EX-10.16







	 	 	 	Borden County, Texas Scurry County, Texas





Garza County, Texas



 DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT,

ASSIGNMENT OF PRODUCTION

AND

FINANCING STATEMENT




Dated as of September 1, 2009




THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES PAYMENT OF FUTURE ADVANCES,
AND COVERS PROCEEDS OF COLLATERAL.



THIS INSTRUMENT COVERS AS-EXTRACTED COLLATERAL RELATED TO THE PROPERTIES DESCRIBED HEREIN
(INCLUDING, WITHOUT LIMITATION, OIL, GAS, OTHER MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH, AND THE ACCOUNTS RELATING THERETO, WHICH WILL BE FINANCED AT THE
WELLHEADS OF THE WELLS LOCATED ON THE PROPERTIES DESCRIBED HEREIN AND ACCOUNTS ARISING OUT OF THE
SALE THEREOF).



THIS INSTRUMENT COVERS GOODS WHICH ARE OR ARE TO BECOME FIXTURES RELATED TO THE REAL PROPERTY
DESCRIBED HEREIN.



THIS INSTRUMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE OR COMPARABLE
RECORDS OF THE COUNTIES REFERENCED IN EXHIBIT “A” HERETO, AND SUCH FILING SHALL SERVE, AMONG OTHER
PURPOSES, AS A FIXTURE FILING AND AS A FINANCING STATEMENT FOR AS-EXTRACTED COLLATERAL.



THE MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE AND IMMOVABLE PROPERTY CONCERNED, WHICH
INTEREST IS DESCRIBED HEREIN.



NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY
OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT BEFORE IT IS FILED FOR RECORD IN THE PUBLIC
RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER’S LICENSE NUMBER.



Please return documents with filing information

to




Jeffrey D. Hewett

Lynch, Chappell & Alsup

300 North Marienfeld, Suite 700

Midland, Texas 79701




DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT,



ASSIGNMENT OF PRODUCTION AND FINANCING STATEMENT




KNOW ALL MEN BY THESE PRESENTS:



That as of September 1, 2009, ESCONDE RESOURCES LP, a Texas limited partnership, whose address
is 415 West Wall Street, Suite 625, Midland, Texas 79701 (the AGrantor@), to secure
payment and performance of the Obligation (hereinafter defined), and for and in consideration of
the sum of TEN AND NO/100 DOLLARS ($10.00) cash and other valuable consideration in hand paid to
Grantor, the receipt and sufficiency of which are hereby acknowledged, and for and in consideration
of the debt and trusts hereinafter mentioned, has GRANTED, BARGAINED, SOLD, ASSIGNED, TRANSFERRED,
and CONVEYED, and by these presents does GRANT, BARGAIN, SELL, ASSIGN, TRANSFER, and CONVEY, unto
MIKE MARSHALL, TRUSTEE, whose address is 620 North Grant Avenue, Odessa, Texas 79761(hereinafter
called the ATrustee@), for the benefit of AMERICAN STATE BANK (the
ABeneficiary@), and to the Trustee’s successor or successors or substitutes in this
trust, with power of sale, the real and personal properties, rights, titles, interests, and estates
described or to which reference is made in Paragraphs I through VI, inclusive, below, whether now
owned by Grantor or hereafter acquired by Grantor (herein collectively called the AMortgaged
Property@), to-wit:



Paragraph I. Oil and Gas Leases and Other Properties. All of those certain oil and
gas and/or oil, gas and mineral leases, lands, interests, and other properties (all such leases
being herein called the ASubject Leases@ and all such leases, lands, minerals, and
royalty interests and other properties being herein called the ASubject Interests@),
which are described and/or to which reference may be made on Exhibit AA@ attached to
and made a part of this Deed of Trust for all purposes and incorporated herein by reference as
fully as if copied verbatim in the body of this Deed of Trust at this point;



Paragraph II. Pooled Interests. All rights, titles, interests, and estates now owned
or hereafter acquired by Grantor in and to (i) any and all properties now or hereafter pooled or
unitized with any of the Subject Interests, and (ii) all presently existing or future unitization,
communitization, and pooling agreements, and the units created thereby, which include all or any
part of the Subject Interests, including, without limitation, all units formed under or pursuant to
any laws. The rights, titles, interest, and estates described in this Paragraph II shall also be
included within the term ASubject Interests@ as used herein;



Paragraph III. Hydrocarbons. All oil, gas, casinghead gas, drip gasoline, natural
gasoline and condensate, all other liquid and gaseous hydrocarbons, and all other minerals, whether
similar to the foregoing or not (herein collectively called AHydrocarbons@), now or
hereafter accruing to or produced from the Subject Interests and/or to which Grantor now or
hereafter may be entitled as a result of or by virtue of its record and/or beneficial ownership of
any one or more of the Subject Interests;



Paragraph IV. Contracts. All present and future rights of Grantor (including, without
limitation, all rights to receive payments, including, but not limited to, lease bonuses,
rents, tolls, incomes, and royalties) under or by virtue of all present and future operating
agreements, contracts for the purchase, exchange, processing, transportation or sale of
hydrocarbons, and other contracts and agreements relating in any way to all or any part of the
Mortgaged Property, as the same may be amended or supplemented from time to time (herein
collectively called the ASubject Contracts@);



Paragraph V. Other Property. All tenements, hereditaments, appurtenances, and
properties in anywise appertaining, belonging, affixed, or incidental to the Subject Interests, in
which Grantor now owns or hereafter acquires an interest, including, without limitation, any and
all property, real or personal, in which Grantor now owns or hereafter acquires an interest which
is situated upon and/or used or useful in connection with all or any part of the Subject Interests
and including all pipelines, gathering lines, trunk lines, lateral lines, pipeline easements and
rights-of-way, compressor, dehydration units, separators, heater treaters, valves, flow lines,
gauge meters, alarms, supplies, machinery, derricks, buildings, tanks, casings, christmas trees,
tubing, rods, liquid extractors, engines, boilers, tools, appliances, cables, wires, surface
leases, rights-of-way, easements, servitudes, and franchises, and all accessions, additions,
substitutes and replacements to or for, and all accessories and attachments to any of the foregoing
(all such surface leases, easements, licenses, rights-of-way, and franchises being herein called
the ASubject Easements,@ and all such tangible property described in this Paragraph V
being herein called the APersonal Property@); and



Paragraph VI. Other Rights to Hydrocarbons. Any and all other rights, titles,
estates, royalties, and interests (whether or not presently included in the Subject Interests) now
owned or hereafter acquired by Grantor (a) in and to all Hydrocarbons in and under and that may be
produced and saved from the lands described or to which reference is made in Exhibit
AA@ (herein called the ALand@), and (b) in and to all reversions,
remainder, tolls, rents, revenues, issues, proceeds, earnings, income, and profits from the Land.



IN ADDITION TO THE REAL AND PERSONAL PROPERTIES, RIGHTS, TITLES, INTERESTS,
AND ESTATES DESCRIBED OR TO WHICH REFERENCE IS MADE IN PARAGRAPHS I THROUGH VI,
INCLUSIVE, ABOVE, IF GRANTOR CURRENTLY OWNS OR HEREAFTER ACQUIRES AN INTEREST IN ANY
OTHER OIL, GAS, OR OTHER MINERAL INTEREST (INCLUDING, BUT NOT LIMITED TO, ANY AND
ALL LEASEHOLD INTERESTS, WORKING, INTERESTS, OVERRIDING ROYALTY INTERESTS,
PARTICIPATING AND NON-PARTICIPATING ROYALTY INTERESTS, NET PROFITS INTERESTS,
PRODUCTION PAYMENT INTERESTS, UNLEASED MINERAL INTERESTS, AND ANY OTHER INTEREST IN
MINERALS) IN ANY OF THE COUNTIES SET FORTH ON THE COVER PAGE OF THIS INSTRUMENT OR
IN THE PREFACE TO THE EXHIBIT AA@ THAT IS ATTACHED HERETO (COLLECTIVELY,
THE ASUBJECT COUNTIES@), THE TITLE TO WHICH EITHER CURRENTLY OR
HEREAFTER STANDS IN GRANTOR=S NAME, GRANTOR DOES GRANT, BARGAIN, SELL, ASSIGN,
TRANSFER, AND CONVEY THAT INTEREST TO THE TRUSTEE, FOR THE BENEFIT OF THE
BENEFICIARY. GRANTOR SPECIFICALLY AFFIRMS THAT IT INTENDS THAT ANY SUCH INTEREST IS
TO BE INCLUDED WITHIN THE DEFINITION OF THE MORTGAGED PROPERTY, AND FURTHER INTENDS
TO CONVEY TO THE TRUSTEE, FOR THE BENEFIT OF THE BENEFICIARY, AS A PART OF THE
MORTGAGED PROPERTY, EVERY POSSIBLE PRESENT INTEREST THAT GRANTOR HAS TO ANY OIL,
GAS, OR MINERAL PROPERTY LOCATED IN ANY OF THE SUBJECT COUNTIES, WHETHER ACTUALLY OR
PROPERLY DESCRIBED HEREIN OR NOT, AND ALL OF SAID OIL, GAS, AND MINERAL INTERESTS
ARE COVERED AND INCLUDED HEREIN AS FULLY IN ALL RESPECTS AS IF THEY HAD BEEN
ACTUALLY AND PROPERLY DESCRIBED HEREIN. IN LIGHT OF THE DECISION IN J. HIRAM MOORE,
LTD. V. GREER, 172 S.W.3d 609 (TEX. 2005), DENIED, GRANTED ON REHEARING), GRANTOR
INTENDS FOR THIS PARAGRAPH, WHEN READ IN CONJUNCTION WITH THE ENTIRETY OF THIS
INSTRUMENT, TO CLEARLY EXPRESS GRANTOR=S INTENTIONS BEYOND A REASONABLE LEVEL
OF CERTAINTY. GRANTOR DOES NOT INTEND TO LIMIT THE OIL, GAS, AND MINERAL INTERESTS
IN LANDS IDENTIFIED BY THIS PROVISION TO SMALL PIECES OR STRIPS OF LAND THAT MAY
EXIST WITHOUT THE KNOWLEDGE OF ANY ONE OF THE PARTIES TO THIS INSTRUMENT BY REASON
OF INCORRECT SURVEYING, CARELESS LOCATION OF FENCES, OR OTHER MISTAKES. RATHER,
GRANTOR SPECIFICALLY INTENDS FOR THIS DEED OF TRUST TO INCLUDE ALL OIL, GAS, AND
MINERAL INTERESTS IN THOSE LANDS OWNED BY GRANTOR IN THE SUBJECT COUNTIES,
INCLUDING SPECIFICALLY ANY OIL, GAS, OR MINERAL INTEREST THAT GRANTOR MAY OWN IN
SAID COUNTY, WHETHER ACTUALLY AND PROPERLY DESCRIBED HEREIN OR NOT.



