exv10w1



 




Exhibit 10.1


CREDIT AGREEMENT




AMONG




APPROACH RESOURCES INC. AS BORROWER,




THE FROST NATIONAL BANK




AND THE INSTITUTIONS NAMED HEREIN




AS LENDERS,




AND




THE FROST NATIONAL BANK




AS ADMINISTRATIVE AGENT




JANUARY 18, 2008




$200,000,000 REVOLVING CREDIT




 









 





TABLE OF CONTENTS




	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page No.
	1.	 	Definitions	 	 	1	 
	2.	 	Commitments of Lenders	 	 	10	 
	 

	 	(a)
	 	Terms of Commitment
	 	 	10	 
	 

	 	(b)
	 	Procedure for Borrowing
	 	 	10	 
	 

	 	(c)
	 	Letters of Credit
	 	 	11	 
	 

	 	(d)
	 	Procedure for Obtaining Letters of Credit
	 	 	12	 
	 

	 	(e)
	 	Outstanding Letters of Credit
	 	 	12	 
	 

	 	(f)
	 	Voluntary Reduction of Commitment
	 	 	12	 
	 

	 	(g)
	 	Mandatory Borrowing Base Reductions	 	 	13	 
	 

	 	(h)
	 	Several Obligations
	 	 	13	 
	 

	 	(i)
	 	Type and Number of Advances
	 	 	13	 
	3.	 	Notes Evidencing Loans	 	 	13	 
	 

	 	(a)
	 	Form of Notes
	 	 	13	 
	 

	 	(b)
	 	Issuance of Additional Notes
	 	 	13	 
	 

	 	(c)
	 	Interest Rates
	 	 	14	 
	 

	 	(d)
	 	Payment of Interest
	 	 	14	 
	 

	 	(e)
	 	Payment of Principal
	 	 	14	 
	 

	 	(f)
	 	Payment to Lenders
	 	 	14	 
	 

	 	(g)
	 	Sharing of Payments, Etc
	 	 	14	 
	 

	 	(h)
	 	Non-Receipt of Funds by Agent
	 	 	14	 
	4.	 	Interest Rates	 	 	15	 
	 

	 	(a)
	 	Options.
	 	 	15	 
	 

	 	(b)
	 	Interest Rate Determination
	 	 	16	 
	 

	 	(c)
	 	Conversion Option
	 	 	16	 
	 

	 	(d)
	 	Recoupment
	 	 	16	 
	 

	 	(e)
	 	Interest Rates Applicable After Default
	 	 	16	 
	5.	 	Special Provisions Relating to Loans	 	 	17	 
	 

	 	(a)
	 	Unavailability of Funds or Inadequacy of Pricing
	 	 	17	 
	 

	 	(b)
	 	Change in Laws
	 	 	17	 
	 

	 	(c)
	 	Increased Cost or Reduced Return
	 	 	17	 
	 

	 	(d)
	 	Discretion of Lender as to Manner of Funding
	 	 	19	 
	 

	 	(e)
	 	Breakage Fees
	 	 	20	 
	6.	 	Collateral Security	 	 	20	 
	7.	 	Borrowing Base	 	 	21	 
	 

	 	(a)
	 	Initial Borrowing Base
	 	 	21	 
	 

	 	(b)
	 	Subsequent Determinations of Borrowing Base
	 	 	21	 
	8.	 	Unused Commitment Fee	 	 	23	 
	9.	 	Prepayments	 	 	23	 
	 

	 	(a)
	 	Voluntary Prepayments
	 	 	23	 
	 

	 	(b)
	 	Mandatory Prepayment For Borrowing Base Deficiency
	 	 	23	 
	10.	 	Representations and Warranties	 	 	24	 
	 

	 	(a)
	 	Organization and Qualification
	 	 	24	 
	 

	 	(b)
	 	Power and Authority
	 	 	24	 
	 

	 	(c)
	 	Binding Obligations
	 	 	24	 






i









 






	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page No.
	 

	 	(d)
	 	No Legal Bar or Resultant Lien
	 	 	24	 
	 

	 	(e)
	 	No Consent
	 	 	24	 
	 

	 	(f)
	 	Financial Condition
	 	 	25	 
	 

	 	(g)
	 	Liabilities
	 	 	25	 
	 

	 	(h)
	 	Litigation
	 	 	25	 
	 

	 	(i)
	 	Taxes; Governmental Charges
	 	 	25	 
	 

	 	(j)
	 	Titles, Etc
	 	 	25	 
	 

	 	(k)
	 	Defaults
	 	 	26	 
	 

	 	(l)
	 	Casualties; Taking of Properties
	 	 	26	 
	 

	 	(m)
	 	Use of Proceeds; Margin Stock
	 	 	26	 
	 

	 	(n)
	 	Location of Business and Offices
	 	 	27	 
	 

	 	(o)
	 	Compliance with the Law
	 	 	27	 
	 

	 	(p)
	 	No Material Misstatements
	 	 	27	 
	 

	 	(q)
	 	Not A Utility
	 	 	27	 
	 

	 	(r)
	 	ERISA
	 	 	27	 
	 

	 	(s)
	 	Intentionally Deleted
	 	 	27	 
	 

	 	(t)
	 	No Subsidiaries
	 	 	28	 
	 

	 	(u)
	 	Environmental Matters
	 	 	28	 
	 

	 	(v)
	 	Liens
	 	 	28	 
	 

	 	(w)
	 	Solvency
	 	 	28	 
	 

	 	(x)
	 	Insurance
	 	 	28	 
	11.	 	Conditions of Lending	 	 	29	 
	12.	 	Affirmative Covenants	 	 	31	 
	 

	 	(a)
	 	Financial Statements and Reports of Borrower, Guarantor
	 	 	31	 
	 

	 	(b)
	 	Hedging Report
	 	 	31	 
	 

	 	(c)
	 	Additional Information
	 	 	31	 
	 

	 	(d)
	 	Certificates of Compliance
	 	 	31	 
	 

	 	(e)
	 	Taxes and Other Liens
	 	 	32	 
	 

	 	(f)
	 	Compliance with Laws
	 	 	32	 
	 

	 	(g)
	 	Further Assurances
	 	 	32	 
	 

	 	(h)
	 	Performance of Obligations
	 	 	32	 
	 

	 	(i)
	 	Insurance
	 	 	33	 
	 

	 	(j)
	 	Accounts and Records
	 	 	33	 
	 

	 	(k)
	 	Right of Inspection
	 	 	33	 
	 

	 	(l)
	 	Notice of Certain Events
	 	 	33	 
	 

	 	(m)
	 	Environmental Reports and Notices
	 	 	34	 
	 

	 	(n)
	 	Compliance and Maintenance
	 	 	34	 
	 

	 	(o)
	 	Operation of Properties
	 	 	34	 
	 

	 	(p)
	 	Compliance with Leases and Other Instruments
	 	 	35	 
	 

	 	(q)
	 	Certain Additional Assurances Regarding Maintenance and
Operations of Properties
	 	 	35	 
	 

	 	(r)
	 	Sale of Certain Assets/Prepayment of Proceeds
	 	 	35	 
	 

	 	(s)
	 	Title Matters
	 	 	36	 
	 

	 	(t)
	 	Change of Principal Place of Business
	 	 	36	 
	 

	 	(u)
	 	Additional Collateral
	 	 	36	 
	13.	 	Negative Covenants	 	 	36	 






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	 	 	 	 	 	 	Page No.
	 

	 	(a)
	 	Negative Pledge
	 	 	36	 
	 

	 	(b)
	 	Current Ratio
	 	 	37	 
	 

	 	(c)
	 	Consolidations and Mergers
	 	 	37	 
	 

	 	(d)
	 	Limitations on Additional Indebtedness
	 	 	37	 
	 

	 	(e)
	 	Restricted Payments
	 	 	38	 
	 

	 	(f)
	 	Rate Management Transactions
	 	 	38	 
	 

	 	(g)
	 	Certain Transactions
	 	 	39	 
	 

	 	(h)
	 	Intentionally Deleted
	 	 	39	 
	 

	 	(i)
	 	Limitation on Investments and New Business
	 	 	39	 
	 

	 	(j)
	 	Limitation on Credit Extensions
	 	 	39	 
	 

	 	(k)
	 	Fiscal Year
	 	 	39	 
	 

	 	(l)
	 	Certain Agreements
	 	 	39	 
	 

	 	(m)
	 	Lines of Business
	 	 	39	 
	14.	 	Events of Default	 	 	39	 
	15.	 	Agent and Lenders	 	 	42	 
	 

	 	(a)
	 	Appointment and Authorization
	 	 	42	 
	 

	 	(b)
	 	Note Holders
	 	 	42	 
	 

	 	(c)
	 	Consultation with Counsel
	 	 	43	 
	 

	 	(d)
	 	Documents
	 	 	43	 
	 

	 	(e)
	 	Resignation or Removal of Agent
	 	 	43	 
	 

	 	(f)
	 	Responsibility of Agent
	 	 	43	 
	 

	 	(g)
	 	Independent Investigation
	 	 	45	 
	 

	 	(h)
	 	Indemnification
	 	 	45	 
	 

	 	(i)
	 	Benefit of Section 15
	 	 	45	 
	 

	 	(j)
	 	Pro Rata Treatment
	 	 	45	 
	 

	 	(k)
	 	Assumption as to Payments
	 	 	46	 
	 

	 	(l)
	 	Other Financings
	 	 	46	 
	 

	 	(m)
	 	Interests of Lenders
	 	 	46	 
	 

	 	(n)
	 	Investments
	 	 	46	 
	 

	 	(o)
	 	Delegation to Affiliates
	 	 	47	 
	 

	 	(p)
	 	Execution of Collateral Documents
	 	 	47	 
	 

	 	(q)
	 	Collateral Releases
	 	 	47	 
	16.	 	Exercise of Rights	 	 	47	 
	17.	 	Notices	 	 	47	 
	18.	 	Expenses	 	 	48	 
	19.	 	Indemnity	 	 	48	 
	20.	 	Non-Liability of Lenders	 	 	49	 
	21.	 	Governing Law	 	 	49	 
	22.	 	Invalid Provisions	 	 	49	 
	23.	 	Maximum Interest Rate	 	 	49	 
	24.	 	Amendments	 	 	50	 
	25.	 	Multiple Counterparts	 	 	50	 
	26.	 	Conflict	 	 	51	 
	27.	 	Survival	 	 	51	 
	28.	 	Parties Bound	 	 	51	 
	29.	 	Assignments and Participations	 	 	51	 






iii









 






	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page No.
	30.	 	Choice of Forum: Consent to Service of Process and Jurisdiction	 	 	53	 
	31.	 	Waiver of Jury Trial	 	 	53	 
	32.	 	Other Agreements	 	 	53	 
	33.	 	Financial Terms	 	 	53	 
	34.	 	Tri-Party Loan	 	 	53	 
	35.	 	USA Patriot Act Notice	 	 	53	 
	36.	 	Approach Resources I LP Credit Agreement	 	 	53	 






	 	 	 	 	 
	Exhibits
	 	 	 	 
	Exhibit “A”

	 	-
	 	Form of Notice of Borrowing
	Exhibit “B”

	 	-
	 	Form of Note
	Exhibit “C”

	 	-
	 	Form of Certificate of Compliance
	Exhibit “D”

	 	-
	 	Form of Assignment and Acceptance Agreement
	 
	 	 	 	 
	Schedules
	 	 	 	 
	Schedule 1

	 	-
	 	Liens
	Schedule 2

	 	-
	 	Financial Condition
	Schedule 2(e)

	 	-
	 	Existing Letters of Credit
	Schedule 3

	 	-
	 	Liabilities
	Schedule 4

	 	-
	 	Litigation
	Schedule 5

	 	-
	 	Environmental Matters






iv













 





CREDIT AGREEMENT




     THIS CREDIT AGREEMENT (the “Agreement”) executed as of January 18, 2008 by and among APPROACH
RESOURCES INC., a Delaware corporation (“Borrower”), and each of the financial institutions which
is a party hereto (as evidenced by the signature pages to this Agreement) or which may from time to
time become a party hereto pursuant to the provisions of Section 29 hereof or any successor or
permitted assignee thereof (collectively, “Lenders”, and individually, “Lender”), and THE FROST
NATIONAL BANK, a national banking association (“Frost”), as Administrative Agent (“Agent”).



WITNESSETH:




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



     1. Definitions. When used herein the terms “Agent”, “Agreement”, “Borrower”, “Frost”,
“Lender” and “Lenders”, shall have the meanings indicated above. When used herein the following
terms shall have the following meanings:



     Accounting Principles means generally accepted accounting principles in effect from
time to time, applied in a manner consistent with prior periods.



     Advance means a borrowing hereunder (i) made by some or all of Lenders on the same
Borrowing Date, or (ii) converted or continued by Lenders on the same date of conversion or
continuation, consisting, in either case, of the aggregate amount of the several Loans of the same
type and, in the case of Eurodollar Loans, for the same Interest Period.



     Affiliate means any Person which, directly or indirectly, controls, is controlled by
or is under common control with the relevant Person. For the purposes of this definition,
“control” (including, with correlative meanings, the terms “controlled by” and “under common
control with”), as used with respect to any Person, shall mean a member of the board of directors,
a partner or an officer of such Person, or any other Person with possession, directly or
indirectly, of the power to direct or cause the direction of the management and policies of such
Person, through the ownership (of record, as trustee, or by proxy) of voting shares, partnership
interests or voting rights, through a management contract or otherwise. Any Person owning or
controlling directly or indirectly ten percent or more of the voting shares, partnership interests
or voting rights, or other equity interest of another Person shall be deemed to be an Affiliate of
such Person.



     Applicable Rate means, for any day, with respect to any Base Rate Loan or Eurodollar
Loan, or with respect to the Unused Commitment Fees payable hereunder, as the case may be, the
applicable rate per annum set forth below under the caption “Base Rate Margin”, “Eurodollar Margin”
or “Unused Commitment Fee Rate”, as the case may be, based upon the Borrowing Base Usage applicable
on such date:



1









 





	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	Unused
	Borrowing Base	 	Eurodollar	 	Base Rate	 	Commitment
	Usage	 	Margin	 	Margin	 	Fee Rate
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	≥ 90%
	 	 	200	  b.p.	 	 	0	  b.p.	 	 	37.5	  b.p.
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	≥ 75% and < 90%
	 	 	175	  b.p.	 	 	0	  b.p.	 	 	37.5	  b.p.
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	≥ 50% and < 75%
	 	 	150	  b.p.	 	 	0	  b.p.	 	 	37.5	  b.p.
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	< 50%
	 	 	125	  b.p.	 	 	0	  b.p.	 	 	37.5	  b.p.
	 




Each change in the Applicable Rate shall apply during the period commencing on the effective date
of such change and ending on the date immediately preceding the effective date of the next change.




     Assignment and Acceptance means a document substantially in the form of Exhibit “D”
hereto.



     Available Commitment means, at any time, the Commitment then in effect minus the Total
Outstandings.



     Base Rate means, as of any date, a rate of interest per annum equal to the Prime Rate
for such date, plus the Applicable Rate.



     Base Rate Loan means any loan during any period which bears interest based upon the
Base Rate or which would bear interest based upon the Base Rate if the Maximum Rate ceiling was not
in effect at that particular time.



     Borrowing Base means, as of any date, the value assigned by Lenders from time to time
to the Borrowing Base Properties pursuant to Section 7 hereof.



     Borrowing Base Deficiency is used herein as defined in Section 9(b) hereof.



     Borrowing Base Properties means the Oil and Gas Properties.



     Borrowing Date means the date elected by Borrower pursuant to Section 2(b) hereof for
an Advance on the Loan.



     Business Day means (i) with respect to any borrowing, payment or note selection of
Eurodollar Loans, a day (other than Saturdays or Sundays) on which banks are legally open for
business in Fort Worth, Texas and on which dealings in United States dollars are carried on in the
London interbank market, and (ii) for all other purposes a day (other than Saturdays and Sundays)
on which banks are legally open for business in Fort Worth, Texas.



     Capital Lease means any lease of property, real or personal, which would be
capitalized on a balance sheet of the lessee prepared in accordance with Accounting Principles.



2









 





     Change of Control means the acquisition by any Person or group of Persons acting
together, of a direct interest in more than a majority of the voting power of the voting stock of
or membership interests in Borrower, by way of merger or consolidation or otherwise.



     Collateral shall have the meaning assigned to in Section 6 hereof.



     Collateral Documents is used collectively to mean this Agreement, all Deeds of Trust,
Mortgages, Security Agreements, Assignments of Production and Financing Statements, the Guaranties
and other documents covering the Oil and Gas Properties and related personal property, equipment,
oil and gas inventory and proceeds of the foregoing and other collateral documents, all such
documents to be in form and substance reasonably satisfactory to Agent.



     Commitment means (A) for all Lenders, the lesser of (i) $200,000,000 or (ii) the
Borrowing Base, as reduced or increased from time to time pursuant to Sections 2 and 7 hereof, and
(B) as to any Lender, its obligation to make Advances hereunder in amounts not exceeding, in the
aggregate, an amount equal to such Lender’s Commitment Percentage times the total Commitment as of
any date. The Commitment of each Lender hereunder shall be adjusted from time to time to reflect
assignments made by such Lender pursuant to Section 29 hereof. Each reduction in the Commitment
shall result in a Pro Rata reduction in each Lender’s Commitment.



     Commitment Percentage means for each Lender the percentage set forth opposite the
Lender’s name on the signature page hereto. The Commitment Percentage of each Lender
hereunder shall be adjusted from time to time to reflect assignments made by such Lender pursuant
to Section 29 hereof.



     Consolidated Current Assets means, as of any date, the current assets which
would be reflected on a consolidated balance sheet of Borrower prepared as of such date in
accordance with Accounting Principles; provided that Borrower’s Consolidated Current Assets shall
include the Available Commitment, and Consolidated Current Assets shall not include the amount of
any non-cash items as a result of the application of Financial Accounting Standards Board Statement
No. 133 and any subsequent amendments thereto or the fair value of any Rate Management Transaction
or any non-hedge derivative contract (whether deemed effective or non-effective).



     Consolidated Current Liabilities means, as of any date, the current liabilities which
would be reflected on a consolidated balance sheet of Borrower prepared as of such date in
accordance with Accounting Principles, but excluding any liabilities as a result of the application
of Financial Accounting Standards Board Statement No. 133 and any subsequent amendments thereto or
the fair value of any Rate Management Transaction or any non-hedge derivative contract (whether deemed effective or non-effective).



     Current Ratio means the ratio of Consolidated Current Assets to Consolidated Current
Liabilities.



     Dollar or $ means United States dollars.



3









 





     Default means all the events specified in Section 14 hereof, regardless of whether
there shall have occurred any passage of time or giving of notice, or both, that would be necessary
in order to constitute such event as an Event of Default.



     Default Rate is used herein as defined in Section 4(e) hereof.



     Effective Date means the date of this Agreement.



     Eligible Assignee means any of (i) a Lender or any Affiliate of a Lender; (ii) a
commercial bank organized under the laws of the United States, or any state thereof, and having a
combined capital and surplus of at least $100,000,000; (iii) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic Cooperation and
Development, or a political subdivision of any such country, and having a combined capital and
surplus of at least $100,000,000.00, provided that such bank is acting through a branch or agency
located in the United States; and (iv) a Person that is primarily engaged in the business of
commercial lending and that (A) is a subsidiary of a Lender, (B) a subsidiary of a Person of which
a Lender is a subsidiary, or (C) a Person of which a Lender is a subsidiary; provided, however,
that no Affiliate of Borrower shall be an Eligible Assignee.



     Engineered Value is used herein as defined in Section 6 hereof.



     Environmental Certificate shall have the meaning assigned to it in Section 4.2 hereof.



     Environmental Laws means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C.A. §9601, et seq., the Resource Conservation and Recovery Act, as amended by the Hazardous
Solid Waste Amendment of 1984, 42 U.S.C.A. §6901, et seq., the Clean Water Act, 33 U.S.C.A. §1251,
et seq., the Clean Air Act, 42 U.S.C.A. §1251, et seq., the Toxic Substances Control Act, 15
U.S.C.A. §2601, et seq., The Oil Pollution Act of 1990, 33 U.S.G. §2701, et seq., and all other
laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, orders, permits and restrictions of any federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts, authorities, officials and
officers, domestic or foreign, relating to in any way the environment, preservation or reclamation
of natural resources, oil pollution, air pollution, water pollution, noise control and/or the
management, release or threatened release, handling, discharge, disposal or recovery of on-site or
off-site asbestos, radioactive materials, spilled or leaked petroleum products, distillates or fractions and industrial solid waste or
“hazardous substances” as defined by 42 U.S.C. § 9601, et seq., as amended, as each of the
foregoing may be amended from time to time.



     Environmental Liability means any claim, demand, obligation, cause of action, order,
violation, damage, injury, judgment, penalty or fine, cost of enforcement, cost of remedial action
or any other costs or expense whatsoever, contingent or otherwise, including reasonable attorneys’
fees and disbursements and any liability for cleanups, costs of environmental remediation, fines or
penalties, resulting from the violation or alleged violation of any Environmental Law or the
release of any substance into the environment which is required to be remediated by a regulatory
agency or governmental authority or the imposition of any



4









 







Environmental Lien (as hereinafter defined), which could reasonably be expected to individually or in the aggregate have a Material
Adverse Effect.



