[EXECUTION COPY]
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                           MONTEREY RESOURCES, INC.

                                 $175,000,000

                         10.61% Senior Notes Due 2005

                                NOTE AGREEMENT

                         Dated as of November 19, 1996

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                               TABLE OF CONTENTS

                                                                          Page

PARAGRAPH 1.     AUTHORIZATION OF ISSUE OF NOTES.............................2

PARAGRAPH 2.     EXCHANGE OF NOTES...........................................2

PARAGRAPH 3.     CONDITIONS..................................................2
      3.         Conditions of Closing.......................................2
      3A.        Certain Documents...........................................3
      3B.        Opinion of Purchasers' Special Counsel......................4
      3C.        Representations and Warranties; No Default..................5
      3D.        Exchange of Notes with All Purchasers; Cancellation 
                 of Series G Notes...........................................5
      3E.        Transactions Permitted by Applicable Laws...................5
      3F.        Proceedings.................................................5
      3G.        Initial Public Offering.....................................5
      3H.        Consummation of Certain Transactions........................6
      3I.        Restructuring Fees and Legal Fees...........................6
      3J.        Compliance With Outstanding Debt Limitations................6

PARAGRAPH 4.     PREPAYMENTS.................................................6
      4.         Prepayments.................................................6
      4A.        Required Prepayments........................................6
      4B.        Optional Prepayment with Yield-Maintenance Premium..........7
      4C.        Notice of Optional Prepayment...............................7
      4D.        Partial Payments Pro Rata...................................7
      4E.        Retirement of Notes.........................................7

PARAGRAPH 5.     AFFIRMATIVE COVENANTS.......................................8
      5.         Affirmative Covenants.......................................8
      5A.        Financial Statements........................................8
      5B.        Inspection of Property.....................................12
      5C.        Compliance with Environmental Laws.........................13
      5D.        Payment of Taxes...........................................13
      5E.        Maintenance of Insurance...................................13
      5F.        Private Placement Rating...................................13
      5G.        Tax Indemnity..............................................14
      5H.        Production Payment.........................................15

PARAGRAPH 6.     NEGATIVE COVENANTS.........................................15
      6.         Negative Covenants.........................................15
      6A.        Restricted Payments and Restricted Investments.............15

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                                                                          PAGE

      6B.        Lien, Debt and Other Restrictions..........................16
      6B(1).     Liens......................................................16
      6B(2).     Debt.......................................................18
      6B(3).     Sale of Less than Substantially All Assets.................19
      6B(4).     Sale of Stock of Restricted Subsidiaries...................20
      6B(5).     Merger and Sale of All or Substantially All Assets.........22
      6B(6).     Sale and Leaseback.........................................24
      6B(7).     Transactions with Affiliates...............................25
      6B(8).     Tax Consolidation..........................................25
      6C.        Issuance of Stock by Restricted Subsidiaries...............25
      6D.        Maintenance of Consolidated Net Worth......................25
      6E.        Interest Coverage..........................................25

PARAGRAPH 7.     EVENTS OF DEFAULT..........................................26
      7.         Events of Default..........................................26
      7A.        Acceleration...............................................26
      7B.        Rescission of Acceleration.  ..............................30
      7C.        Other Remedies.............................................30
      7D.        Notice by the Company of Acceleration......................31

PARAGRAPH 8.     REPRESENTATIONS, COVENANTS AND WARRANTIES..................31
      8.         Representations, Covenants and Warranties..................31
      8A.        Organization; Qualification; Corporate Authority...........31
      8B.        Financial Statements.......................................32
      8C.        Conflicting Agreements and Other Matters...................32
      8D.        Governmental Consent.......................................33
      8E.        Enforceability.............................................33
      8F.        Actions Pending............................................33
      8G.        Outstanding Debt...........................................34
      8H.        Title to Properties........................................34
      8I.        Taxes......................................................34
      8J.        Offering of Notes..........................................34
      8K.        Use of Proceeds from the Initial Public Offering...........34
      8L.        Regulation G, etc..........................................34
      8M.        ERISA......................................................35
      8N.        Disclosure.................................................35
      8O.        Pollution and Other Regulations............................35
      8P.        Brokerage..................................................36
      8Q.        Possession of Permits, Licenses, Etc.......................36
      8R.        Public Utility Holding Company Act; Federal Power Act; 
                 Investment Company Act.....................................37
      8S.        Restricted Investments.....................................37

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                                                                          PAGE


PARAGRAPH 9.     REPRESENTATIONS OF EACH PURCHASER..........................37
      9.         Representations of Each Purchaser..........................37
      9A.        Nature of Purchase.........................................37
      9B.        Source of Funds............................................37
      9C.        Certification Regarding Series G Notes.....................38

PARAGRAPH 10.    DEFINITIONS AND ACCOUNTING TERMS...........................39
      10A.       Certain Defined Terms......................................39
      10B.       Accounting Terms...........................................56

PARAGRAPH 11.    MISCELLANEOUS..............................................57
      11.        Miscellaneous..............................................57
      11A.       Note Payments..............................................57
      11B.       Expenses...................................................57
      11C.       Consent to Amendments......................................57
      11D.       Form, Registration, Transfer and Exchange of Notes; 
                 Lost Notes.................................................58
      11E.       Persons Deemed Owners; Participations......................59
      11F.       Survival of Representations and Warranties; 
                 Entire Agreement...........................................59
      11G.       Successors and Assigns.....................................59
      11H.       Disclosure to Other Persons................................59
      11I.       Notices....................................................60
      11J.       Descriptive Headings; Execution by Facsimile Transmission..60
      11K.       Satisfaction Requirement...................................60
      11L.       Governing Law..............................................61
      11M.       Waiver of Jury Trial; Consent to Jurisdiction..............61
      11N.       Counterparts...............................................62
      11O.       Effectiveness..............................................62

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                                                                          PAGE
Schedule I  -  Schedule of Purchasers
Schedule 8A -  Subsidiaries
Schedule 8C -  Debt Agreements
Schedule 8G -  Outstanding Debt
Schedule 8K -  Use of Proceeds from the Initial Public Offering

Exhibit A   -  Form of Note
Exhibit B-1 -  Opinion of Andrews & Kurth L.L.P. (as to New York, Texas, 
               Delaware GCL and federal law)
Exhibit B-2 -  Opinion of Andrews & Kurth L.L.P. (as to certain matters of 
               California law)
Exhibit B-3 -  Opinion of Terry L. Anderson, Esq.
Exhibit B-4 -  Opinion of David L. Hicks, Esq.
Exhibit C   -  Form of Upstream Loan Subordination Provisions

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                                NOTE AGREEMENT


            This NOTE AGREEMENT (the "AGREEMENT") is entered into as of November
19, 1996 between Monterey Resources, Inc., a Delaware corporation (the
"COMPANY"), and each of the parties identified on the signature pages to this
Agreement (collectively, the "PURCHASERS"). The parties hereto agree as follows:

                                  WITNESSETH

            Santa Fe Energy Resources, Inc., a Delaware corporation ("PARENT"),
the Purchasers and each of the other signatories to the Original Note Agreement
(as hereafter defined) entered into that certain Note Agreement dated as of
March 31, 1990, as amended by that certain First Amendment to Note Agreement
dated as of November 1, 1990, that certain Second Amendment to Note Agreement
dated as of September 1, 1991, that certain Third Amendment to Note Agreement
dated as of November 1, 1992, and that certain Fourth Amendment to Note
Agreement dated as of December 31, 1993 (the "ORIGINAL NOTE AGREEMENT") pursuant
to which Parent issued and sold its Series A 9.92% Senior Notes due March 31,
1993 in the aggregate principal amount of $25,000,000, Series B 10.02% Senior
Notes due March 31, 1994 in the aggregate principal amount of $30,000,000,
Series C 10.04% Senior Notes due March 31, 1995 in the aggregate principal
amount of $30,000,000, Series D 10.14% Senior Notes due March 31, 1996 in the
aggregate principal amount of $35,000,000 (collectively, the "SERIES A-D
NOTES"), Series E 10.23% Senior Notes due March 31, 1997 in the principal amount
of $35,000,000 (the "SERIES E NOTES"), Series F 10.27% Senior Notes due March
31, 1998 in the principal amount of $35,000,000 (the "SERIES F NOTES") and
Series G 10.61% Senior Notes due March 31, 2005 in the principal amount of
$175,000,000 (the "SERIES G NOTES"); and

            The Series A-D Notes have matured, and Parent has paid all
principal, interest and premium, if any, with respect thereto; and

            The Purchasers are the holders of the Series G Notes; and

            In August 1996, Parent organized the Company as a wholly-owned
subsidiary; and

            In connection with the contribution of the Western Assets of Parent
to the Company, the Company assumed, as between itself and Parent, Parent's
obligations under the Original Note Agreement, the Series E Notes, the Series F
Notes and the Series G Notes without relieving Parent of any of its obligations
thereunder; and

            The Company, Parent and the Purchasers have agreed that the
Purchasers will surrender for cancellation the Series G Notes for notes of the
Company dated the last date to which interest has been paid on, and otherwise
with terms substantially identical to those of, the Series G Notes so
surrendered and of like unpaid principal amount;

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            NOW, THEREFORE, in order to accomplish the matters contemplated by
the immediately preceding recital and in consideration of the mutual premises
herein contained and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchasers
agree as follows:

      PARAGRAPH 1.      AUTHORIZATION OF ISSUE OF NOTES.  The Company has
authorized the issue of its senior promissory notes (the "NOTES") in the
aggregate principal amount of $175,000,000, to be dated September 30, 1996 (the
last date through which interest on the Series G Notes has been paid by Parent),
to mature on March 31, 2005, to bear interest on the unpaid balance thereof from
the date thereof until the principal thereof shall become due and payable at the
rate of 10.61% per annum and on overdue principal, Yield-Maintenance Premium and
interest at the rates specified in the Notes. The Notes shall be issuable in
registered form, and shall be in the form of EXHIBIT A attached hereto. The term
"NOTES" as used herein shall include Notes delivered pursuant to any provision
of this Agreement and each Note delivered in substitution or exchange for any
such Note pursuant to any such provision. CAPITALIZED TERMS USED HEREIN HAVE THE
MEANINGS SPECIFIED IN PARAGRAPH 10.

      PARAGRAPH 2. EXCHANGE OF NOTES. The Company hereby agrees to issue the
Notes and, subject to the terms and conditions herein set forth, the Purchasers
severally agree to exchange the Series G Notes with the Company for the
aggregate principal amount of Notes set forth opposite the respective
Purchaser's name in SCHEDULE I attached hereto. The Company will deliver to each
Purchaser, at the offices of Baker & Botts, L.L.P., at 599 Lexington Avenue, New
York, New York 10022-6030, one or more Notes registered in such Purchaser's name
or (if so specified) in the name of such Purchaser's nominee, evidencing the
aggregate principal amount of the Notes to be exchanged by such Purchaser and in
the denomination or denominations specified with respect to such Purchaser in
SCHEDULE I attached hereto against delivery by such Purchaser to the Company of
the Series G Note(s) held by such Purchaser in the aggregate principal amount
equal to the aggregate principal amount of the Notes to be issued to such
Purchaser on the Date of Closing. Upon delivery of the Series G Notes to the
Company, the Company shall cancel, or shall cause Parent to cancel, the Series G
Notes. By wire transfer of immediately available funds to the Paying Agent in
accordance with the Paying Agent Agreement on the date of closing, which shall
be November 19, 1996 or such other date on or prior to November 22, 1996 as the
Company and the Purchasers shall agree (the "CLOSING" or the "DATE OF CLOSING"),
the Company will pay each Purchaser such Purchaser's Restructuring Fee.

      PARAGRAPH 3.      CONDITIONS

            3. CONDITIONS OF CLOSING. The Purchasers' obligations to exchange
the Series G Notes for the Notes hereunder is subject to the satisfaction, on or
before the Date of Closing, of the following conditions:

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            3A. CERTAIN DOCUMENTS. The Purchasers shall have received the
following, each dated the Date of Closing unless otherwise indicated below or in
the relevant definitions set forth in paragraph 10A:

                  (i)   The Notes, which shall be dated September 30, 1996,
            to be exchanged for the Series G Notes;

                  (ii) Certified copies of the Paying Agent Agreement, in form
            and substance satisfactory to the Purchasers, fully executed by the
            Company and the Paying Agent;

                  (iii) Certified copies of the Monterey ERISA Indemnification
            Agreement, in form and substance satisfactory to the Purchasers,
            fully executed by the Company and Parent;

                  (iv) Certified copies of the Conveyance and Contribution
            Agreement, the Corporate Services Agreement, the Registration Rights
            Agreement, and each other document that constitutes an exhibit to
            any of the foregoing, each in form and substance satisfactory to the
            Purchasers, fully executed by the Company and
            Parent;

                  (v) Certified copies of the Agreement Concerning Taxes, in
            form and substance satisfactory to the Purchasers, fully executed by
            Parent, the Company and the Subsidiary of the Company signatory
            thereto;

                  (vi) Certified copies of the Tax Allocation Agreement, in form
            and substance satisfactory to the Purchasers, fully executed by
            Parent and the members of Parent's consolidated group identified
            therein;

                  (vii) Certified copies of the resolutions of the Board of
            Directors of the Company approving this Agreement, the Notes and all
            documents evidencing other necessary corporate action and
            governmental approvals, if any, with respect to this Agreement, the
            Notes and the Paying Agent Agreement;

                  (viii)A certificate of the Secretary or an Assistant Secretary
            of the Company certifying the names and true signatures of the
            officers of the Company authorized to sign this Agreement, the
            Notes, the Paying Agent Agreement and the other documents to be
            delivered hereunder;

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                  (ix)  Certified copies of the Amended and Restated
            Certificate of Incorporation and the bylaws of the Company;

                  (x) Certified copies of the Credit Agreements and the
            Underwriting Agreements, in form and substance satisfactory to the
            Purchasers, fully executed by the parties thereto;

                  (xi) A favorable opinion of Andrews & Kurth L.L.P., special
            counsel to the Company and Parent, satisfactory to the Purchasers
            and substantially in the form of EXHIBIT B-1 attached hereto and as
            to such other matters as the Purchasers may reasonably request;

                  (xii) A favorable opinion of Andrews & Kurth L.L.P., special
            counsel to the Company and Parent, as to certain matters of
            California law, satisfactory to the Purchasers and substantially in
            the form of EXHIBIT B-2 attached hereto and as to such other matters
            of California law as the Purchasers may reasonably request;

                  (xiii)A favorable opinion of Terry L. Anderson, Esq., General
            Counsel of the Company, satisfactory to the Purchasers and
            substantially in the form of EXHIBIT B-3 attached hereto and as to
            such other matters as the Purchasers may reasonably request;

                  (xiv) A favorable opinion of David L. Hicks, Esq., General
            Counsel of Parent, satisfactory to the Purchasers and substantially
            in the form of EXHIBIT B-4 attached hereto and as to such other
            matters as the Purchasers may reasonably request; and

                  (xv) A certificate of the Secretary or an Assistant Secretary
            of the Paying Agent certifying (a) the names and true signatures of
            the officers of the Paying Agent authorized to sign the Paying Agent
            Agreement and the other documents to be delivered thereunder, and
            (b) copies of the resolutions of the Board of Directors of the
            Paying Agent authorizing the execution and delivery of the Paying
            Agent Agreement by such officers on behalf of the Paying Agent.

            3B. OPINION OF PURCHASERS' SPECIAL COUNSEL. The Purchasers shall
have received from Baker & Botts, L.L.P., who are acting as special counsel for
the Purchasers in connection with this transaction, a favorable opinion
satisfactory to the Purchasers as to: (i) the due incorporation, existence and
good standing of the Company; (ii) the due authorization by all requisite
corporate action, execution and delivery and the validity, legally binding
character and enforceability

                                       -4-
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of this Agreement, the Notes and the Paying Agent Agreement; (iii) the absence
of any requirement to register the Notes under the Securities Act; and (iv) such
other matters incident to the matters herein contemplated as the Purchasers may
reasonably request, including the form of all papers and the validity of all
proceedings. In rendering such opinion, such counsel may rely, where
appropriate, upon the opinions referred to in paragraphs 3A(xi), (xii), (xiii)
and (xiv). Such opinion shall also state that, based upon such investigation and
inquiry as is deemed relevant and appropriate by such counsel, the opinions
referred to in paragraphs 3A(xi), (xii), (xiii) and (xiv) are satisfactory in
form and scope to such counsel and, while such investigation and inquiry into
the matters covered by such opinions (other than the matters specified in
clauses (i), (ii) and (iii) above) were not sufficient to enable such counsel
independently to render such opinions, nothing has come to the attention of such
counsel which has caused it to question the legal conclusions expressed in the
opinions referred to in paragraphs 3A(xi), (xii), (xiii) and (xiv) and such
counsel believes that the Purchasers are justified in relying on such opinions.

            3C. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations
and warranties contained in paragraph 8 shall be true on and as of the Date of
Closing; there shall exist on the Date of Closing no Event of Default or
Default; and the Company shall have delivered to the Purchasers an Officer's
Certificate, dated the Date of Closing, to both such effects.

            3D. EXCHANGE OF NOTES WITH ALL PURCHASERS; CANCELLATION OF SERIES G
NOTES. At the Closing, the Company shall exchange the Notes for the Series G
Notes held by each respective Purchaser, and the Company or Parent shall cancel
the Series G Notes.

            3E. TRANSACTIONS PERMITTED BY APPLICABLE LAWS. The consummation of
the transactions contemplated hereby on the terms and conditions herein provided
and the consummation of the Other Transactions shall not violate any applicable
law or governmental regulation (including, without limitation, section 5 of the
Securities Act or Regulation G, T or X of the Board of Governors of the Federal
Reserve System) and shall not subject the Purchasers to any tax (other than the
possibility of taxes covered by the indemnification set forth in paragraph 5G),
penalty, liability or other onerous condition under or pursuant to any
applicable law or governmental regulation, and the Purchasers shall have
received such certificates and other evidence as the Purchasers may request to
establish compliance with this condition.

            3F. PROCEEDINGS. All corporate and other proceedings taken or to be
taken by the Company and Parent in connection with the transactions contemplated
hereby and all documents incident thereto shall be reasonably satisfactory in
substance and form to the Purchasers, and the Purchasers shall have received all
such counterpart originals or certified or other copies of such documents as the
Purchasers may reasonably request.

            3G. INITIAL PUBLIC OFFERING. The Company shall have received net
proceeds of at least $90,000,000, after giving effect to underwriting discounts
and expenses relating thereto as estimated by the Company, from the initial
public offering of shares of the Company's common stock, par value $0.01 per
share, and shall have applied the proceeds thereof that are to be applied

                                       -5-
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by it on or before the Date of Closing as set forth in SCHEDULE 8K hereto; and
the Company shall have delivered to the Purchasers an Officer's Certificate,
dated the Date of Closing, to both such effects.

            3H. CONSUMMATION OF CERTAIN TRANSACTIONS. Parent shall have
transferred the Western Assets to the Company, and the Company and Parent shall
have obtained all necessary consents and waivers (other than those of a routine
nature reasonably expected to be obtained in due course), including, without
limitation, those contemplated by the Waiver, the Consent Solicitation and the
agreements set forth on SCHEDULE 8C hereto, to permit such transfer and the
transactions contemplated by this Agreement.

            3I. RESTRUCTURING FEES AND LEGAL FEES. The Company shall have paid
to the Paying Agent, for the account of each Purchaser and in accordance with
the Paying Agent Agreement, such Purchaser's Restructuring Fee. Without limiting
the generality of paragraph 11B, the Company shall have paid on the Date of
Closing the fees, charges and disbursements of the Purchasers' special counsel
referred to in paragraph 3B to the extent reflected in a statement of such
counsel rendered to the Company at least one Business Day prior to the Closing.

            3J. COMPLIANCE WITH OUTSTANDING DEBT LIMITATIONS. The Company shall
have delivered to the Purchasers an Officer's Certificate of an authorized
financial officer of the Company describing any instrument or agreement to which
Parent, the Company or any Subsidiary is a party or by which Parent, the Company
or any Subsidiary is bound which limits the amount of, or otherwise imposes
restrictions on the incurring of, indebtedness of the type to be evidenced by
the Notes, together with such evidence as the Purchasers or the special counsel
to the Purchasers may reasonably request showing that, after the prepayment of
the Series E Notes and the Series F Notes and after giving effect to the
consents and waivers referred to in paragraph 3H, the transfer by Parent of the
Western Assets and the creation of the Company, the execution, delivery and
performance by the Company of this Agreement and the Notes will not conflict
with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, or result in the creation of any Lien on any
property owned by Parent, the Company or any Subsidiary pursuant to, or
otherwise violate, any agreement or instrument evidencing the indebtedness of
Parent, the Company or any of its Subsidiaries or any agreement relating
thereto.

      PARAGRAPH 4.      PREPAYMENTS

            4. PREPAYMENTS. The Notes shall be subject to prepayment only with
respect to the required prepayments specified in paragraph 4A and also under the
circumstances set forth in paragraph 4B.

            4A. REQUIRED PREPAYMENTS. Until the Notes shall be paid in full, the
Company shall apply to the prepayment of the Notes, without Yield-Maintenance
Premium, the sum of $25,000,000 on March 31, in each of the years 1999 to 2004,
inclusive, and such principal amounts of the Notes, together with interest
thereon to, but excluding, the prepayment dates, shall become

                                       -6-
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due on such prepayment dates. Any prepayment made by the Company pursuant to
paragraph 4B shall not reduce or otherwise affect its obligation to make any
unpaid prepayment required by this paragraph 4A. The remaining $25,000,000
principal amount of the Notes, together with interest accrued thereon, shall
become due on the maturity date of the Notes.

            4B. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE PREMIUM. The Notes
shall be subject to prepayment, in whole at any time or from time to time in
part (in integral multiples of $5,000,000), at the option of the Company, at
100% of the principal amount so prepaid plus interest thereon to, but excluding,
the Settlement Date for such prepayment plus the Yield-Maintenance Premium, if
any, with respect to the Notes being prepaid. All prepayments of the Notes
pursuant to this paragraph 4B shall be applied to the required payments and
prepayments of the Notes in the inverse order of maturities.

            4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give the holder
of each Note (with a copy to the Paying Agent pursuant to the notice provisions
contained in the Paying Agent Agreement) irrevocable written notice of any
prepayment pursuant to paragraph 4B not less than 10 Business Days prior to the
Settlement Date for such prepayment, specifying such Settlement Date and the
principal amount of the Notes, held by such holder, to be prepaid on such date.
Notice of prepayment having been given as aforesaid, the principal amount of the
Notes specified in such notice, together with interest thereon to the Settlement
Date therefor and together with the Yield- Maintenance Premium, if any, provided
in paragraph 4B shall become due and payable on such Settlement Date.

            4D. PARTIAL PAYMENTS PRO RATA. Upon any partial prepayment of the
Notes, the principal amount so prepaid shall be allocated to all Notes at the
time outstanding (including, for the purpose of this paragraph 4D only, all
Notes prepaid or otherwise retired or purchased or otherwise acquired by the
Company or any of its Subsidiaries or Affiliates other than by prepayment
pursuant to paragraphs 4A and 4B) in proportion to the respective outstanding
principal amounts thereof.

