Lender and based on such documents andinformation as it shall deem appropriate at the time, continue to make its owncredit decisions in taking or not taking action under this Agreement; (v) suchassignee appoints and authorizes the Administrative Agent to take such actionas agent on its behalf and to exercise such powers under this Agreement as aredelegated to the Administrative Agent by the terms hereof, together with suchpowers as are reasonably incidental thereto; and (vi) such assignee agreesthat it will perform in accordance with their terms all of the obligationswhich by the terms of this Agreement are required to be performed by it as aLender.

 

(c)           The Register.  The Administrative Agent shall maintain atits address referred to in Section 9.02 a copy of each Assignment andAcceptance delivered to and accepted by it and a register for the recordationof the names and addresses of the Lenders and the Commitments of, and principalamount of the Advances owing to, each Lender from time to time (the “Register”).  The entries in the Register shall beconclusive and binding for all purposes, absent manifest error, and theBorrower, the Administrative Agent, the Issuing Lender, and the Lenders maytreat each Person whose name is recorded in the Register as a Lender hereunderfor all purposes of this Agreement.  TheRegister shall be available for inspection by the Borrower or any Lender at anyreasonable time and from time to time upon reasonable prior notice.

 

(d)           Procedures.  Upon its receipt of an Assignment andAcceptance executed by a Lender and an Eligible Assignee, together with theNotes subject to such assignment, the Administrative Agent shall, if suchAssignment and Acceptance has been completed and is in substantially the formof the attached Exhibit A, (i) accept such Assignment and Acceptance,(ii) record the information contained therein in the Register, and (iii) giveprompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrowershall execute and deliver to the Administrative Agent in exchange for thesurrendered Notes (A) if such Eligible Assignee has acquired a Commitment,a new Note to the order of such Eligible Assignee in an amount equal to theCommitment assumed by it pursuant to such Assignment and Acceptance and (B) ifsuch Lender has retained any Commitment hereunder, a new Note to the order ofsuch Lender in an amount equal to the Commitment retained by it hereunder.  Such new Notes shall be dated the effectivedate of such Assignment and Acceptance and shall otherwise be in substantiallythe form of the attached Exhibit E.

 

(e)           Participations.  Each Lender may sell participations to one ormore banks or other entities in or to all or a portion of its rights andobligations under this Agreement (including, without limitation, all or aportion of its Commitments, the Advances owing to it, its participationinterest in the Letter of Credit Obligations, and the Notes held by it); provided,however, that (i) such Lender’s obligations under this Agreement(including, without limitation, 

 

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its Commitments to theBorrower hereunder) shall remain unchanged, (ii) such Lender shall remainsolely responsible to the other parties hereto for the performance of suchobligations, (iii) such Lender shall remain the holder of any such Notesfor all purposes of this Agreement, (iv) the Borrower, the AdministrativeAgent, and the Issuing Lender and the other Lenders shall continue to dealsolely and directly with such Lender in connection with such Lender’s rightsand obligations under this Agreement, and (v) such Lender shall notrequire the participant’s consent to any matter under this Agreement, exceptfor change in the principal amount of the Notes, reductions in fees or interest,releasing all or substantially all of any Collateral, permitting the Borroweror any Subsidiary to enter into any merger or consolidation with or into anyother,  postponement of any date fixedfor any payment of principal of, or interest on, the Notes or any fees or otheramounts payable hereunder, or extensions of the Maturity Date or the CommitmentTermination Date.  The Borrower herebyagrees 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 respectiveparticipations.

 

Section 9.07           Indemnification; Waiver.

 

(a)           Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT(AND ANY SUB-AGENT THEREOF), EACH LENDER AND THE ISSUING LENDER, AND EACH OFFICER,DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE****OFANY 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 ANDDISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE), INCURRED BY ANY INDEMNITEE ORASSERTED AGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANYSUBSIDIARY OF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULTOF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOANDOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THEPERFORMANCE BY THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER ORTHEREUNDER, THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY ORTHEREBY, OR, IN THE CASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT,OFFICER, DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE THEREOF) THEADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANYADVANCE OR LETTER OF CREDIT OR THE USE OR PROPOSED USE OF THE PROCEEDSTHEREFROM (INCLUDING ANY REFUSAL BY THE ISSUING LENDER TO HONOR A DEMAND FORPAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITHSUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT), (III) ANYACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANYPROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR ANYENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITSSUBSIDIARIES, OR (IV) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION,INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ONCONTRACT, TORT OR ANY 

 

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OTHER THEORY, WHETHERBROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY GUARANTOR, AND REGARDLESS OFWHETHER ANY INDEMNITEE IS A PARTY THERETO**, INALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THECOMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNITEE**; PROVIDEDTHAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THEEXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES AREDETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLEJUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OFSUCH INDEMNITEE**.**

 

(b)           **Waiver of Damages.  To the fullest extent permitted by applicablelaw, the Borrower shall not assert, and hereby waives, any claim against anyIndemnitee, on any theory of liability, for special, indirect, consequential orpunitive damages (as opposed to direct or actual damages) arising out of, inconnection with, or as a result of, this Agreement, any other Loan Document or anyagreement or instrument contemplated hereby, the transactions contemplatedhereby or thereby, any Advance or Letter of Credit or the use of the proceedsthereof.  No Indemnitee referred to insubsection (a) above shall be liable for any damages arising from the useby unintended recipients of any information or other materials distributed byit through telecommunications, electronic or other information transmissionsystems in connection with this Agreement or the other Loan Documents or thetransactions contemplated hereby or thereby.**

 

Section 9.08           Execution in Counterparts.  This Agreement may be executed in any numberof counterparts and by different parties hereto in separate counterparts, eachof which when so executed shall be deemed to be an original and all of whichtaken together shall constitute one and the same agreement.  Delivery of an executed counterpart signaturepage of this Agreement by facsimile is as effective as executing anddelivering this Agreement in the presence of the other parties to thisAgreement.

 

Section 9.09           Survival of Representations, Etc.  All representations and warranties containedin this Agreement or made in writing by or on behalf of the Borrower inconnection herewith shall survive the execution and delivery of this Agreementand the Loan Documents, the making of the Advances and any investigation madeby or on behalf of the Lenders, none of which investigations shall diminish anyLender’s right to rely on such representations and warranties.  All obligations of the Borrower provided forin Sections 2.12, 2.13, 2.14(c), 9.04, and 9.07 and all of the obligationsof the Lenders in Section 8.05 shall survive any termination of thisAgreement and repayment in full of the Obligations.

 

Section 9.10           Severability.  In case one or more provisions of thisAgreement or the other Loan Documents shall be invalid, illegal orunenforceable in any respect under any applicable law, the validity, legality,and enforceability of the remaining provisions contained herein or therein shallnot be affected or impaired thereby.

 

Section 9.11           Business Loans.  The Borrower warrants and represents that theLoans 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 

 

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used in Chapter One (“ChapterOne”) of the Texas Credit Code.  At allsuch times, if any, as Chapter One shall establish a Maximum Rate, the MaximumRate shall be the “indicated rate ceiling” (as such term is defined in ChapterOne) from time to time in effect.

 

Section 9.12           Governing Law; Submission toJurisdiction.  This Agreement, theNotes and the other Loan Documents shall be governed by, and construed andenforced in accordance with, the laws of the State of Texas.  Without limiting the intent of the partiesset forth above, (a) Chapter 346 of the Texas Finance Code, as amended(relating to revolving loans and revolving tri-party accounts (formerlyTex.  Rev. Civ.  Stat. Ann.  Art.  5069, Ch. 15)), shall not apply to this Agreement, the Notes, or the transactionscontemplated hereby and (b) to the extent that any Lender may be subjectto Texas law limiting the amount of interest payable for its account, suchLender shall utilize the indicated (weekly) rate ceiling from time to time ineffect.  Each Letter of Credit shall be governed byeither the Uniform Customs and Practice for Documentary Credits (2007Revision), International Chamber of Commerce Publication No. 600, or theInternational Standby Practices (ISP98), International Chamber of CommercePublication No. 590 (and anysubsequent revisions thereof approved by a Congress of the InternationalChamber of Commerce and adhered to by the Issuing Lender).  The Borrower hereby irrevocablysubmits to the jurisdiction of any Texas state or federal court sitting inDallas, Texas in any action or proceeding arising out of or relating to thisAgreement or the other Loan Documents, and the Borrower hereby irrevocablyagrees that all claims in respect of such action or proceeding may be heard anddetermined in such court.  The Borrowerhereby unconditionally and irrevocably waives, to the fullest extent it mayeffectively do so, any right it may have to the defense of an inconvenientforum to the maintenance of such action or proceeding.  The Borrower hereby agrees that service ofcopies of the summons and complaint and any other process which may be servedin any such action or proceeding may be made by mailing or delivering a copy ofsuch process to such Borrower at its address set forth in this Agreement.  The Borrower agrees that a final judgment inany such action or proceeding shall be conclusive and may be enforced in otherjurisdictions by suit on the judgment or in any other manner provided bylaw.  Nothing in this Section shallaffect the rights of any Lender to serve legal process in any other mannerpermitted by the law or affect the right of any Lender to bring any action orproceeding against the Borrower or its Property in the courts of any otherjurisdiction.

 

Section 9.13           Subordination and IntercreditorAgreement.  The Administrative Agentis hereby authorized on behalf of the Lenders for the Lenders and theirAffiliates that are Swap Counterparties to enter into the Subordination andIntercreditor Agreement.  A copy of suchSubordination and Intercreditor Agreement will be made available to eachSecured Party on the date hereof and thereafter upon request.  Each Lender and each Swap Counterparty (byreceiving the benefits thereunder and of the Collateral) acknowledges andagrees to the terms of such Subordination and Intercreditor Agreement andagrees that the terms thereof shall be binding on such Secured Party and itssuccessors and assigns, as if it were a party thereto.

 

Section 9.14           USA Patriot Act.  Each Lender that is subject to the PatriotAct and the Administrative Agent (for itself and not on behalf of any Lender)hereby notifies the Borrower that pursuant to the requirements of the PatriotAct it is required to obtain, verify and record information that identifies theBorrower, which information includes the name and address of the Borrower andother information that will allow such Lender or the Administrative Agent, asapplicable, to identify the Borrower in accordance with the Patriot Act.

 

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Section 9.15           **WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS, THE ISSUING LENDERAND THE ADMINISTRATIVE AGENT HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTEDBY AND HAVE CONSULTED WITH COUNSEL OF THEIR CHOICE, AND HEREBY KNOWINGLY,VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BYJURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THISAGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATEDHEREBY OR THEREBY.**

 

Section 9.16           **ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT AND THE LOANDOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONGTHE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONGTHE PARTIES.**

 

**[Remainder of this page intentionallyleft blank.  Signature page follows.]**

 

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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 Amended and Restated Credit Agreement*

*(Cano Petroleum, Inc.)*

 

----

 
|   | ** ** | **ADMINISTRATIVE  AGENT/LENDERS**:                  |
|--------|------------|-----------------------------------------------------|
|   | ** ** | ** **                                          |
|   |       |                                                |
|   |       | UNION BANK OF CALIFORNIA, N.A.,                     |
|   |       | as Administrative Agent, Issuing Lender and  Lender |
|   |       |                                                |
|   |       |                                                |
|   |       | By:                                                 | /s/ Randall Osterberg |
|   |       | Name:                                               | Randall Osterberg |
|   |       | Title:                                              | Senior Vice President |
|        |            |                                                     |  |  |  |

 

*Signature page to Amended and Restated Credit Agreement*

*(Cano Petroleum, Inc.)*

 

----

 
|   | ** ** | **LENDER:**             |
|--------|------------|-------------------------|
|   |       |                    |
|   | ** ** | **NATIXIS,**as a Lender |
|   | ** ** | ** **              |
|   |       |                    |
|   |       | By:                     | /s/ Donovan Broussard |
|   |       |                    |  Donovan Broussard |
|   |       |                    |  Managing Director |
|   |       |                    |   |
|   |       |                    |   |
|   |       | By:                     | /s/ Liana Tchernysheva |
|   |       |                    |  Liana Tchernysheva |
|   |       |                    |  Director |

 

*Signature page to Amended and Restated Credit Agreement*

*(Cano Petroleum, Inc.)*

 

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**SCHEDULE I**

** **

**PRICING GRID**

** **

**Applicable Margins**

 

| **Utilization  Level*** | ** ** | **Reference Rate  Advances** | ** ** | **Eurodollar  Rate Advances** | ** ** | **Commitment Fee** | ** ** |
|-------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| Level I                 |       | .875                              | %          | 2.00                               | %          | 0.375                   | %          |
| Level II                |       | 1.125                             | %          | 2.25                               | %          | 0.375                   | %          |
| Level III               |       | 1.375                             | %          | 2.50                               | %          | 0.375                   | %          |
| Level IV                |       | 1.625                             | %          | 2.75                               | %          | 0.500                   | %          |

 

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* Utilization Levels are described below and aredetermined in accordance with the definition of “Utilization Level”.

 

1.** LevelI:**If the Utilization Level is less than 50%.

2.  **Level II:**If the Utilization Level is greater than or equal to 50% but less than 75%.

3.  **Level III:**Ifthe Utilization Level is greater than or equal to 75% but less than 90%.

4.  **Level IV:**Ifthe Utilization Level is greater than or equal to 90%.

 

----

 

**SCHEDULE II**

**NOTICE INFORMATION AND COMMITMENTS**

 

Eachof the commitments to lend set forth herein is governed by the terms of theCredit Agreement which provides for, among other things, borrowing baselimitations which may restrict the Borrower’s ability to request (and theLenders’ obligation to provide) Credit Extensions to a maximum amount which isless than the commitments set forth in this Schedule II.

 

**Administrative Agent/Issuing Lender:**

 

UnionBank of California, N.A.

LincolnPlaza

500N. Akard Street, Suite 4200

Dallas,Texas 75201

Attention:Randall Osterberg

Facsimile:(214) 922-4209

 

**Borrower:**

 

CanoPetroleum, Inc.

BurnettPlaza

801Cherry Street, Suite 3200

FortWorth, Texas 76102

Attention:Benjamin Daitch, CFO

Facsimile:(817) 334-0222

 

| **Lenders:**                   | ** ** | **Commitments** | ** **         |
|--------------------------------|------------|-----------------|--------------------|
| Union Bank of California, N.A. |       | $               | 82,500,000.00      |   |
| Natixis                        |       | $               | 37,500,000.00      |   |
| **Total:**                     | ** ** | **$**           | **120,000,000.00** | ** ** |

 

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**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         |     |

 

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**SCHEDULE 4.05**

 

**EXISTING DEBT**

 

**CanoPetroleum, Inc.**

 

The balances due for the Series D convertiblepreferred 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** | ** ** |

 

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**Schedule 4.07**

 

**LITIGATION**

 

**Burnett:**

 

OnMarch 23, 2006, the following lawsuit was filed in the 100th JudicialDistrict Court in Carson County, Texas; Cause No. 9840, The Tom L. andAnne Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne BurnettWindfohr; 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 electricalwiring and equipment of Cano or certain of its subsidiaries relating to oil andgas operations started a wildfire that began on March 12, 2006 in CarsonCounty.  The owner of the remainder ofthe mineral estate, Texas Christian University, has intervened in the suitjoining the plaintiffs’ request to terminate certain oil and natural gasleases.

 

Theplaintiffs in the above action (i) allege negligence and (ii) seekdamages, including, but not limited to, damages for damage to their land andlivestock, certain expenses related to fighting the fire and certain remedialexpenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) terminationof certain oil and natural gas leases, (ii) reimbursement for theirattorney’s fees (in the amount of at least $549,000) and (iii) exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or a general partnership or de facto partnership.

 

OnJune 21, 2007, the Judge of the 100th Judicial DistrictCourt issued a Final Judgment (a) granting motions for summary judgment infavor of Cano and certain of its subsidiaries on plaintiffs’ claims for (i) breachof contract/termination of an oil and gas lease; and (ii) negligence; and (b) grantingthe plaintiffs’ no-evidence motion for summary judgment on contributorynegligence, assumption of risk, repudiation and estoppel affirmative defensesasserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.

 

**SPS:**

 

OnMarch 14, 2007, the following lawsuit was filed in 100th Judicial DistrictCourt in Carson County, Texas; Cause No. 9994, Southwestern Public ServiceCompany 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”). Theplaintiff claims that the electrical wiring and equipment of Cano or certain ofits subsidiaries relating to oil and gas operations started a wildfire thatbegan 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 distributionequipment, utility poles, lines and other equipment.  In addition, the plaintiff seeksreimbursement for its attorney’s fees.

 

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

 

1

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OnSeptember 11, 2008, the MDL Court signed a Partial Order of Remandremanding 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.

 

**MDLCase:**

 

OnSeptember 25, 2007, the Texas Judicial Panel on MultidistrictLitigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,W. O. Operating Company, Ltd, and WO Energy, Inc.’s Motion toTransfer Related Cases to Pretrial Court pursuant to Texas Rule ofJudicial Administration 13.  The Paneltransferred to a single pretrial court for consideration of pretrial matters ofSouthwestern Public Service Company d/b/a Xcel Energy, identified above,and Valenzuela, identified below, that assert claims against the Companyand its subsidiaries related to wildfires beginning on March 12,2006.  On September 11, 2008, the MDL Court signed a Partial Order ofRemand 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 DistrictCourt 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 plaintiffsand intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment of Cano or certain of itssubsidiaries relating to oil and gas operations started a wildfire that beganon March 12, 2006 in Carson County. The plaintiffs (i) allege negligence and (ii) seek undiscloseddamages for the wrongful death of four relatives, Manuel Dominguez, RobertoChavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a resultof the fire.  In addition, plaintiffsseek (i) reimbursement for their attorney’s fees and (ii) exemplarydamages.  The plaintiffs also claim thatCano and its subsidiaries are jointly and severally liable as a single businessenterprise and/or as a partnership or de facto partnership.

 

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

 

**SecuritiesLitigation**:

 

On October 2, 2008, alawsuit was filed in the United States District Court for the Southern Districtof New York against David W. Wehlmann; Gerald W. Haddock; Randall Boyd; DonaldW. Niemiec; Robert L. Gaudin; William O. Powell, III, and the underwritersalleging violations of the federal securities laws.  The plaintiff seeksto certify the lawsuit as a class action.  The lawsuit alleges that theprospectus for the June 26, 2008 public offering of Cano common stockcontained statements regarding Cano’s proved reserve amounts and standards thatwere 

 

2

----

 

materially false andoverstated 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 ifthe lawsuit is certified as a class action.

 

3

----

 

**SCHEDULE 4.14(a)**

 

**AGREEMENTS WHICH COULD CREATE A MATERIAL ADVERSECHANGE**

 

SubordinatedCredit Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Partyhereto from time to time, as Lenders, and UnionBanCal Equities, Inc., asAdministrative Agent, dated December 17, 2008, and all associatedagreements.

 

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

 

Certificateof Designations, Preferences and Rights of Series D Convertible PreferredStock of Cano Petroleum, Inc. filed August 31, 2006 with the DelawareSecretary 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.                                                                                                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                        |
| 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.                                                                                                                                                                                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                               |
| Unit Agreement for the  Development and Operation for the Cato Unit – Chaves County, New Mexico dated  May 1, 1989.                                                                                                                                      |
|                                                                                                                                                                                                                                                               |
| 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 , dated December 17, 2008 and all associated  agreements. |

 

----

 

**EXHIBIT A**

 

**FORM OF ASSIGNMENT ANDASSUMPTION**

 

ThisAssignment and Assumption (the “Assignment and Assumption”) is dated asof the Effective Date set forth below and is entered into by and between[the][each](1) Assignor identified in item 1 below ([the][each, an] “Assignor”)and [the][each](2) Assignee identified in item 2 below ([the][each, an] “Assignee”).  [It is understood and agreed that the rightsand obligations of [the Assignors][the Assignees](3) hereunder are severaland not joint.](4)  Capitalized terms used but not defined herein shallhave the meanings given to them in the Credit Agreement identified below (asamended, the “Credit Agreement”), receipt of a copy of which is herebyacknowledged by [the][each] Assignee. The Standard Terms and Conditions set forth in Annex 1 attached heretoare hereby agreed to and incorporated herein by reference and made a part ofthis Assignment and Assumption as if set forth herein in full.

 

For an agreed consideration,[the][each] Assignor hereby irrevocably sells and assigns to [the Assignee][therespective Assignees], and [the][each] Assignee hereby irrevocably purchasesand assumes from [the Assignor][the respective Assignors], subject to and inaccordance with the Standard Terms and Conditions and the Credit Agreement, asof the Effective Date inserted by the Administrative Agent as contemplatedbelow (i) all of [the Assignor’s][the respective Assignors’] rights andobligations in [its capacity as a Lender][their respective capacities asLenders] under the Credit Agreement and any other documents or instrumentsdelivered pursuant thereto to the extent related to the amount and percentageinterest identified below of all of such outstanding rights and obligations of[the Assignor][the respective Assignors] under the respective facilitiesidentified below (including without limitation any letters of credit,guarantees, and swingline loans included in such facilities) and (ii) tothe 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 aLender)][the respective Assignors (in their respective capacities as Lenders)]against any Person, whether known or unknown, arising under or in connectionwith the Credit Agreement, any other documents or instruments deliveredpursuant thereto or the loan transactions governed thereby or in any way basedon or related to any of the foregoing, including, but not limited to, contractclaims, tort claims, malpractice claims, statutory claims and all other claimsat law or in equity related to the rights and obligations sold and assignedpursuant to clause (i) above (the rights and obligations sold and assignedby [the][any] Assignor to [the][any] Assignee pursuant to clauses (i) and (ii) abovebeing referred to herein collectively as [the][an] “Assigned Interest”).  Each such sale and assignment is withoutrecourse to 

 

----

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

 

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

 

(3) Select as appropriate.

 

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

 

A-1

----

 

[the][any] Assignor and,except as expressly provided in this Assignment and Assumption, withoutrepresentation 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:                                                           | UNION  BANK OF CALIFORNIA. N.A., as the administrative agent under the Credit  Agreement                                                                                                                                       |
|   |   |                                                                             |                                                                                                                                                                                                                           |
| 5.     |   | Credit  Agreement:                                                               | The  Amended and Restated Credit Agreement dated as of December 17, 2008  among Borrower, the Lenders party thereto from time to time, and Union Bank  of California, N.A. as Administrative Agent and as Issuing Lender. |
|   |   |                                                                             |                                                                                                                                                                                                                           |
| 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) |
|----|--------|--------------|--------|-----|

 

EffectiveDate:                           ,20         [TO BE INSERTED BYADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OFTRANSFER IN THE REGISTER THEREFOR.]

 

----

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

 

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

 

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

 

A-2

----

 

The terms set forth in thisAssignment and Assumption 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: |                |
|                                  |                |
| UNION  BANK OF CALIFORNIA. N.A., as   |                |
| Administrative Agent                  |                |
|                                  |                |
| By:                                   |                |   |
| Name:                                 |                |   |
| Title:                                |                |   |
|                                       |                     |  |  |  |  |  |  |

 

----

(8) Add additional signature blocks as needed.

 

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

 

A-3

----

 
| [Consented  to:](10)                          |   |
|-----------------------------------------------|--------|
|                                          |   |
| CANO  PETROLEUM, INC., a Delaware corporation |   |
|                                          |   |
| By:                                           |   |   |
| Name:                                         |   |   |
| Title:                                        |   |   |
|                                               |        |  |  |  |

 

Annex 1

To Exhibit A – Assignment and Assumption

 

**STANDARD TERMS AND CONDITIONS FOR**

**ASSIGNMENT AND ASSUMPTION**

 

1.  Representations and Warranties.

 

1.1Assignor[s].  [The][Each] Assignor(a) represents and warrants that (i) it is the legal and beneficialowner of [the][the relevant] Assigned Interest, (ii) [the][such] AssignedInterest is free and clear of any lien, encumbrance or other adverse claim and (iii) ithas full power and authority, and has taken all action necessary, to executeand deliver this Assignment and Assumption and to consummate the transactionscontemplated hereby; and (b) assumes no responsibility with respect to (i) anystatements, warranties or representations made in or in connection with theCredit Agreement or any other Loan Document, (ii) the execution, legality,validity, enforceability, genuineness, sufficiency or value of the LoanDocuments or any collateral thereunder, (iii) the financial condition ofthe Borrower, any of its Subsidiaries or Affiliates or any other Personobligated in respect of any Loan Document or (iv) the performance orobservance by the Borrower, any of its Subsidiaries or Affiliates or any otherPerson 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 andAssumption and to consummate the transactions contemplated hereby and to becomea Lender under the Credit Agreement, (ii) it meets all the requirements tobe an assignee under Section 9.05 of the Credit Agreement (subject to suchconsents, if any, as may be required under Section 9.05 of the CreditAgreement), (iii) from and after the Effective Date, it shall be bound bythe provisions of the Credit Agreement as a Lender thereunder and, to theextent of [the][the relevant] Assigned Interest, shall have the obligations ofa Lender thereunder, (iv) it is sophisticated with respect to decisions toacquire assets of the type represented by the Assigned Interest and either it,or the person exercising discretion in making its decision to acquire theAssigned Interest, is experienced in acquiring assets of such type, (v) ithas received a copy of the Credit Agreement, and has received or has been accordedthe opportunity to receive copies of the most recent financial statementsdelivered pursuant to Section 3.01(c) thereof, as applicable, andsuch other documents and information as it deems appropriate to make its owncredit analysis and decision to enter into this Assignment and Assumption andto purchase [the][such] 

 

----

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

 

A-4

----

 

AssignedInterest, (vi) it has, independently and without reliance upon theAdministrative Agent or any other Lender and based on such documents andinformation as it has deemed appropriate, made its own credit analysis anddecision to enter into this Assignment and Assumption and to purchase[the][such] Assigned Interest, and (vii) if it is a Foreign Lender,attached to the Assignment and Assumption is any documentation required to bedelivered by it pursuant to the terms of the Credit Agreement, duly completedand executed by [the][such] Assignee; and (b) agrees that (i) itwill, independently and without reliance on the Administrative Agent,[the][any] Assignor or any other Lender, and based on such documents andinformation as it shall deem appropriate at the time, continue to make its owncredit decisions in taking or not taking action under the Loan Documents, and (ii) itwill perform in accordance with their terms all of the obligations which by theterms of the Loan Documents are required to be performed by it as a Lender.

 

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

 

3.  General Provisions.  This Assignment and Assumption shall bebinding upon, and inure to the benefit of, the parties hereto and theirrespective successors and assigns.  ThisAssignment and Assumption may be executed in any number of counterparts, whichtogether shall constitute one instrument. Delivery of an executed counterpart of a signature page of thisAssignment and Assumption by telecopy shall be effective as delivery of amanually executed counterpart of this Assignment and Assumption.  This Assignment and Assumption shall begoverned by, and construed in accordance with, the law of the State of Texas.

 

A-5

----

** **

**EXHIBIT B**

** **

**FORM OF COMPLIANCECERTIFICATEFOR THE PERIOD FROM _________, 200__ TO _________, 200__**

** **

This certificate dated as of____________ ___, _____ is prepared pursuant to the Amended and Restated CreditAgreement dated as of December 17, 2008 (as amended, supplemented orotherwise modified from time to time, the “Credit Agreement”) among CANOPETROLEUM, INC., a Delaware corporation (“Borrower”), the lenders partythereto (the “Lenders”), and UNION BANK OF CALIFORNIA, N.A., as administrativeagent for such Lenders (in such capacity, the “Administrative Agent”)and as issuing lender.  Unless otherwisedefined in this certificate, capitalized terms that are defined in the CreditAgreement shall have the meanings assigned to them by the Credit Agreement.

 

The undersigned herebycertifies that:

 

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

 

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

 

[(b)                             the followingDefault[s] or Event[s] of Default exist as of the date hereof or have occurredsince the date of the Borrower’s previous certification to the AdministrativeAgent, if any, and the actions set forth below have been or are being taken toremedy such circumstances:

 

___________________________________;and]

 

(c) that as of the lastday of the previous quarter the following statements, amounts, and calculationswere true and correct:

 

**I.****                                        ****Current Ratio—Section 6.17****.**

 
| (a)    | consolidated current assets(11)      |   | $      |   |
|--------|--------------------------------------|--------|--------|--------|
|   |                                 |   |   |
| (b)    | consolidated current liabilities(12) |   | $      |   |

 
| Current  Ratio = (a) to (b) = |   |   |
|-----------------------------------------|--------|--------|

 

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(11)“current assets” shall include the aggregate Unused Commitment Amountsof the Lenders, but shall exclude (A) any cash deposited with or at therequest of a counterparty to any Hedge Contract or any other similar hedgearrangement and (B) any assets representing a valuation account arisingfrom the application of SFAS 133 and 143.

 

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

 

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| 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:                 |   | 4.00 to 1.00 |   |   |

 

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(13)“consolidated Debt” shall not include Debt outstanding under preferredEquity Interests issued in compliance with Section 6.22 of the CreditAgreement.

 

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

 

(15)  Items (ii) – (iv) shall be includedto the extent deducted in determining Consolidated Net Income.

 

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

 

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

 

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

 

(19)Item (vii) only applies to any period during which Pantwist, LLC was awholly-owned Subsidiary of Borrower and only to the extent such are notduplicative of any portions of Items (i) – (v).

 

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| **COMPLIANCE?** | ** ** | **YES  ****o****NO  ****o** |
|-----------------|------------|-------------------------------------------------|

 

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** **

**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 =                | 3.00 to 1.00                                    |   |
|                                             | ** **                                      |   |   |   |
| **COMPLIANCE?**                                  | **YES  ****o****NO  ****o** |   |
|                                                  |                                                 |        |        |  |  |

 

 

IN WITNESS THEREOF, I havehereto signed my name to this Compliance Certificate as of _______________, 20___.

 

 
|   | CANO  PETROLEUM, INC., a Delaware corporation |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
|   | By:                                           |   |
|   |                                          |   |
|   | Name:                                         |   |
|   |                                          |   |
|   | Title:                                        |   |
|        |                                               |  |  |  |  |

 

B-4

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**EXHIBIT C**

 

**FORM OF GUARANTYAGREEMENT**

** **

This Amended and RestatedGuaranty Agreement dated as of December 17, 2008 (this “Guaranty”)is executed by each of the undersigned (individually a “Guarantor” andcollectively, the “Guarantors”), in favor of Union Bank of California,N.A, as Administrative Agent for the ratable benefit of itself, the Lenders (asdefined below) and as Issuing Lender (as defined below), and the SwapCounterparties (as defined in the Credit Agreement referred to below) (togetherwith the Administrative Agent, the Issuing Lender, and the Lenders,individually a “Beneficiary”, and collectively, the “Beneficiaries”).

 

**INTRODUCTION**

** **

A.                                   Cano Petroleum, Inc.a Delaware corporation (the “Borrower”) has previously entered in thatcertain Credit Agreement dated as of November 29, 2005 (as it has beenamended, supplemented, restated or otherwise modified from time to time, the “ExistingCredit Agreement”), among Borrower, the Lenders, the Administrative Agentand the Issuing Lender.

 

B.                                     In order toguarantee the full and punctual payment and performance of the obligationsunder the Existing Credit Agreement and the other Loan Documents (as defined inthe Existing Credit Agreement), the Guarantors executed and delivered to theAdministrative Agent that certain Guaranty Agreement dated as of November 29,2005 (as heretofore amended, restated, supplemented or otherwise modified, the “ExistingGuaranty”).

 

C.                                     The parties tothe Existing Credit Agreement have agreed to amend and restate the ExistingCredit Agreement in its entirely pursuant to that certain Amended and RestatedCredit Agreement dated as of December 17, 2008 (as further amended,supplemented or otherwise modified from time to time, the “Credit Agreement”),among the Borrower, the lenders party thereto from time to time (individually,a “Lender” and collectively, the “Lenders”), and Union Bank ofCalifornia, N.A., as administrative agent (in such capacity, the “AdministrativeAgent”) and as issuing lender (in such capacity, the “Issuing Lender”).

 

D.                                    It is arequirement under the Credit Agreement that the Guarantors shall continue toguarantee the due payment and performance of all Obligations (as defined in theCredit Agreement) by amending and restating in its entirety the ExistingGuaranty as set forth herein.

 

E.                                      Each Guarantoris a subsidiary of the Borrower and will derive substantial direct and indirectbenefit from (i) the transactions contemplated by the Credit Agreement andthe other Loan Documents (as defined in the Credit Agreement) and (ii) theHedge Contracts (as defined in the Credit Agreement) entered into by theBorrower or any of its other subsidiaries with a Swap Counterparty.