     Environmental Lien means a Lien in favor of any court, governmental agency or
instrumentality or any other Person (i) for any Environmental Liability or (ii) for damages arising
from or cost incurred by such court or governmental agency or instrumentality or other person in
response to a release or threatened release of asbestos or “hazardous substance” into the
environment, the imposition of which Lien could reasonably be expected to have a Material Adverse
Effect.



     ERISA means the Employee Retirement Income Security Act of 1974, as amended.



     Eurodollar Base Rate means the offered rate for the period equal to or greater than
the Interest Period for U.S. dollar deposits of not less than $1,000,000 as of 11:00 a.m. City of
London, England time two (2) Business Days prior to the first day of the Interest Period as shown
on the display designated as “British Bankers Association Interest Settlement Rates” on Telerate
for the purpose of displaying such rate. In the event such rate is not available on Telerate, then
such offered rate shall be the comparable rate designated by Reuters or, if such a comparable rate
is not designated by Reuters, such offered rate shall be otherwise independently determined by
Agent from another alternate, substantially independent source available to Agent (such as, but not
limited to, Bloomberg) or shall be calculated by Agent by substantially similar methodology as that
theretofore used to determine such offered rate.



     Eurodollar Loan means any Loan during any period which bears interest at the
Eurodollar Rate, or which would bear interest at such rate if the Maximum Rate ceiling was not in
effect at a particular time.



     Eurodollar Rate means, with respect to a Eurodollar Loan for the relevant Interest
Period, the sum of the quotient of (A) the Eurodollar Base Rate applicable to such Interest Period,
divided by (B) one minus the Reserve Requirement (expressed as a decimal) applicable to such
Interest Period. The Eurodollar Rate shall be rounded to the next higher multiple of 1/100th of
one percent if the rate is not such a multiple.



     Event of Default is used herein as defined in Section 14 hereof.



     Facility Termination Date means the Maturity Date.



     Federal Funds Effective Rate means, for any day, an interest rate per annum equal to
the weighted average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as published for such day
(or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day,
the average of the quotations at approximately 10:00 a.m. (Fort Worth, Texas time) on such day on
such transactions received by Agent from three (3) Federal funds brokers of recognized standing
selected by Agent in its sole discretion.



5









 





     Financial Statements means balance sheets, income statements, statements of cash flow,
stockholder equity and appropriate footnotes and schedules, prepared in accordance with Accounting
Principles.



     Guarantors means Approach Oil & Gas Inc., a Delaware corporation, Approach Oil & Gas
(Canada) Inc., an Alberta, Canada corporation (the “Corporate Guarantors”), and Approach Resources
I, LP, a Texas limited partnership.



     Indebtedness with respect to Borrower or any Guarantor means as of any date, all
liabilities and contingent liabilities which would be reflected on a balance sheet and related
notes thereto of Borrower prepared as of such date in accordance with the Accounting Principles,
including without limitation: (i) all obligations for money borrowed; (ii) all obligations under
conditional sale or other title retention agreements and all obligations issued or assumed as full
or partial payment for property, whether or not any such obligations represent obligations for
borrowed money; (iii) all indebtedness secured by any lien existing on property owned or acquired
by Borrower or any Guarantor subject to any such lien, whether or not the obligations secured
thereby shall have been assumed but only to the extent of the value of the property so secured;
(iv) the proportionate share of Borrower or any Guarantor in all obligations, direct or indirect,
to any joint venture, partnership or other entity of which Borrower or any Guarantor is a member;
(v) all obligations under guaranties, note purchase agreements and other documents having similar
effect; (vi) all obligations for accounts payable or trade credit; (vii) indebtedness of any joint
venture, partnership or other Person for which Borrower or any Guarantor is directly or indirectly
liable; (viii) all obligations and indebtedness arising under a Hedge and (ix) all obligations
under capital leases, operating leases or any other leases only to the extent such leases would be
treated as indebtedness in accordance with the Accounting Principles.



     Interest Payment Date means the last day of each calendar quarter in the case of Base
Rate Loans and, in the case of Eurodollar Loans, the last day of the applicable Interest Period,
and if such Interest Period is longer than three (3) months, at three (3) month intervals following
the first day of such Interest Period.



     Interest Period means with respect to any Eurodollar Loan (i) initially, the period
commencing on the date such Eurodollar Loan is made and ending one (1), two (2), three
(3) or six (6) months thereafter as selected by Borrower pursuant to Section 4(a)(ii), and
(ii) thereafter, each period commencing on the day following the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending one (1), two (2), three (3) or six
(6) months thereafter, as selected by Borrower pursuant to Section 4(a)(ii); provided, however,
that (A) if any Interest Period would otherwise expire on a day which is not a Business Day, such
Interest Period shall expire on the next succeeding Business Day unless the result of such
extension would be to extend such Interest Period into the next calendar month, in which case such
Interest Period shall end on the immediately preceding Business Day, (B) if any Interest Period
begins on the last Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period) such Interest Period
shall end on the last Business Day of a calendar month, and (iii) any Interest Period which would
otherwise expire after the Maturity Date shall end on such Maturity Date.



     Letters of Credit is used herein as defined in Section 2(c) hereof.



6









 





     Lien means any mortgage, deed of trust, pledge, security interest, assignment,
encumbrance or lien (statutory or otherwise) of every kind and character.



     Loan Documents means this Agreement, the Notes, the Collateral Documents and all other
documents executed by Borrower with Agent or Lenders in connection with the transaction described
in this Agreement.



     Loans means the Revolving Loans.



     Material Adverse Effect means a material adverse effect on (i) the assets or
properties, liabilities, financial condition, business or operations of Borrower or any Guarantor,
(ii) the ability of Borrower or any Guarantor to carry out its businesses as of the date of this
Agreement or as proposed at the date of this Agreement to be conducted, (iii) the ability of
Borrower or any Guarantor to perform fully and on a timely basis its obligations under any of the
Loan Documents, (iv) the validity or enforceability of any of the Loan Documents or the rights and
remedies of Agent or Lenders thereunder or (v) the Collateral, the Liens on the Collateral created
pursuant to the Loan Documents or the priority of any such Lien. For purposes of this definition,
the phrase, “or any Guarantor” specifically excludes Approach Oil & Gas (Canada), Inc.



     Maturity Date means July 31, 2010.



     Maximum Rate is used herein as defined in Section 23 hereof.



     Notes means the Notes, substantially in the form of Exhibit “B” hereto issued or to be
issued hereunder to each Lender, respectively, to evidence the indebtedness to such Lender arising
by reason of the Advances on the Commitment, together with all modifications, renewals and
extensions thereof or any part thereof.



     Oil and Gas Properties means all oil, gas and mineral properties and interests and
related personal properties, in which Borrower or any Guarantor owns an interest.



     Payor is used herein as defined in Section 3(h) hereof.



     Permitted Liens means (i) royalties, overriding royalties, reversionary interests,
production payments and similar burdens; (ii) sales contracts or other arrangements for the sale of
production of oil, gas or associated liquid or gaseous hydrocarbons which would not (when
considered cumulatively with the matters discussed in clause (i) above) deprive Borrower or any
Guarantor of any material right in respect of Borrower’s or any Guarantor’s assets or properties
(except for rights customarily granted with respect to such contracts and arrangements); (iii)
statutory Liens for taxes or other assessments that are not yet delinquent (or that, if delinquent,
are being contested in good faith by appropriate proceedings, levy and execution thereon having
been stayed and continue to be stayed and for which Borrower has set aside on its books adequate
reserves in accordance with Accounting Principles); (iv) easements, rights of way, servitudes,
permits, surface leases and other rights in respect to surface operations, pipelines, grazing,
logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and
easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other
easements and rights of way on, over or in respect of Borrower’s or any Guarantor’s assets or
properties and that do not individually or in the aggregate cause a Material



7









 







Adverse Effect; (v) materialmen’s, mechanic’s, repairman’s, employee’s, vendor’s laborer’s warehousemen’s, landlord’s,
carrier’s, pipeline’s, contractor’s, sub-contractor’s, operator’s, non-operator’s (arising under
operating or joint operating agreements), and other Liens (including any financing statements filed
in respect thereof) incidental to obligations incurred by Borrower or any Guarantor in connection
with the construction, maintenance, development, transportation, processing, storage or operation
of Borrower’s or any Guarantor’s assets or properties to the extent not delinquent (or which, if
delinquent, are being contested in good faith by appropriate proceedings and for which Borrower has
set aside on its books adequate reserves in accordance with Accounting Principles); (vi) all
contracts, agreements and instruments, and all defects and irregularities and other matters
affecting Borrower’s or any Guarantor’s assets and properties which were in existence at the time
Borrower’s or any Guarantor’s assets and properties were originally acquired by Borrower or any
Guarantor and all routine operational agreements entered into in the ordinary course of business,
which contracts, agreements, instruments, defects, irregularities and other matters and routine
operational agreements are not such as to, individually or in the aggregate, interfere materially
with the operation, value or use of Borrower’s or any Guarantor’s assets and properties, considered
in the aggregate; (vii) Liens in connection with workmen’s compensation, unemployment insurance or
other social security, old age pension or public liability obligations; (viii) legal or equitable
encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding
or arising out of a judgment or award with respect to which an appeal is being prosecuted in good
faith and levy and execution thereon have been stayed and continue to be stayed; (ix) rights
reserved to or vested in any municipality, governmental, statutory or other public authority to
control or regulate Borrower’s or any Guarantor’s assets and properties in any manner, and all
applicable laws, rules and orders from any governmental authority; (x) landlord’s Liens; (xi) Liens
incurred pursuant to the Collateral Documents and Liens that secure obligations under Rate
Management Transactions permitted pursuant to Section 13(f) hereof; (xii) any inconsequential,
insignificant or immaterial Liens against any of the Oil and Gas Properties which do not interfere with or impair Borrower’s or any
Guarantor’s ownership of, or right or ability to receive proceeds of production from, such
property, and which, singularly or collectively with other inconsequential, insignificant or
immaterial Liens, do not result in a Material Adverse Effect on Borrower or any Guarantor; and
(xiii) Liens existing at the date of this Agreement which are identified in Schedule “1” hereto.



     Person means an individual, a corporation, a partnership, an association, a trust or
any other entity or organization, including a government or political subdivision or an agency or
instrumentality thereof.



     Plan means any plan subject to Title IV of ERISA and maintained by Borrower, or any
such plan to which Borrower is required to contribute on behalf of its employees.



     Pre-Approved Contracts means any contracts or agreements entered into in connection
with any Rate Management Transaction which are designed to hedge, provide a price floor for, or
swap crude oil or natural gas or otherwise sell up to 75%, or in the case of Rate Management
Transactions resulting in a floor price per barrel or mcf, not more than 100% of Borrower’s and
Guarantors’ Projected Production, (with oil and gas calculated separately) for Rate Management
Transactions with Termination Dates of no more than thirty-six (36) months.



8









 





     Prime Rate means the rate per annum equal to the Prime Rate announced from time to
time by Agent (which is not necessarily the lowest rate charged to any customer), changing when and
as said Prime Rate changes.



     Projected Production means the projected production from Borrower’s and Guarantors’
proved developed producing Oil and Gas Properties as of the date on which any calculation is made
as forecasted in the most recent engineering report provided to Lenders.



     Pro Rata or Pro Rata Part means for each Lender, (i) for all purposes where no Loan is
outstanding, such Lender’s Commitment Percentage and (ii) otherwise, the proportion which the
portion of the outstanding Loans owed to such Lender bears to the aggregate outstanding Loans owed
to all Lenders at the time in question.



     Rate Management Transaction means (i) any transaction (including an agreement with
respect thereto) now existing or hereafter entered into by Borrower, any Guarantor or any Affiliate
which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option,
equity or equity index swap, equity or equity index option, bond option, interest rate option,
forward exchange transaction, cap transaction, floor transaction, collar transaction, forward
transaction, currency swap transaction, cross-currency rate swap transaction, currency option or
any other similar transaction (including any option with respect to any of these transactions) or
any combination thereof, whether linked to one or more interest rates, foreign currencies,
commodity prices, equity prices or other financial measures and (ii) any swap, collar, floor, cap,
futures or other contract (including sales contracts with known prices) between Borrower,
any Guarantor and any Person which is intended to reduce or eliminate the risk of fluctuations
in the price of hydrocarbons, including, without limitation, the purchase or sale of any
hydrocarbons for future delivery, any transaction in a forward contract for the delivery of any
hydrocarbons, any physical or spot transaction in any hydrocarbons, or any transaction involving
the purchase or sale of an option on any of the foregoing.



     Redetermination Date is used herein as defined in Section 7(b) hereof.



     Regulation D means Regulation D of the Board of Governors of the Federal Reserve
System as from time to time in effect and any successor thereto and other regulation or official
interpretation of said Board of Governors relating to reserve requirements applicable to member
banks of the Federal Reserve System.



     Reimbursement Obligations means, at any time, the obligations of Borrower in respect
of all Letters of Credit then outstanding to reimburse amounts paid by any Lender in respect of any
drawing or drawings under a Letter of Credit.



     Release Price is used herein as defined in Section 12(r) hereof.



     Required Lenders means Lenders holding 66-2/3% or more of the Commitments or if one or
more of the Commitments has been terminated, Lenders holding 66-2/3% of the outstanding Loans.



     Required Payment is used herein as defined in Section 3(h) hereof.



9









 





     Reserve Requirement means, with respect to any Interest Period, the maximum aggregate
reserve requirement (including all basic, supplemental, marginal and other reserves) which is
imposed under Regulation D on Eurocurrency liabilities.



     Revolving Loan or Loans means an Advance or Advances made pursuant to Section 2(a)
hereof.



     Termination Date means, with respect to any Rate Management Transaction, the date of
expiration of that particular Rate Management Transaction.



     Total Outstandings means the total principal balance outstanding on the Notes at any
time plus (ii) the total face amount of all outstanding Letters of Credit, plus (iii) the total
amount of all unpaid Reimbursement Obligations.



     Tranche means a set of Eurodollar Loans made by Lenders at the same time and for the
same Interest Period.



     Unscheduled Redeterminations means a redetermination of the Borrowing Base made at any
time other than on the dates set for the regular semi-annual redetermination of the Borrowing Base
which are made (i) at the request of Borrower (but only once between Redetermination Dates) or (ii)
at the request of Required Lenders (but only once between Redetermination Dates).



     2. Commitments of Lenders.




     (a) Terms of Commitment. On the terms and conditions hereinafter set forth,
each Lender agrees severally to make Advances to Borrower from time to time during the
period beginning on the Effective Date and ending on the Maturity Date in such amounts as
Borrower may request up to an amount not to exceed, in the aggregate principal amount
advanced at any time, its Pro Rata Part of the Available Commitment. Subject to the terms
of this Agreement, Borrower may borrow, repay and reborrow at any time prior to the
Maturity Date. The obligation of Borrower hereunder shall be evidenced by this Agreement
and the Notes issued in connection herewith, said Notes to be as described in Section 3
hereof. Notwithstanding any other provision of this Agreement, no Advance shall be
required to be made hereunder if any Default or Event of Default (as hereinafter defined)
has occurred and is continuing. Each Advance under the Commitment shall be an aggregate
amount of at least $500,000 or any whole multiples of $100,000 in excess thereof.
Irrespective of the face amount of the Note or Notes, Lenders shall never have the
obligation to Advance any amount or amounts in excess of the Commitment.




     (b) Procedure for Borrowing. Whenever Borrower desires an Advance under the
Commitment, it shall give Agent telegraphic, telex, facsimile or telephonic notice (“Notice
of Borrowing”) of such requested Advance, which in the case of telephonic notice, shall be
promptly confirmed in writing. Each Notice of Borrowing shall be in the form of Exhibit
“A” attached hereto and shall be received by Agent not later than 11:00 a.m. Fort Worth,
Texas time, on (i) the Borrowing Date in the case of the Base Rate Loan, or (ii) three
Business Days prior to any proposed Borrowing Date in the case of Eurodollar Loans. Each
Notice of Borrowing shall specify (i) the Borrowing Date (which shall be a Business Day),
(ii) the principal amount to be borrowed, (iii) the portion of the



10









 







Advance constituting Base Rate Loans and/or Eurodollar Loans and (iv) if any portion of the proposed Advance is
to constitute Eurodollar Loans, the initial Interest Period selected by Borrower pursuant
to Section 4 hereof to be applicable thereto. Upon receipt of such Notice, Agent shall
advise each Lender thereof; provided, that if Lenders have received at least one (1) day’s
notice of such Advance prior to funding of a Base Rate Loan, or at least three (3) days’
notice of each Advance prior to funding in the case of a Eurodollar Loan, each Lender shall
provide Agent at its office at 777 Main Street, Suite 500, Fort Worth, Texas, not later
than 1:00 p.m., Fort Worth, Texas time, on the Borrowing Date, in immediately available
funds, its Pro Rata share of the requested Advance, but the aggregate of all such fundings
by each Lender shall never exceed such Lender’s Commitment. Not later than 2:00 p.m., Fort
Worth, Texas time, on the Borrowing Date, Agent shall make available to Borrower at the
same office, in like funds, the aggregate amount of such requested Advance. Neither Agent
nor any Lender shall incur any liability to Borrower in acting upon any Notice of Borrowing
referred to above which Agent or such Lender believes in good faith to have been given by a
duly authorized officer or other person authorized to borrow on behalf of Borrower or for
otherwise acting in good faith under this Section 2(b). Upon funding of Advances by Lenders and such funds being made available to
Borrower in accordance with this Agreement, pursuant to any such Notice, Borrower shall
have effected Advances hereunder.




     (c) Letters of Credit. On the terms and conditions hereinafter set forth,
Agent shall from time to time during the period beginning on the Effective Date and ending
on the Maturity Date upon request of Borrower, issue standby and/or commercial Letters of
Credit for the account of Borrower, any Guarantor or any affiliate thereof (including
Approach Operating LLC) (the “Letters of Credit”) in such face amounts as Borrower may
request, but not to exceed in the aggregate face amount at any time outstanding ten percent
(10%) of the Borrowing Base then in effect. The face amount of all Letters of Credit
issued and outstanding hereunder shall be considered as Advances on the Commitment for
Borrowing Base purposes and all payments made by Agent on such Letters of Credit shall be
considered as Advances under the Notes. Each Letter of Credit issued for the account of
Borrower, any Guarantor or any affiliate thereof hereunder shall (i) be in favor of such
beneficiaries as specifically requested by Borrower, (ii) have an expiration date not
exceeding the earlier of (a) one year or (b) the Maturity Date, (iii) be in a minimum
amount of $25,000.00 and (iv) contain such other terms and provisions as may be reasonable
required by issuing Lender. Each Lender (other than Agent) agrees that, upon issuance of
any Letter of Credit hereunder, it shall automatically acquire a participation in Agent’s
liability under such Letter of Credit in an amount equal to such Lender’s Commitment
Percentage of such liability, and each Lender (other than Agent) thereby shall absolutely,
unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be
unconditionally obligated to Agent to pay and discharge when due, its Commitment Percentage
of Agent’s liability under such Letter of Credit. Borrower hereby unconditionally agrees
to pay and reimburse Agent for the amount of each demand for payment under any Letter of
Credit that is in substantial compliance with the provisions of any such Letter of Credit
at or prior to the date on which payment is to be made by Agent to the beneficiary
thereunder, without presentment, demand, protest or other formalities of any kind. Upon
receipt from any beneficiary of any Letter



11









 







of Credit of any demand for payment under such
Letter of Credit, Agent shall promptly notify Borrower of the demand and the date upon
which such payment is to be made by Agent to such beneficiary in respect of such demand.
Upon receipt of such notice from Agent, Borrower shall advise Agent whether or not it
intends to borrow hereunder to finance its obligations to reimburse Agent, and if so,
submit a Notice of Borrowing as provided in Section 2(b) hereof. If Borrower fails to so
advise Agent and thereafter fails to reimburse Agent, Agent shall notify each Lender of the
demand and the failure of Borrower to reimburse Agent, and each Lender shall reimburse
Agent for its Commitment Percentage of each such draw paid by Agent and unreimbursed by
Borrower. All such amounts paid by Agent and/or reimbursed by Lenders shall be treated as
an Advance or Advances under the Commitment, which Advances shall be immediately due and
payable and shall bear interest at the Maximum Rate. Borrower agrees to pay Agent for the
benefit of Lenders commissions for issuing the Letters of Credit (calculated separately for
each Letter of Credit) in an amount equal to the greater of (i) $500 or, (ii) one
percent (1.00%) of the maximum face amount of the Letter of Credit. Such commissions
will be calculated on the basis of a year consisting of 360 days.




     (d) Procedure for Obtaining Letters of Credit. The amount and date of
issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the
Commitments shall be designated by Borrower’s written request delivered to Agent at least
three (3) Business Days prior to the date of such issuance, renewal, extension or
reissuance. Concurrently with or promptly following the delivery of the request for a
Letter of Credit, Borrower shall execute and deliver to Agent an application and agreement
with respect to the Letter of Credit, said application and agreement to be in the form used
by Agent (in the event that there is any conflict between the terms of any such application
and agreement for any Letter of Credit and this Agreement, the terms of this Agreement
shall prevail). Agent shall not be obligated to issue, renew, extend or reissue any Letter
of Credit if (i) the amount thereon when added to the face amount of the outstanding
Letters of Credit plus any Reimbursement Obligations exceeds ten percent (10%) of the
Borrowing Base or (ii) the amount thereof when added to the Total Outstandings would exceed
the Commitment.