            4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit
any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or
in part prior to their stated final maturity (other than by prepayment pursuant
to paragraph 4A or 4B or upon acceleration of such final maturity pursuant to
paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes
held by any holder unless the Company or such Subsidiary or Affiliate shall have
offered to prepay or otherwise retire or purchase or otherwise acquire, as the
case may be, the same proportion of the aggregate principal amount of Notes held
by each other holder of Notes at the time outstanding upon the same terms and
conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise
acquired by the Company or any of its Subsidiaries or Affiliates shall not be
deemed to be outstanding for any purpose under this Agreement, except as
provided in paragraph 4D.

                                       -7-
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      PARAGRAPH 5.      AFFIRMATIVE COVENANTS

            5. AFFIRMATIVE COVENANTS. So long as any Note shall remain unpaid or
the holder of any Note shall have any commitment hereunder, the Company
covenants that:

            5A.   FINANCIAL STATEMENTS.  The Company will deliver in triplicate:

                  (i) to each holder, (A) as soon as practicable and in any
            event within 60 days after the end of each quarterly period (other
            than the last quarterly period) in each fiscal year commencing with
            the quarterly period ending March 31, 1997, consolidated and
            consolidating statements of operations, stockholders' equity and
            cash flows of the Company and its Subsidiaries for the period from
            the beginning of the current fiscal year to the end of such
            quarterly period, and a consolidated and consolidating balance sheet
            of the Company and its Subsidiaries as of the end of such quarterly
            period, setting forth (a) as to each account affected thereby, all
            eliminating entries for the Unrestricted Subsidiaries as a group,
            and (b) the resulting consolidated and consolidating figures for the
            Company and its Restricted Subsidiaries, and on and after December
            31, 1997, setting forth in each case in comparative form figures for
            the corresponding period in the preceding fiscal year, all in
            reasonable detail and unaudited but certified by an authorized
            financial officer of the Company, subject to changes resulting from
            year-end adjustments, and (B) prior to the consummation of the
            Spin-Off, as soon as practicable and in any event within 60 days
            after the end of each quarterly period (other than the last
            quarterly period) in each fiscal year, consolidated statements of
            operations, stockholders' equity and cash flows of Parent and its
            Subsidiaries for the period from the beginning of the current fiscal
            year to the end of such quarterly period, and a consolidated balance
            sheet of Parent and its Subsidiaries as of the end of such quarterly
            period, and on and after December 31, 1997, setting forth in each
            case in comparative form figures for the corresponding period in the
            preceding fiscal year, all in reasonable detail and unaudited but
            certified by an authorized financial officer of Parent, subject to
            changes resulting from year-end adjustments, PROVIDED, HOWEVER, that
            delivery of copies of the Quarterly Report on Form 10-Q of Parent
            for such quarterly period filed with the Securities and Exchange
            Commission shall be deemed to satisfy the requirements of this
            clause (i)(B) with respect to consolidated financial statements if
            such financial statements are included in such report;

                                       -8-
<PAGE>
                  (ii) to each holder, (A) as soon as practicable and in any
            event within 120 days after the end of each fiscal year,
            consolidated and consolidating statements of operations,
            stockholders' equity and cash flows of the Company and its
            Subsidiaries for such year, and a consolidated and consolidating
            balance sheet of the Company and its Subsidiaries as of the end of
            such fiscal year, setting forth (a) as to each account affected
            thereby, all eliminating entries for the Unrestricted Subsidiaries
            as a group, and (b) the resulting consolidating figures for the
            Company and its Restricted Subsidiaries, and on and after December
            31, 1997, setting forth in each case in comparative form
            corresponding consolidating figures from the preceding annual audit,
            all in reasonable detail and which shall be reported on by Price
            Waterhouse LLP or other independent public accountants of recognized
            national standing selected by the Company whose report shall (x)
            contain an opinion that shall be unqualified as to the scope or
            limitations imposed by the Company and shall not be subject to any
            other material qualifications and (y) shall state that such
            financial statements present fairly, in all material respects, the
            financial position of the Company and its Subsidiaries at the dates
            indicated and their cash flows and the results of their operations
            and the changes in their financial position for the periods
            indicated in conformity with generally accepted accounting
            principles and shall be accompanied by a report of such independent
            public accountants stating that (w) such audit was made for the
            purpose of forming an opinion on the consolidated financial
            statements taken as a whole, (x) the consolidating information set
            forth therein is presented for purposes of additional analysis
            rather than to present the financial position, results of operations
            and cash flows of the individual companies, (y) such consolidating
            information has been subjected to the auditing procedures applied in
            the audit of the basic financial statements, and (z) in such
            independent public accountants' opinion, such consolidating
            information is fairly stated in all material respects in relation to
            the consolidated financial statements taken as a whole, with such
            changes thereto as such accountants reasonably determine to be
            appropriate under the circumstances, and (B) prior to the
            consummation of the Spin-Off, as soon as practicable and in any
            event within 120 days after the end of each fiscal year,
            consolidated statements of operations, stockholders' equity and cash
            flows of Parent and its Subsidiaries for such year, and a
            consolidated balance sheet of Parent and its Subsidiaries as of the
            end of such fiscal year, and on and after December 31, 1997, setting
            forth in each case figures from the preceding annual audit, all in
            reasonable detail and which shall be reported on by Price Waterhouse
            LLP or other independent

                                       -9-
<PAGE>
            public accountants of recognized national standing selected by
            Parent whose report shall (x) contain an opinion that shall be
            unqualified as to the scope or limitations imposed by Parent and
            shall not be subject to any other material qualifications and (y)
            shall state that such financial statements present fairly, in all
            material respects, the financial position of Parent and its
            Subsidiaries at the dates indicated and their cash flows and the
            results of their operations and the changes in their financial
            position for the periods indicated in conformity with generally
            accepted accounting principles and shall be accompanied by a report
            of such independent public accountants stating that such audit was
            made for the purpose of forming an opinion on the consolidated
            financial statements taken as a whole, with such changes thereto as
            such accountants reasonably determine to be appropriate under the
            circumstances, PROVIDED, HOWEVER, that delivery of copies of the
            Annual Report on Form 10-K of Parent for such fiscal year filed with
            the Securities and Exchange Commission shall be deemed to satisfy
            the requirements of this clause (ii)(B) with respect to consolidated
            financial statements if such financial statements are included in
            such report;

                  (iii) to each holder, promptly upon transmission thereof,
            copies of all such financial statements, proxy statements, notices
            and reports as it shall send to its public stockholders and copies
            of all registration statements (without exhibits, and other than
            registration statements and reports relating to employee benefit or
            compensation plans) and all reports which it files with the
            Securities and Exchange Commission (or any governmental body or
            agency succeeding to the functions of the Securities and Exchange
            Commission);

                  (iv) to each holder, promptly upon receipt thereof, a copy of
            each other report submitted to the Company or any Subsidiary by
            independent accountants in connection with any annual, interim or
            special audit made by them of the books of the Company or any
            Subsidiary;

                  (v) to each holder, as soon as practicable and in any event
            within 15 days after any executive officer of the Company obtains
            knowledge (a) of any condition or event which, in the opinion of
            management of the Company, would have a material adverse effect on
            the business, condition (financial or other), properties, operations
            or prospects (to the extent affecting the Company and its
            Subsidiaries in a materially different manner or extent than the oil
            and gas industry generally) of the Company and its Restricted
            Subsidiaries, taken as a

                                      -10-
<PAGE>
            whole, (b) that any Person has given any notice to the Company or
            any of its Subsidiaries or taken any other action with respect to a
            claimed default or event or condition of the type referred to in
            clause (iii) or (xvii) of paragraph 7A, (c) of the institution of
            any litigation involving claims against the Company or any of its
            Subsidiaries equal to or greater than $5,000,000 with respect to any
            single cause of action or of any adverse determination in any court
            proceeding in any litigation involving a potential liability to the
            Company or any of its Subsidiaries equal to or greater than
            $5,000,000 with respect to any single cause of action which makes
            the likelihood of an adverse determination in such litigation
            against the Company or such Subsidiary substantially more probable,
            (d) of any regulatory proceeding which, if determined adversely to
            the Company, would have a material adverse effect on the business,
            condition (financial or other), properties, operations or prospects
            (to the extent affecting the Company and its Subsidiaries in a
            materially different manner or extent than the oil and gas industry
            generally) of the Company and its Subsidiaries, taken as a whole, or
            (e) of any material disputes between the Company and any of its
            Affiliates or Parent, an Officer's Certificate of the Company
            specifying the nature and period of existence of any such condition
            or event, or specifying the notice given or action taken by such
            Person and the nature of any such claimed default, event or
            condition, or specifying the details of such proceeding, litigation
            or dispute and what action the Company or any of its Subsidiaries
            has taken, is taking or proposes to take with respect thereto;

                  (vi) to each holder, promptly after the filing or receiving
            thereof, (a) copies of all material reports and notices which the
            Company or any Subsidiary or any ERISA Affiliate files under ERISA
            with the Internal Revenue Service or the Pension Benefit Guaranty
            Corporation or the U.S. Department of Labor or which the Company or
            any Subsidiary or any ERISA Affiliate receives from any such
            governmental agency, and (b) with respect to any Plan or
            Multiemployer Plan, copies of any (1) notice of any "reportable
            event" (as defined in Section 4043 of ERISA) with respect to such
            Plan or Multiemployer Plan which might constitute grounds for a
            termination of such Plan under Title IV of ERISA, (2) notice of
            complete or partial withdrawal liability under Title IV of ERISA or
            (3) notice from the PBGC under Title IV of ERISA of an intent to
            terminate or appoint a trustee to administer any Plan or
            Multiemployer Plan, which any ERISA Affiliate gives to or receives

                                      -11-
<PAGE>
            from the Internal Revenue Service or the Pension Benefit Guaranty
            Corporation or the U.S. Department of Labor; and

                  (vii) to each holder, with reasonable promptness, such other
            information respecting the business, financial condition or results
            of operations of the Company or any of its Subsidiaries as such
            holder may reasonably request.

                  Together with each delivery of financial statements required
      by clauses (i)(A) and (ii)(A) above, the Company will deliver to each
      holder an Officer's Certificate demonstrating (with computations in
      reasonable detail) compliance by the Company and its Restricted
      Subsidiaries with the provisions of paragraphs 6A, 6B(2), 6B(3)(ii) and
      (iii), 6B(4), 6B(5), 6B(6), 6D and 6E, demonstrating that no Event of
      Default or Default exists under paragraph 7A(xvi) and stating that there
      then exists no Event of Default or Default, or, if any Event of Default or
      Default exists, specifying the nature and period of existence thereof and
      what action the Company proposes to take with respect thereto. Together
      with each delivery of financial statements required by clause (ii)(A)
      above, the Company will deliver a Reserve Report as of the end of the
      preceding fiscal period to any Significant Holder upon prior written
      request therefor. Together with each delivery of financial statements
      required by clause (ii) above, the Company will deliver to each holder a
      certificate of such accountants stating that, in conducting the audit of
      the Company's consolidated financial statements in accordance with
      generally accepted auditing standards they have obtained no knowledge of
      any Event of Default or Default arising under paragraph 7A(i), 7A(ii),
      7A(iii) or 7A(xvi) or any Event of Default or Default arising under
      paragraph 7A(v) that occurs as a result of the breach or violation by the
      Company or its Restricted Subsidiaries of paragraph 6A, 6B(2), 6B(3),
      6B(4), 6B(5), 6B(6), 6B(7), 6B(8), 6C, 6D or 6E, or, if they have obtained
      knowledge of any Event of Default or Default, specifying the nature and
      period of existence thereof. Such accountants, however, shall not be
      liable to anyone by reason of their failure to obtain knowledge of any
      Event of Default or Default which would not be disclosed in the course of
      an audit conducted in accordance with generally accepted auditing
      standards. The Company also covenants that forthwith upon the chief
      executive officer, principal financial officer or principal accounting
      officer of the Company obtaining knowledge of an Event of Default or
      Default, it will deliver to each holder an Officer's Certificate
      specifying the nature and period of existence thereof and what action the
      Company proposes to take with respect thereto.

            5B. INSPECTION OF PROPERTY. The Company covenants that it will
permit any Person designated in writing by any Significant Holder, at such
Significant Holder's expense and risk, to visit and inspect and (if the Required
Holders in good faith reasonably believe that the Company is in violation of
paragraph 5C or 8O of this Agreement) to take samples from any of the properties
of the Company and its Subsidiaries, to examine the corporate books and
financial records

                                      -12-
<PAGE>

of the Company and its Subsidiaries and to make copies thereof or extracts
therefrom and to discuss the affairs, finances and accounts of such Persons with
the executive officers of the Company, the petroleum reserve engineers employed
by the Company and its Subsidiaries and the Company's independent public
accountants, all at such reasonable times, with a representative of the Company
present and as often as such Significant Holder may reasonably request.

            5C. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will
cause each of its Subsidiaries and each of its Affiliates that are controlled by
the Company or its Subsidiaries to, comply in a timely fashion with, or operate
pursuant to valid waivers of the provisions of, all federal, state and local
environmental or pollution-control laws, regulations, orders and decrees
governing, without limitation, the emission of wastewater effluent, solid and
hazardous waste and air pollution, and laying down general environmental
conditions together with any other applicable requirements for conducting, on a
timely basis, periodic tests and monitoring for contamination of ground water,
surface water, air and land and for biological toxicity of the aforesaid, and
diligently comply with the regulations (except to the extent such regulations
are waived by appropriate governmental authorities) of the Environmental
Protection Agency or other relevant federal, state or local governmental
authority except where noncompliance would not materially adversely affect the
business, financial condition or results of operations of the Company and its
Restricted Subsidiaries taken as a whole. The Company agrees to indemnify and
hold the holder of any Note, such holder's officers, agents and employees
harmless from any loss, liability, claim or expense which such holder may incur
or suffer as a result of a breach by the Company, its Subsidiaries or
Affiliates, as the case may be, of this covenant. The Company shall not be
deemed to have breached or violated this paragraph 5C if the Company, any
Restricted Subsidiary or any Affiliate of the Company is challenging in good
faith by appropriate proceedings diligently pursued the application or
enforcement of any such governmental requirements for which adequate reserves
have been established in accordance with generally accepted accounting
principles.

            5D. PAYMENT OF TAXES. The Company will, and will cause each of its
Subsidiaries to, pay, or have paid on its behalf, before the same become
delinquent, all taxes, assessments and governmental charges imposed upon it or
upon its property except to the extent contested in good faith for which
adequate reserves have been established in accordance with generally accepted
accounting principles.

            5E. MAINTENANCE OF INSURANCE. The Company covenants that it and each
Subsidiary will carry and maintain insurance (subject to self-insurance in the
maximum amount of $10,000,000, customary deductibles and retentions) in at least
such amounts and against such liabilities and hazards and by such methods as
customarily maintained by other companies operating similar businesses and,
together with each delivery of financial statements required by clause (ii)(A)
of paragraph 5A, will deliver an Officer's Certificate specifying the details of
such insurance in effect.

                                      -13-
<PAGE>
            5F. PRIVATE PLACEMENT RATING. If, at any time after January 1, 1998,
any Significant Holder requests that the Company obtain a rating for the Notes
from Standard & Poor's Rating Group, the Company will, no later than 30 days
following the receipt of such request, either (i) at its expense, initiate the
process to obtain such rating and obtain such rating as soon as reasonably
practicable (but in no event later than 90 days after the receipt of such
request) or (ii) pay to the Paying Agent, by wire transfer of immediately
available funds for the ratable account of the holders of the Notes, a fee equal
to 0.25% of the aggregate principal amount of the Notes outstanding on the date
of such request. In the event that the Company elects to obtain a rating
pursuant to clause (i) of the immediately preceding sentence and such rating is
not obtained within the time period specified in such clause or is not
equivalent to a long-term debt rating of BBB- or better from Standard & Poor's
Rating Group, the Company will, at the end of such period or within 30 days
after the receipt of such rating, as the case may be, pay to the Paying Agent in
accordance with the Paying Agent Agreement, by wire transfer of immediately
available funds for the ratable benefit of the holders of the Notes, a fee equal
to 0.25% of the aggregate outstanding principal amount of the Notes outstanding
on the date of the request to obtain such rating. The Company will promptly
notify each holder of a Note of any request from any Significant Holder to
obtain a rating for the Notes, the actions of the Company with respect to such
request, and, if the Company obtains a rating for the Notes, the Private
Placement Rating assigned to the Notes. Notwithstanding the foregoing, there
shall be no more than one request pursuant to this paragraph 5F that the Company
obtain a rating for the Notes.

            5G. TAX INDEMNITY. The Company will indemnify and hold each
Purchaser harmless from and against any and all federal, state and local taxes,
interest, penalties and additions to tax ("TAXES") imposed upon or incurred by
any Purchaser as a result of (a) the Purchaser's receipt of the Notes in
exchange for the Series G Notes (an "ACTUAL EXCHANGE") or (b) any deemed
exchange (a "DEEMED EXCHANGE") of the Series G Notes resulting from any
modifications to the Series G Notes pursuant to any transactions entered into by
Parent or the Company in contemplation of, or contemporaneously with, the
transactions set forth in this Agreement. The amount of the indemnity shall
equal (i) the amount of Taxes incurred by the Purchaser on the Actual Exchange
or Deemed Exchange (including any penalties and interest imposed with respect to
such Taxes), plus (ii) an amount such that when the sum of the amounts set forth
in clause (i) and this clause (ii) are reduced by federal, state and local taxes
imposed upon, or incurred by, the Purchaser as a result of the receipt of such
sum, the reduced amount is equal to the amount set forth in clause (i) of this
paragraph 5G. If a Purchaser receives written notification from the Internal
Revenue Service ("IRS") that the IRS intends to assert that an Actual Exchange
or Deemed Exchange has occurred with respect to the Purchaser (a "TAXABLE
EXCHANGE ISSUE"), the Purchaser agrees to notify the Company with reasonable
promptness and further agrees not to pay any Taxes or consent to any tax
deficiency with respect to the Taxable Exchange Issue during the 30-day period
beginning on the date that the Purchaser notifies the Company of the Taxable
Exchange Issue. In addition, the Purchaser agrees to take such action in
contesting the Taxable Exchange Issue as the Company may reasonably request in
writing (including cooperating with the Company in providing information
relating solely to the Taxable Exchange Issue which may be particularly within
the knowledge of 

                                    -14-
<PAGE>

the Purchaser), but only if (i) within 30 days after the Purchaser notifies the
Company of the Taxable Exchange Issue, the Company requests that the Purchaser
contest the Taxable Exchange Issue, (ii) the Company furnishes the Purchaser
with an opinion of independent tax counsel satisfactory to the Purchaser that
the Purchaser is more likely than not to prevail on the Taxable Exchange Issue,
(iii) if the Purchaser elects to pay the Taxes relating to the Taxable Exchange
Issue and seek a refund, the Company provides the Purchaser, on an interest free
basis, with sufficient funds to enable Purchaser to pay the Tax and (iv) such
requested action will not, in the Purchaser's sole judgment, interfere with the
Purchaser's ability to contest issues other than the Taxable Exchange Issue,
provided that the limitation in this clause (iv) shall not be interpreted as
permitting the Purchaser to refuse altogether to contest the Taxable Exchange
Issue.

            5H. PRODUCTION PAYMENT. The Company will pay the Production Payment
in full no later than two weeks after the Date of Closing and, no later than
five (5) Business Days after such payment, will cause Parent and each other
holder, if any, of all or any portion of the Production Payment to deliver an
Officer's Certificate to each holder of a Note to such effect and as to the
termination of the Production Payment as provided therein.

      PARAGRAPH 6.      NEGATIVE COVENANTS

            6. NEGATIVE COVENANTS. So long as any Note shall remain unpaid or
any holder of a Note shall have any commitment hereunder, the Company covenants
that:

6A. RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company will not and
will not permit any Restricted Subsidiary to (i) make any Restricted Investment
or (ii) pay or declare any dividend on any class of its stock or make any other
distribution on account of any class of its stock, or redeem, purchase or
otherwise acquire, directly or indirectly, any shares of its stock or (iii)
prior to the consummation of the Spin-Off, make any loan or advance to any
Ineligible Subsidiary or Parent (all of the foregoing described in clauses (ii)
and (iii) being herein called "RESTRICTED PAYMENTS") (a) except out of
Consolidated Net Earnings Available For Restricted Payments and Restricted
Investments, and (b) unless, after giving effect to any such Restricted
Investment or Restricted Payment, as the case may be, no Event of Default or
Default shall have occurred and be continuing. Notwithstanding the foregoing,
the Company will not, in each fiscal year prior to the fiscal year in which the
Spin-Off is consummated and, in the case of the fiscal year in which the
Spin-Off is consummated, the portion of the fiscal year preceding the
consummation of the Spin-Off, make Restricted Payments to or Restricted
Investments in Parent or any Ineligible Subsidiary in excess of $31,000,000 in
the aggregate for each such fiscal year or portion thereof. "CONSOLIDATED NET
EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS" shall
mean an amount equal to:

            (1) the sum of (a) $62,000,000 plus (b) 100% (or minus 100% in case
      of a deficit) of Consolidated Net Earnings for the period (taken as one
      accounting period) commencing on the Date of Closing (the "COMMENCEMENT
      DATE") and terminating at the end of the last fiscal quarter preceding the
      date of any proposed 

                                      -15-
<PAGE>
      Restricted Investment or Restricted Payment, as the case may be, plus,
      without duplication, (c) the net cash proceeds received by the Company or
      any Restricted Subsidiary from the sale of any shares of its stock after
      the Commencement Date, except (i) any such proceeds used as a basis for a
      prepayment in respect of the Notes pursuant to paragraph 4A or paragraph
      4B, and (ii) the proceeds from the sale of stock to the Company or a
      Subsidiary after the Commencement Date, plus, without duplication, (d) the
      net cash proceeds received by the Company or any Restricted Subsidiary
      from the sale, after the Commencement Date, of any convertible debt
      security which has been converted into common stock of the Company or a
      Restricted Subsidiary, except (i) any such proceeds used as a basis for a
      prepayment in respect of the Notes pursuant to paragraph 4A or paragraph
      4B and (ii) any proceeds from the sale of such convertible debt security
      to the Company or a Subsidiary, plus, without duplication, (e) any return
      of capital from Unrestricted Subsidiaries or Restricted Investments
      received by the Company or any Restricted Subsidiary after the
      Commencement Date, less

            (2) the sum of all Restricted Investments and all Restricted
      Payments made on or after the Commencement Date.

There shall not be included in Restricted Payments or in any computation of
Consolidated Net Earnings Available for Restricted Payments and Restricted
Investments (x) dividends paid or declared by the Company or any Restricted
Subsidiary in respect of stock thereof held by any Person, or distributions made
to any Person, in stock of the Company or such Restricted Subsidiary, as the
case may be, (y) exchanges of stock of one or more classes of the Company or any
Restricted Subsidiary for common stock of the Company or such Restricted
Subsidiary, as the case may be, or for stock of the Company or such Restricted
Subsidiary, as the case may be, of the same class, except to the extent that
cash or other value is paid by the Company or a Restricted Subsidiary in such
exchange, and (z) dividends paid or declared in respect of stock held by, or
distributions made to, or redemptions, purchases or other acquisitions of stock
made from, the Company or a wholly-owned Restricted Subsidiary. The term "STOCK"
as used in this paragraph 6A shall include warrants, options to purchase stock
and redeemable rights.

