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                                UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ________________

                                   FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1999




[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934


                         Commission File Number 0-26662


                                  PANACO, Inc.
             (Exact name of registrant as specified in its charter)


                  Delaware
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification
                or organization)                             Number)

     1100 Louisiana Street, Suite 5100
                 Houston, Texas                              77002
     (Address of principal executive offices)              (Zip Code)

          Registrant's telephone number, including area code: (713) 970-3100




     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing  requirements  for the past 90 days.  Yes ___X___ No _______ .


     23,985,927 shares of the registrant's $.01 par value Common Stock were
outstanding on September 30, 1999.

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<PAGE>
                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)


                                     ASSETS

<TABLE>
<CAPTION>

                                                           As of                      As of
                                                      September 30, 1999         December 31, 1998
                                                      ------------------         -----------------
<S>                                                          <C>                        <C>

 CURRENT ASSETS
      Cash and cash equivalents                         $    5,692,000             $    3,452,000
      Accounts receivable                                    9,321,000                  8,332,000
      Accounts receivable-employee                              14,000                     18,000
      Prepaid and other                                        495,000                    268,000
                                                         -------------             --------------

         Total current assets                               15,522,000                 12,070,000
                                                         -------------             --------------

 OIL AND GAS PROPERTIES, AS DETERMINED BY THE
 SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
      Oil and gas properties, proved                       254,450,000                238,377,000
      Oil and gas properties, unproved                      15,598,000                 15,128,000
      Less accumulated depletion, depreciation,
         and amortization                                 (174,460,000)              (152,782,000)
                                                          ------------              -------------

         Net oil and gas properties                         95,588,000                100,723,000
                                                          ------------              -------------

 PIPELINES AND EQUIPMENT
      Pipelines and equipment                               26,300,000                 26,252,000
      Less accumulated depreciation                         (5,402,000)                (3,415,000)
                                                          ------------              -------------
         Net pipelines and equipment                        20,898,000                 22,837,000
                                                          ------------              -------------

 OTHER ASSETS
      Deferred debt costs, net                               4,623,000                  3,359,000
      Employee note receivable                                 300,000                    300,000
      Restricted deposits and other                          5,122,000                  4,083,000
                                                          ------------              -------------
         Total other assets                                 10,045,000                  7,742,000
                                                          ------------              -------------

  TOTAL ASSETS                                          $  142,053,000             $  143,372,000
                                                          ============              =============

</TABLE>





         The accompanying notes are in integral part of this statement.

                                       2

<PAGE>

<TABLE>

<CAPTION>


                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)

                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                        As of                        As of
                                                  September 30, 1999           December 31, 1998
                                                  ------------------           -----------------
<S>                                                        <C>                          <C>

 CURRENT LIABILITIES

 Accounts payable                                   $     23,309,000            $     16,976,000
 Interest payable                                                  -                   2,745,000
 Revolving credit facility                                         -                  13,500,000
                                                      --------------               -------------

 Total current liabilities                                23,309,000                  33,221,000
                                                      --------------              --------------

 LONG-TERM DEBT                                          131,329,000                 102,249,000



 STOCKHOLDERS' EQUITY
      Preferred Shares, $.01 par value,
      5,000,000 shares authorized; no
      shares issued and outstanding                                -                           -
      Common Shares, $.01 par value,
      100,000,000 shares authorized;
      23,985,927 and 23,704,955 shares
      issued and outstanding, respectively                   243,000                     240,000
      Additional paid-in capital                          69,444,000                  69,197,000
      Treasury stock, held at cost                          (592,000)                   (592,000)
      Accumulated deficit                                (81,680,000)                (60,943,000)
                                                       -------------              --------------
         Total stockholders' equity (deficit)            (12,585,000)                  7,902,000
                                                       -------------              --------------


 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $    142,053,000            $    143,372,000
                                                      ==============              ==============
 COMMITMENTS AND CONTINGENCIES

</TABLE>


         The accompanying notes are an integral part of this statement.

                                       3

<PAGE>

                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                     For the Nine Months Ended September 30,
                                   (Unaudited)


<TABLE>
<CAPTION>


                                                                             1999                     1998
                                                                       ---------------          ---------------
<S>                                                                           <C>                       <C>


 REVENUES
      Oil and natural gas sales                                        $    29,950,000          $    38,456,000

 COSTS AND EXPENSES
      Lease operating expense                                               12,382,000               13,287,000
      Depletion, depreciation & amortization                                18,492,000               24,936,000
      General and administrative expense                                     2,759,000                3,040,000
      Office consolidation and severance expense                                     -                  987,000
      Production and ad valorem taxes                                          654,000                  866,000
      Exploratory dry hole expense                                             942,000                5,798,000
      Impairment of oil and gas properties                                   5,693,000                1,621,000
      Geological and geophysical expense                                       963,000                1,296,000
                                                                        --------------           --------------
         Total                                                              41,885,000               51,831,000
                                                                        --------------           --------------

 OPERATING LOSS                                                            (11,935,000)             (13,375,000)
                                                                        --------------           --------------

 OTHER INCOME (EXPENSE)
      Interest income                                                           78,000                   790,000
      Interest expense                                                      (8,748,000)               (7,614,000)
                                                                        --------------            --------------
         Total                                                              (8,670,000)               (6,824,000)
                                                                        --------------            --------------

 LOSS BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                                               (20,605,000)              (20,199,000)

 INCOME TAX (BENEFIT)                                                                -                (3,100,000)
                                                                        --------------            --------------

 LOSS BEFORE EXTRAORDINARY ITEM                                            (20,605,000)              (17,099,000)

 EXTRAORDINARY ITEM-Loss on early retirement of debt                          (132,000)                        -
                                                                        --------------            --------------
 NET LOSS                                                               $  (20,737,000)           $  (17,099,000)
                                                                        ==============            ==============

 Loss per share before extraordinary item                               $        (0.86)           $        (0.71)
 Extraordinary item                                                              (0.01)                        -
                                                                        --------------             -------------
 Net loss per share                                                     $        (0.87)           $        (0.71)
                                                                        ==============             =============

 Basic Shares Outstanding                                                   23,925,204                23,942,161
                                                                        ==============             =============
 Diluted Shares Outstanding                                                 23,925,204                23,942,161
                                                                        ==============             =============
</TABLE>



         The accompanying notes are an integral part of this statement.

                                       4

<PAGE>

                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                    For the Three Months Ended September 30,
                                   (Unaudited)

 <TABLE>
<CAPTION>

                                                                        1999                     1998
                                                                   -------------            -------------
<S>                                                                      <C>                      <C>

 REVENUES
      Oil and natural gas sales                                   $   10,178,000           $   14,128,000
 COSTS AND EXPENSES
      Lease operating expense                                          3,978,000                4,639,000
      Depletion, depreciation & amortization                           6,152,000                8,988,000
      General and administrative expense                               1,019,000                  977,000
      Office consolidation and severance expense                               -                  987,000
      Production and ad valorem taxes                                    283,000                  470,000
      Exploratory dry hole expense                                        98,000                  876,000
      Impairment of oil and gas properties                             5,693,000                  558,000
      Geological and geophysical expense                                 398,000                  502,000
                                                                     -----------              -----------
         Total                                                        17,621,000               17,997,000
                                                                     -----------              -----------

 OPERATING LOSS                                                       (7,443,000)              (3,869,000)
                                                                     -----------              -----------

 OTHER INCOME (EXPENSE)
      Interest income                                                     43,000                   39,000
      Interest expense                                                (3,331,000)              (2,655,000)
                                                                     -----------               ----------
         Total                                                        (3,288,000)              (2,616,000)
                                                                     -----------               ----------

 LOSS BEFORE INCOME TAXES
      AND EXTRAORDINARY ITEM                                         (10,731,000)              (6,485,000)

 INCOME TAX (BENEFIT)                                                          -                  398,000
                                                                     -----------               ----------
 LOSS BEFORE EXTRAORDINARY ITEM                                      (10,731,000)              (6,883,000)

 EXTRAORDINARY ITEM-Loss on early retirement of debt                    (132,000)                       -
                                                                     -----------               ----------

 NET LOSS                                                          $ (10,863,000)           $  (6,883,000)
                                                                     ===========               ==========

 Loss per share before extraordinary item                          $       (0.44)           $       (0.29)
 Extraordinary item                                                        (0.01)                       -
                                                                     -----------               ----------
 Net loss per share                                                $       (0.45)           $       (0.29)
                                                                     ===========               ==========

 Basic Shares Outstanding                                             23,985,927               23,947,367
                                                                     ===========               ==========
 Diluted Shares Outstanding                                           23,985,927               23,947,367
                                                                     ===========               ==========
</TABLE>


         The accompanying notes are an integral part of this statement.

                                       5

<PAGE>


                                  PANACO, Inc.
                      Consolidated Statement of Cash Flows
                     For the Nine Months Ended September 30,
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                        1999                     1998
                                                                   -------------            -------------
<S>                                                                      <C>                      <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss                                                      $(20,737,000)            $(17,099,000)
      Adjustments to reconcile net loss to net cash
      provided by operating activities:
         Depletion, depreciation and amortization                     18,492,000               24,936,000
         Impairment of oil and gas properties                          5,693,000                1,621,000
         Exploratory dry hole expense                                    942,000                5,798,000
         Deferred income tax benefit                                           -               (3,100,000)

         Office consolidation and severance expense                            -                  987,000
         Extraordinary item-loss on early retirement of debt             132,000                        -
         Other, net                                                       36,000               (1,331,000)
         Changes in liabilities:
             Accounts receivable                                        (989,000)              (1,296,000)
             Prepaid and other                                          (227,000)                 266,000
             Accounts payable                                          6,333,000               (5,002,000)
             Interest payable                                         (2,745,000)               2,964,000
                                                                      ----------              -----------
                       Net cash provided by operating activities       6,930,000                8,744,000
                                                                      ----------              -----------

 CASH FLOWS FROM INVESTING ACTIVITIES
         Sale of oil and gas properties                                  378,000                   23,000
         Capital expenditures and acquisitions                       (17,911,000)             (54,830,000)
         Increase in restricted deposits                              (1,250,000)              (1,178,000)
                                                                      ----------               ----------
                        Net cash used by investing activities        (18,783,000)             (55,985,000)
                                                                      ----------               ----------

 CASH FLOWS FROM FINANCING ACTIVITIES
         Issuance of common shares                                       250,000                        -
         Short-term borrowings                                        39,580,000               36,549,000
         Repayment of long-term debt                                 (24,000,000)             (23,000,000)
         Additional deferred financing costs                          (1,737,000)                       -
                                                                      ----------               ----------
                        Net cash provided by financing activities     14,093,000               13,549,000
                                                                      ----------               ----------

 NET INCREASE (DECREASE) IN CASH                                       2,240,000              (33,692,000)

 CASH AT BEGINNING OF YEAR                                             3,452,000               36,909,000
                                                                      ----------               ----------

 CASH AT SEPTEMBER 30                                                $ 5,692,000              $ 3,217,000
                                                                      ==========               ==========

</TABLE>


         The accompanying notes are an integral part of this statement.

                                       6

<PAGE>



                                  PANACO, Inc.
       Consolidated Statement of Changes in Stockholders' Equity (Deficit)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                           Amount ($)
                                   -----------------------------------------------------------------------------
                                   Number of                      Additional
                                    Common          Common         Paid-in            Treasury        Accumulated
                                    Shares          Stock          Capital             Stock            Deficit
                                   --------         ------        ---------           --------        -----------
<S>                                   <C>           <C>              <C>                <C>               <C>

Balances, December 31, 1998        23,704,955     $  240,000     $ 69,197,000       $ (592,000)      $(60,943,000)

Net Loss                                    -              -                -                -        (20,737,000)

Common shares issued to the ESOP      280,972          3,000          247,000                -                  -

                                   ----------      ---------      -----------         --------        -----------
Balances, September 30, 1999       23,985,927     $  243,000     $ 69,444,000       $ (592,000)      $(81,680,000)
                                   ==========      =========      ===========         ========        ===========


</TABLE>


         The accompanying notes are an integral part of this statement.

                                       7

<PAGE>




                                  PANACO, Inc.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
Note 1 - BASIS OF  PRESENTATION

     In  the  opinion  of  management,   the  accompanying  unaudited  condensed
consolidated  financial statements contain all adjustments  necessary to present
fairly the financial position as of September 30, 1999 and December 31, 1998 and
the results of  operations  and cash flows for the periods  ended  September 30,
1999 and  1998.  Most  adjustments  made to the  financial  statements  are of a
normal, recurring nature. Although the Company believes that the disclosures are
adequate to make the information  presented not misleading,  certain information
and footnote disclosures,  including significant  accounting policies,  normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted  pursuant to the rules and
regulations  of the  Securities  and Exchange  Commission  (the  "SEC").  A more
complete  description of the accounting policies followed by the Company are set
forth in Note 1 to the Company's financial  statements in Form 10-K for the year
ended  December  31,  1998.  These  financial   statements  should  be  read  in
conjunction  with the financial  statements and notes included in the Form 10-K.
Results for the nine months and three months ended  September 30, 1998 have been
restated  to reflect  the proper  timing of  adjustments  made during the fourth
quarter of 1998 that  related to prior  quarters in that year.

Note 2 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT

     The Company  utilizes the  successful  efforts method of accounting for its
oil and gas properties.  Under the successful efforts method,  lease acquisition
costs are capitalized.  Exploratory  drilling costs are also capitalized pending
determination  of proved  reserves.  If proved reserves are not discovered,  the
exploratory   costs  are  expensed.   All  development  costs  are  capitalized.
Non-drilling  exploratory  costs including  geological and geophysical costs and
rentals are expensed. Unproved leaseholds with significant acquisition costs are
assessed periodically, on a property-by-property basis, and a loss is recognized
to the extent, if any, that the cost of the property has been impaired. Unproved
leaseholds  whose  acquisition  costs  are  not  individually   significant  are
aggregated,  and the  portion  of  such  costs  estimated  to  ultimately  prove
nonproductive,  based on  experience,  are  amortized  over an  average  holding
period.  As unproved  leaseholds are  determined to be  productive,  the related
costs are  transferred  to proved  leaseholds.  Provision for  depreciation  and
depletion is determined on a depletable unit basis using the  unit-of-production
method.   Estimated  future   abandonment  costs  are  recorded  by  charges  to
depreciation and depletion  expense over the lives of the proved reserves of the
properties.

     The  Company  performs  a  review  for  impairment  of  proved  oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review.  For each  depletable  unit  determined  to be  impaired,  an
impairment loss equal to the difference  between the carrying value and the fair
value of the  depletable  unit will be recognized.  Fair value,  on a depletable
unit basis,  is estimated to be the present value of expected  future cash flows
computed  by applying  estimated  future oil and gas prices,  as  determined  by
management,  to estimated  future  production  of oil and gas reserves  over the
economic  lives of the reserves.  Future cash flows are based upon the Company's
estimate of proved  reserves.  In addition,  other  factors such as probable and
possible  reserves  are taken into  consideration  when  justified  by  economic
conditions  and  actual or  planned  drilling.  The  Company  recorded  an asset
impairment for the year ended December 31, 1998 of $20.4 million,  primarily due
to lower oil and natural gas  prices.  An  additional  impairment  was  recorded
during  the third  quarter of 1999 on the  Company's  unproved  properties.  The
impairment  totaled $5.7 million and was recorded to reflect the lack of planned
drilling  activity on those  properties  with  associated  unproved  costs.  The

                                       8

<PAGE>

Company  has an  extensive  drilling  program  planned  through the end of 2000;
however, the projects identified to begin over the next 15 months do not include
those properties upon which an impairment was recorded.

     Pipelines  and other  equipment  are  carried at cost.  Oil and natural gas
pipelines and equipment are depreciated on the  straight-line  method over their
estimated lives,  primarily fifteen years. Other property is also depreciated on
the straight-line  method over their estimated lives,  ranging from three to ten
years.  Fees for  processing  oil and  natural  gas for others are  treated as a
reduction  of  lease   operating   expense   related  to  the   facilities   and
infrastructure.

Note 3 - CASH FLOW INFORMATION

     For  purposes of the  consolidated  statement  of cash  flows,  the Company
considers  all cash  investments  purchased  with  original  maturities of three
months  or less to be cash  equivalents.  Cash  payments  for  interest  totaled
$11,963,000  and  $9,920,000  during  the  first  nine  months of 1999 and 1998,
respectively.  Cash  payments for income taxes  totaled $0 during the first nine
months of 1999 and 1998, respectively.

 Note 4 - PER SHARE AMOUNTS

     The Company currently has 1,150,000 stock options  outstanding at September
30, 1999 that are excluded from per share calculations in 1999 and 1998, as they
are anti-dilutive.  The options were issued in 1997 to officers and directors at
an exercise  price of $4.45 per share and expire June 2000.

 Note 5 - RESTRICTED DEPOSITS

     Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against  satisfaction of its
eventual  responsibility  to plug and abandon wells and remove  structures  when
certain  fields no longer  produce oil and gas.  Through  November  30, 1997 the
Company  funded  $900,000 into an escrow  account with respect to the West Delta
Fields. At that time, the Company completed its obligation for the funding under
the West Delta agreement.  The Company has entered into an escrow agreement with
Amoco Production  Company under which the Company deposits,  for the life of the
fields,  in a bank escrow  account ten  percent  (10%) of the net cash flow,  as
defined in the agreement, from the Amoco properties. The Company has established
the "PANACO East Breaks 110 Platform Trust" in favor of the Minerals  Management
Service of the U.S.  Department of the Interior.  This trust required an initial
funding of $846,720 in December 1996, and remaining  deposits of $244,320 due at
the end of each  quarter in 1999 and  $144,000 due at the end of each quarter in
2000 for a total of $2.4 million.  In connection  with its BP  Acquisition,  the
Company  deposited  $1.0 million into an escrow  account on July 1, 1998. On the
first day of each quarter  thereafter,  the Company  deposits  $250,000 into the
escrow  account  until the balance in the escrow  account  reaches $6.5 million.

Note 6 - COMMITMENTS AND CONTINGENCIES

     The Company is subject to various legal  proceedings and claims which arise
in the ordinary course of business. In the opinion of management,  the amount of
liability, if any, with the respect to these actions would not materially affect
the financial position of the Company or its results of operation.

     An action was filed against the Company,  Exxon Pipeline Company ("Exxon"),
National  Energy  Group,  Inc.  ("NEG"),  Mendoza  Marine,  Inc.,  Shell Western
Exploration  &  Production,  Inc.  ("Shell")  and the  Louisiana  Department  of
Transportation  and  Development.  The petition  was filed in August  1998,  and
alleges  that,  in 1997 and  perhaps  earlier,  leaks  from a buried  crude  oil
pipeline contaminated the plaintiff's property.

                                       9

     Pursuant to the  purchase and sale  agreement  between the Company and NEG,
NEG is required to indemnify the Company from any damages  attributable to NEG's
operations  on the  property  after  the sale.  However,  NEG is in  Chapter  11
bankruptcy proceedings, and so any action by the Company to assert its indemnity
rights  against NEG is currently  stayed.  Counsel for the Company have prepared
and may file a  motion  to lift the stay so that  the  Company  may  assert  its
indemnification  rights  against NEG. But even if the Company is  successful  in
proving  its  right to  indemnity,  NEG's  judgementworthiness  is  questionable
because of the bankruptcy.

     Pursuant  to another  purchase  and sale  agreement,  the  Company  may owe
indemnity to Shell and Exxon,  from which it had acquired the property  prior to
selling  same to NEG.  The Company may have  insurance  coverage  for the claims
asserted in the petition, and has notified or is in the process of notifying all
insurance  carriers  that might  provide  coverage  under their  policies.  Some
discovery  has  occurred  in  the  case,  but  discovery  is not  yet  complete.
Therefore,  at this point it is not  possible to evaluate the  likelihood  of an
unfavorable outcome, or to estimate the amount or range of potential loss.

Note 7 - LONG-TERM DEBT

     The  Company's  source of  short-term  borrowings  for working  capital and
general  corporate   purposes  is  its  revolving  credit  facility  (the  "Bank
Facility").  The Bank Facility has a first mortgage on substantially  all of its
oil and gas assets and has a borrowing base  determined by the future  estimated
discounted  cash  flows from  those  assets.  Through  September  30,  1999 this
facility was provided by First Union National Bank ("First Union"), as Agent and
Paribas.  The First  Union  Bank  Facility  was based  primarily  on the  proved
developed  producing  value only of the  Company's  reserves and had a borrowing
base at September  30, 1999 of $21 million,  subject to a review of its reserves
as of  July 1,  1999.  The  First  Union  Bank  Facility  contained  restrictive
covenants  that  management  believed  the  Company  would  violate  during  the
succeeding  year. With the probability  that the covenants would be violated and
the  inability to  immediately  repay the balance of the Bank  Facility were the
banks to require it, the Company  classified the amounts  outstanding  under the
previous Bank Facility as current. The borrowing base under the First Union Bank
Facility also  prohibited the Company from  developing its  properties,  thereby
increasing its production and reserves.

     Effective  September  30,  1999 the Company  replaced  the First Union Bank
Facility  with a new $60 million  Bank  Facility,  provided by Foothill  Capital
Corporation,  as Agent for the lenders. This new Bank Facility provides a larger
borrowing  base  by  including  more  of the  proved  non-producing  and  proved
undeveloped  reserve categories in the borrowing base. The new borrowing base at
September 30 was $49 million,  with  availability of $20 million.  The covenants
are also less  restrictive  in the new Bank  Facility  under  which the  Company
believes it will maintain compliance with throughout the term of the facility.

     The principal  amount of the loan is due September 30, 2001, with an option
to extend  the term for two  additional  six-month  periods.  At no time may the
Company have outstanding borrowings in excess of its borrowing base. Interest on
the loan is computed  at the bank's  prime rate up to the prime rate plus 0.5 to
3.0%  (depending  upon the  percentage  of the facility  being  used).  The Bank
Facility  provides  for  the  establishment  of a cash  collateral  account,  as
described in the agreement, with the Agent. The cash collateral account provides
for reductions of the line as cash is received in the account from the Company's
deposits under certain conditions  provided in the agreement.

     The Bank Facility  contains  certain  covenants  including a requirement to
maintain a positive  indebtedness to cash flow ratio, a positive working capital
ratio, capital expenditure limitations and certain minimum and maximum levels of

                                       10

<PAGE>

hedging  activity.  The agreement  also provides  certain  limitations on future
debt, guarantees, liens, dividends, mergers, and sale of assets. The Company has
classified  this debt as long term as it is  currently  in  compliance  with the
terms of the Bank  Facility and it is probable that it will remain in compliance
with all of the covenants  throughout  the term of the facility.  The failure to
satisfy  these  covenants,  or any of the other  covenants in the Bank  Facility
would  constitute an event of default  thereunder  and may permit the lenders to
accelerate  the  indebtedness  outstanding  under the Bank  Facility  and demand
immediate payment thereof.  In such event, the Company could be required to sell
certain oil and gas assets,  sell equity  securities or obtain  additional  bank
financing.  No assurance can be given that such  transactions can be consummated
on terms  acceptable  to the  Company  or its  lenders,  whose  approval  may be
required.  In this  situation,  if the Company is unable to raise the  necessary
funds,  the  Company  could  become  in  default  on  the  full  amount  of  its
indebtedness,  which includes the Senior Notes.  The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility.  Due to the restrictive covenants and borrowing
base limitations  imposed by the Bank Facility the Company is evaluating several
alternative  sources of funding to improve its current  liquidity and to provide
resources for continued reserve growth.

Note 8 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCTING ACTIVITIES

     The reserve  information  presented in the following  table was prepared by
the  Company  based upon  reports of  independent  petroleum  engineers  and are
estimates only and should not be construed as being exact amounts.  All reserves
presented  are proved  reserves that are defined as estimated  quantities  which
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating conditions.

Proved developed and undeveloped reserves          Oil             Gas
-----------------------------------------         (Bbls)          (Mcf)
                                                  ------          -----
December 31, 1998                               7,454,000       81,249,000
Extensions and discoveries                      1,768,000       10,176,000
Production                                       (863,000)      (8,383,000)
                                                ---------       ----------
Estimated reserves at September 30, 1999        8,359,000       83,042,000
                                                =========       ==========

     No major  discovery  or other  favorable  or  adverse  event  has  caused a
significant  change in the estimated  proved  reserves since September 30, 1999.
The  Company  does not have  proved  reserves  applicable  to  long-term  supply
agreements with  governments or authorities.  All proved reserves are located in
the United States.

                                       11

<PAGE>

PART I
Item 2.

                           MANAGEMENT'S DISCUSSION AND
                         ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


 Forward-looking Statements

     Forward-looking statements in this Form 10-Q, future filings by the Company
with the Securities and Exchange  Commission,  the Company's  press releases and
oral statements by authorized officers of the Company are intended to be subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking  statements involve risks
and uncertainty, including without limitation, the risk of a significant natural
disaster,  the inability of the Company to insure  against  certain  risks,  the
adequacy of its loss reserves,  fluctuations in commodity  prices,  the inherent
limitations in the ability to estimate oil and gas reserves, changing government
regulations, as well as general market conditions,  competition and pricing. The
Company  believes  that  forward-looking  statements  made by it are based  upon
reasonable expectations. However, no assurances can be given that actual results
will  not  differ  materially  from  those  contained  in  such  forward-looking
statements. The words "estimate,"  "anticipate,"  "expect," "predict," "believe"
and similar  expressions  are intended to identify  forward-looking  statements.

General

     The oil and gas industry has experienced  significant  volatility in recent
years because of the fluctuating relationship of the supply of most fossil fuels
relative to the demand for such  products and other  uncertainties  in the world
energy  markets.  These  industry  conditions  should  be  considered  when this
analysis of the  Company's  operations  is read.

     In  September  1999 the Company  received  notification  that shares of its
common stock would no longer be listed on the NASDAQ market due to its inability
to meet continued listing requirements. This may reduce the Company's visibility
and  volume  of its  stock  that is  traded,  however,  since  notification  the
Company's  common stock has continued to be actively  traded on the OTC Bulletin
Board.

Liquidity and Capital Resources

     The Company's board of directors  approved a $35 million capital budget for
1999  subject  to  regular  review by  management  and the  board.  The  Company
estimates  that it will  spend  $25  million,  excluding  acquisitions,  in 1999
primarily on the development of its oil and gas properties.  A limited amount of
its capital  budget will be spent on  exploratory  projects.  The capital budget
will be funded by cash flows from  operations and borrowings  under its new line
of credit,  see "Bank Facility."  The Company  estimates that its capital budget
for 2000, excluding acquisitions will be $25 million, the majority of which will
be funded  from cash  flows  from  operations.

     The Company's working capital improved approximately $1.5 million from June
30,  1999  primarily  due  to  improved   product  prices  and  reduced  capital
expenditures  during  the third  quarter  of 1999.  The  Company  expects  it to
continue  to improve  during  the  remainder  of 1999.  The  Company's  new Bank

                                       12

<PAGE>

Facility provides an availability of $20 million at September 30, 1999, allowing
it to keep a minimum amount of cash on hand.  The Company  maintains a policy of
keeping a limited amount of cash on hand in order to reduce its interest  costs.

Bank Facility

     The  Company's  source of  short-term  borrowings  for working  capital and
general corporate  purposes is its Bank Facility.  The Bank Facility has a first
mortgage on substantially all of its oil and gas assets and has a borrowing base
determined  by the future  estimated  discounted  cash flows from those  assets.
Through  September 30, 1999 this  facility was provided by First Union  National
Bank ("First  Union"),  as Agent and Paribas.  The First Union Bank Facility was
based  primarily on the proved  developed  producing value only of the Company's
reserves and had a borrowing base at September 30, 1999 of $21 million,  subject
to a review of its  reserves as of July 1, 1999.  The First Union Bank  Facility
contained  restrictive  covenants  that  management  believed the Company  would
violate  during the succeeding  year.  With the  probability  that the covenants
would be violated and the inability to immediately repay the balance of the Bank
Facility  were the banks to  require  it, the  Company  classified  the  amounts
outstanding  under the previous  Bank Facility as current.  The  borrowing  base
under the First Union Bank Facility also  prohibited the Company from developing
its  properties,  thereby  increasing its production and reserves.  This lack of
development is  represented by the production  decreases for the nine months and
three months ended September 30, 1999.

     Effective  September  30,  1999 the Company  replaced  the First Union Bank
Facility  with a new $60 million  Bank  Facility,  provided by Foothill  Capital
Corporation,  as Agent for the lenders. This new Bank Facility provides a larger
borrowing  base  by  including  more  of the  proved  non-producing  and  proved
undeveloped  reserve categories in the borrowing base. The new borrowing base at
September 30 was $49 million,  with  availability of $20 million.  The covenants
are also less  restrictive  in the new Bank  Facility  under  which the  Company
believes it will maintain  compliance  with throughout the term of the facility.

     The principal  amount of the loan is due September 30, 2001, with an option
to extend  the term for two  additional  six-month  periods.  At no time may the
Company have outstanding borrowings in excess of its borrowing base. Interest on
the loan is computed  at the bank's  prime rate up to the prime rate plus 0.5 to
3.0%  (depending  upon the  percentage  of the facility  being  used).  The Bank
Facility  provides  for  the  establishment  of a cash  collateral  account,  as
described in the agreement, with the Agent. The cash collateral account provides
for reductions of the line as cash is received in the account from the Company's
deposits under certain conditions  provided in the agreement.

     The Bank Facility  contains  certain  covenants  including a requirement to
maintain a positive  indebtedness to cash flow ratio, a positive working capital
ratio, capital expenditure limitations and certain minimum and maximum levels of
hedging  activity.  The agreement  also provides  certain  limitations on future
debt, guarantees, liens, dividends, mergers, and sale of assets. The Company has
classified  this debt as long term as it is  currently  in  compliance  with the
terms of the Bank  Facility and it is probable that it will remain in compliance
with all of the covenants  throughout  the term of the facility.  The failure to
satisfy  these  covenants,  or any of the other  covenants in the Bank  Facility
would  constitute an event of default  thereunder  and may permit the lenders to
accelerate  the  indebtedness  outstanding  under the Bank  Facility  and demand
immediate payment thereof.  In such event, the Company could be required to sell
certain oil and gas assets,  sell equity  securities or obtain  additional  bank
financing.  No assurance can be given that such  transactions can be consummated
on terms  acceptable  to the  Company  or its  lenders,  whose  approval  may be
required.  In this  situation,  if the Company is unable to raise the  necessary
funds,  the  Company  could  become  in  default  on  the  full  amount  of  its
indebtedness,  which includes the Senior Notes.  The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility.  Due to the restrictive covenants and borrowing
base limitations  imposed by the Bank Facility the Company is evaluating several
alternative  sources of funding to improve its current  liquidity and to provide
resources for continued reserve growth.

                                       13

<PAGE>

 Property Acquisition

     On May 14, 1998 the Company  entered  into a definitive  agreement  with BP
Exploration  and Oil, Inc. (the "BP  Acquisition")  to acquire BP's 100% working
interest  in East  Breaks  Blocks 165 and 209 and 75%  working  interest in High
Island Block 587. The  acquisition  was accounted for using the purchase  method
and closed on May 26,  1998.  PANACO  became the  operator  of all three  blocks
effective June 1, 1998. The Company acquired the properties for $19.6 million in
cash.  Included in the  acquisition is the production  platform,  located in 863
feet of water in East Breaks Block 165. The Company also acquired 31.72 miles of
12" pipeline,  with capacity of over 20,000  barrels of oil per day,  which ties
the  production  platform  to the High  Island  Pipeline  System,  the major oil
transportation  system  in the  area.  It also  acquired  9.3  miles  of 12 3/4"
pipeline, which ties the production platform to the High Island Offshore System,
the major gas transportation system in the area.


Senior Note offering

     On October 9, 1997, the Company issued $100.0 million  principal  amount of
10 5/8%  Senior  Notes due  October  1, 2004.  Interest  on the Notes is payable
semi-annually  in  arrears on each April 1 and  October 1,  commencing  April 1,
1998.  Of the  $96.2  million  net  proceeds,  $55.5  million  was used to repay
substantially all of the Company's  outstanding  indebtedness with the remaining
$40.7 million used for capital  expenditures  and the BP Acquisition.

Commodity price hedges

     In 1999 the  Company's  natural  gas  hedge  transactions  are  based  upon
published  gas  pipeline  index  prices.  The  Company has natural gas hedged in
quantities  ranging from 7,300 to 37,300 MMbtu per day in each month in 1999 for
a total of 8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per
MMbtu, for a NYMEX equivalent of approximately  $2.14 per MMbtu. The Company has
hedged 218 MMbtu for each day in 2000 at an average pipeline index swap price of
$1.87.

     The Company has hedged a total of 540,000 bbls of oil in 1999 at an average
NYMEX West Texas  Intermediate  equivalent  floor  price of $15.34 per bbl.  The
number of hedged bbls per day ranges from 232 to 2,232. Of the oil hedged, 1,000
bbls per day have a floor  price of $15.00 per bbl and a cap price of $19.12 per
bbl and  another  1,000 bbls per day have a floor  price of $15.00 per bbl and a
cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed the cap price
for the period in which the Company has a cap price in effect,  the Company must
pay the difference to the company that effected the swap for the total number of
bbls  hedged.  The Company has hedged 232 Bbls of oil for each day in 2000 at an
average price of $17.35 per Bbl.

     On December 31, 1998 the Company's open hedge positions had fair values, or
estimated future gains, of $1.8 million, to be realized over the periods hedged.
Due to increases in NYMEX future  commodity  prices since the inception  date of
the  respective  hedge  agreements,  as of September 30, 1999, the fair value of
these  agreements  is a $2.1 million loss. A 10% increase in oil and natural gas
prices would increase this loss to $3.1 million.

     The Company produces and sells natural gas, oil and natural gas liquids. As
a result,  its  financial  results can be  significantly  affected by changes in
these commodity  prices.  The Company uses derivative  financial  instruments to
hedge its exposure to changes in the market price of natural gas and oil.  While
commodity financial instruments are intended to reduce the Company's exposure to
declines in these market prices,  the commodity  financial  instruments may also
limit the Company's  gains from increases in the market price of natural gas and
oil.  As a result,  gains and  losses on  commodity  financial  instruments  are
generally  offset by similar  changes in the realized  prices of natural gas and

                                       14

<PAGE>

oil.  Gains or losses on these  transactions  are  recognized in the  production
month  to  which a hedge  contract  relates.

Restricted  deposits

     Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against  satisfaction of its
eventual  responsibility  to plug and abandon wells and remove  structures  when
certain  fields no longer  produce oil and gas.  The Company has entered into an
escrow agreement with Amoco Production Company under which the Company deposits,
for the life of the fields,  in a bank escrow  account ten percent  (10%) of the
net cash flow,  as  defined in the  agreement,  from the Amoco  properties.  The
Company has  established the "PANACO East Breaks 110 Platform Trust" in favor of
the Minerals  Management  Service of the U.S.  Department of the Interior.  This
trust  required an initial  funding of $846,720 in December  1996, and remaining
deposits of $244,320  due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of $2.4 million.  In connection with
the BP Acquisition, the Company deposited $1.0 million into an escrow account on
July 1, 1998. On the first day of each quarter thereafter,  the Company deposits
$250,000 into the escrow account until the balance in the escrow account reaches
$6.5  million.  In  addition,  the Company has $9.3  million in surety  bonds to
secure its plugging and abandonment operations.

Capital expenditures

     Capital  expenditures  totaled  $17.9  million for the first nine months of
1999,  which  represents  a 67%  decrease  from the  $54.8  million  of  capital
expenditures incurred in the comparable period of 1998. The capital expenditures
incurred  in 1999 were  primarily  for the  development  of the East  Breaks 165
Field,  which was acquired in May 1998, and property  acquisition and well costs
incurred in the Price Lake Field  (Stallion  prospect)  and North  Cowards Gully
Field.  These  expenditures  were  funded  with cash flows from  operations  and
borrowings under the Bank Facility, accounting for the $29.1 million increase in
debt outstanding at September 30, 1999. The decrease in capital  expenditures is
primarily due to the decrease in  availability  of capital  resources from lower
commodity prices.  The Company's total capital budget for 1999 is $25.0 million,
the majority of which has already been expended or committed to spend.

Property  sales

     The Company began a program in 1999 to sell its non-core properties to fund
capital  expenditures  and  allow  it to  concentrate  its  resources  on  those
properties  upon which  management  believes will provide better returns and add
more  value  to  its  shareholders.  These  properties  are  primarily  onshore,
non-operated  properties in which the Company has small  ownership  percentages.
During the third quarter of 1999 the Company  received sales  proceeds  totaling
$378,000 and estimates  that it will receive an additional  $375,000 to $700,000
during the remainder of 1999.

Results of Operations

For the nine months ended September 30, 1999 and 1998:

     "Oil and natural gas sales" decreased 22% for the first nine months of 1999
primarily  due to a 24%  decrease in total  production.  Natural gas  production
decreased 42% in 1999 while oil production  increased 44%.

                                       15

<PAGE>

     Production. Natural gas production decreased 42%, to 8.4 billion cubic feet
("Bcf") in 1999,  from 14.3 Bcf in 1998. The West Delta Fields,  the High Island
309 Fields and the  Umbrella  Point  Field  accounted  for the  majority  of the
decrease.  West Delta  production  decreased 1.6 Bcf due to shut-ins  earlier in
1999 while the pipeline  owned by Tennessee Gas Pipeline was repaired along with
the  natural  production  decline  of the  wells.  High  Island  309  production
decreased 3.5 Bcf from 1998 also due to natural production  declines,  which was
further  complicated by compressor  problems on both the High Island 309 and 310
platforms.  Also,  production  from the Umbrella Point Field was  accelerated in
1998 with the successful  completion of the SL 74#10 well in January 1998.  This
well produced as much as 27 MMcf per day in 1998 and has reduced since then. The
change in production  from 1998 was a reduction of 1.2 Bcf. These decreases were
somewhat offset by an addition of 1.2 Bcf for the first nine months of 1999 from
the East Breaks 165 Fields.  The Fields were  acquired in May 1998 and  produced
for a full nine months in 1999.

     Oil  production  increased  44% in 1999 to 863,000  barrels,  from  601,000
barrels in 1998. The significant  factor in the increased oil production was the
acquisition of the East Breaks 165 Field in May 1998,  which is primarily an oil
field.

     Prices.  Average  natural  gas  prices,  including  the  impacts of hedging
transactions, decreased 7% in 1999, from $2.05 per Mcf in 1998 to $1.90 in 1999.
The Company  recognized  $2.0  million in natural gas hedge losses in 1999 which
had the effect of  decreasing  the natural gas price  realized by $0.24 per Mcf.
During 1998, a gain of $0.5 million was recognized,  which increased the average
price  received by $0.03.  The  Company  has  natural  gas hedged in  quantities
ranging  from 7,300 to 37,300 MMbtu per day in each month in 1999 for a total of
8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per MMbtu, for
a NYMEX  equivalent  of  approximately  $2.14 per  MMbtu.

     Average  oil  prices,   including  the  impacts  of  hedging  transactions,
increased  8%, to $16.27 per barrel,  from $15.05 per barrel in 1998.  Oil hedge
losses of $0.5 million in 1999 had the effect of decreasing  the average net oil
price  realized  by $0.63 per  barrel,  while the  average  price per barrel was
increased  by $2.26 in 1998 with hedge  gains of $1.4  million.  The Company has
hedged a total of  540,000  bbls of oil in 1999 at an  average  NYMEX West Texas
Intermediate equivalent floor price of $15.34 per bbl. The number of hedged bbls
per day ranges from 232 to 2,232.  Of the oil hedged,  1,000 bbls per day have a
floor  price of $15.00  per bbl and a cap price of  $19.12  per bbl and  another
1,000  bbls per day  have a floor  price of  $15.00  per bbl and a cap  price of
$17.50  per bbl.  If the NYMEX  equivalent  prices  exceed the cap price for the
period in which the Company has a cap price in effect,  the Company must pay the
difference  to the company  that  effected the swap for the total number of bbls
hedged.

     "Lease  operating  expense"  decreased  $0.9 million or 7% in 1999.  Due to
lower production,  these expenses increased to 41% of oil and natural gas sales,
from 35% in 1998. On an Mcf equivalent  ("Mcfe") basis, lease operating expenses
also increased from $0.74 in 1998 to $0.91 in 1999.

     "Depletion,  depreciation and amortization"  decreased $6.4 million in part
due to a lower unit of production  cost in 1999, in conjunction  with a decrease
in  production.  The  amount per Mcfe  decreased  from $1.39 in 1998 to $1.36 in
1999.

     "General and  administrative  expense" decreased $281,000 in 1999 primarily
due to a  provision  for bad  debts  incurred  in 1998 and cost  savings  from a
consolidation  of offices,  offset somewhat by an increase in outside legal fees
incurred in connection  with various  corporate  legal matters  during the first
quarter of 1999. The Company resolved several of these matters during the second
quarter and  anticipates  a reduction  in these fees for the  remainder of 1999.

                                       16

<PAGE>

     "Exploratory  dry hole expense"  decreased $4.9 million in 1999 as a result
of the Company's  decreased  exploratory  well  participation in 1999. While the
Company  believes  that  its  continued  participation  in a  modest  amount  of
exploratory  activities is an important factor in increasing  shareholder value,
the amount  budgeted for 1999 is  significantly  less than that incurred  during
1998.

     "Impairment of oil and gas properties" is a result of the Company's regular
review of the  recoverability  of the property costs incurred from the estimated
future net cash flows related to those assets.  The impairment  incurred in 1999
is a result of the decision by the Company to not develop the unproved  reserves
on  those  properties  that had  been  allocated  unproved  property  values  in
connection with acquisitions made in 1996 and 1997.

     "Geological  and  geophysical  expense"  decreased  in 1999 as a result  of
reduced  seismic  acquisition  costs  and  lower  salaries  and  contract  labor
expenses.

     "Interest income" decreased  primarily due to a decrease in cash on hand in
1999 versus the comparable  period of 1998.  The interest  income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October  1997.  These excess  proceeds  were  utilized in May 1998 for the BP
Acquisition.

     "Interest expense"  increased due to higher average borrowings  outstanding
under the Bank  Facility  primarily  for  capital  expenditures.

     "Extraordinary   Item-Loss  on  early  retirement  of  debt"  reflects  the
replacement of the Company's revolving credit facility prior to its maturity and
the resulting write-off of the remaining  associated deferred costs.

     "Income tax benefit" decreased in 1999 due to the complete elimination of a
deferred  income tax liability  recorded in connection  with an  acquisition  in
1997. The Company has not recorded a deferred  income tax asset to date based on
uncertainty  regarding  its  future  utilization  of over  $40.2  million in net
operating loss carryforwards.

For the three months ended  September  30, 1999 and 1998:

     "Oil and natural gas sales" decreased 28% for the third quarter of 1999 due
to a 41% decrease in total production.  Natural gas production  decreased 59% in
1999 while oil  production  increased  12%.

     Production.  Natural gas production decreased 59%, to 2.1 Bcf in 1999, from
5.0 Bcf in 1998.  Production  declines as discussed  above in the Umbrella Point
Field (1.4 Bcf);  the High Island 309 Fields (1.1 Bcf) and the West Delta Fields
(0.5 Bcf) accounted for the majority of the decrease.  Successful development of
the East Breaks 165 Fields  increased  natural gas  production by 0.3 Bcf during
the third  quarter of 1999.  In addition,  production  from the West Cameron 172
Field and Ship Shoal 111 Field, two successful  exploratory  discoveries in late
1998, added 0.3 Bcf of new natural gas production in 1999 versus the same period
in 1998.

     Oil  production  increased  12% in 1999 to 312,000  barrels,  from  280,000
barrels in 1998. The primary factor in the increased oil production was also the
successful  development of the East Breaks 165 Fields.

     Prices.  Average  natural  gas  prices,  including  the  impacts of hedging
transactions, increased 2% in 1999, from $2.02 per Mcf in 1998 to $2.06 in 1999.
The Company recognized natural gas hedge losses of $1.8 million in 1999 that had
the effect of  decreasing  the  natural gas price  realized by $0.86  during the

                                       17

<PAGE>

third quarter. Hedge gains of $0.6 million increased the price realized by $0.12
per Mcf during the third quarter of 1998.  The Company has natural gas hedged in
quantities  ranging from 7,300 to 37,300 MMbtu per day in each month in 1999 for
a total of 8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per
MMbtu,  for a NYMEX  equivalent of  approximately  $2.14 per MMbtu.

     Average  oil  prices,   including  the  impacts  of  hedging  transactions,
increased  32%, to $18.91 per barrel,  from $14.29 per barrel in 1998.  The 1999
oil  hedge  program  had the  effect of  decreasing  the  average  net oil price
realized by $2.05 per barrel with total hedge losses of $0.6 million.  Oil hedge
gains in 1998  increased  the average  realized  price by $2.01 per barrel.  The
Company  hedged a total of 540,000 bbls of oil in 1999 at an average  NYMEX West
Texas  Intermediate  equivalent  floor  price of $15.34  per bbl.  The number of
hedged bbls per day ranges from 232 to 2,232. Of the oil hedged,  1,000 bbls per
day have a floor  price of $15.00  per bbl and a cap price of $19.12 per bbl and
another  1,000 bbls per day have a floor price of $15.00 per bbl and a cap price
of $17.50 per bbl. If the NYMEX  equivalent  prices exceed the cap price for the
period in which the Company has a cap price in effect,  the Company must pay the
difference  to the company  that  effected the swap for the total number of bbls
hedged.

     "Lease  operating  expense"  decreased  $0.7 million or 14% in 1999. Due to
lower production,  however,  lease operating expense increased to 39% of oil and
natural gas sales,  from 33% in 1998.  On an Mcfe  basis,  these  expenses  also
increased  from  $0.69 in 1998 to $1.01 in 1999.

     "Depletion,   depreciation   and   amortization"   decreased  $2.8  million
principally  due to  lower  production  in 1999.  The  cost  per Mcfe  increased
slightly,  from $1.34 in 1998 to $1.56 in 1999.

     "Exploratory  dry hole expense"  decreased $0.8 million in 1999 as a result
of the Company's  decreased  exploratory  well  participation in 1999. While the
Company  believes  that  its  continued  participation  in a  modest  amount  of
exploratory  activities is an important factor in increasing  shareholder value,
the amount  budgeted for 1999 is  significantly  less than that incurred  during
1998.

     "Impairment of oil and gas properties" is a result of the Company's regular
review of the  recoverability  of the property costs incurred from the estimated
future net cash flows related to those assets.  The impairment  incurred in 1999
is a result of the decision by the Company to not develop the unproved  reserves
on  those  properties  that had  been  allocated  unproved  property  values  in
connection with acquisitions made in 1996 and 1997.

     "Geological  and  geophysical  expense"  decreased  in 1999 as a result  of
reduced  seismic  acquisition  costs  and  lower  salaries  and  contract  labor
expenses.

     "Interest income" decreased  primarily due to a decrease in cash on hand in
1999 versus the comparable  period of 1998.  The interest  income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October 1997.

     "Interest expense"  increased due to higher average borrowings  outstanding
under the Bank  Facility  primarily  for  capital  expenditures.

     "Extraordinary   Item-Loss  on  early  retirement  of  debt"  reflects  the
replacement of the Company's revolving credit facility prior to its maturity and
the resulting write-off of the remaining associated deferred costs.

                                       18

<PAGE>

Year 2000 Issue

     The various problems that may result from the use of date codes in software
and other  machinery  is referred  to as the "Year 2000  Issue." The once common
practice  of using a  two-digit  identifier  for the year in a date may  cause a
program  or system to become  faulty or  inoperative  on or prior to  January 1,
2000.  This document  serves as an  informational  disclosure  regarding the Y2K
assessment  activities  for the  Company  under  the Year 2000  Information  and
Readiness  Disclosure Act of 1998.

     The Company established a program during 1998 to ensure that, to the extent
reasonably possible, all systems are or will be Year 2000 ready prior to the end
of 1999. The Year 2000 Program ("Y2K Program"),  designed with the assistance of
an outside  consultant,  consists of five phases: (a) Assessment -which includes
compiling an inventory of assets, including significant third-party supplier and
customer relationships, (b) Repair/Upgrade/Replace -including an analysis of the
assets to determine  compliance or  non-compliance  and repairing,  upgrading or
replacing those that are non-compliant,  (c) Compliance Testing, (d) Contingency
Planning,  and  (e)  Roll-over  Planning.

     A team  consisting of the  Company's  managers of  Information  Technology,
Finance and Operations has been established as the Year 2000 Compliance  Project
Team.  With the assistance of its outside  consultant,  the Team has designed an
aggressive schedule to identify information  technology ("IT") and non-IT assets
requiring readiness upgrades, and a timetable for performance and testing of the
affected  systems.  In  addition,  the  Y2K  Program  calls  for  validation  of
compliance by significant  suppliers and customers.

     Once  identified,  detailed  remediation  steps will be scheduled to ensure
that internal systems and significant  external suppliers and customers meet Y2K
compatibility  requirements,  or that sufficient contingency plans are in place.

Current Status

     As of November  1999, the Company's  Year 2000  assessment is complete.  An
inventory of computing,  communications  and facility  systems has been prepared
and validated.  Significant  third-party  suppliers and customers have also been
identified for validation.

     The Company has completed the inventory for both its IT and non-IT systems.
The Y2K Program  called for the  completion of all phases for both IT and non-IT
systems by year-end 1999. It did not identify any mission  critical systems that
were not Y2K compliant.

     The Company has performed a review of  significant  third party  suppliers,
customers and purchasers and, where available, is surveying the public Year 2000
statements issued by them.  Additionally,  it has sent questionnaires to certain
third party  suppliers  and customers  requesting  information  regarding  their
vulnerability  to  Year  2000  issues.  The  Company  has  received  appropriate
responses to these  inquiries  and has  evaluated  the responses to determine if
alternate  business  actions will be  necessary.  Management  believes  that its
mission critical vendors are prepared for the Year 2000 issue.

Costs

     The  estimated  total  costs  for Y2K  readiness  has been  nominal.  It is
anticipated  that such costs for  complete  Y2K  readiness  will  continue to be
nominal. In addition,  there have been no material capital  expenditures for Y2K
and there is not  anticipated  to be  material  capital  expenditures,  as it is
believed at this point that most major  critical  field  operations  do not have
date sensitive  equipment.  The Company does not  separately  track the internal

                                       19

<PAGE>

costs  incurred  for the Y2K project as such costs are  principally  the related
payroll costs for its  information  systems  group.  Remediation  and testing is
scheduled to be completed during the 4th quarter of 1999.