     (e) Outstanding Letters of Credit. On the Effective Date, the
Letters of Credit listed on Schedule “2(e)” shall be deemed to have been issued under this
Agreement by Agent, without payment of any fees otherwise due upon the issuance of a Letter
of Credit, and Agent shall be deemed, without further action by any party hereto, to have
sold to each Lender, and each Lender shall be deemed, without further action by any party
hereto, to have purchased from Agent, a participation, to the extent of such Lender’s Pro
Rata Part, in such Letters of Credit.



     (f) Voluntary Reduction of Borrowing Base. Subject to the provisions of
Section 5(c) hereof, Borrower may at any time, or from time to time, upon not less than
three (3) Business Days’ prior written notice to Agent, reduce the Borrowing Base;
provided, however, that (i) each reduction in the Borrowing Base must be in the amount of
$1,000,000 or more, in increments of $1,000,000 and (ii) each reduction must be



12









 







accompanied by a prepayment of the Notes in the amount by which the Total Outstandings exceed the
Borrowing Base as reduced pursuant to this Section 2(f).




     (g) Mandatory Borrowing Base Reductions. The Borrowing Base shall be reduced
from time to time by an amount of any prepayment required by Section 12(r) hereof upon the
sale of assets. If, as a result of any such reduction in the Borrowing Base, the Total
Outstandings ever exceed the Borrowing Base then in effect, Borrower shall make the
mandatory prepayment of principal required pursuant to Section 9(b) hereof.




     (h) Several Obligations. The obligations of Lenders under the Commitments are
several and not joint. The failure of any Lender to make an
Advance required to be made by it shall not relieve any other Lender of its obligation
to make its Advance, and no Lender shall be responsible for the failure of any other Lender
to make the Advance to be made by such other Lender. No Lender shall be required to lend
hereunder any amount in excess of its legal lending limit.




     (i) Type and Number of Advances. Any Advance on the Commitment may be a Base
Rate Loan or a Eurodollar Loan, or a combination thereof, as selected by Borrower pursuant
to Section 4 hereof. The total number of Tranches which may be outstanding at any time
shall never exceed five (5).



     3. Notes Evidencing Loans. The loans described above in Section 2 shall be evidenced by
promissory notes of Borrower as follows:




     (a) Form of Notes. The Loans shall be evidenced by a Note or Notes in the
aggregate face amount of $200,000,000, and shall be in the form of Exhibit “B” hereto with
appropriate insertions. Notwithstanding the face amount of the Notes, the actual
principal amount due from Borrower to Lenders on account of the Notes, as of any date of
computation, shall be the sum of Advances then and theretofore made on account thereof,
less all principal payments actually received by Lenders in collected funds with respect
thereto. Although the Notes may be dated as of the Effective Date, interest in respect
thereof shall be payable only for the period during which the loans evidenced thereby are
outstanding and, although the stated amount of the Notes may be higher, the Notes shall be
enforceable, with respect to Borrower’s obligation to pay the principal amount thereof,
only to the extent of the unpaid principal amount of the Loans. Irrespective of the face
amount of the Notes, no Lender shall ever be obligated to advance on the Commitment any
amount in excess of its Commitment then in effect.




     (b) Issuance of Additional Notes. At the Effective Date there shall be
outstanding Notes in the aggregate face amount of $200,000,000 payable to the order of
Lenders. From time to time new Notes may be issued to other Lenders as such
Lenders become parties to this Agreement. Upon request from Agent, Borrower shall execute
and deliver to Agent any such new or additional Notes. From time to time as new Notes are
issued Agent shall require that each Lender exchange its Note(s) for newly issued Note(s)
to better reflect the extent of each Lender’s Commitments hereunder.



13









 






     (c) Interest Rates. The unpaid principal balance of the Notes shall bear
interest from time to time as set forth in Section 4 hereof.




     (d) Payment of Interest. Interest on the Notes shall be payable on each
Interest Payment Date unless earlier due in whole or in part as a result of an
acceleration of the amount due as a result of an Event of Default or pursuant to the
mandatory prepayment provisions of Section 9(b) or 9(c) hereof.




     (e) Payment of Principal. Principal of the Loans shall be due and payable to
Agent for the ratable benefit of Lenders on the Maturity Date unless earlier due
in whole or in part as a result of an acceleration of the amount due or pursuant to the
mandatory prepayment provisions of Section 9(b) or 9(c) hereof.




     (f) Payment to Lenders. Each Lender’s Pro Rata Part of payment or prepayment
of the Loans shall be directed by wire transfer to such Lender by Agent at the address
provided to Agent for such Lender for payments no later than 2:00 p.m., Fort Worth, Texas,
time on the Business Day such payments or prepayments are deemed hereunder to have been
received by Agent; provided, however, in the event that any Lender shall have failed to
make an Advance as contemplated under Section 2 hereof (a “Defaulting Lender”) and Agent
or another Lender or Lenders shall have made such Advance, payment received by Agent for
the account of such Defaulting Lender or Lenders shall not be distributed to such
Defaulting Lender or Lenders until such Advance or Advances shall have been repaid in full
to Lender or Lenders who funded such Advance or Advances. Any payment or prepayment
received by Agent at any time after 12:00 noon, Fort Worth, Texas, time on a Business Day
shall be deemed to have been received on the next Business Day. Interest shall cease to
accrue on any principal as of the end of the day preceding the Business Day on which any
such payment or prepayment is deemed hereunder to have been received by Agent. If Agent
fails to transfer any principal amount to any Lender as provided above, then Agent shall
promptly direct such principal amount by wire transfer to such Lender.




     (g) Sharing of Payments, Etc. If any Lender shall obtain any payment
(whether voluntary, involuntary, or otherwise) on account of the Loans (including, without
limitation, any set-off) which is in excess of its Pro Rata Part of payments on the Loans,
as the case may be, obtained by all Lenders, such Lender shall purchase from the other
Lenders such participation as shall be necessary to cause such purchasing Lender
to share the excess payment Pro Rata with each of them; provided that, if all or any
portion of such excess payment is thereafter recovered from such purchasing Lender, the
purchase shall be rescinded and the purchase price restored to the extent of the recovery.
Borrower agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section may, to the fullest extent permitted by law, exercise all of its
rights of payment (including the right of offset) with respect to such participation as
fully as if such Lender were the direct creditor of Borrower in the amount of such
participation.




     (h) Non-Receipt of Funds by Agent. Unless Agent shall have been notified by
a Lender or Borrower (the “Payor”) prior to the date on which such Lender is to



14









 







make payment to Agent of the proceeds of a Loan to be made by it hereunder Borrower is to make
a payment to Agent for the account of one or more of Lenders, as the case may be (such
payment being herein called the “Required Payment”), which notice shall be effective upon
receipt, that Payor does not intend to make the Required Payment to Agent, Agent
may assume that the Required Payment has been made and may, in reliance upon such assumption (but
shall not be required to), make the amount thereof available to the intended recipient on
such date and, if Payor has not in fact made the Required Payment to Agent, the recipient
of such payment shall, on demand, pay to Agent the amount made available to it together
with interest thereon in respect of the period commencing on the date such amount was made
available by Agent until the date Agent recovers such amount at the rate applicable to
such portion of the applicable Loan.



     4. Interest Rates.




     (a) Options.




     (i) Base Rate Loans. On all Base Rate Loans Borrower agrees to pay
interest on the Notes calculated on the basis of a year consisting of 365 days or
366 days in a leap year, as the case may be, and for the actual number of days
elapsed. with respect to the unpaid principal amount of each Base Rate Loan from
the date the proceeds thereof are made available to Borrower until maturity
(whether by acceleration or otherwise), at a varying rate per annum equal to the
lesser of (i) the Maximum Rate, or (ii) the Base Rate plus the Applicable
Rate. Subject to the provisions of this Agreement as to prepayment, the principal
of the Notes representing Base Rate Loans shall be payable as specified in Section
3(e) hereof and the interest in respect of each Base Rate Loan shall be payable on
each Interest Payment Date applicable thereto. Past due principal and, to the
extent permitted by law, past due interest in respect to each Base Rate Loan, shall
bear interest, payable on demand, at a rate per annum equal to the Default Rate.




     (ii) Eurodollar Loans. On all Eurodollar Loans Borrower agrees to pay
interest calculated on the basis of a year consisting of 365 days or 366 days in a
leap year, as the case may be, and for the actual number of days elapsed. with
respect to the unpaid principal amount of each Eurodollar Loan from the date the
proceeds thereof are made available to Borrower until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser of (i)
the Maximum Rate, or (ii) the Eurodollar Rate plus the Applicable Rate. Subject to
the provisions of this Agreement with respect to prepayment, the principal of the
Notes shall be payable as specified in Section 3(e) hereof and the interest with
respect to each Eurodollar Loan shall be payable on each Interest Payment Date
applicable thereto. Past due principal and, to the extent permitted by law, past
due interest shall bear interest, payable on demand, at a rate per annum equal to
the Default Rate. Upon three (3) Business Days’ written notice prior to the making
by Lenders of any Eurodollar Loan (in the case of the initial Interest Period
therefor) or the expiration date of each succeeding Interest Period (in the case of
subsequent Interest Periods therefor), Borrower shall have the option,



15









 







subject to compliance by Borrower with all of the provisions of this Agreement, as long as no Event of Default exists, to specify whether the Interest
Period commencing on any such date shall be a one (1), two (2), three (3) or six
(6) month period, subject to availability. If Agent shall not have received timely
notice of a designation of such Interest Period as herein provided, Borrower shall
be deemed to have elected to convert all then maturing Eurodollar Loans to Base
Rate Loans.




     (b) Interest Rate Determination. Agent shall determine each interest rate
applicable to the Loans hereunder. Agent shall give prompt written notice to Borrower and
Lenders of each rate of interest so determined and its determination thereof shall be
conclusive absent error.




     (c) Conversion Option. Borrower may elect from time to time (i) to convert
all or any part of its Eurodollar Loans to Base Rate Loans by giving Agent irrevocable
notice of such election in writing prior to 10:00 a.m. (Fort Worth, Texas time) on the
conversion date and such conversion shall be made on the requested conversion date,
provided that any such conversion of a Eurodollar Loan shall only be made on the last day
of the Interest Period with respect thereto, and (ii) to convert all or any part of its
Base Rate Loans to Eurodollar Loans by giving Agent irrevocable written notice of such
election no later than three (3) Business Days prior to the proposed conversion and such
conversion shall be made on the requested conversion date or, if such requested conversion
date is not a Business Day, on the next succeeding Business Day. Any such conversion shall
not be deemed to be a prepayment of any of the loans for purposes of this Agreement or the
Notes.




     (d) Recoupment. If at any time the applicable rate of interest selected
pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the Maximum Rate, thereby
causing the interest on the Notes to be limited to the Maximum Rate, then any subsequent
reduction in the interest rate so selected or subsequently selected shall not reduce the
rate of interest on the Notes below the Maximum Rate until the total amount of interest
accrued on the Notes equals the amount of interest which would have accrued on the Notes if
the rate or rates selected pursuant to Sections 4(a)(i) or (ii), as the case may be, had at
all times been in effect.




     (e) Interest Rates Applicable After Default. Notwithstanding anything to the
contrary contained in this Section 4, during the continuance of an Event of Default the
Required Lenders may, at their option, by notice from Agent to Borrower (which notice may
be revoked at the option of the Required Lenders notwithstanding the provisions of Section
15 hereof, which requires all Lenders to consent to changes in interest rates) declare that
no Advance may be made as, converted into, or continued as a Eurodollar Loan. During the
continuance of an Event of Default, the Required Lenders, may, at their option, by notice
from Agent to Borrower (which notice may be revoked at the option of Required Lenders
notwithstanding the provisions of Section 15 hereof, which requires all Lenders to consent
to changes in interest rates) declare that (i) each Eurodollar
Loan shall bear interest for the remainder of the applicable Interest Period at the
rate otherwise applicable to such Interest Period plus two percent (2%) per annum and



16









 







(ii) each Base Rate Loan shall bear interest at the rate otherwise applicable to such Base Rate
Loan plus two percent (2%), provided that, during the continuance of an Event of Default
under Section 14(g) or 14(h), the interest rate set forth in clauses (i) and (ii) above
(the “Default Rate”) shall be applicable to all outstanding Loans without any election or
action on the part of Agent or any Lender.



     5. Special Provisions Relating to Loans.




     (a) Unavailability of Funds or Inadequacy of Pricing. In the event that, in
connection with any proposed Eurodollar Loan, Agent reasonably determines, which
determination shall, absent manifest error, be final, conclusive and binding upon all
parties, due to changes in circumstances since the date hereof, adequate and fair means do
not exist for determining the Eurodollar Rate or such rate will not accurately reflect the
costs to Lenders of funding a Eurodollar Loan for such Interest Period, Agent shall give
notice of such determination to Borrower and Lenders, whereupon, until Agent notifies
Borrower and Lenders that the circumstances giving rise to such suspension no longer exist,
the obligations of Lenders to make, continue or convert Loans into Eurodollar Loans shall
be suspended, and all Loans to Borrower shall be Base Rate Loans during the period of
suspension.




     (b) Change in Laws. If at any time hereafter any new law or any change in
existing laws or in the interpretation of any new or existing laws shall make it unlawful
for any Lender to make or continue to maintain or fund Eurodollar Loans hereunder, then
such Lender shall promptly notify Borrower in writing and such Lender’s obligation to make,
continue or convert Loans into Eurodollar Loans under this Agreement shall be suspended
until it is no longer unlawful for such Lender to make or maintain Eurodollar Loans. Upon
receipt of such notice, Borrower shall either repay the outstanding Eurodollar Loans owed
to such Lender, without penalty, on the last day of the current Interest Periods (or, if
any Lender may not lawfully continue to maintain and fund such Eurodollar Loans,
immediately), or Borrower may convert such Eurodollar Loans at such appropriate time to
Base Rate Loans.




     (c) Increased Cost or Reduced Return.




     (i) If, after the date hereof, the adoption of any applicable law,
rule, or regulation, or any change in any applicable law, rule, or
regulation, or any change in the interpretation or administration thereof
by any governmental authority, central bank, or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Lender with any request or directive (whether or not having the force of
law) of any such governmental authority, central bank, or comparable
agency:




     (A) shall subject such Lender to any tax, duty, or
other charge with respect to any Eurodollar Loans, its
Notes, or its obligation to make Eurodollar Loans, or
change the basis of taxation of any amounts payable to
such



17









 







Lender under this Agreement or its Notes in respect
of any Eurodollar Loan (other than franchise taxes and
taxes imposed on or measured by the overall net income of
such Lender);




     (B) shall impose, modify, or deem applicable any
reserve, special deposit, assessment, or similar
requirement (other than reserve requirements, if any,
taken into account in the determination of the Eurodollar
Rate) relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, such Lender, including the Commitment of
such Lender hereunder; or




     (C) shall impose on such Lender or on the London
interbank market any other condition affecting this
Agreement or its Notes or any of such extensions of
credit or liabilities or commitments;





and the result of any of the foregoing is to increase the cost to such
Lender of making, converting into, continuing, or maintaining any
Eurodollar Loan or to reduce any sum received or receivable by such Lender
under this Agreement or its Notes with respect to any Eurodollar Loan,
then Borrower shall pay to such Lender on demand such amount or amounts as
will reasonably compensate such Lender for such increased cost or
reduction. If any Lender requests compensation by Borrower under this
Section 5(c)(i), Borrower may, by notice to such Lender (with a copy to
Agent), suspend the obligation of such Lender to make or continue
Eurodollar Loans, or to convert all or part of the Base Rate Loans owing
to such Lender to Eurodollar Loans, until the event or condition giving
rise to such request ceases to be in effect (in which case the provisions
of Section 5(c)(i) shall be applicable); provided that such suspension
shall not affect the right of such Lender to receive the compensation so
requested.




     (ii) If, after the date hereof, any Lender shall have reasonably
determined that the adoption of any applicable law, rule, or regulation
regarding capital adequacy or any change therein or in the interpretation
or administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration thereof, or any
request or directive regarding capital adequacy (whether or not having the
force of law) of any such governmental authority, central bank, or
comparable agency, has or would have the effect of reducing the rate of
return on the capital of such Lender or any corporation controlling such
Lender as a consequence of such Lender’s obligations hereunder to a level
below that which such Lender or such corporation could have achieved but
for such adoption, change, request, or directive (taking into



18









 







consideration its policies with respect to capital adequacy), then from
time to time upon demand Borrower shall pay to such Lender such additional
amount or amounts as will reasonably compensate such Lender for such
reduction. If any Lender requests compensation by Borrower under this
Section 5(c)(ii), Borrower may, by notice to such Lender (with a copy to
Agent), suspend the obligation of such Lender to make or continue
Eurodollar Loans, or to convert all or part of the Base Rate Loans owing
to such Lender to Eurodollar Loans, until the event or condition giving
rise to such request ceases to be in effect (in which case the provisions
of Section 5(c)(ii) shall be applicable); provided that such suspension
shall not affect the right of such Lender to receive the compensation so
requested.




     (iii) Each Lender shall promptly notify Borrower and Agent of any
event of which it has knowledge, occurring after the date hereof, which
will entitle such Lender to compensation pursuant to this Section 5(c) and
will designate a separate lending office, if applicable, if such
designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the judgment of such Lender, be otherwise
disadvantageous to it. Any Lender claiming compensation under this
Section 5(c) shall furnish to Borrower and Agent a statement setting forth
the additional amount or amounts to be paid to it hereunder which shall be
conclusive in the absence of manifest error. In determining such amount,
such Lender may use any reasonable averaging and attribution methods.




     (iv) Any Lender giving notice to Borrower through Agent pursuant to
this Section 5(c) shall give to Borrower a statement signed by an officer
of such Lender setting forth in reasonable detail the basis for, and the
calculation of such additional cost, reduced payments or capital
requirements, as the case may be, and the additional amounts required to
compensate such Lender therefor.




     (v) Within five (5) Business Days after receipt by Borrower of any
notice referred to in this Section 5(c), Borrower shall pay to Agent for the account of Lender issuing such notice such
additional amounts as are required to compensate such Lender for the
increased cost, reduced payments or increased capital requirements
identified therein, as the case may be.




     (vi) Failure or delay on the part of any Lender to demand
compensation pursuant to this Section shall not constitute a waiver of any
such Lender’s right to demand such compensation.




     (d) Discretion of Lender as to Manner of Funding. Notwithstanding any
provisions of this Agreement to the contrary, each Lender shall be entitled to fund and
maintain its funding of all or any part of its Loan in any manner it sees fit, it being
understood, however, that for the purposes of this Agreement all determinations



19









 







hereunder shall be made as if each Lender had actually funded and maintained each Eurodollar Loan
through the purchase of deposits having a maturity corresponding to the last day of the
Interest Period applicable to such Eurodollar Loan and bearing an interest rate at the
applicable interest rate for such Interest Period.




     (e) Breakage Fees. Without duplication under any other provision hereof, if
any Lender incurs any loss, cost or expense including, without limitation, any loss of
profit and loss, cost, expense or premium reasonably incurred by reason of the liquidation
or re-employment of deposits or other funds acquired by such Lender to fund or maintain any
Eurodollar Loan or the relending or reinvesting of such deposits or amounts paid or prepaid
to Lenders as a result of any of the following events other than any such occurrence as a
result in the change of circumstances described in Sections 5(a) and (b):




     (i) any payment, prepayment or conversion of a Eurodollar Loan on a
date other than the last day of its Interest Period (whether by
acceleration, prepayment or otherwise);




     (ii) any failure to make a principal payment of a Eurodollar Loan on
the due date thereof; or




     (iii) any failure by Borrower to borrow, continue, prepay or convert
to a Eurodollar Loan on the dates specified in a notice given pursuant to
Section 2(b) or 4(c) hereof;





then Borrower shall pay to such Lender such amount as will reimburse such Lender for such
loss, cost or expense. If any Lender makes such a claim for compensation, it shall furnish
to Borrower and Agent a statement setting forth the amount of such loss, cost or expense in
reasonable detail (including an explanation of the basis for and the computation of such
loss, cost or expense) and the amounts shown on such statement shall be conclusive and
binding absent manifest error.



     6. Collateral Security.




     (a) To secure performance by Borrower of its obligations under this Agreement and the
Notes, Borrower and Guarantors shall grant to Agent in its capacity as such Agent under
this Agreement for the ratable benefit of Lenders hereunder, a first priority security
interest in and Lien (and only Lien, except for Permitted Liens) on certain of the Oil and
Gas Properties of Borrower and Guarantors as may be selected by Agent, in its capacity as
such Agent under this Agreement, and the oil, gas and mineral production therefrom or
attributable thereto, and in all operating agreements and oil or gas purchase contracts
(now existing or hereafter arising) relating to such Oil and Gas Properties and in related
personal properties, fixtures and other properties, as evidenced by mortgages, deeds of
trust, assignments of production, security agreements, general security agreements,
indentures, and other documents to be executed by Borrower and Guarantors and delivered to
or on behalf of Agent, in its capacity as such Agent under this Agreement for the ratable
benefit of Lenders. Obligations arising from agreements arising from Rate Management
Transactions between Borrower and one or more of Lenders or



20









 







an Affiliate of any of Lenders shall be secured by the Collateral covering the Oil and Gas Properties on a pari passu
basis with the indebtedness and obligations of Borrower under the Loan Documents. Once
agreements arising from Rate Management Transactions involving one or more Lenders, or an
Affiliate of any Lender, are entered into, and pursuant to this provision become secured by
the Collateral on a pari passu basis, said Collateral shall continue to secure such
obligations until such agreements are no longer in force and effect irrespective of whether
Lender involved in such agreement ceases to be a Lender under this Agreement. All Oil and
Gas Properties and other collateral in which Borrower and Guarantors grant or hereafter
grant to Agent for the ratable benefit of Lenders, a first and prior Lien (to the
satisfaction of Agent) in accordance with this Section 6, as such properties and interests
are from time to time constituted, are hereinafter collectively called the “Collateral”.




