**Exhibit 10.8**

Execution Version

 

 

**$25,000,000**

 

**SUBORDINATEDCREDIT AGREEMENT**

 

Among

 

**CANO PETROLEUM, INC.**

 

as Borrower,

 

**THE LENDERS PARTY HERETO FROM TIMETO TIME**

** **

as Lenders,

 

and

 

**UNIONBANCALEQUITIES, INC.**

 

as Administrative Agent

 

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                      | 19       |
| Section 1.03                                                                                                                                                                                                                     | Accounting Terms; Changes in GAAP                | 19       |
| Section 1.04                                                                                                                                                                                                                     | Types of Advances                                | 20       |
| Section 1.05                                                                                                                                                                                                                     | Miscellaneous                                    | 20       |
|                                                                                                                                                                                                                                  |                                             |     |
| ARTICLE II                             CREDIT FACILITIES                                       | 20                                               |
|                                                                                                                                                                                                                                  |                                             |     |
| Section 2.01                                                                                                                                                                                                                     | Commitment for Advances                          | 20       |
| Section 2.02                                                                                                                                                                                                                     | [Reserved]                                       | 21       |
| Section 2.03                                                                                                                                                                                                                     | Method of Borrowing                              | 21       |
| Section 2.04                                                                                                                                                                                                                     | Reduction of the Commitment                      | 23       |
| Section 2.05                                                                                                                                                                                                                     | Prepayment of Advances                           | 24       |
| Section 2.06                                                                                                                                                                                                                     | Repayment of Advances                            | 26       |
| Section 2.07                                                                                                                                                                                                                     | Commitment Fees                                  | 26       |
| Section 2.08                                                                                                                                                                                                                     | Fees                                             | 26       |
| Section 2.09                                                                                                                                                                                                                     | Interest                                         | 26       |
| Section 2.10                                                                                                                                                                                                                     | Payments and Computations                        | 27       |
| Section 2.11                                                                                                                                                                                                                     | Sharing of Payments, Etc                         | 28       |
| Section 2.12                                                                                                                                                                                                                     | Breakage Costs                                   | 29       |
| Section 2.13                                                                                                                                                                                                                     | Increased Costs                                  | 29       |
| Section 2.14                                                                                                                                                                                                                     | Taxes                                            | 30       |
| Section 2.15                                                                                                                                                                                                                     | Replacement of Lender                            | 32       |
| Section 2.16                                                                                                                                                                                                                     | Increase in Commitments                          | 33       |
|                                                                                                                                                                                                                                  |                                             |     |
| ARTICLE III                         CONDITIONS OF LENDING                                                          | 34                                               |
|                                                                                                                                                                                                                                  |                                             |     |
| Section 3.01                                                                                                                                                                                                                     | Conditions Precedent to Initial Credit Extension | 34       |
| Section 3.02                                                                                                                                                                                                                     | Conditions Precedent to All Borrowings           | 37       |
|                                                                                                                                                                                                                                  |                                             |     |
| ARTICLE IV                         REPRESENTATIONS AND WARRANTIES                                                  | 37                                               |
|                                                                                                                                                                                                                                  |                                             |     |
| Section 4.01                                                                                                                                                                                                                     | Existence; Subsidiaries                          | 37       |
| Section 4.02                                                                                                                                                                                                                     | Power                                            | 38       |
| Section 4.03                                                                                                                                                                                                                     | Authorization and Approvals                      | 38       |
| Section 4.04                                                                                                                                                                                                                     | Enforceable Obligations                          | 38       |
| Section 4.05                                                                                                                                                                                                                     | Financial Statements                             | 38       |
| Section 4.06                                                                                                                                                                                                                     | True and Complete Disclosure                     | 39       |
| Section 4.07                                                                                                                                                                                                                     | Litigation; Compliance with Laws                 | 39       |
| Section 4.08                                                                                                                                                                                                                     | Use of Proceeds                                  | 40       |
| Section 4.09                                                                                                                                                                                                                     | Investment Company Act                           | 40       |
| Section 4.10                                                                                                                                                                                                                     | Federal Power Act                                | 40       |
|                                                                                                                                                                                                                                       |                                                  |          |  |

 

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| Section 4.11                                                                                                                                                                                  | Taxes                                                       | 40     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|--------|
| Section 4.12                                                                                                                                                                                  | Pension Plans                                               | 41     |
| Section 4.13                                                                                                                                                                                  | Condition of Property; Casualties                           | 41     |
| Section 4.14                                                                                                                                                                                  | No Burdensome Restrictions; No Defaults                     | 41     |
| Section 4.15                                                                                                                                                                                  | Environmental Condition                                     | 42     |
| Section 4.16                                                                                                                                                                                  | Permits, Licenses, Etc                                      | 42     |
| Section 4.17                                                                                                                                                                                  | Gas Contracts                                               | 43     |
| Section 4.18                                                                                                                                                                                  | Liens; Titles, Leases, Etc                                  | 43     |
| Section 4.19                                                                                                                                                                                  | Solvency and Insurance                                      | 43     |
| Section 4.20                                                                                                                                                                                  | Hedging Agreements                                          | 43     |
| Section 4.21                                                                                                                                                                                  | Material Agreements                                         | 43     |
|                                                                                                                                                                                               |                                                        |   |
| ARTICLE V                             AFFIRMATIVE COVENANTS | 44                                                          |
|                                                                                                                                                                                               |                                                        |   |
| Section 5.01                                                                                                                                                                                  | Compliance with Laws, Etc                                   | 44     |
| Section 5.02                                                                                                                                                                                  | Maintenance of Insurance                                    | 44     |
| Section 5.03                                                                                                                                                                                  | Preservation of Corporate Existence, Etc                    | 45     |
| Section 5.04                                                                                                                                                                                  | Payment of Taxes, Etc                                       | 45     |
| Section 5.05                                                                                                                                                                                  | Visitation Rights                                           | 45     |
| Section 5.06                                                                                                                                                                                  | Reporting Requirements                                      | 45     |
| Section 5.07                                                                                                                                                                                  | Maintenance of Property                                     | 49     |
| Section 5.08                                                                                                                                                                                  | Agreement to Pledge                                         | 49     |
| Section 5.09                                                                                                                                                                                  | Use of Proceeds                                             | 49     |
| Section 5.10                                                                                                                                                                                  | Title Evidence and Opinions                                 | 50     |
| Section 5.11                                                                                                                                                                                  | Further Assurances; Cure of Title Defects                   | 50     |
| Section 5.12                                                                                                                                                                                  | Hedging Arrangements                                        | 50     |
| Section 5.13                                                                                                                                                                                  | Bank Accounts                                               | 51     |
|                                                                                                                                                                                               |                                                        |   |
| ARTICLE VI                         NEGATIVE COVENANTS                           | 51                                                          |
|                                                                                                                                                                                               |                                                        |   |
| Section 6.01                                                                                                                                                                                  | Liens, Etc                                                  | 51     |
| Section 6.02                                                                                                                                                                                  | Debts, Guaranties, and Other Obligations                    | 52     |
| Section 6.03                                                                                                                                                                                  | Agreements Restricting Liens and Distributions              | 53     |
| Section 6.04                                                                                                                                                                                  | Merger or Consolidation; Asset Sales                        | 53     |
| Section 6.05                                                                                                                                                                                  | Restricted Payments                                         | 54     |
| Section 6.06                                                                                                                                                                                  | Investments                                                 | 54     |
| Section 6.07                                                                                                                                                                                  | Affiliate Transactions                                      | 55     |
| Section 6.08                                                                                                                                                                                  | Compliance with ERISA                                       | 55     |
| Section 6.09                                                                                                                                                                                  | Sale-and-Leaseback                                          | 56     |
| Section 6.10                                                                                                                                                                                  | Change of Business                                          | 56     |
| Section 6.11                                                                                                                                                                                  | Organizational Documents, Name Change                       | 56     |
| Section 6.12                                                                                                                                                                                  | Use of Proceeds                                             | 56     |
| Section 6.13                                                                                                                                                                                  | Gas Imbalances, Take-or-Pay or Other Prepayments            | 57     |
| Section 6.14                                                                                                                                                                                  | Limitation on Speculative Hedging                           | 57     |
| Section 6.15                                                                                                                                                                                  | Additional Subsidiaries; Additional Oil and Gas  Properties | 57     |
| Section 6.16                                                                                                                                                                                  | Account Payables                                            | 57     |
| Section 6.17                                                                                                                                                                                  | Current Ratio                                               | 57     |

 

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| Section 6.18                                                                                                                                             | Leverage Ratio                              | 58     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|--------|
| Section 6.19                                                                                                                                             | Interest Coverage Ratio                     | 58     |
| Section 6.20                                                                                                                                             | Senior Debt                                 | 58     |
| Section 6.21                                                                                                                                             | Non-Guarantor Subsidiary                    | 58     |
| Section 6.22                                                                                                                                             | Equity Issuance                             | 58     |
| Section 6.23                                                                                                                                             | Minimum Asset Coverage Ratio                | 59     |
|                                                                                                                                                          |                                        |   |
| ARTICLE VII                     EVENTS OF DEFAULT; REMEDIES    | 59                                          |
|                                                                                                                                                          |                                        |   |
| Section 7.01                                                                                                                                             | Events of Default                           | 59     |
| Section 7.02                                                                                                                                             | Optional Acceleration of Maturity           | 62     |
| Section 7.03                                                                                                                                             | Automatic Acceleration of Maturity          | 62     |
| Section 7.04                                                                                                                                             | Right of Set-off                            | 63     |
| Section 7.05                                                                                                                                             | Non-exclusivity of Remedies                 | 63     |
| Section 7.06                                                                                                                                             | Application of Proceeds                     | 63     |
|                                                                                                                                                          |                                        |   |
| ARTICLE VIII                 THE ADMINISTRATIVE AGENT                              | 64                                          |
|                                                                                                                                                          |                                        |   |
| Section 8.01                                                                                                                                             | Authorization and Action                    | 64     |
| Section 8.02                                                                                                                                             | Administrative Agent’s Reliance, Etc   | 64     |
| Section 8.03                                                                                                                                             | The Administrative Agent and Its Affiliates | 65     |
| Section 8.04                                                                                                                                             | Lender Credit Decision                      | 65     |
| Section 8.05                                                                                                                                             | Indemnification                             | 65     |
| Section 8.06                                                                                                                                             | Successor Administrative Agent              | 66     |
| Section 8.07                                                                                                                                             | Collateral Matters                          | 67     |
|                                                                                                                                                          |                                        |   |
| ARTICLE IX                        MISCELLANEOUS | 67                                          |
|                                                                                                                                                          |                                        |   |
| Section 9.01                                                                                                                                             | Amendments, Etc                             | 67     |
| Section 9.02                                                                                                                                             | Notices, Etc                                | 68     |
| Section 9.03                                                                                                                                             | No Waiver; Remedies                         | 68     |
| Section 9.04                                                                                                                                             | Costs and Expenses                          | 68     |
| Section 9.05                                                                                                                                             | Binding Effect                              | 69     |
| Section 9.06                                                                                                                                             | Lender Assignments and Participations       | 69     |
| Section 9.07                                                                                                                                             | Indemnification; Waiver                     | 71     |
| Section 9.08                                                                                                                                             | Execution in Counterparts                   | 72     |
| Section 9.09                                                                                                                                             | Survival of Representations, Etc            | 72     |
| Section 9.10                                                                                                                                             | Severability                                | 72     |
| Section 9.11                                                                                                                                             | Business Loans                              | 72     |
| Section 9.12                                                                                                                                             | Governing Law; Submission to Jurisdiction   | 72     |
| Section 9.13                                                                                                                                             | Subordination and Intercreditor Agreement   | 73     |
| Section 9.14                                                                                                                                             | USA Patriot Act                             | 73     |
| Section 9.15                                                                                                                                             | WAIVER OF JURY TRIAL                        | 73     |
| Section 9.16                                                                                                                                             | ORAL AGREEMENTS                             | 73     |

 

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| **EXHIBITS:**  |   |   |   |                                              |
|----------------|--------|--------|--------|---------------------------------------------------|
| Exhibit A |   | -      |   | Form of Assignment and Acceptance            |
| Exhibit B |   | -      |   | Form of Compliance Certificate               |
| Exhibit C |   | -      |   | Form of Guaranty                             |
| Exhibit D |   | -      |   | Form of Mortgage                             |
| Exhibit E |   | -      |   | Form of Note                                 |
| Exhibit F |   | -      |   | Form of Notice of Borrowing                  |
| Exhibit G |   | -      |   | Form of Notice of Conversion or Continuation |
| Exhibit H |   | -      |   | Form of Pledge Agreement                     |
| Exhibit I |   | -      |   | Form of Security Agreement                   |
| Exhibit J |   | -      |   | Form of Transfer Letters                     |
| Exhibit K |   | -      |   | Form of Borrower’s Counsel Opinion      |

 
| **SCHEDULES:**                             |   |                               |
|--------------------------------------------|--------|------------------------------------|
| Schedule I      - |   | Notice Information and Commitments |
| Schedule 4.01 -                            |   | Subsidiaries of Borrower           |
| Schedule 4.05 -                            |   | Existing Debt                      |
| Schedule 4.07 -                            |   | Litigation                         |
| Schedule 4.14(a) -                    |   | Material Debt Documents            |
| Schedule 4.20 -                            |   | Hedging Contracts                  |
| Schedule 4.21 -                            |   | Material Agreements                |

 

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**SUBORDINATEDCREDIT AGREEMENT**

 

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

 

The partieshereto agree to as follows:

 

**Section 1.**

** **

**DEFINITIONSAND ACCOUNTING TERMS**

 

(a)          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).

 

“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 UnionBanCal Equities, Inc., 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 orindirectly, of the power to direct or cause the direction of the management andpolicies of a Person, whether through ownership of a Control Percentage, bycontract, or otherwise.  Without limitingthe generality of the foregoing, a Person shall be deemed to be controlled byanother Person if such other Person 

 

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

 

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

 

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

 

“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.

 

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

 

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

 

“BorrowingBase” shall have the definition given to such term in the Senior CreditAgreement as in effect on the date hereof of as modified in accordance with theSubordination and Intercreditor Agreement.

 

“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 any Eurodollar Rate Advances, on which dealings arecarried on by banks in 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.

 

“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 Senior Administrative Agent on August 25,2006.

 

2

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“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 inclauses (i) and (ii) above constituting at the time of such electionor nomination at least a majority of that board or equivalent governingbody.   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 partnership, limited liabilitycompany, or similar entity, all of the Voting Securities of which is owned byany 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 I 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), or ifsuch Lender has increased its Commitment under Section 2.16 below, as setforth in the agreement increasing such Commitment or joinder agreement, asapplicable, as such amount may be reduced, increased or terminated pursuant to Section 2.04,2.16 or Article VII or otherwise under this Agreement.  The aggregate amount of the Commitments onthe date hereof is $15,000,000.00.

 

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

 

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“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 periodarising from the sale, exchange, retirement or other disposition of capitalassets (such term to include all fixed assets and all securities) other than inthe ordinary course of business, and (ii) any write-up or write-down ofassets and (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).

 

“CreditExtension” means an Advance made by any Lender.

 

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

 

(i)                                     indebtednessof such Person for borrowed money;

 

(ii)                                  obligationsof such Person evidenced by bonds, debentures, notes or other similarinstruments;

 

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

 

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

 

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

 

(vi)                              obligationsof such Person under any Hedge Contract;

 

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

 

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(viii)                        anyobligations of such Person owing in connection with any volumetric orproduction prepayments;

 

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

 

(x)                                   indebtednessor obligations of others 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

 

(xi)                                allliabilities of such Person in respect of unfunded vested benefits under anyPlan.

 

“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.

 

“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 required to be funded by it hereunder within one BusinessDay of the date required to be funded by it hereunder unless such failure hasbeen cured within three Business Days (or such longer time period accepted bythe Borrower and the Administrative Agent), (b) has otherwise failed topay over to the Administrative Agent or any other Lender any other amountrequired to be paid by it hereunder within one Business Day of the date whendue, unless the subject of a good faith dispute or unless such failure has beencured within three Business Days (or such longer time period accepted by theAdministrative Agent or such other Lender, as applicable), or (c) has, orhas an Affiliate that has, been deemed insolvent or become the subject of abankruptcy or 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 (including non-cashincome resulting from the requirements of SFAS 133 or 143) plus (d) thenet gain on the Pantwist Sale; provided that this clause (d) shall onlyapply for the financial covenant ratios calculated at, and as of, the fiscalquarter ending 

 

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

 

“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 in its sole discretion, and (ii) unless anEvent of Default has occurred and is continuing, reasonably acceptable to theBorrower.

 

“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).

 

“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 

 

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equity securities issued (i) to the Borrower or one of itsSubsidiaries, (ii) pursuant to employee or director and officer stockoption plans in the ordinary course of business, and (iii) the conversionof previously issued preferred, convertible Equity Interests or convertiblenotes to the extent such Equity Interests and notes were issued in compliancewith 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 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.

 

“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 

 

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transactions with members of the Federal Reserve System arranged byFederal funds brokers, as published for such day (or, if such day is not aBusiness Day, for the next preceding Business Day) by the Federal Reserve Bankof New York, or, if such rate is not so published for any day which is aBusiness 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.

 

“FinancialStatements” means the financial statements included in the Form 10-Kfiled 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 or arisingfrom 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, floor

 

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transactions, collar transactions, currency swap transactions,cross-currency rate swap transactions, currency options, spot contracts, or anyother similar transactions or any combination of any of the foregoing(including any options to enter into any of the foregoing), whether or not anysuch transaction is governed by or subject to any master agreement, and (b) anyand all transactions of any kind, and the related confirmations, which aresubject to the terms and conditions of, or governed by, any form of masteragreement published 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 provides solely for the sale by the Borrower or itsSubsidiaries of physical Hydrocarbons in exchange for cash in the ordinarycourse of its business.

 

“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 value andthe 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 of Hydrocarbonsfrom such Proven Reserves based on product price and cost escalationassumptions specified by the Administrative Agent and the Lenders, and (d) containsuch other information as is customarily obtained from and provided in suchreports or is otherwise reasonably requested by the Administrative Agent or anyLender.

 

“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, 

 

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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 costs pertainingto the payment in full of the Subordinated Debt and pertaining to theObligations.

 

“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.

 

“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 three months (other than for purposes of the definition of “AdjustedReference Rate”); provided, however, that:

 

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

 

(ii)                                  InterestPeriods commencing on the same date for Advances comprising part of the sameBorrowing shall be of the same duration;

 

(iii)                               wheneverthe last day of any Interest Period would otherwise occur on a day other than aBusiness Day, the last day of such Interest Period shall be extended to occuron the next succeeding Business Day, provided that if such extensionwould cause the last day of such Interest Period to occur in the next followingcalendar month, the last day of such Interest Period shall occur on the nextpreceding Business Day; and

 

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

 

“InterimFinancial Statements” means the financial statements included in the Form 10Q filed 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 

 

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the Oil and Gas Properties owned by the Borrower or any of itsSubsidiaries (or to be acquired by the Borrower or any of its Subsidiaries, asapplicable) which are or are to be included in the Borrowing Base, which reportshall (a) specify the location, quantity, and type of the estimated ProvenReserves attributable to such Oil and Gas Properties, (b) contain aprojection of the rate of production of such Oil and Gas Properties, (c) containan estimate of the net operating revenues to be derived from the production andsale of Hydrocarbons 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.

 

“JuniorCapital Issuance” 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 the lenders listed on the signature pages of this Agreement and eachEligible Assignee that shall become a party to this Agreement pursuant to Section 9.06.

 

“LendingOffice” means, as to any Lender, the office or offices of such Lenderdescribed as such in such Lender’s administrative questionnaire requested bythe Administrative Agent, or such other office or offices as a Lender may fromtime to time notify the Borrower and the Administrative Agent.

 

“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).

 

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“LiquidInvestments” means:

 

(i)                                     directobligations of, or obligations the principal of and interest on which areunconditionally guaranteed by, the United States maturing within 180 days fromthe date of any acquisition thereof;

 

(ii)                                  (i) negotiableor nonnegotiable certificates of deposit, time deposits, or other similarbanking arrangements maturing within 180 days from the date of acquisitionthereof (“bank debt securities”), issued by (A) any Lender or any SeniorLender (or any Affiliate of any Lender or any Senior Lender) or (B) anyother bank or trust company so long as such certificate of deposit is pledgedto secure the Borrower’s or any Subsidiaries’ ordinary course of businessbonding requirements, or any other bank or trust company which has primarycapital of not less than $500,000,000, if at the time of deposit or purchase,such bank debt securities are rated not less than “AA” (or the thenequivalent) by the rating service of Standard & Poor’s Ratings Groupor of Moody’s Investors Service, Inc., and (ii) commercial paperissued by (A) any Lender or any Senior Lender (or any Affiliate of anyLender or any Senior Lender) or (B) any other Person if at the time of purchasesuch commercial paper is rated not less than “A-1” (or the then equivalent) bythe rating service of Standard & Poor’s Ratings Group or not less than“P-1” (or the then equivalent) by the rating service of Moody’s InvestorsService, Inc., or upon the discontinuance of both of such services, suchother nationally recognized rating service or services, as the case may be, asshall be selected by the Borrower with the consent of the Majority Lenders;

 

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

 

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

 

(v)                                 suchother instruments (within the meaning of Article 9 of the Texas Businessand Commerce Code) as the Borrower may request and the Administrative Agent mayapprove in writing.

 

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

 

“MaximumNote Amount” means $25,000,000.

 

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

 

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amount of the Commitments at such time; provided further that,if there are two or more Lenders, the Commitment of, and the portion of theAdvances held or deemed held by, any Defaulting Lender shall be excluded forpurposes 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 June 17, 2013.

 

“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 ratable benefit of the Secured Parties insubstantially the form of the attached Exhibit D or such other form as maybe requested by the Administrative Agent, together with any assumptions orassignments of the obligations thereunder by the Borrower, any Guarantor or anyof their respective Subsidiaries, and “Mortgages” shall mean all of suchMortgages collectively.

 

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

 

“Net Cash Proceeds” shall mean,with respect to any Asset Sale, the proceeds thereof in the form of cash, cashequivalents and marketable securities (including any such proceeds received byway of deferred payment of principal pursuant to a note or installmentreceivable or purchase price adjustment receivable, or by the sale, transfer orother disposition of any non-cash consideration received in connectiontherewith or otherwise, but only as and when received) received by the Borroweror any Subsidiary (including cash proceeds subsequently received (as and whenreceived by the Borrower or any Subsidiary) in respect of non-cashconsideration initially received) net of (i) reasonable and customaryselling expenses (including reasonable brokers’ fees or commissions, legal,accounting and other professional and transactional fees, transfer and similartaxes and Borrower’s good faith estimate of income taxes paid or payable inconnection with such sale (after taking into account any available tax creditsor deductions and any tax sharing arrangements)), (ii) the principalamount, premium or penalty, if any, interest and other amounts of the SeniorDebt which are repaid with such proceeds, and (iii) the principal amount,premium or penalty, if any, and interest of the Debt under the Series DPreferred Shares which are required to be paid as a result of such Asset Saleand which are repaid with such proceeds.

 

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“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 andin an amount equal to such Lenders Pro Rata Share of the Maximum Note Amount.

 

“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.

** **

**“**NPV**”**means, with respect to any Proven Reserves expected to be produced from anyundivided interests in Oil and Gas Properties, the net present value,discounted at 10% per annum, of the future net revenues expected to accrue tothe Borrower’s or any of its Subsidiary’s interests in such Proven Reserves(after deducting all existing burdens) during the remaining expected economiclives of such Proven Reserves.  Eachcalculation of such expected future net revenues shall be made in accordancewith the then existing standards of the Society of Petroleum Engineers,provided that in any event (a) appropriate deductions shall be made forseverance and ad valorem taxes, and for operating (including purchasing andinjecting water), gathering, transportation and marketing costs required forthe production and sale of such reserves, (b) the pricing assumptions andescalations used in determining NPV for any particular reserves shall be basedupon the Strip Price (or any other pricing assumptions and escalations to whichthe Borrower and Majority Lenders may agree) and (c) the cash-flowsderived from the pricing assumptions set forth in clause (b) above shallbe further adjusted to account for the historical basis (*i.e.*thedifferential that exists as of any time between the price at a pricing pointand the price at the point of sale) in a manner reasonably acceptable to theAdministrative Agent.  NPV shall becalculated hereunder in connection with each Engineering Report, either by theBorrower, by Administrative Agent, or by the third party engineering firm whoprepares such Engineering Report; in the event of any conflict, AdministrativeAgent’s calculation shall be conclusive and final, absent manifest error.

 

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

 

“Obligations”means all principal, interest, fees, reimbursements, indemnifications, andother amounts payable by the Borrower, any Guarantor or any of their respectiveSubsidiaries to the Administrative Agent, or the Lenders under the LoanDocuments.

 

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“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 5, 2008 among the Borrower, Pantwist LLC and Legacy ReservesOperating LP without giving effect to any amendments, modification orsupplements thereto.

 

“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.

 

“PDPReserves” means Proven Reserves which are categorized as both “Developed”and “Producing” in the definitions promulgated by the Society of PetroleumEvaluation Engineers and the World Petroleum Congress as in effect at the timein question; “PDNP Reserves” means Proven Reserves which are categorizedas both “Developed” and “Non-Producing” in such definitions; and “PUDReserves” means Proved Reserves which are categorized as “Undeveloped” insuch definitions.

 

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

 

“PDPPresent Value” means the NPV attributable to all PDP Reserves from the Oiland Gas Properties of the Borrower and its Subsidiaries and based on anEngineering Report or other applicable information relating to the ProvenReserves of the Borrower and its Subsidiaries provided by Borrower.

 

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

 

“PermittedLiens” means the Liens permitted under Section 6.01.

 

“PermittedPrior Liens” means the Liens securing the Senior Debt and Liens permittedunder paragraphs (c) through (i) of Section 6.01.

 

“Person”means an individual, partnership, corporation (including a business trust),joint stock company, limited liability corporation or company, 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.

 

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“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.

 

“Projections” means, as to the Borrower and for a given period, the Borrower’sforecasted consolidating balance sheets, profit and loss statements, and cashflow statements, and including thereinprojections for anticipated income, revenues, expenses, taxes, EBITDAand budgeted capital expenditures during such period, all based on good faith estimates and utilizing the assumptions which areset forth in such Projections and prepared in accordance with GAAP.

 

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

 

“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).

 

“PUDPresent Value” means the NPV attributable to all PUD Reserves from the Oiland Gas Properties of the Borrower and its Subsidiaries and based on anEngineering Report or other applicable information relating to the ProvenReserves of the Borrower and its Subsidiaries provided by Borrower.

 

“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 orcancelled, the ratio (expressed as a percentage) of outstanding Advances owingto such Lender to the aggregate outstanding Advances owing to all such Lenders.

 

“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.

 

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

 

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“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 and the Lenders.

 

“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.

 

“SecurityInstruments” means, collectively, (a) the Mortgages, (b) theTransfer Letters, (c) the Pledge Agreements, (d) the Security Agreements, (e) eachother agreement, instrument or document executed at any time in connection withthe Pledge Agreements, the Security Agreements, or the Mortgages, and (f) eachother agreement, instrument or document executed at any time in connection withsecuring the Obligations.

 

“SeniorAdministrative Agent” means Union Bank of California, N.A., in its capacityas agent under the Senior Credit Agreement, and any successor agent pursuantthereto.

 

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

 

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

 

“SeniorLenders” means the lenders from time to time parties to the Senior CreditAgreement.

 

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

 

“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 fairvaluation and at present fair saleable value) is greater than the totalliabilities, including contingent liabilities, of such Person, (b) thepresent fair saleable value of the assets of such Person is not less than theamount that will be required to pay the probable liability of such Person onits debts as they become absolute and matured, (c) such Person is able torealize upon its assets and pay its debts and other liabilities, contingentobligations, and other commitments as they mature in the normal course ofbusiness, (d) such Person does not intend to, and does not believe that itwill, incur debts or liabilities beyond such Person’s ability to pay as suchdebts and liabilities mature, and (e) such Person is not engaged inbusiness or a transaction, and is not about to engage in business or atransaction, for which such Person’s Property would constitute unreasonablysmall capital after giving due consideration to current and anticipated futurecapital requirements and current and anticipated future business conduct andthe prevailing practice in the industry in which such Person is engaged.  In computing the amount of contingentliabilities at any time, such liabilities shall be computed at the amountwhich, in light of the facts and circumstances existing at such time,represents the amount that can reasonably be expected to become an actual ormatured liability.

 

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

 

“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 date hereof among theAdministrative Agent, the Borrower, the Guarantors, the Lenders, the SeniorAgent and the Senior 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” 

 

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

 

“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.

 

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

 

“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.

 

“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.

 

(b)         Computation of TimePeriods.  In this Agreement, withrespect to the computation of periods of time from a specified date to a laterspecified date, the word “from” means “from and including” and the words “to”and “until” each means “to but excluding”.

 

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

 

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Statements and theInterim Financial Statements).  Allcalculations made for the purposes of determining compliance with thisAgreement shall (except as otherwise expressly provided herein) be made byapplication of GAAP applied on a basis consistent with those used in thepreparation of the annual or quarterly financial statements furnished to theLenders pursuant to Section 5.06 hereof most recently delivered prior toor concurrently with such calculations (or, prior to the delivery of the firstfinancial statements under Section 5.06 hereof, used in the preparation ofthe Financial Statements and the Interim Financial Statements).  In addition, all calculations and definedaccounting terms used herein shall, unless expressly provided otherwise, whenreferring to any Person, refer to such Person on a consolidated basis and meansuch Person and its consolidated subsidiaries.

 

(d)         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.

 

(e)          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.

** **

**Section 2.**

** **

**CREDIT FACILITIES**

** **

(a)          Commitment forAdvances.

 

(i)                                     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 Effective Dateuntil the Commitment Termination Date in an amount for each Lender not toexceed such Lender’s Availability at such time. Each Borrowing shall be in an aggregate amount not less than $5,000,000,and in integral multiples of $500,000 in excess thereof, and shall consist ofAdvances of the same Type made on the same day by the Lenders ratably accordingto their respective Availability.  AnyAdvances which have been prepaid or repaid may not be reborrowed.

 

(ii)                                  Advancesupon Increase in Commitments.  EachLender that increases its Commitment under Section 2.16 (including any newLender that joins this Agreement as a Lender pursuant to a joinder agreement asprovided in Section 2.16) severally agrees, on the terms and conditionsset forth in this Agreement, to make a single advance term loan on the IncreaseEffective Date on a non-revolving basis to the Borrower in an amount equal toits

 

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

 

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

 

(b)         [Reserved].

 

(c)          Method of Borrowing.

