Exhibit 10.8


Execution Version


 




 





$25,000,000


 


SUBORDINATED
CREDIT AGREEMENT


 


Among


 


CANO PETROLEUM, INC.


 


as Borrower,


 


THE LENDERS PARTY HERETO FROM TIME
TO TIME


 


as Lenders,


 


and


 


UNIONBANCAL
EQUITIES, INC.


 


as Administrative Agent


 


December 17, 2008




 





 

















 


TABLE OF CONTENTS


 


	
   

  	
   

  	
  Page

  
	
  ARTICLE I                                 DEFINITIONS AND ACCOUNTING TERMS

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
  Certain Defined Terms

  	
  1

  
	
  Section 1.02

  	
  Computation of Time Periods

  	
  19

  
	
  Section 1.03

  	
  Accounting Terms; Changes in GAAP

  	
  19

  
	
  Section 1.04

  	
  Types of Advances

  	
  20

  
	
  Section 1.05

  	
  Miscellaneous

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE II                             CREDIT FACILITIES

  	
  20

  
	
   

  	
   

  	
   

  
	
  Section 2.01

  	
  Commitment for Advances

  	
  20

  
	
  Section 2.02

  	
  [Reserved]

  	
  21

  
	
  Section 2.03

  	
  Method of Borrowing

  	
  21

  
	
  Section 2.04

  	
  Reduction of the Commitment

  	
  23

  
	
  Section 2.05

  	
  Prepayment of Advances

  	
  24

  
	
  Section 2.06

  	
  Repayment of Advances

  	
  26

  
	
  Section 2.07

  	
  Commitment Fees

  	
  26

  
	
  Section 2.08

  	
  Fees

  	
  26

  
	
  Section 2.09

  	
  Interest

  	
  26

  
	
  Section 2.10

  	
  Payments and Computations

  	
  27

  
	
  Section 2.11

  	
  Sharing of Payments, Etc

  	
  28

  
	
  Section 2.12

  	
  Breakage Costs

  	
  29

  
	
  Section 2.13

  	
  Increased Costs

  	
  29

  
	
  Section 2.14

  	
  Taxes

  	
  30

  
	
  Section 2.15

  	
  Replacement of Lender

  	
  32

  
	
  Section 2.16

  	
  Increase in Commitments

  	
  33

  
	
   

  	
   

  	
   

  
	
  ARTICLE III                         CONDITIONS OF LENDING

  	
  34

  
	
   

  	
   

  	
   

  
	
  Section 3.01

  	
  Conditions Precedent to Initial Credit Extension

  	
  34

  
	
  Section 3.02

  	
  Conditions Precedent to All Borrowings

  	
  37

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV                         REPRESENTATIONS AND WARRANTIES

  	
  37

  
	
   

  	
   

  	
   

  
	
  Section 4.01

  	
  Existence; Subsidiaries

  	
  37

  
	
  Section 4.02

  	
  Power

  	
  38

  
	
  Section 4.03

  	
  Authorization and Approvals

  	
  38

  
	
  Section 4.04

  	
  Enforceable Obligations

  	
  38

  
	
  Section 4.05

  	
  Financial Statements

  	
  38

  
	
  Section 4.06

  	
  True and Complete Disclosure

  	
  39

  
	
  Section 4.07

  	
  Litigation; Compliance with Laws

  	
  39

  
	
  Section 4.08

  	
  Use of Proceeds

  	
  40

  
	
  Section 4.09

  	
  Investment Company Act

  	
  40

  
	
  Section 4.10

  	
  Federal Power Act

  	
  40

  
				



 


i

















 


	
  Section 4.11

  	
  Taxes

  	
  40

  
	
  Section 4.12

  	
  Pension Plans

  	
  41

  
	
  Section 4.13

  	
  Condition of Property; Casualties

  	
  41

  
	
  Section 4.14

  	
  No Burdensome Restrictions; No Defaults

  	
  41

  
	
  Section 4.15

  	
  Environmental Condition

  	
  42

  
	
  Section 4.16

  	
  Permits, Licenses, Etc

  	
  42

  
	
  Section 4.17

  	
  Gas Contracts

  	
  43

  
	
  Section 4.18

  	
  Liens; Titles, Leases, Etc

  	
  43

  
	
  Section 4.19

  	
  Solvency and Insurance

  	
  43

  
	
  Section 4.20

  	
  Hedging Agreements

  	
  43

  
	
  Section 4.21

  	
  Material Agreements

  	
  43

  
	
   

  	
   

  	
   

  
	
  ARTICLE V                             AFFIRMATIVE COVENANTS

  	
  44

  
	
   

  	
   

  	
   

  
	
  Section 5.01

  	
  Compliance with Laws, Etc

  	
  44

  
	
  Section 5.02

  	
  Maintenance of Insurance

  	
  44

  
	
  Section 5.03

  	
  Preservation of Corporate Existence, Etc

  	
  45

  
	
  Section 5.04

  	
  Payment of Taxes, Etc

  	
  45

  
	
  Section 5.05

  	
  Visitation Rights

  	
  45

  
	
  Section 5.06

  	
  Reporting Requirements

  	
  45

  
	
  Section 5.07

  	
  Maintenance of Property

  	
  49

  
	
  Section 5.08

  	
  Agreement to Pledge

  	
  49

  
	
  Section 5.09

  	
  Use of Proceeds

  	
  49

  
	
  Section 5.10

  	
  Title Evidence and Opinions

  	
  50

  
	
  Section 5.11

  	
  Further Assurances; Cure of Title Defects

  	
  50

  
	
  Section 5.12

  	
  Hedging Arrangements

  	
  50

  
	
  Section 5.13

  	
  Bank Accounts

  	
  51

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI                         NEGATIVE COVENANTS

  	
  51

  
	
   

  	
   

  	
   

  
	
  Section 6.01

  	
  Liens, Etc

  	
  51

  
	
  Section 6.02

  	
  Debts, Guaranties, and Other Obligations

  	
  52

  
	
  Section 6.03

  	
  Agreements Restricting Liens and Distributions

  	
  53

  
	
  Section 6.04

  	
  Merger or Consolidation; Asset Sales

  	
  53

  
	
  Section 6.05

  	
  Restricted Payments

  	
  54

  
	
  Section 6.06

  	
  Investments

  	
  54

  
	
  Section 6.07

  	
  Affiliate Transactions

  	
  55

  
	
  Section 6.08

  	
  Compliance with ERISA

  	
  55

  
	
  Section 6.09

  	
  Sale-and-Leaseback

  	
  56

  
	
  Section 6.10

  	
  Change of Business

  	
  56

  
	
  Section 6.11

  	
  Organizational Documents, Name Change

  	
  56

  
	
  Section 6.12

  	
  Use of Proceeds

  	
  56

  
	
  Section 6.13

  	
  Gas Imbalances, Take-or-Pay or Other Prepayments

  	
  57

  
	
  Section 6.14

  	
  Limitation on Speculative Hedging

  	
  57

  
	
  Section 6.15

  	
  Additional Subsidiaries; Additional Oil and Gas
  Properties

  	
  57

  
	
  Section 6.16

  	
  Account Payables

  	
  57

  
	
  Section 6.17

  	
  Current Ratio

  	
  57

  



 


ii

















 


	
  Section 6.18

  	
  Leverage Ratio

  	
  58

  
	
  Section 6.19

  	
  Interest Coverage Ratio

  	
  58

  
	
  Section 6.20

  	
  Senior Debt

  	
  58

  
	
  Section 6.21

  	
  Non-Guarantor Subsidiary

  	
  58

  
	
  Section 6.22

  	
  Equity Issuance

  	
  58

  
	
  Section 6.23

  	
  Minimum Asset Coverage Ratio

  	
  59

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII                     EVENTS OF DEFAULT; REMEDIES

  	
  59

  
	
   

  	
   

  	
   

  
	
  Section 7.01

  	
  Events of Default

  	
  59

  
	
  Section 7.02

  	
  Optional Acceleration of Maturity

  	
  62

  
	
  Section 7.03

  	
  Automatic Acceleration of Maturity

  	
  62

  
	
  Section 7.04

  	
  Right of Set-off

  	
  63

  
	
  Section 7.05

  	
  Non-exclusivity of Remedies

  	
  63

  
	
  Section 7.06

  	
  Application of Proceeds

  	
  63

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII                 THE ADMINISTRATIVE AGENT

  	
  64

  
	
   

  	
   

  	
   

  
	
  Section 8.01

  	
  Authorization and Action

  	
  64

  
	
  Section 8.02

  	
  Administrative Agent’s Reliance, Etc

  	
  64

  
	
  Section 8.03

  	
  The Administrative Agent and Its Affiliates

  	
  65

  
	
  Section 8.04

  	
  Lender Credit Decision

  	
  65

  
	
  Section 8.05

  	
  Indemnification

  	
  65

  
	
  Section 8.06

  	
  Successor Administrative Agent

  	
  66

  
	
  Section 8.07

  	
  Collateral Matters

  	
  67

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX                        MISCELLANEOUS

  	
  67

  
	
   

  	
   

  	
   

  
	
  Section 9.01

  	
  Amendments, Etc

  	
  67

  
	
  Section 9.02

  	
  Notices, Etc

  	
  68

  
	
  Section 9.03

  	
  No Waiver; Remedies

  	
  68

  
	
  Section 9.04

  	
  Costs and Expenses

  	
  68

  
	
  Section 9.05

  	
  Binding Effect

  	
  69

  
	
  Section 9.06

  	
  Lender Assignments and Participations

  	
  69

  
	
  Section 9.07

  	
  Indemnification; Waiver

  	
  71

  
	
  Section 9.08

  	
  Execution in Counterparts

  	
  72

  
	
  Section 9.09

  	
  Survival of Representations, Etc

  	
  72

  
	
  Section 9.10

  	
  Severability

  	
  72

  
	
  Section 9.11

  	
  Business Loans

  	
  72

  
	
  Section 9.12

  	
  Governing Law; Submission to Jurisdiction

  	
  72

  
	
  Section 9.13

  	
  Subordination and Intercreditor Agreement

  	
  73

  
	
  Section 9.14

  	
  USA Patriot Act

  	
  73

  
	
  Section 9.15

  	
  WAIVER OF JURY TRIAL

  	
  73

  
	
  Section 9.16

  	
  ORAL AGREEMENTS

  	
  73

  



 


iii

















 


	
  EXHIBITS:

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  -

  	
   

  	
  Form of Assignment and Acceptance

  
	
  Exhibit B

  	
   

  	
  -

  	
   

  	
  Form of Compliance Certificate

  
	
  Exhibit C

  	
   

  	
  -

  	
   

  	
  Form of Guaranty

  
	
  Exhibit D

  	
   

  	
  -

  	
   

  	
  Form of Mortgage

  
	
  Exhibit E

  	
   

  	
  -

  	
   

  	
  Form of Note

  
	
  Exhibit F

  	
   

  	
  -

  	
   

  	
  Form of Notice of Borrowing

  
	
  Exhibit G

  	
   

  	
  -

  	
   

  	
  Form of Notice of Conversion or Continuation

  
	
  Exhibit H

  	
   

  	
  -

  	
   

  	
  Form of Pledge Agreement

  
	
  Exhibit I

  	
   

  	
  -

  	
   

  	
  Form of Security Agreement

  
	
  Exhibit J

  	
   

  	
  -

  	
   

  	
  Form of Transfer Letters

  
	
  Exhibit K

  	
   

  	
  -

  	
   

  	
  Form of Borrower’s Counsel Opinion

  



 


	
  SCHEDULES:

  	
   

  	
   

  
	
  Schedule I      -

  	
   

  	
  Notice Information and Commitments

  
	
  Schedule 4.01 -

  	
   

  	
  Subsidiaries of Borrower

  
	
  Schedule 4.05 -

  	
   

  	
  Existing Debt

  
	
  Schedule 4.07 -

  	
   

  	
  Litigation

  
	
  Schedule 4.14(a) -

  	
   

  	
  Material Debt Documents

  
	
  Schedule 4.20 -

  	
   

  	
  Hedging Contracts

  
	
  Schedule 4.21 -

  	
   

  	
  Material Agreements

  



 


iv

















 


SUBORDINATED
CREDIT AGREEMENT


 


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


 


The parties
hereto agree to as follows:


 


Section 1.


 


DEFINITIONS
AND ACCOUNTING TERMS


 


(a)          Certain Defined Terms.  As used in this Agreement, the terms defined
above shall have the meanings set forth therein and the following terms shall
have the following meanings (unless otherwise indicated, such meanings to be
equally applicable to both the singular and plural forms of the terms defined):


 


“Acceptable
Security Interest” in any Property means a Lien which (a) exists in
favor of the Administrative Agent for the benefit of the Secured Parties, (b) is
superior to all Liens or rights of any other Person in the Property encumbered
thereby, other than Permitted Prior Liens, (c) secures the Obligations,
and (d) is perfected and enforceable.


 


“Acquisition”
means the purchase by the Borrower or any of its Subsidiaries of any business,
including the purchase of all or substantially all the associated assets or
operations or of stock (or other ownership interests) of a Person (other than
of a wholly-owned Subsidiary of the Borrower).


 


“Adjusted
Reference Rate” means, for any day, the fluctuating rate per annum of
interest equal to the greatest of (a) the Reference Rate in effect on such
day, (b) the Federal Funds Rate in effect on such day plus 1⁄2 of 1% and (c) the
Eurodollar Rate for an Interest Period of one month which begins on such day
plus 1.50%.


 


“Administrative
Agent” means UnionBanCal Equities, Inc., in its capacity as agent
pursuant to Article VIII, and any successor agent pursuant to Section 8.06.


 


“Advance”
means an advance by a Lender to the Borrower pursuant to Section 2.01(a) as
part of a Borrowing and refers to a Reference Rate Advance or a Eurodollar Rate
Advance.


 


“Affiliate”
means, as to any Person, any other Person that, directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlled
by” or “under common control with”) means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of a Control Percentage, by
contract, or otherwise.  Without limiting
the generality of the foregoing, a Person shall be deemed to be controlled by
another Person if such other Person 


 

















 


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


 


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


 


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


 


“Assignment
and Acceptance” means an assignment and acceptance entered into by a Lender
and an Eligible Assignee, and accepted by the Administrative Agent, in
substantially the form of the attached Exhibit A.


 


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


 


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


 


“Borrowing
Base” shall have the definition given to such term in the Senior Credit
Agreement as in effect on the date hereof of as modified in accordance with the
Subordination and Intercreditor Agreement.


 


“Business
Day” means a day of the year on which banks are not required or authorized
to close in Dallas, Texas and Los Angeles, California and, if the applicable
Business Day relates to any Eurodollar Rate Advances, on which dealings are
carried on by banks in the London interbank market.


 


“Capital
Leases” means, as applied to any Person, any lease of any Property by such
Person as lessee which would, in accordance with GAAP, be required to be
classified and accounted for as a capital lease on the balance sheet of such
Person.


 


“CERCLA”
means the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, state and local analogs, and all rules and
regulations and requirements thereunder in each case as now or hereafter in
effect.


 


“Certificate
of Designation” means the Certificate of Designations, Preferences and
Rights of Series D Convertible Preferred Stock of Cano Petroleum, Inc.
which is filed with the Secretary of State of Delaware on August 31, 2006
and which has been acknowledged by the Senior Administrative Agent on August 25,
2006.


 


2

















 


“Change in
Control” shall mean the occurrence of any of the following events: (a) the
Borrower ceases to own, either directly or indirectly, 100% of the Equity
Interest in any Subsidiary other than as a result of a sale of assets or merger
permitted under Section 6.04, (b) any “person” or “group” (as such
terms are used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) other than a Permitted Holder becomes the “beneficial owner” (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of
1934, except that a person or group shall be deemed to have “beneficial
ownership” of all securities that such person or group has the right to acquire
(such right, an “option right”), whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of 33% or more of
the Equity Interest of the Borrower entitled to vote for members of the board
of directors or equivalent governing body of the Borrower on a fully-diluted
basis (and taking into account all such securities that such person or group
has the right to acquire pursuant to any option right), or (c) during any
period of 12 consecutive months, a majority of the members of the board of
directors or other equivalent governing body of the Borrower cease to be
composed of individuals (i) who were members of that board or equivalent
governing body on the first day of such period, (ii) whose election or
nomination to that board or equivalent governing body was approved by
individuals referred to in clause (i) above constituting at the time of
such election or nomination at least a majority of that board or equivalent
governing body or (iii) whose election or nomination to that board or
other equivalent governing body was approved by individuals referred to in
clauses (i) and (ii) above constituting at the time of such election
or nomination at least a majority of that board or equivalent governing
body.   For purposes of this definition, “Permitted
Holder” means any of the following: (A) any Person that is the “beneficial
owner” (as referred to above) of an Equity Interest in the Borrower on the date
hereof, (B) any such Person’s estate, spouse and lineal descendants and
the legal representative of any of the foregoing, (C) the trustees of any
bona fide trusts of which any of the foregoing are the sole beneficiaries and
grantors, and (D) any corporation, limited partnership, limited liability
company, or similar entity, all of the Voting Securities of which is owned by
any of the foregoing.


 


“Code”
means the Internal Revenue Code of 1986, as amended, and any successor statute.


 


“Collateral” means (a) all “Collateral”, “Pledged
Collateral” and “Mortgaged Properties” (as defined in each of the Mortgages,
the Security Agreements, and the Pledge Agreement, as applicable) or similar
terms used in the Security Instruments, and (b) all amounts contained in
the Borrower’s and its Subsidiaries’ bank accounts.


 


“Commitment”
means the amount set opposite such Lender’s name on the Schedule I hereof as
its Commitment, or if such Lender has entered into any Assignment and
Acceptance, as set forth for such Lender as its Commitment in the Register
maintained by the Administrative Agent pursuant to Section 9.06(c), or if
such Lender has increased its Commitment under Section 2.16 below, as set
forth in the agreement increasing such Commitment or joinder agreement, as
applicable, as such amount may be reduced, increased or terminated pursuant to Section 2.04,
2.16 or Article VII or otherwise under this Agreement.  The aggregate amount of the Commitments on
the date hereof is $15,000,000.00.


 


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


 


3

















 


“Compliance
Certificate” means a compliance certificate in the form of the attached Exhibit B
signed by a Responsible Officer of the Borrower.


 


“Consolidated
Net Income” means, with respect to the Borrower and its consolidated
Subsidiaries, for any period, the net income for such period after taxes, as
determined in accordance with GAAP, excluding, however, (a) extraordinary
items, including (i) any net non-cash gain or loss during such period
arising from the sale, exchange, retirement or other disposition of capital
assets (such term to include all fixed assets and all securities) other than in
the ordinary course of business, and (ii) any write-up or write-down of
assets and (b) the cumulative effect of any change in GAAP.


 


“Control
Percentage” means, with respect to any Person, the percentage of the
outstanding Equity Interest (including any options, warrants or similar rights
to purchase such Equity Interest) of such Person having ordinary voting power
which gives the direct or indirect holder of such Equity Interest the power to
elect a majority of the board of directors (or other applicable governing body)
of such Person.


 


“Controlled
Group” means all members of a controlled group of corporations and all
businesses (whether or not incorporated) under common control which, together
with the Borrower, are treated as a single employer under Section 414 of
the Code.


 


“Convert,”
“Conversion,” and “Converted” each refers to a conversion of
Advances of one Type into Advances of another Type pursuant to Section 2.03(b).


 


“Credit
Extension” means an Advance made by any Lender.


 


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


 


(i)                                     indebtedness
of such Person for borrowed money;


 


(ii)                                  obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments;


 


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


 


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


 


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


 


(vi)                              obligations
of such Person under any Hedge Contract;


 


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


 


4

















 


(viii)                        any
obligations of such Person owing in connection with any volumetric or
production prepayments;


 


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


 


(x)                                   indebtedness
or obligations of others of the kinds referred to in clauses (a) through (i) above
secured by any Lien on or in respect of any Property of such Person; and


 


(xi)                                all
liabilities of such Person in respect of unfunded vested benefits under any
Plan.


 


“Debt
Issuance” means the issuance by the Borrower of Debt in the form of
convertible notes.


 


“Debt
Issuance Proceeds” means, with respect to any Debt Issuance, all cash and
cash equivalent investments received by the Borrower from such Debt Issuance
after payment of, or provision for, all underwriter fees and expenses, SEC and
blue sky fees, printing costs, fees and expenses of accountants, lawyers and
other professional advisors, brokerage commissions and other out-of-pocket fees
and expenses actually incurred in connection with such Debt Issuance.


 


“Default”
means (a) an Event of Default or (b) any event or condition which
with notice or lapse of time or both would become an Event of Default.


 


“Defaulting
Lender” means any Lender that (a) has failed to fund its Pro Rata
Share of any Advance required to be funded by it hereunder within one Business
Day of the date required to be funded by it hereunder unless such failure has
been cured within three Business Days (or such longer time period accepted by
the Borrower and the Administrative Agent), (b) has otherwise failed to
pay over to the Administrative Agent or any other Lender any other amount
required to be paid by it hereunder within one Business Day of the date when
due, unless the subject of a good faith dispute or unless such failure has been
cured within three Business Days (or such longer time period accepted by the
Administrative Agent or such other Lender, as applicable), or (c) has, or
has an Affiliate that has, been deemed insolvent or become the subject of a
bankruptcy or insolvency proceeding.


 


“Dollars”
and “$” means lawful money of the United States of America.


 


“EBITDA”
means, for any period, without duplication, (a) Consolidated Net Income
for such period plus (b) to the extent deducted in determining
Consolidated Net Income, Interest Expense, taxes, depreciation, amortization,
depletion and other non-cash charges for such period (including any provision
for the reduction in the carrying value of assets recorded in accordance with
GAAP and including non-cash charges resulting from the requirements of SFAS 133
or 143) for such period minus (c) all non-cash items of income
which were included in determining such Consolidated Net Income (including non-cash
income resulting from the requirements of SFAS 133 or 143) plus (d) the
net gain on the Pantwist Sale; provided that this clause (d) shall only
apply for the financial covenant ratios calculated at, and as of, the fiscal
quarter ending 


 


5

















 


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


 


“Eligible
Assignee” means (a) any Lender, (b) any Subsidiary or Affiliate
of a Lender, and (c) any commercial bank or other financial institution (i) approved
by the Administrative Agent in its sole discretion, and (ii) unless an
Event of Default has occurred and is continuing, reasonably acceptable to the
Borrower.


 


“Engineering
Report” means either an Independent Engineering Report or an Internal
Engineering Report.


 


“Environment”
or “Environmental” shall have the meanings set forth in 42 U.S.C.  9601(8) (1988).


 


“Environmental
Claim” means any third party (including governmental agencies and
employees) action, lawsuit, claim, demand, regulatory action or proceeding,
order, decree, consent agreement or notice of potential or actual
responsibility or violation (including claims or proceedings under the
Occupational Safety and Health Acts or similar laws or requirements relating to
health or safety of employees) which seeks to impose liability under any
Environmental Law.


 


“Environmental
Law” means, as to the Borrower or its Subsidiaries, all Legal Requirements
or common law theories applicable to the Borrower or its Subsidiaries arising
from, relating to, or in connection with the Environment, health, or safety,
including without limitation CERCLA, relating to (a) pollution,
contamination, injury, destruction, loss, protection, cleanup, reclamation or
restoration of the air, surface water, groundwater, land surface or subsurface
strata, or other natural resources; (b) solid, gaseous or liquid waste
generation, treatment, processing, recycling, reclamation, cleanup, storage,
disposal or transportation; (c) exposure to pollutants, contaminants,
hazardous, or toxic substances, materials or wastes; (d) the safety or
health of employees; or (e) the manufacture, processing, handling,
transportation, distribution in commerce, use, storage or disposal of hazardous
or toxic substances, materials or wastes.


 


“Environmental
Permit” means any permit, license, order, approval, registration or other
authorization under Environmental Law.


 


“Equity
Interest” means with respect to any Person, any shares, interests,
participation, or other equivalents (however designated) of corporate stock,
membership interests or partnership interests (or any other ownership
interests) of such Person.


 


“Equity
Issuance” means any issuance of equity securities or any other Equity
Interests (including any preferred equity securities) by the Borrower or any of
its Subsidiaries other than 


 


6

















 


equity securities issued (i) to the Borrower or one of its
Subsidiaries, (ii) pursuant to employee or director and officer stock
option plans in the ordinary course of business, and (iii) the conversion
of previously issued preferred, convertible Equity Interests or convertible
notes to the extent such Equity Interests and notes were issued in compliance
with the terms hereof.


 


“Equity
Issuance Proceeds” means, with respect to any Equity Issuance, all cash and
cash equivalent investments received by the Borrower or any of its Subsidiaries
from such Equity Issuance after payment of, or provision for, all underwriter
fees and expenses, SEC and blue sky fees, printing costs, fees and expenses of
accountants, lawyers and other professional advisors, brokerage commissions and
other out-of-pocket fees and expenses actually incurred in connection with such
Equity Issuance.


 


“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended from time
to time.


 


“Eurocurrency
Liabilities” has the meaning assigned to that term in Regulation D of
the Federal Reserve Board (or any successor), as in effect from time to time.


 


“Eurodollar
Rate” means, for the Interest Period for each Eurodollar Rate Advance
comprising the same Borrowing, the interest rate per annum (rounded upward to
the nearest whole multiple of 1/100 of 1% per annum) set forth on the Reuters
Reference LIBOR01 as the London Interbank Offered Rate, for deposits in Dollars
at 11:00 a.m. (London, England time) two Business Days before the
first day of such Interest Period and for a period equal to such Interest
Period; provided that, if no such quotation appears on the Reuters
Reference LIBOR01, the Eurodollar Rate shall be an interest rate per annum
equal to the rate per annum at which deposits in Dollars are offered by the
principal office of Union Bank of California, N.A.  in London, England to prime banks in the
London interbank market at 11:00 a.m. 
(London, England time) two Business Days before the first day of such
Interest Period in an amount substantially equal to the Eurodollar Rate Advance
to be maintained by the Lender that is the Administrative Agent in respect of
such Borrowing and for a period equal to such Interest Period.


 


“Eurodollar
Rate Advance” means an Advance which bears interest as provided in Section 2.09(b).


 


“Eurodollar
Rate Reserve Percentage” of any Lender for the Interest Period for any
Eurodollar Rate Advance means the reserve percentage applicable during such
Interest Period (or if more than one such percentage shall be so applicable,
the daily average of such percentages for those days in such Interest Period
during which any such percentage shall be so applicable) under regulations
issued from time to time by the Federal Reserve Board for determining the
maximum reserve requirement (including, without limitation, any emergency,
supplemental, or other marginal reserve requirement) for such Lender with
respect to liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.


 


“Event of
Default” has the meaning specified in Section 7.01.


 


“Federal
Funds Rate” means, for any period, a fluctuating interest rate per annum
equal for each day during such period to the weighted average of the rates on
overnight Federal funds 


 


7

















 


transactions with members of the Federal Reserve System arranged by
Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for any such day on such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.


 


“Federal
Reserve Board” means the Board of Governors of the Federal Reserve System
or any of its successors.


 


“Financial
Statements” means the financial statements included in the Form 10-K
filed by the Borrower with the SEC on September 11, 2008, including the
audited consolidated balance sheet of the Borrower and its consolidated
Subsidiaries as of fiscal year ended June 30, 2008, and the related
audited consolidated statements of income, cash flow, and retained earnings of
the Borrower and its consolidated Subsidiaries for the fiscal year then ended,
copies of which have been delivered to the Administrative Agent and the
Lenders.


 


“Fire
Litigation” means those certain lawsuits and claims now pending or
hereafter filed against Borrower or any of its Subsidiaries related to or arising
from fires beginning on March 12, 2006 in the Texas panhandle.


 


“GAAP”
means United States generally accepted accounting principles as in effect from
time to time, applied on a basis consistent with the requirements of Section 1.03.


 


“Governmental
Authority” means, as to any Person in connection with any subject, any
foreign, national, state or provincial governmental authority, or any political
subdivision of any state thereof, or any agency, department, commission, board,
authority or instrumentality, bureau or court, in each case having jurisdiction
over such Person or such Person’s Property in connection with such subject.


 


“Guarantor”
means each Subsidiary of the Borrower executing a Guaranty.


 


“Guaranty”
means a Guaranty in substantially the form of the attached Exhibit C and
executed by a Guarantor, and “Guaranties” shall mean all such guaranties
collectively.


 


“Hazardous
Substance” means the substances identified as such pursuant to CERCLA and
those regulated under any other Environmental Law, including without limitation
pollutants, contaminants, petroleum, petroleum products, radionuclides,
radioactive materials, and medical and infectious waste.


 


“Hazardous
Waste” means the substances regulated as such pursuant to any Environmental
Law.


 


“Hedge
Contract” means (a) any and all rate swap transactions, basis swaps,
credit derivative transactions, forward rate transactions, puts, commodity
swaps, commodity options, forward commodity contracts, equity or equity index
swaps or options, bond or bond price or bond index swaps or options or forward
bond or forward bond price or forward bond index transactions, interest rate
options, forward foreign exchange transactions, cap transactions, floor


 


8
















 


transactions, collar transactions, currency swap transactions,
cross-currency rate swap transactions, currency options, spot contracts, or any
other similar transactions or any combination of any of the foregoing
(including any options to enter into any of the foregoing), whether or not any
such transaction is governed by or subject to any master agreement, and (b) any
and all transactions of any kind, and the related confirmations, which are
subject to the terms and conditions of, or governed by, any form of master
agreement published by the International Swaps and Derivatives Association, Inc.,
any International Foreign Exchange Master Agreement, or any other master
agreement (any such master agreement, together with any related schedules, a “Master
Agreement”), including any such obligations or liabilities under any Master
Agreement; provided that, a “Hedge Contract” shall not include any “Master
Agreement” that provides solely for the sale by the Borrower or its
Subsidiaries of physical Hydrocarbons in exchange for cash in the ordinary
course of its business.


 


“Hydrocarbon
Hedge Agreement” means a Hedge Contract which is intended to reduce or
eliminate the risk of fluctuations in the price of Hydrocarbons.


 


“Hydrocarbons”
means oil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline,
condensate, distillate, and all other liquid and gaseous hydrocarbons produced
or to be produced in conjunction therewith from a well bore and all products,
by-products, and other substances derived therefrom or the processing thereof,
and all other minerals and substances produced in conjunction with such
substances, including, but not limited to, sulfur, geothermal steam, water,
carbon dioxide, helium, and any and all minerals, ores, or substances of value and
the products and proceeds therefrom.


 


“Independent
Engineer” means (a) Forest Garb & Associates, (b) Miller
and Lents, Ltd., (c) Netherland, Sewell & Associates, Inc.
or (d) any other engineering firm acceptable to the Administrative Agent.


 


“Independent
Engineering Report” means a report, in form and substance satisfactory to
the Administrative Agent and each of the Lenders, prepared by an Independent
Engineer, addressed to the Administrative Agent and the Lenders with respect to
the Oil and Gas Properties owned by the Borrower or its Subsidiaries (or to be
acquired by the Borrower or any of its Subsidiaries, as applicable) which are
or are to be included in the Borrowing Base, which report shall (a) specify
the location, quantity, and type of the estimated Proven Reserves attributable
to such Oil and Gas Properties, (b) contain a projection of the rate of
production of such Oil and Gas Properties, (c) contain an estimate of the
net operating revenues to be derived from the production and sale of Hydrocarbons
from such Proven Reserves based on product price and cost escalation
assumptions specified by the Administrative Agent and the Lenders, and (d) contain
such other information as is customarily obtained from and provided in such
reports or is otherwise reasonably requested by the Administrative Agent or any
Lender.


 


“Interest
Expense” means, for the Borrower and its consolidated Subsidiaries for any
period, total interest, letter of credit fees, and other fees and expenses
incurred in connection with any Debt for such period, whether paid or accrued,
including, without limitation, (i) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers’ acceptance
financing, imputed interest under Capital Leases, and net costs under Interest
Hedge Agreements, all as determined in conformity with GAAP, and (ii) all
interests, 


 


9

















 


dividends, distributions, or other payments made in respect of
preferred Equity Interests or Debt Issuances; but excluding (A) dividends
payable solely in Equity Interests of the Borrower made in respect of preferred
Equity Interests and (B) the expensing of deferred amortized costs pertaining
to the payment in full of the Subordinated Debt and pertaining to the
Obligations.


 


“Interest
Hedge Agreement” means a Hedge Contract between the Borrower and one or
more financial institutions providing for the exchange of nominal interest
obligations between the Borrower and such financial institution or the cap of
the interest rate on any Debt of the Borrower.


 


“Interest
Period” means, for each Eurodollar Rate Advance comprising part of the same
Borrowing, the period commencing on the date of such Eurodollar Rate Advance or
the date of the Conversion of any Reference Rate Advance into a Eurodollar Rate
Advance and ending on the last day of the period selected by the Borrower
pursuant to the provisions below and Section 2.03 and, thereafter, each
subsequent period commencing on the last day of the immediately preceding
Interest Period and ending on the last day of the period selected by the
Borrower pursuant to the provisions below and Section 2.03.  The duration of each such Interest Period
shall be three months (other than for purposes of the definition of “Adjusted
Reference Rate”); provided, however, that:


 


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


 


(ii)                                  Interest
Periods commencing on the same date for Advances comprising part of the same
Borrowing shall be of the same duration;


 


(iii)                               whenever
the last day of any Interest Period would otherwise occur on a day other than a
Business Day, the last day of such Interest Period shall be extended to occur
on the next succeeding Business Day, provided that if such extension
would cause the last day of such Interest Period to occur in the next following
calendar month, the last day of such Interest Period shall occur on the next
preceding Business Day; and


 


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


 


“Interim
Financial Statements” means the financial statements included in the Form 10
Q filed by the Borrower with the SEC on November 10, 2008 including the
unaudited consolidated balance sheet of the Borrower and its consolidated
Subsidiaries dated September 30, 2008, and the related unaudited
consolidated statements of income, cash flow, and retained earnings of the
Borrower and its consolidated Subsidiaries for the three months then ended,
copies of which have been delivered to the Administrative Agent and the
Lenders.


 


“Internal
Engineering Report” means a report, in form and substance satisfactory to
the Administrative Agent and each Lender, prepared by the Borrower and
certified by a Responsible Officer of the Borrower, addressed to the
Administrative Agent and the Lenders with respect to 


 


10

















 


the Oil and Gas Properties owned by the Borrower or any of its
Subsidiaries (or to be acquired by the Borrower or any of its Subsidiaries, as
applicable) which are or are to be included in the Borrowing Base, which report
shall (a) specify the location, quantity, and type of the estimated Proven
Reserves attributable to such Oil and Gas Properties, (b) contain a
projection of the rate of production of such Oil and Gas Properties, (c) contain
an estimate of the net operating revenues to be derived from the production and
sale of Hydrocarbons from such Proven Reserves based on product price and cost
escalation assumptions specified by the Administrative Agent and the Lenders,
and (d) contain such other information as is customarily obtained from and
provided in such reports or is otherwise reasonably requested by the
Administrative Agent or any Lender.


 


“Junior
Capital Issuance” means either (a) an Equity Issuance permitted under Section 6.22
or (b) a Debt Issuance.


 


“Leases”
means all oil and gas leases, oil, gas and mineral leases, oil, gas and
casinghead gas leases or any other instruments, agreements, or conveyances
under and pursuant to which the owner thereof has or obtains the right to enter
upon lands and explore for, drill, and develop such lands for the production of
Hydrocarbons.


 


“Legal
Requirement” means, as to any Person, any law, statute, ordinance, decree,
requirement, order, judgment, rule, regulation (or official interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, including, but not limited to, Regulations D, T,
U, and X, which is applicable to such Person.


 


“Lenders”
means the lenders listed on the signature pages of this Agreement and each
Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.06.


 


“Lending
Office” means, as to any Lender, the office or offices of such Lender
described as such in such Lender’s administrative questionnaire requested by
the Administrative Agent, or such other office or offices as a Lender may from
time to time notify the Borrower and the Administrative Agent.


 


“Leverage
Ratio” means, as of the end of any fiscal quarter, the ratio of (a) the
consolidated Debt of the Borrower (other than obligations under Hedge
Contracts) as of such fiscal quarter end to (b) the consolidated EBITDA of
the Borrower for the four fiscal quarter period then ended.


 


“Lien”
means any mortgage, lien, pledge, assignment, charge, deed of trust, security
interest, hypothecation, preference, deposit arrangement or encumbrance (or
other type of arrangement having the practical effect of the foregoing) to
secure or provide for the payment of any obligation of any Person, whether
arising by contract, operation of law, or otherwise (including, without
limitation, the interest of a vendor or lessor under any conditional sale
agreement, synthetic lease, Capital Lease, or other title retention agreement).


 


11

















 


“Liquid
Investments” means:


 


(i)                                     direct
obligations of, or obligations the principal of and interest on which are
unconditionally guaranteed by, the United States maturing within 180 days from
the date of any acquisition thereof;


 


(ii)                                  (i) negotiable
or nonnegotiable certificates of deposit, time deposits, or other similar
banking arrangements maturing within 180 days from the date of acquisition
thereof (“bank debt securities”), issued by (A) any Lender or any Senior
Lender (or any Affiliate of any Lender or any Senior Lender) or (B) any
other bank or trust company so long as such certificate of deposit is pledged
to secure the Borrower’s or any Subsidiaries’ ordinary course of business
bonding requirements, or any other bank or trust company which has primary
capital of not less than $500,000,000, if at the time of deposit or purchase,
such bank debt securities are rated not less than “AA” (or the then
equivalent) by the rating service of Standard & Poor’s Ratings Group
or of Moody’s Investors Service, Inc., and (ii) commercial paper
issued by (A) any Lender or any Senior Lender (or any Affiliate of any
Lender or any Senior Lender) or (B) any other Person if at the time of purchase
such commercial paper is rated not less than “A-1” (or the then equivalent) by
the rating service of Standard & Poor’s Ratings Group or not less than
“P-1” (or the then equivalent) by the rating service of Moody’s Investors
Service, Inc., or upon the discontinuance of both of such services, such
other nationally recognized rating service or services, as the case may be, as
shall be selected by the Borrower with the consent of the Majority Lenders;


 


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


 


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


 


(v)                                 such
other instruments (within the meaning of Article 9 of the Texas Business
and Commerce Code) as the Borrower may request and the Administrative Agent may
approve in writing.


 


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


 


“Maximum
Note Amount” means $25,000,000.


 


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


 


12

















 


amount of the Commitments at such time; provided further that,
if there are two or more Lenders, the Commitment of, and the portion of the
Advances held or deemed held by, any Defaulting Lender shall be excluded for
purposes of making a determination of Majority Lenders.


 


“Material
Adverse Change” means (a) a material adverse change in the business,
assets (including the Oil and Gas Properties of the Borrower or any of its
Subsidiaries), condition (financial or otherwise), or results of operations of
the Borrower or any of its Subsidiaries, taken as a whole, or (b) a
material adverse effect on the Borrower’s or any Subsidiary’s ability to
perform its obligations under this Agreement, any Note, any Guaranty, or any
other Loan Document.


 


“Maturity
Date” means June 17, 2013.


 


“Maximum
Rate” means the maximum nonusurious interest rate under applicable law
(determined under such laws after giving effect to any items which are required
by such laws to be construed as interest in making such determination,
including without limitation if required by such laws, certain fees and other
costs).


 


“Mortgage”
means each of the Mortgages, Deeds of Trust, Security Agreements, Assignment of
Liens and Security Interests, Financing Statements and Assignments of
Production or any other mortgage or deed of trust executed by any one or more
of the Borrower, a Guarantor or any of their respective Subsidiaries in favor
of the Administrative Agent for the ratable benefit of the Secured Parties in
substantially the form of the attached Exhibit D or such other form as may
be requested by the Administrative Agent, together with any assumptions or
assignments of the obligations thereunder by the Borrower, any Guarantor or any
of their respective Subsidiaries, and “Mortgages” shall mean all of such
Mortgages collectively.


 


“Multiemployer
Plan” means a “multiemployer plan” as defined in Section 4001(a)(3) of
ERISA.


 


“Net Cash Proceeds” shall mean,
with respect to any Asset Sale, the proceeds thereof in the form of cash, cash
equivalents and marketable securities (including any such proceeds received by
way of deferred payment of principal pursuant to a note or installment
receivable or purchase price adjustment receivable, or by the sale, transfer or
other disposition of any non-cash consideration received in connection
therewith or otherwise, but only as and when received) received by the Borrower
or any Subsidiary (including cash proceeds subsequently received (as and when
received by the Borrower or any Subsidiary) in respect of non-cash
consideration initially received) net of (i) reasonable and customary
selling expenses (including reasonable brokers’ fees or commissions, legal,
accounting and other professional and transactional fees, transfer and similar
taxes and Borrower’s good faith estimate of income taxes paid or payable in
connection with such sale (after taking into account any available tax credits
or deductions and any tax sharing arrangements)), (ii) the principal
amount, premium or penalty, if any, interest and other amounts of the Senior
Debt which are repaid with such proceeds, and (iii) the principal amount,
premium or penalty, if any, and interest of the Debt under the Series D
Preferred Shares which are required to be paid as a result of such Asset Sale
and which are repaid with such proceeds.