Contingency Plans

     The Company has  implemented  contingency  plans for what it believes to be
any potential  problems that may arise including  safety and platform  operation
plans.  The Company also maintains  insurance for loss of revenues and potential
legal proceedings against the Company.

Risks

     The failure to correct a Year 2000 problem could result in the interruption
or failure of certain  normal  business  activities or  operations.  The Company
believes that the greatest risks lie in its (a) financial systems  applications,
(b) embedded chips in field equipment, (c) and third parties. A significant Year
2000-related  disruption in these systems could disrupt financial and accounting
functions, crude oil and natural gas production,  transportation,  and marketing
activities.  This  disruption  could  have  a  material  adverse  effect  on the
Company's operating results and liquidity.

     The Company is not presently aware of any Year 2000 issue that is likely to
result in any  disruption.  Although  there is inherent  uncertainty in the Year
2000 issue,  the Company  expects  that its Y2K Program has reduced the level of
uncertainty about the impact of the Year 2000 issue.

Conclusion and Disclaimers

     These estimates and conclusions contain forward-looking  statements and are
based on  management's  best estimates of future events.  PANACO's  expectations
about  risks,  future  costs,  and  the  timely  completion  of  its  Year  2000
remediation  are subject to  uncertainties  that could cause  actual  results to
differ  materially  from the statements made in this readiness  disclosure.

     The Company  believes  that its greatest risk from the Year 2000 Issue is a
failure by a third party supplier, pipeline, etc., to be Y2K compliant. Although
it has taken all of the steps it believes are  necessary  to insure  against it,
these failures could materially disrupt its operations and financial  condition.
There can be no assurances  that the steps it has taken,  including  contingency
plans put in place,  will  prevent  such a  disruption.

Changes in Accounting Principles

     Accounting  for  Derivatives  Statement of Financial  Accounting  Standards
("SFAS")  No.  133,  "Accounting  for  Derivative  Instruments  and for  Hedging
Activities,"  provides  guidance for accounting for derivative  instruments  and
hedging  activities.  In July 1999,  SFAS No.  137  "Deferring  Statement  133's
Effective  Date,"  was issued which delays the  effective  date for one year, to
fiscal years beginning after June 15, 2000. The Company has not yet completed an
evaluation of the impact of the provisions of SFAS No. 133.

                                       20

<PAGE>

Other Contingencies

     The Company is subject to various legal  proceedings and claims which arise
in the ordinary course of business. In the opinion of management,  the amount of
liability, if any, with the respect to these actions would not materially affect
the financial position of the Company or its results of operation.

     An action was filed against the Company,  Exxon Pipeline Company ("Exxon"),
National  Energy  Group,  Inc.  ("NEG"),  Mendoza  Marine,  Inc.,  Shell Western
Exploration  &  Production,  Inc.  ("Shell")  and the  Louisiana  Department  of
Transportation  and  Development.  The petition  was filed in August  1998,  and
alleges  that,  in 1997 and  perhaps  earlier,  leaks  from a buried  crude  oil
pipeline  contaminated  the plaintiff's  property.

     Pursuant to the  purchase and sale  agreement  between the Company and NEG,
NEG is required to indemnify the Company from any damages  attributable to NEG's
operations  on the  property  after  the sale.  However,  NEG is in  Chapter  11
bankruptcy proceedings, and so any action by the Company to assert its indemnity
rights  against NEG is currently  stayed.  Counsel for the Company have prepared
and may file a  motion  to lift the stay so that  the  Company  may  assert  its
indemnification  rights  against NEG. But even if the Company is  successful  in
proving  its  right to  indemnity,  NEG's  judgementworthiness  is  questionable
because of the bankruptcy.

     Pursuant  to another  purchase  and sale  agreement,  the  Company  may owe
indemnity to Shell and Exxon,  from which it had acquired the property  prior to
selling  same to NEG.  The Company may have  insurance  coverage  for the claims
asserted in the petition, and has notified or is in the process of notifying all
insurance  carriers  that might  provide  coverage  under their  policies.  Some
discovery  has  occurred  in  the  case,  but  discovery  is not  yet  complete.
Therefore,  at this point it is not  possible to evaluate the  likelihood  of an
unfavorable outcome, or to estimate the amount or range of potential loss.

                                       21

<PAGE>

PART II                         OTHER INFORMATION

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits

         10.25                Amended  and  Restated  Loan and  Security
                              Agreement by and between PANACO,  Inc. and PANACO
                              Production Company as Borrowers, and The Financial
                              Institutions Named  Herein as the  Lenders,  and
                              Foothill Capital Corporation as Agent.

         27                   Financial Date Schedule

     (b) Reports on Form 8-K

         None
                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                  PANACO, Inc.


Date:  November  12,  1999              /s/ Todd R. Bart
       -------------------              ---------------------------------------
                                        Todd R. Bart,  Chief  Financial Officer

<PAGE>






===============================================================================


Exhibit 10.25


                AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

                                 by and between

                                  PANACO, INC.

                                      and

                           PANACO PRODUCTION COMPANY

                                 as Borrowers,

                                      and

                    THE FINANCIAL INSTITUTIONS NAMED HEREIN

                                as the Lenders,

                                      and

                          FOOTHILL CAPITAL CORPORATION

                                    as Agent

                         Dated as of September 30, 1999



===============================================================================
<PAGE>


                               TABLE OF CONTENTS

                                                                         Page(s)

1.   DEFINITIONS AND CONSTRUCTION.............................................2
     1.1    Definitions.......................................................2
     1.2    Accounting Terms.................................................27
     1.3    Code.............................................................27
     1.4    Construction.....................................................27
     1.5    Schedules and Exhibits...........................................27
     1.6    The Term "Borrower" or "Borrowers"...............................27
2.   LOAN AND TERMS OF PAYMENT...............................................28
     2.1    Revolving Advances...............................................28
     2.2    Letter of Credit Subfacility.....................................35
     2.3    Hedging Arrangement Subfacility..................................39
     2.4    Payments.........................................................43
     2.5    Overadvances.....................................................44
     2.6    Interest and Letter of Credit Fees:  Rates, Payments, and
            Calculations.....................................................44
     2.7    Collection of Accounts...........................................46
     2.8    Crediting Payments; Application of Collections...................48
     2.9    Designated Account...............................................49
     2.10   Maintenance of Loan Account; Statements of Obligations...........49
     2.11   Fees.............................................................49
     2.12   Joint and Several Liability; Rights of Contribution..............50
3.   CONDITIONS; TERM OF AGREEMENT...........................................51
     3.1    Conditions Precedent to the Initial Advance, Letter of Credit
            and Hedging Agreement Undertaking................................51
     3.2    Conditions Precedent to all Advances, all Letters of Credit
            and all Hedging Arrangements.....................................56
     3.3    Condition Subsequent.............................................57
     3.4    Term; Automatic Renewal..........................................57
     3.5    Effect of Termination............................................58
     3.6    Early Termination by Borrower....................................58
     3.7    Termination Upon Event of Default................................59
4.   CREATION OF SECURITY INTEREST...........................................59
     4.1    Grant of Security Interest.......................................59
     4.2    Negotiable Collateral............................................59
     4.3    Collection of Accounts, General Intangibles, and Negotiable
            Collateral.......................................................59
     4.4    Delivery of Additional Documentation Required....................60
     4.5    Power of Attorney................................................60
     4.6    Right to Inspect.................................................60
     4.7    Control Agreements...............................................61
5.   REPRESENTATIONS AND WARRANTIES..........................................61
     5.1    No Encumbrances..................................................61
     5.2    Eligible Proved Reserves; Ownership of Oil and Gas Properties....61

                                      (i)

<PAGE>


     5.3    Operations of Oil and Gas Properties.............................63
     5.4    Equipment........................................................63
     5.5    Location of Inventory and Equipment..............................63
     5.6    Oil and Gas Property Collateral Records and Inventory Records....64
     5.7    Location of Chief Executive Office; FEIN.........................64
     5.8    Due Organization and Qualification; Subsidiaries.................64
     5.9    Due Authorization; No Conflict...................................65
     5.10   Claims, Disputes, and Litigation.................................66
     5.11   No Material Adverse Change.......................................66
     5.12   No Fraudulent Transfer...........................................66
     5.13   Employee Benefits................................................67
     5.14   Environmental Condition..........................................67
     5.15   Compliance with the Law..........................................68
     5.16   Insurance........................................................68
     5.17   Hedging Agreement................................................69
     5.18   Brokerage Fees...................................................69
     5.19   Permits and other Intellectual Property..........................69
     5.20   Year 2000 Compatibility..........................................70
     5.21   Locations; Leases................................................70
     5.22   Absence of Certain Changes.......................................70
     5.23   Operating Costs..................................................71
     5.24   Imbalances.......................................................71
     5.25   No Default.......................................................71
     5.26   Leases...........................................................71
     5.27   Marketing Agreements.............................................72
     5.28   Non-Consent Operations...........................................72
     5.29   Condition of Equipment...........................................72
     5.30   Wells............................................................72
6.   AFFIRMATIVE COVENANTS...................................................72
     6.1    Accounting System................................................72
     6.2    Collateral Reporting.............................................73
     6.3    Financial Statements, Reports, Certificates......................75
     6.4    Tax Returns......................................................76
     6.5    Guarantor Reports................................................76
     6.6    [Intentionally Omitted]..........................................76
     6.7    Title to Equipment...............................................76
     6.8    Maintenance of Oil and Gas Property Collateral and Equipment;
            Operation of Business............................................76
     6.9    Taxes............................................................78
     6.10   Insurance........................................................78
     6.11   No Setoffs or Counterclaims......................................79
     6.12   Location of Inventory and Equipment..............................80
     6.13   Compliance with Laws.............................................80
     6.14   Employee Benefits................................................80
     6.15   Leases...........................................................81

                                      (ii)

<PAGE>

     6.16   Broker Commissions...............................................81
     6.17.  Oil and Gas Property Title Information...........................82
     6.18   Additional Collateral............................................82
     6.19   Hedging Agreements...............................................83
     6.20   Further Assurances...............................................83
7.   NEGATIVE COVENANTS......................................................83
     7.1    Indebtedness.....................................................84
     7.2    Liens............................................................85
     7.3    Restrictions on Fundamental Changes..............................85
     7.4    Disposal of Assets...............................................85
     7.5    Change Name......................................................86
     7.6    Guarantee........................................................86
     7.7    Nature of Business...............................................86
     7.8    Prepayments and Amendments.......................................86
     7.9    Change of Control................................................86
     7.10   Consignments.....................................................86
     7.11   Distributions; Repurchases of Capital Stock......................87
     7.12   Accounting Methods...............................................87
     7.13   Investments......................................................87
     7.14   Transactions with Affiliates.....................................87
     7.15   Suspension.......................................................87
     7.16   Compensation.....................................................87
     7.17   Use of Proceeds..................................................88
     7.18   Change in Location of Chief Executive Offices; Inventory and
            Equipment........................................................88
     7.19   No Prohibited Transactions Under ERISA...........................88
     7.20   Financial Covenants..............................................89
     7.21   Capital Expenditures.............................................89
     7.22   Securities Accounts..............................................90
     7.22   Securities Accounts..............................................90
     7.24   Limited Business of with Atlantic and GAC........................90
8.   EVENTS OF DEFAULT.......................................................90
9.   THE LENDER GROUP'S RIGHTS AND REMEDIES..................................92
     9.1    Rights and Remedies..............................................92
     9.2    Remedies Cumulative..............................................94
10.  TAXES AND EXPENSES......................................................94
11.  WAIVERS; INDEMNIFICATION................................................95
     11.1   Demand; Protest; etc.............................................95
     11.2   The Lender Group's Liability for Collateral......................95
     11.3   Indemnification..................................................95
12.  NOTICES.................................................................95
13.  Choice Of Law And Venue; Jury Trial Waiver..............................95
14.  DESTRUCTION OF BORROWER'S DOCUMENTS.....................................95
15.  ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..............................95
     15.1   Assignments and Participations...................................95
     15.2   Successors.......................................................95

                                     (iii)

<PAGE>
16.  AMENDMENTS; WAIVERS.....................................................95
     16.1   Amendments and Waivers...........................................95
     16.2   No Waivers; Cumulative Remedies..................................95
17.  AGENT; THE LENDER GROUP.................................................95
     17.1   Appointment and Authorization of Agent...........................95
     17.2   Delegation of Duties.............................................95
     17.3   Liability of Agent...............................................95
     17.4   Reliance by Agent................................................95
     17.5   Notice of Default or Event of Default............................95
     17.6   Credit Decision..................................................95
     17.7   Costs and Expenses; Indemnification..............................95
     17.8   Agent in Individual Capacity.....................................95
     17.9   Successor Agent..................................................95
     17.10  Withholding Tax..................................................95
     17.11  Collateral Matters...............................................95
     17.12  Restrictions on Actions by Lenders; Sharing of Payments..........95
     17.13  Agency for Perfection............................................95
     17.14  Payments by Agent to the Lenders.................................95
     17.15  Concerning the Collateral and Related Loan Documents.............95
     17.16  Field Audits and Examination Reports; Confidentiality; Disclaimers
            by Lenders; Other Reports and Information........................95
     17.17  Several Obligations; No Liability................................95
18.  GENERAL PROVISIONS......................................................95
     18.1   Effectiveness....................................................95
     18.2   Section Headings.................................................95
     18.3   Interpretation...................................................95
     18.4   Severability of Provisions.......................................95
     18.5   Amendments in Writing............................................95
     18.6   Counterparts; Telefacsimile Execution............................95
     18.7   Revival and Reinstatement of Obligations.........................95
     18.8   Integration......................................................95
     18.9   Amendment and Restatement; Release...............................95

                                      (iv)

<PAGE>
                             SCHEDULES AND EXHIBITS

Schedule A-1        Definition of Adjusted Consolidated Net Tangible Assets
Schedule C-1        Commitments
Schedule P-1        Permitted Liens
Schedule 2.7        Initial Collection Account Banks
Schedule 3.1(c)(iv) Oil and Gas Properties to be Covered by Oil and Gas
                    Property Mortgages at the Closing Date
Schedule 3.3(b)     Properties to which Section 3.3(b) Conditions Subsequent
                    Apply
Schedule 3.3(c)     Properties to which Section 3.3(c) Conditions Subsequent
                    Apply
Schedule 5.1(a)     Certain Owned Oil and Gas Properties
Schedule 5.1(b)     Net Revenue Interest
Schedule 5.1(c)     Material Contract Rights & Obligations
Schedule 5.1(d)     Non-Leasehold Asset Ownership
Schedule 5.2(e)     Imbalances in Gas Production or "Take or Pay" Payments
Schedule 5.3        Operations of Mineral Interests
Schedule 5.8        Capital Stock/Subsidiaries
Schedule 5.10       Litigation
Schedule 5.13       ERISA Benefit Plans
Schedule 5.16       Insurance
Schedule 5.17       Hedging Agreements
Schedule 5.19       Permits and Other Intellectual Property
Schedule 5.20       Y2K Compliance Timeline
Schedule 5.21       Certain Additional Locations of Collateral
Schedule 5.27       Certain Marketing Agreements
Schedule 6.12       Location of Inventory and Equipment
Schedule 7.1        Permitted Other Indebtedness
Schedule 7.4        Certain Oil and Gas Properties Borrower Intends to Sell
Exhibit A-1         Form of Agreement and Acceptance
Exhibit C-1         Form of Compliance Certificate
Exhibit P-1, 2 & 3  Forms of Prior Lenders Assignment Agreements
Exhibit T-1         Form of Transfer Order Letters
Exhibit 3.3         Mortgages, Opinions, Certificates and Certain Other
                    Required Items and Information
Exhibit 3.3(e)      MMS/PANACO Correspondence (East Breaks 165)
Exhibit 6.2         Form of Borrowing Base Certificate

                                      (v)

<PAGE>

                AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

     THIS AMENDED AND RESTATED LOAN AND SECURITY  AGREEMENT (this  "Agreement"),
is entered  into as of  September  30, 1999,  among the  financial  institutions
listed on the signature pages hereof (such financial institutions, together with
their  respective  successors  and  assigns,  are referred to  hereinafter  each
individually as a "Lender" and collectively as the "Lenders"),  FOOTHILL CAPITAL
CORPORATION, a California corporation,  as agent for the Lenders ("Agent"), with
a place of business  located at 11111 Santa Monica  Boulevard,  Suite 1500,  Los
Angeles, California 90025-3333; PANACO, INC., a Delaware corporation ("Panaco"),
with its chief executive office located at 1100 Louisiana,  Suite 5100, Houston,
Texas 77002-5220;  and PANACO PRODUCTION  COMPANY, a Texas corporation  ("PPC"),
with its chief executive office located at 1100 Louisiana,  Suite 5100, Houston,
Texas 77002  (Panaco and PPC being  hereinafter  individually  and  collectively
referred to as "Borrower", as governed by Section 1.6).

                                    RECITALS

     A. Panaco,  certain  lenders (the "Prior  Lenders"),  First Union  National
Bank, as Administrative  Agent (the "Prior  Administrative  Agent"), and Paribas
(formerly  known  as  Banque  Paribas),   as  Documentation  Agent  (the  "Prior
Documentation  Agent"),  are parties to that certain Amended and Restated Credit
Agreement  dated as of  October  9,  1997,  as  amended  by that  certain  First
Amendment to Amended and Restated  Credit  Agreement,  dated  December 11, 1998,
that certain Second  Amendment to Amended and Restated Credit  Agreement,  dated
March 31, 1999, and that certain Third  Amendment to Amended and Restated Credit
Agreement,  dated June 30, 1999 (such credit agreement,  as amended,  the "Prior
Credit Agreement").

     B. Borrower has requested  that (i) the Lenders  assume the  obligations of
the Prior Lenders under the Prior Credit Agreement, (ii) Agent assume the agency
responsibilities of the Prior  Administrative  Agent and the Prior Documentation
Agent under the Prior Credit  Agreement,  and (iii) Agent and the Lenders  amend
and restate the Prior Credit  Agreement and make credit available to Borrower on
the terms and conditions  stated herein.  It is Borrower's  intention  that, for
purposes of the Unsecured Notes Indenture (as defined below), this Agreement and
the other Loan  Documents  (as defined  below)  replace and succeed,  but do not
constitute  a novation  of, the Prior Credit  Agreement  and thereby,  solely as
among Panaco and the other parties to the Unsecured Notes Indenture,  constitute
the Senior Credit Facility (as defined in the Unsecured Notes Indenture).

     C.  Contemporaneously  with the above transactions,  Agent is entering into
the Assignment and Acceptance  Agreement wherein the assignment of the rights of
the Prior Lenders to the Agent, on behalf of the Lenders,  is intended to be for
the ratable  benefit of the Lenders.

                                        1

<PAGE>

     D.  Agent and the  Lenders,  subject  to the terms  and  conditions  stated
herein,  are willing to amend and restate the Prior Credit Agreement and to make
such credit facilities available.

     NOW,  THEREFORE,  for good and  valuable  consideration,  the  receipt  and
sufficiency of which are acknowledged, the parties hereto agree as follows:

     1. DEFINITIONS AND CONSTRUCTION.

     1.1 As used in this Agreement, the following terms shall have the following
definitions:

     "Account Debtor" means any Person who is or who may become obligated under,
with respect to, or on account of, an Account.

     "Accounts"  means all currently  existing and hereafter  arising  accounts,
contract rights,  and all other forms of obligations owing to Borrower or any of
its Subsidiaries arising out of the sale or lease of goods,  Hydrocarbons or Oil
and Gas  Properties  or the  rendition  of  services  by  Borrower or any of its
Subsidiaries,  irrespective  of whether earned by  performance,  and any and all
credit insurance, guaranties, or security therefor.

     "Adjusted  Consolidated  Net Tangible Assets" has the meaning given to such
term in Schedule A-1. "Advances" has the meaning set forth in Section 2.1(a).

     "Affiliate"  means, as applied to any Person, any other Person who directly
or indirectly  controls,  is controlled by, is under common control with or is a
director or officer of such Person.  For purposes of this definition,  "control"
means the possession, directly or indirectly, of the power to vote 5% or more of
the securities having ordinary voting power for the election of directors or the
direct or  indirect  power to direct the  management  and  policies of a Person.

     "Agent"  means  Foothill,  solely in its capacity as agent for the Lenders,
and shall include any successor agent.

     "Agent Account" means an account at a bank designated by Agent from time to
time as the account into which Borrower shall make all payments to Agent for the
benefit of the Lender  Group,  and into  which the Lender  Group  shall make all
payments to Agent, under this Agreement and the other Loan Documents. Initially,
unless and until Agent  notifies  Borrower and the Lender Group to the contrary,
the Agent Account shall be that certain  deposit  account bearing account number
323-266193 and maintained by Agent with The Chase  Manhattan  Bank, N.A.,  4 New
York Plaza, 15th Floor, New York, New York 10004, ABA #021-000-021.

     "Agent  Advances"  has the  meaning set forth in Section  2.1(g).

                                       2
<PAGE>

     "Agent's  Liens" has the meaning set forth in Section  4.1.

     "Agent-Related  Persons" means Agent and any successor agent, together with
their respective Affiliates, and the officers,  directors,  employees,  counsel,
agents, and attorneys-in-fact of such Persons and their Affiliates.

     "Agreement" has the meaning set forth in the preamble hereto.
 "Arranging Institution" has the meaning set forth in Section 2.3(a).

     "Assignee"  has the  meaning  set forth in Section  15.1.

     "Assignment  and  Acceptance" has the meaning set forth in Section 15.1 and
shall be in the form of Exhibit A-1 attached hereto.

     "Atlantic" means Atlantic Offshore Insurance, Ltd., a Barbados corporation.
"Authorized Person" means any officer or other employee of Borrower.

     "Availability"  means the amount  that  Borrower  is  entitled to borrow as
Advances  under Section 2.1, such amount being the  difference  derived when (a)
the sum of the  principal  amount of  Advances  (including  Agent  Advances  and
Foothill  Loans) then  outstanding  (including any amounts that the Lender Group
may have paid for the account of Borrower  pursuant to any of the Loan Documents
and that have not been  reimbursed by Borrower) is subtracted from (b) the least
of (i) the Maximum  Revolving  Amount less the aggregate amount of all Letter of
Credit/Hedging  Arrangement  Usage,  or (ii)  the  Borrowing  Base  less (A) the
aggregate amount of all Letter of Credit/Hedging Arrangement Usage, less (B) the
aggregate  amount of the Reserves  Against  Availability  or (iii) the Unsecured
Note Indebtedness Limitation.

If the  Revolving  Facility  Usage is equal to or greater  than the least of the
Borrowing Base, the Maximum  Revolving Amount or the Unsecured Note Indebtedness
Limitation,  then the  Availability  is zero (-0-).

     "Average Unused Portion of Maximum  Revolving Amount" means, as of any date
of determination,  (a) the Maximum Revolving Amount, less (b) the sum of (i) the
average Daily Balance of Advances that were  outstanding  during the immediately
preceding  month,  plus  (ii)  the  average  Daily  Balance  of  the  Letter  of
Credit/Hedging Arrangement Usage during the immediately preceding month.

     "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. 101 et
seq.), as amended, and any successor statute.

     "Benefit Plan" means a "defined  benefit plan" (as defined in Section 3(35)
of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate
has been an "employer" (as defined in Section 3(5) of ERISA) within the past six
years.

                                       3

<PAGE>

     "Books" means all of  Borrower's  and its  Subsidiaries'  books and records
including:  ledgers; records indicating,  summarizing,  or evidencing Borrower's
and its  Subsidiaries'  properties  or  assets  (including  the  Collateral)  or
liabilities,  including but not limited to well logs and seismographic  reports;
all information relating to Borrower's and its Subsidiaries' business operations
or  financial  condition;  and  all  computer  programs,  disk  or  tape  files,
printouts, runs, or other computer prepared information.

     "Borrower" has the meaning set forth in the preamble to this Agreement.

     "Borrowing" means a borrowing hereunder  consisting of Advances made on the
same day by the Lenders to a Borrower,  or by Foothill in the case of a Foothill
Loan,  or by Agent in the case of an Agent  Advance.

     "Borrowing Base" has the meaning set forth in Section 2.1(a).

     "Borrowing Request" has the meaning set forth in Section 2.1(c).

     "Business Day" means any day that is not a Saturday,  Sunday,  or other day
on which national banks are authorized or required to close.

     "Change of Control"  shall be deemed to have occurred at such time as (a) a
"person" or "group"  (within the meaning of Sections  13(d) and  14(d)(2) of the
Securities  Exchange Act of 1934) becomes the "beneficial  owner" (as defined in
Rule 13d-3 under the Securities  Exchange Act of 1934),  directly or indirectly,
of more  than 30% of the  total  voting  power  of all  classes  of  stock  then
outstanding  of Panaco  entitled to vote in the  election of  directors or (b) a
"person" or "group"  (within the meaning of Sections  13(d) and  14(d)(2) of the
Securities  Exchange Act of 1934) other than Panaco becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Securities  Exchange Act of 1934),  directly
or indirectly, of any voting power of any class of stock then outstanding of GAC
or Atlantic  entitled to vote in the  election of directors or (c) a "person" or
"group"  (within the meaning of Sections  13(d) and  14(d)(2) of the  Securities
Exchange Act of 1934) other than Panaco or GAC becomes a "beneficial  owner" (as
defined in Rule 13d-3 under the  Securities  Exchange Act of 1934),  directly or
indirectly,  of any voting power of any class of stock then  outstanding  of PPC
entitled to vote in the election of directors.

     "Closing  Date"  means the date of the first to occur of the  making of the
initial  Advance or the issuance of the initial  Letter of Credit.  "Code" means
the New York Uniform Commercial Code.


     "Collateral"  means all of Borrower's right,  title, and interest in and to
each of the following:

                    (a)  the Accounts,

                                       4

<PAGE>

                    (b)  the Books,

                    (c)  the Equipment,

                    (d)  the General Intangibles,

                    (e)  the Inventory,

                    (f)  the Investment Property,

                    (g)  the Negotiable Collateral,

                    (h)  the Oil and Gas Properties,

                    (i)  any money,  or other  assets of Borrower  that now or
hereafter  come into the  possession,  custody,  or control of any member of the
Lender Group, and

                    (j)  the  proceeds  and  products,  whether  tangible  or
intangible,  of any of the foregoing,  including  proceeds of insurance covering
any or all of the Collateral,  and any and all Accounts,  the Books,  Equipment,
General Intangibles,  Inventory, Investment Property, Negotiable Collateral, Oil
and Gas Properties,  money,  deposit  accounts,  or other tangible or intangible
property resulting from the sale, exchange,  collection, or other disposition of
any of the  foregoing,  or any  portion  thereof or  interest  therein,  and the
proceeds thereof.

     "Collateral Access Agreement" means a landlord waiver or consent, mortgagee
waiver or consent, bailee letter, or a similar acknowledgement  agreement of any
warehouseman,  processor,  lessor,  consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the  Equipment,  Inventory,
or Oil and Gas Properties,  in each case, in form and substance  satisfactory to
Agent.

     "Collections" means all cash, checks, notes,  instruments,  and other items
of payment  (including,  insurance  proceeds,  proceeds  of cash  sales,  rental
proceeds,  and tax refunds).

     "Commitment"  means,  at any time with respect to a Lender,  the  principal
amount set forth beside such  Lender's  name under the heading  "Commitment"  on
Schedule C-1 attached  hereto or on the  signature  page of the  Assignment  and
Acceptance pursuant to which such Lender became a Lender hereunder in accordance
with the  provisions of  Section 15.1,  as such  Commitment may be adjusted from
time  to  time  in  accordance   with  the  provisions  of   Section 15.1,   and
"Commitments"  means,  collectively,  the aggregate amount of the commitments of
all of the Lenders.

     "Compliance  Certificate" means a certificate  substantially in the form of
Exhibit C-1 and delivered by the chief accounting  officer of Panaco,  on behalf
of Borrowers,  to Agent.

                                       5

<PAGE>


     "Consolidated  Current Assets" means, as of any date of determination,  the
aggregate  amount of all current  assets of Borrower  that would,  in accordance
with GAAP, be classified on a balance sheet as current assets.

     "Consolidated  Current Liabilities" means, as of any date of determination,
the  aggregate  amount of all current  liabilities  of Borrower  that would,  in
accordance  with GAAP, be classified on a balance sheet as current  liabilities.
For  purposes  of  this  definition,  all  Obligations  outstanding  under  this
Agreement  shall be deemed to be current  liabilities  without regard to whether
they would be deemed to be so under GAAP.

     "Consolidated  Net  Income"  shall mean with  respect to  Borrower  and its
Subsidiaries,  for any  period,  the  aggregate  of the net  income (or loss) of
Borrower  and its  Subsidiaries  after  allowances  for taxes  for such  period,
determined on a consolidated basis in accordance with GAAP;  provided that there
shall be  excluded  from  such net  income  (to the  extent  otherwise  included
therein) the  following:  (i) the net income of any Person in which  Borrower or
any of its  Subsidiaries  has an interest (which interest does not cause the net
income of such other Person to be  consolidated  with the net income of Borrower
and its  Subsidiaries  in  accordance  with  GAAP),  except to the extent of the
amount of dividends or distributions  actually paid in such period by such other
Person to Borrower or to any of its  Subsidiaries,  as the case may be; (ii) the
net income (but not loss) of any of Borrower's  Subsidiaries  to the extent that
the declaration or payment of dividends or similar distributions or transfers or
loans by that  Subsidiary is not at the time permitted by operation of the terms
of its charter or any agreement,  instrument or Legal Requirement  applicable to
such  Subsidiary,  or  is  otherwise  restricted  or  prohibited  in  each  case
determined in accordance with GAAP; (iii) the net income (or loss) of any Person
acquired in a pooling-of-interests  transaction for any period prior to the date
of such transaction;  (iv) any extraordinary gains, including gains attributable
to Property  sales not in the ordinary  course of business;  (v) the  cumulative
effect of a change in accounting principles and any gains or losses attributable
to writeups or writedowns  of assets;  and (vi) any  writedowns  of  non-current
assets,  provided  however,  that any ceiling  limitation  writedowns  under SEC
guidelines shall be treated as capitalized  costs, as if such writedowns had not
occurred.

     "Control  Agreement"  means a  control  agreement,  in form  and  substance
reasonably  satisfactory to Agent,  between Borrower,  Agent, and the applicable
securities  intermediary with respect to the applicable  Securities  Account and
related Investment Property.

     "Daily  Balance"  means the  amount of an  Obligation  owed at the end of a
given day.

     "Deems  itself  insecure"  means that the Person deems  itself  insecure in
accordance  with the provisions of Section 1208 of the Code.

     "Default"  means an event,  condition,  or default that, with the giving of
notice, the passage of time, or both, would be an Event of Default.

                                       6

<PAGE>
     "Defaulting Lender" means any Lender that fails to make any Advance that it
is required to make  hereunder  on any Funding  Date and that has not cured such
failure by making such Advance  within one (1) Business Day after written demand
upon it by Agent to do so.

     "Defaulting  Lenders Rate" means the Reference Rate for the first three (3)
days from and after the date the relevant payment is due and, thereafter, at the
interest rate then  applicable to Advances.

     "Default  Margin"  means,  as  of  any  date  of  determination,  four  (4)
percentage points above the then applicable Margin, as the applicable Margin may
change from time to time.

     "Designated  Account" means account number 335185 of Panaco maintained with
Borrower's  Designated  Account Bank,  or such other  deposit  account of Panaco
(located  within the United  States) which has been  designated,  in writing and
from  time to time,  by  Borrower  to Agent.

     "Designated   Account  Bank"  means  Southwest  Bank  of  Texas,   National
Association,  whose office is located at 5 Post Oak Park, 4400 Post Oak Parkway,
Houston, Texas 77027, and whose ABA number is 113011258.

     "Designated  Affiliate"  means, as applied to any Person,  any other Person
who directly or indirectly  controls,  is controlled by, is under common control
with  or is a  director  or  officer  of  such  Person.  For  purposes  of  this
definition, "control" means the possession, directly or indirectly, of the power
to vote 20% or more of the Stock having  ordinary  voting power for the election
of  directors  or the director or indirect  power to direct the  management  and
policies of a Person.

     "Disbursement  Letter" means an instructional letter executed and delivered
by  Borrower  to Agent  regarding  the  extensions  of  credit to be made on the
Closing Date,  the form and substance of which shall be  satisfactory  to Agent.


     "Dollars or $" means United States dollars.

     "Early Termination Premium" has the meaning set forth in Section 3.6.

     "East Breaks 165 Interest"  means that certain  Federal  Outer  Continental
Shelf  Mineral  Interest  lease  known as East  Breaks  165  OCS-G  6280,  dated
October 1,  1983,  between the United  States of America,  as Lessor,  and Sohio
Petroleum  Company,  as  Lessee,  which  lease is the  subject  of that  certain
Assignment  of  Record  of Title,  dated  effective  June 1,  1998,  between  BP
Exploration & Oil, Inc.,  successor in interest to Sohio Petroleum  Company,  as
assignor, and Panaco, as assignee.

     "EBITDA"  shall  mean,  for  any  period,  the  sum,   determined  (without
duplication) for Borrower and its  Subsidiaries,  of (i) Consolidated Net Income

                                       7
<PAGE>

of Borrower and its Subsidiaries  plus (ii) Interest Expense of Borrower and its
Subsidiaries  for such  period to the extent  deducted in the  determination  of
Consolidated  Net Income of Borrower and its  Subsidiaries  for such period plus
(iii)  depreciation,  amortization  and other similar  non-cash  items (with the
exception  of  non-cash  charges  that  require an  accrual or reserve  for cash
charges for any future  period and  normally  recurring  accruals) to the extent
deducted in the  determination  of  Consolidated  Net Income of Borrower and its
Subsidiaries  for such period plus (iv) all taxes  accrued for such period on or
measured by income to the extent deducted in the  determination  of Consolidated
Net Income of Borrower and its Subsidiaries for such period.

     "Eligible  Proved Developed  Non-Producing  Reserves" means Eligible Proved
Reserves of Borrower  consisting  of Proved  Developed  Non-Producing  Reserves.

     "Eligible  Proved  Developed  Producing  Reserves"  means  Eligible  Proved
Reserves  consisting of Proved Developed  Producing  Reserves.

     "Eligible  Proved  Reserves"  means  the  NYMEX  Value of  Proved  Reserves
consisting  of Mineral  Interests  of Borrower  that:  (i) are subject to a duly
executed  and  recorded  Oil and Gas  Property  Mortgage  that  creates  a first
priority perfected lien in such Mineral Interest;  (ii) either are identified on
Schedule  5.1(a) or constitute  Qualified  Subsequent Oil and Gas Property;  and
(iii) strictly  comply with each and all of the  representations  and warranties
made by Borrower to Agent in the Loan Documents. In determining the amount to be
so included, Eligible Proved Reserves shall be valued based upon the NYMEX Value
of such Proved  Reserves  as of the date of  determination  of  Eligible  Proved
Reserves,  with  such  adjustments  as Agent  may deem  appropriate  in its sole
discretion.  An item of Proved Reserves shall not be included in Eligible Proved
Reserves if:

     (a) it is not owned  solely by  Borrower  or  Borrower  does not have good,
valid, and marketable title thereto,  or the title information  relating thereto
is not satisfactory to Agent (without  limiting the foregoing,  it is understood
and agreed by Borrower that no Mineral  Interests of any Borrower  located at or
about East Breaks 165 or other locations in the Federal Outer  Continental Shelf
shall be included in Eligible  Proved  Reserves  prior to the time that Panaco's
Mineral  Interest  therein  and  Panaco's  acquisition  thereof  shall have been
approved in writing by the MMS and  evidence of the same  satisfactory  to Agent
shall  have  been  received  by  Agent);

     (b) it is not  subject to a valid and  perfected  first  priority  Lien and
security  interest in favor of Agent for the benefit of the Lender Group created
by a duly recorded Oil and Gas Property  Mortgage,  except for  Permitted  Liens
with respect to which Agent has  established a Reserve  Against  Availability in
the full amount (or such other amount as may be  determined by Agent in its sole
discretion)  that any holders of the  Permitted  Liens could assert from time to
time  thereunder  (whether  upon  the  passage  of  time,  the  satisfaction  of
conditions,  or otherwise); or

     (c) it is  subject  to a Lien in favor of any third  Person  or any  order,
judgment,  writ or decree,  which  either  restricts  or  purports  to  restrict

                                       8

<PAGE>

Borrower or any of its Subsidiaries'  ability to grant Liens to other Persons on
or in respect of its respective assets or properties.

     "Eligible  Proved  Undeveloped  Reserves"  means Eligible  Proved  Reserves
consisting of Proved Undeveloped Reserves.

     "Eligible Transferee" means: (a) a commercial bank organized under the laws
of the United States, or any state thereof, and having total assets in excess of
$100,000,000;  (b) a  commercial  bank  organized  under  the laws of any  other
country  which is a member of the  Organization  for  Economic  Cooperation  and
Development  or a political  subdivision  of any such country,  and having total
assets in excess of  $100,000,000;  provided that such bank is acting  through a
branch or agency located in the United States; (c) a finance company,  insurance
company  or other  financial  institution  or fund that is  engaged  in  making,
purchasing or otherwise  investing in commercial loans in the ordinary course of
its business and having total assets in excess of $50,000,000; (d) any Affiliate
(other than  individuals)  of, or any fund,  money  market  account,  investment
account or other account managed by, a pre-existing Lender under this Agreement;
(e) so long as no Event of Default has  occurred  and is  continuing,  any other
Person  approved by Agent and Borrower;  and (f) during the  continuation  of an
Event of Default, any other Person approved by Agent.

     "Environmental  Laws" shall mean any and all Legal Requirements  pertaining
to health or the environment in effect in any and all jurisdictions in which the
Borrower or any Subsidiary is conducting or at any time has conducted  business,
or where any Property of the Borrower or any  Subsidiary  is located,  including
without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as
amended, the Comprehensive Environmental,  Response, Compensation, and Liability
Act of 1980 ("CERCLA"),  as amended, the Federal Water Pollution Control Act, as
amended,  the  Occupational  Safety  and  Health Act of 1970,  as  amended,  the
Resource  Conservation and Recovery Act of 1976 ("RCRA"),  as amended,  the Safe
Drinking Water Act, as amended,  the Toxic  Substances  Control Act, as amended,
the  Superfund  Amendments  and  Reauthorization  Act of 1986,  as amended,  the
Hazardous  Materials  Transportation  Act, as amended,  and other  environmental
conservation or protection laws. The term "oil" shall have the meaning specified
in OPA, the term "release" (or "threatened  release") has the meaning  specified
in CERCLA,  and the terms "solid waste" and "disposal" (or "disposed")  have the
meanings specified in RCRA; provided, however, that (i) in the event either OPA,
CERCLA or RCRA is  amended  so as to broaden  the  meaning  of any term  defined
thereby,  such broader  meaning shall apply  subsequent to the effective date of
such  amendment,  and  (ii) to  the  extent  the laws of the  state in which any
Property of the Borrower or any  Subsidiary  is located  establish a meaning for
"oil,"  "release,"  "solid  waste"  or  "disposal"  which is  broader  than that
specified in either OPA, CERCLA or RCRA, such broader meaning shall apply.

     "Equipment"  means  all  of  Borrower's   present  and  hereafter  acquired
machinery, machine tools, motors, equipment, furniture,  furnishings,  fixtures,
drillsite  equipment  (including   separators,   dehydrators,   meters,   etc.),
compressors,  gathering lines, pipelines, vehicles (including motor vehicles and
trailers),  tools,  parts,  and other goods  (other than  consumer  goods,  farm
products,  or  Inventory),  wherever  located,  including,  (a) any  interest of

                                       9

<PAGE>

Borrower  in  any  of the  foregoing,  and  (b)  all  attachments,  accessories,
accessions, replacements,  substitutions,  additions, and improvements to any of
the foregoing.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  29
U.S.C. 1000 et seq., amendments thereto,  successor statutes, and regulations or
guidance promulgated thereunder.

     "ERISA  Affiliate"  means  (a)  any  corporation  subject  to  ERISA  whose
employees  are  treated as employed by the same  employer  as the  employees  of
Borrower under IRC  Section 414(b),  (b) any trade or business  subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower  under IRC  Section 414(c),  (c) solely for  purposes of Section 302 of
ERISA and  Section 412 of the IRC, any  organization  subject to ERISA that is a
member of an affiliated  service  group of which  Borrower is a member under IRC
Section 414(m),  or  (d)  solely  for  purposes  of  Section  302 of  ERISA  and
Section 412  of the  IRC,  any  party  subject  to  ERISA  that is a party to an
arrangement  with Borrower and whose employees are aggregated with the employees
of Borrower under IRC Section 414(o).

     "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan
or Multiemployer  Plan, (b) the withdrawal of Borrower,  any of its Subsidiaries
or ERISA  Affiliates  from a Benefit  Plan  during a plan year in which it was a
"substantial  employer"  (as defined in  Section 4001(a)(2)  of ERISA),  (c) the
providing  of  notice  of  intent to  terminate  a  Benefit  Plan in a  distress
termination (as described in Section 4041(c) of ERISA),  (d) the  institution by
the PBGC of  proceedings  to  terminate a Benefit  Plan or  Multiemployer  Plan,
(e) any event or condition  (i) that provides a basis under  Section 4042(a)(1),
(2), or (3) of ERISA for the  termination of, or the appointment of a trustee to
administer,  any Benefit Plan or Multiemployer  Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA,  (f) the
partial or complete  withdrawal  within the meaning of Sections 4203 and 4205 of
ERISA,  of  Borrower,  any  of  its  Subsidiaries  or  ERISA  Affiliates  from a
Multiemployer  Plan,  or (g)  providing  any security to any Plan under  Section
401(a)(29)  of the IRC by  Borrower  or its  Subsidiaries  or any of their ERISA
Affiliates.

     "Event of Default" has the meaning set forth in Section 8.

     "Exchange Act" means the Securities  Exchange Act of 1934, as amended,  and
any successor statute thereto.

     "FEIN" means Federal Employer Identification Number.

     "First Renewal Period" has the meaning set forth in Section 3.4(a)(ii).

     "Foothill" means Foothill Capital Corporation, a California corporation.

     "Foothill  Loans" has the  meaning  set forth in  Section 2.1(f).

     "Funding Date" means the date on which a Borrowing occurs.

                                       10

<PAGE>

     "GAAP" means  generally  accepted  accounting  principles as in effect from
time to time in the United States,  consistently  applied.

     "GAC" means Goldking  Acquisition Corp., a Delaware  corporation,  with its
chief executive  office located at 1100 Louisiana,  Suite 5100,  Houston,  Texas
77002.

     "General  Intangibles"  means all of Borrower's  present and future general
intangibles  and other personal  property  (including  contract  rights,  rights
arising under common law, statutes, or regulations,  choses or things in action,
goodwill, Permits, patents, trade names, trademarks,  servicemarks,  copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension  funds,  route lists,  rights to payment and other rights under any
royalty  or  licensing  agreements,   infringement  claims,  computer  programs,
information contained on computer disks or tapes, literature, reports, catalogs,
deposit  accounts,  insurance  premium  rebates,  tax  refunds,  and tax  refund
claims),  other than  goods,  Accounts,  and  Negotiable  Collateral.

     "Goldking  Entities"  means Goldking Oil & Gas Corp.,  Goldking  Companies,
Inc, Hill Transportation Company, Inc., Umbrella Point Gathering Co., L.L.C. and
Goldking Trinity Bay Corp.

     "Governing Documents" means, with respect to any Person, the certificate or
articles  of  incorporation,  by-laws,  or  other  organizational  or  governing
documents  of  such  Person.

     "Governmental  Authority"  means  any  nation  or  government,  any  state,
province,  or other political  subdivision thereof, any central bank (or similar
monetary or regulatory  authority)  thereof,  any entity  exercising  executive,
legislative,  judicial,  regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled,  through
Stock or capital ownership or otherwise, by any of the foregoing.

     "Guaranty  Agreements"  means,  collectively,  any and all of the  guaranty
agreements with respect to the Obligations  which are, or are to be, executed by
a Guarantor in favor of Agent for the benefit of the Lender  Group,  as required
from time to time by Agent, in form and substance satisfactory to Agent, in each
case as the same may be amended, modified,  restated,  supplemented,  increased,
renewed, extended, substituted for or replaced from time to time.

     "Guarantor"  means GAC, each Subsidiary of Borrower not a signatory to this
Agreement,  and  each  other  Person  who may  hereafter  guarantee  payment  or
performance of the whole or any part of the Obligations.

     "Hazardous  Materials" means  (a) substances that are defined or listed in,
or otherwise  classified  pursuant to, any  applicable  laws or  regulations  as
"hazardous   substances,"  "hazardous  materials,"  "hazardous  wastes,"  "toxic
substances,"  or any other  formulation  intended to define,  list,  or classify
substances  by  reason  of   deleterious   properties   such  as   ignitability,
corrosivity,   reactivity,   carcinogenicity,   reproductive  toxicity,  or  "EP
toxicity,"  (b) oil, petroleum,  or petroleum derived  substances,  natural gas,

                                       11

<PAGE>

natural gas liquids,  synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any  radioactive  materials,  and (d)  asbestos  in any  form  or  electrical
equipment  that  contains  any oil or  dielectric  fluid  containing  levels  of
polychlorinated biphenyls in excess of 50 parts per million.

     "Hedging  Agreements"  shall mean (i) any  interest rate or currency  swap,
rate cap, rate floor,  rate collar,  forward agreement or other exchange or rate
protection  agreements  or any option with respect to any such  transaction  and
(ii) any swap  agreement,  cap, floor,  collar,  exchange  transaction,  forward
agreement or other exchange or protection  agreement relating to Hydrocarbons or
any option with respect to any such transaction.

     "Hedging Agreement Undertaking" has the meaning set forth in Section 2.3.

     "Hedging  Arrangements Usage" means the sum of (a) the amount determined by
Agent  from  time  to  time  as  Agent's  estimate  of the  aggregate  liability
(contingent or otherwise) of the Lender Group with respect to Hedging Agreements
which are the subject of Hedging Agreement Undertakings, plus (b) the amounts of
unreimbursed payments made by the Lender Group with respect to Hedging Agreement
Undertakings.

     "Hydrocarbons"  shall mean oil, natural gas, casinghead gas, drip gasoline,
natural  gasoline,   condensate,   distillate,   liquid  hydrocarbons,   gaseous
hydrocarbons and all  constituents,  elements or compounds  thereof and products
refined or separated therefrom.

     "Indebtedness"  means:  (a)  all  obligations  of  Borrower  or  any of its
Subsidiaries  for borrowed money,  (b) all obligations of Borrower or any of its
Subsidiaries evidenced by bonds, debentures, notes, or other similar instruments
and  all   reimbursement  or  other  obligations  of  Borrower  or  any  of  its
Subsidiaries in respect of letters of credit, bankers acceptances, interest rate
swaps,  or other financial  products,  (c) all obligations of Borrower or any of
its  Subsidiaries  under capital  leases,  (d) all obligations or liabilities of
others  secured by a Lien on any  property  or asset of  Borrower  or any of its
Subsidiaries,  irrespective  of whether such obligation or liability is assumed,
(e) any  obligation  of  Borrower  or any of its  Subsidiaries  guaranteeing  or
intended to guarantee (whether guaranteed,  endorsed,  co-made,  discounted,  or
sold with  recourse to Borrower or any of its  Subsidiaries)  any  indebtedness,
lease, dividend,  letter of credit, or other obligation of any other Person, (f)
the net  mark to  market  value of all  obligations  of  Borrower  or any of its
Subsidiaries under any Hedging Agreements and any Hedging Agreement Undertaking,
(g) all  obligations of Borrower or any of its  Subsidiaries to deliver goods or
services  including  Hydrocarbons in consideration of advance payments,  and (h)
the  undischarged  balance of any  production  payment or net  profits  interest
created by  Borrower  or any of its  Subsidiaries  or for the  creation of which
Borrower or any of its Subsidiaries directly or indirectly received payment.

     "Indemnified  Liabilities"  has the  meaning  set  forth in  Section  11.3.

     "Indemnified Person" has the meaning set forth in Section 11.3.

                                       12

<PAGE>

     "Insolvency  Proceeding"  means any proceeding  commenced by or against any
Person under any provision of the Bankruptcy Code or under any other  bankruptcy
or insolvency law, assignments for the benefit of creditors,  formal or informal
moratoria,  compositions,  extensions  generally with creditors,  or proceedings
seeking reorganization, arrangement, or other similar relief.

     "Intangible  Assets" means, with respect to any Person, that portion of the
book value of all of such Person's  assets that would be treated as  intangibles
under GAAP.

     "Intellectual  Property" has the meaning  ascribed thereto in Section 5.19.

     "Interest Expense" shall mean, for any period, the sum (determined  without
duplication) of the aggregate  amount of interest  expense  accruing during such
period on Indebtedness of Borrower and its Subsidiaries,  including the interest
portion of payments under capitalized leases and any capitalized  interest,  but
excluding amortization of debt discount and expense.

     "Inventory" means all present and future inventory in which Borrower or any
of its Subsidiaries has any interest, including goods and extracted Hydrocarbons
held for sale or lease or to be furnished under a contract of service and all of
Borrower's  present and future raw materials,  work in process,  finished goods,
and packing and shipping materials, wherever located.

     "Investment  Property"  means  all  of  Borrower's  present  and  hereafter
acquired  "investment  property" as that term is defined in Section 9-115 of the
Code.

     "IRC"  means  the  Internal  Revenue  Code of  1986,  as  amended,  and the
regulations thereunder.

     "L/C" has the meaning set forth in Section 2.2(a).

     "L/C  Guaranty"  has the  meaning  set  forth  in  Section  2.2(a).

     "Legal Requirements" means all applicable international,  foreign, federal,
state, and local laws, judgments, decrees, orders, statutes,  ordinances, rules,
regulations, or Permits, including,  without limitation, all Environmental Laws.

     "Lender"  and  "Lenders"  have the  respective  meanings  set  forth in the
preamble to this  Agreement,  and shall include any other Person made a party to
this Agreement in accordance with the provisions of Section 15.1 hereof.

     "Lender Group" means, individually and collectively, each of the individual
Lenders and Agent.