 

(i)                                     Notice.  EachBorrowing shall be made pursuant to a Notice of Borrowing (or by telephonenotice promptly confirmed in writing by a Notice of Borrowing), given not laterthan 10:00 a.m.  (Dallas, Texastime) / 8:00 a.m. (Los Angeles, California time) (i) on the thirdBusiness Day before the date of the proposed Borrowing, in the case of aBorrowing comprised of Eurodollar Rate Advances (other than the initialBorrowing to be made on the Effective Date) or (ii) on the Business Day ofthe proposed Borrowing, in the case of a Borrowing comprised of Reference RateAdvances (or Eurodollar Rate Advances in the case of the Borrowing to be madeon the Effective Date), by the Borrower to the Administrative Agent, whichshall in turn give to each Lender prompt notice of such proposed Borrowing bytelecopier or telex.  Each Notice of aBorrowing shall be given by telecopier or telex, confirmed immediately inwriting, specifying the information required therein.  In the case of a proposed Borrowing comprisedof Eurodollar Rate Advances, the Administrative Agent shall promptly notifyeach Lender of the applicable interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m.  (Dallas, Texas time) / 10:00 a.m. (LosAngeles, California time) on the date of such Borrowing, make available for theaccount of its Lending Office to the Administrative Agent at its address referredto in Section 9.02, or such other location as the Administrative Agent mayspecify 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 of suchfunds 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.

 

(ii)                                  Conversionsand Continuations.  The Borrower mayelect to Convert or continue any Borrowing under this Section 2.03 bydelivering an irrevocable Notice of Conversion or Continuation to theAdministrative Agent at the Administrative Agent’s office no later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m.  (Los Angeles, California time) (i) 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 acontinuation of a Borrowing comprised of Eurodollar Rate Advances and (ii) onthe Business 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).

 

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(iii)                               CertainLimitations.  Notwithstandinganything to the contrary contained in paragraphs (a) and (b) above:

 

(i)                                     atno time shall there be more than one Interest Period applicable to outstandingEurodollar Rate Advances and the Borrower may not select Eurodollar RateAdvances for any Borrowing at any time that a Default has occurred and iscontinuing;

 

(ii)                                  ifany Lender shall, at least one Business Day before the date of any requestedBorrowing, Conversion, or continuation, notify the Administrative Agent thatthe introduction of or any change in or in the interpretation of any law orregulation makes it unlawful, or that any central bank or other GovernmentalAuthority asserts that it is unlawful, for such Lender or its Lending Office toperform its obligations under this Agreement to make Eurodollar Rate Advances orto fund or maintain Eurodollar Rate Advances, the right of the Borrower toselect Eurodollar Rate Advances from such Lender shall be suspended until suchLender shall notify the Administrative Agent that the circumstances causingsuch suspension no longer exist, and the Advance made by such Lender in respectof such Borrowing, Conversion, or continuation shall be a Reference RateAdvance;

 

(iii)                               ifthe Administrative Agent is unable to determine the Eurodollar Rate forEurodollar Rate Advances comprising any requested Borrowing, the right of theBorrower to select Eurodollar Rate Advances for such Borrowing or for anysubsequent Borrowing shall be suspended until the Administrative Agent shallnotify the Borrower and the Lenders that the circumstances causing suchsuspension no longer exist, and each Advance comprising such Borrowing shall bea Reference Rate Advance;

 

(iv)                              ifthe Majority Lenders shall, at least one Business Day before the date of anyrequested Borrowing, notify the Administrative Agent that the Eurodollar Ratefor Eurodollar Rate Advances comprising such Borrowing will not adequatelyreflect the cost to such Lenders of making or funding their respectiveEurodollar Rate Advances, as the case may be, for such Borrowing, the right ofthe Borrower to select Eurodollar Rate Advances for such Borrowing or for anysubsequent Borrowing shall be suspended until the Administrative Agent shallnotify the Borrower and the Lenders that the circumstances causing suchsuspension no longer exist, and each Advance comprising such Borrowing shall bea Reference Rate Advance; and

 

(v)                                 ifthe Borrower shall fail to select the duration or continuation of any InterestPeriod for any Eurodollar Rate Advances in accordance with the provisionscontained in the definition of “Interest Period” in Section 1.01 andparagraph (b) above, the Administrative Agent shall forthwith sonotify the Borrower and the Lenders and such Advances shall be made availableto the Borrower on the date of such Borrowing as Reference Rate Advances or, ifan existing Advance, Convert into Reference Rate Advances.

 

(iv)                              NoticesIrrevocable.  Each Notice ofBorrowing and Notice of Conversion or Continuation shall be irrevocable andbinding on the Borrower.  In the case ofany Borrowing for which the related Notice of Borrowing specifies is to becomprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lenderagainst any loss, out-of-pocket cost, or expense incurred by such Lender as aresult of any failure by the Borrower to fulfill on or before 

 

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the date specified insuch Notice of Borrowing for such Borrowing the applicable conditions set forthin Article III including, without limitation, any loss (including any lossof anticipated profits), cost, or expense incurred by reason of the liquidationor reemployment 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.

 

(v)                                 AdministrativeAgent Reliance.  Unless theAdministrative Agent shall have received notice from a Lender before the dateof any Borrowing that such Lender shall not make available to theAdministrative Agent such Lender’s Pro Rata Share of a Borrowing, theAdministrative Agent may assume that such Lender has made its Pro Rata Share ofsuch Borrowing available to the Administrative Agent on the date of suchBorrowing in accordance with paragraph (a) of this Section 2.03and the Administrative Agent may, in reliance upon such assumption, makeavailable to the Borrower on such date a corresponding amount.  If and to the extent that such Lender shallnot have so made its Pro Rata Share of such Borrowing available to theAdministrative 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 repaid shall constitute such Lender’s Advance aspart of such Borrowing for purposes of this Agreement even though not made onthe same day as the other Advances comprising such Borrowing.

 

(vi)                              LenderObligations Several.  The failure ofany Lender to make the Advance to be made by it as part of any Borrowing shallnot relieve any other Lender of its obligation, if any, to make its Advance onthe date of such Borrowing.  No Lendershall be responsible for the failure of any other Lender to make the Advance tobe made by such other Lender on the date of any Borrowing.

 

(d)         Reduction of theCommitment.

 

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

 

(ii)                                  Otherthan as provided in Section 2.04(c) below, any reduction andtermination of the Commitments pursuant to this Section 2.04 shall beapplied ratably to each Lender’s Commitment and shall be permanent, with noobligation of the Lenders to reinstate such Commitments.

 

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

 

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such Defaulting Lenderunder this Agreement and under the other Loan Documents (including principal ofand interest on the Advances owed to such Defaulting Lender, accrued commitmentfees, and letter of credit fees but specifically excluding any amounts owingunder Section 2.12 as result of such payment of Advances), (iii) aDefaulting Lender’s Commitment may be terminated by the Borrower under this Section 2.04(c) ifand only if at such time, the Borrower has elected, or is then electing, toterminate the Commitments 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

 

(e)          Prepayment ofAdvances.

 

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

 

(ii)                                  Mandatory.

 

(i)                                     Changein Control.  If a Change in Controlshall occur and the Borrower has not optionally prepaid in full the outstandingprincipal amount of the Advances concurrently with the consummation of suchChange in Control, at the Lenders’ option (which option may be exercised intheir sole discretion) the Borrower shall prepay the outstanding principalamount of the Advances, in whole or in part as elected by the Lenders, togetherwith (A) the accrued interest to the date of such prepayment on theprincipal amount prepaid, (B) the amounts, if any, required to be paidpursuant to Section 2.12 as a result of such prepayment being made on suchdate, (C) if such Change in Control occurs on or prior to the firstanniversary of the Effective Date, a prepayment premium in an amount equal to2.00% of the principal amount required to be 

 

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prepaid; and (D) ifsuch Change in Control occurs after the first anniversary of the Effective Datebut on or prior to the second anniversary of the Effective Date, a prepaymentpremium in an amount equal to 1.00% of the principal amount required to beprepaid.  No prepayment premium will bedue for any Change of Control which occurs after the second anniversary of theEffective Date.  If the Lenders requirethe Borrower to prepay the Advances as provided above, the Administrative Agentshall so notify the Borrower in writing, which notice shall specify the amountto be paid by the Borrower pursuant to this Section 2.05(b).  The Borrower shall pay all such amounts infull within two Business Days of receipt of such notice.  The foregoing will not be deemed to be aconsent by Lenders to any Change of Control or a waiver of any Defaultresulting therefrom.

 

(ii)                                  AssetSales.  Subject to the terms of theSubordination and Intercreditor Agreement, not later than one Business Dayfollowing the receipt of any Net Cash Proceeds of any Asset Sale (regardless ofwhether such Asset Sale was permitted herein), the Borrower shall apply 100% ofsuch Net Cash Proceeds and make a prepayment of the outstanding Advances,together with (A) the accrued interest to the date of such prepayment onthe principal amount prepaid, (B) the amounts, if any, required to be paidpursuant to Section 2.12 as a result of such prepayment being made on suchdate, (C) if such Asset Sale occurs on or prior to the first anniversaryof the Effective Date, a prepayment premium in an amount equal to 2.00% of theprincipal amount required to be prepaid; and (D) if such Asset Sale occursafter the first anniversary of the Effective Date but on or prior to the secondanniversary of the Effective Date, a prepayment premium in an amount equal to1.00% of the principal amount required to be prepaid.  No prepayment premium will be due for anyAsset Sale which occurs after the second anniversary of the Effective Date.   The foregoing will not be deemed to be aconsent by Lenders to any Asset Sale or a waiver of any Default resultingtherefrom.

 

(iii)                               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 outstanding hereunder,(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 equal tothe aggregate principal amount of the Eurodollar Rate Advances prepaid to suchLender, 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.

 

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

 

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all notices givenpursuant to this Section 2.05 shall be irrevocable and binding upon theBorrower.  Each payment of any Advancepursuant to this Section 2.05 shall be made in a manner such that allAdvances comprising part of the same Borrowing are paid in whole or ratably inpart.

 

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

 

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

 

(h)         Fees.  The Borrower shall pay the fees as agreed tobetween the Borrower and the Administrative Agent in that certain fee letterdated the date hereof.

 

(i)             Interest.

 

(i)                                     RatesBased on Applicable Margin.  TheBorrower shall pay interest on the unpaid principal amount of each Advance madeby each Lender from the date of such Advance until such principal amount shallbe paid in full, at the following rates per annum:

 

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

 

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

 

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

 

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interest is payable onsuch Advance.  Such additional interestpayable to any Lender shall be determined by such Lender and notified to theBorrower through the Administrative Agent (such notice to include thecalculation of such additional interest, which calculation shall be conclusivein the absence of manifest error).

 

(iii)                               [Reserved]

 

(iv)                              UsuryRecapture.

 

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

 

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

 

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

 

(j)             Payments andComputations.

 

(i)                                     PaymentProcedures.  The Borrower shall makeeach payment under this 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 counterclaim of any kind, except as may beapplicable to any Defaulting Lender.  TheAdministrative Agent shall promptly thereafter cause to be distributed likefunds relating to the 

 

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

 

(ii)                                  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.

 

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

 

(iv)                              AdministrativeAgent Reliance.  Unless theAdministrative Agent shall have received written notice from the Borrower priorto the date on which any payment is due to the Lenders that the Borrower shallnot make such payment in full, the Administrative Agent may assume that theBorrower has made such payment in full to the Administrative Agent on such dateand the Administrative Agent may, in reliance upon such assumption, cause to bedistributed to each Lender on such date an amount equal to the amount then duesuch Lender.  If and to the extent theBorrower shall not have so made such payment in full to the AdministrativeAgent, each Lender shall repay to the Administrative Agent forthwith on demandsuch amount distributed to such Lender, together with interest, for each dayfrom the date such amount is distributed to such Lender until the date suchLender repays such amount to the Administrative Agent, at the Federal FundsRate for such day.

 

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

 

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

 

(l)             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 theAdministrative Agent for the account of such Lender any amounts required tocompensate such Lender for any additional losses, out-of-pocket costs orexpenses which it may reasonably incur as a result of such payment ornonpayment, including, without limitation, any loss (including loss ofanticipated profits), cost or expense incurred by reason of the liquidation orreemployment of deposits or other funds acquired by any Lender to fund ormaintain such Advance.

 

(m)       Increased Costs.

 

(i)                                     EurodollarRate Advances.  If, due to either (i) theintroduction of or any change (other than any change by way of imposition orincrease of reserve requirements included in the Eurodollar Rate ReservePercentage) in or in the interpretation of any law or regulation or (ii) thecompliance with any guideline or request from any central bank or otherGovernmental Authority (whether or not having the force of law), there shall beany increase in the cost to any Lender of agreeing to make or making, funding,or maintaining Eurodollar Rate Advances, then the Borrower shall from time totime, upon demand by such Lender (with a copy of such demand to theAdministrative Agent), immediately pay to the Administrative Agent for theaccount of such Lender additional amounts sufficient to compensate such Lenderfor such increased cost.  A certificateas to the amount of such increased cost and detailing the calculation of suchcost submitted to the Borrower and the Administrative Agent by such Lendershall be conclusive and binding for all purposes, absent manifest error.

 

(ii)                                  CapitalAdequacy.  If any Lender determinesin good faith that compliance with any law or regulation adopted or changedafter the date hereof or any guideline or request from any central bank orother Governmental Authority (whether or not having the force of law) affectsor would affect the amount of capital required or expected to be maintained bysuch 

 

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Lender or any corporationcontrolling such Lender and that the amount of such capital is increased by orbased upon the existence of such Lender’s commitment to lend and othercommitments of this type, then, upon 30 days’ prior written notice by suchLender (with a copy of any such demand to the Administrative Agent), theBorrower shall immediately pay to the Administrative Agent for the account ofsuch Lender, from time to time as specified by such Lender, additional amountssufficient to compensate such Lender, in light of such circumstances, to theextent that such Lender reasonably determines such increase in capital to beallocable to the existence of such Lender’s commitment to lend under thisAgreement.  A certificate as to suchamounts and detailing the calculation of such amounts submitted to the Borrowerby such Lender shall be conclusive and binding for all purposes, absentmanifest error.

 

(iii)                               Reserved.

 

(iv)                              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.

 

(n)         Taxes.

 

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

 

(ii)                                  OtherTaxes.  In addition, the Borroweragrees to pay any present or future stamp or documentary taxes or any otherexcise or property taxes, charges or similar levies which arise from anypayment made or from the execution, delivery or registration of, or otherwisewith respect to, this Agreement, the Notes, or the other Loan Documents(hereinafter referred to as “Other Taxes”).

 

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(iii)                               Indemnification.  **THE BORROWER INDEMNIFIESEACH LENDER AND THE ADMINISTRATIVE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHERTAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANYJURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14) PAID BY SUCHLENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY(INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO,WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLYASSERTED.  EACH PAYMENT REQUIRED TO BEMADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THEADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATIONWITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROMTHE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS ADMINISTRATIVE AGENT OR ANYSUCH LENDER.  IF ANY LENDER OR THEADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THEBORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER OR THE ADMINISTRATIVEAGENT, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER’SSHARE OF SUCH REFUND.**

 

(iv)                              ForeignLender Withholding Exemption.  EachLender 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 Lender whichdelivers to the Borrower and the Administrative Agent a Form W8-ECI orW8-BEN and Form W-8 or W-9 pursuant to the next preceding sentence furtherundertakes to deliver to the Borrower and the Administrative Agent two furthercopies of the said letter and Form W8-ECI or W8-BEN and Form W-8 orW-9 , or successor applicable forms, or other manner of certification, as thecase 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 

 

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

 

(o)         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) atany time prior to the Commitment Termination Date, any Lender becomes aDefaulting Lender (any such Lender, a “Subject Lender”), then (A) inthe case of a Defaulting Lender, the Administrative Agent may, upon notice tothe Subject Lender and the Borrower, require such Subject Lender to assign anddelegate, 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 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 Agreement and the related LoanDocuments to an assignee that shall assume such obligations (which assignee maybe another Lender, if a Lender accepts such assignment), provided that:

 

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

 

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

 

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

 

(D)                               suchassignment does not conflict with applicable Legal Requirements.

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

 

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

 

(p)   Increase in Commitments.

 

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

 

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

 

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

 

(iv)          Effective Date and Allocations.  If the Commitments are increased inaccordance with this Section, the Administrative Agent and the Borrower shalldetermine the effective date (the “Increase Effective Date”) and thefinal allocation of such increase.  TheAdministrative Agent shall promptly notify the Borrower and the Lenders of thefinal allocation of such increase and the Increase Effective Date.

 

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

 

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

 

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

 

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

** **

**Section 3.CONDITIONS OF LENDING**

 

(a)   Conditions Precedent to Initial CreditExtension.  The obligation of each Lender to make itsCredit Extension on the Effective Date hereunder is subject to satisfaction ofthe following conditionsprecedent:

 

(i)            Documentation.  The Administrative Agent shall have receivedthe following duly executed by all the parties thereto, in form and substancesatisfactory to the Administrative Agent and the Lenders, and, whereapplicable, 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 andOil and Gas Properties in which the Senior Administrative Agent has a Lien, andeach 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 of thisAgreement by a Responsible Officer of the Borrower of (A) the resolutionsof the Board of Directors of the Borrower approving the Loan Documents to whichthe Borrower is a party, (B) the certificate of incorporation of the 

 

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Borrower, (C) thebylaws of the Borrower, and (D) all other documents evidencing othernecessary corporate action and governmental approvals, if any, with respect tothis Agreement, the Note, and the other Loan Documents;

 

(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 Financing Statementscovering the Collateral for filing with the appropriate authorities and anyother documents, agreements or instruments necessary to create an AcceptableSecurity Interest in such Collateral;

 

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

 

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

 

(xi)           the Subordination and IntercreditorAgreement; and

 

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

 

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

 

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

 

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consolidating financialstatements of the Borrower as of the Effective Date after giving effect to theAdvances made hereunder and any credit extensions outstanding on the EffectiveDate under the Senior Credit Agreement, including therein the Borrower’sconsolidated balance sheet and statements of income, cash flows, and retainedearnings, (v) a sources and uses statement outlining the uses to which theproceeds of the Advances will be applied on the Effective Date, and (vi) suchother financial information as the Lenders may reasonably request.

 

(iv)          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.

 

(v)           Due Diligence on Title andEnvironmental.  The AdministrativeAgent shall be satisfied with the condition of the Oil and Gas Properties withrespect to the Borrower’s and its Subsidiaries’ compliance with EnvironmentalLaws and the Borrower’s and its Subsidiaries’ title to such properties.

 

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

 

(vii)         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.

 

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

 

(ix)           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) which in the judgment of the AdministrativeAgent, could reasonably be expected to result in a Material Adverse Change(other than the developments under the litigation proceedings set forth onSchedule 4.07 which have been disclosed to the Administrative Agent prior tothe Effective Date).

 

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

 

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be in full force andeffect, and all applicable waiting periods shall have expired without anyaction being taken or threatened by any competent authority which wouldrestrain, prevent or otherwise impose adverse conditions on this Agreement andthe actions contemplated hereby.

 

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

 

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

 

(xiii)         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.

 

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

 

(i)            the following statements shall betrue (and each of the giving of the applicable Notice of Borrowing and Noticeof Conversion or Continuation and the acceptance by the Borrower of theproceeds of such Borrowing shall constitute a representation and warranty bythe Borrower that on the date of such Borrowing 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 before and after giving effect to suchBorrowing and to the application of the proceeds from such Borrowing, as thoughmade on and as of such date except to the extent that any such representationor warranty 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, and

 

(ii)           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.

** **

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**Section 4.**

** **

**REPRESENTATIONSAND WARRANTIES**

 

The Borrowerrepresents and warrants as follows:

 

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

 

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

 

(c)   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, no authorization or approval or other action by,and no notice to or filing with, any Governmental Authority will be requiredfor such Borrowing or the use of the proceeds of such Borrowing.

 

(d)   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, 

 

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valid, and bindingobligation of the Borrower and each Guarantor which is a party to itenforceable against the Borrower and each such Guarantor in accordance with itsterms, except as such enforceability may be limited by any applicablebankruptcy, insolvency, reorganization, moratorium, or similar law affectingcreditors’ rights generally and by general principles of equity.

 

(e)   Financial Statements.

 

(i)            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.

 

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

 

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

 

(f)    True and Complete Disclosure.  All factual information (excluding estimates)heretofore or contemporaneously furnished by or on behalf of the Borrower 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.

 

(g)   Litigation; Compliance with Laws.

 

(i)            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 

 

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seeks to adjudicate theBorrower or any of the Guarantors 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.

 

(ii)           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

 

(h)   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.

 

(i)    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.

 

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

 

(k)   Taxes.

 

(i)            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.

 

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(ii)           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).

 

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

 

(l)    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 valuation date applicable thereto, exceedthe value of the assets of such Plan allocable to such vested benefits.  Neither the Borrower nor any member of theControlled Group has had a complete or partial withdrawal from anyMultiemployer 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.

 

(m)  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 PermittedLiens.  The material Properties used orto be used in the continuing operations of the Borrower and each of theGuarantors are in good repair, working order and condition.  Since the date of the Financial Statements,neither the business nor the material Properties of the Borrower and each ofthe Guarantors, taken as a whole, has been materially and adversely affected asa result of any fire, explosion, earthquake, flood, drought, windstorm,accident, strike or other labor disturbance, embargo, requisition or taking ofProperty 

 

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

 

(n)   No Burdensome Restrictions; No Defaults.

 

(i)            Other than those identified 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 anyDebt.  Neither the Borrower nor any ofits Subsidiaries has received any notice of default under any materialcontract, agreement, lease, or other instrument to which the Borrower or suchSubsidiary is a party a copy of which has not been delivered to theAdministrative Agent.

 

(ii)           No Default has occurred and iscontinuing.

 

(o)   Environmental Condition.

 

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

 

(ii)           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 a MaterialAdverse Change.

 

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

 

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to each Response or otherrestoration or remedial project undertaken by the Borrower or the Guarantors orany of their former Subsidiaries on any of their presently or formerly owned oroperated Property 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.

 

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

 

(q)   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.

 

(r)    Liens; Titles, Leases, Etc.  None of the Property of the Borrower or anyof the Guarantors is subject to any Lien other than Permitted Liens.  On the date of this Agreement, allgovernmental actions and all other filings, recordings, registrations, thirdparty consents and other actions which are necessary to create and perfect theLiens provided for in the Security Instruments will have been made, obtainedand taken in all relevant jurisdictions. All leases and agreements for the conduct of business of the Borrowerand the Guarantors are valid and subsisting, in full force and effect and thereexists no default or event of default or circumstance which with the giving ofnotice or lapse of time or both would give rise to a default under any suchleases or agreements which could reasonably be expected to cause a MaterialAdverse Change.  Neither the Borrower norany of the Guarantors is a party to any agreement or arrangement (other thanthis Agreement and the Security Instruments), or subject to any order,judgment, writ or decree, which either restricts or purports to restrict itsability to grant Liens to secure the Obligations against their respectiveassets or Properties.

 

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

 

(t)    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,all credit support agreements relating thereto (including any margin requiredor supplied), and the counterparty to each such agreement.

 

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(u)   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.

** **

**Section 5.**

** **

**AFFIRMATIVECOVENANTS**

 

So long as anyNote or any amount under any Loan Document shall remain unpaid, or any Lendershall have any Commitment hereunder, the Borrower agrees, unless the MajorityLenders shall otherwise consent in writing, to comply with the followingcovenants.

 

(a)   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 alljurisdictions in which the Borrower, or any of its Subsidiaries do business; provided,however, that this Section 5.01 shall not prevent the Borrower or any 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.

 

(b)   Maintenance of Insurance.

 

(i)            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, 

 

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liabilities and otherhazards 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.

 

(ii)           All certified copies of policies orcertificates thereof, and endorsements and renewals thereof shall be deliveredto and retained by the Administrative Agent. Unless the Senior Credit Agreement requires otherwise, all policies ofinsurance shall either have attached thereto a Lender’s loss payableendorsement for the benefit of the Administrative Agent, as loss payee in formreasonably satisfactory to the Administrative Agent or shall name theAdministrative 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.  Unless the Senior CreditAgreement requires otherwise, all policies of insurance required under theterms hereof shall contain an endorsement or agreement by the insurer that anyloss shall be payable in accordance with the terms of such policynotwithstanding any act of negligence of the Borrower, or a Subsidiary or anyparty holding under the Borrower or a Subsidiary which might otherwise resultin a forfeiture of the insurance and the further agreement of the insurerwaiving all rights of setoff, counterclaim or deductions against the Borrowerand its Subsidiaries.  Unless the SeniorCredit Agreement requires otherwise, all such policies shall contain aprovision that notwithstanding any contrary agreements between the Borrower, itsSubsidiaries, and the applicable insurance company, such policies will not becanceled, allowed to lapse without renewal, surrendered or amended (whichprovision shall include any reduction in the scope or limits of coverage)without at least 30 days’ prior written notice to the AdministrativeAgent.  In the event that,notwithstanding the “lender’s loss payable endorsement” requirement of this Section 5.02,the proceeds of any insurance policy described above are paid to the Borroweror a Subsidiary, any Obligations are outstanding and the Senior Debt has beenindefeasibly paid in full, the Borrower shall deliver such proceeds to theAdministrative Agent immediately upon receipt.

 

(c)   Preservation of Corporate Existence, Etc.  The Borrower shall preserve and maintain, andcause each of its Subsidiaries to preserve and maintain, its corporate orlimited liability company, as applicable, existence, rights, franchises, andprivileges in the jurisdiction of its incorporation or organization, asapplicable, and qualify and remain qualified, and cause each such Subsidiary toqualify and remain qualified, as a foreign corporation in each jurisdiction inwhich qualification is necessary or desirable in view of its business andoperations or the ownership of its Properties, and, in each case, where failureto qualify or preserve and maintain its rights and franchises could reasonablybe expected to cause a Material Adverse Change.

 

(d)   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 

 

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

 

(e)   Visitation Rights.  At any reasonable time and from time to time,upon reasonable notice, the Borrower shall, and shall cause its 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 the account of, and visit and inspectat their 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.

 

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

 

(i)            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 audit, (ii) any management letters delivered by such accountantsto the Borrower, (iii) the Form 10-K filed with the SEC for suchfiscal year end, (iv) a Compliance Certificate executed by a ResponsibleOfficer of the Borrower and (v) a copy of the unaudited annualconsolidating financial statements of each of its Subsidiaries, includingtherein such Subsidiary’s balance sheet and statements of income, cash flows,and retained earnings for such fiscal year;

 

(ii)           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;

 

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(iii)          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 eachyear, 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 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, fromits Oil and Gas Properties, (G) except as set forth on a schedule attachedto the certificate, all of the Oil and Gas Properties evaluated by such EngineeringReport are pledged as Collateral for the Obligations, and (H) attached tothe certificate is a quarterly cash flow budget for the four quarters followingthe delivery of such certificate setting forth the Borrower’s projections forproduction volumes, revenues, expenses, taxes and budgeted capital expendituresduring such period.

 

(iv)          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, 

 

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

 

(v)           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 whichthe Borrower or such Subsidiary has taken and proposes to take with respectthereto;

 

(vi)          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;

 

(vii)         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;

 

(viii)        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 Plan sponsor, a copy of each noticereceived by the Borrower or any member of the Controlled Group concerning theimposition or amount of withdrawal liability pursuant to Section 4202 ofERISA;

 

(ix)           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;

 

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

 

(xi)           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;

 

(xii)          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.

 

(xiii)         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;

 

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

 

(xv)         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;

 

(xvi)        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

 

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

 

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Subsidiaries, as anyLender through the Administrative Agent may from time to time reasonablyrequest.  The Administrative Agent agreesto provide the Lenders with copies of any material notices and informationdelivered solely to the Administrative Agent pursuant to the terms of thisAgreement.

 

(g)   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.

 

(h)   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.

 

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

 

(j)    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 producing reserves ofthe Borrower and its Subsidiaries as determined by the AdministrativeAgent.  Within 60 days after the datehereof, the Borrower shall have delivered to the Administrative Agent title andlien searches from the county recording offices of (a) Chavez andRoosevelt counties of New Mexico, (b) Lincoln and Nowata counties ofOklahoma, and (c) Erath, Comanche, Eastland, Carson, Gray andHutchinson counties of Texas.

 

(k)   Further Assurances; Cure of Title Defects.  The Borrower shall, and shall cause eachSubsidiary to, cure promptly any defects in the creation and issuance of theNotes and the execution and delivery of the Security Instruments and thisAgreement.  The Borrower herebyauthorizes the Administrative Agent to file any financing statements withoutthe signature of the Borrower to the extent permitted by applicable law inorder to perfect or maintain the perfection of any security interest grantedunder any of the Loan Documents.  TheBorrower at its expense will, and will cause each Subsidiary to, promptlyexecute and deliver to the Administrative Agent upon request all such otherdocuments, agreements and instruments to comply with or accomplish thecovenants and agreements of the Borrower or any Subsidiary, as the case may be,

 

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in the SecurityInstruments and this Agreement, or to further evidence and more fully describethe collateral intended as security for the Notes, or to correct any omissionsin the Security Instruments, or to state more fully the security obligationsset out herein or in any of the Security Instruments, or to perfect, protect orpreserve any Liens created pursuant to any of the Security Instruments, or tomake any recordings, to file any notices or obtain any consents, all as may benecessary or appropriate in connection therewith or to enable theAdministrative Agent to exercise and enforce its rights and remedies withrespect to any Collateral.  Within 30days after a request by the Administrative Agent or the Lenders to cure anytitle defects or exceptions which are not Permitted Liens raised by suchinformation, the Borrower shall (i) cure such title defects or exceptionswhich are not Permitted Liens or substitute acceptable Oil and Gas Propertieswith no title defects or exceptions except for Permitted Liens coveringCollateral of an equivalent value and (ii) deliver to the AdministrativeAgent satisfactory 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 theAdministrative Agent’s Liens and security interests therein as are required tomaintain compliance with Section 5.10.

 

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

 

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

** **

**Section 6.**

 

**NEGATIVECOVENANTS**

 

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

 

(a)   Liens, Etc.  The Borrower shall not create, assume, incur,or suffer to exist, or permit any of its Subsidiaries to create, assume, incur,or suffer to exist, any Lien on or in respect of any of its Property 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:

 

(i)            Liens created by the SecurityInstruments;

 

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(ii)           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;

 

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

 

(iv)          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;

 

(v)           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 appropriate proceedings,if such reserve as may be required by GAAP shall have been made therefor;

 

(vi)          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 Security Instrumentsor in the Senior Credit Agreement;

 

(vii)         Liens arising in the ordinary course ofbusiness 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;

 

(viii)        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 in the Senior Credit Agreement, to the extent that anysuch Lien referred to in this clause does not materially impair the use of theProperty covered by such Lien for the purposes for which such Property is heldby the Borrower or any Subsidiary or materially impair the value of suchProperty subject thereto;

 

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(ix)           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; and

 

(x)            Liens securing the Senior Debt.

 

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

 

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

 

(ii)           Senior Debt;

 

(iii)          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;

 

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

 

(v)           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 (as defined in theSenior Credit Agreement) which are secured under the Senior Loan Documents, (ii) suchDebt shall not obligate the Borrower or any of its Subsidiaries to anymargin call requirements, and (iii) the deferred premium paymentsassociated with such Hedge Contracts shall be limited to the deferred premiumpayments for put option contracts which are secured under the Loan Documents;provided that, the aggregate outstanding amount of such deferred premiumpayments shall not exceed $500,000;

 

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

 

(vii)         Debt of the Borrower or any Subsidiaryowing to the Borrower or to any other Subsidiary; provided that such Debt issubordinated to the Obligations on terms acceptable to the Administrative Agentin its sole discretion;

 

(viii)        Debt that constitutes a renewal,refinancing or extension of any Debt referred to clause (d) of this Section 6.02;provided that (i) no Lien existing at the time of such renewal,refinancing or extension shall be extended to cover any property not 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

 

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(ix)           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.