            6B. LIEN, DEBT AND OTHER RESTRICTIONS. The Company will not and will
not permit any Restricted Subsidiary to:

            6B(1).LIENS. Create, assume or suffer to exist any Lien upon any of
its properties or assets, whether now owned or hereafter acquired except

                  (i) Liens for taxes or assessments or other governmental
            charges or levies not yet due or which are being actively contested
            in good faith by appropriate proceedings,

                                    -16-
<PAGE>
                  (ii) Liens (including, but not limited to, mechanics' and
            materialmen's liens, landlord liens, easements, rights-of-way or the
            like) incidental to the conduct of its business or the ownership of
            its property and assets which are not incurred in connection with
            the borrowing of money or the obtaining of advances or credit (other
            than advances or credit on open account, includable in current
            liabilities, for goods and services in the ordinary course of
            business and on terms and conditions which are customary in the oil,
            gas and mineral exploration and development business) or the
            guaranteeing of the obligations of another Person, and which do not
            in the aggregate materially detract from the value of its property
            or assets or materially impair the use thereof in the operation of
            its business,

                  (iii) Liens for lessor's royalties, overriding royalties, net
            profits interests, carried interests, reversionary interests and
            other similar burdens, production sales contracts, division orders,
            contracts for the sale, purchase, exchange, or processing of
            hydrocarbons, unitization and pooling designations, declarations,
            orders and agreements, operating agreements, agreements of
            development, area of mutual interest agreements, gas balancing or
            deferred production agreements, processing agreements, plant
            agreements, pipeline gathering and transportation agreements,
            injection, repressuring and recycling agreements, salt water or
            other disposal agreements, seismic or geophysical permits or
            agreements, and other agreements which are customary in the oil, gas
            and mineral exploration and development business or in the business
            of processing gas and gas condensate production for the extraction
            of products therefrom, if the net cumulative effect of such burdens
            does not operate to reduce the net revenue interest of any oil and
            gas properties (a) to less than the "NET REVENUE INTEREST" set forth
            in the most recent Reserve Report for those oil and gas properties
            included in such Reserve Report or (b) to less than the net revenue
            interest so acquired for those oil and gas properties acquired after
            the date of the most recent Reserve Report; PROVIDED, HOWEVER, that
            such Liens are not incurred in connection with the borrowing of
            money or the obtaining of advances or credit (other than advances or
            credit on open account, includable in current liabilities, for goods
            and services in the ordinary course of business and on terms and
            conditions which are customary in the oil, gas and mineral
            exploration and development business) or the guaranteeing of the
            obligations of another Person,

                                    -17-
<PAGE>

                  (iv) Liens existing on any real property of any Person at the
            time such Person becomes a Restricted Subsidiary, or any Liens
            existing prior to the time of acquisition upon any real property
            acquired by the Company or any Restricted Subsidiary through
            purchase, merger or consolidation or otherwise, whether or not the
            obligation secured by such Lien is assumed by the Company or such
            Restricted Subsidiary, PROVIDED, that, (a) except as otherwise
            permitted by the other clauses of this paragraph 6B(1), any such
            Lien (x) shall not encumber any other property of the Company or any
            Restricted Subsidiary, and (y) shall not have been created or
            modified in any respect in anticipation of such Person becoming a
            Restricted Subsidiary or in anticipation of the acquisition by the
            Company or any Restricted Subsidiary of the real property subject
            thereto (other than to reflect the assumption of such Lien or other
            ministerial acts relating thereto), (b) the aggregate principal
            amount of the obligations secured by any such Lien shall not be
            increased prior to and in anticipation of, contemporaneously with or
            following, the acquisition by the Company or any Restricted
            Subsidiary of the real property subject thereto or such Person
            becoming a Restricted Subsidiary, and (c) the obligations secured by
            any such Lien shall not be modified, extended or renewed in any
            respect (other than to reflect the assumption of such obligations or
            other ministerial acts with respect thereto) prior to and in
            anticipation of, contemporaneously with or following, the
            acquisition by the Company or any Restricted Subsidiary of the real
            property secured thereby or such Person becoming a Restricted
            Subsidiary, and

                  (v) other Liens on any property of the Company or a Restricted
            Subsidiary securing Debt permitted by the proviso to paragraph
            6B(2)(ii).

            6B(2).DEBT. Create, incur, assume or suffer to exist any Debt,
except

                  (i) unsecured Funded Debt or unsecured Current Debt of the
            Company owing to and held by a wholly-owned Restricted Subsidiary
            which is subordinated to the Funded Debt represented by the Notes
            upon terms set forth on EXHIBIT C attached hereto, and Funded Debt
            or Current Debt of a Restricted Subsidiary owing to and held by the
            Company or one or more other wholly-owned Restricted Subsidiaries,
            and

                                      -18-

<PAGE>
                  (ii) other Funded Debt and Current Debt of the Company and its
            Restricted Subsidiaries the aggregate principal amount of which does
            not at any time exceed 300% of the excess of (i) EBITD for the
            immediately preceding four fiscal quarters OVER (ii) the aggregate
            amount of Restricted Payments for such immediately preceding four
            fiscal quarters, PROVIDED, that (A) until payment in full of the
            Production Payment, the Production Payment shall be the only
            Priority Debt outstanding, and (B) thereafter, the aggregate
            principal amount of Priority Debt outstanding may not exceed at any
            time 15% of Consolidated Tangible Net Worth.

            6B(3).SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange,
transfer or otherwise dispose of part, but less than all or substantially all,
of their respective assets, unless

                  (i) such sale, exchange, transfer or other disposition is made
            in the ordinary course of business (including, without limitation,
            abandonments, farm-ins, farm-outs, leases and subleases of developed
            or undeveloped properties owned or held by the Company or any
            Restricted Subsidiary that are made or entered into in the ordinary
            course of business, but EXCLUDING, however, any sale of net profits
            interests in developed oil and gas properties); or

                  (ii) after giving effect to such sale, exchange, transfer or
            other disposition, (1) the aggregate net book value of (a) all
            assets of the Company and its Restricted Subsidiaries (including,
            without limitation, the sale of net profits interests in developed
            oil and gas properties) sold, exchanged, transferred or otherwise
            disposed of (on a consolidated basis) (but excluding assets sold,
            exchanged, transferred or otherwise disposed of in the ordinary
            course of business pursuant to subparagraph 6B(3)(i) above) during
            the period of 12 consecutive months immediately preceding such sale,
            exchange, transfer or other disposition and (b) the assets of all
            Restricted Subsidiaries, the stock of which have been sold or
            otherwise disposed of pursuant to paragraph 6B(4)(b)(i) during such
            12-month period shall not exceed 10% of Consolidated Net Tangible
            Assets of the Company and its Restricted Subsidiaries as of the end
            of the fiscal quarter immediately preceding or coinciding with such
            sale, exchange, transfer or other disposition, and (2) the assets
            described in the foregoing subclauses (a) and (b) shall not have
            contributed more than 10% of EBITD of the Company and its Restricted
            Subsidiaries for the four most recently completed fiscal quarters
            taken as a single accounting period; or

                                    -19-

<PAGE>

                  (iii) after giving effect to such sale, exchange, transfer or
            other disposition, (1) the aggregate net book value of (a) all
            assets of the Company and its Restricted Subsidiaries (including,
            without limitation, the sale of net profits interests in developed
            oil and gas properties) sold, exchanged, transferred or otherwise
            disposed of (on a consolidated basis) (but excluding assets sold,
            exchanged, transferred or otherwise disposed of pursuant to
            subparagraphs 6B(3)(i) and (ii) above) during the period of twelve
            consecutive months immediately preceding such sale, exchange,
            transfer or other disposition and (b) the assets of all Restricted
            Subsidiaries, the stock of which has been sold or otherwise disposed
            of pursuant to paragraph 6B(4)(b)(ii) during such 12-month period,
            shall not exceed 10% of Consolidated Net Tangible Assets of the
            Company and its Restricted Subsidiaries as of the end of the fiscal
            quarter immediately preceding or coinciding with such sale,
            exchange, transfer or other disposition and (2) the assets described
            in the foregoing subclauses (a) and (b) shall not have contributed
            more than 10% of EBITD of the Company and its Restricted
            Subsidiaries for the four most recently completed fiscal quarters
            taken as a single accounting period, and (3) within six months after
            such sale, exchange, transfer or other disposition, the net proceeds
            thereof are applied toward, or the exchange results in, (a) the
            acquisition by the Company or a Restricted Subsidiary of (1) assets
            which have an aggregate fair market value at least equal to the net
            proceeds received by the Company and its Restricted Subsidiaries
            from such sale, exchange, transfer or other disposition, (2) if the
            assets so sold, exchanged, transferred or otherwise disposed of were
            located in the United States of America or Canada, the assets
            acquired are located in the United States of America or Canada and
            (3) the assets so acquired are of a type usual and customary in the
            oil and gas business, PROVIDED that no Liens shall at any time exist
            on the assets so acquired which secure any Debt except as permitted
            by paragraph 6B(1)(i), (ii), (iii) or (v), or (b) the prepayment of
            an aggregate principal amount of all Notes plus accrued interest and
            premium, if any (at the greater of par or the respective applicable
            Yield-Maintenance Premium), or the payment of an aggregate principal
            amount of other Funded Debt (other than Funded Debt subordinate in
            right of payment to the Notes) plus accrued interest and premium, if
            any, in either case in an amount at least equal to the aggregate net
            proceeds that the Company or its Restricted Subsidiary receives from
            the sale, exchange, transfer or other disposition of such assets.

                                    -20-

<PAGE>

            6B(4).SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise
dispose of, or part with control of, any shares of stock of any Restricted
Subsidiary, (a) except to the Company or another wholly-owned Restricted
Subsidiary, and (b) except that all shares of stock of any Restricted Subsidiary
at the time owned by the Company and all Restricted Subsidiaries may be sold as
an entirety for a cash consideration which represents the fair market value (as
determined in good faith by the Board of Directors of the Company) at the time
of sale of the shares of stock so sold, PROVIDED that for purposes of clause (b)
of this paragraph 6B(4):

                  (i) (a) the net book value of the assets of such Restricted
            Subsidiary together with (i) the net book value of the assets of any
            other Restricted Subsidiary the stock of which was sold during the
            preceding 12-month period and (ii) the net book value of the assets
            of the Company and all Restricted Subsidiaries sold, exchanged,
            transferred or otherwise disposed of pursuant to paragraph 6B(3)(ii)
            during the preceding 12-month period, does not represent more than
            10% of Consolidated Net Tangible Assets of the Company and its
            Restricted Subsidiaries as of the end of the fiscal quarter
            immediately preceding or coinciding with such sale, exchange,
            transfer or other disposition and (b) the earnings of such
            Restricted Subsidiary together with (i) the earnings of any other
            Restricted Subsidiary the stock of which was sold or otherwise
            disposed of pursuant to this paragraph 6B(4)(b)(i) during the
            preceding 12-month period and (ii) the earnings attributable to the
            assets sold, exchanged, transferred or otherwise disposed of
            pursuant to paragraph 6B(3)(ii) during such 12-month period, do not
            represent more than 10% of EBITD of the Company and its Restricted
            Subsidiaries for the four most recently completed fiscal quarters
            taken as a single accounting period, and PROVIDED FURTHER that, at
            the time of such sale, such Restricted Subsidiary shall not own,
            directly or indirectly, (i) any shares of stock of the Company or
            (ii) any shares of stock of any other Restricted Subsidiary unless
            all of the shares of stock of such other Restricted Subsidiary
            owned, directly or indirectly, by the Company and all Restricted
            Subsidiaries are simultaneously being sold as permitted by this
            paragraph 6B(4)(b)(i), or

                  (ii) (a) the net book value of the assets of such Restricted
            Subsidiary together with (i) the net book value of the assets of any
            other Restricted Subsidiary the stock of which was sold during the
            preceding 12-month period and (ii) the net book value of the assets
            of the Company and any Restricted Subsidiary sold, exchanged,
            transferred or otherwise disposed of pursuant to paragraph
            6B(3)(iii) 

                                      -21-

<PAGE>

            during the preceding 12-month period, does not represent more than
            10% of the Consolidated Net Tangible Assets of the Company and its
            Restricted Subsidiaries as of the end of the fiscal quarter
            immediately preceding or coinciding with such sale, exchange,
            transfer or other disposition, and (b) the earnings of such
            Restricted Subsidiary together with (i) the earnings of any other
            Restricted Subsidiary the stock of which was sold or otherwise
            disposed of pursuant to this subparagraph 6B(4)(b)(ii) during the
            preceding 12-month period and (ii) the earnings attributable to the
            assets sold, exchanged, transferred or otherwise disposed of
            pursuant to paragraph 6B(3)(iii) during such 12-month period, do not
            represent more than 10% of EBITD of the Company and its Restricted
            Subsidiaries for the four most recently completed fiscal quarters
            taken as a single accounting period, and (c) within six months after
            such sale or other disposition, the proceeds thereof are applied
            toward (A) the acquisition by the Company or a Restricted Subsidiary
            of (1) assets which have an aggregate fair market value at least
            equal to the net proceeds received by the Company and its Restricted
            Subsidiaries from such sale or other disposition, (2) the assets so
            acquired are of a type usual and customary in the oil and gas
            business, PROVIDED that no Liens shall at any time exist on the
            assets so acquired which secure any Debt except as permitted by
            paragraph 6B(1)(i), (ii), (iii) or (v), or (B) the prepayment of an
            aggregate principal amount of all Notes plus accrued interest and
            premium, if any (at the greater of par or the respective applicable
            Yield-Maintenance Premium), or the payment of an aggregate principal
            amount of other Funded Debt (other than Funded Debt subordinate in
            right of payment to the Notes) plus accrued interest and premium, if
            any, in either case in an amount at least equal to the aggregate net
            proceeds that the Company or its Restricted Subsidiary receives from
            the sale or other disposition, and PROVIDED FURTHER that, at the
            time of such sale or other disposition, such Restricted Subsidiary
            shall not own, directly or indirectly, (i) any shares of stock of
            the Company or (ii) any shares of stock of any other Restricted
            Subsidiary unless all of the shares of stock of such other
            Restricted Subsidiary owned, directly or indirectly, by the Company
            and all Restricted Subsidiaries are simultaneously being sold as
            permitted by this paragraph 6B(4)(b)(ii).

            6B(5).MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Merge or
consolidate with or into any other Person or convey, exchange, transfer or
otherwise dispose of all or a substantial part of its assets (I.E., assets which
could not otherwise be disposed of pursuant to paragraph 6B(3)(ii) or (iii)) to
any Person except that

                                      -22-

<PAGE>

                  (i) any wholly-owned Restricted Subsidiary may merge with the
            Company (PROVIDED that the Company shall be the continuing or
            surviving corporation) or with any one or more other wholly-owned
            Restricted Subsidiaries,

                  (ii)  any Restricted Subsidiary may sell, exchange, transfer
            or otherwise dispose of any of its assets to the Company or to a
            wholly-owned Restricted Subsidiary,

                  (iii) any Restricted Subsidiary may sell, exchange, transfer
            or otherwise dispose of all or substantially all of its assets
            subject to the conditions and provisions specified in paragraphs
            6B(3)(ii) and (iii),

                  (iv) any Restricted Subsidiary may merge into or consolidate
            with any Person which does not thereupon become a Restricted
            Subsidiary, subject to the conditions and provisions specified in
            paragraph 6B(4) with respect to a sale or other disposition of the
            stock of such Restricted Subsidiary,

                  (v) any Restricted Subsidiary may permit any Person to be
            merged into such Restricted Subsidiary or may consolidate with or
            merge into a Person which thereupon becomes a Restricted Subsidiary,
            PROVIDED that immediately after any such merger or consolidation, no
            Default or Event of Default shall have occurred and be continuing,

                  (vi) the Company may permit any Person to be merged into the
            Company (such that the Company shall be the continuing or surviving
            corporation), and

                  (vii) the Company may permit any corporation to consolidate
            with the Company and the Company may merge into or otherwise dispose
            of its assets as an entirety or substantially as an entirety to any
            solvent corporation organized under the laws of the United States of
            America or any state thereof and having at least 80% of its
            consolidated assets located in the United States of America and
            Canada which expressly assumes in writing the due and punctual
            performance of the obligations of the Company under this Agreement
            and the Notes to the same extent as if such successor or transferee
            corporation had originally executed this Agreement and each of the
            Notes in the place of the Company (it being agreed that such
            assumption shall, upon the request of the holder of any outstanding

                                    -23-

<PAGE>

            Note and at the expense of such successor or transferee corporation,
            be evidenced by the exchange of such Note for another Note executed
            by such successor or transferee corporation, with such changes in
            phraseology and form as may be appropriate but in substance of like
            terms as the Note surrendered for such exchange and of like unpaid
            principal amount, and that each Note executed pursuant to paragraph
            11 hereof after such assumption shall be executed by and in the name
            of such successor or transferee corporation);

PROVIDED, that for purposes of subparagraphs 6B(5)(vi) and (vii) immediately
after such merger, consolidation, sale or other disposition, and after giving
effect thereto, no Event of Default or Default shall have occurred and be
continuing. As soon as practicable, and in any event at least 75 days prior to
the proposed consummation date of any merger, consolidation, sale or other
disposition described in subparagraph 6B(5)(vii), the Company shall give written
notice thereof to each holder of a Note describing in reasonable detail the
proposed transaction, the date on which it is proposed to be consummated and the
identity, jurisdiction of organization, and geographic composition of assets of
the proposed successor or transferee corporation. No disposition by the Company
of its assets as an entirety or substantially as an entirety under subparagraph
6B(5)(vii) shall release the corporation that originally executed this Agreement
as the issuer of the Notes from its liability as obligor thereon.

            6B(6).SALE AND LEASEBACK. Enter into any Sale and Leaseback
Transaction unless:

                  (i) the net sales proceeds received by the Company or a
            Restricted Subsidiary in respect of the assets sold pursuant to such
            Sale and Leaseback Transaction are greater than or equal to the fair
            market value of the assets sold (which determination shall be based
            upon a written opinion (the cost of which shall be borne exclusively
            by the Company) as to valuation from an independent valuation expert
            selected by the Company) and such proceeds are concurrently applied
            to: (a) the purchase, acquisition, development or construction of
            assets having a value at least equal to such net proceeds, and to be
            used in the Company's or such Restricted Subsidiary's business,
            PROVIDED that no Liens shall at any time exist on such assets which
            secure any Debt except as permitted by paragraph 6(B)(1)(i), (ii),
            (iii) or (v); or (b) the prepayment at the greater of par or the
            respective applicable Yield-Maintenance Premium, of an aggregate
            principal amount of all the Notes (plus accrued interest and
            premium, if any) at least equal to the amount of such net proceeds;
            or (c) the payment of other Funded Debt (other than Funded Debt
            subordinate in right of payment to the Notes) in an aggregate
            principal amount at least equal to the amount of such net sales
            proceeds; or

                                    -24-

<PAGE>

                  (ii) the Sale and Leaseback Transaction involves the sale of
            assets by the Company to a wholly-owned Restricted Subsidiary or by
            a Restricted Subsidiary to the Company or to another wholly-owned
            Restricted Subsidiary; PROVIDED, that if the Company is the seller
            under any such Sale and Leaseback Transaction, its lease obligations
            thereunder shall be subordinated to the Funded Debt represented by
            the Notes upon terms set forth on EXHIBIT C attached hereto.

            6B(7).TRANSACTIONS WITH AFFILIATES. Directly or indirectly purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise deal with, in the ordinary course of business or otherwise, (i) any
Affiliate (except an employee compensation benefit plan) or (ii) any Person
(other than a Restricted Subsidiary) in which an Affiliate or the Company
(directly or indirectly) owns, beneficially or of record, 5% or more of the
outstanding voting stock or similar equity interest, except that (a) any
Affiliate may be a director, officer or employee of the Company or any
Restricted Subsidiary and may be paid reasonable compensation in connection
therewith, (b) acts and transactions that would otherwise be prohibited by this
paragraph 6B(7) may be performed or engaged in if upon terms not less favorable
to the Company or any Restricted Subsidiary than if no relationship described in
clauses (i) and (ii) above existed, and (c) this paragraph 6B(7) shall not apply
to any agreement specified in paragraph 3A(iii), (iv), (v) or (vi) or to any
transaction described in any such agreement.

            6B(8).TAX CONSOLIDATION. Except for the Tax Allocation Agreement and
the Agreement Concerning Taxes, the Company will not, and will not permit any of
its Subsidiaries to, file or consent to the filing of any consolidated income
tax return with any Person unless such other Person shall have agreed in writing
with the Company that the Company's or such Subsidiary's liability with respect
to taxes as a result of the filing of any such consolidated income tax return
with such Person shall not be materially greater, nor the receipt of any tax
benefits materially less, than they would have been had the Company and its
Subsidiaries continued to file a consolidated income tax return with the Company
as the parent corporation.

            6C. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company
covenants that it will not permit any Restricted Subsidiary (either directly or
indirectly, by the issuance of rights or options for, or securities convertible
into, such shares) to issue, sell or otherwise dispose of any shares of any
authorized but unissued or treasury class of such Restricted Subsidiary's stock
(other than directors' qualifying shares) except to the Company or another
Restricted Subsidiary.

            6D. MAINTENANCE OF CONSOLIDATED NET WORTH. The Company will not
permit Consolidated Net Worth to be less than (i) at any time prior to April 1,
1999, $115,000,000, and (ii) at any time after March 31, 1999, the sum of (a)
$115,000,000 and (b) 20% of the sum of Consolidated Net Income (but in the case
of each fiscal quarter, only if a positive number) for all then completed fiscal
quarters beginning with the fiscal quarter ending March 31, 1999.

                                    -25-

<PAGE>

            6E. INTEREST COVERAGE. The Company will not permit at any time the
ratio of (a) EBITD for the period of four fiscal quarters then most recently
ended to (b) the aggregate Fixed Charges of the Company and its Restricted
Subsidiaries on a consolidated basis for such period to be less than 3.00 to
1.00.