     (b) The granting and assigning of such security interests and Liens by Borrower and
Guarantors shall be pursuant to Collateral Documents in form and substance reasonably
satisfactory to Agent. Concurrently with the delivery of each of the Collateral Documents
or within a reasonable time thereafter, Borrower and Guarantors shall have furnished or
caused to be furnished to Agent mortgage and title opinions and other title information
reasonably satisfactory to Agent with respect to the title and Lien status of Borrower’s
and Guarantors’ interests in not less than 75% of the Engineered Value of the mortgaged
Borrowing Base Properties. “Engineered Value” for this purpose shall mean future net
revenues discounted at the discount rate being used by Agent as of the date of any such
determination utilizing the pricing parameters used in the engineering report furnished to
Agent pursuant to Sections 7 and 12 hereof. Borrower will cause to be executed and
delivered to Agent, in the future, additional Collateral Documents if Agent reasonably
deems such are necessary to insure perfection or maintenance of Lenders’ security interests
and Liens in not less than 80% of the Engineered Value of the Oil and Gas Properties which
are included in the Borrowing Base then in effect.




     (c) Guarantors shall unconditionally guarantee the Notes pursuant to a guaranty
agreement in form and substance satisfactory to Agent.



     7. Borrowing Base.




     (a) Initial Borrowing Base. At the Effective Date, the Borrowing Base shall
be $75,000,000.




     (b) Subsequent Determinations of Borrowing Base. Subsequent determinations of
the Borrowing Base shall be made by Lenders semi-annually on or before April 1 and October
1 of each year beginning April 1, 2008 (each “Redetermination Date”) or as Unscheduled
Redeterminations. No later than March 1 of each year (for the April 1 Redetermination Date
of such year) Borrower shall furnish to Lenders an engineering report in form and substance
reasonably satisfactory to Agent prepared by DeGolyer and MacNaughton or such other
independent petroleum engineering firm acceptable to Agent, said engineering report to
utilize economic and pricing parameters used by Agent as established from time to time,
together with such other information, reports and data concerning the value of Borrowing
Base Properties as Agent shall deem reasonably



21









 







necessary to determine the value of such Borrowing Base Properties. The engineering report prepared for the April 1 Redetermination
Date shall be prepared as of the preceding January 1 of such year and the engineering
report prepared for the October 1 Redetermination Date shall be prepared as of July 1 of
such year. In addition to the scheduled semi-annual Borrowing Base Redeterminations,
Borrower and Lenders may each request one Unscheduled Redetermination between
Redetermination Dates. By September 1 of each year (for the October 1 Redetermination Date
for such year) beginning September 1, 2008, or within thirty (30) days after either (i)
receipt of notice from Agent that Lenders require an Unscheduled Redetermination, or (ii)
Borrower gives notice to Agent of its desire to have an Unscheduled Redetermination
performed, in each case Borrower shall furnish to Lenders an engineering report prepared by
a petroleum engineer employed by Borrower and updating the most recent engineering report
delivered to Lenders hereunder, in form and substance reasonably satisfactory to Agent,
said engineering report to utilize economic and pricing parameters used by Agent as
established from to time, together with such other information, reports and data concerning
the value of such Borrowing Base Properties. Agent shall by written notice to Borrower
within a reasonable time after each Redetermination Date (the date of such notice being
herein called the “Determination Date”) notify Borrower of the designation by Lenders of
the new Borrowing Base for the period beginning on such Determination Date and continuing
until, but not including, the next Determination Date. If an Unscheduled Redetermination
is to be made by Lenders, Agent shall notify Borrower within a reasonable time after
receipt of all requested information of the new Borrowing Base, and such new Borrowing Base
shall continue until the next Determination Date. If Borrower does not furnish all such
information, reports and data by any date specified in this Section 7(b), unless such
failure is of no fault of Borrower, Lenders nonetheless shall designate the Borrowing Base
at any amounts which Lenders in their discretion determine and redesignate the Borrowing Base
from time to time thereafter until Lenders receive all such information, reports and data,
whereupon Lenders shall designate a new Borrowing Base as described above. The procedure
for determining the Borrowing Base at each redetermination shall be that Agent shall
determine the Borrowing Base and submit the same to Lenders. Increases in the Borrowing
Base will require approval of all Lenders, but other reaffirmations or changes in the
Borrowing Base will be subject to the approval of Required Lenders. The failure of any
Lender to respond within fifteen (15) days after receipt of the proposed Borrowing Base
shall be deemed to be an approval of the proposed Borrowing Base. If Required Lenders
(or all Lenders in the case of an increase in the Borrowing Base) do not approve of Agent’s
proposed Borrowing Base, Agent shall poll Lenders to determine the highest Borrowing Base
that is acceptable to such Lenders that constitute Required Lenders (or all Lenders in the
case of an increase in the Borrowing Base), and such amount shall then become the new
Borrowing Base. Each Lender shall determine the amount of the Borrowing Base based upon
the loan collateral value which such Lender in its sole discretion (using such methodology,
assumptions and discount rates as such Lender customarily uses in assigning collateral
value to Borrowing Base Properties, oil and gas gathering systems, gas processing and plant
operations) assigns to such Borrowing Base Properties at the time in question and based
upon such other credit factors consistently applied (including, without limitation, the
assets, liabilities, cash flow, business, properties, prospects, management and



22









 







ownership of Borrower and the effect of Rate Management Transactions in effect at such time) as such
Lender customarily considers in evaluating similar oil and gas credits. If at any time any
of the Borrowing Base Properties are sold, the Borrowing Base then in effect shall
automatically be reduced as required by Section 12(r) hereof. It is expressly understood
that Lenders have no obligation to designate the Borrowing Base at any particular amounts,
except in the exercise of their discretion, whether in relation to the Commitments or
otherwise. Provided, however, that Lenders shall not have the obligation to designate a
Borrowing Base in an amount in excess of the Commitment.



     8. Unused Commitment Fee.




     Borrower shall pay to Agent for the ratable benefit of Lenders an unused commitment
fee (the “Unused Commitment Fee”) equivalent to the Unused Commitment Fee Rate times the
daily average of the sum of the Borrowing Base minus Total Outstandings. Such Unused
Commitment Fee shall be calculated on the basis of a year consisting of 360 days. The
Unused Commitment Fee shall be payable in arrears on the last day of each calendar quarter
beginning March 31, 2008 with the final fee payment due on the Maturity Date for any period
then ending for which the Unused Commitment Fee shall not have been theretofore paid. In
the event the Commitment terminates on any date prior to the end of any such quarterly
period, Borrower shall pay to Agent for the ratable benefit of Lenders, on the date of such
termination, the total Unused Commitment Fee due for the period in which such termination
occurs. If a date for payment of the Unused Commitment Fee shall be other than a Business Day such payment shall be made on
the next succeeding Business Day.



     9. Prepayments.




     (a) Voluntary Prepayments. Subject to the provisions of Section 5(e) hereof,
Borrower may at any time and from time to time, without penalty or premium, prepay the
Notes, in whole or in part. Each such prepayment shall be made on at least three (3)
Business Days’ notice to Agent in the case of Eurodollar Loan Tranches and without notice
in the case of Base Rate Loans and shall be in a minimum amount of (i) $100,000 or any
whole multiple of $100,000 in excess thereof (or the unpaid balance of the Notes, whichever
is less), for Base Rate Loans, plus accrued interest thereon and (ii) $1,000,000 or any
integral multiple thereof (or the unpaid balance on the Notes, whichever is less) for
Eurodollar Loans, plus accrued interest thereon to the date of prepayment.




     (b) Mandatory Prepayment For Borrowing Base Deficiency. In the event the
Total Outstandings ever exceed the Borrowing Base as determined by Lenders pursuant to
Section 7(b) hereof (a “Borrowing Base Deficiency”), Borrower shall, within fifteen (15)
days after written notification from Agent, either (i) by instruments reasonably
satisfactory in form and substance to Agent, provide Agent with collateral with value and
quality in amounts satisfactory to all of Lenders in their discretion in order to increase
the Borrowing Base by an amount at least equal to such excess, (ii) prepay, without premium
or penalty, the principal amount of the Notes in an amount at least equal to such excess
plus accrued interest thereon to the date of prepayment or (iii) commit to make six (6)
equal monthly installment payments in the aggregate amount of the Borrowing Base



23









 







Deficiency, with the first such installment being due on or before thirty (30) days after
Borrower’s receipt of Agent’s notice of the Borrowing Base Deficiency.



     10. Representations and Warranties. In order to induce Lenders to enter into this Agreement,
Borrower represents and warrants to Lenders (which representations and warranties will survive the
delivery of the Notes) that:




     (a) Organization and Qualification. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware and has all
corporate power and authority required to own its property and carry on its business as
presently conducted and proposed to be conducted. Each Guarantor is duly organized, validly
existing and in good standing under the laws of the state or Canadian province of its
organization and has all corporate power and authority required to own its property and
carry on its business as presently conducted and proposed to be conducted. Borrower has all
power and authority to own its properties and assets and to transact the business in which
it is engaged.




     (b) Power and Authority. Borrower has the corporate power and requisite
authority to execute, deliver and perform the necessary Loan Documents, including this
Agreement; and has taken all corporate action necessary for the due creation and issuance
of the Notes and for the due execution, delivery and performance of the Loan Documents,
including this Agreement. Each Guarantor has the corporate or partnership power and
requisite authority to execute, deliver the Loan Documents which it has executed and has
taken all company action necessary to duly authorize (i) the execution, delivery and
performance by such Guarantor of the terms and provisions of the Loan Documents which it
has executed and (ii) the performance by such Guarantor of its obligations under the Loan
Documents.




     (c) Binding Obligations. This Agreement does, and the Notes and other Loan
Documents upon their creation, issuance, execution and delivery will, constitute valid and
binding obligations of Borrower enforceable in accordance with its respective terms (except
that enforcement may be subject to general principles of equity and any applicable
bankruptcy, insolvency, or similar debtor relief laws now or hereafter in effect and
relating to or affecting the enforcement of creditors’ rights generally).




     (d) No Legal Bar or Resultant Lien. The Notes and the Loan Documents,
including this Agreement, do not and will not, to the best of Borrower’s and each
Guarantor’s knowledge, violate or conflict with or result in a default under any provisions
of Borrower’s organizational documents or any contract, agreement, law, regulation, order,
injunction, judgment, decree or writ to which Borrower or any Guarantor is subject, or
result in the creation or imposition of any Lien or other encumbrance upon any assets or
properties of Borrower or any Guarantor, other than those contemplated by this Agreement.




     (e) No Consent. The execution, delivery and performance by Borrower of the
Notes and the execution, delivery and performance by Borrower and Guarantors of the other
Loan Documents that each has executed, including this Agreement, does not require



24









 







the consent or approval of any other person or entity, including without limitation any
regulatory authority or governmental body of the United States or any state thereof or any
political subdivision of the United States or any state thereof except for consents
required for federal, state and, in some instances, private leases, rights-of-ways and
other conveyances or encumbrances of oil and gas leases all of which shall have been
obtained.




     (f) Financial Condition. The Financial Statements of Borrower and Guarantors
which have been delivered to Lenders pursuant to the terms hereof are complete and correct
in all material respects and fully and accurately reflect in all material respects the
financial conditions and the results of the operations of Borrower and Guarantors as of the
dates of such Financial Statements and no change has occurred between such date and the
Effective Date in the condition, financial or otherwise of Borrower or any Guarantor which
is reasonably expected to have a Material Adverse Effect, except as disclosed to Lenders in Schedule “2”
attached hereto.




     (g) Liabilities. Neither Borrower nor any Guarantor has any material
liability, direct or contingent on the Effective Date, except as disclosed to Lenders in
the Financial Statements or on Schedule “3” attached hereto. No unusual or unduly
burdensome restrictions, restraint, or hazard exists by contract, law or governmental
regulation or otherwise relative to the business, assets or properties of Borrower or any
Guarantor which is reasonably expected to have a Material Adverse Effect or which involve
any of the Loan Documents.




     (h) Litigation. Except as described in the Financial Statements, or as
otherwise disclosed to Lenders in Schedule “4” attached hereto, on the Effective Date there
is no litigation, legal or administrative proceeding, investigation or other action of any
nature pending or, to the knowledge of Borrower, threatened against or affecting Borrower
or any Guarantor which involves the possibility of any judgment or liability not fully
covered by insurance, and which is reasonably expected to have a Material Adverse Effect.




     (i) Taxes; Governmental Charges. Borrower and each Guarantor have filed all
tax returns and reports required to be filed and have paid all taxes, assessments, fees and
other governmental charges levied upon Borrower or any Guarantor or Borrower’s or any
Guarantor’s assets, properties or income which are due and payable, including interest and
penalties, the failure of which to pay could reasonably be expected to have a Material
Adverse Effect, except such as are being contested in good faith by appropriate proceedings
and for which adequate reserves for the payment thereof as required by Accounting
Principles has been provided and levy and execution thereon have been stayed and continue
to be stayed.




     (j) Titles, Etc. Borrower or Guarantors have good and defensible title to all
of their material assets, including without limitation, the Oil and Gas Properties, free
and clear of all Liens except Permitted Liens. Borrower or Guarantors are entitled to
receive not less than that percentage of oil, gas and other hydrocarbons produced from the
land covered by the leases pertaining to the Oil and Gas Properties included in the
Borrowing Base (after deduction of all royalties, overriding royalties and other interests
payable



25









 







from or measured by production) equal to the “net revenue interest” specified in
the evaluation of such Oil and Gas Properties in the most recent engineering and/or reserve
report(s) covering such Oil and Gas Properties which are delivered to Agent hereunder, with
the term “net revenue interest” meaning the proportionate share of the production of oil,
gas or other minerals to which Borrower or Guarantors are entitled after deduction of all
royalties, overriding royalties and other interests payable from or measured by production.
Borrower or Guarantors owns the “working interest” in the Oil and Gas Properties included
in the Borrowing Base specified in the evaluation of such Oil and Gas Properties in the
most recent engineering report(s) and/or reserve reports covering such Oil and Gas
Properties
which are delivered to Agent hereunder, with the term “working interest”, as used
herein, meaning the right to explore for, drill and produce oil, gas or other minerals; and
Borrower or Guarantors is not obligated to bear more than that percentage of the cost of
all operations conducted on the Oil and Gas Properties equal to the “working interest” as
above described (other than increases to Borrower’s or Guarantors’ working interest as a
result of non-operator’s electing to not participate in a proposed operation under an
operating agreement). All material oil, gas and mineral leases which constitute a portion
of the Oil and Gas Properties are in full force and effect, and Borrower or Guarantors has
not defaulted on any of its obligations thereunder so as to materially impair the value of
such leases in the aggregate.




     (k) Defaults. Neither Borrower nor any Guarantor is in default and no event
or circumstance has occurred which, but for the passage of time or the giving of notice, or
both, would constitute a default under any loan or credit agreement, indenture, mortgage,
deed of trust, security agreement or other agreement or instrument to which Borrower or any
Guarantor is a party in any respect that would be reasonably expected to have a Material
Adverse Effect. No Default or Event of Default hereunder has occurred and is continuing.




     (l) Casualties; Taking of Properties. Since the dates of the latest Financial
Statements of Borrower and Guarantors delivered to Lenders, neither the business nor the
assets or properties of Borrower or any Guarantor has been affected (to the extent it is
reasonably expected to cause a Material Adverse Effect), as a result of any fire,
explosion, earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition or taking of property or cancellation of contracts,
permits or concessions by any domestic or foreign government or any agency thereof, riot,
activities of armed forces or acts of God or of any public enemy.




     (m) Use of Proceeds; Margin Stock. The proceeds of the Commitment may be used
by Borrower solely for the purposes of (i) refinancing existing indebtedness under the
Approach Resources I Credit Agreement (as defined in Section 36 hereof), (ii) acquisition,
exploration and development of Oil and Gas Properties, including capital expenditures to
fund drilling activities on the Oil and Gas Properties, (iii) working capital; and (iv)
other general corporate purposes in the ordinary course of Borrower’s and each Guarantor’s
business. Borrower is not engaged principally or as one of its important activities in the
business of extending credit for the purpose of purchasing or carrying any “margin stock”
as defined in Regulation U of the Board of Governors of the Federal Reserve System (12
C.F.R. Part 221), or for the purpose of reducing or retiring



26









 







any indebtedness which was
originally incurred to purchase or carry a margin stock or for any other purpose which
might constitute this transaction a “purpose credit” within the meaning of said Regulation
U.




     Neither Borrower nor any person or entity acting on behalf of Borrower has taken or
will take any action which might cause the loans hereunder or any of
the Loan Documents, including this Agreement, to violate Regulation U or any other
regulation of the Board of Governors of the Federal Reserve System or to violate the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now
in effect or as the same may hereafter be in effect.




     (n) Location of Business and Offices. The principal place of business and
chief executive office of Borrower is located at the address as stated in Section 17 hereof
or such other places or offices for which notice has been provided to Agent according to
Section 13(f).




     (o) Compliance with the Law. To the best of Borrower’s knowledge, neither
Borrower nor any Guarantor:




     (i) is in violation of any law, judgment, decree, order, ordinance, or
governmental rule or regulation to which Borrower, or any of its or any Guarantor’s
assets or properties are subject; or




     (ii) has failed to obtain any license, permit, franchise or other governmental
authorization necessary to the ownership of any of its assets or properties or the
conduct of its business;
which violation or failure is reasonably expected to have a Material Adverse Effect.




     (p) No Material Misstatements. No information, exhibit or report furnished by
Borrower to Lenders in connection with the negotiation of this Agreement contained any
material misstatement of fact or omitted to state a material fact or any fact necessary to
make the statements contained therein not materially misleading.




     (q) Not A Utility. Neither Borrower nor any Guarantor is a utility subject to
regulation under the laws of the State of Texas as a result of being engaged in the (i)
generation, transmission, or distribution and sale of electric power; (ii) transportation,
distribution and sale through a local distribution system of natural or other gas for
domestic, commercial, industrial, or other use; (iii) provision of telephone or telegraph
service to others; (iv) production, transmission, or distribution and sale of steam or
water; (v) operation of a railroad; or (vi) provision of sewer service to others.




     (r) ERISA. Borrower maintains no employee benefit plan or other plan for
employees of Borrower that are covered by Title IV of ERISA.




     (s) Intentionally Deleted.



27









 






     (t) No Subsidiaries. During the term of the Loan, Borrower shall neither form
nor acquire any subsidiary, other than Guarantors, unless at the time such subsidiary is
formed or created, such subsidiary shall unconditionally
guarantee the Notes and the obligations of Borrower under this Agreement pursuant to a
guaranty agreement in form and substance satisfactory to Agent.




     (u) Environmental Matters. Except as disclosed on Schedule “5”, as of the
Effective Date Borrower has not (i) received notice or otherwise learned or is otherwise
aware of any Environmental Liability which would be reasonably expected to individually or
in the aggregate have a Material Adverse Effect arising in connection with (A) any
non-compliance with or violation of the requirements of any Environmental Law or (B) the
release or threatened release of any toxic or hazardous waste into the environment, (ii)
received notice or otherwise become aware of any threatened or actual liability in
connection with the release or notice of any threatened release of any toxic or hazardous
waste into the environment which would be reasonably expected to individually or in the
aggregate have a Material Adverse Effect or (iii) received notice or otherwise learned of
or otherwise become aware of any federal or state investigation evaluating whether any
remedial action is needed to respond to a release or threatened release of any toxic or
hazardous waste into the environment for which Borrower or any Guarantor is or may be
liable which would reasonably be expected to result in a Material Adverse Effect.




     (v) Liens. Except (i) as disclosed on Schedule “1” hereto and (ii) for
Permitted Liens, the assets and properties of Borrower are free and clear of all liens and
encumbrances.




     (w) Solvency. Immediately after the consummation of the transactions to occur
on the Effective Date and immediately following the making of each Loan made on the
Effective Date and after giving effect to the application of the proceeds of such Loans,
(i) the fair value of the assets of Borrower will exceed its debts and liabilities,
subordinated, contingent or otherwise; (ii) the present fair saleable value of the property
of Borrower will be greater than the amount that will be required to pay the probable
liability of its debts and other liabilities, subordinated, contingent or otherwise, as
such debts and liabilities become absolute and matured; (iii) Borrower will be able to pay
its debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured; and (iv) Borrower will not have unreasonably
small capital with which to conduct the business in which it is engaged as such business is
now conducted and is proposed to be conducted following the Effective Date.




     (x) Insurance. All insurance reasonably necessary in the ordinary course of
Borrower’s business is maintained by or on behalf of Borrower and all premiums in respect
of such insurance have been paid or will be paid prior to the date such premium payments
are due.