 

F.                                      Each Guarantoris executing and delivering this Guaranty (i) to induce the Lenders toprovide and to continue to provide Advances under the Credit Agreement, (ii) toinduce the Issuing Lender to provide and continue to provide Letters of Creditunder the Credit Agreement, and (iii) intending it to be a legal, valid,binding, enforceable and continuing 

 

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obligationof such Guarantor, whether or not such Guarantor derives any benefit from theCredit Agreement or from any other Loan Document.

 

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

 

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

** **

**Section 2.**                                          Guaranty.

** **

(a)                                  Each Guarantor hereby absolutely,unconditionally and irrevocably guarantees the punctual payment andperformance, when due, whether at stated maturity, by acceleration orotherwise, of all Obligations, whether absolute or contingent and whether forprincipal, interest (including, without limitation, interest that but for theexistence of a bankruptcy, reorganization or similar proceeding would accrue),fees, amounts owing in respect of Letter of Credit Obligations, amountsrequired to be provided as collateral, indemnities, expenses or otherwise(collectively, the “Guaranteed Obligations”).  Without limiting the generality of theforegoing, each Guarantor’s liability shall extend to all amounts thatconstitute part of the Guaranteed Obligations and would be owed by the Borrowerto the Administrative Agent, the Issuing Lender or any Lender under the LoanDocuments and by the Borrower or any of its Subsidiaries to the SwapCounterparty but for the fact that they are unenforceable or not allowable dueto insolvency or the existence of a bankruptcy, reorganization or similarproceeding involving the Borrower or such other Subsidiary.

 

(b)                                 It is the intention of the Guarantors andeach Beneficiary that the amount of the Guaranteed Obligations guaranteed byeach Guarantor shall be in, but not in excess of, the maximum amount permittedby fraudulent conveyance, fraudulent transfer or similar Legal Requirementsapplicable to such Guarantor. Accordingly, notwithstanding anything to thecontrary contained in this Guaranty or in any other agreement or instrumentexecuted in connection with the payment of any of the Guaranteed Obligations,the amount of the Guaranteed Obligations guaranteed by a Guarantor under thisGuaranty shall be limited to an aggregate amount equal to the largest amountthat would not render such Guarantor’s obligations hereunder subject toavoidance under Section 548 of the United States Bankruptcy Code or anycomparable provision of any other applicable law.

 

**Section 3.**                                          GuarantyAbsolute.  Eachguarantor guarantees that the guaranteed obligations will be paid strictly inaccordance with the terms of the loan documents, regardless of any law,regulation or order now or hereafter in effect in any jurisdiction affectingany of such terms or the rights of the administrative agent, the issuinglender, any lender or any swap counterparty with respect thereto but subject tosection 2(b) above.  The obligationsof each guarantor under this guaranty are independent of the guaranteedobligations or any other obligations of any other person under the loandocuments or in connection with any hedge contract, and a separate action oractions may be brought and prosecuted against any guarantor to enforce thisguaranty, irrespective of whether any action is brought against the borrower,any other guarantor or any other person or whether the borrower, any otherguarantor or any other 

 

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** **

**person is joined in any such action oractions. The liability of each guarantor under this guaranty shall beirrevocable, absolute and unconditional irrespective of, and each guarantorhereby irrevocably waives any defenses it may now or hereafter have in any wayrelating to, any or all of the following:**

** **

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

 

(b)                                 any change in the time, manner or placeof payment of, or in any other term of, all or any of the GuaranteedObligations or any other obligations of any Person under the Loan Documents orany agreement or instrument relating to any Hedge Contract with a SwapCounterparty, or any other amendment or waiver of or any consent to departurefrom any Loan Document or any agreement or instrument relating to any HedgeContract with a Swap Counterparty, including, without limitation, any increasein the Guaranteed Obligations resulting from the extension of additional creditto the Borrower or otherwise;

 

(c)                                  any taking, exchange, release ornon-perfection of any collateral, or any taking, release or amendment or waiverof or consent to departure from any other guaranty, for all or any of theGuaranteed Obligations;

 

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

 

(e)                                  any change, restructuring or terminationof the corporate structure or existence of the Borrower or any of itsSubsidiaries;

 

(f)                                    any failure of any Lender, theAdministrative Agent, the Issuing Lender or any other Beneficiary to discloseto the Borrower or any Guarantor any information relating to the business,condition (financial or otherwise), operations, properties or prospects of anyPerson now or in the future known to the Administrative Agent, the IssuingLender, any Lender or any other Beneficiary (and each Guarantor herebyirrevocably waives any duty on the part of any Beneficiary to disclose suchinformation);

 

(g)                                 any signature of any officer of theBorrower or any other Person being mechanically reproduced in facsimile orotherwise; or

 

(h)                                 any other circumstance or any existenceof or reliance on any representation by any Beneficiary that might otherwiseconstitute a defense available to, or a discharge of, the Borrower, anyGuarantor or any other guarantor, surety or other Person.

 

**Section 4.**                                          ContinuationAnd Reinstatement, Etc.  Eachguarantor agrees that, to the extent that payments of any of the guaranteedobligations are made, or any lender, the administrative agent, the issuinglender or any swap counterparty receives any proceeds of collateral, and suchpayments or proceeds or any part thereof are subsequently invalidated, declaredto be fraudulent or preferential, set aside, or otherwise required to berepaid, then to the 

 

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** **

**extent of such repayment the guaranteedobligations shall be reinstated and continued in full force and effect as ofthe date such initial payment or collection of proceeds occurred. **EACH GUARANTOR SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM ANDAGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCHACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSEARISING AS A RESULT OF THE INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUTEXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUNDIN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TOHAVE RESULTED FROM SUCH INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFULMISCONDUCT.

** **

**Section 5.**                                          WaiversAnd Acknowledgments.

** **

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

 

(b)                                 Each Guarantor hereby irrevocably waivesany right to revoke this Guaranty, and acknowledges that this Guaranty iscontinuing in nature and applies to all Guaranteed Obligations, whetherexisting now or in the future.

 

(c)                                  Each Guarantor acknowledges that it willreceive substantial direct and indirect benefits from the financingarrangements involving the Borrower and its Subsidiaries contemplated by theLoan Documents and the Hedge Contracts with a Swap Counterparty and that thewaivers set forth in this Guaranty are knowingly made in contemplation of suchbenefits.

 

**Section 6.**                                          Subrogation.  No guarantor will exercise any rights that itmay now have or hereafter acquire against the borrower or any other person tothe extent that such rights arise from the existence, payment, performance orenforcement of such guarantor’s obligations under this guaranty or any otherloan document, including, without limitation, any right of subrogation,reimbursement, exoneration, contribution or indemnification and any right toparticipate in any claim or remedy of any beneficiary against the borrower orany other person, whether or not such claim, remedy or right arises in equityor under contract, statute or common law, including, without limitation, theright to take or receive from the borrower or any other person, directly orindirectly, 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 untilall of the guaranteed obligations and any and all other amounts payable by theguarantors under this guaranty shall have been paid in full in cash, allletters of credit have terminated or expired and no letter of creditobligations shall remain outstanding, and all commitments shall have expired orterminated.  If any amount shall be paidto a guarantor in violation of the preceding sentence at any time prior to (a) thepayment in full in cash of the guaranteed obligations and any and all otheramounts payable by the guarantors under this guaranty, (b) the satisfactionof all letter of credit obligations and the termination of all obligations ofthe issuing lender and the lenders in respect of letters of credit, 

 

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** **

**(c)  the termination of the hedgecontracts with the beneficiaries, and (d) the termination of thecommitments, such amount shall be held in trust for the benefit of thebeneficiaries and shall forthwith be paid to the administrative agent to becredited and applied to the guaranteed obligations and any and all otheramounts payable by the guarantors under this guaranty, whether matured orunmatured, in accordance with the terms of the loan documents.**

** **

**Section 7.**                                          RepresentationsAnd Warranties. Each guarantor hereby represents and warrants as follows:

** **

(a)                                  There are no conditions precedent to theeffectiveness of this Guaranty.  SuchGuarantor benefits from executing this Guaranty.

 

(b)                                 Such Guarantor has, independently andwithout reliance upon the Administrative Agent, the Issuing Lender or any Lenderand based on such documents and information as it has deemed appropriate, madeits own credit analysis and decision to enter into this Guaranty, and suchGuarantor has established adequate means of obtaining from the Borrower andeach other relevant Person on a continuing basis information pertaining to, andis now and on a continuing basis will be completely familiar with, thebusiness, condition (financial and otherwise), operations, properties andprospects of the Borrower and each other relevant Person.

 

(c)                                  The obligations of such Guarantor underthis Guaranty are the valid, binding and legally enforceable obligations ofsuch Guarantor, and the execution and delivery of this Guaranty by suchGuarantor has been duly and validly authorized in all respects by suchGuarantor, and the Person who is executing and delivering this Guaranty onbehalf 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 onsuch Guarantor’s part to be observed or performed.

 

**Section 8.**                                          RightOf Set-Off. Upon the occurrence and during the continuance of anyevent of default, any lender or the administrative agent, the issuing lenderand any other beneficiary is hereby authorized at any time, to the fullestextent permitted by law, to set off and apply any deposits (general or special,time or demand, provisional or final) and other indebtedness owing by suchbeneficiary to the account of each guarantor against any and all of theobligations of the guarantors under this guaranty, irrespective of whether ornot such beneficiary shall have made any demand under this guaranty andalthough such obligations may be contingent and unmatured.  Such beneficiary shall promptly notify theaffected guarantor after any such set-off and application is made, providedthat the failure to give such notice shall not affect the validity of suchset-off and application.  The rights ofthe beneficiaries under this section 8 are in addition to other rights and remedies(including, without limitation, other rights of set-off) which any beneficiarymay have.

** **

**Section 9.**                                          Amendments,Etc.  No amendment orwaiver of any provision of this guaranty and no consent to any departure by anyguarantor therefrom shall in any event be effective unless the same shall be inwriting and signed by the affected guarantor, the administrative agent and themajority lenders, and then such waiver or consent shall be effective only inthe specific instance and for the specific purpose for which given; providedthat no amendment, waiver or consent shall, unless in writing and signed by allof the lenders, (a) other 

 

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** **

**than to the extent expressly providedin such amendment, waiver or consent, limit the liability of any guarantorhereunder (it being understood that waivers and amendments permitted to be madeunder the credit agreement by the majority lenders with respect to any of theunderlying obligations guaranteed hereunder shall not be deemed to limit theliability of any guarantor within the meaning of this clause (a)), (b) postponeany date fixed for payment hereunder in respect of any of the guaranteedobligations that is principal of, or interest on, the notes or any fees, orletter of credit obligations, or (c) change the percentage of thecommitments or of the aggregate unpaid principal amount of the notes requiredto take any action hereunder.**

** **

**Section 10.**                                   Notices,Etc.  Allnotices and other communications provided for hereunder shall be sent in themanner provided for in section 9.02 of the credit agreement and if to aguarantor, at its address specified on the signature page hereto and if tothe administrative agent, the issuing lender or any lender, at its addressspecified in or pursuant to the credit agreement, and if to a swapcounterparty, at its address specified in the applicable hedge contract.  All such notices and communications shall beeffective when delivered, except that notices and communications to theadministrative agent shall not be effective until received by theadministrative agent.

** **

**Section 11.**                                   NoWaiver: Remedies. No failure on the part of the administrative agent orany other beneficiary to exercise, and no delay in exercising, any righthereunder shall operate as a waiver thereof; nor shall any single or partialexercise of any right hereunder preclude any other or further exercise thereofor the exercise of any other right. The remedies herein provided are cumulativeand not exclusive of any remedies provided by law.

** **

**Section 12.**                                   ContinuingGuaranty: Assignments Under The Credit Agreement.  This guarantyis a continuing guaranty and shall (a) remain in full force and effectuntil the payment in full of all guaranteed obligations and all other amountspayable under the loan documents, the termination of all letter of creditobligations, the termination of the hedge contracts with the beneficiaries, andthe termination of all the commitments, (b) be binding upon each guarantorand its successors and assigns, (c) inure to the benefit of and beenforceable by the administrative agent, each lender, and the issuing lender,and their respective successors, and, in the case of transfers and assignmentsmade in accordance with the credit agreement, transferees and assigns, and (d) inureto the benefit of and be enforceable by a swap counterparty and each of itssuccessors, transferees and assigns to the extent such successor, transferee orassign is a lender or an affiliate of a lender. Without limiting the generality of the foregoing clause (c), subject tosection 9.06 of the credit agreement, any lender may assign or otherwisetransfer all or any portion of its rights and obligations under the creditagreement (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 inrespect thereof granted to such lender herein or otherwise, subject, however,in all respects to the provisions of the credit agreement.  Each guarantor acknowledges that upon anyperson becoming a lender, the administrative agent, or the issuing lender inaccordance with the credit agreement, such person shall be entitled to thebenefits hereof.

** **

**Section 13.**                                   GoverningLaw.  Thisguaranty shall be governed by, and construed and enforced in accordance with,the laws of the state of texas.  Eachguarantor hereby irrevocably submits to the jurisdiction of any texas state orfederal court sitting in dallas, texas in any action 

 

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** **

**or proceeding arising out of orrelating to this guaranty and the other loan documents, and each guarantorhereby irrevocably agrees that all claims in respect of such action orproceeding may be heard and determined in such court.  Each guarantor hereby irrevocably waives, tothe fullest extent it may effectively do so, any right it may have to thedefense of an inconvenient forum to the maintenance of such action or proceeding.  Each guarantor hereby agrees that service ofcopies of the summons and complaint and any other process which may be servedin any such action or proceeding may be made by mailing or delivering a copy ofsuch process to such guarantor at its address set forth in the credit agreementor set forth on the signature page of this guaranty.  Each guarantor agrees that a final judgmentin any such action or proceeding shall be conclusive and may be enforced inother jurisdictions by suit on the judgment or in any other manner provided bylaw.  Nothing in this section shallaffect the rights of any beneficiary to serve legal process in any other mannerpermitted by the law or affect the right of any beneficiary to bring any actionor proceeding against any guarantor or its property in the courts of any otherjurisdiction.**

** **

**Section 14.**                                   Indemnification.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE BENEFICIARIES,AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, ANDDISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALLLIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND ORNATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO ORARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANYACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THEBORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACHBY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT ORANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHERPROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TOTHE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTALLAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATEDPROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THEBORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDITAGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTALLAWS CONCERNING OR RELATED TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES ANDEACH GUARANTOR SHALL REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVEDIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLEOUT-OF-POCKET EXPENSES (INCLUDING REASONABLE OUTSIDE LEGAL FEES) INCURRED INCONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; ANDEXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSEINCURRED 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 ACOURT OF COMPETENT 

 

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** **

**JURISDICTION TO HAVE RESULTEDFROM SUCH INDEMNIFIED PERSON’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.**

** **

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

** **

**Section 16.**                                   AdditionalGuarantors. Pursuant to section 6.15 of the credit agreement,each subsidiary of the borrower that was not in existence on the date of thecredit agreement is required to enter into this guaranty as a guarantor uponbecoming a subsidiary.  After the datehereof, upon execution and delivery after the date hereof by the administrativeagent and such subsidiary of an instrument in the form of annex 1, suchsubsidiary shall become a guarantor hereunder with the same force and effect asif originally named as a guarantor herein. The execution and delivery of any instrument adding an additionalguarantor as a party to this guaranty shall not require the consent of anyother guarantor hereunder.  The rightsand obligations of each guarantor hereunder shall remain in full force andeffect notwithstanding the addition of any new guarantor as a party to thisguaranty.

** **

**Section 17.**                                   Amendment And Restatement.  THIS GUARANTY IS AN AMENDMENTAND RESTATEMENT OF THE EXISTING GUARANTY AND SUPERSEDES THE EXISTING GUARANTYIN ITS ENTIRETY; PROVIDED, HOWEVER, THAT THE EXECUTION AND DELIVERY OF THISGUARANTY SHALL NOT EFFECT A NOVATION OF THE EXISTING GUARANTY BUT SHALL BE, TOTHE FULLEST EXTENT APPLICABLE, IN MODIFICATION, RENEWAL, CONFIRMATION ANDEXTENSION OF THE EXISTING GUARANTY.

** **

**Section 18.**                                   Notice Of FinalAgreements. PURSUANT TO SECTION 26.02OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNTINVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THEAGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’SAUTHORIZED REPRESENTATIVE.

** **

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENTSUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTENAGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BYAND MERGED INTO THIS GURANTY.  THISGUARANTY AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIESWITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BYEVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THEPARTIES.**

 

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** **

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

** **

**[Remainder of this page intentionally leftblank.]**

 

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

 
| AddressforeachGuarantor:            | **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 |
|                                |                                               |
|                                |                                               |
|                                | **ADMINISTRATIVE  AGENT:**                         |
|                                |                                               |
|                                |                                               |
|                                | UNION BANK OF CALIFORNIA, N.A., as                 |
|                                | Administrative  Agent                              |
|                                |                                               |
|                                |                                               |
|                                | By:                                                |   |
|                                | Name:                                              |   |
|                                | Title:                                             |   |
|                                     |                                                    |  |  |  |  |  |

 

C-10

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Annex 1 to the

Guaranty Agreement

 

SUPPLEMENT NO.         dated as of                             (the“Supplement”), to the Amendedand Restated Guaranty Agreement dated as of December 17, 2008 (as amended,supplemented or otherwise modified from time to time, the “Guaranty Agreement”), among each ofthe 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 UNION BANK OF CALIFORNIA, N.A., as Administrative Agent (the “Administrative Agent”) for thebenefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made tothe Amended and Restated Credit Agreement dated as of December 17, 2008(as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among theBorrower, the lenders from time to time party thereto (the “Lenders”), and the AdministrativeAgent.

 

B.            Capitalized terms usedherein and not otherwise defined herein shall have the meanings assigned tosuch terms in the Guaranty Agreement and the Credit Agreement.

 

C.            The Guarantors haveentered into the Guaranty Agreement in order to induce the Lenders to makeAdvances and the Issuing Lender to issue Letters of Credit.  Pursuant to Section 6.15 of the CreditAgreement, the Subsidiaries of the Borrower are required to enter into theGuaranty Agreement as Guarantors.  Section 16of the Guaranty Agreement provides that additional Subsidiaries of the Borrowermay become Guarantors under the Guaranty Agreement by execution and delivery ofan instrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the “New Guarantor”) is executing this Supplement in accordance withthe requirements of the Credit Agreement to become a Guarantor under theGuaranty Agreement in order to induce the Lenders to make additional Advancesand the Issuing Lender to issue additional Letters of Credit and asconsideration for Advances previously made and Letters of Credit previouslyissued.

 

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

 

**Section 1.****             **In accordancewith Section 16 of the Guaranty Agreement, the New Guarantor by itssignature below becomes a Guarantor under the Guaranty Agreement with the sameforce and effect as if originally named therein as a Guarantor and the NewGuarantor hereby (a) agrees to all the terms and provisions of theGuaranty Agreement applicable to it as a Guarantor thereunder and (b) representsand warrants that the representations and warranties made by it as a Guarantorthereunder are true and correct in all material respects on and as of the datehereof.  Each reference to a “Guarantor”in the Guaranty Agreement shall be deemed to include the New Guarantor.  The Guaranty Agreement is hereby incorporatedherein by reference.

 

**Section 2.****             **The NewGuarantor represents and warrants to the Administrative Agent and the otherBeneficiaries that this Supplement has been duly authorized, executed anddelivered by it and constitutes its legal, valid and binding obligation,enforceable against it in 

 

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accordance with its terms(subject to applicable bankruptcy, reorganization, insolvency, moratorium orsimilar laws affecting creditors’ rights generally and subject, as toenforceability, to equitable principles of general application (regardless ofwhether enforcement is sought in a proceeding in equity or at law)).

 

**Section 3.****             **This Supplementmay 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 whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Guarantor and theAdministrative Agent. Delivery of an executed signature page to thisSupplement by fax transmission shall be as effective as delivery of a manuallyexecuted counterpart of this Supplement.

 

**Section 4.****             **Except asexpressly supplemented hereby, the Guaranty Agreement shall remain in fullforce and effect.

 

**Section 5.****             **THIS SUPPLEMENTSHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWSOF THE STATE OF TEXAS.  The New Guarantorhereby irrevocably submits to the jurisdiction of any Texas state or federalcourt sitting in Dallas, Texas in any action or proceeding arising out of orrelating to this Supplement or the Guaranty Agreement and the other LoanDocuments, and the New Guarantor hereby irrevocably agrees that all claims inrespect of such action or proceeding may be heard and determined in suchcourt.  The New Guarantor herebyirrevocably waives, to the fullest extent it may effectively do so, any rightit may have to the defense of an inconvenient forum to the maintenance of suchaction or proceeding.  The New Guarantorhereby agrees that service of copies of the summons and complaint and any otherprocess which may be served in any such action or proceeding may be made bymailing or delivering a copy of such process to such Guarantor at its addressset forth on the signature page hereof. The New Guarantor agrees that a final judgment in any such action orproceeding shall be conclusive and may be enforced in other jurisdictions bysuit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect therights of any Beneficiary to serve legal process in any other manner permittedby the law or affect the right of any Beneficiary to bring any action orproceeding against the New Guarantor or its Property in the courts of any otherjurisdiction.

 

**Section 6.****             **In case any oneor more of the provisions contained in this Supplement should be held invalid,illegal or unenforceable in any respect, the validity, legality andenforceability of the remaining provisions contained herein and in the GuarantyAgreement shall not in any way be affected or impaired thereby (it beingunderstood that the invalidity of a particular provision hereof in a particularjurisdiction shall not in and of itself affect the validity of such provisionin any other jurisdiction).  The partieshereto shall endeavor in good-faith negotiations to replace the invalid,illegal or unenforceable provisions with valid provisions the economic effectof which comes as close as possible to that of the invalid, illegal orunenforceable provisions.

 

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

 

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**Section 8.****             **The NewGuarantor agrees to reimburse the Administrative Agent for its reasonableout-of-pocket expenses in connection with this Supplement, including the fees,disbursements and other charges of counsel for the Administrative Agent.

 

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

 

**THE RIGHTS AND OBLIGATIONS OF THE PARTIES TOAN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROMTHE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARESUPERSEDED BY AND MERGED INTO THIS GURANTY. THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN DOCUMENTSREPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECTMATTER 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 WITNESSWHEREOF, the New Guarantor and the Administrative Agent have duly executed thisSupplement to the Guaranty Agreement as of the day and year first abovewritten.

 
|   | [Name of New Guarantor] |
|--------|-------------------------|
|   |                    |
|   |                    |
|   | By:                     |   |
|   |                    |
|   | Name:                   |   |
|   |                    |
|   | Title:                  |   |
|   |                    |
|   |                    |
|   | AddressofGuarantor:     |
|   |                    |
|   |                    |
|   |                    |
|        |                         |  |  |  |

 

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** **
|   | **ADMINISTRATIVE  AGENT:**                               |
|--------|----------------------------------------------------------|
|   |                                                     |
|   | UNION BANK OF CALIFORNIA, N.A., as  Administrative Agent |
|   |                                                     |
|   |                                                     |
|   | By:                                                      |   |
|   |                                                     |
|   | Name:                                                    |   |
|   |                                                     |
|   | Title:                                                   |   |
|        |                                                          |  |  |  |

 

C-14

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**EXHIBIT D**

 

**FORM OF MORTGAGE**

 

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

 

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCEPROVISIONS.

 

THIS INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN MINERALS OR THELIKE (INCLUDING OIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTERESTCREATED BY THIS INSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THEACCOUNTS RESULTING FROM THE SALE THEREOF AT THE WELLHEAD.  THIS INSTRUMENT COVERS THE INTEREST OFMORTGAGOR IN FIXTURES.  THIS FINANCINGSTATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATERECORDS.  PRODUCTS OF THE COLLATERAL AREALSO COVERED.

 

**NOTICE TO MORTGAGOR:**

 

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

 

FROM

 

**CANO PETROLEUM, INC.**

(Mortgagor, Debtor and Grantor)

 

TO

 

UNION BANK OF CALIFORNIA, N.A., asAdministrative Agent

(Mortgagee, Secured Party and Grantee)

 

_____________, 2008

 

For purposes of filing this Mortgage as a financing statement, themailing address of Mortgagor is 801 Cherry Street, Suite 3200, Fort Worth,Texas 76102.  Mortgagor is a corporationorganized under the laws of the State of Delaware and the Mortgagor’sorganizational number is 

 

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3664494; the mailing address of Mortgagee is Lincoln Plaza, 500 N.Akard Street, Suite 4200, Dallas, Texas 75201.

 

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

 

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 propertyprovisions and covers future advances and proceeds to the fullest extentallowed by applicable law.

 

**ATTENTION RECORDING OFFICER:** Thisinstrument is a mortgage of both real and personal property insofar as the samecovers or relates to the Oil and Gas Properties and is, among other things, aSecurity Agreement and Financing Statement under the Uniform Commercial Code ineffect in Oklahoma.  This instrumentcreates a lien on rights in or relating to lands of Mortgagor which aredescribed 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

 

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

 
| THE STATE OF                                       |   | § |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                               |   | § |
| COUNTY OF                      |   | § |

 

This instrument (the “Mortgage”) is made effective as of                           , 20      (the “Effective Date”) and executed and delivered by CANO PETROLEUM,INC., a Delaware corporation (“Mortgagor”), to and in favor of UnionBank of California, N.A. (the “Mortgagee”) in its capacity as theadministrative agent under the Credit Agreement (as hereinafter defined) and onbehalf of the Credit Parties (as hereinafter defined).  The addresses of Mortgagor and the Mortgageeappear in Section 7.12 of this Mortgage.

 

**RECITALS**

 

WHEREAS, this Mortgage is executed in connection with, and pursuant tothe terms of, that certain Amended and Restated Credit Agreement dated as of December 17,2008 (as the same may be renewed, extended, amended, supplemented and/orrestated from time-to-time, the “Credit Agreement”) among the Mortgagor,the lenders party thereto from time to time (the “Lenders”), andMortgagee as administrative agent for the Lenders (the “Administrative Agent”)and as issuing lender (the “Issuing Lender”).

 

WHEREAS, the Mortgagor and other subsidiaries of Mortgagor, may fromtime-to-time enter into one or more Hedge Contracts (as defined in the CreditAgreement) with Swap Counterparties (as defined in the Credit Agreement, andtogether with the Lenders, Mortgagee, the Issuing Lender and the AdministrativeAgent, being collectively referred to herein as the “Credit Parties”).

 

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

 

NOW, THEREFORE, in consideration of the foregoing and for other goodand valuable consideration, the receipt and sufficiency of which are herebyacknowledged, the Mortgagor (a) wishes to make this Mortgage in favor ofMortgagee to secure the Obligations (as defined herein), including theobligations arising under Hedge Contract with a Swap Counterparty, and (b) herebyagrees as follows:

 

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**ARTICLE I**

**Definitions**

 

1.1           “*Advances*” shall have the meaning assigned to such term inthe Credit Agreement.

 

1.2           “*Collateral*” means the Realty Collateral, PersonaltyCollateral and Fixture Collateral.

 

1.3           “*Commitments*” shall have the meaning assigned to such term inthe Credit Agreement.

 

1.4           “*Contracts*” means all contracts, agreements, operatingagreements, farm-out or farm-in agreements, sharing agreements, mineralpurchase 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 unitizationagreements, and unit or pooling designations and orders now or hereafteraffecting any of the Oil and Gas Properties, Operating Equipment, FixtureOperating Equipment, or Hydrocarbons now or hereafter covered hereby, or whichare useful or appropriate in drilling for, producing, treating, handling,storing, transporting or marketing oil, gas or other minerals produced from anyof the Oil and Gas Properties, and all as such contracts and agreements as theymay be amended, restated, modified, substituted or supplemented fromtime-to-time.

 

1.5           “*Event of Default*” shall have the meaning set forth in Article Vhereof.

 

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

 

1.7           “*Fixture Operating Equipment*” means any of the itemsdescribed in the first sentence of Section 1.17 which as a result of beingincorporated into realty or structures or improvements located therein orthereon, with the intent that they remain there permanently, constitutefixtures under the laws of the state in which such equipment is located.

 

1.8           “*Governmental Authority”*shall have the meaning assigned tosuch term in the Credit Agreement.

 

1.9           “*Hedge Contract*” shall have the meaning assigned to such termin the Credit Agreement.

 

1.10         “*Hydrocarbons*” means oil, gas, coal seam gas, casinghead gas,drip gasoline, natural gasoline, condensate, distillate, and all other liquidand gaseous hydrocarbons produced or to be produced in conjunction therewithfrom a well bore and all products, by-products, and other substances derivedtherefrom or the processing thereof, and all other minerals and substancesproduced in conjunction with such substances, including sulfur, geothermalsteam,

 

D-4

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water, carbon dioxide, helium, and any and all minerals, ores, orsubstances of value and the products and proceeds therefrom.

 

1.11         “*Legal Requirement”*shall have the meaning assigned to suchterm in the Credit Agreement.

 

1.12         “*Letters of Credit”*shall have the meaning assigned to suchterm in the Credit Agreement.

 

1.13         “*Loan Documents*” shall have the meaning assigned to such termin the Credit Agreement.

 

1.14         “*Notes*” shall have the meaning assigned to such term in theCredit Agreement.

 

1.15         “*Obligations*” means

 

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

 

(b)           Allother indebtedness, obligations, and liabilities of Mortgagor or any of itsSubsidiaries arising under the the Security Documents, this Mortgage, or any ofthe other Loan Document;

 

(c)           Allother indebtedness, obligations and liabilities of any kind of Mortgagor owingto any of the Credit Parties now existing or hereafter arising under orpursuant to any Loan Document, whether fixed or contingent, joint or several,direct or indirect, primary or secondary, and regardless of how created orevidenced;

 

(d)           Allsums advanced or costs or expenses incurred by Mortgagee or any of the otherCredit Parties, which are made or incurred pursuant to, or allowed by, theterms of this Mortgage plus interest thereon from the date of the advance orincurrence until reimbursement of Mortgagee or such Credit Party charged at theReimbursement Rate;

 

(e)           Allfuture advances or other value, of whatever class or for whatever purpose, atany time hereafter made or given by Mortgagee or any of the other CreditParties to Mortgagor under or pursuant to any Loan Document, whether or not theadvances or value are given pursuant to a commitment, whether or not theadvances or value are presently contemplated by the parties hereto, and whetheror not Mortgagor is indebted to Mortgagee or any Credit Party at the time ofsuch events; and

 

(f)            Allrenewals, extensions, modifications, amendments, rearrangements andsubstitutions of all or any part of the above whether or not Mortgagor executesany agreement or instrument.

 

1.16         “*Oil and Gas Property*” or “*Oil and GasProperties*” means (a) the oil and gas and/or oil, gas andmineral leases and leasehold interests, fee mineral interests, term mineral 

 

D-5

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interests, participation interests, back-in or carried workinginterests, rights of first refusal, options, subleases, farmouts, royalties,overriding royalties, net profits interests, production payments and similarinterests or estates described in Exhibit A attached hereto and made apart hereof for all purposes including the net revenue interests warranted in Exhibit Aand any reversionary or carried interests relating to any of the foregoing, (b) allproduction units, and drilling and spacing units (and the Properties coveredthereby) which may affect all or any portion of such interests including thoseunits which may be described or referred to on Exhibit A and any unitscreated by agreement or designation or under orders, regulations, rules orother official acts of any Federal, state or other governmental body or agencyhaving jurisdiction, (c) the surface leases described in Exhibit A, (d) anyand all non-consent interests owned or held by, or otherwise benefiting,Mortgagor and arising out of, or pursuant to, any of the Contracts, (e) anyother interest in, to or relating to (i) all or any part of the landdescribed in Exhibit A, the land relating to the leases set forth in Exhibit Aor in the documents described in Exhibit A, or (ii) any of theestates, property rights or other interests referred to above, (f) anyinstrument executed in amendment, correction, modification, confirmation,renewal or extension of the same, (g) any and all rights, titles andinterests of Mortgagor (which are similar in nature to any of the rights,titles and interests described in (a) through (f) above) which arelocated on or under or which concern any Property or Properties located incounties referenced in Exhibit A hereto or counties in which a counterpartof this Mortgage is filed of record in the real property records of suchcounty, and (h) all tenements, hereditaments and appurtenances nowexisting or hereafter obtained in connection with any of the aforesaid,including any rights arising under unitization agreements, orders or otherarrangements, communitization agreements, orders or other arrangements or poolingorders, agreements or other arrangements, including without limitation poolingorders of the Oklahoma Corporation Commission.