 


13

















 


“Note”
means a promissory note of the Borrower payable to the order of any Lender, in
substantially the form of the attached Exhibit E, evidencing indebtedness
of the Borrower to such Lender resulting from Advances owing to such Lender and
in an amount equal to such Lenders Pro Rata Share of the Maximum Note Amount.


 


“Notice of
Borrowing” means a notice of borrowing in the form of the attached Exhibit F
signed by a Responsible Officer of the Borrower.


 


“Notice of
Conversion or Continuation” means a notice of conversion or continuation in
the form of the attached Exhibit G signed by a Responsible Officer of the
Borrower.


 


“NPV”
means, with respect to any Proven Reserves expected to be produced from any
undivided interests in Oil and Gas Properties, the net present value,
discounted at 10% per annum, of the future net revenues expected to accrue to
the Borrower’s or any of its Subsidiary’s interests in such Proven Reserves
(after deducting all existing burdens) during the remaining expected economic
lives of such Proven Reserves.  Each
calculation of such expected future net revenues shall be made in accordance
with the then existing standards of the Society of Petroleum Engineers,
provided that in any event (a) appropriate deductions shall be made for
severance and ad valorem taxes, and for operating (including purchasing and
injecting water), gathering, transportation and marketing costs required for
the production and sale of such reserves, (b) the pricing assumptions and
escalations used in determining NPV for any particular reserves shall be based
upon the Strip Price (or any other pricing assumptions and escalations to which
the Borrower and Majority Lenders may agree) and (c) the cash-flows
derived from the pricing assumptions set forth in clause (b) above shall
be further adjusted to account for the historical basis (i.e. the
differential that exists as of any time between the price at a pricing point
and the price at the point of sale) in a manner reasonably acceptable to the
Administrative Agent.  NPV shall be
calculated hereunder in connection with each Engineering Report, either by the
Borrower, by Administrative Agent, or by the third party engineering firm who
prepares such Engineering Report; in the event of any conflict, Administrative
Agent’s calculation shall be conclusive and final, absent manifest error.


 


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


 


“Obligations”
means all principal, interest, fees, reimbursements, indemnifications, and
other amounts payable by the Borrower, any Guarantor or any of their respective
Subsidiaries to the Administrative Agent, or the Lenders under the Loan
Documents.


 


14

















 


“Oil and
Gas Properties” means fee mineral interests, term mineral interests,
Leases, subleases, farm-outs, royalties, overriding royalties, net profit
interests, carried interests, production payments and similar mineral
interests, and all unsevered and unextracted Hydrocarbons in, under, or
attributable to such oil and gas Properties and interests.


 


“Pantwist
Sale” means the sale of 100% of the Equity Interest held by the Borrower in
Pantwist LLC pursuant to the terms of the Purchase and Sale Agreement dated as
of September 5, 2008 among the Borrower, Pantwist LLC and Legacy Reserves
Operating LP without giving effect to any amendments, modification or
supplements thereto.


 


“Patriot
Act” means the USA Patriot Act (Title III of Pub. L. 107-56 (signed into
law October 26, 2001)).


 


“PBGC”
means the Pension Benefit Guaranty Corporation or any entity succeeding to any
or all of its functions under ERISA.


 


“PDP
Reserves” means Proven Reserves which are categorized as both “Developed”
and “Producing” in the definitions promulgated by the Society of Petroleum
Evaluation Engineers and the World Petroleum Congress as in effect at the time
in question; “PDNP Reserves” means Proven Reserves which are categorized
as both “Developed” and “Non-Producing” in such definitions; and “PUD
Reserves” means Proved Reserves which are categorized as “Undeveloped” in
such definitions.


 


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


 


“PDP
Present Value” means the NPV attributable to all PDP Reserves from the Oil
and Gas Properties of the Borrower and its Subsidiaries and based on an
Engineering Report or other applicable information relating to the Proven
Reserves of the Borrower and its Subsidiaries provided by Borrower.


 


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


 


“Permitted
Liens” means the Liens permitted under Section 6.01.


 


“Permitted
Prior Liens” means the Liens securing the Senior Debt and Liens permitted
under paragraphs (c) through (i) of Section 6.01.


 


“Person”
means an individual, partnership, corporation (including a business trust),
joint stock company, limited liability corporation or company, limited
liability partnership, trust, unincorporated association, joint venture or
other entity, or a government or any political subdivision or agency thereof or
any trustee, receiver, custodian or similar official.


 


15

















 


“Plan”
means an employee benefit plan (other than a Multiemployer Plan) maintained for
employees of the Borrower or any member of the Controlled Group and covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code.


 


“Pledge
Agreement” means a Pledge Agreement in substantially the form of the
attached Exhibit H, executed by the Borrower or any of its Subsidiaries or
any of the Guarantors.


 


“Projections” means, as to the Borrower and for a given period, the Borrower’s
forecasted consolidating balance sheets, profit and loss statements, and cash
flow statements, and including therein
projections for anticipated income, revenues, expenses, taxes, EBITDA
and budgeted capital expenditures during such period, all based on good faith estimates and utilizing the assumptions which are
set forth in such Projections and prepared in accordance with GAAP.


 


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


 


“Proven
Reserves” means, at any particular time, the estimated quantities of
Hydrocarbons which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs attributable
to Oil and Gas Properties included or to be included in the Borrowing Base
under then existing economic and operating conditions (i.e., prices and costs
as of the date the estimate is made).


 


“PUD
Present Value” means the NPV attributable to all PUD Reserves from the Oil
and Gas Properties of the Borrower and its Subsidiaries and based on an
Engineering Report or other applicable information relating to the Proven
Reserves of the Borrower and its Subsidiaries provided by Borrower.


 


“Pro Rata
Share” means, with respect to any Lender, the ratio (expressed as a
percentage) of aggregate Commitments of such Lender to the aggregate
Commitments of all the Lenders (or if such Commitments have been terminated or
cancelled, the ratio (expressed as a percentage) of outstanding Advances owing
to such Lender to the aggregate outstanding Advances owing to all such Lenders.


 


“Reference
Rate” means a fluctuating interest rate per annum as shall be in effect
from time to time equal to the rate of interest publicly announced by Union
Bank of California, N.A., as its reference rate, whether or not the Borrower
has notice thereof.


 


“Reference
Rate Advance” means an Advance which bears interest as provided in Section 2.09(a).


 


“Register”
has the meaning set forth in paragraph (c) of Section 9.06.


 


“Regulations
D, T, U, and X” mean Regulations D, T, U, and X of the Federal Reserve
Board, as the same is from time to time in effect, and all official rulings and
interpretations thereunder or thereof.


 


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


 


16

















 


“Response”
shall have the meaning set forth in CERCLA or under any other Environmental
Law.


 


“Responsible
Officer” means (a) with respect to any Person that is a corporation,
such Person’s Chief Executive Officer, President, Chief Financial Officer, or
Vice President, (b) with respect to any Person that is a limited liability
company, a manager or the Responsible Officer of such Person’s managing member
or manager, and (c) with respect to any Person that is a general
partnership or a limited liability partnership, the Responsible Officer of such
Person’s general partner or partners.


 


“Restricted
Payment” means, with respect to any Person, (a) any direct or indirect
dividend or distribution (whether in cash, securities or other Property) or any
direct or indirect payment of any kind or character (whether in cash,
securities or other Property) in consideration for or otherwise in connection
with any retirement, purchase, redemption or other acquisition of any Equity
Interest of such Person, or any options, warrants or rights to purchase or
acquire any such Equity Interest of such Person or (b) principal or
interest payments (in cash, Property or otherwise) on,  or redemptions of, subordinated debt of such
Person; provided that the term “Restricted Payment” shall not include
any dividend or distribution payable solely in Equity Interests of the Borrower
or warrants, options or other rights to purchase such Equity Interests.


 


“SEC”
means the United States Securities and Exchange Commission.


 


“Secured
Parties” means the Administrative Agent and the Lenders.


 


“Security
Agreements” means the Security Agreements, each in substantially the form
of the attached Exhibit I, executed by the Borrower, any of its
Subsidiaries, or any of the Guarantors.


 


“Security
Instruments” means, collectively, (a) the Mortgages, (b) the
Transfer Letters, (c) the Pledge Agreements, (d) the Security Agreements, (e) each
other agreement, instrument or document executed at any time in connection with
the Pledge Agreements, the Security Agreements, or the Mortgages, and (f) each
other agreement, instrument or document executed at any time in connection with
securing the Obligations.


 


“Senior
Administrative Agent” means Union Bank of California, N.A., in its capacity
as agent under the Senior Credit Agreement, and any successor agent pursuant
thereto.


 


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


 


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


 


“Senior
Lenders” means the lenders from time to time parties to the Senior Credit
Agreement.


 


17

















 


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


 


“Series D
Preferred Shares” means the convertible, preferred Equity Interests of the
Borrower known as the “Series D Convertible Preferred Stock” issued on August 25,
2006 and maturing on August 25, 2011, the terms of which are as set forth
in the Certificate of Designation.


 


“Solvent”
means, with respect to any Person as of the date of any determination, that on
such date (a) the fair value of the Property of such Person (both at fair
valuation and at present fair saleable value) is greater than the total
liabilities, including contingent liabilities, of such Person, (b) the
present fair saleable value of the assets of such Person is not less than the
amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured, (c) such Person is able to
realize upon its assets and pay its debts and other liabilities, contingent
obligations, and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person’s ability to pay as such
debts and liabilities mature, and (e) such Person is not engaged in
business or a transaction, and is not about to engage in business or a
transaction, for which such Person’s Property would constitute unreasonably
small capital after giving due consideration to current and anticipated future
capital requirements and current and anticipated future business conduct and
the prevailing practice in the industry in which such Person is engaged.  In computing the amount of contingent
liabilities at any time, such liabilities shall be computed at the amount
which, in light of the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.


 


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


 


“Subordination
and Intercreditor Agreement” means that certain Subordination and
Intercreditor Agreement, which shall be in a form acceptable to the
Administrative Agent and the Lenders, dated as of the date hereof among the
Administrative Agent, the Borrower, the Guarantors, the Lenders, the Senior
Agent and the Senior Lenders.


 


“Subsidiary”
means, with respect to any Person (the “parent”) at any date, any other
Person the accounts of which would be consolidated with those of the parent in
the parent’s consolidated financial statements if such financial statements
were prepared in accordance with GAAP as of such date, as well as any Person, a
majority of whose outstanding Voting Securities (other than directors’
qualifying shares) shall at any time be owned by such parent or one or more
Subsidiaries of such parent.  Unless otherwise specified,
all references herein to a “Subsidiary” 


 


18

















 


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


 


“Termination
Event” means (a) a Reportable Event described in Section 4043 of
ERISA and the regulations issued thereunder (other than a Reportable Event not
subject to the provision for 30-day notice to the PBGC under such regulations),
(b) the withdrawal of the Borrower or any of its Affiliates from a Plan
during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of
ERISA, (c) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of
ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC,
or (e) any other event or condition which constitutes grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan.


 


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


 


“Transfer
Letters” means, collectively, the letters in lieu of transfer orders in
substantially the form of the attached Exhibit J and executed by the
Borrower, any Guarantor or any of their respective Subsidiaries executing a
Mortgage.


 


“Tri-Flow”
means Tri-Flow, Inc., an Oklahoma corporation.


 


“Type”
has the meaning set forth in Section 1.04.


 


“Voting
Securities” means (a) with respect to any corporation (including any
unlimited liability company), capital stock of such corporation having general
voting power under ordinary circumstances to elect directors of such
corporation (irrespective of whether at the time stock of any other class or
classes shall have or might have special voting power or rights by reason of
the happening of any contingency), (b) with respect to any partnership,
any partnership interest or other ownership interest having general voting
power to elect the general partner or other management of the partnership or
other Person, and (c) with respect to any limited liability company,
membership certificates or interests having general voting power under ordinary
circumstances to elect managers of such limited liability company.


 


(b)         Computation of Time
Periods.  In this Agreement, with
respect to the computation of periods of time from a specified date to a later
specified date, the word “from” means “from and including” and the words “to”
and “until” each means “to but excluding”.


 


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


 


19

















 


Statements and the
Interim Financial Statements).  All
calculations made for the purposes of determining compliance with this
Agreement shall (except as otherwise expressly provided herein) be made by
application of GAAP applied on a basis consistent with those used in the
preparation of the annual or quarterly financial statements furnished to the
Lenders pursuant to Section 5.06 hereof most recently delivered prior to
or concurrently with such calculations (or, prior to the delivery of the first
financial statements under Section 5.06 hereof, used in the preparation of
the Financial Statements and the Interim Financial Statements).  In addition, all calculations and defined
accounting terms used herein shall, unless expressly provided otherwise, when
referring to any Person, refer to such Person on a consolidated basis and mean
such Person and its consolidated subsidiaries.


 


(d)         Types of Advances.  Advances are distinguished by “Type.”  The “Type” of an Advance refers to the
determination whether such Advance is a Eurodollar Rate Advance or Reference
Rate Advance.


 


(e)          Miscellaneous.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Agreement,
unless otherwise specified.  All
references to instruments, documents, contracts, and agreements are references
to such instruments, documents, contracts, and agreements as the same may be
amended, supplemented, and otherwise modified from time to time, unless
otherwise specified.  The words “hereof”,
“herein”, and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.  The term “including”
means “including, without limitation,”. 
Paragraph headings have been inserted in this Agreement as a matter of
convenience for reference only and it is agreed that such paragraph headings
are not a part of this Agreement and shall not be used in the interpretation of
any provision of this Agreement.


 


Section 2.


 


CREDIT FACILITIES


 


(a)          Commitment for
Advances.


 


(i)                                     Advances.  Each Lender severally agrees, on the terms
and conditions set forth in this Agreement, to make Advances to the Borrower
from time to time on any Business Day during the period from the Effective Date
until the Commitment Termination Date in an amount for each Lender not to
exceed such Lender’s Availability at such time. 
Each Borrowing shall be in an aggregate amount not less than $5,000,000,
and in integral multiples of $500,000 in excess thereof, and shall consist of
Advances of the same Type made on the same day by the Lenders ratably according
to their respective Availability.  Any
Advances which have been prepaid or repaid may not be reborrowed.


 


(ii)                                  Advances
upon Increase in Commitments.  Each
Lender that increases its Commitment under Section 2.16 (including any new
Lender that joins this Agreement as a Lender pursuant to a joinder agreement as
provided in Section 2.16) severally agrees, on the terms and conditions
set forth in this Agreement, to make a single advance term loan on the Increase
Effective Date on a non-revolving basis to the Borrower in an amount equal to
its


 


20
















 


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


 


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


 


(b)         [Reserved].


 


(c)          Method of Borrowing.


 


(i)                                     Notice.  Each
Borrowing shall be made pursuant to a Notice of Borrowing (or by telephone
notice promptly confirmed in writing by a Notice of Borrowing), given not later
than 10:00 a.m.  (Dallas, Texas
time) / 8:00 a.m. (Los Angeles, California time) (i) on the third
Business Day before the date of the proposed Borrowing, in the case of a
Borrowing comprised of Eurodollar Rate Advances (other than the initial
Borrowing to be made on the Effective Date) or (ii) on the Business Day of
the proposed Borrowing, in the case of a Borrowing comprised of Reference Rate
Advances (or Eurodollar Rate Advances in the case of the Borrowing to be made
on the Effective Date), by the Borrower to the Administrative Agent, which
shall in turn give to each Lender prompt notice of such proposed Borrowing by
telecopier or telex.  Each Notice of a
Borrowing shall be given by telecopier or telex, confirmed immediately in
writing, specifying the information required therein.  In the case of a proposed Borrowing comprised
of Eurodollar Rate Advances, the Administrative Agent shall promptly notify
each Lender of the applicable interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m.  (Dallas, Texas time) / 10:00 a.m. (Los
Angeles, California time) on the date of such Borrowing, make available for the
account of its Lending Office to the Administrative Agent at its address referred
to in Section 9.02, or such other location as the Administrative Agent may
specify by notice to the Lenders, in same day funds, in the case of a
Borrowing, such Lender’s Pro Rata Share of such Borrowing.  After the Administrative Agent’s receipt of such
funds and upon fulfillment of the applicable conditions set forth in Article III,
the Administrative Agent shall make such funds available to the Borrower at its
account with the Administrative Agent.


 


(ii)                                  Conversions
and Continuations.  The Borrower may
elect to Convert or continue any Borrowing under this Section 2.03 by
delivering an irrevocable Notice of Conversion or Continuation to the
Administrative Agent at the Administrative Agent’s office no later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m.  (Los Angeles, California time) (i) on
the date which is at least three Business Days in advance of the proposed
Conversion or continuation date in the case of a Conversion to or a
continuation of a Borrowing comprised of Eurodollar Rate Advances and (ii) on
the Business Day of the proposed Conversion in the case of a Conversion to a
Borrowing comprised of Reference Rate Advances. 
Each such Notice of Conversion or Continuation shall be in writing or by
telex or telecopier confirmed immediately in writing specifying the information
required therein.  Promptly after receipt
of a Notice of Conversion or Continuation under this Section, the
Administrative Agent shall provide each Lender with a copy thereof and, in the
case of a Conversion to or a continuation of a Borrowing comprised of
Eurodollar Rate Advances, notify each Lender of the applicable interest rate
under Section 2.09(b).


 


21

















 


(iii)                               Certain
Limitations.  Notwithstanding
anything to the contrary contained in paragraphs (a) and (b) above:


 


(i)                                     at
no time shall there be more than one Interest Period applicable to outstanding
Eurodollar Rate Advances and the Borrower may not select Eurodollar Rate
Advances for any Borrowing at any time that a Default has occurred and is
continuing;


 


(ii)                                  if
any Lender shall, at least one Business Day before the date of any requested
Borrowing, Conversion, or continuation, notify the Administrative Agent that
the introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or that any central bank or other Governmental
Authority asserts that it is unlawful, for such Lender or its Lending Office to
perform its obligations under this Agreement to make Eurodollar Rate Advances or
to fund or maintain Eurodollar Rate Advances, the right of the Borrower to
select Eurodollar Rate Advances from such Lender shall be suspended until such
Lender shall notify the Administrative Agent that the circumstances causing
such suspension no longer exist, and the Advance made by such Lender in respect
of such Borrowing, Conversion, or continuation shall be a Reference Rate
Advance;


 


(iii)                               if
the Administrative Agent is unable to determine the Eurodollar Rate for
Eurodollar Rate Advances comprising any requested Borrowing, the right of the
Borrower to select Eurodollar Rate Advances for such Borrowing or for any
subsequent Borrowing shall be suspended until the Administrative Agent shall
notify the Borrower and the Lenders that the circumstances causing such
suspension no longer exist, and each Advance comprising such Borrowing shall be
a Reference Rate Advance;


 


(iv)                              if
the Majority Lenders shall, at least one Business Day before the date of any
requested Borrowing, notify the Administrative Agent that the Eurodollar Rate
for Eurodollar Rate Advances comprising such Borrowing will not adequately
reflect the cost to such Lenders of making or funding their respective
Eurodollar Rate Advances, as the case may be, for such Borrowing, the right of
the Borrower to select Eurodollar Rate Advances for such Borrowing or for any
subsequent Borrowing shall be suspended until the Administrative Agent shall
notify the Borrower and the Lenders that the circumstances causing such
suspension no longer exist, and each Advance comprising such Borrowing shall be
a Reference Rate Advance; and


 


(v)                                 if
the Borrower shall fail to select the duration or continuation of any Interest
Period for any Eurodollar Rate Advances in accordance with the provisions
contained in the definition of “Interest Period” in Section 1.01 and
paragraph (b) above, the Administrative Agent shall forthwith so
notify the Borrower and the Lenders and such Advances shall be made available
to the Borrower on the date of such Borrowing as Reference Rate Advances or, if
an existing Advance, Convert into Reference Rate Advances.


 


(iv)                              Notices
Irrevocable.  Each Notice of
Borrowing and Notice of Conversion or Continuation shall be irrevocable and
binding on the Borrower.  In the case of
any Borrowing for which the related Notice of Borrowing specifies is to be
comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender
against any loss, out-of-pocket cost, or expense incurred by such Lender as a
result of any failure by the Borrower to fulfill on or before 


 


22

















 


the date specified in
such Notice of Borrowing for such Borrowing the applicable conditions set forth
in Article III including, without limitation, any loss (including any loss
of anticipated profits), cost, or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by such Lender to fund the
Advance to be made by such Lender as part of such Borrowing when such Advance,
as a result of such failure, is not made on such date.


 


(v)                                 Administrative
Agent Reliance.  Unless the
Administrative Agent shall have received notice from a Lender before the date
of any Borrowing that such Lender shall not make available to the
Administrative Agent such Lender’s Pro Rata Share of a Borrowing, the
Administrative Agent may assume that such Lender has made its Pro Rata Share of
such Borrowing available to the Administrative Agent on the date of such
Borrowing in accordance with paragraph (a) of this Section 2.03
and the Administrative Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount.  If and to the extent that such Lender shall
not have so made its Pro Rata Share of such Borrowing available to the
Administrative Agent, such Lender and the Borrower severally agree to
immediately repay to the Administrative Agent on demand such corresponding
amount, together with interest on such amount, for each day from the date such
amount is made available to the Borrower until the date such amount is repaid
to the Administrative Agent, at (i) in the case of the Borrower, the
interest rate applicable on such day to Advances comprising such Borrowing and (ii) in
the case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to the
Administrative Agent such corresponding amount and interest as provided above,
such corresponding amount so repaid shall constitute such Lender’s Advance as
part of such Borrowing for purposes of this Agreement even though not made on
the same day as the other Advances comprising such Borrowing.


 


(vi)                              Lender
Obligations Several.  The failure of
any Lender to make the Advance to be made by it as part of any Borrowing shall
not relieve any other Lender of its obligation, if any, to make its Advance on
the date of such Borrowing.  No Lender
shall be responsible for the failure of any other Lender to make the Advance to
be made by such other Lender on the date of any Borrowing.


 


(d)         Reduction of the
Commitment.


 


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


 


(ii)                                  Other
than as provided in Section 2.04(c) below, any reduction and
termination of the Commitments pursuant to this Section 2.04 shall be
applied ratably to each Lender’s Commitment and shall be permanent, with no
obligation of the Lenders to reinstate such Commitments.


 


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


 


23

















 


such Defaulting Lender
under this Agreement and under the other Loan Documents (including principal of
and interest on the Advances owed to such Defaulting Lender, accrued commitment
fees, and letter of credit fees but specifically excluding any amounts owing
under Section 2.12 as result of such payment of Advances), (iii) a
Defaulting Lender’s Commitment may be terminated by the Borrower under this Section 2.04(c) if
and only if at such time, the Borrower has elected, or is then electing, to
terminate the Commitments of all then existing Defaulting Lenders.  Upon written notice to the Defaulting Lender
and Administrative Agent of the Borrower’s election to terminate a Defaulting
Lender’s Commitment pursuant to this clause (c) and the payment and
deposit of amounts required to be made by the Borrower under clause (ii) above,
(A) such Defaulting Lender shall cease to be a “Lender” hereunder for all
purposes except that such Lender’s rights under Sections 2.13, 2.14, and 9.07
shall continue with respect to events and occurrences occurring before or
concurrently with its ceasing to be a “Lender” hereunder, (B) such
Defaulting Lender’s Commitment shall be deemed terminated, and (C) such
Defaulting Lender shall be relieved of its obligations hereunder


 


(e)          Prepayment of
Advances.


 


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


 


(ii)                                  Mandatory.


 


(i)                                     Change
in Control.  If a Change in Control
shall occur and the Borrower has not optionally prepaid in full the outstanding
principal amount of the Advances concurrently with the consummation of such
Change in Control, at the Lenders’ option (which option may be exercised in
their sole discretion) the Borrower shall prepay the outstanding principal
amount of the Advances, in whole or in part as elected by the Lenders, together
with (A) the accrued interest to the date of such prepayment on the
principal amount prepaid, (B) the amounts, if any, required to be paid
pursuant to Section 2.12 as a result of such prepayment being made on such
date, (C) if such Change in Control occurs on or prior to the first
anniversary of the Effective Date, a prepayment premium in an amount equal to
2.00% of the principal amount required to be 


 


24

















 


prepaid; and (D) if
such Change in Control occurs after the first anniversary of the Effective Date
but on or prior to the second anniversary of the Effective Date, a prepayment
premium in an amount equal to 1.00% of the principal amount required to be
prepaid.  No prepayment premium will be
due for any Change of Control which occurs after the second anniversary of the
Effective Date.  If the Lenders require
the Borrower to prepay the Advances as provided above, the Administrative Agent
shall so notify the Borrower in writing, which notice shall specify the amount
to be paid by the Borrower pursuant to this Section 2.05(b).  The Borrower shall pay all such amounts in
full within two Business Days of receipt of such notice.  The foregoing will not be deemed to be a
consent by Lenders to any Change of Control or a waiver of any Default
resulting therefrom.


 


(ii)                                  Asset
Sales.  Subject to the terms of the
Subordination and Intercreditor Agreement, not later than one Business Day
following the receipt of any Net Cash Proceeds of any Asset Sale (regardless of
whether such Asset Sale was permitted herein), the Borrower shall apply 100% of
such Net Cash Proceeds and make a prepayment of the outstanding Advances,
together with (A) the accrued interest to the date of such prepayment on
the principal amount prepaid, (B) the amounts, if any, required to be paid
pursuant to Section 2.12 as a result of such prepayment being made on such
date, (C) if such Asset Sale occurs on or prior to the first anniversary
of the Effective Date, a prepayment premium in an amount equal to 2.00% of the
principal amount required to be prepaid; and (D) if such Asset Sale occurs
after the first anniversary of the Effective Date but on or prior to the second
anniversary of the Effective Date, a prepayment premium in an amount equal to
1.00% of the principal amount required to be prepaid.  No prepayment premium will be due for any
Asset Sale which occurs after the second anniversary of the Effective Date.   The foregoing will not be deemed to be a
consent by Lenders to any Asset Sale or a waiver of any Default resulting
therefrom.


 


(iii)                               Illegality.  If any Lender shall notify the Administrative
Agent and the Borrower that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or that any central
bank or other Governmental Authority asserts that it is unlawful for such
Lender or its Lending Office to perform its obligations under this Agreement to
maintain any Eurodollar Rate Advances of such Lender then outstanding hereunder,
(i) the Borrower shall, no later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (Los
Angeles, California time) (A) if not prohibited by law, on the last day of
the Interest Period for each outstanding Eurodollar Rate Advance made by such
Lender or (B) if required by such notice, on the second Business Day
following its receipt of such notice, prepay all of the Eurodollar Rate
Advances made by such Lender then outstanding, together with accrued interest
on the principal amount prepaid to the date of such prepayment and amounts, if
any, required to be paid pursuant to Section 2.12 as a result of such
prepayment being made on such date, (ii) such Lender shall simultaneously
make a Reference Rate Advance to the Borrower on such date in an amount equal to
the aggregate principal amount of the Eurodollar Rate Advances prepaid to such
Lender, and (iii) the right of the Borrower to select Eurodollar Rate
Advances from such Lender for any subsequent Borrowing shall be suspended until
such Lender gives notice referred to above shall notify the Administrative
Agent that the circumstances causing such suspension no longer exist.


 


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


 


25

















 


all notices given
pursuant to this Section 2.05 shall be irrevocable and binding upon the
Borrower.  Each payment of any Advance
pursuant to this Section 2.05 shall be made in a manner such that all
Advances comprising part of the same Borrowing are paid in whole or ratably in
part.


 


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


 


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


 


(h)         Fees.  The Borrower shall pay the fees as agreed to
between the Borrower and the Administrative Agent in that certain fee letter
dated the date hereof.


 


(i)             Interest.


 


(i)                                     Rates
Based on Applicable Margin.  The
Borrower shall pay interest on the unpaid principal amount of each Advance made
by each Lender from the date of such Advance until such principal amount shall
be paid in full, at the following rates per annum:


 


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


 


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


 


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


 


26

















 


interest is payable on
such Advance.  Such additional interest
payable to any Lender shall be determined by such Lender and notified to the
Borrower through the Administrative Agent (such notice to include the
calculation of such additional interest, which calculation shall be conclusive
in the absence of manifest error).


 


(iii)                               [Reserved]


 


(iv)                              Usury
Recapture.


 


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


 


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


 


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


 


(j)             Payments and
Computations.


 


(i)                                     Payment
Procedures.  The Borrower shall make
each payment under this Agreement and under the Notes not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (Los
Angeles, California time) on the day when due in Dollars to the Administrative
Agent at the location referred to in the Notes (or such other location as the
Administrative Agent shall designate in writing to the Borrower) in same day
funds without deduction, setoff, or counterclaim of any kind, except as may be
applicable to any Defaulting Lender.  The
Administrative Agent shall promptly thereafter cause to be distributed like
funds relating to the 


 


27

















 


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


 


(ii)                                  Computations.  All computations of interest based on the
Reference Rate and of fees shall be made by the Administrative Agent on the
basis of a year of 365 or 366 days, as the case may be, and all computations of
interest based on the Eurodollar Rate and the Federal Funds Rate shall be made
by the Administrative Agent, on the basis of a year of 360 days, in each case
for the actual number of days (including the first day, but excluding the last
day) occurring in the period for which such interest or fees are payable.  Each determination by the Administrative
Agent of an interest rate or fee shall be conclusive and binding for all
purposes, absent manifest error.


 


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


 


(iv)                              Administrative
Agent Reliance.  Unless the
Administrative Agent shall have received written notice from the Borrower prior
to the date on which any payment is due to the Lenders that the Borrower shall
not make such payment in full, the Administrative Agent may assume that the
Borrower has made such payment in full to the Administrative Agent on such date
and the Administrative Agent may, in reliance upon such assumption, cause to be
distributed to each Lender on such date an amount equal to the amount then due
such Lender.  If and to the extent the
Borrower shall not have so made such payment in full to the Administrative
Agent, each Lender shall repay to the Administrative Agent forthwith on demand
such amount distributed to such Lender, together with interest, for each day
from the date such amount is distributed to such Lender until the date such
Lender repays such amount to the Administrative Agent, at the Federal Funds
Rate for such day.


 


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


 


28

















 


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


 


(l)             Breakage Costs.  If (a) any payment of principal of any
Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance, whether as a result of any payment pursuant to Section 2.05,
the acceleration of the maturity of the Notes pursuant to Article VII, or
otherwise, or (b) the Borrower fails to make a principal or interest
payment with respect to any Eurodollar Rate Advance on the date such payment is
due and payable, the Borrower shall, within 10 days of any written demand sent
by any Lender to the Borrower through the Administrative Agent, pay to the
Administrative Agent for the account of such Lender any amounts required to
compensate such Lender for any additional losses, out-of-pocket costs or
expenses which it may reasonably incur as a result of such payment or
nonpayment, including, without limitation, any loss (including loss of
anticipated profits), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by any Lender to fund or
maintain such Advance.


 


(m)       Increased Costs.


 


(i)                                     Eurodollar
Rate Advances.  If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements included in the Eurodollar Rate Reserve
Percentage) in or in the interpretation of any law or regulation or (ii) the
compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), there shall be
any increase in the cost to any Lender of agreeing to make or making, funding,
or maintaining Eurodollar Rate Advances, then the Borrower shall from time to
time, upon demand by such Lender (with a copy of such demand to the
Administrative Agent), immediately pay to the Administrative Agent for the
account of such Lender additional amounts sufficient to compensate such Lender
for such increased cost.  A certificate
as to the amount of such increased cost and detailing the calculation of such
cost submitted to the Borrower and the Administrative Agent by such Lender
shall be conclusive and binding for all purposes, absent manifest error.


 


(ii)                                  Capital
Adequacy.  If any Lender determines
in good faith that compliance with any law or regulation adopted or changed
after the date hereof or any guideline or request from any central bank or
other Governmental Authority (whether or not having the force of law) affects
or would affect the amount of capital required or expected to be maintained by
such 


 


29

















 


Lender or any corporation
controlling such Lender and that the amount of such capital is increased by or
based upon the existence of such Lender’s commitment to lend and other
commitments of this type, then, upon 30 days’ prior written notice by such
Lender (with a copy of any such demand to the Administrative Agent), the
Borrower shall immediately pay to the Administrative Agent for the account of
such Lender, from time to time as specified by such Lender, additional amounts
sufficient to compensate such Lender, in light of such circumstances, to the
extent that such Lender reasonably determines such increase in capital to be
allocable to the existence of such Lender’s commitment to lend under this
Agreement.  A certificate as to such
amounts and detailing the calculation of such amounts submitted to the Borrower
by such Lender shall be conclusive and binding for all purposes, absent
manifest error.


 


(iii)                               Reserved.


 


(iv)                              Mitigation.  Each Lender claiming compensation pursuant to
this Section 2.13 shall designate a different Lending Office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the sole discretion of such Lender, be otherwise
disadvantageous to such Lender.


 


(n)         Taxes.


 


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


 


(ii)                                  Other
Taxes.  In addition, the Borrower
agrees to pay any present or future stamp or documentary taxes or any other
excise or property taxes, charges or similar levies which arise from any
payment made or from the execution, delivery or registration of, or otherwise
with respect to, this Agreement, the Notes, or the other Loan Documents
(hereinafter referred to as “Other Taxes”).


 


30

















 


(iii)                               Indemnification.  THE BORROWER INDEMNIFIES
EACH LENDER AND THE ADMINISTRATIVE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER
TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY
JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14) PAID BY SUCH
LENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY
(INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO,
WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY
ASSERTED.  EACH PAYMENT REQUIRED TO BE
MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE
ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION
WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM
THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS ADMINISTRATIVE AGENT OR ANY
SUCH LENDER.  IF ANY LENDER OR THE
ADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE
BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER OR THE ADMINISTRATIVE
AGENT, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE BORROWER THE BORROWER’S
SHARE OF SUCH REFUND.


 


(iv)                              Foreign
Lender Withholding Exemption.  Each
Lender that is not incorporated under the laws of the United States of America
or a state thereof agrees that it shall deliver to the Borrower and the
Administrative Agent (i) two duly completed copies of United States
Internal Revenue Service Form W8-ECI or W8-BEN or successor applicable
form, as the case may be, certifying in each case that such Lender is entitled
to receive payments under this Agreement and the Notes payable to it, without
deduction or withholding of any United States federal income taxes, (ii) if
applicable, an Internal Revenue Service Form W-8 or W-9 or successor
applicable form, as the case may be, to establish an exemption from United
States backup withholding tax, and (iii) any other governmental forms
which are necessary or required under an applicable tax treaty or otherwise by
law to reduce or eliminate any withholding tax, which have been reasonably
requested by the Borrower.  Each Lender which
delivers to the Borrower and the Administrative Agent a Form W8-ECI or
W8-BEN and Form W-8 or W-9 pursuant to the next preceding sentence further
undertakes to deliver to the Borrower and the Administrative Agent two further
copies of the said letter and Form W8-ECI or W8-BEN and Form W-8 or
W-9 , or successor applicable forms, or other manner of certification, as the
case may be, on or before the date that any such letter or form expires or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent letter and form previously delivered by it to the Borrower and the
Administrative Agent, and such extensions or renewals thereof as may reasonably
be requested by the Borrower and the Administrative Agent certifying in the
case of a Form W8-ECI or W8-BEN that such Lender is entitled to receive
payments under this Agreement without deduction or withholding of any United
States federal income taxes.  If an event
(including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any delivery required by the preceding
sentence would otherwise be required which renders all such forms inapplicable
or which would prevent any Lender from duly completing and delivering any such
letter or form with respect to it and such Lender advises the Borrower and the
Administrative Agent that it is not capable of receiving payments without any
deduction or withholding of United States federal income tax, and in the case
of a Form W-8 


 


31

















 


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


 


(o)         Replacement of Lender.  If (i) any Lender requests compensation
under Section 2.13(a) or (b), (ii) any Lender suspends its
obligation to continue, or Convert Advances into, Eurodollar Rate Advances
pursuant to Section 2.03(c)(ii) or Section 2.11, or (iii) at
any time prior to the Commitment Termination Date, any Lender becomes a
Defaulting Lender (any such Lender, a “Subject Lender”), then (A) in
the case of a Defaulting Lender, the Administrative Agent may, upon notice to
the Subject Lender and the Borrower, require such Subject Lender to assign and
delegate, without recourse (in accordance with and subject to the restrictions
contained in, and consents required by, Section 9.06), all of its
interests, rights and obligations under this Agreement and the related Loan
Documents to an Eligible Assignee that shall assume such obligations (which
Eligible Assignee may be another Lender, if a Lender accepts such assignment)
and (B) in the case of any Subject Lender, including a Defaulting Lender,
the Borrower may, upon notice to the Subject Lender and the Administrative
Agent and at the Borrower’s sole cost and expense, require such Subject Lender
to assign, without recourse (in accordance with and subject to the restrictions
contained in, and consents required by, Section 9.06), all of its
interests, rights and obligations under this Agreement and the related Loan
Documents to an assignee that shall assume such obligations (which assignee may
be another Lender, if a Lender accepts such assignment), provided that:


 


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


 


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


 


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


 


(D)                               such
assignment does not conflict with applicable Legal Requirements.


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


 


32






 












 


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


 


(p)   Increase in Commitments.


 


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


 


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


 


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


 


(iv)          Effective Date and Allocations.  If the Commitments are increased in
accordance with this Section, the Administrative Agent and the Borrower shall
determine the effective date (the “Increase Effective Date”) and the
final allocation of such increase.  The
Administrative Agent shall promptly notify the Borrower and the Lenders of the
final allocation of such increase and the Increase Effective Date.


 


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


 


33

















 


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


 


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


 


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


 


Section 3.



CONDITIONS OF LENDING


 


(a)   Conditions Precedent to Initial Credit
Extension.  The obligation of each Lender to make its
Credit Extension on the Effective Date hereunder is subject to satisfaction of
the following conditions
precedent:


 


(i)            Documentation.  The Administrative Agent shall have received
the following duly executed by all the parties thereto, in form and substance
satisfactory to the Administrative Agent and the Lenders, and, where
applicable, in sufficient copies for each Lender:


 


(i)            this Agreement, a Note payable to
the order of each Lender in the amount of its Commitment, the Guaranties, the
Pledge Agreement, the Security Agreements, and Mortgages encumbering
substantially all of the Borrower’s and its Subsidiaries’ Proven Reserves and
Oil and Gas Properties in which the Senior Administrative Agent has a Lien, and
each of the other Loan Documents, and all attached exhibits and schedules;


 


(ii)           a favorable opinion of the Borrower’s,
its Subsidiaries’ and the Guarantors’ counsel dated as of the date of this
Agreement and substantially in the form of the attached Exhibit K covering
the matters discussed in such Exhibit and such other matters as any Lender
through the Administrative Agent may reasonably request;


 


(iii)          copies, certified as of the date of this
Agreement by a Responsible Officer of the Borrower of (A) the resolutions
of the Board of Directors of the Borrower approving the Loan Documents to which
the Borrower is a party, (B) the certificate of incorporation of the 


 


34

















 


Borrower, (C) the
bylaws of the Borrower, and (D) all other documents evidencing other
necessary corporate action and governmental approvals, if any, with respect to
this Agreement, the Note, and the other Loan Documents;


 


(iv)          certificates of a Responsible Officer
of the Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Agreement, the Notes, Notices of Borrowing,
Notices of Conversion or Continuation, and the other Loan Documents to which
the Borrower is a party;


 


(v)           copies, certified as of the date of
this Agreement by a Responsible Officer or the secretary or an assistant
secretary of each Guarantor of (A) the resolutions of the Board of
Directors (or other applicable governing body) of such Guarantor approving the
Loan Documents to which it is a party, (B) the articles or certificate (as
applicable) of incorporation (or organization) and bylaws of such Guarantor,
and (C) all other documents evidencing other necessary corporate action
and governmental approvals, if any, with respect to the Guaranty, the Security
Instruments, and the other Loan Documents to which such Guarantor is a party;


 


(vi)          a certificate of the secretary or an
assistant secretary of each Guarantor certifying the names and true signatures
of officers of such Guarantor authorized to sign the Guaranty, Security
Instruments and the other Loan Documents to which such Guarantor is a party;


 


(vii)         a certificate dated as of the date of
this Agreement from the Responsible Officer of the Borrower stating that the
conditions in this Section 3.01 have been met;


 


(viii)        appropriate UCC-1 Financing Statements
covering the Collateral for filing with the appropriate authorities and any
other documents, agreements or instruments necessary to create an Acceptable
Security Interest in such Collateral;


 


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


 


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


 


(xi)           the Subordination and Intercreditor
Agreement; and


 


(xii)          such other documents, governmental
certificates, agreements and lien searches as the Administrative Agent or any
Lender may reasonably request.