28









 





     11. Conditions of Lending.




     (a) The effectiveness of this Agreement, and the obligation to make the initial
Advance under the Commitment shall be subject to satisfaction of the following conditions
precedent:




     (i) Borrower’s Execution and Delivery. Borrower shall have executed
and delivered to Agent the Agreement, the Notes and other required Loan Documents,
all in form and substance satisfactory to Agent;




     (ii) Guaranty. Guarantors shall have executed an unconditional
guaranty agreement of the Notes in form and substance satisfactory to Agent.




     (iii) Articles of Incorporation and Bylaws. Borrower shall have
delivered to Agent a true and correct copy of the Articles of Incorporation and
Bylaws of Borrower, together with all amendments thereto, certified as being a
true and correct copy thereof.




     (iv) Corporate Resolutions Certificate. Borrower shall have
delivered to Agent a Certificate of Corporate Resolutions of Borrower, certifying
the name, title and signature of the Person authorized to sign the Loan Documents
to which it is party on behalf of Borrower, duly executed by the secretary of
Borrower.




     (v) Articles, Bylaws and Regulations. Corporate Guarantors shall
have delivered to Agent a true and correct copy of each of their articles of
incorporation and bylaws and Approach Resources I, LP shall have delivered to
Agent a true and correct copy of its partnership agreement, together with all
amendments thereof, and being certified by the secretary of each Corporate
Guarantor and Approach Resources I, LP as being a true and correct copy thereof.




     (vi) Resolutions. Borrower shall have caused to be delivered to
Agent resolutions of the board of directors of Corporate Guarantors and the
partners of Approach Resources I, LP approving each Corporate Guarantor’s and
Approach Resources I, LP’s execution, delivery and performance of the Loan
Documents to which it is a party, duly adopted by such board of directors,
certified by the secretary or partners of each Corporate Guarantor and Approach
Resources I, LP, as being a true and correct copy of such resolutions and that
such resolutions have not been amended or rescinded and remain in full force and
effect.




     (vii) Incumbency Certificate. Agent shall have received a signed
certificate of the secretary or partners of each Corporate Guarantor and Approach
Resources I, LP certifying the name, office and signature of the officers or
partners of each Corporate Guarantor and Approach
Resources I, LP authorized to sign the Loan Documents to which it is a party.




     (viii) Other Certificates. Agent shall have received certificates of
existence and (in the case of Borrower and the Corporate Guarantors only) of good
standing for Borrower each Corporate Guarantor issued by the Secretary of



29









 







State of Delaware (in the case of Borrower) and the Secretary of State of Texas (in the
case of Approach Resources I, LP) and the applicable public office of Alberta
Canada in the case of Approach Oil & Gas (Canada) Inc.




     (ix) Mortgage and Title. Agent shall have received the mortgage and
title information required to be delivered by Borrower pursuant to Section 6 of
this Agreement;




     (x) Representation and Warranties. The representations and
warranties of Borrower under this Agreement and the other Loan Documents shall be
true and correct in all material respects as of such date, as if then made (except
to the extent that such representations and warranties related solely to an
earlier date);




     (xi) No Event of Default. No Default or Event of Default shall have
occurred and be continuing;




     (xii) Intentionally Deleted.




     (xiii) Other Documents. Agent shall have received such other
instruments and documents incidental and appropriate to the transaction provided
for herein as Agent or its counsel may reasonably request, and all such documents
shall be in form and substance reasonably satisfactory to Agent; and




     (xiv) Legal Matters Satisfactory. All legal matters incident to the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for Agent retained at the expense of Borrower.




     (b) The obligation of Lenders to make any Advance or issue any Letter of Credit under
the Commitment (other than the initial Advance) shall be subject to the following
additional conditions precedent that, at the date of making each such Advance or issuing
such Letter of Credit and after giving effect thereto:




     (i) Representations and Warranties. The representations and
warranties of Borrower under this Agreement and the other Loan Documents are true
and correct in all material respects as of such date, as if then made (except to
the extent that such representations and warranties related solely to an earlier
date); and




     (ii) No Event of Default. No Default or Event of Default shall have
occurred and be continuing; and




     (iii) Legal Matters Satisfactory. All legal matters incident to the
consummation of the transactions contemplated hereby shall be reasonably
satisfactory to special counsel for Agent retained at the expense of Borrower; and




30











 






     (iv) Total Outstandings. After giving effect to such Advance or Letter
of Credit, the Total Outstandings do not exceed the Borrowing Base then in effect.


Each Borrowing Notice shall constitute a representation and warranty by Borrower that the
conditions contained in Sections 11(b)(i) and (ii) have been satisfied.




     12. Affirmative Covenants. A deviation from the provisions of this Section 12 shall not
constitute a Default or an Event of Default under this Agreement if such deviation is expressly
consented to in writing by Required Lenders prior to the date of deviation. Borrower will at all
times comply with the covenants contained in this Section 12 from the date hereof and for so long
as the Commitments are in existence or any amount is owed to Agent or Lenders under this Agreement
or the other Loan Documents.




     (a) Financial Statements and Reports of Borrower, Guarantor. Borrower shall
furnish to Agent: (i) as soon as available, but in any event within ninety (90) days after
the end of each fiscal year of Borrower and each Guarantor, commencing with the fiscal year
ending December 31, 2007, an audited consolidated balance sheet of Borrower and Guarantors
prepared as of the close of such fiscal year and audited consolidated statements of
operations, changes in partners or shareholders/members equity and statements of cash flows
of Borrower and Guarantors for such year, in each case setting forth in comparative form the
figures for the preceding fiscal year, all in reasonable detail and certified by independent
certified public accountants selected by Borrower and approved by Agent; and (ii) within
sixty (60) days after the end of the first three fiscal quarters of each fiscal year of
Borrower and Guarantors, commencing with the fiscal quarter ending March 31, 2008, an
unaudited balance sheet (without footnotes) of Borrower and Guarantors prepared as of the
close of such fiscal quarter and unaudited statements of operations (without footnotes) of
Borrower and Guarantors for such quarter.




     (b) Hedging Report. Concurrently with the furnishing of the Financial
Statements required in (a) above and in connection with each Borrowing Base redetermination
and at any other time when requested by Agent, Borrower will provide to Agent a hedging
report in form and substance satisfactory to Agent which shall contain, without limitation,
the Projected Production for the latest available calendar quarter with supporting data, a
description of outstanding Rate Management Transactions, including the commodity, effective
date, termination date, notional quantity, applicable price, cap, or floor, and such other
details required by Agent.




     (c) Additional Information. Promptly upon request of Agent from time to time
any additional financial information or other information that the Agent may reasonably
request.




     (d) Certificates of Compliance. Concurrently with the furnishing of the
Financial Statements pursuant to Subsection 12(a) hereof for the months coinciding with the
end of each fiscal year or quarter, Borrower will furnish or cause to be furnished to Agent
a certificate in the form of Exhibit “C” attached hereto, signed by the President,



31









 







Treasurer or Chief Financial Officer of Borrower, (i) stating that Borrower has
fulfilled in all material respects its obligations under the Notes and the Loan Documents,
including this Agreement, and that all representations and warranties made herein and
therein continue (except to the extent they relate solely to an earlier date) to be true and
correct in all material respects (or specifying the nature of any change), or if a Default
has occurred, specifying the Default and the nature and status thereof; (ii) to the extent
requested from time to time by Agent, specifically affirming compliance of Borrower in all
material respects with any of its representations (except to the extent they relate solely
to an earlier date) or obligations under said instruments; (iii) setting forth the
computation, in reasonable detail as of the end of each period covered by such certificate,
of compliance with Section 13(b); and (iv) containing or accompanied by such financial or
other details, information and material as Agent may reasonably request to evidence such
compliance.




     (e) Taxes and Other Liens. Borrower and each Guarantor will pay and discharge
promptly all taxes, assessments and governmental charges or levies imposed upon Borrower and
such Guarantor, or upon the income or any assets or property of such Borrower, as well as
all claims of any kind (including claims for labor, materials, supplies and rent) which, if
unpaid, might become a Lien or other encumbrance upon any or all of the assets or property
of Borrower or any Guarantor and which could reasonably be expected to result in a Material
Adverse Effect; provided, however, that neither Borrower nor any Guarantor shall be required
to pay any such tax, assessment, charge, levy or claim if the amount, applicability or
validity thereof shall currently be contested in good faith by appropriate proceedings
diligently conducted, levy and execution thereon have been stayed and continue to be stayed
and if Borrower or Guarantors shall have set up adequate reserves therefor, if required,
under Accounting Principles.




     (f) Compliance with Laws. Borrower and Guarantors will observe and comply, in
all material respects, with all applicable laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, orders and restrictions relating to
environmental standards or controls or to energy regulations of all federal, state, county,
municipal and other governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign.




     (g) Further Assurances. Borrower will cure promptly any defects in the
creation and issuance of the Notes and the execution and delivery of the Notes and the Loan
Documents, including this Agreement. Borrower at its sole expense will promptly execute and
deliver, or cause to be executed and delivered, to Agent upon its reasonable request all
such other and further documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements in this Agreement, or to correct any
omissions in the Notes or more fully to state the obligations set out herein.




     (h) Performance of Obligations. Borrower will pay the Notes and other
obligations incurred by it hereunder according to the reading, tenor and effect thereof and
hereof; and Borrower and Guarantors will do and perform every act and discharge all of the
obligations provided to be performed and discharged by Borrower and Guarantors under the
Loan Documents, including this Agreement, at the time or times and in the manner specified.



32









 






     (i) Insurance. Borrower and each Guarantor now maintains and will continue to
maintain insurance with financially sound and reputable insurers with respect to its assets
against such liabilities, fires, casualties, risks and contingencies and in such types and
amounts as is customary in the case of persons engaged in the same or similar businesses and
similarly situated. Upon request of Agent, Borrower will furnish or cause to be furnished
to Agent from time to time a summary of the respective insurance coverage of Borrower and
each Guarantor in form and substance reasonably satisfactory to Agent, and, if requested,
will furnish Agent copies of the applicable policies. Upon demand by Agent any insurance
policies covering any such property shall be endorsed (i) to provide that such policies may
not be canceled, reduced or affected in any manner for any reason without fifteen (15) days
prior notice to Agent, (ii) to provide for insurance against fire, casualty and other
hazards normally insured against, in the amount of the full value (less a reasonable
deductible not to exceed amounts customary in the industry for similarly situated business
and properties) of the property insured, and (iii) to provide for such other matters as
Agent may reasonably require. Borrower and each Guarantor shall at all times maintain
adequate insurance with respect to all of its other assets and wells in accordance with
prudent business practices.




     (j) Accounts and Records. Borrower and Guarantors will keep proper books,
records and accounts in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and activities, prepared in a manner consistent
with prior years, subject to changes suggested by Borrower’s or Guarantors’ auditors.




     (k) Right of Inspection. Borrower and Guarantors will permit, after reasonable
notice to Borrower and Guarantors, any officer, employee or agent of Agent to examine
Borrower’s and Guarantors’ books, records and accounts, and take copies and extracts
therefrom, all at such reasonable times during normal business hours and as often as Lenders
may reasonably request. Lenders will keep all Confidential Information (as herein defined)
confidential and will not disclose or reveal the Confidential Information or any part
thereof other than (i) as required by law, (ii) to Lenders’, and Lenders’ subsidiaries’,
Affiliates, officers, employees, legal counsel and regulatory authorities or advisors to
whom it is necessary to reveal such information for the purpose of effectuating the
agreements and undertakings specified herein or as otherwise required in connection with the
enforcement of Lenders’ and Agent’s rights and remedies under the Notes, this Agreement and
the other Loan Documents and (iii) any assignee of or participant in, or any prospective
assignee of or participant in, any Lender’s rights or obligations under this Agreement. As
used herein, “Confidential Information” means information about Borrower or Guarantors
furnished by Borrower or Guarantors, but does not include information (i) which was publicly
known, or otherwise known to Lenders, at the time of the disclosure, (ii) which subsequently
becomes publicly known through no act or omission by Lenders, or (iii) which otherwise
becomes known to Lenders, other than through disclosure by Borrower and Guarantors.




     (l) Notice of Certain Events. Borrower shall promptly notify Agent if Borrower
learns of the occurrence of (i) any event which constitutes a Default or Event of Default
together with a detailed statement by Borrower of the steps being taken to cure such Default
or Event of Default; (ii) any legal, judicial or regulatory proceedings



33









 







affecting Borrower or any Guarantor or any of the assets or properties of Borrower or
any Guarantor which, if adversely determined, could reasonably be expected to have a
Material Adverse Effect; (iii) any dispute between Borrower or any Guarantor and any
governmental or regulatory body or any other Person or entity which, if adversely
determined, would reasonably be expected to cause a Material Adverse Effect; and (iv) any
other matter which in Borrower’s reasonable opinion could have a Material Adverse Effect.




     (m) Environmental Reports and Notices. Borrower will deliver to Agent (i)
promptly upon its becoming available, one copy of each report (other than routine
informational filings) sent by Borrower or any Guarantor to any court, governmental agency
or instrumentality pursuant to any Environmental Law, (ii) notice, in writing, promptly upon
Borrower’s or any Guarantor’s receipt of notice or otherwise learning of any claim, demand,
action, event, condition, report or investigation indicating any potential or actual
liability arising in connection with (x) the non-compliance with or violation of the
requirements of any Environmental Law which reasonably could be expected to have a Material
Adverse Effect; (y) the release or threatened release of any hazardous substance, toxic or
hazardous waste into the environment which reasonably could be expected to have a Material
Adverse Effect or which release Borrower or Guarantors would have a duty to report to any
court or government agency or instrumentality, or (iii) the existence of any Environmental
Lien on any properties or assets of Borrower or any Guarantor and Borrower shall promptly
deliver a copy of any such notice to Agent.




     (n) Compliance and Maintenance. Borrower and Guarantors will, (i) observe and
comply in all material respects with all Environmental Laws; (ii) except as provided in
Subsections 12(o) and 12(p) below, maintain the Borrowing Base Properties and other assets
and properties in good and workable condition at all times and make all repairs,
replacements, additions, betterments and improvements to the Borrowing Base Properties and
other assets and properties as are needed and proper so that the business carried on in
connection therewith may be conducted properly and efficiently at all times in the opinion
of Borrower, exercised in good faith; (iii) take or cause to be taken whatever actions are
necessary or desirable to prevent an event or condition of default by Borrower or any
Guarantor under the provisions of any gas purchase or sales contract or any other contract,
agreement or lease comprising a part of the Borrowing Base Properties or other collateral
security hereunder which default could reasonably be expected to result in a Material
Adverse Effect; and (iv) furnish Agent upon request evidence reasonably satisfactory to
Agent that there are no Liens, claims or encumbrances on the Borrowing Base Properties,
except Permitted Liens.




     (o) Operation of Properties. Except as provided in Subsections 12(p) and (q)
below, Borrower and Guarantors will operate, or cause to be operated, all Borrowing Base
Properties in a careful and efficient manner in accordance with the practice of the industry
and in compliance in all material respects with all applicable laws, rules, and regulations,
and in compliance in all material respects with all applicable proration and conservation
laws of the jurisdiction in which the properties are situated, and all applicable laws,
rules, and regulations, of every other agency and authority from time to



34









 







time constituted to regulate the development and operation of the properties and the
production and sale of hydrocarbons and other minerals therefrom; provided, however, that
Borrower and Guarantors shall have the right to contest in good faith by appropriate
proceedings, the applicability or lawfulness of any such law, rule or regulation and pending
such contest may defer compliance therewith, as long as such deferment shall not subject the
properties or any part thereof to foreclosure or loss.




     (p) Compliance with Leases and Other Instruments. Borrower and Guarantors will
pay or cause to be paid and discharge all rentals, delay rentals, royalties, production
payment, and indebtedness required to be paid by such party (or required to keep unimpaired
in all material respects the rights of such party in Borrowing Base Properties) accruing
under, and perform or cause to be performed in all material respects each and every act,
matter, or thing required of such party by each and all of the assignments, deeds, leases,
subleases, contracts, and agreements in any way relating to such party or any of the
Borrowing Base Properties and do all other things necessary of such party to keep unimpaired
in all material respects the rights of such party thereunder and to prevent the forfeiture
thereof or default thereunder; provided, however, that nothing in this Agreement shall be
deemed to require Borrower or Guarantors to perpetuate or renew any oil and gas lease or
other lease by payment of rental or delay rental or by commencement or continuation of
operations nor to prevent Borrower or Guarantors from abandoning or releasing any oil and
gas lease or other lease or well thereon when, in any of such events, in the opinion of
Borrower or any Guarantor exercised in good faith, it is not in the best interest of
Borrower or such Guarantor to perpetuate the same.




     (q) Certain Additional Assurances Regarding Maintenance and Operations of
Properties. With respect to those Borrowing Base Properties which are being operated by
operators other than Borrower or Guarantors, Borrower or Guarantors shall not be obligated
to perform any undertakings contemplated by the covenants and agreement contained in
Subsections 12(o) or 12(p) hereof which are performable only by such operators and are
beyond the control of Borrower or Guarantors; however, Borrower and Guarantors agree to
promptly take, or cause to be taken, all reasonable actions available under any operating
agreements or otherwise to bring about the performance of any such material undertakings
required to be performed thereunder.




     (r) Sale of Certain Assets/Prepayment of Proceeds. Borrower will immediately
pay over to Agent for the ratable benefit of Lenders as a prepayment of principal on the
Notes and a reduction of the Borrowing Base, an amount equal to 100% of the “Release Price”
from the sale of Borrowing Base Properties, which sale has been approved in advance by
Required Lenders (provided, however, that approval of Required Lenders shall not be required
for the sales of Borrowing Base Properties aggregating an Engineered Value of ten percent
(10%) or less of the Borrowing Base then in effect during any calendar year). The term
“Release Price” means the amount by which the Total Outstandings exceed the Borrowing Base
after the Borrowing Base is reduced as a result of the sale of Borrowing Base Properties.
Any such prepayment of principal on the Notes required by this Section 12(r), shall not be
in lieu of, but shall be in addition to, any mandatory prepayment of principal required to
be paid pursuant to Section 9(b) hereof. The Borrowing Base shall be reduced by the amount
equal to the



35









 







Engineered Value of the Borrowing Base Properties sold according to the most recent reserve report provided to
Lender (as determined by Agent) and, in addition thereto, upon the sale of any Borrowing
Base Properties that require the prior approval of Required Lenders, if requested by
Required Lenders, the Borrowing Base will be redetermined pursuant to an Unscheduled
Redetermination, which redetermination will be in addition to any other Unscheduled
Redetermination that may be requested by Required Lenders.




     (s) Title Matters. As to any Borrowing Base Properties hereafter mortgaged to
Agent, Borrower or Guarantors will promptly (but in no event more than sixty (60) days
following such mortgaging) furnish, or cause to be furnished to Agent title information
reasonably satisfactory to Agent that is necessary to cause Borrower to be in compliance
with its obligations under Section 12(u) with respect to title information, showing good and
defensible title of Borrower or Guarantors to such Borrowing Base Properties subject only to
Permitted Liens.




     (t) Change of Principal Place of Business. Borrower shall give Agent at least
thirty (30) days prior written notice of its intention to move its principal place of
business and executive offices from the address set forth in Section 17 hereof.




     (u) Additional Collateral. Borrower agrees to regularly monitor engineering
data covering all producing oil and gas properties and interests owned or acquired by
Borrower or Guarantors on or after the date hereof and to mortgage or cause to be mortgaged
such of the same to Agent for the ratable benefit of Lenders in substantially the form of
the Collateral Documents, as applicable, to the extent that Lenders shall at all times
during the existence of the Commitment be secured by perfected Liens and security interests
covering not less than eighty percent (80%) of the Engineered Value of the Borrowing Base
Properties of Borrower and Guarantors. In addition, Borrower agrees that in connection with
the mortgaging of such additional Borrowing Base Properties, it shall within a reasonable
time thereafter, deliver or cause to be delivered to Agent such mortgage and title opinions
and other title information with respect to the title and Lien status of such Borrowing Base
Properties as may be necessary to maintain at all times a level of such title information
(showing good and defensible title) of not less than seventy-five percent (75%) of the
Engineered Value of all Borrowing Base Properties mortgaged to Agent for the ratable benefit
of Lenders.



     13. Negative Covenants. A deviation from the provisions of this Section 13 shall not
constitute an Event of Default under this Agreement if such deviation is consented to in writing by
Required Lenders prior to the date of deviation. Borrower will at all times comply with the
covenants contained in this Section 13 from the date hereof and for so long as the Commitment is in
existence or any amount is owed to Agent or Lenders under this Agreement or the other Loan
Documents.