      PARAGRAPH 7.      EVENTS OF DEFAULT

            7.    EVENTS OF DEFAULT.

            7A. ACCELERATION. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):

                  (i) the Company defaults in the payment or prepayment of any
            principal of or any Yield-Maintenance Premium on any Note when the
            same shall become due, either by the terms thereof or otherwise as
            herein provided; or

                  (ii) the Company defaults in the payment of any interest on
            any Note for more than five (5) Business Days after the date due; or

                  (iii) the Company or any Restricted Subsidiary defaults in any
            payment of principal of or interest on any other obligation for
            money borrowed (or any Capitalized Lease Obligation, any obligation
            under a conditional sale or other title retention agreement, any
            obligation issued or assumed as full or partial payment for property
            whether or not secured by a purchase money mortgage or any
            obligation under notes payable or drafts accepted representing
            extensions of credit) beyond any period of grace provided with
            respect thereto, or the Company or any Restricted Subsidiary fails
            to perform or observe any other agreement, term or condition
            contained in any agreement under which any such obligation is
            created (or if any other event thereunder or under any such
            agreement shall occur and be continuing) and the effect of such
            failure or other event is to cause, or to permit the holder or
            holders of such obligation (or a trustee on behalf of such holder or
            holders) to cause, such obligation to become due prior to any stated
            maturity or the Company fails to pay any Guaranty relating to Debt
            for borrowed money in accordance with its terms, PROVIDED that the
            aggregate amount of all obligations as to which such a payment
            default shall occur and be continuing or such a failure or other
            event causing or permitting acceleration shall occur and be
            continuing exceeds $10,000,000; or

                                    -26-

<PAGE>

                  (iv) any representation or warranty made by the Company herein
            or by the Company or any of its officers in any writing furnished in
            connection with or pursuant to this Agreement shall be false in any
            material respect on the date as of which made; or

                  (v)   the Company fails to perform or observe any term,
            agreement or covenant contained in paragraph 5H or paragraph 6; or

                  (vi) the Company fails to perform or observe any other term,
            agreement or covenant contained herein and such failure shall not be
            remedied within 30 days after any executive officer of the Company
            obtains actual knowledge thereof; or

                  (vii) the Company or any Restricted Subsidiary makes an
            assignment for the benefit of creditors or is generally not paying
            its debts as such debts become due; or

                  (viii)a court or governmental authority enters any decree or
            order for relief in respect of the Company or any Restricted
            Subsidiary under any bankruptcy, reorganization, compromise,
            arrangement, insolvency, readjustment of debt, dissolution or
            liquidation or similar law, whether now or hereafter in effect
            (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or

                  (ix) the Company or any Restricted Subsidiary petitions or
            applies to any tribunal for, or consents to, the appointment of, or
            taking possession by, a trustee, receiver, custodian, liquidator or
            similar official of the Company or any Restricted Subsidiary, or of
            any substantial part of the assets of the Company or any Restricted
            Subsidiary, or commences a voluntary case under the Bankruptcy Law
            of the United States or any proceedings (other than proceedings for
            the voluntary liquidation and dissolution of a Restricted
            Subsidiary) relating to the Company or any Restricted Subsidiary
            under the Bankruptcy Law of any other jurisdiction; or

                  (x) any such petition or application referred to in clause
            (ix) above is filed, or any such proceedings referred to in clause
            (ix) above are commenced, against the Company or any Restricted
            Subsidiary and the Company or such Restricted Subsidiary 

                                    -27-

<PAGE>

            by any act indicates its approval thereof, consent thereto or
            acquiescence therein, or an order, judgment or decree is entered
            appointing any such trustee, receiver, custodian, liquidator or
            similar official, or approving the petition in any such proceedings,
            and such order, judgment or decree remains unstayed and in effect
            for more than 60 consecutive days; or

                  (xi)  any order, judgment or decree is entered in any
            proceedings against the Company decreeing the dissolution of the
            Company or any Restricted Subsidiary and such order, judgment or
            decree remains unstayed and in effect for more than 60 consecutive
            days; or

                  (xii) any order, judgment or decree is entered in any
            proceedings against the Company or any Restricted Subsidiary
            decreeing a split-up of the Company or such Restricted Subsidiary
            which requires (a) the divestiture of assets which exceed, or the
            divestiture of the stock of a Restricted Subsidiary whose assets
            exceed, 10% of Consolidated Net Tangible Assets of the Company and
            its Restricted Subsidiaries as of the end of the fiscal quarter
            immediately preceding or coinciding with such divestiture or (b) the
            divestiture of assets or stock of a Restricted Subsidiary, which
            shall have contributed more than 10% of EBITD for the four most
            recently completed fiscal quarters, and such order, judgment or
            decree remains unstayed and in effect for more than 60 consecutive
            days; or

                  (xiii) any judgment or order, or series of judgments or
            orders, for the payment of money in an amount in excess of
            $5,000,000 is rendered against the Company or any Restricted
            Subsidiary and either (i) enforcement proceedings have been
            commenced by any creditor upon such judgment or order or (ii) within
            30 days after entry thereof, such judgment is not discharged or
            execution thereof stayed pending appeal, or within 60 days after the
            expiration of any such stay, such judgment is not discharged;

                  (xiv) any Termination Event with respect to a Plan shall have
            occurred, and, (i) within 60 days after the occurrence thereof, such
            Termination Event (if correctable) shall not have been corrected and
            (ii) the then present value of such Plan's vested accrued benefits
            exceeds the then current value of assets accumulated in such Plan by
            more than the amount of $5,000,000 (or in the case of a Termination
            Event involving the withdrawal of a "SUBSTANTIAL EMPLOYER" (as
            defined in Section 4001(a)(2) of ERISA), the withdrawing employer's

                                    -28-

<PAGE>

            proportionate share of such excess shall exceed such amount) (in
            each case excluding all amounts for which the Company and its
            Subsidiaries are indemnified, or would be indemnified if there were
            a Loss (as defined in the Monterey ERISA Indemnification Agreement),
            under the Monterey ERISA Indemnification Agreement);

                  (xv) the Company or any of its ERISA Affiliates as employer
            under a Multiemployer Plan shall have made a complete or partial
            withdrawal from such Multiemployer Plan and the plan sponsor of such
            Multiemployer Plan shall have notified such withdrawing employer
            that such employer has incurred a withdrawal liability in an
            aggregate amount exceeding $5,000,000 (excluding all amounts for
            which the Company and its Subsidiaries are indemnified, or would be
            indemnified if there were a Loss (as defined in the Monterey ERISA
            Indemnification Agreement), under the Monterey ERISA Indemnification
            Agreement);

                  (xvi) the Company or any of its ERISA Affiliates has Unfunded
            Vested Accrued Benefits in excess of 5% of Consolidated Net Tangible
            Assets under Plans covered by Title IV of ERISA (excluding all
            amounts for which the Company and its Subsidiaries are indemnified,
            or would be indemnified if there were a Loss (as defined in the
            Monterey ERISA Indemnification Agreement), under the Monterey ERISA
            Indemnification Agreement), PROVIDED that for each calendar year
            during the term of this Agreement, the determination under this
            paragraph 7A(xvi) shall be made as of the end of each calendar
            quarter and shall be based upon (a) the aggregate Unfunded Vested
            Accrued Benefits under such Plans as shown in the most recent
            audited financial statements, or the notes thereto, furnished to the
            holders pursuant to paragraph 5A(ii)(A) and (b) Consolidated Net
            Tangible Assets of the Company and its Restricted Subsidiaries as at
            the end of such quarter;

                  (xvii) one or more demands for payment are made upon the
            Company by Parent or any other Person pursuant to the Agreement
            Concerning Taxes, which payments, if made, would exceed $5,000,000
            in the aggregate;

                  (xviii) one or more demands for payment are made upon the
            Company by Parent or any other Person pursuant to the Original
            Spin-Off Indemnification Agreement, which payments, if made, would
            exceed $5,000,000 in the aggregate;

                                    -29-

<PAGE>

                  (xix) if the Date of Closing does not occur on or before
            November 22, 1996, the Company or Parent fails to perform or observe
            any term, agreement or covenant contained in Section 3.3 of the
            Waiver; or

                  (xx)  a Change of Control shall occur;

then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 7A, the holder of any Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the
Company, declare such Note to be, and such Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company, (b) if such event is an Event of Default
specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the
Company, all of the Notes at the time outstanding shall automatically become
immediately due and payable together with interest accrued thereon and together
with the Yield-Maintenance Premium, if any, with respect to each Note, without
presentment, demand, protest or notice of any kind, all of which are hereby
waived by the Company, and (c) if such event is not an Event of Default
specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the
Company, the holder(s) of at least 331/3% of the aggregate unpaid principal
amount of the Notes then outstanding may at its or their option, by notice in
writing to the Company, declare all of the Notes to be, and all of the Notes
shall thereupon be and become, immediately due and payable together with
interest accrued thereon and together with the Yield-Maintenance Premium, if
any, with respect to each Note, without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Company.

      The Company acknowledges, and the parties hereto agree, that each holder
of a Note has the right to maintain its investment in the Notes free from
repayment by the Company (except as herein specifically provided for) and that
the provisions for payment of the Yield-Maintenance Premium by the Company in
the event that the Notes are prepaid or are accelerated as a result of an Event
of Default are intended to provide compensation for the deprivation of such
right under such circumstances.

            7B. RESCISSION OF ACCELERATION. At any time after any or all of the
Notes shall have been declared immediately due and payable pursuant to paragraph
7A, the holder(s) of at least 67% of the aggregate unpaid principal amount of
the Notes then outstanding may, by notice in writing to the Company, rescind and
annul such declaration and its consequences if (i) the Company shall have paid
all overdue interest on the Notes, the principal of and Yield-Maintenance
Premium, if any, payable with respect to any Notes which have become due
otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal and Yield-Maintenance Premium, at the rate
specified in the Notes, (ii) the Company shall not have paid any amounts which
have become due solely by reason of such declaration, (iii) all Events of
Default and Defaults, other than non-payment of amounts which have become due
solely by reason of such declaration, shall have been cured or waived pursuant
to paragraph 11C, and (iv) no judgment or decree shall have 

                                    -30-

<PAGE>

been entered for the payment of any amounts due pursuant to the Notes or this
Agreement. No such rescission or annulment shall extend to or affect any
subsequent Event of Default or Default or impair any right arising therefrom.

            7C. OTHER REMEDIES. If any Event of Default or Default shall occur
and be continuing, the holder of any Note may proceed to protect and enforce its
rights under this Agreement and such Note by exercising such remedies as are
available to such holder in respect thereof under applicable law, either by suit
in equity or by action at law, or both, whether for specific performance of any
covenant or other agreement contained in this Agreement or in aid of the
exercise of any power granted in this Agreement. No remedy conferred in this
Agreement upon the holder of any Note is intended to be exclusive of any other
remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.

            7D. NOTICE BY THE COMPANY OF ACCELERATION. If the holder or holders
of at least 331/3% of the aggregate unpaid principal amount of the Notes
outstanding shall give notice of acceleration of the maturity of all the Notes
pursuant to paragraph 7A(c) or if the holder of any Note shall give notice of
acceleration of the maturity thereof, as provided in paragraph 7A(a), the
Company will forthwith give written notice thereof to the holders of all
outstanding Notes, describing the nature and status of the Event of Default
giving rise to such notice of acceleration and what action the Company proposes
to take with respect thereto, unless such a notice has previously been given by
the Company pursuant to paragraph 5A.

      PARAGRAPH 8.      REPRESENTATIONS, COVENANTS AND WARRANTIES

            8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company
represents, covenants and warrants:

            8A. ORGANIZATION; QUALIFICATION; CORPORATE AUTHORITY. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and each Subsidiary is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized. The Company has and each Subsidiary has the power to own its
respective property and to carry on its respective business as now being
conducted. The execution, delivery and performance by the Company of this
Agreement, the Notes, the Paying Agent Agreement and all documentation necessary
to consummate the Other Transactions are within the Company's corporate powers
and have been duly authorized by all necessary corporate action. The Company and
all Restricted Subsidiaries are duly qualified as foreign corporations to do
business and are in good standing in every jurisdiction in which the nature of
the properties owned or the businesses conducted by them makes such
qualification necessary, except for such jurisdictions in which the failure to
be so qualified or in good standing would not individually or in the aggregate
have a material adverse effect on the business, financial condition or results
of operations of the Company and its Restricted Subsidiaries taken as a whole.
The only Subsidiary of the Company is identified on SCHEDULE 8A attached hereto,
and the percentage of the partnership 

                                    -31-

<PAGE>

interests in such Subsidiary owned by the Company and the state of organization
of such Subsidiary are as stated in SCHEDULE 8A. All of the outstanding
partnership interests in such Subsidiary have been validly issued, are fully
paid and (except as provided in the partnership agreement and in the Texas
Revised Uniform Limited Partnership Act) nonassessable, and are free of any
adverse claim or other Lien. As of the Date of Closing and prior to giving
effect to the shares to be sold pursuant to the Underwriting Agreements, the
authorized capital stock of the Company consists of (i) 100,000,000 shares of
common stock, par value $0.01 per share, of which 45,350,000 shares are issued
and outstanding and (ii) 25,000,000 shares of preferred stock, par value $0.01
per share, of which no shares are issued and outstanding. All of the outstanding
shares of the Company have been validly issued, are fully paid and
nonassessable. No Subsidiary owns any share of stock of the Company.

            8B. FINANCIAL STATEMENTS. The Company has furnished the Purchasers
with the following financial statements, identified by a principal financial
officer of the Company: (a) (i) a consolidated balance sheet with respect to the
"Western Division" of Parent as at December 31 in each of the years 1994 and
1995, and (ii) consolidated statements of operations, division equity and cash
flows with respect to the "Western Division" of Parent for each of the years
1993 to 1995, inclusive, all certified by Price Waterhouse LLP, and (b)(i) a pro
forma consolidated balance sheet of the Company as at September 30, 1996 and
(ii) pro forma consolidated statements of operations of the Company for the nine
months ended September 30, 1996 and for the fiscal year ended December 31, 1995.
The balance sheets fairly present the historical financial condition of the
"Western Division" of Parent or the pro forma financial condition of the Company
and its Subsidiaries, as the case may be (in the case of the Company, on a pro
forma basis as of such dates, as adjusted to give effect to the transactions
contemplated by this Agreement and the Other Transactions), as at the dates
thereof, and the statements of operations, division equity, and cash flows
fairly present the results of the operations of the "Western Division" of Parent
or the Company and its Subsidiaries (on such pro forma basis), as the case may
be, for the periods indicated (subject to year-end adjustments in the case of
the pro forma basis financial statements of the Company). There has been no
material adverse change in the business, financial condition or results of
operations of the "Western Division" of Parent since December 31, 1995 or of the
Company (on such pro forma basis or in actuality) since September 30, 1996. The
assets of the Company constitute the assets allocated to the "Western Division"
of Parent except for the Excluded Assets, as such term is defined in the
Conveyance and Contribution Agreement, the liabilities of the Company constitute
the liabilities allocated to the "Western Division" of Parent except for the
Retained Liabilities, as such term is defined in the Conveyance and Contribution
Agreement, and the pro forma balance sheet of the Company as at September 30,
1996 fairly presents, in all material respects, the assets and liabilities of
the Company as of the Date of Closing that are of a nature required to be
reflected in a balance sheet (including the footnotes thereto) prepared in
accordance with generally accepted accounting principles except for assets
disposed of or acquired, and liabilities arising or discharged, in the ordinary
course of business after September 30, 1996.

                                    -32-

<PAGE>

            8C. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company
nor any of its Subsidiaries is a party to any contract or agreement or subject
to any charter or other corporate restriction which materially and adversely
affects its business, financial condition or results of operations. Neither the
execution nor delivery of this Agreement, the Notes or the Paying Agent
Agreement, nor the offering, issuance and delivery of the Notes, nor fulfillment
of nor compliance with the terms and provisions of this Agreement, the Notes nor
the consummation of the Other Transactions will conflict with, or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
or result in any violation of, or result in the creation of any Lien (other than
the Production Payment) upon any of the properties or assets of Parent, any
Subsidiary of Parent, the Company or any Subsidiary of the Company pursuant to,
the charter or by-laws of Parent, any Subsidiary of Parent, the Company or any
Subsidiary of the Company, any award of any arbitrator or any material agreement
(including any agreement with stockholders), instrument, order, judgment,
decree, statute, law, rule or regulation to which Parent, any Subsidiary of
Parent, the Company or any Subsidiary of the Company is subject. Except as
disclosed on SCHEDULE 8C, Parent, any Subsidiary of Parent, the Company and any
Subsidiary of the Company are not parties to, or otherwise subject to any
provision contained in, any instrument evidencing indebtedness of Parent, any
Subsidiary of Parent, the Company or any Subsidiary of the Company, any
agreement relating thereto or any other contract or agreement (including their
respective charters) which limits the amount of, or otherwise imposes
restrictions on the incurring of, Debt of the Company of the type to be
evidenced by the Notes.

            8D. GOVERNMENTAL CONSENT. Neither the nature of Parent, any
Subsidiary of Parent, the Company or any Subsidiary of the Company, nor any of
their respective businesses or properties, nor any relationship between Parent,
any Subsidiary of Parent, the Company or any Subsidiary of the Company and any
other Person, nor any circumstance in connection with the offering, issuance or
exchange of the Notes for the Series G Notes or the consummation of the Other
Transactions is such as to require any authorization, consent, approval,
exemption or other action by or notice to or filing with any court or
administrative or governmental or regulatory body (other than (i) those obtained
in connection with the Other Transactions, the Tender Offer and the Consent
Solicitation and (ii) routine filings after the Date of Closing with the
Securities and Exchange Commission and/or state Blue Sky authorities) in
connection with the execution and delivery of this Agreement or the Paying Agent
Agreement, the offering, issuance or exchange of the Notes for the Series G
Notes, fulfillment of or compliance with the terms and provisions of this
Agreement, the Notes or the Paying Agent Agreement or the consummation of the
Other Transactions.

            8E. ENFORCEABILITY. This Agreement and the Paying Agent Agreement
are, and the Notes when delivered hereunder will be, legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms.

            8F. ACTIONS PENDING. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Company, threatened against
Parent, any Subsidiary of Parent, the Company or any Subsidiary of the Company,
or any properties or rights of Parent, any Subsidiary of Parent, the Company or
any Subsidiary of the Company, by or before any court, 

                                      -33-

<PAGE>

arbitrator or administrative or governmental body which, if determined
adversely, would have a material adverse effect on the business, financial
condition or results of operations of the Company and its Subsidiaries taken as
a whole. There is no action, suit, investigation or proceeding pending or, to
the Company's knowledge, threatened against Parent, any Subsidiary of Parent,
the Company or any of Subsidiary of the Company which purports to affect the
validity or enforceability of this Agreement, any Note or the Paying Agent
Agreement or the consummation of the Other Transactions.

            8G. OUTSTANDING DEBT. Neither the Company nor any of its Restricted
Subsidiaries has outstanding any Debt except as set forth on SCHEDULE 8G
attached hereto. There exists no default under the provisions of any instrument
evidencing such Debt or any Debt of Parent or of any agreement relating thereto,
and except for the Waiver, no waiver of default, which is conditional or time
limited, is currently in effect with respect to any instrument evidencing such
Debt or any Debt of Parent or any agreement relating thereto.

            8H. TITLE TO PROPERTIES. Except to the extent disclosed under the
caption entitled "Business - Other Business Matters - Title to Properties" in
the Prospectus, the Company has and each of its Subsidiaries has good and
indefeasible title to its respective real properties (other than properties held
under leases) and good and defensible title to all of its other respective
properties and assets, including the properties and assets reflected in the
balance sheet as at September 30, 1996 referred to in paragraph 8B (other than
properties and assets disposed of in the ordinary course of business), subject
to no Lien of any kind except Liens permitted by clauses (i) through (iii) of
paragraph 6B(1). All leases necessary in any material respect for the conduct of
the respective businesses of the Company and its Subsidiaries are valid and
subsisting and are in full force and effect.

            8I. TAXES. Parent has, the Company has and each of its Subsidiaries
has filed, or has had filed on its behalf, all federal, state and other income
tax returns which, to the best knowledge of the executive officers of the
Company, are required to be filed, except such tax returns (other than state and
federal) with respect to which such failure to file will not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and its Restricted
Subsidiaries taken as a whole, and each has paid all taxes as shown on such
returns and on all assessments received by it except to the extent contested in
good faith by appropriate proceedings for which adequate reserves have been
established in accordance with generally accepted accounting principles.

            8J. OFFERING OF NOTES. Neither the Company nor any agent acting on
its behalf has, directly or indirectly, offered the Notes or any similar
security of the Company for sale to, or solicited any offers to buy the Notes or
any similar security of the Company from, or otherwise approached or negotiated
with respect thereto with, any Person other than the Purchasers, and neither the
Company nor any agent acting on its behalf has taken or will take any action
which would subject the issuance or sale of the Notes to the provisions of
section 5 of the Securities Act or to the provisions of any securities or Blue
Sky law of any applicable jurisdiction.

                                    -34-

<PAGE>

            8K. USE OF PROCEEDS FROM THE INITIAL PUBLIC OFFERING. SCHEDULE 8K is
a true and complete list and description of the use and proposed use of proceeds
from the Initial Public Offering.

            8L. REGULATION G, ETC. Neither the Company nor any Subsidiary owns
or has any present intention of acquiring any "MARGIN STOCK" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System (herein called "MARGIN STOCK"). The issuance of the Notes in exchange for
the Series G Notes does not constitute a "PURPOSE CREDIT" within the meaning of
such Regulation G. Neither the Company nor Parent nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
Notes to violate Regulation G, Regulation T or any other regulation of the Board
of Governors of the Federal Reserve System or to violate the Securities Exchange
Act of 1934, as amended, in each case as in effect now or as the same may
hereafter be in effect.

            8M. ERISA. No accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan. No liability to the Pension Benefit Guaranty Corporation
has been or is expected by the Company to be incurred with respect to any Plan
or any Multiemployer Plan by the Company or any of its ERISA Affiliates which
has had or would have a material adverse effect on the business, financial
condition or results of operations of the Company and its Restricted
Subsidiaries taken as a whole. Neither the Company nor any of its ERISA
Affiliates has incurred or presently expects to incur any withdrawal liability
under Title IV of ERISA with respect to any Multiemployer Plan which has had or
would have a material adverse effect as the business, financial condition or
results of operations of the Company and its Restricted Subsidiaries taken as a
whole. The execution and delivery of this Agreement and the Paying Agent
Agreement and the issuance and sale of the Notes will not involve any
transaction which is subject to the prohibitions of section 406 of ERISA or in
connection with which a tax could be imposed pursuant to section 4975 of the
Code. The representation by the Company in the next preceding sentence is made
in reliance upon and subject to the accuracy of the representations in paragraph
9B as to the source of the assets used to acquire the Notes.

            8N. DISCLOSURE. Neither this Agreement nor the Prospectus nor any
other document, certificate or statement furnished to each Purchaser by or on
behalf of the Company in connection herewith contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading. There is no fact
peculiar to the Company or any of its Subsidiaries which materially adversely
affects or in the future may (so far as the Company can now reasonably foresee)
materially adversely affect the business, financial condition or results of
operations of the Company and its Restricted Subsidiaries, taken as a whole and
which has not been set forth in this Agreement (including the Exhibits hereto),
in the Prospectus or in such documents, certificates and statements. The
financial and other projections contained in the Prospectus are reasonable based
on the assumptions stated therein and the best information available to the
officers of Parent and the Company at the time such projections were prepared.
Nothing in this paragraph 8N shall be construed as a representation, warranty or
covenant that any of such projections shall in fact be achieved.

                                    -35-

<PAGE>


            8O. POLLUTION AND OTHER REGULATIONS. (a) Each of the Company and its
Subsidiaries is, and Parent has been, in compliance with all laws and
regulations, including, without limitation, those relating to equal employment
opportunity and employee safety in all jurisdictions in which it is presently
doing business except where the failure to do so would not materially adversely
affect the business, financial condition or results of operations of the Company
and its Restricted Subsidiaries, taken as a whole.