 


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


 


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


 


35

















 


consolidating financial
statements of the Borrower as of the Effective Date after giving effect to the
Advances made hereunder and any credit extensions outstanding on the Effective
Date under the Senior Credit Agreement, including therein the Borrower’s
consolidated balance sheet and statements of income, cash flows, and retained
earnings, (v) a sources and uses statement outlining the uses to which the
proceeds of the Advances will be applied on the Effective Date, and (vi) such
other financial information as the Lenders may reasonably request.


 


(iv)          Security Instruments.  The Administrative Agent shall have received
all appropriate evidence required by the Administrative Agent and the Lenders
in their sole discretion necessary to determine that the Administrative Agent
(for its benefit and the benefit of the Secured Parties) shall have an
Acceptable Security Interest in the Collateral and that all actions or filings
necessary to protect, preserve and validly perfect such Liens have been made,
taken or obtained, as the case may be, and are in full force and effect.


 


(v)           Due Diligence on Title and
Environmental.  The Administrative
Agent shall be satisfied with the condition of the Oil and Gas Properties with
respect to the Borrower’s and its Subsidiaries’ compliance with Environmental
Laws and the Borrower’s and its Subsidiaries’ title to such properties.


 


(vi)          No Default.  No Default shall have occurred and be
continuing.


 


(vii)         Representations and Warranties.  The representations and warranties contained
in Article IV hereof and in each other Loan Document shall be true and
correct in all material respects.


 


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


 


(ix)           No Proceeding or Litigation; No
Injunctive Relief.  No action, suit,
investigation or other proceeding (including, without limitation, the enactment
or promulgation of a statute or rule) by or before any arbitrator or any
Governmental Authority shall be threatened or pending and no preliminary or
permanent injunction or order by a state or federal court shall have been
entered (i) in connection with this Agreement or any transaction
contemplated hereby or (ii) which in the judgment of the Administrative
Agent, could reasonably be expected to result in a Material Adverse Change
(other than the developments under the litigation proceedings set forth on
Schedule 4.07 which have been disclosed to the Administrative Agent prior to
the Effective Date).


 


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


 


36

















 


be in full force and
effect, and all applicable waiting periods shall have expired without any
action being taken or threatened by any competent authority which would
restrain, prevent or otherwise impose adverse conditions on this Agreement and
the actions contemplated hereby.


 


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


 


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


 


(xiii)         USA Patriot Act.  The Borrower has delivered to each Lender
that is subject to the Patriot Act such information requested by such Lender in
order to comply with the Patriot Act.


 


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


 


(i)            the following statements shall be
true (and each of the giving of the applicable Notice of Borrowing and Notice
of Conversion or Continuation and the acceptance by the Borrower of the
proceeds of such Borrowing shall constitute a representation and warranty by
the Borrower that on the date of such Borrowing such statements are true):


 


(i)            the representations and warranties
contained in Article IV of this Agreement and the representations and
warranties contained in the Security Instruments, the Guaranties, and each of
the other Loan Documents are true and correct in all material respects on and
as of the date of such Borrowing before and after giving effect to such
Borrowing and to the application of the proceeds from such Borrowing, as though
made on and as of such date except to the extent that any such representation
or warranty expressly relates solely to an earlier date, in which case it shall
have been true and correct in all material respects as of such earlier date;
and


 


(ii)           no Default has occurred and is
continuing or would result from such Borrowing or from the application of the
proceeds therefrom, and


 


(ii)           the Administrative Agent shall have
received such other approvals, opinions, or documents reasonably deemed
necessary or desirable by any Lender as a result of circumstances occurring
after the date of this Agreement, as any Lender through the Administrative
Agent may reasonably request.


 


37





















 


Section 4.


 


REPRESENTATIONS
AND WARRANTIES


 


The Borrower
represents and warrants as follows:


 


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


 


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


 


(c)   Authorization and Approvals.  No consent, order, authorization, or approval
or other action by, and no notice to or filing with, any Governmental Authority
or any other Person is required for the due execution, delivery, and
performance by the Borrower of this Agreement, the Notes, or the other Loan
Documents to which the Borrower is a party or by each Guarantor of its Guaranty
or the other Loan Documents to which it is a party or the consummation of the
transactions contemplated thereby.  At
the time of each Borrowing, no authorization or approval or other action by,
and no notice to or filing with, any Governmental Authority will be required
for such Borrowing or the use of the proceeds of such Borrowing.


 


(d)   Enforceable Obligations.  This Agreement, the Notes, and the other Loan
Documents to which the Borrower is a party have been duly executed and
delivered by the Borrower and the Guaranties and the other Loan Documents to
which each Guarantor is a party have been duly executed and delivered by the
Guarantors.  Each Loan Document is the
legal, 


 


38

















 


valid, and binding
obligation of the Borrower and each Guarantor which is a party to it
enforceable against the Borrower and each such Guarantor in accordance with its
terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium, or similar law affecting
creditors’ rights generally and by general principles of equity.


 


(e)   Financial Statements.


 


(i)            The Borrower has
delivered to the Administrative Agent and the Lenders copies of the Financial
Statements and the Interim Financial Statements, and the Financial Statements and the
Interim Financial Statements are
accurate and complete in all material respects and present fairly the financial
condition of Borrower and its consolidated Subsidiaries for their respective
period in accordance with GAAP.  As of
the date of the Financial Statements, there were no material contingent
obligations, liabilities for taxes, unusual forward or long-term commitments,
or unrealized or anticipated losses of the Borrower or any Subsidiary, except
as disclosed therein and adequate reserves for such items have been made in
accordance with GAAP.


 


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


 


(iii)          As of the date
hereof, the Borrower, the Guarantors and their respective Subsidiaries have no
Debt other than the Debt listed on Schedule 4.05.


 


(f)    True and Complete Disclosure.  All factual information (excluding estimates)
heretofore or contemporaneously furnished by or on behalf of the Borrower or
any of the Guarantors in writing to any Lender or the Administrative Agent for
purposes of or in connection with this Agreement, any other Loan Document or
any transaction contemplated hereby or thereby is, and all other such factual
information hereafter furnished by or on behalf of the Borrower and the
Guarantors in writing to the Administrative Agent or any of the Lenders was or
shall be, true and accurate in all material respects on the date as of which
such information was or is dated or certified and did not or does not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements contained therein not misleading at such
time.  All projections, estimates, and
pro forma financial information furnished by the Borrower were prepared on the
basis of assumptions, data, information, tests, or conditions believed to be
reasonable at the time such projections, estimates, and pro forma financial
information were furnished.


 


(g)   Litigation; Compliance with Laws.


 


(i)            There is no pending or, to the best
knowledge of the Borrower, threatened action or proceeding affecting the
Borrower or any of the Guarantors before any court, Governmental Authority or
arbitrator which could reasonably be expected to cause a Material Adverse
Change other than as set forth in Schedule 4.07 or which purports to affect the
legality, validity, binding effect or enforceability of this Agreement, any
Note, or any other Loan Document. 
Additionally, there is no pending or, to the best of the knowledge of
the Borrower, threatened action or proceeding instituted against the Borrower
or any of the Guarantors which 


 


39

















 


seeks to adjudicate the
Borrower or any of the Guarantors as bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of an
order for relief or the appointment of a receiver, trustee or other similar
official for it or for any substantial part of its Property.


 


(ii)           The Borrower and its Subsidiaries
have complied in all material respects with all material statutes, rules,
regulations, orders and restrictions of any Governmental Authority having
jurisdiction over the conduct of their respective businesses or the ownership
of their respective Property


 


(h)   Use of Proceeds.  The proceeds of the Advances will be used by
the Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U). 
No proceeds of any Advance will be used to purchase or carry any margin
stock in violation of Regulation T, U or X.


 


(i)    Investment Company Act.  Neither the Borrower nor any of the
Guarantors is an “investment company” or a company “controlled” by an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.


 


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


 


(k)   Taxes.


 


(i)            Reports and Payments.  All Returns (as defined below in clause (c) of
this Section) required to be filed by or on behalf of the Borrower, the
Guarantors, or any member of the Controlled Group (hereafter collectively
called the “Tax Group”) have been duly filed on a timely basis or appropriate
extensions have been obtained and such Returns are and will be true, complete
and correct, except where the failure to so file would not be reasonably
expected to cause a Material Adverse Change; and all Taxes shown to be payable
on the Returns or on subsequent assessments with respect thereto will have been
paid in full on a timely basis, and no other Taxes will be payable by the Tax
Group with respect to items or periods covered by such Returns, except in each
case to the extent of (i) reserves reflected in the Financial Statements
and the Interim Financial Statements, or (ii) taxes that are being
contested in good faith.  The reserves
for accrued Taxes reflected in the financial statements delivered to the
Lenders under this Agreement are adequate in the aggregate for the payment of
all unpaid Taxes, whether or not disputed, for the period ended as of the date
thereof and for any period prior thereto, and for which the Tax Group may be
liable in its own right, as withholding agent or as a transferee of the assets
of, or successor to, any Person.


 


40

















 


(ii)           Taxes Definition.  “Taxes” in this Section 4.11 shall mean
all taxes, charges, fees, levies, or other assessments imposed by any federal,
state, local, or foreign taxing authority, including without limitation,
income, gross receipts, excise, real or personal property, sales, occupation,
use, service, leasing, environmental, value added, transfer, payroll, and
franchise taxes (and including any interest, penalties, or additions to tax
attributable to or imposed on with respect to any such assessment).


 


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


 


(l)    Pension Plans.  All Plans are in compliance in all material
respects with all applicable provisions of ERISA.  No Termination Event has occurred with
respect to any Plan, and each Plan has complied with and been administered in
all material respects in accordance with applicable provisions of ERISA and the
Code.  No “accumulated funding deficiency”
(as defined in Section 302 of ERISA) has occurred and there has been no
excise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043
of ERISA and the regulations issued thereunder has occurred with respect to any
Multiemployer Plan, and each Multiemployer Plan has complied with and been
administered in all material respects with applicable provisions of ERISA and
the Code.  The present value of all
benefits vested under each Plan (based on the assumptions used to fund such
Plan) did not, as of the last annual valuation date applicable thereto, exceed
the value of the assets of such Plan allocable to such vested benefits.  Neither the Borrower nor any member of the
Controlled Group has had a complete or partial withdrawal from any
Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation date
applicable thereto, neither the Borrower nor any member of the Controlled Group
would become subject to any liability under ERISA if the Borrower or any member
of the Controlled Group has received notice that any Multiemployer Plan is
insolvent or in reorganization.  Based
upon GAAP existing as of the date of this Agreement and current factual
circumstances, the Borrower has no reason to believe that the annual cost
during the term of this Agreement to the Borrower or any member of the
Controlled Group for post-retirement benefits to be provided to the current and
former employees of the Borrower or any member of the Controlled Group under
Plans that are welfare benefit plans (as defined in Section 3(1) of
ERISA) could, in the aggregate, reasonably be expected to cause a Material
Adverse Change.


 


(m)  Condition of Property; Casualties.  Each of the Borrower and the Guarantors has
good and marketable title to all of its Oil and Gas Properties as is customary
in the oil and gas industry in all material respects, free and clear of all
Liens except for Permitted Liens.  Each
of the Borrower and the Guarantors has good and indefeasible title to all of
its other Properties, free and clear of all Liens except for Permitted
Liens.  The material Properties used or
to be used in the continuing operations of the Borrower and each of the
Guarantors are in good repair, working order and condition.  Since the date of the Financial Statements,
neither the business nor the material Properties of the Borrower and each of
the Guarantors, taken as a whole, has been materially and adversely affected as
a result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking of
Property 


 


41

















 


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


 


(n)   No Burdensome Restrictions; No Defaults.


 


(i)            Other than those identified on
Schedule 4.14(a), neither the Borrower nor any Guarantor is a party to any
indenture, loan, or credit agreement or any lease or other agreement or
instrument or subject to any charter or corporate restriction or provision of
applicable law or governmental regulation that could reasonably be expected to
cause a Material Adverse Change.  Neither
the Borrower nor any of its Subsidiaries is in default under or with respect to
any contract, agreement, lease, or other instrument to which the Borrower or
any Subsidiary is a party and which could reasonably be expected to cause a
Material Adverse Change or under any agreement in connection with any
Debt.  Neither the Borrower nor any of
its Subsidiaries has received any notice of default under any material
contract, agreement, lease, or other instrument to which the Borrower or such
Subsidiary is a party a copy of which has not been delivered to the
Administrative Agent.


 


(ii)           No Default has occurred and is
continuing.


 


(o)   Environmental Condition.


 


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


 


(ii)           Certain Liabilities.  To the Borrower’s actual knowledge, none of
the present or previously owned or operated Property of the Borrower or any
Guarantor or of any of their former Subsidiaries, wherever located, (i) has
been placed on or proposed to be placed on the National Priorities List, the
Comprehensive Environmental Response Compensation Liability Information System
list, or their state or local analogs, or have been otherwise investigated,
designated, listed, or identified as a potential site for removal, remediation,
cleanup, closure, restoration, reclamation, or other response activity under
any Environmental Laws; (ii) is subject to a Lien, arising under or in
connection with any Environmental Laws, that attaches to any revenues or to any
Property owned or operated by the Borrower or any of the Guarantors, wherever
located, which could reasonably be expected to cause a Material Adverse Change;
or (iii) has been the site of any Release of Hazardous Substances or
Hazardous Wastes from present or past operations which has caused at the site
or at any third-party site any condition that has resulted in or could
reasonably be expected to result in the need for Response that would cause a Material
Adverse Change.


 


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


 


42

















 


to each Response or other
restoration or remedial project undertaken by the Borrower or the Guarantors or
any of their former Subsidiaries on any of their presently or formerly owned or
operated Property and (ii) the present and, to the Borrower’s best knowledge,
future liability, if any, of the Borrower and the Guarantors which could
reasonably be expected to arise in connection with requirements under
Environmental Laws will not result in a Material Adverse Change.


 


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


 


(q)   Gas Contracts.  Neither the Borrower nor any of the
Guarantors, as of the date hereof, (a) is obligated in any material
respect by virtue of any prepayment made under any contract containing a “take-or-pay”
or “prepayment” provision or under any similar agreement to deliver
hydrocarbons produced from or allocated to any of the Borrower’s and its
Subsidiaries’ Oil and Gas Properties at some future date without receiving full
payment therefor at the time of delivery, or (b) except as has been
disclosed to the Administrative Agent, has produced gas, in any material
amount, subject to, and none of the Borrower’s and the Guarantors’ Oil and Gas
Properties is subject to, balancing rights of third parties or subject to
balancing duties under governmental requirements.


 


(r)    Liens; Titles, Leases, Etc.  None of the Property of the Borrower or any
of the Guarantors is subject to any Lien other than Permitted Liens.  On the date of this Agreement, all
governmental actions and all other filings, recordings, registrations, third
party consents and other actions which are necessary to create and perfect the
Liens provided for in the Security Instruments will have been made, obtained
and taken in all relevant jurisdictions. 
All leases and agreements for the conduct of business of the Borrower
and the Guarantors are valid and subsisting, in full force and effect and there
exists no default or event of default or circumstance which with the giving of
notice or lapse of time or both would give rise to a default under any such
leases or agreements which could reasonably be expected to cause a Material
Adverse Change.  Neither the Borrower nor
any of the Guarantors is a party to any agreement or arrangement (other than
this Agreement and the Security Instruments), or subject to any order,
judgment, writ or decree, which either restricts or purports to restrict its
ability to grant Liens to secure the Obligations against their respective
assets or Properties.


 


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


 


(t)    Hedging Agreements.  Schedule 4.20 sets forth, as of the date
hereof, a true and complete list of all Interest Hedge Agreements, Hydrocarbon
Hedge Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, the
material terms thereof (including the type, term, effective date, termination
date and notional amounts or volumes), the net mark to market value thereof,
all credit support agreements relating thereto (including any margin required
or supplied), and the counterparty to each such agreement.


 


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(u)   Material Agreements.  Schedule 4.21 sets forth a complete and
correct list of all material agreements, leases, indentures, purchase
agreements, obligations in respect of letters of credit, guarantees, joint
venture agreements, and other instruments in effect or to be in effect as of
the date hereof (other than the agreements set forth in Schedule 4.20) providing
for, evidencing, securing or otherwise relating to any Debt of the Borrower or
any of the Guarantors, and all obligations of the Borrower or any of the
Guarantors to issuers of surety or appeal bonds issued for account of the
Borrower or any such Guarantor, and such list correctly sets forth the names of
the debtor or lessee and creditor or lessor with respect to the Debt or lease
obligations outstanding or to be outstanding and the Property subject to any
Lien securing such Debt or lease obligation. 
Also set forth on Schedule 4.21 hereto is a complete and correct list of
all material agreements and other instruments of the Borrower and the
Guarantors relating to the purchase, transportation by pipeline, gas
processing, marketing, sale and supply of natural gas and other
Hydrocarbons.  The Borrower has
heretofore delivered to the Administrative Agent and the Lenders a complete and
correct copy of all such material credit agreements, indentures, purchase
agreements, contracts, letters of credit, guarantees, joint venture agreements,
or other instruments, including any modifications or supplements thereto, as in
effect on the date hereof.


 


Section 5.


 


AFFIRMATIVE
COVENANTS


 


So long as any
Note or any amount under any Loan Document shall remain unpaid, or any Lender
shall have any Commitment hereunder, the Borrower agrees, unless the Majority
Lenders shall otherwise consent in writing, to comply with the following
covenants.


 


(a)   Compliance with Laws, Etc.  The Borrower shall comply, and cause each of
its Subsidiaries to comply, in all material respects with all material Legal
Requirements.  Without limiting the
generality and coverage of the foregoing, the Borrower shall comply, and shall
cause each of its Subsidiaries to comply, in all material respects, with all
material Environmental Laws and all laws, regulations, or directives with
respect to equal employment opportunity and employee safety in all
jurisdictions in which the Borrower, or any of its Subsidiaries do business; provided,
however, that this Section 5.01 shall not prevent the Borrower or any of
its Subsidiaries from, in good faith and with reasonable diligence, contesting
the validity or application of any such laws or regulations by appropriate
legal proceedings.  Without limitation of
the foregoing, the Borrower shall, and shall cause each of its Subsidiaries to,
(a) maintain and possess all authorizations, Permits, licenses,
trademarks, trade names, rights and copyrights which are necessary to the
conduct of its business and (b) obtain, as soon as practicable, all
consents or approvals required from any states of the United States (or other
Governmental Authorities) necessary to grant the Administrative Agent an
Acceptable Security Interest in the Borrower’s and its Subsidiaries’ Oil and
Gas Properties.


 


(b)   Maintenance of Insurance.


 


(i)            The Borrower shall, and shall cause
each of its Subsidiaries to, procure and maintain or shall cause to be procured
and maintained continuously in effect policies of insurance in form and amounts
and issued by companies, associations or organizations reasonably satisfactory
to the Administrative Agent covering such casualties, risks, perils, 


 


44

















 


liabilities and other
hazards reasonably required by the Administrative Agent.  In addition, the Borrower shall, and shall
cause each of its Subsidiaries to, comply with all requirements regarding
insurance contained in the Security Instruments.


 


(ii)           All certified copies of policies or
certificates thereof, and endorsements and renewals thereof shall be delivered
to and retained by the Administrative Agent. 
Unless the Senior Credit Agreement requires otherwise, all policies of
insurance shall either have attached thereto a Lender’s loss payable
endorsement for the benefit of the Administrative Agent, as loss payee in form
reasonably satisfactory to the Administrative Agent or shall name the
Administrative Agent as an additional insured, as applicable.  The Borrower shall furnish the Administrative
Agent with a certificate of insurance or a certified copy of all policies of
insurance required.  All policies or
certificates of insurance shall set forth the coverage, the limits of
liability, the name of the carrier, the policy number, and the period of
coverage.  Unless the Senior Credit
Agreement requires otherwise, all policies of insurance required under the
terms hereof shall contain an endorsement or agreement by the insurer that any
loss shall be payable in accordance with the terms of such policy
notwithstanding any act of negligence of the Borrower, or a Subsidiary or any
party holding under the Borrower or a Subsidiary which might otherwise result
in a forfeiture of the insurance and the further agreement of the insurer
waiving all rights of setoff, counterclaim or deductions against the Borrower
and its Subsidiaries.  Unless the Senior
Credit Agreement requires otherwise, all such policies shall contain a
provision that notwithstanding any contrary agreements between the Borrower, its
Subsidiaries, and the applicable insurance company, such policies will not be
canceled, allowed to lapse without renewal, surrendered or amended (which
provision shall include any reduction in the scope or limits of coverage)
without at least 30 days’ prior written notice to the Administrative
Agent.  In the event that,
notwithstanding the “lender’s loss payable endorsement” requirement of this Section 5.02,
the proceeds of any insurance policy described above are paid to the Borrower
or a Subsidiary, any Obligations are outstanding and the Senior Debt has been
indefeasibly paid in full, the Borrower shall deliver such proceeds to the
Administrative Agent immediately upon receipt.


 


(c)   Preservation of Corporate Existence, Etc.  The Borrower shall preserve and maintain, and
cause each of its Subsidiaries to preserve and maintain, its corporate or
limited liability company, as applicable, existence, rights, franchises, and
privileges in the jurisdiction of its incorporation or organization, as
applicable, and qualify and remain qualified, and cause each such Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which qualification is necessary or desirable in view of its business and
operations or the ownership of its Properties, and, in each case, where failure
to qualify or preserve and maintain its rights and franchises could reasonably
be expected to cause a Material Adverse Change.


 


(d)   Payment of Taxes, Etc.  The Borrower shall pay and discharge, and
cause each of its Subsidiaries to pay and discharge, before the same shall
become delinquent, (a) all taxes, assessments, and governmental charges or
levies imposed upon it or upon its income or profits or Property that are
material in amount, prior to the date on which penalties attach thereto and (b) all
lawful claims that are material in amount which, if unpaid, might by law become
a Lien upon its Property; provided, however, that neither the Borrower
nor any such Subsidiary shall be required to pay or discharge any such tax,
assessment, charge, levy, or claim which is being 


 


45

















 


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


 


(e)   Visitation Rights.  At any reasonable time and from time to time,
upon reasonable notice, the Borrower shall, and shall cause its Subsidiaries
to, permit the Administrative Agent and any Lender or any of their respective
agents or representatives thereof, to (a) examine and make copies of and
abstracts from the records and books of the account of, and visit and inspect
at their reasonable discretion the Properties of, the Borrower and any such
Subsidiary, and (b) discuss the affairs, finances and accounts of the
Borrower and any such Subsidiary with any of their respective officers or
directors.


 


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


 


(i)            Annual Financials.  As soon as available and in any event not
later than 90 days after the end of each fiscal year of the Borrower and its consolidated Subsidiaries,
commencing with fiscal year ending June 30, 2009, (i) to the extent
not otherwise provided in the Form 10-K filed by the Borrower with the SEC
for such fiscal year end, a copy of the annual audit report for such year for
the Borrower and its consolidated Subsidiaries, including therein the Borrower’s
and its consolidated Subsidiaries’ balance sheets as of the end of such
fiscal year and the Borrower’s and its consolidated Subsidiaries’ statements of
income, cash flows, and retained earnings, in each case certified by an
independent certified public accountants of national standing reasonably
acceptable to the Administrative Agent and including any management letters
delivered by such accountants to the Borrower or any Subsidiary in connection
with such audit, (ii) any management letters delivered by such accountants
to the Borrower, (iii) the Form 10-K filed with the SEC for such
fiscal year end, (iv) a Compliance Certificate executed by a Responsible
Officer of the Borrower and (v) a copy of the unaudited annual
consolidating financial statements of each of its Subsidiaries, including
therein such Subsidiary’s balance sheet and statements of income, cash flows,
and retained earnings for such fiscal year;


 


(ii)           Quarterly Financials.  As
soon as available and in any event not later than 45 days after the end of each
of the first three fiscal quarters of each fiscal year of the Borrower and its
consolidated Subsidiaries, commencing with the fiscal quarter ending December 31,
2008, (i) to the extent not otherwise provided in the Form 10-Q for
such fiscal quarter end, the unaudited balance sheet and the statements of
income, cash flows, and retained earnings of each such Person for the period
commencing at the end of the previous year and ending with the end of such
fiscal quarter, all in reasonable detail and duly certified with respect to
such consolidated statements (subject to year-end audit adjustments) by a
Responsible Officer of the Borrower as having been prepared in accordance with
GAAP, (ii) the Form 10-Q filed with the SEC for such fiscal quarter
end, and (iii) a Compliance Certificate executed by the Responsible
Officer of the Borrower;


 


46
















 


(iii)          Oil and Gas Reserve Reports.


 


(i)            As soon as available but in any
event on or before each September 30 of each year, an Independent
Engineering Report dated effective as of July 1 for such year;


 


(ii)           As soon as available but in any event
on or before (A) May 1, 2009, and (b) March 31 of each
year, commencing with March 31, 2010, an Internal Engineering Report dated
effective as of the immediately preceding January 1;


 


(iii)          Such other information as may be
reasonably requested by the Administrative Agent or any Lender with respect to
the Oil and Gas Properties included or to be included in the Borrowing Base;


 


With the delivery of each Engineering Report, a
certificate from a Responsible Officer of the Borrower certifying that, to the
best of his knowledge and in all material respects: (A) the information
contained in the Engineering Report and any other information delivered in
connection therewith is true and correct, (B) the Borrower or its
Subsidiary, as applicable, owns good and marketable title to the Oil and Gas
Properties evaluated in such Engineering Report, as is customary in the oil and
gas industry, and such Oil and Gas Properties are subject to an Acceptable
Security Interest and free of all Liens except for Permitted Liens, (C) except
as set forth on an exhibit to the certificate, on a net basis there are no gas
imbalances, take or pay or other prepayments with respect to its Oil and Gas
Properties evaluated in such Engineering Report which would require the
Borrower or any of its Subsidiaries to deliver Hydrocarbons produced from such
Oil and Gas Properties at some future time without then or thereafter receiving
full payment therefor, (D) none of its Oil and Gas Properties have been
sold since the date of the last Borrowing Base determination except as set
forth on an exhibit to the certificate, which certificate shall list all of its
Oil and Gas Properties sold and in such detail as reasonably required by the
Majority Lenders, (E) attached to the certificate is a list of its Oil and
Gas Properties added to and deleted from the immediately prior Engineering
Report and a list showing any change in working interest or net revenue
interest in its Oil and Gas Properties occurring and the reason for such
change, (F) attached to the certificate is a list of all Persons
disbursing proceeds to the Borrower or to its Subsidiary, as applicable, from
its Oil and Gas Properties, (G) except as set forth on a schedule attached
to the certificate, all of the Oil and Gas Properties evaluated by such Engineering
Report are pledged as Collateral for the Obligations, and (H) attached to
the certificate is a quarterly cash flow budget for the four quarters following
the delivery of such certificate setting forth the Borrower’s projections for
production volumes, revenues, expenses, taxes and budgeted capital expenditures
during such period.


 


(iv)          Production and Hedging Reports.  As
soon as available and in any event within 45 days after the end of each
quarter, commencing with the quarter ending December 31, 2008, a report
certified by a Responsible Officer of the Borrower in form and substance
satisfactory to the Administrative Agent prepared by the Borrower (i) covering
each of the Oil and Gas Properties of the Borrower and its Subsidiaries and
detailing on a quarterly basis (A) the production, revenue, and price
information and associated operating expenses for each such quarter, (B) any
changes to any producing reservoir, production equipment, or producing well
during each such quarter, which changes could cause a Material Adverse Change,
and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and Gas
Properties during each such quarter, 


 


47

















 


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


 


(v)           Defaults.  As soon as possible and in any event within
five days after (i) the occurrence of any Default or (ii) the
occurrence of any default under any instrument or document evidencing Debt of
the Borrower or any Subsidiary, in each case known to any officer of the
Borrower or any of its Subsidiaries which is continuing on the date of such
statement, a statement of a Responsible Officer of the Borrower setting forth
the details of such Default or default, as applicable, and the actions which
the Borrower or such Subsidiary has taken and proposes to take with respect
thereto;


 


(vi)          Termination Events.  As soon as possible and in any event (i) within
30 days after the Borrower or any member of the Controlled Group knows or has
reason to know that any Termination Event described in clause (a) of the
definition of Termination Event with respect to any Plan has occurred, and (ii) within
10 days after the Borrower or any of its Affiliates knows or has reason to know
that any other Termination Event with respect to any Plan has occurred, a
statement of a Responsible Officer of the Borrower describing such Termination
Event and the action, if any, which the Borrower or such Affiliate proposes to
take with respect thereto;


 


(vii)         Termination of Plans.  Promptly and in any event within two Business
Days after receipt thereof by the Borrower or any member of the Controlled
Group from the PBGC, copies of each notice received by the Borrower or any such
member of the Controlled Group of the PBGC’s intention to terminate any Plan or
to have a trustee appointed to administer any Plan;


 


(viii)        Other ERISA Notices.  Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from a Multiemployer Plan sponsor, a copy of each notice
received by the Borrower or any member of the Controlled Group concerning the
imposition or amount of withdrawal liability pursuant to Section 4202 of
ERISA;


 


(ix)           Environmental Notices.  Promptly upon the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any form of request, notice,
summons or citation received from the Environmental Protection Agency, or any
other Governmental Authority, concerning (i) violations or alleged
violations of Environmental Laws, which seeks to impose liability therefor and
could cause a Material Adverse Change, (ii) any action or omission on the
part of the Borrower or any Subsidiary or any of their former Subsidiaries in
connection with Hazardous Waste or Hazardous Substances which could reasonably
result in the imposition of liability therefor that could cause a Material
Adverse Change, including without limitation any information request related
to, or notice of, potential responsibility under CERCLA, or (iii) concerning
the filing of a Lien upon, against or in connection with the Borrower or any
Subsidiary or their former Subsidiaries, or any of their leased or owned
Property, wherever located;


 


48

















 


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


 


(xi)           Material Changes.  Prompt written notice of any condition or
event of which the Borrower has knowledge, which condition or event has
resulted or may reasonably be expected to result in (i) a Material Adverse
Change or (ii) a breach of or noncompliance with any material term,
condition, or covenant of any material contract to which the Borrower or any of
its Subsidiaries is a party or by which they or their Properties may be bound;


 


(xii)          Disputes, Etc.  Prompt written notice of (i) any claims,
legal or arbitration proceedings, proceedings before any Governmental
Authority, or disputes pending, or to the knowledge of the Borrower threatened,
or affecting the Borrower, or any of its Subsidiaries which, if adversely
determined, could reasonably be expected to cause a Material Adverse Change, or
any material labor controversy of which the Borrower or any of its Subsidiaries
has knowledge resulting in or reasonably considered to be likely to result in a
strike against the Borrower or any of its Subsidiaries and (ii) any claim,
judgment, Lien or other encumbrance (other than a Permitted Lien) affecting any
Property of the Borrower or any Subsidiary if the value of the claim, judgment,
Lien, or other encumbrance affecting such Property shall exceed $500,000.


 


(xiii)         Other Accounting Reports.  Promptly upon receipt thereof, a copy of each
other report or letter submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and its Subsidiaries, and a copy of
any response by the Borrower or any Subsidiary of the Borrower, or the Board of
Directors (or other applicable governing body) of the Borrower or any
Subsidiary of the Borrower, to such letter or report;


 


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


 


(xv)         SEC Filings.  Promptly after the sending or
filing thereof, copies of all proxy material, reports and other information
which the Borrower or any of its Subsidiaries sends to or files with the SEC or
sends to any shareholder of the Borrower or of any of its Subsidiaries;


 


(xvi)        USA Patriot Act.  Promptly, following a request by any Lender,
all documentation and other information that such Lender reasonably requests in
order to comply with its ongoing obligations under applicable “know your
customer” and anti-money laundering rules and regulations, including the
Patriot Act; and


 


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


 


49

















 


Subsidiaries, as any
Lender through the Administrative Agent may from time to time reasonably
request.  The Administrative Agent agrees
to provide the Lenders with copies of any material notices and information
delivered solely to the Administrative Agent pursuant to the terms of this
Agreement.


 


(g)   Maintenance of Property.  The Borrower shall, and shall cause each of
its Subsidiaries to, maintain their owned, leased, or operated Property in good
condition and repair; and shall abstain, and cause each of its Subsidiaries to
abstain from, knowingly or willfully permitting the commission of waste or
other injury, destruction, or loss of natural resources, or the occurrence of
pollution, contamination, or any other condition in, on or about the owned or
operated Property involving the Environment that could reasonably be expected
to result in Response activities and that could reasonably be expected to cause
a Material Adverse Change.


 


(h)   Agreement to Pledge.  The Borrower shall, and shall cause each
Subsidiary to, grant to the Administrative Agent an Acceptable Security
Interest in any Property of the Borrower or any Subsidiary now owned or
hereafter acquired promptly after receipt of a written request from the
Administrative Agent.


 


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


 


(j)    Title Evidence and Opinions.  The Borrower shall from time to time upon the
reasonable request of the Administrative Agent, take such actions and execute
and deliver such documents and instruments as the Administrative Agent shall
require to ensure that the Administrative Agent shall, at all times, have
received satisfactory title evidence, which title evidence shall be in form and
substance acceptable to the Administrative Agent in its sole discretion and
shall include information regarding the before payout and after payout
ownership interests held by the Borrower and the Borrower’s Subsidiaries, for
all wells located on the Oil and Gas Properties, covering at least 80% of the
present value of the Proven Reserves of the Borrower and its Subsidiaries and
at least 80% of the present value of the proved developed producing reserves of
the Borrower and its Subsidiaries as determined by the Administrative
Agent.  Within 60 days after the date
hereof, the Borrower shall have delivered to the Administrative Agent title and
lien searches from the county recording offices of (a) Chavez and
Roosevelt counties of New Mexico, (b) Lincoln and Nowata counties of
Oklahoma, and (c) Erath, Comanche, Eastland, Carson, Gray and
Hutchinson counties of Texas.


 


(k)   Further Assurances; Cure of Title Defects.  The Borrower shall, and shall cause each
Subsidiary to, cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments and this
Agreement.  The Borrower hereby
authorizes the Administrative Agent to file any financing statements without
the signature of the Borrower to the extent permitted by applicable law in
order to perfect or maintain the perfection of any security interest granted
under any of the Loan Documents.  The
Borrower at its expense will, and will cause each Subsidiary to, promptly
execute and deliver to the Administrative Agent upon request all such other
documents, agreements and instruments to comply with or accomplish the
covenants and agreements of the Borrower or any Subsidiary, as the case may be,



 


50

















 


in the Security
Instruments and this Agreement, or to further evidence and more fully describe
the collateral intended as security for the Notes, or to correct any omissions
in the Security Instruments, or to state more fully the security obligations
set out herein or in any of the Security Instruments, or to perfect, protect or
preserve any Liens created pursuant to any of the Security Instruments, or to
make any recordings, to file any notices or obtain any consents, all as may be
necessary or appropriate in connection therewith or to enable the
Administrative Agent to exercise and enforce its rights and remedies with
respect to any Collateral.  Within 30
days after a request by the Administrative Agent or the Lenders to cure any
title defects or exceptions which are not Permitted Liens raised by such
information, the Borrower shall (i) cure such title defects or exceptions
which are not Permitted Liens or substitute acceptable Oil and Gas Properties
with no title defects or exceptions except for Permitted Liens covering
Collateral of an equivalent value and (ii) deliver to the Administrative
Agent satisfactory title evidence (including supplemental or new title opinions
meeting the foregoing requirements) in form and substance acceptable to the
Administrative Agent in its reasonable business judgment as to the Borrower’s
and its Subsidiaries’ ownership of such Oil and Gas Properties and the
Administrative Agent’s Liens and security interests therein as are required to
maintain compliance with Section 5.10.


 


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


 


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


 


Section 6.


 


NEGATIVE
COVENANTS


 


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


 


(a)   Liens, Etc.  The Borrower shall not create, assume, incur,
or suffer to exist, or permit any of its Subsidiaries to create, assume, incur,
or suffer to exist, any Lien on or in respect of any of its Property whether
now owned or hereafter acquired, or assign any right to receive income, except
that the Borrower and its Subsidiaries may create, incur, assume, or suffer to
exist:


 


(i)            Liens created by the Security
Instruments;


 


51

















 


(ii)           purchase money Liens or purchase
money security interests upon or in any equipment acquired or held by the
Borrower or any of its Subsidiaries in the ordinary course of business prior to
or at the time of the Borrower’s or such Subsidiary’s acquisition of such
equipment; provided that, the Debt secured by such Liens (i) was
incurred solely for the purpose of financing the acquisition of such equipment,
and does not exceed the aggregate purchase price of such equipment, (ii) is
secured only by such equipment and not by any other assets of the Borrower and
its Subsidiaries, and (iii) is not increased in amount;


 


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


 


(iv)          Liens in favor of vendors, carriers,
warehousemen, repairmen, mechanics, workmen, materialmen, construction, or
similar Liens arising by operation of law in the ordinary course of business in
respect of obligations that are not yet due or that are being contested in good
faith by appropriate proceedings, provided such reserve as may be required by
GAAP shall have been made therefor;


 


(v)           Liens to operators and non-operators
under joint operating agreements arising in the ordinary course of the business
of the Borrower or the relevant Subsidiary to secure amounts owing, which
amounts are not yet due or are being contested in good faith by appropriate proceedings,
if such reserve as may be required by GAAP shall have been made therefor;


 


(vi)          royalties, overriding royalties, net
profits interests, production payments, reversionary interests, calls on
production, preferential purchase rights and other burdens on or deductions
from the proceeds of production, that do not secure Debt for borrowed money and
that are taken into account in computing the net revenue interests and working
interests of the Borrower or any of its Subsidiaries warranted in the Security Instruments
or in the Senior Credit Agreement;


 


(vii)         Liens arising in the ordinary course of
business out of pledges or deposits under workers’ compensation laws,
unemployment insurance, old age pensions or other social security or retirement
benefits, or similar legislation or to secure public or statutory obligations
of the Borrower;


 


(viii)        operating agreements, unitization and
pooling agreements and orders, farmout agreements, gas balancing agreements and
other agreements, in each case that are customary in the oil, gas and mineral
production business and that are entered into in the ordinary course of
business that are taken into account in computing the net revenue interests and
working interests of the Borrower or any of its Subsidiaries warranted in the
Security Instruments or in the Senior Credit Agreement, to the extent that any
such Lien referred to in this clause does not materially impair the use of the
Property covered by such Lien for the purposes for which such Property is held
by the Borrower or any Subsidiary or materially impair the value of such
Property subject thereto;


 


52

















 


(ix)           easements, rights-of-way,
restrictions, and other similar encumbrances, and minor defects in the chain of
title that are customarily accepted in the oil and gas financing industry, none
of which interfere with the ordinary conduct of the business of Borrower or any
Subsidiary or materially detract from the value or use of the Property to which
they apply; and


 


(x)            Liens securing the Senior Debt.


 


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


 


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


 


(ii)           Senior Debt;


 


(iii)          Debt in the form of obligations for
the deferred purchase price of Property or services incurred in the ordinary
course of business which are not yet due and payable or are being contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP have been established;


 


(iv)          Debt secured by the Liens permitted
under paragraph (b) of Section 6.01 in an aggregate amount not
to exceed $3,000,000 at any time;


 


(v)           Debt under Hydrocarbon Hedge
Agreements which are not prohibited by the terms of Section 6.14; provided that (i) such Debt shall not be
secured, other than such Debt owing to Swap Counerparties (as defined in the
Senior Credit Agreement) which are secured under the Senior Loan Documents, (ii) such
Debt shall not obligate the Borrower or any of its Subsidiaries to any
margin call requirements, and (iii) the deferred premium payments
associated with such Hedge Contracts shall be limited to the deferred premium
payments for put option contracts which are secured under the Loan Documents;
provided that, the aggregate outstanding amount of such deferred premium
payments shall not exceed $500,000;


 


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


 


(vii)         Debt of the Borrower or any Subsidiary
owing to the Borrower or to any other Subsidiary; provided that such Debt is
subordinated to the Obligations on terms acceptable to the Administrative Agent
in its sole discretion;


 


(viii)        Debt that constitutes a renewal,
refinancing or extension of any Debt referred to clause (d) of this Section 6.02;
provided that (i) no Lien existing at the time of such renewal,
refinancing or extension shall be extended to cover any property not already
subject to such Lien, and (ii) the principal amount of any Debt renewed,
refinanced or extended shall not exceed the amount of such Debt outstanding
immediately prior to such renewal, refinancing or extension; and


 


53

















 


(ix)           Debt under
the Series D Preferred Shares; provided that, (A) other than the
extension of the maturity date thereof, the terms, conditions and provisions of
such Debt (including but not limited to, the subordination terms thereof) shall
not be amended, supplemented, restated or otherwise modified in any way without
the consent of the Majority Lenders, and (B) the amount of such Debt shall
not increase other than as a result of dividend payments which have been added
to the principal amount thereof as elected by certain holders of the Series D
Preferred Shares.