TO HAVE AND TO HOLD the Mortgaged Property, together with all and singular the rights,
privileges, contracts, and appurtenances now or hereafter at any time before the foreclosure or
release hereof in anywise appertaining or belonging thereto, unto the Trustee and to his successors
or substitutes hereunder and to their successors and assigns, forever, and Grantor hereby binds and
obligates Grantor and Grantor’s successors to warrant and forever defend, all and singular, the
Mortgaged Property unto the Trustee and to his successors or substitutes hereunder and to their
successors and assigns, against the lawful claims of any and all persons whomsoever claiming or to
claim the same, or any part thereof.



This conveyance is made in trust, however, upon the terms and provisions hereinafter set out
to secure the full and final payment and performance of the Obligation.



To further secure the Obligation, Grantor hereby grants to Beneficiary a security interest in
the entire interest of Grantor (whether now owned or hereafter acquired) in and to:




	 	(a)	 	the Mortgaged Property;





(b) all as-extracted collateral and all oil, gas and other hydrocarbons and minerals produced
from or allocated to the Mortgaged Property, and any products processed or obtained therefrom
(herein collectively called the AProduction@), and all liens and security interests in
the Production securing payment of the proceeds of the Production, including, but not limited to,
those liens and security interests provided under statutes enacted in the jurisdictions in which
the Mortgaged Properties are located;



(c) all equipment, inventory, improvements, fixtures, accessions, goods and other personal
property of whatever nature now or hereafter located on or used or held for use in connection with
the Mortgaged Property (or in connection with the operation thereof or the treating, handling,
storing, transporting, processing or marketing of Production) and all renewals or replacements
thereof or substitutions therefor;



(d) all contract rights, contractual rights and other general intangibles related to the
Mortgaged Property, the operation thereof (whether Grantor is operator or non-operator), or the
treating, handling, storing, transporting, processing or marketing of Production, or under which
the proceeds of Production arise or are evidenced or governed;



(e) all geological, geophysical, engineering, accounting, title, legal and other technical or
business data concerning the Mortgaged Property or the Production that are in the possession of
Grantor or in which Grantor can otherwise grant a security interest, and all books, files, records,
magnetic media, computer records and other forms of recording or obtaining access to such data;



(f) all money, documents, instruments, chattel paper, securities, accounts or general
intangibles arising from or by virtue of any transaction related to the Mortgaged Properties or the
Production (all of the properties, rights and interests described in subsections (a), (b), (c), (d)
and (e) above and this subsection (f) being herein sometimes collectively called the
ACollateral@); and



(g) all proceeds of the Collateral or payments in lieu of Production (such as Atake or
pay@ payments), whether such proceeds or payments are goods, money, documents, instruments,
chattel paper, securities, accounts, general intangibles, fixtures, real property or other assets
(the Mortgaged Property, Collateral and the proceeds of the Collateral and payments in lieu of
Production, collectively, the AProperty@).



Upon the occurrence of any default, Beneficiary is and shall be entitled to all of the
rights afforded a secured party by the applicable Uniform Commercial Code with reference to the
Collateral, or Trustee or Beneficiary may proceed as to both the real and personal property covered
hereby in accordance with the rights granted under this Deed of Trust with respect to the real
property covered hereby. Such rights shall be cumulative and in addition to those granted to
Trustee or Beneficiary under any other provision of this Deed of Trust or under any other
instrument executed in connection with or as security for all or any part of the Obligation.



REFERENCE IS MADE TO SECTION 6.13 FOR THE DEFINITIONS OF SEVERAL OF THE TERMS USED HEREIN.



ARTICLE 1

SECURED OBLIGATION




This Deed of Trust, Mortgage, Security Agreement, Assignment of Production and Financing
Statement (herein called the ADeed of Trust@) is made to secure and enforce the
following note or notes, guaranty, obligations, indebtedness, covenants, conditions, agreements,
loans, advances, debts, and liabilities (herein collectively called the AObligation@):



Section 1.1 Loan Agreement. All indebtedness and other obligations now or hereafter
incurred or arising pursuant to the provisions of that certain Loan Agreement, of even date
herewith, by and among Grantor, as Borrower; Esconde Energy LLC, as Guarantor; and Beneficiary, as
Lender, and all supplements thereto and amendments or modifications thereof, and all agreements
given in substitution therefor or in restatement, renewal or extension thereof, in whole or in part
(such Loan Agreement, as the same may from time to time be supplemented, amended or modified, and
all other agreements given in substitution therefor or in restatement, renewal or extension
thereof, in whole or in part, being herein called the AAgreement@);



Section 1.2 Note. That certain Term Note, of even date herewith, executed by Grantor,
and payable to the order of Beneficiary, in the original principal amount of Three Hundred Nine
Thousand Six Hundred Eighty-One and Eighty-Seven/100 Dollars ($309,681.87), finally maturing on
December 15, 2009, with such note bearing interest as specified therein, being payable as
provided therein at Beneficiary’s office in Odessa, Texas, or at such other office as Beneficiary
shall direct in writing and, if not sooner matured (by acceleration or otherwise), (as the same may
be supplemented, amended, modified, extended, and renewed, being referred to herein as the
ANote@),



Section 1.3 Guaranty Agreement. That certain Guaranty Agreement, of even date
herewith, executed by Esconde Energy LLC, a Texas limited liability company, in favor of the
Beneficiary, guaranteeing the performance of the Borrower under the Loan Agreement and the Notes
(as the same may be supplemented, amended, modified, extended, and renewed, being referred to
herein as the “Guaranty Agreement".



Section 1.4 Other Obligations of Grantor. Any and all other or additional
indebtedness or liabilities for which Grantor is now or may hereafter become liable to Beneficiary
at any time and from time to time, in any manner, either primarily or secondarily, absolutely or
contingently, directly or indirectly, jointly, severally, or jointly and severally, and whether
matured or unmatured, including all indebtedness and liabilities now or hereafter arising directly
out of transactions between Grantor and Beneficiary or acquired by Beneficiary outright,
conditionally or as collateral security from another Person and whether or not created after
payment in full of the Notes if this Deed of Trust shall not have been released of record by
Beneficiary.



Section 1.5 Indebtedness Obligation Arising Under Security Instruments. All
indebtedness, obligations, covenants, conditions, agreements, and liabilities arising pursuant to
the provisions of this Deed of Trust and/or any other security agreement, mortgage, deed of trust,
collateral pledge agreement, contract, assignment, or loan agreement of any kind now or hereafter
existing as security for, executed in connection with, or related to the Obligation and/or any part
thereof (each such agreement being herein called Aother security instruments@).



Section 1.6 Future Advances to Grantor. All other loans and future advances that
Beneficiary may now or hereafter make to Grantor, that the Grantor and Beneficiary contemplate may
be necessary from time to time. Such future advances, if any, shall be made on such conditions as
Grantor and Beneficiary may negotiate, but it is specifically agreed that Beneficiary has not
hereby agreed to advance any such additional sums.



Section 1.7 Costs and Expenses. All sums advanced and costs and expenses incurred by
Beneficiary, including without limitation, all reasonable legal, accounting, engineering,
management, consulting or like fees, made and incurred in connection with the foregoing Sections
1.1, 1.2, 1.3, 1.4, 1.5 and 1.6, or any part thereof, or in connection with the acquisition,
perfection, realization, maintenance, or preservation of the security therefor, or in connection
with the following Section 1.8, or any part thereof, whether such advances, costs, or expenses
shall have been made and incurred at the request of Grantor or Beneficiary.



Section 1.8 Renewals, Extensions, and Rearrangements. Any and all renewals,
extensions, increases, and/or rearrangements of all or any part of the Notes, indebtedness,
obligations, debts, loans, advances, covenants, agreements, and liabilities described or to which
reference is made in the foregoing Sections 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, and 1.7.



ARTICLE 2

CERTAIN REPRESENTATIONS, WARRANTIES,

AND COVENANTS OF GRANTOR




Section 2.1 Representations and Warranties. With knowledge that Beneficiary is
relying on the representations and warranties made herein without independent investigation,
Grantor hereby covenants, agrees, represents, and warrants to Beneficiary that:




(a) Authority. The Subject Leases are valid and subsisting and are in
full force and effect, and Grantor has authority to execute this Deed of Trust, to grant,
bargain, sell, mortgage, assign, transfer, and convey the Mortgaged Property to the Trustee
pursuant to this Deed of Trust, and to make the covenants, representations, warranties, and
assignments contained in this Deed of Trust.




(b) Title. Grantor (i) has good and indefeasible title to, (ii) is lawful
owner and holder of, and (iii) is possessed of the Mortgaged Property free and clear of any
and all liens except Permitted Liens.




(c) Interests. With respect to each Mortgaged Property, the ownership of
Grantor in such Mortgaged Property does and will, (i) with respect to each well described in
Exhibit “A” hereto in connection with such Mortgaged Property, (A) entitle Grantor to
receive (subject to the terms and provisions of this Mortgage) a decimal share of the
Production produced from, or allocated to, such well equal to not less than the decimal
share set forth in Exhibit “A” in connection with such well opposite the words ANet
Revenue Interest@ (or words of similar import), (B) cause Grantor to be obligated to
bear a decimal share of the cost of exploration, development and operation of such well not
greater than the decimal share set forth in Exhibit “A” in connection with such well
opposite the words AWorking Interest@ (or words of similar import) and (ii) if
such Mortgage Property is shown in Exhibit “A” to be subject to a unit or units, with
respect to each such unit, (A) entitle Grantor to receive (subject to the terms and
provisions of this Mortgage) a decimal share of Production produced from, or allocated to,
such unit equal to not less than the decimal share set forth in Exhibit “A” in connection
with such Mortgaged Property opposite the words AUnit Net Revenue Interest@ or
words of similar import (and if such Mortgaged Property is subject to more than one unit,
words identifying such interest with such unit), and (B) obligate Grantor to bear a decimal
share of the cost of exploration, development and operation of such unit not greater than
the decimal share set forth in Exhibit “A” in connection with such Mortgaged Property
opposite the words AUnit Working Interest@ or words of similar import (and if
such Mortgaged Property is subject to more than one unit, words identifying such interest
with such unit); such shares of Production which Grantor is entitled to receive, and shares
of expenses which Grantor is obligated to bear, are not and will not be subject to change
(other than changes which arise pursuant to non-consent provisions of operating agreements
described in Exhibit “A” in connection with such Mortgaged Properties, respectively, in
connection with operations hereafter proposed) except, and only to the extent that, such
changes are reflected in Exhibit “A”. There is not and will not be any unexpired financing
statement covering any part of the Property on file in any public office naming any party
other than Lender as secured party. The execution, delivery and performance of this
Mortgage and the creation of the liens hereunder do not violate any provision or constitute
a default under any operating agreement or other instrument which affects any Mortgaged
Property or to which Grantor is a party.