 

1.17         “*Operating Equipment*” means all surface or subsurfacemachinery, equipment, facilities, supplies or other Property of whatsoever kindor nature now or hereafter located on any of the Property affected by the Oiland Gas Properties which are useful for the production, treatment, storage ortransportation of Hydrocarbons, including all oil wells, gas wells, waterwells, 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, powerplants, poles, cables, wires, meters, processing plants, compressors,dehydration units, lines, transformers, starters and controllers, machineshops, 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, andaccessories and attachments to, any of the foregoing.  Operating Equipment shall not include anyitems incorporated into realty or structures or improvements located therein orthereon in such a manner that they no longer remain personalty under the lawsof the state in which such equipment is located.

 

1.18         “*Permitted Liens*” shall have the meaning assigned to suchterm in the Credit Agreement.

 

1.19         “*PermittedPrior Liens*” shall have the meaning assigned to such term in theCredit Agreement.

 

D-6

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1.20         “*Personalty Collateral*” means all of Mortgagor’s interest nowowned or hereafter acquired in and to (a) all Operating Equipment, (b) allHydrocarbons severed and extracted from or attributable to the Oil and GasProperties, including oil in tanks and all other “as-extracted” collateral fromor attributable to the Oil and Gas Properties, (c) all accounts (includingaccounts resulting from the sale of Hydrocarbons at the wellhead), contractrights and general intangibles, including all accounts, contract rights andgeneral intangibles now or hereafter arising regardless of whether any of theforegoing is in connection with the sale or other disposition of anyHydrocarbons or otherwise, including all liens securing the same, (d) allaccounts, contract rights and general intangibles now or hereafter arisingregardless of whether any of the foregoing is in connection with or resultingfrom any of the Contracts, including all liens security the same, (e) allproceeds and products of the Realty Collateral and any other contracts oragreements, (f) all information concerning the Oil and Gas Properties andall wells located thereon, including abstracts of title, title opinions,geological and geophysical information and logs, lease files, well files, andother books and records (including computerized records and data), (g) anydeposit or time accounts with Mortgagee, the AdministrativeAgent, the IssuingLender, or any Lender, including Mortgagor’s operating bank account and allfunds and investments therein, (h) any options or rights of first refusalto 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.

 

1.21         “*Property*” means any property of any kind, whether real,personal, or mixed and whether tangible or intangible.

 

1.22         “*Realty Collateral*” means all of Mortgagor’s interest nowowned or hereafter acquired in and to the Oil and Gas Properties, including anyaccess rights, water and water rights, and all unsevered and unextractedHydrocarbons (even though Mortgagor’s interest therein may be incorrectlydescribed in, or a description of a part or all of such interest may be omittedfrom, Exhibit A).

 

1.23         *“Reimbursement Rate”*means a per annum rate equal to thelesser of (a) the Maximum Rate (as defined in the Credit Agreement) and (b) theAdjusted Reference Rate (as defined in the Credit Agreement) in effect fromtime to time plus the Applicable Margin for Reference Rate Advances (as suchterms are defined in the Credit Agreement) in effect during an Event ofDefault.

 

1.24         Allother capitalized terms defined in the Credit Agreement which are used in thisMortgage and which are not otherwise defined herein shall have the meaningsassigned to such terms in the Credit Agreement. All meanings to defined terms, unless otherwise indicated, are to beequally applicable to both the singular and plural forms of the termsdefined.  Article, Section, Schedule, andExhibit references are to Articles and Sections of and Schedules andExhibits 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, andotherwise 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 thisMortgage as a whole and not to any particular

 

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provision of this Mortgage.  Asused 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 orextensions by the Credit Parties to Mortgagor of the funds or creditconstituting the Obligations (including the making of the Advances and theissuing of the Letters of Credit), and in further consideration of the mutualcovenants contained herein, Mortgagor, by this Mortgage does hereby GRANT,MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, AND ASSIGN with a general warrantyof title, for the uses, purposes and conditions hereinafter set forth all ofits right, title and interest in and to the Realty Collateral, the PersonaltyCollateral and the Fixture Collateral unto Mortgagee, its successors andassigns, with power of sale, to secure the payment and performance of theObligations for the benefit of Mortgagee and the ratable benefit of the CreditParties.

 

**Mortgagor further grants to Mortgagee, itssuccessors and assigns, the right and power to foreclose this Mortgage underthe Oklahoma Power of Sale Mortgage Foreclosure Act, 46. O.S. § 40 et seq.**

 

TO HAVE AND TO HOLD the Realty Collateral, the Personalty Collateraland Fixture Collateral unto the Mortgagee and its successors and assignsforever for the benefit of the Credit Parties, together with all and singularthe rights, hereditaments and appurtenances thereto in anywise appertaining orbelonging, to secure payment of the Obligations and the performance of thecovenants of Mortgagor contained in this Mortgage.  Mortgagor does hereby bind itself, itssuccessors and permitted assigns, to warrant and forever defend all andsingular the Realty Collateral, the Personalty Collateral and the FixtureCollateral unto the Mortgagee and its successors and assigns, against everyPerson whomsoever lawfully claiming or to claim the same, or any part thereof.

 

Subject, however, to the condition that none of the Mortgagee or theCredit Parties shall be liable in any respect for the performance of anycovenant or obligation of the Mortgagor in respect of the Collateral.  Any reference in Exhibit A to the nameof a well shall not be construed to limit the Collateral to the well bore ofsuch well or in the pro rata units.  Itis Mortgagor’s intention that this instrument cover Mortgagor’s entire interestin the lands, leases, units and other interests set forth in Exhibit A.

 

2.2           **Security Interest**.  For the same consideration and to furthersecure the Obligations, Mortgagor hereby grants to Mortgagee for its benefitand the ratable benefit of the other Credit Parties a security interest in andto the Collateral.

 

2.3           **Assignment of Liens and Security Interests**.  For the same consideration and to furthersecure the Obligations, Mortgagor hereby assigns and conveys to Mortgagee forits benefit and the benefit of the other Credit Parties any security interestsheld by Mortgagor arising

 

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under, and any liens granted to the Mortgagor pursuant to, Title 12A ofthe Oklahoma Statutes (as amended from time to time).

 

**ARTICLE III**

**Proceeds from Production**

 

3.1           **Assignmentof Production**.

 

(a)           In order to furthersecure the Obligations, Mortgagor has assigned, transferred, conveyed and deliveredand does hereby assign, transfer, convey and deliver unto Mortgagee, subject toPermitted Prior Liens, effective as of the Effective Date at 7:00 a.m.Dallas, Texas time / 5:00 a.m. Los Angeles, California time, allHydrocarbons produced from, and which are attributable to, Mortgagor’sinterest, now owned or hereafter acquired, in and to the Oil and GasProperties, or are allocated thereto pursuant to pooling or unitization orders,agreements or designations, and all proceeds therefrom.

 

(b)           Subject to theprovisions of subsection (f) below, all parties producing, purchasing,taking, possessing, processing or receiving any production from the Oil and GasProperties, or having in their possession any such production, or the proceedstherefrom, for which they or others are accountable to Mortgagee by virtue ofthe provisions of this Section 3.1, are authorized and directed byMortgagor to treat and regard Mortgagee as the assignee and transferee ofMortgagor and entitled in its place and stead to receive such Hydrocarbons andthe proceeds therefrom.

 

(c)           Mortgagor directs andinstructs each of such parties to pay to Mortgagee, for its benefit and theratable benefit of the other Credit Parties, all of the proceeds of suchHydrocarbons until such time as such party has been furnished evidence that allof the Obligations have been paid and that the Lien evidenced hereby has beenreleased; provided, however, that until Mortgagee shall have exercised therights as herein to instruct such parties to deliver such Hydrocarbons and allproceeds therefrom directly to Mortgagee, such parties shall be entitled todeliver such Hydrocarbons and all proceeds therefrom to Mortgagor for Mortgagor’suse and enjoyment, and Mortgagor shall be entitled to execute division orders,transfer orders and other instruments as may be required to direct all proceedsto Mortgagor without the necessity of joinder by Mortgagee in such divisionorders, transfer orders or other instruments. Mortgagor agrees to perform allsuch acts, and to execute all such further assignments, transfers and divisionorders, and other instruments as may be reasonably required or desired byMortgagee or any party in order to have said revenues and proceeds so paid toMortgagee.  None of such parties shallhave any responsibility for the application of any such proceeds received byMortgagee.  Subject to the provisions ofsubsection (f) below, Mortgagor authorizes Mortgagee to receive andcollect all proceeds of such Hydrocarbons.

 

(d)           Subject to theprovisions of subsection (f) below, Mortgagor will execute and deliver toMortgagee any instruments Mortgagee may from time to time reasonably requestfor the purpose of effectuating this assignment and the payment to Mortgagee ofthe proceeds assigned.

 

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(e)           Neitherthe foregoing assignment nor the exercise by Mortgagee of any of its rightsherein shall be deemed to make Mortgagee a “mortgagee-in-possession” orotherwise responsible or liable in any manner with respect to the Oil and GasProperties or the use, occupancy, enjoyment or operation of all or any portionthereof, unless and until Mortgagee, in person or by agent, assumes actualpossession thereof, nor shall appointment of a receiver for the Oil and Gas Propertiesby any court at the request of Mortgagee or by agreement with Mortgagor or theentering into possession of the Oil and Gas Properties or any part thereof bysuch receiver be deemed to make Mortgagee a “mortgagee-in-possession” orotherwise responsible or liable in any manner with respect to the Oil and GasProperties or the use, occupancy, enjoyment or operation of all or any portionthereof.

 

(f)            Notwithstandinganything to the contrary contained herein, so long as no Event of Default shallhave occurred and is continuing, Mortgagor shall have the right to collect allrevenues and proceeds attributable to the Hydrocarbons that accrue to the Oiland Gas Properties or the products obtained or processed therefrom, as well asany Liens and security interests securing any sales of said Hydrocarbons and toretain, use and enjoy same.

 

(g)           Mortgageemay endorse and cash any and all checks and drafts payable to the order ofMortgagor or Mortgagee for the account of Mortgagor, received from or inconnection with the proceeds of the Hydrocarbons affected hereby, and the samemay be applied as provided herein. Mortgagee may execute any transfer or division orders in the name ofMortgagor or otherwise, with warranties and indemnities binding on Mortgagor;provided that Mortgagee shall not be held liable to Mortgagor for, nor berequired to verify the accuracy of, Mortgagor’s interests as representedtherein.

 

(h)           Mortgageeshall have the right at Mortgagee’s election and in the name of Mortgagor, orotherwise, to prosecute and defend any and all actions or legal proceedingsdeemed advisable by Mortgagee in order to collect such proceeds and to protectthe interests of Mortgagee or Mortgagor, with all costs, expenses and attorneysfees incurred in connection therewith being paid by Mortgagor.  In addition, should any purchaser takingproduction from the Oil and Gas Properties fail to pay promptly to Mortgagee inaccordance with this Article, Mortgagee shall have the right to demand a changeof connection and to designate another purchaser with whom a new connection maybe 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 ofMortgagor to consent to such change of connection, the entire amount of all theObligations may, at the option of Mortgagee, be immediately declared to be dueand payable and subject to foreclosure hereunder.

 

(i)            Withoutin any way limiting the effectiveness of the foregoing provisions, if Mortgagorreceives any proceeds which under this Section 3.1 are payable toMortgagee, Mortgagor shall hold the same in trust and remit such proceeds, orcause them to be remitted, immediately, to Mortgagee.

 

3.2           **Applicationof Proceeds**.  All paymentsreceived by Mortgagee pursuant to this Article III attributable to theinterest of Mortgagor in and to the Hydrocarbons shall be applied in the orderset forth in Section 7.06 of the Credit Agreement.

 

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3.3           **Mortgagor’sPayment Duties**.  Except asprovided in Section 7.16 hereof, nothing contained herein will limitMortgagor’s absolute duty to make payment of the Obligations regardless ofwhether the proceeds assigned by this Article III are sufficient to paythe same, and the receipt by Mortgagee of proceeds from Hydrocarbons under thisMortgage will be in addition to all other security now or hereafter existing tosecure payment of the Obligations.

 

3.4           **Liabilityof Mortgagee**.  Mortgageeis hereby absolved from all liability for failure to enforce collection of anyof such proceeds, and from all other responsibility in connection therewithexcept the responsibility to account to Mortgagor for proceeds actuallyreceived by Mortgagee.

 

3.5           **Actionsto Effect Assignment**.  Subjectto the provisions of Section 3.1(f), Mortgagor covenants to cause alloperators, pipeline companies, production purchasers and other remitters ofsaid proceeds to pay promptly to Mortgagee the proceeds from such Hydrocarbonsin accordance with the terms of this Mortgage, and to execute, acknowledge anddeliver to said remitters such division orders, transfer orders, certificatesand other documents as may be necessary, requested or proper to effect theintent of this assignment; and Mortgagee shall not be required at any time, asa condition to its right to obtain the proceeds of such Hydrocarbons, towarrant its title thereto or to make any guaranty whatsoever.  In addition, Mortgagor covenants to provideto Mortgagee the name and address of every such remitter of proceeds from suchHydrocarbons, together with a copy of the applicable division orders, transferorders, sales contracts and governing instruments.  All expenses incurred by the Mortgagee in thecollection of said proceeds shall be repaid promptly by Mortgagor; and prior tosuch repayment, such expenses shall be a part of the Obligations securedhereby.  If under any existing Contractsfor the sale of Hydrocarbons, other than division orders or transfer orders,any proceeds of Hydrocarbons are required to be paid by the remitter direct toMortgagor so that under such existing agreements payment cannot be made of suchproceeds to Mortgagee in the absence of foreclosure, Mortgagor’s interest inall proceeds of Hydrocarbons under such existing Contracts shall, when receivedby Mortgagor, constitute trust funds in Mortgagor’s hands and shall beimmediately paid over to Mortgagee.

 

3.6           **Power ofAttorney**.  Withoutlimitation upon any of the foregoing, Mortgagor hereby designates and appointsMortgagee as true and lawful agent and attorney-in-fact (with full power ofsubstitution, either generally or for such periods or purposes as Mortgagee mayfrom time to time prescribe), with full power and authority, for and on behalfof and in the name of Mortgagor, to execute, acknowledge and deliver all suchdivision orders, transfer orders, certificates and other documents of everynature, with such provisions as may from time to time, in the opinion ofMortgagee, be necessary or proper to effect the intent and purpose of theassignment contained in this Article III; and Mortgagor shall be boundthereby as fully and effectively as if Mortgagor had personally executed,acknowledged and delivered any of the foregoing orders, certificates ordocuments.  The powers and authoritiesherein conferred on Mortgagee may be exercised by Mortgagee through any personwho, at the time of exercise, is the president, a senior vice president or avice president of Mortgagee.  **The power of attorney conferred by this Section 3.6is granted for valuable consideration and coupled with an**

 

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**interest and is irrevocable until all of theObligations have been fully and finally paid and discharged in full, all HedgeContracts with Credit Parties have been terminated or unwound, all Commitmentshave been terminated or expired, all Letters of Credit have terminated orexpired, and all obligations of the Issuing Lender and the Lenders in respectof Letters of Credit have been terminated.**  All persons dealing with Mortgagee, or anysubstitute, shall be fully protected in treating the powers and authoritiesconferred by this Section 3.6 as continuing in full force and effect untiladvised by Mortgagee that the Obligations are fully and finally paid and theLiens granted hereunder have been released.

 

**3.7****          INDEMNIFICATION.  MORTGAGOR AGREES TO INDEMNIFY MORTGAGEE ANDTHE 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 OROTHER 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 ASA CONSEQUENCE OF THE ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OFTHE OBLIGATIONS THAT ANY OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS ORPROCEEDS PURSUANT TO THIS MORTGAGE OR PURSUANT TO ANY RIGHT TO COLLECT PROCEEDSDIRECTLY FROM ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE INDEMNIFIED PARTIES WILL HAVE THE RIGHTTO EMPLOY ATTORNEYS AND TO DEFEND AGAINST ANY SUCH CLAIMS AND UNLESS FURNISHEDWITH REASONABLE INDEMNITY, THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO PAYOR COMPROMISE AND ADJUST ALL SUCH CLAIMS. MORTGAGOR WILL INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCHAMOUNTS AS MAY BE PAID IN RESPECT THEREOF, OR AS MAY BE SUCCESSFULLYADJUDICATED AGAINST ANY OF THE INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION SHALLAPPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’SOWN NEGLIGENCE BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED BY REASON OFTHE PERSON BEING INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT**.  **THE LIABILITIES OFMORTGAGOR AS SET FORTH IN THIS SECTION 3.7 SHALL SURVIVE THE TERMINATIONOF THIS MORTGAGE.**

 

**ARTICLE IV**

**Mortgagor’s Warranties and Covenants**

 

4.1           **Paymentof Obligations**.  Mortgagorcovenants that Mortgagor shall timely pay and perform the Obligations securedby this Mortgage.

 

4.2           **Representationsand Warranties**.  Mortgagorrepresents and warrants as follows:

 

(a)           *Incorporation of Representations and Warranties from the CreditAgreement*.  Therepresentations and warranties applicable to the Mortgagor and to itsProperties contained in Article IV of the Credit Agreement are herebyconfirmed and restated, each such representation and warranty, together withall related definitions and ancillary provisions, being

 

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hereby incorporated into this Mortgage by reference as thoughspecifically set forth in this Section.

 

(b)           *Title to Collateral*. Mortgagor has good and marketable title to the Collateral as iscustomary in the oil and gas industry in all material respects and free fromall Liens, security interests or other encumbrances except as permitted by theprovisions of Section 4.4(i) below. The descriptions set forth in Exhibit A of the quantum and natureof the interests of Mortgagor in and to the Oil and Gas Properties include theentire interests of Mortgagor in the Oil and Gas Properties and are completeand accurate in all material respects. There are no “back-in” or “reversionary” interests held by third partieswhich could reduce the interests of Mortgagor in the Oil and Gas Propertiesexcept as set forth on Exhibit A. No operating or other agreement to which Mortgagor is a party or bywhich Mortgagor is bound affecting any part of the Collateral requiresMortgagor to bear any of the costs relating to the Collateral greater than theleasehold interest of Mortgagor in such portion of the Collateral, except inthe event Mortgagor is obligated under an operating agreement to assume a portionof a defaulting party’s share of costs.

 

(c)           *Status of Leases, Term Mineral Interests and Contracts*.  All of the leases and term mineral interestsin the Oil and Gas Properties are valid, subsisting and in full force andeffect, and Mortgagor has no knowledge that a default exists under any of theterms or provisions, express or implied, of any of such leases or interests orunder any agreement to which the same are subject.  All of the Contracts and obligations ofMortgagor that relate to the Oil and Gas Properties are in full force andeffect and constitute legal, valid and binding obligations of Mortgagor.  Neither Mortgagor nor, to the knowledge ofMortgagor, any other party to any leases or term mineral interests in the Oiland Gas Properties or any Contract (A) is in breach of or default, or withthe lapse of time or the giving of notice, or both, would be in breach ordefault, with respect to any obligations thereunder, whether express orimplied, or (B) has given or threatened to give notice of any defaultunder or inquiry into any possible default under, or action to alter,terminate, rescind or procure a judicial reformation of, any lease in the Oiland 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 the Oil andGas Properties have been properly and timely paid, except for payments held insuspense in the ordinary course of business or remitted to state agenciesresponsible for handling unclaimed property. All taxes have been properly and timely paid except to the extent suchtaxes are being contested in good faith and for which reserves in accordancewith GAAP have been made as reflected in the Financial Statements.  All expenses payable under the terms of theContracts have been properly and timely paid except for such expenses beingcontested in good faith by appropriate proceedings, and for which reservesshall have been made therefore and except for such expenses as are beingcurrently paid prior to delinquency in the ordinary course of business.  Except for Mortgagor’s interests in certainOil and Gas Properties, which Mortgagor represents do not constitute a materialportion (with 2% or more being deemed material) of the value of the Collateraland all other Properties of Mortgagor securing the Obligations, all of theproceeds from the sale of Hydrocarbons produced from the Realty Collateral arebeing properly and timely paid to Mortgagor by the purchasers or otherremitters of production proceeds without

 

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suspense.  Mortgagor’s ownershipof the Hydrocarbons and the undivided interests therein as specified onattached Exhibit A will, after giving full effect to all Liens permittedhereby and after giving full effect to the agreements or instruments set forthon Exhibit A and any other instruments or agreements affecting Mortgagor’sownership of the Hydrocarbons, afford Mortgagor not less than those netinterests (expressed as a fraction, percentage or decimal) in the productionfrom or which is allocated to such Hydrocarbons specified as net revenueinterest on attached Exhibit A and will cause Mortgagor to bear not morethan that portion (expressed as a fraction, percentage or decimal), specifiedas working interest on attached Exhibit A, of the costs of drilling,developing and operating the wells identified on Exhibit A.

 

(e)           *Pricing*.  The pricesbeing received for the production of Hydrocarbons do not violate any Contractor any law or regulation.  Whereapplicable, all of the wells located on the Oil and Gas Properties andproduction of Hydrocarbons therefrom have been properly classified under appropriategovernmental regulations.

 

(f)            *Gas Regulatory Matters*. Mortgagor has filed with the appropriate state and federal agencies allnecessary rate and collection filings and all necessary applications for welldeterminations under the Natural Gas Act of 1938, as amended, the Natural GasPolicy Act of 1978, as amended, and the rules and regulations of theFederal Energy Regulatory Commission (the “FERC”) thereunder, and eachsuch application has been approved by or is pending before the appropriatestate or federal agency.

 

(g)           *Production Balances*. Except as set forth below or permitted by the Credit Agreement, none ofthe purchasers under any production sales contracts are entitled to “make-up”or otherwise receive deliveries of Hydrocarbons at any time after the datehereof without paying at such time the full contract price therefor.  Except as set forth below, no person isentitled to receive any portion of the interest of Mortgagor in anyHydrocarbons or to receive cash or other payments to “balance” anydisproportionate allocation of Hydrocarbons under any operating agreement, gasbalancing and storage agreement, gas processing or dehydration agreement, orother similar agreements.  Mortgagorbelieves that certain third parties may be entitled to receive “make-up”deliveries of Hydrocarbons or cash or other payments to “balance” adisproportionate allocation of Hydrocarbons produced from certain Oil and GasProperties; provided, however, Mortgagor represents and warrants that suchdeliveries or payments are not material (with 2% or more being deemed material)in aggregate amount when compared to the value of the Collateral and all otherProperties of Mortgagor securing the Obligations.

 

(h)           *Drilling Obligations*. There are no obligations under any Oil and Gas Property or Contractwhich require the drilling of additional wells or operations to earn or tocontinue to hold any of the Oil and Gas Properties in force and effect, exceptfor oil and gas leases that are still within their primary term (each of whichwill require drilling operations to perpetuate it beyond its primary term) andthe standard provision in certain oil and gas leases that requires eitherproduction or operations to perpetuate each respective lease after theexpiration of its primary term.

 

(i)            *Compliance With Laws*. All wells on or attributable to the Oil and Gas Properties have beendrilled, completed and operated, and all production therefrom has been

 

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accounted for and paid to the persons entitled thereto, in compliancein all material respects with all applicable federal, state and local laws andapplicable rules and regulations of the federal, state and localregulatory authorities having jurisdiction thereof.

 

(j)            *Regulatory Filings and Compliance*.  All necessary regulatory filings have beenproperly made, and all regulatory (including Environmental) processes have beencomplied with, in connection with the drilling, completion and operation of thewells on or attributable to the Oil and Gas Properties, and the issuance of allrights of way and other surface uses necessary for the exploration, developmentand transportation to and from such wells, and all other operations relatedthereto.

 

(k)           *Allowables*.  Allproduction and sales of Hydrocarbons produced or sold from the Oil and GasProperties have been made in accordance with any applicable allowables (pluspermitted tolerances) imposed by any Governmental Authorities.

 

(l)            *Refund Obligations*. Mortgagor has not collected any proceeds from the sale of Hydrocarbonsproduced from the Oil and Gas Properties which are subject to any refundobligation.

 

(m)          Theaddress of Mortgagor’s place of business, residence, chief executive office andoffice where Mortgagor keeps its records concerning accounts, contract rightsand general intangibles is as set forth in Section 7.12, and there hasbeen 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 ofMortgagor’s name during the four months immediately preceding the EffectiveDate.  Mortgagor hereby represents andwarrants that its organizational number is 3664494, the state of its formationis Delaware and the correct spelling of Mortgagor’s name is as set forth in itssignature block below.

 

4.3           **Further Assurances**.

 

(a)           Mortgagorcovenants that Mortgagor shall execute and deliver such other and furtherinstruments, and shall do such other and further acts as in the opinion ofMortgagee may be necessary or desirable to carry out more effectively thepurposes of this Mortgage, including without limiting the generality of theforegoing, (i) prompt correction of any defect in the execution oracknowledgment of this Mortgage, any written instrument comprising part or allof the Obligations, or any other document used in connection herewith; (ii) promptcorrection of any defect which may hereafter be discovered in the title to theCollateral; (iii) prompt execution and delivery of all division ortransfer orders or other instruments which in Mortgagee’s opinion are requiredto transfer to Mortgagee, for its benefit and the ratable benefit of the otherCredit Parties, the assigned proceeds from the sale of Hydrocarbons from theOil and Gas Properties; and (iv) prompt payment when due and owing of alltaxes, assessments and governmental charges imposed on this Mortgage, upon theinterest of Mortgagee or upon the income and profits from any of the above.

 

(b)           Mortgagorcovenants that Mortgagor shall maintain and preserve the Lien and securityinterest herein created as an Acceptable Security Interest until all of theObligations

 

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have been fully and finally paid and discharged in full, all HedgeContracts with Credit Parties have been terminated or unwound, all Commitmentshave been terminated or expired, all Letters of Credit have terminated orexpired, and all obligations of the Issuing Lender and the Lenders in respectof Letters of Credit have been terminated.

 

(c)           Mortgagorshall immediately notify Mortgagee of any discontinuance of or change in theaddress of Mortgagor’s place of business, residence, chief executive office oroffice where it keeps records concerning accounts, contract rights and generalintangibles.

 

4.4           **Operationof Oil and Gas Properties**. Until all of the Obligations have been fully and finally paid anddischarged in full, all Hedge Contracts with Credit Parties have beenterminated or unwound, all Commitments have been terminated or expired, all Lettersof Credit have terminated or expired, and all obligations of the Issuing Lenderand the Lenders in respect of Letters of Credit have been terminated, Mortgagorshall (at Mortgagor’s own expense):

 

(a)           notenter into any operating agreement, contract or agreement which materiallyadversely affects the Collateral;

 

(b)           doall things necessary and within the reasonable control of Mortgagor to keep, orcause to be kept, in full force and effect the Oil and Gas Properties andMortgagor’s interests therein;

 

(c)           neitherabandon, forfeit, surrender, release, sell, assign, sublease, farmout orconvey, nor agree to sell, assign, sublease, farmout or convey, nor mortgage orgrant security interests in, nor otherwise dispose of or encumber any of theCollateral or any interest therein, except as permitted by the CreditAgreement;

 

(d)           operatethe Oil and Gas Properties or, to the extent that the right of operation isvested in others, will exercise its best efforts to cause the operator tooperate the Oil and Gas Properties, in each case in such a manner as to causethe Collateral to be maintained, developed and protected against drainage andcontinuously operated for the production and marketing of Hydrocarbons in agood and workmanlike manner as a prudent operator would in accordance with (i) generallyaccepted practices, (ii) applicable oil and gas leases and Contracts, and (iii) allapplicable Federal, state and local laws, rules and regulations;

 

(e)           promptlypay or cause to be paid when due and owing (i) all rentals and royaltiespayable in respect of the Collateral; (ii) all expenses incurred in orarising from the operation or development of the Collateral; (iii) alltaxes, assessments and governmental charges imposed upon the Collateral, uponthe income and profits from any of the Collateral, or upon Mortgagee because ofits interest therein; and (iv) all local, state and federal taxes,payments and contributions for which Mortgagor may be liable except to theextent disputed as permitted under the Credit Agreement; and indemnify Mortgageefrom all liability in connection with any of the foregoing;

 

(f)            promptlytake all action necessary to enforce or secure the observance or performance ofany term, covenant, agreement or condition to be observed or performed by third

 

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parties under any Contract, or any part thereof, or to exercise any ofits rights, remedies, powers and privileges under any Contract, all inaccordance with the respective terms thereof;

 

(g)           otherthan as otherwise permitted under the terms of the Credit Agreement, cause theOperating Equipment and the Fixture Operating Equipment to be kept in good andeffective operating condition, ordinary wear and tear excepted, and cause to bemade all repairs, renewals, replacements, additions and improvements thereof orthereto, necessary or appropriate in connection with the production ofHydrocarbons from the Oil and Gas Properties;

 

(h)           permitand do all things necessary or proper to enable the Mortgagee (through any oftheir respective agents and employees) to enter upon the Oil and Gas Propertiesfor the purpose of investigating and inspecting the condition and operations ofthe Collateral in accordance with the terms of the Credit Agreement;

 

(i)            causethe Collateral to be kept free and clear of Liens, charges, security interestsand encumbrances of every character other than (i) the Liens and securityinterests created and assigned by this Mortgage and (ii) the PermittedLiens;

 

(j)            carryand maintain the insurance required by the Credit Agreement;

 

(k)           furnishto Mortgagee, upon request, copies of any Contracts; and

 

(l)            promptlyperform all covenants express or implied in any Contract.

 

4.5           **Recording**.  Mortgagor shall promptly (at Mortgagor’s ownexpense) record, register, deposit and file this Mortgage and every otherinstrument in addition or supplement hereto, including applicable financingstatements, in such offices and places within the state where the Collateral islocated and in the state where the Mortgagor is registered as a limitedliability company and at such times and as often as may be necessary topreserve, protect and renew the Lien and security interest herein created as anAcceptable Security Interest on real or personal property as the case may be,and otherwise shall do and perform all matters or things necessary or expedientto be done or observed by reason of any Legal Requirement for the purpose ofeffectively creating, perfecting, maintaining and preserving the Lien andsecurity interest created hereby in and on the Collateral.

 

4.6           **Records, Statements and Reports**.Mortgagor shall keep proper books of record and account in which complete andcorrect entries shall be made of Mortgagor’s transactions in accordance withthe method of accounting required in the Credit Agreement and shall furnish orcause to be furnished to Mortgagee the reports required to be deliveredpursuant to the terms of the Credit Agreement.

 

4.7           **Insurance**.  To the extent that insurance is carried by athird-party operator on behalf of Mortgagor, upon request by Mortgagee,Mortgagor shall obtain and provide Mortgagee with copies of certificates ofinsurance showing Mortgagor as a named insured. Mortgagor hereby assigns to Mortgagee for its benefit and the benefit ofthe other Credit Parties any and all monies that may become payable under anysuch policies of insurance by reason of damage, loss

 

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or destruction of any of the Collateral and Mortgagee may receive suchmonies 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 dueand payable, in such manner as Mortgagee may elect. Any insurance proceedsreceived by Mortgagor shall be held in trust for the benefit of Mortgagee,shall be segregated from other funds of Mortgagor and shall be forthwith paidover to Mortgagee.

 

**ARTICLE V**

**Default**

 

5.1           **Events ofDefault**.  An Event ofDefault under the terms of the Credit Agreement shall constitute an “Event ofDefault” under this Mortgage.

 

5.2           **AccelerationUpon Default**.  Upon theoccurrence and during the continuance of any Event of Default, Mortgagee may(or shall at the request of the Majority Lenders), declare the entire unpaidprincipal of, and the interest accrued on, and all other amounts owed inconnection with, the Obligations to be forthwith due and payable, whereupon thesame shall become immediately due and payable without any protest, presentment,demand, notice of intent to accelerate, notice of acceleration or furthernotice of any kind, all of which are hereby expressly waived by Mortgagor.  Whether or not Mortgagee or the MajorityLenders elect to accelerate as herein provided, Mortgagee may simultaneously,or thereafter, without any further notice to Mortgagor, exercise any otherright or remedy provided in this Mortgage or otherwise existing under theCredit Agreement or any other Loan Documents or any other agreement, document,or instrument evidencing obligations owing from the Mortgagor to any of theCredit 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 thecontinuance of an Event of Default, and in addition to all other rights ofMortgagee, Mortgagee shall have the following rights and powers (but noobligation):

 

(i)   To enter upon and takepossession of any of the Realty Collateral and exclude Mortgagor therefrom;

 

(ii)  To hold, use, administer, manage and operate the RealtyCollateral to the extent that Mortgagor could do so, and without any liabilityto 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 RealtyCollateral, to make repairs, to purchase machinery and equipment, to conductworkover operations, to drill additional wells,

 

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and to exercise every power, right and privilege of Mortgagor withrespect to the Realty Collateral.