     "Lender Group Expenses" means all: costs or expenses  (including taxes, and
insurance  premiums)  required  to be paid by  Borrower  under  any of the  Loan
Documents that are paid or incurred by the Lender Group; fees or charges paid or

                                       13

<PAGE>

incurred by the Lender Group in connection with the Lender Group's  transactions
with  Borrower,  including,  fees or  charges  for  photocopying,  notarization,
couriers and messengers,  telecommunication,  public record searches  (including
tax lien,  litigation,  and UCC (or equivalent)  searches and including searches
with the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording,  publication,  appraisal (including periodic
Oil and Gas  Property  Collateral  appraisals  and  engineer  reports),  Reserve
Reports and  environmental  audits;  costs and expenses incurred by Agent in the
disbursement of funds to Borrower (by wire transfer or otherwise);  charges paid
or incurred by Agent  resulting from the dishonor of checks;  costs and expenses
paid or  incurred  by the Lender  Group to correct  any  default or enforce  any
provision  of the Loan  Documents,  or in gaining  possession  of,  maintaining,
handling,  preserving,  storing,  shipping,  selling,  preparing  for  sale,  or
advertising to sell the  Collateral,  or any portion  thereof,  irrespective  of
whether a sale is  consummated;  costs and expenses paid or incurred by Agent in
examining the Books;  costs and expenses of third party claims or any other suit
paid or  incurred  by the  Lender  Group  in  enforcing  or  defending  the Loan
Documents  or in  connection  with  the  transactions  contemplated  by the Loan
Documents  or the  Lender  Group's  relationship  with  Borrower  (or any of its
Subsidiaries  party  to one or more  Loan  Documents);  and the  Lender  Group's
reasonable  attorneys  fees and  expenses  incurred  in  advising,  structuring,
drafting, reviewing, administering,  amending, terminating, enforcing (including
attorneys  fees  and  expenses  incurred  in  connection  with  a  "workout,"  a
"restructuring," or an Insolvency Proceeding concerning Borrower), defending, or
concerning the Loan Documents, irrespective of whether suit is brought.

     "Lender Group Fee Split Letters" means those certain two letter agreements,
dated as of the date hereof,  addressed to Foothill from Ableco  Finance LLC and
from Foothill  Partners  III,  L.P.,  regarding  the  allocation of certain fees
between Foothill and each of them, as amended from time to time.

     "Lender  Group Side  Letters"  means those  certain two letter  agreements,
dated as of the date hereof,  addressed to Foothill from Ableco  Finance LLC and
from Foothill  Partners III,  L.P.,  regarding the taking of certain  actions by
Agent and/or the Lenders under this Agreement, as amended from time to time.

     "Lender Group Triparty Agreement" means that certain letter agreement dated
as of the date hereof addressed to Foothill from Ableco Finance LLC and Foothill
Partners  III,  L.P.,  regarding  certain  agreements  among them  pertaining to
apportionment, application and reversal of payments under this Agreement.

     "Lender-Related  Persons" means,  with respect to any Lender,  such Lender,
together with such Lender's Affiliates, and the officers, directors,  employees,
counsel,  agents,  and  attorneys-in-fact  of  such  Lender  and  such  Lender's
Affiliates.

     "Letter  of  Credit"  means  an  L/C  or an L/C  Guaranty,  as the  context
requires.

     "Letter of Credit/Hedging  Arrangements  Usage" means the sum of (a) Letter
of Credit Usage, plus (b) Hedging Arrangements Usage.

                                       14

<PAGE>


     "Letter  of  Credit  Usage"  means  the sum of (a) the  undrawn  amount  of
uncancelled  Letters of Credit,  plus (b) the  amount of  unreimbursed  drawings
under  Letters  of Credit,  minus (c) the  aggregate  amount of cash  collateral
securing outstanding Letters of Credit pursuant to Section 2.2(e).

     "Lien" means any interest in Property  securing an obligation owed to, or a
claim by, any Person other than the owner of the Property, whether such interest
shall be based on the common law,  statute,  or contract,  whether such interest
shall be recorded or perfected,  and whether such  interest  shall be contingent
upon the  occurrence  of some future  event or events or the  existence  of some
future  circumstance  or  circumstances,  including  (a) the  lien  or  security
interest  arising  from  a  mortgage,  deed  of  trust,   encumbrance,   pledge,
hypothecation,  assignment,  deposit  arrangement,  security agreement,  adverse
claim  or  charge,   conditional  sale  or  trust  receipt,  or  from  a  lease,
consignment,  or bailment for security purposes and also including reservations,
exceptions,  encroachments,  easements,  rights-of-way,  covenants,  conditions,
restrictions,  leases, and other title exceptions and encumbrances affecting Oil
and Gas  Property or Real  Property  and (b)  production  payments  and the like
payable out of Oil and Gas Property. For purposes of this Agreement, Borrower or
any of its Subsidiaries shall be deemed to be the owner of any Property which it
has acquired or holds subject to a conditional sale agreement, or leases under a
financing lease or other arrangement pursuant to which title to the Property has
been  retained by or vested in some other  Person in a  transaction  intended to
create financing.

          "Loan Account" has the meaning set forth in Section 2.10.

     "Loan Documents" means this Agreement, the Disbursement Letter, the Letters
of Credit,  the Lockbox  Agreements,  the Oil and Gas  Property  Mortgages,  the
Guaranty  Agreements,  the  Security  Agreements,  the Prior  Lender  Assignment
Agreements,  any note or notes  executed by  Borrower  and payable to the Lender
Group, and any other agreement entered into, now or in the future, in connection
with this Agreement.

     "Loan Party" means Borrower and each Guarantor.

     "Lockbox Account" shall mean a depositary account  established  pursuant to
one of the Lockbox Agreements.

     "Lockbox  Agreements"  means Lockbox  Operating  Procedural  Agreements and
those certain Depository Account Agreements,  in form and substance satisfactory
to Agent, each of which is among Borrower, Agent, and one of the Lockbox Banks.

     "Lockbox Banks" means Southwest Bank of Texas or such other banks as may be
agreed  to by  Borrower  and  Foothill  from time to time.

     "Lockboxes" has the meaning set forth in Section 2.7.

                                       15

<PAGE>


     "Margin"  means,  as at any date of  determination  during  any month  with
respect to any and all Advances and other  Obligations  owed from Borrower which
are  outstanding  during such month,  the rate of interest  per annum  specified
below as the "Margin" which  corresponds to the Average  Outstandings  set forth
below as of such date:

                   Average Outstandings                   Margin
                   --------------------                   ------

                         <$25,000,000                      0.50%
                      or >$25,000,000
                     and <$31,000,000                      1.00%

                    = or >$31,000,000
                     and <$37,000,000                      1.50%

                    = or >$37,000,000
                     and <$43,000,000                      2.25%

                    = or >$43,000,000                      3.00%

     "Average  Outstandings" means, as of the last day of each month, the sum of
(i) the  amount of the  average  Daily  Balance  of  Advances  (including  Agent
Advances and Foothill Loans) that were  outstanding  (including any amounts that
the Lender  Group may have paid for the account of  Borrower  pursuant to any of
the Loan  Documents and that have not been  reimbursed by Borrower)  during such
month (the  "Averaging  Period"),  plus (ii) the  average  Daily  Balance of the
Letter of Credit/Hedging Arrangement Usage during such month; provided, however,
that with respect to any determinations of the Average  Outstandings  during the
period  beginning on the Closing Date and ending on the last day of the month in
which the Closing Date occurs,  the Averaging Period used for such purpose shall
instead be the period beginning with the Closing Date and ending on the last day
of such month.

     "Material  Adverse  Change"  means  (a) a  material  adverse  change in the
business, prospects,  operations,  results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (b) a material adverse effect on
the ability of Borrower to carry out its  business as at the Closing  Date or as
proposed as of the Closing  Date,  (c) the  material  impairment  of  Borrower's
ability to perform its  obligations  under the Loan  Documents  to which it is a
party or of the Lender  Group to enforce  the  Obligations  or realize  upon the
Collateral,  (d) any event or circumstance  that is reasonably  likely to have a
material  adverse  effect on the value of the  Collateral or the amount that the
Lender Group would be likely to receive (after giving consideration to delays in
payment and costs of enforcement) in the liquidation of the Collateral, or (e) a
material  impairment  of the  priority of the Agent's  Liens with respect to the
Collateral.

                                       16

<PAGE>

     "Material Contract" means, as to any Person, any supply, purchase, service,
employment,  tax, indemnity,  farmout, gas marketing, gas imbalance,  operating,
unitization,  communitization,  partnership, joint venture or other agreement of
such  Person or any of its  Subsidiaries  or by which such  Person or any of its
Subsidiaries or any of their respective properties are otherwise bound, which is
material to the business,  operations or properties of such Person,  as the same
shall be amended, modified and supplemented and in effect from time to time.

     "Maximum Revolving Amount" means $60,000,000.

     "Mineral Interests" shall mean all right,  title,  interest and estates now
owned or hereafter  acquired in and to oil and gas leases,  oil, gas and mineral
leases, or other liquid or gaseous  hydrocarbon  leases,  mineral fee interests,
overriding  royalty and royalty  interests,  net profit interests and production
payment interests,  including any reserved  interests,  reversionary  interests,
carried working interests, or residual interests of whatever nature.

     "MMS" means the Minerals Management Service of the United States Department
of the Interior.

     "Moody's" means Moody's Investors Service, Inc. and any successor thereto.

     "Multiemployer  Plan" means a  "multiemployer  plan" (as defined in Section
4001(a)(3) of ERISA) to which Borrower,  any of its  Subsidiaries,  or any ERISA
Affiliate has contributed,  or was obligated to contribute,  within the past six
years.

     "Negotiable  Collateral" means all of a Person's present and future letters
of credit, notes, drafts, instruments,  Investment Property, documents, personal
property  leases  (wherein such Person is the lessor),  chattel  paper,  and the
Books relating to any of the foregoing.

     "NYMEX  Price"  means,  as of the date of the  determination  thereof,  the
average of the 24 succeeding  monthly futures contract  prices,  commencing with
the  month  during  which  the  determination  is to be  made,  for  each of the
appropriate  crude oil or natural  gas  categories  included  in the most recent
Reserve  Report  provided  by  Borrower to Agent  pursuant  to  Section 6.2,  as
applicable,  as quoted on the New York Mercantile Exchange ("NYMEX"), or, if the
NYMEX no longer provides futures contract price quotes for 24 month periods, the
longest period of quotes of less than 24 months shall be used, and, if the NYMEX
no longer provides such futures  contract  quotes or has ceased to operate,  the
Agent shall designate  another  nationally  recognized  commodities  exchange to
replace the NYMEX.

     "NYMEX Value" means, at any date of determination  thereof as to any Proved
Reserves of Borrower, the result of

     (a) the  discounted  present  value of  future  net  revenues  (i.e., after
deducting  production  and ad valorem  taxes and less future  capital  costs and
operating  expenses) from Proved  Reserves of Borrower as of such date utilizing
the  NYMEX  Price  for the  appropriate  category  of oil or gas as  quoted in a

                                       17

<PAGE>

nationally  recognized  publication for such pricing as selected as of such date
by Agent and assuming that production  costs thereafter  remain  constant,  then
discounted at a rate of 10% per year to obtain the present value; minus

     (b) to the extent not taken into  account in  subparagraph  (a) above,  the
discounted  present value  (discounted  at a rate of 10% per year) of Borrower's
future plugging and abandonment expenses; minus

     c) to the extent not taken into account in subparagraph (a) above, minority
interests and other interests of Persons other than Borrower and any natural gas
balancing  liabilities  of Borrower.

     "Obligations"  means  all  loans,  Advances,  debts,  principal,   interest
(including any interest  that,  but for the  provisions of the Bankruptcy  Code,
would have accrued),  contingent reimbursement obligations under any outstanding
Letters of Credit, premiums (including Early Termination Premiums),  liabilities
(including  all amounts  charged to Borrower's  Loan Account  pursuant  hereto),
obligations,  fees, charges, costs, or Lender Group Expenses (including any fees
or expenses  that, but for the  provisions of the  Bankruptcy  Code,  would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
the Lender Group of any kind and description  (whether  pursuant to or evidenced
by the Loan  Documents  or  pursuant to any other  agreement  between the Lender
Group and  Borrower,  and  irrespective  of whether  for the  payment of money),
whether direct or indirect,  absolute or  contingent,  due or to become due, now
existing or hereafter arising, and including any debt, liability,  or obligation
owing  from  Borrower  to others  that the  Lender  Group may have  obtained  by
assignment or otherwise,  any debt,  liability,  or obligation owing to Agent or
any Lender arising from any Hedging  Agreements  under which Agent or any Lender
is a counterparty or any Hedging  Agreement  Undertaking,  and further including
all interest not paid when due and all Lender Group  Expenses  that  Borrower is
required to pay or reimburse by the Loan Documents, by law, or otherwise.

     "Oil and Gas Properties"  means all of the present and future right,  title
and interest (real, personal,  mixed,  contractual or otherwise) of Borrower and
its  Subsidiaries  in,  to and  under or  derived  from the  following:

     (a) All presently  existing and  hereafter  arising  Mineral  Interests and
surface interests;

     (b)   All   presently   existing   and   hereafter   arising   unitization,
communitization and pooling declarations,  orders, and agreements (including all
units  formed  by  voluntary   agreement  and  those  formed  under  the  rules,
regulations,  orders or other official acts of any governmental entity or tribal
authority  having  appropriate  jurisdiction);

     (c) All presently existing and arising oil sales contracts,  casinghead gas
sales contracts, gas sales contracts, processing contracts, gathering contracts,
transportation contracts, easements, rights-of-way,  servitudes, surface leases,

                                       18

<PAGE>

subsurface leases, farm-out contracts, farm-in contracts,  operating agreements,
areas of mutual interest and other contracts, agreements and instruments;

     (d)  All  presently  existing  and  hereafter  arising  personal  property,
improvements,   fixtures,  wells  (whether  producing,  plugged  and  abandoned,
shut-in,  injection,  disposal  or water  supply),  tanks,  boilers,  buildings,
machinery, vehicles, Equipment, gathering lines, pipelines, utility lines, power
lines,  telephone  lines,  water  rights,  roads,  permits,  licenses  and other
appurtenances, to the extent the same are situated upon and used or held for use
by  Borrower  or any of its  Subsidiaries  in  connection  with  the  ownership,
operation,  maintenance  or  repair  of the  Mineral  Interests  and/or  surface
interests; and

     (e) All reservoir,  reserve,  seismic,  geologic or geophysical information
and data.

     "Oil and Gas Property  Collateral"  means the Oil and Gas Properties  which
are identified on  Schedule 5.1(a) or Schedule 5.1(b), and any other Oil and Gas
Properties  now  owned  or  hereafter   acquired  by  Borrower  or  any  of  its
Subsidiaries.

     "Oil and Gas  Property  Mortgages"  means one or more  mortgages,  deeds of
trust,  or  deeds  to  secure  debt,  executed  by  Borrower  and  each  of  its
Subsidiaries  in  favor of  Agent,  the form  and  substance  of which  shall be
satisfactory to Agent, that encumber the Oil and Gas Property Collateral and the
related improvements thereto (including the Prior Lender Assignment Agreements).

     "Overadvance"  has the meaning set forth in Section  2.5.

     "Panaco"  has the meaning set forth in the preamble  hereto.

     "Participant" has the meaning set forth in Section 15.1(e).

     "Pay-Off  Letter"  means  a  letter,  in  form  and  substance   reasonably
satisfactory  to Agent,  from Prior Lender  respecting  the amount  necessary to
purchase in full all of the  obligations  of Borrower owing to Prior Lenders and
obtain an assignment, termination or release (as determined by Agent in its sole
discretion) of all of the Liens existing in favor of Prior Lenders in and to the
properties  or assets of  Borrower.

     "PBGC" means the Pension Benefit  Guaranty  Corporation as defined in Title
IV of ERISA, or any successor thereto.

     "Permits"  of  a  Person  shall  mean  all  rights,  franchises,   permits,
authorities,  licenses,  certificates of approval or  authorizations,  including
licenses and other authorizations  issuable by a Governmental  Authority,  which
pursuant to applicable  Legal  Requirements  are necessary to permit such Person
lawfully to conduct and operate its business as currently  conducted  and to own
and use its assets.

                                       19

<PAGE>
     "Permitted  Liens"  means (a) Liens  held by Agent for the  benefit  of the
Lender  Group,  (b) Liens  for unpaid taxes that either  (i) are not yet due and
payable or (ii) are  the subject of Permitted  Protests,  (c) Liens set forth on
Schedule P-1, (d) the interests of lessors under  operating  leases and purchase
money Liens of lessors under capital  leases to the extent that the  acquisition
or lease of the underlying  asset is permitted under Section 7.21 and so long as
the Lien only  attaches to the asset  purchased or acquired and only secures the
purchase  price of the asset,  (e) Liens arising by operation of law in favor of
warehousemen,   landlords,  carriers,  mechanics,   materialmen,   laborers,  or
suppliers,  or other like Liens  arising by operation of law  incidental  to the
exploration,  development,  operation and maintenance of Oil and Gas Properties,
in each case incurred in the ordinary  course of business of Borrower and not in
connection with the borrowing of money,  and which Liens either (i) are for sums
not yet due  and  payable,  or  (ii) are  the  subject  of  Permitted  Protests,
(f) Liens  arising from  deposits  made in connection  with  obtaining  worker's
compensation or other unemployment insurance, (g) Liens on deposits and escrowed
funds  made to secure  performance  of bids,  tenders  and leases (to the extent
permitted under this  Agreement)  incurred in the ordinary course of business of
Borrower and not in  connection  with the  borrowing  of money,  (h) Liens of or
resulting from any judgment or award that do not result in and reasonably  could
not be expected to result in a Material  Adverse Change and as to which the time
for the appeal or petition for  rehearing  of which has not yet  expired,  or in
respect of which  Borrower is in good faith  prosecuting an appeal or proceeding
for a review and in respect of which a stay of execution  pending such appeal or
proceeding  for review has been  secured,  (i) Liens with respect to the Oil and
Gas Property  Collateral  that are  exceptions to the title  opinions  issued in
connection  with the Oil and Gas  Mortgages,  as  accepted  by  Agent,  (j) with
respect to any Oil and Gas Property  Collateral  consisting of Mineral Interests
acquired  by  Borrower  or  any of its  Subsidiaries  after  the  date  of  this
Agreement,  (i) minor defects in title which (A) do not affect the marketability
thereof or restrict  the full use or other  benefits of ownership by Borrower or
such  Subsidiary,  as the case may be,  and (B) do not  affect  the  ability  of
Borrower  or  such  Subsidiary,  as the  case  may be,  to  receive  a share  of
production  or proceeds  from,  allocated  to, or  attributable  to such Mineral
Interests equal to the interest of Borrower or such Subsidiary,  as the case may
be, therein as represented herein or in the other Loan Documents, and (C) do not
materially  interfere  with the ordinary  conduct of the business of Borrower or
such Subsidiary, as the case may be, and (D) do not interfere with or impair the
value of Agent's Lien therein for the benefit of the Lender  Group,  and (E) are
customarily waived by reasonable and prudent operators,  and (ii) Liens reserved
in leases or farmout  agreements for rent or royalties and for  compliance  with
the terms of the farmout  agreements or leases in the case of leasehold estates,
to the extent that any such Lien referred to in this clause does not  materially
impair the use of the Mineral Interest covered by such Lien for the purposes for
which such Mineral Interest is held by the Borrower or any Subsidiary,  does not
materially  interfere with or impair the value of such Mineral  Interest subject
thereto  or Agent's  Lien  therein  for the  benefit  of the  Lender  Group,  is
customarily waived by reasonable and prudent  operators,  and is consented to in
writing by Agent,  (k) farmout,  carried  working  interests,  joint  operating,
unitization,  royalty, overriding royalty, sales and similar agreements relating
to the exploration or development of, or production from, Oil and Gas Properties
or the sale of the  hydrocarbons  after they are produced  which are existing at
the time of  acquisition  of such Oil and Gas Property,  are usual and customary

                                       20

<PAGE>

for the industry, and are disclosed to and approved by Agent in writing prior to
any Proved Reserves  attributable to such Oil and Gas Property being included in
Eligible  Proved  Reserves.

     "Permitted  Protest"  means the right of Borrower to protest any Lien other
than any such Lien that secures the  Obligations,  tax (other than payroll taxes
or taxes that are the subject of a United  States  federal tax lien),  or rental
payment,  provided  that  (a) a  reserve  with  respect  to such  obligation  is
established   on  the  books  of  Borrower  in  an  amount  that  is  reasonably
satisfactory  to Agent,  (b) any  such  protest  is  instituted  and  diligently
prosecuted by Borrower in good faith, and (c) Agent is satisfied that, while any
such  protest is pending,  there will be no  impairment  of the  enforceability,
validity, or priority of any of the Agent's Liens in and to the Collateral.

     "Person"  means  and  includes  natural  persons,   corporations,   limited
liability  companies,  limited  partnerships,   general  partnerships,   limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other  organizations,  irrespective  of  whether  they are legal  entities,  and
governments and agencies and political subdivisions thereof.

     "Personal Property  Collateral" means all Collateral other than the Oil and
Gas Property Collateral.

     "Plan" means any employee benefit plan, program, or arrangement  maintained
or contributed  to by Borrower or with respect to which it may incur  liability.

     "PPC" has the meaning set forth in the preamble hereto.

     "Prior Credit Agreement" has the meaning set forth in the recitals hereto.

     "Prior Lender Assignment Agreements" means the assignment agreements in the
form and substance of Exhibits P-1, P-2 and P-3 attached hereto.

     "Prior Lenders" has the meaning set forth in the recitals.

     "Property"  means any  interest in any kind of  property or asset,  whether
real, personal or mixed, tangible or intangible.

     "Pro Rata Share" means, with respect to a Lender, a fraction  (expressed as
a percentage),  the numerator of which is the amount of such Lender's Commitment
and the denominator of which is the aggregate amount of the Commitments.

     "Proved  Developed   Non-Producing   Reserves"  means  Proved  Reserves  of
Borrower,  other than Proved Developed Producing Reserves and Proved Undeveloped
Reserves,  that can be  expected to be  recovered  through  existing  wells with
existing equipment and operating methods.

                                       21

<PAGE>

     "Proved  Developed  Producing  Reserves" means Proved Reserves of Borrower,
other than  Proved  Developed  Non-Producing  Reserves  and  Proved  Undeveloped
Reserves,  that can be expected to be recovered from currently  producing  zones
under the continuation of present operating methods.

     "Proved Reserves" means at any particular time, the estimated quantities of
Hydrocarbons  which  geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known  reservoirs  attributable
to Mineral  Interests  included or to be included  in the Reserve  Report  under
existing economic and operating conditions.

     "Proved Undeveloped Reserves" means Proved Reserves of Borrower, other than
Proved Developed Producing Reserves and Proved Developed Non-Producing Reserves,
that are expected to be recovered from new wells on undrilled  acreage,  or from
existing   wells  where  a  relatively   major   expenditure   is  required  for
recompletion.

     "PV-10 Value" means, at any date of determination thereof, as to any Proved
Reserves, the result of:

     (a) the  discounted  present  value of  future  net  revenues  (i.e., after
deducting  production  and ad valorem  taxes and less future  capital  costs and
operating  expenses) from such Proved  Reserves as most recently  estimated in a
Reserve Report  utilizing the spot price for the appropriate  category of oil or
gas as quoted in a nationally recognized  publication selected by Agent for such
pricing as of the date of the  determination  of PV-10 Value and  assuming  that
production  costs thereafter  remain constant,  then discounted at a rate of 10%
per year to obtain  the  present  value;  minus

     (b) to the extent not taken into  account in  subparagraph  (a) above,  the
discounted present value of Borrower's future plugging and abandonment expenses;
minus

     (c) to the  extent  not taken  into  account  in  subparagraph  (a)  above,
minority  interests  and other  interests of Persons other than Borrower and any
natural gas balancing liabilities of Borrower.

     "Qualified  Subsequent  Oil  and Gas  Property"  means,  as at any  date of
determination thereof, Oil and Gas Properties acquired subsequent to the date of
this  Agreement  with respect to which all of the  representations  specified in
Section 5.2 are true and correct.

     "Real  Property"  means any estates or interests in real property now owned
or hereafter  acquired by Borrower or any Subsidiary of Borrower,  excluding Oil
and Gas Properties.

     "Reference  Rate" means the  variable  rate of  interest,  per annum,  most
recently announced by Wells Fargo Bank, National  Association,  or any successor

                                       22

<PAGE>

thereto, as its "prime rate," irrespective of whether such announced rate is the
best rate available from such financial institution.

     "Renewal Date" has the meaning set forth in Section 3.4.

     "Reportable  Event" means any of the events described in Section 4043(c) of
ERISA or the regulations  thereunder  other than a Reportable  Event as to which
the  provision  of 30  days  notice  to the  PBGC  is  waived  under  applicable
regulations.

     "Required  Lenders"  means,  at any time,  Lenders  whose  Pro Rata  Shares
aggregate  65% or more of the  Commitments,  or,  if the  Commitments  have been
terminated irrevocably, 65% of the Obligations then outstanding.

     "Reserve  Report"  means a report,  in form and substance  satisfactory  to
Agent, prepared by Ryder Scott Company,  Netherland,  Sewell & Associates, Inc.,
W.D.  Van  Gonten & Co.,  or another  firm of  independent  petroleum  engineers
acceptable  to Agent  evaluating  the oil and gas reserves  attributable  to the
Mineral  Interests  of  Borrower  and  its  Subsidiaries  (as  determined  on an
unconsolidated  basis) which shall,  among other things,  (a) identify the wells
covered  thereby,  (b) specify said third  party's  opinions with respect to the
total  volume of Proved  Reserves  (specifying  with such  opinions the terms of
categories Proved Developed Producing Reserves,  Proved Developed  Non-Producing
Reserves  and  Proved  Undeveloped  Reserves)  which  Borrower  has the right to
produce (or cause to be produced) for its own account, (c) set forth said firm's
opinions  with  respect  to the PV-10  Value and the NYMEX  Value of each of the
categories of the Proved Reserves as specified in  subclause (b)  above, (d) set
forth  said  firm's  opinions  with  respect  to the  projected  future  rate of
production  of the  Proved  Reserves,  (e)  contain  such other  information  as
requested  by Agent with  respect to the  projected  rate of  production,  gross
revenues,  operating expenses, net income, taxes, capital expenditures and other
capital   costs,   net  revenues  and  present  value  of  future  net  revenues
attributable  to such  reserves  and  production  therefrom,  and (f)  contain a
statement of the price and escalation  parameters,  procedures  and  assumptions
upon which such determinations were based.

     "Reserves Against  Availability" means such reserves as Agent determines in
Agent's  discretion  as being  appropriate  to  reflect  impediments  to Agent's
ability to realize upon the Collateral or impairments or reductions to the value
of the Collateral.  Without  limiting the generality of the foregoing,  Reserves
Against  Availability  may include (but are not limited to) reserves  based upon
the  following:

     (a) accounts payable which are more than 45 days past the original due date
thereof;

     (b) past due or accrued taxes or other governmental  charges,  including ad
valorem, personal property, production, severance and other taxes which may have
priority over the Liens or security  interests of Agent in the  Collateral;




                                       23

<PAGE>

     (c)  Liens in  favor  of third  Persons  (whether  or not  such  Liens  are
Permitted  Liens);

     (d)  deposits  which  are  due  or  scheduled  to  become  due  during  the
immediately  following  180 day  period  under  deposit  or  escrow  arrangement
concerning  costs,  expenses  and  liabilities  relating  to  the  plugging  and
abandonment of Oil and Gas Properties;

     (e)  estimates  of  present  and  future  costs,  expenses,   deposits  and
liabilities  related  to the  plugging  and  abandonment  of  the  Oil  and  Gas
Properties  net of the amount  thereof  which has been taken into account in the
most  recent  Reserve  Report  or is  fully  secured  by an  escrow  arrangement
acceptable  to Agent;

     (f)  sums  which  Borrower  may be  required  to pay  which  are due or are
scheduled  to become due during the  immediately  following  30 day period  with
respect to rental,  lease and other amounts payable under leases with respect to
which Borrower has not delivered to Agent a Collateral Access Agreement; and

     (g) without duplication of the foregoing,  amounts owing by Borrower to any
Person to the extent  secured by a Lien (whether or not such Lien is a Permitted
Lien) on, or trust  (constructive  or  otherwise)  over,  any of the  Collateral
(including  proceeds  thereof or collections  from the sale of  Hydrocarbons  or
Mineral Interests which may from time to time come into the possession of any of
the  Lender  Group  or its  agents),  which  Lien or  trust,  in the  reasonable
determination  of Agent (from the perspective of an asset-based  lender),  has a
reasonable  possibility of having a priority superior to the Agent's Liens (such
as landlord liens, ad valorem taxes,  production taxes,  severance taxes,  sales
taxes,  Collections  attributable  to Mineral  Interests  of Persons  other than
Borrower) in and to such item of Collateral,  proceeds or  collection.

     "Retiree  Health Plan" means an "employee  welfare benefit plan" within the
meaning of Section 3(1) of ERISA that  provides  benefits to  individuals  after
termination of their employment, other than as required by Section 601 of ERISA.

     "Revolving Facility Usage" means, as of any date of determination,  the sum
of (a) the  aggregate  amount of  Advances  outstanding,  plus (b) the Letter of
Credit/Hedging  Arrangement  Usage.

     "SEC" means the United States  Securities  and Exchange  Commission and any
successor Federal agency having similar powers.

     "Second  Renewal  Period" has the meaning set forth in Section  3.4(a)(ii).

     "Securities  Account" means a "securities  account" as that term is defined
in Section 8-501 of the Code.

                                       24

<PAGE>
     "Security  Agreements"  means,  collectively,  any and all of the  security
agreement,  pledges,  mortgages,  deeds  of  trust,  assignments,  stock  pledge
agreements and such other  agreements,  documents and  instruments,  in form and
substance  satisfactory to Agent,  which are, or are to be, executed by Borrower
and/or any one or more of its  Subsidiaries in favor of Agent and/or the Lenders
as may be required  from time to time by Agent to provide  Agent for the benefit
of the Lender Group with Liens upon all of the assets and properties of Borrower
and its  Subsidiaries as security for the payment and performance in full of the
Obligations,  in each  case as the  same  may be  amended,  modified,  restated,
supplemented,  increased,  renewed,  extended,  substituted for or replaced from
time to time,  together  with the Prior  Lender  Assignment  Agreements  and the
security agreements,  pledges,  mortgages,  deeds of trust,  assignments,  stock
pledge  agreements  and other  agreements,  documents  and  instruments  covered
thereby.

     "Seller" means any Person that sells Stock or other property to Borrower or
a  Subsidiary  of  Borrower  in a Permitted  Acquisition.

     "Settlement"  has the meaning set forth in Section  2.1(h)(i).

     "Settlement Date" has the meaning set forth in Section 2.1(h)(i).

     "Solvent"  means,  with respect to any Person on a particular date, that on
such  date (a) at fair  valuations,  all of the  properties  and  assets of such
Person are greater than the sum of the debts, including contingent  liabilities,
of such Person,  (b) the present fair salable value of the properties and assets
of such  Person is not less than the  amount  that will be  required  to pay the
probable  liability  of such  Person on its debts as they  become  absolute  and
matured,  (c) such  Person is able to realize upon its properties and assets and
pay  its  debts  and  other  liabilities,   contingent   obligations  and  other
commitments  as they mature in the normal  course of business,  (d) such  Person
does not intend to, and does not believe  that it will,  incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in  business  or a  transaction,  and is not about to engage  in  business  or a
transaction,  for which such  Person's  properties  and assets would  constitute
unreasonably  small capital  after giving due  consideration  to the  prevailing
practices  in the  industry in which such Person is engaged.  In  computing  the
amount  of  contingent  liabilities  at  any  time,  it is  intended  that  such
liabilities  will be computed at the amount that,  in light of all the facts and
circumstances  existing at such time,  represents the amount that reasonably can
be expected to become an actual or matured liability.

     "Standard & Poor's" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill  Companies,  Inc., and any successor thereto.

     "Stock" means all shares, options, warrants, interests,  participations, or
other  equivalents  (regardless  of how  designated)  of or in a corporation  or
equivalent  entity,  whether  voting  or  nonvoting,   including  common  stock,
preferred  stock,  or any other  "equity  security"  (as such term is defined in
Rule 3a11-1  of the General Rules and  Regulations  promulgated by the SEC under
the Exchange Act).

                                       25

<PAGE>


     "Subsidiary"  of  a  Person  means  a  corporation,   partnership,  limited
liability  company,  or other entity in which that Person directly or indirectly
owns or  controls  the  shares  of  Stock or other  ownership  interests  having
ordinary  voting power to elect a majority of the board of directors (or appoint
other comparable managers) of such corporation,  partnership,  limited liability
company, or other entity.

     "Title  Opinion"  has the  meaning set forth in Section  3.1(m).

     "Transfer  Order  Letters"  means  transfer  order  letters  in the form of
Exhibit T-1  attached hereto containing the information as provided for therein.


     "Triggering Event" has the meaning set forth in Section 2.7(a).

     "Unsecured  Notes"  means  those  certain  10 5/8%  unsecured  notes in the
aggregate original principal amount of $100,000,000 dated as of October 9,  1997
and maturing on October 1,  2004 issued under the Unsecured Notes Indenture,  as
amended, modified, renewed or restated from time to time.

     "Unsecured Notes Defined Indebtedness" means all Indebtedness (as such term
is defined in the Unsecured Notes  Indenture) of Borrower and its  Subsidiaries.


     "Unsecured  Notes Estoppel  Certificate"  means a certificate,  in form and
substance acceptable to Agent, executed by the trustee under the Unsecured Notes
Indenture,  which  certifies to the unpaid balance of the Unsecured  Notes as of
the Closing  Date,  the absence of any known  defaults  thereunder  by any party
thereto,  and such other matters as may be requested by Agent.

     "Unsecured  Notes  Indebtedness  Limitation"  means an amount  equal to the
lesser of (a) the greater of (i)  $40,000,000 or (ii) the sum of (A) $10,000,000
and (B) 20% of Adjusted  Consolidated  Net  Tangible  Assets of Borrower and its
Subsidiaries,  or (b) an amount which,  when added to all other  Unsecured Notes
Defined Indebtedness of Borrower and its Subsidiaries, would result in the ratio
of  the  Adjusted   Consolidated   Net  Tangible  Assets  of  Borrower  and  its
Subsidiaries in the aggregate  Unsecured Notes Defined  Indebtedness of Borrower
and its  Subsidiaries  being equal to 1.25 to 1; provided,  however,  that in no
event shall the amount of the Unsecured Notes Indebtedness Limitation exceed any
amount which,  when added to all other  Unsecured  Notes  Defined  Indebtedness,
would cause or result in a violation of the Unsecured  Notes  Indenture or cause
or result in any holders of the Unsecured Notes (or any trustee or agent for the
benefit thereof) having the right to demand repayment, repurchase, retirement or
redemption  thereof or any similar right with respect thereto.

     "Unsecured  Notes  Indenture"  means  that  certain  Indenture  dated as of
October 9,  1997  among  Borrower  and UMB  Bank,  N.A.,  pursuant  to which the
Unsecured Notes have been issued, as amended, modified, renewed or restated from
time to time.

     "Voidable  Transfer" has the meaning set forth in Section 15.8.

                                       26

<PAGE>

     "Year 2000 Compliant"  means that Borrower's and each of its  Subsidiaries'
computer  software  programs  (whether used in  Borrower's or its  Subsidiaries'
business or licensed  by or to  Borrower or any of its  Subsidiaries  to or from
third  parties)  effectively  processes  data  including  data fields  requiring
references to dates on and after  January 1,  1000 and have been designed not to
experience  or  produce  invalid  or  incorrect  results  or  abnormal  software
operation  related  to or as a result of the  occurrence  of such  dates.

     1.2 ACCOUNTING TERMS. All accounting terms not specifically  defined herein
shall  be  construed  in  accordance  with  GAAP.  When  used  herein,  the term
"financial  statements" shall include the notes and schedules thereto.  Whenever
the term  "Borrower"  is used in respect of a  financial  covenant  or a related
definition,  it shall be  understood to mean  Borrower on a  consolidated  basis
unless the context clearly requires otherwise.

     1.3 CODE.  Any terms used in this  Agreement  that are  defined in the Code
shall be construed and defined as set forth in the Code unless otherwise defined
herein.

     1.4  CONSTRUCTION.  Unless the context of this  Agreement or any other Loan
Document  clearly  requires  otherwise,  references  to the plural  include  the
singular, references to the singular include the plural, the term "including" is
not  limiting,  and the term "or" has,  except where  otherwise  indicated,  the
inclusive  meaning  represented  by the  phrase  "and/or."  The words  "hereof,"
"herein,"  "hereby,"  "hereunder,"  and similar  terms in this  Agreement or any
other Loan Document refer to this Agreement or any other Loan Documents,  as the
case may be, as a whole and not to any particular provision of this Agreement or
such  other  Loan  Document,  as the case may be.  An  Event  of  Default  shall
"continue"  or be  "continuing"  until such Event of Default  has been waived in
writing by Agent. Section, subsection,  clause, schedule, and exhibit references
herein are to this Agreement unless otherwise  specified.  Any reference in this
Agreement  or in the  Loan  Documents  to  this  Agreement  or  any of the  Loan
Documents  shall  include  all  alterations,  amendments,  changes,  extensions,
modifications, renewals, replacements, substitutions, joinders, and supplements,
thereto and thereof, as applicable.

     1.5 SCHEDULES AND EXHIBITS.  All of the schedules and exhibits  attached to
this Agreement shall be deemed  incorporated  herein by reference.

     1.6 THE TERM  "BORROWER"  OR  "BORROWERS."  Unless  otherwise  specifically
provided herein,  all references to "Borrower" or "Borrowers" herein shall refer
to and include each Borrower separately and all representations contained herein
shall  be  deemed  to be  separately  made  by  each of  them;  and  each of the
covenants, agreements and obligations set forth herein shall be deemed to be the
joint and several  covenants,  agreements  and  obligations of them. Any notice,
request,  consent,  report or other information or agreement  delivered to Agent
and/or any or the Lenders by any  Borrower  shall be deemed to be  ratified  by,
consented to and also delivered by each other Borrower. Each Borrower recognizes
and agrees that each covenant and agreement of "Borrower" or  "Borrowers"  under
this  Agreement  and the other Loan  Documents  shall create a joint and several
obligation of the Borrowers, which may be enforced against Borrowers, jointly or
against each Borrower  separately.  Without limiting the terms of this Agreement

                                       27

<PAGE>

and the other Loan Documents,  security  interests,  assets and collateral shall
extend to the  properties,  interests,  assets and  collateral of each Borrower.
Similarly,  the  term  "Obligations"  shall  include,  without  limitation,  all
obligations,  liabilities and indebtedness of such  corporations,  or any one of
them, to Agent and/or any of the Lenders, whether such obligations,  liabilities
and  indebtedness  shall be joint,  several,  joint and  several or  individual.
Unless otherwise specified in this Agreement, the parties hereto anticipate that
any notice,  request,  consent,  report or other  information or agreement to be
delivered in connection  with this Agreement by Borrowers to Agent and/or any of
the Lenders  will be executed by Panaco,  on behalf of  Borrowers,  and that any
such  notice,  request,  consent,  report  or  other  information  or  agreement
delivered  to Agent  and/or any of the Lenders and  executed by Panaco  shall be
deemed  to be  executed  by Panaco  on  behalf  of all the  Borrowers,  and each
Borrower hereby irrevocably  authorizes and directs Panaco to do the same on its
behalf and irrevocably  appoints Panaco as its attorney in fact for such purpose
and to do all other  things,  on behalf of Panaco  and  Borrowers,  contemplated
under this Agreement and the other Loan Documents. In addition, unless otherwise
specified in this  Agreement,  the parties hereto  anticipate  that any advances
made  hereunder  by  Agent  and/or  any of the  Lenders  to  Borrowers  shall be
disbursed directly to Panaco.

     2. LOAN AND TERMS OF PAYMENT

        2.1 Revolving Advances.

     (a) Subject to the terms and  conditions  of this  Agreement and during the
term of this  Agreement,  each Lender  agrees to make advances  ("Advances")  to
Borrower in an amount at any one time  outstanding  not to exceed such  Lender's
Pro Rata  Share of an  amount  equal to the least of (i) the  Maximum  Revolving
Amount  less  the  Letter  of  Credit/Hedging  Arrangement  Usage,  or (ii)  the
Borrowing  Base, less (A) the aggregate  amount of all Letter of  Credit/Hedging
Arrangement  Usage,  less  (B) the  aggregate  amount  of the  Reserves  Against
Availability,  or (iii) the Unsecured Note Indebtedness Limitation. For purposes
of this Agreement, the "Borrowing Base," as of any date of determination (which,
in the absence of the occurrence and continuation of an Event of Default,  shall
be determined no less  frequently  than monthly),  shall mean the result of:

                     (w)  65% of Borrower's Eligible Proved Developed Producing
      Reserves,  plus

                     (x)  45% of  Borrower's  Eligible  Proved  Developed Non-
      Producing Reserves,  plus

                     (y)  40%  of  Borrower's  Eligible  Proved  Undeveloped
      Reserves, minus

                     (z)  the sum of aggregate amount of reserves,  if any,
      established by Agent under Section 2.1(b).

                                       28

<PAGE>
In determining the Borrowing Base as of any date of  determination,  (a) if such
date of  determination  is March 1st or September 1st, the Proved Reserves shall
be based upon the volumetric  quantity and production  forecasts and the related
lease operating  expenses of Proved Reserves estimated in the Reserve Report for
the immediately  preceding December 31st or June 30th, as applicable,  minus the
amount of Proved  Reserves that has been sold or produced  since the date of the
Reserve Report,  and (b) in the case of a Borrowing Base determined on the first
day of any other month,  the Proved  Reserves shall be based upon the volumetric
quantity and production  forecasts and the related lease  operating  expenses of
Proved Reserves  estimated in the most recently  delivered  Reserve Report minus
the amount of Proved  Reserves that has been sold or produced  since the date of
such Reserve Report.

The Lenders shall have no obligation to make further  Advances  hereunder to the
extent they would cause the outstanding  Revolving  Facility Usage to exceed the
Maximum Revolving  Amount.

Amounts borrowed  pursuant to this Section 2.1 may be repaid and, subject to the
terms and conditions of this  Agreement,  reborrowed at any time during the term
of this Agreement.

     (b) Advance Rate  Adjustments and Reserves;  Proved Reserves  Reappraisals.

               (i)  Anything  to the  contrary in this Section  notwithstanding,
Agent shall have the right to establish  reserves  against the Borrowing Base in
such amounts as Foothill, in its reasonable judgment (from the perspective of an
asset-based  lender) shall deem necessary or appropriate,  including reserves on
account  of  (A)  sums  that  Borrower  is  required  to  pay  (such  as  taxes,
assessments,  insurance  premiums,  or, in the case of leased  assets,  rents or
other amounts payable under such leases) and has failed to pay under any Section
of this Agreement or any other Loan Document, and (B) without duplication of the
foregoing, amounts owing by such Borrower to any Person to the extent secured by
a Lien on, or trust over,  any of the  Collateral,  which Lien or trust,  in the
reasonable  determination  of Foothill  (from the  perspective of an asset-based
lender),  would be likely to have a priority superior to the Agent's Liens (such
as landlord  liens,  ad valorem taxes, or sales taxes where given priority under
applicable law) in and to such item of Collateral.

               (ii)  Agent  shall  have the right to require, from time to time,
Borrower to deliver updated Reserve Reports whereby the volumetric  quantity and
production forecasts and related lease operating expenses of Proved Reserves are
redetermined  from time to time by a qualified  petroleum  engineer  approved by
Agent after the Closing Date for the purpose of recalculating the NYMEX Value of
the Proved  Reserves  located  at the Oil and Gas  Property  Collateral.  In the
absence  of the  occurrence  and  continuation  of an  Event  of  Default,  such
redeterminations  shall occur  semi-annually  on December  31st and June 30th of
each year,  and such  appraisals  shall be  delivered to Agent not later than 60
days after each such date.

     (c) Procedure for Borrowing.  Each Borrowing  shall be made upon Borrower's
irrevocable  request  therefor (the  "Borrowing  Request")  either  delivered in
writing or made by telephone  to Agent  (which  notice must be received by Agent

                                       29

<PAGE>

(x) no later than 1:00 p.m.  (New York  time) on the  Business  Day  immediately
preceding the requested  Funding Date if the  aggregate  amount  requested to be
borrowed on such day by Borrower exceeds $5,000,000,  and (y) no later than 1:00
p.m. (New York time) on the same  Business Day as the requested  Funding Date if
the  aggregate  amount  requested to be borrowed on such day by Borrower is less
than  $5,000,000)  specifying  (i) the  amount  of the  Borrowing,  and (ii) the
requested  Funding Date,  which shall be a Business Day, and each such Borrowing
Request shall be accompanied by a Reserve Report with respect to any Oil and Gas
Properties which are to be acquired by Borrower.  All Advances  requested in any
Borrowing  Request  must be in an amount not less than  $1,000,000  and integral
multiples of $500,000 in excess thereof.

     (d) Agent's  Election.  Promptly after receipt of a request for a Borrowing
pursuant to Section 2.1(c),  Agent shall elect,  in its discretion,  (i) to have
the  terms of  Section  2.1(e)  apply to such  requested  Borrowing,  or (ii) to
request Foothill to make a Foothill Loan pursuant to the terms of Section 2.1(f)
in the amount of the requested Borrowing;  provided,  however,  that if Foothill
declines  in  its  sole   discretion   to  make  a  Foothill  Loan  pursuant  to
Section 2.1(f),  Agent shall elect to have the terms of Section 2.1(e)  apply to
such requested Borrowing.

     (e) Making of Advances.

               (i)  In the  event that  Agent shall elect to  have the terms of
this  Section  2.1(e)  apply to a requested  Borrowing  as  described in Section
2.1(d),  then promptly  after  receipt of a request for a Borrowing  pursuant to
Section  2.1(c),  Agent shall notify the Lenders,  not later than 4:00 p.m. (New
York time) on the Business Day immediately preceding the Funding Date applicable
thereto, by telecopy,  telephone, or other similar form of transmission,  of the
requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata
Share of the requested  Borrowing  available to Agent in  immediately  available
funds, to such account of Agent as Agent may designate, not later than 1:00 p.m.
(New York time) on the Funding Date applicable thereto. After Agent's receipt of
the proceeds of such Advances,  upon  satisfaction of the applicable  conditions
precedent  set forth in Section 3 hereof,  Agent shall make the proceeds of such
Advances  available to Borrower on the applicable  Funding Date by  transferring
same day funds  equal to the  proceeds  of such  Advances  received  by Agent to
Borrower's  Designated  Account;   provided,   however,  that,  subject  to  the
provisions of Section 2.1(k), Agent shall not request any Lender to make, and no
Lender  shall have the  obligation  to make,  any  Advance  if Agent  shall have
received written notice from any Lender, or otherwise has actual knowledge, that
(1) one or more of the  applicable  conditions  precedent set forth in Section 3
will not be satisfied on the requested Funding Date for the applicable Borrowing
unless such  condition  has been waived,  or (2) the requested  Borrowing  would
exceed the  Availability of the Borrower  requesting the Advance on such Funding
Date.

               (ii)  Unless Agent  receives  notice from a Lender on or prior to
the Closing Date or, with respect to any  Borrowing  after the Closing  Date, at
least one (1) Business Day prior to the date of such Borrowing, that such Lender
will not make available as and when required  hereunder to Agent for the account
of Borrower the amount of that Lender's Pro Rata Share of the  Borrowing,  Agent
may assume that each Lender has made or will make such amount available to Agent

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<PAGE>

in immediately  available funds on the Funding Date and Agent may (but shall not
be so required), in reliance upon such assumption, make available to Borrower on
such date a corresponding amount. If and to the extent any Lender shall not have
made its full amount available to Agent in immediately available funds and Agent
in such  circumstances  has made available to Borrower such amount,  that Lender
shall on the Business Day following such Funding Date make such amount available
to Agent,  together  with interest at the  Defaulting  Lenders Rate for each day
during such  period.  A notice  submitted by Agent to any Lender with respect to
amounts owing under this subsection shall be conclusive,  absent manifest error.
If such amount is so made available, such payment to Agent shall constitute such
Lender's Advance on the date of Borrowing for all purposes of this Agreement. If
such amount is not made  available to Agent on the Business  Day  following  the
Funding  Date,  Agent will  notify  Borrower of such  failure to fund and,  upon
demand by Agent,  Borrower  shall pay such amount to Agent for Agent's  account,
together  with  interest  thereon  for each day  elapsed  since the date of such
Borrowing, at a rate per annum equal to the interest rate applicable at the time
to the Advances composing such Borrowing.  The failure of any Lender to make any
Advance on any Funding Date shall not relieve any other Lender of any obligation
hereunder  to make an  Advance  on such  Funding  Date,  but no Lender  shall be
responsible  for the failure of any other  Lender to make the Advance to be made
by such other Lender on any Funding Date.

               (iii)  Agent shall not be  obligated  to transfer to a Defaulting
Lender  any  payments  made by  Borrower  to Agent for the  Defaulting  Lender's
benefit;  nor  shall a  Defaulting  Lender be  entitled  to the  sharing  of any
payments hereunder. Amounts payable to a Defaulting Lender shall instead be paid
to or  retained  by Agent.  Agent may hold and,  in its  discretion,  re-lend to
Borrower  the amount of all such  payments  received  or  retained by it for the
account  of such  Defaulting  Lender.  Solely  for the  purposes  of  voting  or
consenting  to matters with respect to the Loan  Documents and  determining  Pro
Rata  Shares,  such  Defaulting  Lender shall be deemed not to be a "Lender" and
such Lender's  Commitment  shall be deemed to be zero (-0-).  This section shall
remain  effective  with respect to such Lender until (x) the  Obligations  under
this Agreement shall have been declared or shall have become immediately due and
payable or (y) the requisite  non-Defaulting Lenders and Agent shall have waived
such  Lender's  default in writing.  The  operation of this section shall not be
construed  to increase or  otherwise  affect the  Commitment  of any Lender,  or
relieve or excuse the  performance  by  Borrower  of its duties and  obligations
hereunder.

     (f) Making of Foothill Loans.