 


(c)   Agreements Restricting Liens and
Distributions.  The Borrower shall
not, nor shall it permit any of its Subsidiaries to, create, incur, assume or
permit to exist any contract, agreement or understanding (other than this
Agreement, the Senior Loan Documents and the Security Instruments) which in any
way prohibits or restricts the granting, conveying, creation or imposition of
any Lien on any of its Property, whether now owned or hereafter acquired, to
secure the Obligations or restricts any Subsidiary from paying dividends to the
Borrower, or which requires the consent of or notice to other Persons in
connection therewith.


 


(d)   Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to:


 


(a)           merge or consolidate with or into any
other Person without the prior consent of all of the Lenders; provided that the
Borrower or any Subsidiary may merge or may be consolidated into the Borrower
or any Guarantor if the Borrower or such Guarantor is the surviving entity; or


 


(b)           sell, lease, transfer, assign,
farm-out, convey, or otherwise dispose of any of its Property (including,
without limitation, any working interest, overriding royalty interest,
production payments, net profits interest, royalty interest, or mineral fee
interest) other than:


 


(i)            the
sale of Hydrocarbons in the ordinary course of business,


 


(ii)           the
sale or transfer of equipment that is (A) obsolete, worn out, depleted or
uneconomic and disposed of in the ordinary course of business, (B) no
longer necessary for the business of such Person or (C) contemporaneously
replaced by equipment of at least comparable value and use, and


 


(iii)          the
sale, lease, transfer, assignment, farm-out, conveyance, or other disposition
of Property; provided that, (A) 100% of the consideration received in
respect of such disposition shall be cash or cash equivalents, (B) the
consideration received in respect of such disposition shall be equal to or
greater than the fair market value of the such Property, interest therein or
Subsidiary subject of such disposition (as reasonably determined by the board
of directors or the equivalent governing body of the Borrower and, if requested
by the Administrative Agent, the Borrower shall deliver a certificate of a
Responsible Officer of the Borrower certifying to that effect), (C) if any
such disposition is of a Subsidiary owning Oil and Gas Properties, such
disposition shall include all the Equity Interests of such Subsidiary; and (D) the
aggregate fair market value of Properties subject to such dispositions
consummated during any consecutive twelve month period shall not exceed
$4,000,000.


 


54

















 


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


 


(f)    Investments.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, make or permit to exist any loans, advances, or
capital contributions to, or make any investment in (including, without
limitation, the making of any Acquisition), or purchase or commit to purchase
any stock or other securities or evidences of indebtedness of or interests in
any Person or any Oil and Gas Properties or activities related to Oil and Gas
Properties, except:


 


(i)            Liquid Investments;


 


(ii)           trade and customer accounts
receivable which are for goods furnished or services rendered in the ordinary
course of business and are payable in accordance with customary trade terms;


 


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


 


(iv)          the loans, advances, capital
contributions, investments, and commitments  made prior to
the date hereof and identified in the Interim Financial Statements; provided
that, the respective amounts of such loans, advances, capital contributions,
investments, and commitments shall not be increased (other than by
appreciation);


 


(v)           investments received in connection
with the bankruptcy or reorganization of, or settlement of delinquent accounts
and disputes with, customers and suppliers, in each case in the ordinary course
of business; provided that, the aggregate amount of such investment shall not
exceed $1,000,000 (other than by appreciation); and


 


(vi)          investments consisting of any deferred
portion of the sales price received by the Borrower or any Subsidiary in
connection with any sale of assets permitted hereunder.


 


(g)   Affiliate Transactions.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction or series of transactions (including, but not limited to,
the purchase, sale, lease or exchange of Property, the making of any
investment, the giving of any guaranty, the assumption of any obligation or the
rendering of any service) with any of their Affiliates unless such transaction
or series of transactions is on terms no less favorable to the Borrower or the
Subsidiary, as applicable, than 


 


55

















 


those that could be
obtained in a comparable arm’s length transaction with a Person that is not
such an Affiliate.


 


(h)   Compliance with ERISA.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, directly or indirectly, (a) engage in, or
permit any Subsidiary or ERISA Affiliate to engage in, any transaction in
connection with which the Borrower, any Subsidiary or any ERISA Affiliate could
be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or
(l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) terminate,
or permit any Subsidiary or ERISA Affiliate to terminate, any Plan in a manner,
or take any other action with respect to any Plan, which could result in any
liability to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) fail
to make, or permit any Subsidiary or ERISA Affiliate to fail to make, full
payment when due of all amounts which, under the provisions of any Plan,
agreement relating thereto or applicable law, the Borrower, a Subsidiary or any
ERISA Affiliate is required to pay as contributions thereto; (d) permit to
exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any
accumulated funding deficiency within the meaning of Section 302 of ERISA
or section 412 of the Code, whether or not waived, with respect to any Plan; (e) permit,
or allow any Subsidiary or ERISA Affiliate to permit, the actuarial present
value of the benefit liabilities (as “actuarial present value of the benefit
liabilities” shall have the meaning specified in section 4041 of ERISA) under
any Plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate
which is regulated under Title IV of ERISA to exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities; (f) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
Multiemployer Plan; (g) acquire, or permit any Subsidiary or ERISA
Affiliate to acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any
ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any
time in the six-year period preceding such acquisition has sponsored,
maintained, or contributed to, (1) any Multiemployer Plan, or (2) any
other Plan that is subject to Title IV of ERISA under which the actuarial
present value of the benefit liabilities under such Plan exceeds the current
value of the assets (computed on a plan termination basis in accordance with
Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) incur,
or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on
account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
employee welfare benefit plan, as defined in section 3(1) of ERISA,
including, without limitation, any such plan maintained to provide benefits to
former employees of such entities, that may not be terminated by such entities
in their sole discretion at any time without any material liability; (j) amend
or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an
increase in current liability such that the Borrower, any Subsidiary or any
ERISA Affiliate is required to provide security to such Plan under section
401(a)(29) of the Code; or (k) permit to exist any occurrence of any
Reportable Event (as defined in Title IV of ERISA), or any other event or
condition, which presents a material (in the opinion of the Majority Lenders)
risk of such a termination by the PBGC of any Plan.


 


(i)    Sale-and-Leaseback.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, sell or transfer to a Person any Property, whether
now owned or hereafter 


 


56

















 


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


 


(j)    Change of Business.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, make any material change in the character of its
business as an independent oil and gas exploration and production company, nor
will the Borrower or any Subsidiary operate any business in any jurisdiction
other than the United States, including the Gulf of Mexico.


 


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


 


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


 


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


 


(n)   Limitation on Speculative Hedging.  Other than the Hedge Contracts required to be
entered into and maintained pursuant to Section 5.12 hereof, the Borrower
shall not, nor shall it permit any of its Subsidiaries to, (a) purchase,
assume, or hold a speculative position in any commodities market or futures
market or enter into any Hydrocarbon Hedge Agreement, Interest Hedge Agreement
or similar hedge arrangement for speculative purposes, or (b) be party to
or otherwise enter into any Hedge Contract which (i) is entered into for
reasons other than as a part of its normal business operations as a risk
management strategy and/or hedge against changes resulting from market
conditions related to the Borrower’s operations, (ii) covers notional
volumes in excess of 85% of the anticipated production volumes attributable to
Proven Reserves 


 


57

















 


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


 


(o)   Additional Subsidiaries; Additional Oil
and Gas Properties.  The Borrower
shall not, nor shall it permit any of its Subsidiaries to, create or acquire
any additional Subsidiaries or acquire any additional Oil and Gas Properties
without (a) such new Subsidiary executing and delivering to the
Administrative Agent, at its request, a Guaranty, a Pledge Agreement, a
Security Agreement and a Mortgage, and such other Security Instruments as the
Administrative Agent or the Majority Lenders may reasonably request, (b) the
delivery by the Borrower of any certificates, opinions of counsel, title
opinions or other documents as the Administrative Agent may reasonably request,
and (c) the Borrower or such Subsidiary acquiring such Oil and Gas
Properties executing and delivering to the Administrative Agent a new Mortgage
or a supplement to an existing Mortgage encumbering such Oil and Gas
Properties; provided that, in any event, no Subsidiary may be created or
acquired and no Oil and Gas Properties may be acquired if a Default has
occurred before or after giving effect to such creation or acquisition of the
new Subsidiary or the acquisition of the additional Oil and Gas Properties.


 


(p)   Account Payables.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, allow (a) any of its trade payables or other
accounts payable to be outstanding for more than 90 days (except in cases where
any such trade payable is being disputed in good faith and adequate reserves
under GAAP have been established) and (b) the weighted average maturity of
all such trade payables to exceed 120 days.


 


(q)   Current Ratio.  The Borrower shall not permit the ratio of,
as of the end of each fiscal quarter of the Borrower, beginning with the fiscal
quarter ending December 31, 2008, (a) its current assets to (b) its
current liabilities, to be less 1.00 to 1.00. 
For purposes of this calculation (i) “current assets” shall
include, as of the date of calculation, the aggregate Unused Commitment Amounts
(as defined under the Senior Credit Agreement) and Availability under this
Agreement but shall exclude (A) any cash deposited with or at the request
of a counterparty to any Hedge Contract or any other similar hedge arrangement
and (B) any assets representing a valuation account arising from the
application of SFAS 133 and 143, and (ii) “current liabilities” shall exclude, as of the
date of calculation, the current portion of long-term Debt existing under this
Agreement and the current portion of long-term Debt existing under the Senior
Credit Agreement, and any liabilities representing a valuation account arising
from the application of SFAS 133 and 143. 
For the avoidance of doubt, the parties hereto acknowledge that “current
liabilities” includes the current portion of the Series D Preferred
Shares.


 


(r)    Leverage Ratio.  The
Borrower shall not permit the Leverage Ratio for each fiscal quarter
period ending on or after December 31, 2008, to be greater than 4.50 to
1.00; solely for purposes of
calculating Leverage Ratio under this clause, “consolidated Debt” shall not
include Debt outstanding under preferred Equity Interests issued in compliance
with Section 6.22.


 


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


 


58

















 


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


 


(u)   Non-Guarantor Subsidiary.  Notwithstanding anything to the contrary
contained herein, including any provision of this Article VI, the Borrower
shall not, nor shall it permit any of its Subsidiaries to, (a) create,
assume, incur or suffer to exist any Lien on or in respect of any of its
Property for the benefit of Tri-Flow, (b) sell, assign, pledge, or
otherwise transfer any of its Properties to Tri-Flow, or (c) make or
permit to exist any loans, advances, or capital contributions to, or make any
investment in, or purchase or commit to purchase any stock or other securities
or evidences of indebtedness of or interests in, Tri-Flow or in any Properties
of Tri-Flow other than the loans, advances, capital contributions, investments,
and commitments made prior to the date hereof in Tri-Flow; provided
that, the respective amounts of such loans, advances, capital contributions,
investments, and commitments shall not be increased (other than by
appreciation).


 


(v)   Equity Issuance.  The
Borrower shall not, nor shall it permit any of its Subsidiaries to, issue any
preferred, convertible equity securities or other Equity Interests other than
common Equity Interests of the Borrower.


 


(w)  Minimum Asset Coverage Ratio.


 


(i)            The Borrower shall not permit at any
time the ratio of (i) the Total Present Value as of such date to (ii) the
consolidated Debt of the Borrower (other than obligations under Hedge
Contracts) as of the applicable determination date to be less than 1.50 to
1.00.


 


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


 


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


 


59

















 


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


 


(iv)          In the event that the Borrower does
not furnish to the Administrative Agent and the Lenders the Independent
Engineering Report, Internal Engineering Report or other information specified
in Sections 5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by the
date specified in such clauses, the Administrative Agent may, based on the
information available to it, estimate in good faith the Total Present Value
from time to time thereafter until the Administrative Agent and the Lenders
receive the relevant Independent Engineering Report, Internal Engineering
Report, or other information, as applicable. 
Such estimated Total Present Value shall thereupon be used for the purposes
of Section 6.23(a) until a new Total Present Value is calculated or
estimated pursuant to this Agreement.


 


Section 7.


 


EVENTS
OF DEFAULT; REMEDIES


 


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


 


(i)            Payment.  The Borrower shall (i) fail to pay when
due any principal or interest payable hereunder or under the Notes or (ii) fail
to pay, within 3 Business Days of when due, any other amounts (including fees,
reimbursements, and indemnifications) payable hereunder, under the Notes, or
under any other Loan Document;


 


(ii)           Representation and Warranties.  Any representation or warranty made or deemed
to be made (i) by the Borrower, any Guarantor or any of their respective
Subsidiaries (or any of their respective officers) in this Agreement or in any
other Loan Document, or (ii) by the Borrower, any Guarantor or any of
their respective Subsidiaries (or any of their respective officers) in
connection with this Agreement or any other Loan Document, shall prove to have
been incorrect in any material respect when made or deemed to be made;


 


(iii)          Covenant Breaches.  The Borrower, any Guarantor or any of their
respective Subsidiaries shall fail to (i) perform or observe any covenant
contained in Section 5.02(a), Section 5.03, Section 5.06(e), Section 5.09,
Section 5.12, or Article VI of this Agreement or (ii) fail to
perform or observe any other term or covenant set forth in this Agreement or in
any other Loan Document which is not covered by clause (i) above or
any other provision of this Section 7.01 if such failure shall remain
unremedied for 30 days after the occurrence of such breach or failure;


 


(iv)          Cross-Defaults.  (i) The Borrower, any Guarantor or any
of their respective Subsidiaries shall fail to pay any principal of or premium
or interest on its Debt which is outstanding in a principal amount of at least
$1,000,000 individually or when aggregated with all such Debt of the Borrower,
any Guarantor or any of their respective Subsidiaries so in default (but
excluding Debt evidenced by the Notes) when the same becomes due and payable
(whether


 


60
















 


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


 


(v)           Insolvency.  The Borrower, any Guarantor or any of their
respective Subsidiaries shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts generally, or
shall make a general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Borrower, any of its Subsidiaries, or any
Guarantor seeking to adjudicate it as bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of an
order for relief or the appointment of a receiver, trustee or other similar
official for it or for any substantial part of its Property and, in the case of
any such proceeding instituted against the Borrower, any such Subsidiary or any
such Guarantor either such proceeding shall remain undismissed for a period of 60
days or any of the actions sought in such proceeding shall occur; or the
Borrower, any of its Subsidiaries, or any Guarantor shall take any corporate
action to authorize any of the actions set forth above in this
paragraph (e);


 


(vi)          Judgments.  Any judgment or order for the payment of
money in excess of $1,000,000 shall be rendered against the Borrower, any
Guarantor or any of their respective Subsidiaries and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order or (ii) there shall be any period of 30 consecutive days during
which a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;


 


(vii)         Termination Events.  Any Termination Event with respect to a Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
the Borrower by the Administrative Agent, (i) such Termination Event shall
not have been corrected and (ii) the then present value of such Plan’s
vested benefits exceeds the then current value of assets accumulated in such
Plan by more than the amount of $1,000,000 (or in the case of a Termination
Event involving the withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) of
ERISA), the withdrawing employer’s proportionate share of such excess shall
exceed such amount);


 


61

















 


(viii)        Plan Withdrawals.  The Borrower or any member of the Controlled
Group as employer under a Multiemployer Plan shall have made a complete or
partial withdrawal from such Multiemployer Plan and the plan sponsor of such
Multiemployer Plan shall have notified such withdrawing employer that such
employer has incurred a withdrawal liability in an annual amount exceeding
$1,000,000.


 


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


 


(x)            Reserved.


 


(xi)           Loan Documents.  Any material provision of any Loan Document
shall for any reason cease to be valid and binding on the Borrower or a
Guarantor or any of their respective Subsidiaries or any such Person shall so
state in writing;


 


(xii)          Security Instruments.  (i) The Administrative Agent shall fail
to have an Acceptable Security Interest in any material portion of the
Collateral as determined in the sole discretion of the Administrative Agent, (ii) the
Administrative Agent shall fail to have an Acceptable Security Interest in any
immaterial portion of the Collateral as determined in the sole discretion of
the Administrative Agent and such failure continues for more than 30 days after
the Administrative Agent shall have given notice thereof, and a request to cure
such failure, to the Borrower, or (iii) any Security Instrument shall at
any time and for any reason cease to create the Lien on the Property purported
to be subject to such agreement in accordance with the terms of such agreement,
or cease to be in full force and effect, or shall be contested by the Borrower,
any Guarantor or any of their respective Subsidiaries;


 


(xiii)         Potential Failure of Title.  The title of the Borrower, any Guarantor or
any of their respective Subsidiaries to any of the Oil and Gas Properties
subject to the Mortgages, or any material part thereof, shall become the
subject matter of litigation before any Governmental Authority or arbitrator
which could reasonably be expected to result in a Material Adverse Change with
respect to the Borrower’s, such Guarantor’s or such Subsidiary’s title to such
Oil and Gas Properties;


 


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


 


(xv)         Casualty.  Loss, theft, substantial damage or
destruction of a material portion of the Collateral the subject of any Security
Instrument and not fully covered by insurance (except for deductibles and
allowing for the depreciated value of such Collateral) shall have occurred; or


 


(b)   Optional Acceleration of Maturity.  If any Event of Default (other than an Event
of Default pursuant to paragraph (e) of Section 7.01) shall have
occurred and be continuing, then, and in any such event,


 


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


 


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terminate, and (ii) shall
at the request, or may with the consent, of the Majority Lenders, by notice to
the Borrower, declare all principal, interest, fees, reimbursements,
indemnifications, and all other amounts payable under this Agreement, the
Notes, and the other Loan Documents to be forthwith due and payable, whereupon
all such amounts shall become and be forthwith due and payable in full, without
notice of intent to demand, demand, presentment for payment, notice of
nonpayment, protest, notice of protest, grace, notice of dishonor, notice of
intent to accelerate, notice of acceleration, and all other notices, all of
which are hereby expressly waived by the Borrower; and


 


(ii)           the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders (but subject to
the Subordination and Intercreditor Agreement) proceed to enforce its rights and
remedies under the Security Instruments, the Guaranties, and any other Loan
Documents for the ratable benefit of the Secured Parties by appropriate
proceedings.


 


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


 


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


 


(ii)           the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders (but subject to
the Subordination and Intercreditor Agreement) proceed to enforce its rights
and remedies under the Security Instruments, the Guaranties, and any other Loan
Document for the ratable benefit of the Secured Parties by appropriate
proceedings.


 


(d)   Right of Set-off.  Upon the occurrence and during the
continuance of any Event of Default, the Administrative Agent and each Lender
is hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Administrative Agent or such Lender to or
for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this Agreement, the
Notes held by the Administrative Agent or such Lender, and the other Loan
Documents, irrespective of whether or not the Administrative Agent or such
Lender shall have made any demand under this Agreement, such Notes, or such
other Loan Documents, and although such obligations may be unmatured.  The Administrative Agent and each Lender
agrees to promptly notify the Borrower after any such set-off and application
made by the Administrative Agent or such Lender, provided that the failure to
give such notice shall not affect the validity of such set-off and
application.  The rights of the
Administrative Agent and each Lender under this Section 7.04 are in
addition to any other rights and remedies (including, without limitation, other
rights of set-off) that the Administrative Agent or such Lender may have.


 


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


 


(f)    Application of Proceeds.


 


(i)            Prior to the Payment in Full of
Senior Debt (as defined in the Subordination and Intercreditor Agreement) and
other than as otherwise permitted by the Subordination and Intercreditor
Agreement, any monies or Property actually received by the Administrative Agent
pursuant to this Agreement or any other Loan Document as a result of the
exercise of any rights or remedies under any Security Instrument or any other
agreement with the Borrower, any Guarantor or any of their respective
Subsidiaries which secures any of the Obligations, shall in any event be held
in trust by the Administrative Agent for the benefit of Senior Agent and Senior
Secured Parties (as defined in the Subordination and Intercreditor Agreement)
and promptly paid or delivered to Senior Agent in the form received; and


 


(ii)           after the Payment in Full of Senior
Debt and the termination of the Subordination and Intercreditor Agreement, any
monies or Property actually received by the Administrative Agent pursuant to
this Agreement or any other Loan Document as a result of the exercise of any rights
or remedies under any Security Instrument or any other agreement with the
Borrower, any Guarantor or any of their respective Subsidiaries which secures
any of the Obligations, shall be applied in the following order:


 


(i)            First, to the payment of all
amounts, including costs and expenses incurred in connection with the
collection of such proceeds and the payment of any part of the Obligations, due
to the Administrative Agent under any of the expense reimbursement or indemnity
provisions of this Agreement or any other Loan Document, any Security
Instrument or other collateral documents, and any applicable law;


 


(ii)           Second, ratably, according to the
then unpaid amounts thereof, without preference or priority of any kind among
them, to the payment of the Obligations then due and payable; and


 


(iii)          Third, the remainder, if any, to the
Borrower, its Subsidiaries, their respective successors or assigns, or such
other Person as may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct.


 


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


 


Section 8.


 


THE
ADMINISTRATIVE AGENT


 


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


 


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under this Agreement as
are delegated to the Administrative Agent by the terms hereof and of the other
Loan Documents, together with such powers as are reasonably incidental
thereto.  As to any matters not expressly
provided for by this Agreement or any other Loan Document (including, without
limitation, enforcement or collection of the Notes), the Administrative Agent
shall not be required to exercise any discretion or take any action, but shall
be required to act or to refrain from acting (and shall be fully protected in
so acting or refraining from acting) upon the instructions of the Majority
Lenders, and such instructions shall be binding upon all Lenders and all
holders of Notes; provided, however, that the Administrative Agent shall
not be required to take any action which exposes the Administrative Agent to
personal liability or which is contrary to this Agreement, any other Loan Document,
or applicable law.


 


(b)   Administrative Agent’s Reliance, Etc.  Neither the Administrative Agent nor any of
its directors, officers, agents, or employees shall be liable for any action
taken or omitted to be taken (INCLUDING THE
ADMINISTRATIVE AGENT’S OWN NEGLIGENCE) by it or them under or in
connection with this Agreement or the other Loan Documents, except for its or
their own gross negligence or willful misconduct.  Without limitation of the generality of the
foregoing, the Administrative Agent:  (a) may
treat the payee of any Note as the holder thereof until the Administrative
Agent receives written notice of the assignment or transfer thereof signed by
such payee and in form satisfactory to the Administrative Agent; (b) may
consult with legal counsel (including counsel for the Borrower), independent
public accountants, and other experts selected by it and shall not be liable
for any action taken or omitted to be taken in good faith by it in accordance
with the advice of such counsel, accountants, or experts; (c) makes no
warranty or representation to any Lender and shall not be responsible to any
Lender for any statements, warranties, or representations made in or in
connection with this Agreement or the other Loan Documents; (d) shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants or conditions of this Agreement or any other Loan
Document on the part of the Borrower or its Subsidiaries or to inspect the
Property (including the books and records) of the Borrower or its Subsidiaries;
(e) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency, or value of this
Agreement or any other Loan Document; and (f) shall incur no liability
under or in respect of this Agreement or any other Loan Document by acting upon
any notice, consent, certificate, or other instrument or writing (which may be
by telecopier or telex) believed by it to be genuine and signed or sent by the
proper party or parties.


 


(c)   The Administrative Agent and Its
Affiliates.  With respect to its
Commitment, the Advances made by it and the Notes issued to it, the
Administrative Agent shall have the same rights and powers under this Agreement
as any other Lender and may exercise the same as though it were not the
Administrative Agent.  The term “Lender”
or “Lenders” shall, unless otherwise expressly indicated, include the
Administrative Agent in its individual capacity.  The Administrative Agent and its Affiliates
may accept deposits from, lend money to, act as trustee under indentures of,
and generally engage in any kind of business with, the Borrower or any of its
Subsidiaries, and any Person who may do business with or own securities of the
Borrower or any such Subsidiary, all as if the Administrative Agent were not an
agent hereunder and without any duty to account therefor to the Lenders.


 


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


 


65

















 


Financial Statements and
the Interim Financial Statements and such other documents and information as it
has deemed appropriate, made its own credit analysis and decision to enter into
this Agreement.  Each Lender also
acknowledges that it shall, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.


 


(e)   Indemnification.  THE LENDERS SEVERALLY
AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH AFFILIATE THEREOF AND
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT
REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM
AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED
AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT’S OWN
NEGLIGENCE), AND INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL LIABILITIES,
PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES, OR DISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. 
WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THE
ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY
OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE
AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION,
MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL
PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR
RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THE
EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH BY THE
BORROWER.


 


(f)    Successor Administrative Agent.  The Administrative Agent may resign at any
time by giving written notice thereof to the Lenders and the Borrower and may
be removed at any time with or without cause by the Majority Lenders upon
receipt of written notice from the Majority Lenders to such effect.  Upon receipt of notice of any such
resignation or removal, the Majority Lenders shall have the right to appoint a
successor Administrative Agent with, if any Event of Default has not occurred
and is not continuing, the consent of the Borrower, which consent shall not be
unreasonably withheld.  If no successor
Administrative Agent shall have been so appointed by the Majority Lenders with
the consent of the Borrower, and shall have accepted such appointment, within
30 days after the retiring Administrative Agent’s giving of notice of
resignation or the Majority Lenders’ removal of the retiring Administrative
Agent then the retiring Administrative Agent may, on behalf of the Lenders and
the Borrower, appoint a 


 


66

















 


successor Administrative
Agent, which shall be, in the case of a successor agent, a commercial bank
organized under the laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $500,000,000.00; provided that, if the Administrative Agent
shall notify the Borrower and the Lenders that no qualifying Person has
accepted such appointment, then such resignation shall nonetheless become
effective in accordance with such notice and (1) the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder and under the other Loan Documents (except that in the case of any
collateral security held by the Administrative Agent on behalf of the Lenders
under any of the Loan Documents, the retiring Administrative Agent shall
continue to hold such collateral security until such time as a successor
Administrative Agent is appointed) and (2) all payments, communications
and determinations provided to be made by, to or through the retiring
Administrative Agent shall instead be made by or to each Lender directly, until
such time as the Majority Lenders appoint a successor Administrative Agent as
provided for above in this paragraph. 
Upon the acceptance of any appointment as Administrative Agent by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges,
and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations under
this Agreement and the other Loan Documents. 
After any retiring Administrative Agent’s resignation or removal
hereunder as Administrative Agent, the provisions of this Article VIII
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Administrative Agent under this Agreement and the other Loan
Documents.


 


(g)   Collateral Matters.


 


(i)            Administrative Agent is authorized
on behalf of the Secured Parties, without the necessity of any notice to or
further consent from the Secured Parties, from time to time, to take any
actions with respect to any Collateral or Security Instruments which may be
necessary to perfect and maintain Acceptable Security Interests in and Liens
upon the Collateral granted pursuant to the Security Instruments.  Administrative Agent is further authorized on
behalf of the Secured Parties, without the necessity of any notice to or
further consent from the Secured Parties, from time to time, to take any action
(other than enforcement actions requiring the consent of, or request by, the
Majority Lenders as set forth in Section 7.02 or Section 7.03 above)
in exigent circumstances as may be reasonably necessary to preserve any rights
or privileges of the Secured Parties under the Loan Documents or applicable law.


 


(ii)           Each Secured
Party irrevocably authorizes Administrative Agent to release any Lien granted
to or held by the Administrative Agent upon any Collateral: (i) upon
termination of the Commitments and payment in full of all Obligations; (ii) constituting
Property sold or to be sold or otherwise disposed of as part of or in
connection with any disposition permitted under this Agreement or the other
Loan Documents; (iii) constituting Property in which the Borrower or any
Subsidiary owned no interest at the time the Lien was granted or at any time
thereafter; (iv) constituting Property leased to the Borrower or any
Subsidiary under a lease which has expired or has been terminated in a
transaction permitted under this Agreement or is about to expire and which has
not been, and is not intended by the Borrower or such Subsidiary to be, renewed
or extended; or (v) if approved, authorized or ratified in writing by the
applicable Majority Lenders or all the Lenders, as the case may be, as required
by Section 9.01.  Upon the request
of the Administrative Agent at any time, the Secured Parties will confirm in 


 


67

















 


writing the Administrative
Agent’s authority to release particular types or items of Collateral pursuant
to this Section 8.07.


 


(iii)          Notwithstanding anything contained in
any of the Loan Documents to the contrary, the Borrower, the Administrative
Agent, and each Secured Party hereby agree that no Secured Party shall have any
right individually to realize upon any of the Collateral or to enforce the
Guaranties, it being understood and agreed that all powers, rights and remedies
hereunder and under the Security Instruments may be exercised solely by Administrative Agent on
behalf of the Secured Parties in accordance with the terms hereof.


 


Section 9.



MISCELLANEOUS


 


(a)   Amendments, Etc.  No amendment or waiver of any provision of
this Agreement, the Notes, or any other Loan Document, nor consent to any
departure by the Borrower or any Subsidiary therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Majority
Lenders and the Borrower, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given; provided,
however, that no amendment, waiver, or consent shall, unless in writing and
signed by all the Lenders, do any of the following:  (a) waive any of the conditions
specified in Section 3.01, (b) increase the Commitments of the
Lenders other than as provide in Section 2.16, (c) reduce the
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or under any other Loan Document, (d) postpone any date fixed
for any payment of principal of, or interest on, the Notes or any fees or other
amounts payable hereunder or extend the Maturity Date (other than as provided
in Section 2.15), (e) change the percentage of Lenders which shall be
required for the Lenders or any of them to take any action hereunder or under
any other Loan Document, (f) amend Section 2.11 or this Section 9.01,
(g) amend the definition of “Majority Lenders,” (h) release any
Guarantor from its obligations under any Guaranty, (i) permit the Borrower
or any Subsidiary to enter into any merger or consolidation with or into any
other Person or amend Section 6.04(a), (j) release any Collateral
securing the Obligations, except for releases of Collateral sold as permitted
by this Agreement except for releases of Collateral as permitted under Section 8.08(b),
or (k) amend or waive any provision of, nor consent to any departure by
any party thereto from, the Collateral Trust and Intercreditor Agreement; and provided,
further, that no amendment, waiver or consent shall, unless in writing and
signed by the Administrative Agent in addition to the Lenders required above to
take such action, affect the rights or duties of the Administrative Agent under
this Agreement or any other Loan Document.


 


(b)   Notices, Etc.  All notices and other communications shall be
in writing (including, without limitation, telecopy or telex) and mailed by
certified mail, return receipt requested, telecopied, telexed, hand delivered,
or delivered by a nationally recognized overnight courier, at the address for
the appropriate party specified in Schedule I or at such other address as shall
be designated by such party in a written notice to the other parties.  All such notices and communications shall,
when so mailed, telecopied, telexed, or hand delivered or delivered by a
nationally recognized overnight courier, be effective when received if mailed,
when telecopy transmission is completed, when confirmed by telex answer-back,
or when delivered by such messenger or courier, respectively, except that
notices and communications to the Administrative 


 


68

















 


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


 


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


 


(d)   Costs and Expenses.  The Borrower agrees to pay on demand (a) all
reasonable out-of-pocket costs and expenses of the Administrative Agent in
connection with the preparation, execution, delivery, administration,
modification, and amendment of this Agreement, the Notes, the Guaranties, and
the other Loan Documents including the reasonable fees and out-of-pocket
expenses of counsel for the Administrative Agent with respect to advising the
Administrative Agent as to its rights and responsibilities under this Agreement
and (b) all out-of-pocket costs and expenses, if any, of the
Administrative Agent and each Lender (including, without limitation, reasonable
counsel fees and expenses of the Administrative Agent and each Lender) in
connection with the enforcement (whether through negotiations, legal
proceedings, or otherwise) of this Agreement, the Notes, the Guaranties, and
the other Loan Documents.


 


(e)   Binding Effect.  This Agreement shall become effective when it
shall have been executed by the Borrower and the Administrative Agent, and when
the Administrative Agent shall have, as to each Lender, either received a
counterpart hereof executed by such Lender or been notified by such Lender that
such Lender has executed it and thereafter shall be binding upon and inure to
the benefit of the Borrower, the Administrative Agent and each Lender and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights or delegate its duties under this Agreement or any
interest in this Agreement without the prior written consent of each Lender.


 


(f)    Lender Assignments and Participations.


 


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


 


69

















 


effective date specified
in each Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder
shall be a party hereto for all purposes and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (B) such
Lender thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of such Lender’s rights and obligations under this Agreement, such Lender shall
cease to be a party hereto).


 


(ii)           Terms of Assignments.  By executing and delivering an Assignment and
Acceptance, the Lender thereunder and the assignee thereunder confirm to and
agree with each other and the other parties hereto as follows:  (i) other than as provided in such
Assignment and Acceptance, such Lender makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement or the execution,
legality, validity, enforceability, genuineness, sufficiency of value of this
Agreement or any other instrument or document furnished pursuant hereto; (ii) such
Lender makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower or its Subsidiaries or the
performance or observance by the Borrower or its Subsidiaries of any of their
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy
of this Agreement, together with copies of the Financial Statements and Interim
Financial Statements referred to in Section 4.05 and such other documents
and information as it has deemed appropriate to make its own credit analysis
and decision to enter into such Assignment and Acceptance; (iv) such
assignee will, independently and without reliance upon the Administrative
Agent, such Lender or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement; (v) such
assignee appoints and authorizes the Administrative Agent to take such action
as agent on its behalf and to exercise such powers under this Agreement as are
delegated to the Administrative Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vi) such assignee agrees
that it will perform in accordance with their terms all of the obligations
which by the terms of this Agreement are required to be performed by it as a
Lender.


 


(iii)          The Register.  The Administrative Agent shall maintain at
its address referred to in Section 9.02 a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the recordation
of the names and addresses of the Lenders and the Commitments of, and principal
amount of the Advances owing to, each Lender from time to time (the “Register”).  The entries in the Register shall be
conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Administrative Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all purposes of this
Agreement.  The Register shall be
available for inspection by the Borrower or any Lender at any reasonable time
and from time to time upon reasonable prior notice.


 


(iv)          Procedures.  Upon its receipt of an Assignment and
Acceptance executed by a Lender and an Eligible Assignee, together with the
Notes subject to such assignment, the Administrative Agent shall, if such
Assignment and Acceptance has been completed and is in 


 


70

















 


substantially the form of
the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record
the information contained therein in the Register, and (iii) give prompt
notice thereof to the Borrower.  Within
five Business Days after its receipt of such notice, the Borrower shall execute
and deliver to the Administrative Agent in exchange for the surrendered Notes (A) a
new Note to the order of such Eligible Assignee in an amount equal to the
Advances purchased by it pursuant to such Assignment and Acceptance and (B) if
such Lender has retained any portion of the Advances owing to it, a new Note to
the order of such Lender in an amount equal to the portion retained by it
hereunder.  Such new Notes shall be dated
the effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of the attached Exhibit E.


 


(v)           Participations.  Each Lender may sell participations to one or
more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Advances owing to it); provided, however, that (i) such
Lender’s obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) such Lender shall remain the holder
of any such Notes for all purposes of this Agreement, (iv) the Borrower,
the Administrative Agent and the other Lenders shall continue to deal solely
and directly with such Lender in connection with such Lender’s rights and
obligations under this Agreement, and (v) such Lender shall not require
the participant’s consent to any matter under this Agreement, except for change
in the principal amount of the Notes, reductions in fees or interest, releasing
all or substantially all of any Collateral, permitting the Borrower or any
Subsidiary to enter into any merger or consolidation with or into any
other,  postponement of any date fixed
for any payment of principal of, or interest on, the Notes or any fees or other
amounts payable hereunder, or extensions of the Maturity Date (other than as
provided in Section 2.15).  The
Borrower hereby agrees that participants shall have the same rights under
Sections 2.12, 2.13, 2.14(c), and 9.07 as a Lender to the extent of their
respective participations.


 


(g)   Indemnification; Waiver.


 


(a)           Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT
(AND ANY SUB-AGENT THEREOF), EACH LENDER AND EACH OFFICER, DIRECTOR, EMPLOYEE,
AGENT, ATTORNEY-IN-FACT AND AFFILIATE  OF ANY OF THE FOREGOING PERSONS (EACH SUCH
PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE
HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED
EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY
INDEMNITEE), INCURRED BY ANY INDEMNITEE OR ASSERTED AGAINST ANY INDEMNITEE BY
ANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARY OF THE BORROWER ARISING
OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE EXECUTION OR
DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR
INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIES
HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE
CASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR,
EMPLOYEE, AGENT, ATTORNEY-IN-FACT 


 


71

















 


AND AFFILIATE THEREOF) THE
ADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY
ADVANCE OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) ANY
ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY
PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR ANY
ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS
SUBSIDIARIES, OR (IV) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION,
INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THE
BORROWER OR ANY GUARANTOR, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY
THERETO, IN ALL CASES, WHETHER OR NOT
CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY
OR SOLE NEGLIGENCE OF THE INDEMNITEE; PROVIDED THAT SUCH
INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH
LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A
COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE
RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.


 


(b)           Waiver of Damages.  To the fullest extent permitted by applicable
law, the Borrower shall not assert, and hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement, any other Loan Document or
any agreement or instrument contemplated hereby, the transactions contemplated
hereby or thereby, any Advance or the use of the proceeds thereof.  No Indemnitee referred to in subsection (a) above
shall be liable for any damages arising from the use by unintended recipients
of any information or other materials distributed by it through
telecommunications, electronic or other information transmission systems in
connection with this Agreement or the other Loan Documents or the transactions
contemplated hereby or thereby.


 


(h)   Execution in Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.  Delivery of an executed counterpart signature
page of this Agreement by facsimile is as effective as executing and
delivering this Agreement in the presence of the other parties to this
Agreement.


 


(i)    Survival of Representations, Etc.  All representations and warranties contained
in this Agreement or made in writing by or on behalf of the Borrower in
connection herewith shall survive the execution and delivery of this Agreement
and the Loan Documents, the making of the Advances and any investigation made
by or on behalf of the Lenders, none of which investigations shall diminish any
Lender’s right to rely on such representations and warranties.  All obligations of the Borrower provided for
in Sections 2.12, 2.13, 2.14(c), 9.04, and 9.07 and all of the obligations
of the Lenders in Section 8.05 shall survive any termination of this
Agreement and repayment in full of the Obligations.


 


72
















 


(j)    Severability.  In case one or more provisions of this
Agreement or the other Loan Documents shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality,
and enforceability of the remaining provisions contained herein or therein
shall not be affected or impaired thereby.


 


(k)   Business Loans.  The Borrower warrants and represents that the
Loans evidenced by the Notes are and shall be for business, commercial,
investment, or other similar purposes and not primarily for personal, family,
household, or agricultural use, as such terms are used in Chapter One (“Chapter
One”) of the Texas Credit Code.  At all
such times, if any, as Chapter One shall establish a Maximum Rate, the Maximum
Rate shall be the “indicated rate ceiling” (as such term is defined in Chapter
One) from time to time in effect.


 


(l)    Governing Law; Submission to Jurisdiction.  This Agreement, the Notes and the other Loan
Documents shall be governed by, and construed and enforced in accordance with,
the laws of the State of Texas.  Without
limiting the intent of the parties set forth above, (a) Chapter 346 of the
Texas Finance Code, as amended (relating to revolving loans and revolving
tri-party accounts (formerly Tex.  Rev.
Civ.  Stat.  Ann. 
Art.  5069, Ch.  15)), shall not apply to this Agreement, the
Notes, or the transactions contemplated hereby and (b) to the extent that
any Lender may be subject to Texas law limiting the amount of interest payable
for its account, such Lender shall utilize the indicated (weekly) rate ceiling
from time to time in effect.  The
Borrower hereby irrevocably submits to the jurisdiction of any Texas state or
federal court sitting in Dallas, Texas in any action or proceeding arising out
of or relating to this Agreement or the other Loan Documents, and the Borrower
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such court.  The Borrower hereby unconditionally and irrevocably
waives, to the fullest extent it may effectively do so, any right it may have
to the defense of an inconvenient forum to the maintenance of such action or
proceeding.  The Borrower hereby agrees
that service of copies of the summons and complaint and any other process which
may be served in any such action or proceeding may be made by mailing or
delivering a copy of such process to such Borrower at its address set forth in
this Agreement.  The Borrower agrees that
a final judgment in any such action or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.  Nothing in this Section shall
affect the rights of any Lender to serve legal process in any other manner
permitted by the law or affect the right of any Lender to bring any action or
proceeding against the Borrower or its Property in the courts of any other
jurisdiction.