 

Mortgagee may designate any person, firm, corporation or other entityto act on its behalf in exercising the foregoing rights and powers.  When and if the expenses of such operationand development (including costs of unsuccessful workover operations oradditional wells) have been paid, all of the Obligations have been fully andfinally paid and discharged in full, all Hedge Contracts with Credit Partieshave been terminated or unwound, all Commitments have been terminated orexpired, all Letters of Credit have terminated or expired, and all obligationsof the Issuing Lender and the Lenders in respect of Letters of Credit have beenterminated, the Realty Collateral shall be returned to Mortgagor (providingthere 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 salehereafter given, may proceed by a suit or suits, in equity or at law (i) forthe specific performance of any covenant or agreement herein contained or inaid of the execution of any power herein granted, (ii) for the appointmentof a receiver whether there is then pending any foreclosure hereunder or thesale of the Realty Collateral, or (iii) for the enforcement of any otherappropriate legal or equitable remedy. Furthermore, if an action is filed to foreclose this Mortgage, or ifMortgagee seeks to foreclose this Mortgage by power of sale under the OklahomaPower of Sale Mortgage Foreclosure Act, Mortgagee shall be entitled to theimmediate appointment of a receiver pursuant to 12 O.S. §1551(2)(c) withoutthe necessity of further proof.

 

(c)           *Intentionally omitted*.

 

(d)           *Certain Aspects of Sale*. Mortgagee will have the right to become the purchaser at any foreclosuresale and to credit the then outstanding balance of the Obligations against theamount payable by Mortgagee as purchaser at such sale.  Statements of fact or other recitalscontained in any conveyance to any purchaser or purchasers at any sale madehereunder will conclusively establish the occurrence of an Event of Default,any acceleration of the maturity of the Obligations, the advertisement andconduct of such sale in the manner provided herein and the truth and accuracyof all other matters stated therein. Mortgagor does hereby ratify and confirm all legal acts that theMortgagee may do in carrying out the Mortgagee’s duties and obligations underthis Mortgage, and Mortgagor hereby irrevocably appoints Mortgagee to be theattorney-in-fact of Mortgagor and in the name and on behalf of Mortgagor toexecute and deliver any deeds, transfers, conveyances, assignments, assurancesand notices which Mortgagor ought to execute and deliver and do and perform anyand all such acts and things which Mortgagor ought to do and perform under thecovenants herein contained and generally to use the name of Mortgagor in the exerciseof all or any of the powers hereby conferred on Mortgagee.  Upon any sale, whether under the power ofsale hereby given or by virtue of judicial proceedings, it shall not benecessary for Mortgagee or any public officer acting under execution or by orderof court, to have physically present or constructively in his possession any ofthe Collateral, and Mortgagor hereby agrees to deliver to the purchaser orpurchasers at such sale on the date of sale the Collateral purchased by suchpurchasers at such sale and if it should be impossible or impracticable to makeactual delivery of such Collateral, then the title and right of

 

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possession to such Collateral shall pass to the purchaser or purchasersat such sale as completely as if the same had been actually present anddelivered.

 

(e)           *Effect of Sale*.  Anysale 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 Mortgagorin and to the premises and the Realty Collateral sold, and will be a perpetualbar, both at law and in equity, against Mortgagor, Mortgagor’s successors orassigns, and against any and all persons claiming or who shall thereafter claimall or any of the Realty Collateral sold by, through or under Mortgagor, orMortgagor’s successors or assigns. Nevertheless, if requested by the Mortgagee so to do, Mortgagor shalljoin in the execution and delivery of all proper conveyances, assignments andtransfers of the Property so sold.  Thepurchaser or purchasers at the foreclosure sale will receive as incident tohis, her, its or their own ownership, immediate possession of the RealtyCollateral purchased and Mortgagor agrees that if Mortgagor retains possessionof the Realty Collateral or any part thereof subsequent to such sale, Mortgagorwill be considered a tenant at sufferance of the purchaser or purchasers andwill be subject to eviction and removal by any lawful means, with or withoutjudicial intervention, and all damages by reason thereof are hereby expresslywaived by Mortgagor.

 

(f)            *Provisions with Respect tothe Power of Sale*. Notwithstanding any other provisions in this Mortgage, if Mortgageesells the Collateral under the power of sale granted by this Mortgage, thefollowing provisions shall apply:

 

(i)            Thenotices described in Title 46 Okla. Stat. Sec. 40 and following, as amended(the “Act”), shall be given as and when required therein;

 

(ii)           Allnotices which are required to be given Mortgagor under the Act may be given toMortgagor at the address which is set forth in the first paragraph of thisMortgage, or if such address has been changed pursuant to this Mortgage, tothat changed address;

 

(iii)          Mortgageemay purchase part or all of the Collateral at any such sale;

 

(iv)          Mortgagorstipulates the total amounts owing under this Mortgage will have benefitedMortgagor substantially and are not unconscionable in amount, and therefore thetotal amount of the Obligations, less the fair market value of the Collateralsold under such Act, and any prior indebtedness, shall be available as adeficiency judgment against Mortgagor;

 

(v)           Thepurchaser under such sale may seek and obtain a writ of assistance byapplication to the District Court in the county in Oklahoma in which any partof the Realty Collateral is located, or the United States District Court havingvenue for actions arising in such county;

 

(vi)          Mortgageemay, at its option, proceed with foreclosure under judicial proceedings insteadof exercising the rights of this Power of Sale;

 

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(vii)         Allother procedures and requirements of such Act shall be followed;

 

(viii)        Afterthe completion of the sale as contemplated by such Act, the purchaser shallhave 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 ofany person with a priority which is subordinate to the lien of this Mortgage,except any right which may be reserved under such Act;

 

(ix)           Anyrecitation in any notice, publication thereof, recordation thereof, or deed, ofthe existence of an event of default, giving, publication, service andrecordation of notice, occurrence of the sale at the time and place set forthin 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 investigatethe truthfulness or accuracy of any such recitation; and

 

(x)            Theproceeds 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 applicationof proceeds conflicts with the requirements of such Act, the proceeds shall beapplied 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 ofjudicial proceedings, shall either be, at the option of Mortgagee, applied atthe time of receipt, or held by Mortgagee in the Collateral Account asadditional Collateral, and in either case, applied in the order set forth in Section 7.06of the Credit Agreement.

 

(h)           *Appraisement and Marshalling*.  Mortgagor agrees, to the full extent thatMortgagor may lawfully so agree, that Mortgagor will not at any time insistupon or plead or in any manner whatever claim the benefit of any appraisement,valuation, stay, extension or redemption law, now or hereafter in force, inorder to prevent or hinder the enforcement or foreclosure of this Mortgage, theabsolute sale of the Collateral, including the Realty Collateral, or thepossession thereof by any purchaser at any sale made pursuant to this Mortgageor pursuant to the decree of any court of competent jurisdiction.  Mortgagee hereby waives or does not waiveappraisement, such election to be made at or before entry of judgment in anyaction to foreclose this Mortgage, and Mortgagor, for Mortgagor and all who mayclaim through or under Mortgagor, hereby waives, to the extent that Mortgagormay lawfully do so under any applicable law, any and all rights to have the Collateral,including the Realty Collateral, marshaled upon any foreclosure of the Lienhereof or sold in inverse order of alienation. Mortgagor agrees that, in the event of a judicial foreclosure or a saleunder the power of sale provisions of this Mortgage, the Collateral, includingthe Realty Collateral, may be sold in part, in parcels or as an entirety asdirected by Mortgagee.

 

6.2           **Rights toPersonalty Collateral Upon Default**.  Upon the occurrence of an Event of Default,or at any time thereafter, Mortgagee may proceed against the PersonaltyCollateral in accordance with the rights and remedies granted herein withrespect to the Realty

 

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Collateral, or will have all rights and remedies granted by the UniformCommercial Code as in effect in Oklahoma and this Mortgage.  Mortgagee shall have the right to takepossession of the Personalty Collateral, and for this purpose Mortgagee mayenter upon any premises on which any or all of the Personalty Collateral issituated and, to the extent that Mortgagor could do so, take possession of andoperate the Personalty Collateral or remove it therefrom.  Mortgagee may require Mortgagor to assemblethe Personalty Collateral and make it available to Mortgagee at a place to bedesignated by Mortgagee which is reasonably convenient to both parties.  Unless the Personalty Collateral isperishable or threatens to decline speedily in value or is of a typecustomarily sold on a recognized market, Mortgagee will send Mortgagorreasonable notice of the time and place of any public sale or of the time afterwhich any private sale or other disposition of the Personalty Collateral is tobe made.  This requirement of sendingreasonable notice will be met if such notice is mailed, postage prepaid, toMortgagor at the address designated in Section 7.12 hereof (or such otheraddress as has been designated as provided herein) at least ten days before thetime of the sale or disposition.  Inaddition to the expenses of retaking, holding, preparing for sale, selling andthe like, Mortgagee will be entitled to recover attorney’s fees and legalexpenses as provided for in this Mortgage and in the writings evidencing theObligations before applying the balance of the proceeds from the sale or otherdisposition toward satisfaction of the Obligations.  Mortgagor will remain liable for anydeficiency 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 Collateralas either Realty Collateral or as Personalty Collateral (but not both) andproceed to exercise such rights as apply to the type of Collateral selected.

 

6.4           **Account Debtors**.  Mortgagee may, in its discretion, after theoccurrence and during the continuance of an Event of Default, notify anyaccount debtor to make payments directly to Mortgagee and contact accountdebtors directly to verify information furnished by Mortgagor.  Mortgagee shall not have any obligation topreserve any rights against prior parties.

 

6.5           **Costs and Expenses**.  All sums advanced or costs or expensesincurred by Mortgagee (either by it directly or on its behalf by any receiverappointed hereunder) in protecting and enforcing its rights hereunder shallconstitute a demand obligation owing by Mortgagor to Mortgagee as part of theObligations.  Mortgagor hereby agrees torepay such sums on demand plus interest thereon from the date of the advance orincurrence until reimbursement of Mortgagee at the Reimbursement Rate.

 

6.6           **Set-Off**.  Upon the occurrence and during thecontinuance of any Event of Default, Mortgagee shall have the right to set-offany funds of Mortgagor in the possession of Mortgagee against any amounts thendue by Mortgagor to Mortgagee pursuant to this Mortgage.

 

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**ARTICLEVII**

**Miscellaneous**

 

7.1           **Advancesby Mortgagee**.  Each andevery covenant of Mortgagor herein contained shall be performed and kept by Mortgagorsolely at Mortgagor’s expense.  IfMortgagor fails to perform or keep any of the covenants of whatsoever kind ornature contained in this Mortgage, Mortgagee (either by it directly or on itsbehalf by any receiver appointed hereunder) may, but will not be obligated to,make advances to perform the same on Mortgagor’s behalf, and Mortgagor herebyagrees to repay such sums and any attorneys’ fees incurred in connectiontherewith on demand plus interest thereon from the date of the advance untilreimbursement of Mortgagee at the Reimbursement Rate.  In addition, Mortgagor hereby agrees to repayon demand any costs, expenses and attorney’s fees incurred by Mortgagee whichare to be obligations of Mortgagor pursuant to, or allowed by, the terms ofthis Mortgage, including such costs, expenses and attorney’s fees incurredpursuant to Section 3.1(h), Section 6.5 or Section 7.2 hereof,plus interest thereon from the date of the advance by Mortgagee untilreimbursement of Mortgagee at the Reimbursement Rate.  Such amounts will be in addition to any sum ofmoney which may, pursuant to the terms and conditions of the writteninstruments comprising part of the Obligations, be due and owing.  No such advance will be deemed to relieveMortgagor from any default hereunder.

 

7.2           **Defenseof Claims**.  Mortgagorshall promptly notify Mortgagee in writing of the commencement of any legalproceedings affecting Mortgagor’s title to the Collateral or Mortgagee’s Lienor security interest in the Collateral, or any part thereof, and shall takesuch action, employing attorneys agreeable to Mortgagee, as may be necessary topreserve Mortgagor’s and Mortgagee’s rights affected thereby.  If Mortgagor fails or refuses to adequatelyor vigorously, in the sole judgment of Mortgagee, defend Mortgagor’s orMortgagee’s rights to the Collateral, the Mortgagee may take such action onbehalf of and in the name of Mortgagor and at Mortgagor’s expense.  Moreover, Mortgagee may take such independentaction in connection therewith as it may in its discretion deem proper,including the right to employ independent counsel and to intervene in any suitaffecting the Collateral.  All costs,expenses and attorneys’ fees incurred by Mortgagee pursuant to this Section 7.2or in connection with the defense by Mortgagee of any claims, demands orlitigation relating to Mortgagor, the Collateral or the transactionscontemplated in this Mortgage shall be paid by Mortgagor on demand plusinterest thereon from the date of such demand by Mortgagee until reimbursementof Mortgagee at the Reimbursement Rate.

 

7.3           **Termination**.  If all of the Obligations have been fully andfinally paid and discharged in full, all Hedge Contracts with Credit Partieshave been terminated or unwound, all Commitments have been terminated orexpired, all Letters of Credit have terminated or expired, and all obligationsof the Issuing Lender and the Lenders in respect of Letters of Credit have beenterminated, then all of the Collateral (to the extent not sold, assigned orotherwise transferred as permitted herein or under applicable law) will revertto Mortgagor and the entire estate, right, title and interest of the Mortgageewill thereupon cease; and Mortgagee in such case shall, upon the request ofMortgagor and the payment by Mortgagor of all attorneys’ fees and otherexpenses, deliver to Mortgagor proper instruments acknowledging satisfaction ofthis Mortgage.

 

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7.4           **Renewals,Amendments and Other Security**. Without notice or consent of Mortgagor, renewals and extensions of thewritten instruments constituting part or all of the Obligations may be given atany time and amendments may be made to agreements relating to any part of suchwritten instruments or the Collateral. Mortgagee may take or hold other security for the Obligations withoutnotice to or consent of Mortgagor.  Theacceptance of this Mortgage by Mortgagee shall not waive or impair any othersecurity Mortgagee may have or hereafter acquire to secure the payment of theObligations nor shall the taking of any such additional security waive orimpair the Lien and security interests herein granted.  The Mortgagee may resort first to such othersecurity or any part thereof, or first to the security herein given or any partthereof, or from time to time to either or both, even to the partial orcomplete abandonment of either security, and such action will not be a waiverof any rights conferred by this Mortgage. This Mortgage may not be amended, waived or modified except in a writteninstrument executed by both Mortgagor and Mortgagee (acting upon the writtendirection of the Majority Lenders or all Lenders, as applicable).

 

7.5           **SecurityAgreement, Financing Statement and Fixture Filing**.  This Mortgage will be deemed to be and may beenforced from time to time as an assignment, chattel mortgage, contract, deedof trust, financing statement, real estate mortgage, or security agreement, andfrom time to time as any one or more thereof if appropriate under applicablestate law.  As a financing statement,this Mortgage is intended to cover all Personalty Collateral includingMortgagor’s interest in all Hydrocarbons as and after they are extracted andall accounts arising from the sale thereof at the wellhead.  **THIS MORTGAGE SHALL BEEFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TOFIXTURE COLLATERAL INCLUDED WITHIN THE COLLATERAL**.   This Mortgage shall be filed in the realestate records or other appropriate records of the county or counties in thestate in which any part of the Realty Collateral and Fixture Collateral islocated as well as the Uniform Commercial Code records of the Secretary ofState or other appropriate office of the state in which any Collateral orMortgagor is located.  At Mortgagee’srequest Mortgagor shall deliver financing statements covering the PersonaltyCollateral, including all Hydrocarbons sold at the wellhead, and FixtureCollateral, which financing statements may be filed in the Uniform CommercialCode records of the Secretary of State or other appropriate office of the statein which any of the Collateral or Mortgagor is located or in the county whereany of the Collateral is located. Furthermore, Mortgagor hereby irrevocably authorizes Mortgagee and anyaffiliate, employee or agent thereof, at any time and from time to time, tofile in any Uniform Commercial Code jurisdiction any financing statement ordocument and amendments thereto, without the signature of Mortgagor wherepermitted by law, in order to perfect or maintain the perfection of anysecurity interest granted under this Mortgage. A photographic or other reproduction of this Mortgage shall besufficient as a financing statement.

 

7.6           **Unenforceableor Inapplicable Provisions**. If any term, covenant, condition or provision hereof is invalid, illegalor unenforceable in any respect, the other provisions hereof will remain infull force and effect and will be liberally construed in favor of the Mortgageein order to carry out the provisions hereof.

 

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7.7           **RightsCumulative**.  Each andevery right, power and remedy herein given to the Mortgagee will be cumulativeand not exclusive, and each and every right, power and remedy whetherspecifically herein given or otherwise existing may be exercised from time totime and as often and in such order as may be deemed expedient by theMortgagee, as the case may be, and the exercise, or the beginning of theexercise, of any such right, power or remedy will not be deemed a waiver of theright to exercise, at the same time or thereafter, any other right, power orremedy.  No delay or omission byMortgagee in the exercise of any right, power or remedy will impair any suchright, power or remedy or operate as a waiver thereof or of any other right,power or remedy then or thereafter existing.

 

7.8           **Waiver byMortgagee**.  Any and allcovenants in this Mortgage may from time to time by instrument in writing byMortgagee (acting upon the written direction of the Majority Lenders or allLenders, as applicable), be waived to such extent and in such manner as theMortgagee may desire, but no such waiver will ever affect or impair theMortgagee’s rights hereunder, except to the extent specifically stated in suchwritten instrument.

 

7.9           **Terms**.  The term “Mortgagor” as used in this Mortgagewill be construed as singular or plural to correspond with the number ofpersons 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 andseveral.  The terms “Mortgagee” and “Mortgagor”as used in this Mortgage include the heirs, executors or administrators,successors, representatives, receiver, trustees and assigns of thoseparties.  Unless the context otherwiserequires, terms used in this Mortgage which are defined in the UniformCommercial Code of Oklahoma are used with the meanings therein defined.

 

7.10         **Counterparts**.  This Mortgage may be executed in any numberof counterparts, each of which will for all purposes be deemed to be anoriginal, and all of which are identical except that, to facilitaterecordation, in any particular counties counterpart portions of Exhibit Ahereto which describe Properties situated in counties other than the countiesin which such counterpart is to be recorded may have been omitted.

 

7.11         **GoverningLaw**.  This Mortgage shallbe governed by and construed in accordance with the laws of the State ofOklahoma.

 

7.12         **Notice**.  All notices required or permitted to be givenby Mortgagor or Mortgagee shall be made in the manner set forth in the CreditAgreement and shall be addressed as follows:

 
| Mortgagor: |   | Cano Petroleum, Inc.          |
|------------|--------|------------------------------------|
|       |   | 801 Cherry Street, Suite 3200 |
|       |   | Fort Worth, Texas 76102            |
|       |   | Attention: Ben Daitch, CFO         |
|       |   | Facsimile: (817) 334-0222          |
|       |   |                               |
| Mortgagee: |   | Union Bank of California, N.A.     |
|       |   | Lincoln Plaza                      |

 

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|   |   | 500 N. Akard Street, Suite 4200  |
|--------|--------|---------------------------------------|
|   |   | Dallas, Texas 75201                   |
|   |   | Attention: Mr. Randall Osterberg |
|   |   | Facsimile: (214) 922-4209             |

 

7.13         **Condemnation**.  All awards and payments heretofore andhereafter made for the taking of or injury to the Collateral or any portionthereof whether such taking or injury be done under the power of eminent domainor otherwise, are hereby assigned, and shall be paid to Mortgagee.  Mortgagee is hereby authorized to collect andreceive the proceeds of such awards and payments and to give proper receiptsand acquittances therefor.  Mortgagorhereby agrees to make, execute and deliver, upon request, any and allassignments and other instruments sufficient for the purpose of confirming thisassignment of the awards and payments to Mortgagee free and clear of anyencumbrances of any kind or nature whatsoever. Any such award or payment may, at the option of Mortgagee, be retainedand applied by Mortgagee after payment of attorneys’ fees, costs and expensesincurred in connection with the collection of such award or payment towardpayment of all or a portion of the Obligations, whether or not the Obligationsare then due and payable, or be paid over wholly or in part to Mortgagor forthe purpose of altering, restoring or rebuilding any part of the Collateralwhich may have been altered, damaged or destroyed as a result of any suchtaking, or other injury to the Collateral.

 

7.14         **Successorsand Assigns**.

 

(a)           This Mortgage isbinding upon Mortgagor, Mortgagor’s successors and assigns, and shall inure tothe benefit of each Credit Party (other than Swap Counterparties), and each ofits successors and assigns, and to the benefit of the Swap Counterparties, andeach of their respective successors and assigns if such Swap Counterparty or anAffiliate of such Swap Counterparty is a Lender, and the provisions hereofshall likewise be covenants running with the land.

 

(b)           Subject to clause (d) below,this Mortgage shall be transferable and negotiable, with the same force andeffect and to the same extent as the Obligations may be transferable, it beingunderstood that, upon the transfer or assignment by the Credit Parties (or anyof them) of any of the Obligations, the legal transfer or assignment by theCredit Parties (or any of them) of any of the Obligations, the legal holder ofsuch Obligations shall have all of the rights granted to the Mortgagee for thebenefit of the Credit Parties under this Mortgage.  The Mortgagor specifically agrees that uponany transfer of all or any portion of the Obligations, this Mortgage shallsecure with retroactive rank the existing Obligations of the Mortgagor to thetransferee and any and all Obligations to such transferee thereafter arising.

 

(c)           The Mortgagor herebyrecognizes and agrees that the Credit Parties (or any of them) may, from timeto time, one or more times, transfer all or any portion of the Obligations toone or more third parties.  Suchtransfers may include, but are not limited to, sales of participation interestsin such Obligations in favor of one or more third parties.  Upon any transfer of all or any portion ofthe Obligations and subject to clause (d) below, the Mortgagee maytransfer and deliver any and/or all of the Collateral to the transferee of suchObligations and such Collateral shall secure any and all of the Obligations infavor of such a transferee then

 

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existing and thereafter arising, and after any such transfer has takenplace, the Mortgagee shall be fully discharged from any and all futureliability and responsibility to the Mortgagor with respect to such Collateral,and transferee thereafter shall be vested with all the powers, rights andduties with respect such Collateral.

 

(d)           Notwithstandinganything to the contrary contained herein, including the provisions of clauses (b) and(c) above, when any Swap Counterparty assigns or otherwise transfers anyinterest held by it under any Hedge Contract to any other Person pursuant tothe terms of such agreement, that other Person shall thereupon become vestedwith all the benefits held by such Secured Party under this Mortgage only ifsuch Person is also then a Lender or an Affiliate of a Lender.

 

7.15         **Article andSection Headings**. The article and section headings in this Mortgage are inserted forconvenience of reference and shall not be considered a part of this Mortgage orused in its interpretation.

 

7.16         **Usury NotIntended**.  It is theintent of Mortgagor and Mortgagee in the execution and performance of thisMortgage, the Credit Agreement and the other Loan Documents to contract instrict compliance with applicable usury laws governing the Obligationsincluding such applicable usury laws of the State of Texas and the UnitedStates of America as are from time-to-time in effect.  In furtherance thereof, Mortgagee andMortgagor stipulate and agree that none of the terms and provisions containedin this Mortgage, the Credit Agreement or the other Loan Documents shall everbe 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 maximumnon-usurious rate permitted by applicable law and that for purposes hereof “interest”shall include the aggregate of all charges which constitute interest under suchlaws that are contracted for, charged or received under this Mortgage, theCredit Agreement and the other Loan Documents; and in the event that,notwithstanding the foregoing, under any circumstances the aggregate amountstaken, reserved, charged, received or paid on the Obligations, include amountswhich by applicable law are deemed interest which would exceed the maximum non-usuriousrate permitted by applicable law, then such excess shall be deemed to be amistake 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 toMortgagor).  In the event that thematurity of the Obligations is accelerated by reason of any election ofMortgagee resulting from any Event of Default, or in the event of any requiredor permitted prepayment, then such consideration that constitutes interest maynever include more than the maximum non-usurious rate permitted by applicablelaw and excess interest, if any, provided for in this Mortgage, the CreditAgreement or any other Loan Documents shall be canceled automatically as of thedate of such acceleration and prepayment and, if theretofore paid, shall becredited on the Obligations or, if the Obligations shall have been paid infull, refunded to Mortgagor.  Indetermining whether or not the interest paid or payable under any specificcontingencies exceeds the maximum non-usurious rate permitted by applicablelaw, Mortgagor and Mortgagee shall to the maximum extent permitted underapplicable law amortize, prorate, allocate and spread in equal part during theperiod of the full stated term of the Obligations, all amounts considered to beinterest under applicable law of any kind contracted for, charged, received orreserved in connection with the Obligation.

 

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7.17         **CreditAgreement**.  To the fullestextent possible, the terms and provisions of the Credit Agreement shall be readtogether with the terms and provisions of this Mortgage so that the terms andprovisions of this Mortgage do not conflict with the terms and provisions ofthe Credit Agreement; provided, however, notwithstanding the foregoing, in theevent that any of the terms or provisions of this Mortgage conflict with anyterms or provisions of the Credit Agreement, the terms or provisions of theCredit Agreement shall govern and control for all purposes; provided that theinclusion in this Mortgage of terms and provisions, supplemental rights orremedies in favor of the Secured Party not addressed in the Credit Agreementshall not be deemed to be a conflict with the Credit Agreement and all suchadditional terms, provisions, supplemental rights or remedies contained hereinshall be given full force and effect.

 

7.18         **Due Authorization.**  Mortgagor hereby represents, warrants andcovenants to Mortgagee that the obligations of Mortgagor under this Mortgage arethe valid, binding and legally enforceable obligations of Mortgagor, that theexecution, ensealing and delivery of this Mortgage by Mortgagor has been dulyand validly authorized in all respects by Mortgagor, and that the persons whoare executing and delivering this Mortgage on behalf of Mortgagor have fullpower, authority and legal right to so do, and to observe and perform all ofthe terms and conditions of this Mortgage on Mortgagor’s part to be observed orperformed.

 

7.19         **No Offsets, Etc.**  Mortgagor hereby represents, warrants andcovenants to Mortgagee that there are no offsets, counterclaims or defenses atlaw or in equity against this Mortgage or the indebtedness secured hereby.

 

7.20         **Bankruptcy Limitation.**  Notwithstanding anything contained herein tothe contrary, it is the intention of the Mortgagor, the Mortgagee and the otherCredit Parties that the amount of the Obligation secured by the Mortgagor’sinterests in any of its Property shall be in, but not in excess of, the maximumamount permitted by fraudulent conveyance, fraudulent transfer and othersimilar law, rule or regulation of any Governmental Authority applicable to theMortgagor.  Accordingly, notwithstandinganything to the contrary contained in this Mortgage in any other agreement orinstrument executed in connection with the payment of any of the Obligations,the amount of the Obligations secured by the Mortgagor’s interests in any ofits Property pursuant to this Mortgage shall be limited to an aggregate amountequal to the largest amount that would not render the Mortgagor’s obligationshereunder or the Liens and security interest granted to the Mortgagee hereundersubject to avoidance under Section 548 of the United States Bankruptcy Code orany comparable provision of any other applicable law.

 

**THIS WRITTEN AGREEMENT AND THE OTHER LOANDOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.**

 

**[Remainder of this page intentionallyleft blank.]**

 

D-28

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**NOTICE TOMORTGAGOR:**

** **

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

 

EXECUTED AND DELIVERED effective as of the date first written above.

 
|   | MORTGAGOR:                                   |
|--------|----------------------------------------------|
|   |                                         |
|   | CANO PETROLEUM, INC., a Delaware corporation |
|   |                                         |
|   |                                         |
|   | By:                                          |   |
|   | Name:                                        |   |
|   | Title:                                       |   |
|   |                                         |
|   |                                         |
|   | MORTGAGEE:                                   |
|   |                                         |
|   | UNION BANK OF CALIFORNIA, N.A.,              |
|   | as Administrative Agent                      |
|   |                                         |
|   |                                         |
|   | By:                                          |   |
|   | Name:                                        |   |
|   | Title:                                       |   |
|        |                                              |  |  |  |

 

D-29

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| THE STATE OF TEXAS                                                                                                                               | § |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                             | § |
| COUNTY OF [                      ] | § |

 

Thisinstrument was acknowledged before me on this       day of                       ,20      , by                                                 ,as                                       of Cano Petroleum, Inc., on behalf of said limited liability company.

 

 
|   |                     |
|--------|--------------------------|
|   | Notary Public in and for |
|   | the State of Texas       |

 

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| THE STATE OF TEXAS | § |
|--------------------|--------|
|               | § |
| COUNTY OF DALLAS   | § |

 

Thisinstrument was acknowledged before me on this       day of                       ,20      , by                           ,as                             of Union Bank of California, N.A, a national banking association, on behalf ofsaid banking association.

 

 
|   |                     |
|--------|--------------------------|
|   | Notary Public in and for |
|   | the State of Texas       |

 

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EXHIBIT A

TO

**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 meansan interest owned in an oil, gas, and mineral lease that determines thecost-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 theowner of a working interest after deduction for all royalty burdens, overridingroyalty 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 isfree of any obligation for the expense of exploration, development, andproduction, bearing only its pro rata share of severance, production, and othersimilar taxes and, in instances where the document creating the overridingroyalty interest so provides, costs associated with compression, dehydration,other treating or processing, or transportation of production of oil, gas, orother 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 therelevant land and which is free of any obligation for the expense ofexploration, development, and production, bearing only its pro rata share ofseverance,  production, and other similartaxes and, in instances where the document creating the royalty interest soprovides, costs associated with compression, dehydration, other treating orprocessing or transportation of production of oil, gas, or other mineralsrelating to the marketing of such production. Each amount set forth as “Working Interest” or “WI” or “GWI” or “NetRevenue Interest” or “NRI” or “NRIO” or “NRIG” is the Mortgagor’s interestafter giving full effect to, among other things, all Liens permitted by theCredit Agreement and after giving full effect to the agreements or instrumentsset forth in this Exhibit A and any other instruments or agreementsaffecting Mortgagor’s ownership of the Hydrocarbons.

 

Any reference in this Exhibit A to wells or units is for warrantyof interest, administrative convenience, and identification and shall not limitor restrict the right, title, interest, or Properties covered by thisMortgage.  All right, title, and interestof Mortgagor in the Properties described herein and in Exhibit A are andshall be subject to this Mortgage, regardless of the presence of any units orwells not described herein.

 

The reference to book or volume and page herein and in Exhibit Arefer to the recording location of each respective Realty Collateral describedherein and in Exhibit A in the county where the land covered by the RealtyCollateral is located.

 

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**EXHIBIT E**

** **

**FORM OFAMENDED AND RESTATED NOTE**

** **
| $____________ |   |   | ____________ | ______, | 20 | __ |   |
|---------------|--------|--------|--------------|---------|----|----|--------|

 

For valuereceived, the undersigned Cano Petroleum, Inc., a Delaware corporation (“Borrower”),hereby promises to pay to the order of ___________________ (“Bank”), theprincipal amount of _____________________________________________ Dollars ($_____________)or, if less, the aggregate outstanding principal amount of the Advances (asdefined in the Credit Agreement referred to below) made by the Bank to theBorrower, together with interest on the unpaid principal amount of the Advancesfrom the date of such Advances until such principal amount is paid in full, atsuch interest rates, and at such times, as are specified in the CreditAgreement.

 

This Note isone of the Notes referred to in, and is entitled to the benefits of, and issubject to the terms of, the Amended and Restated Credit Agreement dated as of December 17,2008 (as the same may be amended, restated or modified from time to time, the “CreditAgreement”), among the Borrower, the lenders party thereto (the “Lenders”),and Union Bank of California, N.A., as administrative agent for the Lenders(the “Administrative Agent”) and as issuing lender (“Issuing Lender”).  Capitalized terms used in this Note that aredefined in the Credit Agreement and not otherwise defined in this Note have themeanings assigned to such terms in the Credit Agreement.  The Credit Agreement, among other things, (a) providesfor the making of the Advances by the Bank to the Borrower in an aggregateamount not to exceed at any time outstanding the Dollar amount first abovementioned, the indebtedness of the Borrower resulting from each such Advancebeing evidenced by this Note and (b) contains provisions for accelerationof the maturity of this Note upon the happening of certain events stated in theCredit Agreement and for optional and mandatory prepayments of principal priorto the maturity of this Note upon the terms and conditions specified in theCredit Agreement.

 

Both principaland interest are payable in lawful money of the United States of America to theAdministrative Agent at the place and in the manner specified in the CreditAgreement.  The Bank shall recordpayments of principal made under this Note, but no failure of the Bank to makesuch recordings shall affect the Borrower’s repayment obligations under thisNote.

 

Without beinglimited thereto or thereby, this Note is secured by the Security Instrumentsand guaranteed under the Guaranties.