(d) Advance Payment Contract. Grantor is not a party to any Advance Payment
Contract affecting or relating to any of the Subject Interests not heretofore disclosed to
Beneficiary in writing.



(e) Environmental.




(i) Current Status. The Property and Grantor and, to the best knowledge
of Grantor, any property adjoining the Property are not in violation of or subject to
any existing, pending or, to the best knowledge of Grantor, threatened investigation
or inquiry by any governmental authority or to any remedial obligations under any
AEnvironmental Laws@ (as hereinafter defined), and this representation
will continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions, and circumstances, if
any, pertaining to the Property and Grantor. Grantor undertook, at the time of
acquisition of the Property, all appropriate inquiry into the previous ownership and
uses of the Property consistent with good commercial or customary practice to
determine if the Property is in violation of any Environmental Laws. Grantor has
taken all steps necessary to determine and has determined that no Hazardous Materials
have been disposed of or otherwise released on or to the Property except in
accordance with Environmental Laws. The use which Grantor makes and intends to make
of the Property will not result in the disposal or other release of any Hazardous
Material on or to the Property except in accordance with Environmental Laws. In the
event any Environmental Law 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 provided further, to the extent that the applicable laws and
regulations promulgated by the United States of America, the State of Texas, or other
applicable jurisdiction establish a meaning for any term defined thereby which is
broader than that specified in any Environmental Law, such broader meaning shall
apply. The AAssociated Property@ (as hereinafter defined) is not in
violation of any Environmental Law for which Grantor or its predecessors in interest
in the Property would be responsible. As used in this Mortgage, the term
AAssociated Property@ means any and all real and/or personal property
interests in and to (and/or carved out of) the Lands which are described or referred
to as Exhibit “A” hereto, or which are otherwise described in any of the oil, gas
and/or mineral leases or other instruments described or referred to in such Exhibit
“A”.




(ii) Future Performance. Grantor will not cause or permit the
Property, the Associated Property or Grantor to be in violation of, or do anything or
permit anything to be done which will subject the Property or the Associated Property
to any remedial obligations under any Environmental Laws, including without
limitation CERCLA, RCRA, the Toxic Substance Control Act, assuming disclosure to the
applicable governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the Property or Associated Property and Grantor
will promptly notify Beneficiary in writing of the presence of any Hazardous Material
on the Property or Associated Property and of any existing, pending or, to the best
knowledge of Grantor, threatened investigation or inquiry by any governmental
authority in connection with any Environmental Laws. Grantor will take all steps
necessary to determine that no Hazardous Materials have been disposed of or otherwise
released on or to the Property or Associated Property except in accordance with
Environmental Laws. Grantor will not cause or permit the disposal or other release
of any Hazardous Materials on or to the Property, or the Associated Property or any
property adjoining the Property except in accordance with Environmental Laws and
covenants and agrees to keep or cause the Property and the Associated Property to be
kept free of any Hazardous Materials and to remove the same (or if removal is
prohibited by law, to take whatever action is required by law) promptly upon
discovery at its sole expense. Without limitation of the Beneficiary’s rights to
declare an event of default hereunder and to exercise all remedies available by
reason thereof, in the event Grantor fails to comply with or perform any of the
foregoing covenants and obligations, the Beneficiary may (without any obligation,
express or implied) remove any Hazardous Materials from the Property or the
Associated Property (or if removal is prohibited by law, take whatever action is
required by law) and the cost of the removal or such other action shall be a demand
obligation owing by Grantor to the Beneficiary pursuant to this Mortgage. Grantor
grants to Beneficiary and its agents, employees, contractors and consultants access
to the Property and the Associated Property and the license (which is coupled with an
interest and irrevocable while this Mortgage is in effect) to remove the Hazardous
Materials (or if removal is prohibited by law, to take whatever action is required by
law) and agrees to indemnify and hold Beneficiary harmless from all costs and
expenses involved therewith. Upon Beneficiary’s reasonable request, at any time and
from time to time during the existence of this Mortgage, Grantor will provide at
Grantor’s sole expense an inspection or audit of the Property and the Associated
Property from an engineering or consulting firm approved by Beneficiary, indicating
the presence or absence of Hazardous Materials on the Property. If Grantor fails to
provide same after ten (10) days’ notice, Beneficiary may order same, and Grantor
grants to Beneficiary and its employees, agents, contractors and consultants access
to the Property and the Associated Property and a license (which is coupled with an
interest and irrevocable while this Mortgage is in effect) to perform such
inspections and tests. The cost of such inspections and tests shall be a demand
obligation owing by Grantor to Beneficiary pursuant to this Mortgage. The
Beneficiary’s rights under this paragraph are for the sole purpose of protecting the
Beneficiary’s security for the repayment of the secured indebtedness and shall not
under any circumstance be construed as granting the right to participate or
constitute participation in the management of the Property or the business conducted
thereon.




(f) Compliance with Applicable Laws. Grantor represents that, to the best of
its knowledge, Grantor is currently in compliance with all applicable laws, ordinances,
rules and regulations governing Grantor=s ownership, use and operation of the
Mortgaged Property.




(g) Rents, Royalties and Taxes. All rents and royalties due and payable under
the Subject Leases have been paid or otherwise accounted for and all Hydrocarbon severance
and production Taxes, windfall profit Taxes, and all property Taxes payable by Grantor with
respect to the Mortgaged Property have been paid.




(h) Condition of Personal or Movable Property. The equipment, inventory,
improvements, fixtures, goods and other tangible personal/movable property forming a part of
the Property are and will remain in good repair and condition and are and will be adequate
for the normal operation of the Property in accordance with prudent industry standards; all
of such Property is, and will remain, located on the Mortgaged Property, except for that
portion thereof which is or shall be located elsewhere (including that usually located on
the Mortgaged Properties but temporarily located elsewhere) in the course of the normal
operation of the Property.



Section 2.2 Covenants of Grantor. Grantor, for Grantor and Grantor’s successors,
covenants and agrees, unless otherwise specifically permitted or allowed in the Loan Agreement, to:




(a) Additional Documents. At any time, and from time to time, upon request by
Beneficiary, forthwith execute and deliver to Beneficiary any and all additional instruments
and further assurances, and do all other acts and things, as may be necessary or proper, in
Beneficiary’s opinion, to effect the intent of these presents and to evidence and perfect
more fully the rights and liens herein created and intended to be created and to protect the
rights of Beneficiary hereunder.




(b) Existence. If applicable, continuously maintain Grantor’s existence in
good standing as a corporation in the State of Texas or State in which incorporated and its
due qualification as a foreign corporation under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business requires such
qualification.




(c) Cure of Defects. If the validity or priority of this Deed of Trust or of
any rights or liens created or evidenced hereby with respect to the Mortgaged Property or
any material part thereof shall be endangered or questioned, or shall be attacked directly
or indirectly, or if any legal proceedings are instituted against Grantor with respect
thereto, give written notice thereof within three (3) business days of such event to the
Beneficiary and, at Grantor’s own cost and expense, diligently endeavor to cure any defect
that may be developed or claimed, and take all necessary and proper steps for the defense of
such legal proceedings, including, but not limited to, the employment of counsel acceptable
to Beneficiary, the prosecution or defense of litigation and the release or discharge of all
adverse claims, and Trustee and Beneficiary, or either of them (whether or not named as
parties to legal proceedings with respect thereto), are hereby authorized and empowered to
take such additional steps as in their judgment and discretion may be necessary or proper
for the defense of any such legal proceedings, including, but not limited to, the
prosecution or defense of litigation, and the compromise or discharge of any adverse claims
made with respect to the Mortgaged Property, and all expense so incurred of every kind and
character shall be a demand obligation owing by Grantor to Beneficiary.




(d) Notice of Claims. Provide Beneficiary within three (3) business
days of such event written notice of any (i) claim, action, notice, suspension, or
proceeding which could, in the event of an unfavorable outcome, have a material adverse
effect on the business and financial affairs of Grantor or on the ability to fully perform
and abide by the terms, covenants, and conditions hereof, (ii) change in any material fact
or circumstance stated, covenanted, represented, or warranted herein or in any of the
documents contemplated hereby, or (iii) default in or acceleration of any of Grantor’s
obligations of payment or performance of which would have a material adverse effect on
Grantor’s business or financial affairs.




(e) Payment of Taxes. Pay, or cause to be paid, before delinquent, all lawful
taxes in respect to the Mortgaged Property, or any part thereof, and from time to time, upon
request of Beneficiary, to furnish to Beneficiary evidence satisfactory to Beneficiary of
the timely payment of such taxes.




(f) Compliance with Subject Leases, Interests, Contracts, and Easements.
Timely perform all obligations under, and not violate any of, the Subject Leases, Subject
Interests, Subject Contracts, or Subject Easements.




(g) Maintenance of Mortgaged Property. At all times maintain, preserve, and
keep the Mortgaged Property in good repair and condition, and from time to time, to make all
necessary and proper repairs, replacements, and renewals, and not to commit or permit any
waste on or of the Mortgaged Property, and to do anything to the Mortgaged Property that may
impair its value.




(h) Payment for Labor and Materials. Promptly pay all bills for labor and
materials incurred in connection with the Mortgaged Property and never permit to be fixed
against the Mortgaged Property, or any part thereof, any lien, even though inferior to the
lien hereof, for any such bill which may be legally due and payable, except a Permitted
Lien.




(i) Performance of Obligation. Pay the Notes in accordance with the terms of
the Loan Agreement.




(j) Mortgage Taxes. At any time any law shall be enacted imposing or
authorizing the imposition of any tax upon this Deed of Trust, or upon any lien created
hereby, immediately pay all such taxes; provided that, in the alternative, Grantor may, in
the event of the enactment of such a law, and must, if it is unlawful for Grantor to pay
such taxes, prepay that portion of the Obligation which Beneficiary in good faith determines
is secured by property covered by such law within 60 days after demand therefor by
Beneficiary.




(k) Performance of Covenants. Punctually and properly perform all of Grantor’s
covenants, duties, and liabilities under the Loan Agreement, this Deed of Trust and any
other security instrument.




(l) Inspection of Mortgaged Property. Allow Beneficiary to inspect the
Mortgaged Property and all records relating thereto, and to make and take away copies of
such records.




(m) Operation of Mortgaged Property. Operate the Mortgaged Property, or cause
it to be operated, in a careful and efficient manner in accordance with the practices of the
industry and in compliance with all Subject Leases, Subject Contracts, Subject Easements,
and laws.




(n) Development Work. Do, or cause to be done, such development and other work
as may be reasonably necessary to protect from diminution and production capacity of the
Mortgaged Property and each producing well thereon.