            (b) Parent and the Company and its Subsidiaries, and the plants and
sites of each, have complied with all federal, state, local and regional
statutes, ordinances, orders, judgments, rulings and regulations relating to any
matters of pollution or of environmental regulation or control except, in any
such case, where such failure to comply would not result in a material adverse
effect on the business, financial condition or results of operations of the
Company and its Restricted Subsidiaries, taken as a whole. Without limiting the
generality of the preceding sentence, neither the Company nor any of its
Subsidiaries nor Parent has received notice of or has actual knowledge of any
actual or claimed or asserted failure so to comply which alone or together with
any other such failure is material and would result in a material adverse effect
on the business, financial condition or results of operations of the Company and
its Restricted Subsidiaries, taken as a whole. Neither the Company nor any of
its Subsidiaries nor Parent nor their respective plants or other sites manage,
generate or dispose of, or during their respective periods of use, ownership,
occupancy or operation by Parent, the Company or its Subsidiaries have managed,
generated, released or disposed of, any hazardous wastes, hazardous substances,
hazardous materials, toxic substances or toxic pollutants, as those terms are
used or defined in the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act and the
Clean Water Act, in material violation of or in a manner which would result in
liability under such statutes or any regulations promulgated pursuant thereto or
any other applicable law except where such noncompliance or liability would not
result in a material adverse effect on the business, financial condition or
results of operations of the Company and its Restricted Subsidiaries, taken as a
whole. The foregoing representation in this subparagraph (b) is based in its
entirety upon: (i) current interpretations and enforcement policies that have
been publicly disseminated and are utilized by governmental agencies charged
with enforcement of the legal requirements within the scope of the
representation in this subparagraph (b), and (ii) current levels of publicly
disseminated scientific knowledge concerning the detection of, and the health
and environmental risks associated with the discharge of, small quantities of
pollutants regulated pursuant to the legal requirements within the scope of the
representation.

            8P. BROKERAGE. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by the Company without the
intervention of any Person which might give rise to a valid claim against the
Purchasers for a brokerage commission or other like payment; and the Company
agrees to indemnify and hold the Purchasers harmless from and against any such
claims.

                                      -36-

<PAGE>

            8Q. POSSESSION OF PERMITS, LICENSES, ETC. The Company and its
Subsidiaries possess all certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities, and all patents, trademarks, service marks, trade names,
copyrights, licenses, and other rights that are necessary in any material
respect for the ownership, maintenance and operation of their respective
properties and assets, and neither the Company nor any Subsidiary is in
violation of any thereof in any material respect.

            8R. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT;
INVESTMENT COMPANY ACT. Neither the Company nor any Subsidiary is a "HOLDING
COMPANY" or a "SUBSIDIARY COMPANY" of a "HOLDING COMPANY" or a "PUBLIC UTILITY
COMPANY" as such terms are defined in the Public Utility Holding Company Act of
1935, as amended, or a "PUBLIC UTILITY" as such term is defined in the Federal
Power Act, as amended. The Company is not, and is not directly or indirectly
controlled by or acting on behalf of any Person which is, an "INVESTMENT
COMPANY" within the meaning of the Investment Company Act of 1940, as amended.

            8S. RESTRICTED INVESTMENTS. The Company and its Subsidiary own no
Restricted Investments.


      PARAGRAPH 9.      REPRESENTATIONS OF EACH PURCHASER

            9. REPRESENTATIONS OF EACH PURCHASER. Each Purchaser represents as
follows:

            9A. NATURE OF PURCHASE. Such Purchaser is not acquiring the Notes
hereunder with a view to or for sale in connection with any distribution thereof
within the meaning of the Securities Act, provided that the disposition of such
Purchaser's property shall at all times be and remain within such Purchaser's
control.

            9B. SOURCE OF FUNDS. At least one of the following statements is an
accurate representation as to the source (a "SOURCE") to which the Series G
Notes of such Purchaser are, and to which the Notes, at the time of issuance
thereof, will be, allocated:

                  (i) the Source constitutes such Purchaser's "insurance company
            general account" (as such term is defined under Section V of the
            United States Department of Labor's Prohibited Transaction Class
            Exemption ("PTCE") 95-60), and such Purchaser satisfies all of the
            applicable requirements for relief under Sections I and IV of PTCE
            95-60; or

                  (ii) the Source is either (a) an insurance company pooled
            separate account, within the meaning of PTCE 90-1 (issued January
            29, 1990), or (b) a bank collective investment fund, within the
            meaning of the PTCE 91-38 (issued July 12, 1991) and, except as 

                                    -37-

<PAGE>

            such Purchaser has disclosed to the Company in writing pursuant to
            this clause (ii) prior to the execution and delivery of this
            Agreement, no employee benefit plan or group of plans maintained by
            the same employer or employee organization beneficially owns more
            than 10% of all assets allocated to such pooled separate account or
            collective investment fund; or

                  (iii) the Source constitutes assets of an "investment fund"
            within the meaning of Part V of the QPAM Exemption) managed by a
            "qualified professional asset manager" or "QPAM" (within the meaning
            of Part V of the QPAM Exemption), no employee benefit plan's assets
            that are included in such investment fund, when combined with the
            assets of all other employee benefit plans established or maintained
            by the same employer or by an affiliate (within the meaning of
            Section V(c)(1) of the QPAM Exemption) of such employer or by the
            same employee organization and managed by such QPAM, exceed 20% of
            the total client assets managed by such QPAM, the conditions of Part
            I (c) and (g) of the QPAM Exemption are satisfied, neither the QPAM
            nor a person controlling or controlled by the QPAM (applying the
            definition of "control" in Section V(e) of the QPAM Exemption) owns
            a 5% or more interest in the Company and (a) the identity of such
            QPAM and (b) the names of all employee benefit plans whose assets
            are included in such investment fund have been disclosed to the
            Company in writing pursuant to this clause (iii) prior to the
            execution and delivery of this Agreement; or

                  (iv)  the Source is a governmental plan; or

                  (v) the Source is one or more employee benefit plans, or a
            separate account or trust fund comprised of one or more employee
            benefit plans, each of which, or the names of the employers whose
            employees are covered by such plan or plans (within the meaning of
            Section 3(14)(C) of ERISA), have been identified to the Company in
            writing pursuant to this clause (v) prior to the execution and
            delivery of this Agreement; or

                  (vi) the Source does not include assets of any employee
            benefit plan, other than a plan exempt from the coverage of ERISA.

As used in this paragraph 9B, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.

                                    -38-

<PAGE>

            9C. CERTIFICATION REGARDING SERIES G NOTES. The facts set forth in
the certificate delivered by such Purchaser to the Company with respect to its
holding of the Series G Notes being exchanged by it and the circumstances under
which (and the price at which) it acquired the same are true and correct (it
being understood that the representation contained in this paragraph 9C is given
by such Purchaser solely to induce the Company to agree to the inclusion of
paragraph 5G herein for the benefit of such Purchaser).

      PARAGRAPH 10.     DEFINITIONS AND ACCOUNTING TERMS

            10A. CERTAIN DEFINED TERMS. As used in this Agreement the following
terms shall have the meanings specified with respect thereto below (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):

            "AFFILIATE" shall mean, as to any Person, any other Person directly
      or indirectly controlling, controlled by, or under direct or indirect
      common control with, such Person (except, in the case of the Company, a
      Restricted Subsidiary). A Person shall be deemed to control a corporation
      or entity if such Person possesses, directly or indirectly, the power to
      direct or cause the direction of the management and policies of such
      corporation or entity, whether through the ownership of voting securities,
      by contract or otherwise. Unless the context indicates otherwise, any
      reference to an "Affiliate" is to an Affiliate of the Company.

            "AGREEMENT" shall mean this Note Agreement, as the same may be from
      time to time amended.

            "AGREEMENT CONCERNING TAXES" shall mean the Agreement Concerning
      Taxes and Tax Indemnification Upon Spin-Off by and between Parent and the
      Company and those Subsidiaries of the Company signatory thereto dated as
      of the Date of Closing.

            "ATTRIBUTABLE DEBT" shall mean the lesser of (i) the fair market
      value of the assets sold pursuant to any Sale and Leaseback Transaction
      (which determination shall be based upon a written opinion (the cost of
      which shall be borne exclusively by the Company) as to valuation from an
      independent valuation expert selected by the Company) or (ii) the present
      value (discounted according to generally accepted accounting principles at
      the debt rate implicit in the lease) of the obligations of the lessee for
      rental payments during the term of any lease constituting a part of a Sale
      and Leaseback Transaction.

            "BANKRUPTCY LAW" shall have the meaning specified in clause (viii)
      of paragraph 7A.

                                    -39-

<PAGE>

            "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or
      a day on which commercial banks in New York City are required or
      authorized to be closed.

            "CALLED PRINCIPAL" shall mean, with respect to any Note, the
      principal of such Note that is to be prepaid pursuant to paragraph 4B (any
      partial prepayment being applied in satisfaction of required payments of
      principal in inverse order of their scheduled due dates) or is declared to
      be immediately due and payable pursuant to paragraph 7A, as the context
      requires.

            "CAPITAL GAINS" shall mean gains (net of expenses and taxes
      applicable thereto) in excess of losses resulting from the sale,
      conversion or other disposition of capital assets (i.e., assets other than
      current assets).

            "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation
      which, under generally accepted accounting principles, is or will be
      required to be capitalized on the books of the Company or any Restricted
      Subsidiary, taken at the amount thereof accounted for as indebtedness (net
      of interest expense) in accordance with such principles.

            "CHANGE OF CONTROL" shall mean any change so that any Person (or any
      Persons acting together which would constitute a Group), together with any
      Affiliates or Related Persons thereof, other than Permitted Holders, shall
      at any time either (1) Beneficially Own more than 50% of the aggregate
      voting power of all classes of Voting Stock of the Company or (2) succeed
      in having sufficient of its or their nominees elected to the Board of
      Directors of the Company such that such nominees, when added to any
      existing director remaining on the Board of Directors of the Company after
      such election who is an Affiliate or Related Person or such Person or
      Group, shall constitute a majority of the Board of Directors of the
      Company. As used herein (a) "BENEFICIALLY OWN" shall mean beneficially own
      as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as
      amended (the "EXCHANGE ACT"), or any successor provision thereto; (b)
      "GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange
      Act; (c) "RELATED PERSON" of any Person shall mean any other Person owning
      (1) 5% of more of the outstanding common stock of such Person or (2) 5% of
      more of the Voting Stock of such Person; and (d) "VOTING STOCK" of any
      Person shall mean capital stock of such Person which ordinarily has voting
      power for the election of directors (or persons performing similar
      functions) of such Person, whether at all times or only so long as no
      senior class of securities has such voting power by reason of any
      contingency.

            "CLOSING" shall have the meaning specified in paragraph 2.

            "CODE" shall mean the Internal Revenue Code of 1986, as amended.

                                    -40-

<PAGE>

            "COMPANY" shall mean the corporation that originally executed this
      Agreement as issuer of the Notes until a corporation becomes a successor
      or transferee in a transaction permitted by paragraph 6(B)(5)(vii) and
      thereafter shall mean any such successor or transferee corporation.

            "CONSENT SOLICITATION" shall mean the solicitation from the holders
      of Parent's 11% Senior Subordinated Debentures due 2004 of consent to
      waivers of certain provisions of the Indenture pursuant to which such
      Debentures were issued in order to permit certain of the Other
      Transactions.

            "CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues
      (including Capital Gains) of the Company and its Restricted Subsidiaries
      less all operating and non-operating expenses of the Company and its
      Restricted Subsidiaries including all charges of a proper character
      (including current and deferred taxes on income, provision for taxes on
      unremitted foreign earnings which are included in gross revenues, and
      current additions to reserves), but not including in gross revenues any
      gains resulting from write-up of assets, any equity of the Company or any
      Restricted Subsidiary in the unremitted earnings of any Person which is
      not a Restricted Subsidiary, any earnings of any Person acquired by the
      Company or any Restricted Subsidiary through purchase, merger or
      consolidation or otherwise for any year prior to the year of acquisition,
      or any deferred credit representing the excess of equity in any Restricted
      Subsidiary at the date of acquisition over the cost of the investment in
      such Restricted Subsidiary; all determined in accordance with generally
      accepted accounting principles.

            "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS AND
      RESTRICTED INVESTMENTS" shall have the meaning assigned to such term in
      paragraph 6A hereof.

            "CONSOLIDATED NET TANGIBLE ASSETS" shall mean (i) for any
      calculation, as of the end of the fiscal quarter ending September 30,
      1996, $404,300,000 and (ii) for all other determinations, the aggregate
      net tangible assets of the Company and its Restricted Subsidiaries,
      determined as follows:

            (A) The aggregate gross book value of all the assets of the Company
      and its Restricted Subsidiaries, both real and personal, shall be computed
      excluding, however (without duplication), the following items:

                  (1) all franchises, licenses, permits, patents, patent
            applications, copyrights, trademarks, trade names, goodwill,
            experimental or organizational expense, unamortized debt discount
            and expense, and all other properties which under generally accepted
            accounting principles are deemed intangible;

                                    -41-

<PAGE>

                  (2)   any reacquired shares or reacquired Debt of the
            Company or its Restricted Subsidiaries;

                  (3) any write-up of any such assets made by Parent, any
            Subsidiary of Parent, the Company or any Restricted Subsidiary of
            the Company after December 31, 1989;

                  (4) 50% of the value of all assets of the Company and its
            Restricted Subsidiaries acquired by Parent, any Subsidiary of
            Parent, the Company and any Restricted Subsidiary of the Company
            after April 1, 1990 which are located outside the United States of
            America and Canada and not freely returnable to the United States of
            America or Canada, including any notes or accounts receivable from
            any debtor having any substantial part of its business, operations
            or properties located outside the United States of America and
            Canada, except notes or accounts receivable from such a debtor which
            arose in the ordinary course of business of Parent, any Subsidiary
            of Parent, the Company or any Restricted Subsidiary of the Company,
            as the case may be, to which such notes or accounts receivable are
            payable and which otherwise constitute current assets, but only to
            the extent of an amount of United States dollars readily realizable
            from such notes or accounts receivable by liquidation either
            directly or through a currency freely convertible into United States
            dollars; and

                  (5)   all Restricted Investments of the Company and its
            Restricted Subsidiaries.

            (B) From the gross book value of the tangible assets of the Company
      and its Restricted Subsidiaries, determined as provided in the preceding
      subparagraph (A), there shall be deducted the following items:

                  (1) all reserves for depreciation, depletion, obsolescence and
            amortization of the properties of the Company and its Restricted
            Subsidiaries (other than properties excluded as provided in the
            preceding subparagraph (A)), all proper reserves (other than
            reserves for deferred taxes and general contingency reserves and
            other reserves representing mere appropriations of surplus) which in
            accordance with generally accepted accounting principles should be
            set aside in connection with the business conducted by them;

                  (2)   all Current Debt of the Company and its Restricted
            Subsidiaries; and

                                    -42-

<PAGE>

                  (3) all other liabilities of the Company and its Restricted
            Subsidiaries, including the reduction in equity attributable to
            minority interests but excluding deferred taxes, Funded Debt of the
            Company and its Restricted Subsidiaries, capital shares, surplus and
            general contingency reserves and other reserves representing mere
            appropriations of surplus.

            (C) In the determination of Consolidated Net Tangible Assets
      pursuant to clause (ii) of this definition, no amount shall be included
      therein on account of any excess cost of acquisition of shares of any
      Restricted Subsidiary over the net book value of the assets of such
      Restricted Subsidiary attributable to such shares at the date of such
      acquisition or on account of any excess of the net book value of the
      assets of any Restricted Subsidiary attributable to any shares of such
      Restricted Subsidiary at the date of acquisition of such shares over the
      cost of acquisition of such shares.

            "CONSOLIDATED NET WORTH" shall mean the consolidated shareholders'
      equity of the Company and its Restricted Subsidiaries, MINUS (to the
      extent included in the calculation of consolidated shareholders' equity)
      the aggregate amount of Investments (determined in accordance with the
      last sentence of the definition of "Investment") in Unrestricted
      Subsidiaries, all as determined in accordance with generally accepted
      accounting principles.

            "CONSOLIDATED TANGIBLE NET WORTH" shall mean Consolidated Net Worth
      MINUS the net book amount of all assets of the Company and its Restricted
      Subsidiaries (after deducting any reserves applicable thereto) which would
      be shown as intangible assets on a consolidated balance sheet of the
      Company and its Restricted Subsidiaries as of such time prepared in
      accordance with generally accepted accounting principles.

            "CONVEYANCE AND CONTRIBUTION AGREEMENT" shall mean the Conveyance
      and Contribution Agreement from Parent to the Company dated effective
      November 1, 1996.

            "CORPORATE SERVICES AGREEMENT" shall mean the Corporate Services
      Agreement by and between Parent and the Company dated as of the Date of
      Closing.

            "CREDIT AGREEMENTS" shall mean (i) the Credit Agreement, dated as of
      November 13, 1996, among the Company, Parent, the Banks signatory thereto
      and The Chase Manhattan Bank, as Administrative Agent, and (ii) the Credit
      Agreement, dated as of November 13, 1996, among Parent, the Banks
      signatory thereto and The Chase Manhattan Bank, as Administrative Agent.

                                    -43-

<PAGE>

            "CURRENT DEBT" shall mean any obligation for borrowed money (and any
      notes payable and drafts accepted representing obligations for borrowed
      money) payable on demand or within a period of one year from the date of
      the creation thereof and any Guaranty with respect to Current Debt (of the
      kind otherwise described in this definition) of another Person; PROVIDED
      that any obligation shall be treated as Funded Debt, regardless of its
      term, if such obligation is renewable pursuant to the terms thereof or of
      a revolving credit or similar agreement effective for more than one year
      after the date of the creation of such obligation, or may be payable out
      of the proceeds of a similar obligation pursuant to the terms of such
      obligation or of any such agreement.

            "DATE OF CLOSING" shall have the meaning specified in paragraph 2.

            "DEBT" shall mean Funded Debt and/or Current Debt, as the case may
      be.

            "DISCOUNTED VALUE" shall mean, with respect to the Called Principal
      of any Note, the amount obtained by discounting all Remaining Scheduled
      Payments with respect to such Called Principal from their respective
      scheduled due dates to the Settlement Date with respect to such Called
      Principal, in accordance with accepted financial practice and at a
      discount factor (applied on a semiannual basis) equal to (i) in the case
      of prepayment of the Notes made prior to March 31, 1998, the Reinvestment
      Yield with respect to such Called Principal and (ii) with respect to
      prepayment of the Notes made on or after March 31, 1998, 50 basis points
      above the Reinvestment Yield with respect to such Called Principal.

            "EBITD" shall mean for any period Consolidated Net Earnings for such
      period (calculated, for purposes of this definition only, without taking
      into account extraordinary items under generally accepted accounting
      principles or capital gains or capital losses) plus the aggregate amounts
      deducted in determining Consolidated Net Earnings in respect of (i) all
      provisions for any federal, state or other income taxes made by the
      Company and its Restricted Subsidiaries during such period, (ii) Fixed
      Charges of the Company and its Restricted Subsidiaries during such period,
      (iii) depreciation, depletion and amortization charges of the Company and
      its Restricted Subsidiaries for such period, and (iv) all other non-cash
      charges of the Company and its Restricted Subsidiaries for such period,
      all determined in accordance with generally accepted accounting
      principles; PROVIDED, "EBITD" shall mean, for any calculation,
      $25,900,000, $30,600,000, $37,400,000 and $33,800,000 for the fiscal
      quarters ended December 31, 1995, March 31, 1996, June 30, 1996, and
      September 30, 1996 respectively; PROVIDED, FURTHER, that EBITD for the
      fiscal quarter ended December 31, 1996, shall be $15,800,000 plus EBITD
      (determined according to the first clause of this sentence) for the two
      months ended December 31, 1996.

                                    -44-

<PAGE>

            "ERISA" shall mean the Employee Retirement Income Security Act of
      1974, as amended.

            "ERISA AFFILIATE" shall mean any trade or business (whether or not
      incorporated) which is a member of a group of which the Company is a
      member and which is under common control within the meaning of the
      regulations under Section 414 of the Code.

            "EVENT OF DEFAULT" shall mean any of the events specified in
      paragraph 7A, provided that there has been satisfied any requirement in
      connection with such event for the giving of notice, or the lapse of time,
      or the happening of any further condition, event or act, and "DEFAULT"
      shall mean any of such events, whether or not any such requirement has
      been satisfied.

            "FIXED CHARGES" shall mean (without duplication) for any period the
      sum of interest expense in respect of all Debt of the Person(s) for which
      the determination is made, including imputed interest expense in respect
      of Capitalized Lease Obligations; PROVIDED, HOWEVER, that Fixed Charges of
      the Company and its Restricted Subsidiaries shall mean, for any
      calculation, $5,300,000 for each of the fiscal quarters ended December 31,
      1995, March 31, 1996, June 30, 1996, and September 30, 1996; PROVIDED,
      FURTHER, that Fixed Charges of the Company and its Restricted Subsidiaries
      for the fiscal quarter ended December 31, 1996, shall be $1,767,000 plus
      Fixed Charges (determined according to the first clause of this sentence
      but excluding any interest expense in respect of the Series E Notes and
      the Series F Notes and any interest accrued on the Series G Notes prior to
      November 1, 1996) of the Company and its Restricted Subsidiaries for the
      two months ended December 31, 1996.

            "FUNDED DEBT" shall mean and include, without duplication, any
      obligation (including the current maturities thereof)

                  (i) payable more than one year from the date of creation
            thereof (a) for borrowed money, (b) evidenced by bonds, debentures,
            notes or reimbursement obligations in respect of letters of credit
            or other similar instruments (other than letters of credit and
            surety bonds relating to trade obligations incurred in the ordinary
            course of business and includable, under generally accepted
            accounting principles, in current liabilities on a balance sheet or
            in the notes relating thereto), (c) for the payment of the deferred
            purchase price of property or services, except trade accounts
            payable arising in the ordinary course of business, (d) constituting
            Capitalized Lease Obligations, (e) in respect of the Production
            Payment, other production payments, proceeds production payments or
            similar 

                                    -45-

<PAGE>

            financing arrangements, (f) which is, under generally accepted
            accounting principles, shown on a balance sheet (after giving
            effect, in the case of the balance sheet of the Company or a
            Restricted Subsidiary, to the eliminating entries, if any, for the
            Unrestricted Subsidiaries as a group) as long-term debt (excluding
            provisions for deferred income taxes, unfunded pension obligations,
            unfunded liabilities for other post-employment benefits and other
            reserves or provisions to the extent that such reserves or
            provisions do not constitute an obligation), or (g) for any item
            described in any of the foregoing clauses (a) through (f) which is
            secured by any Lien on property owned by the Company or any
            Restricted Subsidiary, whether or not the obligation secured thereby
            shall have been assumed by the Company or such Restricted
            Subsidiary, or

                  (ii) payable more than one year from the date of creation
            thereof, which under generally accepted accounting principles is
            shown on the balance sheet as a long-term liability (excluding
            provisions for deferred income taxes, unfunded pension obligations,
            unfunded liabilities for other post-employment benefits and other
            reserves or provisions to the extent that such reserves or
            provisions do not constitute an obligation), or

                  (iii) constituting a Guaranty with respect to Funded Debt (of
            the kind otherwise described in clauses (i) and (ii) of this
            definition) of another Person, including without limitation any
            obligation by the Company or a Restricted Subsidiary for Funded Debt
            of any other Person, regardless of the percentage of equity interest
            owned therein by the Company or a Restricted Subsidiary, by virtue
            of its capacity as a general partner of such other Person.