 

Except asspecifically provided in the Credit Agreement, the Borrower hereby waivespresentment, demand, protest, notice of intent to accelerate, notice ofacceleration, and any other notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunderon the part of the holder of this Note shall operate as a waiver of suchrights.

 

This Noteshall be governed by, and construed and enforced in accordance with, the lawsof the state of Texas (except that Chapter 346 of the Texas Finance CodeChapter, which regulates certain revolving credit loan accounts shall not applyto this Note).

 

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This Note isgiven in renewal and modification, but not in discharge or novation, of thatcertain Note dated __________ ___, 20___ in the original principal amount of $__________________ and made by the Borrower payable tothe order of the Bank.

 

THIS NOTE ANDTHE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOTBE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT AGREEMENTSOF THE PARTIES.

 

THERE ARE NOUNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

 
|   | **CANO  PETROLEUM, INC.**, a Delaware corporation |
|--------|---------------------------------------------------|
|   |                                              |
|   |                                              |
|   | By:                                               |   |
|   |                                              |
|   | Name:                                             |   |
|   |                                              |
|   | Title:                                            |   |
|        |                                                   |  |  |  |

 

E-2

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**EXHIBIT F**

 

**FORM OFNOTICE OF BORROWING**

 

[Date]

 

Union Bank of California, N.A., as Administrative Agent

1980 SaturnStreet, Mail Code 4-957-161

Monterey Park, California 91755

 

Attention:    Angela Yan

 

Ladies and Gentlemen:

 

Theundersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),refers to the Amended and Restated Credit Agreement dated as of December 17,2008 (as the same has been and may be amended, restated or modified fromtime-to-time, the “Credit Agreement,” the defined terms of which areused in this Notice of Borrowing unless otherwise defined in this Notice ofBorrowing) among the Borrower, the lenders party thereto (the “Lenders”),and Union Bank of California, N.A., as administrative agent for the Lenders(the “Administrative Agent”) and as issuing lender for the Lenders (the “IssuingLender”), and hereby gives you irrevocable notice pursuant to Section 2.03(a) ofthe Credit Agreement that the undersigned hereby requests a Borrowing, and inconnection with that request sets forth below the information relating to suchBorrowing (the “Proposed Borrowing”) as required by Section 2.03(a) ofthe Credit Agreement:

 

(a)                                  TheBusiness Day of the Proposed Borrowing is ________________, _________.

 

(b)                                 TheProposed Borrowing will be composed of [Reference Rate Advances] [EurodollarRate Advances].

 

(c)                                  Theaggregate amount of the Proposed Borrowing is $______________.

 

(d)                                 [TheInterest Period for each Eurodollar Rate Advance made as part of the ProposedBorrowing is [_____ month[s]].]

 

The Borrowerhereby certifies that the following statements are true on the date hereof, andwill be true on the date of the Proposed Borrowing:

 

(1)                                  therepresentations and warranties contained in Article IV of the CreditAgreement and the representations and warranties contained in the SecurityInstruments, the Guaranties, and each of the other Loan Documents are true andcorrect in all material respects on and as of the date of the ProposedBorrowing, before and after giving effect to the Proposed Borrowing and to theapplication of the proceeds from the Proposed Borrowing, as though made on andas of such date, except to the extent that any such representation or warrantyexpressly relates solely to an earlier date, in which case it shall have beentrue and correct in all material respects as of such earlier date;

 

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(2)                                  noDefault has occurred and is continuing or would result from the ProposedBorrowing or from the application of the proceeds therefrom;

 

(3)                                  [theproceeds of the Proposed Borrowing are not to be used to fund a capitalexpenditure] [the proceeds of the Proposed Borrowing are to be used to fund acapital expenditure which has been approved by the Lenders pursuant to anapproval letter, a copy of which is attached as Exhibit A hereto]; and

 

(4)                                  $______________ of the Proposed Borrowingwill be used for general corporate or working capital purposes.

 
|   | Very truly yours,                |
|--------|----------------------------------|
|   |                             |
|   |                             |
|   | CANO PETROLEUM, INC., a Delaware |
|   | corporation                      |
|   |                             |
|   |                             |
|   | By:                              |   |
|   |                             |
|   | Name:                            |   |
|   |                             |
|   | Title:                           |   |
|        |                                  |  |  |  |

 

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**APPROVAL LETTER**

 

Reference is made to the Amended and Restated Credit Agreement dated asof December 17, 2008 (as the same has been and may be amended, restated ormodified from time-to-time, the “Credit Agreement,”) among CanoPetroleum, Inc., a Delaware corporation (the “Borrower”), thelenders party thereto (the “Lenders”), and Union Bank of California,N.A., as administrative agent for the Lenders (the “Administrative Agent”)and as issuing lender for the Lenders (the “Issuing Lender”).  Reference is hereby made to the CreditAgreement for all purposes, and terms defined therein shall have the samemeanings when used herein.  The CreditAgreement provides that the Borrower may not use the proceeds of any Advance tofund capital expenditures unless such capital expenditures are approved inwriting by the Lenders.  This lettershall evidence the Lenders approval of the capital expenditures which arespecified below or specified in the schedule attached hereto:

 

[*specify capital expenditures with a description, date of incurrence,amount, oil and gas property affected thereby, and such other information asthe Lenders may request]*

 

This letter isa Loan Document, and all provisions of the Credit Agreement which apply to LoanDocuments shall apply hereto.  Thisletter may be separately executed in any number of counterparts and by thedifferent parties hereto in separate counterparts, each of which when soexecuted shall be deemed to constitute one and the same agreement.

 

Please executea counterpart of this letter in the place provided below to evidence youragreement to the foregoing and your continuing ratification of the CreditAgreement and the other Loan Documents in consideration of the approval hereincontained.

 

Yours truly,

 
| **UNION BANK OF CALIFORNIA, N.A.** |   | **NATIXIS** |
|------------------------------------|--------|-------------|
|                               |   |        |
|                               |   |        |
| By:                                |   |        | By: |   |
|                               |   |        |
| Name:                              |   |        | Name: |   |
|                               |   |        |
| Title:                             |   |        | Title: |   |
|                               |   |        |
|                               |   |        |
|                               |   | By:         |   |
|                               |   |        |
|                               |   | Name:       |   |
|                               |   |        |
|                               |   | Title:      |   |
|                                    |        |             |  |  |  |  |  |  |  |  |  |

 

**[OTHER LENDERS, IF ANY]*

 

Accepted andagreed to as of the date first written above

 

F-3

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| **CANO PETROLEUM, INC.** |   |
|--------------------------|--------|
|                     |   |
|                     |
| By:                      |   |   |
|                     |   |
| Name:                    |   |   |
|                     |   |
| Title:                   |   |   |
|                          |        |  |  |  |

 

F-4

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**EXHIBIT G**

 

**FORM OFNOTICE OF CONVERSION OR CONTINUATION**

 

[Date]

 

Union Bank ofCalifornia, as Administrative Agent1980 Saturn Street, Mail Code 4-957-161

Monterey Park, California 91755

Attention:    Angela Yan

Ladies and Gentlemen:

 

Theundersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),refers to the Amended and Restated Credit Agreement dated as of December 17,2008 (as the same may be amended, restated or modified from time-to-time, the “CreditAgreement,” the defined terms of which are used in this Notice ofConversion or Continuation unless otherwise defined in this Notice ofConversion or Continuation) among the Borrower, the lenders party thereto (the “Lenders”),and Union Bank of California, N.A., as administrative agent for the Lenders(the “Administrative Agent”) and as issuing lender for the Lenders (the “IssuingLender”), and hereby gives you irrevocable notice pursuant to Section 2.03(b) ofthe Credit Agreement that the undersigned hereby requests a Conversion orcontinuation of an outstanding Borrowing, and in connection with that requestsets forth below the information relating to such Conversion or continuation(the “Proposed Borrowing”) as required by Section 2.03(b) ofthe Credit Agreement:

 

(e)                                  TheBusiness Day of the Proposed Borrowing is _____________, 20____.

 

(f)                                    TheProposed Borrowing consists of [a Conversion to [Reference Rate Advances][Eurodollar Rate Advances]] [a continuation of Eurodollar Rate Advances].

 

(g)                                 Theaggregate amount of the Borrowing to be [Converted] [continued] is $________and consists of [Reference Rate Advances] [Eurodollar Rate Advances].

 

(h)                                 [TheInterest Period for each Eurodollar Rate Advance made as part of the ProposedBorrowing is [____ month[s]].]

 

The Borrowerhereby certifies that the following statements are true on the date hereof, andwill be true on the date of the Proposed Borrowing:

 

(i)                                     therepresentations and warranties contained in Article IV of the CreditAgreement and the representations and warranties contained in the SecurityInstruments, the Guaranties, and each of the other Loan Documents are true andcorrect in all material respects on and as of the date of the ProposedBorrowing, before and after giving effect to the Proposed Borrowing and to theapplication of the proceeds from the Proposed Borrowing, as though made on andas of such date, except to the extent that any such representation or warrantyexpressly relates solely to an earlier date, in which case it shall have beentrue and correct in all material respects as of such earlier date; and

 

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(j)                                     noDefault has occurred and is continuing or would result from the ProposedBorrowing or from the application of the proceeds therefrom.

 

Very truly yours,

 

 
|   | CANO PETROLEUM, INC., a Delaware  corporation |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
|   | By:                                           |   |
|   |                                          |
|   | Name:                                         |   |
|   |                                          |
|   | Title:                                        |   |
|        |                                               |  |  |  |

 

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**EXHIBITH**

 

**FORM OFPLEDGE AGREEMENT**

 

THIS AMENDED AND RESTATED PLEDGE AGREEMENT dated as of December 17,2008 (this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., aDelaware corporation (“Borrower”), each subsidiary of the Borrowersignatory hereto (together with the Borrower, the “Pledgors” andindividually, each a “Pledgor”) and Union Bank of California, N.A. asAdministrative Agent (as hereinafter defined) for the ratable benefit ofitself, the Issuing Lender (as hereinafter defined), the Lenders (ashereinafter defined), and the Swap Counterparties (as defined in the CreditAgreement referred to below, and together with the Administrative Agent, theIssuing Lender, and the Lenders collectively referred to herein as the “SecuredParties” and individually, a “Secured Party”).

 

**RECITALS**

 

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

 

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

 

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

 

D.            It is a requirement under the Credit Agreement that (i) theBorrower shall continue to secure the due payment and performance of allObligations (as defined in the Credit Agreement) by amending and restating inits entirety the Existing Pledge Agreement as set forth herein, and (ii) theother Pledgors shall continue to secure the due payment and performance of allObligations (as defined in the Credit Agreement) by executing and deliveringthis Pledge Agreement, in each case, in favor of the Administrative Agent forthe ratable benefit of the Secured Parties.

 

E.             Each Pledgor (otherthan the Borrower) is a subsidiary of the Borrower and will derive substantialdirect and indirect benefits from (i) the transactions contemplated by theCredit Agreement and the other Loan Documents (as defined the Credit Agreement)and (ii) the Hedge 

 

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Contracts (asdefined in the Credit Agreement) entered into by the Borrower or any of itssubsidiaries with a Swap Counterparty.

 

**AGREEMENT**

 

NOW, THEREFORE, in consideration of theforegoing and other good and valuable consideration, the receipt andsufficiency of which is hereby acknowledged and confessed, each Pledgor herebyagrees with the Administrative Agent for the benefit of the Secured Parties asfollows:

 

**Section 1.             **Definitions.  All capitalized terms nototherwise defined in this pledge agreement that are defined in the creditagreement shall have the meanings assigned to such terms by the creditagreement.  Any terms used in this pledgeagreement that are defined in the uniform commercial code in effect in thestate of texas from time to time (the “ucc”) and not otherwise defined hereinor in the credit agreement, shall have the meanings assigned to those terms bythe ucc.  All meanings to defined terms,unless otherwise indicated, are to be equally applicable to both the singularand plural forms of the terms defined. Article, section, schedule, and exhibit references are to articles andsections of and schedules and exhibits to this pledge agreement, unlessotherwise specified.  All references toinstruments, documents, contracts, and agreements are references to suchinstruments, documents, contracts, and agreements as the same may be amended,supplemented, and otherwise modified from time to time, unless otherwisespecified.  The words “hereof”, “herein”and “hereunder” and words of similar import when used in this pledge agreementshall refer to this pledge agreement as a whole and not to any particularprovision of this pledge agreement.  Asused herein, the term “including” means “including, without limitation,”.Paragraph headings have been inserted in this pledge agreement as a matter ofconvenience for reference only and it is agreed that such paragraph headingsare not a part of this pledge agreement and shall not be used in theinterpretation of any provision of this pledge agreement.

** **

**Section 2.             **Pledge.

** **

2.01                 Grant of Pledge.

 

(a)           EachPledgor hereby pledges to the Administrative Agent, and grants to theAdministrative Agent, for the benefit of the Secured Parties, a continuingsecurity interest in, the Pledged Collateral, as defined in Section 2.02below.  This Pledge Agreement shallsecure (i) all Obligations (as defined in the Credit Agreement) now orhereafter existing; (ii) all other amounts now or hereafter owed by theBorrower, any Pledgor, or any of their respective Subsidiaries under thisPledge Agreement, the Credit Agreement or the other Loan Documents to the AdministrativeAgent or any other Secured Party; and (iii) any increases, extensions,modifications, substitutions, amendments, restatements and renewals of any ofthe foregoing obligations, whether for principal, interest, fees, expenses,indemnification or otherwise.**** All such obligations shall be referred to inthis Pledge Agreement as the “Secured Obligations”.

 

(b)           Notwithstandinganything contained herein to the contrary, it is the intention of each Pledgor,the Administrative Agent and the Secured Parties that the 

 

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amount of the Secured Obligation secured by each Pledgor’s interests inany of its property or assets (whether real or personal, or mixed, tangible orintangible) (“Property”) shall be in, but not in excess of, the maximumamount permitted by fraudulent conveyance, fraudulent transfer and othersimilar law, rule or regulation of any Governmental Authority (as definedin the Credit Agreement) applicable to such Pledgor. Accordingly, notwithstandinganything to the contrary contained in this Pledge Agreement or in any otheragreement or instrument executed in connection with the payment of any of theSecured Obligations, the amount of the Secured Obligations secured by eachPledgor’s interests in any of its Property pursuant to this Pledge Agreementshall be limited to an aggregate amount equal to the largest amount that wouldnot render such Pledgor’s obligations hereunder or the liens and securityinterest granted to the Administrative Agent hereunder subject to avoidanceunder Section 548 of the United States Bankruptcy Code or any comparableprovision of any other applicable law.

 

2.02                 Pledged Collateral.  “Pledged Collateral” shall mean all ofeach Pledgor’s right, title, and interest in the following, whether now ownedor hereafter acquired:

 

(a)           (i) allof the membership interests listed in the attached Schedule 2.02(a) issuedto such Pledgor and all such additional membership interests of any issuer ofsuch interests hereafter acquired by such Pledgor (the “Membership Interests”),(ii) the certificates representing the Membership Interests, if any, and (iii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Membership Interests, including, without limitation, (A) any proceeds from a sale by oron behalf of such Pledgor of any of the Membership Interests, and (B) anydistributions, dividends, cash, instruments and other property fromtime-to-time received or otherwise distributed in respect of the MembershipInterests, whether regular, special or made in connection with the partial ortotal liquidation of the issuer and whether attributable to profits, the returnof any contribution or investment or otherwise attributable to the Membership Interestsor the ownership thereof (collectively, the “Membership InterestsDistributions”);

 

(b)           (i) allof the general and limited partnership interests listed in the attachedSchedule 2.02(b) issued to such Pledgor and all such additional limited orgeneral partnership interests of any issuer of such interests hereafteracquired by such Pledgor (the “Partnership Interests”), and (ii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Partnership Interests,  including,without limitation, (A) any proceeds from a sale by or on behalf of suchPledgor of any of the Partnership Interests, and (B) any distributions,dividends, cash, instruments and other property from time-to-time received orotherwise distributed in respect of the Partnership Interests, whether regular,special or made in connection with the partial or total liquidation of theissuer and whether attributable to profits, the return of any contribution orinvestment or otherwise attributable to the Partnership Interests or theownership thereof (collectively, the “Partnership Interests Distributions”);

 

(c)           (i) allof the shares of stock listed in the attached Schedule 2.02(c) issued tosuch Pledgor and all such additional shares of stock of any issuer of suchshares 

 

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of stock hereafter issued to such Pledgor (the “Pledged Shares”),(ii) the certificates representing the Pledged Shares, and (iii) allrights to money or Property which such Pledgor now has or hereafter acquires inrespect of the Pledged Shares, including, without limitation, (A) anyproceeds from a sale by or on behalf of such Pledgor of any of the PledgedShares, and (B) any distributions, dividends, cash, instruments and otherproperty from time-to-time received or otherwise distributed in respect of thePledged Shares, whether regular, special or made in connection with the partialor total liquidation of the issuer and whether attributable to profits, thereturn of any contribution or investment or otherwise attributable to thePledged Shares or the ownership thereof (collectively, the “Pledged SharesDistributions”; together with the Membership Interests Distributions andthe Partnership Interest Distributions, the “Distributions”); and

 

(d)           allproceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) ofthis Section 2.02.

 

2.03                 Delivery of PledgedCollateral.  All certificates orinstruments, if any, representing the Pledged Collateral shall be delivered tothe Administrative Agent and shall be in suitable form for transfer bydelivery, or shall be accompanied by duly executed instruments of transfer orassignment in blank, all in form and substance reasonably satisfactory to theAdministrative Agent.  After the occurrenceand during the continuance of an Event of Default, the Administrative Agentshall have the right, upon prior written notice to the applicable Pledgor, totransfer to or to register in the name of the Administrative Agent or any ofits nominees any of the Pledged Collateral, subject to the rights specified in Section 2.04.  In addition, after the occurrence and duringthe continuance of an Event of Default, the Administrative Agent shall have theright at any time to exchange the certificates or instruments representing thePledged Collateral for certificates or instruments of smaller or largerdenominations.

 

2.04                 Rights Retained by Pledgor.  Notwithstanding the pledge in Section 2.01,

 

(a)           solong as no Event of Default shall have occurred and remain uncured or unwaivedand except as otherwise provided in the Credit Agreement, (i) each Pledgorshall be entitled to receive and retain any dividends and other Distributionspaid on or in respect of the Pledged Collateral and the proceeds of any sale ofthe Pledged Collateral; and (ii) each Pledgor shall be entitled toexercise any voting and other consensual rights pertaining to its PledgedCollateral for any purpose not inconsistent with the terms of this PledgeAgreement or the Credit Agreement; provided, however, that noPledgor shall exercise nor shall it refrain from exercising any such right ifsuch action or inaction, as applicable, would have a materially adverse effecton the value of the Pledged Collateral; and

 

(b)           ifan Event of Default shall have occurred and remain uncured or unwaived,

 

(i)            until such timethereafter as the Administrative Agent gives written notice of its election toexercise such voting and other consensual rights pursuant to Section 5.02hereof, each Pledgor shall be entitled to exercise any voting and otherconsensual rights pertaining to its Pledged Collateral for any purpose not 

 

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inconsistent withthe terms of this Pledge Agreement or the Credit Agreement; provided, however,that no Pledgor shall exercise nor shall it refrain from exercising any suchright if such action or inaction, as applicable, would have a materiallyadverse effect on the value of the Pledged Collateral; and

 

(ii)           at and after suchtime as the Administrative Agent gives written notice of its election toexercise such voting and other consensual rights pursuant to Section 5.02hereof, each Pledgor shall execute and deliver (or cause to be executed anddelivered) to the Administrative Agent all proxies and other instruments as theAdministrative Agent may reasonably request to enable the Administrative Agentto (A) exercise the voting and other rights which such Pledgor is entitledto exercise pursuant to paragraph (a) or paragraph (b)(i) ofthis Section 2.04, and (B) receive any Distributions and proceeds ofsale of the Pledged Collateral which such Pledgor is authorized to receive andretain pursuant to paragraph (a)(i) of this Section 2.04.

 

**Section 3.             **Pledgor’s Representations AndWarranties.  Each pledgor represents and warrants to theadministrative agent and the secured parties as follows:

** **

(a)           ThePledged Collateral applicable to such Pledgor listed on the attachedSchedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorizedand validly issued to such Pledgor and are fully paid and nonassessable.

 

(b)           SuchPledgor is the legal and beneficial owner of the Pledged Collateral free andclear of any Lien or option, except for (i) the security interest createdby this Pledge Agreement and (ii) other Liens permitted under the CreditAgreement ( the “Permitted Liens”).

 

(c)           Noauthorization, authentication, approval, or other action by, and no notice toor filing with, any Governmental Authority or regulatory body is requiredeither (a) for the pledge by such Pledgor of the Pledged Collateralpursuant to this Pledge Agreement or for the execution, delivery, orperformance of this Pledge Agreement by such Pledgor or (b) for theexercise by the Administrative Agent or any Secured Party of the voting or otherrights provided for in this Pledge Agreement or the remedies in respect of thePledged Collateral pursuant to this Pledge Agreement (except as may be requiredin connection with such disposition by laws affecting the offering and sale ofsecurities generally).

 

(d)           SuchPledgor has the full right, power and authority to deliver, pledge, assign andtransfer the Pledged Collateral to the Administrative Agent.

 

(e)           TheMembership Interests listed on the attached Schedule 2.02(a) constitutethe percentage of the issued and outstanding membership interests of therespective issuer thereof set forth on Schedule 2.02(a) and all of theEquity Interest in such issuer in which the Pledgor has any ownership interest.

 

(f)            ThePartnership Interests listed on the attached Schedule 2.02(b) constitutethe percentage of the issued and outstanding general and limited partnership 

 

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interests of the respective issuer thereof set forth on Schedule 2.02(b) andall of the Equity Interest in such issuer in which the Pledgor has anyownership interest.

 

(g)           ThePledged Shares list on the attached Schedule 2.02(c) constitute thepercentage of the issued and outstanding shares of capital stock of therespective issuer thereof set forth on Schedule 2.02(c) and all of theEquity Interest in such issuer in which the Pledgor has any ownership interest.

 

(h)           Schedule3 sets forth its sole jurisdiction of formation, type of organization, federaltax identification number, the organizational number, and all names used by itduring the last five years prior to the date of this Pledge Agreement.

 

**Section 4.             **Pledgor’s Covenants.  During the term of this pledge agreement anduntil all of the secured obligations (including all letter of creditobligations) have been fully and finally paid and discharged in full, thetermination of the hedge contracts with the secured parties, the commitments(as defined in the credit agreement) under the credit agreement have beenterminated or expired, all letters of credit have terminated or expired, andall obligations of the issuing lender and the lenders in respect of letters ofcredit have been terminated, each pledgor covenants and agrees with theadministrative agent that:

** **

4.01                 Protect Collateral; FurtherAssurances.  Each Pledgor willwarrant and defend the rights and title herein granted unto the AdministrativeAgent in and to the Pledged Collateral (and all right, title, and interestrepresented by the Pledged Collateral) against the claims and demands of allPersons whomsoever.  Each Pledgor agreesthat, at the expense of such Pledgor, such Pledgor will promptly execute anddeliver all further instruments and documents, and take all further action,that may be reasonably necessary and that the Administrative Agent or anySecured Party may reasonably request, in order to perfect and protect anysecurity interest granted or purported to be granted hereby or to enable theAdministrative Agent or any Secured Party to exercise and enforce its rightsand remedies hereunder with respect to any Pledged Collateral.  Each Pledgor hereby authorizes theAdministrative Agent to file any financing statements, amendments orcontinuations without the signature of such Pledgor to the extent permitted byapplicable law in order to perfect or maintain the perfection of any securityinterest granted under this Pledge Agreement.

 

4.02                 Transfer, Other Liens, andAdditional Shares.  Each Pledgoragrees that it will not (a) except as otherwise permitted by the CreditAgreement, 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 Lienupon or with respect to any of the Pledged Collateral, except for PermittedLiens.  Each Pledgor agrees that it will (i) causeeach issuer of the Pledged Collateral that is a Subsidiary of such Pledgor notto issue any other Equity Interests in addition to or in substitution for thePledged Collateral issued by such issuer, except to such Pledgor or any otherPledgor and (ii) pledge hereunder, immediately upon its acquisition(directly or indirectly) thereof, any additional Equity Interests of an issueracquired by such Pledgor.  No Pledgorshall approve any amendment or modification of any of the Pledged Collateral withoutthe Administrative Agent’s prior written consent.

 

H-6

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4.03                 Jurisdiction of Formation;Name Change.  Each Pledgor shall givethe Administrative Agent at least 30 days’ prior written notice before it (i) inthe case of a Pledgor that is not a “registered organization” (as defined in Section 9-102of the UCC) changes the location of its principal place of business and chiefexecutive office, or (ii) uses a trade name other than its current nameused on the date hereof.  Other than aspermitted by Section 6.11 of the Credit Agreement, no Pledgor shall amend,supplement, modify or restate its articles or certificate of incorporation,bylaws, limited liability company agreements, or other equivalent organizationaldocuments, 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 occurredand be continuing:

** **

5.01                 UCC Remedies.  To the extent permitted by law, theAdministrative Agent may exercise in respect of the Pledged Collateral, inaddition to other rights and remedies provided for in this Pledge Agreement orotherwise available to it, all the rights and remedies of a AdministrativeAgent under the UCC (whether or not the UCC applies to the affected PledgedCollateral).

 

5.02                 Dividends and Other Rights.

 

(a)           Allrights of the Pledgors to exercise the voting and other consensual rights whichit would otherwise be entitled to exercise pursuant to Section 2.04(a) maybe exercised by the Administrative Agent if the Administrative Agent so electsand gives written notice of such election to the affected Pledgor and allrights of the Pledgors to receive any Distributions on or in respect of thePledged Collateral and the proceeds of sale of the Pledged Collateral which itwould otherwise be authorized to receive and retain pursuant to Section 2.04(b) shallcease.

 

(b)           AllDistributions on or in respect of the Pledged Collateral and the proceeds ofsale of the Pledged Collateral which are received by any Pledgor shall bereceived in trust for the benefit of the Administrative Agent, shall besegregated from other funds of such Pledgor, and shall be promptly paid over tothe 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 atpublic 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 theAdministrative Agent may deem commercially reasonable in accordance withapplicable laws.  Each Pledgor agreesthat to the extent permitted by law such sales may be made without notice.  If notice is required by law, each Pledgorhereby deems 10 days’ advance notice of the time and place of any public saleor the time after which any private sale is to be made reasonable notification,recognizing that if the Pledged Collateral threatens to decline speedily invalue or is of a type customarily sold on a recognized market shorter noticemay be reasonable.  The AdministrativeAgent shall not be obligated to make any sale of the Pledged Collateralregardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale fromtime-to-time by announcement at the time and place fixed therefor, and such 

 

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sale may, without further notice, be made at the time and place towhich it was so adjourned.  Each Pledgorshall fully cooperate with Administrative Agent in selling or realizing uponall or any part of the Pledged Collateral. In addition, each Pledgor shall fully comply with the securities laws ofthe United States, the State of Texas, and other states and take such actionsas may be necessary to permit Administrative Agent to sell or otherwise disposeof any securities representing the Pledged Collateral in compliance with suchlaws.

 

5.04                 Exempt Sale.  If, in the opinion of the AdministrativeAgent, there is any question that a public or semipublic sale or distributionof any Pledged Collateral will violate any state or federal securities law, theAdministrative Agent in its reasonable discretion (a) may offer and sellsecurities privately to purchasers who will agree to take them for investmentpurposes and not with a view to distribution and who will agree to impositionof restrictive legends on the certificates representing the security, or (b) maysell such securities in an intrastate offering under Section 3(a)(11) ofthe Securities Act of 1933, as amended, and no sale so made in good faith bythe Administrative Agent shall be deemed to be not “commercially reasonable”solely because so made.  Each Pledgorshall cooperate fully with the Administrative Agent in selling or realizingupon 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 asale or other realization permitted by the Credit Agreement) upon all or anypart of the Pledged Collateral pledged by the Pledgors shall be applied by theAdministrative Agent as set forth in Section 7.06 of the Credit Agreement.

 

5.06                 Cumulative Remedies.  Each right, power and remedy hereinspecifically granted to the Administrative Agent or otherwise available to itshall be cumulative, and shall be in addition to every other right, power andremedy herein specifically given or now or hereafter existing at law, inequity, or otherwise, and each such right, power and remedy, whetherspecifically granted herein or otherwise existing, may be exercised at any timeand from time-to-time as often and in such order as may be deemed expedient bythe Administrative Agent in its sole discretion.  No failure on the part of the AdministrativeAgent to exercise, and no delay in exercising, and no course of dealing withrespect 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 remedypreclude any other or further exercise thereof or the exercise of any otherright.

 

**Section 6.             **Administrative Agent AsAttorney-In-Fact For Pledgor.

** **

**6.01               **AdministrativeAgent Appointed Attorney-in-Fact. Each Pledgor hereby irrevocably appoints the Administrative Agent assuch Pledgor’s attorney-in-fact, with full authority after the occurrence andduring the continuance of an Event of Default to act for such Pledgor and inthe name of such Pledgor, and, in the Administrative Agent’s discretion, totake any action and to execute any instrument which the Administrative Agentmay deem reasonably necessary or advisable to accomplish the purposes of thisPledge Agreement, including, without limitation, to receive, indorse, andcollect all instruments made payable to such Pledgor representing any dividend,or the proceeds of the sale of the Pledged Collateral, or other distribution inrespect of the Pledged Collateral and to give full discharge for the same.  **EachPledgor hereby acknowledges, consents and agrees that the power of attorneygranted pursuant to this Section is irrevocable and coupled with aninterest.**

 

H-8

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6.02                 Administrative Agent May Perform.The Administrative Agent may from time-to-time, at its option but at thePledgors’ expense, perform any act which any Pledgor agrees hereunder toperform and which such Pledgor shall fail to perform after being requested inwriting so to perform (it being understood that no such request need be givenafter the occurrence and during the continuance of any Event of Default andafter notice thereof by the Administrative Agent to the affected Pledgor) andthe Administrative Agent may from time-to-time take any other action which theAdministrative Agent reasonably deems necessary for the maintenance,preservation or protection of any of the Pledged Collateral or of its securityinterest therein.  The AdministrativeAgent shall provide notice to the affected Pledgor of any action takenhereunder; provided however, the failure to provide such notice shall not beconstrued as a waiver of any rights of the Administrative Agent provided underthis Pledge Agreement or under applicable law.

 

6.03                 Administrative Agent Has NoDuty.  The powers conferred on theAdministrative Agent hereunder are solely to protect its interest in thePledged Collateral and shall not impose any duty on it to exercise any suchpowers.  Except for reasonable care ofany Pledged Collateral in its possession and the accounting for moneys actuallyreceived by it hereunder, the Administrative Agent shall have no duty as to anyPledged Collateral or responsibility for taking any necessary steps to preserverights against prior parties or any other rights pertaining to any PledgedCollateral.

 

6.04                 Reasonable Care.  The Administrative Agent shall be deemed tohave exercised reasonable care in the custody and preservation of the PledgedCollateral in its possession if the Pledged Collateral is accorded treatmentsubstantially equal to that which the Administrative Agent accords its ownproperty, it being understood that the Administrative Agent shall have noresponsibility for (a) ascertaining or taking action with respect tocalls, conversions, exchanges, maturities, tenders, or other matters relativeto any Pledged Collateral, whether or not the Administrative Agent has or isdeemed to have knowledge of such matters, or (b) taking any necessarysteps to preserve rights against any parties with respect to any PledgedCollateral.

 

**Section 7.             **Miscellaneous.

** **

7.01                 Expenses.  The Pledgors will upon demand pay to theAdministrative Agent for its benefit and the benefit of the other SecuredParties the amount of any reasonable out-of-pocket expenses, including thereasonable fees and disbursements of its counsel and of any experts, which theAdministrative Agent and the other Secured Parties 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) theexercise or enforcement of any of the rights of the Administrative Agent or anyLender or any other Secured Parties hereunder, and (c) the failure by anyPledgor to perform or observe any of the provisions hereof.

 

7.02                 Amendments, Etc.  No amendment or waiver of any provision ofthis Pledge Agreement nor consent to any departure by any Pledgor herefromshall be effective unless made in writing and executed by the affected Pledgorand the Administrative Agent (acting upon the written direction of the MajorityLenders or all Lenders, as applicable), and 

 

H-9

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such waiver or consentshall be effective only in the specific instance and for the specific purposefor which given.

 

7.03                 Addresses for Notices.  All notices and other communications providedfor hereunder shall be in the manner and to the addresses set forth in theCredit Agreement.