(o) Maintenance of Subject Leases, Contracts, and Easements. Maintain all
Subject Leases, Subject Contracts, and Subject Easements in full force and effect and not
permit to occur the surrender, abandonment, release, or termination of any Subject Lease,
Subject Contracts, or Subject Easements, so long as the Subject Interests covered thereby or
relating thereto are capable of producing Hydrocarbons in paying quantities.




(p) Insurance. Carry insurance with respect to the Mortgaged Property with
such insurers, in such amounts, and covering such risks as shall be customary in the
industry, including, but not limited to, worker=s compensation insurance and insurance
against loss or damage by fire, lightening, hail, windstorm, explosion, hazards, casualties
and other contingencies; cause all insurance so carried to be payable to Beneficiary as its
interest may appear; deliver the policies of insurance to Beneficiary and pay or cause to be
paid all premiums for such insurance at least 15 days before such premiums become due,
furnish to Beneficiary satisfactory proof of the timely making of such payments, and deliver
all renewal policies to Beneficiary at least 15 days before the expiration date of each
expiring policy.




(q) Compliance with Laws. Comply with all laws, ordinances, rules and
regulations applicable to the Mortgaged Property and its ownership, use and operation,
including, but not limited to the applicable rules of the Texas Railroad Commission.




(r) Compliance with Environmental Laws. Grantor will promptly notify
Beneficiary in writing of any request from any Tribunal for information on releases of
Hazardous Materials from, affecting or relating to the Mortgaged Property; notify
Beneficiary of any actual, proposed or threatened testing or other investigation by any
Tribunal concerning the environmental condition of the Mortgaged Property; and provide to
Beneficiary such information as Beneficiary shall request concerning the generation,
storage, disposal, transportation or other management, if any, of any Hazardous Materials.
Grantor will at all times comply fully and in a timely manner with, and will cause all
employees, agents, contractors, subcontractors and future lessees (pursuant to appropriate
lease provisions) of Grantor, while such Persons are acting within the scope of their
relationship with Grantor, to so comply with, all Laws applicable to the use, generation,
handling, storage, treatment, transport and disposal of any Hazardous Materials now or
hereafter located or present on or under the Mortgaged Property. In the event Grantor
should discover any Hazardous Materials on any of its Mortgaged property which could result
in a breach of the foregoing covenant, Grantor shall notify Beneficiary within three (3)
days after such discovery. Grantor shall dispose of all material amounts of Hazardous
Materials generated by the Grantor only at facilities and/or with carriers that maintain
valid governmental permits under the RCRA, 42 U.S.C. ' 6901. Grantor agrees to
indemnify and hold Beneficiary harmless from and against any and all claims, losses,
damages, liabilities, fines, penalties, charges, administrative and judicial proceedings and
orders, judgments, remedial actions, requirements and enforcement actions of any kind, and
all costs and expenses incurred in connection therewith (including, without limitation,
attorneys’ fees and expenses), arising directly or indirectly, in whole or in part, out of
(i) the presence of any Hazardous Materials on, under or from the Mortgaged Property,
whether prior to or during the term of this Deed of Trust, or (ii) any activity carried on
or undertaken on or off the Mortgaged Property, whether prior to or during the term of this
Deed of Trust, and whether by Grantor or any predecessor in title or any employees, agents,
contractors or subcontractors of Grantor or any predecessor in title, or any third Persons
at any time occupying or present on the Mortgaged Property, in connection with the handling,
treatment, removal, storage, decontamination, cleanup, transport or disposal of any
Hazardous Materials at any time located or present on or under the Mortgaged Property. The
indemnity provided in this Subsection 2.2(r) shall further apply to any residual
contamination on or under the Mortgaged Property, or affecting any natural resources, and to
any contamination of any property or natural resources arising in connection with the
generation, use, handling, storage, transport or disposal of any Hazardous Materials,
irrespective of whether any of such activities were or will be undertaken in accordance with
applicable Laws.




(s) Additional Reports. From time to time, upon request of Beneficiary,
promptly furnish to Beneficiary such financial statements and reports relating to the
Mortgaged Property as Beneficiary may request.




(t) Sales of Mortgaged Property. Not, without the prior written consent of
Beneficiary, sell, trade, transfer, convey, assign, exchange, pledge, encumber, or create
any lien (except a Permitted Lien) with respect to or otherwise dispose of the Mortgaged
Property or any part thereof, or any interest therein, except items of Personal Property or
any part thereof, which have become obsolete or worn beyond practical use and which have
been replaced by adequate substitutes having a value equal to or greater than the replaced
items when new.




(u) Title Opinions. Furnish to Beneficiary copies of any title opinions and
any abstracts of title requested by Beneficiary from time to time that Grantor has or may
hereafter obtain affecting any part of the Mortgaged Property.




(v) Principal Office. Maintain the principal office and place of business of
Grantor with all of Grantor’s records and files relating to the Mortgaged Property at 3326
West WadleyAvenue, Suite 3-267, Midland, Texas 79701 in Midland County, Texas, except for
those customarily maintained at the Mortgaged Property.




(w) Advance Payment Contract. Not enter into or agree to any Advance Payment
Contract with any person affecting any of the Mortgaged Property. It is expressly
stipulated that as a condition of granting approval of any Advance Payment Contract
Beneficiary may, in its discretion, require that any Advance Payment be paid to Beneficiary
in whole or in part for application toward payment of the Obligation or may require that any
portion of any Advance Payment not thus applied on the Obligation be placed in escrow with
Beneficiary to insure use thereof as Beneficiary may direct or determine, or Beneficiary, in
its sole discretion, may impose other conditions upon such consent or may refuse to consent
to the making of such Advance Payment Contract. Whether or not Beneficiary’s consent to an
Advance Payment Contract heretofore and hereafter made by Grantor has been obtained, and
regardless of whether the existence or making of such Advance Payment Contract constitutes a
breach of Grantor’s representations or covenants herein contained, it is expressly
stipulated that unless otherwise expressly agreed in writing by Beneficiary, all Advance
Payments hereafter becoming due to Grantor under any Advance Payment Contract shall be
deemed proceeds of sale of Hydrocarbons from the Mortgaged Property for purposes hereof,
which are assigned to and are to be paid over to Beneficiary, and Beneficiary’s receipt or
acceptance of any such Advance Payment or application thereof toward payment of the
Obligation shall not constitute a waiver of any default resulting from the existence of
making of the Advance Payment Contract pursuant to which such Advance Payment is made or a
ratification or approval by Beneficiary of such Advance Payment Contract.




(x) Transactions with Affiliates. Not, directly or indirectly, enter into any
sale, lease or exchange of any property or any contract for the rendering of goods or
services with respect to any of the Mortgaged Property (including, without limitation,
operating agreements under which Grantor or an affiliate of Grantor serves as operator) with
any affiliate of Grantor other than upon fair and reasonable terms no less favorable than
could be obtained in an arm’s length transaction with a Person not an affiliate of Grantor.




(y) Properties Not Operated by Grantor. Anything in this Section 2.2 to the
contrary notwithstanding, Grantor, with respect to those Subject Interests which are
operated by operators other than Grantor, shall not be obligated itself to perform
undertakings performable only by such operators and which are beyond the control of Grantor.
In each such case, however, Grantor will promptly take all actions available to it, under
applicable operating arrangements or otherwise, to bring about the performance of any such
undertakings required to be performed by such operators.




(z) Mortgage Registration Taxes and Recording Fees. Promptly pay any mortgage
registration or similar Taxes, recording fees and filing fees which may be required to be
paid with respect to or in connection with the filing and recordation of this Deed of Trust.



ARTICLE 3



DEFAULTS AND REMEDIES




Section 3.1 Defaults. The term Adefault,@ as used herein shall mean: (a)
an Event of Default under the Agreement or the Notes, (b) failure of Grantor to observe or perform
any covenant or agreement contained in this Deed of Trust; (c) the failure of Grantor to pay when
due any installment of principal or interest on the Obligation, or any part thereof, as and when
the same shall be due and payable (whether at stated maturity, by acceleration, or otherwise); (d)
failure by Grantor to comply with any agreement with Beneficiary; (e) the occurrence of any event
or condition which results in, or with lapse of time or service of notice or both could result in a
default in the payment of any indebtedness or the performance of any obligation to Beneficiary made
herein or otherwise; (f) the discovery by Beneficiary of the incorrectness of any material
representation or warranty made to Beneficiary; (g) the liquidation, termination, death, or
dissolution of Grantor; (h) the occurrence of an event causing material loss or depreciation in
the Collateral’s value (whether by casualty, actions by governmental authorities, loss of permits,
authorities, franchises, certificates or rights or otherwise) and Grantor’s failure to within ten
(10) days of demand by Beneficiary, either provide enough additional Collateral or a reduction in
the total indebtedness by an amount sufficient to satisfy Beneficiary; (i) the occurrence of any
claim, action, notice, suspension, or proceeding which affects all or part of the Collateral or the
security interest or liens granted to Beneficiary; (j) the occurrence of the default in or
acceleration of any of Grantor’s obligations of payment or performance under any instrument or
obligation, the default in or accelerated payment or performance of which would, in Beneficiary’s
good faith option, have a material adverse effect on Grantor’s business or financial affairs or on
the ability to fully perform and abide by the terms, covenants, and conditions hereof, or would be
a default under any agreement between Grantor and Beneficiary; (k) the application for, or consent
to the appointment of a receiver, trustee, custodian, or liquidator for Grantor or any of
Grantor’s properties; (l) the seeking by Grantor or the protection of any bankruptcy, insolvency,
reorganization, composition, moratorium, or similar proceeding; (m) the admission in writing of
Grantor’s inability to pay its debts as they regularly mature; (n) the filing of an answer
admitting the material allegations of a petition filed against Grantor in any bankruptcy,
insolvency, reorganization, composition, moratorium, or similar proceeding; and to remain
undismissed for more than thirty (30) days; (o) the permitting of any involuntary petition in
bankruptcy to be filed against Grantor and to remain undismissed for more than thirty (30) days;
(p) Grantor being made a party to an Environmental Proceeding, which Beneficiary, in good faith,
believes that may result in an adverse ruling against Grantor, which will in turn affect Grantor’s
ability to repay the Obligation or any Part thereof; (q) the permitting of any attachment,
sequestration, garnishment, execution, or similar proceeding against Grantor or any of Grantor’s
properties to remain undismissed for more than thirty (30) days; or (r) the making of any
assignment for the benefit of creditors.