            "GUARANTY" shall mean and include, without limitation, any
      obligation of the Company or a Restricted Subsidiary

                  (i) constituting a guaranty, endorsement (other than an
            endorsement of a negotiable instrument for collection in the
            ordinary course of business) or other contingent liability (whether
            direct or indirect) in connection with the obligations, stock or
            dividends of any Person (other than the Company or a Restricted
            Subsidiary),

                  (ii) payable under any contract (other than the Agreement
            Concerning Taxes and any tax indemnification or sharing agreement)
            providing for the making of loans, advances or capital contributions
            to any Person (other than the Company or a Restricted Subsidiary),

                                    -46-

<PAGE>

            or for the purchase of any property from any Person, in each case in
            order primarily to enable such Person to maintain working capital,
            net worth or any other balance sheet condition or to pay debts,
            dividends or expenses,

                  (iii) payable under any contract for the purchase of
            materials, supplies or other property or services (other than any
            natural gas transportation contract or any electrical, water supply,
            steam purchase or other utility supply contract) if such contract
            (or any related document) requires that payment for such materials,
            supplies or other property or services shall be made regardless of
            whether or not delivery of such materials, supplies, or other
            property or services is ever made or tendered; provided that the
            exceptions contained in this clause (iii) shall not apply to any
            contract for the purchase or transportation of natural gas where
            payment is required regardless of whether the delivery of such
            natural gas is ever made or tendered, unless at the time such
            contract is entered into the aggregate of such payments under such
            contract and all such existing contracts would not exceed
            $20,000,000 in any calendar year based on existing rates and
            automatic escalations in such rates under such contracts,

                  (iv) payable under any contract to rent or lease (as lessee)
            any real or personal property (other than any oil and gas leases) if
            such contract (or any related document) provides that the obligation
            to make payments thereunder is absolute and unconditional under
            conditions not customarily found in commercial leases then in
            general use or requires that the lessee purchase or otherwise
            acquire securities or obligations of the lessor, or

                  (v) payable under any other contract which, in economic
            effect, is substantially equivalent to a guarantee for any payment
            or performance of an obligation of a Person other than the Company
            or a Restricted Subsidiary.

            "INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company
      Petroleum Engineers or another independent petroleum engineer retained by
      the Company and well-regarded in the oil and gas industry and who is in
      fact independent and does not have any substantial interest, direct or
      indirect, in the Company or its Subsidiaries, but such Person may be
      regularly retained by the Company. If an individual, such Person shall not
      be a director, officer, investor (in excess of 1,000 shares) or employee
      of the Company or its Subsidiaries. If such 

                                    -47-

<PAGE>

      Person is a partnership or a corporation, it shall not have a partner,
      director or officer who is a director, officer, investor (in excess of
      1,000 shares) or employee of the Company or its Subsidiaries.

            "INELIGIBLE SUBSIDIARY" shall mean each Subsidiary of Parent other
      than (a) the Company, (b) any wholly-owned Restricted Subsidiary and (c)
      any other Restricted Subsidiary as long as no portion of the equity
      interest in such Restricted Subsidiary is owned by Parent, an Ineligible
      Subsidiary or an Affiliate of Parent (except the Company or a wholly-owned
      Restricted Subsidiary).

            "INITIAL PUBLIC OFFERING" shall mean the registered initial public
      offering of shares of the Company's common stock pursuant to the
      Prospectus and the prospectus for the concurrent international offering,
      outside the United States of America, of the common stock of the Company,
      par value $0.01 per share.

            "INVESTMENT" shall mean any purchase or other acquisition of the
      stock, obligations or securities of, or any interest in, or any capital
      contribution, loan or advance to, or any Guaranty in respect of the
      obligations of any Person but in any event shall include as an investment
      in any Person the amount of all Debt owed by such Person, and all accounts
      receivable from such Person which are not current assets or did not arise
      from sales to such Person in the ordinary course of business. As used
      herein, any capital contribution of assets by the Company or any
      Restricted Subsidiary shall be valued at the book value of such assets as
      reflected in the consolidated financial statements of the Company and its
      Restricted Subsidiaries as at the end of the quarter ending immediately
      prior to such contribution.

            "LIEN" shall mean any mortgage, pledge, security interest,
      encumbrance, lien or charge of any kind (including any agreement to give
      any of the foregoing), any conditional sale or other title retention
      agreement, any lease in the nature thereof, and the filing of, or
      agreement to give, any financing statement under the Uniform Commercial
      Code of any jurisdiction or any other type of preferential arrangement.

            "MONTEREY ERISA INDEMNIFICATION AGREEMENT" shall mean the ERISA
      Indemnification Agreement by and between Parent and the Company for the
      benefit of the Company, the Subsidiaries and the Purchasers (as such term
      is defined therein), dated the Date of Closing.

            "MULTIEMPLOYER PLAN" shall mean any plan which is a "MULTIEMPLOYER
      PLAN" (as such term is defined in section 4001(a)(3) of ERISA).

            "NOTE" and "NOTES" shall have the meanings specified in paragraph 1.

                                    -48-

<PAGE>

            "OFFICER'S CERTIFICATE" shall mean, in the case of the Company, any
      other corporation or any other business entity, a certificate signed in
      its name by its President, one of its Vice Presidents or its Treasurer.

            "OLINDA NOTES" shall mean the secured promissory note or notes in an
      original aggregate principal amount of up to $8,500,000 which, under
      certain circumstances, may be purchased by the Company from Parent
      pursuant to the Conveyance and Contribution Agreement.

            "ORIGINAL NOTE AGREEMENT" shall have the meaning specified in the
      recitals of this Agreement.

            "ORIGINAL SPIN-OFF INDEMNIFICATION AGREEMENT" shall mean that
      certain First Amended and Restated Spin-Off Tax Indemnification Agreement
      between Santa Fe Pacific Corporation, a Delaware corporation, and Parent
      dated November 26, 1990.

            "OTHER TRANSACTIONS" shall mean (i) the creation of the Company,
      (ii) the transfer of the Western Assets to the Company, and the assumption
      by the Company of the Assumed Liabilities (as defined in the Conveyance
      and Contribution Agreement), pursuant to the Conveyance and Contribution
      Agreement, (iii) the assumption of Parent's obligations under the Original
      Note Agreement, the Series E Notes, the Series F Notes and the Series G
      Notes by the Company pursuant to the Conveyance and Contribution
      Agreement, (iv) the Initial Public Offering and the use and proposed use
      by the Company and Parent of proceeds thereof, and (v) the other
      transactions contemplated by the Conveyance and Contribution Agreement,
      the Tender Offer and the Consent Solicitation.

            "PARENT" shall mean Santa Fe Energy Resources, Inc., a Delaware
      corporation, and any successor thereto.

            "PAYING AGENT" shall mean The Bank of New York and its successors
      and assigns as paying agent under the Paying Agent Agreement.

            "PAYING AGENT AGREEMENT" shall mean the Paying Agent Agreement,
      dated as of the date hereof, between the Company and the Paying Agent.

            "PERMITTED HOLDER" shall mean Parent and its Affiliates.

                                    -49-

<PAGE>

            "PERSON" shall mean and include an individual or legal entity in the
      form of a partnership, a joint venture, a corporation, a trust, an
      unincorporated organization or a government or any department or agency
      thereof. The term "PERSON" shall not, however, mean and include an
      arrangement that is not a separate legal entity such as the legal
      arrangement between two or more parties owning interests in the same
      property or unit.

            "PLAN" shall mean an "EMPLOYEE PENSION BENEFIT PLAN" (as defined in
      section 3(2) of ERISA) subject to Title IV of ERISA, other than a
      Multiemployer Plan, with respect to which the Company or any ERISA
      Affiliate contributes or has an obligation or liability to contribute.

            "PRIORITY DEBT" shall mean, at any time, without duplication, an
      amount equal to the sum of the amount of all Attributable Debt of the
      Company and its Restricted Subsidiaries outstanding at such time, the
      amount of all Debt of Restricted Subsidiaries (whether or not secured by
      any Lien) outstanding at such time, and the amount of all Debt of the
      Company and its Restricted Subsidiaries outstanding at such time that is
      secured by one or more Liens permitted under clause 6B(1)(v).

            "PRODUCTION PAYMENT" shall mean that certain $30,000,000 production
      payment reserved and retained by Parent from certain properties in the
      Midway- Sunset field pursuant to the Conveyance and Contribution
      Agreement, as more particularly described in the Reservation of Production
      Payment set forth as Exhibit I thereto.

            "PROSPECTUS" shall mean the prospectus, dated as of November 13,
      1996, relating to the underwritten public offering by the Company of the
      portion of the 8,150,000 shares (assuming that the underwriters'
      over-allotment options are not exercised) of its common stock, par value
      $0.01 per share, being offered domestically, in the form first filed by
      the Company with the Securities and Exchange Commission pursuant to Rule
      424(b) of the rules and regulations under the Securities Act.

            "PURCHASERS" shall have the meaning specified in the introductory
      paragraph of this Agreement.

            "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14
      issued by the United States Department of Labor.

            "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights
      and Indemnification Agreement by and between Parent and the Company dated
      as of the Date of Closing.

                                    -50-

<PAGE>

            "REINVESTMENT YIELD" shall mean, with respect to the Called
      Principal of any Note, the yield to maturity implied by (i) the yields
      reported, as of 10:00 A.M. (New York City time) on the Business Day
      preceding the Settlement Date with respect to such Called Principal, on
      the display designated as "Page 678" on the Telerate Access Service (or
      such other display as may replace Page 678 on the Telerate Access Service)
      for actively traded U.S. Treasury securities having a maturity equal to
      the Remaining Average Life of such Called Principal as of such Settlement
      Date, or (ii) if such yields are not reported as of such time or the
      yields reported as of such time are not ascertainable, the Treasury
      Constant Maturity Series Yields reported, for the latest day for which
      such yields have been so reported as of the second Business Day preceding
      the Settlement Date with respect to such Called Principal, in Federal
      Reserve Statistical Release H.15 (519) (or any comparable successor
      publication) for actively traded U.S. Treasury securities having a
      constant maturity equal to the Remaining Average Life of such Called
      Principal as of such Settlement Date. Such implied yield will be
      determined, if necessary, by (a) converting U.S. Treasury bill quotations
      to bond-equivalent yields in accordance with accepted financial practice
      and (b) interpolating linearly between (1) the actively traded U.S.
      Treasury security with the duration closest to and greater than the
      Remaining Average Life and (2) the actively traded U.S. Treasury security
      with the duration closest to and less than the Remaining Average Life.

            "REMAINING AVERAGE LIFE" shall mean, with respect to the Called
      Principal of any Note, the number of years (calculated to the nearest
      one-twelfth year) obtained by dividing (i) such Called Principal into (ii)
      the sum of the products obtained by multiplying (a) each Remaining
      Scheduled Payment of such Called Principal (but not of interest thereon)
      by (b) the number of years (calculated to the nearest one-twelfth year)
      which will elapse between the Settlement Date with respect to such Called
      Principal and the scheduled due date of such Remaining Scheduled Payment.

            "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the
      Called Principal of any Note, all payments of such Called Principal and
      interest thereon that would be due on or after the Settlement Date with
      respect to such Called Principal if no payment of such Called Principal
      were made prior to its scheduled due date.

            "REQUIRED HOLDERS" shall mean the holder or holders of at least 51%
      of the aggregate principal amount of the Notes from time to time
      outstanding.

            "RESERVE REPORT" shall mean a report that is prepared and certified
      by an Independent Petroleum Engineer as of January 1 of the year in which
      such report is delivered which shall, as of such January 1, and on the
      basis of findings and data as of a date not more than four months prior to
      such January 1, identify the proved, probable and possible oil and gas
      properties covered thereby and set forth as of such January 1 the data,
      material, information and calculations required to be covered in 

                                    -51-

<PAGE>

      a reserve report prepared in accordance with Rule 4-10 of Regulation S-X
      (17 C.F.R. Part 210). Each such report shall be prepared in accordance
      with established criteria generally accepted in the oil and gas industry
      and standards accepted in the oil and gas industry and standards
      customarily used by independent petroleum engineers well-regarded in the
      industry in making reserve determinations or appraisals, and the
      assumptions, estimates and projections on which such report is based shall
      be fully disclosed in such Reserve Report. The economic assumptions used
      in such Reserve Report will conform to the standards prescribed by Rule
      4-10 of Regulation S-X.

            "RESTRICTED INVESTMENT" shall mean any Investment other than an
      Investment in the form of

                  (i) Investments in the Company or a Restricted Subsidiary or
            in an entity which immediately after or concurrently with such
            Investment will be a Restricted Subsidiary,

                  (ii) readily marketable direct full faith and credit
            obligations of the United States of America or any agency thereof or
            obligations unconditionally guaranteed by the full faith and credit
            of the United States of America or any agency thereof, due within
            three years of the making of the Investment,

                  (iii) readily marketable direct obligations of any State of
            the United States of America or any political subdivision of any
            such State having a credit rating of at least Aa by Moody's
            Investors Service, Inc. or AA by Standard & Poor's Rating Group, in
            each case due within three years from the making of the Investment,

                  (iv) domestic and Eurodollar certificates of deposit maturing
            within one year from the making of the Investment issued by,
            deposits in, Eurodollar deposits through and banker's acceptances
            of, commercial banks incorporated under the laws of the United
            States or any State thereof, Canada, Japan or any Western European
            country, and having combined capital, surplus and undivided profits
            of at least $100,000,000,

                  (v) readily marketable commercial paper of any commercial bank
            or corporation doing business and incorporated under the laws of the
            United States of America or any State thereof having a credit rating
            of A-1 from Standard & Poor's Rating Group or P-1 by Moody's
            Investors Service, Inc., in each case, due within 270 days after the
            making of the Investment,

                                    -52-

<PAGE>

                  (vi) money market investment programs which primarily invest
            in the types of Investments permitted under clauses (ii) through (v)
            above and which are classified as a current asset in accordance with
            generally accepted accounting principles and which are administered
            by broker-dealers acceptable to the Required Holders,

                  (vii) repurchase agreements with major dealers or banks,
            pursuant to which physical delivery of the respective securities is
            required, except for obligations of the U.S. Treasury to be
            delivered through the Federal Reserve book entry system,

                  (viii) travel and other like advances to officers and
            employees of the Company or Restricted Subsidiary in the ordinary
            course of business,

                  (ix)  prepayment of the Production Payment in accordance
            with paragraph 5H,

                  (x)   prior to one year after the Date of Closing, the Olinda
            Notes,

                  (xi)  Investments, if any, in Parent pursuant to the
            agreements specified in paragraph 3A(iv), (v) and (vi),

                  (xii) prepayment of the Series E Notes and Series F Notes
            on the Date of Closing,

                  (xiii)the assumption by the Company on the Date of Closing of
            up to $16,000,000 aggregate principal amount of borrowings by Parent
            under the Credit Agreement described in clause (i) of the definition
            thereof, or

                  (xiv) Investments, other than those described in the preceding
            clauses (i)-(xiii), in an aggregate outstanding amount not to exceed
            $10,000,000.

            "RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company
      listed on SCHEDULE 8A attached hereto, together with any Subsidiary of the
      Company hereafter created or acquired and, at the time of creation or
      acquisition, not designated by the Board of Directors of the Company as an
      Unrestricted Subsidiary. Any Subsidiary of the Company designated as an
      Unrestricted Subsidiary for purposes of this Agreement may thereafter be
      designated a Restricted Subsidiary upon 30 days' prior written notice to
      the holders of the Notes if, at the time of such 

                                    -53-

<PAGE>

      designation and after giving effect thereto and to the concurrent
      retirement of any Debt, (i) no Event of Default or Default shall have
      occurred and be continuing, (ii) such Subsidiary is organized under the
      laws of the United States or any state thereof, and (iii) 80% or more of
      each class of voting stock outstanding of such Subsidiary is owned by the
      Company or a wholly-owned Restricted Subsidiary.

            "RESTRUCTURING FEE" shall mean, with respect to each Purchaser,
      0.75% of the aggregate principal amount of the Series G Notes held by such
      Purchaser as of the Date of Closing (prior to giving effect to the
      transactions contemplated hereby).

            "SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which
      the Company or a Restricted Subsidiary shall sell any building, equipment
      or surface real property, which was acquired or occupied by the Company or
      a Restricted Subsidiary for more than 180 days, and within 180 days from
      the date of such sale, enter into a lease as lessee of such building,
      equipment or surface real property having a term (including terms of
      renewal or extension at the option of the lessor or the lessee, whether or
      not such option has been exercised) expiring three or more years after the
      commencement of the initial term.

            "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

            "SERIES A-D NOTES" shall have the meaning specified in the recitals
      of this Agreement.

            "SERIES E NOTES" shall have the meaning specified in the recitals of
      this Agreement.

            "SERIES F NOTES" shall have the meaning specified in the recitals of
      this Agreement.

            "SERIES G NOTES" shall have the meaning specified in the recitals of
this Agreement.

            "SETTLEMENT DATE" shall mean, with respect to the Called Principal
      of any Note, the date on which such Called Principal is to be prepaid
      pursuant to paragraph 4B, or is declared to be immediately due and payable
      pursuant to paragraph 7A as the context requires.

            "SFER GROUP" shall mean Santa Fe Energy Resources, Inc. and its
      affiliated group of corporations which together constitute an affiliated
      group of corporations within the meaning of Section 1504(a) of the Code.

                                    -54-

<PAGE>

            "SIGNIFICANT HOLDER" shall mean, as of any time, (i) each Purchaser,
      so long as such Purchaser shall hold any Note at such time, and (ii) any
      other Person that holds at such time at least 1.15% of the aggregate
      principal amount of the Notes then outstanding.

            "SPIN-OFF" shall mean the distribution, by dividend, exchange or
      otherwise, of the shares of capital stock of the Company owned by Parent
      to its security holders.

            "SUBSIDIARY" shall mean, as to any Person, any corporation or
      entity, a majority of the shares of voting stock (or in the case of an
      entity which is not a corporation, of the equity interests that provide
      the power to manage or direct the management of such entity) of which is
      at the time any determination is being made, owned, directly or
      indirectly, by such Person and its wholly-owned Subsidiaries. Unless the
      context otherwise clearly requires, any reference to a "Subsidiary" is a
      reference to a Subsidiary of the Company.

            "TAX ALLOCATION AGREEMENT" shall mean the Agreement For The
      Allocation Of The Consolidated Federal Income Tax Liability and State and
      Local Taxes Among The Members Of The Santa Fe Energy Resources, Inc.
      Affiliated Group by and between Parent and the members of the consolidated
      group of Parent identified therein dated as of November 19, 1996.

            "TENDER OFFER" shall mean the offer, commenced on October 22, 1996,
      by Parent to purchase up to 4,500,000 shares of Parent's Convertible
      Preferred Stock, Series 7%, at a price of $24.50, net to the seller in
      cash, which offer is contained in an Offer to Purchase dated October 22,
      1996, as set forth in the Form 13E-4 filed by Parent with the United
      States Securities and Exchange Commission, as the same may be amended from
      time to time.

            "TERMINATION EVENT" shall mean (i) the withdrawal of the Company or
      any of its ERISA Affiliates from a Plan during a plan year in which it was
      a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or
      (ii) the filing of a notice of intent to terminate a Plan or the treatment
      of a Plan amendment as a termination under Section 4041(c) of ERISA, or
      (iii) the institution of proceedings to terminate a Plan by the Pension
      Benefit Guaranty Corporation, or (iv) any other event or condition which
      would constitute grounds under Section 4042 of ERISA for the termination
      of, or the appointment of a trustee to administer, any Plan, or (v) the
      institution of proceedings by the Pension Benefit Guaranty Corporation
      under Sections 4212(c) or 4069 of ERISA to impose liability under the
      Title IV of ERISA on the Company or any ERISA Affiliate with respect to
      any other employee benefit plan other than a Plan.

            "TRANSFEREE" shall mean any direct or indirect transferee of all or
      any part of any Note acquired by any Purchaser under this Agreement.

                                    -55-

<PAGE>

            "UNDERWRITING AGREEMENTS" shall mean, (i) that certain Underwriting
      Agreement, relating to the public offering in the United States of America
      of 6,320,000 shares of common stock, par value $0.01 per share, of the
      Company, dated November 13, by and among the Company, Parent and Goldman,
      Sachs & Co., Morgan Stanley & Co. Incorporated and Petrie Parkman & Co. as
      representatives of the several underwriters named therein, and (ii) that
      certain International Underwriting Agreement, dated November 13, relating
      to the international offering of 1,580,000 shares of common stock, par
      value $0.01 per share, of the Company by and among the Company, Parent and
      Goldman, Sachs International, Morgan Stanley & Co. International and
      Petrie Parkman & Co., Inc. (in both cases assuming, for purposes of
      determining the number of shares covered thereby, that the underwriters'
      overallotment options are not exercised).

            "UNFUNDED VESTED ACCRUED BENEFITS" shall mean with respect to any
      Plan at any time, the amount (if any) by which (a) the present value of
      all vested benefits under such Plan exceeds (b) the fair market value of
      all Plan assets allocable to such benefits, all determined as of the then
      most recent valuation date for such Plan (on the basis of assumptions in
      accordance with generally accepted accounting principles), but only to the
      extent that such excess represents a potential liability of the Company or
      any ERISA Affiliate to the Pension Benefit Guaranty Corporation or the
      Plan under Title IV of ERISA.

            "UNRESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company
      that is hereafter designated by the Board of Directors of the Company as
      an Unrestricted Subsidiary. Any Subsidiary may be designated an
      Unrestricted Subsidiary upon 30 days' prior written notice to the holders
      of the Notes if, at the time of such designation and after giving effect
      thereto and to the concurrent retirement of any Debt, (i) no Event of
      Default or Default shall have occurred and be continuing and (ii) such
      Subsidiary does not own, directly or indirectly, any Funded Debt or
      capital stock of the Company or a Restricted Subsidiary.

            "WAIVER" shall mean that certain Limited Waiver, dated as of
      November 13, 1996 and effective as of November 1, 1996, among Parent, the
      Company and the holders of the Series G Notes.

            "WESTERN ASSETS" shall mean the "SUBJECT ASSETS" as such term is
      defined in the Conveyance and Contribution Agreement.

                                    -56-

<PAGE>

            "YIELD-MAINTENANCE PREMIUM" shall mean, with respect to any Note, a
      premium equal to the excess, if any, of the Discounted Value of the Called
      Principal of such Note over the sum of (i) such Called Principal plus (ii)
      interest accrued thereon as of (including interest due on) the Settlement
      Date with respect to such Called Principal. The Yield-Maintenance Premium
      shall in no event be less than zero.

            10B. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistent with those applied in the preparation of the December 31,
1995 financial statements certified by Price Waterhouse LLP and referred to in
paragraph 8B.

      PARAGRAPH 11.     MISCELLANEOUS

            11.   MISCELLANEOUS.

            11A. NOTE PAYMENTS. The Company will make payments of principal of
and Yield- Maintenance Premium, if any, and interest on, the Notes, which
payments comply with the terms of this Agreement, not later than 11:00 a.m. (New
York City time) on the day when due by wire transfer of immediately available
funds to the Paying Agent in accordance with the Paying Agent Agreement and for
the ratable benefit of the holders of the Notes, notwithstanding any contrary
provision herein or in any Note with respect to the place of payment. Each
Purchaser agrees that, before disposing of any Note, such Purchaser will make a
notation thereon (or on a schedule attached thereto) of all principal payments
previously made thereon and of the date to which interest thereon has been paid.