 

7.04                 ContinuingSecurity Interest; Transfer of Interest.

 

(a)           ThisPledge Agreement shall create a continuing security interest in the PledgedCollateral and, unless expressly released by the Administrative Agent, shall (i) remainin full force and effect until the indefeasible payment in full in cash of, andtermination of, the Secured Obligations and the termination of the Commitmentsunder the Credit Agreement, (ii) be binding upon the Pledgors, theAdministrative Agent, the Secured Parties and their successors, and assigns,and (iii) inure, together with the rights and remedies of theAdministrative Agent hereunder, to the benefit of and be binding upon, theAdministrative Agent, and the Secured Parties and their respective successors,transferees, and assigns, and to the benefit of and be binding upon, the SwapCounterparties, and each of their respective successors and assigns only to theextent such successors, transferees, and assigns of a Swap Counterparty is aLender or an Affiliate of a Lender. Without limiting the generality of the foregoing clause, when anySecured Party assigns or otherwise transfers any interest held by it under theCredit Agreement or other Loan Document (other than an Interest Hedge Agreementor a Hydrocarbon Hedge Agreement) to any other Person pursuant to the terms ofthe Credit Agreement or such other Loan Document, that other Person shallthereupon become vested with all the benefits held by such Secured Party underthis Pledge Agreement.  Furthermore, whenany Swap Counterparty assigns or otherwise transfers any interest held by itunder an Interest Hedge Agreement or a Hydrocarbon Hedge Agreement to any otherPerson pursuant to the terms of such agreement, that other Person shallthereupon become vested with all the benefits held by such Secured Party underthis Pledge Agreement only if such Person is also then a Lender or an Affiliateof a Lender.

 

(b)           Uponthe indefeasible payment in full and termination of the Secured Obligations andthe termination of all Commitments under the Credit Agreement, the securityinterest granted hereby shall terminate and all rights to the PledgedCollateral shall revert to the applicable Pledgor to the extent such PledgedCollateral shall not have been sold or otherwise applied pursuant to the termshereof.  Upon any such termination, theAdministrative Agent will, at the Pledgors’ expense, deliver all PledgedCollateral to the applicable Pledgor, execute and deliver to the applicablePledgor such documents as such Pledgor shall reasonably request and take anyother 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 ofthe Secured Obligations and this Pledge Agreement;

 

H-10

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(b)           anyrequirement that the Administrative Agent or any Secured Party protect, secure,perfect, or insure any Lien or any Property subject thereto or exhaust anyright or take any action against any Pledgor, any Guarantor, or any otherPerson or any collateral; and

 

(c)           anyduty on the part of the Administrative Agent to disclose to any Pledgor anymatter, fact, or thing relating to the business, operation, or condition of anyPledgor, any Guarantor, or any other Person and their respective assets nowknown or hereafter known by such Person.

 

7.06                 Severability.  Wherever possible each provision of thisPledge Agreement shall be interpreted in such manner as to be effective andvalid under applicable law, but if any provision of this Pledge Agreement shallbe prohibited by or invalid under such law, such provision shall be ineffectiveto the extent of such prohibition or invalidity, without invalidating theremainder of such provision or the remaining provisions of this PledgeAgreement.

 

7.07                 Choice of Law.  This Pledge Agreement shall be governed byand 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 interestshereunder, or remedies hereunder, in respect of any particular PledgedCollateral are governed by the laws of a jurisdiction other than the State ofTexas.

 

7.08                 Counterparts.  The parties may execute this Pledge Agreementin counterparts, each of which constitutes an original, and all of which, collectively,constitute only one agreement.  Deliveryof an executed counterpart signature page by facsimile is as effective asexecuting and delivering this Pledge Agreement in the presence of the otherparties to this Pledge Agreement.  Inproving this Pledge Agreement, a party must produce or account only for theexecuted counterpart of the party to be charged.

 

7.09                 Headings.  Paragraph headings have been inserted in thisPledge Agreement as a matter of convenience for reference only and it is agreedthat such paragraph headings are not a part of this Pledge Agreement and shallnot be used in the interpretation of any provision of this Pledge Agreement.

 

7.10                 Reinstatement.  If, at any time after payment in full of allSecured Obligations and termination of the Administrative Agent’s securityinterest, any payments on the Secured Obligations previously made must bedisgorged by any Secured Party for any reason whatsoever, including, withoutlimitation, the insolvency, bankruptcy or reorganization of any Pledgor or anyother Person, this Pledge Agreement and the Administrative Agent’s securityinterests herein shall be reinstated as to all disgorged payments as thoughsuch payments had not been made, and each Pledgor shall sign and deliver to theAdministrative Agent all documents, and shall do such other acts and things, asmay be necessary to reinstate and perfect the Administrative Agent’s securityinterest.  **EACH PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACHOTHER****SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSEUNDER THIS SECTION 7.10 (INCLUDING REASONABLE ATTORNEYS’ FEES ANDEXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT**

 

H-11

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**INCLUDINGSUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OFTHE INDEMNIFIED****SECUREDPARTY’S****OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS,LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENTBY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIEDSECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.**

 

7.11                 Conflicts.  In the event of any explicit or implicitconflict between any provisions of this Pledge Agreement and any provision ofthe Credit Agreement, the terms of the Credit Agreement shall be controlling.

 

7.12                 Additional Pledgors*.* Pursuant to Section 6.15 of the Credit Agreement, certainSubsidiaries of the Borrower that were not in existence on the date of theCredit Agreement are required to enter into this Pledge Agreement asPledgors.  Upon execution and deliveryafter the date hereof by the Administrative Agent and such Subsidiary of aninstrument in the form of Annex 1, such Subsidiary shall become a Pledgorhereunder with the same force and effect as if originally named as a Pledgorherein.  The execution and delivery ofany instrument adding an additional Pledgor as a party to this Pledge Agreementshall not require the consent of any other Pledgor hereunder.  The rights and obligations of each Pledgorhereunder shall remain in full force and effect notwithstanding the addition ofany new Pledgor as a party to this Pledge Agreement.

 

7.13                 Amendment &Restatement; Confirmation of Liens. This Pledge Agreement is an amendment and restatement of the ExistingPledge Agreement and supersedes the Existing Pledge Agreement in its entirety;provided, however, that (i) the execution and delivery of this PledgeAgreement shall not effect a novation of the Existing Pledge Agreement butshall be, to the fullest extent applicable, in modification, renewal,confirmation and extension of such Existing Pledge Agreement, and (ii) theLiens, security interests and other interests in the Pledged Collateral (assuch term is defined in the Existing Pledge Agreement, hereinafter the “OriginalPledged Collateral”) granted under the Existing Pledge Agreement are andshall remain legal, valid, binding and enforceable with regard to such OriginalPledged Collateral.  Each Pledgor partyto the Existing Pledge Agreement hereby acknowledges and confirms thecontinuing existence and effectiveness of such Liens, security interests andother interests in the Original Pledged Collateral granted under the ExistingPledge Agreement, and further agrees that the execution and delivery of thisPledge Agreement and the other Loan Documents shall not in any way release,diminish, impair, reduce or otherwise affect such Liens, security interests andother interests in the Original Pledged Collateral granted under the Existing PledgeAgreement.

 

**7.14               **EntireAgreement.  **THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THEOTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOTBE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

[SIGNATURE PAGES FOLLOW]

 

H-12

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The partieshereto have caused this Pledge Agreement to be duly executed as of the datefirst above written.

 
|   | **PLEDGORS:**                    |
|--------|----------------------------------|
|   |                             |
|   | **CANO  PETROLEUM, INC.**        |
|   |                             |
|   | By:                              |   |
|   |                             |   | Benjamin Daitch |
|   |                             |   | Senior Vice President and Chief Financial Officer |
|   |                             |
|   | **W.O.  ENERGY, INC.**           |
|   | **W.O.  ENERGY OF NEVADA, INC.** |
|   |                             |
|   |                             |
|   | Each by:                         |   |
|   |                             | Benjamin Daitch |
|   |                             | Vice President and Chief Financial Officer |
|   |                             |
|   |                             |
|   | **ADMINISTRATIVE  AGENT:**       |
|   |                             |
|   | UNION BANK OF CALIFORNIA, N.A.   |
|   |                             |
|   | By:                              |   |
|   | Name:                            |   |
|   | Title:                           |   |
|        |                                  |  |  |  |  |  |  |  |

 

H-13

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**SCHEDULE2.02(a)**

 

**PLEDGEDCOLLATERAL**

 

Attached toand forming a part of that certain Amended and Restated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to Union Bank of California, N.A., as theAdministrative Agent.

 
| **Pledgor** | ** ** | **Issuer** | ** ** | **Type of Membership  Interest** | ** ** | **% of Membership Interest  Owned** |
|-------------|------------|------------|------------|--------------------------------------------|------------|----------------------------------------------------|
| None        |       |       |       |                                       |       |                                               |

 

H-14

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SCHEDULE 2.02(b)

 

**PLEDGED COLLATERAL**

 

Attached toand forming a part of that certain Amended and Restated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to Union Bank of California, N.A., as theAdministrative 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-15

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#### **SCHEDULE2.02(c)**

#### ** **

**PLEDGED COLLATERAL**

 

Attached toand forming a part of that certain Amended and Restated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to Union Bank of California, N.A., as theAdministrative 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-16

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**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-17

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| **Organizational Number:**             |   | C20757-1996-001 |
|----------------------------------------|--------|-----------------|
|                                   |   |            |
| **Federal Tax Identification Number:** |   | 88-0369151      |
|                                   |   |            |
| **Prior Names:**                       |   | None.           |

 

H-18

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Annex 1 to the

Pledge Agreement

 

SUPPLEMENTNO. [            ]  dated as of[               ](the “Supplement”), to the Amended and Restated Pledge Agreement datedas of December 17, 2008 (as amended, supplemented or otherwise modifiedfrom time to time, the “Pledge Agreement”) by and among CANO PETROLEUM,INC., a Delaware corporation (“Borrower”), each other party signatoryhereto (together with the Borrower, the “Pledgors” and individually,each a “Pledgor”) and Union Bank of California, N.A. as AdministrativeAgent (as hereinafter defined) under the Credit Agreement (as hereinafterdefined) for the benefit of the Secured Parties (as hereinafter defined).

 

**RECITALS**

 

D.            Reference is made to the followingdocuments related to extension of credit to the Borrower:

 

(i)            that certainAmended and Restated Credit Agreement dated as of December 17, 2008 (as itmay be amended, restated or otherwise modified from time to time, the “CreditAgreement”) by and among the Borrower, the lenders party thereto from timeto time (the “Lenders”), and Union Bank of California, N.A., asadministrative agent for such Lenders (in such capacity, the “AdministrativeAgent”), and as issuing lender (in such capacity, the “Issuing Lender”);

 

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

 

B.            The Pledgors have entered into the Pledge Agreement inorder to induce the Lenders to make loans and the Issuing Lender to issueletters of credit under the Credit Agreement. Pursuant to Section 6.15 of the Credit Agreement, each Subsidiaryof the Borrower that was not in existence on the date of the Credit Agreementis required to enter into the Pledge Agreement as a Pledgor upon becoming aSubsidiary.  Section 7.12 of thePledge Agreement provides that additional Subsidiaries of the Borrower maybecome Pledgors under the Pledge Agreement by execution and delivery of aninstrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the “New Pledgor”) isexecuting this Supplement in accordance with the requirements of the CreditAgreement to become a Pledgor under the Pledge Agreement in order to induce theLenders to make additional loans and the Issuing Lender to issue additionalletters of credit and as consideration for loans previously made and letters ofcredit previously issued.

 

D.            Capitalized terms used herein and not otherwise definedherein shall have the meanings assigned to such terms in the Pledge Agreementand the Credit Agreement.

 

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

 

(a)           In accordance with Section 7.12of the Pledge Agreement, the New Pledgor by its signature below becomes aPledgor under the Pledge Agreement with the same force and effect 

 

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as if originally namedtherein as a Pledgor and the New Pledgor hereby agrees (a) to all theterms and provisions of the Pledge Agreement applicable to it as a Pledgorthereunder and (b) represents and warrants that the representations andwarranties made by it as a Pledgor thereunder are true and correct on and as ofthe date hereof in all material respects. In furtherance of the foregoing, the New Pledgor, as security for thepayment and performance in full of the Secured Obligations, does hereby createand grant to the Administrative Agent, its successors and assigns, for thebenefit of the Secured Parties, their successors and assigns, a continuingsecurity interest in and lien on all of the New Pledgor’s right, title andinterest in and to the Pledged Collateral of the New Pledgor.  Each reference to a “Pledgor” in the PledgeAgreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporatedherein by reference.

 

(b)           The New Pledgor represents andwarrants to the Administrative Agent and the other Secured Parties that thisSupplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding inequity or at law)).

 

(c)           This Supplement may be executed incounterparts, each of which shall constitute an original, but all of which whentaken together shall constitute a single contract.  This Supplement shall become effective whenthe Administrative Agent shall have received counterparts of this Supplementthat, when taken together, bear the signatures of the New Pledgor and the AdministrativeAgent.  Delivery of an executed signaturepage to this Supplement by facsimile transmission shall be as effective asdelivery of a manually signed counterpart of this Supplement.

 

(d)           The New Pledgor hereby represents andwarrants that (a) set forth on Schedules 2.02(a), 2.02(b), and 2.02(c) attachedhereto are true and correct schedules of all its Membership Interests,Partnership Interests and Pledged Shares, as each term is defined in the PledgeAgreement, and (b) set forth on Schedule 3 attached hereto are its solejurisdiction of formation, type of organization, its federal tax identificationnumber and the organizational number, and all names used by it during the lastfive years prior to the date of this Supplement.

 

(e)           Except as expressly supplementedhereby, the Pledge Agreement shall remain in full force and effect.

 

(f)            THIS SUPPLEMENT SHALL BE GOVERNED BYAND 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 INTERESTSHEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGEDCOLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OFTEXAS.

 

(g)           In case any one or more of theprovisions contained in this Supplement should be held invalid, illegal or unenforceablein any respect, neither party hereto shall be required to 

 

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comply with suchprovision for so long as such provision is held to be invalid, illegal orunenforceable, but the validity, legality and enforceability of the remainingprovisions contained herein and in the Pledge Agreement shall not in any way beaffected or impaired.  The parties heretoshall endeavor in good-faith negotiations to replace the invalid, illegal orunenforceable provisions with valid provisions the economic effect of whichcomes as close as possible to that of the invalid, illegal or unenforceableprovisions.

 

(h)           All communications and noticeshereunder shall be in writing and given as provided in the Pledge Agreement.  All communications and notices hereunder tothe New Pledgor shall be given to it at the address set forth under itssignature hereto.

 

(i)            TheNew Pledgor agrees to reimburse the Administrative Agent for its reasonableout-of-pocket expenses in connection with this Supplement, including thereasonable fees, other charges and disbursements of counsel for theAdministrative Agent.

 

**THISSUPPLEMENT, THE PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOANDOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONGTHE PARTIES HERETO.**

 

[SIGNATURES PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the New Pledgor and the Administrative Agent haveduly executed this Supplement to the Pledge Agreement as of the day and yearfirst above written.

 
|   | **NEW  PLEDGOR:**                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | [                                                                          ] |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | By:                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | Name:                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   | Title:                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | **ADMINISTRATIVE  AGENT:**                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | UNION BANK OF CALIFORNIA, N.A.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | By:                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | Name:                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   | Title:                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |  |  |  |

 

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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)**

 
| **Issuer** | ** ** | **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:                             |                                                                                                    |

 

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**EXHIBIT I**

 

**FORM OF SECURITY AGREEMENT**

 

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

 

**RECITALS**

 

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

 

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

 

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

 

D.            It is a requirement under the Credit Agreement that (i) theBorrower shall continue to secure the due payment and performance of allObligations (as defined in the Credit Agreement) by amending and restating inits entirety the Existing Security Agreement as set forth herein, and (ii) theother Grantors shall continue to secure the due payment and performance of allObligations (as defined in the Credit Agreement) by executing and deliveringthis Security Agreement, in each case, in favor of the Administrative Agent forthe ratable benefit of the Secured Parties.

 

E.             Each Grantor (otherthan the Borrower) is a subsidiary of the Borrower and will derive substantialdirect and indirect benefits from (i) the transactions contemplated by theCredit Agreement and the other Loan Documents (as defined the Credit Agreement)and (ii) the Hedge 

 

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Contracts (asdefined in the Credit Agreement) entered into by the Borrower or any of itssubsidiaries with a Swap Counterparty.

 

**AGREEMENT**

 

NOW, THEREFORE, in consideration of theforegoing and other good and valuable consideration, the receipt andsufficiency of which is hereby acknowledged and confessed, each Grantor herebyagrees with the Administrative Agent for its benefit and the benefit of theSecured Parties as follows:

 

**Section 1.             **Definitions;Interpretation.  (a) Allcapitalized terms not otherwise defined in this Security Agreement that aredefined in the Credit Agreement shall have the meanings assigned to such termsby the Credit Agreement.  Any terms usedin this Security Agreement that are defined in the UCC (as defined below) andnot otherwise defined herein or in the Credit Agreement, shall have themeanings assigned to those terms by the UCC. All meanings to defined terms, unless otherwise indicated, are to beequally applicable to both the singular and plural forms of the terms defined.  The following terms shall have the meaningsspecified below:

 

“Accounts”means an “account” as defined in the UCC, including, without limitation, all ofany 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 orevidenced by an account, note, contract, security agreement, Chattel Paper(including, without limitation, tangible Chattel Paper and electronic ChattelPaper), or other evidence of indebtedness or security, together with all of theright, title and interest of any Grantor in and to (i) all securitypledged, assigned, hypothecated or granted to or held by any Grantor to securethe foregoing, (ii) all of any Grantor’s right, title and interest in andto any goods or services, the sale of which gave rise thereto, (iii) allguarantees, endorsements and indemnifications on, or of, any of the foregoing, (iv) allpowers of attorney granted to any Grantor for the execution of any evidence ofindebtedness or security or other writing in connection therewith, (v) allbooks, correspondence, credit files, records, ledger cards, invoices, and otherpapers relating thereto, including without limitation all similar informationstored on a magnetic medium or other similar storage device and other papersand documents in the possession or under the control of any Grantor or anycomputer bureau from time to time acting for any Grantor, (vi) allevidences of the filing of financing statements and other statements granted toany Grantor and the registration of other instruments in connection therewithand amendments thereto, notices to other creditors or secured parties, andcertificates from filing or other registration officers, (vii) all creditinformation, reports and memoranda relating thereto, and (viii) all otherwritings related in any way to the foregoing.

 

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

 

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

 

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

 

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

 

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

 

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

 

“ContractRights” means (i) all (A) of any Grantor’s rights to paymentunder any Contract or Contract Document and (B) payments due and to becomedue to any Grantor under any Contract or Contract Document, in each casewhether as contractual obligations, damages or otherwise; (ii) all of anyGrantor’s claims, rights, powers, or privileges and remedies under any Contractor Contract Document; and (iii) all of any Grantor’s rights under anyContract or Contract Document to make determinations, to exercise any election(including, but not limited to, election of remedies) or option or to give orreceive any notice, consent, waiver or approval together with full power andauthority with respect to any Contract or Contract Document to demand, receive,enforce or collect any of the foregoing rights or any property which is thesubject of any Contract or Contract Document, to enforce or execute any checks,or other instruments or orders, to file any claims and to take any actionwhich, in the opinion of the Secured Parties, may be necessary or advisable inconnection with any of the foregoing.

 

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

 

“Equipment”means any equipment now or hereafter owned or leased by any Grantor, or inwhich any Grantor holds or acquires any other right, title or interest,constituting “equipment” under the UCC, including, without limitation, allsurface or subsurface machinery, equipment, facilities, supplies, or othertangible personal property, including tubing, rods, pumps, pumping units andengines, pipe, pipelines, meters, apparatus, boilers, compressors, liquidextractors, connectors, valves, fittings, power plants, poles, lines, cables,wires, transformers, starters and controllers, machine shops, tools, machineryand parts, storage yards and equipment stored therein, buildings and camps,telegraph, telephone, and other communication systems, loading docks, loadingracks, and shipping facilities, and any manuals, instructions, blueprints,computer software (including software that is imbedded in and part of theequipment), and similar items 

 

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which relate tothe above, and any and all additions, substitutions and replacements of any ofthe foregoing, wherever located together with all improvements thereon and allattachments, components, parts, equipment and accessories installed thereon oraffixed thereto.

 

“Fixtures”means any fixtures now or hereafter owned or leased by any Grantor, or in whichany 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 locatedtogether with all improvements thereon and all attachments, components, parts,equipment and accessories installed thereon or affixed thereto.

 

“GeneralIntangibles” means all general intangibles now or hereafter owned by anyGrantor, or in which any Grantor holds or acquires any other right, title orinterest, constituting “general intangibles” or “payment intangibles” under theUCC, 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 servicemarks (whether or not registered), trade dress, including logos and/or designs,copyrights, patents, patent applications, goodwill of any Grantor’s businesssymbolized by any of the foregoing, trade secrets, license rights, licenseagreements, permits, franchises, and any rights to tax refunds to which anyGrantor is now or hereafter may be entitled.

 

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

 

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

 

“InsuranceContracts” means all contracts and policies of insurance and re-insurancemaintained or required to be maintained by or on behalf of any Grantor underthe Loan Documents.

 

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

 

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

 

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

 

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

 

“PermittedLiens” shall have the meaning assigned to such term in the CreditAgreement.

 

“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, anyinsurance, indemnity, warranty or guaranty payable from time to time withrespect to any of the Collateral, (ii) any and all payments (in any formwhatsoever) made or due and payable from time to time in connection with anyrequisition, confiscation, condemnation, seizure or forfeiture of all or anypart of the Collateral by any Governmental Authority (or any Person actingunder color of any Governmental Authority), (iii) all proceeds received orreceivable when any or all of the Collateral is sold, exchanged or otherwisedisposed, whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) allclaims of any Grantor for damages arising out of, or for breach of or defaultunder, any Collateral, (v) all rights of any Grantor to terminate, amend,supplement, modify or waive performance under any Contracts, to performthereunder and to compel performance and otherwise exercise all remediesthereunder, and (vi) any and all other amounts from time to time paid orpayable under or in connection with any of the Collateral.

 

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

 

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

 

“UCC” shallmean the Uniform Commercial Code as the same may, from time to time, be ineffect in the State of Texas; provided, however, in the event that, by reasonof mandatory provisions of law, any or all of the attachment, perfection orpriority of the security interest in any Collateral is governed by the UniformCommercial 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 suchother jurisdiction for purposes of the 

 

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provisions hereofrelating to such attachment, perfection or priority and for purposes ofdefinitions related to such provisions.

 

(b)           All meanings todefined terms, unless otherwise indicated, are to be equally applicable to boththe singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit referencesare to Articles and Sections of and Schedules and Exhibits to this SecurityAgreement, unless otherwise specified. All references to instruments, documents, contracts, and agreements arereferences to such instruments, documents, contracts, and agreements as thesame 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 SecurityAgreement shall refer to this Security Agreement as a whole and not to anyparticular provision of this Security Agreement.  As used herein, the term “including” means “including,without limitation,”. Paragraph headings have been inserted in this SecurityAgreement as a matter of convenience for reference only and it is agreed thatsuch paragraph headings are not a part of this Security Agreement and shall notbe 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 promptand complete payment and performance when due of all Secured Obligations, eachGrantor hereby assigns, pledges, and grants to the Administrative Agent for thebenefit of the Secured Parties a lien on and continuing security interest inall of such Grantor’s right, title and interest in, to and under, all itemsdescribed in this Section 2, whether now owned or hereafter acquired bysuch Grantor and wherever located and whether now or hereafter existing orarising (collectively, the “Collateral”):

 
| (i)    |   | all  Contracts, all Contract Rights, Contract Documents and Accounts associated  with such Contracts and each and every document granting security to such  Grantor under any such Contract;                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| (ii)   |   | all  Accounts;                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (iii)  |   | all  Inventory;                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (iv)   |   | all  Equipment;                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (v)    |   | all  General Intangibles;                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (vi)   |   | all  Investment Property;                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (vii)  |   | all  Fixtures;                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (viii) |   | all  Cash Collateral;                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                 |
| (ix)   |   | any  Legal Requirements now or hereafter held by such Grantor (except that any  Legal Requirement which would by its terms or under applicable law become  void, voidable, terminable or revocable by being subjected to the Lien of  this Security Agreement or in which a Lien is not permitted to |

 

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|   |   | 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 containedherein to the contrary, it is the intention of each Grantor, the AdministrativeAgent, and the Secured Parties that the amount of the Secured Obligationsecured by each Grantor’s interests in any of its Property shall be in, but notin excess of, the maximum amount permitted by fraudulent conveyance, fraudulenttransfer and other similar law, rule or regulation of any GovernmentalAuthority applicable to such Grantor. Accordingly, notwithstanding anything tothe contrary contained in this Security Agreement in any other agreement orinstrument executed in connection with the payment of any of the SecuredObligations, the amount of the Secured Obligations secured by each Grantor’sinterests in any of its Property pursuant to this Security Agreement shall belimited to an aggregate amount equal to the largest amount that would notrender such Grantor’s obligations hereunder or the liens and security interestgranted to the Administrative Agent hereunder subject to avoidance under Section 548of the United States Bankruptcy Code or any comparable provision of any otherapplicable law.

 

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**Section 3.             **Representationsand Warranties.  Each Grantor herebyrepresents and warrants the following to the Administrative Agent and the otherSecured Parties:

 

(i)    Records.  Such Grantor’s sole jurisdiction of formationand type of organization are as set forth in Schedule 1 attachedhereto.  All records concerning theAccounts, General Intangibles, or any other Collateral applicable to suchGrantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by apromissory 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 Grantorfree and clear of any Lien, except for the Permitted Liens.  No effective financing statement or otherinstrument similar in effect covering all or any part of the Collateral is, orwill be, on file in any recording office, except such as may be filed inconnection with this Security Agreement or in connection with other PermittedLiens or for which satisfactory releases have been received by theAdministrative Agent.

 

(iii)  Lien Priority and Perfection.

 

Subject only to Permitted Liens, this SecurityAgreement 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 withthe jurisdiction listed in Schedule 1, the security interests granted tothe Secured Parties hereunder will constitute valid first-priority perfectedsecurity interests in all Collateral with respect to which a security interestcan be perfected by the filing of a financing statement, subject only toPermitted Liens.

 

No consent of any other Person and no authorization,approval, or other action by, and no notice to or filing with any GovernmentalAuthority 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) forthe validity, perfection, or maintenance of the pledge, assignment, lien, andsecurity interest created hereby (including the first-priority (subject toPermitted Liens) nature thereof), except for security interests that cannot beperfected by filing under the UCC, or (C) for the exercise by theAdministrative Agent of the rights provided for in this Security Agreement orthe 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) thoseconsents, approvals, authorizations, actions, notices or filings which havebeen duly obtained or made and, in the case of the maintenance of perfection,the filing of continuation statements under the UCC, and (3) those filingsand actions described in Section 3(c)(i).

 

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(iv)  Tax Identification Number andOrganizational Number.  The federaltax identification number of such Grantor and the organizational number of suchGrantor 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 currentname during the last five years prior to the date of this Security Agreement.

 

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

 

**Section 4.             **Covenants.

 

(i)    Further Assurances.

 

Each Grantor agrees that from time to time, at itsexpense, such Grantor shall promptly execute and deliver all instruments anddocuments, and take all action, that may be reasonably necessary or desirable,or that the Administrative Agent may reasonably request, in order to perfectand protect any pledge, assignment, or security interest granted or intended tobe granted hereby or to enable the Administrative Agent to exercise and enforceits rights and remedies hereunder with respect to any Collateral.  Without limiting the generality of theforegoing, each Grantor (A) at the request of the Administrative Agent,shall execute such instruments, endorsements or notices, as may be reasonablynecessary or desirable or as the Administrative Agent may reasonably request,in order to perfect and preserve the assignments and security interests grantedor purported to be granted hereby, (B) shall, at the reasonable request ofthe Administrative Agent, mark conspicuously each material document included inthe Collateral, each Chattel Paper included in the Accounts, and each of itsrecords pertaining to the Collateral with a legend, in form and substancesatisfactory to the Administrative Agent, including that such document, ChattelPaper, or record is subject to the pledge, assignment, and security interestgranted hereby, (C) shall, if any Collateral shall be evidenced by apromissory note or other instrument or chattel paper, deliver and pledge to theAdministrative Agent hereunder such note or instrument or chattel paper dulyendorsed and accompanied by duly executed instruments of transfer orassignment, all in form and substance satisfactory to the Administrative Agent,and (D) authorizes the Administrative Agent to file any financingstatements, amendments or continuations without the signature of such Grantorto the extent permitted by applicable law in order to perfect or maintain theperfection of any security interest granted under this Security Agreement(including, without limitation, financing statements using an “all assets” or “allpersonal property” collateral description).

 

Each Grantor shall pay all filing, registration andrecording fees and all refiling, re-registration and re-recording fees, and allother 

 

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reasonable expenses incident to the execution andacknowledgment 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 anddelivery of this Security Agreement, any agreement supplemental hereto, anyfinancing statements, and any instruments of further assurance.

 

Each Grantor shall promptly provide to theAdministrative Agent all information and evidence the Administrative Agent mayreasonably request concerning the Collateral to enable the Administrative Agentto enforce the provisions of this Security Agreement.

 

(ii)   Change of Name; State of Formation.  Each Grantor shall give the AdministrativeAgent at least 30 days’ prior written notice before it (i) in the case ofany Grantor that is not a “registered organization” (as such term is defined inSection 9-102 of the UCC), changes the location of its principal place ofbusiness and chief executive office, (ii) changes the location of itsjurisdiction of formation or organization, (iii) changes the location ofthe Equipment, Inventory, or original copies of any Chattel Paper evidencingAccounts, or (iv) uses a trade name other than its current name used onthe date hereof.  Other than as permittedby 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 equivalentorganizational documents, nor amend its name or change its jurisdiction ofincorporation, organization or formation.

 

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

 

(iv)  Liability Under Contracts and Accounts.  Notwithstanding anything in this SecurityAgreement to the contrary, (i) the execution of this Security Agreementshall not release any Grantor from its obligations and duties under any of theContract Documents, or any other contract or instrument which are part of theCollateral and Accounts included in the Collateral, (ii) the exercise bythe Administrative Agent of any of its rights hereunder shall not release anyGrantor from any of its duties or obligations under any Contract Documents, orany other Contract or Instrument which are part of the Collateral and Accountsincluded in the Collateral, and (iii) the Administrative Agent shall nothave any obligation or liability under any Contract Documents, or any othercontract or instrument which are part of the Collateral and Accounts includedin the Collateral by reason of the execution and delivery of this SecurityAgreement, nor shall the Administrative Agent be obligated to perform any ofthe obligations or duties of any Grantor thereunder or to take any action tocollect or enforce any claim for payment assigned hereunder.

 

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

 

(vi)          Accounts.  Each Grantor agrees that it will usecommercially reasonable efforts to ensure that each Account (i) is andwill be, in all material respects, the genuine, legal, valid, and bindingobligations of the account debtor in respect thereof, representing anunsatisfied obligation of such account debtor, (ii) is and will be, in allmaterial respects, enforceable in accordance with its terms, (iii) is notand will not be subject to any setoffs, defenses, taxes, counterclaims, exceptin the ordinary course of business, (iv) is and will be, in all materialrespects, in compliance with all applicable laws, whether federal, state, localor foreign, and (v) which if evidenced by Chattel Paper, will not requirethe consent of the account debtor in respect thereof in connection with itsassignment hereunder.

 

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

 

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

 

**Section 5.             **Terminationof Security Interest.  Upon theindefeasible payment in full in cash of the Secured Obligations (including allLetter of Credit Obligations), the termination or expiration of all Letters ofCredit and the termination of all obligations of the Issuing Lender and theLenders in respect of Letters of Credit, the termination of the Hedge Contractswith the Secured Parties and the termination or expiration of the Commitments,the security interest granted hereby shall terminate and all rights to theCollateral shall revert to the applicable Grantor to the extent such Collateralshall not have been sold or otherwise applied pursuant to the termshereof.  Upon any such termination, theAdministrative Agent will, at the Grantors’ expense, execute and deliver to theapplicable Grantor such documents (including, without limitation, UCC-3termination statements) as such Grantor shall reasonably request to evidencesuch termination.