               (i) In the event  Agent  shall  elect,  with  the  consent of
     Foothill as a Lender,  to have the terms of this Section  2.1(f) apply to a
requested  Borrowing as described in Section 2.1(d),  Foothill as a Lender shall
make an Advance in the amount of such Borrowing (any such Advance made solely by
Foothill as a Lender  pursuant to this  Section  2.1(f)  being  referred to as a
"Foothill  Loan" and such Advances being referred to  collectively  as "Foothill
Loans")  available  to  Borrower  on the  Funding  Date  applicable  thereto  by
transferring same day funds to Borrower's Designated Account. Each Foothill Loan
is an Advance  hereunder  and shall be  subject to all the terms and  conditions
applicable to other Advances,  except that all payments thereon shall be payable
to Foothill as a Lender  solely for its own account  (and for the account of the

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<PAGE>

holder of any participation  interest with respect to such Advance).  Subject to
the provisions of Section 2.1(k),  Agent shall not request  Foothill as a Lender
to make,  and  Foothill as a Lender shall not make,  any Foothill  Loan if Agent
shall have  received  written  notice from any Lender,  or otherwise  has actual
knowledge, that (i) one or more of the applicable conditions precedent set forth
in  Section  3 will  not be  satisfied  on the  requested  Funding  Date for the
applicable  Borrowing  unless  such  condition  has  been  waived,  or (ii)  the
requested  Borrowing  would exceed the  Availability of Borrower on such Funding
Date.  Foothill as a Lender shall not otherwise be required to determine whether
the applicable  conditions  precedent set forth in Section 3 have been satisfied
on the Funding Date applicable  thereto prior to making, in its sole discretion,
any Foothill  Loan.

               (ii) The Foothill  Loans shall be secured by the Collateral and
     shall  constitute  Advances  and  Obligations  hereunder,  and  shall  bear
interest  at the rate  applicable  from  time to time to  Advances  pursuant  to
Section 2.6 hereof.

     (g) Agent Advances.

               (i) Subject  to  the  limitations  set forth  in  the  proviso
contained in this Section 2.1(g), Agent hereby is authorized by Borrower and the
Lenders, from time to time in Agent's sole discretion,  (1) after the occurrence
and during the  continuance  of a Default or an Event of Default,  or (2) at any
time that any of the other applicable  conditions precedent set forth in Section
3 have not been satisfied,  to make Advances to either Borrower on behalf of the
Lenders that Agent,  in its reasonable  business  judgment,  deems  necessary or
desirable (A) to preserve or protect the Collateral, or any portion thereof, (B)
to enhance the  likelihood  of repayment of the  Obligations,  or (C) to pay any
other amount  chargeable  to Borrower  pursuant to the terms of this  Agreement,
including Lender Group Expenses and the costs,  fees, and expenses  described in
Section  10  (any  of  the  Advances  described  in  this  Section 2.1(g)  being
hereinafter  referred  to as  "Agent  Advances");  provided,  that the  Required
Lenders may at any time revoke Agent's  authorization  contained in this Section
2.1(g) to make Agent  Advances,  any such  revocation  to be in  writing  and to
become  effective  upon Agent's  receipt  thereof.

               (ii) Agent Advances shall be repayable on demand and secured by
the Collateral,  shall constitute Advances and Obligations hereunder,  and shall
bear interest at the rate applicable from time to time to the Advances  pursuant
to Section 2.6 hereof.

     (h)  Settlement.  It is agreed  that each  Lender's  funded  portion of the
Advances is intended by the Lenders to equal,  at all times,  such  Lender's Pro
Rata Share of the outstanding Advances. Such agreement  notwithstanding,  Agent,
Foothill,  and the other  Lenders  agree (which  agreement  shall not be for the
benefit  of or  enforceable  by  Borrower)  that  in  order  to  facilitate  the
administration of this Agreement and the other Loan Documents,  settlement among
them as to the Advances,  the Foothill Loans,  and the Agent Advances shall take
place on a periodic basis in accordance with the following provisions:

               (i) Agent shall  request  settlement  ("Settlement")  with the
     Lenders on a weekly basis,  or on a more frequent basis if so determined by
Agent,  (1) on behalf of  Foothill,  with respect to each  outstanding  Foothill
Loan, (2) for itself,  with respect to each Agent Advance,  and (3) with respect

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<PAGE>

to  Collections  received,  as to each by  notifying  the  Lenders by  telecopy,
telephone, or other similar form of transmission,  of such requested Settlement,
no later than 5:00 p.m. (New York time) on the Business Day immediately prior to
the date of such requested  Settlement  (the date of such  requested  Settlement
being the "Settlement  Date").  Such notice of a Settlement Date shall include a
summary  statement of the amount of outstanding  Advances,  Foothill Loans,  and
Agent  Advances for the period since the prior  Settlement  Date,  the amount of
repayments  received in such period, and the amounts allocated to each Lender of
the interest,  fees, and other charges for such period. Subject to the terms and
conditions contained herein (including Section  2.1(e)(iii)):  (y) if a Lender's
balance  of the  Advances,  Foothill  Loans,  and Agent  Advances  exceeds  such
Lender's Pro Rata Share of the Advances,  Foothill Loans,  and Agent Advances as
of a  Settlement  Date,  then Agent  shall by no later than 3:00 p.m.  (New York
time) on the  Settlement  Date transfer in  immediately  available  funds to the
account of such  Lender as such Lender may  designate,  an amount such that each
such Lender shall, upon receipt of such amount,  have as of the Settlement Date,
its Pro Rata Share of the Advances,  Foothill Loans, and Agent Advances; and (z)
if a Lender's  balance of the Advances,  Foothill  Loans,  and Agent Advances is
less than such  Lender's Pro Rata Share of the  Advances,  Foothill  Loans,  and
Agent  Advances as of a  Settlement  Date,  such Lender shall no later than 3:00
p.m. (New York time) on the Settlement  Date transfer in  immediately  available
funds to such account of Agent as Agent may designate,  an amount such that each
such Lender shall, upon transfer of such amount, have as of the Settlement Date,
its Pro Rata Share of the Advances,  Foothill Loans,  and Agent  Advances.  Such
amounts made  available to Agent under clause (z) of the  immediately  preceding
sentence shall be applied against the amounts of the applicable Foothill Loan or
Agent  Advance and,  together  with the portion of such  Foothill  Loan or Agent
Advance  representing  Foothill's  Pro  Rata  Share  thereof,  shall  constitute
Advances of such Lenders.  If any such amount is not made  available to Agent by
any Lender on the Settlement Date  applicable  thereto to the extent required by
the terms hereof, Agent shall be entitled to recover for its account such amount
on demand from such Lender  together  with  interest  thereon at the  Defaulting
Lenders Rate.

               (ii) In determining  whether a Lender's  balance of the Advances,
Foothill Loans,  and Agent Advances is less than, equal to, or greater than such
Lender's Pro Rata Share of the Advances,  Foothill Loans,  and Agent Advances as
of a Settlement Date, Agent shall, as part of the relevant Settlement,  apply to
such balance the portion of payments actually received in good funds by Agent or
Foothill  with  respect to  principal,  interest,  fees  payable by Borrower and
allocable to the Lenders  hereunder,  and proceeds of Collateral.  To the extent
that a net amount is owed to any such Lender  after such  application,  such net
amount shall be  distributed by Agent or Foothill to that Lender as part of such
next Settlement.

               (iii) Between  Settlement Dates,  Agent, to the extent  no Agent
Advances  or  Foothill  Loans  are  outstanding,  may pay over to  Foothill  any
payments  received by Agent, that in accordance with the terms of this Agreement
would be applied to the reduction of the Advances, for application to Foothill's
Pro Rata  Share of the  Advances.  If, as of any  Settlement  Date,  Collections
received since the then immediately  preceding Settlement Date have been applied
to  Foothill's  Pro Rata Share of the Advances  other than to Foothill  Loans or
Agent Advances, as provided for in the previous sentence,  Foothill shall pay to
Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be

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<PAGE>

applied to the  outstanding  Advances of such Lenders,  an amount such that each
Lender shall, upon receipt of such amount, have, as of such Settlement Date, its
Pro Rata Share of the  Advances.  During the period  between  Settlement  Dates,
Foothill with respect to Foothill  Loans,  Agent with respect to Agent Advances,
and each Lender with respect to the Advances other than Foothill Loans and Agent
Advances,  shall be entitled to interest at the applicable rate or rates payable
under this Agreement on the daily amount of funds  employed by Foothill,  Agent,
or the Lenders, as applicable.

     (i) Notation.  Agent shall record on its books the principal  amount of the
Advances  owing to each Lender,  including the Foothill Loans owing to Foothill,
and Agent  Advances  owing to Agent,  and the interests  therein of each Lender,
from time to time.  In addition,  each Lender is  authorized,  at such  Lender's
option,  to note the date and amount of each payment or  prepayment of principal
of such Lender's Advances in its books and records,  including computer records,
such books and records  constituting  rebuttably  presumptive  evidence,  absent
manifest error, of the accuracy of the information contained therein.

     (j) Lenders' Failure to Perform.All Advances (other than Foothill Loans and
Agent  Advances) shall be made by the Lenders  simultaneously  and in accordance
with  their  Pro Rata  Shares.  It is  understood  that (i) no  Lender  shall be
responsible  for any failure by any other  Lender to perform its  obligation  to
make any Advances hereunder, nor shall any Commitment of any Lender be increased
or  decreased  as a result of any  failure by any other  Lender to  perform  its
obligation to make any Advances hereunder,  and (ii) no failure by any Lender to
perform its  obligation  to make any Advances  hereunder  shall excuse any other
Lender  from  its  obligation  to make  any  Advances  hereunder.

     (k)  Optional  Overadvances.  Any  contrary  provision  of  this  Agreement
notwithstanding,  if the condition for borrowing  under Section 3.2(d) cannot be
fulfilled,  the Lenders  nonetheless  hereby  authorize  Agent or  Foothill,  as
applicable, and Agent or Foothill, as applicable,  may, but is not obligated to,
knowingly and intentionally continue to make Advances (including Foothill Loans)
to Borrower such failure of condition  notwithstanding,  so long as, at any time
(i) the outstanding  Revolving Facility Usage does not exceed the Borrowing Base
by more  than the  lesser  of (A)  seven  and  one-half  percent  (7.5%)  of the
Borrowing Base or (B) $1,500,000,  and (ii) the outstanding  Revolving  Facility
Usage  (except  for and  excluding  amounts  charged  to the  Loan  Account  for
interest,  fees, or Lender Group Expenses) does not exceed the Maximum Revolving
Amount.  The  foregoing  provisions  are for the sole and  exclusive  benefit of
Agent, Foothill, and the Lenders and are not intended to benefit Borrower in any
way. The Advances and Foothill Loans,  as applicable,  that are made pursuant to
this  Section  2.1(k) shall be subject to the same terms and  conditions  as any
other Advance or Foothill Loan, as applicable,  except that the rate of interest
applicable thereto shall be the rates set forth in Section 2.6(b) hereof without
regard to the  presence or absence of a Default or Event of  Default;  provided,
that the Required Lenders may, at any time during the continuance of an Event of
Default or if Borrower  fails to satisfy any other material  lending  condition,
revoke  Agent's   authorization   contained  in  this  Section  2.1(k)  to  make
Overadvances  (except for and excluding  amounts charged to the Loan Account for
interest,  fees, or Lender Group Expenses), any such revocation to be in writing
and to become effective upon Agent's receipt thereof.

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<PAGE>

               In the  event Agent  obtains  actual  knowledge  that Revolving
Facility  Usage  exceeds  the  amount  permitted  by  the  preceding  paragraph,
regardless  of the  amount of or reason  for such  excess,  Agent  shall  notify
Lenders  as soon as  practicable  (and  prior to  making  any,  or any  further,
intentional  Overadvances  (except for and excluding amounts charged to the Loan
Account for interest,  fees, or Lender Group Expenses))  unless Agent determines
that prior notice would result in imminent harm to the Collateral or its value),
and the Lenders  thereupon  shall,  together with Agent,  jointly  determine the
terms of  arrangements  that shall be  implemented  with  Borrower  intended  to
reduce,  within a  reasonable  time,  the  outstanding  principal  amount of the
Advances to Borrower to an amount permitted by the preceding  paragraph.  In the
event any Lender  disagrees over the terms of reduction  and/or repayment of any
Overadvance,   the  terms  of  reduction  and/or  repayment   thereof  shall  be
implemented  according to the determination of the Required Lenders.

               Each Lender shall be  obligated to settle with Agent as provided
in  Section 2.1(h)  for the  amount  of such  Lender's  Pro  Rata  Share  of any
unintentional  Overadvances  by Agent reported to such Lender,  any  intentional
Overadvances  made as permitted under this Section 2.1(k),  and any Overadvances
resulting  from the charging to the Loan Account of  interest,  fees,  or Lender
Group Expenses.

               (l) Effect of Bankruptcy.  If a case is commenced by or against
Borrower under the U.S.  Bankruptcy Code, or other statute  providing for debtor
relief, then, unless otherwise agreed by all Lenders, the Lender Group shall not
make additional loans or provide additional  financial  accommodations under the
Loan Documents to Borrower as debtor or debtor-in-possession,  or to any trustee
for Borrower,  nor consent to the use of cash collateral (provided that the Loan
Account shall continue to be charged,  to the fullest  extent  permitted by law,
for accruing interest, fees, and Lender Group Expenses)

          2.2  Letter of Credit Subfacility

     (a) Agreement to Cause Issuance;  Amounts; Outside Expiration Date. Subject
to the terms and conditions of this Agreement,  Agent agrees to issue letters of
credit for the account of Borrower  (each,  an "L/C") or to issue  guarantees of
payment,  indemnities,  participations  and/or undertakings (each such guaranty,
indemnity,  participation  or  undertaking  an "L/C  Guaranty")  with respect to
letters of credit  issued by an issuing bank for the account of Borrower.  Agent
shall  have no  obligation  to issue a Letter of Credit if any of the  following
would result:

               (i) the sum of 100%  of the  aggregate  amount  of all  Letter of
          Credit  Usage would  exceed  the  Borrowing  Base less  the amount of
          outstanding  Advances  less  the  aggregate  amount of  the  Hedging
          Arrangement  Usage,  less the aggregate  amount of  Reserves  Against
          Availability and reserves established under Section 2.1(b); or

               (ii) the aggregate  amount of all Letter  of Credit Usage  would
          exceed  the  least of:  (x) the  Maximum  Revolving  Amount  less the
          amount of outstanding  Advances less  the  aggregate  amount  of  the

                                       35

<PAGE>

          Hedging Arrangement Usage, less  the  aggregate  amount  of  Reserves
          Against Availability and  reserves established under  Section  2.1(b);
          or (y)  the  Unsecured  Note  Indebtedness Limitation; or

               (iii) the outstanding  Obligations  would   exceed  the  Maximum
          Revolving Amount; or

               (iv) the aggregate  amount of all  Letter of Credit  Usage would
          exceed $4,000,000; or

               (v)  the  aggregate  amount  of  all  Letter  of  Credit/Hedging
          Agreement Usage would exceed $10,000,000.

Borrower expressly understands and agrees that Agent shall have no obligation to
arrange for the  issuance by issuing  banks of the letters of credit that are to
be the subject of L/C Guarantees.  Borrower and the Lender Group acknowledge and
agree that  certain of the  letters of credit  that are to be the subject of L/C
Guarantees may be  outstanding on the Closing Date.  Each Letter of Credit shall
have an  expiry  date no later  than 60 days  prior  to the  date on which  this
Agreement is scheduled to  terminate  under  Section 3.4 (without  regard to any
potential  renewal  term) and all such  Letters  of Credit  shall be in form and
substance  acceptable  to Agent in its sole  discretion.  If the Lender Group is
obligated to advance funds under a Letter of Credit,  Borrower immediately shall
reimburse  such amount to Agent and, in the absence of such  reimbursement,  the
amount  so  advanced  immediately  and  automatically  shall be  deemed to be an
Advance  hereunder  and,  thereafter,  shall  bear  interest  at the  rate  then
applicable to such Advances under Section 2.6.

     (b) Indemnification. Borrower hereby agrees to indemnify, save, defend, and
hold the Lender Group  harmless  from any loss,  cost,  expense,  or  liability,
including payments made by the Lender Group,  expenses, and reasonable attorneys
fees  incurred  by the Lender  Group  arising out of or in  connection  with any
Letter of Credit.  Borrower agrees to be bound by the issuing bank's regulations
and  interpretations of any Letters of Credit guarantied by the Lender Group and
opened to or for  Borrower's  account or by Agent's  interpretations  of any L/C
issued by the  Lender  Group to or for  Borrower's  account,  even  though  this
interpretation  may be different from Borrower's  own, and Borrower  understands
and agrees that the Lender Group shall not be liable for any error,  negligence,
or  mistake,  whether  of  omission  or  commission,   in  following  Borrower's
instructions  or those  contained in the Letter of Credit or any  modifications,
amendments, or supplements thereto. Borrower understands that the L/C Guarantees
may require the Lender Group to indemnify  the issuing bank for certain costs or
liabilities  arising  out of claims  by  Borrower  against  such  issuing  bank.
Borrower  hereby agrees to indemnify,  save,  defend,  and hold the Lender Group
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees),  or  liability  incurred by the Lender  Group under any L/C Guaranty as a
result of the Lender Group's indemnification of any such issuing bank.

     (c) Supporting  Materials.  Borrower hereby authorizes and directs any bank
that  issues a letter of credit  guaranteed  by the  Lender  Group to deliver to
Agent all instruments,  documents,  and other writings and property  received by
the issuing bank pursuant to such letter of credit,  and to accept and rely upon

                                       36

<PAGE>

Agent's  instructions  and  agreements  with  respect to all matters  arising in
connection with such letter of credit and the related application.  Borrower may
or may not be the  "applicant" or "account party" with respect to such letter of
credit.

     (d) Compensation for Letters of Credit.  Any and all charges,  commissions,
fees, and costs  incurred by Agent relating to the letters of credit  guaranteed
by the Lender Group shall be  considered  Lender Group  Expenses for purposes of
this Agreement and immediately  shall be reimbursable by Borrower to Agent.

     (e) Cash  Collateral.  Immediately  upon the termination of this Agreement,
Borrower  agrees to either (i) provide cash collateral to be held by Agent in an
amount  equal to 110% of the maximum  amount of the Lender  Group's  obligations
under  outstanding  Letters of Credit,  or (ii) cause to be  delivered  to Agent
releases of all of the Lender Group's  obligations under outstanding  Letters of
Credit.  At Agent's  discretion,  any proceeds of  Collateral  received by Agent
after the occurrence and during the  continuation  of an Event of Default may be
held as the cash  collateral  required by this  Section  2.2(e).

     (f) Increased  Costs. If by reason of (i) any change in any applicable law,
treaty,  rule, or regulation or any change in the  interpretation or application
by any  governmental  authority of any such  applicable  law,  treaty,  rule, or
regulation,  or (ii) compliance by the issuing bank or Agent with any direction,
request, or requirement (irrespective of whether having the force of law) of any
governmental  authority or monetary  authority  including,  without  limitation,
Regulation  D of the Board of Governors  of the Federal  Reserve  System as from
time to time in effect (and any successor thereto):

                    a. any reserve,  deposit, or similar requirement is or shall
be imposed or modified in respect of any Letters of Credit issued hereunder,  or

                    b. there shall be imposed on  the issuing bank or any other
condition  regarding any letter of credit,  or Letter of Credit,  as applicable,
issued pursuant hereto;

and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or the Lender  Group of issuing,  making,  guaranteeing,  or
maintaining  any letter of credit,  or Letter of Credit,  as  applicable,  or to
reduce the amount  receivable  in respect  thereof by such  issuing  bank or the
Lender  Group,  then,  and in any such case,  the Lender  Group may, at any time
within a reasonable  period after the additional  cost is incurred or the amount
received is reduced,  notify  Borrower,  and  Borrower  shall pay on demand such
amounts as the issuing bank or Agent may specify to be  necessary to  compensate
the  issuing  bank or the  Lender  Group  for such  additional  cost or  reduced
receipt,  together  with  interest  on such  amount from the date of such demand
until  payment in full  thereof at the rate set forth in  Section  2.6(a)(i)  or
(c)(i),  as applicable.  The  determination by the issuing bank or Agent, as the
case may be, of any amount due pursuant to this Section 2.2(f),  as set forth in
a certificate setting forth the calculation thereof in reasonable detail, shall,
in the absence of manifest or  demonstrable  error,  be final and conclusive and
binding on all of the parties hereto.

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<PAGE>

     (g)  Participations.

     (1) Purchase of Participations.  Immediately upon issuance of any Letter of
Credit in accordance  with this Section 2.2, each Lender shall be deemed to have
irrevocably  and  unconditionally  purchased  and received  without  recourse or
warranty,  an undivided  interest  and  participation  in the credit  support or
enhancement  provided  through  Agent  to such  issuer  in  connection  with the
issuance of such Letter of Credit,  equal to such Lender's Pro Rata Share of the
face  amount of such  Letter  of  Credit  (including,  without  limitation,  all
obligations  of Borrower  with respect  thereto,  and any  security  therefor or
guaranty pertaining thereto).

     (2) Documentation.  Upon the request of any Lender,  Agent shall furnish to
such Lender copies of any Letter of Credit, reimbursement agreements executed in
connection therewith, application for any Letter of Credit and credit support or
enhancement provided through Agent in connection with the issuance of any Letter
of Credit,  and such other  documentation as may reasonably be requested by such
Lender.

     (3)  Obligations  Irrevocable.  The  obligations  of  each  Lender  to make
payments  to Agent with  respect to any Letter of Credit or with  respect to any
credit support or enhancement provided through Agent with respect to a Letter of
Credit,  and the  obligations  of  Borrower to make  payments to Agent,  for the
account of the Lenders,  shall be irrevocable,  not subject to any qualification
or exception whatsoever, including any of the following circumstances:

     (i) any lack of validity or  enforceability of this Agreement or any of the
other Loan Documents;

     (ii) the  existence  of any claim,  setoff,  defense or other  right  which
Borrower may have at any time against a beneficiary  named in a Letter of Credit
or any  transferee  of any  Letter of Credit  (or any  Person  for whom any such
transferee  may be  acting),  any  Lender,  Agent,  the issuer of such Letter of
Credit,  or any other Person,  whether in connection  with this  Agreement,  any
Letter  of  Credit,  the  transactions  contemplated  herein  or  any  unrelated
transactions  (including any  underlying  transactions  between  Borrower or any
other  Person  and the  beneficiary  named in any Letter of  Credit);

     (iii) any draft,  certificate  or any other  document  presented  under the
Letter of Credit proving to be forged,  fraudulent,  invalid or  insufficient in
any respect or any statement  therein being untrue or inaccurate in any respect;

     (iv) the  surrender or impairment  of any security for the  performance  or
observance  of any of the  terms  of any  of  the  Loan  Documents; or

     (v) the  occurrence of any Default or Event of Default.

     (h) Recovery or  Avoidance  of Payments.  In the event any payment by or on
behalf of Borrower  received  by Agent with  respect to any Letter of Credit (or
any  guaranty by  Borrower  or  reimbursement  obligation  of Borrower  relating
thereto)  and  distributed  by the  Agent to the  Lenders  on  account  of their




                                       38

<PAGE>

respective participations therein, is thereafter set aside, avoided or recovered
from  Agent in  connection  with any  receivership,  liquidation  or  bankruptcy
proceeding,  the  Lenders  shall,  upon  demand  by  Agent,  pay to Agent  their
respective  Pro Rata  Shares of such  amount  set aside,  avoided or  recovered,
together  with interest at the rate required to be paid by Agent upon the amount
required to be repaid by it.

     2.3 Hedging Arrangement Subfacility

     (a) Agreement to Cause Issuance;  Amounts; Outside Expiration Date. Subject
to the terms and conditions of this Agreement,  Agent agrees to issue guarantees
of payment,  indemnities,  participations and/or undertakings related to Hedging
Agreements (each such guaranty, indemnity, participation or other undertaking, a
"Hedging Agreement Undertaking") with respect to Hedging Agreements entered into
with, or arranged by or through,  directly or indirectly,  one or more financial
institutions  acceptable  to Agent (each,  an "Arranging  Institution")  for the
account of Borrower. Agent shall have no obligation to issue a Hedging Agreement
Undertaking  to Borrower if any of the following  would  result:

     (i) the sum of 100% of the  aggregate  amount  of all  Hedging  Arrangement
Usage,  would exceed the Borrowing Base less the amount of outstanding  Advances
less the  aggregate  amount of the Letter of Credit  Usage,  less the  aggregate
amount  of  Reserves  Against   Availability  and  reserves   established  under
Section 2.1(b);  or

     (ii) the aggregate amount of all Hedging Arrangement Usage would exceed the
least of:  (x) the  Maximum  Revolving  Amount  less the  amount of  outstanding
Advances  less the  aggregate  amount of the  Letter of Credit  Usage,  less the
aggregate amount of Reserves Against Availability and reserves established under
Section 2.1(b); or (y) the Unsecured Note Indebtedness Limitation; or

     (iv) the aggregate amount of all Letter of Credit/Hedging Arrangement Usage
would exceed $10,000,000.

Borrower expressly understands and agrees that Agent shall have no obligation to
arrange  for any  Arranging  Institution  to enter into or arrange  any  Hedging
Agreement that is to be the subject of Hedging Agreement Undertakings.  Borrower
and  the  Lender  Group  acknowledge  and  agree  that  certain  of the  Hedging
Agreements that are to be the subject of Hedging  Agreement  Undertakings may be
outstanding on the Closing Date. Each Hedging Agreement that is to be subject of
a Hedging Agreement Undertaking shall have an expiry date no later than the date
on which this  Agreement is scheduled  to terminate  under  Section 3.4 (without
regard to any  potential  renewal  term until such time as the renewal  term has
been exercised and became effective) and all such Hedging Agreements and Hedging
Agreement Undertakings shall be in form and substance acceptable to Agent in its
sole  discretion.  If the Lender  Group is  obligated  to advance  funds under a
Hedging Agreement Undertaking,  Borrower immediately shall reimburse such amount
to Agent and,  in the  absence  of such  reimbursement,  the amount so  advanced

                                       39

<PAGE>

immediately and  automatically  shall be deemed to be an Advance  hereunder and,
thereafter,  shall bear  interest at the rate then  applicable  to such Advances
under  Section 2.6.

     (b) Indemnification. Borrower hereby agrees to indemnify, save, defend, and
hold the Lender Group  harmless  from any loss,  cost,  expense,  or  liability,
including payments made by the Lender Group,  expenses, and reasonable attorneys
fees  incurred  by the Lender  Group  arising out of or in  connection  with any
Hedging  Agreement  Undertaking.  Borrower  agrees to be bound by the  Arranging
Institution's   regulations  and   interpretations  of  any  Hedging  Agreements
guarantied,  indemnified,  participated in or otherwise undertaken by the Lender
Group and opened to or for Borrower's  account or by Agent's  interpretations of
any  Hedging  Agreement  Undertaking  issued  by  the  Lender  Group  to or  for
Borrower's  account,  even  though this  interpretation  may be  different  from
Borrower's own, and Borrower  understands and agrees that the Lender Group shall
not be liable for any error,  negligence,  or  mistake,  whether of  omission or
commission,  in  following  Borrower's  instructions  or those  contained in the
Hedging Agreements or any  modifications,  amendments,  or supplements  thereto.
Borrower  understands  that the Hedging  Agreement  Undertakings may require the
Lender  Group to  indemnify  the  Arranging  Institution  for  certain  costs or
liabilities arising out of claims by Borrower against any Arranging Institution.
Borrower  hereby agrees to indemnify,  save,  defend,  and hold the Lender Group
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees),  or liability  incurred by the Lender  Group under any Hedging  Agreement
Undertaking as a result of the Lender Group's  indemnification  of any Arranging
Institution.

     (c)  Supporting  Materials.  Borrower  hereby  authorizes  and directs each
Arranging Institution to deliver to Agent all instruments,  documents, and other
writings and property  received by such  Arranging  Institution  pursuant to any
Hedging  Agreements,  and,  following  Agent's  notification  to such  Arranging
Institution  that an Event of  Default  has  occurred,  to accept  and rely upon
Agent's  instructions  and  agreements  with  respect to all matters  arising in
connection with such Hedging Agreement and the related application. Borrower may
or may not be the  "applicant" or "account party" with respect to such letter of
credit.

     (d) Compensation for Hedging Agreement  Undertakings.  Any and all charges,
commissions,  fees,  and  costs  incurred  by  Agent  relating  to  the  Hedging
Agreements guaranteed by the Lender Group and the Hedging Agreement Undertakings
shall be  considered  Lender Group  Expenses for purposes of this  Agreement and
immediately  shall be  reimbursable by Borrower to Agent.

     (e) Cash  Collateral.  Immediately  upon the termination of this Agreement,
Borrower  agrees to either (i) provide cash collateral to be held by Agent in an
amount  equal to 110% of the maximum  amount of the Lender  Group's  obligations
under outstanding Hedging Agreement Undertakings,  or (ii) cause to be delivered
to Agent releases of all of the Lender  Group's  obligations  under  outstanding
Hedging  Agreement  Undertakings.   At  Agent's  discretion,   any  proceeds  of
Collateral received by Agent after the occurrence and during the continuation of
an Event of Default may be held as the cash collateral  required by this Section
2.3(e).

                                       40

<PAGE>


     (f) Increased  Costs. If by reason of (i) any change in any applicable law,
treaty,  rule, or regulation or any change in the  interpretation or application
by any  governmental  authority of any such  applicable  law,  treaty,  rule, or
regulation,  or (ii)  compliance by any Arranging  Institution or Agent with any
direction,  request, or requirement (irrespective of whether having the force of
law) of any  governmental  authority or monetary  authority  including,  without
limitation, Regulation D of the Board of Governors of the Federal Reserve System
as from time to time in effect (and any successor thereto):

     a. any reserve,  deposit,  or similar requirement is or shall be imposed or
modified in respect of any Hedging Agreement  Undertaking or Hedging  Agreements
guaranteed  indemnified,  participated  in or with respect to which there is any
undertaking hereunder, or

     b.  there  shall be  imposed  on any  Arranging  Institution  or any  other
condition regarding any Hedging Agreement or Hedging Agreement Undertaking;

and the result of the foregoing is to increase, directly or indirectly, the cost
to  an  Arranging   Institution   or  the  Lender  Group  of  issuing,   making,
guaranteeing,   or  maintaining  any  Hedging  Agreement  or  Hedging  Agreement
Undertaking,  as  applicable,  or to reduce  the  amount  receivable  in respect
thereof by any Arranging  Institution or the Lender Group, then, and in any such
case,  the Lender  Group may, at any time within a  reasonable  period after the
additional cost is incurred or the amount received is reduced,  notify Borrower,
and Borrower  shall pay on demand such amounts as any Arranging  Institution  or
Agent may specify to be necessary to compensate the Arranging Institution or the
Lender Group for such additional cost or reduced receipt, together with interest
on such amount from the date of such demand until payment in full thereof at the
rate set forth in Section 2.6(a)(i) or (c)(i), as applicable.  The determination
by any  Arranging  Institution  or Agent,  as the case may be, of any amount due
pursuant to this Section 2.3(f), as set forth in a certificate setting forth the
calculation  thereof in reasonable detail,  shall, in the absence of manifest or
demonstrable  error,  be final and  conclusive and binding on all of the parties
hereto.

     (g) Participations.

     (1) Purchase of  Participations.  Immediately  upon issuance of any Hedging
Agreement  Undertaking in accordance with this Section 2.3, each Lender shall be
deemed to have  irrevocably and  unconditionally  purchased and received without
recourse or warranty,  an undivided  interest  and  participation  in the credit
support or enhancement  provided through Agent to such issuer in connection with
the issuance of such Hedging Agreement  Undertaking,  equal to such Lender's Pro
Rata Share of the face amount of such Hedging Agreement Undertaking  (including,
without  limitation,  all obligations of Borrower with respect thereto,  and any
security therefor or Undertaking pertaining thereto).

     (2) Documentation.  Upon the request of any Lender,  Agent shall furnish to
such Lender copies of any Hedging Agreement,  reimbursement  agreements executed
in  connection  therewith,  application  for any  Hedging  Agreement  and credit

                                       41
<PAGE>

support or enhancement  provided  through Agent in connection  with the entering
into  or  arrangement  of any  Hedging  Agreement  guaranteed  hereunder  or the
issuance of any Hedging Agreement  Undertaking,  and such other documentation as
may reasonably be requested by such Lender.

     (3)  Obligations  Irrevocable.  The  obligations  of  each  Lender  to make
payments  to Agent with  respect to any  Hedging  Agreement,  Hedging  Agreement
Undertaking  or with  respect to any  credit  support  or  enhancement  provided
through  Agent with  respect to a any  Hedging  Agreement  or Hedging  Agreement
Undertaking,  and the obligations of Borrower to make payments to Agent, for the
account of the Lenders,  shall be irrevocable,  not subject to any qualification
or exception whatsoever, including any of the following circumstances:

     (i) any lack of validity or  enforceability of this Agreement or any of the
other Loan Documents;

     (ii) the  existence  of any claim,  setoff,  defense or other  right  which
Borrower may have at any time against a counterparty to any Hedging Agreement or
any  transferee  of any  Hedging  Agreement  (or any  Person  for  whom any such
transferee may be acting), any Lender, Agent, any Arranging Institution,  or any
other Person, whether in connection with this Agreement,  any Hedging Agreement,
any Hedging Agreement Undertaking,  the transactions  contemplated herein or any
unrelated transactions  (including any underlying  transactions between Borrower
or any other Person and the  counterparty to the Hedging  Agreement);

     (iii) any draft,  certificate  or any other  document  presented  under any
Hedging  Agreement  or  Hedging  Agreement  Undertaking  proving  to be  forged,
fraudulent,  invalid or  insufficient  in any respect or any  statement  therein
being untrue or inaccurate  in any respect;

     (iv) the  surrender or impairment  of any security for the  performance  or
observance  of any of the  terms  of any  of  the  Loan  Documents;

or (v)  the
occurrence of any Default or Event of Default.

     (h) Recovery or  Avoidance  of Payments.  In the event any payment by or on
behalf of  Borrower  received  by Agent with  respect to any  Hedging  Agreement
Undertaking (or any guaranty by Borrower or reimbursement obligation of Borrower
relating  thereto)  and  distributed  by the Agent to the  Lenders on account of
their respective  participations  therein,  is thereafter set aside,  avoided or
recovered  from  Agent in  connection  with  any  receivership,  liquidation  or
bankruptcy  proceeding,  the Lenders shall,  upon demand by Agent,  pay to Agent
their respective Pro Rata Shares of such amount set aside, avoided or recovered,
together  with interest at the rate required to be paid by Agent upon the amount
required to be repaid by it.

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<PAGE>


     2.4   Payments

     (a) Payments by Borrower.

     (i) All  payments to be made by  Borrower  shall be made  without  set-off,
recoupment,  deduction,  or counterclaim,  except as otherwise  required by law.
Except as otherwise expressly provided herein, all payments by Borrower shall be
made to Agent for the  account of the  Lenders at Agent's  address  set forth in
Section 12, and shall be made in immediately available funds, no later than 2:00
p.m. (New York time) on the date specified herein. Any payment received by Agent
later than 2:00 p.m. (New York time), at the option of Agent, shall be deemed to
have been received on the following Business Day and any applicable  interest or
fee shall  continue to accrue until such  following  Business Day.

     (ii)  Whenever any payment is due on a day other than a Business  Day, such
payment shall be made on the following  Business Day, and such extension of time
shall in such case be included in the  computation  of interest or fees,  as the
case may be.

     (iii) Unless Agent receives notice from Borrower prior to the date on which
any payment is due to the Lenders  that  Borrower  will not make such payment in
full as and when required,  Agent may assume that Borrower has made such payment
in full to Agent on such date in immediately  available funds and Agent may (but
shall not be so required), in reliance upon such assumption,  distribute to each
Lender on such due date an amount equal to the amount then due such  Lender.  If
and to the extent  Borrower  has not made such  payment  in full to Agent,  each
Lender  shall repay to Agent on demand such amount  distributed  to such Lender,
together with interest  thereon at the Reference Rate for each day from the date
such  amount  is  distributed  to  such  Lender  until  the  date  repaid.

     (b)  Apportionment,  Application,  and  Reversal  of  Payments.  Except  as
otherwise  provided  with  respect  to  Defaulting  Lenders  and  except  as may
otherwise be agreed among the Lenders, aggregate principal and interest payments
shall  be  apportioned  ratably  among  the  Lenders  (according  to the  unpaid
principal  balance of the  Advances to which such  payments  relate held by each
Lender) and  payments of the fees (other than fees  designated  for Agent's sole
and separate  account)  shall, as applicable,  be apportioned  ratably among the
Lenders.  All  payments  shall be  remitted to Agent and all such  payments  not
relating to  principal  or interest of specific  Advances,  or not  constituting
payment of specific  fees,  and all  proceeds  of  Accounts or other  Collateral
received  by  Agent,  shall be  applied,  first,  to pay any  fees,  or  expense
reimbursements  then  due to Agent  from  Borrower;  second,  to pay any fees or
expense  reimbursements  then due to the Lenders from  Borrower;  third,  to pay
interest  due in respect of all  Advances  (including  Foothill  Loans and Agent
Advances);  fourth,  to pay or  prepay  principal  of  Foothill  Loans and Agent
Advances;  fifth,  ratably to pay principal of the Advances (other than Foothill
Loans and Agent  Advances);  sixth,  to be held by Agent as cash  collateral  in
accordance with Section 2.2(e) hereof with respect to  unreimbursed  obligations
in  respect  of  Letters  of  Credit;  and  seventh,  ratably  to pay any  other
Obligations due to Agent or any Lender by Borrower.

                                       43

<PAGE>

     2.5  Overadvances.  If,  at any  time  or for any  reason,  the  amount  of
Obligations  pursuant to Sections  2.1 and 2.2 is greater than either the Dollar
or percentage  limitations set forth in Sections 2.1 or 2.2 (an  "Overadvance"),
Borrower  immediately  shall pay to Agent,  in cash,  the amount of such excess,
which amount shall be used by Agent to reduce the Obligations in accordance with
the  priority set forth in Section  2.4(b).

     2.6 Interest and Letter of Credit Fees: Rates,  Payments,  and Calculations

     (a) Interest  Rate.  Except as provided in clause (c) and clause (d) below,
all Obligations  (except for amounts undrawn under Letters of Credit and Hedging
Arrangement  Usage) shall bear interest on the Daily Balance at a per annum rate
equal to the sum of (i) the then applicable  Margin as the applicable Margin may
change from time to time,  plus (ii) the  Reference  Rate.

     (b) Letter of Credit Fee; Hedging Agreement Undertaking Fee. Borrower shall
pay Agent,  for the ratable  benefit of the Lender Group,  a fee (in addition to
the charges, commissions,  fees, and costs set forth in Section 2.2(d)) equal to
1.5% per annum times the amount of the undrawn Letters of Credit. Borrower shall
pay Agent,  for the ratable  benefit of the Lender Group,  a fee (in addition to
the charges, commissions,  fees, and costs set forth in Section 2.3(d)) equal to
1.5% per annum times the amount of the Hedging  Arrangements  Usage.

     (c) Default Rate.  Upon the  occurrence and during the  continuation  of an
Event of Default,  (i) all Obligations  (except amounts undrawn under Letters of
Credit and Hedging  Arrangement  Usage) shall bear  interest at a per annum rate
equal to the sum of (A) the then  applicable  Default  Margin as the  applicable
Default Margin may change from time to time,  plus (B) the Reference  Rate, (ii)
the Letter of Credit fee  provided in Section  2.6(b) shall be increased to 5.5%
per  annum  times  the  amount  of the  undrawn  Letters  of  Credit  that  were
outstanding  during  the  immediately  preceding  month,  and (iii) the  Hedging
Agreement  Undertaking fee provided in Section 2.6(b) shall be increased to 5.5%
per annum times the amount of the Hedging Arrangement Usage that was outstanding
during the immediately  preceding month.

     (d) Minimum  Interest.  In no event  shall the rate of interest  chargeable
under Section  2.6(a) for any day be less than 8% per annum.  To the extent that
interest  accrued  hereunder at the rate set forth in such section would be less
than the foregoing  minimum daily rate, the interest rate  chargeable  hereunder
for such day  automatically  shall be deemed  increased to the minimum rate.

     (e) Payments. Interest and Letter of Credit fees payable hereunder shall be
due and  payable,  in  arrears,  on the first day of each month  during the term
hereof. Borrower hereby authorizes Agent, at its option, without prior notice to
Borrower,  to charge such  interest and Letter of Credit fees,  all Lender Group
Expenses (as and when  incurred),  the  charges,  commissions,  fees,  and costs
provided for in Section  2.2(d) (as and when accrued or incurred),  the fees and
charges provided for in Section 2.11 (as and when accrued or incurred),  and all
installments  or other  payments due under any Loan Document to Borrower's  Loan
Account,  which  amounts  thereafter  shall  accrue  interest  at the rate  then

                                       44

<PAGE>

applicable  to  Advances  hereunder.  Any  interest  not paid  when due shall be
compounded and shall  thereafter  accrue interest at the rate then applicable to
Advances hereunder.

     (f)  Computation.  The Reference  Rate as of the date of this  Agreement is
8.25% per annum.  In the event the  Reference  Rate is changed from time to time
hereafter,  the rate of  interest  provided  for in Section  2.6(a) and  Section
2.6(c)(i) and (ii) automatically and immediately shall be increased or decreased
by an amount equal to such change in the Reference  Rate.  All interest and fees
chargeable  under the Loan Documents shall be computed on the basis of a 360 day
year for the actual number of days elapsed.

     (g) Intent to Limit Charges to Maximum  Lawful Rate. It is the intention of
the parties hereto that the Agent or each Lender shall conform strictly to usury
laws applicable to it. Accordingly,  if the transactions  contemplated hereby or
by any other Loan Document would be usurious as to the Agent or any Lender under
laws  applicable to it  (including  the laws of the United States of America and
the State of New York or any other  jurisdiction  whose laws may be  mandatorily
applicable  to  such  Lender   notwithstanding  the  other  provisions  of  this
Agreement), then, in that event, notwithstanding anything to the contrary in any
of the Loan  Documents or any agreement  entered into in  connection  with or as
security for the Indebtedness, it is agreed as follows: (i) the aggregate of all
consideration  which  constitutes  interest under law applicable to Agent or any
Lender that is contracted for, taken, reserved,  charged or received by Agent or
such Lender  under any of the Loan  Documents  or  agreements  or  otherwise  in
connection with the Indebtedness shall under no circumstances exceed the maximum
amount  allowed  by such  applicable  law,  and any  excess  shall  be  canceled
automatically  and if  theretofore  paid shall be  credited by the Agent or such
Lender on the principal amount of the  Indebtedness  (or, to the extent that the
principal amount of the Indebtedness shall have been or would thereby be paid in
full, refunded by the Agent or such Lender, as applicable, to the Borrower); and
(ii) in the event that the maturity of the Indebtedness is accelerated by reason
of an election of the holder  thereof  resulting from any Event of Default under
this  Agreement  or  otherwise,  or in the event of any  required  or  permitted
prepayment,   then  such  consideration  that  constitutes  interest  under  law
applicable to Agent or any Lender may never include more than the maximum amount
allowed by such applicable  law, and excess  interest,  if any,  provided for in
this  Agreement or otherwise  shall be canceled  automatically  by Agent or such
Lender, as applicable, as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by Agent or such Lender,  as applicable,  on
the principal amount of the  Indebtedness  (or, to the extent that the principal
amount of the  Indebtedness  shall  have been or would  thereby be paid in full,
refunded by Agent or such Lender to the Borrower). All sums paid or agreed to be
paid to Agent or any Lender for the use,  forbearance  or  detention of sums due
hereunder  shall,  to the extent  permitted by law  applicable  to Agent or such
Lender, be amortized, prorated, allocated and spread throughout the full term of
the Obligations  until payment in full so that the rate or amount of interest on
account of any Obligations  hereunder does not exceed the maximum amount allowed
by such  applicable  law. If at any time and from time to time (i) the amount of
interest  payable to Agent or any Lender on any date  shall be  computed  at the
Highest  Lawful  Rate (as  defined  below)  applicable  to Agent or such  Lender
pursuant to this Section 2.6(g) and (ii) in respect of any  subsequent  interest
computation  period the amount of  interest  otherwise  payable to Agent or such

                                       45

<PAGE>

Lender would be less than the amount of interest payable to Agent or such Lender
computed at the Highest Lawful Rate applicable to Agent or such Lender, then the
amount of interest payable to Agent or such Lender in respect of such subsequent
interest  computation period shall continue to be computed at the Highest Lawful
Rate  applicable  to Agent or such  Lender  until the total  amount of  interest
payable to Agent or such Lender shall equal the total  amount of interest  which
would have been  payable to Agent or such Lender if the total amount of interest
had been computed without giving effect to this Section 2.6(g).  For purposes of
this Section  2.6(g),  the term  "applicable  law" shall mean that law in effect
from time to time and applicable to the loan  transaction  between  Borrower and
the Lender  Group that  lawfully  permits the  charging  and  collection  of the
highest  permissible,   lawful  non-usurious  rate  of  interest  on  such  loan
transaction and this Agreement,  including laws of the State of New York and, to
the extent  controlling,  laws of the United  States of America.  It is intended
that, in the event that,  notwithstanding  the parties'  express choice of other
law to be  applicable  to this  Agreement,  the laws of the  State of Texas  are
included in determining  applicable  law,  Chapters 301 through 306 of the Texas
Finance Code,  shall be included in any such  determination,  and that,  for the
purpose of  applying  the Texas  Finance  Code to this  Agreement,  the  maximum
interest rate shall be the "weekly ceiling" (as such term is used in Chapter 303
of the Texas  Finance  Code) from time to time in effect.  Any Lender may,  from
time to time,  as to current and future  balances,  implement  any other ceiling
under Chapter 303 of the Texas Finance Code by notice to Borrower, if and to the
extent  permitted by Chapter 303 of the Texas Finance Code.  The parties  hereto
expressly  agree that,  except for Section  346.004  thereof,  the provisions of
Chapter 346 of the Texas  Finance  Code shall not apply to this  Agreement or to
any of the other Loan  Documents  or to any  Obligations  and that  neither this
Agreement  nor any Loan shall be  governed  by or subject to the  provisions  of
Chapter Fifteen in any manner whatsoever.  For purposes of this  Section 2.6(g),
"Highest  Lawful Rate" means,  with respect to Agent or any Lender,  the maximum
non-usurious interest rate, if any, that at any time or from time to time may be
contracted for, taken,  reserved,  charged or received on the Obligations  under
the laws applicable to Agent or such Lender which are currently in effect or, to
the extent allowed by law, under such  applicable laws which may hereafter be in
effect  and  which  allow a  higher  maximum  non-usurious  interest  rate  than
applicable laws now allow.

     2.7  Collection of Accounts.

     (a) Borrower shall,  as of the date of this Agreement  establish and at all
times thereafter  maintain one or more bank accounts in Borrower's name (each an
"Collection Account" and,  collectively,  the "Collection Accounts") at the bank
set forth on Schedule 2.7 or such other banks as are acceptable to Agent,  which
Collection  Accounts shall be covered by tri-party  blocked  account  agreements
among such banks, Agent and Borrower, in form and substance acceptable to Agent.
Borrower  shall deposit and shall cause each of its  Subsidiaries  to deposit or
cause  to be  deposited  promptly,  and in any  event no  later  than the  first
Business  Day after the date of receipt  thereof,  all cash,  checks,  drafts or
other  similar  items  of  payment  made in  respect  of any and all  Collateral
(whether or not otherwise  delivered to a Lockbox) into  Collection  Accounts at
banks set  forth on  Schedule  2.7.  From  time to time as  requested  by Agent,
Borrower shall, and shall cause each of its Subsidiaries to, execute and deliver
Transfer  Orders to Agent,  in form and substance  satisfactory  to Agent,  with
respect to all present and future rights to payment  relating to or arising from
the Oil and Gas Property Collateral. Borrower shall not establish any other bank

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<PAGE>

accounts  after  the date of this  Agreement  except  upon not less than 30 days
prior written  notice to Agent and the delivery to Agent of a tri-party  blocked
account  agreement in form and  substance  acceptable  to Agent among such bank,
Agent and Borrower.  Each such blocked account  agreement  shall provide,  among
other  things,  that (i) all items of payment  deposited  in such  accounts  and
proceeds thereof deposited in the applicable Collection Account are held by such
banks as agent or  bailee-in-possession  for Agent, (ii) the bank executing such
agreement  has no rights of setoff or recoupment or any other claim against such
account, as the case may be, other than for payment of its service fee and other
charges directly related to the  administration of such account and for returned
checks or other items of payment,  and (iii)  following  Agent giving  notice to
such bank to do so (which  notice Agent agrees not to give to such bank prior to
the occurrence of a Triggering Event),  such bank agrees to immediately  forward
all  amounts  received  in the  applicable  Collection  Account  to the  Agent's
Account. From and after the occurrence of a Triggering Event, no Borrower shall,
or shall cause or permit any Subsidiary  thereof to, accumulate or maintain cash
in disbursement or payroll accounts as of any date of determination in excess of
checks  outstanding  against such accounts as of that date and amounts necessary
to meet minimum balance  requirements.  As used in this  Agreement,  "Triggering
Event" means:  (A) the occurrence or continued  existence of an Event of Default
or (B) the  occurrence  or  continued  existence of the sum of  Availability  of
Borrower  (as  determined  on a combined  basis),  plus  Borrower's  immediately
available  unrestricted cash on hand, minus an amount determined by Agent in its
sole  discretion  that  would  be  sufficient  to  maintain  Borrower's  and its
Subsidiaries'  accounts payable and other current  liabilities within reasonable
terms (as determined on a consolidated basis) is less than (I) $6,000,000 at any
time during the 30 day period  immediately  following  the Closing Date, on (II)
$10,000,000 at any time from and after the 31st day following the Closing Date.