 

(c)   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 Senior Loan Documents and the Security Instruments) which in anyway prohibits or restricts the granting, conveying, creation or imposition ofany Lien on any of its Property, whether now owned or hereafter acquired, tosecure the Obligations or restricts any Subsidiary from paying dividends to theBorrower, or which requires the consent of or notice to other Persons inconnection therewith.

 

(d)   Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall it permitany 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

 

(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 orgreater than the fair market value of the such Property, interest therein orSubsidiary subject of such disposition (as reasonably determined by the boardof directors or the equivalent governing body of the Borrower and, if requestedby the Administrative Agent, the Borrower shall deliver a certificate of aResponsible Officer of the Borrower certifying to that effect), (C) if anysuch disposition is of a Subsidiary owning Oil and Gas Properties, suchdisposition shall 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.

 

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

 

(f)    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:

 

(i)            Liquid Investments;

 

(ii)           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;

 

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

 

(iv)          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);

 

(v)           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

 

(vi)          investments consisting of any deferredportion of the sales price received by the Borrower or any Subsidiary inconnection with any sale of assets permitted hereunder.

 

(g)   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 

 

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those that could beobtained in a comparable arm’s length transaction with a Person that is notsuch an Affiliate.

 

(h)   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 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.

 

(i)    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 

 

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

 

(j)    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.

 

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

 

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

 

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

 

(n)   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 

 

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

 

(o)   Additional Subsidiaries; Additional Oiland Gas Properties.  The Borrowershall not, nor shall it permit any of its Subsidiaries to, create or acquireany additional Subsidiaries or acquire any additional Oil and Gas Propertieswithout (a) such new Subsidiary executing and delivering to theAdministrative 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.

 

(p)   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.

 

(q)   Current Ratio.  The Borrower shall not permit the ratio of,as of the end of each fiscal quarter of the Borrower, beginning with the 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 Amounts(as defined under the Senior Credit Agreement) and Availability under thisAgreement but shall exclude (A) any cash deposited with or at the requestof a counterparty to any Hedge Contract or any other similar hedge arrangementand (B) any assets representing a valuation account arising from theapplication of SFAS 133 and 143, and (ii) “current liabilities” shall exclude, as of thedate of calculation, the current portion of long-term Debt existing under thisAgreement and the current portion of long-term Debt existing under the SeniorCredit Agreement, and any liabilities representing a valuation account arisingfrom the application of SFAS 133 and 143. For the avoidance of doubt, the parties hereto acknowledge that “currentliabilities” includes the current portion of the Series D PreferredShares.

 

(r)    Leverage Ratio.  TheBorrower shall not permit the Leverage Ratio for each fiscal quarterperiod ending on or after December 31, 2008, to be greater than 4.50 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.

 

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

 

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

 

(u)   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 orpermit to 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).

 

(v)   Equity Issuance.  TheBorrower shall not, nor shall it permit any of its Subsidiaries to, issue anypreferred, convertible equity securities or other Equity Interests other thancommon Equity Interests of the Borrower.

 

(w)  Minimum Asset Coverage Ratio.

 

(i)            The Borrower shall not permit at anytime the ratio of (i) the Total Present Value as of such date to (ii) theconsolidated Debt of the Borrower (other than obligations under HedgeContracts) as of the applicable determination date to be less than 1.50 to1.00.

 

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

 

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

 

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

 

(iv)          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 Sections 5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by thedate specified in such clauses, the Administrative Agent may, based on theinformation available to it, estimate in good faith the Total Present Valuefrom time to time thereafter until the Administrative Agent and the Lendersreceive the relevant Independent Engineering Report, Internal EngineeringReport, or other information, as applicable. Such estimated Total Present Value shall thereupon be used for the purposesof Section 6.23(a) until a new Total Present Value is calculated orestimated pursuant to this Agreement.

 

**Section 7.**

 

**EVENTSOF DEFAULT; REMEDIES**

 

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

 

(i)            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 other amounts (including fees,reimbursements, and indemnifications) payable hereunder, under the Notes, orunder any other Loan Document;

 

(ii)           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;

 

(iii)          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;

 

(iv)          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

 

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

 

(v)           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 against the Borrower, any such Subsidiary or anysuch Guarantor either such proceeding shall remain undismissed for a period of 60days or any of the actions sought in such proceeding shall occur; or theBorrower, any of its Subsidiaries, or any Guarantor shall take any corporateaction to authorize any of the actions set forth above in thisparagraph (e);

 

(vi)          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;

 

(vii)         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);

 

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(viii)        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.

 

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

 

(x)            Reserved.

 

(xi)           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;

 

(xii)          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;

 

(xiii)         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;

 

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

 

(xv)         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; or

 

(b)   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,

 

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

 

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terminate, and (ii) shallat the request, or may with the consent, of the Majority Lenders, by notice tothe Borrower, declare all principal, interest, fees, reimbursements,indemnifications, and all other amounts payable under this Agreement, theNotes, and the other Loan Documents to be forthwith due and payable, whereuponall such amounts shall become and be forthwith due and payable in full, withoutnotice of intent to demand, demand, presentment for payment, notice ofnonpayment, protest, notice of protest, grace, notice of dishonor, notice ofintent to accelerate, notice of acceleration, and all other notices, all ofwhich are hereby expressly waived by the Borrower; and

 

(ii)           the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders (but subject tothe Subordination and Intercreditor Agreement) proceed to enforce its rights andremedies under the Security Instruments, the Guaranties, and any other LoanDocuments for the ratable benefit of the Secured Parties by appropriateproceedings.

 

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

 

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

 

(ii)           the Administrative Agent shall at therequest of, or may with the consent of, the Majority Lenders (but subject tothe Subordination and Intercreditor Agreement) proceed to enforce its rightsand remedies under the Security Instruments, the Guaranties, and any other LoanDocument for the ratable benefit of the Secured Parties by appropriateproceedings.

 

(d)   Right of Set-off.  Upon the occurrence and during thecontinuance of any Event of Default, the Administrative Agent and each Lenderis hereby authorized at any time and from time to time, to the fullest extentpermitted by law, to set off and apply any and all deposits (general orspecial, time or demand, provisional or final) at any time held and otherindebtedness at any time owing by the Administrative Agent or such Lender to orfor the credit or the account of the Borrower against any and all of theobligations of the Borrower now or hereafter existing under this Agreement, theNotes held by the Administrative Agent or such Lender, and the other LoanDocuments, irrespective of whether or not the Administrative Agent or suchLender shall have made any demand under this Agreement, such Notes, or suchother Loan Documents, and although such obligations may be unmatured.  The Administrative Agent and each Lenderagrees to promptly notify the Borrower after any such set-off and applicationmade by the Administrative Agent or such Lender, provided that the failure togive such notice shall not affect the validity of such set-off andapplication.  The rights of theAdministrative Agent and each Lender under this Section 7.04 are inaddition to any other rights and remedies (including, without limitation, otherrights of set-off) that the Administrative Agent or such Lender may have.

 

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

 

(f)    Application of Proceeds.

 

(i)            Prior to the Payment in Full ofSenior Debt (as defined in the Subordination and Intercreditor Agreement) andother than as otherwise permitted by the Subordination and IntercreditorAgreement, any monies or Property actually received by the Administrative Agentpursuant to this Agreement or any other Loan Document as a result of theexercise of any rights or remedies under any Security Instrument or any otheragreement with the Borrower, any Guarantor or any of their respectiveSubsidiaries which secures any of the Obligations, shall in any event be heldin trust by the Administrative Agent for the benefit of Senior Agent and SeniorSecured Parties (as defined in the Subordination and Intercreditor Agreement)and promptly paid or delivered to Senior Agent in the form received; and

 

(ii)           after the Payment in Full of SeniorDebt and the termination of the Subordination and Intercreditor Agreement, anymonies or Property actually received by the Administrative Agent pursuant tothis Agreement or any other Loan Document as a result of the exercise of any rightsor remedies under any Security Instrument or any other agreement with theBorrower, any Guarantor or any of their respective Subsidiaries which securesany of the Obligations, shall be applied in the following order:

 

(i)            First, to the payment of allamounts, including costs and expenses incurred in connection with thecollection of such proceeds and the payment of any part of the Obligations, dueto the Administrative 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;

 

(ii)           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; and

 

(iii)          Third, the remainder, if any, to theBorrower, its Subsidiaries, their respective successors or assigns, or suchother Person as may be lawfully entitled to receive the same or as a court ofcompetent jurisdiction may direct.

 

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

** **

**Section 8.**

** **

**THEADMINISTRATIVE AGENT**

 

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

 

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under this Agreement asare delegated to the Administrative Agent by the terms hereof and of the otherLoan Documents, together with such powers as are reasonably incidentalthereto.  As to any matters not expresslyprovided for by this Agreement or any other Loan Document (including, withoutlimitation, enforcement or collection of the Notes), the Administrative Agentshall not be required to exercise any discretion or take any action, but shallbe required to act or to refrain from acting (and shall be fully protected inso acting or refraining from acting) upon the instructions of the MajorityLenders, and such instructions shall be binding upon all Lenders and allholders of Notes; provided, however, that the Administrative Agent shallnot be required to take any action which exposes the Administrative Agent topersonal liability or which is contrary to this Agreement, any other Loan Document,or applicable law.

 

(b)   Administrative Agent’s Reliance, Etc.  Neither the Administrative Agent nor any ofits directors, officers, agents, or employees shall be liable for any actiontaken 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), independentpublic accountants, and other experts selected by it and shall not be liablefor any action taken or omitted to be taken in good faith by it in accordancewith the advice of such counsel, accountants, or experts; (c) makes nowarranty or representation to any Lender and shall not be responsible to anyLender for any statements, warranties, or representations made in or inconnection with this Agreement or the other Loan Documents; (d) shall nothave any duty to ascertain or to inquire as to the performance or observance ofany of the terms, covenants or conditions of this Agreement or any other LoanDocument on the part of the Borrower or its Subsidiaries or to inspect theProperty (including the books and records) of the Borrower or its Subsidiaries;(e) shall not be responsible to any Lender for the due execution,legality, validity, enforceability, genuineness, sufficiency, or value of thisAgreement or any other Loan Document; and (f) shall incur no liabilityunder or in respect of this Agreement or any other Loan Document by acting uponany notice, consent, certificate, or other instrument or writing (which may beby telecopier or telex) believed by it to be genuine and signed or sent by theproper party or parties.

 

(c)   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.

 

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

 

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Financial Statements andthe Interim Financial Statements and such other documents and information as ithas deemed appropriate, made its own credit analysis and decision to enter intothis Agreement.  Each Lender alsoacknowledges that it shall, independently and without reliance upon theAdministrative Agent 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.

 

(e)   Indemnification.  **THE LENDERS SEVERALLYAGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH AFFILIATE THEREOF ANDTHEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOTREIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROMAND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND ORNATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTEDAGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THISAGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THISAGREEMENT OR ANY OTHER LOAN DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT’S OWNNEGLIGENCE), AND INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES,PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES,OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,EXPENSES, OR DISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT’S GROSSNEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THEADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANYOUT-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 ORRESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THEEXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH BY THEBORROWER.**

 

(f)    Successor Administrative Agent.  The Administrative Agent may resign at anytime by giving written notice thereof to the Lenders and the Borrower and maybe removed at any time with or without cause by the Majority Lenders uponreceipt of written notice from the Majority Lenders to such effect.  Upon receipt of notice of any suchresignation or removal, the Majority Lenders shall have the right to appoint asuccessor Administrative Agent with, if any Event of Default has not occurredand is not continuing, the consent of the Borrower, which consent shall not beunreasonably withheld.  If no successorAdministrative Agent shall have been so appointed by the Majority Lenders withthe consent of the Borrower, and shall have accepted such appointment, within30 days after the retiring Administrative Agent’s giving of notice ofresignation or the Majority Lenders’ removal of the retiring AdministrativeAgent then the retiring Administrative Agent may, on behalf of the Lenders andthe Borrower, appoint a 

 

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successor AdministrativeAgent, which shall be, in the case of a successor agent, a commercial bankorganized under the laws of the United States of America or of any Statethereof and having a combined capital and surplus of at least $500,000,000.00; provided that, if the Administrative Agentshall notify the Borrower and the Lenders that no qualifying Person hasaccepted such appointment, then such resignation shall nonetheless becomeeffective in accordance with such notice and (1) the retiringAdministrative Agent shall be discharged from its duties and obligationshereunder and under the other Loan Documents (except that in the case of anycollateral security held by the Administrative Agent on behalf of the Lendersunder any of the Loan Documents, the retiring Administrative Agent shallcontinue to hold such collateral security until such time as a successorAdministrative Agent is appointed) and (2) all payments, communicationsand determinations provided to be made by, to or through the retiringAdministrative Agent shall instead be made by or to each Lender directly, untilsuch time as the Majority Lenders appoint a successor Administrative Agent asprovided for above in this paragraph. Upon the acceptance of any appointment as Administrative Agent by asuccessor Administrative Agent, such successor Administrative Agent shallthereupon succeed to and become vested with all the rights, powers, privileges,and duties of the retiring Administrative Agent, and the retiringAdministrative Agent shall be discharged from its duties and obligations underthis Agreement and the other Loan Documents. After any retiring Administrative Agent’s resignation or removalhereunder as Administrative Agent, 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 under this Agreement and the other LoanDocuments.

 

(g)   Collateral Matters.

 

(i)            Administrative Agent is authorizedon behalf 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 applicable law.

 

(ii)           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 and payment in full of all Obligations; (ii) constitutingProperty sold or to be sold or otherwise disposed of as part of or inconnection with any disposition permitted under this Agreement or the otherLoan Documents; (iii) constituting Property in which the Borrower or anySubsidiary owned no interest at the time the Lien was granted or at any timethereafter; (iv) constituting Property leased to the Borrower or anySubsidiary under a lease which has expired or has been terminated in atransaction permitted under this Agreement or is about to expire and which hasnot been, and is not intended by the Borrower or such Subsidiary to be, renewedor extended; or (v) if approved, authorized or ratified in writing by theapplicable Majority Lenders or all the Lenders, as the case may be, as requiredby Section 9.01.  Upon the requestof the Administrative Agent at any time, the Secured Parties will confirm in 

 

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writing the AdministrativeAgent’s authority to release particular types or items of Collateral pursuantto this Section 8.07.

 

(iii)          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.

** **

**Section 9.**MISCELLANEOUS

 

(a)   Amendments, Etc.  No amendment or waiver of any provision ofthis Agreement, the Notes, or any other Loan Document, nor consent to anydeparture by the Borrower or any Subsidiary therefrom, shall in any event beeffective unless the same shall be in writing and signed by the MajorityLenders and the Borrower, and then such waiver or consent shall be effective onlyin the specific 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 Commitments of theLenders other than as provide in Section 2.16, (c) reduce theprincipal of, or interest on, the Notes or any fees or other amounts payablehereunder or under any other Loan Document, (d) postpone any date fixedfor any payment of principal of, or interest on, the Notes or any fees or otheramounts payable hereunder or extend the Maturity Date (other than as providedin Section 2.15), (e) change the percentage of Lenders which shall berequired for the Lenders or any of them to take any action hereunder or underany other Loan Document, (f) amend Section 2.11 or this Section 9.01,(g) amend the definition of “Majority Lenders,” (h) release anyGuarantor from its obligations under any Guaranty, (i) permit the Borroweror any Subsidiary to enter into any merger or consolidation with or into anyother Person or amend Section 6.04(a), (j) release any Collateralsecuring the Obligations, except for releases of Collateral sold as permittedby this Agreement except for releases of Collateral as permitted under Section 8.08(b),or (k) amend or waive any provision of, nor consent to any departure byany party thereto from, the Collateral Trust and Intercreditor Agreement; and provided,further, that no amendment, waiver or consent shall, unless in writing andsigned by the Administrative Agent in addition to the Lenders required above totake such action, affect the rights or duties of the Administrative Agent underthis Agreement or any other Loan Document.

 

(b)   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 I 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 

 

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

 

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

 

(d)   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 and each Lender (including, without limitation, reasonablecounsel fees and expenses of the Administrative Agent and each Lender) inconnection with the enforcement (whether through negotiations, legalproceedings, or otherwise) of this Agreement, the Notes, the Guaranties, andthe other Loan Documents.

 

(e)   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 and each Lender and theirrespective successors and assigns, except that the Borrower shall not have theright to assign its rights or delegate its duties under this Agreement or anyinterest in this Agreement without the prior written consent of each Lender.

 

(f)    Lender Assignments and Participations.

 

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

 

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effective date specifiedin each Assignment and Acceptance, which effective date shall be at least threeBusiness Days after the execution thereof, (A) the assignee thereundershall be a party hereto for all purposes and, to the extent that rights andobligations hereunder have been assigned to it pursuant to such Assignment andAcceptance, have the rights and obligations of a Lender hereunder and (B) suchLender thereunder shall, to the extent that rights and obligations hereunderhave been assigned by it pursuant to such Assignment and Acceptance, relinquishits rights and be released from its obligations under this Agreement (and, inthe case of an Assignment and Acceptance covering all or the remaining portionof such Lender’s rights and obligations under this Agreement, such Lender shallcease to be a party hereto).

 

(ii)           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 of thisAgreement or any other instrument or document furnished pursuant hereto; (ii) suchLender makes no representation or warranty and assumes no responsibility withrespect to 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.

 

(iii)          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 and the Lenders may treat each Person whosename is recorded in the Register as a Lender hereunder for all purposes of thisAgreement.  The Register shall beavailable for inspection by the Borrower or any Lender at any reasonable timeand from time to time upon reasonable prior notice.

 

(iv)          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 

 

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substantially the form ofthe attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) recordthe information contained therein in the Register, and (iii) give promptnotice thereof to the Borrower.  Withinfive Business Days after its receipt of such notice, the Borrower shall executeand deliver to the Administrative Agent in exchange for the surrendered Notes (A) anew Note to the order of such Eligible Assignee in an amount equal to theAdvances purchased by it pursuant to such Assignment and Acceptance and (B) ifsuch Lender has retained any portion of the Advances owing to it, a new Note tothe order of such Lender in an amount equal to the portion retained by ithereunder.  Such new Notes shall be datedthe effective date of such Assignment and Acceptance and shall otherwise be insubstantially the form of the attached Exhibit E.

 

(v)           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 the Advances owing to it); provided, however, that (i) suchLender’s obligations under this Agreement shall remain unchanged, (ii) suchLender shall remain solely responsible to the other parties hereto for theperformance of such obligations, (iii) such Lender shall remain the holderof any such Notes for all purposes of this Agreement, (iv) the Borrower,the Administrative Agent and the other Lenders shall continue to deal solelyand directly with such Lender in connection with such Lender’s rights andobligations under this Agreement, and (v) such Lender shall not requirethe participant’s consent to any matter under this Agreement, except for changein the principal amount of the Notes, reductions in fees or interest, releasingall or substantially all of any Collateral, permitting the Borrower or anySubsidiary 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 (other than asprovided in Section 2.15).  TheBorrower hereby agrees that participants shall have the same rights underSections 2.12, 2.13, 2.14(c), and 9.07 as a Lender to the extent of theirrespective participations.

 

(g)   Indemnification; Waiver.

 

(a)           Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT(AND ANY SUB-AGENT THEREOF), EACH LENDER AND EACH OFFICER, DIRECTOR, EMPLOYEE,AGENT, ATTORNEY-IN-FACT AND AFFILIATE****OF ANY OF THE FOREGOING PERSONS (EACH SUCHPERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEEHARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATEDEXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANYINDEMNITEE), INCURRED BY ANY INDEMNITEE OR ASSERTED AGAINST ANY INDEMNITEE BYANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARY OF THE BORROWER ARISINGOUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE EXECUTION ORDELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT ORINSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIESHERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THECONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THECASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR,EMPLOYEE, AGENT, ATTORNEY-IN-FACT 

 

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AND AFFILIATE THEREOF) THEADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANYADVANCE OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (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 OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THEBORROWER OR ANY GUARANTOR, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTYTHERETO**, IN ALL CASES, WHETHER OR NOTCAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORYOR SOLE NEGLIGENCE OF THE INDEMNITEE**; PROVIDED THAT SUCHINDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCHLOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY ACOURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVERESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH 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 orany agreement or instrument contemplated hereby, the transactions contemplatedhereby or thereby, any Advance or the use of the proceeds thereof.  No Indemnitee referred to in subsection (a) aboveshall be liable for any damages arising from the use by unintended recipientsof any information or other materials distributed by it throughtelecommunications, electronic or other information transmission systems inconnection with this Agreement or the other Loan Documents or the transactionscontemplated hereby or thereby.**

 

(h)   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.

 

(i)    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.

 

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(j)    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 thereinshall not be affected or impaired thereby.

 

(k)   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 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.

 

(l)    Governing Law; Submission to Jurisdiction.  This Agreement, the Notes and the other LoanDocuments shall be governed by, and construed and enforced in accordance with,the laws of the State of Texas.  Withoutlimiting the intent of the parties set forth above, (a) Chapter 346 of theTexas Finance Code, as amended (relating to revolving loans and revolvingtri-party accounts (formerly Tex.  Rev.Civ.  Stat.  Ann. Art.  5069, Ch.  15)), shall not apply to this Agreement, theNotes, or the transactions contemplated hereby and (b) to the extent thatany Lender may be subject to Texas law limiting the amount of interest payablefor its account, such Lender shall utilize the indicated (weekly) rate ceilingfrom time to time in effect.  TheBorrower hereby irrevocably submits to the jurisdiction of any Texas state orfederal court sitting in Dallas, Texas in any action or proceeding arising outof or relating to this Agreement or the other Loan Documents, and the Borrowerhereby irrevocably agrees that all claims in respect of such action orproceeding may be heard and determined in such court.  The Borrower hereby unconditionally and irrevocablywaives, to the fullest extent it may effectively do so, any right it may haveto the defense of an inconvenient forum to the maintenance of such action orproceeding.  The Borrower hereby agreesthat service of copies of the summons and complaint and any other process whichmay be served in any such action or proceeding may be made by mailing ordelivering a copy of such process to such Borrower at its address set forth inthis Agreement.  The Borrower agrees thata final judgment in any such action or proceeding shall be conclusive and maybe enforced in other jurisdictions by suit on the judgment or in any othermanner provided by law.  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.

 

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

 

(n)   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 

 

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Borrower and otherinformation that will allow such Lender or the Administrative Agent, asapplicable, to identify the Borrower in accordance with the Patriot Act.

 

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

 

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

 

*Signaturepage to Subordinated Credit Agreement(Cano Petroleum, Inc.)*

 

----

 
| ** ** | **ADMINISTRATIVE AGENT/LENDERS:**                               |
|------------|-----------------------------------------------------------------|
|       |                                                            |
|       | UNIONBANCAL EQUITIES, INC.,  as Administrative Agent and Lender |
|       |                                                            |
|       |                                                            |
|       | By:                                                             | /s/ Ted A. McNulty |
|       | Name:                                                           | Ted A. McNulty |
|       | Title:                                                          | Senior Vice President |
|       |                                                            |
|       |                                                            |
|       | By:                                                             |   | /s/ Derrick Pan |
|       | Name:                                                           | Derrick Pan |
|       | Title:                                                          | Vice President |
|            |                                                                 |  |  |  |

 

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

 

----

 

**SCHEDULE I**

**NOTICE INFORMATION AND COMMITMENTS**

 

Each of the commitments to lend set forth herein is governed by theterms of the Credit Agreement which provides for, among other things, borrowingbase limitations 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 I.

 

**Administrative Agent:**

 

UnionBanCal Equities, Inc.

445 South Figueroa Street, 21st Floor

Los Angeles, California 90071

Attention:  Maggie Elower

Phone:  213-236-7881

Fax:  213-236-7619

 

**Borrower:**

 

Cano Petroleum, Inc.

Burnett Plaza

801 Cherry Street, Suite 3200

Fort Worth, Texas 76102

Attention: Benjamin Daitch, CFO

Facsimile: (817) 334-0222

 

| **Lenders:**                    | ** ** | **Commitment**     | ** ** |
|---------------------------------|------------|--------------------|------------|
| UnionBanCal Equities, Inc. |       | $15,000,000.00     |       |
| **Total:**                      | ** ** | **$15,000,000.00** | ** ** |

 

----

 

**SCHEDULE 4.01**

 

**SUBSIDIARIES OF BORROWER**

 
| **Ladder Companies, Inc.**          |   |     |
|------------------------------------------|--------|----------|
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Delaware |
| Type of Organization:Corporation         |   |     |
|                                     |   |     |
| **Square One Energy, Inc.**         |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Texas    |
| Type of Organization:Corporation         |   |     |
|                                     |   |     |
| **W.O. Energy of Nevada, Inc.**     |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Nevada   |
| Type of Organization:Corporation         |   |     |
|                                     |   |     |
| **WO Energy, Inc.**                 |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Texas    |
| Type of Organization:Corporation         |   |     |
|                                     |   |     |
| **W.O. Operating Company, Ltd.**         |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Texas    |
| Type of Organization:Limited Partnership |   |     |
|                                     |   |     |
| **W.O. Production Company, Ltd.**        |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Texas    |
| Type of Organization:Limited Partnership |   |     |
|                                     |   |     |
| **Cano Petro of New Mexico**             |   |     |
|                                     |   |     |
| Sole Jurisdiction of Formation / Filing: |   | Texas    |
| Type of Organization:Corporation         |   |     |

 

1

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**SCHEDULE 4.05**

 

**EXISTING DEBT**

** **

**CanoPetroleum, Inc.**

 

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

 

$27,000,000

 

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

 
| D.E. Shaw Laminar Portfolios, L.L.C.                                                                  |       | $            | 11,804,024.06     |       |
|-------------------------------------------------------------------------------------------------------|------------|--------------|-------------------|------------|
| Investcorp Interlachen Multi-Strategy  Master Fund Limited                                            |       | 1,479,484.90 |              |
| Kellogg Capital Group LLC                                                                             |       | 2,046,906.46 |              |
| William Herbert Hunt Trust Estate                                                                     |       | 3,391,960.94 |              |
| Radcliffe SPC, Ltd. for and on behalf of  the Class A Convertible Crossover Segregated Portfolio |       | 2,046,906.46 |              |
| Touradji DeepRock Master Fund, Ltd.                                                                   |       | 1,016,843.75 |              |
| Trapeze Capital Corp.                                                                                 |       | 3,492,858.29 |              |
| O’Connor PIPEs Corporate Strategies Master  Limited                                              |       | 1,275,122.07 |              |
| **Total Convertible Preferred Stock**                                                                 | ** ** | **$**        | **26,554,106.93** | ** ** |

 

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

 

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

 

**Square One Energy, Inc.**

 

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

 

**W.O. Energy of Nevada, Inc.**

 

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

 

**WO Energy, Inc.**

 

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

 

**W.O. Operating Company, Ltd.**

 

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

 

1

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**W.O. Production Company, Ltd.**

 

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

 

**Cano Petro of New Mexico**

 

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

 

2

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**Schedule 4.07**

 

**LITIGATION**

** **

**Burnett:**

 

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

 

The plaintiffs 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.

 

On June 21, 2007, the Judge of the 100th Judicial District Court issued a FinalJudgment (a) granting motions for summary judgment in favor of Cano andcertain of its subsidiaries on plaintiffs’ claims for (i) breach ofcontract/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:**

 

On March 14, 2007, the following lawsuit was filed in 100thJudicial District Court in Carson County, Texas; Cause No. 9994,Southwestern Public Service Company d/b/a Xcel Energy v. Cano Petroleum, Inc.,W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WOEnergy, Inc. (“SPS”). The plaintiff claims 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 plaintiff (i) allegesnegligence and breach of contract and (ii) seeks $1,876,000 in damages forloss and damage to transmission and distribution equipment, utility poles,lines and other equipment.  In addition,the plaintiff seeks reimbursement for its attorney’s fees.

 

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

 

1

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

 

**MDLCase:**

 

On September 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 JudicialDistrict Court of Tarrant County, Texas, Cause No. 348-227907-07, NormaValenzuela, 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 all pretrialmatters and remands this case to the 348th District Court for trial.  A Motion to transfer Venue has been heard andtaken under advisement by the Court.  TheMDL Court has not yet remanded this case for 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

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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

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**SCHEDULE 4.14(a)**

 

**AGREEMENTS WHICH COULD CREATE A MATERIALADVERSE CHANGE**

 

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

 

Securities Purchase Agreement dated August 25, 2006 by and amongCano 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.

 

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**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 |   |

 

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**SCHEDULE 4.21**

 

**MATERIAL AGREEMENTS**

 

**Description**

** **

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.

 

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

 

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

 

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

 

Amendment to Gas Purchase Contract between GPM Gas Corporation and RioPetroleum, 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 PartnersMarketing & Terminals, LP and Ladder Energy Company dated December 1,2004.

 

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

 

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

 

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

 

Amendmentto 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 Incand STP, Inc. dated August 15, 2002.

 

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

 

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

 

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

 

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

 

Gas Sales & Purchase Agreement Amendment between AlliantEnergy 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) andSquare One Energy contract number 7062-1001 dated March 1, 2007.

 

1

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Crude Oil Purchase Agreement Amendment between Sunoco PartnersMarketing & Terminals L.P. and Square One Energy Reference Number521329 dated June 1, 2003.

 

Crude Oil Purchase Agreement Amendment between Sunoco PartnersMarketing & Terminals L.P. and Square One Energy Reference Number521329 dated March 1, 2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco PartnersMarketing & Terminals L.P. and Square One Energy Reference Number521329 dated November 1, 2004.

 

Crude Oil Purchase Agreement Amendment between Sunoco PartnersMarketing & Terminals L.P. and Square One Energy Reference Number521329 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 PartnersMarketing & Terminals L.P. and Square One Energy Reference Number521329 dated November 1, 2006.

 

Crude OilPurchase 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 andW. 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 ShamrockRefining Company, L. P. and W. O. Operating Company Contract number 01-0838dated August 1, 2007 and Exhibit A.

 

Gas Purchase Contract between W. O. Operating Company and GPMCorporation 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 andSupply Company and W. O. Operating Company dated December 1, 2007.

 

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

 

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

 

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

 

Amendmentto Gas Services and/or Purchase Agreement between Cano Petroleum, Inc, Ownerand Versado Gas Processors, L.L.C. acting through Targa Midstream ServicesLimited Partnership, its operator

 

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

 

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

 

UnitOperating Agreement — Cano Unit dated May 1, 1989.