 

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**Section 6.****                                         **Reinstatement.If, at any time after payment in full of all Secured Obligations andtermination of the Administrative Agent’s security interest, any payments onthe Secured Obligations previously made must be disgorged by any Secured Partyfor any reason whatsoever, including, without limitation, the insolvency,bankruptcy or reorganization of any Grantor or any other Person, this SecurityAgreement and the Administrative Agent’s security interests herein shall bereinstated as to all disgorged payments as though such payments had not beenmade, and each Grantor shall sign and deliver to the Administrative Agent alldocuments, and shall do such other acts and things, as may be necessary toreinstate and perfect the Administrative Agent’s security interest.  **EACHGRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHERSECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OREXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE ATTORNEYS’ FEES ANDEXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THEINDEMNIFIED SECURED PARTY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE,LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLEJUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCHINDEMNIFIED SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.**

 

**Section 7.****                                         **Remediesupon Event of Default.

 

(a)                                  Ifany Event of Default has occurred and is continuing, the Administrative Agentmay (and shall at the written request of the Majority Lenders or all Lenders,as applicable), (i) proceed to protect and enforce the rights vested in itby this Security Agreement or otherwise available to it, including but notlimited to, the right to cause all revenues and other moneys pledged hereby asCollateral to be paid directly to it, and to enforce its rights hereunder tosuch payments and all other rights hereunder by such appropriate judicialproceedings as it shall deem most effective to protect and enforce any of suchrights, either at law or in equity or otherwise, whether for specificenforcement of any covenant or agreement contained in any of the ContractDocuments, or in aid of the exercise of any power therein or herein granted, orfor any foreclosure hereunder and sale under a judgment or decree in anyjudicial proceeding, or to enforce any other legal or equitable right vested init by this Security Agreement or by law; (ii) cause any action at law or suitin equity or other proceeding to be instituted and prosecuted and enforce anyrights hereunder or included in the Collateral, subject to the provisions andrequirements thereof; (iii) sell or otherwise dispose of any or all of theCollateral or cause the Collateral to be sold or otherwise disposed of in oneor more sales or transactions, at such prices and in such manner as may becommercially reasonable, and for cash or on credit or for future delivery,without assumption of any credit risk, at public or private sale, withoutdemand of performance or notice of intention to sell or of time or place ofsale (except such notice as is required by applicable statute and cannot bewaived), it being agreed that the Administrative Agent may be a purchaser on behalfof the Secured Parties or on its own behalf at any such sale and that theAdministrative Agent, any other Secured Party, or any other Person who may be abona fide purchaser for value and without notice of any claims of any or all ofthe Collateral so sold shall thereafter hold the same absolutely free from anyclaim or right of whatsoever kind, including any equity of redemption of anyGrantor, any such demand, notice or right and equity 

 

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being hereby expressly waived and released to theextent permitted by law; (iv) incur reasonable expenses, includingreasonable attorneys’ fees, reasonable consultants’ fees, and other costsappropriate to the exercise of any right or power under this SecurityAgreement; (v) perform any obligation of any Grantor hereunder and makepayments, purchase, contest or compromise any encumbrance, charge or lien, andpay taxes and expenses, without, however, any obligation to do so; (vi) inconnection with any acceleration and foreclosure, take possession of theCollateral and render it usable and repair and renovate the same, without,however, any obligation to do so, and enter upon any location where theCollateral may be located for that purpose, control, manage, operate, rent andlease the Collateral, collect all rents and income from the Collateral andapply the same to reimburse the Secured Parties for any cost or expensesincurred hereunder or under any of the Loan Documents and to the payment orperformance of any Grantor’s obligations hereunder or under any of the LoanDocuments, and apply the balance to the other Secured Obligations and anyremaining excess balance to whomsoever is legally entitled thereto; (vii) securethe appointment of a receiver for the Collateral or any part thereof; (viii) requireany Grantor to, and each Grantor hereby agrees that it will at its expense andupon request of the Administrative Agent forthwith, assemble all or part of theCollateral as directed by the Administrative Agent and make it available to theAdministrative Agent at a place to be designated by the Administrative Agentwhich is reasonably convenient to both parties; (ix) exercise any other oradditional rights or remedies granted to a secured party under the UCC; or (x) occupyany premises owned or leased by any Grantor where the Collateral or any partthereof is assembled for a reasonable period in order to effectuate its rightsand remedies hereunder or under law, without obligation to any Grantor inrespect of such occupation.  If, pursuantto applicable law, prior notice of sale of the Collateral under this Section isrequired to be given to any Grantor, each Grantor hereby acknowledges that theminimum 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 beobligated to make any sale of Collateral regardless of notice of sale havingbeen given.  The Administrative Agent mayadjourn any public or private sale from time to time by announcement at thetime and place fixed therefor, and such sale may, without further notice, bemade at the time and place to which it was so adjourned.

 

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

 

**Section 8.****                                         **RemediesCumulative; Delay Not Waiver.

 

(a)                                  Noright, power or remedy herein conferred upon or reserved to the AdministrativeAgent is intended to be exclusive of any other right, power or remedy and everysuch right, power and remedy shall, to the extent permitted by law, becumulative and in addition to every other right, power and remedy givenhereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right orremedy hereunder or otherwise shall not prevent the concurrent assertion oremployment of any other appropriate right or 

 

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remedy.  Resortto any or all security now or hereafter held by the Administrative Agent may betaken concurrently or successively and in one or several consolidated orindependent judicial actions or lawfully taken nonjudicial proceedings, orboth.

 

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

 

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

 

**Section 10.****                                  **Accounts.

 

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

 

(b)                                 After receipt by anyGrantor of the notice referred to in Section 10(a) above that anEvent of Default has occurred and is continuing, all amounts and Proceeds(including instruments) received by such Grantor in respect of the Accountsshall be received in trust for the benefit of the Administrative Agenthereunder, shall be segregated from other funds of such Grantor, and shallpromptly be paid over to the Administrative Agent in the same form as soreceived (with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, orcompromise the amount or payment of any Account, nor release wholly or partlyany account debtor or obligor thereof, nor allow any credit or discount thereonother than in the ordinary course of business and consistent with pastpractices.

 

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

 

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

 

(i)             toask, require, demand, receive and give acquittance for any and all moneys andclaims for moneys due and to become due under or arising out of the any of theother Collateral, including without limitation, any Insurance Contracts;

 

(ii)          toelect remedies thereunder and to endorse any checks or other instruments ororders in connection therewith;

 

(iii)       to file any claims or take any action orinstitute any proceedings in connection therewith which the AdministrativeAgent may deem to be necessary or advisable;

 

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

 

(v)         uponforeclosure, to do any and every act which any Grantor may do on its behalfwith respect to the Collateral or any part thereof and to exercise any or allof 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 uponthe occurrence and continuation of an Event of Default.  **This power of attorney isa power coupled with an interest and shall be irrevocable.**

 

**Section 13.****                                  **AdministrativeAgent May Perform.  TheAdministrative Agent may from time-to-time perform any act which any Grantorhas agreed hereunder to perform and which such Grantor shall fail to performafter being requested in writing so to perform (it being understood that nosuch request need be given after the occurrence and during the continuance ofany Event of Default and after notice thereof by the Administrative Agent toany Grantor) and the Administrative Agent may from time-to-time take any otheraction which the Administrative Agent deems necessary for the maintenance,preservation or protection of any of the Collateral or of its security interesttherein, and the reasonable expenses of the Administrative Agent incurred inconnection therewith shall be part of the Secured Obligations and shall besecured hereby.

 

**Section 14.****                                  **AdministrativeAgent Has No Duty.  The powersconferred on the Administrative Agent hereunder are solely to protect itsinterest in the Collateral and shall not impose any duty on it to exercise anysuch powers.  Except for reasonable careof any Collateral in its possession and the accounting for moneys actuallyreceived by it hereunder, the Administrative Agent shall have no duty as to anyCollateral or responsibility for taking any 

 

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necessary steps topreserve rights against prior parties or any other rights pertaining to anyCollateral.

 

**Section 15.****                                  **ReasonableCare.  The Administrative Agent shallbe deemed to have exercised reasonable care in the custody and preservation ofthe Collateral in its possession if the Collateral is accorded treatmentsubstantially equal to that which the Administrative Agent accords its ownProperty.

 

**Section 16.****                                  **PaymentsHeld in Trust.  During thecontinuance of an Event of Default, all payments received by any Grantor underor in connection with any Collateral shall be received in trust for the benefitof the Administrative Agent, and shall be segregated from other funds of suchGrantor and shall be forthwith paid over to the Administrative Agent in thesame form as received (with any necessary endorsement).

 

**Section 17.****                                  **Miscellaneous.

 

(i)             Expenses.  Each Grantor will upon demand pay to theAdministrative Agent for its benefit and the benefit of the Secured Parties theamount of any reasonable out-of-pocket expenses, including the reasonable feesand disbursements of its counsel and of any experts, which the AdministrativeAgent and the Secured Parties may incur in connection with (i) thecustody, preservation, use, or operation of, or the sale, collection, or otherrealization of, any of the Collateral, (ii) the exercise or enforcement ofany of the rights of the Administrative Agent or any Secured Party hereunder,and (iii) the failure by any Grantor to perform or observe any of the provisionshereof.

 

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

 

(iii)       Addresses for Notices.  All notices and other communications providedfor hereunder shall be made in the manner and to the addresses set forth in theCredit Agreement.

 

(iv)      ContinuingSecurity Interest; Transfer of Interest. This Security Agreement shall create a continuing security interest inthe Collateral and, unless expressly released by the Administrative Agent,shall (a)  remain in full force and effect until the indefeasible paymentin full in cash of the Secured Obligations (including all Letter of CreditObligations), the termination or expiration of all Letters of Credit and thetermination of all obligations of the Issuing Lender and the Lenders in respectof Letters of Credit, the termination of the Hedge Contracts with the SecuredParties and the termination or expiration of the Commitments, (b) bebinding upon each Grantor and its successors, tranferees and assigns, and (c) inure,together with the rights and remedies of the Administrative Agent hereunder, tothe benefit of and be binding upon, the Administrative Agent, the IssuingLender, the Lenders, and their respective successors, transferees, and assigns,and to the benefit of and be binding upon, 

 

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the Swap Counterparties,and each of their respective successors, transferees, and assigns to the extentsuch successors, transferees, and assigns of a Swap Counterparty is a Lender oran Affiliate of a Lender.  Withoutlimiting the generality of the foregoing clause, when any Lender assigns orotherwise transfers any interest held by it under the Credit Agreement or otherLoan Documents to any other Person pursuant to the terms of the CreditAgreement or such other Loan Documents, that other Person shall thereuponbecome vested with all the benefits held by such Lender under this SecurityAgreement.  Notwithstanding theforegoing, when any Swap Counterparty assigns or otherwise transfers anyinterest held by it under any Hedge Contract to any other Person pursuant tothe terms of such agreement, that other Person shall thereupon become vestedwith all the benefits held by such Secured Party under this Security Agreementonly if such Person is also then a Lender or an Affiliate of a Lender.

 

(v)         Severability.  Wherever possible each provision of thisSecurity Agreement shall be interpreted in such manner as to be effective andvalid under applicable law, but if any provision of this Security Agreementshall be prohibited by or invalid under such law, such provision shall beineffective to the extent of such prohibition or invalidity, withoutinvalidating the remainder of such provision or the remaining provisions ofthis Security Agreement.

 

(vi)      Choiceof Law.  This Security Agreementshall be governed by and construed and enforced in accordance with the laws ofthe State of Texas, except to the extent that the validity or perfection of thesecurity interests hereunder, or remedies hereunder, in respect of anyparticular Collateral are governed by the laws of a jurisdiction other than thestate of Texas.

 

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

 

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

 

(ix)        Conflicts.**** In the event of any explicit orimplicit conflict between any provision of this Security Agreement and anyprovision of the Credit Agreement, the terms of the Credit Agreement shall becontrolling.

 

(x)           AdditionalGrantors*.* Pursuant to Section 6.15 of the Credit Agreement, each Subsidiaryof the Borrower that was not in existence on the date of the Credit Agreementis required to enter into this Security Agreement as a Grantor upon becoming aSubsidiary of the Borrower.  Uponexecution and delivery after the date hereof by the Administrative Agent andsuch Subsidiary of an instrument in the form of Annex 1, suchSubsidiary shall become a Grantor hereunder with the same force and effect asif originally 

 

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named as a Grantorherein.  The execution and delivery ofany instrument adding an additional Grantor as a party to this SecurityAgreement shall not require the consent of any other Grantor hereunder.  The rights and obligations of each Grantorhereunder shall remain in full force and effect notwithstanding the addition ofany new Grantor as a party to this Security Agreement.

 

(xi)        Amendmentand Restatement; Confirmation of Liens. This Security Agreement is an amendment and restatement of the ExistingSecurity Agreement and supersedes the Existing Security Agreement in itsentirety; provided, however, that (i) the execution and delivery of thisSecurity Agreement shall not effect a novation of the Existing SecurityAgreement but shall be, to the fullest extent applicable, in modification,renewal, confirmation and extension of such Existing Security Agreement, and (ii) theLiens, security interests and other interests in the collateral as described inthe Existing Security Agreement (the “Original Collateral”) grantedunder the Existing Security Agreement are and shall remain legal, valid,binding and enforceable with regard to such Original Collateral.  Each Grantor party to the Existing SecurityAgreement hereby acknowledges and confirms the continuing existence andeffectiveness of such Liens, security interests and other interests in theOriginal Collateral granted under the Existing Security Agreement, and furtheragrees that the execution and delivery of this Security Agreement and the otherLoan Documents shall not in any way release, diminish, impair, reduce orotherwise affect such Liens, security interests and other interests in theOriginal Collateral granted under the Existing Security Agreement.

 

**(xii)****                         **EntireAgreement.  **THISSECURITY AGREEMENT, THE CREDIT AGREEMENT, AND THE OTHER LOAN DOCUMENTSREPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONGTHE PARTIES HERETO.**

 

[SIGNATURE PAGES FOLLOW]

 

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The partieshereto have caused this Security Agreement to be duly executed as of the datefirst above written.

 
|   | **GRANTORS:**                                      |
|--------|----------------------------------------------------|
|   |                                               |
|   | **CANO  PETROLEUM, INC.**                          |
|   | ** **                                         |
|   | By:                                                |   |
|   |                                               | Benjamin Daitch |
|   |                                               | Senior Vice President and Chief Financial Officer |
|   |                                               |
|   | **LADDER  COMPANIES, INC.**                        |
|   | **SQUARE  ONE ENERGY, INC.**                       |
|   | **W.O.  ENERGY, INC.**                             |
|   | **W.O.  ENERGY OF NEVADA, INC.**                   |
|   | **CANO  PETRO OF NEW MEXICO, INC.**                |
|   |                                               |
|   | Each by:                                           |   |
|   |                                               | 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 |

 

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|   | **ADMINISTRATIVE  AGENT:**     |
|--------|--------------------------------|
|   |                           |
|   | UNION BANK OF CALIFORNIA, N.A. |
|   |                           |
|   | By:                            |   |
|   | Name:                          |   |
|   | Title:                         |   |
|        |                                |  |  |  |

 

I-20

----

 

**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        |

 

I-21

----

 

 
| **Grantor:**                                 | Square One Energy, Inc.       |
|----------------------------------------------|------------------------------------|
|                                         |                               |
| **Sole Jurisdiction of Formation / Filing:** | Texas                              |
|                                         |                               |
| **Type of Organization:**                    | Corporation                        |
|                                         |                               |
| **Address where records for**                |                               |
| **Collateral are kept:**                     | 801 Cherry Street, Suite 3200 |
|                                         | Fort Worth, Texas 76102            |
|                                         |                               |
| **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.                              |

 

I-22

----

 
| **Grantor:**                                 | W.O. Energy of Nevada, Inc.   |
|----------------------------------------------|------------------------------------|
|                                         |                               |
| **Sole Jurisdiction of Formation / Filing:** | Nevada                             |
|                                         |                               |
| **Type of Organization:**                    | Corporation                        |
|                                         |                               |
| **Address where records for**                |                               |
| **Collateral are kept:**                     | 801 Cherry Street, Suite 3200 |
|                                         | Fort Worth, Texas 76102            |
|                                         |                               |
| **Organizational Number:**                   | C20757-1996-001                    |
|                                         |                               |
| **Federal Tax Identification Number:**       | 88-0369151                         |
|                                         |                               |
| **Prior Names:**                             | None.                              |
|                                         |                               |
| **Grantor:**                                 | W.O. Operating Company, Ltd.       |
|                                         |                               |
| **Sole Jurisdiction of Formation / Filing:** | Texas                              |
|                                         |                               |
| **Type of Organization:**                    | Limited Partnership                |
|                                         |                               |
| **Address where records for**                |                               |
| **Collateral are kept:**                     | 801 Cherry Street, Suite 3200 |
|                                         | Fort Worth, Texas 76102            |
|                                         |                               |
| **Organizational Number:**                   | 9373210                            |
|                                         |                               |
| **Federal Tax Identification Number:**       | 75-2675224                         |
|                                         |                               |
| **Prior Names:**                             | None.                              |
|                                         |                               |
| **Grantor:**                                 | W.O. Production Company, Ltd.      |
|                                         |                               |
| **Sole Jurisdiction of Formation / Filing:** | Texas                              |
|                                         |                               |
| **Type of Organization:**                    | Limited Partnership                |

 

I-23

----

 
| **Address where records for**                |                                |
|----------------------------------------------|-------------------------------------|
| **Collateral are kept:**                     | 801 Cherry Street, Suite 3200  |
|                                         | Fort Worth, Texas 76102             |
|                                         |                                |
| **Organizational Number:**                   | 9295410                             |
|                                         |                                |
| **Federal Tax Identification Number:**       | 75-2675222                          |
|                                         |                                |
| **Prior Names:**                             | None.                               |
|                                         |                                |
| **Grantor:**                                 | Cano Petro of New Mexico, Inc. |
|                                         |                                |
| **Sole Jurisdiction of Formation / Filing:** | Texas                               |
|                                         |                                |
| **Type of Organization:**                    | Corporation                         |
|                                         |                                |
| **Address where records for**                |                                |
| **Collateral are kept:**                     | 801 Cherry Street, Suite 3200  |
|                                         | Fort Worth, Texas 76102             |
|                                         |                                |
| **Organizational Number:**                   | TX 800782069                        |
|                                         |                                |
| **Federal Tax Identification Number:**       | 20-8564572                          |
|                                         |                                |
| **Prior Names:**                             | None.                               |

 

I-24

----

 

Annex 1 to the

Security Agreement

 

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

 

E.             Reference is made to the followingdocuments related to extension of credit to the Borrower:

 

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

 

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

 

F.             Capitalized terms used herein andnot otherwise defined herein shall have the meanings assigned to such terms inthe Security Agreement and the Credit Agreement.

 

G.            The Grantors have entered into theSecurity Agreement in order to induce the Lenders to make loans and the IssuingLender to issue letters of credit under the Credit Agreement. Pursuant to Section 6.15of the Credit Agreement, each Subsidiary of the Borrower that was not inexistence on the date of the Credit Agreement is required to enter into theSecurity Agreement as a Grantor upon becoming a Subsidiary. Section 17(j) ofthe Security Agreement provides that additional Subsidiaries of the Borrowermay become Grantors under the Security Agreement by execution and delivery ofan instrument in the form of this Supplement. The undersigned Subsidiary of theBorrower (the “New Grantor”) is executing this Supplement in accordancewith the requirements of the Credit Agreement to become a Grantor under theSecurity Agreement in order to induce the Lenders to make additional loans andthe Issuing

 

I-25

----

 

Lender to issueadditional letters of credit and as consideration for loans previously made andletters of credit previously issued.

 

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

 

(j)            In accordance with Section 17(j) ofthe Security Agreement, the New Grantor by its signature below becomes aGrantor under the Security Agreement with the same force and effect as iforiginally named therein as a Grantor and the New Grantor hereby agrees (a) toall the terms and provisions of the Security Agreement applicable to it as aGrantor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Grantor thereunder are true andcorrect on and as of the date hereof in all material respects. In furtherance ofthe foregoing, the New Grantor, as security for the payment and performance infull of the Secured Obligations (as defined in the Security Agreement), doeshereby create and grant to the Administrative Agent, its successors andassigns, 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 SecurityAgreement) of the New Grantor. Each reference to a “Grantor” in the SecurityAgreement shall be deemed to include the New Grantor. The Security Agreement ishereby incorporated herein by reference.

 

(k)           The New Grantor represents andwarrants to the Administrative Agent and the other Secured Parties that thisSupplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding inequity or at law)).

 

(l)            This Supplement may be executed in counterparts,each of which shall constitute an original, but all of which when takentogether shall constitute a single contract. This Supplement shall becomeeffective when the Administrative Agent shall have received counterparts ofthis Supplement that, when taken together, bear the signatures of the NewGrantor and the Administrative Agent. Delivery of an executed signature page tothis Supplement by facsimile transmission shall be as effective as delivery ofa manually signed counterpart of this Supplement.

 

(m)          The New Grantor hereby represents andwarrants that set forth on Schedule 1 attached hereto are (a) itssole jurisdiction of formation and type of organization, (b) the locationof all records concerning its Accounts, General Intangibles, or any otherCollateral, (c) its federal tax identification number and theorganizational number, and (d) all names used by it during the last fiveyears prior to the date of this Supplement.

 

I-26

----

 

(n)           Except as expressly supplementedhereby, the Security Agreement shall remain in full force and effect.

 

(o)           THIS SUPPLEMENT SHALL BE GOVERNED BYAND 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 INTERESTSHEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGEDCOLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OFTEXAS.

 

(p)           In case any one or more of theprovisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, neither party hereto shall be required to complywith such provision for so long as such provision is held to be invalid,illegal or unenforceable, but the validity, legality and enforceability of theremaining provisions contained herein and in the Security Agreement shall notin any way be affected or impaired. The parties hereto shall endeavor ingood-faith negotiations to replace the invalid, illegal or unenforceableprovisions with valid provisions the economic effect of which comes as close aspossible to that of the invalid, illegal or unenforceable provisions.

 

(q)           All communications and noticeshereunder shall be in writing and given as provided in the Security Agreement. Allcommunications and notices hereunder to the New Grantor shall be given to it atthe address set forth under its signature hereto.

 

(r)            The New Grantor agrees to reimbursethe Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the reasonable fees, other chargesand disbursements of counsel for the Administrative Agent.

 

**THIS SUPPLEMENT, THE SECURITYAGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THEFINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCEOF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

IN WITNESSWHEREOF, the New Grantor and the Administrative Agent have duly executed thisSupplement to the Security Agreement as of the day and year first abovewritten.

 
|   | [Name of New Grantor], |
|--------|------------------------|
|   |                   |
|   | By:                    |   |

 

I-27

----

 
|   | Name:                  |   |
|--------|------------------------|--------|
|   | Title:                 |   |
|   |                   |
|   | Address:               |   |
|   |                   |
|   |                   |
|   |                   |
|   | [ADMINISTRATIVE AGENT] |
|   |                   |
|   |                   |
|   | By:                    |   |
|   | Name:                  |   |
|   | Title:                 |   |
|        |                        |        |  |  |  |  |  |

 

I-28

----

 

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-29

----

 

**EXHIBIT J**

 

**FORM OF TRANSFERLETTERS**

 

_______, 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 oftrust dated effective as of December 17, 2008 (“Mortgage”) for thebenefit of Union Bank of California, N.A., as Administrative Agent for theratable benefit of itself and certain other credit parties as described in theMortgage (“Credit Parties”), which Mortgage has been recorded in theReal Property Records of the Counties listed on the attached Exhibit A.A copy of the Mortgage is enclosed. The properties covered by the Mortgageinclude all of the oil, gas and other hydrocarbons and/or other mineralsattributable to the above-referenced Contract to which we understand you arecurrently a party and includes the well or wells listed on the attached Exhibit Awith respect to which you are remitting proceeds of production to theMortgagor. Your division order or lease numbers for such well or wells are setforth on the attached Exhibit A.

 

Pursuant to Article IIIof the Mortgage, the Administrative Agent is entitled to receive all ofMortgagor’s interest in all Hydrocarbons (as defined in the Mortgage), whichare covered by the above-referenced Contract, all products obtained orprocessed therefrom, and the revenues and proceeds attributable thereto. Theassignment of the Hydrocarbons, products and proceeds was effective as of 7:00 A.M.,(Dallas, Texas Time) / 5:00 A.M. (Los Angeles, California Time), on December 17,2008 (“Effective Date”). The Credit Parties, however, as provided in Article III,have permitted Mortgagor to collect the Hydrocarbons and the revenues andproceeds attributable thereto until the Administrative Agent or the Mortgagorshall have instructed the seller or purchaser of production to deliver suchHydrocarbons and all proceeds therefrom directly to the Administrative Agent. Thepurpose of this letter is to notify you that, commencing immediately upon thereceipt hereof, and in accordance with the terms and conditions of theMortgage, you are to deliver all proceeds attributable to the sale of suchHydrocarbons pursuant to the above-referenced Contract directly to theAdministrative Agent at its office at Lincoln Plaza, 500 N. Akard Street, Suite 4200,Dallas, Texas 75201, Telephone: (214) 922-4200, Facsimile: (214) 922-4209,Attention: Randall Osterberg, or to such other address of which we maysubsequently notify you in writing. If you require the execution of

 

J-1

----

 

transfer ordivision orders, please forward the transfer or division orders to theAdministrative Agent at its address at indicated above, Attention: RandallOsterberg.

 

J-2

----

 

Should youhave any questions in connection with any of the foregoing, please do nothesitate to contact us.

 
|   | Very truly yours,                                        |
|--------|----------------------------------------------------------|
|   |                                                     |
|   |                                                     |
|   | UNION BANK OF CALIFORNIA, N.A., as  Administrative Agent |
|   |                                                     |
|   |                                                     |
|   | By:                                                      |   |
|   |                                                     |
|   | Name:                                                    |   |
|   |                                                     |
|   | Title:                                                   |   |
|   |                                                     |
|   |                                                     |
|   | CANO PETROLEUM, INC., a Delaware  corporation            |
|   |                                                     |
|   |                                                     |
|   | By:                                                      |   |
|   |                                                     |
|   | Name:                                                    |   |
|   |                                                     |
|   | Title:                                                   |   |
|        |                                                          |  |  |  |  |  |

 

J-3

----

**EXHIBIT A**

 

| **Name and Location of Well** | ** ** | **Division Order or Lease No.** |
|---------------------------------------------------|------------|-----------------------------------------------------|
| ** **                                        | ** ** | ** **                                          |
| ** **                                        | ** ** | ** **                                          |
| ** **                                        | ** ** | ** **                                          |

 

J-4

----

 

Exhibit K — Form of Borrower’s Counsel Opinion

 

December 17,2008

 

UnionBank of California, N.A.

AdministrativeAgent and a Lender, and all the

otherLenders party to the Senior Credit Agreement

describedbelow

LincolnPlaza

500N. Akard Street, Suite 4200

Dallas,Texas 75201

 

Ladiesand Gentlemen:

 

Wehave acted as Texas counsel to Cano Petroleum, Inc., a Delawarecorporation (“***Borrower***”),Ladder Companies, Inc., a Delaware corporation (“***Ladder***”), Square OneEnergy, 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., aTexas limited partnership (“***Operating***”), W.O. Production Company, Ltd., a Texaslimited 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***”; Borrowerand 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 Amended and Restated Credit Agreement (the “***Senior Credit Agreement***”) dated asof even date herewith, executed by Borrower, Union Bank of California, N.A., asAdministrative Agent (in such capacity, the *“**AdministrativeAgent**”*), and each financial institution party thereto asa Lender (collectively, the “***Lenders***”). Capitalized terms used herein shall, unless otherwise provided herein,have the respective meanings set forth in the Senior Credit Agreement.

 

Forthe purpose of rendering the opinions set forth herein, we have been furnishedwith and have reviewed the following documents each dated of even date with theSenior Credit Agreement unless otherwise indicated (collectively, the “***Transaction Documents***”):

 

K-1

----

 

(a)           the Senior Credit Agreement;

 

(b)           the Amended and Restated Note,executed by Borrower and payable to the order of the Administrative Agent inthe original principal amount of $82,500,000 and the Amended and Restated Note,executed by Borrower and payable to the order of Natixis in the originalprincipal amount of $37,500,000;

 

(c)           the Amended and Restated SecurityAgreement, executed by the Loan Parties, in favor of the Administrative Agent(the “***Security Agreement***”);

 

(d)           the Amended and Restated Guaranty,executed by the Guarantors, in favor of the Administrative Agent, for thebenefit of the Beneficiaries (as defined therein);

 

(e)           the Reaffirmation and SecondAmendment of Deed of Trust, Security Agreement, Financing Statement, FixtureFiling and Assignment of Production dated December 17, 2008, executed bySquare One, WOEN, WOE, Operating and Production as Mortgagors andAdministrative Agent as the Mortgagee (the “***TexasDeed of Trust Reaffirmation***”) and the Reaffirmation, Supplementand Third Amendment of 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 andAdministrative Agent as the Mortgagee (the “***TexasDeed of Trust Supplement***”; and collectively with the Texas Deedof Trust Reaffirmation being the “***Texas Reaffirmations***”);

 

(f)            the Reaffirmation and SecondAmendment of Mortgage, Line of Credit Mortgage, Assignment, Security Agreement,Fixture Filing and Financing Statement dated December 17, 2008, executedby Borrower and Ladder as Mortgagors and Administrative Agent as the Mortgagee(the “***OklahomaReaffirmation***”**)**;

 

(g)           the Reaffirmation and First Amendmentof Mortgage, Line of Credit Mortgage, Assignment, Security Agreement, FixtureFiling and Financing Statement dated December 17, 2008, executed by CPNMas Mortgagor and Administrative Agent as the Mortgagee (the “***New Mexico Reaffirmation***”**)**;

 

(h)           the Amended and Restated PledgeAgreement, executed by Borrower, WOEN, and WOE in favor of the AdministrativeAgent (the “***PledgeAgreement***”);

 

(j)            the Subordination and IntercreditorAgreement;

 

K-2

----

 

(j)            the UCC-1 Financing Statementreflecting Borrower as debtor and the Administrative Agent as secured party,filed in the Office of the Secretary of State of Delaware (the “***Borrower Financing Statement***”);

 

(k)           the UCC-1 Financing Statementreflecting Ladder as debtor and the Administrative Agent as secured party,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 Statementreflecting Square One as debtor and the Administrative Agent as secured party,filed in the Office of the Secretary of State of Texas (the “***Square One Financing Statement***”);

 

(m)          the UCC-1 Financing Statementreflecting WOE as debtor and the Administrative Agent as secured party, filedin the Office of the Secretary of State of Texas (the “***WOE Financing Statement***”);

 

(n)           the UCC-1 Financing Statementreflecting Operating as debtor and the Administrative Agent as secured party,filed in the Office of the Secretary of State of Texas (the “***Operating Financing Statement***”);

 

(o)           the UCC-1 Financing Statement reflectingProduction as debtor and the Administrative Agent as secured party, filed inthe Office of the Secretary of State of Texas (the “***Production Financing Statement***”);

 

(p)           the UCC-1 Financing Statementreflecting CPNM as debtor and the Administrative Agent as secured party, filedin the Office of the Secretary of State of Texas (the “***CPNM Financing Statement***”,and together with the Square One Financing Statement, the WOE FinancingStatement, the Operating Financing Statement and the Production Financing Statement,the “***Texas FinancingStatements***”; the Delaware Financing Statements and the TexasFinancing Statements are collectively, the “***Financing Statements***”).

 

(q)           the UCC-1 Financing Statementreflecting Borrower as debtor and the Administrative Agent as secured party,filed in certain Oklahoma county filing offices (the “***Borrower County Financing Statement***”);

 

(r)            the UCC-1 Financing Statementreflecting Ladder as debtor and the Administrative Agent as secured party,filed in certain Oklahoma county filing offices (the “***Ladder County Financing Statement***”);

 

K-3

----

 

(s)           the UCC-1 Financing Statementreflecting CPNM as debtor and the Administrative Agent as secured party, filedin certain New Mexico county filing offices (the ***“CPNMCounty Financing Statement”***);

 

(t)            the UCC-1 Financing Statementreflecting Square One as debtor and the Administrative Agent as secured party,filed in certain Texas county filing offices (the “***Square One County FinancingStatement***”);

 

(u)           the UCC-1 Financing Statementreflecting WOE as debtor and the Administrative Agent as secured party, filedin certain Texas county filing offices (the “***WOE County Financing Statement***”);

 

(v)           the UCC-1 Financing Statementreflecting Operating as debtor and the Administrative Agent as secured party,filed in certain Texas county filing offices (the “***Operating County Financing Statement***”);

 

(w)          the UCC-1 Financing Statementreflecting Production as debtor and the Administrative Agent as secured party,to be filed in certain Texas county filing offices (the “***Production County FinancingStatement***”;

 

(x)            the UCC-3 Financing StatementAmendment for Square One to be filed in Hutchinson County, Texas in connectionwith the Texas Deed of Trust Supplement (the “***Square One Financing Statement Amendment***”);

 

(y)           the UCC-3 Financing StatementAmendment for WOEN to be filed in Hutchinson County, Texas in connection withthe Texas Deed of Trust Supplement (the “***WOEN Financing Statement Amendment***”);

 

(z)            the UCC-3 Financing StatementAmendment for WOE to be filed in Hutchinson County, Texas in connection withthe Texas Deed of Trust Supplement (the “***WOE Financing Statement Amendment***”);

 

(aa)         the UCC-3 Financing Statement Amendmentfor Operating to be filed in Hutchinson County, Texas in connection with theTexas Deed of Trust Supplement (the “***Operating Financing Statement Amendment***”);

 

(bb)         the UCC-3 Financing Statement Amendmentfor Production to be filed in Hutchinson County, Texas in connection with theTexas Deed of Trust Supplement (the 

 

K-4

----

 

“***Production Financing Statement Amendment***” andtogether with the Square One County Financing Statement, the WOE CountyFinancing Statement, the Operating County Financing Statement, the ProductionCounty Financing Statement, the Borrower County Financing Statement, the LadderCounty Financing Statement, the CPNM County Financing Statement, the Square OneFinancing Statement Amendment, the WOEN Financing Statement Amendment, the WOE FinancingStatement Amendment and the Operating Financing Statement Amendment,collectively, the “***County Financing Statements***”).