 


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


 


(n)   USA Patriot Act.  Each Lender that is subject to the Patriot
Act and the Administrative Agent (for itself and not on behalf of any Lender)
hereby notifies the Borrower that pursuant to the requirements of the Patriot
Act it is required to obtain, verify and record information that identifies the
Borrower, which information includes the name and address of the 


 


73

















 


Borrower and other
information that will allow such Lender or the Administrative Agent, as
applicable, to identify the Borrower in accordance with the Patriot Act.


 


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


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.


 


[Remainder of this page intentionally
left blank.  Signature page follows.]


 


74

















 


EXECUTED as of the date first above written.


 


	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC. a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Benjamin Daitch

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Senior Vice President and

  
	
   

  	
   

  	
  Chief Financial Officer

  
				



 


Signature
page to Subordinated Credit Agreement

(Cano Petroleum, Inc.)


 

















 


	
   

  	
  ADMINISTRATIVE AGENT/LENDERS:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.,

  as Administrative Agent and Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ted A. McNulty

  
	
   

  	
  Name:

  	
  Ted A. McNulty

  
	
   

  	
  Title:

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Derrick Pan

  
	
   

  	
  Name:

  	
  Derrick Pan

  
	
   

  	
  Title:

  	
  Vice President

  
					



 


Signature page to Subordinated Credit Agreement

(Cano Petroleum, Inc.)


 

















 


SCHEDULE I


NOTICE INFORMATION AND COMMITMENTS


 


Each of the commitments to lend set forth herein is governed by the
terms of the Credit Agreement which provides for, among other things, borrowing
base limitations which may restrict the Borrower’s ability to request (and the
Lenders’ obligation to provide) Credit Extensions to a maximum amount which is
less than the commitments set forth in this Schedule I.


 


Administrative Agent:


 


UnionBanCal Equities, Inc.


445 South Figueroa Street, 21st Floor


Los Angeles, California 90071


Attention:  Maggie Elower


Phone:  213-236-7881


Fax:  213-236-7619


 


Borrower:


 


Cano Petroleum, Inc.


Burnett Plaza


801 Cherry Street, Suite 3200


Fort Worth, Texas 76102


Attention: Benjamin Daitch, CFO


Facsimile: (817) 334-0222


 




	
  Lenders:

  	
   

  	
  Commitment

  	
   

  
	
  UnionBanCal Equities, Inc.

  	
   

  	
  $15,000,000.00

  	
   

  
	
  Total:

  	
   

  	
  $15,000,000.00

  	
   

  






 

















 


SCHEDULE 4.01


 


SUBSIDIARIES OF BORROWER


 


	
  Ladder Companies, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
  Type of Organization:Corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Square One Energy, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:Corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
  Type of Organization:Corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WO Energy, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:Corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  W.O. Operating Company, Ltd.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:Limited Partnership

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  W.O. Production Company, Ltd.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:Limited Partnership

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Cano Petro of New Mexico

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
  Type of Organization:Corporation

  	
   

  	
   

  



 


1

















 


SCHEDULE 4.05


 


EXISTING DEBT


 


Cano
Petroleum, Inc.


 


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


 


$27,000,000


 


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


 


	
  D.E. Shaw Laminar Portfolios, L.L.C.

  	
   

  	
  $

  	
  11,804,024.06

  	
   

  
	
  Investcorp Interlachen Multi-Strategy
  Master Fund Limited

  	
   

  	
  1,479,484.90

  	
   

  
	
  Kellogg Capital Group LLC

  	
   

  	
  2,046,906.46

  	
   

  
	
  William Herbert Hunt Trust Estate

  	
   

  	
  3,391,960.94

  	
   

  
	
  Radcliffe SPC, Ltd. for and on behalf of
  the Class A Convertible Crossover Segregated Portfolio

  	
   

  	
  2,046,906.46

  	
   

  
	
  Touradji DeepRock Master Fund, Ltd.

  	
   

  	
  1,016,843.75

  	
   

  
	
  Trapeze Capital Corp.

  	
   

  	
  3,492,858.29

  	
   

  
	
  O’Connor PIPEs Corporate Strategies Master
  Limited

  	
   

  	
  1,275,122.07

  	
   

  
	
  Total Convertible Preferred Stock

  	
   

  	
  $

  	
  26,554,106.93

  	
   

  



 


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


 


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


 


Square One Energy, Inc.


 


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


 


W.O. Energy of Nevada, Inc.


 


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


 


WO Energy, Inc.


 


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


 


W.O. Operating Company, Ltd.


 


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


 


1

















 


W.O. Production Company, Ltd.


 


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


 


Cano Petro of New Mexico


 


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


 


2

















 


Schedule 4.07


 


LITIGATION


 


Burnett:


 


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


 


The plaintiffs in the above action (i) allege negligence and (ii) seek
damages, including, but not limited to, damages for damage to their land and
livestock, certain expenses related to fighting the fire and certain remedial
expenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) termination
of certain oil and natural gas leases, (ii) reimbursement for their
attorney’s fees (in the amount of at least $549,000) and (iii) exemplary
damages.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or a general partnership or de facto partnership.


 


On June 21, 2007, the Judge of the 100th Judicial District Court issued a Final
Judgment (a) granting motions for summary judgment in favor of Cano and
certain of its subsidiaries on plaintiffs’ claims for (i) breach of
contract/termination of an oil and gas lease; and (ii) negligence; and (b) granting
the plaintiffs’ no-evidence motion for summary judgment on contributory
negligence, assumption of risk, repudiation and estoppel affirmative defenses
asserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.


 


SPS:


 


On March 14, 2007, the following lawsuit was filed in 100th
Judicial District Court in Carson County, Texas; Cause No. 9994,
Southwestern Public Service Company d/b/a Xcel Energy v. Cano Petroleum, Inc.,
W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO
Energy, Inc. (“SPS”). The plaintiff claims that the electrical
wiring and equipment of Cano or certain of its subsidiaries relating to oil and
gas operations started a wildfire that began on March 12, 2006 in Carson
County.  The plaintiff (i) alleges
negligence and breach of contract and (ii) seeks $1,876,000 in damages for
loss and damage to transmission and distribution equipment, utility poles,
lines and other equipment.  In addition,
the plaintiff seeks reimbursement for its attorney’s fees.


 


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


 


1

















 


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


 


MDL
Case:


 


On September 25, 2007, the Texas Judicial Panel on Multidistrict
Litigation granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W. O. Operating Company, Ltd, and WO Energy, Inc.’s Motion to
Transfer Related Cases to Pretrial Court pursuant to Texas Rule of
Judicial Administration 13.  The Panel
transferred to a single pretrial court for consideration of pretrial matters of
Southwestern Public Service Company d/b/a Xcel Energy, identified above,
and Valenzuela, identified below, that assert claims against the Company
and its subsidiaries related to wildfires beginning on March 12,
2006.  On September 11, 2008, the MDL Court signed a Partial Order of
Remand remanding the SPS case and setting it for trial before the 100th Judicial District Court of Carson County,
Texas on February 16, 2009.


 


Valenzuela:


 


On December 18, 2007,
the following lawsuit was filed in the 348th Judicial
District Court of Tarrant County, Texas, Cause No. 348-227907-07, Norma
Valenzuela, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W.O. Operating, Ltd. and WO Energy, Inc. (“Valenzuela”).  Six plaintiffs, including the two plaintiffs
and intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County. 
The plaintiffs (i) allege negligence and (ii) seek undisclosed
damages for the wrongful death of four relatives, Manuel Dominguez, Roberto
Chavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a result
of the fire.  In addition, plaintiffs
seek (i) reimbursement for their attorney’s fees and (ii) exemplary
damages.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or as a partnership or de facto partnership.


 


The Company filed a Motion
to Transfer Venue and a Notice of Tag Along transferring the case to the MDL
Matter in the 200th Judicial District Court of Travis County, Texas (the “MDL
Court”).  No further action will be taken
in the 348th District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 348th District Court for trial.  A Motion to transfer Venue has been heard and
taken under advisement by the Court.  The
MDL Court has not yet remanded this case for trial.


 


Securities
Litigation:


 


On October 2, 2008, a
lawsuit was filed in the United States District Court for the Southern District
of New York against David W. Wehlmann; Gerald W. Haddock; Randall Boyd; Donald
W. Niemiec; Robert L. Gaudin; William O. Powell, III, and the underwriters
alleging violations of the federal securities laws.  The plaintiff seeks
to certify the lawsuit as a class action.  The lawsuit alleges that the
prospectus for the June 26, 2008 public offering of Cano common stock
contained statements regarding Cano’s proved reserve amounts and standards that
were 


 


2

















 


materially false and
overstated Cano’s proved reserves.  Messrs. Wehlmann, Haddock, Boyd,
Niemiec, Gaudin and Powell were Cano outside directors on June 26,
2008.  The lawsuit seeks an unspecified amount of damages for the class if
the lawsuit is certified as a class action.


 


3

















 


SCHEDULE 4.14(a)


 


AGREEMENTS WHICH COULD CREATE A MATERIAL
ADVERSE CHANGE


 


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


 


Securities Purchase Agreement dated August 25, 2006 by and among
Cano Petroleum, Inc. and the Buyers listed therein.


 


Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of Cano Petroleum, Inc. filed August 31,
2006 with the Delaware Secretary of State.


 
















 


SCHEDULE 4.20


 


HEDGING CONTRACTS


 


	
  Time Period

  	
   

  	
  Floor

  Oil Price

  	
   

  	
  Ceiling

  Oil Price

  	
   

  	
  Barrels

  Per Day

  	
   

  	
  Floor

  Gas Price

  	
   

  	
  Ceiling

  Gas Price

  	
   

  	
  Mcf

  per Day

  	
   

  	
  Barrels of

  Equivalent

  Oil per Day

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  117.50

  	
   

  	
  367

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.40

  	
   

  	
  1,867

  	
   

  	
  678

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  110.90

  	
   

  	
  367

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  10.60

  	
   

  	
  1,667

  	
   

  	
  644

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  108.20

  	
   

  	
  333

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  9.85

  	
   

  	
  1,567

  	
   

  	
  594

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  107.30

  	
   

  	
  333

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.60

  	
   

  	
  1,467

  	
   

  	
  578

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  110.60

  	
   

  	
  267

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.90

  	
   

  	
  1,233

  	
   

  	
  472

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  104.40

  	
   

  	
  233

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.15

  	
   

  	
  1,133

  	
   

  	
  422

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  101.50

  	
   

  	
  233

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  9.40

  	
   

  	
  1,033

  	
   

  	
  406

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  100.50

  	
   

  	
  200

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  11.05

  	
   

  	
  967

  	
   

  	
  361

  	
   

  



 





















 


SCHEDULE 4.21


 


MATERIAL AGREEMENTS


 


Description


 


Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of Cano Petroleum, Inc. filed August 31,
2006 with the Delaware Secretary of State.


 


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


 


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


 


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


 


Amendment to Gas Purchase Contract between GPM Gas Corporation and Rio
Petroleum, Inc. dated June 1, 1999.


 


Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated February 1, 2000.


 


Amendment to Crude Oil Purchase Agreement between Sunoco Partners
Marketing & Terminals, LP and Ladder Energy Company dated December 1,
2004.


 


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


 


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


 


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


 


Amendment
to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals, LP and Ladder Energy Company dated September 11, 2008.


 


Gas Purchase and Sales Contract between Arrow Oil & Gas Inc
and STP, Inc. dated August 15, 2002.


 


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


 


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


 


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


 


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


 


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


 


Gas Purchase Contract between Enbridge G & P (North Texas) L.
P. and Square One Energy, Inc. contract number 5409 dated March 1,
2007.


 


Crude Oil Purchase Contract between Plains Marketing, LP (PMLP) and
Square One Energy contract number 7062-1001 dated March 1, 2007.


 


1





















 


Crude Oil Purchase Agreement Amendment between Sunoco Partners
Marketing & Terminals L.P. and Square One Energy Reference Number
521329 dated June 1, 2003.


 


Crude Oil Purchase Agreement Amendment between Sunoco Partners
Marketing & Terminals L.P. and Square One Energy Reference Number
521329 dated March 1, 2004.


 


Crude Oil Purchase Agreement Amendment between Sunoco Partners
Marketing & Terminals L.P. and Square One Energy Reference Number
521329 dated November 1, 2004.


 


Crude Oil Purchase Agreement Amendment between Sunoco Partners
Marketing & Terminals L.P. and Square One Energy Reference Number
521329 dated September 1, 2006.


 


Crude Oil Purchase Agreement between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated November 1,
2006.


 


Crude Oil Purchase Agreement Amendment between Sunoco Partners
Marketing & Terminals L.P. and Square One Energy Reference Number
521329 dated November 1, 2006.


 


Crude Oil
Purchase Agreement Amendment between Sunoco Partners Marketing &
Terminals L.P. and Square One Energy Reference Number 521329 dated April 7,
2004.


 


Gas Purchase Contract between Duke Energy Field Services and W. O.
Operating dated November 1, 2003.


 


Gas Purchase Contract Amendment between Duke Energy Field Services and
W. O. Operating dated September 1, 2005.


 


Gas Purchase Contract between Duke Energy Field Services and W. O.
Operating dated August 1, 2005.


 


Crude Oil Purchase Contract between Diamond Shamrock Refining Company,
L. P. and W. O. Operating Company Contract number 01-0838 dated May 1,
2001


 


Crude Oil Purchase Agreement Amendment 13 between Diamond Shamrock
Refining Company, L. P. and W. O. Operating Company Contract number 01-0838
dated August 1, 2007 and Exhibit A.


 


Gas Purchase Contract between W. O. Operating Company and GPM
Corporation dated March 15, 1994.


 


Gas Purchase Agreement between ONEOK Texas Field Services, L. P. and W.
O. Operating Company, LTD dated January 1, 2005.


 


Crude Oil Purchase Agreement Amendment 14 between Valero Marketing and
Supply Company and W. O. Operating Company dated December 1, 2007.


 


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


 


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


 


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


 


Amendment
to Gas Services and/or Purchase Agreement between Cano Petroleum, Inc, Owner
and Versado Gas Processors, L.L.C. acting through Targa Midstream Services
Limited Partnership, its operator


 


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


 


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


 


Unit
Operating Agreement — Cano Unit dated May 1, 1989.


 


2





















 


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


 


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


 


3





















 


EXHIBIT A


 


FORM OF
ASSIGNMENT AND ACCEPTANCE


 


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


 


For an agreed
consideration, [the][each] Assignor hereby irrevocably sells and assigns to
[the Assignee][the respective Assignees], and [the][each] Assignee hereby
irrevocably purchases and assumes from [the Assignor][the respective
Assignors], subject to and in accordance with the Standard Terms and Conditions
and the Credit Agreement, as of the Effective Date inserted by the
Administrative Agent as contemplated below (i) all of [the Assignor’s][the
respective Assignors’] rights and obligations in [its capacity as a
Lender][their respective capacities as Lenders] under the Credit Agreement and
any other documents or instruments delivered pursuant thereto to the extent
related to the amount and percentage interest identified below of all of such
outstanding rights and obligations of [the Assignor][the respective Assignors]
under the respective facilities identified below (including without limitation
any letters of credit, guarantees, and swingline loans included in such
facilities) and (ii) to the extent permitted to be assigned under
applicable law, all claims, suits, causes of action and any other right of [the
Assignor (in its capacity as a Lender)][the respective Assignors (in their
respective capacities as Lenders)] against any Person, whether known or unknown,
arising under or in connection with the Credit Agreement, any other documents
or instruments delivered pursuant thereto or the loan transactions governed
thereby or in any way based on or related to any of the foregoing, including,
but not limited to, contract claims, tort claims, malpractice claims, statutory
claims and all other claims at law or in equity related to the rights and
obligations sold and assigned pursuant to clause (i) above (the rights and
obligations sold and assigned by [the][any] Assignor to [the][any] Assignee
pursuant to clauses (i) and (ii) above being referred to herein
collectively as [the][an] “Assigned Interest”).  Each such sale and assignment is without
recourse to 


 






(1) For bracketed language here and elsewhere
in this form relating to the Assignor(s), if the assignment is from a single
Assignor, choose the first bracketed language. 
If the assignment is from multiple Assignors, choose the second
bracketed language.


 


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


 


(3) Select as appropriate.


 


(4) Include
bracketed language if there are either multiple Assignors or multiple
Assignees.


 


A-1

















 


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


 


	
  1.

  	
   

  	
  Assignor[s]:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Assignee[s]:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Borrower:

  	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Administrative Agent:

  	
   

  	
  UNIONBANCAL EQUITIES, INC., as the administrative agent under the
  Credit Agreement

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Credit Agreement:

  	
   

  	
  The Subordinated Credit Agreement dated as of December 17, 2008
  among Borrower, the Lenders party thereto from time to time, and UnionBanCal
  Equities, Inc. as Administrative Agent.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  Assigned Interest[s]:

  	
   

  	
   

  



 


	
  Assignor[s]

  	
   

  	
  Assignee[s]

  	
   

  	
  Facility

  Assigned

  	
   

  	
  Aggregate Amount

  of Commitment

  /Advance for all

  Lenders

  	
   

  	
  Amount of

  Commitment / 

  Advances

  Assigned(5)

  	
   

  	
  Percentage Assigned

  of Commitment / 

  Advances(6)

  	
   

  	
  CUSIP

  Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
  %

  	
   

  	
   

  



 


	
  7.

  	
   

  	
  Trade Date:

  	
                                (7)

  



 


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


 






(5) Amount to be adjusted by the
counterparties to take into account any payments or prepayments made between
the Trade Date and the Effective Date.


 


(6) Set forth, to at least 9 decimals, as a percentage of the
Commitment / Advances of all Lenders thereunder.


 


(7) To be completed if the Assignor(s) and
the Assignee(s) intend that the minimum assignment amount is to be
determined as of the Trade Date.


 


A-2

















 


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


 


	
   

  	
  ASSIGNOR[S](8)

  
	
   

  	
  [NAME OF
  ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME OF
  ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ASSIGNEE[S]

  
	
   

  	
  [NAME OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
  [Consented to and](9)
  Accepted:

  	
   

  
	
   

  	
   

  
	
  UNIONBANCAL EQUITIES, INC., as

  	
   

  
	
   Administrative Agent

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
									



 






(8) Add additional signature blocks as needed.


 


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


 


A-3

















 


	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  
	
  [Consented to:](10)

  
	
   

  
	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					



 






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


 


A-4

















 


Annex 1


To Exhibit A — Assignment
and Acceptance


 


STANDARD
TERMS AND CONDITIONS FOR


ASSIGNMENT
AND ACCEPTANCE


 


1.  Representations and
Warranties.


 


1.1 Assignor[s]. 
[The][Each] Assignor (a) represents and warrants that (i) it
is the legal and beneficial owner of [the][the relevant] Assigned Interest, (ii) [the][such]
Assigned Interest is free and clear of any lien, encumbrance or other adverse
claim and (iii) it has full power and authority, and has taken all action
necessary, to execute and deliver this Assignment and Acceptance and to
consummate the transactions contemplated hereby; and (b) assumes no
responsibility with respect to (i) any statements, warranties or
representations made in or in connection with the Credit Agreement or any other
Loan Document, (ii) the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Loan Documents or any collateral
thereunder, (iii) the financial condition of the Borrower, any of its
Subsidiaries or Affiliates or any other Person obligated in respect of any Loan
Document or (iv) the performance or observance by the Borrower, any of its
Subsidiaries or Affiliates or any other Person of any of their respective
obligations under any Loan Document.


 


1.2. Assignee[s]. 
[The][Each] Assignee (a) represents and warrants that (i) it
has full power and authority, and has taken all action necessary, to execute
and deliver this Assignment and Acceptance and to consummate the transactions
contemplated hereby and to become a Lender under the Credit Agreement, (ii) it
meets all the requirements to be an Eligible Assignee under Section 9.06
of the Credit Agreement (subject to such consents, if any, as may be required
under Section 9.06 of the Credit Agreement), (iii) from and after the
Effective Date, it shall be bound by the provisions of the Credit Agreement as
a Lender thereunder and, to the extent of [the][the relevant] Assigned
Interest, shall have the obligations of a Lender thereunder, (iv) it is
sophisticated with respect to decisions to acquire assets of the type represented
by the Assigned Interest and either it, or the person exercising discretion in
making its decision to acquire the Assigned Interest, is experienced in
acquiring assets of such type, (v) it has received a copy of the Credit
Agreement, and has received or has been accorded the opportunity to receive
copies of the most recent financial statements delivered pursuant to Section 3.01(c) thereof,
as applicable, and such other documents and information as it deems appropriate
to make its own credit analysis and decision to enter into this Assignment and
Acceptance and to purchase [the][such] Assigned Interest, (vi) it has,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Assignment and Acceptance and to purchase [the][such] Assigned Interest, and (vii) if
it is a Person that is organized under the laws of a jurisdiction other than
that in which the Borrower is resident for tax purposes, attached to the
Assignment and Acceptance is any documentation required to be delivered by it
pursuant to the terms of the Credit Agreement, duly completed and executed by
[the][such] Assignee; and (b) agrees that (i) it will, independently
and without reliance on the Administrative Agent, [the][any] Assignor or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action 


 


A-5

















 


under the Loan Documents, and (ii) it will perform in accordance
with their terms all of the obligations which by the terms of the Loan
Documents are required to be performed by it as a Lender.


 


2.  Payments.  From and after the Effective Date, the
Administrative Agent shall make all payments in respect of [the][each] Assigned
Interest (including payments of principal, interest, fees and other amounts) to
[the][the relevant] Assignee whether such amounts have accrued prior to, on or
after the Effective Date.  The
Assignor[s] and the Assignee[s] shall make all appropriate adjustments in
payments by the Administrative Agent for periods prior to the Effective Date or
with respect to the making of this assignment directly between themselves.


 


3.               General
Provisions.  This Assignment and
Acceptance shall be binding upon, and inure to the benefit of, the parties
hereto and their respective successors and assigns.  This Assignment and Acceptance may be
executed in any number of counterparts, which together shall constitute one
instrument.  Delivery of an executed
counterpart of a signature page of this Assignment and Acceptance by
telecopy shall be effective as delivery of a manually executed counterpart of
this Assignment and Acceptance.  This
Assignment and Acceptance shall be governed by, and construed in accordance
with, the law of the State of Texas.


 


A-6
















 


EXHIBIT B


 


FORM OF
COMPLIANCE CERTIFICATE


 


FOR THE PERIOD
FROM _______, 200__ TO ________, 200__


 


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


 


The
undersigned hereby certifies that:


 


(a)                                  all
of the representations and warranties made by the Borrower in the Credit
Agreement and the other Loan Documents are true and correct in all material
respects as if made on this date, except to the extent that any such
representation or warranty expressly relates solely to an earlier date, in
which case it shall have been true and correct in all material respects as of
such earlier date;


 


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


 


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


 


____________________________________;
and]


 


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


 


I.                                         Current
Ratio—Section 6.17.


 


	
  (a)

  	
  consolidated
  current assets(11)

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  current liabilities(12)

  	
   

  	
  $

  	
   

  	
   

  



 






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


 


 (12) “current liabilities” shall
exclude, as of the date of calculation, the current portion of long-term Debt
existing under the Senior Credit Agreement, the current portion of long-term
Debt existing under the Credit Agreement and any liabilities representing a
valuation account arising from the application of SFAS 133 and 143.


 


B-1

















 


	
  Current Ratio = (a) to (b) =

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Minimum Current Ratio not less than:

  	
   

  	
  1.00 to 1.00

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES  o NO  o

  



 


II.            Leverage
Ratio—Section 6.18.


 


	
  (a)

  	
  consolidated
  Debt(13)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  EBITDA(14) =  (i) + [(ii) + (iii) + (iv)](15) —
  (v) + (vi) + (vii) = 

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (i) 
  Consolidated Net Income

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (ii) 
  consolidated Interest Expense

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (iii) 
  taxes

  	
   

  	
  $

  	
    

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (iv) 
  depreciation, amortization, depletion & other non-cash items(16)

  	
   

  	
  $

  	
    

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (v)  all
  non-cash items of income included in determining Consolidated Net Income(17)

  	
   

  	
  $

  	
    

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (vi)  net
  gain on Pantwist Sale(18)

  	
   

  	
  $

  	
    

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (vii) 
  Items (i) — (v) associated with Pantwist, LLC(19)

  	
   

  	
  $

  	
    

  	
   

  



 


	
  Leverage Ratio = (a) to (b) =

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Maximum Leverage Ratio:

  	
   

  	
  4.50 to 1.00

  	
   

  



 


	
  COMPLIANCE?

  	
   

  	
  YES  o NO  o

  



 






(13) “consolidated Debt” shall not include Debt outstanding under
preferred Equity Interests issued in compliance with Section 6.22 of the
Credit Agreement.


 


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


 


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


 


(16) Other non-cash items should include any provisions for the reduction
in the carrying value of assets recorded in accordance with GAAP and including
non-cash charges resulting from the requirements of SFAS 133 or 143.


 


(17) Non-cash items of income should include any items resulting from
the requirements of SFAS 133 or 143.


 


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


 


(19) Item (vii) only applies to any period during which Pantwist,
LLC was a wholly-owned Subsidiary of Borrower and only to the extent such are
not duplicative of any portions of Items (i) — (v).


 


B-2

















 


III.           Interest
Coverage Ratio—Section 6.19.


 


	
  (a)

  	
  consolidated
  EBITDA = See II(b) above = 

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  Interest Expense = 

  	
   

  	
  $

  	
   

  	
   

  



 


	
  Interest Coverage Ratio = (a) to
  (b) =

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum Interest Coverage Ratio
  = 

  	
   

  	
  2.50 to 1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
   

  	
   

  



 


IV.           Minimum
Asset Coverage Ratio - Section 6.23.


 


	
  (a)

  	
  PDP NPV = 

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  PDNP NPV = 

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (c)

  	
  PUD NPV =

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (d)

  	
  = (a) divided
  by sum of (a) plus (b) plus (c)

  	
   

  	
   

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (e)

  	
  = (a) divided
  by .60

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (f)

  	
  = (a) plus
  (b) plus (c)

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (g)

  	
  Total
  Present Value = either (f), or if (d) is less than 60%, then Total
  Present Value equals (e)= 

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (h)

  	
  consolidated
  Debt = see II(a) above = 

  	
   

  	
  $

  	
   

  	
   

  



 


	
  Minimum Reserve Ratio = (g) to (h)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum Interest Coverage Ratio:

  	
   

  	
  1.50 to 1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES  o NO  o

  	
   

  



 


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


 


B-3

















 


	
   

  	
  CANO PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
   

  
	
   

  	
  Title:

  



 


B-4

















 


EXHIBIT
C


 


FORM OF
GUARANTY AGREEMENT


 


This
Subordinated Guaranty Agreement dated as of December 17, 2008 (this “Guaranty”)
is executed by each of the undersigned (individually a “Guarantor” and
collectively, the “Guarantors”), in favor of UnionBanCal Equities, Inc.,
as Administrative Agent for the ratable benefit of itself, the Lenders (as
defined below) (together with the Administrative Agent and the Lenders,
individually a “Beneficiary”, and collectively, the “Beneficiaries”).


 


INTRODUCTION


 


A.            This Guaranty is given in connection
with that certain Subordinated Credit Agreement dated as of December 17,
2008 (as it has been or may be amended, supplemented, restated or otherwise
modified from time to time, the “Credit Agreement”), among Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), the
lenders party thereto from time to time (individually a “Lender” and
collectively, the “Lenders”), and UnionBanCal Equities, Inc. as
administrative agent (“Administrative Agent”) for such Lenders.


 


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


 


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


 


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


 


Section 1.              Definitions.  All capitalized terms not otherwise defined
in this guaranty that are defined in the credit agreement shall have the
meanings assigned to such terms by the credit agreement.


 


Section 2.              Guaranty.


 


(a)           Each Guarantor hereby absolutely,
unconditionally and irrevocably guarantees the punctual payment and
performance, when due, whether at stated maturity, by acceleration or
otherwise, of all Obligations, whether absolute or contingent and whether for
principal, interest (including, without limitation, interest that but for the existence
of a bankruptcy, reorganization or similar proceeding would accrue), fees,
amounts required to be provided as collateral, indemnities, expenses or
otherwise (collectively, the “Guaranteed Obligations”). Without limiting
the generality of the foregoing, each Guarantor’s liability shall extend to all
amounts that constitute part of the Guaranteed Obligations and would be owed by
the Borrower to the Administrative Agent or any Lender under the Loan Documents
and by the Borrower or any of its Subsidiaries but for the fact that they are
unenforceable or not allowable due to insolvency or 


 


C-1

















 


the existence of a
bankruptcy, reorganization or similar proceeding involving the Borrower or such
other Subsidiary.


 


(b)           It is the intention of the Guarantors
and each Beneficiary that the amount of the Guaranteed Obligations guaranteed
by each Guarantor shall be in, but not in excess of, the maximum amount
permitted by fraudulent conveyance, fraudulent transfer or similar Legal
Requirements applicable to such Guarantor. Accordingly, notwithstanding
anything to the contrary contained in this Guaranty or in any other agreement
or instrument executed in connection with the payment of any of the Guaranteed
Obligations, the amount of the Guaranteed Obligations guaranteed by a Guarantor
under this Guaranty shall be limited to an aggregate amount equal to the
largest amount that would not render such Guarantor’s obligations hereunder
subject to avoidance under Section 548 of the United States Bankruptcy
Code or any comparable provision of any other applicable law.


 


Section 3.              Guaranty Absolute.  Each guarantor guarantees that the guaranteed
obligations will be paid strictly in accordance with the terms of the loan
documents, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
administrative agent or any lender with respect thereto but subject to section
2(b) above.  The obligations of each
guarantor under this guaranty are independent of the guaranteed obligations or
any other obligations of any other person under the loan documents, and a
separate action or actions may be brought and prosecuted against any guarantor
to enforce this guaranty, irrespective of whether any action is brought against
the borrower, any other guarantor or any other person or whether the borrower,
any other guarantor or any other person is joined in any such action or
actions. The liability of each guarantor under this guaranty shall be
irrevocable, absolute and unconditional irrespective of, and each guarantor
hereby irrevocably waives any defenses it may now or hereafter have in any way
relating to, any or all of the following:


 


(a)           any lack of validity or enforceability
of any Loan Document or any agreement or instrument relating thereto or any
part of the Guaranteed Obligations being irrecoverable;


 


(b)           any change in the time, manner or
place of payment of, or in any other term of, all or any of the Guaranteed Obligations
or any other obligations of any Person under the Loan Documents, or any other
amendment or waiver of or any consent to departure from any Loan Document,
including, without limitation, any increase in the Guaranteed Obligations
resulting from the extension of additional credit to the Borrower or otherwise;


 


(c)           any taking, exchange, release or
non-perfection of any collateral, or any taking, release or amendment or waiver
of or consent to departure from any other guaranty, for all or any of the Guaranteed
Obligations;


 


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


 


C-2

















 


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


 


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


 


(g)           any signature of any officer of the
Borrower or any other Person being mechanically reproduced in facsimile or
otherwise; or


 


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


 


Section 4.              Continuation And Reinstatement,
Etc.  Each guarantor agrees that, to the extent
that payments of any of the guaranteed obligations are made, or any lender or
the administrative agent receives any proceeds of collateral, and such payments
or proceeds or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, or otherwise required to be repaid, then
to the extent of such repayment the guaranteed obligations shall be reinstated
and continued in full force and effect as of the date such initial payment or
collection of proceeds occurred.  EACH GUARANTOR SHALL DEFEND AND
INDEMNIFY EACH BENEFICIARY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY,
COST OR EXPENSE UNDER THIS SECTION 4 (INCLUDING REASONABLE ATTORNEYS’ FEES
AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE,
LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE
JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH
INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.


 


Section 5.              Waivers And Acknowledgments.


 


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


 


(b)           Each Guarantor hereby irrevocably
waives any right to revoke this Guaranty, and acknowledges that this Guaranty
is continuing in nature and applies to all Guaranteed Obligations, whether
existing now or in the future.


 


(c)           Each Guarantor acknowledges that it
will receive substantial direct and indirect benefits from the financing
arrangements involving the Borrower and its Subsidiaries contemplated by the
Loan Documents and that the waivers set forth in this Guaranty are knowingly
made in contemplation of such benefits.


 


C-3





















 


Section 6.              Subrogation.  No guarantor will exercise any rights that it
may now have or hereafter acquire against the borrower or any other person to
the extent that such rights arise from the existence, payment, performance or
enforcement of such guarantor’s obligations under this guaranty or any other
loan document, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of any beneficiary against the borrower or
any other person, whether or not such claim, remedy or right arises in equity
or under contract, statute or common law, including, without limitation, the
right to take or receive from the borrower or any other person, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right, unless and until
all of the guaranteed obligations and any and all other amounts payable by the
guarantors under this guaranty shall have been paid in full in cash, all commitments
shall have expired or terminated, and the credit agreement has been terminated
in writing.  If any amount shall be paid
to a guarantor in violation of the preceding sentence at any time prior to (a) the
payment in full in cash of the guaranteed obligations and any and all other
amounts payable by the guarantors under this guaranty, and (b) the
termination of the commitments, such amount shall be held in trust for the
benefit of the beneficiaries and shall forthwith be paid to the administrative
agent to be credited and applied to the guaranteed obligations and any and all
other amounts payable by the guarantors under this guaranty, whether matured or
unmatured, in accordance with the terms of the loan documents.


 


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


 


(a)           There are no conditions precedent to
the effectiveness of this Guaranty.  Such
Guarantor benefits from executing this Guaranty.


 


(b)           Such Guarantor has, independently and
without reliance upon the Administrative Agent or any Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Guaranty, and such Guarantor has
established adequate means of obtaining from the Borrower and each other
relevant Person on a continuing basis information pertaining to, and is now and
on a continuing basis will be completely familiar with, the business, condition
(financial and otherwise), operations, properties and prospects of the Borrower
and each other relevant Person.


 


(c)           The obligations of such Guarantor
under this Guaranty are the valid, binding and legally enforceable obligations
of such Guarantor, and the execution and delivery of this Guaranty by such
Guarantor has been duly and validly authorized in all respects by such
Guarantor, and the Person who is executing and delivering this Guaranty on
behalf of such Guarantor has full power, authority and legal right to so do,
and to observe and perform all of the terms and conditions of this Guaranty on
such Guarantor’s part to be observed or performed.


 


Section 8.              Right Of Set-Off.  Upon the occurrence and during the
continuance of any event of default, any beneficiary is hereby authorized at
any time, to the fullest extent permitted by law, to set off and apply any
deposits (general or special, time or demand, provisional or final) and other
indebtedness owing by such beneficiary to the account of each guarantor against
any and all of the obligations of the guarantors under this guaranty,
irrespective of whether or not such beneficiary shall have made any demand
under this guaranty and although such obligations 


 


C-4





















 


may be
contingent and unmatured.  Such
beneficiary shall promptly notify the affected guarantor after any such set-off
and application is made, provided that the failure to give such notice shall
not affect the validity of such set-off and application.  The rights of the beneficiaries under this
section 8 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which any beneficiary may have.


 


Section 9.              Amendments, Etc. 
No amendment or waiver of any provision of this guaranty and no consent
to any departure by any guarantor therefrom shall in any event be effective
unless the same shall be in writing and signed by the affected guarantor, the
administrative agent and the majority lenders, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided that no amendment, waiver or consent shall,
unless in writing and signed by all of the lenders, (a) other than to the
extent expressly provided in such amendment, waiver or consent, limit the
liability of any guarantor hereunder (it being understood that waivers and
amendments permitted to be made under the credit agreement by the majority
lenders with respect to any of the underlying obligations guaranteed hereunder
shall not be deemed to limit the liability of any guarantor within the meaning
of this clause (a)), (b) postpone any date fixed for payment hereunder in
respect of any of the guaranteed obligations that is principal of, or interest
on, the notes or any fees, or (c) change the percentage of the commitments
or of the aggregate unpaid principal amount of the notes required to take any
action hereunder.


 


Section 10.            Notices, Etc.  All notices and other communications provided for
hereunder shall be sent in the manner provided for in section 9.02 of the
credit agreement and if to a guarantor, at its address specified on the
signature page hereto and if to the administrative agent or any lender, at
its address specified in or pursuant to the credit agreement.  All such notices and communications shall be
effective when delivered, except that notices and communications to the
administrative agent shall not be effective until received by the
administrative agent.


 


Section 11.            No Waiver:
Remedies.  No failure on the part of any beneficiary to exercise, and
no delay in exercising, any right hereunder shall operate as a waiver thereof;
nor shall any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.


 


Section 12.            Continuing Guaranty: Assignments
Under The Credit Agreement.  This guaranty is a continuing guaranty and shall (a) remain
in full force and effect until the payment in full of all guaranteed
obligations and all other amounts payable under the loan documents and the
termination of all the commitments, (b) be binding upon each guarantor and
its successors and assigns, and (c) inure to the benefit of and be
enforceable by the administrative agent and each lender, and, in the case of
transfers and assignments made in accordance with the credit agreement,
transferees and assigns.  Without
limiting the generality of the foregoing clause (c), subject to section 9.06 of
the credit agreement, any lender may assign or otherwise transfer all or any
portion of its rights and obligations under the credit agreement (including,
without limitation, all or any portion of its commitment, the advances owing to
it and the note or notes held by it) to any other person, and such other person
shall thereupon become vested with all the benefits in respect thereof granted
to such lender herein or otherwise, subject, however, in all 


 


C-5





















 


respects to the
provisions of the credit agreement.  Each
guarantor acknowledges that upon any person becoming a lender, the
administrative agent in accordance with the credit agreement, such person shall
be entitled to the benefits hereof.


 


Section 13.            Governing Law.  This guaranty shall be governed by, and construed and
enforced in accordance with, the laws of the state of texas.  Each guarantor hereby irrevocably submits to
the jurisdiction of any texas state or federal court sitting in dallas, texas
in any action or proceeding arising out of or relating to this guaranty and the
other loan documents, and each guarantor hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
such court.  Each guarantor hereby
irrevocably waives, to the fullest extent it may effectively do so, any right
it may have to the defense of an inconvenient forum to the maintenance of such
action or proceeding.  Each guarantor
hereby agrees that service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding may be made by
mailing or delivering a copy of such process to such guarantor at its address
set forth in the credit agreement or set forth on the signature page of
this guaranty.  Each guarantor agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.  Nothing in this
section shall affect the rights of any beneficiary to serve legal process in
any other manner permitted by the law or affect the right of any beneficiary to
bring any action or proceeding against any guarantor or its property in the
courts of any other jurisdiction.


 


Section 14.            Indemnification.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE
BENEFICIARIES, AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND
ALL LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND
OR NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO
OR ARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS,
LOSSES, CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE
BORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH
BY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR
ANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER
PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO
THE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED
PROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE
BORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT
AGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATED TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND
EACH GUARANTOR SHALL REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE
OUT-OF-POCKET EXPENSES (INCLUDING REASONABLE OUTSIDE LEGAL FEES) 


 


C-6





















 


INCURRED IN
CONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND
EXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE
INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE,  BUT EXCLUDING ANY SUCH LOSSES,
LIABILITIES, CLAIMS, DAMAGES OR EXPENSES THAT IS FOUND IN A FINAL,
NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED
FROM SUCH INDEMNIFIED PERSON’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.


 


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


 


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


 


Section 17.            Subordination And Intercreditor
Agreement.  Reference is made to the
subordination and intercreditor agreement dated as of december 17, 2008 (as
amended, restated, supplemented or otherwise modified from time to time, the “subordination
and intercreditor agreement”), among union bank of
california, n.a., as senior agent, and unionbancal equities, inc., as subordinated agent, and
certain other persons, party or that may become party thereto from time to time.  Notwithstanding anything herein to the
contrary, this guaranty, the obligations of the guarantors hereunder and the
rights and remedies of the beneficiaries hereunder are subject to the
provisions of the subordination and intercreditor agreement.  In the event of any conflict between the terms
of the subordination and intercreditor agreement and this guaranty, the terms
of the subordination and intercreditor agreement shall govern and control.