 

2

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

 

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

 

3

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**EXHIBIT A**

 

**FORM OFASSIGNMENT AND ACCEPTANCE**

 

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

 

For an agreedconsideration, [the][each] Assignor hereby irrevocably sells and assigns to[the Assignee][the respective Assignees], and [the][each] Assignee herebyirrevocably purchases and assumes from [the Assignor][the respectiveAssignors], subject to and in accordance with the Standard Terms and Conditionsand the Credit Agreement, as of the Effective Date inserted by theAdministrative Agent as contemplated below (i) all of [the Assignor’s][therespective Assignors’] rights and obligations in [its capacity as aLender][their respective capacities as Lenders] under the Credit Agreement andany other documents or instruments delivered pursuant thereto to the extentrelated to the amount and percentage interest identified below of all of suchoutstanding rights and obligations of [the Assignor][the respective Assignors]under the respective facilities identified below (including without limitationany letters of credit, guarantees, and swingline loans included in suchfacilities) and (ii) to the extent permitted to be assigned underapplicable law, all claims, suits, causes of action and any other right of [theAssignor (in its capacity as a Lender)][the respective Assignors (in theirrespective capacities as Lenders)] against any Person, whether known or unknown,arising under or in connection with the Credit Agreement, any other documentsor instruments delivered pursuant thereto or the loan transactions governedthereby or in any way based on or related to any of the foregoing, including,but not limited to, contract claims, tort claims, malpractice claims, statutoryclaims and all other claims at law or in equity related to the rights andobligations sold and assigned pursuant to clause (i) above (the rights andobligations sold and assigned by [the][any] Assignor to [the][any] Assigneepursuant to clauses (i) and (ii) above being referred to hereincollectively as [the][an] “Assigned Interest”).  Each such sale and assignment is withoutrecourse to 

 

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(1) For bracketed language here and elsewherein this form relating to the Assignor(s), if the assignment is from a singleAssignor, choose the first bracketed language. If the assignment is from multiple Assignors, choose the secondbracketed language.

 

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

 

(3) Select as appropriate.

 

(4) Includebracketed language if there are either multiple Assignors or multipleAssignees.

 

A-1

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

 
| 1.     |   | Assignor[s]:                                                                   |   |                                                                                                                                                                                             |   |
|--------|--------|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                           |   |                                                                                                                                                                                             |   |
|   |   |                                                                           |   |                                                                                                                                                                                             |   |
| 2.     |   | Assignee[s]:                                                                   |   |                                                                                                                                                                                             |   |
|   |   |                                                                           |   |                                                                                                                                                                                             |   |
|   |   |                                                                           |
|   |   | [for each Assignee, indicate [Affiliate][Approved Fund] of [*identify Lender*] |
|   |   |                                                                           |   |                                                                                                                                                                                             |
| 3.     |   | Borrower:                                                                      |   | CANO PETROLEUM, INC., a Delaware corporation                                                                                                                                                     |
|   |   |                                                                           |   |                                                                                                                                                                                             |
| 4.     |   | Administrative Agent:                                                          |   | UNIONBANCAL EQUITIES, INC., as the administrative agent under the  Credit Agreement                                                                                                              |
|   |   |                                                                           |   |                                                                                                                                                                                             |
| 5.     |   | Credit Agreement:                                                              |   | The Subordinated Credit Agreement dated as of December 17, 2008  among Borrower, the Lenders party thereto from time to time, and UnionBanCal  Equities, Inc. as Administrative Agent. |
|   |   |                                                                           |   |                                                                                                                                                                                             |
| 6.     |   | Assigned Interest[s]:                                                          |   |                                                                                                                                                                                             |

 
| **Assignor[s]** | ** ** | **Assignee[s]** | ** ** | **Facility  Assigned** | ** ** | **Aggregate Amount  of Commitment  /Advance for all  Lenders** | ** ** | **Amount of  Commitment /   Advances  Assigned(5)** | ** ** | **Percentage Assigned  of Commitment /   Advances(6)** | ** ** | **CUSIP  Number** | ** ** |
|-----------------|------------|-----------------|------------|------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------|------------|
|            |       |            |       |                   |       | $                                                                                  |       |                                                               | $          |                                                                       |       |              | %          |   |   |
|            |       |            |       |                   |       | $                                                                                  |       |                                                               | $          |                                                                       |       |              | %          |   |   |
|            |       |            |       |                   |       | $                                                                                  |       |                                                               | $          |                                                                       |       |              | %          |   |   |

 
| 7. |   | Trade Date: |                               (7) |
|----|--------|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

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(5) Amount to be adjusted by thecounterparties to take into account any payments or prepayments made betweenthe Trade Date and the Effective 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) andthe Assignee(s) intend that the minimum assignment amount is to bedetermined as of the Trade Date.

 

A-2

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

 
|                             | ASSIGNOR[S](8)      |
|----------------------------------|---------------------|
|                             | [NAME OF  ASSIGNOR] |
|                             |                |
|                             |                |
|                             | By:                 |   |
|                             | Name:               |   |
|                             | Title:              |   |
|                             |                |
|                             | [NAME OF  ASSIGNOR] |
|                             |                |
|                             |                |
|                             | By:                 |   |
|                             | Name:               |   |
|                             | Title:              |   |
|                             |                |   |
|                             | ASSIGNEE[S]         |
|                             | [NAME OF ASSIGNEE]  |
|                             |                |
|                             |                |
|                             | By:                 |   |
|                             | Name:               |   |
|                             | Title:              |   |
|                             |                |   |
|                             | [NAME OF ASSIGNEE]  |
|                             |                |
|                             |                |
|                             | By:                 |   |
|                             | Name:               |   |
|                             | Title:              |   |
|                             |                |
| [Consented to and](9)  Accepted: |                |
|                             |                |
| UNIONBANCAL EQUITIES, INC., as   |                |
|  Administrative Agent       |                |
|                             |                |
| By:                              |                |   |
| Name:                            |                |   |
| Title:                           |                |   |
|                             |                |
| By:                              |                |   |
|                                  |                     |  |  |  |  |  |  |  |

 

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(8) Add additional signature blocks as needed.

 

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

 

A-3

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

 

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

 

A-4

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Annex 1

To Exhibit A — Assignmentand Acceptance

 

**STANDARDTERMS AND CONDITIONS FOR**

**ASSIGNMENTAND ACCEPTANCE**

 

1.  Representations andWarranties.

 

1.1 Assignor[s]. [The][Each] Assignor (a) represents and warrants that (i) itis the legal and beneficial owner of [the][the relevant] Assigned Interest, (ii) [the][such]Assigned Interest is free and clear of any lien, encumbrance or other adverseclaim and (iii) it has full power and authority, and has taken all actionnecessary, to execute and deliver this Assignment and Acceptance and toconsummate the transactions contemplated hereby; and (b) assumes noresponsibility with respect to (i) any statements, warranties orrepresentations made in or in connection with the Credit Agreement or any otherLoan Document, (ii) the execution, legality, validity, enforceability,genuineness, sufficiency or value of the Loan Documents or any collateralthereunder, (iii) the financial condition of the Borrower, any of itsSubsidiaries or Affiliates or any other Person obligated in respect of any LoanDocument or (iv) the performance or observance by the Borrower, any of itsSubsidiaries or Affiliates or any other Person of any of their respectiveobligations under any Loan Document.

 

1.2. Assignee[s]. [The][Each] Assignee (a) represents and warrants that (i) ithas full power and authority, and has taken all action necessary, to executeand deliver this Assignment and Acceptance and to consummate the transactionscontemplated hereby and to become a Lender under the Credit Agreement, (ii) itmeets all the requirements to be an Eligible Assignee under Section 9.06of the Credit Agreement (subject to such consents, if any, as may be requiredunder Section 9.06 of the Credit Agreement), (iii) from and after theEffective Date, it shall be bound by the provisions of the Credit Agreement asa Lender thereunder and, to the extent of [the][the relevant] AssignedInterest, shall have the obligations of a Lender thereunder, (iv) it issophisticated with respect to decisions to acquire assets of the type representedby the Assigned Interest and either it, or the person exercising discretion inmaking its decision to acquire the Assigned Interest, is experienced inacquiring assets of such type, (v) it has received a copy of the CreditAgreement, and has received or has been accorded the opportunity to receivecopies of the most recent financial statements delivered pursuant to Section 3.01(c) thereof,as applicable, and such other documents and information as it deems appropriateto make its own credit analysis and decision to enter into this Assignment andAcceptance and to purchase [the][such] Assigned Interest, (vi) it has,independently and without reliance upon the Administrative Agent or any otherLender and based on such documents and information as it has deemedappropriate, made its own credit analysis and decision to enter into thisAssignment and Acceptance and to purchase [the][such] Assigned Interest, and (vii) ifit is a Person that is organized under the laws of a jurisdiction other thanthat in which the Borrower is resident for tax purposes, attached to theAssignment and Acceptance is any documentation required to be delivered by itpursuant to the terms of the Credit Agreement, duly completed and executed by[the][such] Assignee; and (b) agrees that (i) it will, independentlyand without reliance on the Administrative Agent, [the][any] Assignor or anyother Lender, and based on such documents and information as it shall deemappropriate at the time, continue to make its own credit decisions in taking ornot taking action 

 

A-5

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under the Loan Documents, and (ii) it will perform in accordancewith their terms all of the obligations which by the terms of the LoanDocuments 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.               GeneralProvisions.  This Assignment andAcceptance shall be binding upon, and inure to the benefit of, the partieshereto and their respective successors and assigns.  This Assignment and Acceptance may beexecuted in any number of counterparts, which together shall constitute oneinstrument.  Delivery of an executedcounterpart of a signature page of this Assignment and Acceptance bytelecopy shall be effective as delivery of a manually executed counterpart ofthis Assignment and Acceptance.  ThisAssignment and Acceptance shall be governed by, and construed in accordancewith, the law of the State of Texas.

 

A-6

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**EXHIBIT B**

 

**FORM OFCOMPLIANCE CERTIFICATE**

 

**FOR THE PERIODFROM _______, 200__ TO ________, 200**__

 

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

 

Theundersigned hereby certifies that:

 

(a)                                  allof the representations and warranties made by the Borrower in the CreditAgreement and the other Loan Documents are true and correct in all materialrespects as if made on this date, except to the extent that any suchrepresentation or warranty expressly relates solely to an earlier date, inwhich case it shall have been true and correct in all material respects as ofsuch earlier date;

 

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

 

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

 

____________________________________;and]

 

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

** **

**I.****                                         CurrentRatio—Section 6.17.**

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

 

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

 

 (12) “current liabilities” shallexclude, as of the date of calculation, the current portion of long-term Debtexisting under the Senior Credit Agreement, the current portion of long-termDebt existing under the Credit Agreement and any liabilities representing avaluation account arising from the application of SFAS 133 and 143.

 

B-1

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| Current Ratio = (a) to (b) = |       |                                         |   |
|----------------------------------------|------------|----------------------------------------------|--------|
|                                   |       |                                         |
| Minimum Current Ratio not less than:   |       | 1.00 to 1.00                                 |
|                                   |       |                                         |
| **COMPLIANCE?**                        | ** ** | **YES  ****o NO  ****o** |

** **

**II.            LeverageRatio—Section 6.18.**

 
| (a)    | consolidated  Debt(13)                                                                                               |   |   |   |
|--------|----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|   |                                                                                                                 |   |   |   |
| (b)    | consolidated  EBITDA(14) =(i) + [(ii) + (iii) + (iv)](15) —  (v) + (vi) + (vii) = |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (i)   Consolidated Net Income                                                                                   |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (ii)   consolidated Interest Expense                                                                            |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (iii)   taxes                                                                                                   |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (iv)   depreciation, amortization, depletion & other non-cash items(16)                                |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (v)  all  non-cash items of income included in determining Consolidated Net Income(17)                          |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (vi)  net  gain on Pantwist Sale(18)                                                                            |   | $      |   |   |
|   |                                                                                                                 |   |   |   |
|   | (vii)   Items (i) — (v) associated with Pantwist, LLC(19)                                        |   | $      |   |   |

 
| Leverage Ratio = (a) to (b) = |   |         |   |
|-----------------------------------------|--------|--------------|--------|
|                                    |   |         |   |
| Maximum Leverage Ratio:                 |   | 4.50 to 1.00 |   |

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

 

----

(13) “consolidated Debt” shall not include Debt outstanding underpreferred Equity Interests issued in compliance with Section 6.22 of theCredit Agreement.

 

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

 

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

 

(16) Other non-cash items should include any provisions for the reductionin the carrying 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 fromthe requirements of SFAS 133 or 143.

 

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

 

(19) Item (vii) only applies to any period during which Pantwist,LLC was a wholly-owned Subsidiary of Borrower and only to the extent such arenot duplicative of any portions of Items (i) — (v).

 

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**III.           InterestCoverage Ratio—Section 6.19.**

 
| (a)    | consolidated  EBITDA = *See II(b) above* = |   | $      |   |   |
|--------|-------------------------------------------------|--------|--------|--------|--------|
|   |                                            |   |   |   |
| (b)    | consolidated  Interest Expense =                |   | $      |   |   |

 
| Interest Coverage Ratio = (a) to  (b) = |   |         |   |
|---------------------------------------------------|--------|--------------|--------|
|                                              |   |         |   |
| Minimum Interest Coverage Ratio  =                |   | 2.50 to 1.00 |   |
|                                              |   |         |   |
| **COMPLIANCE?**                                   |   |         |   |

 

**IV.           MinimumAsset Coverage Ratio - Section 6.23.**

 
| (a)        | PDP NPV *=*                                                                                                   |   | $      |   |   |
|------------|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|       |                                                                                                          |   |   |   |
| (b)        | PDNP NPV *=*                                                                                                  |   | $      |   |   |
|       |                                                                                                          |   |   |   |
| (c)        | PUD NPV =                                                                                                     |   | $      |   |   |
|       |                                                                                                          |   |   |   |
| (d)        | = (a) divided  by sum of (a) plus (b) plus (c)                                                 |   |   | %      |
|       |                                                                                                          |   |   |   |
| (e)        | = (a) divided  by .60                                                                                    |   | $      |   |   |
|       |                                                                                                          |   |   |   |
| (f)        | = (a) plus  (b) plus (c)                                                                            |   | $      |   |   |
|       |                                                                                                          |   |   |   |
| **(g)**    | **Total  Present Value = either (f), or if (d) is less than 60%, then Total  Present Value equals (e)=** |   | $      |   |   |
| ** ** | ** **                                                                                                    |   |   |   |
| **(h)**    | **consolidated  Debt = *see II(a) above =***                                                             |   | $      |   |   |

 
| Minimum Reserve Ratio = (g) to (h) |   |                                         |   |
|-----------------------------------------|--------|----------------------------------------------|--------|
|                                    |   |                                         |   |
| Minimum Interest Coverage Ratio:        |   | 1.50 to 1.00                                 |   |
|                                    |   |                                         |   |
| **COMPLIANCE?**                         |   | **YES  ****o NO  ****o** |   |

 

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

 

B-3

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

 

B-4

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**EXHIBITC**

 

**FORM OFGUARANTY AGREEMENT**

 

ThisSubordinated Guaranty 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 UnionBanCal Equities, Inc.,as Administrative Agent for the ratable benefit of itself, the Lenders (asdefined below) (together with the Administrative Agent and the Lenders,individually a “Beneficiary”, and collectively, the “Beneficiaries”).

 

**INTRODUCTION**

 

A.            This Guaranty is given in connectionwith that certain Subordinated Credit Agreement dated as of December 17,2008 (as it has been or may be amended, supplemented, restated or otherwisemodified from time to time, the “Credit Agreement”), among CanoPetroleum, Inc., a Delaware corporation (the “Borrower”), thelenders party thereto from time to time (individually a “Lender” andcollectively, the “Lenders”), and UnionBanCal Equities, Inc. asadministrative agent (“Administrative Agent”) for such Lenders.

 

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

 

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

 

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

** **

**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 the existenceof a bankruptcy, reorganization or similar proceeding would accrue), fees,amounts required to be provided as collateral, indemnities, expenses orotherwise (collectively, the “Guaranteed Obligations”). Without limitingthe generality of the foregoing, each Guarantor’s liability shall extend to allamounts that constitute part of the Guaranteed Obligations and would be owed bythe Borrower to the Administrative Agent or any Lender under the Loan Documentsand by the Borrower or any of its Subsidiaries but for the fact that they areunenforceable or not allowable due to insolvency or 

 

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the existence of abankruptcy, reorganization or similar proceeding involving the Borrower or suchother Subsidiary.

 

(b)           It is the intention of the Guarantorsand each Beneficiary that the amount of the Guaranteed Obligations guaranteedby each Guarantor shall be in, but not in excess of, the maximum amountpermitted by fraudulent conveyance, fraudulent transfer or similar LegalRequirements applicable to such Guarantor. Accordingly, notwithstandinganything to the contrary contained in this Guaranty or in any other agreementor instrument executed in connection with the payment of any of the GuaranteedObligations, the amount of the Guaranteed Obligations guaranteed by a Guarantorunder this Guaranty shall be limited to an aggregate amount equal to thelargest amount that would not render such Guarantor’s obligations hereundersubject to avoidance under Section 548 of the United States BankruptcyCode or any comparable provision of any other applicable law.

** **

**Section 3.             **Guaranty Absolute.  Each guarantor guarantees that the guaranteedobligations will be paid strictly in accordance with the terms of the loandocuments, regardless of any law, regulation or order now or hereafter ineffect in any jurisdiction affecting any of such terms or the rights of theadministrative agent or any lender with respect thereto but subject to section2(b) above.  The obligations of eachguarantor under this guaranty are independent of the guaranteed obligations orany other obligations of any other person under the loan documents, and aseparate action or actions may be brought and prosecuted against any guarantorto enforce this guaranty, irrespective of whether any action is brought againstthe borrower, any other guarantor or any other person or whether the borrower,any other guarantor or any other person is joined in any such action 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 enforceabilityof any Loan Document or any agreement or instrument relating thereto or anypart of the Guaranteed Obligations being irrecoverable;

 

(b)           any change in the time, manner orplace of payment of, or in any other term of, all or any of the Guaranteed Obligationsor any other obligations of any Person under the Loan Documents, or any otheramendment or waiver of or any consent to departure from any Loan Document,including, without limitation, any increase in the Guaranteed Obligationsresulting from the extension of additional credit to 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 the GuaranteedObligations;

 

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

 

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

 

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

 

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

 

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

** **

**Section 4.             **Continuation And Reinstatement,Etc.  Each guarantor agrees that, to the extentthat payments of any of the guaranteed obligations are made, or any lender orthe administrative agent receives any proceeds of collateral, and such paymentsor proceeds or any part thereof are subsequently invalidated, declared to befraudulent or preferential, set aside, or otherwise required to be repaid, thento the extent of such repayment the guaranteed obligations shall be reinstatedand continued in full force and effect as of the date such initial payment orcollection of proceeds occurred.  EACH GUARANTOR SHALL DEFEND ANDINDEMNIFY EACH BENEFICIARY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY,COST OR EXPENSE UNDER THIS SECTION 4 (INCLUDING REASONABLE ATTORNEYS’ FEESAND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THEINDEMNIFIED BENEFICIARY’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 BENEFICIARY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

** **

**Section 5.             **Waivers And Acknowledgments.

 

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

 

(b)           Each Guarantor hereby irrevocablywaives any right to revoke this Guaranty, and acknowledges that this Guarantyis continuing in nature and applies to all Guaranteed Obligations, whetherexisting now or in the future.

 

(c)           Each Guarantor acknowledges that itwill receive substantial direct and indirect benefits from the financingarrangements involving the Borrower and its Subsidiaries contemplated by theLoan Documents and that the waivers set forth in this Guaranty are knowinglymade in contemplation of such benefits.

** **

**C-3**

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** **

**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, all commitmentsshall have expired or terminated, and the credit agreement has been terminatedin writing.  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, and (b) thetermination of the commitments, such amount shall be held in trust for thebenefit of the beneficiaries and shall forthwith be paid to the administrativeagent to be credited and applied to the guaranteed obligations and any and allother amounts payable by the guarantors under this guaranty, whether matured orunmatured, in accordance with the terms of the loan documents.

** **

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

 

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

 

(b)           Such Guarantor has, independently andwithout reliance upon the Administrative Agent or any Lender and based on suchdocuments and information as it has deemed appropriate, made its own creditanalysis and decision to enter into this Guaranty, and such Guarantor hasestablished adequate means of obtaining from the Borrower and each otherrelevant Person on a continuing basis information pertaining to, and is now andon a continuing basis will be completely familiar with, the business, condition(financial and otherwise), operations, properties and prospects of the Borrowerand each other relevant Person.

 

(c)           The obligations of such Guarantorunder this Guaranty are the valid, binding and legally enforceable obligationsof such 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.             **Right Of Set-Off.  Upon the occurrence and during thecontinuance of any event of default, any beneficiary is hereby authorized atany time, to the fullest extent permitted by law, to set off and apply anydeposits (general or special, time or demand, provisional or final) and otherindebtedness owing by such beneficiary to the account of each guarantor againstany and all of the obligations of the guarantors under this guaranty,irrespective of whether or not such beneficiary shall have made any demandunder this guaranty and although such obligations 

** **

**C-4**

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** **

**may becontingent and unmatured.  Suchbeneficiary shall promptly notify the affected guarantor after any such set-offand application is made, provided that the failure to give such notice shallnot affect the validity of such set-off and application.  The rights of the beneficiaries under thissection 8 are in addition to other rights and remedies (including, withoutlimitation, other rights of set-off) which any beneficiary may have.**

** **

**Section 9.             **Amendments, Etc. No amendment or waiver of any provision of this guaranty and no consentto any departure by any guarantor therefrom shall in any event be effectiveunless the same shall be in writing and signed by the affected guarantor, theadministrative agent and the majority lenders, and then such waiver or consentshall be effective only in the specific instance and for the specific purposefor which given; provided that no amendment, waiver or consent shall,unless in writing and signed by all of the lenders, (a) other than to theextent expressly provided in such amendment, waiver or consent, limit theliability of any guarantor hereunder (it being understood that waivers andamendments permitted to be made under the credit agreement by the majoritylenders with respect to any of the underlying obligations guaranteed hereundershall not be deemed to limit the liability of any guarantor within the meaningof this clause (a)), (b) postpone any date fixed for payment hereunder inrespect of any of the guaranteed obligations that is principal of, or intereston, the notes or any fees, or (c) change the percentage of the commitmentsor of the aggregate unpaid principal amount of the notes required to take anyaction hereunder.

** **

**Section 10.           **Notices, Etc.  All notices and other communications provided forhereunder shall be sent in the manner provided for in section 9.02 of thecredit agreement and if to a guarantor, at its address specified on thesignature page hereto and if to the administrative agent or any lender, atits address specified in or pursuant to the credit agreement.  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.           **No Waiver:Remedies.  No failure on the part of any beneficiary to exercise, andno delay in exercising, any right hereunder shall operate as a waiver thereof;nor shall any single or partial exercise of any right hereunder preclude anyother or further exercise thereof or the exercise of any other right. Theremedies herein provided are cumulative and not exclusive of any remediesprovided by law.

** **

**Section 12.           **Continuing Guaranty: AssignmentsUnder The Credit Agreement.  This guaranty is a continuing guaranty and shall (a) remainin full force and effect until the payment in full of all guaranteedobligations and all other amounts payable under the loan documents and thetermination of all the commitments, (b) be binding upon each guarantor andits successors and assigns, and (c) inure to the benefit of and beenforceable by the administrative agent and each lender, and, in the case oftransfers and assignments made in accordance with the credit agreement,transferees and assigns.  Withoutlimiting the generality of the foregoing clause (c), subject to section 9.06 ofthe credit agreement, any lender may assign or otherwise transfer all or anyportion of its rights and obligations under the credit agreement (including,without limitation, all or any portion of its commitment, the advances owing toit and the note or notes held by it) to any other person, and such other personshall thereupon become vested with all the benefits in respect thereof grantedto such lender herein or otherwise, subject, however, in all 

** **

**C-5**

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** **

**respects to theprovisions of the credit agreement.  Eachguarantor acknowledges that upon any person becoming a lender, theadministrative agent in accordance with the credit agreement, such person shallbe entitled to the benefits hereof.**

** **

**Section 13.           **Governing Law.  This guaranty shall be governed by, and construed andenforced in accordance with, the laws of the state of texas.  Each guarantor hereby irrevocably submits tothe jurisdiction of any texas state or federal court sitting in dallas, texasin any action or proceeding arising out of or relating to this guaranty and theother loan documents, and each guarantor hereby irrevocably agrees that allclaims in respect of such action or proceeding may be heard and determined insuch court.  Each 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.  Each 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 in the credit agreement or set forth on the signature page ofthis guaranty.  Each guarantor agreesthat a final judgment in any such action or proceeding shall be conclusive andmay be enforced in other jurisdictions by suit on the judgment or in any othermanner provided by law.  Nothing in thissection shall affect the rights of any beneficiary to serve legal process inany other manner permitted by the law or affect the right of any beneficiary tobring any action or proceeding against any guarantor or its property in thecourts of any other jurisdiction.

** **

**Section 14.           **Indemnification.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THEBENEFICIARIES, AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTSFROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY ANDALL LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KINDOR NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TOOR ARISING 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) 

** **

**C-6**

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** **

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

** **

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

** **

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

** **

**Section 17.           **Subordination And IntercreditorAgreement.  Reference is made to thesubordination and intercreditor agreement dated as of december 17, 2008 (asamended, restated, supplemented or otherwise modified from time to time, the “subordinationand ***intercreditor agreement***”), among union bank ofcalifornia, n.a., as senior agent, and ****unionbancal equities, inc.,****as subordinated agent, andcertain other persons, party or that may become party thereto from time to time.  Notwithstanding anything herein to thecontrary, this guaranty, the obligations of the guarantors hereunder and therights and remedies of the beneficiaries hereunder are subject to theprovisions of the subordination and intercreditor agreement.  In the event of any conflict between the termsof the subordination and intercreditor agreement and this guaranty, the termsof the subordination and intercreditor agreement shall govern and control.

** **

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

** **

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

 

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**FROM THE WRITTEN AGREEMENT, AND ANY PRIORORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THISGURANTY.  THIS GUARANTY AND THE OTHERLOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TOTHE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OFPRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

** **

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

** **

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

 

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Each Guarantorhas caused this Guaranty to be duly executed as of the date first abovewritten.

 
| Address for each Guarantor:        | **GUARANTORS:**                                   |
|------------------------------------|---------------------------------------------------|
| c/o Cano Petroleum, Inc.      |                                              |
| 801 Cherry Street, Suite 3200 | **SQUARE ONE ENERGY, INC.**                       |
| Forth Worth, Texas 76102           | **LADDER COMPANIES, INC.**                        |
| Attention: Ben Daitch, CFO         | **W.O. ENERGY OF NEVADA, INC.**                   |
| Facsimile: (817) 334-0222          | **WO ENERGY, INC.**                               |
| ** **                         | **CANO PETRO OF NEW MEXICO, INC.**                |
|                               |                                              |
|                               |                                              |
|                               | Each By:                                          |   |
|                               |                                              | Benjamin Daitch |
|                               |                                              | Vice President and Chief Financial |
|                               |                                              | Officer |
|                               |                                              |
|                               |                                              |
| ** **                         | **W.O. OPERATING COMPANY, LTD.**                  |
| ** **                         | **W.O. PRODUCTION COMPANY, LTD.**                 |
|                               | Each By: WO Energy, Inc., as general partner |
|                               |                                              |
|                               |                                              |
|                               | By:                                               |   |
|                               |                                              |   Benjamin Daitch |
|                               |                                              |   Vice President and Chief Financial |
|                               |                                              |   Officer |
|                                    |                                                   |  |  |

 

C-9

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Annex 1 to the

Subordinated Guaranty Agreement

 

SUPPLEMENTNO.        dated as of                    (the*“Supplement*”),to the Subordinated Guaranty Agreement dated as of December 17, 2008 (asamended, supplemented or otherwise modified from time to time, the *“Guaranty Agreement”*),among each of the subsidiaries party thereto (each such subsidiaryindividually, a *“Guarantor”* and collectively, the *“Guarantors”*) of CANO PETROLEUM,INC., a Delaware corporation (the *“Borrower”*) in favor ofUNIONBANCAL EQUITIES, INC., as Administrative Agent (the *“Administrative Agent”*) for thebenefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made to theSubordinated 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 used herein andnot otherwise defined herein shall have the meanings assigned to such terms inthe Guaranty Agreement and the Credit Agreement.

 

C.            The Guarantors have entered into theGuaranty Agreement in order to induce the Lenders to make Advances.  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 thisSupplement in accordance with the requirements of the Credit Agreement tobecome a Guarantor under the Guaranty Agreement.

 

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

 

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

 

SECTION 2.           The New Guarantor represents andwarrants to the Administrative Agent and the other Beneficiaries 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-10

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SECTION 3.           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 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 as expressly supplementedhereby, the Guaranty Agreement shall remain in full force and effect.

 

SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY,AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor hereby irrevocably submitsto the jurisdiction of any Texas state or federal court sitting in Dallas,Texas in any action or proceeding arising out of or relating to this Supplementor the Guaranty Agreement and the other Loan Documents, and the New Guarantorhereby irrevocably agrees that all claims in respect of such action orproceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,to the fullest extent it may effectively do so, any right it may have to thedefense of an inconvenient forum to the maintenance of such action orproceeding.  The New Guarantor herebyagrees 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 one or more of theprovisions contained in this Supplement should be held invalid, illegal orunenforceable in any respect, the validity, legality and enforceability of theremaining provisions contained herein and in the Guaranty Agreement shall notin any way be affected or impaired thereby (it being understood that theinvalidity of a particular provision hereof in a particular jurisdiction shallnot in and of itself affect the validity of such provision in any otherjurisdiction).  The parties hereto shallendeavor 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.

 

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

 

SECTION 8.           The New Guarantor agrees to reimbursethe Administrative Agent for its reasonable out-of-pocket expenses inconnection with this Supplement, including the fees, disbursements and othercharges of counsel for the Administrative Agent.

 

C-11

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SECTION 9.           **PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESSAND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENTEXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITINGAND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED 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:                  |   |
|   |                    |
|   |                    |
|   | Address of Guarantor:   |
|   |                    |
|   |                    |
|   |                    |
|        |                         |  |  |  |

 

C-12

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|   | **ADMINISTRATIVE  AGENT:**                           |
|--------|------------------------------------------------------|
|   |                                                 |
|   |                                                 |
|   | UNIONBANCAL EQUITIES, INC., as  Administrative Agent |
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   |                                                 |
|   | Name:                                                |   |
|   |                                                 |
|   | Title:                                               |   |
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   |                                                 |
|   | Name:                                                |   |
|   |                                                 |
|   | Title:                                               |   |
|        |                                                      |  |  |  |  |  |

 

C-13

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**EXHIBIT D**

 

**FORM OF MORTGAGE**

 

**SUBORDINATED MORTGAGE, LINE OF CREDITMORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCINGSTATEMENT**

 

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 THISMORTGAGE.  A POWER OF SALE MAY ALLOWTHE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURTIN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.**

 

FROM

 

**CANO PETROLEUM, INC.**

(Mortgagor, Debtor and Grantor)

 

TO

 

UNIONBANCAL EQUITIES, INC., as AdministrativeAgent

(Mortgagee, Secured Party and Grantee)

 

December 17, 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 3664494 the mailing address of Mortgagee is 445 SouthFigueroa Street, 21st Floor, Los Angeles, California 90071.

 

D-1

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

 

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

 

D-2

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**SUBORDINATED MORTGAGE, LINE OF CREDITMORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCINGSTATEMENT**

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

 

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

 

WHEREAS, this Mortgage is executed in connection with, and pursuant tothe terms of that certain Subordinated 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 Mortgagor,the lenders party thereto from time to time (the “Lenders”) and theMortgagee (the Mortgagee and the Lenders collectively referred to herein as the“Credit Parties”).

 

WHEREAS, it is a condition precent to the extension of credit to Mortgagorunder the Credit Agreement that the Mortgagor and the Mortgagee on behalf ofthe 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), and (b) herebyagrees as follows:

 

**ARTICLE I**

**Definitions**

 

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

 

1.2           “*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, 

 

D-3

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

 

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

 

1.4           “*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.