Section 3.2 Remedies. If a Default shall occur and be continuing, Beneficiary may, at
its option, do any one or more of the following to the extent permitted by applicable law:




(a) Payment or Performance by Beneficiary. If Grantor has failed to keep or
perform any covenant whatsoever contained in this Deed of Trust or any other security
instrument, Beneficiary may, but shall not be obligated to any person to do so, perform or
attempt to perform such covenant, and any payment made or expense incurred in the
performance or attempted performance of any such covenant shall be a part of the Obligation,
and Grantor promises, upon demand, to pay to Beneficiary, at the place where the Notes are
payable, or at such other place as Beneficiary may direct by written notice, all sums so
advanced or paid by Beneficiary, with interest at the Highest Lawful Rate, from the date
when paid or incurred by Beneficiary until paid by Grantor. No such payment by Beneficiary
shall constitute a waiver of any default. In addition to the liens hereof, Beneficiary
shall be subrogated to all rights and liens securing the payment of any debt, claim, tax, or
assessment for the payment of which Beneficiary may make an advance, or which Beneficiary
may pay.




(b) Acceleration. Beneficiary may, at its option, declare the aggregate unpaid
principal amount of and interest on the Notes and all other parts of the Obligation to be,
and the same shall thereupon become immediately due and payable without presentment, demand,
protest, notice of acceleration, notice of intent to accelerate, notice of protest or notice
of dishonor, or any other notice of any kind, all of which are expressly waived by Grantor.




(c) Foreclosure. Beneficiary may request Trustee to proceed with
foreclosure, and in such event Trustee is hereby authorized and empowered, and it shall be
his duty, upon such request of Beneficiary, and to the extent permitted by applicable Law,
to sell all or any part of the Mortgaged Property at one or more sales, as an entirety or in
parcels, at such place or places and otherwise in such manner and upon such notice as may be
required by applicable Law, or in the absence of any such requirement, as Trustee and/or
Beneficiary may deem appropriate, and to make conveyance to the purchaser or purchasers
thereof. Any sale of any part of the Mortgaged Property shall be made to the highest bidder
or bidders for cash, at the courthouse door of, or at such other place as may be required or
permitted by applicable Law in, the county (or judicial district) wherein the Land included
within the Mortgaged Property to be sold is situated; provided that if the Land is situated
in more than one county (or judicial district), such sale of the Mortgaged Property, or any
part thereof, may be made in any county (or judicial district) wherein any part of the Land
included within the Mortgaged Property to be sold is situated. Any such sale shall be made
at public outcry, on the day of any month, during the hours of such day and after written
notices thereof have been publicly posted in such places and for such time periods and after
all Persons entitled to notice thereof have been sent such notice, all as required by
applicable Law in effect at the time of such sale; and nothing herein shall be deemed to
require Beneficiary or Trustee to do, and Beneficiary and Trustee shall not be required to
do, any act other than as required by applicable Law in effect at the time of such sale.
Any such sale may be as a whole or in such parcels as Trustee may select. After such sale,
Trustee shall make to the purchaser or purchasers thereunder good and sufficient deeds and
assignments, in the name of Grantor, conveying the Mortgaged Property, or part thereof, so
sold to the purchaser or purchasers with general warranty of title (subject to Permitted
Liens) by Grantor. Sale of a part of the Mortgaged Property shall not exhaust the power of
sale, but sales may be made from time to time until the Obligation is paid and performed in
full. It shall not be necessary to have present or to exhibit at any such sale any of the
Collateral. In addition to the Rights and powers of sale granted under the preceding
provisions of this Subsection 3.2(c), if default is made in the payment of any installment
of the Obligation, Beneficiary, at its option, at once or at any time thereafter while any
matured installment remains unpaid, without declaring the entire Obligation to be due and
payable may orally or in writing direct Trustee to enforce this trust and to sell the
Mortgaged Property subject to such unmatured Obligation and the Liens securing its payment,
in the same manner, on the same terms, at the same place and time, and after having given
notice in the same manner, all as provided in the preceding provisions of this Subsection
3.2(c). After such sale, Trustee shall make due conveyance to the purchaser or purchasers.
Sales made without maturing the Obligation may be made hereunder whenever there is a default
in the payment of any installment of the Obligation without exhausting the power of sale
granted hereby, and without affecting in any way the power of sale granted under this
Subsection 3.2(c) on the unmatured balance of the Obligation (except as to any proceeds of
any sale which Beneficiary may apply as a prepayment on the Obligation) or the Liens
securing payment of the Obligation. It is intended by each of the foregoing provisions of
this Subsection 3.2(c) that Trustee may, after any request or direction by Beneficiary,
sell, not only the Subject Interests included within, but also, all other items constituting
a part of, the Mortgaged Property, or any part thereof, along with the Land, or any part
thereof, included within the Mortgaged Property all as a unit and as a part of a single
sale, or may sell any part of the Mortgaged Property separately from the remainder of the
Mortgaged Property. It is agreed that, in any deed or assignment given by Trustee, any and
all statements of fact or other recitals therein made as to the identity of Beneficiary, or
as to the occurrence or existence of any Default, or as to the acceleration of the maturity
of the Obligation, or as to the request to sell, notice of sale, time, place, terms and
manner of sale, and the receipt, distribution and application of the money realized
therefrom, or as to the due and proper appointment of a substitute trustee, and, without
being limited by the foregoing, as to any other act or thing having been duly done by
Beneficiary or by Trustee, shall be taken by all courts of law and equity as prima
facie evidence that the said statements or recitals state facts and are without
further question to be so accepted, and Grantor does hereby ratify and confirm any and all
acts that Trustee may lawfully do in the premises by virtue hereof. In the event of the
resignation (such resignation being hereby authorized for any reason) or death of Trustee,
or his removal from his county of residence stated on the first page hereof, or his failure,
refusal or inability, for any reason, to make any such sale or to perform any of the trusts
herein declared, or, at the option of Beneficiary, without cause, Beneficiary may appoint,
in writing, a substitute trustee, who shall thereupon succeed to all the estates, titles,
rights, powers and trusts herein granted to and vested in Trustee. Such appointment may be
made on behalf of Beneficiary by any person who is then the president, or any vice
president, or the cashier or secretary, or branch manager, or a senior representative, or
any other authorized officer or agent of Beneficiary. In the event of the resignation (such
resignation being hereby authorized for any reason) or death of any such substitute trustee,
or his failure, refusal or inability to make such sale or perform such trusts, or, at the
option of Beneficiary, without cause, successive substitute trustees may thereafter, from
time to time, be appointed by Beneficiary in the same manner. Trustee may appoint, in
writing, any one or more Persons as Trustee’s agent and attorney-in-fact to act as Trustee
under him and in his name, place and stead, to perform any one or more acts necessary or
incident to any sale under the power of sale granted under the preceding provisions of this
Subsection 3.2(c), including, without limitation, the posting and filing of any notices, the
conduct of such sale and the execution and delivery of any instruments conveying the
Mortgaged Property so sold, but in the name and on behalf of Trustee. All acts done or
performed by any such agent and attorney-in-fact shall be valid, lawful and binding as if
done or performed by Trustee. Wherever herein the word ATrustee@ is used, the
same shall mean the person who is the duly appointed trustee or substitute trustee hereunder
at the time in question.




(d) Suit. Beneficiary may, or Trustee may upon written request of Beneficiary,
proceed by suit or suits, at law or in equity, to enforce the payment and performance of the
Obligation in accordance with the terms hereof, of the Notes or the other security
instruments, or other documents and/or writings securing and/or evidencing the Obligation,
to foreclose the liens of this Deed of Trust as against all or any part of the Mortgaged
Property and to have all or any part of the Mortgaged Property sold under the judgment or
decree of a court of competent jurisdiction.




(e) Appointment of Receiver. Beneficiary, as a matter or right and without
regard to the sufficiency of the security, and without any showing of insolvency, fraud or
mismanagement on the part of Grantor, and without the necessity of filing any judicial or
other proceeding other than the proceeding for appointment of a receiver, shall be entitled
to the appointment of a receiver or receivers of the Mortgaged Property, or any part
thereof, and of the income, rents, issues and profits thereof.




(f) Possession of Mortgaged Property. Beneficiary may enter upon the Land
included within the Mortgaged Property, take possession of the Mortgaged Property, and
remove the Personal Property included within the Mortgaged Property, or any part thereof,
with or without any responsibility or liability on the part of Beneficiary, take possession
of any property located on or in the Mortgaged Property which is not a part of the Mortgaged
Property and hold or store such property at Grantor’s expense.




(g) Assemble Collateral. Beneficiary may require Grantor to assemble the
Collateral included within the Mortgaged Property, or any part thereof, and make it
available to Beneficiary at a place to be designated by Beneficiary which is reasonably
convenient to Grantor and Beneficiary.




(h) Disposition of Collateral. After notification, if any, as hereafter
provided in this Subsection 3.2(h), Beneficiary may sell, lease or otherwise dispose of, at
the office of Beneficiary, or on the Land, or elsewhere, as chosen by Beneficiary, all or
any part of the Collateral included within the Mortgaged Property, in its then condition, or
following any commercially reasonable preparation or processing, and each sale [as used in
this Subsection 3.2(h), the term “sale” means any such sale, lease, or other disposition
made pursuant to this Subsection 3.2(h)] may be a unit or in parcels, by public or in
private proceedings, and by way of one or more contracts, and, at any sale, it shall not be
necessary to exhibit the Collateral, or part thereof, being sold, leased or otherwise
disposed of. The sale of any part of the Collateral shall not exhaust Beneficiary’s power
of sale, but sales may be made from time to time until the Obligation is paid and performed
in full. Reasonable notification of the time and place of any public sale pursuant to this
Subsection 3.2(h), or reasonable notification of the time after which any private sale is to
be made pursuant to this Subsection 3.2(h), shall be sent to Grantor and to any other person
entitled under the applicable Code to notice. It is agreed that notice sent or given not
less than twenty-one (21) calendar days prior to the taking of the action to which the
notice relates, is reasonable notification and notice for such purposes of this Subsection
3.2(h).




(i) Surrender of Insurance Policies. Beneficiary may surrender the insurance
policies maintained pursuant to Subsection 2.2(p) hereof, or any part thereof, and receive
and apply the unearned premiums as a credit on the Obligation, and, in connection therewith,
Grantor hereby appoints Beneficiary as the agent and attorney-in-fact for Grantor to collect
such premiums.



Section 3.3 Purchase of Mortgaged Property by Beneficiary. If Beneficiary is the
purchaser of the Mortgaged Property, or any part thereof (and it is specifically agreed that
Beneficiary may be the purchaser of the Mortgaged Property, or any part thereof, if permitted by
applicable law), at any sale thereof, whether such sale be under the power of sale hereinabove
vested in Trustee, or upon any other foreclosure of the liens hereof, or otherwise, Beneficiary
shall, upon any such purchase, acquire good title to the Mortgaged Property so purchased, free of
the liens of these presents.