 


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


 


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


 


C-7

















 


FROM THE WRITTEN AGREEMENT, AND ANY PRIOR
ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THIS
GURANTY.  THIS GUARANTY AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO
THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


[Remainder of this page intentionally
left blank.]


 


C-8

















 


Each Guarantor
has caused this Guaranty to be duly executed as of the date first above
written.


 


	
  Address for each Guarantor:

  	
  GUARANTORS:

  
	
  c/o Cano Petroleum, Inc.

  	
   

  
	
  801 Cherry Street, Suite 3200

  	
  SQUARE ONE ENERGY, INC.

  
	
  Forth Worth, Texas 76102

  	
  LADDER COMPANIES, INC.

  
	
  Attention: Ben Daitch, CFO

  	
  W.O. ENERGY OF NEVADA, INC.

  
	
  Facsimile: (817) 334-0222

  	
  WO ENERGY, INC.

  
	
   

  	
  CANO PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each By:

  	
   

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial

  
	
   

  	
   

  	
  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O. OPERATING COMPANY, LTD.

  
	
   

  	
  W.O. PRODUCTION COMPANY, LTD.

  
	
   

  	
  Each By: WO Energy, Inc., as general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
    Benjamin Daitch

  
	
   

  	
   

  	
    Vice President and Chief Financial

  
	
   

  	
   

  	
    Officer

  
				



 


C-9
















 


Annex 1 to the


Subordinated Guaranty Agreement


 


SUPPLEMENT
NO.        dated as of                    (the
“Supplement”),
to the Subordinated Guaranty Agreement dated as of December 17, 2008 (as
amended, supplemented or otherwise modified from time to time, the “Guaranty Agreement”),
among each of the subsidiaries party thereto (each such subsidiary
individually, a “Guarantor” and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of
UNIONBANCAL EQUITIES, INC., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).


 


A.            Reference is made to the
Subordinated Credit Agreement dated as of December 17, 2008 (as amended,
supplemented or otherwise modified from time to time, the “Credit Agreement”), among the
Borrower, the lenders from time to time party thereto (the “Lenders”), and the Administrative
Agent.


 


B.            Capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to such terms in
the Guaranty Agreement and the Credit Agreement.


 


C.            The Guarantors have entered into the
Guaranty Agreement in order to induce the Lenders to make Advances.  Pursuant to Section 6.15 of the Credit
Agreement, the Subsidiaries of the Borrower are required to enter into the
Guaranty Agreement as Guarantors.  Section 16
of the Guaranty Agreement provides that additional Subsidiaries of the Borrower
may become Guarantors under the Guaranty Agreement by execution and delivery of
an instrument in the form of this Supplement. 
The undersigned Subsidiary of the Borrower (the “New Guarantor”) is executing this
Supplement in accordance with the requirements of the Credit Agreement to
become a Guarantor under the Guaranty Agreement.


 


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


 


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


 


SECTION 2.           The New Guarantor represents and
warrants to the Administrative Agent and the other Beneficiaries that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).


 


C-10

















 


SECTION 3.           This Supplement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the New Guarantor and the
Administrative Agent. Delivery of an executed signature page to this
Supplement by fax transmission shall be as effective as delivery of a manually
executed counterpart of this Supplement.


 


SECTION 4.           Except as expressly supplemented
hereby, the Guaranty Agreement shall remain in full force and effect.


 


SECTION 5.           THIS SUPPLEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.  The New Guarantor hereby irrevocably submits
to the jurisdiction of any Texas state or federal court sitting in Dallas,
Texas in any action or proceeding arising out of or relating to this Supplement
or the Guaranty Agreement and the other Loan Documents, and the New Guarantor
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such court.  The New Guarantor hereby irrevocably waives,
to the fullest extent it may effectively do so, any right it may have to the
defense of an inconvenient forum to the maintenance of such action or
proceeding.  The New Guarantor hereby
agrees that service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding may be made by
mailing or delivering a copy of such process to such Guarantor at its address
set forth on the signature page hereof. 
The New Guarantor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect the
rights of any Beneficiary to serve legal process in any other manner permitted
by the law or affect the right of any Beneficiary to bring any action or
proceeding against the New Guarantor or its Property in the courts of any other
jurisdiction.


 


SECTION 6.           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and in the Guaranty Agreement shall not
in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision hereof in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction).  The parties hereto shall
endeavor in good-faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.


 


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


 


SECTION 8.           The New Guarantor agrees to reimburse
the Administrative Agent for its reasonable out-of-pocket expenses in
connection with this Supplement, including the fees, disbursements and other
charges of counsel for the Administrative Agent.


 


C-11

















 


SECTION 9.           PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS
AND COMMERCE CODE, AN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN AGREEMENT
EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING
AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.


 


THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO
AN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM
THE WRITTEN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE
SUPERSEDED BY AND MERGED INTO THIS GURANTY. 
THIS SUPPLEMENT, THE GUARANTY AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


IN WITNESS
WHEREOF, the New Guarantor and the Administrative Agent have duly executed this
Supplement to the Guaranty Agreement as of the day and year first above
written.


 


	
   

  	
  [Name of New Guarantor]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address of Guarantor:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
					



 


C-12

















 


	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
							



 


C-13

















 


EXHIBIT D


 


FORM OF MORTGAGE


 


SUBORDINATED MORTGAGE, LINE OF CREDIT
MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING
STATEMENT


 


THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCE
PROVISIONS.


 


THIS INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN MINERALS OR THE
LIKE (INCLUDING OIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTEREST
CREATED BY THIS INSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THE
ACCOUNTS RESULTING FROM THE SALE THEREOF AT THE WELLHEAD.  THIS INSTRUMENT COVERS THE INTEREST OF
MORTGAGOR IN FIXTURES.  THIS FINANCING
STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE
RECORDS.  PRODUCTS OF THE COLLATERAL ARE
ALSO COVERED.


 


NOTICE TO MORTGAGOR:


 


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


 


FROM


 


CANO PETROLEUM, INC.


(Mortgagor, Debtor and Grantor)


 


TO


 


UNIONBANCAL EQUITIES, INC., as Administrative
Agent


(Mortgagee, Secured Party and Grantee)


 


December 17, 2008


 


For purposes of filing this Mortgage as a financing statement, the
mailing address of Mortgagor is 801 Cherry Street, Suite 3200, Fort Worth,
Texas 76102.  Mortgagor is a corporation
organized under the laws of the State of Delaware and the Mortgagor’s
organizational number is 3664494 the mailing address of Mortgagee is 445 South
Figueroa Street, 21st Floor, Los Angeles, California 90071.


 


D-1

















 


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


 


This instrument, prepared by Sommer N. Louie, Bracewell &
Giuliani LLP, 711 Louisiana, South Tower Pennzoil Place, Suite 2300,
Houston, Texas 77002, (713) 221-1363, contains after-acquired property
provisions and covers future advances and proceeds to the fullest extent
allowed by applicable law.


 


ATTENTION RECORDING OFFICER: This
instrument is a mortgage of both real and personal property insofar as the same
covers or relates to the Oil and Gas Properties and is, among other things, a
Security Agreement and Financing Statement under the Uniform Commercial Code in
effect in Oklahoma.  This instrument
creates a lien on rights in or relating to lands of Mortgagor which are
described in Exhibit A hereto or in documents described in such Exhibit A.


 


RECORDED DOCUMENT SHOULD BE RETURNED TO:


 


BRACEWELL & GIULIANI LLP


711 Louisiana, South Tower Pennzoil Place, Suite 2300


Houston, Texas 77002


Attn: Sommer N. Louie


 


D-2

















 


SUBORDINATED MORTGAGE, LINE OF CREDIT
MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING
STATEMENT


 


	
  THE STATE OF OKLAHOMA

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF 

  	
  §

  
	
   

  	
  §

  



 


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


 


WHEREAS, this Mortgage is executed in connection with, and pursuant to
the terms of that certain Subordinated Credit Agreement dated as of December 17,
2008 (as the same may be renewed, extended, amended, supplemented and/or
restated from time-to-time, the “Credit Agreement”), among Mortgagor,
the lenders party thereto from time to time (the “Lenders”) and the
Mortgagee (the Mortgagee and the Lenders collectively referred to herein as the
“Credit Parties”).


 


WHEREAS, it is a condition precent to the extension of credit to Mortgagor
under the Credit Agreement that the Mortgagor and the Mortgagee on behalf of
the Credit Parties execute and deliver this Mortgage.


 


NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Mortgagor (a) wishes to make this Mortgage in favor of
Mortgagee to secure the Obligations (as defined herein), and (b) hereby
agrees as follows:


 


ARTICLE I


Definitions


 


1.1           “Collateral” means the Realty Collateral, Personalty
Collateral and Fixture Collateral.


 


1.2           “Contracts” means all contracts, agreements, operating
agreements, farm-out or farm-in agreements, sharing agreements, mineral
purchase agreements, contracts for the purchase, exchange, transportation,
processing or sale of Hydrocarbons, rights-of-way, easements, surface leases,
equipment leases, permits, franchises, licenses, pooling or unitization
agreements, and unit or pooling designations and orders now or hereafter
affecting any of the Oil and Gas Properties, Operating Equipment, Fixture
Operating Equipment, or Hydrocarbons now or hereafter covered hereby, or which
are useful or appropriate in drilling for, producing, 


 


D-3

















 


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


 


1.3           “Event of Default” shall have the meaning set forth in Article V
hereof.


 


1.4           “Fixture Collateral” means all of Mortgagor’s interest now
owned or hereafter acquired in and to all Fixture Operating Equipment and all
proceeds, products, renewals, increases, profits, substitutions, replacements,
additions, amendments and accessions thereof, thereto or therefor.


 


1.5           “Fixture Operating Equipment” means any of the items
described in the first sentence of the definition of “Operating Equipment”
below which as a result of being incorporated into realty or structures or
improvements located therein or thereon, with the intent that they remain there
permanently, constitute fixtures under the laws of the state in which such
equipment is located.


 


1.6           “Governmental Authority” shall have the meaning assigned to
such term in the Credit Agreement.


 


1.7           “Hydrocarbons” means oil, gas, coal seam gas, casinghead gas,
drip gasoline, natural gasoline, condensate, distillate, and all other liquid
and gaseous hydrocarbons produced or to be produced in conjunction therewith
from a well bore and all products, by-products, and other substances derived
therefrom or the processing thereof, and all other minerals and substances
produced in conjunction with such substances, including sulfur, geothermal
steam, water, carbon dioxide, helium, and any and all minerals, ores, or
substances of value and the products and proceeds therefrom.


 


1.8           “Legal Requirement” shall have the meaning assigned to such
term in the Credit Agreement.


 


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


 


1.10         “Obligations”
means


 


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


 


(b)           All other
indebtedness, obligations, and liabilities of Mortgagor or any of its
Subsidiaries arising under the Credit Agreement, the Security Documents, this
Mortgage, or any of the other Loan Documents;


 


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


 


D-4

















 


(d)           All sums advanced or
costs or expenses incurred by Mortgagee or any of the other Credit Parties,
which are made or incurred pursuant to, or allowed by, the terms of this
Mortgage plus interest thereon from the date of the advance or incurrence until
reimbursement of Mortgagee or such Credit Party charged at the Reimbursement
Rate;


 


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


 


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


 


1.11         “Oil and Gas
Property” or “Oil and Gas Properties”
means (a) the oil and gas and/or oil, gas and mineral leases and leasehold
interests, fee mineral interests, term mineral interests, participation
interests, back-in or carried working interests, rights of first refusal,
options, subleases, farmouts, royalties, overriding royalties, net profits
interests, production payments and similar interests or estates described in Exhibit A
attached hereto and made a part hereof for all purposes including the net
revenue interests warranted in Exhibit A and any reversionary or carried
interests relating to any of the foregoing, (b) all production units, and
drilling and spacing units (and the Properties covered thereby) which may
affect all or any portion of such interests including those units which may be
described or referred to on Exhibit A and any units created by agreement
or designation or under orders, regulations, rules or other official acts
of any Federal, state or other governmental body or agency having jurisdiction,
(c) the surface leases described in Exhibit A, (d) any and all
non-consent interests owned or held by, or otherwise benefiting, Mortgagor and
arising out of, or pursuant to, any of the Contracts, (e) any other
interest in, to or relating to (i) all or any part of the land described
in Exhibit A, the land relating to the leases set forth in Exhibit A
or in the documents described in Exhibit A, or (ii) any of the
estates, property rights or other interests referred to above, (f) any
instrument executed in amendment, correction, modification, confirmation,
renewal or extension of the same, (g) any and all rights, titles and
interests of Mortgagor (which are similar in nature to any of the rights,
titles and interests described in (a) through (f) above) which are
located on or under or which concern any Property or Properties located in
counties referenced in Exhibit A hereto or counties in which a counterpart
of this Mortgage is filed of record in the real property records of such
county, and (h) all tenements, hereditaments and appurtenances now
existing or hereafter obtained in connection with any of the aforesaid,
including any rights arising under unitization agreements, orders or other
arrangements, communitization agreements, orders or other arrangements or
pooling orders, agreements or other arrangements, including without limitation
pooling orders of the Oklahoma Corporation Commission.


 


1.12         “Operating
Equipment” means all surface or subsurface machinery, equipment,
facilities, supplies or other Property of whatsoever kind or nature now or
hereafter located on any 


 


D-5

















 


of the Property affected by the Oil and Gas Properties which are useful
for the production, treatment, storage or transportation of Hydrocarbons,
including all oil wells, gas wells, water wells, injection wells, casing,
tubing, rods, pumping units and engines, christmas trees, derricks, separators,
gun barrels, flow lines, pipelines, tanks, gas systems (for gathering, treating
and compression), water systems (for treating, disposal and injection),
supplies, derricks, wells, power plants, poles, cables, wires, meters,
processing plants, compressors, dehydration units, lines, transformers, starters
and controllers, machine shops, tools, storage yards and equipment stored
therein, buildings and camps, telegraph, telephone and other communication
systems, roads, loading racks, shipping facilities and all additions,
substitutes and replacements for, and accessories and attachments to, any of
the foregoing.  Operating Equipment shall
not include any items incorporated into realty or structures or improvements
located therein or thereon in such a manner that they no longer remain
personalty under the laws of the state in which such equipment is located.


 


1.13         “Permitted
Liens” means the Liens permitted under the Credit Agreement.


 


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


 


1.15         “Personalty
Collateral” means all of Mortgagor’s interest now owned or hereafter
acquired in and to (a) all Operating Equipment, (b) all Hydrocarbons
severed and extracted from or attributable to the Oil and Gas Properties,
including oil in tanks and all other “as-extracted” collateral from or
attributable to the Oil and Gas Properties, (c) all accounts (including
accounts resulting from the sale of Hydrocarbons at the wellhead), contract
rights and general intangibles, including all accounts, contract rights and
general intangibles now or hereafter arising regardless of whether any of the
foregoing is in connection with the sale or other disposition of any
Hydrocarbons or otherwise, including all liens securing the same, (d) all
accounts, contract rights and general intangibles now or hereafter arising
regardless of whether any of the foregoing is in connection with or resulting
from any of the Contracts, including all liens security the same, (e) all
proceeds and products of the Realty Collateral and any other contracts or
agreements, (f) all information concerning the Oil and Gas Properties and
all wells located thereon, including abstracts of title, title opinions,
geological and geophysical information and logs, lease files, well files, and
other books and records (including computerized records and data), (g) any
deposit or time accounts with Mortgagee or any Lender, (h) any options or
rights of first refusal to acquire any Realty Collateral, and (i) all
proceeds, products, renewals, increases, profits, substitutions, replacements,
additions, amendments and accessions of, to or for any of the foregoing.


 


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


 


1.17         “Realty
Collateral” means all of Mortgagor’s interest now owned or hereafter
acquired in and to the Oil and Gas Properties, including any access rights,
water and water rights, and all unsevered and unextracted Hydrocarbons (even
though Mortgagor’s interest therein may be incorrectly described in, or a
description of a part or all of such interest may be omitted from, Exhibit A).


 


D-6

















 


1.18         “Reimbursement
Rate” means a per annum rate equal to the lesser of (a) the
Maximum Rate (as defined in the Credit Agreement) and (b) the Adjusted
Reference Rate (as defined in the Credit Agreement) in effect from time to time
plus the Applicable Margin for Reference Rate Advances (as such terms are
defined in the Credit Agreement) in effect during an Event of Default.


 


1.19         All other capitalized
terms defined in the Credit Agreement which are used in this Mortgage and which
are not otherwise defined herein shall have the meanings assigned to such terms
in the Credit Agreement.  All meanings to
defined terms, unless otherwise indicated, are to be equally applicable to both
the singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Mortgage,
unless otherwise specified.  All
references to instruments, documents, contracts, and agreements are references
to such instruments, documents, contracts, and agreements as the same may be
amended, supplemented, and otherwise modified from time to time, unless
otherwise specified.  The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Mortgage
shall refer to this Mortgage as a whole and not to any particular provision of
this Mortgage.  As used herein, the term “including”
means “including, without limitation,”.


 


ARTICLE II


Creation of Security


 


2.1           Conveyance
and Grant of Lien.  In
consideration of the advances or extensions by the Credit Parties to Mortgagor
of the funds or credit constituting the Obligations, and in further
consideration of the mutual covenants contained herein, Mortgagor, by this
Mortgage does hereby GRANT, MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, AND
ASSIGN with a general warranty of title, for the uses, purposes and conditions
hereinafter set forth all of its right, title and interest in and to the Realty
Collateral, the Personalty Collateral and the Fixture Collateral unto
Mortgagee, its successors and assigns, with power of sale, to secure the
payment and performance of the Obligations for the benefit of Mortgagee and the
ratable benefit of the Credit Parties.


 


MORTGAGOR FURTHER GRANTS TO MORTGAGEE, ITS
SUCCESSORS AND ASSIGNS, THE RIGHT AND POWER TO FORECLOSE THIS MORTGAGE UNDER
THE OKLAHOMA POWER OF SALE MORTGAGE FORECLOSURE ACT, 46. O.S. § 40 ET SEQ.


 


TO HAVE AND TO HOLD the Realty Collateral, the Personalty Collateral
and Fixture Collateral unto the Mortgagee and its successors and assigns
forever for the benefit of the Credit Parties, together with all and singular
the rights, hereditaments and appurtenances thereto in anywise appertaining or
belonging, to secure payment of the Obligations and the performance of the
covenants of Mortgagor contained in this Mortgage.  Mortgagor does hereby bind itself, its
successors and permitted assigns, to warrant and forever defend all and
singular the Realty Collateral, the Personalty Collateral and the Fixture
Collateral unto the Mortgagee and its successors and assigns, against every
Person whomsoever lawfully claiming or to claim the same, or any part thereof.


 


D-7

















 


Subject, however, to the condition that none of the Mortgagee or the
Credit Parties shall be liable in any respect for the performance of any
covenant or obligation of the Mortgagor in respect of the Collateral.  Any reference in Exhibit A to the name
of a well shall not be construed to limit the Collateral to the well bore of
such well or in the pro rata units.  It
is Mortgagor’s intention that this instrument cover Mortgagor’s entire interest
in the lands, leases, units and other interests set forth in Exhibit A.


 


2.2           Security
Interest.  For the same
consideration and to further secure the Obligations, Mortgagor hereby grants to
Mortgagee for its benefit and the ratable benefit of the other Credit Parties a
security interest in and to the Collateral.


 


2.3           Assignment
of Liens and Security Interests. 
For the same consideration and to further secure the Obligations,
Mortgagor hereby assigns and conveys to Mortgagee for its benefit and the
benefit of the other Credit Parties any security interests held by Mortgagor
arising under, and any liens granted to the Mortgagor pursuant to, Title 12A of
the Oklahoma Statutes (as amended from time to time).


 


ARTICLE III


Proceeds from Production


 


3.1           Assignment
of Production.


 


(a)           In order to further
secure the Obligations, Mortgagor has assigned, transferred, conveyed and
delivered and does hereby assign, transfer, convey and deliver unto Mortgagee,
subject to Permitted Prior Liens, effective as of the Effective Date at 7:00 a.m.
Dallas, Texas time, all Hydrocarbons produced from, and which are attributable
to, Mortgagor’s interest, now owned or hereafter acquired, in and to the Oil
and Gas Properties, or are allocated thereto pursuant to pooling or unitization
orders, agreements or designations, and all proceeds therefrom.


 


(b)           Subject to the
provisions of subsection (f) below, all parties producing, purchasing,
taking, possessing, processing or receiving any production from the Oil and Gas
Properties, or having in their possession any such production, or the proceeds
therefrom, for which they or others are accountable to Mortgagee by virtue of
the provisions of this Section 3.1, are authorized and directed by
Mortgagor to treat and regard Mortgagee as the assignee and transferee of Mortgagor
and entitled in its place and stead to receive such Hydrocarbons and the
proceeds therefrom.


 


(c)           Mortgagor directs
and instructs each of such parties to pay to Mortgagee, for its benefit and the
ratable benefit of the other Credit Parties, all of the proceeds of such
Hydrocarbons until such time as such party has been furnished evidence that all
of the Obligations have been paid and that the Lien evidenced hereby has been
released; provided, however, that until Mortgagee shall have exercised the rights
as herein to instruct such parties to deliver such Hydrocarbons and all
proceeds therefrom directly to Mortgagee, such parties shall be entitled to
deliver such Hydrocarbons and all proceeds therefrom to Mortgagor for 


 


D-8

















 


Mortgagor’s use and enjoyment, and Mortgagor shall be entitled to
execute division orders, transfer orders and other instruments as may be
required to direct all proceeds to Mortgagor without the necessity of joinder
by Mortgagee in such division orders, transfer orders or other instruments.
Mortgagor agrees to perform all such acts, and to execute all such further
assignments, transfers and division orders, and other instruments as may be
reasonably required or desired by Mortgagee or any party in order to have said
revenues and proceeds so paid to Mortgagee. 
None of such parties shall have any responsibility for the application
of any such proceeds received by Mortgagee. 
Subject to the provisions of subsection (f) below, Mortgagor authorizes
Mortgagee to receive and collect all proceeds of such Hydrocarbons.


 


(d)           Subject to the
provisions of subsection (f) below, Mortgagor will execute and deliver to
Mortgagee any instruments Mortgagee may from time to time reasonably request
for the purpose of effectuating this assignment and the payment to Mortgagee of
the proceeds assigned.


 


(e)           Neither the
foregoing assignment nor the exercise by Mortgagee of any of its rights herein
shall be deemed to make Mortgagee a “mortgagee-in-possession” or otherwise
responsible or liable in any manner with respect to the Oil and Gas Properties
or the use, occupancy, enjoyment or operation of all or any portion thereof,
unless and until Mortgagee, in person or by agent, assumes actual possession
thereof, nor shall appointment of a receiver for the Oil and Gas Properties by
any court at the request of Mortgagee or by agreement with Mortgagor or the
entering into possession of the Oil and Gas Properties or any part thereof by
such receiver be deemed to make Mortgagee a “mortgagee-in-possession” or
otherwise responsible or liable in any manner with respect to the Oil and Gas
Properties or the use, occupancy, enjoyment or operation of all or any portion
thereof.


 


(f)            Notwithstanding
anything to the contrary contained herein, so long as no Event of Default shall
have occurred and is continuing, Mortgagor shall have the right to collect all
revenues and proceeds attributable to the Hydrocarbons that accrue to the Oil
and Gas Properties or the products obtained or processed therefrom, as well as
any Liens and security interests securing any sales of said Hydrocarbons and to
retain, use and enjoy same.


 


(g)           Mortgagee may
endorse and cash any and all checks and drafts payable to the order of
Mortgagor or Mortgagee for the account of Mortgagor, received from or in
connection with the proceeds of the Hydrocarbons affected hereby, and the same
may be applied as provided herein. 
Mortgagee may execute any transfer or division orders in the name of
Mortgagor or otherwise, with warranties and indemnities binding on Mortgagor;
provided that Mortgagee shall not be held liable to Mortgagor for, nor be
required to verify the accuracy of, Mortgagor’s interests as represented
therein.


 


(h)           Mortgagee shall have
the right at Mortgagee’s election and in the name of Mortgagor, or otherwise,
to prosecute and defend any and all actions or legal proceedings deemed
advisable by Mortgagee in order to collect such proceeds and to protect the
interests of Mortgagee or Mortgagor, with all costs, expenses and attorneys
fees incurred in connection therewith being paid by Mortgagor.  In addition, should any purchaser taking
production from the Oil and Gas Properties fail to pay promptly to Mortgagee in
accordance with this Article, 


 


D-9

















 


Mortgagee shall have the right to demand a change of connection and to
designate another purchaser with whom a new connection may be made without any
liability on the part of Mortgagee in making such election, so long as ordinary
care is used in the making thereof, and upon failure of Mortgagor to consent to
such change of connection, the entire amount of all the Obligations may, at the
option of Mortgagee, be immediately declared to be due and payable and subject
to foreclosure hereunder.


 


(i)            Without in any way
limiting the effectiveness of the foregoing provisions, if Mortgagor receives
any proceeds which under this Section 3.1 are payable to Mortgagee,
Mortgagor shall hold the same in trust and remit such proceeds, or cause them
to be remitted, immediately, to Mortgagee.


 


3.2           Application
of Proceeds.  All payments
received by Mortgagee pursuant to this Article III attributable to the
interest of Mortgagor in and to the Hydrocarbons shall be applied in the order
set forth in Section 7.06 of the Credit Agreement.


 


3.3           Mortgagor’s
Payment Duties.  Except as
provided in Section 7.16 hereof, nothing contained herein will limit
Mortgagor’s absolute duty to make payment of the Obligations regardless of
whether the proceeds assigned by this Article III are sufficient to pay
the same, and the receipt by Mortgagee of proceeds from Hydrocarbons under this
Mortgage will be in addition to all other security now or hereafter existing to
secure payment of the Obligations.


 


3.4           Liability
of Mortgagee.  Mortgagee
is hereby absolved from all liability for failure to enforce collection of any
of such proceeds, and from all other responsibility in connection therewith
except the responsibility to account to Mortgagor for proceeds actually received
by Mortgagee.


 


3.5           Actions
to Effect Assignment. 
Subject to the provisions of Section 3.1(f), Mortgagor covenants to
cause all operators, pipeline companies, production purchasers and other
remitters of said proceeds to pay promptly to Mortgagee the proceeds from such
Hydrocarbons in accordance with the terms of this Mortgage, and to execute,
acknowledge and deliver to said remitters such division orders, transfer
orders, certificates and other documents as may be necessary, requested or
proper to effect the intent of this assignment; and Mortgagee shall not be
required at any time, as a condition to its right to obtain the proceeds of
such Hydrocarbons, to warrant its title thereto or to make any guaranty
whatsoever.  In addition, Mortgagor
covenants to provide to Mortgagee the name and address of every such remitter
of proceeds from such Hydrocarbons, together with a copy of the applicable
division orders, transfer orders, sales contracts and governing
instruments.  All expenses incurred by
the Mortgagee in the collection of said proceeds shall be repaid promptly by
Mortgagor; and prior to such repayment, such expenses shall be a part of the
Obligations secured hereby.  If under any
existing Contracts for the sale of Hydrocarbons, other than division orders or
transfer orders, any proceeds of Hydrocarbons are required to be paid by the
remitter direct to Mortgagor so that under such existing agreements payment
cannot be made of such proceeds to Mortgagee in the absence of foreclosure,
Mortgagor’s interest in all proceeds of Hydrocarbons under such existing
Contracts 


 


D-10

















 


shall, when received by Mortgagor, constitute trust funds in Mortgagor’s
hands and shall be immediately paid over to Mortgagee.


 


3.6           Power of
Attorney.  Without
limitation upon any of the foregoing, Mortgagor hereby designates and appoints
Mortgagee as true and lawful agent and attorney-in-fact (with full power of
substitution, either generally or for such periods or purposes as Mortgagee may
from time to time prescribe), with full power and authority, for and on behalf
of and in the name of Mortgagor, to execute, acknowledge and deliver all such
division orders, transfer orders, certificates and other documents of every
nature, with such provisions as may from time to time, in the opinion of
Mortgagee, be necessary or proper to effect the intent and purpose of the
assignment contained in this Article III; and Mortgagor shall be bound
thereby as fully and effectively as if Mortgagor had personally executed,
acknowledged and delivered any of the foregoing orders, certificates or
documents.  The powers and authorities
herein conferred on Mortgagee may be exercised by Mortgagee through any person
who, at the time of exercise, is the president, a senior vice president or a
vice president of Mortgagee.  The power of attorney conferred by this Section 3.6
is granted for valuable consideration and coupled with an interest and is
irrevocable until all of the Obligations have been fully and finally paid and
discharged in full, all Commitments have been terminated or expired and the
Credit Agreement has been terminated in writing.   All persons dealing
with Mortgagee, or any substitute, shall be fully protected in treating the
powers and authorities conferred by this Section 3.6 as continuing in full
force and effect until advised by Mortgagee that the Obligations are fully and
finally paid and the Liens granted hereunder have been released.


 


3.7          INDEMNIFICATION.  MORTGAGOR AGREES TO INDEMNIFY MORTGAGEE AND
THE OTHER CREDIT PARTIES, AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, AND AGENTS (COLLECTIVELY, THE “INDEMNIFIED PARTIES”) FROM,
AND DISCHARGE, RELEASE AND HOLD EACH OF THEM HARMLESS AGAINST ALL LOSSES,
DAMAGES, CLAIMS, ACTIONS, LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS FEES OR
OTHER CHARGES OF WHATSOEVER KIND OR NATURE (HEREAFTER REFERRED TO AS “CLAIMS”)
MADE AGAINST, IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM IN ANY AS
A CONSEQUENCE OF THE ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OF
THE OBLIGATIONS THAT ANY OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS OR
PROCEEDS PURSUANT TO THIS MORTGAGE OR PURSUANT TO ANY RIGHT TO COLLECT PROCEEDS
DIRECTLY FROM ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT
TO EMPLOY ATTORNEYS AND TO DEFEND AGAINST ANY SUCH CLAIMS AND UNLESS FURNISHED
WITH REASONABLE INDEMNITY, THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO PAY
OR COMPROMISE AND ADJUST ALL SUCH CLAIMS. 
MORTGAGOR WILL INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCH
AMOUNTS AS MAY BE PAID IN RESPECT THEREOF, OR AS MAY BE SUCCESSFULLY
ADJUDICATED AGAINST ANY OF THE INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION SHALL
APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S
OWN NEGLIGENCE BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF
THE PERSON BEING INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  THE LIABILITIES OF
MORTGAGOR AS SET FORTH IN THIS SECTION 3.7 SHALL SURVIVE THE TERMINATION
OF THIS MORTGAGE.


 


D-11
















 


ARTICLE IV


Mortgagor’s Warranties and Covenants


 


4.1           Payment
of Obligations.  Mortgagor
covenants that Mortgagor shall timely pay and perform the Obligations secured
by this Mortgage.


 


4.2           Representations
and Warranties.  Mortgagor
represents and warrants as follows:


 


(a)           Incorporation
of Representations and Warranties from the Credit Agreement.  The representations and warranties applicable
to the Mortgagor and to its Properties contained in Article IV of the
Credit Agreement are hereby confirmed and restated, each such representation
and warranty, together with all related definitions and ancillary provisions,
being hereby incorporated into this Mortgage by reference as though
specifically set forth in this Section.


 


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


 


(c)           Status of
Leases, Term Mineral Interests and Contracts.  All of the leases and term mineral interests
in the Oil and Gas Properties are valid, subsisting and in full force and
effect, and Mortgagor has no knowledge that a default exists under any of the
terms or provisions, express or implied, of any of such leases or interests or
under any agreement to which the same are subject.  All of the Contracts and obligations of
Mortgagor that relate to the Oil and Gas Properties are in full force and
effect and constitute legal, valid and binding obligations of Mortgagor.  Neither Mortgagor nor, to the knowledge of
Mortgagor, any other party to any leases or term mineral interests in the Oil
and Gas Properties or any Contract (A) is in breach of or default, or with
the lapse of time or the giving of notice, or both, would be in breach or
default, with respect to any obligations thereunder, whether express or
implied, or (B) has given or threatened to give notice of any default
under or inquiry into any possible default under, or action to alter,
terminate, rescind or procure a judicial reformation of, any lease in the Oil
and Gas Properties or any Contract.


 


(d)           Production
Burdens, Taxes, Expenses and Revenues.  All rentals, royalties, overriding royalties,
shut-in royalties and other payments due under or with respect to 


 


D-12

















 


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


 


(e)           Pricing.  The prices being received for the production
of Hydrocarbons do not violate any Contract or any law or regulation.  Where applicable, all of the wells located on
the Oil and Gas Properties and production of Hydrocarbons therefrom have been
properly classified under appropriate governmental regulations.


 


(f)            Gas Regulatory Matters. 
Mortgagor has filed with the appropriate state and federal agencies all
necessary rate and collection filings and all necessary applications for well
determinations under the Natural Gas Act of 1938, as amended, the Natural Gas
Policy Act of 1978, as amended, and the rules and regulations of the
Federal Energy Regulatory Commission (the “FERC”) thereunder, and each
such application has been approved by or is pending before the appropriate state
or federal agency.


 


(g)           Production
Balances.  Except as set forth
below or permitted by the Credit Agreement, none of the purchasers under any
production sales contracts are entitled to “make-up” or otherwise receive
deliveries of Hydrocarbons at any time after the date hereof without paying at
such time the full contract price therefor. 
Except as set forth below, no person is entitled to receive any portion
of the interest of Mortgagor in any Hydrocarbons or to receive cash or other
payments to “balance” any disproportionate allocation of Hydrocarbons under any
operating agreement, gas balancing and storage agreement, gas processing or
dehydration agreement, or other similar agreements.  Mortgagor believes that certain third parties
may be entitled to receive “make-up” deliveries of Hydrocarbons or cash or
other payments to “balance” a disproportionate allocation of Hydrocarbons
produced from certain Oil and Gas Properties; provided, however, Mortgagor
represents and warrants that such deliveries or payments are not 


 


D-13

















 


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


 


(h)           Drilling
Obligations.  There are no
obligations under any Oil and Gas Property or Contract which require the
drilling of additional wells or operations to earn or to continue to hold any
of the Oil and Gas Properties in force and effect, except for oil and gas
leases that are still within their primary term (each of which will require
drilling operations to perpetuate it beyond its primary term) and the standard
provision in certain oil and gas leases that requires either production or
operations to perpetuate each respective lease after the expiration of its
primary term.


 


(i)            Compliance With Laws. 
All wells on or attributable to the Oil and Gas Properties have been
drilled, completed and operated, and all production therefrom has been
accounted for and paid to the persons entitled thereto, in compliance in all
material respects with all applicable federal, state and local laws and
applicable rules and regulations of the federal, state and local
regulatory authorities having jurisdiction thereof.


 


(j)            Regulatory Filings and Compliance.  All necessary regulatory filings have been
properly made, and all regulatory (including Environmental) processes have been
complied with, in connection with the drilling, completion and operation of the
wells on or attributable to the Oil and Gas Properties, and the issuance of all
rights of way and other surface uses necessary for the exploration, development
and transportation to and from such wells, and all other operations related
thereto.


 


(k)           Allowables.  All production and sales of Hydrocarbons
produced or sold from the Oil and Gas Properties have been made in accordance
with any applicable allowables (plus permitted tolerances) imposed by any
Governmental Authorities.


 


(l)            Refund Obligations. 
Mortgagor has not collected any proceeds from the sale of Hydrocarbons
produced from the Oil and Gas Properties which are subject to any refund
obligation.


 


(m)          The address of
Mortgagor’s place of business, residence, chief executive office and office
where Mortgagor keeps its records concerning accounts, contract rights and
general intangibles is as set forth in Section 7.12, and there has been no
change in the location of Mortgagor’s place of business, residence, chief
executive office and office where it keeps such records and no change of
Mortgagor’s name during the four months immediately preceding the Effective
Date.  Mortgagor hereby represents and
warrants that its organizational number is 3664494, the state of its formation
is Delaware and the correct spelling of Mortgagor’s name is as set forth in its
signature block below.


 


4.3           Further
Assurances.


 


(a)           Mortgagor covenants
that Mortgagor shall execute and deliver such other and further instruments,
and shall do such other and further acts as in the opinion of Mortgagee may be
necessary or desirable to carry out more effectively the purposes of this
Mortgage, 


 


D-14

















 


including without limiting the generality of the foregoing, (i) prompt
correction of any defect in the execution or acknowledgment of this Mortgage,
any written instrument comprising part or all of the Obligations, or any other
document used in connection herewith; (ii) prompt correction of any defect
which may hereafter be discovered in the title to the Collateral; (iii) prompt
execution and delivery of all division or transfer orders or other instruments
which in Mortgagee’s opinion are required to transfer to Mortgagee, for its
benefit and the ratable benefit of the other Credit Parties, the assigned
proceeds from the sale of Hydrocarbons from the Oil and Gas Properties; and (iv) prompt
payment when due and owing of all taxes, assessments and governmental charges
imposed on this Mortgage, upon the interest of Mortgagee or upon the income and
profits from any of the above.


 


(b)           Mortgagor covenants
that Mortgagor shall maintain and preserve the Lien and security interest
herein created as an Acceptable Security Interest until all of the Obligations
have been fully and finally paid and discharged in full, all Commitments have
been terminated or expired and the Credit Agreement has been terminated in
writing.


 


(c)           Mortgagor shall
immediately notify Mortgagee of any discontinuance of or change in the address
of Mortgagor’s place of business, residence, chief executive office or office
where it keeps records concerning accounts, contract rights and general
intangibles.


 


4.4           Operation
of Oil and Gas Properties. 
Until all of the Obligations have been fully and finally paid and
discharged in full, all Commitments have been terminated or expired, and the
Credit Agreement has been terminated in writing, Mortgagor shall (at Mortgagor’s
own expense):


 


(a)           not enter into any
operating agreement, contract or agreement which materially adversely affects
the Collateral;


 


(b)           do all things necessary
and within the reasonable control of Mortgagor to keep, or cause to be kept, in
full force and effect the Oil and Gas Properties and Mortgagor’s interests
therein;


 


(c)           neither abandon,
forfeit, surrender, release, sell, assign, sublease, farmout or convey, nor
agree to sell, assign, sublease, farmout or convey, nor mortgage or grant
security interests in, nor otherwise dispose of or encumber any of the
Collateral or any interest therein, except as permitted by the Credit
Agreement;


 


(d)           operate the Oil and
Gas Properties or, to the extent that the right of operation is vested in
others, will exercise its best efforts to cause the operator to operate the Oil
and Gas Properties, in each case in such a manner as to cause the Collateral to
be maintained, developed and protected against drainage and continuously
operated for the production and marketing of Hydrocarbons in a good and
workmanlike manner as a prudent operator would in accordance with (i) generally
accepted practices, (ii) applicable oil and gas leases and Contracts, and (iii) all
applicable Federal, state and local laws, rules and regulations;


 


D-15

















 


(e)           promptly pay or
cause to be paid when due and owing (i) all rentals and royalties payable
in respect of the Collateral; (ii) all expenses incurred in or arising
from the operation or development of the Collateral; (iii) all taxes,
assessments and governmental charges imposed upon the Collateral, upon the
income and profits from any of the Collateral, or upon Mortgagee because of its
interest therein; and (iv) all local, state and federal taxes, payments
and contributions for which Mortgagor may be liable except to the extent
disputed as permitted under the Credit Agreement; and indemnify Mortgagee from
all liability in connection with any of the foregoing;


 


(f)            promptly take all
action necessary to enforce or secure the observance or performance of any
term, covenant, agreement or condition to be observed or performed by third
parties under any Contract, or any part thereof, or to exercise any of its
rights, remedies, powers and privileges under any Contract, all in accordance
with the respective terms thereof;


 


(g)           other than as
otherwise permitted under the terms of the Credit Agreement, cause the
Operating Equipment and the Fixture Operating Equipment to be kept in good and
effective operating condition, ordinary wear and tear excepted, and cause to be
made all repairs, renewals, replacements, additions and improvements thereof or
thereto, necessary or appropriate in connection with the production of
Hydrocarbons from the Oil and Gas Properties;


 


(h)           permit and do all
things necessary or proper to enable the Mortgagee (through any of their
respective agents and employees) to enter upon the Oil and Gas Properties for
the purpose of investigating and inspecting the condition and operations of the
Collateral in accordance with the terms of the Credit Agreement;


 


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


 


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


 


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


 


(l)            promptly perform
all covenants express or implied in any Contract.