 

1.5           “*Fixture Operating Equipment*” means any of the itemsdescribed in the first sentence of the definition of “Operating Equipment”below which as a result of being incorporated into realty or structures orimprovements located therein or thereon, with the intent that they remain therepermanently, constitute fixtures under the laws of the state in which suchequipment is located.

 

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

 

1.7           “*Hydrocarbons*” means oil, gas, coal seam gas, casinghead gas,drip gasoline, natural gasoline, condensate, distillate, and all other 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, water, carbon dioxide, helium, and any and all minerals, ores, orsubstances of value and the products and proceeds therefrom.

 

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

 

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

 

1.10         “*Obligations*”means

 

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

 

(b)           All otherindebtedness, obligations, and liabilities of Mortgagor or any of itsSubsidiaries arising under the Credit Agreement, the Security Documents, thisMortgage, or any of the other Loan Documents;

 

(c)           All otherindebtedness, obligations and liabilities of any kind of Mortgagor owing to anyof the Credit Parties now existing or hereafter arising under or pursuant toany Loan Document, whether fixed or contingent, joint or several, direct orindirect, primary or secondary, and regardless of how created or evidenced;

 

D-4

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(d)           All sums advanced orcosts or expenses incurred by Mortgagee or any of the other Credit Parties,which are made or incurred pursuant to, or allowed by, the terms of thisMortgage plus interest thereon from the date of the advance or incurrence untilreimbursement of Mortgagee or such Credit Party charged at the ReimbursementRate;

 

(e)           All future advancesor other value, of whatever class or for whatever purpose, at any timehereafter made or given by Mortgagee or any of the other Credit Parties toMortgagor under or pursuant to the Credit Agreement or any other Loan Document,whether or not the advances or value are given pursuant to a commitment,whether or not the advances or value are presently contemplated by the partieshereto, and whether or not Mortgagor is indebted to Mortgagee or any CreditParty at the time of such events; and

 

(f)            All renewals,extensions, modifications, amendments, rearrangements and substitutions of allor any part of the above whether or not Mortgagor executes any agreement orinstrument.

 

1.11         “*Oil and GasProperty*” or “*Oil and Gas Properties*”means (a) the oil and gas and/or oil, gas and mineral leases and leaseholdinterests, fee mineral interests, term mineral interests, participationinterests, back-in or carried working interests, rights of first refusal,options, subleases, farmouts, royalties, overriding royalties, net profitsinterests, production payments and similar interests or estates described in Exhibit Aattached hereto and made a part hereof for all purposes including the netrevenue interests warranted in Exhibit A and any reversionary or carriedinterests relating to any of the foregoing, (b) all production units, anddrilling and spacing units (and the Properties covered thereby) which mayaffect all or any portion of such interests including those units which may bedescribed or referred to on Exhibit A and any units created by agreementor designation or under orders, regulations, rules or other official actsof any Federal, state or other governmental body or agency having jurisdiction,(c) the surface leases described in Exhibit A, (d) any and allnon-consent interests owned or held by, or otherwise benefiting, Mortgagor andarising out of, or pursuant to, any of the Contracts, (e) any otherinterest in, to or relating to (i) all or any part of the land describedin 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 orpooling orders, agreements or other arrangements, including without limitationpooling orders of the Oklahoma Corporation Commission.

 

1.12         “*OperatingEquipment*” means all surface or subsurface machinery, equipment,facilities, supplies or other Property of whatsoever kind or nature now orhereafter located on any 

 

D-5

----

 

of the Property affected by the Oil and Gas Properties which are usefulfor the production, treatment, storage or transportation of Hydrocarbons,including all oil wells, gas wells, water wells, injection wells, casing,tubing, rods, pumping units and engines, christmas trees, derricks, separators,gun barrels, flow lines, pipelines, tanks, gas systems (for gathering, treatingand compression), water systems (for treating, disposal and injection),supplies, derricks, wells, power plants, poles, cables, wires, meters,processing plants, compressors, dehydration units, lines, transformers, startersand controllers, machine shops, tools, storage yards and equipment storedtherein, buildings and camps, telegraph, telephone and other communicationsystems, roads, loading racks, shipping facilities and all additions,substitutes and replacements for, and accessories and attachments to, any ofthe foregoing.  Operating Equipment shallnot include any items incorporated into realty or structures or improvementslocated therein or thereon in such a manner that they no longer remainpersonalty under the laws of the state in which such equipment is located.

 

1.13         “*PermittedLiens*” means the Liens permitted under the Credit Agreement.

 

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

 

1.15         “*PersonaltyCollateral*” means all of Mortgagor’s interest now owned or hereafteracquired in and to (a) all Operating Equipment, (b) all Hydrocarbonssevered and extracted from or attributable to the Oil and Gas Properties,including oil in tanks and all other “as-extracted” collateral from orattributable 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 or any Lender, (h) any options orrights of first refusal to acquire any Realty Collateral, and (i) allproceeds, products, renewals, increases, profits, substitutions, replacements,additions, amendments and accessions of, to or for any of the foregoing.

 

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

 

1.17         “*RealtyCollateral*” means all of Mortgagor’s interest now owned or hereafteracquired in and to the Oil and Gas Properties, including any access rights,water and water rights, and all unsevered and unextracted Hydrocarbons (eventhough Mortgagor’s interest therein may be incorrectly described in, or adescription of a part or all of such interest may be omitted from, Exhibit A).

 

D-6

----

 

1.18         *“ReimbursementRate”*means a per annum rate equal to the lesser of (a) theMaximum Rate (as defined in the Credit Agreement) and (b) the AdjustedReference Rate (as defined in the Credit Agreement) in effect from time to timeplus the Applicable Margin for Reference Rate Advances (as such terms aredefined in the Credit Agreement) in effect during an Event of Default.

 

1.19         All other capitalizedterms defined in the Credit Agreement which are used in this Mortgage and whichare not otherwise defined herein shall have the meanings assigned to such termsin the Credit Agreement.  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 Mortgage,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 this Mortgageshall refer to this Mortgage as a whole and not to any particular provision ofthis Mortgage.  As used herein, the term “including”means “including, without limitation,”.

 

**ARTICLE II**

**Creation of Security**

 

2.1           **Conveyanceand Grant of Lien**.  Inconsideration of the advances or extensions by the Credit Parties to Mortgagorof the funds or credit constituting the Obligations, and in furtherconsideration of the mutual covenants contained herein, Mortgagor, by thisMortgage does hereby GRANT, MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, ANDASSIGN with a general warranty of title, for the uses, purposes and conditionshereinafter set forth all of its right, title and interest in and to the RealtyCollateral, the Personalty Collateral and the Fixture Collateral untoMortgagee, its successors and assigns, with power of sale, to secure thepayment and performance of the Obligations for the benefit of Mortgagee and theratable benefit of the Credit Parties.

 

**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.

 

D-7

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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           **SecurityInterest**.  For the sameconsideration and to further secure the Obligations, Mortgagor hereby grants toMortgagee for its benefit and the ratable benefit of the other Credit Parties asecurity interest in and to the Collateral.

 

2.3           **Assignmentof Liens and Security Interests**. For the same consideration and to further secure the Obligations,Mortgagor hereby assigns and conveys to Mortgagee for its benefit and thebenefit of the other Credit Parties any security interests held by Mortgagorarising 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 anddelivered and does hereby assign, transfer, convey and deliver unto Mortgagee,subject to Permitted Prior Liens, effective as of the Effective Date at 7:00 a.m.Dallas, Texas time, all Hydrocarbons produced from, and which are attributableto, Mortgagor’s interest, now owned or hereafter acquired, in and to the Oiland Gas Properties, or are allocated thereto pursuant to pooling or unitizationorders, 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 of Mortgagorand entitled in its place and stead to receive such Hydrocarbons and theproceeds therefrom.

 

(c)           Mortgagor directsand instructs 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 the rightsas 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 

 

D-8

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Mortgagor’s use and enjoyment, and Mortgagor shall be entitled toexecute division orders, transfer orders and other instruments as may berequired to direct all proceeds to Mortgagor without the necessity of joinderby Mortgagee in such division orders, transfer orders or other instruments.Mortgagor agrees to perform all such acts, and to execute all such furtherassignments, transfers and division orders, and other instruments as may bereasonably required or desired by Mortgagee or any party in order to have saidrevenues and proceeds so paid to Mortgagee. None of such parties shall have any responsibility for the applicationof any such proceeds received by Mortgagee. Subject to the provisions of subsection (f) below, Mortgagor authorizesMortgagee to receive and collect 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.

 

(e)           Neither theforegoing assignment nor the exercise by Mortgagee of any of its rights hereinshall be deemed to make Mortgagee a “mortgagee-in-possession” or otherwiseresponsible or liable in any manner with respect to the Oil and Gas Propertiesor the use, occupancy, enjoyment or operation of all or any portion thereof,unless and until Mortgagee, in person or by agent, assumes actual possessionthereof, nor shall appointment of a receiver for the Oil and Gas Properties byany 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)           Mortgagee mayendorse 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)           Mortgagee shall havethe right at Mortgagee’s election and in the name of Mortgagor, or otherwise,to prosecute and defend any and all actions or legal proceedings deemedadvisable by Mortgagee in order to collect such proceeds and to protect theinterests 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, 

 

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Mortgagee shall have the right to demand a change of connection and todesignate another purchaser with whom a new connection may be made without anyliability on the part of Mortgagee in making such election, so long as ordinarycare is used in the making thereof, and upon failure of Mortgagor to consent tosuch change of connection, the entire amount of all the Obligations may, at theoption of Mortgagee, be immediately declared to be due and payable and subjectto foreclosure hereunder.

 

(i)            Without in any waylimiting the effectiveness of the foregoing provisions, if Mortgagor receivesany proceeds which under this Section 3.1 are payable to Mortgagee,Mortgagor shall hold the same in trust and remit such proceeds, or cause themto 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.

 

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 actually receivedby Mortgagee.

 

3.5           **Actionsto Effect Assignment**. Subject to the provisions of Section 3.1(f), Mortgagor covenants tocause all operators, pipeline companies, production purchasers and otherremitters of said proceeds to pay promptly to Mortgagee the proceeds from suchHydrocarbons in accordance with the terms of this Mortgage, and to execute,acknowledge and deliver to said remitters such division orders, transferorders, certificates and other documents as may be necessary, requested orproper to effect the intent of this assignment; and Mortgagee shall not berequired at any time, as a condition to its right to obtain the proceeds ofsuch Hydrocarbons, to warrant its title thereto or to make any guarantywhatsoever.  In addition, Mortgagorcovenants to provide to Mortgagee the name and address of every such remitterof proceeds from such Hydrocarbons, together with a copy of the applicabledivision orders, transfer orders, sales contracts and governinginstruments.  All expenses incurred bythe Mortgagee in the collection of said proceeds shall be repaid promptly byMortgagor; and prior to such repayment, such expenses shall be a part of theObligations secured hereby.  If under anyexisting Contracts for the sale of Hydrocarbons, other than division orders ortransfer orders, any proceeds of Hydrocarbons are required to be paid by theremitter direct to Mortgagor so that under such existing agreements paymentcannot be made of such proceeds to Mortgagee in the absence of foreclosure,Mortgagor’s interest in all proceeds of Hydrocarbons under such existingContracts 

 

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shall, when received by Mortgagor, constitute trust funds in Mortgagor’shands and shall be immediately 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 interest and isirrevocable until all of the Obligations have been fully and finally paid anddischarged in full, all Commitments have been terminated or expired and theCredit Agreement has been terminated in writing.**** **All persons dealingwith Mortgagee, or any substitute, shall be fully protected in treating thepowers and authorities conferred by this Section 3.6 as continuing in fullforce and effect until advised by Mortgagee that the Obligations are fully andfinally paid and the Liens 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.**

 

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**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)           *Incorporationof Representations and Warranties from the Credit Agreement*.  The representations and warranties applicableto the Mortgagor and to its Properties contained in Article IV of theCredit Agreement are hereby confirmed and restated, each such representationand warranty, together with all related definitions and ancillary provisions,being hereby incorporated into this Mortgage by reference as thoughspecifically set forth in this Section.

 

(b)           *Title toCollateral*.  Mortgagor hasgood and marketable title to the Collateral as is customary in the oil and gasindustry in all material respects and free from all Liens, security interestsor other encumbrances except as permitted by the provisions of Section 4.4(i) below.  The descriptions set forth in Exhibit Aof the quantum and nature of the interests of Mortgagor in and to the Oil andGas Properties include the entire interests of Mortgagor in the Oil and GasProperties and are complete and accurate in all material respects.  There are no “back-in” or “reversionary”interests held by third parties which could reduce the interests of Mortgagorin the Oil and Gas Properties except as set forth on Exhibit A.  No operating or other agreement to whichMortgagor is a party or by which Mortgagor is bound affecting any part of theCollateral requires Mortgagor to bear any of the costs relating to theCollateral greater than the leasehold interest of Mortgagor in such portion ofthe Collateral, except in the event Mortgagor is obligated under an operatingagreement to assume a portion of a defaulting party’s share of costs.

 

(c)           *Status ofLeases, 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)           *ProductionBurdens, Taxes, Expenses and Revenues*.  All rentals, royalties, overriding royalties,shut-in royalties and other payments due under or with respect to 

 

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the Oil and Gas Properties have been properly and timely paid, exceptfor payments held in suspense in the ordinary course of business or remitted tostate agencies responsible for handling unclaimed property.  All taxes have been properly and timely paidexcept to the extent such taxes are being contested in good faith and for whichreserves in accordance with GAAP have been made as reflected in the FinancialStatements.  All expenses payable underthe terms of the Contracts have been properly and timely paid except for suchexpenses being contested in good faith by appropriate proceedings, and forwhich reserves shall have been made therefore and except for such expenses asare being currently paid prior to delinquency in the ordinary course ofbusiness.  Except for Mortgagor’sinterests in certain Oil and Gas Properties, which Mortgagor represents do notconstitute a material portion (with 2% or more being deemed material) of thevalue of the Collateral and all other Properties of Mortgagor securing theObligations, all of the proceeds from the sale of Hydrocarbons produced fromthe Realty Collateral are being properly and timely paid to Mortgagor by thepurchasers or other remitters of production proceeds without suspense.  Mortgagor’s ownership of the Hydrocarbons andthe undivided interests therein as specified on attached Exhibit A will,after giving full effect to all Liens permitted hereby and after giving fulleffect to the agreements or instruments set forth on Exhibit A and anyother instruments or agreements affecting Mortgagor’s ownership of the Hydrocarbons,afford Mortgagor not less than those net interests (expressed as a fraction,percentage or decimal) in the production from or which is allocated to suchHydrocarbons specified as net revenue interest on attached Exhibit A andwill cause Mortgagor to bear not more than that portion (expressed as afraction, percentage or decimal), specified as working interest on attached Exhibit A,of the costs of drilling, developing and operating the wells identified on Exhibit A.

 

(e)           *Pricing*.  The prices being received for the productionof Hydrocarbons do not violate any Contract or any law or regulation.  Where applicable, all of the wells located onthe Oil and Gas Properties and production of Hydrocarbons therefrom have beenproperly classified under appropriate governmental 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 appropriate stateor federal agency.

 

(g)           *ProductionBalances*.  Except as set forthbelow or permitted by the Credit Agreement, none of the purchasers under anyproduction sales contracts are entitled to “make-up” or otherwise receivedeliveries of Hydrocarbons at any time after the date hereof without paying atsuch time the full contract price therefor. Except as set forth below, no person is entitled to receive any portionof the interest of Mortgagor in any Hydrocarbons or to receive cash or otherpayments to “balance” any disproportionate allocation of Hydrocarbons under anyoperating agreement, gas balancing and storage agreement, gas processing ordehydration agreement, or other similar agreements.  Mortgagor believes that certain third partiesmay be entitled to receive “make-up” deliveries of Hydrocarbons or cash orother payments to “balance” a disproportionate allocation of Hydrocarbonsproduced from certain Oil and Gas Properties; provided, however, Mortgagorrepresents and warrants that such deliveries or payments are not 

 

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material (with 2% or more being deemed material) in aggregate amountwhen compared to the value of the Collateral and all other Properties ofMortgagor securing the Obligations.

 

(h)           *DrillingObligations*.  There are noobligations under any Oil and Gas Property or Contract which require thedrilling of additional wells or operations to earn or to continue to hold anyof the Oil and Gas Properties in force and effect, except for oil and gasleases that are still within their primary term (each of which will requiredrilling operations to perpetuate it beyond its primary term) and the standardprovision in certain oil and gas leases that requires either production oroperations to perpetuate each respective lease after the expiration of itsprimary 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 beenaccounted for and paid to the persons entitled thereto, in compliance in allmaterial 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*.  All production and sales of Hydrocarbonsproduced or sold from the Oil and Gas Properties have been made in accordancewith any applicable allowables (plus permitted tolerances) imposed by anyGovernmental 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)          The address ofMortgagor’s place of business, residence, chief executive office and officewhere Mortgagor keeps its records concerning accounts, contract rights andgeneral intangibles is as set forth in Section 7.12, and there has been nochange in the location of Mortgagor’s place of business, residence, chiefexecutive 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           **FurtherAssurances**.

 

(a)           Mortgagor covenantsthat Mortgagor shall execute and deliver such other and further instruments,and shall do such other and further acts as in the opinion of Mortgagee may benecessary or desirable to carry out more effectively the purposes of thisMortgage, 

 

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including without limiting the generality of the foregoing, (i) promptcorrection of any defect in the execution or acknowledgment of this Mortgage,any written instrument comprising part or all of the Obligations, or any otherdocument used in connection herewith; (ii) prompt correction of any defectwhich may hereafter be discovered in the title to the Collateral; (iii) promptexecution and delivery of all division or transfer orders or other instrumentswhich in Mortgagee’s opinion are required to transfer to Mortgagee, for itsbenefit and the ratable benefit of the other Credit Parties, the assignedproceeds from the sale of Hydrocarbons from the Oil and Gas Properties; and (iv) promptpayment when due and owing of all taxes, assessments and governmental chargesimposed on this Mortgage, upon the interest of Mortgagee or upon the income andprofits from any of the above.

 

(b)           Mortgagor covenantsthat Mortgagor shall maintain and preserve the Lien and security interestherein created as an Acceptable Security Interest until all of the Obligationshave been fully and finally paid and discharged in full, all Commitments havebeen terminated or expired and the Credit Agreement has been terminated inwriting.

 

(c)           Mortgagor shallimmediately notify Mortgagee of any discontinuance of or change in the addressof Mortgagor’s place of business, residence, chief executive office or officewhere 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 Commitments have been terminated or expired, and theCredit Agreement has been terminated in writing, Mortgagor shall (at Mortgagor’sown expense):

 

(a)           not enter into anyoperating agreement, contract or agreement which materially adversely affectsthe Collateral;

 

(b)           do all things necessaryand within the reasonable control of Mortgagor to keep, or cause to be kept, infull force and effect the Oil and Gas Properties and Mortgagor’s intereststherein;

 

(c)           neither abandon,forfeit, surrender, release, sell, assign, sublease, farmout or convey, noragree to sell, assign, sublease, farmout or convey, nor mortgage or grantsecurity interests in, nor otherwise dispose of or encumber any of theCollateral or any interest therein, except as permitted by the CreditAgreement;

 

(d)           operate the Oil andGas Properties or, to the extent that the right of operation is vested inothers, will exercise its best efforts to cause the operator to operate the Oiland Gas Properties, in each case in such a manner as to cause the Collateral tobe maintained, developed and protected against drainage and continuouslyoperated for the production and marketing of Hydrocarbons in a good andworkmanlike 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;

 

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(e)           promptly pay orcause to be paid when due and owing (i) all rentals and royalties payablein respect of the Collateral; (ii) all expenses incurred in or arisingfrom the operation or development of the Collateral; (iii) all taxes,assessments and governmental charges imposed upon the Collateral, upon theincome and profits from any of the Collateral, or upon Mortgagee because of itsinterest therein; and (iv) all local, state and federal taxes, paymentsand contributions for which Mortgagor may be liable except to the extentdisputed as permitted under the Credit Agreement; and indemnify Mortgagee fromall liability in connection with any of the foregoing;

 

(f)            promptly take allaction necessary to enforce or secure the observance or performance of anyterm, covenant, agreement or condition to be observed or performed by thirdparties under any Contract, or any part thereof, or to exercise any of itsrights, remedies, powers and privileges under any Contract, all in accordancewith the respective terms thereof;

 

(g)           other than asotherwise 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)           permit and do allthings necessary or proper to enable the Mortgagee (through any of theirrespective agents and employees) to enter upon the Oil and Gas Properties forthe purpose of investigating and inspecting the condition and operations of theCollateral in accordance with the terms of the Credit Agreement;

 

(i)            cause theCollateral to be kept free and clear of Liens, charges, security interests andencumbrances of every character other than (i) the Liens and securityinterests created and assigned by this Mortgage and (ii) the PermittedLiens;

 

(j)            carry and maintainthe insurance required by the Credit Agreement;

 

(k)           furnish toMortgagee, upon request, copies of any Contracts; and

 

(l)            promptly performall 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.

 

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4.6           **Records,Statements and Reports**. Mortgagor shall keep proper books ofrecord and account in which complete and correct entries shall be made ofMortgagor’s transactions in accordance with the method of accounting requiredin the Credit Agreement and shall furnish or cause to be furnished to Mortgageethe reports required to be delivered pursuant to the terms of the CreditAgreement.

 

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 or destruction of any ofthe Collateral and Mortgagee may receive such monies and apply all or any partof the sums so collected, at its election, toward payment of the Obligations,whether or not such Obligations are then due and payable, in such manner asMortgagee may elect. Any insurance proceeds received by Mortgagor shall be heldin trust for the benefit of Mortgagee, shall be segregated from other funds ofMortgagor and shall be forthwith paid over 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 toRealty Collateral Upon Default**.

 

(a)           *Operation ofProperty by Mortgagee*.  Uponthe occurrence and during the continuance of an Event of Default, and inaddition to all other rights of Mortgagee, Mortgagee shall have the followingrights and powers (but no obligation):

 

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(i)  To enter upon and take possession of any of the RealtyCollateral and exclude Mortgagor therefrom;

 

(ii)  To hold, use, administer, manage and operate the Realty Collateralto the extent that Mortgagor could do so, and without any liability toMortgagor 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, and to exercise every power,right and privilege of Mortgagor with respect to the Realty Collateral.

 

Mortgagee may designate any person, firm, corporation or other 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 and all of the Obligations have been fully andfinally paid and discharged in full, all of the Commitments have terminated orexpired, and the Credit Agreement has been terminated in writing, the RealtyCollateral shall be returned to Mortgagor (providing there has been noforeclosure sale).

 

(b)           *JudicialProceedings*.  Upon theoccurrence and during the continuance of an Event of Default, the Mortgagee, inlieu of or in addition to exercising the power of sale hereafter given, mayproceed by a suit or suits, in equity or at law (i) for the specificperformance of any covenant or agreement herein contained or in aid of theexecution of any power herein granted, (ii) for the appointment of areceiver whether there is then pending any foreclosure hereunder or the sale ofthe 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)           *Intentionallyomitted*.

 

(d)           *CertainAspects of Sale*.  Mortgageewill have the right to become the purchaser at any foreclosure sale and tocredit the then outstanding balance of the Obligations against the amountpayable by Mortgagee as purchaser at such sale. Statements of fact or other recitals contained in any conveyance to anypurchaser or purchasers at any sale made hereunder will conclusively establishthe occurrence of an Event of Default, any acceleration of the maturity of theObligations, the advertisement and conduct of such sale in the manner providedherein and the truth and accuracy of all other matters stated therein.  Mortgagor does hereby ratify and confirm alllegal acts that the Mortgagee may do in carrying out the Mortgagee’s duties andobligations under this Mortgage, and Mortgagor hereby irrevocably appointsMortgagee to be the attorney-in-fact of Mortgagor and in the name and on behalfof Mortgagor to execute and deliver any deeds, transfers, conveyances,assignments, assurances and notices which Mortgagor 

 

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ought to execute and deliver and do and perform any and all such actsand things which Mortgagor ought to do and perform under the covenants hereincontained and generally to use the name of Mortgagor in the exercise of all orany 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 byorder of court, to have physically present or constructively in his possessionany of the Collateral, and Mortgagor hereby agrees to deliver to the purchaseror purchasers 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 possession tosuch Collateral shall pass to the purchaser or purchasers at such sale ascompletely as if the same had been actually present and delivered.

 

(e)           *Effect ofSale*.  Any sale or sales ofthe Realty Collateral will operate to divest all right, title, interest, claimand demand whatsoever, either at law or in equity, of Mortgagor in and to thepremises and the Realty Collateral sold, and will be a perpetual bar, both atlaw and in equity, against Mortgagor, Mortgagor’s successors or assigns, andagainst any and all persons claiming or who shall thereafter claim all or anyof the Realty Collateral sold by, through or under Mortgagor, or Mortgagor’ssuccessors or assigns.  Nevertheless, ifrequested by the Mortgagee so to do, Mortgagor shall join in the execution anddelivery of all proper conveyances, assignments and transfers of the Propertyso sold.  The purchaser or purchasers atthe foreclosure sale will receive as incident to his, her, its or their ownownership, immediate possession of the Realty Collateral purchased andMortgagor agrees that if Mortgagor retains possession of the Realty Collateralor any part thereof subsequent to such sale, Mortgagor will be considered atenant at sufferance of the purchaser or purchasers and will be subject toeviction and removal by any lawful means, with or without judicialintervention, and all damages by reason thereof are hereby expressly waived byMortgagor.

 

(f)            *Provisions with Respect to the Power of Sale*.  Notwithstanding any other provisions in thisMortgage, if Mortgagee sells the Collateral under the power of sale granted bythis Mortgage, the following provisions shall apply:

 

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

 

(ii)           All notices whichare required to be given Mortgagor under the Act may be given to Mortgagor atthe address which is set forth in the first paragraph of this Mortgage, or ifsuch address has been changed pursuant to this Mortgage, to that changedaddress;

 

(iii)          Mortgagee maypurchase part or all of the Collateral at any such sale;

 

(iv)          Mortgagor stipulatesthe total amounts owing under this Mortgage will have benefited Mortgagorsubstantially and are not unconscionable in amount, and therefore the totalamount of the Obligations, less the fair market value of the Collateral soldunder such Act, and any prior indebtedness, shall be available as a deficiencyjudgment against Mortgagor;

 

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(v)           The purchaser undersuch sale may seek and obtain a writ of assistance by application to theDistrict Court in the county in Oklahoma in which any part of the RealtyCollateral is located, or the United States District Court having venue foractions arising in such county;

 

(vi)          Mortgagee may, atits option, proceed with foreclosure under judicial proceedings instead ofexercising the rights of this Power of Sale;

 

(vii)         All other proceduresand requirements of such Act shall be followed;

 

(viii)        After the completionof the sale as contemplated by such Act, the purchaser shall have all ofMortgagor’s right, title and interest in and to the Collateral, free and clearof all rights of Mortgagor, and free and clear of all rights of any person witha priority which is subordinate to the lien of this Mortgage, except any rightwhich may be reserved under such Act;

 

(ix)           Any recitation inany notice, publication thereof, recordation thereof, or deed, of the existenceof an event of default, giving, publication, service and recordation of notice,occurrence of the sale at the time and place set forth in such notice or anypostponement authorized and effective under such Act, circumstances of sale andbidding, and compliance with the terms of such Act, shall be presumed to bestatements of fact and no person shall be required to investigate thetruthfulness or accuracy of any such recitation; and

 

(x)            The proceeds of anysuch sale shall be applied first to the costs, attorney fees, and expenses ofsale, next to the Obligations; except that if such application of proceedsconflicts with the requirements of such Act, the proceeds shall be applied asprovided under such Act only to the extent of any such conflict.

 

(g)           *Applicationof Proceeds*.  The proceeds ofany sale of the Realty Collateral or any part thereof, whether under the powerof sale herein granted and conferred or by virtue of judicial proceedings,shall either be, at the option of Mortgagee, applied at the time of receipt, orheld by Mortgagee in the Collateral Account as additional Collateral, and ineither case, applied in the order set forth in Section 7.06 of the CreditAgreement.

 

(h)           *Appraisementand Marshalling*.  Mortgagoragrees, to the full extent that Mortgagor may lawfully so agree, that Mortgagorwill not at any time insist upon or plead or in any manner whatever claim thebenefit of any appraisement, valuation, stay, extension or redemption law, nowor hereafter in force, in order to prevent or hinder the enforcement orforeclosure of this Mortgage, the absolute sale of the Collateral, includingthe Realty Collateral, or the possession thereof by any purchaser at any salemade pursuant to this Mortgage or pursuant to the decree of any court ofcompetent jurisdiction.  Mortgagee herebywaives or does not waive appraisement, such election to be made at or beforeentry of judgment in any action to foreclose this Mortgage, and Mortgagor, forMortgagor and all who may claim through or under Mortgagor, hereby waives, tothe extent that Mortgagor may lawfully do so under any applicable 

 

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law, any and all rights to have the Collateral, including the RealtyCollateral, marshaled upon any foreclosure of the Lien hereof or sold ininverse order of alienation.  Mortgagoragrees that, in the event of a judicial foreclosure or a sale under the powerof sale provisions of this Mortgage, the Collateral, including the RealtyCollateral, may be sold in part, in parcels or as an entirety as directed byMortgagee.

 

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 Collateral, or will have all rights and remedies grantedby the Uniform Commercial 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 toFixture Collateral Upon Default**. Upon the occurrence of an Event of Default, or at any time thereafter,Mortgagee may elect to treat the Fixture Collateral as either Realty Collateralor as Personalty Collateral (but not both) and proceed to exercise such rightsas apply to the type of Collateral selected.

 

6.4           **AccountDebtors**.  Mortgagee may,in its discretion, after the occurrence and during the continuance of an Eventof Default, notify any account debtor to make payments directly to Mortgageeand contact account debtors directly to verify information furnished byMortgagor.  Mortgagee shall not have anyobligation to preserve any rights against prior parties.

 

6.5           **Costs andExpenses**.  All sumsadvanced or costs or expenses incurred by Mortgagee (either by it directly oron its behalf by any receiver appointed hereunder) in protecting and enforcingits rights hereunder shall constitute a demand obligation owing by Mortgagor toMortgagee as part of the Obligations. Mortgagor hereby agrees to repay such sums on demand plus interestthereon from the date of the advance or incurrence until reimbursement ofMortgagee at the Reimbursement Rate.

 

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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.

 

**ARTICLEVII**

**Miscellaneous**

 

7.1           **Advancesby Mortgagee**.  Each andevery covenant of Mortgagor herein contained shall be performed and kept byMortgagor solely at Mortgagor’s expense. If Mortgagor fails to perform or keep any of the covenants of whatsoeverkind or nature contained in this Mortgage, Mortgagee (either by it directly oron its behalf by any receiver appointed hereunder) may, but will not beobligated to, make advances to perform the same on Mortgagor’s behalf, andMortgagor hereby agrees to repay such sums and any attorneys’ fees incurred inconnection therewith on demand plus interest thereon from the date of theadvance until reimbursement 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 incurred pursuantto Section 3.1(h), Section 6.5 or Section 7.2 hereof, plusinterest thereon from the date of the advance by Mortgagee until reimbursementof Mortgagee at the Reimbursement Rate. Such amounts will be in addition to any sum of money which may, pursuantto the terms and conditions of the written instruments comprising part of theObligations, be due and owing.  No suchadvance will be deemed to relieve Mortgagor 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 Commitments have been terminated orexpired, and the Credit Agreement has been terminated in writing, then all ofthe Collateral (to the extent not sold, assigned or otherwise transferred aspermitted herein or under applicable law) will revert to Mortgagor and theentire estate, right, title and interest of the Mortgagee will thereupon cease;and Mortgagee in 

 

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such case shall, upon the request of Mortgagor and the payment byMortgagor of all attorneys’ fees and other expenses, deliver to Mortgagorproper instruments acknowledging satisfaction of this Mortgage.