Section 3.4 Operation of Properties by Beneficiary. Should any part of the Mortgaged
Property come into the possession of Beneficiary, whether before or after default, Beneficiary may
use or operate (to the extent allowed under applicable operating arrangements) the Mortgaged
Property for the purpose of preserving it or its value, pursuant to the order of a court of
appropriate jurisdiction, or in accordance with any other rights held by Beneficiary in respect to
the Mortgaged Property. Grantor covenants promptly to reimburse and pay to Beneficiary, at the
place where notes are payable, or at such other place as may be designated by Beneficiary in
writing, the amount of all reasonable expenses (including the cost of any insurance, taxes,
attorney’s fees and other charges) incurred by Beneficiary in connection with its custody,
preservation, use or operation of the Mortgaged Property, together with interest thereon from the
date incurred by Beneficiary at the Highest Lawful Rate, and all such expenses, cost, taxes,
interest and other charges shall be a part of the Obligation. It is agreed, however, that the risk
of loss or damage to the Mortgaged Property is on Grantor, and Beneficiary shall have no liability
whatever for decline or diminution in value of the Mortgaged Property, nor for failure to obtain or
maintain insurance, nor for failure to determine whether any insurance ever in force is adequate as
to amount or as to the risks insured.



Section 3.5 Possession of Property After Foreclosure. In case the liens hereof shall
be foreclosed by Trustee’s sale, or by other judicial or non-judicial action, the purchaser at any
such sale shall receive, as an incident to his ownership, immediate possession of the Mortgaged
Property, or any part thereof so conveyed, and, subsequent to foreclosure, Grantor and Grantor’s
successors shall be considered as tenants at sufferance of the purchaser at foreclosure sale, and
anyone occupying the property after demand made for possession thereof shall be guilty of forcible
detainer and shall be subject to eviction and removal, forcible, or otherwise, with or without
process of law, and all damages by reason thereof are hereby expressly waived.



Section 3.6 Application of Proceeds. The proceeds from any sale, lease or other
disposition made pursuant to this Article 3, any proceeds of Hydrocarbons collected by Beneficiary
pursuant to Article 4, and sums received pursuant to Section 6.5 shall be applied by Trustee, or by
Beneficiary, as the case may be, first to the payment of any and all expenses incurred by the
Trustee or the Beneficiary in foreclosing upon the Property and carrying out such sale (including
any attorneys= fees); second to the payment of any fees assessed by the Trustee, and third to
the payment or prepayment of the Obligation, whether or not matured, as may be determined by the
Beneficiary in its sole discretion until the Obligation is paid in full.



Section 3.7 Abandonment of Sale. In the event a foreclosure hereunder should be
commenced by Trustee in accordance with Subsection 3.2(c), Beneficiary may at any time before the
sale direct Trustee to abandon the sale, and may then institute suit for collection of the
Obligation, and/or for the foreclosure of the liens hereof. If Beneficiary should institute a suit
for the collection of the Obligation, and/or for a foreclosure of the liens hereof, it may at any
time before the entry of a final judgment in said suit dismiss the same, and sell and/or require
Trustee to sell (and the Trustee is hereby expressly authorized to sell) the Mortgaged Property, or
any part thereof, in accordance with the provisions of this Deed of Trust.



Section 3.8 Waiver of Appraisement and Redemption. To the full extent Grantor may
lawfully do so, Grantor agrees that Grantor will not at any time insist upon, plead, claim or take
the benefit or advantage of any appraisement, valuation, stay, extension or redemption laws, now or
hereafter in force, in order to prevent or hinder the enforcement of this Deed of Trust or the
absolute sale of the Mortgaged Property or any part thereof, or the possession thereof by any
purchaser at any such sale, but Grantor, insofar as Grantor now or hereafter may lawfully do so,
hereby waives the benefit of all such laws; provided, however, that the appraisement of any of the
Mortgaged Property is hereby expressly waived or not waived at the option of Trustee and/or
Beneficiary, such option to be exercised prior to or at the time judgment is rendered in any
foreclosure of this Deed of Trust. Grantor also expressly waives, to the extent Grantor may
lawfully do so, all rights to have the Mortgaged Property marshaled upon any foreclosure of this
Deed of Trust.



ARTICLE 4

ASSIGNMENT OF PRODUCTION




Section 4.1 Assignment and Additional Security. In addition to the conveyance to
Trustee herein made and to additionally secure the Obligation, Grantor has, effective as of 7:00
o’clock a.m., local time, on September 1, 2009, at the site of each of the Subject Leases,
ASSIGNED, TRANSFERRED AND CONVEYED, and does hereby ASSIGN, TRANSFER AND CONVEY, unto Beneficiary
all of the following:




(a) All Hydrocarbons, and the proceeds therefrom and products obtained or
processed therefrom (such proceeds and products being herein called
AProceeds@), produced and to be produced from the Mortgaged Property, and all
Rights of Grantor to security interests and Liens securing payment of Proceeds, including,
without limitation, those security interests and Liens provided for in '9.343 of the
Code. Grantor hereby authorizes and empowers Beneficiary to demand, collect and receive
such Hydrocarbons and Proceeds, to endorse and cash any checks and drafts payable to Grantor
or Beneficiary for the account of Grantor received from or in connection with such
Hydrocarbons and Proceeds, to execute any release, receipt, division order, transfer order,
and relinquishment or other instrument that may be required or necessary to collect and
receive such Hydrocarbons and Proceeds, and to exercise any Rights as the holder of security
interests and Liens securing payment of Proceeds. Grantor hereby authorizes and directs all
pipeline companies, gathering companies, and others purchasing such Hydrocarbons or having
in their possession any such Hydrocarbons or Proceeds, to pay and deliver to Beneficiary all
such Hydrocarbons and Proceeds. Grantor agrees that all division orders, transfer orders,
receipts and other instruments which Beneficiary may from time to time execute and deliver
for the purpose of collecting or receipting for Hydrocarbons or Proceeds may be relied upon
in all respects and that the same shall be binding upon Grantor and Grantor’s Successors.
Grantor agrees to execute and deliver all necessary, convenient and appropriate instruments,
including transfer and division orders, which may be required by Beneficiary in connection
with the receipt by Beneficiary of such Hydrocarbons or Proceeds and to indemnify and keep
and hold Beneficiary free and harmless from all parties whomsoever having or claiming an
adverse interest in such Hydrocarbons and Proceeds and in this respect agrees to pay all
expenses, costs, charges and attorneys’ fees that may be incurred by Beneficiary as to any
of such matters.




(b) All proceeds hereafter payable to or to become payable to Grantor or to which
Grantor is entitled under all gas sales or exchange contracts, all oil, distillate, or
condensate sales or exchange contracts, all gas transportation contracts, and all gas
processing contracts now or hereafter to become a part of the Mortgaged Property.




(c) All amounts, sums, revenues, and income which become payable to Grantor from any of
the Mortgaged Property (including any after-acquired properties) or under any contract,
present or future, relating to, any gas pipeline system and processing plant or unit now or
hereafter constituting a part of the Mortgaged Property.




(d) All lease bonus, delay rentals, royalties and shut-in gas royalties which become
payable to Grantor from any of the Mortgaged Property.



Section 4.2 Transfer Orders. Grantor agrees to execute such transfer orders, payment
orders, division orders and other instruments as may be needed by Beneficiary or requested by it
incident to its having all assigned payments made direct to it at its office in Midland, Texas.
Grantor hereby authorizes and directs all such pipeline companies, purchasers, transporters and
other parties owing moneys to Grantor under contracts herein assigned, to pay such amounts direct
to Beneficiary as follows:




AMERICAN STATE BANK


620 North Grant Avenue



Odessa, Texas 79761



and such authorization shall continue until this Deed of Trust is released. Beneficiary is
authorized to collect, receive, and give receipt for all such amounts, and no party making payment
shall have any responsibility to see to the application of any funds paid to the Beneficiary but
shall be fully protected in making such payment to Beneficiary under the assignments herein
contained. Should Beneficiary bring suit against any third party for collection of any amounts or
sums included within this assignment (and Beneficiary shall have the right to bring any such suit),
it may sue either in its own name or in the name of Grantor.



Section 4.3 Payment of Proceeds. In the event that, for its convenience, Beneficiary
should elect with respect to particular properties or contracts not to exercise immediately its
right to receive Hydrocarbons or proceeds, then the purchasers or other persons obligated to make
such payment shall continue to make payment to Grantor until such time as written demand has been
made upon them by Beneficiary or Trustee that payment be made directly to Beneficiary. Such
failure to notify shall not in any way waive the right of Beneficiary to receive any payments not
theretofore paid out to Grantor before the giving of written notice. In this regard, in the event
payments are made directly to Beneficiary, and then, at the request of Beneficiary payments are,
for a period of time, paid to Grantor, Beneficiary shall nevertheless have the right, effective
upon written notice, to require that future payments be again made to Beneficiary.



Section 4.4 Proceeds Held in Trust by Grantor. If under any existing gas sales or
exchange agreements or products sales or exchange contracts, other than division orders or transfer
orders, or under any gas transportation contract, any proceeds are required to be paid by the
purchaser or transporter direct to Grantor so that under such existing agreements payment cannot be
made to Beneficiary in the absence of foreclosure, then Grantor’s interest in all proceeds under
such sales agreement and in all other proceeds which for any reason may be paid to Grantor shall,
when received by Grantor, constitute trust funds in his hands and shall be immediately paid over to
Beneficiary, if Beneficiary has requested that such payments be delivered to it under this
assignment.



Section 4.5 Limitation of Liability of Beneficiary and Trustee. Beneficiary is
hereby absolved from all liability for failure to enforce collection of the proceeds and amounts
assigned under Section 4.1 above and from all other responsibility in connection therewith, except
the responsibility to account to the person legally entitled thereto (by application upon the
Obligation or otherwise) for funds actually received. Grantor agrees to indemnify and hold
harmless Trustee and Beneficiary against any and all liabilities, actions, claims, judgments,
costs, charges, and attorney’s fees by reason of the assertion that they or either of them have
received, either before or after payment and performance in full of the Obligation, funds from the
production of hydrocarbons claimed by third persons, and the Trustee and Beneficiary shall each
have the right to compromise and adjust any such claims, actions, and judgments, and in addition to
the rights to be indemnified as herein provided, all amounts paid by Trustee or by Beneficiary in
compromise, satisfaction, or discharge of any such claim, action or judgment, and all court costs,
attorney’s fees, and other expenses of every character incurred by Trustee or by Beneficiary,
pursuant to the provisions of this section, shall be demand obligations owing by Grantor and shall
bear interest at the Highest Lawful Rate from date of expenditure until paid and shall be secured
by the liens created and granted by this Deed of Trust.



Section 4.6 Duty to Pay Obligation. Nothing contained herein shall limit Grantor’s
absolute duty to make payment when due of the Obligation when the Proceeds received by Beneficiary
pursuant to Section 4.1 hereof are insufficient to pay the same, and receipt of Proceeds under said
Section 4.1 shall be in addition to all other security now or hereafter existing to secure payment
of the Obligation.