     (a) Negative Pledge. Neither Borrower nor any Guarantor shall, without the
prior written consent of Required Lenders:



36









 






     (i) create, incur, assume or permit to exist any Lien, security
interest or other encumbrance on any of its assets or properties except
Permitted Liens; or




     (ii) during any annual period, sell, convey, exchange, lease or
otherwise dispose of during any annual period any of its Oil and Gas
Properties having an aggregate value as determined in the most recent
engineering report delivered to Agent under Section 7(b) hereof in excess of
ten percent (10%) of the Borrowing Base, excluding (i) obsolete or worn-out
equipment and (ii) oil, gas and hydrocarbons sold in the ordinary course of
Borrower’s or Guarantors’ business and (iii) Oil and Gas Properties that
have been given no Engineered Value in the Borrowing Base then in effect.
After a Borrowing Base has been determined, upon the sale of any oil and gas
properties, the Borrowing Base shall be reduced, effective on the date of
consummation of such sale, by an amount which the Required Lenders determine
is the Borrowing Base value last assigned to such oil and gas properties
according to the most recent reserve report or update thereof delivered to
Agent. Agent shall provide Borrower with written notice of the redetermined
Borrowing Base made in accordance with this Section 13(a)(ii), which written
notice shall be sufficient to give effect to such redetermined Borrowing
Base without further amendment to this Agreement.




     (b) Current Ratio. Borrower will not allow the Consolidated Current Ratio of
Borrower to at any time be less than 1.0 to 1.0.




     (c) Consolidations and Mergers. Borrower will not consolidate or merge with or
into any other Person if Borrower is not the surviving entity or, if Borrower is the
surviving entity, such merger or consolidation would cause an Event of Default to occur, or
permit any other Person to consolidate with or merge into it if Borrower is not the
surviving entity or, if Borrower is the surviving entity, such merger or consolidation would
cause an Event of Default to occur or transfer all, or substantially all, of its property.




     (d) Limitation on Additional Indebtedness. Borrower will not incur, create,
assume or in any manner become or be liable in respect of any indebtedness, nor will any
Borrower guarantee or otherwise in any manner become or be liable in respect of any
indebtedness, liabilities or other obligations of any other person or entity, whether by
agreement to purchase the indebtedness of any other person or entity or agreement for the
furnishing of funds to any other person or entity through the purchase or lease of goods,
supplies or services (or by way of stock purchase, capital contribution, advance or loan)
for the purpose of paying or discharging the indebtedness of any other person or entity, or
otherwise, except that the foregoing restrictions shall not apply to:




     (i) the Notes and Letters of Credit, and any renewal or increase
thereof, or other indebtedness of Borrower outstanding at the



37









 







Effective Date which has heretofore disclosed to Lenders in Borrower’s
Financial Statements or on Schedule “4” hereto; or




     (ii) taxes, assessments or other government charges which are not yet
due or are being contested in good faith by appropriate action promptly
initiated and diligently conducted, if such reserve as shall be required by
Accounting Principles shall have been made therefor and levy and execution
thereon have been stayed and continue to be stayed; or




     (iii) indebtedness (other than in connection with a loan or lending
transaction) incurred in the ordinary course of business, including, but not
limited to indebtedness for drilling, completing, leasing and reworking oil
and gas wells; or




     (iv) obligations under permitted Rate Management Transactions; or




     (v) such other indebtedness not to exceed $1,000,000; or




     (vi) trade payables and other accrued liabilities that are incurred in the
ordinary course of business; and




     (vii) any renewals or extensions of (but, other than in the case of the Notes,
not increases in) any of the foregoing.




     (e) Restricted Payments. Borrower will not declare or pay any cash dividend or
distribution (whether in cash, securities or other property) purchase, redeem or otherwise
acquire for value any of its stock interest now or hereafter outstanding, return any capital
to its stockholders or make any distribution of its assets to its stockholders as such,
except that, if no Event of Default has occurred and is continuing, Borrower may distribute
to its shareholders an amount equal annually to their tax liability incurred as a result of
their ownership interest in Borrower.




     (f) Rate Management Transactions. Borrower will not enter into any Rate
Management Transaction, except the foregoing prohibition shall not apply to (i) transactions
consented to in writing by the Required Lenders which are on terms acceptable to the
Required Lenders, or (ii) Pre-Approved Contracts. Once Borrower enters into a Rate
Management Transaction, the terms and conditions of such Rate Management Transaction may not
be materially amended or modified, nor may such Rate Management Transaction be cancelled
without Borrower having given Agent written notice of such amendment, modification or
cancellation on the date not later than three (3) Business Days after the date such action
takes place. Borrower further agrees to give Agent written notice of any bankruptcy,
insolvency or similar proceeding commenced by or against any counterparty to any agreement
entered into any such Rate Management Transaction.



38









 






     (g) Certain Transactions. With respect to the Oil and Gas Properties, neither
Borrower nor any Guarantor shall enter into any transaction with any Affiliate except for
transactions with Affiliates upon terms not less favorable to Borrower than would be
obtainable at the time in comparable transactions of Borrower in arm’s length dealings with
Persons other than Affiliates.




     (h) Intentionally Deleted.




     (i) Limitation on Investments and New Businesses. Borrower shall not engage
directly or indirectly in any new business or make any acquisitions, investments, or
commitments, except such businesses, operations, acquisitions, or investments which are
incidental to or reasonably related to the present businesses and operations conducted by
Borrower and Guarantors and except (i) investment in obligations of the United States
government or any agency thereof or obligations guaranteed by the United States government
having a maturity not in excess of one year, (ii) investments in certificates of deposit of
financially sound commercial banks having a maturity not in excess of one year, (iii)
investments in commercial paper with a rating of at least “Prime 1” according to Moody’s
Investors Service, Inc., or a similar rating of a comparable or successor service, having a
maturity not in excess of one year.




     (j) Limitation on Credit Extensions. Borrower shall not extend credit, make
advances or make loans to any Person or entity other than normal and prudent extensions of
credit in the ordinary course of business.




     (k) Fiscal Year. Borrower shall not change its fiscal year.




     (l) Certain Agreements. Neither Borrower nor any Guarantor shall enter into
any agreement, which by its terms would expressly restrict its performance of its
obligations pursuant to this Loan Agreement or the other Loan Documents.




     (m) Lines of Business. Neither Borrower nor any Guarantor shall directly or
indirectly, engage in any business other than the acquisition, exploration, development,
operation, management or resale of oil, gas and energy properties and the processing,
gathering, marketing and transportation of production therefrom.



     14. Events of Default. Any one or more of the following events shall be considered an “Event
of Default” as that term is used herein:




     (a) Borrower shall fail to pay when due or declared due the principal of the Notes or
any Reimbursement Obligations with respect to any Letter of Credit, including any payment of
principal required under Section 9(b), and such failure to pay shall continue unremedied for
a period of one (1) day; or




     (b) Borrower shall fail to pay when due accrued interest on any of the Notes or any
fees or other amounts payable hereunder or under any other Loan Document and such failure to
pay shall continue unremedied for a period of three (3) days; or



39









 






     (c) Any representation or warranty made by Borrower under this Agreement, or in any
certificate or statement furnished or made to Lenders pursuant hereto, or in connection
herewith, or in connection with any document furnished hereunder, shall prove to be untrue
in any material respect as of the date on which such representation or warranty is made (or
deemed made), or any representation, statement (including financial statements),
certificate, report or other data furnished or to be furnished or made by Borrower under any
Loan Document, including this Agreement, proves to have been untrue in any material respect;
or




     (d) Default shall be made in the due observance or performance of any of the covenants
or agreements of Borrower contained in the Loan Documents, including this Agreement
(excluding covenants contained in Section 13 of the Agreement for which there is no cure
period), and such default shall continue for more than thirty (30) days after written notice
from Agent is received by Borrower; or




     (e) Default shall be made in the due observance or performance of the covenants of
Borrower contained in Section 13 of this Agreement; or




     (f) Default shall be made in respect of any obligation for borrowed money in excess of
$500,000 other than the Notes, for which Borrower is liable (directly, by assumption, as
guarantor or otherwise), or any obligations secured by any mortgage, pledge or other
consensual security interest with respect thereto, on any asset or property of Borrower or
any Guarantor or in respect of any agreement relating to any such obligations, and if such
default shall continue beyond the applicable grace period, if any; or




     (g) Borrower or any Guarantor shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or seeking an
appointment of a trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due, or shall take any
corporate action authorizing the foregoing; or




     (h) An involuntary case or other proceeding, shall be commenced against Borrower or any
Guarantor seeking liquidation, reorganization or other relief with respect to its debts
under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of sixty (60) days; or an order for relief
shall be entered against Borrower or any Guarantor under the federal bankruptcy laws as now
or hereinafter in effect; or




     (i) A final judgment or order for the payment of money in excess of $500,000 (or
judgments or orders aggregating in excess of $500,000) shall be rendered against



40









 







Borrower or any Guarantor and such judgments or orders shall continue unsatisfied and
unstayed for a period of thirty (30) days; provided, however, that if any such judgment
order is not satisfied or stayed within such 30-day period an Event of Default shall not
exist if prior to the end of such 30-day period Borrower provides to Agent an unqualified
statement from Borrower’s insurance carrier addressed to Agent that the entire amount of
such judgment or order is a covered loss under the insurance policies that Borrower
maintains with such insurance carrier and that such insurance carrier does not dispute such
insurance coverage and will provide Borrower with such proceeds of insurance required to
satisfy such judgment or order; or




     (j) Borrower shall fail to pay any obligation owed under any Rate Management
Transaction in an amount in excess of $500,000 or in any amount if the obligations of
Borrower under any such Rate Management Transaction are secured by the Collateral Documents
or any event of default (as defined therein) shall occur as a result of the action or
inaction of Borrower under any agreement entered into in connection with any Rate Management
Transaction; or




     (k) The Liens securing the Loans cease to be in place and/or effective (other than as a
result of Agent’s actions or inactions); or




     (l) A Change of Control shall occur; or




     (m) The dissolution of Borrower or any Guarantor.



     Upon occurrence of any Event of Default specified in Subsections 14(g) and (h) hereof, the
entire principal amount due under the Notes and all interest then accrued thereon, and any other
liabilities of Borrower hereunder, shall become automatically and immediately due and payable all
without notice and without presentment, demand, protest, notice of protest or dishonor or any other
notice of default of any kind, all of which are hereby expressly waived by Borrower. Upon the
occurrence of any other Event of Default, Agent, upon request of Required Lenders, shall by written
notice to Borrower terminate the Commitment and declare the principal of, and all interest then
accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable,
whereupon the same shall forthwith become due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which
Borrower hereby expressly waives, anything contained herein or in the Notes to the contrary
notwithstanding.



     Upon the occurrence and during the continuance of any Event of Default, Lenders are hereby
authorized at any time and from time to time, without notice to Borrower (any such notice being
expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and other indebtedness at any time owing by any
Lender to or for the credit or the account of Borrower against any and all of the indebtedness of
Borrower under the Notes and the Loan Documents, including this Agreement, irrespective of whether
or not Lenders shall have made any demand under the Loan Documents, including this Agreement or the
Notes and although such indebtedness may be unmatured. Any amount set-off by any Lender shall be
applied against the indebtedness owed Lenders by Borrower pursuant to this Agreement and the Notes.
Lenders agree promptly to notify Borrower



41









 







after any such setoff and application, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of Lenders under this Section are
in addition to other rights and remedies (including, without limitation, other rights of set-off)
which Lenders may have.



     15. Agent and Lenders.




     (a) Appointment and Authorization. Each Lender hereby appoints Agent as its
nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of
such Lender in and under all Loan Documents; (ii) to arrange the means whereby the funds of
Lenders are to be made available to Borrower under the Loan Documents; (iii) to take such
action as may be requested by any Lender under the Loan Documents (when such Lender is
entitled to make such request under the Loan Documents); (iv) to receive all documents and
items to be furnished to Lenders under the Loan Documents; (v) to be the secured party,
mortgagee, beneficiary, and similar party in respect of, and to receive, as the case may be,
any collateral for the benefit of Lenders; (vi) to promptly distribute to each Lender all
material information, requests, documents and items received from Borrower under the Loan
Documents; (vii) to promptly distribute to each Lender such Lender’s Pro Rata Part of each
payment or prepayment (whether voluntary, as proceeds of insurance thereon, or otherwise) in
accordance with the terms of the Loan Documents and (viii) to deliver to the appropriate
Persons requests, demands, approvals and consents received from Lenders. Each Lender hereby
authorizes Agent to take all actions and to exercise such powers under the Loan Documents as
are specifically delegated to Agent by the terms hereof or thereof, together with all other
powers reasonably incidental thereto. With respect to its Commitment hereunder and the
Notes issued to it, Agent and any successor Agent shall have the same rights under the Loan
Documents as any other Lender and may exercise the same as though it were not Agent; and the
term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include Agent and
any successor Agent in its capacity as a Lender. Agent and any successor Agent and its
Affiliates may accept deposits from, lend money to, act as trustee under indentures of and
generally engage in any kind of business with Borrower, and any person which may do business
with Borrower, all as if Agent and any successor Agent was not Agent hereunder and without
any duty to account therefor to Lenders; provided that, if any payments in respect of any
property (or the proceeds thereof) now or hereafter in the possession or control of Agent
which may be or become security for the obligations of Borrower arising under the Loan
Documents by reason of the general description of indebtedness secured or of property
contained in any other agreements, documents or instruments related to any such other
business shall be applied to reduction of the obligations of Borrower arising under the Loan
Documents, then each Lender shall be entitled to share in such application according to its
Pro Rata Part thereof. Each Lender, upon request of any other Lender, shall disclose to all
other Lenders all indebtedness and liabilities, direct and contingent, of Borrower to such
Lender as of the time of such request.




     (b) Note Holders. From time to time as other Lenders become a party to this
Agreement, Agent shall obtain execution by Borrower of additional Notes in amounts
representing the Commitments of each such new Lender, up to an aggregate face amount



42









 







of all Notes not exceeding $200,000,000. The obligation of such Lender shall be
governed by the provisions of this Agreement, including but not limited to, the obligations
specified in Section 2 hereof. From time to time, Agent may require that Lenders exchange
their Notes for newly issued Notes to better reflect the Commitments of Lenders. Agent may
treat the payee of any Note as the holder thereof until written notice of transfer has been
filed with it, signed by such payee and in form satisfactory to Agent.




     (c) Consultation with Counsel. Lenders agree that Agent may consult with legal
counsel selected by Agent and shall not be liable for any action taken or suffered in good
faith by it in accordance with the advice of such counsel. LENDERS ACKNOWLEDGE THAT MURPHY
MAHON KEFFLER & FARRIER, L.L.P. IS COUNSEL FOR FROST, BOTH AS AGENT AND AS A LENDER, AND
THAT SUCH FIRM DOES NOT REPRESENT ANY OF THE OTHER LENDERS IN CONNECTION WITH THIS
TRANSACTION.




     (d) Documents. Agent shall not be under a duty to examine or pass upon the
validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents
or any other instrument or document furnished pursuant thereto or in connection therewith,
and Agent shall be entitled to assume that the same are valid, effective, enforceable and
genuine and what they purport to be.




     (e) Resignation or Removal of Agent. Subject to the appointment and acceptance
of a successor Agent as provided below, Agent may resign at any time by giving written
notice thereof to Lenders and Borrower, and Agent may be removed at any time with or without
cause by Required Lenders (excluding Agent). If no successor Agent has been so appointed by
Required Lenders (and approved by Borrower) and has accepted such appointment within thirty
(30) days after the retiring Agent’s giving of notice of resignation or removal of the
retiring Agent, then the retiring Agent may, on behalf of Lenders, appoint a successor
Agent. Any successor Agent must be approved by Borrower, which approval will not be
unreasonably withheld. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become vested with all
the rights and duties of the retiring Agent, and the retiring Agent, as the case may be,
shall be discharged from its duties and obligations hereunder. After any retiring Agent’s
resignation or removal hereunder as Agent, the provisions of this Section 15 shall continue
in effect for its benefit in respect to any actions taken or omitted to be taken by it while
it was acting as Agent. To be eligible to be an Agent hereunder the party serving, or to
serve, in such capacity must own a Pro Rata Part of the Commitments equal to the level of
Commitment required to be held by any Lender pursuant to Section 29 hereof.




     (f) Responsibility of Agent. It is expressly understood and agreed that the
obligations of Agent under the Loan Documents are only those expressly set forth in the Loan
Documents as to each and that Agent shall be entitled to assume that no Default or Event of
Default has occurred and is continuing, unless Agent has actual knowledge of such fact or
has received notice from a Lender or Borrower that such Lender or Borrower considers that a
Default or an Event of Default has occurred and is continuing and



43









 







specifying the nature thereof. Neither Agent nor any of its directors, officers,
attorneys or employees shall be liable for any action taken or omitted to be taken by them
under or in connection with the Loan Documents, except for its or their own gross negligence
or willful misconduct. Agent shall not incur liability under or in respect of any of the
Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or
instrument believed by it to be genuine or authentic or to be signed by the proper party or
parties, or with respect to anything which it may do or refrain from doing in the reasonable
exercise of its judgment, or which may seem to it to be necessary or desirable.




     Agent shall not be responsible to Lenders for any of Borrower’s recitals, statements,
representations or warranties contained in any of the Loan Documents, or in any certificate
or other document referred to or provided for in, or received by any Lender under, the Loan
Documents, or for the value, validity, effectiveness, genuineness, enforceability or
sufficiency of any of the Loan Documents or for any failure by Borrower to perform any of
its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and
shall not be answerable, except as to money or securities received by it or its authorized
agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by
it with reasonable care.




     The relationship between Agent and each Lender is only that of agent and principal and
has no fiduciary aspects. Nothing in the Loan Documents or elsewhere shall be construed to
impose on Agent any duties or responsibilities other than those for which express provision
is therein made. In performing its duties and functions hereunder, Agent does not assume
and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or
responsibility toward or any relationship of agency or trust with or for Borrower or any of
its beneficiaries or other creditors. As to any matters not expressly provided for by the
Loan Documents, Agent shall not be required to exercise any discretion or take any action,
but shall be required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of all Lenders and such instructions
shall be binding upon all Lenders and all holders of the Notes; provided, however, that
Agent shall not be required to take any action which is contrary to the Loan Documents or
applicable law.




     Agent shall have the right to exercise or refrain from exercising, without notice or
liability to Lenders, any and all rights afforded to Agent by the Loan Documents or which
Agent may have as a matter of law; provided, however, Agent shall not (i) except as provided
herein and in Section 7(b) hereof, without the consent of Required Lenders approve the sale,
release or substitution of Collateral other than the sale of Collateral permitted pursuant
to Section 13(a)(ii) hereof, or (ii) without the consent of Required Lenders, take any other
action with regard to amending the Loan Documents, waiving any Default under the Loan
Documents, or taking any other action with respect to the Loan Documents. Agent shall not
have liability to Lenders for failure or delay in exercising any right or power possessed by
Agent pursuant to the Loan Documents or otherwise unless such failure or delay is caused by
the gross negligence of Agent, in which case only Agent responsible for such gross
negligence shall have liability therefor to Lenders.



44









 






     (g) Independent Investigation. Each Lender severally represents and warrants
to Agent that it has made its own independent investigation and assessment of the financial
condition and affairs of Borrower in connection with the making and continuation of its
participation hereunder and has not relied exclusively on any information provided to such
Lender by Agent in connection herewith, and each Lender represents, warrants and undertakes
to Agent that it shall continue to make its own independent appraisal of the credit
worthiness of Borrower while the Notes are outstanding or its commitments hereunder are in
force. Agent shall not be required to keep itself informed as to the performance or
observance by Borrower of this Agreement or any other document referred to or provided for
herein or to inspect the properties or books of Borrower and Guarantors. Other than as
provided in this Agreement, Agent shall not have any duty, responsibility or liability to
provide any Lender with any credit or other information concerning the affairs, financial
condition or business of Borrower which may come into the possession of Agent.




     (h) Indemnification. Lenders agree to indemnify Agent, its Affiliates, its
directors, officers, attorneys and employees (the “Indemnified Agents”), from and against
any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any proper and reasonable kind or nature whatsoever
which may be imposed on, incurred by or asserted against Agent in any way relating to or
arising out of the Loan Documents or any action taken or omitted by any Indemnified Agent
under the Loan Documents, 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 any Indemnified Agent’s gross negligence or willful
misconduct. Each Lender shall be entitled to be reimbursed by any such Indemnified Agent
for any amount such Lender paid to such Indemnified Agent under this Section 15(h) to the
extent such Indemnified Agent has been reimbursed for such payments by Borrower or any other
Person. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT AGENT
FROM THE CONSEQUENCES OF ANY LIABILITY INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO
BE IMPOSED ON ANY INDEMNIFIED AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE,
WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR CONCURRING CAUSE OF ANY SUCH
LIABILITY.




     (i) Benefit of Section 15. The agreements contained in this Section 15 are
solely for the benefit of Agent and Lenders and are not for the benefit of, or to be relied
upon by, Borrower, any affiliate of Borrower or any other person.




     (j) Pro Rata Treatment. Subject to the provisions of this Agreement, each
payment (including each prepayment) by Borrower and each collection by Lenders (including
offsets) on account of the principal of and interest on the Notes and fees provided for in
this Agreement, that are payable by Borrower, shall be made Pro Rata; provided, however, in
the event that any Defaulting Lender shall have failed to make an Advance as contemplated
under Section 2 hereof and Agent or another Lender or Lenders shall have made such Advance,
payment received by Agent for the account of such



45









 







Defaulting Lender or Lenders shall not be distributed to such Defaulting Lender or
Lenders until such Advance or Advances shall have been repaid in full to the Lender or
Lenders who funded such Advance or Advances.