     (b) Upon the occurrence of a Triggering Event, each Borrower,  upon Agent's
written  request,  (i) shall establish and maintain lock boxes  ("Lockboxes") at
one or more banks set forth on Schedule  2.7,  (ii) shall request in writing and
otherwise take such reasonable  steps to ensure that all Account Debtors forward
payment  directly  to such  Lockboxes,  (iii)  shall and shall cause each of its
Subsidiaries  to instruct  all Account  Debtors  with  respect to the  Accounts,
General  Intangibles,  and  Negotiable  Collateral  of  such  Borrower  or  such
Subsidiary,  as the case may be, to remit all  Collections in respect thereof to
such Lockbox  Account,  and (iv) shall, and shall cause each of its Subsidiaries
to,  deposit  all  other  Collections  received  by  Borrower  from  any  source
immediately  upon  receipt in to the  Lockboxes.  Borrower,  each of  Borrower's
Subsidiaries,  Agent,  and the  Lockbox  Banks  shall  enter  into  the  Lockbox
Agreements,  which among other things shall provide for the opening of a Lockbox
Account for the deposit of Collections at a Lockbox Bank.  Borrower  agrees that
upon the occurrence of a Triggering  Event,  all  Collections  and other amounts
received by Borrower or any of its  Subsidiaries  from any Account Debtor or any
other source immediately upon receipt shall be deposited into a Lockbox Account.
No Lockbox  Agreement or arrangement  contemplated  thereby shall be modified by
Borrower  or any of its  Subsidiaries  without  the  prior  written  consent  of
Agent. Upon  the terms and subject to the  conditions  set forth in the Lockbox
Agreements,  all amounts  received in each Lockbox  Account  shall be wired each
Business Day into the Agent's Account;  provided,  however,  that Agent reserves
the right, in its sole  discretion,  to require that any amounts received in any
Lockbox Account which may represent  amounts  attributable to trust funds (i.e.,

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<PAGE>

production taxes,  severance taxes, or payroll taxes) or amounts attributable to
Mineral Interests of third Persons be segregated by the Lockbox Bank and held in
a  separate  account or  otherwise  as  directed  by Agent.

     (c) The Lockboxes, Collection Accounts and Designated Account shall be cash
collateral accounts,  with all cash, checks and similar items of payment in such
accounts securing payment of the Obligations and all other Indebtedness,  and in
which each Loan Party shall have granted a Lien to Agent  hereunder and pursuant
to the other  Loan  Documents

     (d)  Each  Borrower  shall  and  shall  cause  its  Designated  Affiliates,
officers, employees, agents, directors or other Persons acting for or in concert
with such Borrower (each a "Related  Person") to (i) hold in trust for Agent all
checks, cash and other items of payment received by Borrower or any such Related
Person,  and (ii) within one (1) Business day after  receipt by such Borrower or
any Related  Person of any checks,  cash or other items of payment,  deposit the
same into a Collection Account of such Borrower.  Each Borrower and each Related
Person thereof acknowledges and agrees that all cash, checks or items of payment
constituting proceeds of Collateral are the property of Agent for the benefit of
the Lenders.  All proceeds of the sale or other  disposition of any  Collateral,
shall be deposited directly into the applicable  Borrower  Collection Account.

     2.8  Credit  Payments;  Application  of  Collections.  The  receipt  of any
Collections  by Agent  (whether  from  transfers  to Agent by the Lockbox  Banks
pursuant to the Lockbox  Agreements or otherwise)  immediately  shall be applied
provisionally to reduce the Obligations outstanding under Section 2.1, but shall
not be  considered a payment on account  unless such  Collection  item is a wire
transfer of immediately available federal funds and is made to the Agent Account
or unless and until such  Collection item is honored when presented for payment;
provided,  however,  that Agent reserves the right, in its sole  discretion,  to
exclude  from such  provisional  reduction  and  payment  the amount of any such
Collections that Agent  determines may constitute trust funds (e.g.,  production
taxes,  severance  taxes,  or payroll taxes) or amounts  attributable to Mineral
Interests  of third  Persons.  From and after the Closing  Date,  Agent shall be
entitled to charge  Borrower for 1 Business Day of 'clearance' or 'float' at the
rate set forth in Section 2.6(a) or  Section 2.6(c)(i),  as  applicable,  on all
Collections  that are  received by the  Lockbox  Banks or Agent  (regardless  of
whether forwarded by the Lockbox Banks to Agent, whether  provisionally  applied
to  reduce  the   Obligations   under   Section   2.1,   or   otherwise).   This
across-the-board  1 Business Day clearance or float charge on all Collections is
acknowledged  by the parties to constitute an integral  aspect of the pricing of
the Lender Group's  financing of Borrower,  and shall apply  irrespective of the
characterization of whether receipts are owned by Borrower or Agent, and whether
or not there are any outstanding Advances, the effect of such clearance or float
charge  being the  equivalent  of  charging 1 Business  Day of  interest on such
Collections.  Should any  Collection  item not be  honored  when  presented  for
payment,  then  Borrower  shall be deemed  not to have made  such  payment,  and
interest shall be recalculated  accordingly.  Anything to the contrary contained
herein  notwithstanding,  any Collection  item shall be deemed received by Agent
only if it is  received  into the Agent  Account on a Business  Day on or before
2:00 p.m.  New York time.  If any  Collection  item is  received  into the Agent
Account on a  non-Business  Day or after  2:00 p.m.  New York time on a Business
Day,  it shall be deemed to have been  received  by Agent as of the  opening  of
business on the immediately following Business Day. Anything contained herein to

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<PAGE>

the  contrary  notwithstanding,  the  economic  benefit  of the 1  Business  Day
clearance  or  float  charge  provided  for in this  Section  2.8 is not for the
ratable  benefit of the Lenders,  but instead shall be for the sole and separate
account of Agent.

     2.9 Designated Account.  Agent, Foothill, and the Lenders are authorized to
make the  Advances,  and the Letters of Credit under this  Agreement  based upon
telephonic  or other  instructions  received  from  anyone  purporting  to be an
Authorized  Person,  or without  instructions  if  pursuant  to Section  2.6(e).
Borrower  agrees to  establish  and  maintain  the  Designated  Account with the
Designated  Account  Bank for the  purpose  of  receiving  the  proceeds  of the
Advances  requested  by  Borrower  and made by Agent,  Foothill  or the  Lenders
hereunder.  Unless otherwise agreed by Agent and Borrower, any Advance requested
by Borrower and made hereunder shall be made to the Designated  Account.

     2.10  Maintenance of Loan Account;  Statements of Obligations.  Agent shall
maintain an account on its books in the name of Borrower (the "Loan Account") on
which Borrower will be charged with all Advances made by Agent, Foothill, or the
Lenders to Borrower or for  Borrower's  account,  including,  accrued  interest,
Lender  Group  Expenses,  and any other  payment  Obligations  of  Borrower.  In
accordance with Section 2.8, the Loan Account will be credited with all payments
received by Agent from Borrower or for Borrower's account, including all amounts
received  in the  Agent  Account  from any  Lockbox  Bank.  Agent  shall  render
statements  regarding  the  Loan  Account  to  Borrower,   including  principal,
interest,  fees,  and  including  an  itemization  of all charges  and  expenses
constituting   Lender  Group  Expenses  owing,  and  such  statements  shall  be
conclusively  presumed  to be correct and  accurate  and  constitute  an account
stated  between  Borrower  and the  Lender  Group  unless,  within 30 days after
receipt thereof by Borrower,  Borrower shall deliver to Agent written  objection
thereto  describing  the error or errors  contained  in any such  statements.

     2.11 Fees.  Borrower shall pay to Agent,  for the benefit of the Lenders in
the  percentages  and amounts as set forth in the Lender Group Fee Split Letters
(except as otherwise indicated), the following fees:

     (a) Closing Fee. On the Closing  Date, a closing fee of  $1,200,000,  which
amount  shall be fully  earned and  nonrefundable  as of the Closing  Date.

     (b) Unused Line Fee. On the first day of each month during the term of this
Agreement,  an unused  line fee in an amount  equal to 0.50% per annum times the
Average Unused Portion of the Maximum  Revolving  Amount during the  immediately
preceding month, payable in arrears.

     (c) [Intentionally Omitted]

     (d) Financial Examination,  Documentation, and Appraisal Fees. For the sole
and  separate  account  of  Agent:  Agent's  customary  fee of $750  per day per
examiner,  plus Agent's  out-of-pocket  expenses for each financial analysis and
examination (i.e., audits) of Borrower performed by personnel employed by Agent;
Agent's  customary  one-time  electronic  reporting  setup fee of  $3,000,  plus

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<PAGE>

Agent's out-of-pocket expenses relating thereto; Agent's customary appraisal fee
of $1,500 per day per appraiser,  plus Agent's  out-of-pocket  expenses for each
appraisal of the Collateral  performed by personnel  employed by Agent; and, the
actual  charges paid or incurred by Agent if it elects to employ the services of
one or more third Persons to perform such  financial  analyses and  examinations
(i.e.,  audits) of Borrower or to appraise the  Collateral.

     (e) Loan Servicing Fee. For the sole and separate  account of Agent, on the
first day of each month during the term of this  Agreement,  and  thereafter  so
long as any Obligations are outstanding, a loan servicing fee in an amount equal
to $10,000 per month,  which amount shall be fully earned and  nonrefundable  in
advance on the first day of each month.

     (f) Unsecured  Notes  Repurchase Fee.  Concurrently  with the repurchase or
retirement of any of the Unsecured Notes by Borrower or any of its Subsidiaries,
a fee in an  amount  equal to 1% of the face  amount of the  Unsecured  Notes so
repurchased   or  retired.

     2.12 Joint and Several Liability; Rights of Contribution.

     (a) Each  Borrower  states and  acknowledges  that:  (i)  pursuant  to this
Agreement,   Borrowers  desire  to  utilize  their  borrowing   potential  on  a
consolidated basis to the same extent possible if they were merged into a single
corporate entity;  (ii) it has determined that it will benefit  specifically and
materially from the advances of credit contemplated by this Agreement;  (iii) it
is both a condition  precedent to the obligations of Agent and the Lenders and a
desire of the Borrowers that each Borrower  execute and deliver to Agent and the
Lenders this Agreement;  and (iv) Borrowers have requested and bargained for the
structure  and  terms of and  security  for the  advances  contemplated  by this
Agreement.

     (b) Each Borrower hereby irrevocably and  unconditionally:  (i) agrees that
it is jointly  and  severally  liable to Agent and the  Lenders for the full and
prompt payment of the  Obligations  and the  performance by each Borrower of its
obligations  hereunder in accordance with the terms hereof; (ii) agrees to fully
and  promptly  perform all of its  obligations  hereunder  with  respect to each
advance of credit hereunder as if such advance had been made directly to it; and
(iii) agrees as a primary  obligation to indemnify Agent and each of the Lenders
on demand for and against any loss incurred by Agent and such Lender as a result
of any of the  obligations  of any Borrower  being or becoming  void,  voidable,
unenforceable or ineffective for any reason whatsoever,  whether or not known to
Agent,  any of the  Lenders  or any  Person,  the  amount of such loss being the
amount which Agent and/or such Lender,  as the case may be, would otherwise have
been  entitled to recover from  Borrower.

     (c) It is the intent of each  Borrower that the  indebtedness,  obligations
and liability  hereunder of no one of them be subject to challenge on any basis.
Accordingly,  as of the date hereof,  the liability of each Borrower  under this
Section 2.12,  together with all of its other  liabilities  to all Persons as of
the date  hereof and as of any other date on which a transfer is deemed to occur
by virtue of this Agreement, calculated in amount sufficient to pay its probable
net  liabilities on its existing  Indebtedness  as the same become  absolute and
matured  ("Dated  Liabilities")  is,  and is to be,  less than the amount of the

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<PAGE>

aggregate  of a fair  valuation of its  property as of such  corresponding  date
("Dated Assets").  To this end, each Borrower under this Section 2.12 (i) grants
to and recognizes in each other  Borrower,  ratably,  rights of subrogation  and
contribution in the amount,  if any, by which the Dated Assets of such Borrower,
but for the aggregate of subrogation and  contribution  in its favor  recognized
herein,  would exceed the Dated Liabilities of such Borrower or, as the case may
be, (ii)  acknowledges  receipt of and recognizes  its right to subrogation  and
contribution ratably from each other Borrower in the amount, if any by which the
Dated  Liabilities  of such Borrower,  but for the aggregate of subrogation  and
contribution in its favor  recognized  herein,  would exceed the Dated Assets of
such Borrower  under this Section 2.12.  In  recognizing  the value of the Dated
Assets  and  the  Dated  Liabilities,  it  is  understood  that  Borrowers  will
recognize,  to at  least  the same  extent  of their  aggregate  recognition  of
liabilities hereunder,  their rights to subrogation and contribution  hereunder.
It is a material  objective of this Section 2.12 that each  Borrower  recognizes
rights to subrogation and contribution rather than be deemed to be insolvent (or
in contemplation thereof) by reason of any arbitrary interpretation of its joint
and several obligations  hereunder.

     2.13 Loan Under Prior Credit  Agreement.  On the Closing Date:

     (a) Borrower shall pay all accrued and unpaid  commitment fees  outstanding
under the Prior Credit  Agreement for the account of each Prior Lender under the
Prior  Credit  Agreement;

     (b) each loan,  advance or other  extension  of credit under the Prior Loan
Agreement  shall be deemed to be an Advance  under this  Agreement; and

     (c) the Prior Credit  Agreement  and the  commitments  thereunder  shall be
superceded  by  this  Agreement  and  such  commitments  shall  terminate.

     3. CONDITIONS; TERM OF AGREEMENT

     3.1  Conditions  Precedent  to the  Initial  Advance,  Letter of Credit and
Hedging  Agreement. The obligation of the Lender Group (or any member  thereof)
to make the initial Advance,  to issue the initial Letter of Credit, or to enter
into the  initial  Hedging  Undertaking  is subject to the  fulfillment,  to the
satisfaction of Agent and its counsel, of each of the following conditions on or
before the Closing Date:

     (a) the Closing  Date shall occur on or before  October 5, 1999;

     (b) Agent shall have received all financing  statements and fixture filings
required by Agent,  duly  executed by  Borrower,  and Agent shall have  received
searches of all recording  offices  requested by Agent  reflecting the filing of
all such  financing  statements and fixture  filings,  together with searches of
such other offices as Agent may require  (including those of Borrower,  Atlantic
and the Goldking Entities),  each such search dated a date within 15 days of the
Closing Date;

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     (c) Agent shall have received each of the following documents,  in form and
substance  satisfactory to Agent, duly executed (and  acknowledged,  as the case
may be) by all parties and formalities  contemplated  thereunder,  and each such
document shall be in full force and effect:

     i. the Lockbox Agreements;

     ii. the  Disbursement  Letter;

     iii.  the  Pay-Off  Letter,  together  with  the  Prior  Lender  Assignment
Agreements,  UCC assignment  statements,  UCC  termination  statements and other
documentation  evidencing the assignment  and/or  termination  (as determined by
Agent) by the Prior Lenders (and all other holders, if any, of the indebtedness,
liabilities  and  other  obligations  under  or  relating  to the  Prior  Credit
Agreement)  and each other holder of Liens  against the  properties or assets of
Borrower or any of its Subsidiaries  (other than Permitted  Liens), of its Liens
in and to the  properties and assets of Borrower and its  Subsidiaries;

     iv.  the Oil and Gas  Property  Mortgages,  dated as of the  Closing  Date,
covering each of the Oil and Gas Properties described in Schedule 3.1(c)(iv);

     v. the Lender Group Fee Split Letter,  the Lender Group Side Letter and the
Lender Group Triparty Agreement, each in form and substance acceptable to Agent,
executed by each of the Lenders in the Lender Group as of the Closing Date;

     vi.  Guaranty  Agreements,  in form  and  substance  acceptable  to  Agent,
executed by each of Borrower's Subsidiaries (other than Atlantic);

     vii.  Security  Agreements,  in form and  substance  acceptable  to  Agent,
executed by Borrower and each of Borrower's Subsidiaries, with respect to all of
the  assets  and  properties  of any and all of  them;

     viii. the governmental permits, approvals and orders for each well and each
unit  pertaining  to the  Oil and Gas  Properties  described  in the Oil and Gas
Property Mortgages,  which shall be in form and substance satisfactory to Agent;

     ix. the Transfer Order Letters for each well on the Oil and Gas Properties,
which shall be in form and substance  satisfactory to Agent;

     x.  assignments in form and substance  acceptable to Agent of each Material
Contract  pertaining  to the  Oil  and  Gas  Property  Collateral  which  either
(i) affects Borrower s or any of its Subsidiaries', as the case may be, title to
the Oil and Gas  Property  Collateral  or  otherwise  affects the value,  use or
operation of the Oil and Gas  Property  Collateral  in any  material  respect or

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<PAGE>

(ii) creates  or  evidences a material  obligation  or  liability on the part of
Borrower or any or its Subsidiaries,  together with copies of each such Material
Contract attached thereto;

     xi.  a  solvency  certificate  with  respect  to  Borrower  and each of its
Subsidiaries,  in the form and  substance  acceptable  to Agent,  executed by an
executive  officer of Borrower;

     xii. the Unsecured Notes Estoppel Certificate; and

     xiii. all original stock certificates evidencing the issued and outstanding
shares of capital stock of PPC and GAC, together with stock powers duly executed
in blank by the  holders of all of the legal and  beneficial  ownership  of such
shares.

     (d) Agent shall have received a certificate  from the Secretary of Borrower
attesting to the  resolutions of Borrower's  Board of Directors  authorizing its
execution,  delivery,  and  performance  of this  Agreement  and the other  Loan
Documents  to which  Borrower is a party and  authorizing  specific  officers of
Borrower to execute the same;

     (e) Agent shall have received copies of Borrower's Governing Documents,  as
amended,  modified,  or  supplemented  by the  Closing  Date,  certified  by the
Secretary of Borrower;

     (f) Agent  shall have  received a  certificate  of status  with  respect to
Borrower,  dated  within 10 days of the Closing  Date,  such  certificate  to be
issued  by the  appropriate  officer  of the  jurisdiction  of  organization  of
Borrower,  which certificate shall indicate that Borrower is in good standing in
such  jurisdiction;

     (g) Agent  shall  have  received  certificates  of status  with  respect to
Borrower, each dated within 15 days of the Closing Date, such certificates to be
issued by the appropriate  officer of the  jurisdictions in which its failure to
be duly qualified or licensed would constitute a Material Adverse Change,  which
certificates   shall  indicate  that  Borrower  is  in  good  standing  in  such
jurisdictions;

     (h) Agent shall have received a certificate of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which  shall  be  satisfactory  to Agent  and its  counsel;  (i)  [intentionally
omitted];

     (j) Agent  shall have  received  such  Collateral  Access  Agreements  from
lessors,  warehousemen,  bailees,  and other third  persons  with respect to (i)
Borrower's  leased  premises  at which its  chief  executive  offices,  (ii) all
location at which Borrower's Books are located from time to time, and (iii) each

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<PAGE>

other  location of Borrower  except the Oil and Gas  Properties and locations on
which Borrower has Inventory or Equipment having an aggregate value of less than
$250,000 at such location;

     (k) Agent shall have received copies of all contracts set forth on Schedule
5.1(c), and such contracts shall be in form and substance satisfactory to Agent;

     (l) Agent shall have received an opinion of Borrower's  counsel in form and
substance  satisfactory  to  Agent  in its  sole  discretion,  and  opinions  of
Borrower's and Guarantor's Texas and Louisiana counsel and counsel in such other
states and  jurisdictions  as may be  requested  by Agent in form and  substance
satisfactory to Agent in its sole discretion;

     (m) Agent shall have received (i)  appraisals of the Oil and Gas Properties
in the form of Reserve Reports  prepared by a third party petroleum  engineering
firm (including,  but not limited to, appraisals,  verifications and liquidation
analyses of Borrower's and each of its Subsidiaries'  Proved Reserves)  covering
the  Borrower's  Mineral  Interests  listed  on  Schedule  5.1(a)  in each  case
satisfactory  to Agent,  and (ii) title  opinions for the Oil and Gas Properties
covering  Borrower's  eight highest value  Mineral  Interests  (based upon PV-10
Value) listed on  Schedule 5.1(a)  issued to Agent for the benefit of the Lender
Group by a legal counsel to Borrower that is experienced  in the  examination of
title to such Oil and Gas Properties and is satisfactory to Agent (each a "Title
Opinion" and, collectively,  the "Title Opinions"), each of which Title Opinions
shall be in form and substance  satisfactory to Agent and shall:

     (A) be updated  within 15 days of the date of the filing of the Oil and Gas
Property Mortgage to confirm the priority of the Lien created by the Oil and Gas
Property  Mortgage,

     (B) opine as to such  matters  incident to such Oil and Gas  Properties  as
Agent may reasonably request including the following with respect to the Mineral
Interests in the particular Oil and Gas Property Collateral being reviewed:

     (I)  Borrower  or its  Subsidiary,  as the case may be, that is the grantor
under the Oil and Gas Property  Mortgage covering the Oil and Gas Properties has
good and  marketable  title to such Oil and Gas  Properties to the extent of the
Mineral Interests as specified therein,  free and clear of all Liens and defects
except  Permitted  Liens.

     (II)  Borrower or its  Subsidiary,  as the case may be, that is the grantor
under the Oil and Gas Property  Mortgage  covering the Oil and Gas Properties is
entitled to receive, after giving effect to all royalties,  overriding royalties
and other burdens payable out of production, a decimal share of all Hydrocarbons
produced and sold from such Oil and Gas Properties, before and after payout, not
less than set forth in the opinion.

     (III) The operating  interest in such Oil and Gas Properties of Borrower or
its  Subsidiary,  as the case may be, that is the grantor  under the Oil and Gas

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Property Mortgage covering the Oil and Gas Properties,  is not obligated to bear
a decimal share of all costs and expenses  from the operation  thereof in excess
of that set forth  therein.

     (IV) The Liens  created by the Oil and Gas Property  Mortgage are valid and
enforceable  first priority mortgage Liens which are first in right and prior in
time and superior to all other Liens  against such Mineral  Interests  and other
Oil and Gas Properties other than Permitted Liens.

     (n) The Mineral Interests in the Oil and Gas Property  Collateral shall not
be less than the Mineral Interests for such properties  furnished by Borrower to
Agent in connection  with Agent's  credit  evaluation  in  connection  with this
Agreement;

     (o) Borrower shall have delivered to Agent evidence  satisfactory  to Agent
confirming that each of the producing wells listed on Schedule 5.1(b) is located
on an Oil and Gas Property  (i) covered by the title opinions and (ii) described
in the legal description contained in an Oil and Gas Property Mortgage which has
been duly executed and delivered to Agent;

     (p)  [intentionally  omitted];

     (q) Agent shall have received a phase-I  environmental  report with respect
to the Oil and Gas Property Collateral; the environmental consultants, the scope
of the reports or surveys,  and the results thereof shall be acceptable to Agent
in its sole discretion;

     (r) Agent shall have  received  satisfactory  evidence that all tax returns
required  to be filed by  Borrower  have been  timely  filed and all taxes  upon
Borrower or its  properties,  assets,  income,  and franchises  (including  real
property  taxes and payroll taxes) have been paid prior to  delinquency,  except
such taxes that are the  subject of a  Permitted  Protest;  (s) Agent shall have
received satisfactory reference investigation reports of key
officers and employees;

     (t) On the Closing Date,  Borrower shall have not less than  $12,500,000 of
Availability (on a combined basis) and unrestricted  immediately  available cash
on hand after  making the  payments  described  in  Section  7.17(a)(i)  and the
$1,200,000  due on the  Closing  Date  pursuant  to  Section 2.11(a)  and  after
reserving as an additional  deduction from  Availability an amount determined by
Agent in its sole discretion that would be sufficient to maintain Borrowers' and
their  Subsidiaries'  accounts  payable  and other  current  liabilities  within
reasonable  terms;

     (u) Agent shall reviewed Borrowers' and each of their Subsidiaries' Hedging
Agreements  and other  hedging  arrangements  (with  respect to its  present and
future Hydrocarbon production and otherwise), and all of such Hedging Agreements
and other hedging  arrangements shall be acceptable to Agent;

                                       55

<PAGE>

     (v) Foothill shall have received commitments from one or more other Persons
acceptable to Agent to become  Lenders under this Agreement to the extent of 50%
of the  Commitments,  on a repayment  basis  which is junior to Foothill  and on
other terms and conditions which are acceptable to Foothill, all in a manner and
to an extent which is in form and substance  acceptable  to Foothill;

     (w) Agent shall have received  evidence  satisfactory  to Agent  including,
without  limitation,  a certificate  executed by the chief financial  officer of
Borrower,  to such effect,  that no Material  Adverse Change has occurred in the
business,  assets,  operations,  prospects or  financial  or other  condition of
Borrower or any of its Subsidiaries since  December 31,  1998; and

     (x)  all  other   documents  and  legal  matters  in  connection  with  the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded  and shall be in form and  substance  satisfactory  to Agent and its
counsel.

     3.2  Conditions  Precedent to all  Advances,  all Letters of Credit and all
Hedging Agreement Guarantees. The following shall be conditions precedent to all
Advances,  all Letters of Credit and all Hedging Agreement Guarantees hereunder:


     (a) the representations and warranties  contained in this Agreement and the
other Loan Documents  shall be true and correct in all respects on and as of the
date of such extension of credit,  as though made on and as of such date (except
to the extent  that such  representations  and  warranties  relate  solely to an
earlier  date);

     (b) no Default or Event of Default shall have occurred and be continuing on
the date of such  extension of credit,  nor shall either  result from the making
thereof;

     (c) no injunction,  writ,  restraining  order, or other order of any nature
prohibiting,  directly or  indirectly,  the  extending of such credit shall have
been  issued  and  remain in force by any  governmental  authority  against  any
Borrower,  Agent, the Lender Group, or any of their Designated  Affiliates;  and


     (d) the amount of the Revolving  Facility Usage, after giving effect to the
requested Advance, Letter of Credit or Hedging Arrangement, shall not exceed the
Availability.

The  foregoing  conditions  precedent  are not  conditions  to each  Lender  (i)
participating  in or  reimbursing  Agent for such Lenders' Pro Rata Share of any
drawings  under or any other  amounts  payable with respect to Letters of Credit
and Hedging Agreement Guarantees as provided herein, or (ii) participating in or
reimbursing  Foothill  or the  Agent  for such  Lenders'  Pro Rata  Share of any
Foothill Loan or Agent Advance as provided herein.

     3.3  Condition  Subsequent.  As conditions  subsequent  to initial  closing
hereunder,  Borrower  shall perform or cause to be performed the following  (the
failure by Borrower to so perform or cause to be performed constituting an Event
of  Default):

     (a) within 30 days of the  Closing  Date,  deliver  to Agent the  certified
copies of the policies of insurance,  together with the endorsements thereto, as
are  required  by  Section  6.10,  the form  and  substance  of  which  shall be
satisfactory  to Agent and its counsel;

     (b) within 60 days of the  Closing  Date,  deliver to Agent the Oil and Gas
Mortgages,  opinions,  certificates and other items and information described on
Exhibit 3.3 with  respect to all Oil and Gas  Properties  of Borrower  listed on
Schedule  3.3(b);

     (c)  within  60 days of the  Closing  Date,  deliver  to Agent  Oil and Gas
Mortgages and legal opinions,  each in form and substance  satisfactory to Agent
with  respect  to all Oil and Gas  Properties  of  Borrower  listed on  Schedule
3.3(c);

     (d) on or before  December 31, 1999,  Panaco and PPC shall have merged with
PPC merging with and into Panaco,  with Panaco being the sole surviving  entity,
and such merger shall have become valid,  binding and effective for all purposes
under all  applicable  laws on or before such date,  and shall have delivered to
Agent such certificates and other evidence thereof, together with legal opinions
regarding  the same,  as are  satisfactory  to Agent;

     (e) within 30 days of the Closing  Date,  Borrower  shall  deliver to Agent
evidence  satisfactory to Agent that all general bonding,  supplemental  bonding
and other security required by the MMS pursuant to the  correspondence  from the
MMS to  Panaco  (copies  of which are  attached  hereto as  Exhibit  3.3(e))  in
connection  with or  relating to the  purchase by and  transfer to Panaco of the
East Breaks 165  Interest;  and

     (f) at all times after Closing Date, Borrower shall use its best efforts to
cause the MMS to approve  the  purchase  by and  transfer  to Panaco of the East
Breaks 165 Interest,  and all rights,  title and interests  thereto. . 3.4 Term;
Automatic Renewal

     (a) This Agreement  shall become  effective upon the execution and delivery
hereof by  Borrower  and the Lender  Group and shall  continue in full force and
effect for a term ending on the date (the  "Renewal  Date") that is 2 years from
the Closing Date;  provided,  however,  that as long as there has not occurred a
Default  or  Event  of  Default  which  is then  continuing,  Borrower  shall be
permitted  to renew this  Agreement  for (i) one 6 month period from the Renewal
Date (the "First  Renewal  Period")  provided that Borrower shall have (A) given
Agent at least 30 days prior  written  notice of its  intention to so renew this
Agreement for the First Renewal Period and (B) paid to Agent, for the benefit of
the  Lenders in the  percentages  and fees as set forth in the Lender  Group Fee
Split  Letter,  a renewal fee in an amount equal to 1% of the Maximum  Revolving
Credit Amount with respect to the First Renewal  Period (which renewal fee shall
be deemed  fully earned and  nonrefundable  as of the date that  Borrower  gives
notice of such  renewal to Agent),  and (ii) one  additional 6 month period from
the last day of the First Renewal Period (the "Second Renewal Period")  provided
that Borrower  shall have (A) given Agent at least 30 days prior written  notice
of its intention to so renew this  Agreement for the Second  Renewal  Period and
(B) paid to Agent, for the benefit of the Lenders in the percentages and fees as

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<PAGE>

set forth in the Lender Group Fee Split Letter, a renewal fee in an amount equal
to 1% of the Maximum Revolving Credit Amount with respect to such Second Renewal
Period (which renewal fee shall be deemed fully earned and  nonrefundable  as of
the date that  Borrower  gives notice of such renewal to Agent),  unless  sooner
terminated pursuant to the terms hereof.

     (b) Borrower may terminate  this  Agreement  only on the Renewal Date,  the
last day of the  First  Renewal  Period  or the last day of the  Second  Renewal
Period,   except  as  otherwise   provided  in  Section   3.6.   The   foregoing
notwithstanding,  the  Lender  Group  shall  have  the  right to  terminate  its
obligations  under  this  Agreement  immediately  and  without  notice  upon the
occurrence and during the  continuation  of an Event of Default.

     3.5 Effect of Termination On the date of termination of this Agreement, all
Obligations  (including  contingent  reimbursement  obligations of Borrower with
respect to any outstanding  Letters of Credit)  immediately shall become due and
payable  without notice or demand.  No termination of this  Agreement,  however,
shall  relieve or  discharge  Borrower of  Borrower's  duties,  Obligations,  or
covenants  hereunder or under the other Loan Documents,  and Agent's  continuing
security interests in the Collateral, for the benefit of the Lender Group, shall
remain in effect until all  Obligations  have been fully and finally  discharged
and the Lender Group's  obligations to provide  additional credit hereunder have
been  terminated.

     3.6 Early  Termination  by Borrower.  Borrower has the option,  at any time
upon 90 days prior  written  notice to Agent,  to  terminate  this  Agreement by
paying to Agent,  for the  ratable  benefit of the Lender  Group,  in cash,  the
Obligations  (including  an amount  equal to 110% of the  undrawn  amount of the
Letters of Credit and the Hedging  Arrangement  Usage), in full, together with a
premium (the "Early Termination  Premium") equal to the greater of (a) the total
interest and Letter of Credit fees and Hedging  Agreement  Undertaking  fees for
the immediately  preceding 6 months, and (b) if the termination occurs (i) on or
before the first  anniversary  of the Closing Date, an amount equal to 2% of the
Maximum Revolving Amount,  and (ii) if the termination  occurs at any time after
the first anniversary of the Closing Date (other than the Renewal Date, the last
day of the First Renewal Period or the last day of the Second  Renewal  Period),
an amount  equal to 1% of the Maximum  Revolving  Amount.

     3.7 Termination Upon Event of Default.  If the Lender Group terminates this
Agreement  upon  the  occurrence  of  an  Event  of  Default,  in  view  of  the
impracticability  and extreme  difficulty of ascertaining  actual damages and by
mutual  agreement  of the parties as to a reasonable  calculation  of the Lender
Group's lost profits as a result thereof,  Borrower shall pay to Agent,  for the
ratable  benefit  of  the  Lender  Group,   upon  the  effective  date  of  such
termination,  a premium in an amount equal to the Early Termination Premium. The
Early  Termination  Premium  shall  be  presumed  to be the  amount  of  damages
sustained  by the  Lender  Group as the  result  of the  early  termination  and
Borrower  agrees  that  it  is  reasonable  under  the  circumstances  currently
existing.  The Early Termination  Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.

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<PAGE>

     4. CREATION OF SECURITY INTEREST.

     4.1 Grant of Security  Interest.  Borrower hereby grants to Agent,  for the
benefit of the Lender Group,  continuing Liens on all right, title, and interest
of Borrower in and to all currently  existing and hereafter  acquired or arising
Collateral in order to secure prompt repayment of any and all Obligations and in
order to secure  prompt  performance  by Borrower of each of its  covenants  and
duties under the Loan Documents (the "Agent's Liens").  The Agent's Liens in and
to the Collateral shall attach to all Collateral without further act on the part
of the Lender Group or  Borrower.  Anything  contained in this  Agreement or any
other Loan  Document  to the  contrary  notwithstanding,  except for the sale of
Inventory  to  buyers  in  the  ordinary   course  of  business  and  except  as
specifically permitted under Section 7.4, Borrower has no authority,  express or
implied, to dispose of any item or portion of the Collateral. Subject to Section
2.4(b),  the secured claims of the Lender Group secured by the Collateral  shall
be of equal priority,  and ratable  according to the respective  Obligations due
each member of the Lender Group.

     4.2  Negotiable  Collateral.  In the event that any  Collateral,  including
proceeds,  is  evidenced  by or  consists  of  Negotiable  Collateral,  Borrower
promptly shall, and shall cause each of its Subsidiaries to, endorse and deliver
physical possession of such Negotiable Collateral to Agent.

     4.3 Collection of Accounts,  General Intangible, and Negotiable Collateral.
At any time,  Agent or  Agent's  designee  may (a) notify  customers  or Account
Debtors that the Accounts,  General Intangibles,  or Negotiable  Collateral have
been assigned to Agent for the benefit of the Lender Group,  or that Agent,  for
the benefit of the Lender Group, has a security interest therein and (b) collect
the Accounts, General Intangibles, and Negotiable Collateral directly and charge
the collection  costs and expenses to the Loan Account.  Borrower agrees that it
will, and will cause each of its  Subsidiaries  to, hold in trust for the Lender
Group,  as the Lender  Group's  trustee,  any  Collections  that it receives and
immediately  will deliver said  Collections  to Agent in their  original form as
received by Borrower  or any of its  Subsidiaries,  as the case may be.

     4.4 Delivery of  Additional  Documentation  Required.  At any time upon the
request of Agent,  Borrower shall,  and shall cause each of its Subsidiaries to,
execute and deliver to Agent all financing statements,  collateral  assignments,
continuation  financing  statements,   fixture  filings,   security  agreements,
pledges, assignments,  mortgages, leasehold mortgages, deeds of trust, leasehold
deeds of trust,  endorsements of certificates of title,  applications for title,
affidavits,  reports, notices,  schedules of accounts, letters of authority, and
all other documents that Agent reasonably may request,  in form  satisfactory to
Agent,  to perfect and continue  perfected the Agent's  Liens on the  Collateral
(whether now owned or hereafter arising or acquired), and in order to consummate
fully all of the transactions  contemplated  hereby and under the other the Loan
Documents.

     4.5 Power of Authority. Borrower hereby irrevocably makes, constitutes, and
appoints Agent (and any of Agent's officers,  employees, or agents designated by
Agent) as  Borrower's  true and lawful  attorney,  with power to (a) if Borrower
refuses  to,  or fails  timely  to  execute  and  deliver  any of the  documents
described  in Section  4.4,  sign the name of Borrower  on any of the  documents

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<PAGE>

described  in Section 4.4, (b) at any time that an Event of Default has occurred
and is continuing or Agent deems itself  insecure,  sign  Borrower's name on any
invoice  or bill of lading  relating  to any  Account,  drafts  against  Account
Debtors,  schedules and assignments of Accounts,  verifications of Accounts, and
notices to Account Debtors, (c) send requests for verification of Accounts,  (d)
endorse  Borrower's  name on any  Collection  item that may come into the Lender
Group's possession, (e) at any time that an Event of Default has occurred and is
continuing  or the Lender  Group deems itself  insecure,  notify the post office
authorities to change the address for delivery of Borrower's  mail to an address
designated by Agent, to receive and open all mail addressed to Borrower,  and to
retain  all mail  relating  to the  Collateral  and  forward  all other  mail to
Borrower,  (f) at any  time  that  an  Event  of  Default  has  occurred  and is
continuing or Agent deems itself insecure,  make,  settle, and adjust all claims
under Borrower's policies of insurance and make all determinations and decisions
with respect to such policies of insurance, and (g) at any time that an Event of
Default has occurred and is  continuing or Agent deems itself  insecure,  settle
and adjust  disputes and claims  respecting  the Accounts  directly with Account
Debtors, for amounts and upon terms that Agent determines to be reasonable,  and
Agent may cause to be executed and  delivered  any  documents  and releases that
Agent  determines  to be  necessary.  The  appointment  of Agent  as  Borrower's
attorney,  and each and every one of Agent's  rights and powers,  being  coupled
with an interest,  is irrevocable  until all of the Obligations  have been fully
and finally  repaid and performed and the Lender  Groups'  obligations to extend
credit  hereunder  are  terminated.

     4.6  Right to Inspect.  Agent  (through any of its officers,  employees, or
agents) shall have the right,  from time to time  hereafter to inspect the Books
and to  check,  test,  audit  and  appraise  the  Collateral  in order to verify
Borrower's and its  Subsidiaries'  financial  condition or the amount,  quality,
value,  condition of, or any other matter relating to, the Collateral (including
checks, tests and audits by a qualified engineer selected by Agent of Borrower's
and  each of its  Subsidiaries'  onshore  and  offshore  wells,  rigs,  pipeline
distribution  systems and  operations).

     4.7 Control Agreements.  Borrower agrees that it will not, and that it will
cause each of its  Subsidiaries  not to,  transfer  assets out of any Securities
Accounts  other  than  as  permitted  under  Section  7.22  and,  if to  another
securities  intermediary,  unless each of Borrower, such Subsidiary,  Agent, and
the substitute securities intermediary have entered into a Control Agreement. No
arrangement  contemplated  hereby or by any Control  Agreement in respect of any
Securities  Accounts or other investment  property shall be modified by Borrower
or any of its Subsidiaries  without the prior written consent of Agent. Upon the
occurrence and during the  continuance  of a Default or Event of Default,  Agent
may notify any securities  intermediary  to liquidate or transfer the applicable
Securities Account or any related investment property maintained or held thereby
and remit the proceeds thereof to the Agent Account.

     5.  REPRESENTATIONS  AND  WARRANTIES.

     In order to induce the Lender Group to enter into this Agreement,  Borrower
makes the  following  representations  and  warranties to the Lender Group which
shall be true, correct,  and complete in all respects as of the date hereof, and
shall be true, correct, and complete in all respects as of the Closing Date, and
at and as of the date of the  making of each  Advance  or Letter of Credit  made

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thereafter,  as though made on and as of the date of the making of such  Advance
or  Letter  of Credit  (except  to the  extent  that  such  representations  and
warranties  relate  solely  to an  earlier  date) and such  representations  and
warranties  shall  survive  the  execution  and  delivery of this  Agreement:

     5.1 No Encumbrances.  Borrower has good,  marketable and indefeasible title
to the  Collateral,  free and clear of all Liens (except for  Permitted  Liens),
including but not limited to:

     (a) Ownership of the Oil and Gas Properties listed on Schedule 5.1(a);

     (b) The amount of the Net Revenue  Interest of the Oil and Gas  Properties,
as set forth on Schedule  5.1(b);

     (c) All rights under the Material  Contracts listed on Schedule 5.1(c); and

     (d)  Ownership  of the Real  Property,  to the  extent  stated on  Schedule
5.1(d).

     5.2 Eligible Proved Reserves; Ownership of Oil and Gas Properties.

     (a) All Eligible  Proved Reserves are Proved Reserves of which Borrower has
fee simple legal title to or valid  leasehold  interest in (in each case,  good,
marketable and indefeasible,  except for Permitted Liens), and of which Borrower
is the  beneficial  owner of, to the full  extent of the  quantity  of  interest
specified in the most recent Reserve Report delivered to Agent by Borrower,  and
all of the  information  with respect  thereto  contained  on Schedules  5.1(a),
5.1(b),  5.1(c),  5.2(e) and 5.3 (and with respect to all Proved  Reserves other
than those  listed on Schedule  5.1(a),  the  analogous  supplemental  Schedules
contemplated  on Exhibit  3.3 with  respect  thereto) is true and  correct.  All
Mineral  Interests of the Eligible  Proved Reserves are a part are in full force
and effect and Borrower is in full compliance  with its obligations  thereunder.
All wells drilled and Hydrocarbons produced with respect to such Eligible Proved
Reserves   were  drilled  and  produced  in  compliance   with  all   applicable
regulations.  There are no outstanding authorities for expenditures with respect
to any  Eligible  Proved  Reserves  which are not  reflected  in the most recent
Reserve  Report  delivered by Borrower to Agent.  Borrower has not elected to go
"nonconsent" on any operations with respect to any Eligible Proved Reserves. All
of such  Eligible  Proved  Reserves  are a part  of the  Oil and Gas  Properties
described  in  Schedule 5.1(a),  are covered by the  engineering  reports  which
Borrower has previously delivered to and which have been relied upon by Agent in
connection  with  this  Agreement,  and are  part  of the  Oil and Gas  Property
Collateral covered by the Oil and Gas Property Mortgages.  All bills (except for
those which are less than 45 days past original  invoice date,  are not past due
and do not give rise to a Lien other than a Permitted  Lien) and taxes have been
paid with  respect to all Eligible  Proved  Reserves.

     (b) All Eligible Proved Developed  Producing  Reserves are Proved Developed
Producing  Reserves  of which  Borrower  has fee simple  legal title to or valid
leasehold interest in (in each case, good,  marketable and indefeasible,  except
for Permitted  Liens),  and of which Borrower is the beneficial owner of, to the

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<PAGE>

full extent of the  quantity of interest  specified  in the most recent  Reserve
Report  delivered to Agent by Borrower,  and all of the information with respect
thereto contained on Schedules 5.1(a),  5.1(b), 5.1(c), 5.2(e) and 5.3 (and with
respect to all Proved Reserves other than those listed on Schedule  5.1(a),  the
analogous  supplemental  Schedules  contemplated  on  Exhibit  3.3 with  respect
thereto) is true and correct.

     (c)  All  Eligible  Proved  Developed  Non-Producing  Reserves  are  Proved
Developed Non-Producing Reserves of which Borrower has fee simple legal title to
or valid leasehold interest in (in each case, good, marketable and indefeasible,
except for Permitted  Liens),  and of which Borrower is the beneficial owner of,
to the full  extent of the  quantity of  interest  specified  in the most recent
Reserve Report  delivered to Agent by Borrower,  and all of the information with
respect thereto contained on Schedules 5.1(a),  5.1(b),  5.1(c),  5.2(e) and 5.3
(and with  respect to all Proved  Reserves  other than those  listed on Schedule
5.1(a), the analogous  supplemental  Schedules  contemplated on Exhibit 3.3 with
respect  thereto)  attached hereto is true and correct.

     (d)  All  Eligible  Proved  Undeveloped  Reserves  are  Proved  Undeveloped
Reserves of which  Borrower  has fee simple  legal  title to or valid  leasehold
interest  in (in each  case,  good,  marketable  and  indefeasible,  except  for
Permitted Liens),  and of which Borrower is the beneficial owner of, to the full
extent of the quantity of interest  specified in the most recent  Reserve Report
delivered to Agent by Borrower,  and all of the information with respect thereto
contained on Schedules 5.1(a),  5.1(b), 5.1(c), 5.2(e) and 5.3 (and with respect
to all Proved Reserves other than those listed on Schedule 5.1(a), the analogous
supplemental  Schedules  contemplated  on  Exhibit  3.3  with  respect  thereto)
attached  hereto  is  true  and  correct.

     (e) All of  Borrower's  marketing  arrangements  with respect to its Proved
Reserves are valid, enforceable and in full force and effect. There do not exist
any cumulative imbalances in gas production or receipt of "take or pay" payments
except as  disclosed  (as to both  existence  and  extent)  on  Schedule  5.2(e)
attached hereto.

     (f)  Without  limiting  the  foregoing,  after  giving  full  effect to the
Permitted  Liens,   Borrower  owns  the  net  revenue  interests  in  production
attributable  to the Oil and Gas Properties  covered by the Oil and Gas Property
Mortgages as is reflected in the most recently  delivered Reserve Report and the
ownership of such Properties shall not in any material respect obligate Borrower
to bear the costs and  expenses  relating to the  maintenance,  development  and
operations of each such Property in an amount in excess of the working  interest
of each such Property set forth in the most recently  delivered  Reserve Report.
All information  contained in the most recently delivered Reserve Report is true
and correct in all material respects as of the date thereof. (g) With respect to
all Eligible Proved Reserves, all of the statements on Exhibit
3.3 are true and correct.

     (h)  There  has not been any  Material  Adverse  Change  in the Oil and Gas
Properties  since the date of the most recent Reserve Report.

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     5.3  Operations  of Oil and Gas  Properties.  With  respect to each Mineral
Interest  which is a working  interest,  Borrower is the operator  except as set
forth in Schedule 5.3 attached  hereto.

     5.4  Equipment.  All of the Equipment is used or held for use in Borrower's
business and is fit for such  purposes,  subject to (a) normal wear and tear and
(b) dispositions  permitted under Section 7.4.

     5.5 Location of Inventory  and  Equipment.  The Inventory and Equipment are
not stored with a bailee, warehouseman, or similar party and are located only at
the  locations  identified  on Schedule  6.12 or otherwise  permitted by Section
6.12,  except for Inventory  and Equipment  which

     (a) are located on the Oil and Gas Property Collateral;  (b) are in-transit
for delivery in the ordinary course of business to Borrower from
Borrower's suppliers;

     (c) are  located in Texas,  Louisiana,  Mississippi  or Alabama  (or in the
Federal Outer Continental Shelf and adjacent to any such state in-transit in the
ordinary  course of business  between  Borrower's  Oil and Gas  Properties;

     (d) consist of well pipe being coated in the ordinary course of business by
a processor for Borrower;

     (e) or have a value  of less  than  $50,000  for  all  such  Inventory  and
Equipment.

     5.6 Oil and Gas Property Collateral Records and Inventory Records. Borrower
keeps correct and accurate  records  itemizing and  describing  the kind,  type,
quality,  and quantity of the Oil and Gas Property Collateral and the Inventory,
and Borrower's cost therefor.

     5.7 Location of Chief Executive Office; FEIN. The chief executive office of
Panaco is located at the address indicated in the preamble to this Agreement and
Panaco's FEIN is 43-1593374.  The chief executive  office of each of PPC and GAC
is located at the same location as Panaco's address indicated in the preamble to
this Agreement, PPC's FEIN is 76-0380056 and GAC's FEIN is 43-1796254.

     5.8 Due Organization and Qualification;  Subsidiaries.

     (a) Each Borrower is duly organized and existing and in good standing under
the laws of the jurisdiction of its  incorporation and qualified and licensed to
do business  in, and in good  standing  in, any state where the failure to be so
licensed or  qualified  reasonably  could be expected to  constitute  a Material
Adverse Change.  Each of Borrower's  Subsidiaries is duly organized and existing

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and in good standing under the laws of the jurisdiction of its incorporation and
qualified  and  licensed to do business  in, and in good  standing in, any state
where the failure to be so licensed or qualified reasonably could be expected to
constitute  a Material  Adverse  Change.

     (b) Set forth on Schedule  5.8, is a complete and accurate  description  of
the authorized capital Stock of Borrower, by class, and, as of the Closing Date,
a  description  of the  number of shares of each such  class that are issued and
outstanding and the number of such shares that are held in Borrower's  treasury.
All such  outstanding  shares  have been  validly  issued and, as of the Closing
Date,  are fully  paid,  nonassessable  shares  free of  contractual  preemptive
rights.  The issuance and sale of all such shares have been in  compliance  with
all applicable  federal and state  securities  laws.  Other than as described on
Schedule 5.8, there are no subscriptions,  options,  warrants, or calls relating
to any shares of Borrower's capital Stock,  including any right of conversion or
exchange under any outstanding  security or other  instrument.  Neither Borrower
nor any of its  Subsidiaries  is not subject to any  obligation  (contingent  or
otherwise)  to  repurchase  or  otherwise  acquire  or retire  any shares of its
capital Stock or any security  convertible  into or exchangeable  for any of its
capital Stock.

     (c)  Set  forth  on  Schedule  5.8,  is a  complete  and  accurate  list of
Borrower's direct and indirect  Subsidiaries,  showing:  (i) the jurisdiction of
their  incorporation;  (ii) the  number of shares  of each  class of common  and
preferred Stock authorized for each of such  Subsidiaries;  and (iii) the number
and the percentage of the  outstanding  shares of each such class owned directly
or indirectly  by Borrower.  All of the  outstanding  capital Stock of each such
Subsidiary  has  been  validly  issued  and is fully  paid  and  non-assessable.
Borrower has no interest in any partnerships  (other than tax partnerships which
are not partnerships under applicable state law). GAC has no assets in excess of
$10,000 in the  aggregate  except for its ownership of 100% of the capital stock
of PPC. GAC has no liabilities  in excess of $10,000 in the aggregate.  Atlantic
has no assets in excess of  $10,000  in the  aggregate,  has no  liabilities  in
excess of $10,000 in the aggregate is dormant and has not conducted any business
during the 12 month period immediately preceding the Closing Date.

     (d)  Except  as set  forth  on  Schedule  5.8,  no  capital  Stock  (or any
securities,  instruments,  warrants,  options,  purchase  rights,  conversion or
exchange rights, calls,  commitments or claims of any character convertible into
or  exercisable  for  capital  Stock) of any direct or  indirect  Subsidiary  of
Borrower  is subject  to the  issuance  of any  security,  instrument,  warrant,
option,  purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.

     5.9 Due  Authorization;  No  Conflict.

     (a) The execution,  delivery, and performance by Borrower of this Agreement
and the Loan  Documents to which it is a party have been duly  authorized by all
necessary  corporate  action.