 


4.5           Recording.  Mortgagor shall promptly (at Mortgagor’s own
expense) record, register, deposit and file this Mortgage and every other
instrument in addition or supplement hereto, including applicable financing
statements, in such offices and places within the state where the Collateral is
located and in the state where the Mortgagor is registered as a limited
liability company and at such times and as often as may be necessary to
preserve, protect and renew the Lien and security interest herein created as an
Acceptable Security Interest on real or personal property as the case may be,
and otherwise shall do and perform all matters or things necessary or expedient
to be done or observed by reason of any Legal Requirement for the purpose of
effectively creating, perfecting, maintaining and preserving the Lien and
security interest created hereby in and on the Collateral.


 


D-16

















 


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


 


4.7           Insurance.  To the extent that insurance is carried by a
third-party operator on behalf of Mortgagor, upon request by Mortgagee,
Mortgagor shall obtain and provide Mortgagee with copies of certificates of
insurance showing Mortgagor as a named insured. 
Mortgagor hereby assigns to Mortgagee for its benefit and the benefit of
the other Credit Parties any and all monies that may become payable under any
such policies of insurance by reason of damage, loss or destruction of any of
the Collateral and Mortgagee may receive such monies and apply all or any part
of the sums so collected, at its election, toward payment of the Obligations,
whether or not such Obligations are then due and payable, in such manner as
Mortgagee may elect. Any insurance proceeds received by Mortgagor shall be held
in trust for the benefit of Mortgagee, shall be segregated from other funds of
Mortgagor and shall be forthwith paid over to Mortgagee.


 


ARTICLE V


Default


 


5.1           Events of
Default.  An Event of
Default under the terms of the Credit Agreement shall constitute an “Event of
Default” under this Mortgage.


 


5.2           Acceleration
Upon Default.  Upon the
occurrence and during the continuance of any Event of Default, Mortgagee may
(or shall at the request of the Majority Lenders), declare the entire unpaid
principal of, and the interest accrued on, and all other amounts owed in
connection with, the Obligations to be forthwith due and payable, whereupon the
same shall become immediately due and payable without any protest, presentment,
demand, notice of intent to accelerate, notice of acceleration or further
notice of any kind, all of which are hereby expressly waived by Mortgagor.  Whether or not Mortgagee or the Majority
Lenders elect to accelerate as herein provided, Mortgagee may simultaneously,
or thereafter, without any further notice to Mortgagor, exercise any other
right or remedy provided in this Mortgage or otherwise existing under the
Credit Agreement or any other Loan Documents or any other agreement, document,
or instrument evidencing obligations owing from the Mortgagor to any of the
Credit Parties.


 


ARTICLE VI


Mortgagee’s Rights


 


6.1           Rights to
Realty Collateral Upon Default.


 


(a)           Operation of
Property by Mortgagee.  Upon
the occurrence and during the continuance of an Event of Default, and in
addition to all other rights of Mortgagee, Mortgagee shall have the following
rights and powers (but no obligation):


 


D-17

















 


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


 


(ii)  To hold, use, administer, manage and operate the Realty Collateral
to the extent that Mortgagor could do so, and without any liability to
Mortgagor in connection with such operations; and


 


(iii) To the extent that Mortgagor could do so, to collect,
receive and receipt for all Hydrocarbons produced and sold from the Realty
Collateral, to make repairs, to purchase machinery and equipment, to conduct
workover operations, to drill additional wells, and to exercise every power,
right and privilege of Mortgagor with respect to the Realty Collateral.


 


Mortgagee may designate any person, firm, corporation or other entity
to act on its behalf in exercising the foregoing rights and powers.  When and if the expenses of such operation
and development (including costs of unsuccessful workover operations or
additional wells) have been paid and all of the Obligations have been fully and
finally paid and discharged in full, all of the Commitments have terminated or
expired, and the Credit Agreement has been terminated in writing, the Realty
Collateral shall be returned to Mortgagor (providing there has been no
foreclosure sale).


 


(b)           Judicial
Proceedings.  Upon the
occurrence and during the continuance of an Event of Default, the Mortgagee, in
lieu of or in addition to exercising the power of sale hereafter given, may
proceed by a suit or suits, in equity or at law (i) for the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, (ii) for the appointment of a
receiver whether there is then pending any foreclosure hereunder or the sale of
the Realty Collateral, or (iii) for the enforcement of any other
appropriate legal or equitable remedy. 
Furthermore, if an action is filed to foreclose this Mortgage, or if
Mortgagee seeks to foreclose this Mortgage by power of sale under the Oklahoma
Power of Sale Mortgage Foreclosure Act, Mortgagee shall be entitled to the
immediate appointment of a receiver pursuant to 12 O.S. §1551(2)(c) without
the necessity of further proof.


 


(c)           Intentionally
omitted.


 


(d)           Certain
Aspects of Sale.  Mortgagee
will have the right to become the purchaser at any foreclosure sale and to
credit the then outstanding balance of the Obligations against the amount
payable by Mortgagee as purchaser at such sale. 
Statements of fact or other recitals contained in any conveyance to any
purchaser or purchasers at any sale made hereunder will conclusively establish
the occurrence of an Event of Default, any acceleration of the maturity of the
Obligations, the advertisement and conduct of such sale in the manner provided
herein and the truth and accuracy of all other matters stated therein.  Mortgagor does hereby ratify and confirm all
legal acts that the Mortgagee may do in carrying out the Mortgagee’s duties and
obligations under this Mortgage, and Mortgagor hereby irrevocably appoints
Mortgagee to be the attorney-in-fact of Mortgagor and in the name and on behalf
of Mortgagor to execute and deliver any deeds, transfers, conveyances,
assignments, assurances and notices which Mortgagor 


 


D-18

















 


ought to execute and deliver and do and perform any and all such acts
and things which Mortgagor ought to do and perform under the covenants herein
contained and generally to use the name of Mortgagor in the exercise of all or
any of the powers hereby conferred on Mortgagee.  Upon any sale, whether under the power of
sale hereby given or by virtue of judicial proceedings, it shall not be
necessary for Mortgagee or any public officer acting under execution or by
order of court, to have physically present or constructively in his possession
any of the Collateral, and Mortgagor hereby agrees to deliver to the purchaser
or purchasers at such sale on the date of sale the Collateral purchased by such
purchasers at such sale and if it should be impossible or impracticable to make
actual delivery of such Collateral, then the title and right of possession to
such Collateral shall pass to the purchaser or purchasers at such sale as
completely as if the same had been actually present and delivered.


 


(e)           Effect of
Sale.  Any sale or sales of
the Realty Collateral will operate to divest all right, title, interest, claim
and demand whatsoever, either at law or in equity, of Mortgagor in and to the
premises and the Realty Collateral sold, and will be a perpetual bar, both at
law and in equity, against Mortgagor, Mortgagor’s successors or assigns, and
against any and all persons claiming or who shall thereafter claim all or any
of the Realty Collateral sold by, through or under Mortgagor, or Mortgagor’s
successors or assigns.  Nevertheless, if
requested by the Mortgagee so to do, Mortgagor shall join in the execution and
delivery of all proper conveyances, assignments and transfers of the Property
so sold.  The purchaser or purchasers at
the foreclosure sale will receive as incident to his, her, its or their own
ownership, immediate possession of the Realty Collateral purchased and
Mortgagor agrees that if Mortgagor retains possession of the Realty Collateral
or any part thereof subsequent to such sale, Mortgagor will be considered a
tenant at sufferance of the purchaser or purchasers and will be subject to
eviction and removal by any lawful means, with or without judicial
intervention, and all damages by reason thereof are hereby expressly waived by
Mortgagor.


 


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


 


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


 


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


 


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


 


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


 


D-19

















 


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


 


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


 


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


 


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


 


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


 


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


 


(g)           Application
of Proceeds.  The proceeds of
any sale of the Realty Collateral or any part thereof, whether under the power
of sale herein granted and conferred or by virtue of judicial proceedings,
shall either be, at the option of Mortgagee, applied at the time of receipt, or
held by Mortgagee in the Collateral Account as additional Collateral, and in
either case, applied in the order set forth in Section 7.06 of the Credit
Agreement.


 


(h)           Appraisement
and Marshalling.  Mortgagor
agrees, to the full extent that Mortgagor may lawfully so agree, that Mortgagor
will not at any time insist upon or plead or in any manner whatever claim the
benefit of any appraisement, valuation, stay, extension or redemption law, now
or hereafter in force, in order to prevent or hinder the enforcement or
foreclosure of this Mortgage, the absolute sale of the Collateral, including
the Realty Collateral, or the possession thereof by any purchaser at any sale
made pursuant to this Mortgage or pursuant to the decree of any court of
competent jurisdiction.  Mortgagee hereby
waives or does not waive appraisement, such election to be made at or before
entry of judgment in any action to foreclose this Mortgage, and Mortgagor, for
Mortgagor and all who may claim through or under Mortgagor, hereby waives, to
the extent that Mortgagor may lawfully do so under any applicable 


 


D-20

















 


law, any and all rights to have the Collateral, including the Realty
Collateral, marshaled upon any foreclosure of the Lien hereof or sold in
inverse order of alienation.  Mortgagor
agrees that, in the event of a judicial foreclosure or a sale under the power
of sale provisions of this Mortgage, the Collateral, including the Realty
Collateral, may be sold in part, in parcels or as an entirety as directed by
Mortgagee.


 


6.2           Rights to
Personalty Collateral Upon Default.  Upon the occurrence of an Event of Default,
or at any time thereafter, Mortgagee may proceed against the Personalty
Collateral in accordance with the rights and remedies granted herein with
respect to the Realty Collateral, or will have all rights and remedies granted
by the Uniform Commercial Code as in effect in Oklahoma and this Mortgage.  Mortgagee shall have the right to take
possession of the Personalty Collateral, and for this purpose Mortgagee may
enter upon any premises on which any or all of the Personalty Collateral is
situated and, to the extent that Mortgagor could do so, take possession of and
operate the Personalty Collateral or remove it therefrom.  Mortgagee may require Mortgagor to assemble
the Personalty Collateral and make it available to Mortgagee at a place to be
designated by Mortgagee which is reasonably convenient to both parties.  Unless the Personalty Collateral is
perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Mortgagee will send Mortgagor
reasonable notice of the time and place of any public sale or of the time after
which any private sale or other disposition of the Personalty Collateral is to
be made.  This requirement of sending
reasonable notice will be met if such notice is mailed, postage prepaid, to
Mortgagor at the address designated in Section 7.12 hereof (or such other
address as has been designated as provided herein) at least ten days before the
time of the sale or disposition.  In
addition to the expenses of retaking, holding, preparing for sale, selling and
the like, Mortgagee will be entitled to recover attorney’s fees and legal
expenses as provided for in this Mortgage and in the writings evidencing the
Obligations before applying the balance of the proceeds from the sale or other
disposition toward satisfaction of the Obligations.  Mortgagor will remain liable for any
deficiency remaining after the sale or other disposition.


 


6.3           Rights to
Fixture Collateral Upon Default. 
Upon the occurrence of an Event of Default, or at any time thereafter,
Mortgagee may elect to treat the Fixture Collateral as either Realty Collateral
or as Personalty Collateral (but not both) and proceed to exercise such rights
as apply to the type of Collateral selected.


 


6.4           Account
Debtors.  Mortgagee may,
in its discretion, after the occurrence and during the continuance of an Event
of Default, notify any account debtor to make payments directly to Mortgagee
and contact account debtors directly to verify information furnished by
Mortgagor.  Mortgagee shall not have any
obligation to preserve any rights against prior parties.


 


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


 


D-21

















 


6.6           Set-Off.  Upon the occurrence and during the
continuance of any Event of Default, Mortgagee shall have the right to set-off
any funds of Mortgagor in the possession of Mortgagee against any amounts then
due by Mortgagor to Mortgagee pursuant to this Mortgage.


 


ARTICLE
VII


Miscellaneous


 


7.1           Advances
by Mortgagee.  Each and
every covenant of Mortgagor herein contained shall be performed and kept by
Mortgagor solely at Mortgagor’s expense. 
If Mortgagor fails to perform or keep any of the covenants of whatsoever
kind or nature contained in this Mortgage, Mortgagee (either by it directly or
on its behalf by any receiver appointed hereunder) may, but will not be
obligated to, make advances to perform the same on Mortgagor’s behalf, and
Mortgagor hereby agrees to repay such sums and any attorneys’ fees incurred in
connection therewith on demand plus interest thereon from the date of the
advance until reimbursement of Mortgagee at the Reimbursement Rate.  In addition, Mortgagor hereby agrees to repay
on demand any costs, expenses and attorney’s fees incurred by Mortgagee which
are to be obligations of Mortgagor pursuant to, or allowed by, the terms of
this Mortgage, including such costs, expenses and attorney’s fees incurred pursuant
to Section 3.1(h), Section 6.5 or Section 7.2 hereof, plus
interest thereon from the date of the advance by Mortgagee until reimbursement
of Mortgagee at the Reimbursement Rate. 
Such amounts will be in addition to any sum of money which may, pursuant
to the terms and conditions of the written instruments comprising part of the
Obligations, be due and owing.  No such
advance will be deemed to relieve Mortgagor from any default hereunder.


 


7.2           Defense
of Claims.  Mortgagor
shall promptly notify Mortgagee in writing of the commencement of any legal
proceedings affecting Mortgagor’s title to the Collateral or Mortgagee’s Lien
or security interest in the Collateral, or any part thereof, and shall take
such action, employing attorneys agreeable to Mortgagee, as may be necessary to
preserve Mortgagor’s and Mortgagee’s rights affected thereby.  If Mortgagor fails or refuses to adequately
or vigorously, in the sole judgment of Mortgagee, defend Mortgagor’s or
Mortgagee’s rights to the Collateral, the Mortgagee may take such action on
behalf of and in the name of Mortgagor and at Mortgagor’s expense.  Moreover, Mortgagee may take such independent
action in connection therewith as it may in its discretion deem proper,
including the right to employ independent counsel and to intervene in any suit
affecting the Collateral.  All costs,
expenses and attorneys’ fees incurred by Mortgagee pursuant to this Section 7.2
or in connection with the defense by Mortgagee of any claims, demands or
litigation relating to Mortgagor, the Collateral or the transactions
contemplated in this Mortgage shall be paid by Mortgagor on demand plus
interest thereon from the date of such demand by Mortgagee until reimbursement
of Mortgagee at the Reimbursement Rate.


 


7.3           Termination.  If all of the Obligations have been fully and
finally paid and discharged in full, all Commitments have been terminated or
expired, and the Credit Agreement has been terminated in writing, then all of
the Collateral (to the extent not sold, assigned or otherwise transferred as
permitted herein or under applicable law) will revert to Mortgagor and the
entire estate, right, title and interest of the Mortgagee will thereupon cease;
and Mortgagee in 


 


D-22

















 


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


 


7.4           Renewals,
Amendments and Other Security. 
Without notice or consent of Mortgagor, renewals and extensions of the
written instruments constituting part or all of the Obligations may be given at
any time and amendments may be made to agreements relating to any part of such
written instruments or the Collateral. 
Mortgagee may take or hold other security for the Obligations without
notice to or consent of Mortgagor.  The
acceptance of this Mortgage by Mortgagee shall not waive or impair any other
security Mortgagee may have or hereafter acquire to secure the payment of the
Obligations nor shall the taking of any such additional security waive or
impair the Lien and security interests herein granted.  The Mortgagee may resort first to such other
security or any part thereof, or first to the security herein given or any part
thereof, or from time to time to either or both, even to the partial or
complete abandonment of either security, and such action will not be a waiver
of any rights conferred by this Mortgage. 
This Mortgage may not be amended, waived or modified except in a written
instrument executed by both Mortgagor and Mortgagee.


 


7.5           Security
Agreement, Financing Statement and Fixture Filing.  This Mortgage will be deemed to be and may be
enforced from time to time as an assignment, chattel mortgage, contract, deed
of trust, financing statement, real estate mortgage, or security agreement, and
from time to time as any one or more thereof if appropriate under applicable
state law.  As a financing statement,
this Mortgage is intended to cover all Personalty Collateral including
Mortgagor’s interest in all Hydrocarbons as and after they are extracted and
all accounts arising from the sale thereof at the wellhead.  THIS MORTGAGE SHALL BE
EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TO
FIXTURE COLLATERAL INCLUDED WITHIN THE COLLATERAL.   This Mortgage shall be filed in the real
estate records or other appropriate records of the county or counties in the
state in which any part of the Realty Collateral and Fixture Collateral is
located as well as the Uniform Commercial Code records of the Secretary of
State or other appropriate office of the state in which any Collateral or
Mortgagor is located.  At Mortgagee’s
request Mortgagor shall deliver financing statements covering the Personalty
Collateral, including all Hydrocarbons sold at the wellhead, and Fixture
Collateral, which financing statements may be filed in the Uniform Commercial
Code records of the Secretary of State or other appropriate office of the state
in which any of the Collateral or Mortgagor is located or in the county where
any of the Collateral is located. 
Furthermore, Mortgagor hereby irrevocably authorizes Mortgagee and any
affiliate, employee or agent thereof, at any time and from time to time, to
file in any Uniform Commercial Code jurisdiction any financing statement or
document and amendments thereto, without the signature of Mortgagor where
permitted by law, in order to perfect or maintain the perfection of any
security interest granted under this Mortgage. 
A photographic or other reproduction of this Mortgage shall be
sufficient as a financing statement.


 


7.6           Unenforceable
or Inapplicable Provisions. 
If any term, covenant, condition or provision hereof is invalid, illegal
or unenforceable in any respect, the other provisions hereof will remain in
full force and effect and will be liberally construed in favor of the Mortgagee
in order to carry out the provisions hereof.


 


D-23

















 


7.7           Rights
Cumulative.  Each and
every right, power and remedy herein given to the Mortgagee will be cumulative
and not exclusive, and each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and as often and in such order as may be deemed expedient by the
Mortgagee, as the case may be, and the exercise, or the beginning of the
exercise, of any such right, power or remedy will not be deemed a waiver of the
right to exercise, at the same time or thereafter, any other right, power or remedy.  No delay or omission by Mortgagee in the
exercise of any right, power or remedy will impair any such right, power or
remedy or operate as a waiver thereof or of any other right, power or remedy
then or thereafter existing.


 


7.8           Waiver by
Mortgagee.  Any and all
covenants in this Mortgage may from time to time by instrument in writing by
Mortgagee, be waived to such extent and in such manner as the Mortgagee may
desire, but no such waiver will ever affect or impair the Mortgagee’s rights
hereunder, except to the extent specifically stated in such written instrument.


 


7.9           Terms.  The term “Mortgagor” as used in this Mortgage
will be construed as singular or plural to correspond with the number of
persons executing this Mortgage as Mortgagor. 
If more than one person executes this Mortgage as Mortgagor, his, her,
its, or their duties and liabilities under this Mortgage will be joint and
several.  The terms “Mortgagee” and “Mortgagor”
as used in this Mortgage include the heirs, executors or administrators,
successors, representatives, receiver, trustees and assigns of those
parties.  Unless the context otherwise
requires, terms used in this Mortgage which are defined in the Uniform
Commercial Code of Oklahoma are used with the meanings therein defined.


 


7.10         Counterparts.  This Mortgage may be executed in any number
of counterparts, each of which will for all purposes be deemed to be an
original, and all of which are identical except that, to facilitate
recordation, in any particular counties counterpart portions of Exhibit A
hereto which describe Properties situated in counties other than the counties
in which such counterpart is to be recorded may have been omitted.


 


7.11         Governing
Law.  This Mortgage shall
be governed by and construed in accordance with the laws of the State of
Oklahoma.


 


7.12         Notice.  All notices required or permitted to be given
by Mortgagor or Mortgagee shall be made in the manner set forth in the Credit
Agreement and shall be addressed as follows:


 


	
  Mortgagor:

  	
   

  	
  c/o Cano Petroleum, Inc.

  
	
   

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
  Attention: Ben Daitch, CFO

  
	
   

  	
   

  	
  Facsimile: (817) 334-0222

  
	
   

  	
   

  	
   

  
	
  Mortgagee:

  	
   

  	
  UnionBanCal Equities, Inc.

  
	
   

  	
   

  	
  445 South Figueroa Street, 21st Floor

  
	
   

  	
   

  	
  Los Angeles, California 90071

  
	
   

  	
   

  	
  Attention: Maggie Elower

  
	
   

  	
   

  	
  Facsimile: 213-236-7619

  



 


D-24

















 


7.13         Condemnation.  All awards and payments heretofore and
hereafter made for the taking of or injury to the Collateral or any portion
thereof whether such taking or injury be done under the power of eminent domain
or otherwise, are hereby assigned, and shall be paid to Mortgagee.  Mortgagee is hereby authorized to collect and
receive the proceeds of such awards and payments and to give proper receipts
and acquittances therefor.  Mortgagor
hereby agrees to make, execute and deliver, upon request, any and all
assignments and other instruments sufficient for the purpose of confirming this
assignment of the awards and payments to Mortgagee free and clear of any
encumbrances of any kind or nature whatsoever. 
Any such award or payment may, at the option of Mortgagee, be retained
and applied by Mortgagee after payment of attorneys’ fees, costs and expenses
incurred in connection with the collection of such award or payment toward
payment of all or a portion of the Obligations, whether or not the Obligations
are then due and payable, or be paid over wholly or in part to Mortgagor for
the purpose of altering, restoring or rebuilding any part of the Collateral
which may have been altered, damaged or destroyed as a result of any such
taking, or other injury to the Collateral.


 


7.14         Successors
and Assigns.


 


(a)           This Mortgage is
binding upon Mortgagor, Mortgagor’s successors and assigns, and shall inure to
the benefit of each Credit Party and each of its successors and assigns, and
the provisions hereof shall likewise be covenants running with the land.


 


(b)           This Mortgage shall
be transferable and negotiable, with the same force and effect and to the same
extent as the Obligations may be transferable, it being understood that, upon
the transfer or assignment by the Credit Parties (or any of them) of any of the
Obligations, the legal transfer or assignment by the Credit Parties (or any of
them) of any of the Obligations, the legal holder of such Obligations shall
have all of the rights granted to the Mortgagee for the benefit of the Credit
Parties under this Mortgage.  The
Mortgagor specifically agrees that upon any transfer of all or any portion of
the Obligations, this Mortgage shall secure with retroactive rank the existing
Obligations of the Mortgagor to the transferee and any and all Obligations to
such transferee thereafter arising.


 


(c)           The Mortgagor hereby
recognizes and agrees that the Credit Parties (or any of them) may, from time
to time, one or more times, transfer all or any portion of the Obligations to
one or more third parties.  Such
transfers may include, but are not limited to, sales of participation interests
in such Obligations in favor of one or more third parties.  Upon any transfer of all or any portion of
the Obligations, the Mortgagee may transfer and deliver any and/or all of the
Collateral to the transferee of such Obligations and such Collateral shall
secure any and all of the Obligations in favor of such a transferee then
existing and thereafter arising, and after any such transfer has taken place,
the Mortgagee shall be fully discharged from any and all future liability and
responsibility to the Mortgagor with respect to such Collateral, and transferee
thereafter shall be vested with all the powers, rights and duties with respect
such Collateral.


 


D-25
















 


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


 


7.16         Usury Not Intended.  It is the intent of Mortgagor and Mortgagee
in the execution and performance of this Mortgage, the Credit Agreement and the
other Loan Documents to contract in strict compliance with applicable usury
laws governing the Obligations including such applicable usury laws of the
State of Texas and the United States of America as are from time-to-time in
effect.  In furtherance thereof,
Mortgagee and Mortgagor stipulate and agree that none of the terms and
provisions contained in this Mortgage, the Credit Agreement or the other Loan
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the maximum non-usurious rate permitted by applicable law and that for purposes
hereof “interest” shall include the aggregate of all charges which constitute
interest under such laws that are contracted for, charged or received under
this Mortgage, the Credit Agreement and the other Loan Documents; and in the
event that, notwithstanding the foregoing, under any circumstances the
aggregate amounts taken, reserved, charged, received or paid on the
Obligations, include amounts which by applicable law are deemed interest which
would exceed the maximum non-usurious rate permitted by applicable law, then
such excess shall be deemed to be a mistake and Mortgagee shall credit the same
on the principal of the Obligations (or if the Obligations shall have been paid
in full, refund said excess to Mortgagor). 
In the event that the maturity of the Obligations is accelerated by
reason of any election of Mortgagee resulting from any Event of Default, or in
the event of any required or permitted prepayment, then such consideration that
constitutes interest may never include more than the maximum non-usurious rate permitted
by applicable law and excess interest, if any, provided for in this Mortgage,
the Credit Agreement or other Loan Documents shall be canceled automatically as
of the date of such acceleration and prepayment and, if theretofore paid, shall
be credited on the Obligations or, if the Obligations shall have been paid in
full, refunded to Mortgagor.  In
determining whether or not the interest paid or payable under any specific
contingencies exceeds the maximum non-usurious rate permitted by applicable law,
Mortgagor and Mortgagee shall to the maximum extent permitted under applicable
law amortize, prorate, allocate and spread in equal part during the period of
the full stated term of the Obligations, all amounts considered to be interest
under applicable law of any kind contracted for, charged, received or reserved
in connection with the Obligation.


 


7.17         Credit Agreement.  To the fullest extent possible, the terms and
provisions of the Credit Agreement shall be read together with the terms and
provisions of this Mortgage so that the terms and provisions of this Mortgage
do not conflict with the terms and provisions of the Credit Agreement;
provided, however, notwithstanding the foregoing, in the event that any of the
terms or provisions of this Mortgage conflict with any terms or provisions of
the Credit Agreement, the terms or provisions of the Credit Agreement shall
govern and control for all purposes; provided that the inclusion in this
Mortgage of terms and provisions, supplemental rights or remedies in favor of
the Secured Party not addressed in the Credit Agreement shall not be deemed to
be a conflict with the Credit Agreement and all such additional terms,
provisions, supplemental rights or remedies contained herein shall be given
full force and effect.


 


D-26

















 


7.18        Due Authorization.  Mortgagor hereby represents, warrants and
covenants to Mortgagee that the obligations of Mortgagor under this Mortgage
are the valid, binding and legally enforceable obligations of Mortgagor, that
the execution, ensealing and delivery of this Mortgage by Mortgagor has been
duly and validly authorized in all respects by Mortgagor, and that the persons
who are executing and delivering this Mortgage on behalf of Mortgagor have full
power, authority and legal right to so do, and to observe and perform all of
the terms and conditions of this Mortgage on Mortgagor’s part to be observed or
performed.


 


7.19        No Offsets, Etc.  Mortgagor hereby represents, warrants and
covenants to Mortgagee that there are no offsets, counterclaims or defenses at
law or in equity against this Mortgage or the indebtedness secured hereby.


 


7.20        Bankruptcy Limitation.  Notwithstanding anything contained herein
to the contrary, it is the intention of the Mortgagor, the Mortgagee and the
other Credit Parties that the amount of the Obligation secured by the Mortgagor’s
interests in any of its Property shall be in, but not in excess of, the maximum
amount permitted by fraudulent conveyance, fraudulent transfer and other
similar law, rule or regulation of any Governmental Authority applicable
to the Mortgagor.  Accordingly,
notwithstanding anything to the contrary contained in this Mortgage in any
other agreement or instrument executed in connection with the payment of any of
the Obligations, the amount of the Obligations secured by the Mortgagor’s
interests in any of its Property pursuant to this Mortgage shall be limited to
an aggregate amount equal to the largest amount that would not render the
Mortgagor’s obligations hereunder or the Liens and security interest granted to
the Mortgagee hereunder subject to avoidance under Section 548 of the
United States Bankruptcy Code or any comparable provision of any other
applicable law.


 


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


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


[Remainder of this page intentionally
left blank.]


 


D-27

















 


NOTICE TO MORTGAGOR:


 


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


 


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


 


	
   

  	
  MORTGAGOR:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial
  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MORTGAGEE:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL
  EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
  as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
								



 


D-28

















 


	
  THE STATE OF TEXAS

  	
   

  	
  §

  
	
   

  	
   

  	
  §

  
	
  COUNTY OF TARRANT

  	
   

  	
  §

  



 


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


 


 


	
   

  	
   

  
	
   

  	
  Notary Public in and for

  
	
   

  	
  the State of Texas

  



 


	
  STATE OF CALIFORNIA

  	
  )

  
	
   

  	
  )

  
	
  COUNTY OF
                     

  	
  )

  



 


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


 


WITNESS my hand and official seal.


 


 


	
  Signature 

  	
   

  	
  (Seal)

  



 


 


	
  STATE OF CALIFORNIA

  	
  )

  
	
   

  	
  )

  
	
  COUNTY OF                    

  	
  )

  



 


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


 


WITNESS my hand and official seal.


 


 


	
  Signature 

  	
   

  	
  (Seal)

  



 


D-29

















 


EXHIBIT A


TO


SUBORDINATED MORTGAGE, LINE OF CREDIT
MORTGAGE, ASSIGNMENT, SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING
STATEMENT


 


The designation “Working Interest” or “WI” or “GWI” when used in this Exhibit means
an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest.  The designation “Net Revenue Interest” or “NRI”
or “NRIO” or “NRIG” means that portion of the production attributable to the
owner of a working interest after deduction for all royalty burdens, overriding
royalty burdens or other burdens on production, except severance, production,
and other similar taxes.  The designation
“Overriding Royalty Interest” “ORRI” means an interest in production which is
free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the overriding
royalty interest so provides, costs associated with compression, dehydration,
other treating or processing, or transportation of production of oil, gas, or
other minerals relating to the marketing of such production.  The designation “Royalty Interest” or “RI”
means an interest in production which results from an ownership in the mineral
fee estate or royalty estate in the relevant land and which is free of any
obligation for the expense of exploration, development, and production, bearing
only its pro rata share of severance, production, and other similar taxes and,
in instances where the document creating the royalty interest so provides,
costs associated with compression, dehydration, other treating or processing or
transportation of production of oil, gas, or other minerals relating to the
marketing of such production.  Each
amount set forth as “Working Interest” or “WI” or “GWI” or “Net Revenue
Interest” or “NRI” or “NRIO” or “NRIG” is the Mortgagor’s interest after giving
full effect to, among other things, all Liens permitted by the Credit Agreement
and after giving full effect to the agreements or instruments set forth in this
Exhibit A and any other instruments or agreements affecting Mortgagor’s
ownership of the Hydrocarbons.


 


Any reference in this Exhibit A to wells or units is for warranty
of interest, administrative convenience, and identification and shall not limit
or restrict the right, title, interest, or Properties covered by this
Mortgage.  All right, title, and interest
of Mortgagor in the Properties described herein and in Exhibit A are and
shall be subject to this Mortgage, regardless of the presence of any units or
wells not described herein.


 


The reference to book or volume and page herein and in Exhibit A
refer to the recording location of each respective Realty Collateral described
herein and in Exhibit A in the county where the land covered by the Realty
Collateral is located.


 


D-30

















 


EXHIBIT E


 


FORM OF
NOTE


 


THE
OBLIGATIONS OF THE BORROWER UNDER THIS NOTE ARE SUBORDINATED TO THE PAYMENT OF
CERTAIN SENIOR DEBT AS SET FORTH IN THE SUBORDINATION AND INTERCREDITOR
AGREEMENT REFERRED TO BELOW.


SUBORDINATED
NOTE


 


	
  $________________

  	
  ____________, 20__

  	
   

  



 


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


 


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


 


Both principal
and interest are payable in lawful money of the United States of America to the
Administrative Agent at the place and in the manner specified in the Credit
Agreement.  The Bank shall record
payments of principal made under this Note, but no failure of the Bank to make
such recordings shall affect the Borrower’s repayment obligations under this
Note.


 


Without being
limited thereto or thereby, this Note is secured by the Security Instruments
and guaranteed under the Guaranties.


 


E-1

















 


Except as
specifically provided in the Credit Agreement, the Borrower hereby waives
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration, and any other notice of any kind. 
No failure to exercise, and no delay in exercising, any rights hereunder
on the part of the holder of this Note shall operate as a waiver of such rights.


 


This Note is
also subject to the terms and provisions of the Subordination and Intercreditor
Agreement dated as of December 17, 2008 (as the same may be modified from
time to time, the “Subordination and Intercreditor Agreement”), among
the Borrower, the Administrative Agent, the Guarantors, the Lenders, the Senior
Agent and the Senior Lenders.  The
Subordination and Intercreditor Agreement, among other things, contains
subordination provisions that subordinate the rights of the Bank to obtain
payment of and exercise remedies with respect to this Note.


 


This Note
shall be governed by, and construed and enforced in accordance with, the laws
of the state of Texas (except that Chapter 346 of the Texas Finance Code
Chapter, which regulates certain revolving credit loan accounts shall not apply
to this Note).


 


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


 


THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.


 


 


	
   

  	
  CANO
  PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


E-2

















 


EXHIBIT F


 


FORM OF
NOTICE OF BORROWING


 


[Date]


 


UnionBanCal Equities, Inc., as Administrative Agent


601 Potrero Grande Dr.


Monterey Park, CA 91754


 


Attention:    Vanna
HuaTham


 


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated Credit Agreement dated as of December 17, 2008
(as the same has been and may be amended, restated or modified from
time-to-time, the “Credit Agreement,” the defined terms of which are
used in this Notice of Borrowing unless otherwise defined in this Notice of
Borrowing) among the Borrower, the lenders party thereto (the “Lenders”),
and UnionBanCal Equities, Inc., as administrative agent for the Lenders
(the “Administrative Agent”), and hereby gives you irrevocable notice
pursuant to Section 2.03(a) of the Credit Agreement that the
undersigned hereby requests a Borrowing, and in connection with that request
sets forth below the information relating to such Borrowing (the “Proposed
Borrowing”) as required by Section 2.03(a) of the Credit
Agreement:


 


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


 


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


 


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


 


(d)           [The Interest Period
for each Eurodollar Rate Advance made as part of the Proposed Borrowing is
[_____ month[s]].]


 


The Borrower
hereby certifies that the following statements are true on the date hereof, and
will be true on the date of the Proposed Borrowing:


 


(1)           the representations and
warranties contained in Article IV of the Credit Agreement and the
representations and warranties contained in the Security Instruments, the
Guaranties, and each of the other Loan Documents are true and correct in all
material respects on and as of the date of the Proposed Borrowing, before and
after giving effect to the Proposed Borrowing and to the application of the
proceeds from the Proposed Borrowing, as though made on and as of such date,
except to the extent that any such representation or warranty expressly relates
solely to an earlier date, in which case it shall have been true and correct in
all material respects as of such earlier date; and


 


F-1

















 


(2)           no
Default has occurred and is continuing or would result from the Proposed
Borrowing or from the application of the proceeds therefrom.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


F-2

















 


EXHIBIT G


 


FORM OF
NOTICE OF CONVERSION OR CONTINUATION


 


[Date]


 


UnionBanCal Equities, Inc., as Administrative Agent


601 Potrero Grande Dr.


Monterey Park, CA 91754


 


Attention:  Vanna HuaTham


 


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated Credit Agreement dated as of December 17, 2008
(as the same may be amended, restated or modified from time-to-time, the “Credit
Agreement,” the defined terms of which are used in this Notice of
Conversion or Continuation unless otherwise defined in this Notice of
Conversion or Continuation) among the Borrower, the lenders party thereto (the “Lenders”),
and UnionBanCal Equities, Inc., as administrative agent for the Lenders
(the “Administrative Agent”), and hereby gives you irrevocable notice
pursuant to Section 2.03(b) of the Credit Agreement that the
undersigned hereby requests a Conversion or continuation of an outstanding
Borrowing, and in connection with that request sets forth below the information
relating to such Conversion or continuation (the “Proposed Borrowing”)
as required by Section 2.03(b) of the Credit Agreement:


 


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


 


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


 


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


 


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


 


The Borrower
hereby certifies that the following statements are true on the date hereof, and
will be true on the date of the Proposed Borrowing:


 


(i)            the representations
and warranties contained in Article IV of the Credit Agreement and the
representations and warranties contained in the Security Instruments, the
Guaranties, and each of the other Loan Documents are true and correct in all
material respects on and as of the date of the Proposed Borrowing, before and
after giving effect to the Proposed Borrowing and to the application of the
proceeds from the Proposed Borrowing, as though made on and as of such date,
except to the extent that any such representation or warranty expressly relates
solely to an earlier date, in which case it shall have been true and correct in
all material respects as of such earlier date; and


 


G-1

















 


(j)            no Default has
occurred and is continuing or would result from the Proposed Borrowing or from
the application of the proceeds therefrom.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


G-2
















 


EXHIBIT
H


 


FORM OF
PLEDGE AGREEMENT


 


THIS SUBORDINATED PLEDGE AGREEMENT dated as of December 17, 2008
(this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower
signatory hereto (together with the Borrower, the “Pledgors” and
individually, each a “Pledgor”) and UnionBanCal Equities, Inc. as
Administrative Agent (in such capacity the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined), for its benefit and the benefit
of the Lenders (as hereinafter defined).


RECITALS


 


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


 


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


 


C.            Each
Pledgor (other than the Borrower) is a subsidiary of the Borrower, and
therefore shall derive direct and indirect benefits from the transactions
contemplated by the Credit Agreement.


 


AGREEMENT


 


NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Pledgor hereby
agrees with the Administrative Agent for the benefit of the Secured Parties as
follows:


 


Section 1.              Definitions.  All capitalized terms not otherwise defined
in this pledge agreement that are defined in the credit agreement shall have
the meanings assigned to such terms by the credit agreement.  Any terms used in this pledge agreement that
are defined in the uniform commercial code in effect in the state of texas from
time to time (the “ucc”) and not otherwise defined herein or in the credit
agreement, shall have the meanings assigned to those terms by the ucc.  All meanings to defined terms,
unless otherwise indicated, are to be equally applicable to both the singular
and plural forms of the terms defined. 
Article, section, schedule, and exhibit references are to articles and
sections of and schedules and exhibits to this pledge agreement, unless
otherwise specified.  All references to
instruments, documents, contracts, and agreements are references to such
instruments, documents, contracts, and agreements as the same may be amended,
supplemented, and otherwise modified from time to time, unless otherwise
specified.  The words “hereof”, “herein”
and “hereunder” and words of similar import when used in this pledge agreement
shall refer to this pledge agreement as a whole and not to any particular
provision of this pledge agreement.  As
used herein, the term “including” means “including, 


 


H-1





















 


without
limitation,”. Paragraph headings have been inserted in this pledge agreement as
a matter of convenience for reference only and it is agreed that such paragraph
headings are not a part of this pledge agreement and shall not be used in the
interpretation of any provision of this pledge agreement.


 


Section 2.              Pledge.


 


2.01         Grant of Pledge.


 


(a)           Each
Pledgor hereby pledges to the Administrative Agent, and grants to the
Administrative Agent, for the benefit of the Secured Parties, a continuing
security interest in, the Pledged Collateral, as defined in Section 2.02
below.  This Pledge Agreement shall
secure (i) all Obligations (as defined in the Credit Agreement) now or
hereafter existing (ii) all other amounts now or hereafter owed by the
Borrower, any Pledgor, or any of their respective Subsidiaries under this
Pledge Agreement or the other Loan Documents to the Administrative Agent or any
other Lender, and (iii) any increases, extensions, modifications,
substitutions, amendments, restatements and renewals of any of the foregoing
obligations, whether for principal, interest, fees, expenses, indemnification
or otherwise.   All such obligations shall be referred to in
this Pledge Agreement as the “Secured Obligations”.


 


(b)           Notwithstanding
anything contained herein to the contrary, it is the intention of each Pledgor,
the Administrative Agent and the Lenders that the amount of the Secured
Obligation secured by each Pledgor’s interests in any of its property or assets
(whether real or personal, or mixed, tangible or intangible) (“Property”)
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Pledgor.  Accordingly, notwithstanding anything to the
contrary contained in this Pledge Agreement or in any other agreement or
instrument executed in connection with the payment of any of the Secured
Obligations, the amount of the Secured Obligations secured by each Pledgor’s
interests in any of its Property pursuant to this Pledge Agreement shall be
limited to an aggregate amount equal to the largest amount that would not
render such Pledgor’s obligations hereunder or the liens and security interest
granted to the Administrative Agent hereunder subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provision of any other
applicable law.