            11B. EXPENSES. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save the Purchasers and
any Transferee harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all fees,
costs and expenses (including, without limitation, wire transfer and similar
charges) of the Paying Agent and otherwise in connection with the Paying Agent
Agreement, (ii) all costs and expenses of obtaining all necessary private
placement numbers, (iii) all document production and duplication charges and the
fees and expenses of any special counsel engaged by the Purchasers or any
Transferee in connection with this Agreement, the transactions contemplated
hereby and any subsequent proposed modification of, or proposed consent under,
this Agreement, whether or not such proposed modification shall be effected or
proposed consent granted, and (iv) the costs and expenses, including reasonable
attorneys' fees, incurred by the Purchasers or any Transferee in enforcing any
rights under this Agreement, the Notes or the Paying Agent Agreement (whether in
the context of a civil action, adversarial proceedings, workout or otherwise) or
in responding to any subpoena or other legal process issued in connection with
this Agreement or the transactions contemplated hereby or by reason of the
Purchasers' or any Transferee's having acquired any Note, including without
limitation costs and expenses incurred in any bankruptcy case. The obligations
of the Company under this paragraph 11B shall survive 

                                    -57-

<PAGE>

the transfer of any Note or portion thereof or interest therein by any Purchaser
or any Transferee and the payment of any Note. The Company shall not be
obligated to pay any legal fees incurred by the Purchasers or any other holder
of any Note other than the reasonable fees of one special counsel designated by
the Required Holders.

            11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the written consent
to such amendment, action or omission to act, of the Required Holders except
that, without the written consent of the holder or holders of all Notes at the
time outstanding, no amendment to this Agreement shall change the maturity of
any Note, or change the principal of, or the rate or time of payment of interest
or any premium payable with respect to any Note, or affect the time, amount or
allocation of any required prepayments, or reduce the proportion of the
principal amount of the Notes required with respect to any consent. Each holder
of any Note at the time or thereafter outstanding shall be bound by any consent
authorized by this paragraph 11C, whether or not such Note shall have been
marked to indicate such consent, but any Notes issued thereafter may bear a
notation referring to any such consent. No course of dealing between the Company
and the holder of any Note nor any delay in exercising any rights hereunder or
under any Note shall operate as a waiver of any rights of any holder of such
Note. For the purpose of determining whether the holders of outstanding Notes of
the requisite unpaid principal amount at any time have taken any action
authorized by this paragraph 11C or any other provision of this Agreement, any
Note owned by the Company or any Subsidiary or Affiliate of the Company shall
not be deemed outstanding.

            11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES.
The Notes are issuable as registered notes without coupons in denominations of
at least $100,000, except as may be necessary to reflect any principal amount
not evenly divisible by $100,000. The Company shall keep at its principal office
a register in which the Company shall provide for the registration and transfer
of all Notes issued pursuant to any provision of this Agreement. Upon surrender
for registration of transfer of any Note at the principal office of the Company,
the Company shall, at its expense, (i) execute and deliver one or more new Notes
of like tenor and of a like aggregate principal amount, as the then unpaid
principal amount of the Note so surrendered, which new Notes shall be registered
in the name of the designated Transferee or Transferees and (ii) promptly notify
the Paying Agent pursuant to the notice provisions contained in the Paying Agent
Agreement of such registration of transfer and provide the Paying Agent with
payment instructions for (and provided by) the designated Transferee(s) and such
new Note(s) substantially in the form of those contained in SCHEDULE I hereto;
PROVIDED, HOWEVER, that no Note may be presented for registration of transfer on
the Business Day prior to, or on, any date on which there is to be made any
payment of the principal of, or interest or Yield-Maintenance Premium on, such
Note pursuant to the terms thereof or the terms of paragraph 4A, 4B or 4C. Any
Transferee, by its acceptance of a Note registered in its name (or the name of
its nominee), shall be deemed to have made the representation set forth in
paragraph 9B. Upon transfer of any Note, the new Note or Notes issued upon
surrender of such Notes shall be dated as of the date to which interest has been
paid on the Note so surrendered or, if such surrender is prior to the payment of
any interest thereon, then dated as of the date of issue of 

                                    -58-

<PAGE>

the Note so surrendered. At the option of the holder of any Note, such Note may
be exchanged for Notes of like tenor, of any authorized denominations and of a
like aggregate principal amount, upon surrender of the Note to be exchanged at
the principal office of the Company. Whenever any Note is so surrendered for
exchange, the Company shall, at its expense, execute and deliver the Note(s)
which the holder making the exchange is entitled to receive. Every Note
surrendered for registration of transfer or exchange shall be duly endorsed, or
be accompanied by (i) a written instrument of transfer duly executed, by the
holder of such Note or such holder's attorney duly authorized in writing and
(ii) information (which the Company shall promptly provide to the Paying Agent
pursuant to the notice provisions contained in the Paying Agent Agreement), in
substantially the form contemplated by SCHEDULE I attached hereto, as to the
holder(s) of the Note(s) issued upon such transfer or exchange and the payment
instructions relating to such Note(s) so issued. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Note, the Company will make and deliver a new Note, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Note. The Company
agrees to indemnify and hold harmless the holder of each Note from and against
all loss, liability, claims and expenses such holder may incur or suffer as a
result of (i) a breach by the Company of its obligations under this paragraph
11D or under the Paying Agent Agreement to provide the Paying Agent with prompt
written notice of such transfer or exchange or of the payment instructions
provided by such holder in respect of such Note or (ii) a breach by the Paying
Agent of any of its obligations under the Paying Agent Agreement including,
without limitation, the failure to make full, timely and accurate disbursements
to the holders of the Notes of funds paid by the Company thereunder.

            11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment
for registration of transfer, the Company and the Paying Agent may treat the
Person in whose name any Note is registered as the owner and holder of such Note
for the purpose of receiving payment of principal of and Yield-Maintenance
Premium, if any, and interest on such Note and for all other purposes
whatsoever, whether or not such Note shall be overdue, and the Company shall not
be affected by notice to the contrary. Subject to the preceding sentence the
holder of any Note may from time to time grant participations in all or any part
of such Note to any Person on such terms and conditions as may be determined by
such holder in its sole and absolute discretion.

            11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein or made in writing by or on
behalf of the Company in connection herewith shall survive the execution and
delivery of this Agreement and the Notes, the transfer by any Purchaser of any
Note or portion thereof or interest therein and the payment of any 

                                    -59-

<PAGE>

Note, and may be relied upon by any Transferee, regardless of any investigation
made at any time by or on behalf of such Purchaser or any Transferee. Subject to
the preceding sentence, this Agreement, the Notes and the Paying Agent Agreement
embody the entire agreement and understanding between the Purchasers and the
Company and supersede all prior agreements and understandings relating to the
subject matter hereof.

            11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee) whether so expressed or
not.

            11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that the
holder of any Note may deliver copies of any financial statements and other
documents delivered to such holder, and disclose any other information disclosed
to such holder, by or on behalf of the Company or any Subsidiary in connection
with or pursuant to this Agreement to (i) such holder's directors, officers,
employees, agents and professional consultants, (ii) any other holder of any
Note, (iii) any Person to which such holder offers to sell such Note or any part
thereof, (iv) any Person to which such holder sells or offers to sell a
participation in all or any part of such Note, (v) any Federal or State
regulatory authority having jurisdiction over such holder, (vi) the National
Association of Insurance Commissioners or any similar organization or (vii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (a) in compliance with any law, rule, regulation or order applicable
to such holder, (b) in response to any subpoena or other legal process, (c) in
connection with any litigation to which such holder is a party, (d) in order to
protect such holder's investment in such Note or (e) to correct any false or
misleading information which may become public concerning the relationship of
such holder to the Company or its Subsidiaries. Except as provided in the
previous sentence, each holder agrees that it will use its best efforts to hold
in confidence and not to disclose the Confidential Information. As used herein
"CONFIDENTIAL INFORMATION" means any material, non-public information that is
provided to any such holder pursuant to this Agreement, but does not include
information (i) which was publicly known or otherwise known to such holder, at
the time of disclosure, (ii) which subsequently becomes publicly known through
no act or omission of such holder, or (iii) which otherwise becomes known to
such holder, other than through disclosure by the Company or any Subsidiary.

            11I. NOTICES. All notices or other communications provided for
hereunder (except for any telephonic notice contemplated by SCHEDULE I) shall be
in writing and sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and, (i) if to a Purchaser, addressed to such Purchaser
at the address specified for such communications in the SCHEDULE I attached
hereto, or at such other address as such Purchaser shall have specified to the
Company in writing, (ii) if to any other holder of any Note, addressed to such
other holder for the purpose thereof as it appears on the register of the
Company maintained under paragraph 11D and (iii) if to the Company, addressed to
it at 5201 Truxtun Avenue, Suite 100, Bakersfield, California 93309, Attention:
General Counsel, 

                                    -60-

<PAGE>

or at such other address as the Company shall have specified to the holder of
each Note in writing; PROVIDED, HOWEVER, that any such communication to the
Company may also, at the option of the holder of any Note, be delivered by any
other means either to the Company at its address specified above or to any
officer of the Company.

            11J. DESCRIPTIVE HEADINGS; EXECUTION BY FACSIMILE TRANSMISSION. The
descriptive headings of the several paragraphs of this Agreement are inserted
for convenience only and do not constitute a part of this Agreement. The method
of execution of this Agreement set forth in paragraph 11N hereof may be by means
of facsimile transmission, and delivery of such a facsimile transmission shall
be deemed an original for purposes of paragraph 11N hereof.

            11K. SATISFACTION REQUIREMENT. If any agreement, certificate or
other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to the Purchasers or to the Required
Holders, the determination of such satisfaction shall be made by the Purchasers
or the Required Holders, as the case may be, in the sole and exclusive judgment
(exercised in good faith) of the Person or Persons making such determination.

            11L. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW
OF THE STATE OF NEW YORK AND THE UNITED STATES OF AMERICA. This Agreement may
not be changed orally, but (subject to the provisions of paragraph 11C) only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.

            11M.  WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION.

                  (i) THE COMPANY AND EACH PURCHASER HEREBY KNOWINGLY,
            VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A
            TRIAL BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS BASED HEREON,
            OR ARISES OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE
            NOTES OR THE PAYING AGENT AGREEMENT, OR ANY TRANSACTIONS RELATING
            HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
            STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY OR
            THE PURCHASERS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS PROVISION
            IS A MATERIAL INDUCEMENT FOR THE OTHER PARTY TO ENTER INTO THE NOTE
            AGREEMENT.

                                    -61-

<PAGE>

                  (ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
            AGREEMENT, THE NOTES OR THE PAYING AGENT AGREEMENT, OR ANY
            TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT,
            COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS
            OF THE COMPANY OR THE PURCHASERS MAY BE BROUGHT IN THE COURTS OF THE
            STATE OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN
            DISTRICT OF NEW YORK, AND FOR THESE PURPOSES THE PARTIES HERETO
            HEREBY ACCEPT THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
            TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES
            HERETO HEREBY IRREVOCABLY WAIVE ANY OBJECTIONS, INCLUDING, WITHOUT
            LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
            GROUNDS OF FORUM NON CONVENIENS, WHICH THEY MAY NOW OR HEREAFTER
            HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH
            RESPECTIVE JURISDICTIONS.

            11N. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts (including by facsimile transmission), each of which
shall be deemed an original, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such counterpart.

            11O. EFFECTIVENESS. It is the intention of the parties hereto that
this Agreement and the Notes issued on the Date of Closing shall (1) be
delivered in the State of New York and (2) become valid, binding and effective
obligations of the respective parties thereto only upon such delivery (as
evidenced by physical delivery to Baker & Botts, L.L.P., at its office in New
York, New York, against receipt therefor, of fully executed counterparts of this
Agreement and of such Notes).

                                    -62-

<PAGE>

            EXECUTED and effective on this 19th day of November, 1996.


                                          MONTEREY RESOURCES, INC.


                                          By: /s/ R. GRAHAM WHALING
                                          Name:   R. Graham Whaling
                                          Title:  Chief Executive Officer


                                          ALLSTATE LIFE INSURANCE COMPANY


                                          By: /s/ PATRICIA WILSON
                                          Name:   Patricia Wilson


                                          By: /s/ STEVEN M. LAUDE
                                          Name:   Steven M. Laude
                                             Authorized Signatories


                                          AMERICAN ENTERPRISE LIFE
                                          INSURANCE COMPANY


                                          By: /s/ LORRAINE R. HART
                                          Name:   Lorraine R. Hart
                                          Title:  Vice President, Investments


                                          AMERUS LIFE INSURANCE COMPANY


                                          By: /s/ TODD D. YOUNGER
                                          Name:   Todd D. Younger
                                          Title:  Portfolio Manager


                                      -63-

<PAGE>

                                          FARM BUREAU LIFE INSURANCE
                                          COMPANY


                                          By: /s/ RICHARD D. WARMING
                                          Name:   Richard D. Warming
                                          Title:  VP - Chief Investment Officer


                                          GALICO


                                          By: /s/ DOUGLAS R. KOESTER
                                          Name:   Douglas R. Koester
                                          Title:  Senior Vice President


                                          GREAT-WEST LIFE & ANNUITY
                                          INSURANCE COMPANY


                                          By: /s/ JAMES G. LOWERY
                                          Name:   James G. Lowery
                                          Title:  Assistant Vice President


                                          IDS LIFE INSURANCE COMPANY


                                          By: /s/ LORRAINE R. HART
                                          Name:   Lorraine R. Hart
                                          Title:  Vice President, Investments


                                          MASSACHUSETTS MUTUAL LIFE
                                          INSURANCE COMPANY
 

                                          By: /s/ RICHARD C. MORRISON
                                          Name:   Richard C. Morrison
                                          Title:  Managing Director

                                      -64-

<PAGE>

                                          MELLON BANK, N.A.,
                                            AS TRUSTEE FOR FIRST PLAZA
                                            GROUP TRUST


                                          By: /s/ LAURIE A. ADAMS
                                          Name:   Laurie A. Adams
                                          Title:  Trust Officer

      
                                          PAN-AMERICAN LIFE INSURANCE
                                          COMPANY


                                          By: /s/ F. ANDERSON STONE
                                          Name:   F. Anderson Stone
                                          Title:  Vice President, 
                                                  Corporate Securities


                                          PRINCIPAL MUTUAL LIFE INSURANCE
                                          COMPANY


                                          By: /s/ SARAH D. PITTS
                                          Name:   Sarah D. Pitts
                                          Title:  Counsel

                                          By: /s/ JON C. HENRY
                                          Name:   Jon C. Henry
                                          Title:  Counsel


                                          PROVIDENT MUTUAL LIFE INSURANCE
                                          COMPANY


                                          By: /s/ JAMES D. KESTNER
                                          Name:   James D. Kestner
                                          Title:  Vice President

                                      -65-

<PAGE>

                                          THE PRUDENTIAL INSURANCE
                                          COMPANY OF AMERICA


                                          By: /s/ RANDALL M. KOB
                                          Name:   Randall M. Kob
                                          Title:  Vice President

                                      -66-
<PAGE>
                                    EXHIBIT A
                                 [FORM OF NOTE]

                   THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
           SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
         TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION EXCEPT PURSUANT
                     TO EXEMPTIONS THEREFROM UNDER SUCH ACT.

                            MONTEREY RESOURCES, INC.

                      10.61% SENIOR NOTE DUE MARCH 31, 2005

PPN 612622A*1                                             _______________[Date]
No. _________                                               New York, New York
$____________

            FOR VALUE RECEIVED, the undersigned, MONTEREY RESOURCES, INC.
(the "Company"), a corporation organized and existing under the laws of the
State of Delaware, hereby promises to pay to__________________________________,
or registered assigns, the principal sum of __________________________________
DOLLARS on March 31, 2005, with interest (computed on the basis of a 360-day
year--30-day month) (a) on the unpaid balance thereof at the rate of 10.61% per
annum from the date hereof, payable semiannually in arrears on March 31 and
September 30 in each year, commencing with the March 31 or September 30 next
succeeding the date hereof, until the principal hereof shall have become due and
payable, and (b) on any overdue payment of principal, any overdue payment of
Yield-Maintenance Premium (as defined in the Agreement (as defined below)) and,
to the extent permitted by applicable law, any overdue payment of interest,
payable semiannually as aforesaid (or, at the option of the registered holder
hereof, on demand), at a rate per annum from time to time equal to the greater
of (a) 11.61% or (b) 1% above the rate of interest publicly announced by The
Bank of New York from time to time in New York City as its Prime Commercial
Lending Rate, effective as of the effective date of the change of such Prime
Commercial Lending Rate, calculated from the date each overdue payment was due
until paid in full.

            Payments of principal, Yield-Maintenance Premium, if any, and
interest are to be made at the main office of The Bank of New York, as paying
agent (together with its successors in such capacity, the "Paying Agent"),
pursuant to that certain Paying Agent Agreement dated as of November 19, 1996
between the Company and The Bank of New York (the "Paying Agent Agreement"), in
New York City in lawful money of the United States of America.

            This Note is one of a series of Notes (the "Notes") issued pursuant
to a Note Agreement, dated as of November 19, 1996 (the "Agreement"), between
the Company and the respective original purchasers of the Notes named in
Schedule I attached thereto and is entitled to the benefits thereof. As provided
in the Agreement, this Note is subject to prepayment, in whole or from time to
time in part, in certain cases without Yield-Maintenance Premium and in other
cases with Yield-Maintenance Premium as specified in the Agreement. This Note is
also entitled to the benefits of the Paying Agent Agreement.

                                       A-1

<PAGE>

            This Note is a registered Note and, as provided in paragraph 11D of
the Agreement, upon surrender of this Note to the Company for registration of
transfer, duly endorsed, or accompanied by a written instrument of transfer duly
executed, by the registered holder hereof or such holder's attorney duly
authorized in writing, a new Note for a like principal amount will be issued to,
and registered by the Company (with written notice thereof to the Paying Agent)
in the name of, the transferee. (i) Prior to due presentment for registration of
transfer, the Company, and (ii) prior to the Business Day (as defined in the
Agreement) after its receipt of notice from the Company of such registration of
transfer, the Paying Agent, may treat the person in whose name this Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Company and the Paying Agent shall not be affected by
any notice to the contrary. Reference is made to paragraph 11D of the Agreement
under which, among other things, the Company agrees to indemnify the holders of
Notes with respect to certain matters relating to the provision by the Company
to the Paying Agent of information concerning registration of transfer of Notes
and relating to the disbursement by the Paying Agent of payments made by the
Company in respect of the Notes.

            The Company agrees to make prepayments of principal on the dates and
in the amounts specified in the Agreement. If an Event of Default, as defined in
the Agreement, shall occur and be continuing, the principal of this Note may be
declared or otherwise become due and payable in the manner and with the effect
provided in the Agreement. Except as otherwise provided in the Agreement, the
Company and any and all endorsers, guarantors and sureties severally waive
grace, demand, presentment for payment, notice of dishonor or default, notice of
intent to accelerate, notice of acceleration, protest and diligence in
collecting. Should any indebtedness represented by this Note be collected at law
or in equity, or in bankruptcy or other proceedings, or should this Note be
placed in the hands of attorneys for collection, the Company agrees to pay, in
addition to the principal, Yield-Maintenance Premium, if any, and interest due
and payable hereon, all reasonable costs of collecting or attempting to collect
this Note, including reasonable attorneys' fees and expenses (including those
incurred in connection with any appeal). The Company shall not be obligated to
pay any legal fees incurred by the holder hereof or any other holder of any Note
other than the reasonable fees of one special counsel designated by the Required
Holders (as defined in the Agreement).

            THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF
NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE.

                                          MONTEREY RESOURCES, INC.

                                          By: ____________________________
                                          Name: __________________________
                                          Title: _________________________

                                       A-2

<PAGE>

                                    EXHIBIT C

                       [FORM OF SUBORDINATION PROVISIONS]


            1. The payment of any and all Subordinated Debt is expressly
subordinated to the extent and in the manner set forth in paragraphs 2 to 11,
inclusive, hereof to Senior Debt. The term "Subordinated Debt" as used in this
[NOTE] shall mean and include all indebtedness at any time evidenced by this
[NOTE] including, without limitation, the principal of, interest on, premium, if
any, with respect to, and fees, expenses and advances incurred in connection
with, all liabilities, indebtedness or obligations of the Payor to the Payee
hereunder or under any agreement governing this [NOTE] or executed in connection
with this [NOTE]. The term "Senior Debt" as used in this [NOTE] shall mean and
include (i) the principal of, Yield-Maintenance Premium (as defined in the Note
Agreement (as hereafter defined)), if any, with respect to, interest on
(including any interest accruing subsequent to the commencement of a Proceeding
described in paragraph 5 below), expenses, fees and advances incurred in
connection with (including, without limitation, all expenses described in
paragraph 11B of the Note Agreement (as hereafter defined)), and the aggregate
amount of indemnities arising in connection with, all liabilities, indebtedness
and obligations of the Payor to the holders of indebtedness, arising under the
Note Agreement dated as of November [___], 1996, (as amended, modified,
supplemented and restated from time to time, the "Note Agreement") between the
Payor and the Purchasers thereunder (as such term is defined therein) and the
senior promissory notes in the original outstanding aggregate principal amount
of $175,000,000 (the "Senior Notes") issued pursuant thereto (including
extensions, renewals, refinancings and refundings of the Senior Notes, whether
or not the principal amount is increased), and (ii) the principal of, premium,
if any, with respect to, interest on (including any interest accruing subsequent
to the commencement of a Proceeding described in paragraph 5 below), expenses,
fees and advances incurred in connection with, and the aggregate amount of
letter of credit liabilities and advances and indemnities arising in connection
with, all liabilities, indebtedness and obligations of the Payor to the holders
of indebtedness, arising under the Credit Agreement dated as of November [__],
1996, (as amended, modified, supplemented and restated from time to time, the
"Credit Agreement") among the Payor, the Banks signatory thereto (the "Banks")
and The Chase Manhattan Bank, as Administrative Agent, and the promissory notes
in the original aggregate face amount of $75,000,000 (the "Bank Notes") issued
pursuant thereto (including extensions, renewals, refinancings and refundings of
the Bank Notes, whether or not the principal amount is increased).

            2. No direct or indirect payment on account of this [NOTE] shall be
demanded, made, or accepted, no assets of Payor shall be applied to the payment,
purchase, redemption or other acquisition or retirement of this [NOTE], and no
security interest shall be granted by the Payor to secure, or enforced by the
Payor as security for, this [NOTE], unless, in each case, all Senior Debt
previously shall have been indefeasibly paid in full in cash and the Credit
Agreement shall have terminated in accordance with its terms; PROVIDED, however,
that Payor may, upon at least 15 days

                                     C-1

<PAGE>

prior written notice to the holders of the Senior Notes and the Agent (as
defined in the Credit Agreement) in the manner contemplated by the Note
Agreement and the Credit Agreement, respectively, make payments of interest at
the times and in the amounts required hereunder and pay when due all or any part
of the principal hereof (and the Payee may receive all such payments) so long as
there is not then existing under the Note Agreement or the Credit Agreement a
Default, an Event of Default or a Borrowing Base Deficiency (as, respectively,
defined therein) and no such Default, Event of Default or Borrowing Base
Deficiency would result from such payment.