     (b) The execution,  delivery, and performance by Borrower of this Agreement
and the Loan  Documents  to which it is a party do not and will not  (i) violate
any  provision  of  federal,  state,  or  local  law  or  regulation  (including
Regulations U and X of the Federal  Reserve Board)  applicable to Borrower,  the

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Governing Documents of Borrower, or any order,  judgment, or decree of any court
or other Governmental Authority binding on Borrower,  (ii) conflict with, result
in a breach  of,  or  constitute  (with  due  notice or lapse of time or both) a
default under any Material Contract or other material contractual  obligation or
material  lease  of  Borrower,  (iii) result  in  or  require  the  creation  or
imposition of any Lien of any nature whatsoever upon any properties or assets of
Borrower,   other  than  Permitted   Liens,  or  (iv) require  any  approval  of
stockholders  or any  approval  or  consent  of any  Person  under any  Material
Contract or other material  contractual  obligation of Borrower.

     (c) Other  than the  taking of any  action  expressly  required  under this
Agreement and the Loan Documents,  the execution,  delivery,  and performance by
Borrower of this  Agreement and the Loan  Documents to which Borrower is a party
do not and will not require any registration with,  consent,  or approval of, or
notice to, or other action with or by, any  federal,  state,  foreign,  or other
Governmental  Authority  or  other  Person.

     (d) This Agreement and the Loan Documents to which Borrower is a party, and
all other documents contemplated hereby and thereby, when executed and delivered
by Borrower  will be the  legally  valid and binding  obligations  of  Borrower,
enforceable  against Borrower in accordance with their respective terms,  except
as  enforcement  may  be  limited  by  equitable  principles  or by  bankruptcy,
insolvency, reorganization,  moratorium, or similar laws relating to or limiting
creditors' rights generally.

     (e) The Agent's Liens granted by Borrower to Agent,  for the benefit of the
Lender Group, in and to its properties and assets pursuant to this Agreement and
the other Loan  Documents are validly  created,  perfected,  and first  priority
Liens,  subject only to Permitted Liens.

     (f) Neither the  Borrower nor any of its  Subsidiaries  has  violated,  and
neither the Borrower, nor any Subsidiary will be in violation of, any provisions
of the  Natural  Gas Act or the  Natural  Gas  Policy  Act of 1978 or any  other
Federal or State law or any of the regulations  thereunder  (including  those of
the  respective  Conservation  Commissions  and  Land  Offices  of  the  various
jurisdictions  having authority over its Oil and Gas Properties) with respect to
its Oil and Gas Properties which would create a Material Adverse Change, and the
Borrower and each  Subsidiary have or will have made all necessary rate filings,
certificate applications,  well category filings, interim collection filings and
notices, and any other filings or certifications,  and has or will have received
all necessary regulatory  authorizations (including without limitation necessary
authorizations, if any, with respect to any processing arrangements conducted by
it or others  respecting  its Oil and Gas  Properties or  production  therefrom)
required under said laws and regulations  with respect to all of its Oil and Gas
Properties  or  production  therefrom  so as not to  create a  Material  Adverse
Change.  To the best of the  Borrower's  knowledge,  said material rate filings,
certificate applications,  well category filings, interim collection filings and
notices,  and other filings and  certifications  contain no untrue statements of
material facts nor do they omit any  statements of material  facts  necessary in
said  filings.

     5.10 Claims, Disputes, and Litigation.  There are no actions or proceedings
pending by or against  Borrower  before any court or  administrative  agency and
Borrower  does not  have  knowledge  or  belief  of any  pending  or  threatened

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litigation,  governmental  investigations,  or claims,  complaints,  actions, or
prosecutions involving Borrower or any guarantor of the Obligations, except for:
(a) ongoing collection matters in which Borrower is the claimant,  petitioner or
plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after
the date hereof that,  if decided  adversely  to Borrower,  do not result in and
reasonably  could not be expected to result in a Material  Adverse Change.

     5.11 No Material  Adverse  Change.  All  financial  statements  relating to
Borrower  or any  guarantor  of the  Obligations  that  have been  delivered  by
Borrower to the Lender Group have been prepared in accordance with GAAP (except,
in the case of unaudited  financial  statements,  for the lack of footnotes  and
being subject to year-end audit  adjustments) and fairly present  Borrower's (or
such guarantor's,  as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material  Adverse  Change  with  respect  to  Borrower  (or such  guarantor,  as
applicable) since the date of the latest financial  statements  submitted to the
Lender Group on or before the Closing Date.

     5.12 No Fraudulent Transfer.

     (a)  Borrower  is  Solvent.

     (b) No transfer of property is being made by Borrower and no  obligation is
being incurred by Borrower in connection with the  transactions  contemplated by
this Agreement or the other Loan Documents with the intent to hinder,  delay, or
defraud either present or future creditors of Borrower.

     5.13 Employee Benefits.  None of Borrower, any of its Subsidiaries,  or any
of their ERISA  Affiliates  maintains or contributes to any Benefit Plan,  other
than those listed on Schedule 5.13.  Borrower, each of its Subsidiaries and each
ERISA  Affiliate have satisfied the minimum  funding  standards of ERISA and the
IRC with respect to each Benefit Plan to which it is obligated to contribute. No
ERISA Event has occurred nor has any other event  occurred that may result in an
ERISA Event that  reasonably  could be expected to result in a Material  Adverse
Change.  None of  Borrower  or its  Subsidiaries,  any ERISA  Affiliate,  or any
fiduciary  of any Plan is  subject  to any  direct or  indirect  liability  with
respect to any Plan under any  applicable  law,  treaty,  rule,  regulation,  or
agreement.  None of  Borrower  or its  Subsidiaries  or any ERISA  Affiliate  is
required to provide security to any Plan under Section  401(a)(29) of the IRC.

     5.14  Environmental  Condition.  None of the Oil and Gas  Properties or the
Real Property has ever been  designated or identified in any manner  pursuant to
any Environmental  Laws as a Hazardous  Materials  disposal site, or a candidate
for closure pursuant to any environmental  protection  statute.  No Lien arising
under any  Environmental  Laws has  attached  to any  revenues or to any real or
personal  property  owned or operated by  Borrower.  Borrower has not received a
summons, citation, notice, or directive from the Environmental Protection Agency
or any other  federal  or state  governmental  agency  concerning  any action or
omission by Borrower  resulting  in the  releasing  or  disposing  of  Hazardous
Materials  into  the  environment.  Borrower  has  taken  all  steps  reasonably
necessary to determine and has  determined  that no Hazardous  Materials,  solid

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waste, or oil and gas exploration and production  wastes,  have been disposed of
or otherwise  released and there has been no threatened release of any Hazardous
Materials on or to any Property of Borrower or any of its Subsidiaries except in
compliance  with  Environmental  Laws  and so as not to  pose  an  imminent  and
substantial endangerment to public health or welfare or the environment.  To the
extent  applicable,  all  Property  of  Borrower  and  each of its  Subsidiaries
currently satisfies all design, operation, and equipment requirements imposed by
the OPA or scheduled as of the Closing Date to be imposed by OPA during the term
of this  Agreement,  and Borrower  does not have any reason to believe that such
Property,  to the extent subject to OPA, will not be able to maintain compliance
with the OPA  requirements  during the term of this Agreement.  Neither Borrower
nor any of its  Subsidiaries  has any known  contingent  liability in connection
with any release or threatened  release of any oil,  Hazardous Material or solid
waste  into the  environment,  except  with  respect to the  pending  litigation
disclosed on Schedule 5.10. All Hazardous  Materials,  solid waste,  and oil and
gas exploration and production wastes, if any, generated at any and all Property
of  Borrower  or any of its  Subsidiaries  have in the  past  been  transported,
treated and disposed of in accordance with  Environmental  Laws and so as not to
pose an imminent and substantial endangerment to public health or welfare or the
environment, and, to the best knowledge of Borrower, all such transport carriers
and treatment and disposal  facilities have been and are operating in compliance
with  Environmental  Laws  and so as not to pose  an  imminent  and  substantial
endangerment  to public  health or welfare or the  environment,  and are not the
subject of any existing, pending or threatened action,  investigation or inquiry
by any  Governmental  Authority in  connection  with any  Environmental  Laws.

     5.15 Compliance with the Law.  Neither Borrower nor any of its Subsidiaries
has violated any requirement of a Governmental Authority or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of the  Property or the conduct of its  business,  which  violation or
failure could  reasonably be expected to result in (in the event such  violation
or failure were asserted by any Person  through  appropriate  action) a Material
Adverse Change.  Except for such acts or failures to act as do not result in and
could not reasonably be expected to result in a Material Adverse Change, the Oil
and Gas Properties  have been  maintained,  operated and developed in a good and
workmanlike  manner and in conformity  with all  applicable  laws and all rules,
regulations and orders of all duly constituted  authorities having  jurisdiction
and in  conformity  with  the  provisions  of all  leases,  subleases  or  other
contracts  comprising a part of the Mineral  Interests  and other  contracts and
agreements  forming a part of the Oil and Gas  Properties;  specifically in this
connection, (i) after the Closing Date, no Oil and Gas Properties are subject to
having  allowable  production  reduced  below  the  full and  regular  allowable
(including  the maximum  permissible  tolerance)  because of any  overproduction
(whether or not the same was  permissible at the time) prior to the Closing Date
and (ii) none of the wells  comprising a part of the Oil and Gas  Properties are
deviated from the vertical more than the maximum  permitted by applicable  laws,
regulations,  rules and orders, and such wells are, in fact,  bottomed under and
are producing from the Oil and Gas Properties.  Neither  Borrower nor any of its
Subsidiaries  has entered into,  and the Oil and Gas  Properties are not subject
to, any agreements, consent orders, administrative orders or similar obligations
based on a violation or alleged violation of Legal Requirements.

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     5.16  Insurance.  Schedule  5.16 attached  hereto  contains an accurate and
complete  description  of all material  policies of  insurance  owned or held by
Borrower and each  Subsidiary.  Except as set forth on Schedule  5.16,  all such
policies  are in full  force and  effect,  all  premiums  with  respect  thereto
covering all periods up to and including the Closing Date have been paid, and no
notice of cancellation or termination has been received with respect to any such
policy. Such policies are sufficient for compliance with all requirements of law
and of all agreements to which Borrower or any of its  Subsidiaries  is a party;
are valid,  outstanding and enforceable  policies;  provide  adequate  insurance
coverage in at least such amounts and against at least such risks (but including
in any event  public  liability)  as are  usually  insured  against  in the same
general  area by  companies  engaged in the same or a similar  business  for the
assets and operations of Borrower and each of its  Subsidiaries;  will remain in
full force and effect  through the  respective  dates set forth in Schedule 5.16
without the payment of additional premiums except as set forth on Schedule 5.16;
and will not in any way be affected  by, or terminate or lapse by reason of, the
transactions  contemplated  by this agreement.  Neither  Borrower nor any of its
Subsidiaries  has been  refused  any  insurance  with  respect  to its assets or
operations,  nor has its coverage been limited below usual and customary  policy
limits,  by an insurance  carrier to which it has applied for any such insurance
or with which it has carried  insurance  during the last three years.

     5.17 Hedging Agreement. Schedule 5.17 sets forth, as of the Closing Date, a
true and complete list of all Hedging Agreements (including commodity price swap
agreements, forward agreements or contracts of sale which provide for prepayment
for  deferred  shipment  or delivery of oil,  gas or other  commodities)  of the
Borrower and each of its Subsidiaries, the material terms thereof (including the
type, term,  effective date,  termination date and notional amounts or volumes),
the net mark to market value  thereof,  all credit support  agreements  relating
thereto  (including any margin  required or supplied),  and the  counterparty to
each such  agreement.  Borrower has delivered true and correct copies of each of
the Hedging  Agreements to Agent prior to the date of this  Agreement.

     5.18  Brokerage  Fees.  Except  for a  $150,000  brokerage  fee  payable by
Borrower to Farlow Financial Corporation  ("Farlow") on the Closing Date for the
services rendered to Borrower by Farlow, no brokerage commission or finders fees
has or shall  be  incurred  or  payable  in  connection  with or as a result  of
Borrower's  obtaining financing from the Lender Group under this Agreement,  and
neither  Borrower nor any of its  Subsidiaries  has utilized the services of any
broker or finder in connection  with  Borrower's  obtaining  financing  from the
Lender Group under this  Agreement,  Borrower  and  Guarantor  acknowledge  that
neither Agent nor any Lender is in any way liable for such payment to Farlow.

     5.19  Permits  and  other  Intellectual  Property.  Except  as set forth on
Schedule 5.19,  Borrower owns or possesses  adequate licenses or other rights to
use  all  Permits,   patents,   patent   applications,   trademarks,   trademark
applications, service marks, service mark applications, trade names, copyrights,
trade secrets and know-how (collectively,  the "Intellectual Property") that are
necessary for the operation of its business as currently conducted.  No claim is
pending or threatened to the effect that Borrower  infringes  upon, or conflicts
with, the asserted rights of any other Person under any  Intellectual  Property,
and to the best of  Borrower's  knowledge  there is no basis for any such  claim
(whether pending or threatened).  To the best of Borrower's knowledge,  no claim

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is pending or threatened to the effect that any such Intellectual Property owned
or licensed by Borrower,  or in which Borrower otherwise has the right to use is
invalid or  unenforceable by Borrower,  and to the best of Borrower's  knowledge
there is no basis for any such claim (whether or not pending or  threatened).

     5.20  Year  2000  Compatibility.

     (a) On the  basis  of a  comprehensive  inventory,  review  and  assessment
currently   being   undertaken  by  Borrower  of  Borrower's  and  each  of  its
Subsidiaries'  computer  applications  utilized  by  Borrower  and  any  of  its
Subsidiaries  or  contained in goods,  products or services  produced or sold by
Borrower or any of its Subsidiaries, and upon inquiry made of each of Borrower's
and  each  of its  Subsidiaries'  material  suppliers  and  vendors,  Borrower's
management is of the considered view that Borrower and each of its Subsidiaries,
and its  respective  goods,  products and services  and all such  suppliers  and
vendors will be Year 2000 Compliant  before  November 30, 1999.

     (b) Borrower (i) has undertaken a detailed inventory, review and assessment
of all areas within its business and operations that could be adversely affected
by the failure of Borrower or any of its  Subsidiaries or its respective  goods,
products or  services  to be Year 2000  Compliant  on a timely  basis,  (ii) has
developed the plan and timeline for becoming Year 2000 Compliant attached hereto
as Schedule  5.20;  and (iii) to date, is  implementing  that plan in accordance
with that timetable in all material respects.  Borrower  reasonably  anticipates
that it will be Year 2000 Compliant on a timely basis.

     5.21  Locations;  Leases.

     (a) The  primary  accounting  and  business  books,  records  and papers of
Borrower  pertaining  to the  Collateral  are  kept  and  maintained  solely  at
Borrower's  chief executive office set forth in the beginning of this Agreement.
In  addition,  the  Collateral,  and the books,  records  and papers of Borrower
pertaining thereto, are kept and maintained solely at Borrower's chief executive
office set forth in the beginning of this Agreement and at those locations which
are listed on Schedule 5.1(a)  attached hereto,  except that certain Oil and Gas
Property  Collateral also is located at the locations specified on Schedule 5.21
attached  hereto,  which  schedules  include the names and  addresses of each of
Borrower's  landlords.  Except  (i) to  accomplish  sales  of  Inventory  in the
ordinary  course of business  or (ii) to utilize  such of the  Collateral  as is
removed in the ordinary course of business (such as motor vehicles), or (iii) to
dispose of Collateral to the extent prescribed under Section 7.4, Borrower shall
not remove any Collateral from said executive  office or those locations  listed
on Schedule 5.1(a) or Schedule 5.21,  as the case may be.

     (b) Except as Borrower  shall have  notified in writing  prior  thereto and
Borrower shall have delivered to Agent a Collateral Access Agreement in form and
substance  satisfactory to Agent, no tangible  personal  property of Borrower or
any of its  Subsidiaries  shall be in the care or custody of any third  party or
stored or entrusted with a bailee or other third party and none shall  hereafter

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be placed under such care, custody, storage or entrustment, except for Inventory
and  Equipment  having  a fair  saleable  value  of less  than  $250,000  in the
aggregate for all such Inventory and Equipment.

     5.22  Absence of Certain  Changes.  Since July 1, 1999,  there has not been
without Agent's prior written consent:

     (a) A waiver of any right  relating  to the Oil and Gas  Properties;

     (b) A sale, lease or other disposition of the Oil and Gas Properties;

     (c) A mortgage,  pledge or grant of a lien or  security  interest in any of
the Oil and Gas Properties;

     (d) A  contract  for the  sale of  products  produced  from the Oil and Gas
Properties; (e) A contract between Borrower and any of its Subsidiaries; or

     (f) A contract or  commitment to do any of the  foregoing.

     5.23 Operating  Costs.  All costs and expenses  incurred in connection with
the operation of the Properties have been fully paid and discharged by Borrower,
except (a) normal  costs and  expenses  incurred  in  operating  the Oil and Gas
Properties for which  Borrower has not yet been billed,  (b) with respect to the
period  beginning  on the  Closing  Date and  ending  on the  tenth  (10th)  day
following the Closing Date,  normal costs and expenses incurred in operating the
Oil and Gas Properties  incurred  during the one hundred twenty (120) day period
immediately preceding the date of determination  thereof, and (c) from and after
the eleventh (11th) day following the Closing Date,  normal expenses incurred in
operating the Oil and Gas Properties  incurred  during the sixty (60) day period
immediately  preceding the date of determination  thereof.

     5.24  Imbalances.  Except  as set forth on  Schedule 5.2(b)  or on the most
recent Reserve Report delivered to Agent by Borrower pursuant to Section 6.2(g),
Borrower has not taken or received any amount of gas, oil,  liquid  hydrocarbons
(or products  refined  therefrom) so that any person or entity may thereafter be
entitled to receive any portion of the  interests of Borrower to  "balance"  any
previous  disproportionate  allocation.

     5.25 No Default. Schedule 5.1(c) sets forth all of the contracts associated
with the Oil and Gas  Properties  of Borrower  having a Mineral  Interest  value
(based  upon  PV-10  Value) in excess  of  $500,000  on the  Closing  Date.  The
contracts  associated  with such Oil and Gas  Properties  are in full  force and
effect in accordance with their respective terms, and there exist no defaults in
the  performance of any  obligation  thereunder.  Additionally,  Borrower is not
aware of any event that with notice or lapse of time, or both,  would constitute
a default under any such contracts.

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     5.26  Leases.  The oil  and  gas  leases  associated  with  the Oil and Gas
Properties  are in full force and  effect in  accordance  with their  respective
terms,  and  there  exist  no  defaults  in the  performance  of any  obligation
thereunder. Additionally, Borrower is not aware of any event that with notice or
lapse of time,  or both,  would  constitute a default under any such oil and gas
leases.

     5.27  Marketing  Agreements.  Except as set forth in Schedule 5.27, the Oil
and Gas  Properties  (and  the  production  therefrom)  are not  subject  to any
purchase  agreement,   sale  agreement  or  similar  marketing  arrangement  not
cancelable on thirty (30) days notice,  nor are any of the Properties subject to
any  agreements  with any  companies  affiliated  with  Borrower  that cannot be
terminated immediately upon Closing without penalty, cost or liability to Agent.

     5.28 Non-Consent Operations.  Since the execution of this Agreement,  there
have been no  operations  associated  with the Oil and Gas  Properties  under an
operating agreement,  unit agreement or governmental order with respect to which
Borrower has become a non-consenting  party.

     5.29  Condition of Equipment.  All of the wells,  facilities  and equipment
associated with the Oil and Gas Properties are:  (a) structurally  sound with no
material  defects  known to  Borrower,  (b) in  good  operating  condition,  and
(c) have been and are maintained in accordance with prudent business  standards.

     5.30 Wells.  Each oil or gas well located on the Oil and Gas Properties is:
(a) properly  permitted,   (b) in  compliance  with  all  applicable  Laws,  and
(c) within the production  tolerances  allocated by the  governmental  entity or
tribal authority having appropriate jurisdiction. All of the leaseholds in which
there are located Mineral Interests of Borrower having a PV-10 Value of $100,000
are  producing  Hydrocarbons  in  commercial  quantities.   Each  of  Borrower's
producing  wells listed on Schedule 5.1(b) is located on an Oil and Gas Property
(i)  covered  by title  opinions  and (ii)  described  in the legal  description
contained in an Oil and Gas Property  Mortgage  which has been duly executed and
delivered to Agent.

     6. AFFIRMATIVE COVENANTS.

     Borrower  covenants and agrees that, so long as any credit  hereunder shall
be available and until full and final payment of the Obligations,  each Borrower
shall, and shall cause each of its  Subsidiaries to, do all of the following:

     6.1 Accounting System.  Maintain a standard and modern system of accounting
that enables Borrower to produce financial statements in accordance with GAAP on
a separate  Borrower-by-Borrower  basis, as well as on a consolidated basis, and
maintain records  pertaining to the Collateral that contain  information as from
time to time may be requested by Agent.  Borrower also shall keep a modern joint
interest  billing and remittance  system with respect to each of the Oil and Gas
Properties on which it is the operator and a modern reporting system that shows,
among other things,  the value,  revenues and  profits/losses of the Oil and Gas
Properties,  volume of production and value of sales of Hydrocarbon  production,

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the location  and  condition  of the  Equipment  and  Borrower's  positions  and
liability    exposure    under   the   Hedging    Agreements   on   a   separate
Borrower-by-Borrower  basis, as well as on a consolidated  basis. 6.2 Collateral
Reporting.  Provide Agent with the following documents at the following times in
form  satisfactory  to Agent  during  the term of this  Agreement  on a separate
Borrower-by-Borrower  basis, as well as on a consolidated basis:

     (a) By no later than the last day of each month, a detailed update, for the
previous  month,  of the  Borrowing  Base  on the  form  of the  Borrowing  Base
Certificate  which is  attached  hereto as Exhibit 6.2 (or on such other form as
Agent in its sole discretion may require),  including (i) a detailed calculation
of the NYMEX Value of each of the Oil and Gas Properties  (categorized by Proved
Developed Producing Reserves, Proved Developed Non-Producing Reserves and Proved
Undeveloped  Reserves,  subcategories  of Eligible  Proved  Developed  Producing
Reserves,  Eligible Proved Developed  Non-Producing Reserves and Eligible Proved
Undeveloped Reserves,  and "other"),  (ii) historical production data of the oil
and gas reserves included in the Oil and Gas Property  Collateral since the date
of the most recent  Reserve  Report,  (iii) the Oil and Gas Property  Collateral
prices  received  for  production,  lease  operating  expenses  and  such  other
information  as  Agent  may deem  necessary  or  appropriate,  in  Agent's  sole
discretion,  (iv) any changes in the Oil and Gas Property  Collateral  since the
date of the most recent Reserve Report in Borrower's (or such Subsidiaries',  as
the case may be) working interest or net revenue interest, (v) any changes since
the date of the most recent Reserve Report in the  categorization  of any or all
of the Oil and Gas Properties among Proved Developed Producing Reserves,  Proved
Developed Non-Producing Reserves and Proved Undeveloped Reserves,  subcategories
of Eligible Proved  Developed  Producing  Reserves,  Eligible  Proved  Developed
Non-Producing  Reserves and Eligible Proved Undeveloped  Reserves,  and "other",
(vi) a reconciliation  and explanation of the changes of  categorization  of any
Oil and  Gas  Properties  among  Proved  Developed  Producing  Reserves,  Proved
Developed Non-Producing Reserves and Proved Undeveloped Reserves,  subcategories
of Eligible Proved  Developed  Producing  Reserves,  Eligible  Proved  Developed
Non-Producing  Reserves and Eligible Proved Undeveloped  Reserves,  and "other",
since the date of the  immediately  preceding  Borrowing Base  Certificate,  and
(vii) any changes in the Borrower's  working interest or net revenue interest in
the Oil and Gas  Property  Collateral  since  the date of the  previous  month's
Borrowing Base  Certificate;

     (b) By no later than the last day of each month,  a detailed  statement  of
sales and  revenues  derived  from all  products  produced  from the Oil and Gas
Properties, for the previous month, including purchasers, prices received, prior
period  adjustments to such revenues and prices, and any Material Adverse Change
affecting the sales or marketing  agreements or arrangements with the purchasers
of such  products;

     (c) By no later than the last day of each month, a written report to Agent,
in form and substance  acceptable to Agent,  detailing and aging  Borrower's and
each of its  Subsidiaries'  unpaid  lease  operating  expenses  and unpaid other
liabilities,  for the  previous  month,  with  respect to which a mineral  lien,

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subcontractor's lien, mechanic's lien,  materialmen's lien or other Lien against
any of the  Collateral  may arise which may have a priority  superior to Agent's
Lien on such Collateral;

     (d) By no later  than the last day of each  month,  notice  of all  claims,
disputes,  and  litigation  that have  arisen  since the date of the most recent
statement to Agent pursuant to this Section 6.2;  except (i) ongoing  collection
matters in which  Borrower is the claimant or plaintiff;  and (ii) matters that,
if decided  adversely to Borrower,  do not result in and reasonably could not be
expected to result in a Material  Adverse Change;

     (e) By no later than the last day of each  month,  (i) a written  report to
Agent, in form and substance  acceptable to Agent,  detailing the costs incurred
and revenues  received by Borrower under its Hedging  Agreements for oil and gas
production,  and  (ii) a  detailed  calculation  of  Adjusted  Consolidated  Net
Tangible  Assets as of the last day of the previous  month in form and substance
acceptable to Agent;

     (f) By the last day of the month following each calendar quarter (i.e., the
last day of April, July,  October and January),  a report: (i) listing the total
amount actually paid by Borrower during the preceding  quarter for: (A) plugging
and  abandonment   costs  for  previous  or  ongoing  plugging  and  abandonment
operations  pertaining to the Oil and Gas  Properties,  and (B) general bond and
supplemental  bond payments  pertaining to plugging and abandonment  costs;  and
(ii)  estimating  the future  payments for (A) and (B),  above,  for each of the
succeeding  two  quarters;

     (g)  Reserve  Reports  prepared  by an  independent  petroleum  engineering
consultant pertaining to the six-month period ending December 31st and June 30th
of each year (with such  Reserve  Reports to be  delivered on or before the 60th
day following such six-month  period).  Each Reserve Report shall be in form and
substance   satisfactory  to  Agent,   and  shall:   (i)  be  accompanied  by  a
certification of Borrower to the effect that nothing has occurred since the date
of the last  Reserve  Report  that could  reasonably  be expected to result in a
Material  Adverse  Change,  except that which has  previously  been disclosed to
Agent in writing;  and (ii) contain such other  information as may be reasonably
requested  by Agent.

     Each  delivery  of a Reserve  Report or a  Borrowing  Base  Certificate  by
Borrower to Agent shall constitute a representation  and warranty by Borrower to
Agent that,  unless  otherwise  disclosed to Agent in writing on or prior to the
date of such delivery, (w) Borrower (or its Subsidiary, as the case may be) owns
the Oil and Gas Properties described in the Reserve Report free and clear of any
Liens  (except  Permitted  Liens)  and (x)  each  of the Oil and Gas  Properties
described in such Reserve Report  constitute at least  ninety-five  (95%) of the
value of Borrower's Proved Reserves in the Oil and Gas Property Collateral;

     (h) Upon  request by Agent from time to time,  copies of  Borrower's  lease
files, well files and contract files (including production reports on each well,
marketing  contracts,  and  information  regarding  locations  of and  equipment
located on each well); and

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     (i) Such other  reports as to the  Collateral  or the business or financial
condition  of  Borrower  as Agent may  request  from time to time.

     6.3 Financial  Statements,  Reports,  Certificates.  Deliver to Agent, with
copies to each Lender: (a) as soon as available, but in any event within 30 days
after the end of each month during each of Borrower's  fiscal  years,  a company
prepared balance sheet,  income  statement,  and statement of cash flow covering
Borrower's  operations during such period; and (b) as soon as available,  but in
any event  within  90 days  after the end of each of  Borrower's  fiscal  years,
financial  statements  of  Borrower  for  each  such  fiscal  year,  audited  by
independent  certified  public  accountants  reasonably  acceptable to Agent and
certified, without any qualifications, by such accountants to have been prepared
in  accordance  with  GAAP,  together  with a  certificate  of such  accountants
addressed to Agent stating that such  accountants  do not have  knowledge of the
existence of any Default or Event of Default.  Such audited financial statements
shall include a balance sheet, profit and loss statement,  and statement of cash
flow and, if prepared, such accountants' letter to management.  If Borrower is a
parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or
Designated  Affiliate of another  company,  then,  in addition to the  financial
statements  referred to above,  Borrower agrees to deliver financial  statements
prepared  on a  consolidating  basis so as to  present  Borrower  and each  such
related entity separately, and on a consolidated basis.

     Together with the above,  Borrower also shall deliver to Agent, with copies
to each  Lender,  Borrower's  Form 10-Q  Quarterly  Reports,  Form  10-K  Annual
Reports,  and Form 8-K Current  Reports,  and any other filings made by Borrower
with the SEC,  if any, as soon as the same are filed,  or any other  information
that is  provided by Borrower  to its  shareholders,  and any other  information
reasonably  requested by the Lender Group relating to the financial condition of
Borrower.

     Each month,  together with the financial  statements  provided  pursuant to
Section 6.3(a),  Borrower shall deliver to Agent,  with copies to each Lender, a
certificate  signed by its chief  financial  officer to the effect that: (i) all
financial  statements  delivered  or caused to be  delivered  to any one or more
members of the Lender Group hereunder have been prepared in accordance with GAAP
(except,  in the  case  of  unaudited  financial  statements,  for  the  lack of
footnotes and being subject to year-end  audit  adjustments)  and fairly present
the financial condition of Borrower,  (ii) the representations and warranties of
Borrower  contained in this  Agreement and the other Loan Documents are true and
correct in all material respects on and as of the date of such  certificate,  as
though  made  on  and  as  of  such  date   (except  to  the  extent  that  such
representations and warranties relate solely to an earlier date), (iii) for each
month that also is the date on which a financial  covenant in Section 7.20 is to
be  tested,  a  Compliance   Certificate   demonstrating  in  reasonable  detail
compliance  at the end of such period with the  applicable  financial  covenants
contained in Section 7.20,  and (iv) on the date of delivery of such certificate
to Agent there does not exist any condition or event that  constitutes a Default
or Event of Default  (or, in the case of clauses  (i),  (ii),  or (iii),  to the
extent of any  non-compliance,  describing such non-compliance as to which he or
she may have  knowledge  and what  action  Borrower  has taken,  is  taking,  or
proposes to take with respect  thereto).

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     As soon as available and in any event within forty-five (45) days after the
last day of each calendar quarter, a report, in form and substance  satisfactory
to the Administrative  Agent,  setting forth as of the last Business day of such
calendar quarter, a true and complete list of all Hedging Agreements  (including
commodity price swap agreements,  forward  agreements or contracts of sale which
provide for  prepayment  for deferred  shipment or delivery of oil, gas or other
commodities)  of the Borrower and each  Subsidiary,  the Material  terms thereof
(including the type, term, effective date, termination date and notional amounts
or volumes),  the net mark to market  values  therefor,  any new credit  support
agreements  relating  thereto,  any margin required or supplied under any credit
support  document,  and the counterparty to each such agreement.

     Borrower  shall  have  issued  written   instructions  to  its  independent
certified public  accountants  authorizing them to communicate with Agent and to
release to Agent whatever financial  information  concerning Borrower that Agent
may request.  Borrower hereby  irrevocably  authorizes and directs all auditors,
accountants,  or other third parties to deliver to Agent, at Borrower's expense,
copies of Borrower's  financial  statements,  papers related thereto,  and other
accounting  records of any nature in their possession,  and to disclose to Agent
any  information  they  may  have  regarding  Borrower's  business  affairs  and
financial  conditions.

     6.4 Tax  Returns.  Deliver  to Agent  copies of each of  Borrower's  future
federal income tax returns,  and any amendments  thereto,  within 30 days of the
filing thereof with the Internal Revenue  Service.

     6.5 Guarantor  Reports.  Cause any guarantor of any of the  Obligations  to
deliver its annual financial  statements at the time when Borrower  provides its
audited  financial  statements  to Agent and  copies of all  federal  income tax
returns as soon as the same are available and in any event no later than 30 days
after the same are required to be filed by law.

     6.6 [Intentionally Omitted].

     6.7 Title to  Equipment.  Upon Agent's  request,  Borrower  promptly  shall
deliver to Agent,  properly  endorsed,  any and all  evidences of ownership  of,
certificates of title, or  applications  for title to any items of Equipment.

     6.8 Maintenance of Oil and Gas Property Collateral and Equipment; Operation
of Business.

     (a) At its expense, do or cause to be done all things reasonably  necessary
to preserve and keep in good repair,  working order and  efficiency  (except for
normal  wear and  tear)  all of its Oil and Gas  Property  Collateral  and other
material Properties including, without limitation, all equipment,  machinery and
facilities,  and  from  time to time  will  make  all the  reasonably  necessary
repairs,  renewals and replacements so that at all times the state and condition
of its Oil and Gas Property Collateral and other material Property will be fully
preserved  and  maintained,  allowing for  depletion  in the ordinary  course of
business, except to the extent a portion of such Oil and Gas Property Collateral
is no longer  capable of producing  Hydrocarbons  in commercial  quantities  (in
which case  Borrower  shall fully comply with all of its  obligations  and Legal
Requirements  pertaining  to plugging and  abandoning  its wells related to such

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portion). Borrower shall, and shall cause each of its Subsidiaries to, promptly:
(i) pay and discharge,  or make reasonable and customary  efforts to cause to be
paid and discharged,  all delay rentals,  royalties,  expenses and  indebtedness
accruing under the leases or other agreements affecting or pertaining to its Oil
and Gas Property  Collateral;  (ii)  perform or make  reasonable  and  customary
efforts to cause to be  performed,  in accordance  with  industry  standards the
obligations  required  by  each  and  all of  the  assignments,  deeds,  leases,
sub-leases,  contracts and agreements affecting its interests in its Oil and Gas
Property Collateral and other material Properties;  (iii) shall, and shall cause
each of its  Subsidiaries  to, do all other things necessary to keep unimpaired,
except  for  Permitted  Liens,  its rights  with  respect to each and all of the
assignments,  deeds, leases, sub-leases,  contracts and agreements affecting its
interests in its Oil and Gas Property Collateral and other material Property and
prevent any forfeiture thereof or a default thereunder, except (A) to the extent
a  portion  of such Oil and Gas  Property  Collateral  is no longer  capable  of
producing   Hydrocarbons  in  economically   reasonable   amounts  and  (B)  for
dispositions  permitted by Section 7.4 hereof.  Borrower shall,  and shall cause
each of its  Subsidiaries,  to operate its Oil and Gas Property  Collateral  and
other material  Property or cause or make  reasonable  and customary  efforts to
cause such Oil and Gas Property  Collateral and other material  Properties to be
operated in a reasonably  prudent manner in accordance with the practices of the
industry  and in  compliance  in  all  material  respects  with  all  applicable
contracts and  agreements  and in  compliance in all material  respects with all
Legal Requirements.

     (b) At its expense,  maintain the Equipment in good operating condition and
repair  (ordinary wear and tear excepted),  and make all necessary  replacements
thereto,  except as permitted in Section 7.4(c), so that the value and operating
efficiency  thereof shall at all times be maintained and  preserved.  Other than
those items of Equipment that constitute  fixtures on the Closing Date, Borrower
shall not permit any item of  Equipment to become a fixture to real estate or an
accession  to other  property,  and such  Equipment  shall at all  times  remain
personal  property.

     (c) At its expense,  (i) explore,  develop and maintain the leases,  wells,
units and  acreage to which the Oil and Gas  Property  Collateral  pertains in a
prudent  and  economical  manner,  (ii) act  prudently  and in  accordance  with
customary  industry  standards in managing or operating the Oil and Gas Property
Collateral,  (iii)  pay and  promptly  discharge  all  rentals,  delay  rentals,
royalties,  overriding royalties,  payments of production and other indebtedness
or  obligations  accruing  under the leases  comprising the Oil and Gas Property
Collateral, and perform every act required to keep such leases in full force and
effect,   (iv)  deliver  all  operating   agreements,   pooling  or  unitization
agreements,   sales  or  processing   contracts,   drilling  and/or  development
agreements,  pipeline  transportation  agreements and other material  agreements
which  pertain to the Oil and Gas Property  Collateral,  (v) deliver  production
information  on a monthly basis,  (vi) deliver copies of all reports,  forms and
other documents and data submitted by Borrower or any of its Subsidiaries to the
Federal Energy Regulatory Commission, the applicable state conservation agencies
and any other applicable Governmental Authorities, (vii) not mortgage, pledge or
otherwise  encumber or sell the Oil and Gas  Property  Collateral  except to the
limited extent  permitted  under this  Agreement,  (viii) not alter any Material
Contract  relating to the Oil and Gas Property  Collateral except to the limited
extent  permitted  under  this  Agreement,  (ix) pay on or  before  the due date
thereof all of Borrower's and each of its Subsidiaries' lease operating expenses

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and other  liabilities  with  respect to which a mineral  lien,  subcontractor's
lien,  mechanic's  lien,  materialmen's  lien or other Lien  against  any of the
Collateral may arise which may have a priority  superior to Agent's Lien on such
Collateral,  and (x) perform all acts and execute  such  documents  as Agent may
require in order to maintain the  existence,  perfection  and first  priority of
Agent's Lien on the Oil and Gas Property Collateral and the other Collateral.

     6.9 Taxes.

     (a) Cause all assessments and taxes, whether real, personal,  or otherwise,
due or payable by, or imposed,  levied,  or assessed  against Borrower or any of
its  property  or assets to be paid in full,  before  delinquency  or before the
expiration  of any extension  period,  except to the extent that the validity of
such assessment or tax (other than production  taxes,  severance taxes,  payroll
taxes or taxes that are the subject of a United  States  federal tax lien) shall
be the  subject  of a  Permitted  Protest.

     (b) Make due and timely payment or deposit of all such federal,  state, and
local  taxes,  assessments,  or  contributions  required of it by law,  and will
execute and deliver to Agent, on demand,  appropriate  certificates attesting to
the payment thereof or deposit with respect thereto.

     (c) Make  timely  payment or deposit of all tax  payments  and  withholding
taxes  required  of it by  applicable  laws,  including  those  laws  concerning
F.I.C.A.,  F.U.T.A.,  state  disability,  and local,  state,  and federal income
taxes,  and will, upon request,  furnish Agent with proof  satisfactory to Agent
indicating that Borrower has made such payments or deposits.

     6.10  Insurance.

     (a)  At  its  expense,   maintain  the  insurance   policies  described  in
Schedule 5.16 in full force and effect.

     (b) At its expense, obtain and maintain (i) insurance of the type necessary
to insure the  Collateral  in such  amounts and against  such risks as Agent may
require,  but in any  event in  amounts  sufficient  to  prevent  Borrower  from
becoming a co-insurer  under such  policies.

     (c) All such  policies  of  insurance  shall  be in such  form,  with  such
companies,  and in such amounts as may be reasonably  satisfactory to Agent. All
insurance  required  herein  shall be written by  companies  which have a Best's
rating of A for capital and X for financial stability.  All hazard insurance and
such  other  insurance  as Agent  shall  specify,  shall  contain a Form  438BFU
(NS) mortgagee  endorsement, or an equivalent endorsement satisfactory to Agent,
showing  Agent as sole  loss  payee  thereof,  and  shall  contain  a waiver  of
warranties.  Every  policy of  insurance  referred to in this Section 6.10 shall
contain an agreement  by the insurer that it will not cancel such policy  except
after 30 days prior written notice to Agent and that any loss payable thereunder
shall be payable notwithstanding any act or negligence of Borrower or the Lender
Group which might,  absent such  agreement,  result in a forfeiture  of all or a

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part of such insurance payment and  notwithstanding  (i) occupancy or use of the
Collateral  for  purposes  more  hazardous  than  permitted by the terms of such
policy,  (ii) any  foreclosure or other action or proceeding taken by the Lender
Group  pursuant to the Oil and Gas  Mortgages  upon the happening of an Event of
Default,  or (iii) any change in title or ownership of the Collateral.  Borrower
shall  deliver to Agent  certified  copies of such  policies  of  insurance  and
evidence of the  payment of all  premiums  therefor.

     (d)  Original  policies  or  certificates  thereof  satisfactory  to  Agent
evidencing  such insurance shall be delivered to Agent at least 30 days prior to
the expiration of the existing or preceding policies.  Borrower shall give Agent
prompt  notice of any loss covered by such  insurance,  and Agent shall have the
right to adjust any loss.  Agent  shall have the  exclusive  right to adjust all
losses  payable  under any such  insurance  policies  without any  liability  to
Borrower  whatsoever  in respect of such  adjustments.  Any monies  received  as
payment for any loss under any insurance policy including the insurance policies
mentioned above,  shall be paid over to Agent to be applied at the option of the
Required Lenders either to the prepayment of the Obligations without premium, in
such order or manner as Agent may elect, or shall be disbursed to Borrower under
stage  payment  terms  satisfactory  to  Agent  for  application  to the cost of
repairs,   replacements,   or  restorations.   All  repairs,   replacements,  or
restorations  shall be effected  with  reasonable  promptness  and shall be of a
value at least  equal to the value of the items or property  destroyed  prior to
such damage or  destruction.  Upon the  occurrence  of an Event of Default,  the
Lender  Group shall have the right to apply all prepaid  premiums to the payment
of the Obligations in such order or form as Agent shall determine.

     (e) Borrower  shall not take out separate  insurance  concurrent in form or
contributing in the event of loss with that required to be maintained under this
Section  6.10,  unless Agent is included  thereon as named insured with the loss
payable to Agent  under a standard  438BFU  (NS) Mortgagee  endorsement,  or its
local equivalent. Borrower immediately shall notify Agent whenever such separate
insurance is taken out,  specifying the insurer  thereunder and full particulars
as to  the  policies  evidencing  the  same,  and  originals  of  such  policies
immediately shall be provided to Agent.

     (f) Borrower shall,  and shall cause each of its  Subsidiaries  to, use its
best efforts to cause the operator of each Oil and Gas  Property  Collateral  in
which Borrower or any of its Subsidiaries owns a non-operating  working interest
to maintain  for the benefit of all working  interest  owners  insurance  of the
types and in the coverage  amounts and with  reasonable  deductibles as is usual
and  customary,  including  those  specified  in  Section  6.10(b),  to name the
non-operating working interest owners,  including Borrower and its Subsidiaries,
as an  additional  insured on the  liabilities,  and to otherwise  have the such
insurance  comply with the requirements  specified in Section 6.10(c).  Borrower
shall,  and shall  cause each of its  Subsidiaries  to, use its best  efforts to
obtain from its operators  certificates of insurance  evidencing coverage of the
Oil and Gas  Property  Collateral  as set forth above as and when  requested  by
Agent.

     6.11 No Setoffs or  Counterclaims.  Make  payments  hereunder and under the
other Loan Documents by or on behalf of Borrower  without setoff or counterclaim

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and free and clear of, and without  deduction or  withholding  for or on account
of, any federal, state, or local taxes.

     6.12 Location of Inventory and Equipment.  Keep the Inventory and Equipment
only at the locations  identified  the Oil and Gas  Mortgages in Schedule  6.12;
provided,  however,  that  Borrower  may  amend  Schedule 6.12  so  long as such
amendment  occurs by written  notice to Agent not less than 30 days prior to the
date on which the Inventory or Equipment is moved to such new location,  so long
as such new location is within the continental United States, and so long as, at
the  time  of  such  written  notification,   Borrower  provides  any  financing
statements  or fixture  filings  necessary  or advisable to perfect and continue
perfected  the  Agent's  Liens  on such  assets  and  also  provides  to Agent a
Collateral Access Agreement; provided, however, that this Section 6.12 shall not
apply to Inventory and Equipment having an aggregate value of less than $250,000
for all such Inventory and Equipment.

     6.13  Compliance  with  Laws.

     (a)  Comply  with  the   requirements  of  all  applicable   laws,   rules,
regulations,   and  orders  of  any   Governmental   Authority,   including  all
Environmental  Laws,  the  Fair  Labor  Standards  Act  and the  Americans  With
Disabilities  Act,  other  than  laws,  rules,   regulations,   and  orders  the
non-compliance with which, individually or in the aggregate, would not result in
and reasonably could not be expected to result in a Material Adverse Change.

     (b) Establish and implement such procedures as may be reasonably  necessary
to continuously determine and assure that any failure of the following would not
result in and reasonably  could not be expected to result in a Material  Adverse
Change: (i) all Property of the Borrower and its Subsidiaries and the operations
conducted  thereon and other activities of the Borrower and its Subsidiaries are
in  compliance  with and do not violate the  requirements  of any  Environmental
Laws,  (ii) no oil,  Hazardous  Materials  or solid  wastes are  disposed  of or
otherwise  released  on or to any  Property  owned by any such  party  except in
compliance  with  Environmental  Laws,  (iii)  no  Hazardous  Materials  will be
released on or to any such  Property in a quantity  equal to or  exceeding  that
quantity which requires reporting pursuant to Section 103 of CERCLA, and (iv) no
oil, oil and gas exploration and production  wastes,  or Hazardous  Materials is
released on or to any such  Property so as to pose an imminent  and  substantial
endangerment to public health or welfare or the environment.

     (c)   Promptly   notify  Agent  in  writing  of  any   threatened   action,
investigation or inquiry by any Governmental  Authority of which Borrower or any
of its  Subsidiaries  has knowledge in connection with any  Environmental  Laws,
excluding routine testing and minor corrective action.

     (d) Provide  environmental  audits and tests in  accordance  with  American
Society for Testing and Materials standards, as reasonably requested by Agent or
as otherwise  required to be obtained by Agent or by any Governmental  Authority
in  connection  with  Borrower's  existing  and  hereafter  acquired Oil and Gas
Properties or other material Properties.

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     6.14  Employee  Benefits.

     (a) Cause to be delivered to Agent:  (i) promptly,  and in any event within
10 Business Days after Borrower or any of its  Subsidiaries  knows or has reason
to know that an ERISA Event has  occurred  that has  resulted  in or  reasonably
could be expected to result in a Material Adverse Change, a written statement of
the chief  financial  officer of  Borrower  describing  such ERISA Event and any
action  that is  being  taking  with  respect  thereto  by  Borrower,  any  such
Subsidiary  or ERISA  Affiliate,  and any action taken or threatened by the IRS,
Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable,  shall
be deemed to know all facts known by the  administrator  of any Benefit  Plan of
which it is the plan sponsor, (ii) promptly,  and in any event within 3 Business
Days  after the  filing  thereof  with the IRS,  a copy of each  funding  waiver
request filed with respect to any Benefit Plan and all  communications  received
by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA
Affiliate  with respect to such request,  and (iii)  promptly,  and in any event
within 3 Business Days after receipt by Borrower, any of its Subsidiaries or, to
the  knowledge  of Borrower,  any ERISA  Affiliate,  of the PBGC's  intention to
terminate a Benefit Plan or to have a trustee  appointed to administer a Benefit
Plan,  copies of each such  notice.

     (b) Cause to be  delivered  to Agent,  upon  Agent's  request,  each of the
following:  (i) a copy of each Plan (or,  where any such plan is not in writing,
complete  description  thereof) (and if applicable,  related trust agreements or
other   funding   instruments)   and  all   amendments   thereto,   all  written
interpretations   thereof  and  written  descriptions  thereof  that  have  been
distributed  to employees or former  employees of Borrower or its  Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the three most recent plan years, annual reports on Form
5500 Series required to be filed with any  governmental  agency for each Benefit
Plan; (iv) all actuarial reports prepared for the last three plan years for each
Benefit  Plan;  (v) a listing of all  Multiemployer  Plans,  with the  aggregate
amount of the most recent annual  contributions  required to be made by Borrower
or any ERISA Affiliate to each such plan and copies of the collective bargaining
agreements  requiring such  contributions;  (vi) any  information  that has been
provided to Borrower or any ERISA Affiliate regarding withdrawal liability under
any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments  made to former  employees  of Borrower or its  Subsidiaries  under any
Retiree  Health Plan.

     6.15 Leases.  Pay when due all rents and other  amounts  payable  under any
leases to which Borrower is a party or by which Borrower's properties and assets
are bound,  unless such payments are the subject of a Permitted Protest.  To the
extent  that  Borrower  fails  timely to make  payment  of such  rents and other
amounts  payable  when due under its  leases,  Agent shall be  entitled,  in its
discretion,  to reserve  an amount  equal to such  unpaid  amounts  against  the
Borrowing Base.

     6.16 Broker  Commissions.  Pay any and all brokerage  commission or finders
fees  incurred  or  payable  in  connection  with or as a result  of  Borrower's
obtaining financing from the Lender Group under this Agreement.

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     6.17. Oil and Gas Property Title  Information.

     (a) On or before the delivery to Agent of each Reserve  Report  required by
Section 2.1(b)  or Section 6.2,  Borrower  will provide Agent with current title
opinions  covering the Oil and Gas Property  Collateral for which title opinions
have not previously been provided to Agent so that at all times the value of the
Eligible  Proved  Reserves for which title opinions are or have been provided to
Agent shall equal or exceed ninety-five  percent (95%) of the NYMEX Value of all
of the Oil  and Gas  Property  Collateral  as set  forth  in the  most  recently
delivered  Reserve Report of Proved Reserves.

     (b)  Borrower  shall  cure all title  defects or  exceptions  which are not
Permitted Liens, or substitute  acceptable Oil and Gas Property  Collateral with
no title defects or exceptions  except for Permitted  Liens covering Oil and Gas
Property  Collateral of an equivalent  value,  within 30 days after a request by
Agent to cure such defects or exceptions.  If the Borrower is unable to cure any
title  defect  requested  by Agent to be cured  within the 30 day  period,  such
failure to cure shall not be a Default or an Event of Default,  but instead such
Property  shall remain  excluded from the Borrowing  Base as provided in Section
2.1 until such time as title is satisfactory to Agent. Upon the discovery of any
title defect or exception  which is not a Permitted  Lien,  Agent shall have the
right to exercise the right to remedy such title defect or exception in its sole
discretion  from time to time (and any failure to so exercise this remedy at any
time shall not be a waiver as to future exercise of the remedy by Agent).