     (k) Assumption as to Payments. Except as specifically provided herein, unless
Agent shall have received notice from Borrower prior to the date on which any payment is due
to Lenders hereunder that Borrower will not make such payment in full, Agent may, but shall
not be required to, assume that Borrower has made such payment in full to Agent on such date
and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on
such due date an amount equal to the amount then due such Lender. If and to the extent
Borrower shall not have so made such payment in full to Agent, each Lender shall repay to
Agent forthwith on demand such amount distributed to such Lender together with interest
thereon, for each day from the date such amount is distributed to such Lender until the date
such Lender repays such amount to Agent, at the interest rate applicable to such portion of
the Loan.




     (l) Other Financings. Without limiting the rights to which any Lender
otherwise is or may become entitled, such Lender shall have no interest, by virtue of this
Agreement or the Loan Documents, in (a) any present or future loans from, letters of credit
issued by, or leasing or other financial transactions by, any other Lender to, on behalf of,
or with Borrower (collectively referred to herein as “Other Financings”) other than the
obligations hereunder; (b) any present or future guarantees by or for the account of
Borrower which are not contemplated by the Loan Documents; (c) any present or future
property taken as security for any such Other Financings; or (d) any property now or
hereafter in the possession or control of any other Lender which may be or become security
for the obligations of Borrower arising under any loan document by reason of the general
description of indebtedness secured or property contained in any other agreements, documents
or instruments relating to any such Other Financings.




     (m) Interests of Lenders. Nothing in this Agreement shall be construed to
create a partnership or joint venture between Lenders for any purpose. Agent, Lenders and
Borrower recognize that the respective obligations of Lenders under the Commitments shall be
several and not joint and that neither Agent nor any of Lenders shall be responsible or
liable to perform any of the obligations of the other under this Agreement. Each Lender is
deemed to be the owner of an undivided interest in and to all rights, titles, benefits and
interests belonging and accruing to Agent under the Security Instruments, including, without
limitation, liens and security interests in any collateral, fees and payments of principal
and interest by Borrower under the Commitments on a Pro Rata basis. Each Lender shall
perform all duties and obligations of Lenders under this Agreement in the same proportion as
its ownership interest in the Loans outstanding at the date of determination thereof.




     (n) Investments. Whenever Agent in good faith determines that it is uncertain
about how to distribute to Lenders any funds which it has received, or whenever Agent in
good faith determines that there is any dispute among Lenders about how such funds should be
distributed, Agent may choose to defer distribution of the funds which are the subject of
such uncertainty or dispute. If Agent in good faith believes that the uncertainty



46









 







or dispute will not be promptly resolved, or if Agent is otherwise required to invest
funds pending distribution to Lenders, Agent may invest such funds pending distribution (at
the risk of Lenders). All interest on any such investment shall be distributed upon the
distribution of such investment and in the same proportions and to the same Persons as such
investment. All monies received by Agent for distribution to Lenders (other than to the
Person who is Agent in its separate capacity as a Lender) shall be held by Agent pending
such distribution solely as Agent for such Lenders, and Agent shall have no equitable title
to any portion thereof.




     (o) Delegation to Affiliates. Borrower and Lenders agree that Agent may
delegate any of its duties under this Agreement to any of its Affiliates. Any such
Affiliate (and such Affiliate’s directors, officers, agents and employees) which perform
duties in connection with this Agreement shall be entitled to the same benefits of the
indemnification, waiver and other protective provisions to which Agent is entitled under
Sections 15 and 18.




     (p) Execution of Collateral Documents. Lenders hereby empower and authorize
Agent to execute and deliver the Security Instruments and all related financing statements
and other financing statements, agreements, documents or instruments that shall be necessary
or appropriate to effect the purposes of the Security Instruments.




     (q) Collateral Releases. Lenders hereby empower and authorize Agent to execute
and deliver to Borrower or Guarantors on its behalf any agreements, documents, or
instruments as shall be necessary or appropriate to reflect any releases of Collateral which
shall be permitted by the terms hereof (including, without limitation, the release of
Collateral that Borrower or any Guarantor is permitted to sell pursuant to Section 13
hereof) or of any other Loan Document or which shall otherwise have been approved by the
Required Lenders pursuant to Section 15 hereof.



     16. Exercise of Rights. No failure to exercise, and no delay in exercising, on the part of
Agent or Lenders, any right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the exercise of any
other right. The rights of Agent and Lenders hereunder shall be in addition to all other rights
provided by law.



     17. Notices. Any notices or other communications required or permitted to be given by this
Agreement or any other documents or instruments referred to herein must be given in writing (which
may be by bank wire, telecopy or similar writing) and shall be given to the party to whom such
notice or communication is directed at the address or telecopy number of such party as follows:
(a) BORROWER: Approach Resources Inc., One Ridgmar Centre, 6500 West Freeway, Suite 800, Fort
Worth, Texas 76116, Attention: J. Ross Craft, Facsimile No. (817) 989-9001; with copy to: Steve
Smart, One Ridgmar Centre, 6500 West Freeway, Suite 800, Fort Worth, Texas 76116, Fort Worth, Texas
76116, Facsimile No. (817) 989-9001; (b) AGENT and LENDERS: c/o The Frost National Bank, 777 Main
Street, Suite 500, Fort Worth, Texas 76102, Attention: John S. Warren, Facsimile No. (817)
420-5250. Any such notice or other communication shall be effective (a) if given by telecopy, when
such telecopy is transmitted to the telecopy number specified in this Section 17 and the
appropriate answerback is received or



47









 







receipt is otherwise confirmed, (b) if given by mail, three (3) days after deposit in the
mails with first-class postage, prepaid, as addressed as aforesaid or (c) if given by any other
method, when delivered at the address specified in this Section 17; provided, however, that notices
to Agent under Sections 2, 3, 4 or 5 hereof shall not be effective until received. Any notice
required to be given to Lenders shall be given to Agent and distributed to all Lenders by Agent.



     18. Expenses. Borrower shall pay (i) all reasonable and necessary out-of-pocket expenses of
Agent, including reasonable fees and disbursements of special counsel for Agent, in connection with
the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any
Default or Event of Default or alleged Default or Event of Default hereunder, (ii) all reasonable
and necessary out-of-pocket expenses of Agent, including reasonable fees and disbursements of
special counsel for Agent in connection with the preparation of any participation agreement for a
participant or participants requested by Borrower or any amendment thereof and (iii) if a Default
or an Event of Default occurs, all reasonable and necessary out-of-pocket expenses incurred by
Lenders, including reasonable fees and disbursements of counsel, in connection with such Default
and Event of Default and collection and other enforcement proceedings resulting therefrom.
BORROWER HEREBY ACKNOWLEDGES THAT MURPHY MAHON KEFFLER & FARRIER, L.L.P. IS SPECIAL COUNSEL TO
FROST, AS AGENT AND AS A LENDER, UNDER THIS AGREEMENT AND THAT IT IS NOT COUNSEL TO, NOR DOES IT
REPRESENT BORROWER IN CONNECTION WITH THE TRANSACTIONS DESCRIBED IN THIS AGREEMENT. Borrower is
relying on separate counsel in the transaction described herein. Borrower shall indemnify Lenders,
within thirty (30) days after written demand therefor, against any transfer taxes, document taxes,
assessments or charges made by any governmental authority and paid by Lenders (or Agent on behalf
of Lenders) by reason of the execution, delivery and filing of the Loan Documents. The obligations
of this Section 18 shall survive any termination of this Agreement, the expiration of the Loans and
the payment of all indebtedness of Borrower to Lenders hereunder and under the Notes.



     19. Indemnity. Borrower hereby agrees to indemnify Agent, each Lender, their respective
Affiliates, and each of their directors, officers, and employees (the “Indemnified Parties”)
against all losses, claims, damages, penalties, judgments, liabilities and expenses (including,
without limitation, all expenses of litigation or preparation therefor of any Indemnified Party,
Agent, any Lender or any Affiliate that is a party thereto) which any of them may pay or incur
arising out of or relating to this Agreement, the other Loan Documents, the transactions
contemplated hereby or the direct or indirect application or proposed application of the proceeds
of any loan hereunder even if any of the foregoing arises out of the ordinary negligence of the
party seeking indemnification except to the extent that they are determined in a final
non-appealable judgment by a court of competent jurisdiction to have resulted from the gross
negligence or willful misconduct of the party seeking indemnification. The indemnity set forth
herein shall be in addition to any other obligations or liabilities of Borrower to any Indemnified
Party, Agent, and each of Lenders hereunder or at common law or otherwise, and shall survive any
termination of this Agreement, the expiration of the Loans and the payment of all indebtedness of
Borrower to Lenders hereunder and under the Notes. THE PARTIES INTEND FOR THE PROVISIONS OF THIS
SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ANY LIABILITY
INCLUDING STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED



48









 







ON AGENT AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT
NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM.



     20. Non-Liability of Lenders. The relationship between Borrower on the one hand and Lenders
and Agent on the other hand shall be solely that of borrower and lender. Neither Agent, nor any
Lender shall have any fiduciary responsibility to Borrower. Neither Agent, nor any Lender
undertakes any responsibility to Borrower to review or inform Borrower of any matter in connection
with any phase of Borrower’s businesses or operations. Borrower agrees that neither Agent, nor any
Lender shall have any liability to Borrower (whether sounding in tort, contract or otherwise) for
losses suffered by Borrower in connection with, arising out of, or in any way related to, the
transactions contemplated and the relationship established by this Agreement and the other Loan
Documents, or any act, omission or event occurring in connection therewith, unless it is determined
in a final non-appealable judgment by a court of competent jurisdiction that such loss resulted
from the gross negligence or willful misconduct of the party from which recovery is sought.
Neither Agent, nor any Lender shall have any liability with respect to, and Borrower hereby waives,
releases and agrees not to sue for, any special, indirect, consequential or punitive damages
suffered by Borrower in connection with, arising out of, or in any way related to this Agreement,
the Loan Documents or any transaction contemplated thereby.



     21. Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS INTENDED TO BE
PERFORMED, IN FORT WORTH, TARRANT COUNTY, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS SHALL GOVERN THE
VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS
AND INSTRUMENTS REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.



     22. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term of this Agreement, such
provisions shall be fully severable and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance from this
Agreement.



     23. Maximum Interest Rate. Regardless of any provisions contained in this Agreement or in any
other documents and instruments referred to herein, Lenders shall never be deemed to have
contracted for or be entitled to receive, collect or apply as interest on the Notes any amount in
excess of the Maximum Rate, and in the event any Lender ever receives, collects or applies as
interest any such excess, or if an acceleration of the maturities of any Notes or if any prepayment
by Borrower results in Borrower having paid any interest in excess of the Maximum Rate, such amount
which would be excessive interest shall be applied to the reduction of the unpaid principal balance
of the Notes for which such excess was received, collected or applied, and, if the principal
balance of such Note is paid in full, any remaining excess shall forthwith be paid to Borrower.
All sums paid or agreed to be paid to Lenders for the use, forbearance or detention of the
indebtedness evidenced by the Notes and/or this Agreement shall,



49









 







to the extent permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the rate or amount of
interest on account of such indebtedness does not exceed the Maximum Rate. In determining whether
or not the interest paid or payable under any specific contingency exceeds the Maximum Rate of
interest permitted by law, Borrower and Lenders shall, to the maximum extent permitted under
applicable law, (i) characterize any non-principal payment as an expense, fee or premium, rather
than as interest; and (ii) exclude voluntary prepayments and the effect thereof; and (iii) compare
the total amount of interest contracted for, charged or received with the total amount of interest
which could be contracted for, charged or received throughout the entire contemplated term of the
Note at the Maximum Rate.



     For purposes of Section 303 of the Texas Finance Code, to the extent applicable to any Lender
or Agent, Borrower agrees that the Maximum Rate shall be the “weekly ceiling” as defined in said
Chapter, provided that such Lender or Agent, as applicable, may also rely, to the extent permitted
by applicable laws of the State of Texas and the United States of America, on alternative maximum
rates of interest under the Texas Finance Code or other laws applicable to such Lender or Agent
from time to time if greater (the “Maximum Rate”).



     24. Amendments. This Agreement may be amended only by an instrument in writing executed by an
authorized officer of the party against whom such amendment is sought to be enforced. No
modification or waiver of any provision of the Loan Documents, including this Agreement, or the
Notes nor consent to departure therefrom, shall be effective unless in writing signed by Borrower
and Required Lenders; provided, however, that no amendment, waiver, or other action shall be
effected pursuant to this Section 24 without the consent of all Lenders which: (a) would increase
the Borrowing Base, (b) would reduce any fees hereunder, or the principal of, or the interest on,
any Lender’s Note or Notes, (c) would postpone any date fixed for any payment of any fees
hereunder, or any principal or interest of any Lender’s Note or Notes, (d) would increase the
aggregate Commitments or any Lender’s individual Commitment hereunder or would materially alter
Agent’s obligations to any Lender hereunder, (e) would release Borrower from its obligation to pay
any Lender’s Note or Notes, (f) would release any Collateral (other than the Collateral that is
sold or transferred with the prior consent of Required Lenders pursuant to Section 13(a)(ii)), (g)
would change the definition of Required Lenders (or without the prior consent of Required Lenders
if such consent is not required), or (h) would amend this sentence. No such consent or waiver
shall extend beyond the particular case and purpose involved. No notice or demand given in any
case shall constitute a waiver of the right to take other action in the same, similar or other
circumstances without such notice or demand. No amendment of any provision of this Agreement
relating to Agent shall be effective without the written consent of Agent.



     25. Multiple Counterparts. This Agreement may be executed in a number of identical separate
counterparts, each of which for all purposes is to be deemed an original, but all of which shall
constitute, collectively, one agreement. No party to this Agreement shall be bound hereby until a
counterpart of this Agreement has been executed by all parties hereto. Delivery of an executed
counterpart of a signature page of the Agreement by telecopy shall be effective as delivery of a
manually executed counterpart of this Agreement.



50









 





     26. Conflict. In the event any term or provision hereof is inconsistent with or conflicts
with any provision of the Loan Documents, the terms or provisions contained in this Agreement shall
be controlling.



     27. Survival. All covenants, agreements, undertakings, representations and warranties made in
the Loan Documents, including this Agreement, the Notes or other documents and instruments referred
to herein shall survive all closings hereunder and shall not be affected by any investigation made
by any party.



     28. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided, however, that Borrower may
not, without the prior written consent of all of Lenders, assign any rights, powers, duties or
obligations hereunder.



     29. Assignments and Participations.




     (a) Each Lender shall have the right to sell, assign or transfer all or any part of its
Note or Notes, its Commitment and its rights and obligations hereunder to one or more
Affiliates, Lenders, financial institutions, pension plans, insurance companies, investment
funds, or similar Persons who are Eligible Assignees or to a Federal Reserve Bank; provided,
that each sale, assignment or transfer (other than to an Affiliate or a Federal Reserve
Bank) shall require the consent of Agent and Borrower, which consents will not be
unreasonably withheld; provided, however, that if an Event of Default has occurred and is
continuing, the consent of Borrower shall not be required. Any such assignee, transferee or
recipient shall have, to the extent of such sale, assignment, or transfer, the same rights,
benefits and obligations as it would if it were such Lender and a holder of such Note,
Commitment and rights and obligations, including, without limitation, the right to vote on
decisions requiring consent or approval of all Lenders or Required Lenders and the
obligation to fund its Commitment; provided, that (1) each such sale, assignment, or
transfer (other than to an Affiliate or a Federal Reserve Bank) shall be in an aggregate
principal amount not less than $5,000,000, (2) each remaining Lender shall at all times
maintain Commitment then outstanding in an aggregate principal amount of at least equal to
$5,000,000; (3) each such sale, assignment or transfer shall be of a Pro Rata Part of such
Lender’s Commitment, (4) no Lender may offer to sell its Note or Notes, Commitment, rights
and obligations or interests therein in violation of any securities laws; and (5) no such
assignments (other than to a Federal Reserve Bank) shall become effective until the
assigning Lender and its assignee delivers to Agent and Borrower an Assignment and
Acceptance and the Note or Notes subject to such assignment and other documents evidencing
any such assignment. An assignment fee in the amount of $3,500 for each such assignment
(other than to an Affiliate, a Lender or the Federal Reserve Bank) will be payable by the
transferring Lender to Agent by assignor or assignee. Within five (5) Business Days after
its receipt of copies of the Assignment and Acceptance and the other documents relating
thereto and the Note or Notes, Borrower shall execute and deliver to Agent (for delivery to
the relevant assignee) a new Note or Notes evidencing such assignee’s assigned Commitment
and if the assignor Lender has retained a portion of its Commitment, a replacement Note in
the principal amount of the Commitment retained by the assignor (except as provided in the
last sentence of this



51









 







paragraph (a) such Note or Notes to be in exchange for, but not in payment of, the Note
or Notes held by such Lender). On and after the effective date of an assignment hereunder,
the assignee shall for all purposes be a Lender, party to this Agreement and any other Loan
Document executed by Lenders and shall have all the rights and obligations of a Lender under
the Loan Documents, to the same extent as if it were an original party thereto, and no
further consent or action by Borrower, Lenders or Agent shall be required to release the
transferor Lender with respect to its Commitment assigned to such assignee and the
transferor Lender shall henceforth be so released.




     (b) Each Lender shall have the right to grant participations in all or any part of such
Lender’s Notes and Commitment hereunder to one or more pension plans, investment funds,
insurance companies, financial institutions or other Persons, provided, that:




     (i) each Lender granting a participation shall retain the right to vote
hereunder, and no participant shall be entitled to vote hereunder on
decisions requiring consent or approval of Lender or Required Lenders
(except as set forth in (iii) below);




     (ii) in the event any Lender grants a participation hereunder, such
Lender’s obligations under the Loan Documents shall remain unchanged, such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, such Lender shall remain the holder of any
such Note or Notes for all purposes under the Loan Documents, and Agent,
each Lender and Borrower shall be entitled to deal with the Lender granting
a participation in the same manner as if no participation had been granted;
and




     (iii) no participant shall ever have any right by reason of its
participation to exercise any of the rights of Lenders hereunder, except
that any Lender may agree with any participant that such Lender will not,
without the consent of such participant (which consent may not be
unreasonably withheld) consent to any amendment or waiver requiring approval
of all Lenders.




     (c) It is understood and agreed that any Lender may provide to assignees and
participants and prospective assignees and participants financial information and reports
and data concerning Borrower’s or Guarantors’ properties and operations which was provided
to such Lender pursuant to this Agreement, provided, that each recipient thereto has first
agreed, for the benefit of Borrower, to hold such information, reports and data in
confidence on the terms set out in Section 12(j) hereof.




     (d) Upon the reasonable request of either Agent or Borrower, each Lender will identify
those to whom it has assigned or participated any part of its Notes and Commitment, and
provide the amounts so assigned or participated.



52









 





     30. Choice of Forum: Consent to Service of Process and Jurisdiction. THE OBLIGATIONS OF
BORROWER UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN TARRANT COUNTY, TEXAS. ANY SUIT, ACTION OR
PROCEEDING AGAINST BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT
IN RESPECT THEREOF, MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF TARRANT, OR IN
THE UNITED STATES COURTS LOCATED IN TARRANT COUNTY, TEXAS AND BORROWER HEREBY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY SUCH SUIT, ACTION OR PROCEEDING.
BORROWER HEREBY IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN
SAID COURT BY THE MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
BORROWER, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17. BORROWER HEREBY IRREVOCABLY WAIVES
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE
STATE OF TEXAS, COUNTY OF TARRANT, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.



     31. Waiver of Jury Trial. BORROWER, AGENT AND LENDERS HEREBY WAIVE, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT
OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.



     32. Other Agreements. THIS WRITTEN CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.



     33. Financial Terms. All accounting terms used in this Agreement which are not specifically
defined herein shall be construed in accordance with Accounting Principles.



     34. Tri-Party Loan. Texas Finance Code, Section 346 shall not apply to loans evidenced by
this Agreement or the Notes.



     35. USA Patriot Act Notice. Each Lender hereby notifies Borrower that pursuant to the
requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (the “Act”), it is required to obtain, verify and record information that identifies
Borrower, which information includes the name and address of Borrower and other information that
will allow such Lender to identify Borrower in accordance with the Act.



     36. Approach Resources I, LP Credit Agreement. As of the Effective Date, Borrower has assumed
all liabilities and obligations of Approach Resources I, LP in existence



53









 







and arising under that certain Amended and Restated Credit Agreement dated February 15, 2007 among
Approach Resources I, LP, The Frost National Bank, as Administrative Agent and Lenders (the
“Approach Resources I Credit Agreement”). Effective upon the Effective Date, this Agreement shall
supersede in its entirety the Approach Resources I Credit Agreement and the Approach Resources I,
Credit Agreement shall terminate. Agent does hereby release Approach Resources I, LP from any and
all obligations, covenants, representations and warranties contained in the Approach Resources I
Credit Agreement and, within twenty (20) days after the Effective Date, will return to Borrower
the promissory notes executed by Approach Resources I, LP pursuant to the Approach Resources I
Credit Agreement, marked “Cancelled” ;



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.