 

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.

 

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 or remedy.  No delay or omission by Mortgagee in theexercise of any right, power or remedy will impair any such right, power orremedy or operate as a waiver thereof or of any other right, power or remedythen or thereafter existing.

 

7.8           **Waiver byMortgagee**.  Any and allcovenants in this Mortgage may from time to time by instrument in writing byMortgagee, be waived to such extent and in such manner as the Mortgagee maydesire, but no such waiver will ever affect or impair the Mortgagee’s rightshereunder, except to the extent specifically stated in such written 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: |   | c/o Cano Petroleum, Inc.         |
|------------|--------|---------------------------------------|
|       |   | 801 Cherry Street, Suite 3200    |
|       |   | Fort Worth, Texas 76102               |
|       |   | Attention: Ben Daitch, CFO            |
|       |   | Facsimile: (817) 334-0222             |
|       |   |                                  |
| Mortgagee: |   | UnionBanCal Equities, Inc.       |
|       |   | 445 South Figueroa Street, 21st Floor |
|       |   | Los Angeles, California 90071         |
|       |   | Attention: Maggie Elower              |
|       |   | Facsimile: 213-236-7619               |

 

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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 and each of its successors and assigns, andthe provisions hereof shall likewise be covenants running with the land.

 

(b)           This Mortgage shallbe transferable and negotiable, with the same force and effect and to the sameextent as the Obligations may be transferable, it being understood that, uponthe transfer or assignment by the Credit Parties (or any of them) of any of theObligations, the legal transfer or assignment by the Credit Parties (or any ofthem) of any of the Obligations, the legal holder of such Obligations shallhave all of the rights granted to the Mortgagee for the benefit of the CreditParties under this Mortgage.  TheMortgagor specifically agrees that upon any transfer of all or any portion ofthe Obligations, this Mortgage shall secure with retroactive rank the existingObligations of the Mortgagor to the transferee and any and all Obligations tosuch 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, the Mortgagee may transfer and deliver any and/or all of theCollateral to the transferee of such Obligations and such Collateral shallsecure any and all of the Obligations in favor of such a transferee thenexisting and thereafter arising, and after any such transfer has taken place,the Mortgagee shall be fully discharged from any and all future liability andresponsibility to the Mortgagor with respect to such Collateral, and transfereethereafter shall be vested with all the powers, rights and duties with respectsuch Collateral.

 

D-25

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7.15         **Article and Section Headings**.  The article and section headings in thisMortgage are inserted for convenience of reference and shall not be considereda part of this Mortgage or used in its interpretation.

 

7.16         **Usury Not Intended**.  It is the intent of Mortgagor and Mortgageein the execution and performance of this Mortgage, the Credit Agreement and theother Loan Documents to contract in strict compliance with applicable usurylaws governing the Obligations including such applicable usury laws of theState of Texas and the United States of America as are from time-to-time ineffect.  In furtherance thereof,Mortgagee and Mortgagor stipulate and agree that none of the terms andprovisions contained in this Mortgage, the Credit Agreement or the other LoanDocuments shall ever be construed to create a contract to pay, as considerationfor the use, forbearance or detention of money, interest at a rate in excess ofthe maximum non-usurious rate permitted by applicable law and that for purposeshereof “interest” shall include the aggregate of all charges which constituteinterest under such laws that are contracted for, charged or received underthis Mortgage, the Credit Agreement and the other Loan Documents; and in theevent that, notwithstanding the foregoing, under any circumstances theaggregate amounts taken, reserved, charged, received or paid on theObligations, include amounts which by applicable law are deemed interest whichwould exceed the maximum non-usurious rate permitted by applicable law, thensuch excess shall be deemed to be a mistake and Mortgagee shall credit the sameon the principal of the Obligations (or if the Obligations shall have been paidin full, refund said excess to Mortgagor). In the event that the maturity of the Obligations is accelerated byreason of any election of Mortgagee resulting from any Event of Default, or inthe event of any required or permitted prepayment, then such consideration thatconstitutes interest may never include more than the maximum non-usurious rate permittedby applicable law and excess interest, if any, provided for in this Mortgage,the Credit Agreement or other Loan Documents shall be canceled automatically asof the date of such acceleration and prepayment and, if theretofore paid, shallbe credited 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 applicable law,Mortgagor and Mortgagee shall to the maximum extent permitted under applicablelaw amortize, prorate, allocate and spread in equal part during the period ofthe full stated term of the Obligations, all amounts considered to be interestunder applicable law of any kind contracted for, charged, received or reservedin connection with the Obligation.

 

7.17         **Credit Agreement**.  To the fullest extent possible, the terms andprovisions of the Credit Agreement shall be read together with the terms andprovisions of this Mortgage so that the terms and provisions of this Mortgagedo not conflict with the terms and provisions of the Credit Agreement;provided, however, notwithstanding the foregoing, in the event that any of theterms or provisions of this Mortgage conflict with any terms or provisions ofthe Credit Agreement, the terms or provisions of the Credit Agreement shallgovern and control for all purposes; provided that the inclusion in thisMortgage of terms and provisions, supplemental rights or remedies in favor ofthe Secured Party not addressed in the Credit Agreement shall not be deemed tobe a conflict with the Credit Agreement and all such additional terms,provisions, supplemental rights or remedies contained herein shall be givenfull force and effect.

 

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**7.18****        Due Authorization. **Mortgagor hereby represents, warrants andcovenants to Mortgagee that the obligations of Mortgagor under this Mortgageare the valid, binding and legally enforceable obligations of Mortgagor, thatthe execution, ensealing and delivery of this Mortgage by Mortgagor has beenduly and validly authorized in all respects by Mortgagor, and that the personswho are 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 hereinto the contrary, it is the intention of the Mortgagor, the Mortgagee and theother Credit 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 applicableto the Mortgagor.  Accordingly,notwithstanding anything to the contrary contained in this Mortgage in anyother agreement or instrument executed in connection with the payment of any ofthe Obligations, the amount of the Obligations secured by the Mortgagor’sinterests in any of its Property pursuant to this Mortgage shall be limited toan aggregate amount equal to the largest amount that would not render theMortgagor’s obligations hereunder or the Liens and security interest granted tothe Mortgagee hereunder subject to avoidance under Section 548 of theUnited States Bankruptcy Code or any comparable provision of any otherapplicable law**.**

 

**7.21****        Subordination andIntercreditor Agreement.  Referenceis made to the Subordination and Intercreditor Agreement, dated as of December 17,2008 (as amended, restated, supplemented or otherwise modified from time totime, the “Subordination and ***Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and******UnionBanCal Equities, Inc.,******as Subordinated Agent, andcertain other persons, party or that may become party thereto from time totime.  Notwithstanding anything hereinto the contrary, this Mortgage, the Liens granted to the Mortgagee pursuantto this Mortgage and the exercise of any right or remedy by the Mortgagee orany of the Lenders hereunder are subject to the provisions of the Subordinationand Intercreditor Agreement.  In theevent of any conflict between the terms of the Subordination and IntercreditorAgreement and this Mortgage, the terms of the Subordination and IntercreditorAgreement shall govern and control.**

 

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

** **

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

 

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

 

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**NOTICE TO MORTGAGOR:**

 

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

 

EXECUTED AND DELIVERED effective as of the date first written above.

 
| ** ** | **MORTGAGOR:**                               |
|------------|----------------------------------------------|
|       |                                         |
|       | CANO PETROLEUM, INC., a Delaware corporation |
|       |                                         |
|       |                                         |
|       | By:                                          |   |
|       |                                         | Benjamin Daitch |
|       |                                         | Senior Vice President and Chief Financial  Officer |
|       |                                         |
|       |                                         |
|       | **MORTGAGEE:**                               |
|       | ** **                                   |
|       | **UNIONBANCAL  EQUITIES, INC.**              |
|       | ** **                                   |
|       | as Administrative Agent                      |
|       |                                         |
|       |                                         |
|       | By:                                          |   |
|       | Name:                                        |   |
|       | Title:                                       |   |
|       |                                         |
|       |                                         |
|       | By:                                          |   |
|       | Name:                                        |   |
|       | Title:                                       |   |
|            |                                              |  |  |  |  |  |  |

 

D-28

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| THE STATE OF TEXAS |   | § |
|--------------------|--------|--------|
|               |   | § |
| COUNTY OF TARRANT  |   | § |

 

This instrument was acknowledged before me on this        day of December, 2008, by Benjamin Daitch as Senior Vice President and ChiefFinancial Officer of Cano Petroleum, Inc., on behalf of said corporation.

 

 
|   |                     |
|--------|--------------------------|
|   | Notary Public in and for |
|   | the State of Texas       |

 
| STATE OF CALIFORNIA                                                                                                           | ) |
|-------------------------------------------------------------------------------------------------------------------------------|---|
|                                                                                                                          | ) |
| COUNTY OF                      | ) |

 

On December    , 2008, before me,                 ,personally known to me (or proved to me on the basis of satisfactory evidence)to be the person whose name is subscribed to the within instrument andacknowledged to me that he executed the same in his authorized capacity, andthat by his signature on the instrument the person, or the entity upon behalfof which the person acted, executed the instrument.

 

WITNESS my hand and official seal.

 

 
| Signature |   | (Seal) |
|-----------|--------|--------|

 

 
| STATE OF CALIFORNIA                                                                                                          | ) |
|------------------------------------------------------------------------------------------------------------------------------|---|
|                                                                                                                         | ) |
| COUNTY OF                     | ) |

 

On December    , 2008, before me,                ,personally known to me (or proved to me on the basis of satisfactory evidence)to be the person whose name is subscribed to the within instrument andacknowledged to me that he executed the same in his authorized capacity, andthat by his signature on the instrument the person, or the entity upon behalfof which the person acted, executed the instrument.

 

WITNESS my hand and official seal.

 

 
| Signature |   | (Seal) |
|-----------|--------|--------|

 

D-29

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EXHIBIT A

TO

**SUBORDINATED MORTGAGE, LINE OF CREDITMORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCINGSTATEMENT**

 

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 mineralfee estate or royalty estate in the relevant land and which is free of anyobligation for the expense of exploration, development, and production, bearingonly its pro rata share of severance, production, and other similar taxes and,in instances where the document creating the royalty interest so provides,costs associated with compression, dehydration, other treating or processing ortransportation of production of oil, gas, or other minerals relating to themarketing of such production.  Eachamount set forth as “Working Interest” or “WI” or “GWI” or “Net RevenueInterest” or “NRI” or “NRIO” or “NRIG” is the Mortgagor’s interest after givingfull effect to, among other things, all Liens permitted by the Credit Agreementand after giving full effect to the agreements or instruments set forth in thisExhibit A and any other instruments or agreements affecting Mortgagor’sownership 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 OFNOTE**

** **

**THEOBLIGATIONS OF THE BORROWER UNDER THIS NOTE ARE SUBORDINATED TO THE PAYMENT OFCERTAIN SENIOR DEBT AS SET FORTH IN THE SUBORDINATION AND INTERCREDITORAGREEMENT REFERRED TO BELOW.**

**SUBORDINATEDNOTE**

** **
| $________________ | ____________, 20__ |   |
|-------------------|--------------------|--------|

 

For valuereceived, the undersigned Cano Petroleum, Inc., a Delaware corporation (“Borrower”),hereby promises to pay to the order of _______________________ (“Bank”),the principal amount of _______________________________________ Dollars($______________) or, if less, the aggregate outstanding principal amount ofthe Advances (as defined in the Credit Agreement referred to below) made by theBank to the Borrower, together with interest on the unpaid principal amount ofthe Advances from the date of such Advances until such principal amount is paidin full, at such interest rates, and at such times, as are specified in theCredit Agreement.

 

This Note isone of the Notes referred to in, and is entitled to the benefits of, and issubject to the terms of, the Subordinated Credit Agreement dated as of December 17,2008 (as the same may be amended, restated, or modified from time to time, the “CreditAgreement”), among the Borrower, the lenders party thereto (the “Lenders”),and UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”). Capitalized terms used in this Note that are defined in the CreditAgreement and not otherwise defined in this Note have the meanings assigned tosuch terms in the Credit Agreement.  TheCredit Agreement, among other things, (a) provides for the making of theAdvances by the Bank to the Borrower in an aggregate amount not to exceed atany time outstanding the Dollar amount first above mentioned, the indebtednessof the Borrower resulting from each such Advance being evidenced by this Noteand (b) contains provisions for acceleration of the maturity of this Noteupon the happening of certain events stated in the Credit Agreement and foroptional and mandatory prepayments of principal prior to the maturity of thisNote upon the terms and conditions specified in the Credit 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.

 

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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 such rights.

 

This Note isalso subject to the terms and provisions of the Subordination and IntercreditorAgreement dated as of December 17, 2008 (as the same may be modified fromtime to time, the “Subordination and Intercreditor Agreement”), amongthe Borrower, the Administrative Agent, the Guarantors, the Lenders, the SeniorAgent and the Senior Lenders.  TheSubordination and Intercreditor Agreement, among other things, containssubordination provisions that subordinate the rights of the Bank to obtainpayment of and exercise remedies with respect to this Note.

 

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).

 

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:                                            |   |
|        |                                                   |  |  |  |

 

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**EXHIBIT F**

 

**FORM OFNOTICE OF BORROWING**

 

[Date]

 

UnionBanCal Equities, Inc., as Administrative Agent

601 Potrero Grande Dr.

Monterey Park, CA 91754

 

Attention:    VannaHuaTham

 

Ladies and Gentlemen:

 

Theundersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),refers to the Subordinated Credit Agreement dated as of December 17, 2008(as the same has been and may be amended, restated or modified 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 UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”), and hereby gives you irrevocable noticepursuant to Section 2.03(a) of the Credit Agreement that theundersigned hereby requests a Borrowing, and in connection with that requestsets forth below the information relating to such Borrowing (the “ProposedBorrowing”) as required by Section 2.03(a) of the CreditAgreement:

 

(a)           The Business Day of theProposed Borrowing is _____________, _____.

 

(b)           The Proposed Borrowingwill be composed of [Reference Rate Advances] [Eurodollar Rate Advances].

 

(c)           The aggregate amount ofthe Proposed Borrowing is $____________.

 

(d)           [The Interest Periodfor each Eurodollar Rate Advance made as part of the Proposed Borrowing 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)           the representations andwarranties contained in Article IV of the Credit Agreement and therepresentations and warranties contained in the Security Instruments, theGuaranties, and each of the other Loan Documents are true and correct in allmaterial respects on and as of the date of the Proposed Borrowing, before andafter giving effect to the Proposed Borrowing and to the application of theproceeds from the Proposed Borrowing, as though made on and as of such date,except to the extent that any such representation or warranty expressly relatessolely to an earlier date, in which case it shall have been true and correct inall material respects as of such earlier date; and

 

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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.

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

 

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**EXHIBIT G**

 

**FORM OFNOTICE OF CONVERSION OR CONTINUATION**

 

[Date]

 

UnionBanCal Equities, Inc., as Administrative Agent

601 Potrero Grande Dr.

Monterey Park, CA 91754

 

Attention:  Vanna HuaTham

 

Ladies and Gentlemen:

 

Theundersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),refers to the Subordinated Credit Agreement dated as of December 17, 2008(as the same may be amended, restated or modified from time-to-time, the “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 UnionBanCal Equities, Inc., as administrative agent for the Lenders(the “Administrative Agent”), and hereby gives you irrevocable noticepursuant to Section 2.03(b) of the Credit Agreement that theundersigned hereby requests a Conversion or continuation of an outstandingBorrowing, and in connection with that request sets forth below the informationrelating to such Conversion or continuation (the “Proposed Borrowing”)as required by Section 2.03(b) of the Credit Agreement:

 

(e)           The Business Day of theProposed Borrowing is _______________, 20__.

 

(f)            The Proposed Borrowingconsists of [a Conversion to [Reference Rate Advances] [Eurodollar RateAdvances]] [a continuation of Eurodollar Rate Advances].

 

(g)           The aggregate amount ofthe Borrowing to be [Converted] [continued] is $______ and consists of[Reference Rate Advances] [Eurodollar Rate Advances].

 

(h)           The Interest Period foreach Eurodollar Rate Advance made as part of the Proposed Borrowing is three (3) months.

 

The Borrowerhereby certifies that the following statements are true on the date hereof, andwill be true on the date of the Proposed Borrowing:

 

(i)            the representationsand warranties contained in Article IV of the Credit Agreement and therepresentations and warranties contained in the Security Instruments, theGuaranties, and each of the other Loan Documents are true and correct in allmaterial respects on and as of the date of the Proposed Borrowing, before andafter giving effect to the Proposed Borrowing and to the application of theproceeds from the Proposed Borrowing, as though made on and as of such date,except to the extent that any such representation or warranty expressly relatessolely to an earlier date, in which case it shall have been true and correct inall material respects as of such earlier date; and

 

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(j)            no Default hasoccurred and is continuing or would result from the Proposed Borrowing or fromthe 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 SUBORDINATED 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 UnionBanCal Equities, Inc. asAdministrative Agent (in such capacity the “Administrative Agent”) underthe Credit Agreement (as hereinafter defined), for its benefit and the benefitof the Lenders (as hereinafter defined).

**RECITALS**

 

A.            TheBorrower, the lenders party thereto from time to time (the “Lenders”;together with the Administrative Agent, the “‘Secured Parties”), and theAdministrative Agent have entered into that certain Subordinated CreditAgreement dated of even date herewith (as it may be amended, restated,supplemented or otherwise modified from time to time, the “Credit Agreement”).

 

B.            Itis a condition precedent to the extension of credit to the Borrower under theCredit Agreement that the Pledgors and the Administrative Agent, on behalf ofthe Lenders, execute and deliver this Pledge Agreement.

 

C.            EachPledgor (other than the Borrower) is a subsidiary of the Borrower, andtherefore shall derive direct and indirect benefits from the transactionscontemplated by the Credit Agreement.

 

**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 not otherwise definedin this pledge agreement that are defined in the credit agreement shall havethe meanings assigned to such terms by the credit agreement.  Any terms used in this pledge agreement thatare defined in the uniform commercial code in effect in the state of texas fromtime to time (the “ucc”) and not otherwise defined herein or in the creditagreement, shall have the meanings assigned to those terms by the ucc.  All meanings to defined terms,unless otherwise indicated, are to be equally applicable to both the 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, 

** **

**H-1**

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**withoutlimitation,”. Paragraph headings have been inserted in this pledge agreement asa matter of convenience for reference only and it is agreed that such paragraphheadings are 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 or the other Loan Documents to the Administrative Agent or anyother Lender, and (iii) any increases, extensions, modifications,substitutions, amendments, restatements and renewals of any of the foregoingobligations, whether for principal, interest, fees, expenses, indemnificationor 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 Lenders that the amount of the SecuredObligation secured by each Pledgor’s interests in any of its property or assets(whether real or personal, or mixed, tangible or intangible) (“Property”)shall be in, but not in excess of, the maximum amount permitted by fraudulentconveyance, fraudulent transfer and other similar law, rule or regulationof any Governmental Authority applicable to such Pledgor.  Accordingly, notwithstanding anything to thecontrary contained in this Pledge Agreement or 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 Pledgor’sinterests in any of its Property pursuant to this Pledge Agreement shall belimited to an aggregate amount equal to the largest amount that would notrender such Pledgor’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.

 

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) anyproceeds from a sale by or on behalf of such Pledgor of any of the MembershipInterests, and (B) any distributions, dividends, 

 

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cash, instruments and other property from time-to-time received orotherwise distributed in respect of the Membership 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 Membership Interests or theownership thereof (collectively, the “Membership Interests Distributions”);

 

(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) anyproceeds from a sale by or on behalf of such Pledgor of any of the PartnershipInterests, and (B) any distributions, dividends, cash, instruments andother property from time-to-time received or otherwise distributed in respectof the Partnership Interests, whether regular, special or made in connectionwith the partial or total liquidation of the issuer and whether attributable toprofits, the return of any contribution or investment or otherwise attributableto the Partnership Interests or the ownership thereof (collectively, the “PartnershipInterests 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 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 the PledgedShares 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 

 

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have the right at anytime to exchange the certificates or instruments representing the PledgedCollateral for certificates or instruments of smaller or larger denominations.

 

2.04         Rights Retained byPledgor.  Notwithstanding the pledgein 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)            untilsuch time thereafter as the Administrative Agent gives written notice of itselection to exercise 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 notinconsistent with the terms of this Pledge Agreement or the Credit Agreement; provided,however, that no Pledgor shall exercise nor shall it refrain fromexercising any such right if such action or inaction, as applicable, would havea materially adverse effect on the value of the Pledged Collateral; and

 

(ii)           at andafter such time as the Administrative Agent gives written notice of its electionto exercise 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 And Warranties.  Each pledgor represents and warrants to theadministrative agent and the lenders 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 

 

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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 partnershipinterests 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 theterm of this pledge agreement and until all of the secured obligations havebeen fully and finally paid and discharged in full, the commitments under the creditagreement have been terminated or expired, and the credit agreement has beenterminated in writing, each pledgor covenants and agrees with theadministrative agent that:

 

4.01         Protect Collateral;Further Assurances.  Each Pledgorwill warrant and defend the rights and title herein granted unto theAdministrative Agent in and to the Pledged Collateral (and all right, title,and interest represented by the Pledged Collateral) against the claims anddemands of all Persons whomsoever.  EachPledgor agrees that, at the expense of such Pledgor, such Pledgor will promptlyexecute and deliver all further instruments and documents, and take all furtheraction, that may be reasonably necessary and that the Administrative Agent orany Secured Party may reasonably request, in order to perfect and 

 

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protect any securityinterest granted or purported to be granted hereby or to enable theAdministrative Agent or any Secured Party to exercise and enforce its rights andremedies 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,and Additional 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 Collateralwithout the Administrative Agent’s prior written consent.

 

4.03         Jurisdiction ofFormation; Name Change.  Each Pledgorshall give the Administrative Agent at least 30 days’ prior written noticebefore it (i) in the case of a Pledgor that is not a “registeredorganization” (as defined in Section 9-102 of the UCC) changes thelocation of its principal place of business and chief executive office, or (ii) usesa trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11of the respective Credit Agreement, no Pledgor shall amend, supplement, modifyor restate its articles or certificate of incorporation, bylaws, limitedliability company agreements, or other equivalent organizational documents, noramend its name or change its jurisdiction of incorporation, organization orformation.

 

**Section 5.**              Remedies Upon Default.  If any eventof default shall have occurred and 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 OtherRights.

 

(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.

 

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(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 PledgedCollateral. The Administrative Agent may sell all or part of the PledgedCollateral at public or private sale, at any of the Administrative Agent’s officesor elsewhere, for cash, on credit, or for future delivery, and upon such otherterms as the Administrative Agent may deem commercially reasonable inaccordance with applicable laws.  EachPledgor agrees that to the extent permitted by law such sales may be madewithout notice.  If notice is required bylaw, each Pledgor hereby deems 10 days’ advance notice of the time and place ofany public sale or the time after which any private sale is to be madereasonable notification, recognizing that if the Pledged Collateral threatensto decline speedily in value or is of a type customarily sold on a recognizedmarket shorter notice may be reasonable. The Administrative Agent shall not be obligated to make any sale of thePledged Collateral regardless of notice of sale having been given.  The Administrative Agent may adjourn anypublic or private sale from time-to-time by announcement at the time and placefixed therefor, and such sale may, without further notice, be made at the timeand place to which it was so adjourned. Each Pledgor shall fully cooperate with Administrative Agent in sellingor realizing upon all or any part of the Pledged Collateral.  In addition, each Pledgor shall fully complywith the securities laws of the United States, the State of Texas, and otherstates and take such actions as may be necessary to permit Administrative Agentto sell or otherwise dispose of any securities representing the PledgedCollateral in compliance with such laws.

 

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 ofCollateral. The proceeds of any sale, or other realization (other than thatreceived from a sale or other realization permitted by the Credit Agreement)upon all or any part of the Pledged Collateral pledged by the Pledgors shall beapplied by the Administrative Agent as set forth in Section 7.06 of theCredit Agreement.

 

5.06         Cumulative Remedies.  Each right, power and remedy herein specificallygranted to the Administrative Agent or otherwise available to it shall becumulative, and shall be in addition to every other right, power and remedyherein specifically given or now or hereafter existing at law, in equity, orotherwise, and each such right, power and remedy, whether specifically grantedherein or otherwise existing, may be exercised at any time and fromtime-to-time as often and in such order as may be deemed expedient by theAdministrative Agent in its 

 

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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 As Attorney-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.**

 

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 AgentHas No Duty.  The powers conferred onthe Administrative 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 

 

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(b) taking anynecessary steps to preserve rights against any parties with respect to anyPledged Collateral.

 

**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 Lenders may incur in connection with (a) thecustody, preservation, use, or operation of, or the sale, collection, or otherrealization of, any of the Pledged Collateral, (b) the exercise orenforcement of any of the rights of the Administrative Agent or any Lender orany other Lenders hereunder, and (c) the failure by any Pledgor to performor 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, and such waiver or consent shall be effectiveonly in the specific instance and for the specific purpose for 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 Lenders and their successors, and assigns, and (iii) inure,together with the rights and remedies of the Administrative Agent hereunder, tothe benefit of and be binding upon, the Administrative Agent, and the Lendersand their respective successors, transferees, and assigns.  Without limiting the generality of theforegoing clause, when any Secured Party assigns or otherwise transfers anyinterest held by it under either the Credit Agreement or other Loan Document toany other Person pursuant to the terms of the Credit Agreement or such otherLoan Document, that other Person shall thereupon become vested with all thebenefits held by such Secured Party under this Pledge Agreement.

 

(b)           Uponthe indefeasible payment in full and termination of the Secured Obligations,the termination of all Commitments under the Credit Agreement, and thetermination of the Credit Agreement in writing, the security interest grantedhereby shall terminate and all rights to the Pledged Collateral shall revert tothe applicable Pledgor to the extent such Pledged Collateral shall not havebeen sold or otherwise applied pursuant to the terms hereof.  Upon any such termination, the AdministrativeAgent will, at the Pledgors’ expense, deliver all Pledged Collateral to theapplicable Pledgor, execute and 

 

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deliver to the applicable Pledgor such documents as such Pledgor shallreasonably request and take any other actions reasonably requested to evidenceor 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;

 

(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. Delivery of an executed counterpart signature page by facsimile isas effective as executing and delivering this Pledge Agreement in the presenceof the other parties to this Pledge Agreement. In proving this Pledge Agreement, a party must produce or account onlyfor the executed 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 security 

 

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interests herein shall bereinstated as to all disgorged payments as though such payments had not beenmade, and each Pledgor 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.  **EACHPLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER****SECURED PARTY FROM ANDAGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 7.10(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****SECURED PARTY’S****OWNNEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSETHAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENTJURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED SECURED PARTY’S GROSSNEGLIGENCE 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         Subordination andIntercreditor Agreement.**  Reference is made to the Subordination andIntercreditor Agreement, dated as of December 17, 2008 (as amended,restated, supplemented or otherwise modified from time to time, the “Subordinationand ***Intercreditor Agreement***”),among Union Bank of California, N.A., as Senior Agent, and ****UnionBanCalEquities, Inc.,****************asSubordinated Agent, and certain other persons, party or that may become partythereto from time to time.  Notwithstandinganything herein to the contrary, this Pledge Agreement, the Liens grantedto the Administrative Agent pursuant to this Pledge Agreement and the exerciseof any right or remedy by the Administrative Agent or any of the Lendershereunder are subject to the provisions of the Subordination and IntercreditorAgreement.  In the event of any conflictbetween the terms of the Subordination and Intercreditor Agreement and thisPledge Agreement, the terms of the Subordination and Intercreditor Agreementshall govern and control.**

 

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**

 

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**EVIDENCEOF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THEREARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.**

 

[SIGNATURE PAGES FOLLOW]

 

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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:                              |   |
|       |                             | Ben Daitch |
|       |                             | Senior Vice President and Chief Financial  Officer |
|       |                             |
|       |                             |
| ** ** | **W.O.  ENERGY, INC.**           |
| ** ** | **W.O.  ENERGY OF NEVADA, INC.** |
|       |                             |
|       |                             |
|       | Each by:                         |   |
|       |                             | Ben Daitch |
|       |                             | Vice President and Chief Financial  Officer |
|            |                                  |  |  |  |

 

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|   | **ADMINISTRATIVE  AGENT:** |
|--------|----------------------------|
|   |                       |
|   | UNIONBANCAL EQUITIES, INC. |
|   |                       |
|   |                       |
|   | By:                        |   |
|   | Ted A. McNulty             |
|   | Senior Vice President      |
|   |                       |
|   |                       |
|   | By:                        |   |
|   | Derrick Pan                |
|   | Vice President             |
|        |                            |  |  |

 

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**SCHEDULE2.02(a)**

** **

**PLEDGEDCOLLATERAL**

 

Attached toand forming a part of that certain Subordinated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to UnionBanCal Equities, Inc., as theAdministrative Agent.

 
| **Pledgor** | ** ** | **Issuer** | ** ** | **Type of Membership  Interest** | ** ** | **% of Membership Interest  Owned** |
|-------------|------------|------------|------------|----------------------------------|------------|-------------------------------------|
| None        |       |       |       |                             |       |                                |

 

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#### **SCHEDULE2.02(b)**

 

**PLEDGED COLLATERAL**

 

Attached toand forming a part of that certain Subordinated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to UnionBanCal Equities, Inc., 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      |

 

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#### **SCHEDULE2.02(c)**

 

**PLEDGED COLLATERAL**

 

Attached toand forming a part of that certain Subordinated Pledge Agreement dated December 17,2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WOEnergy, Inc., as Pledgors, to UnionBanCal Equities, Inc., 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                    |       |

 

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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            |

 

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| **Organizational Number:**             |   | C20757-1996-001 |
|----------------------------------------|--------|-----------------|
|                                   |   |            |
| **Federal Tax Identification Number:** |   | 88-0369151      |
|                                   |   |            |
| **Prior Names:**                       |   | None.           |

 

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Annex 1 to the

Subordinated Pledge Agreement

 

SUPPLEMENTNO. [            ]  dated as of[               ](the “Supplement”), to the Subordinated Pledge Agreement dated as of December 17,2008 (as amended, supplemented or otherwise modified from time to time, the “PledgeAgreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),each other party signatory hereto (together with the Borrower, the “Pledgors”and individually, each a “Pledgor”) and UnionBanCal Equities, Inc.as Administrative Agent (in such capacity, the “Administrative Agent”) underthe Credit Agreement (as hereinafter defined) for the benefit of the Lenders(as hereinafter defined).