     6.18 Additional Collateral.

     (a) Should Borrower or any of its Subsidiaries purchase,  otherwise acquire
or own any Oil and Gas Property that is not already  included in the Oil and Gas
Property Collateral and the subject of an Oil and Gas Property Mortgage in favor
of Agent other then Oil and Gas Properties  owned on the date of this Agreement,
which have a NYMEX  Value of $100,000 or less until such time as the NYMEX Value
thereof  exceeds  $100,000) for the benefit of the Lender  Group,  Borrower will
grant  or cause  to be  granted  to Agent  as  security  for the  Obligations  a
first-priority  Lien (subject  only to Permitted  Liens) on all of Borrower's or
such  Subsidiary's,  as the case may be, interest in such Oil and Gas Properties
not  already  subject  to a Lien  of  such  an Oil  and  Gas  Property  Mortgage
simultaneously  with Borrower's or such  Subsidiary's  purchase,  acquisition or
ownership of such Oil and Gas Property  which Lien will be created and perfected
by and in accordance with the provisions of an Oil and Gas Property Mortgage and
other  security   agreements  and  financing   statements,   or  other  security
instruments,  all in form  and  substance  satisfactory  to  Agent  in its  sole
discretion  and in sufficient  executed  (and  acknowledged  where  necessary or
appropriate)  counterparts for recording  purposes.

     (b) Concurrently  with the granting of the Lien or other action referred to
in Section 6.18(a) above, Borrower will provide to Agent title information and a
title opinion in form and substance satisfactory to Agent in its sole discretion
with respect to Borrower's or such  Subsidiary's,  as the case may be, interests
in such Oil and Gas Properties.

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     (c) Borrower  shall cause all of its present and future  Subsidiaries  that
are 50% or more owned  directly or  indirectly by Borrower to execute a Guaranty
Agreement and Security Agreements, except for Atlantic Offshore Insurance, Ltd.;
provided that Atlantic  Offshore  Insurance,  Ltd. shall at no time guarantee or
grant any Lien to  secure  the  Unsecured  Notes or any  other  Indebtedness  of
Borrower.

     6.19 Hedging Agreements.  The Borrower shall maintain in effect one or more
Hedging  Agreements with respect to its Hydrocarbon  production with one or more
investment grade  counterparties,  rated Aa3 or better by Moody's,  A+ or better
according to Standard & Poor's,  or the equivalent by a rating agency acceptable
to Agent,  the  effective  term of such Hedging  Agreements to expire no earlier
than September 30, 2001, (and Hedging  Agreements with terms extending until the
end of the First and Second Renewal  Period,  in the event that the Agreement is
renewed and extended for such  periods) and the  aggregate  notional  volumes of
Hydrocarbons  the subject of such Hedging  Agreements shall  constitute,  at all
times,  from and after the 60th day  following  the Closing Date during the term
thereof,  not  less  than 25% and not more  than  75% of  Borrower's  forecasted
Hydrocarbon production for such period from Oil and Gas Properties classified as
Proved  Developed  Producing  Reserves as of the date of the most recent Reserve
Report.  Borrower  shall  use such  Hedging  Agreements  solely as a part of its
normal business  operations as a risk  management  strategy and/or hedge against
changes  resulting  from  market  conditions   related  to  Borrower's  and  its
Subsidiaries'  oil  and gas  operations  and not as a  means  to  speculate  for
investment  purposes on trends and shifts in financial or  commodities  markets.
Borrower  shall notify Agent  immediately  upon becoming aware (in any event not
later than the close of business on the same Business  Day) that its  production
of  Hydrocarbons  could  reasonably be expected to be  insufficient  to meet its
obligations  under any Hedging  Agreements.

     6.20  Further  Assurances.  Cure  promptly  any defects in the  creation or
issuance of the  Obligations  or the  execution  or delivery of the  Obligations
and/or Loan Documents,  including this Agreement. Borrower at its expense shall,
and shall  cause each or its  Subsidiaries  to  promptly  execute and deliver to
Agent upon  request all such other  documents,  agreements  and  instruments  to
comply with or accomplish the covenants and agreements of Borrower or any of its
Subsidiaries  in the Loan  Documents,  including this  Agreement,  or to further
evidence  and more fully  describe the  collateral  intended as security for the
Obligations, or to correct any omissions in the Loan Documents, or to state more
fully the security  obligations  set out herein or in any of the Loan Documents,
or to perfect, protect or preserve any Liens created pursuant to any of the Loan
Documents,  or to make  any  recordings,  to file  any  notices  or  obtain  any
consents,  all as may be  reasonably  necessary  or  appropriate  in  connection
therewith.

     7. NEGATIVE  COVENANTS.

     Borrower  covenants and agrees that, so long as any credit  hereunder shall
be available and until full and final payment of the Obligations,  Borrower will
not,  and will not permit any of its  Subsidiaries  to, do any of the  following
without the Required Lenders' prior written consent:

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     7.1 Indebtedness.  Create, incur, assume, permit,  guarantee,  or otherwise
become  or  remain,   directly  or  indirectly,   liable  with  respect  to  any
Indebtedness,  except:

     (a) Indebtedness evidenced by this Agreement, together with Indebtedness to
issuers  of  letters  of credit  that are the  subject  of L/C  Guarantees;

     (b)  Indebtedness  set forth on Schedule 7.1;

     (c) Indebtedness secured by Permitted Liens;

     (d) the Unsecured Notes.

     (e)  accounts  payable  (for the  deferred  purchase  price of  Property or
services) from time to time incurred in the ordinary  course of business  which,
if greater than 90 days past the invoice or billing date, are being contested in
good faith by appropriate proceedings if reserves adequate under GAAP shall have
been  established  therefor;

     (f) Indebtedness  associated with bonds or surety  obligations  required by
Legal  Requirements  in  connection  with the  operation of  Borrower's  and its
Subsidiaries' Oil and Gas Properties;

     (g)  Indebtedness  under  Hedging  Agreements  covering  oil  or  gas  with
Arranging Institutions, Agent or any Lender as a counterparty or with such other
Persons as  approved  by Agent  entered  into as a part of its  normal  business
operations as a risk management  strategy and/or hedge against changes resulting
from market  conditions  related to Borrower's and its Subsidiaries' oil and gas
operations  (but not as a means to speculate for  investment  purposes on trends
and shifts in financial or commodities  markets) but only to the extent that the
total  volumes  hedged for any 12 month  period do not exceed 75% of  Borrower's
forecasted  Hydrocarbon  production  for such period from Oil and Gas Properties
classified  as Proved  Developed  Producing  Reserves as  indicated  in the most
Recent Reserve Report:

     (h) refinancings,  renewals, or extensions of Indebtedness  permitted under
clauses  (b) and (c) of this  Section  7.1 (and  continuance  or  renewal of any
Permitted Liens associated  therewith) and under clause (d) of this Section 7.1,
in each such case so long as: (i) the terms and conditions of such refinancings,
renewals,  or extensions do not materially  impair the prospects of repayment of
the  Obligations by Borrower,  (ii) the net cash proceeds of such  refinancings,
renewals,  or extensions do not result in an increase in the aggregate principal
amount of the  Indebtedness  so  refinanced,  renewed,  or extended,  (iii) such
refinancings,  renewals, refundings, or extensions do not result in a shortening
of the average weighted maturity of the Indebtedness so refinanced,  renewed, or
extended,  and (iv) to the  extent  that  Indebtedness  that is  refinanced  was
subordinated  in right of payment  to the  Obligations,  then the  subordination
terms  and  conditions  of the  refinancing  Indebtedness  must be at  least  as
favorable  to  the  Lender  Group  as  those   applicable   to  the   refinanced
Indebtedness.

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<PAGE>

     7.2  Liens.  Create,  incur,  assume,  or  permit  to  exist,  directly  or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind,  whether  now  owned or  hereafter  acquired,  or any  income  or  profits
therefrom,  except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(h) and so long as the  replacement  Liens only encumber those assets
or property  that  secured the original  Indebtedness).

     7.3 Restrictions on Fundamental Changes.

     (a) Enter  into any merger  (other  than the  merger  described  in Section
3.3(d)), consolidation,  reorganization, or recapitalization,  or reclassify its
capital  Stock.

     (b) Liquidate,  wind up, or dissolve  itself (or suffer any  liquidation or
dissolution).

     (c) Convey, sell, assign, lease,  transfer, or otherwise dispose of, in one
transaction  or a series of  transactions,  all or any  substantial  part of its
property or assets.

     7.4 Disposal of Assets. Sell, lease, assign, farm-out, convey, transfer, or
otherwise  dispose  of  any  of any  Borrower's  or  any  of  its  Subsidiaries'
Properties or assets other than (a) sales of Inventory to buyers in the ordinary
course of such  Borrower's  business as  currently  conducted,  (b)  farmouts of
nonproven  acreage or nonproven  depths and  assignments in connection with such
farmouts,  (c) the sale or transfer of Equipment having a fair saleable value of
less than an aggregate  amount of $500,000 for all Borrowers  during the term of
this Agreement that is no longer  necessary for the business of Borrower or such
Subsidiary or is replaced by Equipment of at least comparable value and use, and
(d) as long as no  Default  or Event of  Default  is  existing  or would  result
therefrom and no Overadvance would result  therefrom,  during any fiscal year of
the Borrower,  sales of the specific Oil and Gas  Properties  listed on Schedule
7.4 and other sales in the ordinary course of business of Oil and Gas Properties
having an  aggregate  NYMEX  Value,  as of the date of the most  recent  Reserve
Report  delivered by Borrower to Agent,  which does not exceed in the  aggregate
$2,000,000 in the aggregate  during the term of this Agreement;  provided,  that
the  Borrowing  Base shall be adjusted by an amount equal to the value,  if any,
assigned  to  such  Oil and  Gas  Properties  in the  most  recently  determined
Borrowing Base and that the Proceeds from such permitted  disposals of Equipment
and Oil and Gas Properties  shall be remitted to the Collection  Accounts;  and,
provided, further, at or prior to the closing date of any such sale, assignment,
farmout,  conveyance or other transfer of any Oil and Gas  Properties,  and as a
condition of Borrower's  authority to do so,  Borrower  shall deliver to Agent a
certificate  executed by the chief executive  officer or chief financial officer
of Panaco certifying (i) that no Default or Event of Default has occurred and is
continuing,  (ii)  to the  valuation  of the Oil  and  Gas  Properties  involved
utilizing the NYMEX Price for valuation  purposes,  (iii) that the  dispositions
proposed will not violate any of the dollar limitation set forth in this Section
7.4, (iv) that the disposition  will not result in an  Overadvance,  and (v) the
consideration  and manner of the payment  thereof to be received by Borrower for
the disposition of the Oil and Gas Properties  involved.

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     7.5 Change Name.  Change any Borrower's or any of its  Subsidiaries'  name,
FEIN,  corporate  structure (within the meaning of Section 9402(7) of the Code),
or identity,  or add any new fictitious name.

     7.6 Gurantee.  Guarantee or otherwise become in any way liable with respect
to the  obligations  of any third Person except by endorsement of instruments or
items of payment for deposit to the account of Borrower or which are transmitted
or turned over to Agent.

     7.7  Nature  of  Business.  Make any  change  in the  principal  nature  of
Borrower's or any of its  Subsidiaries'  business as an independent  oil and gas
exploration and production company.

     7.8 Prepayments and Amendments.

     (a) Except in connection  with a refinancing  permitted by Section  7.1(d),
prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness
owing to any third Person (including,  but not limited to, the Unsecured Notes),
other than the Obligations in accordance with this Agreement (provided, however,
that that Borrower  shall be permitted to repurchase or retire up to $25,000,000
in the original  face amount of the  Unsecured  Notes as long as, as a condition
precedent thereto,  (i) no Default or Event of Default then exists or reasonably
could be expected to result therefrom,  (ii) Borrower at such time, after giving
effect thereto,  has at least an aggregate  amount of $5,000,000 of Availability
and unrestricted  immediately  available cash on hand reserving as an additional
deduction from Availability an amount determined by Agent in its sole discretion
that would be sufficient to maintain  Borrower's and its Subsidiaries'  accounts
payable  and  other  current  liabilities  within  reasonable  terms,  and (iii)
Borrower  has paid to Agent the fee  described in  Section 2.11(f)  with respect
thereto),  and

     (b) Directly or indirectly,  amend, modify, alter,  increase, or change any
of the terms or conditions of any  agreement,  instrument,  document,  indenture
(including, but not limited to, the Unsecured Notes Indenture), or other writing
evidencing or concerning  Indebtedness  permitted under Sections 7.1(b), (c), or
(d).

     7.9 Change of Control.  Cause,  permit, or suffer,  directly or indirectly,
any Change of Control.

     7.10 Consignments.  Consign any Inventory or sell any Inventory on bill and
hold, sale or return,  sale on approval,  or other  conditional terms of sale.

     7.11  Distribution;  Repurchases of Capital Stock. Make any distribution or
declare or pay any  dividends  (in cash or other  property,  other than  capital
Stock) on, or purchase,  acquire,  redeem,  or retire any of Borrower's  capital
Stock, of any class,  whether now or hereafter  outstanding.

     7.12 Accounting Methods. Modify or change its method of accounting or enter
into,  modify,  or terminate any agreement  currently  existing,  or at any time
hereafter  entered into with any third party  accounting  firm or service bureau

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<PAGE>

for the  preparation or storage of Borrower's  accounting  records  without said
accounting  firm  or  service  bureau  agreeing  to  provide  Agent  information
regarding the Collateral or Borrower's financial condition.  Borrower waives the
right to  assert  a  confidential  relationship,  if any,  it may have  with any
accounting firm or service bureau in connection  with any information  requested
by Agent pursuant to or in accordance with this Agreement, and agrees that Agent
may contact  directly  any such  accounting  firm or service  bureau in order to
obtain such information.

     7.13  Investments.  Directly  or  indirectly  make,  acquire,  or incur any
liabilities (including contingent obligations) for or in connection with (a) the
acquisition  of the securities  (whether debt or equity) of, or other  interests
in, a Person,  (b) loans,  advances,  capital  contributions,  or  transfers  of
property to a Person,  or (c) the acquisition of all or substantially all of the
properties or assets of a Person; provided that the foregoing restrictions shall
not apply to purchases by Panaco of Mineral  Interests  from Persons  other than
Affiliates  as long as: (i) there has not  occurred  an Event of Default  and no
Default or Event of Default  could  reasonably  be  expected  to result from the
making thereof,  (ii) Panaco shall have complied with all of the requirements of
Section 6.18 with respect  thereto,  (iii) the aggregate  consideration  paid or
incurred in connection  with any such  individual  purchase or series of related
purchases  does not exceed  $10,000,000,  and (iv) after  giving  effect to such
purchases,  the  sum  of  Availability  plus  Borrower's  immediately  available
unrestricted  cash on hand,  minus  an  amount  determined  by Agent in its sole
discretion that would be sufficient to maintain Borrower's and its Subsidiaries'
accounts  payable and other current  liabilities  within  reasonable terms is at
least  $5,000,000.

     7.14  Transactions  with  Affiliates.  Directly or indirectly enter into or
permit to exist any  material  transaction  between any  Borrower  with  another
Borrower or between any Borrower with any Affiliate of such Borrower  except for
transactions that are in the ordinary course of such Borrower's  business,  upon
fair and reasonable  terms,  that are fully disclosed to Agent,  and that are no
less  favorable  to such  Borrower  than would be  obtained  in an arm's  length
transaction with a non-Affiliate.

     7.15  Suspension.  Suspend  or go  out  of a  substantial  portion  of  its
business.

     7.16  Compensation.  Increase  the annual fee or  per-meeting  fees paid to
directors  during any year by more than 15% over the prior  year;  pay or accrue
total cash  compensation,  during any year,  to officers  and senior  management
employees  in an  aggregate  amount in excess of 125% of that paid or accrued in
the prior  year.

     7.17 Use of Proceeds.  Use the proceeds of the Advances made  hereunder for
any  purpose  other  than  (a) on the  Closing  Date,  (i) to  repay in full the
outstanding principal,  accrued interest, and accrued fees and expenses owing to
Prior Lenders,  and (ii) to pay transactional fees, costs, and expenses incurred
in connection with this Agreement, and (b) thereafter, consistent with the terms
and  conditions  hereof,  for its lawful and  permitted  corporate  purposes.

     7.18  Change  in  Location  of  Chief  Executive  Offices;   Inventory  and
Equipment.  Relocate  its  chief  executive  office  to a new  location  without

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providing 30 days prior written notification thereof to Agent and so long as, at
the  time  of  such  written  notification,   Borrower  provides  any  financing
statements or fixture  filings  necessary to perfect and continue  perfected the
Agent's  Liens and also  provides to Agent a Collateral  Access  Agreement  with
respect to such new location.  The Inventory and Equipment shall not at any time
now or hereafter be stored with a bailee, warehouseman, or similar party without
Agent's  prior  written  consent.  Borrower  will not,  and will not  permit its
Subsidiaries to store, warehouse or bail the Inventory and Equipment of Borrower
and its  Subsidiaries  at Real Property other than such Real Property  listed on
Schedule  5.1(d),  except for such Inventory and Equipment  whose aggregate fair
saleable market value, for any fiscal year, does not exceed $250,000.

     7.19 No Prohibited  Transactions  Under ERISA.  Directly or indirectly:

     (a)  engage,  or permit  any  Subsidiary  of  Borrower  to  engage,  in any
prohibited  transaction  which is reasonably likely to result in a civil penalty
or excise tax described in  Sections 406 of ERISA or 4975 of the IRC for which a
statutory or class  exemption is not  available or a private  exemption  has not
been previously  obtained from the Department of Labor;

     (b)  permit to exist  with  respect  to any  Benefit  Plan any  accumulated
funding  deficiency  (as defined in  Sections 302  of ERISA and 412 of the IRC),
whether or not waived;

     (c) fail,  or permit any  Subsidiary  of  Borrower  to fail,  to pay timely
required  contributions  or annual  installments  due with respect to any waived
funding deficiency to any Benefit Plan;

     (d)  terminate,  or permit any  Subsidiary  of Borrower to  terminate,  any
Benefit Plan where such event would result in any liability of Borrower,  any of
its  Subsidiaries or any ERISA  Affiliate under Title IV of ERISA;

     (e)  fail,  or permit  any  Subsidiary  of  Borrower  to fail,  to make any
required  contribution or payment to any Multiemployer Plan;

     (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required
installment  or any other payment  required  under  Section 412 of the IRC on or
before the due date for such installment or other payment;

     (g) amend,  or permit any Subsidiary of Borrower to amend, a Plan resulting
in an  increase  in  current  liability  for the plan year  such that  either of
Borrower,  any  Subsidiary  of  Borrower or any ERISA  Affiliate  is required to
provide  security  to such  Plan  under  Section 401(a)(29)  of the IRC;  or

     (h) withdraw,  or permit any  Subsidiary of Borrower to withdraw,  from any
Multiemployer  Plan where such withdrawal is reasonably  likely to result in any
liability of any such entity under Title IV of ERISA;

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which,  individually  or inthe  aggregate,  results  in or  reasonably  would be
expected  to result in a claim  against or  liability  of  Borrower,  any of its
Subsidiaries  or any  ERISA  Affiliate  in excess of  $250,000.

     7.20 Financial Covenants. Fail to maintain:

     (a)  Current  Ratio.  As of  the  last  day  of  each  month,  a  ratio  of
Consolidated  Current Assets divided by Consolidated  Current  Liabilities of at
least 0.25:1.0;

     (b) Consolidated Interest Coverage Ratio.  Borrower's ratio, as of the last
day of each  month  set  forth  below,  of (i)  consolidated  EBITDA  for the 12
consecutive  fiscal  month  period then  ended,  to (ii)  consolidated  Interest
Expense for the 12 consecutive fiscal month period then ended, shall not be less
than   the   ratio   set   forth    below    corresponding    to   such   month:

              ------------------------------------------------------
                     Month                                  Ratio
              ------------------------------------------------------
                September 1999                             1.0:1.0
                October 1999                               1.0:1.0
                November 1999                              1.0:1.0
                December 1999                              1.0:1.0
                January 2000 and each month thereafter     1.5:1.0
              ------------------------------------------------------

     7.21 Capital Expenditures.  Make capital expenditures in any fiscal year in
excess of  $30,000,000  in the  aggregate.

     7.22  Securities  Accounts.  Borrower  shall not  establish or maintain any
Securities  Account unless Agent shall have received a Control  Agreement,  duly
executed and in full force and effect,  in respect of such  Securities  Account.
Borrower agrees that it will not transfer assets out of any Securities Accounts;
provided,  however,  that,  so long as no Event of Default has  occurred  and is
continuing or would result therefrom, Borrower may use such assets to the extent
permitted by this  Agreement.

     7.23 Gas Imbalances,  Take-or-Pay or Other Prepayments. Borrower shall not,
and shall not permit any of its  Subsidiaries  to,  enter into any  contracts or
agreements  which  warrant  production  of  Hydrocarbons   (other  than  Hedging
Agreements  otherwise  permitted  hereunder)  and will not  hereafter  allow gas
imbalances,  take-or-pay  or other  prepayments  with respect to its Oil and Gas
Properties which would require such Person to deliver  Hydrocarbons  produced on
Oil and Gas Properties at some future time without then or thereafter  receiving

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full payment therefor to exceed, during any monthly period, five percent (5%) of
the current  aggregate  monthly gas  production for such monthly period from the
Oil and Gas  Properties  Collateral.

     7.24 Limited Business of Atlantic and GAC. Borrower shall not permit GAC to
acquire  any  assets in the  aggregate  amount in excess of  $10,000,  incur any
indebtedness or other  liabilities in the aggregate  amount in excess of $10,000
to any Persons  other than Agent and the Lender  Group,  or conduct any business
other than  merely  holding  shares of stock of PPC.  Borrower  shall not permit
Atlantic  to acquire  any assets in the  aggregate  amount in excess of $10,000,
incur any indebtedness or other liabilities in the aggregate amount in excess of
$10,000 to any  Persons  other than Agent and the Lender  Group,  or conduct any
business.  Borrower shall not, and shall not permit any of its  Subsidiaries to,
conduct any transactions  with or make any loans or advances to or investment in
Atlantic and/or GAC.

     8.  EVENTS  OF  DEFAULT.

     Any one or more of the  following  events  shall  constitute  an  event  of
default (each, an "Event of Default")  under this Agreement:

     8.1 If  Borrower  or any other Loan Party fails to pay when due and payable
or when  declared due and payable,  any portion of the  Obligations  (whether of
principal, interest (including any interest which, but for the provisions of the
Bankruptcy Code,  would have accrued on such amounts),  fees and charges due the
Lender  Group,   reimbursement  of  Lender  Group  Expenses,  or  other  amounts
constituting  Obligations);

     8.2 If Borrower or any other Loan Party fails to perform,  keep, or observe
any  term,  provision,  condition,  covenant,  or  agreement  contained  in this
Agreement,  in any of the Loan  Documents,  or in any  other  present  or future
agreement  between  Borrower  or such Loan  Party,  as the case may be,  and the
Lender Group;

     8.3 If there is a Material  Adverse Change;

     8.4 If any  material  portion  of  Borrower's  or any  other  Loan  Party's
properties  or assets  is  attached,  seized,  subjected  to a writ or  distress
warrant,  or is levied upon,  or comes into the  possession of any third Person;


     8.5 If an Insolvency  Proceeding is commenced by Borrower or any other Loan
Party;

     8.6 If an Insolvency  Proceeding is commenced against Borrower or any other
Loan Party and any of the  following  events  occur:  (a) Borrower  or such Loan
Party,  as the  case  may be,  consents  to the  institution  of the  Insolvency
Proceeding against it; (b) the petition commencing the Insolvency  Proceeding is
not timely controverted;  (c) the petition commencing the Insolvency  Proceeding
is not  dismissed  within 45  calendar  days of the date of the filing  thereof;
provided,  however,  that, during the pendency of such period, Agent,  Foothill,
and any other member of the Lender Group shall be relieved of its  obligation to
extend credit hereunder;  (d) an interim trustee is appointed to take possession

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of all or a  substantial  portion of the  properties or assets of, or to operate
all or any substantial  portion of the business of, Borrower or such Loan Party,
as the case may be; or (e) an order for relief shall have been issued or entered
therein;

     8.7 If Borrower or any other Loan Party is enjoined,  restrained, or in any
way prevented by court order from continuing to conduct all or any material part
of its business  affairs;

     8.8 If a notice  of Lien,  levy,  or  assessment  is filed of  record  with
respect to any of Borrower's  or any other Loan Party's  properties or assets by
the United States  Government,  or any department,  agency,  or  instrumentality
thereof, or by any state, county,  municipal,  or governmental agency, or if any
taxes or debts owing at any time  hereafter to any one or more of such  entities
becomes a Lien, whether choate or otherwise, upon any of Borrower's or any other
Loan Party's  properties  or assets and the same is not paid on the payment date
thereof;

     8.9 If a judgment or other  claim  becomes a Lien or  encumbrance  upon any
material  portion of Borrower's or any other Loan Party's  properties or assets;

     8.10 If there is (a) a default in any  material  agreement  (including  the
Unsecured Notes or the Unsecured Notes Indenture) to which Borrower or any other
Loan Party is a party with one or more third Persons and such default (i) occurs
at the final maturity of the obligations thereunder,  or (ii) results in a right
by such third Person(s),  irrespective of whether  exercised,  to accelerate the
maturity of  Borrower's  or any other Loan Party's  obligations  thereunder,  to
terminate such  agreement,  or to refuse to renew such agreement  pursuant to an
automatic renewal right therein,  or (b) any payment default under the Unsecured
Notes or the Unsecured Notes Indenture;

     8.11 If  Borrower  or any other Loan Party  makes any payment on account of
Indebtedness that has been contractually subordinated in right of payment to the
payment of the  Obligations,  except to the extent such  payment is permitted by
the terms of the subordination provisions applicable to such Indebtedness;

     8.12 If any  misstatement or  misrepresentation  exists now or hereafter in
any warranty,  representation,  statement, or report made to the Lender Group by
Borrower or any other Loan Party or any officer, employee, agent, or director of
Borrower or any other Loan Party, or if any such warranty or  representation  is
withdrawn;  or

     8.13 If the  obligation of any guarantor  under its guaranty or other third
Person under any Loan  Document is limited or  terminated by operation of law or
by the  guarantor or other third  Person  thereunder,  or any such  guarantor or
other third Person  becomes the subject of an  Insolvency  Proceeding.

     9. THE LENDER GROUP'S RIGHTS AND REMEDIES.

     9.1 Rights and Remedies. Upon the occurrence,  and during the continuation,
of an Event of Default,  the  Required  Lenders (at their  election  but without
notice of their election and without demand) may, except to the extent otherwise
expressly provided or required below, authorize and instruct Agent to do any one

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<PAGE>

or more of the  following on behalf of the Lender Group (and Agent,  acting upon
the  instructions  of the Required  Lenders,  shall do the same on behalf of the
Lender  Group),  all of which  are  authorized  by  Borrower:

     (a) Declare all Obligations, whether evidenced by this Agreement, by any of
the other Loan Documents,  or otherwise,  immediately due and payable;

     (b) Cease  advancing  money or  extending  credit to or for the  benefit of
Borrower under this  Agreement,  under any of the Loan  Documents,  or under any
other  agreement  between  Borrower and the Lender  Group;

     (c) Terminate  this Agreement and any of the other Loan Documents as to any
future  liability  or  obligation  of the Lender  Group,  but without  affecting
Agent's rights and security  interests,  for the benefit of the Lender Group, in
the  Collateral  and without  affecting  the  Obligations;

     (d) Settle or adjust  disputes and claims directly with Account Debtors for
amounts and upon terms which Agent considers advisable, and in such cases, Agent
will credit  Borrower's Loan Account with only the net amounts received by Agent
in payment of such disputed  Accounts after  deducting all Lender Group Expenses
incurred or expended in connection therewith;

     (e) Cause  Borrower to hold all returned  Inventory in trust for the Lender
Group,  segregate all returned  Inventory from all other property of Borrower or
in Borrower's  possession and conspicuously label said returned Inventory as the
property of the Lender Group;

     (f) Without notice to or demand upon Borrower or any  guarantor,  make such
payments and do such acts as Agent considers  necessary or reasonable to protect
its  security  interests  in the  Collateral.  Borrower  agrees to assemble  the
Collateral if Agent so requires,  and to make the Collateral  available to Agent
as Agent may designate.  Borrower  authorizes  Agent to enter the premises where
the Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay,  purchase,  contest,  or compromise any encumbrance,
charge,  or Lien that in  Agent's  determination  appears to  conflict  with the
Agent's  Liens and to pay all expenses  incurred in connection  therewith.  With
respect to any of Borrower's  owned or leased  premises,  Borrower hereby grants
Agent a license  to enter into  possession  of such  premises  and to occupy the
same,  without charge, for up to 120 days in order to exercise any of the Lender
Group's rights or remedies provided herein, at law, in equity, or otherwise;

     (g) Without notice to Borrower (such notice being  expressly  waived),  and
without  constituting  a  retention  of any  collateral  in  satisfaction  of an
obligation  (within the meaning of Section 9505 of the Code),  set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by the
Lender Group (including any amounts received in the Lockbox  Accounts),  or (ii)
indebtedness  at any time owing to or for the credit or the  account of Borrower
held by the Lender Group;

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<PAGE>

     (h) Hold, as cash collateral, any and all balances and deposits of Borrower
held by the Lender Group, and any amounts received in the Lockbox  Accounts,  to
secure the full and final repayment of all of the Obligations;

     (i) Ship, reclaim,  recover, store, finish,  maintain,  repair, prepare for
sale,  advertise  for sale,  and sell (in the manner  provided  for  herein) the
Collateral.  Borrower  hereby  grants to Agent a license or other  right to use,
without charge,  Borrower's labels,  patents,  copyrights,  rights of use of any
name,  trade secrets,  trade names,  trademarks,  service marks, and advertising
matter,  or any property of a similar nature,  as it pertains to the Collateral,
in completing  production of,  advertising  for sale, and selling any Collateral
and  Borrower's  rights under all licenses and all  franchise  agreements  shall
inure to the Lender Group's benefit;

     (j) Sell the  Personal  Property  Collateral  at either a public or private
sale, or both, by way of one or more contracts or  transactions,  for cash or on
terms,  in such manner and at such places  (including  Borrower's  premises)  as
Agent  determines  is  commercially  reasonable.  It is not  necessary  that the
Personal  Property  Collateral be present at any such sale;

     (k) Agent shall give notice of the  disposition  of the  Personal  Property
Collateral  as  follows:

     (1) Agent shall give Borrower and each holder of a security interest in the
Personal  Property  Collateral  who has filed with Agent a written  request  for
notice,  a notice in  writing of the time and place of public  sale,  or, if the
sale is a private sale or some other  disposition other than a public sale is to
be made of the Personal Property Collateral, then the time on or after which the
private  sale or  other  disposition  is to be  made;

     (2) The notice shall be personally delivered or mailed, postage prepaid, to
Borrower  as  provided  in Section 12, at least 5 days before the date fixed for
the sale,  or at least 5 days before the date on or after which the private sale
or other  disposition  is to be made;  no notice  needs to be given prior to the
disposition  of  any  portion  of  the  Personal  Property  Collateral  that  is
perishable  or  threatens  to  decline  speedily  in  value or that is of a type
customarily sold on a recognized  market.  Notice to Persons other than Borrower
claiming an interest in the Personal  Property  Collateral shall be sent to such
addresses  as they have  furnished  to Agent;

     (3) If the sale is to be a public sale, Agent also shall give notice of the
time and place by  publishing  a notice one time at least 5 days before the date
of the sale in a  newspaper  of general  circulation  in the county in which the
sale is to be held;

     (l) The Lender Group may credit bid and  purchase at any public  sale;

     (m) The Lender Group shall have all other rights and remedies  available to
it at law or in  equity  pursuant  to any  other  Loan  Documents;  and

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<PAGE>

     (n) Any deficiency that exists after  disposition of the Personal  Property
Collateral as provided above will be paid  immediately  by Borrower.  Any excess
will be returned,  without  interest and subject to the rights of third Persons,
by Agent to Borrower.

     9.2 Remedies Cumulative.  The rights and remedies of the Lender Group under
this Agreement,  the other Loan  Documents,  and all other  agreements  shall be
cumulative.  The Lender  Group  shall have all other  rights  and  remedies  not
inconsistent  herewith as  provided  under the Code,  by law,  or in equity.  No
exercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the  Lender  Group of any  Event of  Default  shall be deemed a
continuing  waiver.  No delay by the Lender  Group  shall  constitute  a waiver,
election,  or  acquiescence  by it. Nothing in this Agreement in any way limits,
impairs or reduces any rights of the Lender Group under the Oil and Gas Property
Mortgages or any of the other Loan Documents.

     10. TAXES AND EXPENSES.

     If Borrower fails to pay any monies (whether taxes, assessments,  insurance
premiums, or, in the case of leased properties or assets, rents or other amounts
payable under such leases) due to third  Persons,  or fails to make any deposits
or furnish any required  proof of payment or deposit,  all as required under the
terms of this  Agreement,  then, to the extent that Agent  determines  that such
failure by Borrower could result in a Material Adverse Change, in its discretion
and without prior notice to Borrower,  Agent may do any or all of the following:
(a) make payment of the same or any part  thereof;  (b) set up such  reserves in
Borrower's  Loan  Account as Agent deems  necessary  to protect the Lender Group
from the exposure created by such failure;  or (c) obtain and maintain insurance
policies of the type described in Section 6.10, and take any action with respect
to such  policies as Agent deems  prudent.  Any such amounts paid by Agent shall
constitute  Lender Group  Expenses.  Any such  payments  made by Agent shall not
constitute  an agreement  by the Lender  Group to make  similar  payments in the
future  or a waiver  by the  Lender  Group of any Event of  Default  under  this
Agreement.  Agent need not inquire as to, or contest the  validity  of, any such
expense,  tax,  or Lien and the  receipt  of the usual  official  notice for the
payment  thereof shall be conclusive  evidence that the same was validly due and
owing.

     11. WAIVERS; INDEMNIFICATION.

     11.1 Demand;  Protest;  etc.  Borrower  waives demand,  protest,  notice of
protest,  notice of  default or  dishonor,  notice of  payment  and  nonpayment,
nonpayment at maturity, release, compromise,  settlement,  extension, or renewal
of accounts, documents,  instruments,  chattel paper, and guarantees at any time
held by the Lender Group on which Borrower may in any way be liable.

     11.2 The Lender Group's  Liability for  Collateral.  Borrower hereby agrees
that:  (a) so long as the Lender Group  complies with its  obligations,  if any,
under Section 9207 of the Code,  the Lender Group shall not in any way or manner
be liable or responsible  for: (i) the safekeeping of the  Collateral;  (ii) any
loss or damage  thereto  occurring  or arising in any manner or fashion from any
cause; (iii) any diminution in the value thereof;  or (iv) any act or default of
any carrier,  warehouseman,  bailee, forwarding agency, or other Person; and (b)
all risk of loss,  damage,  or destruction  of the Collateral  shall be borne by
Borrower.

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<PAGE>

     11.3 Indemnification.  Borrower shall pay, indemnify,  defend, and hold the
Agent-Related  Persons, the Lender-Related  Persons with respect to each Lender,
each Participant, and each of their respective officers,  directors,  employees,
counsel,  agents, and attorneys-in-fact (each, an "Indemnified Person") harmless
(to the fullest  extent  permitted  by law) from and against any and all claims,
demands,  suits,  actions,  investigations,  proceedings,  and damages,  and all
reasonable  attorneys  fees and  disbursements  and  other  costs  and  expenses
actually  incurred in  connection  therewith  (as and when they are incurred and
irrespective of whether suit is brought), at any time asserted against,  imposed
upon, or incurred by any of them in connection with or as a result of or related
to the execution, delivery, enforcement, performance, and administration of this
Agreement and any other Loan Documents or the transactions  contemplated herein,
and with respect to any investigation, litigation, or proceeding related to this
Agreement,  any other Loan  Document,  or the use of the  proceeds of the credit
provided  hereunder  (irrespective of whether any Indemnified  Person is a party
thereto),  or any act,  omission,  event or  circumstance  in any manner related
thereto  (all  the  foregoing,  collectively,  the  "Indemnified  Liabilities").
Borrower shall have no obligation to any  Indemnified  Person under this Section
11.3  with  respect  to any  Indemnified  Liability  that a court  of  competent
jurisdiction  finally  determines to have resulted from the gross  negligence or
willful misconduct of such Indemnified  Person. This provision shall survive the
termination of this Agreement and the repayment of the other Obligations.

12.  NOTICES

     Unless otherwise provided in this Agreement,  all notices or demands by any
party  relating to this Agreement or any other Loan Document shall be in writing
and (except for financial statements and other informational documents which may
be sent by first-class mail,  postage prepaid) shall be personally  delivered or
sent  by  registered  or  certified  mail  (postage   prepaid,   return  receipt
requested),  overnight  courier,  or  telefacsimile to the relevant party at its
address set forth below:

         If to Borrower:           PANACO, Inc.
                                   1100 Louisiana, Suite 5100
                                   Houston, Texas  77002-5220
                                   Attn:    Larry M. Wright
                                   Fax No. 713.970.3151

         with copies to:           Schully, Robert, Slattery, Jaubert & Marino
                                   New Orleans, Louisiana  70163-1800
                                   Attn: Lisa Jaubert, Esq.
                                   Fax No. 504.585.7890


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<PAGE>

         If to Agent or
         the Lender Group
         in care of Agent:         FOOTHILL CAPITAL CORPORATION
                                   11111 Santa Monica Boulevard, Suite 1500
                                   Los Angeles, California 90025-3333
                                   Attn:  Business Finance Division Manager
                                   Fax No. 310.478.9788

         with copies to:           Patton Boggs LLP
                                   2001 Ross Avenue, Suite 3000
                                   Dallas, Texas 75201
                                   Attn:  James C. Chadwick, Esq.
                                   Fax No. 214.758.1550

     The  parties  hereto may  change  the  address at which they are to receive
notices  hereunder,  by notice in writing in the  foregoing  manner given to all
other parties.  All notices or demands sent in accordance  with this Section 12,
other than notices by the Lender Group in connection  with Sections 9504 or 9505
of the  Code,  shall be deemed  received  on the  earlier  of the date of actual
receipt or 3 days after the deposit thereof in the mail.  Borrower  acknowledges
and agrees that  notices sent by the Lender Group in  connection  with  Sections
9504 or 9505 of the Code  shall be  deemed  sent when  deposited  in the mail or
personally delivered,  or, where permitted by law, transmitted  telefacsimile or
other similar method set forth above.

     13.  CHOICE OF LAW AND VENUE;  SERVICE OF  PROCESS;  JURY TRIAL  WAIVER.

     THE  VALIDITY  OF THIS  AGREEMENT  AND THE  OTHER  LOAN  DOCUMENTS  (UNLESS
EXPRESSLY  PROVIDED TO THE CONTRARY IN ANOTHER LOAN  DOCUMENT IN RESPECT OF SUCH
OTHER LOAN DOCUMENT), THE CONSTRUCTION,  INTERPRETATION,  AND ENFORCEMENT HEREOF
AND  THEREOF,  AND THE RIGHTS OF THE PARTIES  HERETO AND THERETO WITH RESPECT TO
ALL MATTERS  ARISING  HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL
BE DETERMINED  UNDER,  GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.

     THE PARTIES  AGREE THAT ALL ACTIONS OR  PROCEEDINGS  ARISING IN  CONNECTION
WITH THIS  AGREEMENT AND THE OTHER LOAN  DOCUMENTS  SHALL BE TRIED AND LITIGATED
ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE
OF CALIFORNIA,  PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF
ANY  JURISDICTION  WHERE  AGENT  ELECTS  TO BRING  SUCH  ACTION  OR  WHERE  SUCH
COLLATERAL OR OTHER PROPERTY MAY BE FOUND.  BORROWER AND THE LENDER GROUP WAIVE,

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<PAGE>

TO THE EXTENT  PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT
THE  DOCTRINE  OF FORUM NON  CONVENIENS  OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING  IS BROUGHT IN  ACCORDANCE  WITH THIS  SECTION  13.  BORROWER  HEREBY
IRREVOCABLY  DESIGNATES  LARRY M. WRIGHT LOCATED AT 1100 LOUISIANA,  SUITE 5110,
HOUSTON,  TEXAS  77002,  AS THE  DESIGNEE,  APPOINTEE  AND AGENT OF  BORROWER TO
RECEIVE,  FOR AND ON BEHALF OF BORROWER,  SERVICE OF PROCESS IN SUCH  RESPECTIVE
JURISDICTIONS  IN ANY  LEGAL  ACTION  OR  PROCEEDING  WITH  RESPECT  TO THE LOAN
DOCUMENTS.  IT IS  UNDERSTOOD  THAT A COPY OF SUCH PROCESS  SERVED ON SUCH AGENT
WILL BE PROMPTLY  FORWARDED BY OVERNIGHT  COURIER TO BORROWER AT ITS ADDRESS SET
FORTH UNDER ITS  SIGNATURE  BELOW,  BUT THE FAILURE OF BORROWER TO RECEIVE  SUCH
COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.  BORROWER  FURTHER
IRREVOCABLY  CONSENTS  TO THE  SERVICE OF  PROCESS OF ANY OF THE  AFOREMENTIONED
COURTS IN ANY SUCH  ACTION OR  PROCEEDING  BY THE  MAILING OF COPIES  THEREOF BY
REGISTERED OR CERTIFIED MAIL,  POSTAGE REPAID,  TO BORROWER AT ITS SAID ADDRESS,
SUCH SERVICE TO BECOME EFFECTIVE  THIRTY (30) DAYS AFTER SUCH MAILING.  BORROWER
AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN  DOCUMENTS
OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS,  BREACH OF DUTY CLAIMS,  AND ALL OTHER  COMMON LAW OR STATUTORY  CLAIMS.
BORROWER AND THE LENDER GROUP  REPRESENT  THAT EACH HAS REVIEWED THIS WAIVER AND
EACH  KNOWINGLY  AND  VOLUNTARILY   WAIVES  ITS  JURY  TRIAL  RIGHTS   FOLLOWING
CONSULTATION  WITH LEGAL  COUNSEL.  IN THE EVENT OF  LITIGATION,  A COPY OF THIS
AGREEMENT  MAY BE FILED AS A  WRITTEN  CONSENT  TO A TRIAL BY THE  COURT.

     14. DESTRUCTION OF BORROWER'S DOCUMENTS.

     All documents,  schedules,  invoices,  agings, or other papers delivered to
any one or more  members  of the  Lender  Group may be  destroyed  or  otherwise
disposed of by such member of the Lender Group 4 months after they are delivered
to or received by such member of the Lender Group, unless Borrower requests,  in
writing,  the return of said  documents,  schedules,  or other  papers and makes
arrangements,  at Borrower's  expense,  for their return.

     15.  ASSIGNMENTS  AND  PARTICIPATIONS;  SUCCESSORS.

     15.1  Assignments and  Participations.

     (a) Any Lender may, with the written consent of Agent,  assign and delegate
to one or more  assignees  (provided  that no written  consent of Agent shall be

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<PAGE>

required in  connection  with any  assignment  and  delegation by a Lender to an
Eligible  Transferee)  (each an "Assignee")  all, or any ratable part of all, of
the  Obligations,  the  Commitments and the other rights and obligations of such
Lender  hereunder  and under the other Loan  Documents,  in a minimum  amount of
$5,000,000  (except that such minimum amount shall not apply in connection  with
any  assignment  and  delegation  by a Lender (x) to any  Affiliate  (other than
individuals) of, or any fund, money market account,  investment account or other
account  managed by, a  pre-existing  Lender under this  Agreement or (y) of the
entire Obligations,  Commitments and other rights and obligations of such Lender
hereunder and under the other Loan Documents);  provided, however, that Borrower
and  Agent  may  continue  to deal  solely  and  directly  with  such  Lender in
connection with the interest so assigned to an Assignee until (i) written notice
of such assignment,  together with payment  instructions,  addresses and related
information with respect to the Assignee,  shall have been given to Borrower and
Agent by such Lender and the Assignee;  (ii) such  Lender and its Assignee shall
have delivered to Borrower and Agent an Assignment  and Acceptance  ("Assignment
and  Acceptance")  in form and substance  satisfactory  to Agent;  and (iii) the
assignor  Lender or  Assignee  has paid to Agent for Agent's  sole and  separate
account a processing  fee in the amount of $5,000  (except that such  processing
fee  shall  not  apply to any  assignment  and  delegation  by a  Lender  to any
Affiliate  (other  than  individuals)  of, or any fund,  money  market  account,
investment account or other account managed by, a pre-existing Lender under this
Agreement).  Anything  contained  herein to the  contrary  notwithstanding,  the
consent of Agent  shall not be  required  (and  payment of any fees shall not be
required) if such  assignment is in connection  with any merger,  consolidation,
sale,  transfer,  or other disposition of all or any substantial  portion of the
business  or loan  portfolio  of such  Lender.

     (b) From and after the date that Agent notifies the assignor Lender that it
has  received  an  executed   Assignment  and  Acceptance  and  payment  of  the
above-referenced  processing fee, (i) the Assignee  thereunder  shall be a party
hereto  and,  to the extent  that  rights and  obligations  hereunder  have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and  obligations  of a Lender  under the Loan  Documents,  and (ii) the assignor
Lender shall, to the extent that rights and obligations  hereunder and under the
other Loan  Documents  have been assigned by it pursuant to such  Assignment and
Acceptance,  relinquish  its rights (except with respect to Section 11.3 hereof)
and be released from its obligations under this Agreement (and in the case of an
Assignment and Acceptance  covering all or the remaining portion of an assigning
Lender's  rights  and  obligations  under  this  Agreement  and the  other  Loan
Documents,  such Lender shall cease to be a party hereto and thereto),  and such
assignment  shall effect a novation  between  Borrower and the Assignee.

     (c) By executing and delivering an Assignment and Acceptance, the assigning
Lender  thereunder  and the Assignee  thereunder  confirm to and agree with each
other and the other  parties  hereto as  follows:  (1) other than as provided in
such Assignment and Acceptance, such assigning Lender makes no representation or
warranty  and  assumes  no  responsibility   with  respect  to  any  statements,
warranties or  representations  made in or in connection  with this Agreement or
the execution, legality, validity, enforceability,  genuineness,  sufficiency or
value of this Agreement or any other Loan Document  furnished  pursuant  hereto;
(2) such  assigning  Lender makes no  representation  or warranty and assumes no
responsibility  with  respect to the  financial  condition  of  Borrower  or the
performance  or  observance  by  Borrower of any of its  obligations  under this

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Agreement  or any  other  Loan  Document  furnished  pursuant  hereto;  (3) such
Assignee  confirms that it has received a copy of this Agreement,  together with
such other  documents and  information as it has deemed  appropriate to make its
own credit  analysis and decision to enter into such  Assignment and Acceptance;
(4) such Assignee  will,  independently  and without  reliance upon Agent,  such
assigning  Lender  or  any  other  Lender,  and  based  on  such  documents  and
information as it shall deem  appropriate at the time,  continue to make its own
credit  decisions in taking or not taking action under this Agreement;  (5) such
Assignee  appoints  and  authorizes  Agent to take  such  action as agent on its
behalf and to exercise  such powers  under this  Agreement  as are  delegated to
Agent  by the  terms  hereof,  together  with  such  powers  as  are  reasonably
incidental  thereto;  and (6)  such  Assignee  agrees  that it will  perform  in
accordance  with their terms all of the  obligations  which by the terms of this
Agreement are required to be performed by it as a Lender.

     (d)  Immediately  upon each  Assignee's  making its  processing fee payment
under  the  Assignment  and  Acceptance,  this  Agreement  shall be deemed to be
amended to the extent, but only to the extent, necessary to reflect the addition
of  the  Assignee  and  the  resulting  adjustment  of the  Commitments  arising
therefrom.   The  Commitment  allocated  to  each  Assignee  shall  reduce  such
Commitments of the assigning Lender pro tanto.

     (e) Any Lender may at any time, with the written consent of Agent,  sell to
one or more  commercial  banks,  financial  institutions,  or other  Persons not
Affiliates  of such  Lender (a  "Participant")  participating  interests  in the
Obligations,  the Commitment,  and the other rights and interests of that Lender
(the  "originating  Lender")  hereunder  and  under  the  other  Loan  Documents
(provided that no written  consent of Agent shall be required in connection with
any  sale  of any  such  participating  interests  by a  Lender  to an  Eligible
Transferee);  provided,  however,  that (i) the originating Lender's obligations
under this Agreement shall remain unchanged,  (ii) the  originating Lender shall
remain   solely   responsible   for  the   performance   of  such   obligations,
(iii) Borrower  and Agent shall  continue to deal solely and  directly  with the
originating  Lender in  connection  with the  originating  Lender's  rights  and
obligations  under this Agreement and the other Loan  Documents,  (iv) no Lender
shall transfer or grant any  participating  interest under which the Participant
has the sole and exclusive  right to approve any amendment to, or any consent or
waiver with respect to, this Agreement or any other Loan Document, except to the
extent such amendment to, or consent or waiver with respect to this Agreement or
of any other  Loan  Document  would (A) extend  the final  maturity  date of the
Obligations hereunder in which such Participant is participating; (B) reduce the
interest rate applicable to the Obligations  hereunder in which such Participant
is  participating;  (C) release all or a material  portion of the  Collateral or
guaranties (except to the extent expressly provided herein or in any of the Loan
Documents)  supporting the  Obligations  hereunder in which such  Participant is
participating;  (D)  postpone  the  payment  of, or reduce  the  amount  of, the
interest or fees payable to such Participant  through such Lender; or (E) change
the amount or due dates of scheduled  principal  repayments  or  prepayments  or
premiums;  and (v) all amounts payable by Borrower hereunder shall be determined
as if such  Lender  had not sold such  participation;  except  that,  if amounts
outstanding under this Agreement are due and unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant  shall be deemed to have the right of set-off in respect of its
participating  interest in amounts owing under this Agreement to the same extent
as if the amount of its  participating  interest were owing  directly to it as a
Lender  under  this  Agreement.  The  rights of any  Participant  only  shall be

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derivative   through  the   originating   Lender  with  whom  such   Participant
participates  and no  Participant  shall have any direct  rights as to the other
Lenders,  Agent,  Borrower,  the  Collections,  the Collateral,  or otherwise in
respect of the Obligations.  No Participant  shall have the right to participate
directly in the making of  decisions  by the Lenders  among  themselves.

     (f) In connection  with any such  assignment or  participation  or proposed
assignment or participation, a Lender may disclose all documents and information
which it now or hereafter may have relating to Borrower or Borrower's  business.