            3. In the event that the Payee shall receive any payment on
Subordinated Debt which it is not entitled to receive under the subordination
provisions contained in these paragraphs 1 through 11, inclusive, the Payee will
hold any amount so received in trust for the holders of Senior Debt and will
forthwith turn over such payment to a representative of the holders of Senior
Debt selected by the Required Holders (as defined in the Note Agreement) and the
Required Banks (as defined in the Credit Agreement) (the "Representative") (for
the ratable benefit of the holders of Senior Debt) in the form received (with
any endorsements or other instruments of transfer requested by the Required
Holders and the Required Banks), to be applied on Senior Debt proportionately
based upon the aggregate principal amount of each holder's Senior Debt then
outstanding. In the event of any failure by Payee to make any such endorsement
or execute any such instrument of transfer, the Representative is hereby
authorized to make or execute the same, as the case may be.

            4. The Payee will not commence any action or proceeding against the
Payor to recover all or any part of the Subordinated Debt or join with any
creditor, unless the holders of Senior Debt shall also join, in bringing any
proceedings against the Payor under any bankruptcy, reorganization, readjustment
of debt, arrangement of debt, receivership, liquidation or insolvency law or
statute of the Federal or any State government unless and until Senior Debt
shall be paid in full in cash and the Credit Agreement shall have terminated in
accordance with its terms.

            5. In the event of any liquidation, dissolution or other winding up
of the Payor, or in the event of any receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization or arrangement with
creditors, whether or not pursuant to bankruptcy laws, sale (under court
supervision) of all or substantially all of the assets or any other marshalling
of the assets and liabilities of the Payor (each of the foregoing, a
"Proceeding"), (i) Senior Debt shall first be indefeasibly paid in full in cash
and the Credit Agreement shall have terminated in accordance with its terms
before the Payee shall be entitled to receive any moneys, dividends or other
assets in any such Proceeding, and (ii) the Payee will at the request of the
holders of Senior Debt, file any claim, proof of claim or other instrument of
similar character necessary to enforce the obligations of the Payor in respect
of Subordinated Debt and will hold in trust for the holders of Senior Debt and
pay over to the Representative (for the ratable benefit of the holders of Senior
Debt), in the form received (with any endorsements or other instruments of
transfer requested by the Required Holders and the Required Banks), to be
applied on Senior Debt (proportionately based upon the aggregate principal
amount of each holder's Senior Debt then outstanding), any and all moneys,
dividends or other assets received in any such Proceeding on account of
Subordinated Debt, unless and until Senior Debt shall be indefeasibly paid in
full in cash (including post-petition interest which, as a 

                                     C-2

<PAGE>

result of a Proceeding, the Payor is no longer obligated to pay) and the Credit
Agreement shall have terminated in accordance with its terms. In the event that
the Payee shall fail to take such action requested by the holders of Senior
Debt, the Representative may, as attorney-in-fact for the Payee, take such
action on behalf of the Payee, and demand, sue for, collect and receive any and
all such moneys, dividends or other assets and give acquittance therefor and
take such other action (including voting for and the acceptance or rejection of
any plan of reorganization or arrangement) in the name of the holders of Senior
Debt or in the name of the Payee as the holders of Senior Debt may deem
necessary or advisable for the enforcement of this [NOTE]; and the Payee will
execute and deliver to the holders of Senior Debt such other and further powers
of attorney or other instruments as the holders of Senior Debt may request in
order to accomplish the foregoing.

            6. Payee shall not be subrogated to the rights of any holder of
Senior Debt to receive any moneys, dividends or other assets of Payor applicable
to Senior Debt until all Senior Debt shall have been indefeasibly paid in full
in cash and the Credit Agreement shall have terminated in accordance with its
terms. For purposes of such subrogation, none of the payments or distributions
to the holders of Senior Debt to which Payee would be entitled except for the
provisions of this [NOTE] shall, as among the Payor, its creditors other than
the holders of Senior Debt and Payee, be deemed to be a payment by the Payor to
or on account of Senior Debt, and none of the payments or distributions to Payee
by virtue of the subrogation herein provided for shall, as among the Payor, its
creditors other than the holders of Senior Debt and Payee, be deemed to be a
payment to or on account of this [NOTE].

            7. The holders of Senior Debt may, at any time and from time to
time, without the consent of or notice to the Payee, without incurring
responsibility to the Payee, and without impairing or releasing any of the
rights of the holders of Senior Debt, or any of the obligations of the Payor
hereunder: (a) change the amount, manner, place or terms of payment or change or
extend the time of payment of or renew or alter Senior Debt or amend the Note
Agreement (other than Exhibit C thereto in a manner that purports to affect
retroactively the terms or provisions of this [NOTE] so as to cause the
indebtedness of Payor evidenced hereby no longer to satisfy paragraph 6B(2)(i)
of the Note Agreement) or the Credit Agreement in any manner or enter into or
amend in any manner any other agreement (other than this [NOTE]) relating to
Senior Debt (including provisions restricting or further restricting payments of
principal of and interest on Subordinated Debt); (b) sell, exchange, release or
otherwise deal with any property by whomsoever at any time pledged or mortgaged
to secure, or howsoever securing, Senior Debt; (c) release anyone liable in any
manner for the payment or collection of Senior Debt; (d) exercise or refrain
from exercising any rights against the Payor and others (including the Payee);
and (e) apply any sums by whomsoever paid or however realized to Senior Debt in
such order or manner as the holders of Senior Debt may in their sole discretion
determine, but only in accordance with the Credit Agreement or Note Agreement,
as the case may be.

            8. The subordination provisions of this [NOTE] are intended solely
for the purpose of defining the relative rights and priorities of Payee, on the
one hand, and the holders of Senior Debt, on the other hand, and are solely for
the benefit of the holders of Senior Debt (and their 

                                     C-3

<PAGE>

successors and assigns) and shall be enforceable by them directly against Payee.
Nothing contained in this [NOTE] is intended or shall affect the relative rights
of Payee and creditors of Payor other than the holders of Senior Debt, nor shall
anything herein prevent any holder of Senior Debt from exercising all remedies
otherwise permitted by applicable law upon a Default, an Event of Default or a
Borrowing Base Deficiency (all as defined above). No holder of Senior Debt shall
be prejudiced in its right to enforce subordination of this [NOTE] by any act or
failure to act by Payor or anyone in custody of Payor's assets or property. No
invalidity, irregularity or unenforceability of any provision relating to Senior
Debt or any security therefor or guaranty thereof shall affect, impair or be a
defense to the subordination provisions contained in these paragraphs 1 through
11, inclusive. This [NOTE] cannot be transferred or assigned, and no waiver or
amendment of the terms of this [NOTE] shall be effective, without the prior
written consent of the Required Holders and the Required Banks, PROVIDED that,
in any event, this [NOTE] cannot be transferred or assigned while any Senior
Debt remains unpaid or the Credit Agreement remains in effect unless such
transfer or assignment is made expressly subject to the subordination provisions
contained in these paragraphs 1 through 11, inclusive. Any instrument hereafter
evidencing the Subordinated Debt evidenced hereby will contain provisions
referring specifically to the subordination provisions contained in these
paragraphs 1 through 11, inclusive.

            9. Any holder of any Senior Debt may assign all or part of such
Senior Debt any number of times in accordance with the Note Agreement or the
Credit Agreement, as the case may be, and all Senior Debt so transferred shall
be and remain entitled to all of the benefits of the subordination provisions
contained in these paragraphs 1 through 11, inclusive.

            10. Upon the Senior Debt being indefeasibly paid in full in cash and
the termination of the Credit Agreement in accordance with its terms, the
subordination provisions contained in these paragraphs 1 through 11, inclusive,
shall terminate.

            11. The subordination provisions contained in these paragraphs 1
through 11, inclusive are a continuing agreement and all Senior Debt to which
they apply or may apply shall conclusively be presumed to have been created in
reliance upon them.

                                       C-4

<PAGE>

                                   SCHEDULE I

                             SCHEDULE OF PURCHASERS


                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

ALLSTATE LIFE INSURANCE                       $7,000,000            $7,000,000
   COMPANY

(1) All payments by Fedwire or intrabank 
transfer of immediately available funds, 
identifying the name of the Issuer (and 
the Credit, if any), the Private Placement 
Number preceded by "DPP" and the payment 
as principal, interest or premium, in the 
format as follows:

BKK =   Harris Trust and Savings Bank
        ABA #071000288
BNF =   Allstate Life Insurance Company
        Collection Account #168-117-0
ORG =   (Enter Issuer Name (and Credit
        Name, if any))
OBI =   DPP - (Enter Private Placement No,
        if available) - (L_____ (enter Lease
        Number, if any) -
        Payment Due Date (MM/DD/YY) -
        P_____ (Enter "P" and amount of
        principal being remitted, for example,
        P5000000.00) -
        I_____ (Enter "I" and amount of
        interest being remitted, for example,
        I225000.00)

(2) All notices of scheduled payments and 
written confirmations of such wire transfer 
to be sent to:

Allstate Insurance Company
Investment Operations - Private Placements
3075 Sanders Road, STE G4A
Northbrook, IL 60062-7127
Telephone:  (847) 402-8709
Telecopy:   (847) 402-7331

                                  Schedule I-1

<PAGE>

(3) All financial reports, compliance 
certificates and all other written 
communications, including notice of 
prepayments, to be sent to:

Allstate Life Insurance Company
Private Placements Department
3075 Sanders Road, STE G3A
Northbrook, Illinois  60062-7127
Telephone:  (847) 402-4394
Telecopy:   (847) 402-3092
(4) Tax Id. No.: 36-2554642

                                  Schedule I-2

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

AMERICAN ENTERPRISE LIFE                      $500,000             $500,000
   INSURANCE COMPANY

(1) All payments on account of Notes 
held by such purchaser shall be made 
by wire or intrabank transfer of 
immediately available funds for 
credit to:

Norwest Bank Minnesota N.A.
MPLS MN
ABA:    091000019
For credit to: American Express Trust
               Company
               A/C #  38-500

(2) Address for all notices relating to
payments:

American Express Trust Company
733 Marquette Avenue
Minneapolis, MN 55402
Attn:   Pat Jacobson   N10/922

(3) Address for all other communications and
notices:

American Express Trust Company
733 Marquette Avenue
Minneapolis, MN 55402
Attn:   Pat Jacobson   N10/922

(4) Tax Identification No.: 41-1435284

                                  Schedule I-3

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

AMERUS LIFE INSURANCE                         $3,000,000          $3,000,000
   COMPANY

(1) All payments on account of Notes 
held by such purchaser shall be made 
by wire or intrabank transfer of 
immediately available funds for 
credit to:

Bankers Trust Company/NY
ABA:    021001033
A/C:    # 99911145
FFC:    A/C # 097446
REF:    CUSIP Number

(2) Address for all notices relating to
payments:

AmerUs Life Insurance Company
611 Fifth Avenue, Dept. L-31
Des Moines, IA 50309
Attn:   Dan Owens

(3) Address for all other communications and
notices:

AmerUs Life Insurance Company
611 Fifth Avenue, Dept. L-34
Des Moines, IA 50309
Attn:   Todd Youngberg

(4) Tax Identification No.: 42-0175020

                                  Schedule I-4

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

FARM BUREAU LIFE INSURANCE                   $7,000,000           $7,000,000
   COMPANY

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of 
immediately available funds for credit to:

Bankers Trust Company
ABA:    021 001 033
Pvt. Placement Proc. # 99 911 145
For Credit Acct. 098643
Farm Bureau Life Insurance Company
Include a Description of Issue & Payment
   Breakdown

(2) Address for all notices relating to
payments:

Farm Bureau Life Insurance Company 
5400 University Avenue 
West Des Moines, IA 50266 
Attn: Bob Rummelhart 

(3) Address for all other communications 
and notices:

Farm Bureau Life Insurance Company
5400 University Avenue
West Des Moines, IA 50266
Attn:   Bob Rummelhart

(4) Tax Identification No.: 42-0623913

                                  Schedule I-5

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

GALICO                                       $5,000,000           $5,000,000

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of immediately 
available funds for credit to:

General American Life Insurance Company
c/o The Bank of New York
ABA:    # 021000018   BNF: IOC566
Attn:   P&I Department

(2) Address for all notices relating to
payments:

General American Life Insurance Company
Attn:   Investment Accounting
P.O. Box 418
St. Louis, MO 63166

with a copy to:

GALICO
c/o The Bank of New York
P.O. Box 19266
Newark, NJ 07195

(3) Address for all other communications and
notices:

General American Life Insurance Company
Attn:   Securities Division
P.O. Box 396
St. Louis, MO 63166

with a copy to:

GALICO
c/o The Bank of New York
P.O. Box 19266
Newark, NJ 07195

(4) Tax Identification No.: 43-6168630

                                  Schedule I-6
<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------
GREAT-WEST LIFE & ANNUITY                    $15,000,000         $15,000,000
   INSURANCE COMPANY

(1) All payments on account of Notes held 
by such purchaser shall be made by wire 
or intrabank transfer of immediately 
available funds for credit to:

Norwest Bank Minnesota, N.A.
ABA:    091-000-019
NW MPLS/TRUST CLEARING ACCT:
   08-40-245
Attn:   Acct. #12468800
(describing security (PPN) and allocation of
payment among principal, interest and
premium, if any, and confirming principal
balance)

(2) Address for all notices relating to
payments:

Norwest Bank Minnesota, N.A.
733 Marquette Avenue
Investors Building, 5th Floor
Minneapolis, MN 55479-0047
Attn:   Income Collections

(3) Address for all other communications and
notices:

Great-West Life & Annuity Insurance
   Company
8515 E. Orchard Road
3rd Floor, Tower II
Englewood, CO 80111
Attn:   U.S. Private Placements
(4) Tax Identification No.: 84-0467907

                                  Schedule I-7

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

IDS LIFE INSURANCE COMPANY                   $8,500,000           $8,500,000

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of immediately 
available funds for credit to:

Norwest Bank Minnesota N.A.
MPLS MN
ABA:    091000019
For credit to: American Express Trust
               Company
               A/C # 38-500

(2) Address for all notices relating to
payments:

American Express Trust Company
733 Marquette Avenue
Minneapolis, MN 55402
Attn:   Pat Jacobson   N10/922

(3) Address for all other communications and
notices:

American Express Trust Company
733 Marquette Avenue
Minneapolis, MN 55402
Attn:   Pat Jacobson   N10/922
(4) Tax Identification No.: 41-1430260

                                     Schedule I-8

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------
MASSACHUSETTS MUTUAL LIFE                    $15,000,000         $15,000,000
   INSURANCE COMPANY

(1) All payments on account of Notes held 
by such purchaser shall be made by wire 
or intrabank transfer of immediately 
available funds for credit to:

Chase Manhattan Bank
New York, NY
ABA# 021 000021
Acct# 910-1388131
Reference: Monterey Resources, Inc.


(2) Address for all notices relating to
payments:

Massachusetts Mutual Life Insurance
Company
1295 State Street
Springfield, MA 01111
Attention:  Securities Custody and Collection
F381


(3) Address for all other communications and
notices:

Massachusetts Mutual Life Insurance
Company
1295 State Street
Springfield, MA 01111
Attention: Richard C. Morrison

(4) Tax Identification No.:  04-1590850

                                  Schedule I-9

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

MELLON BANK, N.A.                            $5,000,000           $1,000,000
   AS TRUSTEE FOR FIRST PLAZA
   GROUP TRUST                                                    $1,000,000

(1) All payments on account of Notes held                         $1,000,000
by such purchaser shall be made by wire or
intrabank transfer of immediately available                       $1,000,000
funds for credit to:
                                                                  $1,000,000
Federal Reserve Bank of Boston
ABA:    011001234/BOS SAFE DEP
DDA:    108449 Cost Center 1265
Ref:    GM - Account GMCF
        1744192/Alliance Cap

(2) Address for all notices relating to
payments:

Mellon Bank, N.A.
One Mellon Bank Center, Room 3346
Pittsburgh, PA 15258
Attn:   Stephanie Rieger

(3) Address for all other communications and
notices:

Mellon Bank, N.A.
One Mellon Bank Center, Room 3346
Pittsburgh, PA 15258
Attn:   Stephanie Rieger

with a copy to:

Alliance Capital Management Corp.
1345 Avenue of the Americas
New York, NY 10105
Attn:   Ina Lane
Corp. Bond/Credit Research

(4) Tax Identification No.: ###-##-####

                                  Schedule I-10

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

PAN-AMERICAN LIFE INSURANCE                  $3,000,000           $3,000,000
   COMPANY

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of immediately 
available funds for credit to:

Pan-American Life Insurance Company
Account #1100-29496
First National Bank of Commerce
ABA # 065000029
210 Baronne Street
New Orleans, LA 70112
(identifying the issue by its PPN and 
description of security, and providing
complete details including breakdown of 
principal, premium, if any, and interest) 

(2) Address for all notices relating to payments:

Pan-American Life Insurance Company
Attn: Bond & Stock Accounting, 28th Floor
601 Poydras Street
New Orleans, LA 70130
Facsimile: (504) 566-3459

(3) Address for all other communications and
notices:

Pan-American Life Insurance Company
Attn: Investment Department, 28th Floor
601 Poydras Street
New Orleans, LA 70130

(4) Tax Identification No.: 72-0281240

                                  Schedule I-11

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

PRINCIPAL MUTUAL LIFE                        $20,000,000         $20,000,000
   INSURANCE COMPANY

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of immediately 
available funds for credit to:

Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA:    073000228
Acct:   014752
OBI:    PFGSE(S)B23254( )

(2) Address for all notices relating to
payments:

Principal Mutual Life Insurance Company
711 High Street
Des Moines, IA 50392-0870
Attn:   Inv-A&T #1-B-23254

(3) Address for all other communications and
notices:

Principal Mutual Life Insurance Company
711 High Street
Des Moines, IA 50392-0800
Attn:   Inv-Securities #1-B-23254

(4) Tax Identification No.: 42-0127290

                                  Schedule I-12

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

PROVIDENT MUTUAL LIFE                        $4,000,000           $4,000,000
   INSURANCE COMPANY

(1) All payments on account of Notes held 
by such purchaser shall be made by wire or 
intrabank transfer of immediately available 
funds for credit to:

PNC Bank, Philadelphia, PA
ABA:    031000053, for account no.
        8540842176 Provident Mutual Life
        Insurance Company,
        Attn: Treasurer, re Santa Fe Energy
              Resources, Inc.

(2) Address for all notices relating to
payments:

Provident Mutual Life Insurance Company
P.O. Box 1717
Valley Forge, PA 19482-1717
Attn:  Treasurer

(3) Address for all other communications and
notices:

Provident Mutual Life Insurance Company
P.O. Box 1717
Valley Forge, PA 19482-1717
Attn:  Treasurer

(4) Tax Identification No.: 23-0990450

                                  Schedule I-13

<PAGE>

                                         AGGREGATE PRINCIPAL
                PURCHASER                  AMOUNT OF NOTES    NOTE DENOMINATIONS
                ---------                  ---------------    ------------------

THE PRUDENTIAL INSURANCE                     $82,000,000          $75,000,000
   COMPANY OF AMERICA
                                                                  $7,000,000

(1) All payments on account of Notes 
held by such purchaser shall be made by
wire or intrabank transfer of immediately 
available funds for credit to:

Account No. 890-0304-391
Bank of New York
New York, New York
(ABA No.: 021-000-018)

(2) Address for all notices relating to
payments:

The Prudential Insurance Company of America 
c/o Prudential Capital Group 
Four Gateway Center 
100 Mulberry Street 
Newark, New Jersey 07102-4069 
Attention: Investment Administration Unit 

(3) Address for all other communications and
notices:

The Prudential Insurance Company of
America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Attention:  Managing Director

(4) Tax Identification No: 22-1211670

                                  Schedule I-14

<PAGE>

                                                                     Schedule 8A

                            SCHEDULE OF SUBSIDIARIES


            South Belridge Limited Partnership ("SBLP"), a Texas limited
partnership of which the Company is the sole general partner. Prior to the
conveyance under the Conveyance and Contribution Agreement, Parent was the sole
general partner of SBLP. As sole general partner of SBLP, the Company will
generally own a 50% general partner interest in SBLP.

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                                                                     Schedule 8C

                        SCHEDULE OF OTHER DEBT AGREEMENTS



1.          The Credit Agreements

2.          The Original Note Agreement

3.          Indenture, dated as of May 25, 1994, between Parent and The First
            National Bank of Boston, as Trustee, pursuant to which Parent has
            issued its 11% Senior Subordinated Debentures due 2004 which are the
            subject of the Consent Solicitation

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                                                                     Schedule 8G

                          SCHEDULE OF OUTSTANDING DEBT


            None, other than (i) an aggregate of $245,000,000 in principal
amount of indebtedness assumed by the Company from Parent as evidenced by the
Series E, Series F and Series G Notes issued pursuant to the Original Note
Agreement, (ii) the Production Payment, (iii) a $2,200,000 loss contingency with
respect to environmental commitments and contingencies described in footnote 3
to the unaudited financial statements of the "Western Division" of Parent for
the nine months ended September 30, 1996 and (iv) up to $16,000,000 to be
borrowed by Parent under the Credit Agreement referred to in clause (i) of the
definition of "Credit Agreements" at or prior to the effectiveness of this
Agreement. As described in Schedule 8K, a portion of the net proceeds from the
initial public offering by the Company will be used to (a) prepay in full the
principal amount of the Series E and Series F Notes issued under the Original
Note Agreement PLUS accrued and unpaid interest due thereunder and to pay a
prepayment premium thereunder, and (b) repay in full all amounts borrowed by
Parent as provided in clause (iv) of the preceding sentence. The Series G Notes
will be canceled and surrendered pursuant to the Agreement to which this
Schedule 8G is attached in exchange for the Notes to be issued pursuant to such
Agreement.

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                                                                     Schedule 8K

                           SCHEDULE OF USE OF PROCEEDS


            The net proceeds of the Initial Public Offering are estimated to be
approximately $100 million, based upon the initial public offering price of
$14.50 per share and after deducting estimated expenses. Such net proceeds will
be used for the following purposes: (i) approximately $72.5 million will be used
to prepay in full the $70 million principal amount of the Series E Notes and
Series F Notes and accrued and unpaid interest thereon and to pay the prepayment
premium associated therewith, (ii) approximately $16 million will be used to
repay outstanding indebtedness in respect of borrowing by Parent under the
Credit Agreement referred to in clause (i) of the definition of "Credit
Agreements" and (iii) the balance will be used for general corporate purposes.
If the underwriters' over-allotment options are exercised, the Company intends
to use the net proceeds therefrom to repay any balance then outstanding under
the Credit Agreement referred to in clause (i) of the definition of "Credit
Agreements" and any remaining proceeds will be used for working capital
purposes.

            Promptly following the consummation of the Offering, the Company
intends to prepay the Production Payment in full with funds available under the
Credit Agreement referred to in clause (i) of the definition of "Credit
Agreements."