ARTICLE 5

FINANCING STATEMENT




Section 5.1 Effective as a Financing Statement. This Deed of Trust covers goods which
are or are to become fixtures on the real property described herein. This Deed of Trust shall be
effective as a financing statement filed as a fixture filing with respect to all fixtures included
within the Property and is to be filed for record in the real property records of each county in
which any part of the Mortgaged Properties (including said fixtures) is situated. This Deed of
Trust shall also be effective as a financing statement covering as-extracted collateral, minerals
or the like (including oil and gas) and accounts arising out of the sale at the wellhead or
minehead of the wells or mines located on the Mortgaged Properties of oil, gas, or other minerals
in which Grantor has an interest before extraction, and is to be filed for record in the real
property records of each county in which any part of the Mortgaged Properties is situated. The
Grantor is the debtor. This Deed of Trust shall also be effective as a financing statement
covering any other Property and may be filed in any other appropriate filing or recording office.
The mailing address of Grantor is the address of the Beneficiary from which information concerning
the security interests hereunder may be obtained is the address of the Beneficiary set forth in
Section 6.10 of this Deed of Trust. Grantor is a general partnership, organized under the laws of
the State of Texas.



Section 5.2 Reproduction of Deed of Trust as Financing Statement. A photographic or
other reproduction of this Deed of Trust or of any financing statement relating to this Deed of
Trust shall be sufficient as a financing statement for any of the purposes referred to in Section
5.1.



Section 5.3 Notice to Account Debtors. In addition to the rights granted in Article 4
hereof, the Beneficiary may at any time notify the account debtors or obligors of any accounts,
chattel paper, negotiable instruments or other evidences of indebtedness included in the Collateral
to pay the Beneficiary directly.



Section 5.4 Filing of Financing Statement. The Beneficiary shall have the right,
without the consent or joinder of the Grantor, to execute and file with any governmental authority
such financing statements, financing statement amendments and continuation statements as may, in
the sole discretion of the Beneficiary, be necessary or advisable to maintain, perfect or otherwise
evidence the Lien of the Beneficiary in and to any of the Mortgaged Property. The Grantor, as
Debtor, hereby expressly authorizes the Beneficiary, as Secured Party, to file any such financing
statement without the signature of the Grantor to the extent permitted by applicable law.



ARTICLE 6

MISCELLANEOUS




Section 6.1 Release. If the Obligation is paid and performed in full in accordance
with the terms of this Deed of Trust and the Notes and other security instruments and documents and
writings evidencing or securing all or any part of the Obligation, and if Grantor shall well and
truly perform all of Grantor’s covenants contained herein, then this conveyance shall be released
at Grantor’s request and expense; otherwise, it shall remain in full force and effect, provided,
however, that Grantor’s warranties and indemnities contained in this Deed of Trust shall survive
the payment and performance of the Obligation and the release of this Deed of Trust.



Section 6.2 Rights Cumulative. All rights and liens herein expressly conferred are
cumulative of all other rights and liens herein, or by law or in equity provided, or provided in
any other security instruments, and shall not be deemed to deprive Beneficiary or Trustee of any
such other legal or equitable rights and liens by judicial proceedings, or otherwise, appropriate
to enforce the conditions, covenants and terms of this Deed of Trust and other security
instruments, and the employment or enforcement of any rights hereunder, or otherwise, shall not
prevent the concurrent or subsequent employment or enforcement of any other rights.



Section 6.3 Waivers. Any and all covenants in this Deed of Trust may from time to
time, by instrument in writing signed by Beneficiary and delivered to Grantor, be waived to such
extent and in such manner as Beneficiary may desire, but no such waiver shall ever affect or impair
Beneficiary’s rights and liens hereunder, except to the extent specifically stated in such written
instruments.



Section 6.4 Sale of Mortgaged Property. In the event Grantor or any of Grantor’s
successors conveys any interest in the Mortgaged Property, or in any part thereof, to any other
party, Beneficiary may, without notice to Grantor or Grantor’s successors, deal with any owner of
any part of the Mortgaged Property with reference to this Deed of Trust and the Obligation, either
by way of forbearance on the part of Beneficiary, or extension of time of payment of the
Obligation, or release of all or any part of the Mortgaged Property, or any other property securing
payment and performance of the Obligation, without in any way modifying or affecting Beneficiary’s
rights and liens hereunder or the liability of Grantor or any other party liable for payment and
performance of the Obligation, in whole or in part; provided, that no action taken or omitted to be
taken by Beneficiary under this Section 6.4 shall be deemed a waiver of any default occurring by
reason of any such conveyance.



Section 6.5 Condemnation Sale. Beneficiary shall be entitled to receive any
and all sums which may be awarded or become payable to Grantor for the condemnation of the
Mortgaged Property, or any part thereof, for public or quasi-public use, or by virtue of private
sale in lieu thereof, and any sums which may be awarded or become payable to Grantor for damages
caused by public works or construction on or near the Mortgaged Property. All such sums are hereby
assigned to Beneficiary, and Grantor shall, upon request of Beneficiary, make, execute, acknowledge
and deliver any and all additional assignments and documents as may be necessary from time to time
to enable Beneficiary to collect and receipt for any such sums. Beneficiary shall not be, under
any circumstances, liable or responsible for failure to collect, or exercise diligence in the
collection of, any of such sums.



Section 6.6 Renewals of Indebtedness. It is understood and agreed that the proceeds
of the Notes or of any further loans or advances, to the extent the same are utilized to renew or
extend any indebtedness or take up any outstanding liens against the Mortgaged Property, or any
portion thereof, have been advanced by Beneficiary at Grantor’s request and upon Grantor’s
representation that such amounts are due and payable. Beneficiary shall be subrogated to any and
all rights and liens owned or claimed by any owner or holder of such outstanding rights and liens,
however remote, regardless of whether such rights and liens are acquired by assignment or are
released by the holder thereof upon payment.



Section 6.7 Waiver of Marshaling. Grantor hereby waives all rights of marshaling in
the event of any foreclosure of the liens hereby created.



Section 6.8 Number and Gender of Words, Etc. Whenever herein the singular number is
used, the same shall include the plural where appropriate, and vice versa, and words such as
Aherein,@ Ahereof,@ Ahereinafter,@ and other words of similar
import shall refer to this Deed of Trust and not to any particular section or portion hereof, and
words of any gender shall include each other gender where appropriate.



Section 6.9 Headings. The captions, headings, and arrangements used in this Deed of
Trust are for convenience only and do not in any way affect, limit, amplify, or modify the terms
and provisions hereof.



Section 6.10 Notices. Whenever this Deed of Trust requires or permits any consent,
approval, notice, request or demand from one party to another, the consent, approval, notice,
request, or demand must be in writing to be effective and shall be deemed to have been given on the
day personally delivered or, if mailed, on the day it is enclosed in an envelope, properly stamped,
sealed and deposited in a post office or official depository maintained by the United States Postal
Service, certified mail, return receipt requested, addressed to the party to be notified at the
address stated below (or at such other address as may have been designated by written notice):



	 	 	 
	If to Grantor:	 	ESCONDE RESOURCES LP
	 	 	3326 West Wadley Avenue, Suite 3-267
	 	 	Midland, Texas 79701
	If to Beneficiary:

	 	AMERICAN STATE BANK







620 North Grant Avenue



Odessa, Texas 79761



Section 6.11 Governing Law. THIS DEED OF TRUST IS INTENDED TO BE PERFORMED IN THE
STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND OF THE UNITED STATES OF AMERICA SHALL
GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT, AND INTERPRETATION OF THIS DEED OF TRUST. HOWEVER,
ANYTHING IN THIS DEED OF TRUST TO THE CONTRARY NOTWITHSTANDING, THE SUBSTANTIVE LAWS OF THE STATES
OF TEXAS RELATING TO THE VALIDITY, CONSTRUCTION AND INTERPRETATION OF THE OBLIGATION AND TO USURY
AND PERMISSIBLE INTEREST AND SIMILAR CHARGES AND AMOUNTS SHALL GOVERN ALL ASPECTS OF THIS DEED OF
TRUST.



Section 6.12 Invalid Provisions. If any provision of this Deed of Trust is invalid or
unenforceable in any jurisdiction applicable to this Deed of Trust, then, to the extent permitted
by law, (a) the other provisions hereof shall remain in full force and effect in such jurisdiction
and shall be liberally construed in favor of Beneficiary in order to carry out the intentions of
the parties hereto as nearly may be possible; and (b) the invalidity or unenforceability of such
provision in any jurisdiction shall not affect the validity or enforceability thereof in any other
jurisdiction. If the rights and liens created by this Deed of Trust shall be invalid or
unenforceable as to any part of the Obligation, the unsecured portion of the Obligation shall be
completely paid prior to the payment of the remaining and secured portion of the Obligation, and
all payments made on the Obligation shall be considered to have been paid on and applied first to
the complete payment of the unsecured portion of the Obligation.



Section 6.13 Definitions. In addition to the terms defined elsewhere herein, as used
herein, the following terms shall have the meanings indicated:



AAdvance Payment Contract@ means any contract with another person
or party (the AOther Party@) whereby Grantor either (i) receives or becomes entitled to
receive (either directly or to a third party for Grantor’s account or benefit) any payment (an
AAdvance Payment@) which the Other Party may require to be applied toward payment of
the purchase price of Hydrocarbons produced or to be produced from any of the Mortgaged Property
and which Advance Payment is paid or to be paid in advance of actual delivery of such production to
or for the account of the Other Party regardless of such production, or (ii) grants an option or
right of refusal to such Other Party to purchase and take delivery of such production, and, in
either of the foregoing instances, regardless of whether the Advance Payment may be applied as
payment for a portion only of the purchase price thereof or of a percentage or share of such
production. Inclusion of the standard Atake or pay@ provision in any gas sales or
purchase contract shall not, in and of itself, constitute such contract an AAdvance Payment
Contract@ for the purposes hereof.



ACode@ means the applicable Uniform Commercial Code, if any, of each state
where any of the Mortgaged Property is situated.



ACollateral@ has the meaning given such term on page 2 hereof.




ADeed of Trust@ has the meaning given such term in Article 1 hereof.




ADefault@ has the meaning given such term in Section 3.1 hereof.



ADisposal or Disposed@ shall have the meanings specified in RCRA.



AEnvironmental Laws@ means the following: the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. '' 6901 et seq., as amended by the Used
Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984 (“RCRA”), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C. '' 9601 et seq. (“CERCLA”), the Toxic Substance Control Act, 15 U.S.C.
'' 2601 et seq., the Clean Air Act, 42 U.S.C. '' 7401
et seq., the Clean Water Act, 33 U.S.C. '' 1251 et
seq., and any other Law regulating or imposing liability for or standards of conduct
concerning the release or disposal of any Hazardous Material or relating to pollution or the
protection of the environment, including, without limitation, Laws relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or other Hazardous Materials into the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata), health, industrial hygiene,
or otherwise relating to the manufacture, processing, distribution, use, treatment, storage,
removal, cleanup, disposal, transport or handling of pollutants, contaminants, chemicals or
industrial, toxic or other Hazardous Materials.