     (g) Any other provision in this Agreement  notwithstanding,  any Lender may
at any time create a security interest in, or pledge,  all or any portion of its
rights under and interest in this Agreement in favor of any Federal Reserve Bank
in accordance  with  Regulation A of the Federal  Reserve Bank or U.S.  Treasury
Regulation 31 CFR 203.14,  and such Federal Reserve Bank may enforce such pledge
or  security  interest  in any manner  permitted  under  applicable  law.

     15.2 Successors.  This Agreement shall bind and inure to the benefit of the
respective  successors  and assigns of each of the parties;  provided,  however,
that  Borrower may not assign this  Agreement or any rights or duties  hereunder
without the Lenders' prior written consent and any prohibited  assignment  shall
be  absolutely  void ab initio.  No consent to  assignment  by the Lenders shall
release  Borrower from its  Obligations.  A Lender may assign this Agreement and
the other Loan  Documents  and its rights and duties  hereunder  and  thereunder
pursuant to Section 15.1 hereof and,  except as expressly  required  pursuant to
Section  15.1  hereof,  no  consent or  approval  by  Borrower  is  required  in
connection with any such assignment.

     16.  AMENDMENTS;  WAIVERS

     16.1  Amendments  and Waivers.  No amendment or waiver of any  provision of
this  Agreement or any other Loan  Document,  and no consent with respect to any
departure by Borrower therefrom,  shall be effective unless the same shall be in
writing and signed by the Required  Lenders (or by Agent at the written  request
of the Required  Lenders) and Borrower and then any such waiver or consent shall
be  effective  only in the specific  instance  and for the specific  purpose for
which  given;  provided,  however,  that no such waiver,  amendment,  or consent
shall,  unless  in  writing  and  signed by all the  Lenders  and  Borrower  and
acknowledged  by Agent,  do any of the  following:

     (a) increase or extend the Commitment of any Lender;

     (b)  postpone or delay any date fixed by this  Agreement  or any other Loan
Document for any payment of  principal,  interest,  fees or other amounts due to
the Lenders (or any of them)  hereunder  or under any other Loan  Document;

     (c) reduce the  principal of, or the rate of interest  specified  herein on
any Loan, or any fees or other amounts payable hereunder or under any other Loan
Document;

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     (d) change the percentage of the  Commitments or  Obligations,  as the case
may be,  that is  required  for the  Lenders  or any of them to take any  action
hereunder;

     (f) amend this Section or any  provision  of the  Agreement  providing  for
consent or other action by all  Lenders;

     (g) release Collateral other than as permitted by Section 17.11;

     (h) change the definition of "Required  Lenders";

     (i) release  Borrower or Guarantor  from any  Obligation for the payment of
money; or

     (j) amend any of the  provisions  of Article  17.

and,  provided  further,  however,  that no amendment,  waiver or consent shall,
unless in  writing  and  signed by Agent,  affect  the rights or duties of Agent
under this Agreement or any other Loan Document; and, provided further, however,
that no  amendment,  waiver or consent  shall,  unless in writing  and signed by
Foothill in its individual  capacity as a Lender,  affect the specific rights or
duties of Foothill in its individual  capacity as a Lender (as  contrasted  with
rights  or duties  of  Foothill  as a member of the  Lender  Group)  under  this
Agreement  or any  other  Loan  Document.  The  foregoing  notwithstanding,  any
amendment,  modification,  waiver, consent,  termination,  or release of or with
respect to any  provision  of this  Agreement  or any other Loan  Document  that
relates only to the relationship of the Lender Group among themselves,  and that
does not affect the rights or obligations of Borrower, shall not require consent
by or the agreement of Borrower.

     16.2 No Waivers;  Cumulative Remedies. No failure by Agent or any Lender to
exercise  any right,  remedy,  or option  under this  Agreement,  any other Loan
Document, or any present or future supplement hereto or thereto, or in any other
agreement  between or among Borrower and Agent or any Lender,  or delay by Agent
or any Lender in  exercising  the same,  will  operate as a waiver  thereof.  No
waiver by Agent or any Lender will be  effective  unless it is in  writing,  and
then only to the extent  specifically  stated. No waiver by Agent or the Lenders
on any  occasion  shall  affect or  diminish  Agent's and each  Lender's  rights
thereafter to require  strict  performance  by Borrower of any provision of this
Agreement.  Agent's and each Lender's  rights under this Agreement and the other
Loan Documents will be cumulative and not exclusive of any other right or remedy
which Agent or any Lender may have.

     17. AGENT;  THE LENDER GROUP.

     17.1 Appointment and  Authorization of Agent. Each Lender hereby designates
and  appoints  Foothill  as its agent  under this  Agreement  and the other Loan
Documents  and each  Lender  hereby  irrevocably  authorizes  Agent to take such
action on its behalf under the  provisions of this Agreement and each other Loan
Document and to exercise  such powers and perform  such duties as are  expressly
delegated  to it by the  terms of this  Agreement  or any other  Loan  Document,
together with such powers as are reasonably incidental thereto.  Agent agrees to

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act as  such  on the  express  conditions  contained  in this  Article  17.  The
provisions  of this  Article  17 are  solely  for the  benefit  of Agent and the
Lenders,  and Borrower shall have no rights as a third party  beneficiary of any
of the  provisions  contained  herein;  provided,  however,  that certain of the
provisions  of Section  17.10  hereof also shall be for the benefit of Borrower.
Any provision to the contrary  contained  elsewhere in this  Agreement or in any
other  Loan  Document  notwithstanding,  Agent  shall  not  have any  duties  or
responsibilities,  except those expressly set forth herein, nor shall Agent have
or be deemed to have any fiduciary  relationship with any Lender, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this  Agreement  or any other  Loan  Document  or  otherwise  exist
against Agent; it being expressly understood and agreed that the use of the word
"Agent" is for convenience  only, that Foothill is merely the  representative of
the Lenders,  and has only the  contractual  duties set forth herein.  Except as
expressly otherwise provided in this Agreement, Agent shall have and may use its
sole  discretion  with respect to exercising or refraining  from  exercising any
discretionary rights or taking or refraining from taking any actions which Agent
is expressly  entitled to take or assert under or pursuant to this Agreement and
the other Loan Documents.  Without limiting the generality of the foregoing,  or
of any other  provision of the Loan Documents that provides  rights or powers to
Agent,  Lenders  agree that Agent shall have the right to exercise the following
powers as long as this Agreement remains in effect: (a) maintain,  in accordance
with its customary business practices, ledgers and records reflecting the status
of the Advances,  the Letters of Credit,  the Collateral,  the Collections,  and
related matters; (b) execute or file any and all financing or similar statements
or notices, amendments, renewals, supplements, documents, instruments, proofs of
claim,  notices and other written agreements with respect to the Loan Documents;
(c) make Advances, and the Letters of Credit, for itself or on behalf of Lenders
as  provided  in  the  Loan  Documents;  (d)  exclusively  receive,  apply,  and
distribute  the  Collections  as  provided in the Loan  Documents;  (e) open and
maintain  such  bank  accounts  and  lock  boxes as Agent  deems  necessary  and
appropriate  in accordance  with the Loan  Documents for the foregoing  purposes
with respect to the Collateral and the Collections;  (f) perform,  exercise, and
enforce any and all other  rights and  remedies of the Lender Group with respect
to Borrower,  the Obligations,  the Collateral,  the  Collections,  or otherwise
related to any of same as provided in the Loan Documents;  and (g) incur and pay
such Lender Group Expenses as Agent may deem  necessary or  appropriate  for the
performance  and  fulfillment  of its functions and powers  pursuant to the Loan
Documents.

     17.2  Delegation of Duties.  Except as otherwise  provided in this section,
Agent may  execute  any of its  duties  under this  Agreement  or any other Loan
Document  by or through  agents,  employees  or  attorneys-in-fact  and shall be
entitled to advice of counsel  concerning all matters pertaining to such duties.
Agent shall not be responsible  for the negligence or misconduct of any agent or
attorney-in-fact  that  it  selects  as  long  as  such  selection  was  made in
compliance with this section and without gross negligence or willful misconduct.


     17.3  Liability of Agent.  None of the  Agent-Related  Persons shall (i) be
liable  for any  action  taken or omitted to be taken by any of them under or in
connection  with this  Agreement or any other Loan Document or the  transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be  responsible  in any manner to any of the  Lenders  for any  recital,
statement,  representation  or warranty  made by Borrower or any  Subsidiary  or
Affiliate of  Borrower,  or any officer or director  thereof,  contained in this

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Agreement  or in  any  other  Loan  Document,  or in  any  certificate,  report,
statement or other document referred to or provided for in, or received by Agent
under or in connection  with, this Agreement or any other Loan Document,  or the
validity,  effectiveness,  genuineness,  enforceability  or  sufficiency of this
Agreement  or any other Loan  Document,  or for any  failure of  Borrower or any
other  party to any Loan  Document  to  perform  its  obligations  hereunder  or
thereunder.  No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the  observance  or  performance  of any of the
agreements  contained  in, or  conditions  of, this  Agreement or any other Loan
Document,  or to inspect the properties,  books or records of Borrower or any of
Borrower's  Subsidiaries  or Affiliates.

     17.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully
protected  in  relying,   upon  any  writing,   resolution,   notice,   consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement  or other  document or  conversation  believed by it to be genuine and
correct and to have been signed,  sent, or made by the proper Person or Persons,
and upon advice and statements of legal counsel  (including  counsel to Borrower
or counsel to any Lender), independent accountants and other experts selected by
Agent.  Agent shall be fully justified in failing or refusing to take any action
under this  Agreement or any other Loan  Document  unless it shall first receive
such advice or concurrence of the Lenders as it deems appropriate and until such
instructions are received,  Agent shall act, or refrain from acting, as it deems
advisable. If Agent so requests, it shall first be indemnified to its reasonable
satisfaction  by Lenders  against any and all  liability and expense that may be
incurred by it by reason of taking or continuing to take any such action.  Agent
shall in all cases be fully  protected in acting,  or in refraining from acting,
under this Agreement or any other Loan Document in accordance  with a request or
consent of the Lenders and such  request and any action  taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.

     17.5  Notice of Default or Event of  Default.  Agent shall not be deemed to
have  knowledge or notice of the  occurrence of any Default or Event of Default,
except with respect to defaults in the payment of principal, interest, fees, and
expenses  required  to be paid to Agent for the account of the  Lenders,  except
with  respect to Events of Default of which Agent has actual  knowledge,  unless
Agent shall have received written notice from a Lender or Borrower  referring to
this Agreement,  describing  such Default or Event of Default,  and stating that
such notice is a "notice of default."  Agent promptly will notify the Lenders of
its  receipt of any such  notice or of any Event of  Default of which  Agent has
actual  knowledge.  If any  Lender  obtains  actual  knowledge  of any  Event of
Default,  such Lender  promptly shall notify the other Lenders and Agent of such
Event of Default. Each Lender shall be solely responsible for giving any notices
to its  Participants,  if any.  Subject to Section  17.4,  Agent shall take such
action with  respect to such  Default or Event of Default as may be requested by
the Required  Lenders in  accordance  with Section 9;  provided,  however,  that
unless and until Agent has received any such  request,  Agent may (but shall not
be  obligated  to) take such action,  or refrain  from taking such action,  with
respect to such Default or Event of Default as it shall deem  advisable.

     17.6  Credit  Decision.   Each  Lender   acknowledges   that  none  of  the
Agent-Related Persons has made any representation or warranty to it, and that no
act by Agent hereinafter taken,  including any review of the affairs of Borrower

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and  its  Subsidiaries  or  Affiliates,   shall  be  deemed  to  constitute  any
representation  or warranty  by any  Agent-Related  Person to any  Lender.  Each
Lender represents to Agent that it has,  independently and without reliance upon
any  Agent-Related  Person and based on such documents and information as it has
deemed  appropriate,  made  its own  appraisal  of and  investigation  into  the
business,  prospects,  operations,  property,  financial and other condition and
creditworthiness  of Borrower and any other Person (other than the Lender Group)
party to a Loan Document,  and all applicable  bank  regulatory laws relating to
the transactions  contemplated  hereby,  and made its own decision to enter into
this  Agreement  and to extend credit to Borrower.  Each Lender also  represents
that it will,  independently and without reliance upon any Agent-Related  Person
and based on such documents and information as it shall deem  appropriate at the
time,  continue to make its own credit  analysis,  appraisals  and  decisions in
taking or not taking action under this  Agreement and the other Loan  Documents,
and to make such investigations as it deems necessary to inform itself as to the
business,  prospects,  operations,  property,  financial and other condition and
creditworthiness  of Borrower and any other Person (other than the Lender Group)
party to a Loan  Document.  Except  for  notices,  reports  and other  documents
expressly  herein required to be furnished to the Lenders by Agent,  Agent shall
not have any duty or  responsibility  to provide  any Lender  with any credit or
other  information  concerning the business,  prospects,  operations,  property,
financial  and other  condition  or  creditworthiness  of Borrower and any other
Person party to a Loan Document that may come into the  possession of any of the
Agent-Related  Persons.

     17.7 Costs and Expenses;  Indemnifications.  Agent may incur and pay Lender
Group Expenses to the extent Agent deems reasonably necessary or appropriate for
the  performance  and  fulfillment of its  functions,  powers,  and  obligations
pursuant to the Loan Documents, including without limiting the generality of the
foregoing,  court  costs,  reasonable  attorneys  fees  and  expenses,  costs of
collection  by outside  collection  agencies  and  auctioneer  fees and costs of
security guards or insurance  premiums paid to maintain the Collateral,  whether
or not Borrower is obligated  to  reimburse  Agent or Lenders for such  expenses
pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to
deduct and retain  sufficient  amounts from  Collections to reimburse  Agent for
such  out-of-pocket  costs and expenses prior to the distribution of any amounts
to Lenders.  In the event Agent is not  reimbursed  for such costs and  expenses
from Collections, each Lender hereby agrees that it is and shall be obligated to
pay to or  reimburse  Agent  for the  amount  of such  Lender's  Pro Rata  Share
thereof.  Whether or not the transactions  contemplated  hereby are consummated,
the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent
not  reimbursed by or on behalf of Borrower and without  limiting the obligation
of Borrower to do so), according to their Pro Rata Shares,  from and against any
and all  Indemnified  Liabilities;  provided,  however,  that no Lender shall be
liable for the  payment  to the  Agent-Related  Persons  of any  portion of such
Indemnified  Liabilities resulting solely from such Person's gross negligence or
willful  misconduct.  Without  limitation  of the  foregoing,  each Lender shall
reimburse Agent upon demand for its ratable share of any costs or  out-of-pocket
expenses (including attorneys fees and expenses) incurred by Agent in connection
with  the  preparation,   execution,  delivery,  administration,   modification,
amendment or enforcement  (whether through  negotiations,  legal  proceedings or
otherwise) of, or legal advice in respect of rights or  responsibilities  under,
this  Agreement,  any other Loan Document,  or any document  contemplated  by or
referred to herein, to the extent that Agent is not reimbursed for such expenses

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by or on behalf of Borrower.  The  undertaking in this section shall survive the
payment of all  Obligations  hereunder and the  resignation  or  replacement  of
Agent.

     17.8 Agent in Individual  Capacity.  Foothill and its  Affiliates  may make
loans to,  issue  letters of credit for the account of,  accept  deposits  from,
acquire equity interests in and generally engage in any kind of banking,  trust,
financial  advisory,  underwriting  or  other  business  with  Borrower  and its
Subsidiaries  and  Affiliates and any other Person (other than the Lender Group)
party to any Loan  Documents as though  Foothill  were not Agent  hereunder  and
without  notice to or consent of the  Lenders.  The  Lenders  acknowledge  that,
pursuant to such activities,  Foothill or its Affiliates may receive information
regarding Borrower or its Affiliates and any other Person (other than the Lender
Group)  party  to  any  Loan  Documents  that  is  subject  to   confidentiality
obligations  in favor of Borrower  or such other  Person and that  prohibit  the
disclosure of such information to the Lenders, and the Lenders acknowledge that,
in such  circumstances  (and in the absence of a waiver of such  confidentiality
obligations, which waiver Agent will use its reasonable best efforts to obtain),
Agent shall be under no obligation  to provide such  information  to them.  With
respect to the Foothill Loans and Agent  Advances,  Foothill shall have the same
rights and powers under this  Agreement as any other Lender and may exercise the
same as though it were not Agent,  and the terms "Lender" and "Lenders"  include
Foothill in its  individual  capacity.

     17.9 Successor Agent.  Agent may resign as Agent upon 45 days notice to the
Lenders.  If Agent  resigns  under this  Agreement,  the Required  Lenders shall
appoint a successor  Agent for the Lenders.  If no successor  Agent is appointed
prior to the effective date of the  resignation  of Agent,  Agent shall appoint,
after  consulting  with the  Lenders,  a  successor  Agent  and  such  appointed
successor  Agent  shall be  deemed  acceptable  to the  Lenders.  If  Agent  has
materially  breached  or  failed  to  perform  any  material  provision  of this
Agreement or of  applicable  law,  the Required  Lenders may agree in writing to
remove and replace Agent with a successor  Agent from among the Lenders.  In any
such event, upon the acceptance of its appointment as successor Agent hereunder,
such successor  Agent shall succeed to all the rights,  powers and duties of the
retiring  Agent and the term  "Agent"  shall mean such  successor  Agent and the
retiring  Agent's  appointment,  powers and duties as Agent shall be terminated.
After any retiring  Agent's  resignation  hereunder as Agent,  the provisions of
this Section 17 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Agent under this  Agreement.  If no successor  Agent
has  accepted  appointment  as Agent by the date  which is 45 days  following  a
retiring Agent's notice of resignation,  the retiring Agent's  resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the
duties of Agent  hereunder  until such time,  if any, as the  Lenders  appoint a
successor  Agent as  provided  for  above.

     17.10  Withholding  Tax.  (a)  If any  Lender  is a  "foreign  corporation,
partnership  or trust"  within  the  meaning of the IRC and such  Lender  claims
exemption  from, or a reduction of, U.S.  withholding tax under Sections 1441 or
1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower,  to
deliver to Agent and Borrower:

     (i) if such Lender claims an exemption from, or a reduction of, withholding
tax under a United States tax treaty,  properly completed IRS Forms 1001 and W-8

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before the  payment of any  interest in the first  calendar  year and before the
payment of any  interest in each third  succeeding  calendar  year during  which
interest  may be paid under this  Agreement;

     (ii) if such  Lender  claims that  interest  paid under this  Agreement  is
exempt from United States  withholding  tax because it is effectively  connected
with a United  States trade or business of such Lender,  two properly  completed
and  executed  copies of IRS Form 4224 before the payment of any interest is due
in the first taxable year of such Lender and in each succeeding  taxable year of
such Lender during which interest may be paid under this Agreement, and IRS Form
W-9;  and

     (iii) such other  form or forms as may be  required  under the IRC or other
laws of the United  States as a condition to exemption  from,  or reduction  of,
United States  withholding  tax.

Such  Lender  agrees  promptly  to notify  Agent and  Borrower  of any change in
circumstances  which would  modify or render  invalid any claimed  exemption  or
reduction.

     (b) If any Lender claims  exemption from, or reduction of,  withholding tax
under a United  States tax  treaty by  providing  IRS Form 1001 and such  Lender
sells, assigns, grants a participation in, or otherwise transfers all or part of
the  Obligations of Borrower to such Lender,  such Lender agrees to notify Agent
of the  percentage  amount  in which it is no  longer  the  beneficial  owner of
Obligations of Borrower to such Lender. To the extent of such percentage amount,
Agent will  treat such  Lender's  IRS Form 1001 as no longer  valid.

     (c) If any Lender claiming  exemption from United States withholding tax by
filing IRS Form 4224 with Agent sells,  assigns,  grants a participation  in, or
otherwise  transfers all or part of the  Obligations of Borrower to such Lender,
such Lender  agrees to undertake  sole  responsibility  for  complying  with the
withholding tax  requirements  imposed by Sections 1441 and 1442 of the IRC.

     (d) If any Lender is entitled to a reduction in the applicable  withholding
tax,  Agent may  withhold  from any  interest  payment to such  Lender an amount
equivalent  to the  applicable  withholding  tax after  taking into account such
reduction.  If the forms or other  documentation  required by subsection  (a) of
this  Section  are not  delivered  to Agent,  then Agent may  withhold  from any
interest payment to such Lender not providing such forms or other  documentation
an amount  equivalent to the applicable  withholding  tax.

     (e) If the IRS or any other Governmental  Authority of the United States or
other jurisdiction asserts a claim that Agent did not properly withhold tax from
amounts paid to or for the account of any Lender (because the  appropriate  form
was not delivered,  was not properly executed,  or because such Lender failed to
notify Agent of a change in circumstances  which rendered the exemption from, or
reduction of, withholding tax ineffective,  or for any other reason) such Lender
shall  indemnify  Agent fully for all amounts paid,  directly or indirectly,  by
Agent as tax or otherwise,  including penalties and interest,  and including any
taxes  imposed by any  jurisdiction  on the amounts  payable to Agent under this
Section,  together  with all costs and expenses  (including  attorneys  fees and

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expenses). The obligation of the Lenders under this subsection shall survive the
payment of all  Obligations and the resignation or replacement of Agent.

     17.11  Collateral  Matters.

     (a) The Lenders hereby  irrevocably  authorize  Agent, at its option and in
its  sole  discretion,  to  release  any  Lien on any  Collateral  (i) upon  the
termination of the Commitments and payment and  satisfaction in full by Borrower
of all  Obligations;  (ii) constituting  property being sold or disposed of if a
release is  required  or  desirable  in  connection  therewith  and if  Borrower
certifies to Agent that the sale or disposition is permitted  under  Section 7.4
of this Agreement or the other Loan  Documents (and Agent may rely  conclusively
on any such certificate,  without further inquiry);  (iii) constituting property
in which  Borrower  owned no  interest  at the time the  security  interest  was
granted  or at any time  thereafter;  or (iv)  constituting  property  leased to
Borrower  under a lease  that has  expired  or is  terminated  in a  transaction
permitted under this Agreement. Except as provided above, Agent will not execute
and deliver a release of any Lien on any  Collateral  without the prior  written
authorization  of (y)  if the  release  is of  all or  substantially  all of the
Collateral,  of all of the Lenders, or (z) otherwise,  all of the Lenders.  Upon
request by Agent or Borrower at any time,  the Lenders  will  confirm in writing
Agent's  authority  to release  any such Liens on  particular  types or items of
Collateral pursuant to this  Section 17.11;  provided,  however,  that (1) Agent
shall not be required to execute any document necessary to evidence such release
on terms that, in Agent's opinion, would expose Agent to liability or create any
obligation or entail any consequence other than the release of such Lien without
recourse,  representation,  or warranty,  and (2) such release  shall not in any
manner  discharge,  affect,  or impair the  Obligations or any Liens (other than
those  expressly being released) upon (or obligations of Borrower in respect of)
all interests retained by Borrower,  including, the proceeds of any sale, all of
which shall continue to constitute part of the Collateral.

     (c) Agent  shall have no  obligation  whatsoever  to any of the  Lenders to
assure  that the  Collateral  exists or is owned by  Borrower  or is cared  for,
protected,  or insured or has been  encumbered,  or that the Agent's  Liens have
been properly or  sufficiently or lawfully  created,  perfected,  protected,  or
enforced or are entitled to any particular priority, or to exercise at all or in
any particular manner or under any duty of care,  disclosure or fidelity,  or to
continue  exercising,  any of the  rights,  authorities  and  powers  granted or
available to Agent pursuant to any of the Loan  Documents,  it being  understood
and agreed  that in respect of the  Collateral,  or any act,  omission  or event
related thereto, subject to the terms and conditions contained herein, Agent may
act in any manner it may deem appropriate,  in its sole discretion given Agent's
own  interest in the  Collateral  in its capacity as one of the Lenders and that
Agent shall have no other duty or liability  whatsoever  to any Lender as to any
of the foregoing, except as otherwise provided herein.

     17.12 Restrictions on Actions by Lenders;  Sharing of Payments. (a) Each of
the Lenders agrees that it shall not,  without the express consent of Agent, and
that it shall, to the extent it is lawfully  entitled to do so, upon the request
of Agent, set off against the  Obligations,  any amounts owing by such Lender to
Borrower or any  accounts  of Borrower  now or  hereafter  maintained  with such
Lender.   Each  of  the  Lenders  further  agrees  that  it  shall  not,  unless

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specifically  requested to do so by Agent, take or cause to be taken any action,
including, the commencement of any legal or equitable proceedings,  to foreclose
any  Lien  on,  or  otherwise  enforce  any  security  interest  in,  any of the
Collateral  the  purpose  of which is, or could  be,  to give  such  Lender  any
preference or priority against the other Lenders with respect to the Collateral.

     (b)  Subject to  Section 17.8,  if, at any time or times any  Lender  shall
receive  (i) by  payment,  foreclosure,  setoff or  otherwise,  any  proceeds of
Collateral or any payments with respect to the  Obligations  arising  under,  or
relating  to, this  Agreement or the other Loan  Documents,  except for any such
proceeds or payments received by such Lender from Agent pursuant to the terms of
this Agreement,  or (ii) payments  from Agent in excess of such Lender's ratable
portion of all such  distributions by Agent, such Lender promptly shall (1) turn
the same over to Agent,  in kind, and with such  endorsements as may be required
to negotiate the same to Agent,  or in same day funds,  as  applicable,  for the
account  of all  of the  Lenders  and  for  application  to the  Obligations  in
accordance with the applicable  provisions of this  Agreement,  or (2) purchase,
without  recourse or warranty,  an undivided  interest and  participation in the
Obligations owed to the other Lenders so that such excess payment received shall
be  applied  ratably  as among the  Lenders  in  accordance  with their Pro Rata
Shares;  provided,  however, that if all or part of such excess payment received
by the  purchasing  party is thereafter  recovered  from it, those  purchases of
participations  shall be rescinded in whole or in part, as  applicable,  and the
applicable portion of the purchase price paid therefor shall be returned to such
purchasing party, but without interest except to the extent that such purchasing
party is required to pay interest in connection  with the recovery of the excess
payment.

     17.13 Agency for  Perfection.  Agent and each Lender  hereby  appoints each
other Lender as agent for the purpose of perfecting  the Agent's Liens in assets
which,  in  accordance  with  Article  9 of the  UCC  can be  perfected  only by
possession.  Should any Lender obtain  possession of any such  Collateral,  such
Lender shall notify Agent thereof,  and,  promptly upon Agent's request therefor
shall  deliver  such   Collateral  to  Agent  or  in  accordance   with  Agent's
instructions.

     17.14 Payments by Agent to the Lenders. All payments to be made by Agent to
the  Lenders  shall  be made by bank  wire  transfer  or  internal  transfer  of
immediately available funds to:

         If to Foothill:           The Chase Manhattan Bank
                                   New York, New York
                                   ABA # 021-000-021
                                   Credit:  Foothill Capital Corporation
                                   Account No. 323-266193
                                   Re:  PANACO, Inc.

         If to Ableco              Chase Bank of Texas, N.A.
         Finance LLC:              ABA # 113-000-609
                                   Account No. 00102619468
                                   BNF:  Wires-Clearing-Asset Backed Securities
                                   OBI:  Ref:  Kevin Celestine/Ableco
                                         Finance/Panaco/Acct. #2316401

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<PAGE>

         If to Foothill
         Partners III, L.P.:       The Chase Manhattan Bank
                                   New York, New York
                                   ABA #  021000021
                                   Credit:  Foothill Partners III, L.P.
                                   Account No. 323-214711
                                   Re:  PANACO, INC.

or pursuant to such other wire transfer instructions as each party may designate
for  itself by written  notice to Agent.  Concurrently  with each such  payment,
Agent shall identify  whether such payment (or any portion  thereof)  represents
principal, premium or interest on revolving advances or otherwise.

     17.15 Concerning the Collateral and Related Loan Decuments.  Each member of
the Lender Group  authorizes  and directs Agent to enter into this Agreement and
the other Loan  Documents  relating  to the  Collateral,  for the benefit of the
Lender  Group.  Each member of the Lender  Group agrees that any action taken by
Agent or all  Lenders,  as  applicable,  in  accordance  with the  terms of this
Agreement  or the  other  Loan  Documents  relating  to the  Collateral  and the
exercise by Agent or all Lenders, as applicable,  of their respective powers set
forth  therein or herein,  together  with such other powers that are  reasonably
incidental thereto, shall be binding upon all of the Lenders.

     17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by
Lenders;  Other . By signing this Agreement,  each Lender:

     (a) is deemed to have  requested  that Agent furnish such Lender,  promptly
after it becomes  available,  a copy of each field audit or  examination  report
(each a "Report" and collectively, "Reports") prepared by Agent, and Agent shall
so furnish each Lender with such Reports;

     (b) expressly agrees and  acknowledges  that neither Foothill nor Agent (i)
makes any  representation  or warranty as to the accuracy of any Report, or (ii)
shall be liable for any  information  contained  in any  Report;

     (c)   expressly   agrees  and   acknowledges   that  the  Reports  are  not
comprehensive  audits or examinations,  that Agent or other party performing any
audit or examination will inspect only specific  information  regarding Borrower
and will rely  significantly  upon Borrower's  books and records,  as well as on
representations  of  Borrower's  personnel;

     (d) agrees to keep all Reports and other material,  non-public  information
regarding  Borrower  and its  Subsidiaries  and their  operations,  assets,  and
existing and  contemplated  business  plans in a confidential  manner;  it being
understood  and  agreed by  Borrower  that in any  event  such  Lender  may make
disclosures (a) to counsel for and other advisors,  accountants, and auditors to

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such  Lender,  (b)  reasonably  required  by any bona fide  potential  or actual
Assignee,  transferee,  or Participant in connection  with any  contemplated  or
actual  assignment  or  transfer  by such  Lender of an  interest  herein or any
participation  interest in such Lender's  rights  hereunder,  (c) of information
that has become  public by  disclosures  made by Persons other than such Lender,
its Affiliates,  assignees,  transferees, or participants, or (d) as required or
requested by any court,  governmental or administrative agency,  pursuant to any
subpoena or other legal process,  or by any law, statute,  regulation,  or court
order;  provided,  however,  that, unless prohibited by applicable law, statute,
regulation,  or court order, such Lender shall notify Borrower of any request by
any court, governmental or administrative agency, or pursuant to any subpoena or
other legal process for disclosure of any such non-public  material  information
concurrent with, or where practicable,  prior to the disclosure thereof; and

     (e) without limiting the generality of any other indemnification  provision
contained in this Agreement, agrees: (i) to hold Agent and any such other Lender
preparing a Report harmless from any action the indemnifying  Lender may take or
conclusion  the  indemnifying  Lender  may  reach  or draw  from any  Report  in
connection with any loans or other credit  accommodations  that the indemnifying
Lender  has  made  or  may  make  to  Borrower,  or  the  indemnifying  Lender's
participation  in, or the indemnifying  Lender's purchase of, a loan or loans of
Borrower; and (ii) to pay and protect, and indemnify,  defend and hold Agent and
any such other Lender preparing a Report harmless from and against,  the claims,
actions,  proceedings,  damages,  costs,  expenses and other amounts (including,
attorney costs)  incurred by Agent and any such other Lender  preparing a Report
as the direct or indirect  result of any third  parties who might  obtain all or
part  of  any  Report  through  the  indemnifying  Lender.

In addition to the  foregoing:  (x) Any Lender may from time to time  request of
Agent in  writing  that  Agent  provide  to such  Lender a copy of any report or
document  provided  by  Borrower  to Agent  that has not been  contemporaneously
provided by Borrower to such Lender,  and, upon receipt of such  request,  Agent
shall provide a copy of same to such Lender  promptly upon receipt  thereof from
Borrower;  (y) To the extent that Agent is entitled,  under any provision of the
Loan Documents,  to request additional reports or information from Borrower, any
Lender may, from time to time,  reasonably  request Agent to exercise such right
as specified in such Lender's  notice to Agent,  whereupon  Agent promptly shall
request of Borrower  the  additional  reports or  information  specified by such
Lender, and, upon receipt thereof from Borrower,  Agent promptly shall provide a
copy of same to such Lender;  and (z) Any time that Agent  renders to Borrower a
statement regarding the Loan Account,  Agent shall send a copy of such statement
to each Lender.

     17.17 Several  Obligations;  No Liability.  Notwithstanding that certain of
the Loan Documents now or hereafter may have been or will be executed only by or
in  favor  of  Agent  in its  capacity  as  such,  and not by or in favor of the
Lenders,  any and all  obligations  on the  part of  Agent  (if any) to make any
credit  available  hereunder  shall  constitute  the  several  (and  not  joint)
obligations  of the respective  Lenders on a ratable  basis,  according to their
respective  Commitments,  to make an amount of such  credit  not to  exceed,  in
principal amount,  at any one time  outstanding,  the amount of their respective
Commitments.  Nothing contained herein shall confer upon any Lender any interest
in, or subject any Lender to any liability  for, or in respect of, the business,
assets,  profits,  losses, or liabilities of any other Lender. Each Lender shall

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<PAGE>

be solely  responsible for notifying its Participants of any matters relating to
the Loan Documents to the extent any such notice may be required,  and no Lender
shall have any  obligation,  duty, or liability to any  Participant of any other
Lender.  Except as provided in Section 17.7, no member of the Lender Group shall
have any  liability  for the acts or any other  member of the Lender  Group.  No
Lender shall be  responsible  to Borrower or any other Person for any failure by
any other Lender to fulfill its obligations to make credit available  hereunder,
nor to advance for it or on its behalf in connection with its Commitment, nor to
take  any  other  action  on its  behalf  hereunder  or in  connection  with the
financing contemplated herein.

     18.  GENERAL  PROVISIONS.

     18.1  Effectiveness.  This Agreement shall be binding and deemed  effective
when executed by Borrower and each member of the Lender Group whose signature is
provided for on the signature pages hereof.

     18.2 Section Headings.  Headings and numbers have been set forth herein for
convenience  only.  Unless the contrary is compelled by the context,  everything
contained in each section  applies equally to this entire  Agreement.

     18.3  Interpretation.   Neither  this  Agreement  nor  any  uncertainty  or
ambiguity  herein  shall be  construed  or resolved  against the Lender Group or
Borrower,  whether under any rule of construction or otherwise. On the contrary,
this  Agreement  has been  reviewed by all parties  and shall be  construed  and
interpreted  according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.

     18.4 Severability of Provisions.  Each provision of this Agreement shall be
severable  from every  other  provision  of this  Agreement  for the  purpose of
determining the legal enforceability of any specific provision.

     18.5 Amendments in Writing. This Agreement can only be amended by a writing
signed by Agent, the requisite  Lenders,  and Borrower.

     18.6 Counterparts;  Telefacsimile Execution. This Agreement may be executed
in any number of counterparts and by different parties on separate counterparts,
each of which,  when executed and delivered,  shall be deemed to be an original,
and all of which,  when taken  together,  shall  constitute but one and the same
Agreement.   Delivery  of  an  executed   counterpart   of  this   Agreement  by
telefacsimile  shall be equally as effective as delivery of an original executed
counterpart of this Agreement.  Any party delivering an executed  counterpart of
this  Agreement  by  telefacsimile  also  shall  deliver  an  original  executed
counterpart  of this  Agreement but the failure to deliver an original  executed
counterpart shall not affect the validity, enforceability, and binding effect of
this  Agreement.  The forgoing  shall apply to each other Loan Document  mutatis
mutandis.

     18.7 Revival and Reinstatement of Obligations. If the incurrence or payment
of the  Obligations  by  Borrower or any  guarantor  of the  Obligations  or the
transfer by either or both of such  parties to the Lender  Group of any property

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<PAGE>

of either or both of such parties should for any reason subsequently be declared
to be void or  voidable  under any state or federal law  relating to  creditors'
rights,  including  provisions  of the  Bankruptcy  Code  relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively,  a "Voidable Transfer"),  and if the Lender
Group is required to repay or restore,  in whole or in part,  any such  Voidable
Transfer, or elects to do so upon the reasonable advice of its counsel, then, as
to any such Voidable  Transfer,  or the amount  thereof that the Lender Group is
required  or  elects  to  repay  or  restore,  and as to all  reasonable  costs,
expenses,  and attorneys fees of the Lender Group related thereto, the liability
of Borrower or such guarantor  automatically shall be revived,  reinstated,  and
restored and shall exist as though such Voidable Transfer had never been made.

     18.8 Integration.  This Agreement,  together with the other Loan Documents,
reflects  the  entire   understanding   of  the  parties  with  respect  to  the
transactions  contemplated  hereby and shall not be contradicted or qualified by
any other agreement,  oral or written,  before the date hereof.

     18.9 Amendment and Restatement; Release. This Agreement and the obligations
of  Borrower  set  forth  herein  constitute  an  amendment,   modification  and
restatement,  but not an  extinguishment  or  novation,  of  obligations  of the
Borrower  originally  owed to the  Prior  Lenders  and/or  the  predecessors  in
interest to Prior Lenders (the "Prior  Obligations"),  the Prior Lenders  having
assigned  all of such Prior  Obligations  (together  with all Liens and security
documents securing the same) to Agent and the Lender Group pursuant to the Prior
Lender  Assignment  Agreements.  This Agreement and the other Loan Documents are
not  intended  as,  and shall not be  construed  as, a  release,  impairment  or
novation of the Prior  Obligations or the other  indebtedness,  liabilities  and
obligations  of Borrower or any of the other Loan Parties under the  agreements,
documents and instruments  executed in connection  therewith or relating thereto
or the Liens  granted  therein,  all of which  Liens  are  hereby  modified  and
affirmed.  BORROWER AND EACH OTHER LOAN PARTY HEREBY  VOLUNTARILY  AND KNOWINGLY
RELEASE AND FOREVER  DISCHARGE AGENT AND EACH OF THE LENDERS,  ITS PREDECESSORS,
AGENTS, EMPLOYEES,  ATTORNEYS, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS,
DEMANDS,  ACTIONS,  CAUSES OF ACTION,  DAMAGES, COSTS, EXPENSES, AND LIABILITIES
WHATSOEVER,  KNOWN  OR  UNKNOWN,  ANTICIPATED  OR  UNANTICIPATED,  SUSPECTED  OR
UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING
IN WHOLE OR IN PART ON OR BEFORE  THE DATE THIS  AGREEMENT  IS  EXECUTED,  WHICH
BORROWER AND SUCH OTHER LOAN PARTIES,  INDIVIDUALLY OR COLLECTIVELY,  MAY NOW OR
HEREAFTER  HAVE AGAINST AGENT,  ANY OF THE LENDERS,  ITS  PREDECESSORS,  AGENTS,
EMPLOYEES,  ATTORNEYS,  SUCCESSORS  AND  ASSIGNS,  IF ANY, AND  IRRESPECTIVE  OF
WHETHER  ANY SUCH  CLAIMS  ARISE  OUT OF  CONTRACT,  TORT,  VIOLATION  OF LAW OR
REGULATIONS,  OR OTHERWISE, AND ARISING FROM ANY ADVANCES,  LETTERS OF CREDIT OR
OTHER  INDEBTEDNESS,   INCLUDING,   WITHOUT  LIMITATION,  ANY  CONTRACTING  FOR,
CHARGING,  TAKING, RESERVING,  COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE

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<PAGE>

HIGHEST  LAWFUL RATE  APPLICABLE,  THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER
THE AGREEMENT OR OTHER TRANSACTION DOCUMENTS,  AND NEGOTIATION FOR AND EXECUTION
OF THIS AGREEMENT.
                  [Remainder of Page Intentionally Left Blank.]

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<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed.

                              BORROWER:

                              PANACO, INC.,
                              a Delaware corporation


                             By_____________________________________
                             Title:_________________________________

                             PANACO PRODUCTION COMPANY,
                             a Texas corporation

                             By_____________________________________
                             Title:_________________________________

                             AGENT:

                             FOOTHILL CAPITAL CORPORATION,
                             a California corporation, as Agent for the Lenders


                             By ____________________________________
                             Title:_________________________________

                             LENDERS:

                             FOOTHILL CAPITAL CORPORATION,
                             a California corporation, as a Lender

                             By______________________________________
                             Title:__________________________________


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                             ABLECO FINANCE LLC,
                             a Delaware limited liability company, as a Lender

                             By_______________________________________
                             Title:___________________________________


                             FOOTHILL PARTNERS III, L.P.
                             a Delaware limited partnership, as a Lender

                             By_______________________________________
                             Title:___________________________________


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                               SCHEDULE A-1

     "Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of any date of determination thereof:

(a)  the sum of

     (i)  discounted  future net revenue from Proved  Reserves of Panaco and its
Subsidiaries,  calculated in accordance with SEC guidelines (before any state or
federal income tax), as estimated by one or more reputable  firms of independent
petroleum  engineers  as of a date no earlier  than the date of Panaco's  latest
annual consolidated financial statements, as

     (A) increased by, as of the date of determination, the estimated discounted
future net revenues from

     (I)  estimated  Proved  Reserves  acquired  since the date of such year-end
Reserve Report,  and

     (II)  estimated  oil  and  natural  gas  reserves  attributable  to  upward
revisions  of  estimates  of Proved  Reserves  since  the date of such  year-end
Reserve Report due to exploration,  development or exploitation  activities,  in
each case  calculated in accordance  with SEC  guidelines  (utilizing the prices
utilized in such year-end Reserve Report), and

     (B) decreased by, as of the date of determination, the estimated discounted
future net revenues from

     (I) estimated  Proved  Reserves  produced  or disposed of since the date of
such year-end Reserve Report, and

     (II)  estimated  Proved  Reserves  attributable  to downward  revisions  of
estimates of Proved Reserves  attributable to downward revisions of estimates of
Proved Reserves since the date of such year-end Reserve Report due to changes in
geological  conditions or other factors which would, in accordance with standard

                                     A-1-1

<PAGE>

industry practice,  cause such revisions,  in each case calculated in accordance
with standard industry practice,  cause such revisions,  in each case calculated
in  accordance  with SEC  guidelines  (utilizing  the  prices  utilized  in such
year-end Reserve Report);

provided, however, that, in the case of each of the determinations made pursuant
to clauses (A) and (B), such  increases  and decreases  shall be as estimated by
Panaco's  petroleum  engineers,  unless in the event  that  there is a  Material
Adverse Change as a result of such acquisitions, dispositions or revisions, then
the discounted future net revenues  utilized for purposes of this  clause (a)(i)
shall be confirmed in writing,  by one or more  reputable  firms of  independent
petroleum engineers (which may be Panaco's  independent  petroleum engineers who
prepare the Panaco's annual Reserve  Report),  plus

     (ii)  the  capitalized  costs that are  attributable to oil and natural gas
properties of the Panaco and its  Subsidiaries  to which no Proved  Reserves are
attributable,  based on the  Panaco's  books and records as of a date no earlier
than the date of the Panaco's latest annual or quarterly  financial  statements,
plus

     (iii) the  Net  Working  Capital on a date no earlier  than the date of the
Panaco's latest consolidated annual or quarterly financial statements, plus

     (iv)  with  respect  to each  other  tangible  asset of the  Panaco  or its
Subsidiaries  specifically  including,  but not to the  exclusion  of any  other
qualifying  tangible  assets,  the Panaco's or its  Subsidiaries'  Crude Oil and
Natural Gas Related  Assets (to the extent not  included in (i),  (ii) and (iii)
above or  otherwise  in this clause (iv)) (less any  remaining  deferred  income
taxes  which have been  allocated  to such  Crude Oil and  Natural  Gas  Related
Assets), Real Property, Equipment,  leasehold improvements,  investments carried
on the equity  method,  restricted  cash and the  carrying  value of  marketable
securities,  the greater of (A) the net book value of such other  tangible asset
on a date no earlier than the date of the Panaco's latest consolidated annual or
quarterly  financial  statements or (B) the appraised  value,  as estimated by a
qualified  Independent  Advisor, of such other tangible assets of the Panaco and
its  Subsidiaries,  as of a date no earlier than the date of the Panaco's latest
audited financial statements, plus

     (v) to the  extent  deducted  in the  calculation  of (i)  above,  reserves
against plugging and abandonment expenses; provided, that such reserves shall be

                                     A-1-2

<PAGE>

included  under this clause (v) only to the extent of any cash  deposited by the
Panaco against such liabilities, minus

(b)  minority  interests and, to the extent not otherwise  taken into account in
     determining  Adjusted  Consolidated  Net Tangible  Assets,  any natural gas
     balancing  liabilities of the Panaco and its Subsidiaries  reflected in the
     Panaco's latest audited financial statements.

In addition to, but without duplication of, the foregoing,  for purposes of this
definition,  "Adjusted  Consolidated  Net Tangible  Assets"  shall be calculated
after giving effect,  on a pro forma basis, to (1) any Investment not prohibited
by the Unsecured Notes  Indenture,  to and including the date of the transaction
giving rise to the need to calculate  Adjusted  Consolidated Net Tangible Assets
(the "Assets  Transaction  Date"), in any other Person that, as a result of such
Investment,  becomes a Subsidiary of the Borrower,  (2) the acquisition,  to and
including the Assets  Transaction Date (by merger,  consolidation or purchase of
stock or assets),  of any  business or assets,  including,  without  limitation,
Permitted  Industry  investments,  and (3) any  sales or other  dispositions  of
assets  permitted  by  the  Unsecured  Notes  Indenture  (other  than  sales  of
Hydrocarbons  or other  mineral  products in the  ordinary  course of  business)
occurring on or prior to the Assets Transaction Date.

Solely for purposes of this  definition of "Adjusted  Consolidated  Net Tangible
Assets",  the following terms have the respective  meanings:

(A)  "Crude  Oil  and  Natural  Gas   Business"   means  (i)  the   acquisition,
     exploration, development, operation and disposition of interests in Oil and
     Gas Properties and all other  Hydrocarbon  properties,  (ii) the gathering,
     marketing, treating,  processing,  storage, selling and transporting of any
     production  from such  interests or properties of Panaco or of others,  and
     (iii)  activities  incidental to the foregoing.

(B)  "Crude Oil and Natural Gas Related  Assets" means any Investment or capital
     expenditure  (but not including  additions to working capital or repayments
     of any revolving  credit or working  capital  borrowings)  by Panaco or any
     Subsidiary  of Panaco  which is  related to the Crude Oil and  Natural  Gas
     Business.

(C)  "Independent  Advisor" means a nationally  recognized investment banking or
     accounting firm, or a reputable  engineering firm,  (i) which does not, and
     whose directors, officers and employees or Affiliates do not, have a direct
     or indirect material  financial interest in the Panaco and its Subsidiaries
     and (ii) which, in the judgment of the Board of Directors of the Panaco and
     its Subsidiaries, is otherwise disinterested,  independent and qualified to
     perform the task for which it is to be  engaged.

(D)  "Investment"  means, with respect to any Person, any direct or indirect (i)
     loan, advance or other extension of credit (including,  without limitation,
     a guarantee) or capital contribution to by means of any transfer of cash or

                                     A-1-3

<PAGE>

     other  property  (valued at the fair market value thereof as of the date of
     transfer) others or any payment for property or services for the account or
     use of others,  (ii) purchase or  acquisition by such Person of any capital
     stock,  bonds,  notes,  debentures  or other  securities  or  evidences  of
     indebtedness  issued  by,  any Person  (whether  by merger,  consolidation,
     amalgamation  or otherwise and whether or not  purchased  directly from the
     issuer of such securities or evidences of Indebtedness), (iii) guarantee or
     assumption of the  Indebtedness  of any other Person,  and (iv) other items
     that would be classified as  investments  on a balance sheet of such Person
     prepared  in  accordance   with  GAAP.   Notwithstanding   the   foregoing,
     "Investment"  shall  exclude  extensions  of trade credit by Panaco and its
     Subsidiaries  on  commercially  reasonable  terms in accordance with normal
     trade  practices  of Panaco  or such  Subsidiary,  as the case may be.  The
     amount of any  Investment  shall not be adjusted for increases or decreases
     in value,  or write-ups,  write-downs  or  write-offs  with respect to such
     Investment.  If Panaco or any Subsidiary sells or otherwise disposes of any
     capital Stock of any Subsidiary such that,  after giving effect to any such
     sale or disposition,  it ceases to be a Subsidiary of Panaco,  Panaco shall
     be  deemed  to have  made an  Investment  on the date of any  such  sale or
     disposition  equal to the fair market  value of the  capital  stock of such
     Subsidiary not sold or disposed of.

(E)  "Net  Working  Capital"  means (i) all  current  assets  of Panaco  and its
     Subsidiaries,  minus  (ii)  all  current  liabilities  of  Panaco  and  its
     Subsidiaries,  except current liabilities included in Indebtedness, in each
     case as set forth in financial  statements of Panaco prepared in accordance
     with  GAAP.

(F)  "Permitted Industry Investments" means (i) capital expenditures, including,
     without   limitation,   acquisitions   of  Properties  of  Panaco  and  its
     Subsidiaries  and  interests   therein;   (ii)  (a)  entry  into  operating
     agreements,  joint ventures, working interests,  royalty interests, mineral
     leases,  unitization  agreements,  pooling arrangements or other similar or
     customary agreements, transactions,  properties, interests or arrangements,
     and  Investments  and  expenditures  in  connection  therewith  or pursuant
     thereto,  in each case made or entered into in the  ordinary  course of the
     oil and natural gas business, and (b) exchanges of the Properties of Panaco
     and its Subsidiaries for other Properties of Panaco and its Subsidiaries of
     at least  equivalent  value as  determined  in good  faith by the  Board of
     Directors of Panaco;  and (iii) Investments of operating funds on behalf of
     co-owners of Oil and Gas Properties of Panaco or the Subsidiaries  pursuant
     to joint operating agreements.

                                     A-1-4

<PAGE>


                                  SCHEDULE C-1
                                   COMMITMENTS



               Name of Lender                           Commitment
               --------------                           ----------

               Foothill Capital Corporation             $30,000,000

               Ableco Finance LLC                       $20,000,000

               Foothill Partners III, L.P.              $10,000,000


                                     C-1-1

<PAGE>


                                  Schedule 5.20
                                  -------------

                             Y2K COMPLIANCE TIMELINE
                             -----------------------




                                  See Attached






Schedule 5.20

<PAGE>



                                 Exhibit 3.3(e)
                                 --------------


               MAY 11, 1999 CORRESPONDENCE FROM THE MMS TO PANACO
               --------------------------------------------------


                                  See Attached




Schedule 5.20


<PAGE>