 

Asused herein, the term “***Collateral***”shall mean the non-fixture equipment, accounts, inventory, and generalintangibles and other personal property that is *“Collateral”* (as defined in the Security Agreement); *provided that* the Collateral shall excludeall real property, real estate, leases, and fixtures that are not personalproperty.  As used herein, the term “***Real Property Collateral***”shall mean the real property, real estate, leases, and fixtures described inthe Texas Deed of Trust Supplement.  Asused herein, the term “***PledgedCollateral***” shall mean the “Pledged Collateral” as defined inthe Pledge Agreement.

 

Inaddition to the Transaction Documents, other documents we have reviewed inrendering this opinion, and upon which we have relied, include the following:

 

(a)           the Certificate of Incorporation ofBorrower, 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’sCertificate***”) dated as of December 17, 2008, certifying (i) theCertificate of Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutionsadopted 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 ofState of the State of Delaware indicating that Borrower is in existence andgood standing as of November 25, 2008 (the “***Borrower’s Existence and Good Standing Certificate***”);

 

(d)           the Certificate of Incorporation ofLadder, 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) theBylaws of Ladder, (iii) Resolutions adopted by the Board of Directors ofLadder authorizing the execution, 

 

K-5

----

 

delivery, and performance of the TransactionDocuments executed by Ladder, and (iv) the incumbency of officers ofLadder;

 

(f)            a certificate from the Secretary ofState of the State of Delaware indicating that Ladder is in existence and goodstanding as of November 25, 2008 (“***Ladder’s Existence and Good Standing Certificate***”);

 

(g)           the Articles of Incorporation of Square One, certified bythe Secretary of State of the State of Texas on November 25, 2008;

 

(h)           an Officer’s Certificate of SquareOne (“***Square One’sOfficer’s Certificate***”) dated as of December 17,2008 certifying (i) theArticles of Incorporation of Square One, (ii) the Bylaws of Square One, (iii) Resolutionsadopted 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 ofState of the State of Texas indicating that Square One is in existence as of November 25,2008 (“***Square One’sExistence Certificate***”);

 

(j)            a certificate, dated November 25,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by Square One of all franchise and similar taxes (“***Square One’s Good StandingCertificate***”);

 

(k)           the Articles of Incorporation ofWOEN, 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 ofIncorporation of WOEN, (ii) the Bylaws of WOEN, (iii) Resolutionsadopted by the Board of Directors of WOEN authorizing the execution, delivery,and performance of the Transaction Documents executed by WOEN, and (iv) theincumbency of officers of WOEN;

 

(m)          a certificate from the Secretary ofState of the State of Nevada indicating that WOEN is in existence and goodstanding 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;

 

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(o)           an Officer’s Certificate of WOE (“***WOE’s Officer’s Certificate***”)dated as of December 17, 2008 certifying (i) the Articles ofIncorporation of WOE, (ii) the Bylaws of WOE, (iii) Resolutionsadopted by the Board of Directors of WOE authorizing the execution, delivery,and performance of the Transaction Documents executed by WOE, and (iv) theincumbency of officers of WOE;

 

(p)           a certificate from the Secretary ofState of the State of Texas indicating that WOE is in existence as of November 25,2008 (“***WOE’s ExistenceCertificate***”);

 

(q)           a certificate, dated November 25,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by WOE of all franchise and similar taxes (“***WOE’s Good Standing Certificate***”);

 

(r)            the Certificate of LimitedPartnership of Operating, certified by the Secretary of State of the State ofTexas 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 ofLimited Partnership of Operating, (ii) the Agreement of LimitedPartnership of Operating, (iii) Resolutions adopted by Board of Directorsof WOE, acting in its capacity as the sole General Partner of Operating,authorizing the execution, delivery, and performance of the TransactionDocuments executed by the officers of WOE acting in its capacity as the soleGeneral Partner of Operating, and (iv) the incumbency of officers of WOE;

 

(t)            a certificate from the Secretary ofState of the State of Texas indicating that Operating is in existence as of November 25,2008 (“***Operating’sExistence Certificate***”);

 

(u)           the Certificate of LimitedPartnership of Production, certified by the Secretary of State of the State ofTexas 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 ofLimited Partnership of Production, (ii) the Agreement of LimitedPartnership of Production, (iii) Resolutions adopted by Board of Directorsof WOE, acting in its capacity as the sole General Partner of Production,authorizing the execution, delivery, and performance of the TransactionDocuments executed by the officers of WOE, acting in its capacity as the soleGeneral Partner of Production, and (iv) the incumbency of officers of WOE;

 

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(w)          a certificate from the Secretary ofState of the State of Texas indicating that Production is in existence as of November 25,2008 (“***Production’sExistence Certificate***”);

 

(x)            the Certificate of Formation ofCPNM, 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 ofFormation of CPNM, (ii) the Bylaws of CPNM, (iii) Resolutions adoptedby the Board of Directors of CPNM authorizing the execution, delivery, andperformance of the Transaction Documents executed by CPNM, and (iv) theincumbency of officers of CPNM;

 

(z)            a certificate from the Secretary ofState of the State of Texas indicating that CPNM is in existence as of November 25,2008 (“***CPNM’s ExistenceCertificate***”);

 

(aa)         a certificate, dated November 25,2008, from the Comptroller of Public Accounts of the State of Texas, attestingto the current payment by CPNM of all franchise and similar taxes (“***CPNM’s Good Standing Certificate***”);and

 

(bb)         a certificate from the officer of theBorrower, Ladder, Square One, WOEN, WOE, CPNM and WOE as general partner ofOperating and Production dated as of December 17, 2008, certifying as tocertain factual matters, including the Material Agreements.

 

**Scope of Examination and General**

**Assumptions and Qualifications**

 

We have been furnished with and examinedoriginals or copies, certified or otherwise identified to our satisfaction, ofall such records of the Loan Parties, agreements and other instruments,certificates of officers and representatives of the Loan Parties, certificatesof public officials, and other documents as we have deemed necessary ordesirable as a basis for the opinions hereinafter expressed.  As to questions of fact material to suchopinions, we have, without independent verification of their accuracy, reliedto the extent we deem reasonably appropriate upon the representations andwarranties of the Loan Parties made in the Transaction Documents and upon theirrespective Officer’s Certificates.

 

Inmaking such examinations, we have assumed, with your consent (a) thegenuineness of all signatures (other than the signatures of officers of theLoan Parties), (b) the authenticity of all documents submitted to us asoriginals, (c) the conformity to original documents of all documentssubmitted to us as certified or photostatic copies, (d) the authenticityof the originals 

 

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ofthe documents referred to in the immediately preceding ***clause (c)***, (e) theprompt and proper recordation of any Transaction Documents in which recordationis anticipated, (f) that each party to the Transaction Documents (otherthan 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 itis a party and has duly authorized, executed, and delivered each suchTransaction Document, (g) that the Transaction Documents (other than theOklahoma Reaffirmation and the New Mexico Reaffirmation) constitute the valid,binding, and enforceable agreement of all the parties thereto (other than theLoan Parties), and (h) the correctness and accuracy of all the facts setforth in all certificates and reports identified in this opinion.

 

Wehave been advised by officers of the Loan Parties (and with your consent haverelied on that advice) that the agreements described on ***Exhibit A***attached hereto (the “***MaterialAgreements***”) are the only agreements and there are no orders,writs, judgments, or decrees that are material to Borrower or applicable LoanParty and which, if violated by the execution, delivery, or performance of theTransaction Documents, could reasonably be expected to have a material adverseeffect on the validity, performance, or enforceability of any TransactionDocument or the ability of any Loan Party to fulfill its material obligationsunder the Transaction Documents.  Weadvise you that we have not reviewed, and have not devoted substantiveattention to, any other agreements (other than those described on ***Exhibit A***) forthe 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 similarcovenant or provision contained in the Material Agreements to the extent thatany such covenant or provision would require a determination as to anyfinancial or accounting matters.  Inaddition, we express no opinion as to any breach of any confidentialityprovision contained in any Material Agreement caused by any TransactionDocument or Borrower’s or applicable Loan Party’s actions pursuant thereto orin contemplation thereof.  We note thatsome 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 faceof the Material Agreements.  We also notethat some of the Material Agreements are not assignable by Borrower orapplicable Loan Party (the “***Non-Assignable Material Agreements***”).  As a result, to the extent that theCollateral includes Borrower’s or applicable Loan Party’s rights under theMaterial Agreements, we have relied upon *Section 9.408(a) *ofthe UCC (defined below).  We note thatany assignment of Non-Assignable Material Agreements is subject to thelimitations set forth in *Section 9.408(d) *ofthe UCC.

 

Ouropinions set forth below are limited solely to matters governed by the laws ofthe State of Texas, the federal laws of the United States of America, and theGeneral Corporation Law of the State of Delaware (collectively, “***Applicable Law***”) and we express noopinion as to questions concerning the laws of any other jurisdiction.  The opinions expressed herein are limited tothe 

 

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*Uniform Commercial Code* as adopted in the State of Texas (the “***Texas UCC***”) and theState of Delaware (the “***DelawareUCC***”) in effect on the date hereof (the Texas UCC and the DelawareUCC are collectively, the “***UCC***”).

 

**SpecificLimitations and Qualifications on**

**OpinionsRegarding Enforceability**

 

Withrespect to our opinion set forth in ***Paragraph 12*** under the heading “Opinions”below, we advise you that:

 

1.             The enforceability of theTransaction Documents is subject to (a) the effects of (i) applicablebankruptcy, insolvency, reorganization, fraudulent transfer, moratorium,rearrangement, liquidation, conservatorship, or similar laws of generalapplication now or hereafter in effect relating to or affecting the rights ofcreditors generally, (ii) general equity principles, and (iii) statutoryprovisions of the *Federal Bankruptcy Code* and the *UniformFraudulent Transfer Act* as adopted by the State of Texas (andrelated court decisions) pertaining to the voidability of preferential orfraudulent transfers, conveyances, and obligations, (b) the application ofa standard of “*good faith*” suchas 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*, asamended; *provided, however*, that any limitations referred to under ***clauses (a)(ii) ***and ***(a)(iii) ***ofthis paragraph imposed by such laws on the enforceability of any TransactionDocument will not render any Transaction Document invalid as a whole or preventyou from the ultimate realization of the practical benefits of such TransactionDocument, except for the economic consequences of any judicial, administrative,or other procedural delay which may result from such laws.

 

2.             The opinion that the TransactionDocuments are enforceable is also subject to the qualification that certain ofthe remedial, waiver, and other provisions of the Transaction Documents may notbe enforceable; but such unenforceability will not, in our judgment, render theTransaction Documents invalid as a whole or substantially interfere with therealization of the principal legal benefits and/or security intended to beprovided by the Transaction Documents, except to the extent of any proceduraldelay which may result therefrom.

 

3.             We express no opinion as to: (a) theenforceability of provisions of the Transaction Documents to the extent thatsuch provisions: (i) purport to waive or affect any rights to noticesrequired 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) statethat any Lender’s failure or delay in exercising rights, powers, privileges orremedies under the Transaction Documents shall not operate as a waiver thereof;(iv) purport to indemnify any Lender for such Lender’s violations offederal or state securities laws or environmental laws, or any obligation tothe extent such 

 

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obligation arises from or is a result of suchLender’s own fraud, negligence, or willful misconduct or to the extent thatsuch indemnification is inconsistent with public policy; (v) purport toestablish 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 unenforceableprovisions from the Transaction Documents, to the extent that the enforcementof remaining provisions would frustrate the fundamental intent of the partiesto such documents; (vii) restrict access to legal or equitable remedies; (viii) purportto waive any claim of any Loan Party against any Lender arising out of, or inany way related to, the Transaction Documents; (ix) purport to provideremedies inconsistent with applicable law; or (x) providing that decisionsby a party are conclusive or may be made in its sole discretion; (b) whethera court would grant specific performance or any other equitable remedy withrespect to enforcement of any provision contained in the Transaction Documents;(c) the enforceability of any provision in the Transaction Documents thatpurports to appoint an agent for service of process or establish or otherwise affectjurisdiction, venue, evidentiary standards, or limitation periods, orprocedural rights in any suit or other proceeding; (d) the enforceabilityof 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 otherwiserestricted or denied; (e) the enforceability of any provision in theTransaction Documents that allows any Lender to accelerate the maturity date ofthe obligations evidenced by the Transaction Documents, to instituteforeclosure proceedings, or to exercise any similar right, without notice tothe person or entity signatory thereto or bound thereby; or (f) theenforceability of any provision contained in the Transaction Documents relatingto the appointment of a receiver, to the extent that appointment of a receiveris governed by applicable statutory requirements, and to the extent that suchprovision may not be in compliance with such requirements.

 

4.             We express no opinion on any Lender’sability 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 receivepayments thereunder and the right to receive an assignment of accountsreceivable arising thereunder) as a party to the Non-Assignable MaterialAgreements, under which such Loan Party’s rights, obligations, or duties arenot freely assignable or transferable.

 

5.             We express no opinion regarding theenforceability of any documents or agreements referenced in the TransactionDocuments (other than the Transaction Documents).

 

6.             We express no opinion regarding anyLender’s ability to exercise any rights or remedies against any collateral thatis personal property pursuant to the Transaction Documents other than inaccordance with the Texas UCC or the Delaware UCC.

 

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7.             We express no opinion regarding (a) theenforceability of provisions of the Texas Reaffirmations that grant the rightto become a mortgagee in possession of the Real Property Collateral prior to aforeclosure of the lien of the Transaction Documents or provide for thecollection of (or the perfection or effectiveness of your lien in) rents andprofits prior to actual or constructive possession of the Real PropertyCollateral, (b) the enforceability of any waiver of any right to anappraisal of the Real Property Collateral, to the extent one is providedpursuant to *Texas Property Code AnnotatedSections 51.003-51.005*, which rights are not waivable under Texaslaw, or (c) compliance with, or the effect of land use, zoning, building,sanitation, environmental, or ecological laws or regulations affecting the RealProperty Collateral.

 

**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.             Wehave assumed that (a) no fees, charges, or other compensation will be paidto Lenders, or for their benefit, except as specified in the TransactionDocuments, and (b) no interest will accrue on the unfunded portion of theindebtedness evidenced by the Transaction Documents.

 

2.             We have assumed that Lenders willcomply with and give effect to all of the provisions of the TransactionDocuments with respect to the computation of the interest rate and the chargingand collection of interest thereunder, including without limitation, the “***Savings Clause***”(herein so called) (*i.e.*, aclause to the effect that Borrower shall never be required to pay, and Lendersshall never be entitled to collect or receive, interest on the loans evidencedby the Senior Credit Agreement at a rate in excess of the maximum ratepermitted by applicable law).  We adviseLenders that, if Borrower repays, or Lenders accelerate or otherwise demandpayment of, the loans made under the Senior Credit Agreement prior to thescheduled maturity date thereof, then Lenders will have to return any excessiveinterest received as the result of such prepayment in order to give effect tothe Savings Clause.

 

3.             We express no opinion as to whetherthe fees denominated in the Senior Credit Agreement as “*commitment fees*” or other fees andexpenses (other than those explicitly designated as interest) payable toLenders under the Transaction Documents are interest or in certain cases,whether any fees should be deducted from the principal of the loan evidenced bythe Transaction Documents in determining interest chargeable under suchloan.  We assume that Lenders will complywith applicable law in the treatment of such items under such loan.

 

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4.             *Section 2.09(d) *ofthe Senior Credit Agreement limits the reduction in the contract rate ofinterest in certain circumstances in order to recoup the contracted rate ofinterest for the prior period where the contracted rate was capped at a lowerrate by the maximum lawful rate.  Whilethere is a Texas statute and established precedent for the spreading ofinterest forward over the anticipated life of a loan, we are aware of no casespermitting “*backward*”spreading.  Notwithstanding the lack ofcase law, however, backward spreading, we believe, is consistent with theprinciples underlying forward spreading and should be permissible under Texaslaw.

 

**Specific Limitations and Qualifications on**

**Opinions Regarding Laws and Consents**

 

Withrespect to our opinions in ***Paragraphs14***and***15***under the heading “Opinions” below with respect to no violation of anyapplicable law and as to the lack of any required consents, approvals, orauthorizations of governmental authorities, our opinions are expressed onlywith respect to statutes or regulations that a lawyer in Texas or Delaware, asapplicable, exercising customary professional diligence would reasonablyrecognize as being applicable to the Loan Parties or the transactionscontemplated by the Transaction Documents. In addition, we express no opinion as to the following: (a) federalsecurities laws and regulations administered by the Securities and ExchangeCommission, State of Texas “Blue Sky” laws and regulations, and laws andregulations relating to commodity (and other) futures and indices and othersimilar instruments; or (b) the statutes and ordinances, theadministrative decisions, and the rules and regulations of counties,towns, municipalities, and special political subdivisions (whether created orenabled 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 opinionsexpressed below regarding the perfection of the Administrative Agent’s liensand security interests in the Collateral, we advise you that:

 

1.             We express no opinion regarding (a) theaccuracy or completeness of any property descriptions contained in theTransaction Documents; however such descriptions are in sufficient form,assuming accuracy and completeness, (b) title to the Collateral, (c) thecreation or perfection of the Administrative Agent’s liens and securityinterests in the Collateral insofar as the laws of a jurisdiction *other than* the State of Texas (withrespect to creation) or the States of Texas and Delaware (with respect toperfection) govern the creation or perfection of such liens 

 

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and security interests, or (d) the creationor perfection of the Administrative Agent’s liens and security interests inCollateral that is not described in the Transaction Documents.

 

2.             We have assumed, with yourpermission, the following facts: (a) the Loan Parties, as applicable, havegood and sufficient title to the Collateral; (b) the Loan Parties, asapplicable, 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) theDelaware Loan Parties are each solely incorporated, formed, or organized, asthe case may be, under the laws of the State of Delaware, the Texas LoanParties 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 thelaws of the State of Nevada; and (e) the Administrative Agent’s address iscorrectly set forth on the Financing Statements and the County FinancingStatements.

 

3.             The opinions given in ***Paragraphs 16, 17, and 18*** under theheading “Opinions” below as to the creation and perfection of securityinterests do not cover real property and other property transactions excludedfrom the coverage of the Texas UCC pursuant to*Section 9.109* of the Texas UCC.

 

4.             We advise you that (a) in thecase of Collateral consisting of motor vehicles for which certificates of titlehave been issued and for which the exclusive manner of perfecting a securityinterest is by noting the Administrative Agent’s security interests on the certificateof title in accordance with the *TexasCertificate of Title Act* or other comparable law of other states,the Administrative Agent’s security interest therein cannot be perfected by thefiling of the Financing Statements, but will be perfected only if theAdministrative Agent’s security interests are so noted, (b) thecontinuation of any security interests and perfection of any security interestsin Collateral consisting of proceeds is limited to the extent set forth in theUCC, (c) continuation statements complying with the UCC must be filed notmore than six (6) months prior to the expiration of a five (5) yearperiod dating from the date of filing of the Financing Statements (or otherwisewithin the time permitted by the UCC) and subsequent continuation statementsmust be filed within six (6) months prior to the end of each subsequentfive (5) year period and amendments or supplements to the FinancingStatements and/or additional financing statements may be required to be filedin the event of a change of name, identity, or corporate structure of any ofthe Delaware Loan Parties or any of the Texas Loan Parties, or if any of theDelaware Loan Parties or any of the Texas Loan Parties changes the jurisdictionof its incorporation, organization, or formation, as the case may be, (d) inthe case of property which becomes Collateral after the date hereof, *Section 552*of the *Federal Bankruptcy Code*limits the extentto which property acquired by a debtor after the commencement of a case underthe *Federal Bankruptcy Code*maybe subject to a security interest arising from a security agreement enteredinto by the debtor before the commencement of the case, (e) although thefiling of a financing 

 

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statement will perfect a security interest inchattel paper, negotiable documents, instruments, and investment property, (i) sucha perfected security interest in chattel paper, negotiable documents, andinstruments is subject to rights of prior or subsequent holders who obtainpossession of such Collateral, and (ii) such a perfected security interestin investment property is subject to rights of prior or subsequent holders whoobtain *“control”* (as such term isdefined in the UCC) of such Collateral, *unless*the secured party obtains *“control”*of such Collateral in accordance with the UCC, and (f) as against thirdparties having or acquiring an interest in or a lien on the real property towhich any fixtures are attached, the rights and duties of the law of the staterelating to real property and fixtures may apply.

 

5.             We express no opinion as to theperfection of liens and security interests in the Collateral constitutinggeneral intangibles consisting of copyrights, patents, trademarks, andtradenames to the extent security interests in such property may be perfectedonly by the filing of the appropriate documents in the United States CopyrightOffice and the United States Patent and Trademark Office.

 

6.             We have assumed that none of theCollateral consists or will consist of consumer goods, farm products, crops, ortimber, or accounts resulting from the sale of timber.

 

7.             We also note that a securityinterest in after-acquired property may attach and become enforceable and maybecome perfected only when the debtor has obtained rights in such Collateral.

 

8.             We express no opinion regarding thepriority of any liens and security interests created by the TransactionDocuments.

 

9.             We have made no review of theCollateral, the books and records relating to the Collateral, or any complianceby any of the Loan Parties with applicable rules and regulations governingthe ownership, use, leasing, maintenance, or charter of the Collateral, andtherefore 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 orsecurities intermediary, as such terms are defined in the UCC, and (b) anyoriginal certificates evidencing the Pledged Collateral have been delivered to,and possession thereof will be held by, the Administrative Agent in the Stateof Texas.

 

11.           We note that in order to enforceLenders’ remedies and rights of foreclosure by sale, after default, of thePledged Collateral, Lenders will be required to comply with applicable federaland state securities laws.

 

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**Opinions**

 

Based upon the foregoing,and subject to the qualifications set forth below, we are of the opinion that:

 

1.             Borroweris, based solely upon, and as of the date of, the Borrower’s Existence and GoodStanding Certificate, validly existing and in good standing under the laws ofthe State of Delaware.

 

2.             Ladder is, based solely upon, andas of the date of, Ladder’s Existence and Good Standing Certificate, validlyexisting 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 GoodStanding Certificate, validly existing and in good standing under the laws ofthe State of Texas.

 

4.             WOEN is, based solely upon, and asof the date of, WOEN’s Existence and Good Standing Certificate, validlyexisting and in good standing under the laws of the State of Nevada.

 

5.             WOE is, based solely upon, and asof the date of, WOE’s Existence Certificate and WOE’s Good StandingCertificate, validly existing and in good standing under the laws of the Stateof Texas.

 

6.             Operating is, based solely upon,and as of the date of, Operating’s Existence Certificate, validly existingunder 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 theState of Texas.

 

8.             CPNM is, based solely upon, and as of the date of, CPNM’sExistence Certificate and CPNM’s Good Standing Certificate, validly existingand in good standing under the laws of the State of Texas.

 

9.             Borrower and Ladder each have the corporate power andauthority under the *General Corporation Lawof the State of Delaware* and their respective Certificates ofIncorporation and Bylaws to execute, deliver, and perform their obligationsunder the Transaction Documents.  TheTransaction Documents to which Borrower and/or Ladder is a 

 

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partyhave been duly authorized by all necessary corporate action on the part ofBorrower and/or Ladder, as appropriate, and have been duly executed anddelivered by Borrower and/or Ladder, as appropriate.

 

10.           Square One, WOE and CPNM each havethe corporate power and authority under the *TexasBusiness Corporation Act*orthe *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 SquareOne, WOE and/or CPNM is a party have been duly authorized by all necessarycorporate 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, asappropriate.

 

11.           Operating and Production each havethe partnership power and authority under the *TexasRevised Limited Partnership Act* and their respective Certificates ofLimited Partnership and Limited Partnership Agreements to execute, deliver, andperform their obligations under the Transaction Documents.  The Transaction Documents to which Operatingand/or Production is a party have been duly authorized by all necessarypartnership action on the part of Operating and/or Production and their generalpartners, as appropriate, and have been duly executed and delivered byOperating and/or Production (or their general partners on their behalf), asappropriate.

 

12.           The Transaction Documents (other thanthe Oklahoma Reaffirmation and New Mexico Reaffirmation) to which any LoanParty is a party are enforceable against such Loan Party in accordance withtheir respective terms.

 

13.           The execution and delivery by eachLoan Party of, and performance of its agreements in, the Transaction Documentsdo not (a) violate the Certificate of Incorporation, Articles ofIncorporation, Bylaws, Certificate of Limited Partnership or LimitedPartnership Agreement, each as applicable, of any Loan Party, or (b) breachor result in a default under any obligation of any Loan Party under, or requirea consent under, or result in the creation of any Lien (except for the Lienscreated pursuant to the Transaction Documents) upon any of the properties,revenues, or other assets of any Loan Party pursuant to, any MaterialAgreement.

 

14.           The execution and delivery of theTransaction Documents, the consummation of the transactions contemplatedthereby, and compliance by the Loan Parties with the provisions thereof willnot violate any Applicable Law.

 

15.           No consent, approval, waiver,license, or authorization or any other action by or filing with anygovernmental authority is required under Applicable Law in connection with the 

 

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execution and delivery by the Loan Parties ofthe Transaction Documents, except for those already obtained or completed.

 

16.           The Security Agreement creates infavor of the Administrative Agent, for the benefit of the Secured Parties (asdefined 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 asecurity 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 theSecretary of State of Texas or the Office of the Secretary of State ofDelaware, as appropriate, the Administrative Agent had and continues to have aperfected security interest, for the benefit of the Secured Parties (as definedin the Security Agreement) in the Collateral in which a security interest maybe perfected by filing of financing statements under the Texas UCC or DelawareUCC, as appropriate.

 

17.           The Pledge Agreement createsin favor of the Administrative Agent for the benefit of the Secured Parties (asdefined therein) a valid security interest in all right, title, and interest ofeach Loan Party a party thereto in the Pledged Collateral enforceable againsteach such Loan Party, securing the Secured Obligations (as defined in thePledge Agreement).

 

18.           Upon the filing of the DelawareFinancing Statements in the Office of the Secretary of State of Delaware andthe Texas Financing Statements in the Office of the Secretary of State ofTexas, the Administrative Agent had and continues to have a perfected securityinterest in the Pledged Collateral.

 

19.           The form of theTexas Deed of Trust Supplement and the form of the description of the MortgagedProperty (as such term is defined therein and so used herein) situated in theState of Texas are in satisfactory form for filing and recording in the officesdescribed in ***Paragraph20*** below.

 

20.           Upon filing and recording of the Texas Deedof Trust Supplement in the real property records of Hutchinson County, Texas,the Texas Deed of Trust Supplement will create a valid and binding perfectedmortgage lien in favor of the Administrative Agent on the Real PropertyCollateral.  The proper recordings of theTexas Deed of Trust Supplement in the real property records of HutchinsonCounty Texas (the “***County Filing Office***”) is theonly filing, recording, and registration necessary to publish notice andpreserve the liens of the Texas Deed of Trust Supplement in the Real PropertyCollateral.  The Texas Deed of TrustSupplement creates a valid security interest in favor of the AdministrativeAgent to the extent provided therein in all right, title and interest of eachLoan Party thereto in that portion of the “Collateral” (as defined therein)(other than the Real Property Collateral) which constitutes personalproperty.  Upon the proper filing in thereal property records of Hutchinson County, Texas of County 

 

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Financing Statements naming Square One, WOE,Operating, Production and WOEN, as debtors, the Administrative Agent will havea perfected security interest within the meaning of Chapter 9 of the Texas UCCin that portion of the Collateral (as defined in the Texas Deed of TrustSupplement) that is personal property and constitutes fixtures located on theReal Property Collateral or as-extracted collateral from such Real PropertyCollateral in which a security interest may be perfected by filing a financingstatement subject, however, with respect to proceeds, to Section 9.315 ofthe Texas UCC.

 

21.           No state or localmortgage registration tax, stamp tax, or other similar fee, tax, orgovernmental charge (other than filing and recording fees to be paid uponfiling) is required to be paid to the State of Texas or any subdivision thereofin connection with the execution, delivery, filing, or recording of the TexasDeed of Trust Supplement or the consummation of the transactions contemplatedtherein.  Except for the payment ofrecording or filing fees and taxes associated with filings made with respect tothe Financing Statements and the Texas Deed of Trust Supplement, no other taxesor governmental fees or charges are required under Applicable Law in connectionwith (a) the creation, perfection, or the recording of the Liens purportedto be created by the Transaction Documents, (b) the execution and deliveryof any of the Transaction Documents, or (c) the obtaining of credit underthe Senior Credit Agreement.

 

22.           The Advances to bemade on the date hereof and the application of the proceeds****thereofas provided for in the Senior Credit Agreement do not violate Regulation U or Xof the Board of Governors of the Federal Reserve System.

 

23.           No Loan Party is an “investmentcompany” or a company “controlled by” an “investment company” within themeaning of the Investment Company Act of 1940, as amended.

 

Thisopinion (a) has been furnished to you at your request, and we consider itto be a confidential communication that may not be furnished, reproduced,distributed or disclosed to anyone (other than your permitted successors andassigns under the Senior Credit Agreement) without our prior written consent, (b) isrendered solely for your information and assistance in connection with theabove transaction, and may not be relied upon by any other person (other thanyour permitted successors and assigns under the Senior Credit Agreement) or forany other purpose without our prior written consent, (c) is rendered as ofthe date hereof, and we undertake no, and hereby disclaim any kind ofobligation to advise you of any changes for any new developments that mightaffect any matters or opinions set forth herein, and (d) is limited to thematters stated herein and no opinions may be inferred or implied beyond thematters expressly stated herein.

 

Sincerely,

 

**HAYNES AND BOONE, LLP**

 

K-19

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**EXHIBIT A**

 

**MATERIAL AGREEMENTS**

 

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

 

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

 

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

 

CanoPetroleum, Inc. 2005 Long-Term Incentive Plan dated December 7, 2005,incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-Kfiled on December 9, 2005.

 

AmendmentNo. 1 to the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan effectiveDecember 28, 2006.

 

EmploymentAgreement between Cano Petroleum, Inc. and S. Jeffrey Johnson datedeffective January 1, 2006.

 

FirstAmendment to Employment Agreement between Cano Petroleum, Inc. and S.Jeffrey Johnson dated effective May 31, 2008.

 

EmploymentAgreement of Michael J. Ricketts effective July 1, 2006.

 

FirstAmendment to Employment Agreement of Michael J. Ricketts effective June 29,2007.

 

FourthAmendment to Employment Agreement of Michael J. Ricketts effective May 31,2008.

 

EmploymentAgreement of Patrick McKinney effective June 1, 2006.

 

FirstAmendment to Employment Agreement of Patrick McKinney dated November 9,2006.

 

SecondAmendment to Employment Agreement of Patrick McKinney dated June 29, 2007.

 

ThirdAmendment to Employment Agreement of Patrick McKinney dated May 31, 2008.

 

EmploymentAgreement of Phillip Feiner dated May 31, 2008.

 

FirstAmendment to Employment Agreement of Phillip Feiner dated September 8,2008.

 

EmploymentAgreement of Benjamin Daitch dated June 23, 2008.

 

SecuritiesPurchase Agreement dated November 2, 2007 between Cano Petroleum, Inc.and the investors listed therein.

 

RegistrationRights Agreement dated November 2, 2007 between Cano Petroleum, Inc.and the investors listed therein.

 

SubordinatedCredit Agreement among Cano Petroleum, Inc. as Borrower, TheLenders Party hereto from time to time, as Lenders, and UnionBanCal Equities, Inc.,as Administrative Agent, dated December 17, 2008, including all associatedagreements.

 

K-20

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