AGrantor@ means Esconde Resources LP, a Texas limited partnership.



AGrantor’s Successors@ means each and all of the immediate and remote
successors, assigns, heirs, executor, administrators, and legal representatives of Grantor.



AHazardous Material@ shall mean any flammable explosive, radioactive
material, hazardous waste, toxic substance or related material and any other substance or material
defined or designated as a hazardous or toxic substance, material or waste by any Law presently in
effect or as amended or promulgated in the future and shall include, without limitation:



(i) those substances included within the definitions of Ahazardous
substances,@ Ahazardous materials,@ Atoxic
substances,@ or Asolid waste@ in CERCLA, RCRA, and the Hazardous
Materials Transportation Act, 49 U.S.C. '' 1801 et seq.,
and in the regulations promulgated pursuant thereto;



(ii) those substances defined as Ahazardous wastes@ or as
Ahazardous substances@ in applicable state Law and in the regulations
promulgated pursuant thereto;



(iii) those substances listed by the Environmental Protection Agency as
hazardous substances;



(iv) such other substances, materials and wastes which are or become regulated
under applicable Law or which are classified as hazardous or toxic under Laws; and



(v) any material, waste or substance which is (A) petroleum, (B) asbestos, (C)
polychlorinated biphenyls or (D) designated as a Ahazardous substance@
pursuant to Section 311 of the Clean Water Act, 33 U.S.C. '' 1251
et seq. (33 U.S.C. '' 1321), or listed pursuant to
Section 307 of the Clean Water Act (33 U.S.C. '' 1317).



AHighest Lawful Rate@ means the maximum nonusurious rate of interest which
Beneficiary is allowed from time to time to contract for, charge, take, reserve, or receive on
notes or other indebtedness owed to Beneficiary, as the case may be, under Laws applicable to the
Notes or other indebtedness owing to the Beneficiary which are presently in effect or, to the
extent allowed by applicable Law, under such applicable Laws which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable Laws now allow, after taking
into account, to the extent required by applicable laws, any and all relevant payments or charges
under the Notes. For purposes of such determination, the AHighest Lawful Rate@
shall mean the greater of (a) the maximum rate of interest from time to time permitted under the
laws of the United States of America (including without limitation the rate of interest permitted
to be charged under 12 U.S.C. '85), and (b) the maximum rate of interest permitted to be
charged under the laws of the State of Texas.



AHolder@ means any present or future holder of the Obligation or any part
thereof.



AHydrocarbons@ has the meaning given such term in Paragraph III.



ALand@ has the meaning given such term in Paragraph VI.



ALaws@ means all applicable constitution, treaties, statues, laws,
ordinances, regulations, orders, writs, injunctions, or decrees of the United States or of any
state, commonwealth, county, parish, municipality, or tribunal.



ALien@ means any lien, mechanic’s lien, materialman’s lien, pledge,
conditional sale agreement, title retention agreement, financing lien, production payment, security
interest, mortgage, deed of trust or other encumbrance, whether arising by agreement or under law.



AMortgaged Property@ has the meaning given such term on page 1 hereof.



ANote@ or ANotes@ has the meaning given to such term
in Section 1.2 hereof.



AObligation@ has the meaning given such term in Article I hereof.



AOther security instrument@ has the meaning given such term in Section 1.4
hereof.



APerson@ means any individual, firm, corporation, association,
partnership, joint venture, company, trust, tribunal or other entity.



APersonal Property@ has the meaning given such term in Paragraph V.



AProceeds@ has the meaning given such term in Section 4.1(a) hereof.



ARelease@ shall have the meanings specified in CERCLA.



ARights@ means rights, remedies, powers, and privileges.



ASale@ has the meaning given such term in Subsection 3.2(h) hereof.



ASection@ means a section of this Deed of Trust, unless specifically
indicated otherwise.



ASubject Contracts@ has the meaning given such term in Paragraph IV.



ASubject Easements@ has the meaning given such term in Paragraph V.



ASubject Interests@ has the meaning given such term in Paragraph I and II.



ASubject Leases@ has the meaning given such term in Paragraph I.



ATaxes@ means all taxes, assessments, fees, levies, imposts, duties,
deductions, withholdings or other similar charges from time to time or at any time imposed by any
law or any tribunal.



ATribunal@ means any court or any governmental department, commission,
board, bureau, agency or instrumentality of the United States or of any state, commonwealth,
nation, territory, possession, county, parish or municipality, whether now or hereafter constituted
and/or existing.



ATrustee@ means the person who is at the time the duly appointed trustee
or successor or substitute trustee under this Deed of Trust at the time in question.



Section 6.14 Form of Deed of Trust. This instrument may be construed and enforced
from time to time whether within the State of Texas, and elsewhere outside the State of Texas, as a
mortgage, deed of trust, chattel mortgage, conveyance, assignment, security agreement, pledge,
financing statement, hypothecation or contract, or any one or more of them as may be appropriate
under applicable laws, in order fully to effectuate the lien hereof and the purposes and agreements
herein set forth. Insofar as this instrument is a security agreement, pledge, financing statement,
hypothecation or contract, or any one or more of them as may be appropriate under applicable laws,
in order fully to effectuate the lien hereof and the purposes and agreements herein set forth,
Grantor is the debtor and Beneficiary is the secured party. The addresses shown in Section 6.10
are the addresses of the debtor and secured party and information concerning the security interest
granted hereby may be obtained from the secured party at such address. Without in any manner
limiting the generality of any of the foregoing provisions hereof: (a) some portions of the goods
described or to which reference is made herein are or are to become fixtures on the Land described
or to which reference is made herein; (b) the minerals and the like (including oil and gas)
included in the Mortgaged Property and the accounts resulting from the sale thereof will be
financed at the wellhead(s) or minehead(s) or the well(s) or mine(s) located on the Land described
or to which reference is made herein; and (c) this instrument is to be filed of record in the real
estate records in the counties in which any portion of the Mortgaged Property is situated as a
financing statement but the failure to do so will not otherwise affect the validity or
enforceability of this instrument.



Section 6.15 Restatement of Prior Mortgage. If Schedule 1 is attached hereto, the
Notes described in Section 1.2 is given in renewal and extension of indebtedness outstanding under
the promissory Notes described in and secured by the instruments set forth in Schedule 1 attached
hereto and made a part hereof (as amended and supplemented to the date hereof, the APrior
Mortgages@). It is the desire and intention of Grantor and Beneficiary to renew and extend
all liens, rights, powers, privileges, superior titles, estate and security interests existing by
virtue of the Prior Mortgages and in connection therewith, it is understood and agreed that this
Mortgage restates and amends each of the Prior Mortgages in its entirety. This Mortgage renews and
extends all liens, rights, powers, privileges, superior titles, estates and security interests
existing by virtue of each of the Prior Mortgages without interruption or lapse, but the terms,
provisions, and conditions of such liens, powers, privileges, superior titles, estates and security
interests shall hereafter be governed in all respects by this Mortgage and any amendments or
supplements thereto.



Section 6.16 Multiple Counterparts. This Deed of Trust has simultaneously been
executed in a number of identical counterparts, each of which shall be deemed an original, and all
of which are identical, except that in order to facilitate recordation, portions of Exhibit
“A” hereto which describe Mortgaged Property situated in counties other than the particular
county in which a counterpart hereof is being recorded may be omitted from such counterpart.



Section 6.17 Binding Effect. This Deed of Trust is binding upon Grantor and Grantor’s
successors and shall inure to the benefit of Beneficiary and their respective successors and
assigns, and the provisions hereof shall likewise be covenants running with the Land. The duties,
covenants, conditions, obligations, and warranties of Grantor in this Deed of Trust shall be joint
and several obligations of Grantor and Grantor’s successors. Each and every party who signs this
Deed of Trust, other than Beneficiary, and each and every subsequent owner of the Mortgaged
Property, or any part thereof, jointly and severally covenants and agrees that he or it will
perform, or cause to be performed, each and every condition, term, provision, and covenant of this
Deed of Trust.



Effective as of September 1, 2009, but executed the day of acknowledgment.



	 	 	 	 	 	 	 
	 	 	ESCONDE RESOURCES LP, a Texas Limited Partnership
	3326 West Wadley Avenue, Suite 3-267	 	 	 	 
	Midland, Texas 79701	 	By:	 	Esconde Energy LLC, its general partner
	 	 	 	 	By:

	 	Pierce-Hamilton Energy Partners LP,






Managing Member




	 	 	 	By:
Muscoda Hill Energy LLC, its general
partner





By: /s/ Lisa P. Hamilton

Lisa P. Hamilton, President




/s/ Paul W. Heard



Paul W. Heard, Managing Member



/s/ Ronnie L. Steinocher             



Ronnie L. Steinocher, Managing Member



GRANTOR




AMERICAN STATE BANK



620 North Grant Avenue


Odessa, Texas 79761



By: /s/ MIKE MARSHALL

MIKE MARSHALL

President





BENEFICIARY



	 	 	 
	THE STATE OF TEXAS

COUNTY OF MIDLAND

	 	'

'

'






This instrument was acknowledged before me on the   day of September 2009, by
Lisa P. Hamilton, President of Muscoda Hill Energy LLC, general partner of Pierce-Hamilton Energy
Partners LP, Managing Member of Esconde Energy LLC, General Partner of Esconde Resources LP, a
Texas limited partnership, on behalf of said partnership.



      



Notary Public, State of Texas



	 	 	 
	THE STATE OF TEXAS

COUNTY OF MIDLAND

	 	'

'

'






This instrument was acknowledged before me on the   day of September 2009, by
Paul W. Heard, Managing Member of Esconde Energy LLC, General Partner of Esconde Resources LP, a
Texas limited partnership, on behalf of said partnership.




      



Notary Public, State of Texas



	 	 	 
	THE STATE OF TEXAS

COUNTY OF MIDLAND

	 	'

'

'






This instrument was acknowledged before me on the   day of September 2009, by
Ronnie L. Steinocher, Managing Member of Esconde Energy LLC, General Partner of Esconde Resources
LP, a Texas limited partnership, on behalf of said partnership.




      



Notary Public, State of Texas



	 	 	 
	THE STATE OF TEXAS

COUNTY OF MIDLAND

	 	'

'

'






This instrument was acknowledged before me on the   day of September 2009, by
Mike Marshall, President of American State Bank, a Texas banking association, on behalf of said
association.




      




Notary Public, State of Texas