 

**RECITALS**

 

D.            Reference is made to that certainSubordinated Credit Agreement dated as of December 17, 2008 (as it may beamended, restated or otherwise modified from time to time, the “CreditAgreement”, among the Borrower, the lenders party thereto from time to time(the “Lenders”), and the Administrative Agent; and

 

B.            The Pledgors have entered into the Pledge Agreement inorder to induce the Lenders to make the Advances under the CreditAgreement.  Pursuant to Section 6.15of the Credit Agreement, each Subsidiary of the Borrower that was not inexistence on the date of the respective Master Debt Agreement is required toenter into the Pledge Agreement as a Pledgor upon becoming a Subsidiary.  Section 7.12 of the Pledge Agreementprovides that additional Subsidiaries of the Borrower may become Pledgors underthe Pledge Agreement by execution and delivery of an instrument in the form ofthis Supplement.  The undersignedSubsidiary of the Borrower (the “New Pledgor”) is executing thisSupplement in accordance with the requirements of the Senior Credit Agreementto become a Pledgor under the Pledge Agreement.

 

C.            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 as iforiginally named therein as a Pledgor and the New Pledgor hereby agrees (a) toall the terms and provisions of the Pledge Agreement applicable to it as aPledgor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Pledgor thereunder are true andcorrect on and as of the date hereof in all material respects.  In furtherance of the foregoing, the NewPledgor, as security for the payment and performance in full of the SecuredObligations, does hereby create and grant to the Administrative Agent, itssuccessors and assigns, for the benefit of the Secured Parties, theirsuccessors and assigns, a continuing security interest in and lien on all ofthe New Pledgor’s right, title and interest in and to the Pledged Collateral ofthe New Pledgor.  Each reference to a “Pledgor”in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporatedherein by reference.

 

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(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 theAdministrative Agent.  Delivery of anexecuted signature page to this Supplement by facsimile transmission shallbe as effective as delivery of a manually signed counterpart of thisSupplement.

 

(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 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 Pledge Agreement shall not inany way be affected or impaired.  Theparties hereto shall endeavor in good-faith negotiations to replace theinvalid, illegal or unenforceable provisions with valid provisions the economiceffect of which comes as close as possible to that of the invalid, illegal orunenforceable provisions.

 

(h)           All communications and noticeshereunder shall be in writing and given as provided in the PledgeAgreement.  All communications andnotices hereunder to the New Pledgor shall be given to it at the address setforth under its signature hereto.

 

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(i)            TheNew Pledgor agrees to reimburse the Administrative Agent for its reasonableout-of-pocket expenses in connection with this Supplement, including the reasonablefees, other charges and disbursements of counsel for the Administrative 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]

 

H-22

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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:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | UNIONBANCAL EQUITIES, INC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | By:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
| ** ** | Name:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
| ** ** | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | By:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| ** ** | Name                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
| ** ** | Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  |  |  |  |  |

 

H-23

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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)**

 
| **Issue**  | ** ** | **Type of Partnership Interest** | ** ** | **% of Partnership Interest  Owned** | ** ** |
|------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** ** | ** ** | ** **                       | ** ** | ** **                           | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                           | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                           | ** ** |

#### ** **

**SCHEDULE2.02(c)**

** **
| **Issuer** | ** ** | **Type of Shares** | ** ** | **Number of  Shares** | ** ** | **% of Shares  Owned** | ** ** | **Certificate No.** | ** ** |
|------------|------------|------------------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------|------------|
|       |       |                         |       |                       |       |                             |       |                     |       |
|       |       |                         |       |                       |       |                             |       |                     |       |
|       |       |                         |       |                       |       |                             |       |                     |       |

 

SCHEDULE 3

 
| New Pledgor:                             |                                                                               |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Sole Jurisdiction of Formation / Filing: |                                                                               |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Type of Organization:                    |                                                                               |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Organizational Number:                   |                                                                               |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Federal Tax Identification Number:       |                                                                               |
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                     | Prior Names:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                               |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |

 

H-24

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**EXHIBIT I**

 

**FORM OF SECURITY AGREEMENT**

 

THIS SUBORDINATED SECURITY AGREEMENT dated as of December 17, 2008(this “Security Agreement”) is by and among CANO PETROLEUM, INC., aDelaware corporation (“Borrower”), each subsidiary of the Borrower partyhereto from time to time (together with the Borrower, the “Grantors” andindividually, each a “Grantor”) and UnionBanCal Equities, Inc. asadministrative agent (in such capacity the “AdministrativeAgent”)for the ratable benefit of itself and the Lenders (as defined below) (togetherwith the Lenders, individually a “Secured Party”, and collectively, the “SecuredParties”).

 

**RECITALS**

 

A.            Referenceis made to that certain Subordinated Credit Agreement dated as of December 17,2008 among the Borrower, the lenders party thereto from time to time (the “Lenders”)and the Administrative Agent (as the same may be amended, restated,supplemented or otherwise modified from time to time, the “Credit Agreement”).

 

B.            EachGrantor (other than Borrower) is a subsidiary of the Borrower and will derivesubstantial direct and indirect benefit from the transactions contemplated bythe Credit Agreement and the other Loan Documents (as defined in the CreditAgreement).

 

C.            Itis a condition precedent to the extension of credit to the Borrower under theCredit Agreement that the Grantors and the Administrative Agent, on behalf ofthe Lenders, execute and deliver this Security Agreement.

 

**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) all capitalized terms not otherwisedefined in this security agreement that are defined in the credit agreementshall have the meanings assigned to such terms by the credit agreement.  Any terms used in this security agreementthat are defined in the ucc (as defined below) and not otherwise defined hereinor in the credit agreement, shall have the meanings assigned to those terms bythe ucc.  The following terms shall havethe meanings specified 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 security 

 

I-1

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pledged, assigned,hypothecated or granted to or held by any Grantor to secure the foregoing, (ii) allof any Grantor’s right, title and interest in and to any goods or services, thesale of which gave rise thereto, (iii) all guarantees, endorsements andindemnifications on, or of, any of the foregoing, (iv) all powers ofattorney granted to any Grantor for the execution of any evidence of indebtednessor security or other writing in connection therewith, (v) all books,correspondence, credit files, records, ledger cards, invoices, and other papersrelating thereto, including without limitation all similar information storedon a magnetic medium or other similar storage device and other papers anddocuments in the possession or under the control of any Grantor or any computerbureau from time to time acting for any Grantor, (vi) all evidences of thefiling of financing statements and other statements granted to any Grantor andthe registration of other instruments in connection therewith and amendmentsthereto, notices to other creditors or secured parties, and certificates fromfiling or other registration officers, (vii) all credit information,reports and memoranda relating thereto, and (viii) all other writingsrelated 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, theCash Collateral Account, all monies, proceeds or sums due or to become duetherefrom or thereon and all documents (including, but not limited topassbooks, certificates and receipts) evidencing all funds and investments heldin such accounts.

 

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

 

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

 

“Contracts”means all contracts to which any Grantor now is, or hereafter will be bound, 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.

 

“Contract Rights”means (i) all (A) of any Grantor’s rights to payment under anyContract or Contract Document and (B) payments due and to become due toany Grantor under any Contract or Contract Document, in each case whether ascontractual obligations, damages or otherwise; (ii) all of any Grantor’sclaims, rights, powers, or privileges and remedies under any Contract orContract 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 

 

I-2

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Contract Document,to enforce or execute any checks, or other instruments or orders, to file anyclaims and to take any action which, in the opinion of any Secured Party, maybe necessary or advisable in connection 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 which relate to the above, and any and alladditions, substitutions and replacements of any of the foregoing, whereverlocated together with all improvements thereon and all attachments, components,parts, equipment and accessories installed thereon or affixed thereto.

 

“Fixtures”means any fixtures now or hereafter owned or leased by any Grantor, or in 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”has the meaning set forth in the Senior 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 

 

I-3

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of money and isnot itself a security agreement or lease and is of a type which is in theordinary course of business transferred by delivery with any necessaryendorsement or assignment (other than Instruments constituting Chattel 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.

 

“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.

 

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

 

“Proceeds”means all proceeds (as defined in the UCC) of any or all of the Collateral,including without limitation (i) any and all proceeds of, all claims for,and all rights of any Grantor to receive the return of any premiums for, 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 all Obligations now or hereafter owed by the Borrower,any Guarantor, or any of their respective Subsidiaries to the Secured Parties,including any extensions, modifications, substitutions, amendments and renewalsthereof, whether for principal, interest, fees, expenses, indemnification, orotherwise.

 

I-4

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“SecurityAgreement” means this Subordinated Security Agreement, as the same may bemodified, supplemented or amended from time to time in accordance with itsterms.

 

“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 such otherjurisdiction for purposes of the provisions hereof relating to such attachment,perfection or priority and for purposes of definitions related to suchprovisions.

 

(b)           Allmeanings to defined terms, unless otherwise indicated, are to be equallyapplicable to both the 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 OfSecurity Interest.

** **

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

 
| (i)    |   | all Contracts, all Contract Rights, Contract  Documents and Accounts associated with such Contracts and each and every  document granting security to such Grantor under any such Contract; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                        |
| (ii)   |   | all Accounts;                                                                                                                                                                               |
|   |   |                                                                                                                                                                                        |
| (iii)  |   | all Inventory;                                                                                                                                                                              |
|   |   |                                                                                                                                                                                        |
| (iv)   |   | all Equipment;                                                                                                                                                                              |
|   |   |                                                                                                                                                                                        |
| (v)    |   | all General Intangibles;                                                                                                                                                                    |
|   |   |                                                                                                                                                                                        |
| (vi)   |   | all Investment Property;                                                                                                                                                                    |

 

I-5

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| (vii)  |   | all Fixtures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (viii) |   | all Cash Collateral;                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (ix)   |   | any Legal Requirements now or hereafter held by such  Grantor (except that any Legal Requirement which would by its terms or under  applicable law become void, voidable, terminable or revocable by being  subjected to the Lien of this Security Agreement or in which a Lien is not  permitted to be granted under applicable law, is hereby excluded from such  Lien to the extent necessary so as to avoid such voidness, voidability,  terminability or revocability); |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (x)    |   | any right to receive a payment under any Hedge  Contract in connection with a termination thereof;                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xi)   |   | (A) all policies of insurance and Insurance  Contracts, now or hereafter held by or on behalf of such Grantor, including  casualty and liability, business interruption, and any title insurance,  (B) all Proceeds of insurance, and (C) all rights, now or hereafter  held by such Grantor to any warranties of any manufacturer or contractor of  any other Person;                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xii)  |   | any and all liens and security interests (together  with the documents evidencing such security interests) granted to such  Grantor by an obligor to secure such obligor’s obligations owing under any  Instrument, Chattel Paper, or Contract which is pledged hereunder or with  respect to which a security interest in such Grantor’s rights in such  Instrument, Chattel Paper, or Contract is granted hereunder;                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xiii) |   | any and all guaranties given by any Person for the  benefit of such Grantor which guarantees the obligations of an obligor under  any Instrument, Chattel Paper or Contract, which are pledged hereunder;                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xiv)  |   | without limiting the generality of the foregoing,  all other personal property, goods, Instruments, Chattel Paper, Documents,  Fixtures, credits, claims, demands and assets of such Grantor whether now  existing or hereafter acquired from time to time; and                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xv)   |   | any and all additions, accessions and improvements  to, all substitutions and replacements for and all products and Proceeds of  or derived from all of the items described above in this Section 2.                                                                                                                                                                                                                                                                    |

 

(b)           Notwithstandinganything contained herein to the contrary, it is the intention of each Grantor,the Administrative Agent, and the other Secured Parties that the amount of the SecuredObligation secured by each Grantor’s interests in any of its Property shall bein, but not in excess of, the maximum amount permitted by fraudulentconveyance, fraudulent transfer and other similar law, rule or regulationof any Governmental Authority applicable to such Grantor. Accordingly,notwithstanding anything to the contrary contained in this Security Agreementin any other agreement or instrument executed in connection with the payment ofany of the 

 

I-6

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Secured Obligations, the amount of the SecuredObligations secured by each Grantor’s interests in any of its Property pursuantto this Security Agreement shall be limited to an aggregate amount equal to thelargest amount that would not render such Grantor’s obligations hereunder orthe liens and security interest granted to the Administrative Agent hereundersubject to avoidance under Section 548 of the United States BankruptcyCode or any comparable provision of any other applicable law.

 

**Section 3.**              Representations And Warranties.  Each grantor hereby represents and warrantsthe following to the administrative agent and the other secured 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 a promissorynote 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 andPerfection.

 

Subject only to PermittedLiens, this Security Agreement creates valid and continuing security interestsin the Collateral, securing the payment and performance of all the SecuredObligations.  Upon the filing offinancing statements with the jurisdiction listed in Schedule 1, thesecurity interests granted to the Administrative Agent hereunder willconstitute valid first-priority perfected security interests in all Collateralwith respect to which a security interest can be perfected by the filing of afinancing statement, subject only to Permitted Liens.

 

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

 

I-7

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(iv)          Tax IdentificationNumber and Organizational Number. The federal tax identification number of such Grantor and theorganizational number of such Grantor are as set forth in Schedule 1.

 

(v)           Tradenames; PriorNames.  Except as set forth on Schedule1, such Grantor has not conducted business under any name other than itscurrent name during the last five years prior to the date of this SecurityAgreement.

 

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

 

**Section 4.**              Covenants.

 

(i)            FurtherAssurances.

 

Each Grantor agrees thatfrom time to time, at its expense, such Grantor shall promptly execute anddeliver all instruments and documents, and take all action, that may bereasonably necessary or desirable, or that the Administrative Agent mayreasonably request, in order to perfect and protect any pledge, assignment, orsecurity interest granted or intended to be granted hereby or to enable theAdministrative Agent to exercise and enforce its rights and remedies hereunderwith respect to any Collateral.  Withoutlimiting the generality of the foregoing, each Grantor (A) at the requestof the Administrative Agent, shall execute such instruments, endorsements ornotices, as may be reasonably necessary or desirable or as the AdministrativeAgent may reasonably request, in order to perfect and preserve the assignmentsand security interests granted or purported to be granted hereby, (B) shall,at the reasonable request of the Administrative Agent, mark conspicuously eachmaterial document included in the Collateral, each Chattel Paper included inthe Accounts, and each of its records pertaining to the Collateral with alegend, in form and substance satisfactory to the Administrative Agent,including that such document, Chattel Paper, or record is subject to thepledge, assignment, and security interest granted hereby, (C) shall, ifany Collateral shall be evidenced by a promissory note or other instrument orchattel paper, deliver and pledge to the Administrative Agent hereunder suchnote or instrument or chattel paper duly endorsed and accompanied by dulyexecuted instruments of transfer or assignment, all in form and substancesatisfactory to the Administrative Agent, and (D) authorizes theAdministrative Agent to file any financing statements, amendments orcontinuations without the signature of such Grantor to the extent permitted byapplicable law in order to perfect or maintain the perfection of any securityinterest granted under this Security Agreement (including, without limitation,financing statements using an “all assets” or “all personal property”collateral description).

 

Each Grantor shall payall filing, registration and recording fees and all refiling, re-registrationand re-recording fees, and all other reasonable expenses incident to theexecution and acknowledgment of this Security Agreement, any assurance, and allfederal, state, county and municipal stamp taxes and other taxes, duties,imports, assessments and charges arising out of or in connection with theexecution and delivery of this Security Agreement, any agreement supplementalhereto, any financing statements, and any instruments of further assurance.

 

I-8

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Each Grantor shallpromptly provide to the Administrative Agent all information and evidence theAdministrative Agent may reasonably request concerning the Collateral to enablethe Administrative Agent to enforce the provisions of this Security Agreement.

 

(ii)           Change of Name;State of Formation.  Each Grantorshall give the Administrative Agent at least 30 days’ prior written noticebefore it (i) in the case of any Grantor that is not a “registeredorganization” (as such term is defined in Section 9-102 of the UCC),changes the location of its principal place of business and chief executiveoffice, (ii) changes the location of its jurisdiction of formation ororganization, (iii) changes the location of the Equipment, Inventory, ororiginal copies of any Chattel Paper evidencing Accounts, or (iv) uses atrade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11of the Credit Agreement, no Grantor shall amend, supplement, modify or restateits articles or certificate of incorporation, bylaws, limited liability companyagreements, or other equivalent organizational documents, nor amend its name orchange its jurisdiction of incorporation, 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 theAdministrative Agent, upon reasonable advance notice, at any time during normalbusiness hours to inspect and copy them. Upon the occurrence and during the continuation of any Event of Default,at the Administrative Agent’s request, each Grantor shall promptly delivercopies of any and all such records to the Administrative Agent.

 

(iv)          Liability UnderContracts and Accounts. Notwithstanding anything in this Security Agreement to the contrary, (i) theexecution of this Security Agreement shall not release any Grantor from itsobligations and duties under any of the Contract Documents, or any othercontract or instrument which are part of the Collateral and Accounts includedin the Collateral, (ii) the exercise by the Administrative Agent of any ofits rights hereunder shall not release any Grantor from any of its duties orobligations under any Contract Documents, or any other Contract or Instrumentwhich are part of the Collateral and Accounts included in the Collateral, and (iii) theAdministrative Agent shall not have any obligation or liability under anyContract Documents, or any other contract or instrument which are part of theCollateral and Accounts included in the Collateral by reason of the executionand delivery of this Security Agreement, nor shall the Administrative Agent beobligated to perform any of the obligations or duties of any Grantor thereunderor to take any action to collect or enforce any claim for payment assignedhereunder.

 

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

 

(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 

 

I-9

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binding obligations of the account debtor in respectthereof, representing an unsatisfied obligation of such account debtor, (ii) isand will be, in all material respects, enforceable in accordance with itsterms, (iii) is not and will not be subject to any setoffs, defenses,taxes, counterclaims, except in the ordinary course of business, (iv) isand will be, in all material respects, in compliance with all applicable laws,whether federal, state, local or foreign, and (v) which if evidenced byChattel Paper, will not require the consent of the account debtor in respectthereof in connection with its assignment 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 ofGrantor.  Each Grantor agrees that (i) anyaction or 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 and the termination or expiration of the Commitments, warrant anddefend its title to the Collateral and the interest of the Administrative Agentin the Collateral against any claim or demand of any Persons (other thanPermitted Liens) which could reasonably be expected to materially adverselyaffect such Grantor’s title to, or the Administrative Agent’s right or interestin, such Collateral.

 

**Section 5.**              Termination Of Security Interest.  Upon the indefeasible payment in full in cash of thesecured obligations, the termination or expiration of all commitments and thetermination of the credit agreement in writing, the security interest grantedhereby shall terminate and all rights to the collateral shall revert to theapplicable grantor to the extent such collateral shall not have been sold orotherwise applied pursuant to the terms hereof. Upon any such termination, the administrative agent will, at thegrantors’ expense, execute and deliver to the applicable grantor such documents(including, without limitation, ucc-3 termination statements) as such grantorshall reasonably request to evidence such termination.

 

**Section 6.**              Reinstatement.  If, at any time after payment in full of all securedobligations and termination of the administrative agent’s security interest,any payments on the secured obligations previously made must be disgorged bythe administrative agent for any reason whatsoever, including, withoutlimitation, the insolvency, bankruptcy or reorganization of any grantor or anyother person, this security 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 grantor 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 GRANTOR SHALL DEFEND AND INDEMNIFY THEADMINISTRATIVE AGENT AND EACH OTHER ADMINISTRATIVE AGENT FROM AND AGAINST ANYCLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 6(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCHACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, 

 

I-10

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** **

**COST, OR EXPENSE ARISING AS A RESULT OF THEINDEMNIFIED ADMINISTRATIVE AGENT’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM,DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL,NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTEDFROM SUCH INDEMNIFIED ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFULMISCONDUCT.**

 

**Section 7.**              Remedies Upon Event Of Default.

 

(a)           If any Event of Defaulthas occurred and is continuing, the Administrative Agent may (and shall at thewritten request of the Majority Lender), (i) proceed to protect andenforce the rights vested in it by this Security Agreement or otherwiseavailable to it, including but not limited to, the right to cause all revenuesand other moneys pledged hereby as Collateral to be paid directly to it, and toenforce its rights hereunder to such payments and all other rights hereunder bysuch appropriate judicial proceedings as it shall deem most effective toprotect and enforce any of such rights, either at law or in equity orotherwise, whether for specific enforcement of any covenant or agreementcontained in any of the Contract Documents, or in aid of the exercise of anypower therein or herein granted, or for any foreclosure hereunder and saleunder a judgment or decree in any judicial proceeding, or to enforce any otherlegal or equitable right vested in it by this Security Agreement or by law; (ii) causeany action at law or suit in equity or other proceeding to be instituted andprosecuted and enforce any rights hereunder or included in the Collateral,subject to the provisions and requirements thereof; (iii) sell orotherwise dispose of any or all of the Collateral or cause the Collateral to besold or otherwise disposed of in one or more sales or transactions, at suchprices and in such manner as may be commercially reasonable, and for cash or oncredit or for future delivery, without assumption of any credit risk, at publicor private sale, without demand of performance or notice of intention to sellor of time or place of sale (except such notice as is required by applicablestatute and cannot be waived), it being agreed that the Administrative Agentmay be a purchaser on behalf of the Secured Parties or on its own behalf at anysuch sale and that the Administrative Agent, any other Secured Party, or anyother Person who may be a bona fide purchaser for value and without notice ofany claims of any or all of the Collateral so sold shall thereafter hold thesame absolutely free from any claim or right of whatsoever kind, including anyequity of redemption of any Grantor, any such demand, notice or right andequity being hereby expressly waived and released to the extent permitted bylaw; (iv) incur reasonable expenses, including reasonable attorneys’ fees,reasonable consultants’ fees, and other costs appropriate to the exercise ofany right or power under this Security Agreement; (v) perform anyobligation of any Grantor hereunder and make payments, purchase, contest orcompromise any encumbrance, charge or lien, and pay taxes and expenses, without,however, any obligation to do so; (vi) in connection with any accelerationand foreclosure, take possession of the Collateral and render it usable andrepair and renovate the same, without, however, any obligation to do so, andenter upon any location where the Collateral may be located for that purpose,control, manage, operate, rent and lease the Collateral, collect all rents andincome from the Collateral and apply the same to reimburse the Secured Partiesfor any cost or expenses incurred hereunder or under any of the Loan Documentsand to the payment or performance of any Grantor’s obligations hereunder orunder any of the Loan Documents, and apply the balance to the other SecuredObligations and any remaining excess balance to whomsoever is legally entitledthereto; (vii) secure the appointment of a receiver for the Collateral orany part thereof; (viii) require any Grantor to, and 

 

I-11

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each Grantor hereby agrees that it will at its expenseand upon request of the Administrative Agent forthwith, assemble all or part ofthe Collateral as directed by the Administrative Agent and make it available tothe Administrative Agent at a place to be designated by the AdministrativeAgent which is reasonably convenient to both parties; (ix) exercise anyother or additional rights or remedies granted to a Administrative Agent underthe UCC; or (x) occupy any premises owned or leased by any Grantor wherethe Collateral or any part thereof is assembled for a reasonable period inorder to effectuate its rights and remedies hereunder or under law, withoutobligation to any Grantor in respect of such occupation.  If, pursuant to applicable law, prior noticeof sale of the Collateral under this Section is required to be given toany Grantor, each Grantor hereby acknowledges that the minimum time required bysuch applicable law, or if no minimum time is specified, 10 days, shall bedeemed a reasonable notice period.   TheAdministrative Agent shall not be obligated to make any sale of 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 suchsale may, without further notice, be made at the time and place to which it wasso adjourned.

 

(b)           All reasonable costs and expenses (includingreasonable attorneys’ fees and expenses) incurred by the Administrative Agentin connection with any suit or proceeding in connection with the performance bythe Administrative Agent of any of the agreements contained in any of theContract Documents, or in connection with any exercise of its rights orremedies hereunder, pursuant to the terms of this Security Agreement, shallconstitute additional indebtedness secured by this Security Agreement and shallbe paid on demand by the Grantors to the Administrative Agent on behalf of theSecured Parties.

 

**Section 8.**              Remedies Cumulative; Delay NotWaiver.

 

(a)           No right, power orremedy herein conferred upon or reserved to the Administrative Agent isintended to be exclusive of any other right, power or remedy and every suchright, power and remedy shall, to the extent permitted by law, be cumulativeand in addition to every other right, power and remedy given hereunder or nowor 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 remedy.  Resort to any or all security now orhereafter held by the Administrative Agent may be taken concurrently orsuccessively and in one or several consolidated or independent judicial actionsor lawfully taken nonjudicial proceedings, or both.

 

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

 

**Section 9.**              Contract Rights.  After the occurrence and duringthe continuance of an event of default, the administrative agent may exercise any of thecontract rights and remedies of any grantor under or in connection with theinstruments, chattel paper, or contracts which represent 

** **

**I-12**

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** **

**accounts, thegeneral intangibles, or which otherwise relate to the collateral, including,without limitation, any rights of any grantor to demand or otherwise requirepayment of any amount under, or performance of any provisions of, theinstruments, chattel paper, or contracts which represent accounts, or thegeneral intangibles.**

 

**Section 10.**            Accounts.

** **

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

 

(b)           After receipt by any Grantor of the noticereferred to in Section 10(a) above that an Event of Default hasoccurred and is continuing, all amounts and Proceeds (including instruments)received by such Grantor in respect of the Accounts shall be received in trustfor the benefit of the Administrative Agent hereunder, shall be segregated fromother funds of such Grantor, and shall promptly be paid over to theAdministrative Agent in the same form as so received (with any necessaryindorsement) to be held as Collateral. No Grantor shall adjust, settle, or compromise the amount or payment ofany Account, nor release wholly or partly any account debtor or obligorthereof, nor allow any credit or discount thereon other than in the ordinarycourse of business and consistent with past practices.

 

**Section 11.**            Application Of Collateral.  The proceeds of any sale, or otherrealization (other than that received from a sale or other realizationpermitted by the senior 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.

** **

**Section 12.**            Administrative Agent AsAttorney-In-Fact For Grantor.  Each grantorhereby constitutes and irrevocably appoints the administrative agent, actingfor and on behalf of itself and the secured parties and each successor orassign of the administrative agent and the secured parties, the true and lawfulattorney-in-fact of such grantor, with full power and authority in the placeand stead of such grantor and in the name of such grantor, the administrativeagent or otherwise to, following the occurrence and during the continuation ofan event of default, take any action and execute any instrument at the writtendirection of the secured parties and enforce all rights, interests and remediesof such grantor with respect to the collateral, including the right:

** **

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

 

(ii)           to elect remediesthereunder and to endorse any checks or other instruments or orders inconnection therewith;

 

I-13

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(iii)          to file any claims ortake any action or institute any proceedings in connection therewith which theAdministrative Agent may deem to be necessary or advisable;

 

(iv)          to pay, settle orcompromise all bills and claims which may be or become liens or securityinterests against any or all of the Collateral, or any part thereof, unless abond or other security satisfactory to the Administrative Agent has beenprovided; and

 

(v)           upon foreclosure, to doany and every act which any Grantor may do on its behalf with respect to theCollateral or any part thereof and to exercise any or all of such Grantor’srights 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.**            Administrative Agent May Perform.  The administrative agent may fromtime-to-time perform any act which any grantor has agreed hereunder to performand which such grantor shall fail to perform after being requested in writingso to perform (it being understood that no such request need be given after theoccurrence and during the continuance of any event of default and after noticethereof by the administrative agent to any grantor) and the administrativeagent may from time-to-time take any other action which the administrativeagent deems necessary for the maintenance, preservation or protection of any ofthe collateral or of its security interest therein, and the reasonable expensesof the administrative agent incurred in connection therewith shall be part ofthe secured obligations and shall be secured hereby.

** **

**Section 14.**            Administrative Agent Has No Duty.  The powers conferred on the administrativeagent hereunder are solely to protect its interest in the collateral and shallnot impose any duty on it to exercise any such powers.  Except for reasonable care of any collateralin its possession and the accounting for moneys actually received by it hereunder,the administrative agent shall have no duty as to any collateral orresponsibility for taking any necessary steps to preserve rights against priorparties or any other rights pertaining to any collateral.

** **

**Section 15.**            Reasonable Care.  The administrative agent shall be deemed tohave exercised reasonable care in the custody and preservation of thecollateral in its possession if the collateral is accorded treatmentsubstantially equal to that which the administrative agent accords its ownproperty.

** **

**Section 16.**            Payments Held In Trust.  During the continuance of an event ofdefault, all payments received by any grantor under or in connection with anycollateral shall be received in trust for the benefit of the administrativeagent, and shall be segregated from other funds of such grantor and shall beforthwith paid over to the administrative agent in the same form as received(with any necessary endorsement).

** **

**Section 17.**            Miscellaneous.

** **

(vi)          Expenses.  Each Grantor will upon demand pay to theAdministrative Agent for its benefit and the benefit of the Secured Parties theamount of any reasonable out-of-pocket

 

I-14

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expenses, including the reasonable fees anddisbursements of its counsel and of any experts, which the Administrative Agentmay incur in connection with (i) the custody, preservation, use, oroperation of, or the sale, collection, or other realization of, any of theCollateral, (ii) the exercise or enforcement of any of the rights of theAdministrative Agent hereunder, and (iii) the failure by any Grantor toperform or observe any of the provisions hereof.

 

(vii)         Amendments; Etc.  No amendment or waiver of any provision ofthis Security Agreement nor consent to any departure by any Grantor herefromshall be effective unless the same shall be in writing and executed by theaffected Grantor and the Administrative Agent, and then such waiver or consentshall be effective only in the specific instance and for the specific purposefor which given.

 

(viii)        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.

 

(ix)           Continuing SecurityInterest; Transfer of Interest.  ThisSecurity Agreement shall create a continuing security interest in theCollateral and, unless expressly released by the Administrative Agent, shall (a) remain in full force and effect until the indefeasible payment in full in cashof the Secured Obligations, the termination or expiration of all Commitments,and the termination of the Credit Agreement in writing, (b) be bindingupon 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 Lenders andtheir respective successors, transferees, and assigns.  Without limiting the generality of theforegoing clause, when any Lender assigns or otherwise transfers any interestheld by it under the Credit Agreement or other Loan Document to any otherPerson pursuant to the terms of the Credit Agreement or such other LoanDocument, that other Person shall thereupon become vested with all the benefitsheld by such Lender under this Security Agreement.

 

(x)            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.

 

(xi)           Choice of Law.  This Security 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 Collateral aregoverned by the laws of a jurisdiction other than the state of Texas.

 

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

 

I-15

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(xiii)         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.

 

(xiv)        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 Senior Credit Agreementshall be controlling.

 

(xv)         Additional Grantors*.*  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 thisSecurity Agreement as a Grantor upon becoming a Subsidiary of theBorrower.  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 aGrantor hereunder with the same force and effect as if originally named as aGrantor herein.  The execution anddelivery of any instrument adding an additional Grantor as a party to thisSecurity Agreement shall not require the consent of any other Grantorhereunder.  The rights and obligations ofeach Grantor hereunder shall remain in full force and effect notwithstandingthe addition of any new Grantor as a party to this Security Agreement.