[Signature Pages to Follow]





54












 





	 	 	 	 	 
	 	BORROWER:



APPROACH RESOURCES INC.,

a Delaware corporation

 	 
	 	By:  	/s/ J. Ross Craft
 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 
	 
	 	GUARANTORS:



APPROACH OIL & GAS INC.,

a Delaware corporation

 	 
	 	By:  	/s/ J. Ross Craft
 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 
	 
	 	APPROACH OIL & GAS (CANADA), INC.,

an Alberta, Canada corporation

 	 
	 	By:  	/s/ J. Ross Craft
 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 



55









 






	 	 	 	 	 



	 	 	 	 	 
	 	APPROACH RESOURCES I, LP,

a Texas limited partnership

 	 
	 	By:  	Approach Operating, LLC,
 	 
	 	 	a Delaware limited liability company, 	 
	 	 	its general partner 	 
	 
	 	 	 
	 	By:  	Approach Resources Inc.,
 	 
	 	 	a Delaware corporation, 	 
	 	 	its sole member 	 
	 
	 	 	 
	 	By:  	/s/ J. Ross Craft
 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 
	 
	 	AGENT:



THE FROST NATIONAL BANK

 	 
	 	By:  	/s/ John S. Warren
 	 
	 	 	John S. Warren, Senior Vice President 	 
	 	 	 	 
	 



	 	 	 	 	 
	

Commitment Percentage

50%
	LENDERS:



THE FROST NATIONAL BANK

 	 
	 	By:  	                                          /s/ John S. Warren
 	 
	 	 	John S. Warren, Senior Vice President 	 
	 	 	 	 
	 
	
Commitment Percentage

50% 	

JPMORGAN CHASE BANK, NA

 	 
	 	By:  	                                         /s/ Wm. Mark Cranmer
 	 
	 	 	Wm. Mark Cranmer, Senior Vice President 	 
	 	 	 	 
	 




56









 








EXHIBIT “A”




NOTICE OF BORROWING





     The undersigned APPROACH RESOURCES INC., a Delaware corporation (“Borrower”), is authorized to
execute this Notice of Borrowing in the capacity stated below. With reference to that certain
Credit Agreement dated as of January 18, 2008 (as same may be amended, modified, increased,
supplemented and/or restated from time to time, the “Agreement”) entered into by and among Borrower
and THE FROST NATIONAL BANK (“Agent”), and the financial institutions parties thereto (the
“Lenders”), Borrower further certifies, represents and warrants that all of the foregoing
statements are true and correct (each capitalized term used herein having the same meaning given to
it in the Agreement unless otherwise specified):




     (a) Borrower requests that Lenders advance Borrower on the Loan the aggregate sum of
$                     by no later than                     . Immediately following such Advance,
the aggregate outstanding balance of Advances shall equal $                     on the Loan.




     (b) This Advance shall be a: Base Rate Loan                     , or a Eurodollar Loan
                    , (if Eurodollar please state requested Interest Period            months).




     (c) As of the date hereof, and as a result of the making of the requested Advance,
there does not and will not exist any Default or Event of Default.




     (d) Borrower has performed and complied in all material respects with all agreements
and conditions contained in the Agreement which are required to be performed or complied
with by Borrower before or on the date hereof.




     (e) The representations and warranties contained in the Agreement are true and correct
in all material respects as of the date hereof and shall be true and correct in all material
respects upon the making of the Advance, with the same force and effect as though made on
and as of the date hereof and thereof (except to the extent such representations and
warranties related solely to an earlier date).




     (f) No change that would cause a Material Adverse Effect to the condition, financial or
otherwise, of Borrower has occurred since the most recent Financial Statement provided to
Lenders.



1









 





     EXECUTED AND DELIVERED this       day of      , 200   .



	 	 	 	 	 
	 	APPROACH RESOURCES INC.,

a Delaware corporation

 	 
	 	By:  	 	 
	 	 	J. Ross Craft, President and Chief Executive Officer	 



2









 






	 	 	 	 	 



EXHIBIT “B”




REVOLVING NOTE




					
	 	 	 	 	 
	$200,000,000.00
	 	Fort Worth, Texas
	 	January 18, 2008






     FOR VALUE RECEIVED, the undersigned APPROACH RESOURCES INC., a Delaware corporation
(“Borrower”), hereby unconditionally promises to pay to the order of THE FROST NATIONAL BANK and
the other financial institutions named in the Credit Agreement (as hereinafter defined) (the
“Lenders”) at the offices of THE FROST NATIONAL BANK (the “Agent”) in Tarrant County, Texas, the
principal sum of TWO HUNDRED MILLION AND NO/100 DOLLARS ($200,000,000.00), or so much thereof as
may be advanced and outstanding at any time or from time to time pursuant to the Credit Agreement
in lawful money of the United States of America together with interest from the date hereof until
paid at the rates specified in the Credit Agreement. All payments of principal and interest due
hereunder are payable at the offices of Agent at 777 Main Street, Suite 500, Fort Worth, Texas
76102, Attention: John S. Warren, or at such other address as Agent shall designate in writing to
Borrower.



     The principal and all accrued interest on this Note shall be due and payable in accordance
with the terms and provisions of the Credit Agreement.



     This Note is executed pursuant to that certain Credit Agreement (the “Credit Agreement”) dated
of even date herewith by and among Borrower, the Agent and Lenders, and is one of the Notes
referred to therein. Reference is made to the Credit Agreement and the Loan Documents (as that
term is defined in the Credit Agreement) for a statement of prepayment rights and obligations of
Borrower, for a statement of the terms and conditions under which the due date of this Note may be
accelerated and for statements regarding other matters affecting this Note (including without
limitation the obligations of the holder hereof to advance funds hereunder, principal and interest
payment due dates, voluntary and mandatory prepayments, exercise of rights and remedies, payment of
attorneys’ fees, court costs and other costs of collection and certain waivers by Borrower and
others now or hereafter obligated for payment of any sums due hereunder). Upon the occurrence of
an Event of Default (as that term is defined in the Credit Agreement and Loan Documents) the Agent
may declare forthwith to be entirely and immediately due and payable the principal balance hereof
and the interest accrued hereon, and the Lender shall have all rights and remedies of the Lender
under the Credit Agreement and Loan Documents. This Note may be prepaid in accordance with the
terms and provisions of the Credit Agreement.



     Regardless of any provision contained in this Note, the holder hereof shall never be entitled
to receive, collect or apply, as interest on this Note, any amount in excess of the Maximum Rate
(as such term is defined in the Credit Agreement), and, if the holder hereof ever receives,
collects, or applies as interest any such amount which would be excessive interest, it shall be
deemed a partial prepayment of principal and treated hereunder as such; and, if the indebtedness
evidenced hereby is paid in full, any remaining excess shall forthwith be paid to Borrower. In
determining whether or not the interest paid or payable under any specific contingency exceeds the
Maximum Rate, Borrower and the holder hereof shall, to the maximum



1









 







extent permitted under applicable law (i) characterize any non-principal payment as an
expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, and (iii) spread the total amount of interest throughout the entire contemplated term of
the obligations evidenced by this Note and/or referred to in the Credit Agreement so that the
interest rate is uniform throughout the entire term of this Note; provided that, if this Note is
paid and performed in full prior to the end of the full contemplated term thereof and if the
interest received for the actual period of existence thereof exceeds the Maximum Rate, the holder
hereof shall refund to Borrower the amount of such excess or credit the amount of such excess
against the indebtedness evidenced hereby, and, in such event, the holder hereof shall not be
subject to any penalties provided by any laws for contracting for, charging, taking, reserving or
receiving interest in excess of the Maximum Rate.



     If any payment of principal or interest on this Note shall become due on a day other than a
Business Day (as such term is defined in the Credit Agreement), such payment shall be made on the
next succeeding Business Day and such extension of time shall in such case be included in computing
interest in connection with such payment.



     If this Note is placed in the hands of an attorney for collection, or if it is collected
through any legal proceeding at law or in equity or in bankruptcy, receivership or other court
proceedings, Borrower agrees to pay all costs of collection, including, but not limited to, court
costs and reasonable attorneys’ fees.



     Borrower and each surety, endorser, guarantor and other party ever liable for payment of any
sums of money payable on this Note, jointly and severally waive presentment and demand for payment,
notice of intention to accelerate the maturity, protest, notice of protest and nonpayment, as to
this Note and as to each and all installments hereof, and agree that their liability under this
Note shall not be affected by any renewal or extension in the time of payment hereof, or in any
indulgences, or by any release or change in any security for the payment of this Note, and hereby
consent to any and all renewals, extensions, indulgences, releases or changes.



     THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA AND THE LAWS OF THE STATE OF TEXAS. BORROWER AGREES THAT THIS NOTE IS
PERFORMABLE IN TARRANT COUNTY, TEXAS AND THAT SUCH COUNTY IS PROPER VENUE FOR ANY ACTION OR
PROCEEDING INVOLVING THIS NOTE TO THE EXCLUSION OF ALL OTHER VENUES.



     A portion of the principal amount of this Note is given in renewal, but not extinguishment, of
all amounts left owing and unpaid on those certain Promissory Notes dated February 15, 2007,
executed and delivered by Approach Resources I, LP and payable to the order of The Frost National
Bank and other financial institutions named in the credit agreement dated February 15, 2007 between
Approach Resources I, LP and The Frost National Bank and JPMorgan Chase Bank, NA in the original
aggregate amount of $100,000,000 (the “Prior Note”). Effective the date hereof, Borrower has
assumed all of the liabilities and obligations of Approach Resources I, LP under the Prior Note.



2









 





     THIS INSTRUMENT SECURES A LINE OF CREDIT USED PRIMARILY FOR BUSINESS, COMMERCIAL OR
AGRICULTURAL PURPOSES.



     THIS WRITTEN NOTE, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENTS BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.



     EXECUTED as of the date and year first above written.



	 	 	 	 	 
	 	BORROWER:




APPROACH RESOURCES INC.,

a Delaware corporation

 	 
	 	By:  	 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 



3









 






	 	 	 	 	 



EXHIBIT “C”




CERTIFICATE OF COMPLIANCE





     The undersigned APPROACH RESOURCES INC., a Delaware corporation (“Borrower”), hereby certifies
that J. Ross Craft is authorized to execute this Certificate of Compliance (in the capacity stated
in his signature below). With reference to that certain Credit Agreement, dated as of January 18,
2008 (as same may be amended, modified, increased, supplemented and/or restated from time to time,
the “Agreement”) entered into between the Borrower and THE FROST NATIONAL BANK as “Agent” and
Lender, for itself and the Lenders signatory thereto (the “Lenders”), the undersigned further
certifies, represents and warrants on behalf of Borrower that all of the following statements are
true and correct (each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):




     (a) Borrower has fulfilled in all material respects its obligations under the Notes and
Loan Documents, including the Agreement, and all representations and warranties made herein
and therein continue (except to the extent they relate solely to an earlier date) to be true
and correct in all material respects.




     (b) No Default or Event of Default has occurred under the Loan Documents, including the
Agreement.




     (c) To the extent requested from time to time by the Agent, the certifying party shall
specifically affirm compliance of Borrower in all material respects with any of its
representations and warranties (except to the extent they relate solely to an earlier date)
or obligations under said instruments.




     (d) Financial Computations for the period ending                                          :




     (ii) Current Ratio:



     EXECUTED, DELIVERED AND CERTIFIED TO this       day of           , 200   .



	 	 	 	 	 
	 	APPROACH RESOURCES INC.,

a Delaware corporation

 	 
	 	By:  	 	 
	 	 	J. Ross Craft, President and Chief Executive Officer 	 
	 	 	 	 



1









 






	 	 	 	 	 



EXHIBIT “D”




ASSIGNMENT AND ACCEPTANCE AGREEMENT





     This Assignment Agreement (“Assignment Agreement”) between                                          (the
“Assignor”) and                                          (the “Assignee”) is dated as of
                                        , 2008. The parties hereto agree as follows:



     1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement (which, as it
may be amended, modified, renewed or extended from time to time is herein called the “Credit
Agreement”) described in Item 1 of Schedule 1 attached hereto (“Schedule 1”). Capitalized terms
used herein and not otherwise defined herein shall have the meanings attributed to them in the
Credit Agreement.



     2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the Assignee,
and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the
Assignor’s rights and obligations under the Credit Agreement and the other Loan Documents, such
that after giving effect to such assignment the Assignee shall have purchased pursuant to this
Assignment Agreement the percentage interest specified in Item 3 of Schedule 1 of all outstanding
rights and obligations under the Credit Agreement and the other Loan Documents relating to the
facilities listed in Item 3 of Schedule 1. The aggregate Commitment (or Loans, if the applicable
Commitment has been terminated) purchased by the Assignee hereunder is set forth in Item 4 of
Schedule 1.



     3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the “Effective
Date”) shall be the later of the date specified in Item 5 of Schedule 1 or two Business Days (or
such shorter period agreed to by the Agent) after this Assignment Agreement, together with any
consents required under the Credit Agreement, are delivered to the Agent. In no event will the
Effective Date occur if the payments required to be made by the Assignee to the Assignor on the
Effective Date are not made on the proposed Effective Date.



     4. PAYMENT OBLIGATIONS. In consideration for the sale and assignment of Loans
hereunder, the Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the
Assignor and the Assignee. On and after the Effective Date, the Assignee shall be entitled to
receive from the Agent all payments of principal, interest and fees with respect to the interest
assigned hereby. The Assignee will promptly remit to the Assignor any interest on Loans and fees
received from the Agent which relate to the portion of the Commitment or Loans assigned to the
Assignee hereunder for periods prior to the Effective Date and not previously paid by the Assignee
to the Assignor. In the event that either party hereto receives any payment to which the other
party hereto is entitled under this Assignment Agreement, then the party receiving such amount
shall promptly remit it to the other party hereto.



     5. RECORDATION FEE. The Assignor and Assignee each agree to pay one-half of the
recordation fee required to be paid to the Agent in connection with this Assignment Agreement
unless otherwise specified in Item 6 of Schedule 1.



1









 





     6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR’S LIABILITY. The
Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest
being assigned by it hereunder, (ii) such interest is free and clear of any adverse claim created
by the Assignor and (iii) the execution and delivery of this Assignment Agreement by the Assignor
is duly authorized. It is understood and agreed that the assignment and assumption hereunder are
made without recourse to the Assignor and that the Assignor makes no other representation or
warranty of any kind to the Assignee. Neither the Assignor nor any of its officers, directors,
employees, agents or attorneys shall be responsible for (i) the due execution, legality, validity,
enforceability, genuineness, sufficiency or collectability of any Loan Document, including without
limitation, documents granting the Assignor and the other Lenders a security interest in assets of
the Borrower [or Guarantor], (ii) any representation, warranty or statement made in or in
connection with any of the Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower [or Guarantor], (iv) the performance of or compliance with any of the terms or provisions
of any of the Loan Documents, (v) inspecting any of the property, books or records of the Borrower,
(vi) the validity, enforceability, perfection, priority, condition, value or sufficiency of any
collateral securing or purporting to secure the Loans or (vii) any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan Documents.



     7. REPRESENTATIONS AND UNDERTAKINGS OF THE ASSIGNEE. The Assignee (i) confirms that
it has received a copy of the Credit Agreement and other Loan Documents, together with copies of
the financial statements requested by the Assignee and such other documents and information as it
has deemed appropriate to make its own credit analysis and decision to enter into this Assignment
Agreement, (ii) agrees that it will, independently and without reliance upon the Agent, the
Assignor or any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or not taking action
under the Loan Documents, (iii) appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by
the terms thereof, together with such powers as are reasonably incidental thereto, (iv) confirms
that the execution and delivery of this Assignment Agreement by the Assignee is duly authorized,
(v) agrees that it will perform in accordance with its terms all of the obligations which by the
terms of the Loan Documents are required to be performed by it as a Lender, (vi) agrees that its
payment instructions and notice instructions are as set forth in the attachment to Schedule 1,
(vii) confirms that none of the funds, monies, assets or other consideration being used to make the
purchase and assumption hereunder are “plan assets” as defined under ERISA and that its rights,
benefits and interests in and under the Loan Documents will not be “plan assets” under ERISA,
(viii) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses
(including, without limitation, reasonable attorneys’ fees) and liabilities incurred by the
Assignor in connection with or arising in any manner from the Assignee’s non-performance of the
obligations assumed under this Assignment Agreement, and (ix) if applicable, attaches the forms
prescribed by the Internal Revenue Service of the United States certifying that the Assignee is
entitled to receive payments under the Loan Documents without deduction or withholding of any
United States federal income taxes.



     8. GOVERNING LAW. This Assignment Agreement shall be governed by the internal law,
and not the law of conflicts, of the State of Texas



2









 





     9. NOTICES. Notices shall be given under this Assignment Agreement in the manner set
forth in the Credit Agreement. For the purpose hereof, the addresses of the parties hereto (until
notice of a change is delivered) shall be the address set forth in the attachment to Schedule 1.



     10. COUNTERPARTS; DELIVERY BY FACSIMILE. This Assignment Agreement may be executed in
counterparts. Transmission by facsimile of an executed counterpart of this Assignment Agreement
shall be deemed to constitute due and sufficient delivery of such counterpart and such facsimile
shall be deemed to be an original counterpart of this Assignment Agreement.



     IN WITNESS WHEREOF, the duly authorized officers of the parties hereto have executed this
Assignment Agreement by executing Schedule 1 hereto as of the date first above written.



	 	 	 	 	 
	 	[ASSIGNOR]

 	 
	 	By:  	 	 
	 	Title:  	
 	 
	 	 	 
	 	Address:  	 	 
	 	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	[ASSIGNEE]

 
	 	By:  	 	 
	 	Title:  	
 	 
	 	 	 
	 	Address:  	 	 
	 	 	 	 	 



3









 





	 	 	 	 	 




	 	 	 	 	 
	(If required)



ACKNOWLEDGED AND CONSENTED TO:



THE FROST NATIONAL BANK,

as Agent

 	 	 
	By:  	 	 	 
	 	John S. Warren, Senior Vice President 	 	 
	 	 	 	 
	 
	APPROACH RESOURCES INC.,

a Delaware corporation

 	 	 
	By:  	 	 	 
	 	J. Ross Craft, President and Chief Executive 	 	 
	 	Officer 	 	 



4









 





SCHEDULE 1

to Assignment Agreement




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	1.	 	Description and Date of Credit Agreement: $200,000,000 Credit Agreement dated January 18,
2008
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	2.	 	Date of Assignment Agreement:                     , 2008
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	3.	 	Amounts (As of Date of Item 2 above):	 	Facility
	 	Facility	 	Facility	 	Facility
	 

	 	 	 	 	 	 	1*	 	 	2*
	 	3*
	 	4*
	 

	 	 	 	 	 	 	 	 
	 	 
	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	a.
	 	Assignee’s percentage
of each Facility purchased
under the Assignment
Agreement**
	 	     %
	 	     %
	 	     %
	 	     %
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	b.
	 	Amount of each Facility
purchased under the
Assignment Agreement***
	 	$     
	 	$     
	 	$     
	 	$     
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4.	 	Assignee’s Commitment (or Loans
with respect to terminated Commitments)
purchased hereunder:	 	 	$	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5.	 	Proposed Effective Date:	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	6.	 	Non-standard Recordation Fee

Arrangement	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	[Assignor/Assignee

to pay 100% of fee]

[Fee waived by Agent]	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accepted and Agreed:	 	 	 	 	 	 	 	 	 	 






	 	 	 	 	 	 
	[NAME OF ASSIGNOR]

	 	[NAME OF ASSIGNEE]
	 
	 	 
	By:
	 	 	By:
	 	 

	 	 	 
	 
	 	 
	Title:
	 	 	Title:
	 	 

	 	 	 
	 
	 	 
	 
	 	 
	ACCEPTED AND CONSENTED TO BY

APPROACH RESOURCES INC.,

a Delaware corporation

	 	ACCEPTED AND CONSENTED TO BY

THE FROST NATIONAL BANK
	 
	 	 
	 

	 	 	By:
	 	 

	 	 	 
	 

	 	 	 	John S. Warren, Senior Vice President
	By:
	 	 
	 	 
	 	 
	 	J. Ross Craft, President and
Chief Executive Officer
	 	 







5











 





SCHEDULE 1




LIENS



None.




 









 








SCHEDULE 2




FINANCIAL CONDITION



None.




 









 








SCHEDULE 2(e)




EXISTING LETTERS OF CREDIT




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Date	 	Applicant	 	LC No.	 	Amount	 	Issuer	 	Beneficiary	 	Expiration
	8/4/2006

	 	Approach Operating,

LLC
	 	25383-SA
	 	$	50,000	 	 	Frost Bank
	 	Commonwealth of
Kentucky
	 	8/1/2008
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	2/7/2007

	 	Approach Operating,

LLC
	 	25558-SA
	 	$	50,000	 	 	Frost Bank
	 	Lyon County Fiscal

Court
	 	2/7/2008
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	3/28/2007

	 	Approach Operating,

LLC
	 	25602-SA
	 	$	50,000	 	 	Frost Bank
	 	State of New Mexico
— Energy, Minerals
and Natural
Resources
Department, Oil
Conservation
Division
	 	3/28/2012
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	7/12/2007

	 	Approach Oil & Gas
Inc.
	 	25707-SA
	 	$	2,600,000	 	 	Frost Bank
	 	EnCana Oil & Gas
(USA) Inc.
	 	7/13/2008
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	10/16/2007

	 	Approach Operating,

LLC
	 	25428-S
	 	$	250,000	 	 	Frost Bank
	 	Railroad Commission
of Texas
	 	3/1/2009






 









 






SCHEDULE 3




LIABILITIES



None.




 









 








SCHEDULE 4




LITIGATION



None.




 









 








SCHEDULE 5




ENVIRONMENTAL MATTERS



None.