 

(xvi)        **Subordinationand Intercreditor Agreement. Reference is made to the Subordination and Intercreditor Agreement,dated as of December 17, 2008 (as amended, restated, supplemented orotherwise modified from time to time, the “Subordination and ***IntercreditorAgreement***”), among Union Bank of California, N.A., asSenior Agent, and ****UnionBanCal Equities, Inc.,****************as Subordinated Agent, and certain other persons, party or that maybecome party thereto from time to time.  Notwithstandinganything herein to the contrary, this Security Agreement, the Liens grantedto the Administrative Agent pursuant to this Security Agreement and the exerciseof any right or remedy by the Administrative Agent or any of the Lendershereunder are subject to the provisions of the Subordination and IntercreditorAgreement.  In the event of any conflictbetween the terms of the Subordination and Intercreditor Agreement and thisSecurity Agreement, the terms of the Subordination and Intercreditor Agreementshall govern and control**.

 

(xvii)       Entire Agreement.  **THIS SECURITY AGREEMENTAND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES ANDMAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, ORSUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

** **

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

 

[SIGNATURE PAGES FOLLOW]

 

I-16

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

** **
| ** ** | **GRANTORS:**                                  |
|------------|------------------------------------------------|
| ** ** | ** **                                     |
| ** ** | **CANO  PETROLEUM, INC.**                      |
|       |                                           |
|       | By:                                            |   |
|       |                                           | Ben Daitch |
|       |                                           | Senior Vice President and Chief Financial |
|       |                                           | Officer |
|       |                                           |   |
|       |                                           |   |
| ** ** | **LADDER  COMPANIES, INC.**                    |
| ** ** | **SQUARE  ONE ENERGY, INC.**                   |
| ** ** | **W.O.  ENERGY, INC.**                         |
| ** ** | **W.O.  ENERGY OF NEVADA, INC.**               |
| ** ** | **CANO  PETRO OF NEW MEXICO, INC.**            |
|       |                                           |
|       |                                           |   |
|       | Each by:                                       |   |
|       |                                           | Ben Daitch |
|       |                                           | Vice President and Chief Financial  Officer |
|       |                                           |   |
|       |                                           |   |
| ** ** | **W.O.  OPERATING COMPANY, LTD.**              |
|       | By: WO Energy, Inc., its general  partner |
|       |                                           |
|       |                                           |
|       | By:                                            |   |
|       |                                           | Ben Daitch |
|       |                                           | Vice President and Chief Financial |
|       |                                           | Officer |
|       |                                           |   |
|       |                                           |   |
| ** ** | **W.O.  PRODUCTION COMPANY, LTD.**             |
|       | By: WO Energy, Inc., its general  partner |
|       |                                           |
|       |                                           |
|       | By:                                            |   |
|       |                                           | Ben Daitch |
|       |                                           | Vice President and Chief Financial |
|       |                                           | Officer |
|            |                                                |  |  |  |

 

I-17

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| ** ** | **ADMINISTRATIVE  AGENT:** |
|------------|----------------------------|
|       |                       |
|       | UNIONBANCAL EQUITIES, INC. |
|       |                       |
|       |                       |
|       | By:                        |   |
|       |                       | Ted A. McNulty |
|       |                       | Senior Vice President |
|       |                       |   |
|       |                       |
|       | By:                        |   |
|       |                       | Derrick Pan |
|       |                       | Vice President |

 

I-18

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**SCHEDULE 1**

**to Security Agreement**

 
| **Grantor:**                                        |   | Cano Petroleum, Inc.          |
|-----------------------------------------------------|--------|------------------------------------|
|                                                |   |                               |
| **Sole Jurisdiction of Formation / Filing:**        |   | Delaware                           |
|                                                |   |                               |
| **Type of Organization:**                           |   | Corporation                        |
|                                                |   |                               |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|                                                |   | Fort Worth, Texas 76102            |
|                                                |   |                               |
| **Organizational Number:**                          |   | 3664494                            |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 77-0635673                         |
|                                                |   |                               |
| **Prior Names:**                                    |   | Huron Ventures, Inc.          |
|                                                |   |                               |
| **Grantor:**                                        |   | Ladder Companies, Inc.        |
|                                                |   |                               |
| **Sole Jurisdiction of Formation / Filing:**        |   | Delaware                           |
|                                                |   |                               |
| **Type of Organization:**                           |   | Corporation                        |
|                                                |   |                               |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|                                                |   | Fort Worth, Texas 76102            |
|                                                |   |                               |
| **Organizational Number:**                          |   | 2097505                            |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 73-1282131                         |
|                                                |   |                               |
| **Prior Names:**                                    |   | d/b/a Ladder Energy Company        |
|                                                |   |                               |
| **Grantor:**                                        |   | Square One Energy, Inc.       |
|                                                |   |                               |
| **Sole Jurisdiction of Formation / Filing:**        |   | Texas                              |

 

I-19

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| **Type of Organization:**                           |   | Corporation                        |
|-----------------------------------------------------|--------|------------------------------------|
|                                                |   |                               |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|                                                |   | Fort Worth, Texas 76102            |
|                                                |   |                               |
| **Organizational Number:**                          |   | 800262012                          |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 81-0639886                         |
|                                                |   |                               |
| **Prior Names:**                                    |   | None.                              |
|                                                |   |                               |
| **Grantor:**                                        |   | WO Energy, Inc.               |
|                                                |   |                               |
| **Sole Jurisdiction of Formation / Filing:**        |   | Texas                              |
|                                                |   |                               |
| **Type of Organization:**                           |   | Corporation                        |
|                                                |   |                               |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|                                                |   | Fort Worth, Texas 76102            |
|                                                |   |                               |
| **Organizational Number:**                          |   | 113518200                          |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 75-2303966                         |
|                                                |   |                               |
| **Prior Names:**                                    |   | None.                              |
|                                                |   |                               |
| **Grantor:**                                        |   | W.O. Energy of Nevada, Inc.   |
|                                                |   |                               |
| **Sole Jurisdiction of Formation / Filing:**        |   | Nevada                             |
|                                                |   |                               |
| **Type of Organization:**                           |   | Corporation                        |
|                                                |   |                               |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|                                                |   | Fort Worth, Texas 76102            |
|                                                |   |                               |
| **Organizational Number:**                          |   | C20757-1996-001                    |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 88-0369151                         |

 

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| **Prior Names:**                                    |   | None.                               |
|-----------------------------------------------------|--------|-------------------------------------|
|                                                |   |                                |
| **Grantor:**                                        |   | W.O. Operating Company, Ltd.        |
|                                                |   |                                |
| **Sole Jurisdiction of Formation / Filing:**        |   | Texas                               |
|                                                |   |                                |
| **Type of Organization:**                           |   | Limited Partnership                 |
|                                                |   |                                |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200  |
|                                                |   | Fort Worth, Texas 76102             |
|                                                |   |                                |
| **Organizational Number:**                          |   | 9373210                             |
|                                                |   |                                |
| **Federal Tax Identification Number:**              |   | 75-2675224                          |
|                                                |   |                                |
| **Prior Names:**                                    |   | None.                               |
|                                                |   |                                |
| **Grantor:**                                        |   | W.O. Production Company, Ltd.       |
|                                                |   |                                |
| **Sole Jurisdiction of Formation / Filing:**        |   | Texas                               |
|                                                |   |                                |
| **Type of Organization:**                           |   | Limited Partnership                 |
|                                                |   |                                |
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200  |
|                                                |   | Fort Worth, Texas 76102             |
|                                                |   |                                |
| **Organizational Number:**                          |   | 9295410                             |
|                                                |   |                                |
| **Federal Tax Identification Number:**              |   | 75-2675222                          |
|                                                |   |                                |
| **Prior Names:**                                    |   | None.                               |
|                                                |   |                                |
| **Grantor:**                                        |   | Cano Petro of New Mexico, Inc. |
|                                                |   |                                |
| **Sole Jurisdiction of Formation / Filing:**        |   | Texas                               |
|                                                |   |                                |
| **Type of Organization:**                           |   | Corporation                         |

 

I-21

----

 
| **Address where records for Collateral are  kept:** |   | 801 Cherry Street, Suite 3200 |
|-----------------------------------------------------|--------|------------------------------------|
| ** **                                          |   | Fort Worth, Texas 76102            |
| ** **                                          |   |                               |
| **Organizational Number:**                          |   | TX 800782069                       |
|                                                |   |                               |
| **Federal Tax Identification Number:**              |   | 20-8564572                         |
|                                                |   |                               |
| **Prior Names:**                                    |   | None.                              |

 

I-22

----

 

Annex 1 to the

Security Agreement

 

SUPPLEMENTNO. [            ]  dated as of[               ](the “Supplement”), to the Subordinated Security Agreement dated as of December 17,2008 (as amended, supplemented or otherwise modified from time to time, the “SecurityAgreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”and individually, a “Grantor”) and UnionBanCal Equities, Inc., asadministrative agent (the “Administrative Agent”) for the ratablebenefit of itself, the Lenders (as defined below) (together with the Lenders,individually a “Secured Party”, and collectively, the “SecuredParties”).

 

E.             Reference is made tothat certain Subordinated Credit Agreement dated as of December 17, 2008by and among the Borrower, the lenders party thereto from time to time(individually, a “Lender”, and collectively, the “Lenders”), andthe Administrative Agent (as it may be amended, restated or otherwise modifiedfrom time to time, the “Credit Agreement”).

 

F.             Capitalized termsused herein and not otherwise defined herein shall have the meanings assignedto such terms in the Security Agreement and the Credit Agreement.

 

G.            The Grantors haveentered into the Security Agreement in order to induce the Lenders to makeAdvances.  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) of the SecurityAgreement provides that additional Subsidiaries of the Borrower may becomeGrantors under the Security Agreement by execution and delivery of aninstrument in the form of this Supplement. The undersigned Subsidiary of the Borrower (the “New Grantor”) isexecuting this Supplement in accordance with the requirements of the CreditAgreement to become a Grantor under the Security Agreement.

 

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

 

(j)            In accordance with Section 17(j) 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 of the foregoing, the NewGrantor, as security for the payment and performance in full of the SecuredObligations (as defined in the Security Agreement), does hereby create andgrant to the Administrative Agent, its successors and assigns, for the benefitof the Secured Parties, their successors and assigns, a continuing securityinterest in and lien on all of the New Grantor’s right, title and interest inand to the Collateral (as defined in the Security Agreement) 

 

I-23

----

 

of the New Grantor.  Each reference to a “Grantor” in the SecurityAgreement shall be deemed to include the New Grantor.  The Security Agreement is hereby incorporatedherein by reference.

 

(k)           The New Grantorrepresents and warrants to the Administrative Agent that this Supplement has beenduly authorized, executed and delivered by it and constitutes its legal, validand binding obligation, enforceable against it in 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)).

 

(l)            This Supplement may beexecuted in counterparts, each of which shall constitute an original, but allof 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 Grantor and theAdministrative Agent.  Delivery of anexecuted signature page to this Supplement by facsimile transmission shallbe as effective as delivery of a manually signed counterpart of thisSupplement.

 

(m)          The New Grantor herebyrepresents and warrants that set forth on Schedule 1 attached hereto are(a) its sole jurisdiction of formation and type of organization, (b) thelocation of all records concerning its Accounts, General Intangibles, or anyother Collateral, (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.

 

(n)           Except as expresslysupplemented hereby, the Security Agreement shall remain in full force andeffect.

 

(o)           THIS SUPPLEMENT SHALLBE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THESTATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THESECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANYPARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHERTHAN THE STATE OF TEXAS.

 

(p)           In case any one or moreof the provisions contained in this Supplement should be held invalid, illegalor unenforceable in any respect, neither party hereto shall be required tocomply with 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.  Theparties hereto shall endeavor in good-faith negotiations to replace theinvalid, illegal or unenforceable provisions with valid provisions the economiceffect of which comes as close as possible to that of the invalid, illegal orunenforceable provisions.

 

I-24

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(q)           All communications andnotices hereunder shall be in writing and given as provided in the SecurityAgreement.  All communications andnotices hereunder to the New Grantor shall be given to it at the address setforth under its signature hereto.

 

(r)            The New Grantor agreesto reimburse the Administrative Agent for its reasonable out-of-pocket expensesin connection with this Supplement, including the reasonable fees, othercharges and disbursements of counsel for the Administrative Agent.

** **

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

** **

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

 

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

 

 
|   | [Name of New  Grantor], |
|--------|-------------------------|
|   |                    |
|   | By:                     |   |
|   | Name:                   |   |
|   | Title:                  |   |
|   |                    |   |
|   |                    |   |
|   | Address:                |   |
|   |                    |
|   |                    |
|   |                    |
|   | [ADMINISTRATIVE AGENT]  |
|   |                    |
|   |                    |
|   | By:                     |   |
|   | Name:                   |   |
|   | Title:                  |   |
|   |                    |
|   | By:                     |   |
|   | Name:                   |   |
|   | Title:                  |   |
|        |                         |  |  |  |  |

 

I-25

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Schedule 1

Supplement No.     

to the Security Agreement

 
| **New Grantor:**                                   | [GRANTOR]                                                                                                                                                                                                                                                                                                                |
|----------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Jurisdiction of Formation / Filing:**            | [STATE]                                                                                                                                                                                                                                                                                                                  |
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Type of Organization:**                          | [ENTITY  TYPE]                                                                                                                                                                                                                                                                                                           |
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Address where records for Collateral are kept:** | [ADDRESS]                                                                                                                                                                                                                                                                                                                |
| ** **                                         | [CITY,  STATE ZIP]                                                                                                                                                                                                                                                                                                       |
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Organizational Number:**                         |                                                      |   |
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Federal Tax Identification Number:**             |                                                      |   |
|                                               |                                                                                                                                                                                                                                                                                                                     |
| **Prior  Names:**                                  |                                                      |   |

 

I-26

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** **

**EXHIBIT J**

** **

**FORM OF TRANSFERLETTERS**

 

_________________, 20__

 
|   |   |   |
|--------|--------|--------|
|   |   |   |
|   |   |   |

 

Re:          Agreement dated _____________,by and between_______________, as Seller, and_______________________, asBuyer (the “Contract”).

 

Ladies and Gentlemen:

 

Cano Petroleum, Inc., aDelaware corporation (“Mortgagor”), has executed a mortgage or deed oftrust dated effective as of December 17, 2008 (“Mortgage”) for thebenefit of UnionBanCal Equities, Inc., as Administrative Agent for theratable benefit of itself and the Lenders (as defined in the Mortgage), whichMortgage has been recorded in the Real Property Records of the Counties listedon the attached Exhibit A. A copy of the Mortgage is enclosed. Theproperties covered by the Mortgage include all of the oil, gas and otherhydrocarbons and/or other minerals attributable to the above-referencedContract to which we understand you are currently a party and includes the wellor wells listed on the attached Exhibit A with respect to which youare remitting proceeds of production to the Mortgagor. Your division order orlease numbers for such well or wells are set forth on the attached Exhibit A.

 

Pursuant to Article IIIof the Mortgage, the Administrative Agent is entitled to receive all of Mortgagor’sinterest in all Hydrocarbons (as defined in the Mortgage), which are covered bythe above-referenced Contract, all products obtained or processed therefrom,and the revenues and proceeds attributable thereto. The assignment of theHydrocarbons, products and proceeds was effective as of 7:00 A.M.,(Dallas, Texas Time), on December 17, 2008 (“Effective Date”). TheLenders and the Administrative Agent, 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 445 South Figueroa Street, 21st Floor,Los Angeles, California 90071, Telephone (213) 236-7881, Facsimile: (213)236-7619, Attention: Maggie Elower, or to such other address of which we maysubsequently notify you in writing. If you require the execution of transfer ordivision orders, please forward the transfer or division orders to theAdministrative Agent at its address at indicated above, Attention: MaggieElower.

 

J-1

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Should you have anyquestions in connection with any of the foregoing, please do not hesitate tocontact us.

 
|   | Very truly yours,                                    |
|--------|------------------------------------------------------|
|   |                                                 |
|   |                                                 |
|   | UNIONBANCAL EQUITIES, INC., as  Administrative Agent |
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   |                                                 |
|   | Name:                                                |   |
|   |                                                 |
|   | Title:                                               |   |
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   |                                                 |
|   | Name:                                                |   |
|   |                                                 |
|   | Title:                                               |   |
|   |                                                 |
|   |                                                 |
|   | CANO PETROLEUM, INC., a Delaware  corporation        |
|   |                                                 |
|   |                                                 |
|   | By:                                                  |   |
|   |                                                 |
|   | Name:                                                |   |
|   |                                                 |
|   | Title:                                               |   |
|        |                                                      |  |  |  |

 

J-2

----

** **

**EXHIBIT A**

 
| **Name  and Location of Well** | ** ** | **Division Order or Lease No.** |
|--------------------------------|------------|---------------------------------|
| ** **                     | ** ** | ** **                      |
| ** **                     | ** ** | ** **                      |
| ** **                     | ** ** | ** **                      |

 

J-3

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Exhibit K — Form of Borrower’s Counsel Opinion

 

December 17,2008

 

UnionBanCalEquities, Inc.

 Administrative Agent and a Lender, and all the

 other Lenders party to the Subordinated CreditAgreement

 described below

445South Figueroa Street

21st Floor

LosAngeles, California 90071

 

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 Subordinated Credit Agreement (herein socalled) dated as of even date herewith, executed by Borrower, UnionBanCalEquities, Inc., as Administrative Agent (in such capacity, the *“**Administrative Agent**”*), andeach financial institution party thereto as a Lender (collectively, the “***Lenders***”). Capitalizedterms used herein shall, unless otherwise provided herein, have the respectivemeanings set forth in the Subordinated 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 theSubordinated Credit Agreement unless otherwise indicated (collectively, the “***Transaction Documents***”):

 

(a)           the Subordinated Credit Agreement;

 

(b)           the Subordinated Note, executed byBorrower and payable to the order of the Administrative Agent in the originalprincipal amount of $25,000,000;

 

(c)           the Subordinated Security Agreement,executed by the Loan Parties, in favor of the Administrative Agent (the ***“Security Agreement”***);

 

K-1

----

 

(d)           the Subordinated Guaranty, executedby the Guarantors, in favor of the Administrative Agent, for the benefit of theBeneficiaries (as defined therein);

 

(e)           the Subordinated Deed of Trust,Security Agreement, Financing Statement, Fixture Filing and Assignment ofProduction dated December 17, 2008, executed by Square One, WOEN, WOE,Operating and Production as Mortgagors made to Ted A. McNulty as the Trusteefor the benefit of the Administrative Agent as the Mortgagee (the “***Texas Mortgage***”);

 

(f)            the Subordinated Mortgage, Line ofCredit Mortgage, Assignment, Security Agreement, Fixture Filing and FinancingStatement dated December 17, 2008, executed by Borrower and Ladder asMortgagors in favor of the Administrative Agent as the Mortgagee (the “***Oklahoma Mortgage***”**)**;

 

(g)           the Subordinated Mortgage, Line ofCredit Mortgage, Assignment, Security Agreement, Fixture Filing and FinancingStatement dated December 17, 2008, executed by CPNM as Mortgagor in favorof the Administrative Agent as the Mortgagee (the “***New Mexico Mortgage***”**)**;

 

(h)           the Subordinated Pledge Agreement,executed by Borrower, WOEN, and WOE in favor of the Administrative Agent (the “***Pledge Agreement***”);

 

(j)            the Subordination and IntercreditorAgreement;

 

(j)            the UCC-1 Financing Statementreflecting Borrower as debtor and the Administrative Agent as secured party, tobe 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, tobe 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,to be 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, to befiled in 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,to be filed in the Office of the Secretary of State of Texas (the “***Operating Financing Statement***”);

 

K-2

----

 

(o)           the UCC-1 Financing Statementreflecting Production as debtor and the Administrative Agent as secured party,to be filed in the Office of the Secretary of State of Texas (the “***Production Financing Statement***”);

 

(p)           the UCC-1 Financing Statementreflecting CPNM as debtor and the Administrative Agent as secured party, to befiled in 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, tobe 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, tobe filed in certain Oklahoma county filing offices (the “***Ladder County Financing Statement***”);

 

(s)           the UCC-1 Financing Statementreflecting CPNM as debtor and the Administrative Agent as secured party, to befiled in 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,to be filed in the County Filing Offices, as defined below (the “***Square One County FinancingStatement***”);

 

(u)           the UCC-1 Financing Statementreflecting WOE as debtor and the Administrative Agent as secured party, to befiled in the County Filing Offices (the “***WOE County Financing Statement***”);

 

(v)           the UCC-1 Financing Statementreflecting Operating as debtor and the Administrative Agent as secured party,to be filed in the County Filing Offices (the “***Operating County Financing Statement***”);

 

(w)          the UCC-1 Financing Statementreflecting Production as debtor and the Administrative Agent as secured party,to be filed in the County Filing Offices (the “***Production County Financing Statement***”,and together with the Square One County Financing Statement, the WOE CountyFinancing Statement, the Operating County Financing Statement, the BorrowerCounty Financing Statement, the Ladder County Financing Statement and the CPNMCounty Financing Statement, collectively, the “***CountyFinancingStatements***”).

 

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***

 

K-3

----

 

***Collateral***” shall meanthe real property, real estate, leases, and fixtures described in the TexasMortgage. As used herein, the term “***Pledged Collateral***” shall mean the “PledgedCollateral” as defined in the 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 ofIncorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutionsadopted by the Board of Directors of Ladder authorizing the execution,delivery, and performance of the Transaction Documents executed by Ladder, and (iv) theincumbency of officers of Ladder;

 

(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 ofSquare One, certified by the 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, 2008certifying (i) the Articles of Incorporation of Square One, (ii) theBylaws of Square One, (iii) Resolutions adopted by the Board of Directorsof Square One authorizing the execution, delivery, and performance of theTransaction Documents executed by Square One, and (iv) the incumbency ofofficers 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***”);

 

K-4

----

 

(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;

 

(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***”);

 

K-5

----

 

(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 of LimitedPartnership of Production, (ii) the Agreement of Limited Partnership ofProduction, (iii) Resolutions adopted by Board of Directors of WOE, actingin its capacity as the sole General Partner of Production, authorizing theexecution, delivery, and performance of the Transaction Documents executed bythe officers of WOE, acting in its capacity as the sole General Partner ofProduction, and (iv) the incumbency of officers of WOE;

 

(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***”);

 

(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 offact material to such opinions, we have, without independent verification oftheir accuracy, relied to the extent we deem reasonably appropriate upon therepresentations and warranties of the Loan Parties made in the TransactionDocuments and upon their respective Officer’s Certificates.

 

K-6

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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 of the 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 and New Mexico Mortgages) constitute the valid, binding, andenforceable agreement of all the parties thereto (other than the Loan Parties),and (h) the correctness and accuracy of all the facts set forth in allcertificates 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. We advise you that we have not reviewed, andhave not devoted substantive attention to, any other agreements (other thanthose described on ***Exhibit A***)for the purposes of rendering the opinion set forth in ***Paragraph 13***below. We have made no examination of, and express no opinion with respect to,any financial, accounting, or similar covenant or provision contained in theMaterial Agreements to the extent that any such covenant or provision wouldrequire a determination as to any financial or accounting matters. In addition,we express no opinion as to any breach of any confidentiality provisioncontained in any Material Agreement caused by any Transaction Document orBorrower’s or applicable Loan Party’s actions pursuant thereto or incontemplation thereof. We note that some of the Material Agreements are notgoverned 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 note that some of the Material Agreementsare not assignable by Borrower or applicable Loan Party (the “***Non-Assignable Material Agreements***”).As a result, to the extent that the Collateral includes Borrower’s orapplicable Loan Party’s rights under the Material Agreements, we have reliedupon *Section 9.408(a) *ofthe UCC (defined below). We note that any assignment of Non-Assignable MaterialAgreements is subject to the limitations set forth in *Section 9.408(d) *of the 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. Theopinions expressed herein are limited to the *UniformCommercial Code* as adopted in the State of Texas (the “***Texas UCC***”) and theState of

 

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Delaware(the “***Delaware UCC***”)in effect on the date hereof (the Texas UCC and the Delaware UCC arecollectively, 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 obligation arises from or is a result of such Lender’s ownfraud, negligence, or willful misconduct or to the extent that suchindemnification 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 

 

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Partyagainst any Lender arising out of, or in any way related to, the TransactionDocuments; (ix) purport to provide remedies inconsistent with applicablelaw; or (x) providing that decisions by a party are conclusive or may bemade in its sole discretion; (b) whether a court would grant specificperformance or any other equitable remedy with respect to enforcement of anyprovision contained in the Transaction Documents; (c) the enforceabilityof any provision in the Transaction Documents that purports to appoint an agentfor service of process or establish or otherwise affect jurisdiction, venue,evidentiary standards, or limitation periods, or procedural rights in any suitor other proceeding; (d) the enforceability of any provision in theTransaction Documents that purports to waive, subordinate, or otherwiserestrict or deny access to rights, benefits, claims, causes of action, orremedies that cannot be waived, subordinated, or otherwise restricted ordenied; (e) the enforceability of any provision in the TransactionDocuments that allows any Lender to accelerate the maturity date of theobligations evidenced by the Transaction Documents, to institute foreclosureproceedings, or to exercise any similar right, without notice to the person orentity signatory thereto or bound thereby; or (f) the enforceability ofany provision contained in the Transaction Documents relating to theappointment of a receiver, to the extent that appointment of a receiver isgoverned 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.

 

7.             We express no opinion regarding (a) theenforceability of provisions of the Texas Mortgage that grant the right tobecome 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 provided pursuantto *Texas Property Code Annotated Sections51.003-51.005*, which rights are not waivable under Texas law, or (c) compliancewith, or the effect of land use, zoning, building, sanitation, environmental,or ecological laws or regulations affecting the Real Property Collateral.

 

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**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 Subordinated 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 Subordinated 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 Subordinated 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.

 

4.             *Section 2.09(d) *ofthe Subordinated 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 

 

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Partiesor the transactions contemplated by the Transaction Documents.  In addition, we express no opinion as to thefollowing: (a) federal securities laws and regulations administered by theSecurities and Exchange Commission, State of Texas “Blue Sky” laws andregulations, and laws and regulations relating to commodity (and other) futuresand indices and other similar instruments; or (b) the statutes andordinances, the administrative decisions, and the rules and regulations ofcounties, towns, municipalities, and special political subdivisions (whethercreated or enabled through legislative action at the federal, state, orregional level), and any judicial decisions to the extent they deal with any ofthe 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 and securityinterests, or (d) the creation or perfection of the Administrative Agent’sliens and security interests in Collateral that is not described in theTransaction 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 Financing Statements.

 

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 thecertificate of 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 

 

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areso noted, (b) the continuation of any security interests and perfection ofany security interests in Collateral consisting of proceeds is limited to theextent set forth in the UCC, (c) continuation statements complying withthe UCC must be filed not more than six (6) months prior to the expirationof a five (5) year period dating from the date of filing of the FinancingStatements (or otherwise within the time permitted by the UCC) and subsequentcontinuation statements must be filed within six (6) months prior to theend of each subsequent five (5) year period and amendments or supplementsto the Financing Statements and/or additional financing statements may berequired to be filed in the event of a change of name, identity, or corporatestructure of any of the Delaware Loan Parties or any of the Texas Loan Parties,or if any of the Delaware Loan Parties or any of the Texas Loan Parties changesthe jurisdiction of its incorporation, organization, or formation, as the casemay be, (d) in the case of property which becomes Collateral after thedate hereof, *Section 552*ofthe *Federal Bankruptcy Code*limitsthe extent to which property acquired by a debtor after the commencement of acase under the *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 statement will perfect a security interest in chattelpaper, 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, except as explicitly set forth in ***Paragraph18*** under the heading “Opinions” below.  We express no opinion as to the priority ofany security interest in the Pledged Collateral or portions thereof that are orbecome subject to liens for taxes, assessments, levies, fees and othergovernmental and similar charges, and other claims of any type of anygovernmental authority, in each case that may be afforded priority over thesecurity interests of Lender by Applicable Law.

 

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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 yourpermission, that (a) that no party executing the Security Agreement is abroker or securities 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.

 

**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 existingunder the laws of the State of Texas.

 

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8.             CPNM is, based solely upon, and asof the date of, CPNM’s Existence Certificate and CPNM’s Good StandingCertificate, validly existing and in good standing under the laws of the Stateof Texas.

 

9.             Borrower and Ladder each have thecorporate power and authority under the *GeneralCorporation Law of the State of Delaware* and their respectiveCertificates of Incorporation and Bylaws to execute, deliver, and perform theirobligations under the Transaction Documents. The Transaction Documents to which Borrower and/or Ladder is a 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 and New Mexico Mortgages) to which any Loan Party is a party areenforceable against such Loan Party in accordance with their 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 Material Agreement.

 

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.

 

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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 theexecution and delivery by the Loan Parties of the Transaction Documents, exceptfor 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 shall have a perfectedsecurity interest, for the benefit of the Secured Parties (as defined in theSecurity Agreement) in the Collateral in which a security interest may beperfected 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 shall have a perfected security interest in thePledged Collateral.

 

19.           The form of theTexas Mortgage and the form of the description of the Mortgaged Property (assuch term is defined therein and so used herein) situated in the State of Texasare in satisfactory form for filing and recording in the offices described in ***Paragraph 20*** below.

 

20.           Upon filing and recording of the TexasMortgage with the real property records of the Texas counties, as applicable,the Texas Mortgage will create a valid and binding perfected mortgage lien infavor of the Administrative Agent on the Real Property Collateral.  The proper recordings of the Texas Mortgagein the real property records of the respective Texas counties identifiedtherein (the “***County Filing Offices***”) arethe only filings, recordings, and registrations necessary to publish notice andpreserve the liens of the Texas Mortgage in the Real Property Collateral.  The Texas Mortgage creates a valid securityinterest in favor of the Administrative Agent to the extent provided therein inall right, title and interest of each Loan Party thereto in that portion of the“Collateral” (as defined therein) (other than the Real Property Collateral)which constitutes personal property. Upon the proper filing in the real property records of the County FilingOffices of the County Financing Statements, 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 Mortgage) that ispersonal property and constitutes fixtures located on the Real PropertyCollateral or as-extracted collateral from such Real Property Collateral inwhich a security interest may be perfected by filing a financing statementsubject, however, with respect to proceeds, to Section 9.315 of the TexasUCC.

 

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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 TexasMortgage or the consummation of the transactions contemplated therein.  Except for the payment of recording or filingfees and taxes associated with filings made with respect to the FinancingStatements and the Texas Mortgage, no other taxes or governmental fees orcharges are required under Applicable Law in connection with (a) thecreation, perfection, or the recording of the Liens purported to be created bythe Transaction Documents, (b) the execution and delivery of any of theTransaction Documents, or (c) the obtaining of credit under theSubordinated Credit Agreement.

 

22.           The Advances to bemade on the date hereof and the application of the proceeds thereof as providedfor in the Subordinated Credit Agreement do not violate Regulation U or X ofthe 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 Subordinated Credit Agreement) without our prior writtenconsent, (b) is rendered solely for your information and assistance inconnection with the above transaction, and may not be relied upon by any otherperson (other than your permitted successors and assigns under the SubordinatedCredit Agreement) or for any other purpose without our prior written consent, (c) isrendered as of the date hereof, and we undertake no, and hereby disclaim anykind of obligation to advise you of any changes for any new developments thatmight affect any matters or opinions set forth herein, and (d) is limitedto the matters stated herein and no opinions may be inferred or implied beyondthe matters expressly stated herein.

 
| Sincerely,                |
|---------------------------|
|                      |
| **HAYNES AND BOONE, LLP** |

 

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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 Planeffective December 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.

 

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

 

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