 


2.02         Pledged Collateral.  “Pledged Collateral” shall mean all of
each Pledgor’s right, title, and interest in the following, whether now owned
or hereafter acquired:


 


(a)           (i) all
of the membership interests listed in the attached Schedule 2.02(a) issued
to such Pledgor and all such additional membership interests of any issuer of
such interests hereafter acquired by such Pledgor (the “Membership Interests”),
(ii) the certificates representing the Membership Interests, if any, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Membership Interests, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Membership
Interests, and (B) any distributions, dividends, 


 


H-2





















 


cash, instruments and other property from time-to-time received or
otherwise distributed in respect of the Membership Interests, whether regular,
special or made in connection with the partial or total liquidation of the
issuer and whether attributable to profits, the return of any contribution or
investment or otherwise attributable to the Membership Interests or the
ownership thereof (collectively, the “Membership Interests Distributions”);


 


(b)           (i) all
of the general and limited partnership interests listed in the attached
Schedule 2.02(b) issued to such Pledgor and all such additional limited or
general partnership interests of any issuer of such interests hereafter
acquired by such Pledgor (the “Partnership Interests”), and (ii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Partnership Interests, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Partnership
Interests, and (B) any distributions, dividends, cash, instruments and
other property from time-to-time received or otherwise distributed in respect
of the Partnership Interests, whether regular, special or made in connection
with the partial or total liquidation of the issuer and whether attributable to
profits, the return of any contribution or investment or otherwise attributable
to the Partnership Interests or the ownership thereof (collectively, the “Partnership
Interests Distributions”);


 


(c)           (i) all
of the shares of stock listed in the attached Schedule 2.02(c) issued to
such Pledgor and all such additional shares of stock of any issuer of such
shares of stock hereafter issued to such Pledgor (the “Pledged Shares”),
(ii) the certificates representing the Pledged Shares, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Pledged Shares, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Pledged
Shares, and (B) any distributions, dividends, cash, instruments and other
property from time-to-time received or otherwise distributed in respect of the
Pledged Shares, whether regular, special or made in connection with the partial
or total liquidation of the issuer and whether attributable to profits, the
return of any contribution or investment or otherwise attributable to the Pledged
Shares or the ownership thereof (collectively, the “Pledged Shares
Distributions”; together with the Membership Interests Distributions and
the Partnership Interest Distributions, the “Distributions”); and


 


(d)           all
proceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) of
this Section 2.02.


 


2.03         Delivery of Pledged
Collateral.  All certificates or
instruments, if any, representing the Pledged Collateral shall be delivered to
the Administrative Agent and shall be in suitable form for transfer by
delivery, or shall be accompanied by duly executed instruments of transfer or
assignment in blank, all in form and substance reasonably satisfactory to the
Administrative Agent.  After the occurrence
and during the continuance of an Event of Default, the Administrative Agent
shall have the right, upon prior written notice to the applicable Pledgor, to
transfer to or to register in the name of the Administrative Agent or any of
its nominees any of the Pledged Collateral, subject to the rights specified in Section 2.04.  In addition, after the occurrence and during
the continuance of an Event of Default, the Administrative Agent shall 


 


H-3





















 


have the right at any
time to exchange the certificates or instruments representing the Pledged
Collateral for certificates or instruments of smaller or larger denominations.


 


2.04         Rights Retained by
Pledgor.  Notwithstanding the pledge
in Section 2.01,


 


(a)           so
long as no Event of Default shall have occurred and remain uncured or unwaived
and except as otherwise provided in the Credit Agreement, (i) each Pledgor
shall be entitled to receive and retain any dividends and other Distributions
paid on or in respect of the Pledged Collateral and the proceeds of any sale of
the Pledged Collateral; and (ii) each Pledgor shall be entitled to
exercise any voting and other consensual rights pertaining to its Pledged
Collateral for any purpose not inconsistent with the terms of this Pledge
Agreement or the Credit Agreement; provided, however, that no
Pledgor shall exercise nor shall it refrain from exercising any such right if
such action or inaction, as applicable, would have a materially adverse effect
on the value of the Pledged Collateral; and


 


(b)           if
an Event of Default shall have occurred and remain uncured or unwaived,


 


(i)            until
such time thereafter as the Administrative Agent gives written notice of its
election to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall be entitled to exercise any voting and other
consensual rights pertaining to its Pledged Collateral for any purpose not
inconsistent with the terms of this Pledge Agreement or the Credit Agreement; provided,
however, that no Pledgor shall exercise nor shall it refrain from
exercising any such right if such action or inaction, as applicable, would have
a materially adverse effect on the value of the Pledged Collateral; and


 


(ii)           at and
after such time as the Administrative Agent gives written notice of its election
to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall execute and deliver (or cause to be executed and
delivered) to the Administrative Agent all proxies and other instruments as the
Administrative Agent may reasonably request to enable the Administrative Agent
to (A) exercise the voting and other rights which such Pledgor is entitled
to exercise pursuant to paragraph (a) or paragraph (b)(i) of
this Section 2.04, and (B) receive any Distributions and proceeds of
sale of the Pledged Collateral which such Pledgor is authorized to receive and
retain pursuant to paragraph (a)(i) of this Section 2.04.


 


Section 3.              Pledgor’s Representations And Warranties.  Each pledgor represents and warrants to the
administrative agent and the lenders as follows:


 


(a)           The
Pledged Collateral applicable to such Pledgor listed on the attached
Schedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorized
and validly issued to such Pledgor and are fully paid and nonassessable.


 


(b)           Such
Pledgor is the legal and beneficial owner of the Pledged Collateral free and
clear of any Lien or option, except for (i) the security interest created
by this 


 


H-4





















 


Pledge Agreement and (ii) other Liens permitted under the Credit
Agreement ( the “Permitted Liens”).


 


(c)           No
authorization, authentication, approval, or other action by, and no notice to
or filing with, any Governmental Authority or regulatory body is required
either (a) for the pledge by such Pledgor of the Pledged Collateral
pursuant to this Pledge Agreement or for the execution, delivery, or
performance of this Pledge Agreement by such Pledgor or (b) for the
exercise by the Administrative Agent or any Secured Party of the voting or other
rights provided for in this Pledge Agreement or the remedies in respect of the
Pledged Collateral pursuant to this Pledge Agreement (except as may be required
in connection with such disposition by laws affecting the offering and sale of
securities generally).


 


(d)           Such
Pledgor has the full right, power and authority to deliver, pledge, assign and
transfer the Pledged Collateral to the Administrative Agent.


 


(e)           The
Membership Interests listed on the attached Schedule 2.02(a) constitute
the percentage of the issued and outstanding membership interests of the
respective issuer thereof set forth on Schedule 2.02(a) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.


 


(f)            The
Partnership Interests listed on the attached Schedule 2.02(b) constitute
the percentage of the issued and outstanding general and limited partnership
interests of the respective issuer thereof set forth on Schedule 2.02(b) and
all of the Equity Interest in such issuer in which the Pledgor has any
ownership interest.


 


(g)           The
Pledged Shares list on the attached Schedule 2.02(c) constitute the
percentage of the issued and outstanding shares of capital stock of the
respective issuer thereof set forth on Schedule 2.02(c) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.


 


(h)           Schedule
3 sets forth its sole jurisdiction of formation, type of organization, federal
tax identification number, the organizational number, and all names used by it
during the last five years prior to the date of this Pledge Agreement.


 


Section 4.              Pledgor’s Covenants.  During the
term of this pledge agreement and until all of the secured obligations have
been fully and finally paid and discharged in full, the commitments under the credit
agreement have been terminated or expired, and the credit agreement has been
terminated in writing, each pledgor covenants and agrees with the
administrative agent that:


 


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


 


H-5





















 


protect any security
interest granted or purported to be granted hereby or to enable the
Administrative Agent or any Secured Party to exercise and enforce its rights and
remedies hereunder with respect to any Pledged Collateral.  Each Pledgor hereby authorizes the
Administrative Agent to file any financing statements, amendments or
continuations without the signature of such Pledgor to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under this Pledge Agreement.


 


4.02         Transfer, Other Liens,
and Additional Shares.  Each Pledgor
agrees that it will not (a) except as otherwise permitted by the Credit
Agreement, sell or otherwise dispose of, or grant any option with respect to,
any of the Pledged Collateral or (b) create or permit to exist any Lien
upon or with respect to any of the Pledged Collateral, except for Permitted
Liens.  Each Pledgor agrees that it will (i) cause
each issuer of the Pledged Collateral that is a Subsidiary of such Pledgor not
to issue any other Equity Interests in addition to or in substitution for the
Pledged Collateral issued by such issuer, except to such Pledgor or any other
Pledgor and (ii) pledge hereunder, immediately upon its acquisition
(directly or indirectly) thereof, any additional Equity Interests of an issuer
acquired by such Pledgor.  No Pledgor
shall approve any amendment or modification of any of the Pledged Collateral
without the Administrative Agent’s prior written consent.


 


4.03         Jurisdiction of
Formation; Name Change.  Each Pledgor
shall give the Administrative Agent at least 30 days’ prior written notice
before it (i) in the case of a Pledgor that is not a “registered
organization” (as defined in Section 9-102 of the UCC) changes the
location of its principal place of business and chief executive office, or (ii) uses
a trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the respective Credit Agreement, no Pledgor shall amend, supplement, modify
or restate its articles or certificate of incorporation, bylaws, limited
liability company agreements, or other equivalent organizational documents, nor
amend its name or change its jurisdiction of incorporation, organization or
formation.


 


Section 5.              Remedies Upon Default.  If any event
of default shall have occurred and be continuing:


 


5.01         UCC Remedies.  To the extent permitted by law, the
Administrative Agent may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for in this Pledge Agreement or
otherwise available to it, all the rights and remedies of a Administrative
Agent under the UCC (whether or not the UCC applies to the affected Pledged
Collateral).


 


5.02         Dividends and Other
Rights.


 


(a)           All
rights of the Pledgors to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 2.04(a) may
be exercised by the Administrative Agent if the Administrative Agent so elects
and gives written notice of such election to the affected Pledgor and all
rights of the Pledgors to receive any Distributions on or in respect of the
Pledged Collateral and the proceeds of sale of the Pledged Collateral which it
would otherwise be authorized to receive and retain pursuant to Section 2.04(b) shall
cease.


 


H-6





















 


(b)           All
Distributions on or in respect of the Pledged Collateral and the proceeds of
sale of the Pledged Collateral which are received by any Pledgor shall be
received in trust for the benefit of the Administrative Agent, shall be
segregated from other funds of such Pledgor, and shall be promptly paid over to
the Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary indorsement).


 


5.03         Sale of Pledged
Collateral. The Administrative Agent may sell all or part of the Pledged
Collateral at public or private sale, at any of the Administrative Agent’s offices
or elsewhere, for cash, on credit, or for future delivery, and upon such other
terms as the Administrative Agent may deem commercially reasonable in
accordance with applicable laws.  Each
Pledgor agrees that to the extent permitted by law such sales may be made
without notice.  If notice is required by
law, each Pledgor hereby deems 10 days’ advance notice of the time and place of
any public sale or the time after which any private sale is to be made
reasonable notification, recognizing that if the Pledged Collateral threatens
to decline speedily in value or is of a type customarily sold on a recognized
market shorter notice may be reasonable. 
The Administrative Agent shall not be obligated to make any sale of the
Pledged Collateral regardless of notice of sale having been given.  The Administrative Agent may adjourn any
public or private sale from time-to-time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. 
Each Pledgor shall fully cooperate with Administrative Agent in selling
or realizing upon all or any part of the Pledged Collateral.  In addition, each Pledgor shall fully comply
with the securities laws of the United States, the State of Texas, and other
states and take such actions as may be necessary to permit Administrative Agent
to sell or otherwise dispose of any securities representing the Pledged
Collateral in compliance with such laws.


 


5.04         Exempt Sale.  If, in the opinion of the Administrative
Agent, there is any question that a public or semipublic sale or distribution
of any Pledged Collateral will violate any state or federal securities law, the
Administrative Agent in its reasonable discretion (a) may offer and sell
securities privately to purchasers who will agree to take them for investment
purposes and not with a view to distribution and who will agree to imposition
of restrictive legends on the certificates representing the security, or (b) may
sell such securities in an intrastate offering under Section 3(a)(11) of
the Securities Act of 1933, as amended, and no sale so made in good faith by
the Administrative Agent shall be deemed to be not “commercially reasonable”
solely because so made.  Each Pledgor
shall cooperate fully with the Administrative Agent in selling or realizing
upon all or any part of the Pledged Collateral.


 


5.05         Application of
Collateral. The proceeds of any sale, or other realization (other than that
received from a sale or other realization permitted by the Credit Agreement)
upon all or any part of the Pledged Collateral pledged by the Pledgors shall be
applied by the Administrative Agent as set forth in Section 7.06 of the
Credit Agreement.


 


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


 


H-7





















 


sole discretion.  No failure on the part of the Administrative
Agent to exercise, and no delay in exercising, and no course of dealing with
respect to, any such right, power or remedy, shall operate as a waiver thereof,
nor shall any single or partial exercise of any such rights, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right.


 


Section 6.              Administrative Agent As Attorney-In-Fact For Pledgor.


 


6.01         Administrative
Agent Appointed Attorney-in-Fact. 
Each Pledgor hereby irrevocably appoints the Administrative Agent as
such Pledgor’s attorney-in-fact, with full authority after the occurrence and
during the continuance of an Event of Default to act for such Pledgor and in
the name of such Pledgor, and, in the Administrative Agent’s discretion, to
take any action and to execute any instrument which the Administrative Agent
may deem reasonably necessary or advisable to accomplish the purposes of this
Pledge Agreement, including, without limitation, to receive, indorse, and
collect all instruments made payable to such Pledgor representing any dividend,
or the proceeds of the sale of the Pledged Collateral, or other distribution in
respect of the Pledged Collateral and to give full discharge for the same.  Each
Pledgor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an
interest.


 


6.02         Administrative Agent May Perform.
The Administrative Agent may from time-to-time, at its option but at the
Pledgors’ expense, perform any act which any Pledgor agrees hereunder to
perform and which such Pledgor shall fail to perform after being requested in
writing so to perform (it being understood that no such request need be given
after the occurrence and during the continuance of any Event of Default and
after notice thereof by the Administrative Agent to the affected Pledgor) and
the Administrative Agent may from time-to-time take any other action which the
Administrative Agent reasonably deems necessary for the maintenance,
preservation or protection of any of the Pledged Collateral or of its security
interest therein.  The Administrative
Agent shall provide notice to the affected Pledgor of any action taken
hereunder; provided however, the failure to provide such notice shall not be
construed as a waiver of any rights of the Administrative Agent provided under
this Pledge Agreement or under applicable law.


 


6.03         Administrative Agent
Has No Duty.  The powers conferred on
the Administrative Agent hereunder are solely to protect its interest in the
Pledged Collateral and shall not impose any duty on it to exercise any such
powers.  Except for reasonable care of
any Pledged Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Administrative Agent shall have no duty as to any
Pledged Collateral or responsibility for taking any necessary steps to preserve
rights against prior parties or any other rights pertaining to any Pledged
Collateral.


 


6.04         Reasonable Care.  The Administrative Agent shall be deemed to
have exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
property, it being understood that the Administrative Agent shall have no
responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders, or other matters relative
to any Pledged Collateral, whether or not the Administrative Agent has or is
deemed to have knowledge of such matters, or 


 


H-8





















 


(b) taking any
necessary steps to preserve rights against any parties with respect to any
Pledged Collateral.


 


Section 7.              Miscellaneous.


 


7.01         Expenses.  The Pledgors will upon demand pay to the
Administrative Agent for its benefit and the benefit of the other Secured
Parties the amount of any reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of its counsel and of any experts, which the
Administrative Agent and the other Lenders may incur in connection with (a) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Pledged Collateral, (b) the exercise or
enforcement of any of the rights of the Administrative Agent or any Lender or
any other Lenders hereunder, and (c) the failure by any Pledgor to perform
or observe any of the provisions hereof.


 


7.02         Amendments, Etc.  No amendment or waiver of any provision of
this Pledge Agreement nor consent to any departure by any Pledgor herefrom
shall be effective unless made in writing and executed by the affected Pledgor
and the Administrative Agent, and such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.


 


7.03         Addresses for Notices.  All notices and other communications provided
for hereunder shall be in the manner and to the addresses set forth in the
Credit Agreement.


 


7.04         Continuing
Security Interest; Transfer of Interest.


 


(a)           This
Pledge Agreement shall create a continuing security interest in the Pledged
Collateral and, unless expressly released by the Administrative Agent, shall (i) remain
in full force and effect until the indefeasible payment in full in cash of, and
termination of, the Secured Obligations and the termination of the Commitments
under the Credit Agreement, (ii) be binding upon the Pledgors, the
Administrative Agent, the Lenders and their successors, and assigns, and (iii) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, and the Lenders
and their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Secured Party assigns or otherwise transfers any
interest held by it under either the Credit Agreement or other Loan Document to
any other Person pursuant to the terms of the Credit Agreement or such other
Loan Document, that other Person shall thereupon become vested with all the
benefits held by such Secured Party under this Pledge Agreement.


 


(b)           Upon
the indefeasible payment in full and termination of the Secured Obligations,
the termination of all Commitments under the Credit Agreement, and the
termination of the Credit Agreement in writing, the security interest granted
hereby shall terminate and all rights to the Pledged Collateral shall revert to
the applicable Pledgor to the extent such Pledged Collateral shall not have
been sold or otherwise applied pursuant to the terms hereof.  Upon any such termination, the Administrative
Agent will, at the Pledgors’ expense, deliver all Pledged Collateral to the
applicable Pledgor, execute and 


 


H-9





















 


deliver to the applicable Pledgor such documents as such Pledgor shall
reasonably request and take any other actions reasonably requested to evidence
or effect such termination.


 


7.05         Waivers.  Each Pledgor hereby waives:


 


(a)           promptness,
diligence, notice of acceptance, and any other notice with respect to any of
the Secured Obligations and this Pledge Agreement;


 


(b)           any
requirement that the Administrative Agent or any Secured Party protect, secure,
perfect, or insure any Lien or any Property subject thereto or exhaust any
right or take any action against any Pledgor, any Guarantor, or any other
Person or any collateral; and


 


(c)           any
duty on the part of the Administrative Agent to disclose to any Pledgor any
matter, fact, or thing relating to the business, operation, or condition of any
Pledgor, any Guarantor, or any other Person and their respective assets now
known or hereafter known by such Person.


 


7.06         Severability.  Wherever possible each provision of this
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Pledge Agreement shall
be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Pledge
Agreement.


 


7.07         Choice of Law.  This Pledge Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas,
except to the extent that the validity or perfection of the security interests
hereunder, or remedies hereunder, in respect of any particular Pledged
Collateral are governed by the laws of a jurisdiction other than the State of
Texas.


 


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


 


7.09         Headings.  Paragraph headings have been inserted in this
Pledge Agreement as a matter of convenience for reference only and it is agreed
that such paragraph headings are not a part of this Pledge Agreement and shall
not be used in the interpretation of any provision of this Pledge Agreement.


 


7.10         Reinstatement.  If, at any time after payment in full of all
Secured Obligations and termination of the Administrative Agent’s security
interest, any payments on the Secured Obligations previously made must be
disgorged by any Secured Party for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any Pledgor or any
other Person, this Pledge Agreement and the Administrative Agent’s security 


 


H-10





















 


interests herein shall be
reinstated as to all disgorged payments as though such payments had not been
made, and each Pledgor shall sign and deliver to the Administrative Agent all
documents, and shall do such other acts and things, as may be necessary to
reinstate and perfect the Administrative Agent’s security interest.  EACH
PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER SECURED PARTY FROM AND
AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 7.10
(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH
ACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
ARISING AS A RESULT OF THE INDEMNIFIED SECURED PARTY’S  OWN
NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED SECURED PARTY’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.


 


7.11         Conflicts.  In the event of any explicit or implicit
conflict between any provisions of this Pledge Agreement and any provision of
the Credit Agreement, the terms of the Credit Agreement shall be controlling.


 


7.12         Additional Pledgors. 
Pursuant to Section 6.15 of the Credit Agreement, certain
Subsidiaries of the Borrower that were not in existence on the date of the
Credit Agreement are required to enter into this Pledge Agreement as
Pledgors.  Upon execution and delivery
after the date hereof by the Administrative Agent and such Subsidiary of an
instrument in the form of Annex 1, such Subsidiary shall become a Pledgor
hereunder with the same force and effect as if originally named as a Pledgor
herein.  The execution and delivery of
any instrument adding an additional Pledgor as a party to this Pledge Agreement
shall not require the consent of any other Pledgor hereunder.  The rights and obligations of each Pledgor
hereunder shall remain in full force and effect notwithstanding the addition of
any new Pledgor as a party to this Pledge Agreement.


 


7.13         Subordination and
Intercreditor Agreement.  Reference is made to the Subordination and
Intercreditor Agreement, dated as of December 17, 2008 (as amended,
restated, supplemented or otherwise modified from time to time, the “Subordination
and Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal
Equities, Inc.,  as
Subordinated Agent, and certain other persons, party or that may become party
thereto from time to time.  Notwithstanding
anything herein to the contrary, this Pledge Agreement, the Liens granted
to the Administrative Agent pursuant to this Pledge Agreement and the exercise
of any right or remedy by the Administrative Agent or any of the Lenders
hereunder are subject to the provisions of the Subordination and Intercreditor
Agreement.  In the event of any conflict
between the terms of the Subordination and Intercreditor Agreement and this
Pledge Agreement, the terms of the Subordination and Intercreditor Agreement
shall govern and control.


 


7.14         Entire
Agreement.  THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE CONTRADICTED BY 


 


H-11





















 


EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.


 


[SIGNATURE PAGES FOLLOW]


 


H-12





















 


The parties
hereto have caused this Pledge Agreement to be duly executed as of the date
first above written.


 


	
   

  	
  PLEDGORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial

  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial

  Officer

  
					



 


H-13





















 


	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Ted A. McNulty

  
	
   

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Derrick Pan

  
	
   

  	
  Vice President

  
				



 


H-14
















 


SCHEDULE
2.02(a)


 


PLEDGED
COLLATERAL


 


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


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  
	
  None

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


H-15





















 


SCHEDULE
2.02(b)


 


PLEDGED COLLATERAL


 


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


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Partnership

  Interest

  	
   

  	
  % of Partnership Interest

  Owned

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  Limited Partnership Interest

  	
   

  	
  95% Limited Partnership Interest

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Operating Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  
	
  WO Energy, Inc.

  	
   

  	
  W.O. Production Company, Ltd.

  	
   

  	
  General Partnership Interest

  	
   

  	
  5% General Partnership Interest

  



 


H-16





















 


SCHEDULE
2.02(c)


 


PLEDGED COLLATERAL


 


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


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of

  Shares

  	
   

  	
  % of

  Shares

  Owned

  	
   

  	
  Certificate

  No.

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Square One
  Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,500

  	
   

  	
  100

  	
  %

  	
  4

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  Ladder
  Companies, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,000

  	
   

  	
  100

  	
   

  	
  7

  	
   

  
	
  Cano Petroleum, Inc.

  	
   

  	
  W.O. Energy
  of Nevada, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,200

  	
   

  	
  100

  	
  %

  	
  5

  	
   

  
	
  W.O. Energy of Nevada, Inc.

  	
   

  	
  WO
  Energy, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  1,100

  	
   

  	
  100

  	
  %

  	
  6

  	
   

  
	
  Cano Petroleum Inc.

  	
   

  	
  Cano Petro
  of New Mexico, Inc.

  	
   

  	
  Common Stock

  	
   

  	
  100

  	
   

  	
  100

  	
  %

  	
  1

  	
   

  



 


H-17





















 


SCHEDULE 3


 


PLEDGOR INFORMATION


 


	
  Grantor:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  3664494

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  77-0635673

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  113518200

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2303966

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  



 


H-18





















 


	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  



 


H-19





















 


Annex 1 to the


Subordinated Pledge Agreement


 


SUPPLEMENT
NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Subordinated Pledge Agreement dated as of December 17,
2008 (as amended, supplemented or otherwise modified from time to time, the “Pledge
Agreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and UnionBanCal Equities, Inc.
as Administrative Agent (in such capacity, the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined) for the benefit of the Lenders
(as hereinafter defined).


 


RECITALS


 


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


 


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


 


C.            Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Pledge Agreement
and the Credit Agreement.


 


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


 


(a)           In accordance with Section 7.12
of the Pledge Agreement, the New Pledgor by its signature below becomes a
Pledgor under the Pledge Agreement with the same force and effect as if
originally named therein as a Pledgor and the New Pledgor hereby agrees (a) to
all the terms and provisions of the Pledge Agreement applicable to it as a
Pledgor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Pledgor thereunder are true and
correct on and as of the date hereof in all material respects.  In furtherance of the foregoing, the New
Pledgor, as security for the payment and performance in full of the Secured
Obligations, does hereby create and grant to the Administrative Agent, its
successors and assigns, for the benefit of the Secured Parties, their
successors and assigns, a continuing security interest in and lien on all of
the New Pledgor’s right, title and interest in and to the Pledged Collateral of
the New Pledgor.  Each reference to a “Pledgor”
in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporated
herein by reference.


 


H-20





















 


(b)           The New Pledgor represents and
warrants to the Administrative Agent and the other Secured Parties that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).


 


(c)           This Supplement may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the New Pledgor and the
Administrative Agent.  Delivery of an
executed signature page to this Supplement by facsimile transmission shall
be as effective as delivery of a manually signed counterpart of this
Supplement.


 


(d)           The New Pledgor hereby represents and
warrants that (a) set forth on Schedules 2.02(a), 2.02(b), and 2.02(c) attached
hereto are true and correct schedules of all its Membership Interests,
Partnership Interests and Pledged Shares, as each term is defined in the Pledge
Agreement, and (b) set forth on Schedule 3 attached hereto are its sole
jurisdiction of formation, type of organization, its federal tax identification
number and the organizational number, and all names used by it during the last
five years prior to the date of this Supplement.


 


(e)           Except as expressly supplemented
hereby, the Pledge Agreement shall remain in full force and effect.


 


(f)            THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS.


 


(g)           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Pledge Agreement shall not in
any way be affected or impaired.  The
parties hereto shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.


 


(h)           All communications and notices
hereunder shall be in writing and given as provided in the Pledge
Agreement.  All communications and
notices hereunder to the New Pledgor shall be given to it at the address set
forth under its signature hereto.


 


H-21





















 


(i)            The
New Pledgor agrees to reimburse the Administrative Agent for its reasonable
out-of-pocket expenses in connection with this Supplement, including the reasonable
fees, other charges and disbursements of counsel for the Administrative Agent.


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


[SIGNATURES PAGES FOLLOW]


 


H-22





















 


IN WITNESS WHEREOF, the New Pledgor and the Administrative Agent have
duly executed this Supplement to the Pledge Agreement as of the day and year
first above written.


 


	
   

  	
  NEW
  PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  [                                                                                                        ]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name

  	
   

  
	
   

  	
  Title

  	
   

  
									



 


H-23





















 


Schedules


Supplement No.      


to the Pledge Agreement


 


Pledged Collateral of the New Pledgor


 


SCHEDULE 2.02(a)


 


	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 2.02(b)


 


	
  Issue

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE
2.02(c)


 


	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of

  Shares

  	
   

  	
  % of Shares

  Owned

  	
   

  	
  Certificate No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 3


 


	
  New Pledgor:

  	
                                                                               

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
                                                                               

  
	
   

  	
   

  
	
  Type of Organization:

  	
                                                                               

  
	
   

  	
   

  
	
  Organizational Number:

  	
                                                                               

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
                                                                               

  
	
   

  	
   

  
	
   

  	
  Prior Names:

  	
                                                                               

  
			



 


H-24




















 


EXHIBIT I


 


FORM OF SECURITY AGREEMENT


 


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


 


RECITALS


 


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


 


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


 


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


 


AGREEMENT


 


NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Grantor hereby
agrees with the Administrative Agent for its benefit and the benefit of the
Secured Parties as follows:


 


Section 1.              Definitions; Interpretation.  (a) all capitalized terms not otherwise
defined in this security agreement that are defined in the credit agreement
shall have the meanings assigned to such terms by the credit agreement.  Any terms used in this security agreement
that are defined in the ucc (as defined below) and not otherwise defined herein
or in the credit agreement, shall have the meanings assigned to those terms by
the ucc.  The following terms shall have
the meanings specified below:


 


“Accounts”
means an “account” as defined in the UCC, including, without limitation, all of
any Grantor’s rights to payment for goods sold or leased, services performed,
or otherwise, whether now in existence or arising from time to time hereafter,
including, without limitation, rights arising under any of the Contracts or
evidenced by an account, note, contract, security agreement, Chattel Paper
(including, without limitation, tangible Chattel Paper and electronic Chattel
Paper), or other evidence of indebtedness or security, together with all of the
right, title and interest of any Grantor in and to (i) all security 


 


I-1

















 


pledged, assigned,
hypothecated or granted to or held by any Grantor to secure the foregoing, (ii) all
of any Grantor’s right, title and interest in and to any goods or services, the
sale of which gave rise thereto, (iii) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (iv) all powers of
attorney granted to any Grantor for the execution of any evidence of indebtedness
or security or other writing in connection therewith, (v) all books,
correspondence, credit files, records, ledger cards, invoices, and other papers
relating thereto, including without limitation all similar information stored
on a magnetic medium or other similar storage device and other papers and
documents in the possession or under the control of any Grantor or any computer
bureau from time to time acting for any Grantor, (vi) all evidences of the
filing of financing statements and other statements granted to any Grantor and
the registration of other instruments in connection therewith and amendments
thereto, notices to other creditors or secured parties, and certificates from
filing or other registration officers, (vii) all credit information,
reports and memoranda relating thereto, and (viii) all other writings
related in any way to the foregoing.


 


“Cash
Collateral” means all amounts from time to time held in any checking,
savings, deposit or other account of such Grantor, including, if applicable, the
Cash Collateral Account, all monies, proceeds or sums due or to become due
therefrom or thereon and all documents (including, but not limited to
passbooks, certificates and receipts) evidencing all funds and investments held
in such accounts.


 


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


 


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


 


“Contracts”
means all contracts to which any Grantor now is, or hereafter will be bound, or
to which such Grantor is or hereafter will be a party, beneficiary or assignee,
all Insurance Contracts, and all exhibits, schedules and other attachments to
such contracts, as the same may be amended, supplemented or otherwise modified
or replaced from time to time.


 


“Contract
Documents” means all Instruments, Chattel Paper, letters of credit, bonds,
guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.


 


“Contract Rights”
means (i) all (A) of any Grantor’s rights to payment under any
Contract or Contract Document and (B) payments due and to become due to
any Grantor under any Contract or Contract Document, in each case whether as
contractual obligations, damages or otherwise; (ii) all of any Grantor’s
claims, rights, powers, or privileges and remedies under any Contract or
Contract Document; and (iii) all of any Grantor’s rights under any
Contract or Contract Document to make determinations, to exercise any election
(including, but not limited to, election of remedies) or option or to give or
receive any notice, consent, waiver or approval together with full power and
authority with respect to any Contract or Contract Document to demand, receive,
enforce or collect any of the foregoing rights or any property which is the
subject of any Contract or 


 


I-2

















 


Contract Document,
to enforce or execute any checks, or other instruments or orders, to file any
claims and to take any action which, in the opinion of any Secured Party, may
be necessary or advisable in connection with any of the foregoing.


 


“Document”
means a bill of lading, dock warrant, dock receipt, warehouse receipt or order
for the delivery of goods, and also any other document which in the regular
course of business or financing is treated as adequately evidencing that the
person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.


 


“Equipment”
means any equipment now or hereafter owned or leased by any Grantor, or in
which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the
equipment), and similar items which relate to the above, and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.


 


“Fixtures”
means any fixtures now or hereafter owned or leased by any Grantor, or in which
any Grantor holds or acquires any other right, title or interest, constituting “fixtures”
under the UCC, including without limitation any and all additions,
substitutions and replacements of any of the foregoing, wherever located
together with all improvements thereon and all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.


 


“General
Intangibles” means all general intangibles now or hereafter owned by any
Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business identifiers, prints, labels, trade styles and service
marks (whether or not registered), trade dress, including logos and/or designs,
copyrights, patents, patent applications, goodwill of any Grantor’s business
symbolized by any of the foregoing, trade secrets, license rights, license
agreements, permits, franchises, and any rights to tax refunds to which any
Grantor is now or hereafter may be entitled.


 


“Hedge Contract”
has the meaning set forth in the Senior Credit Agreement.


 


“Instrument”
means an “instrument” as defined in the UCC, including, without limitation, any
Negotiable Instrument, or any other writing which evidences a right to the
payment 


 


I-3

















 


of money and is
not itself a security agreement or lease and is of a type which is in the
ordinary course of business transferred by delivery with any necessary
endorsement or assignment (other than Instruments constituting Chattel Paper).


 


“Insurance
Contracts” means all contracts and policies of insurance and re-insurance
maintained or required to be maintained by or on behalf of any Grantor under
the Loan Documents.


 


“Inventory”
means all of the inventory of any Grantor, or in which any Grantor holds or
acquires any right, title or interest, of every type or description, now owned
or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary
course of its business, all present and future substitutions therefor, parts
and accessories thereof and all additions thereto, all Proceeds thereof and
products of such inventory in any form whatsoever, and any other item
constituting “inventory” under the UCC.


 


“Investment
Property” means “investment property” as defined in the UCC, including,
without limitation, all securities (whether certificated or uncertificated),
security entitlements, securities accounts, commodity contracts, and commodity
accounts.


 


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


 


“Proceeds”
means all proceeds (as defined in the UCC) of any or all of the Collateral,
including without limitation (i) any and all proceeds of, all claims for,
and all rights of any Grantor to receive the return of any premiums for, any
insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting
under color of any Governmental Authority), (iii) all proceeds received or
receivable when any or all of the Collateral is sold, exchanged or otherwise
disposed, whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) all
claims of any Grantor for damages arising out of, or for breach of or default
under, any Collateral, (v) all rights of any Grantor to terminate, amend,
supplement, modify or waive performance under any Contracts, to perform
thereunder and to compel performance and otherwise exercise all remedies
thereunder, and (vi) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral.


 


“Secured
Obligations” means all Obligations now or hereafter owed by the Borrower,
any Guarantor, or any of their respective Subsidiaries to the Secured Parties,
including any extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise.


 


I-4

















 


“Security
Agreement” means this Subordinated Security Agreement, as the same may be
modified, supplemented or amended from time to time in accordance with its
terms.


 


“UCC” shall
mean the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of Texas; provided, however, in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of the security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of Texas,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions hereof relating to such attachment,
perfection or priority and for purposes of definitions related to such
provisions.


 


(b)           All
meanings to defined terms, unless otherwise indicated, are to be equally
applicable to both the singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Security
Agreement, unless otherwise specified. 
All references to instruments, documents, contracts, and agreements are
references to such instruments, documents, contracts, and agreements as the
same may be amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.  The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Security
Agreement shall refer to this Security Agreement as a whole and not to any
particular provision of this Security Agreement.  As used herein, the term “including” means “including,
without limitation,”. Paragraph headings have been inserted in this Security
Agreement as a matter of convenience for reference only and it is agreed that
such paragraph headings are not a part of this Security Agreement and shall not
be used in the interpretation of any provision of this Security Agreement.


 


Section 2.              Assignment, Pledge And Grant Of
Security Interest.


 


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


 


	
  (i)

  	
   

  	
  all Contracts, all Contract Rights, Contract
  Documents and Accounts associated with such Contracts and each and every
  document granting security to such Grantor under any such Contract;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  all Accounts;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  all Inventory;

  
	
   

  	
   

  	
   

  
	
  (iv)

  	
   

  	
  all Equipment;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  all General Intangibles;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  all Investment Property;

  



 


I-5

















 


	
  (vii)

  	
   

  	
  all Fixtures;

  
	
   

  	
   

  	
   

  
	
  (viii)

  	
   

  	
  all Cash Collateral;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  any Legal Requirements now or hereafter held by such
  Grantor (except that any Legal Requirement which would by its terms or under
  applicable law become void, voidable, terminable or revocable by being
  subjected to the Lien of this Security Agreement or in which a Lien is not
  permitted to be granted under applicable law, is hereby excluded from such
  Lien to the extent necessary so as to avoid such voidness, voidability,
  terminability or revocability);

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  any right to receive a payment under any Hedge
  Contract in connection with a termination thereof;

  
	
   

  	
   

  	
   

  
	
  (xi)

  	
   

  	
  (A) all policies of insurance and Insurance
  Contracts, now or hereafter held by or on behalf of such Grantor, including
  casualty and liability, business interruption, and any title insurance,
  (B) all Proceeds of insurance, and (C) all rights, now or hereafter
  held by such Grantor to any warranties of any manufacturer or contractor of
  any other Person;

  
	
   

  	
   

  	
   

  
	
  (xii)

  	
   

  	
  any and all liens and security interests (together
  with the documents evidencing such security interests) granted to such
  Grantor by an obligor to secure such obligor’s obligations owing under any
  Instrument, Chattel Paper, or Contract which is pledged hereunder or with
  respect to which a security interest in such Grantor’s rights in such
  Instrument, Chattel Paper, or Contract is granted hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiii)

  	
   

  	
  any and all guaranties given by any Person for the
  benefit of such Grantor which guarantees the obligations of an obligor under
  any Instrument, Chattel Paper or Contract, which are pledged hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiv)

  	
   

  	
  without limiting the generality of the foregoing,
  all other personal property, goods, Instruments, Chattel Paper, Documents,
  Fixtures, credits, claims, demands and assets of such Grantor whether now
  existing or hereafter acquired from time to time; and

  
	
   

  	
   

  	
   

  
	
  (xv)

  	
   

  	
  any and all additions, accessions and improvements
  to, all substitutions and replacements for and all products and Proceeds of
  or derived from all of the items described above in this Section 2.

  



 


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


 


I-6

















 


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


 


Section 3.              Representations And Warranties.  Each grantor hereby represents and warrants
the following to the administrative agent and the other secured parties:


 


(i)            Records.  Such Grantor’s sole jurisdiction of formation
and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the
Accounts, General Intangibles, or any other Collateral applicable to such
Grantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by a promissory
note or other instrument.


 


(ii)           Other Liens.  Such Grantor is, and will be the record,
legal, and beneficial owner of all of the Collateral pledged by such Grantor
free and clear of any Lien, except for the Permitted Liens.  No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is, or
will be, on file in any recording office, except such as may be filed in
connection with this Security Agreement or in connection with other Permitted
Liens or for which satisfactory releases have been received by the
Administrative Agent.


 


(iii)          Lien Priority and
Perfection.


 


Subject only to Permitted
Liens, this Security Agreement creates valid and continuing security interests
in the Collateral, securing the payment and performance of all the Secured
Obligations.  Upon the filing of
financing statements with the jurisdiction listed in Schedule 1, the
security interests granted to the Administrative Agent hereunder will
constitute valid first-priority perfected security interests in all Collateral
with respect to which a security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens.


 


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


 


I-7

















 


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


 


(v)           Tradenames; Prior
Names.  Except as set forth on Schedule
1, such Grantor has not conducted business under any name other than its
current name during the last five years prior to the date of this Security
Agreement.


 


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


 


Section 4.              Covenants.


 


(i)            Further
Assurances.


 


Each Grantor agrees that
from time to time, at its expense, such Grantor shall promptly execute and
deliver all instruments and documents, and take all action, that may be
reasonably necessary or desirable, or that the Administrative Agent may
reasonably request, in order to perfect and protect any pledge, assignment, or
security interest granted or intended to be granted hereby or to enable the
Administrative Agent to exercise and enforce its rights and remedies hereunder
with respect to any Collateral.  Without
limiting the generality of the foregoing, each Grantor (A) at the request
of the Administrative Agent, shall execute such instruments, endorsements or
notices, as may be reasonably necessary or desirable or as the Administrative
Agent may reasonably request, in order to perfect and preserve the assignments
and security interests granted or purported to be granted hereby, (B) shall,
at the reasonable request of the Administrative Agent, mark conspicuously each
material document included in the Collateral, each Chattel Paper included in
the Accounts, and each of its records pertaining to the Collateral with a
legend, in form and substance satisfactory to the Administrative Agent,
including that such document, Chattel Paper, or record is subject to the
pledge, assignment, and security interest granted hereby, (C) shall, if
any Collateral shall be evidenced by a promissory note or other instrument or
chattel paper, deliver and pledge to the Administrative Agent hereunder such
note or instrument or chattel paper duly endorsed and accompanied by duly
executed instruments of transfer or assignment, all in form and substance
satisfactory to the Administrative Agent, and (D) authorizes the
Administrative Agent to file any financing statements, amendments or
continuations without the signature of such Grantor to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under this Security Agreement (including, without limitation,
financing statements using an “all assets” or “all personal property”
collateral description).


 


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


 


I-8

















 


Each Grantor shall
promptly provide to the Administrative Agent all information and evidence the
Administrative Agent may reasonably request concerning the Collateral to enable
the Administrative Agent to enforce the provisions of this Security Agreement.


 


(ii)           Change of Name;
State of Formation.  Each Grantor
shall give the Administrative Agent at least 30 days’ prior written notice
before it (i) in the case of any Grantor that is not a “registered
organization” (as such term is defined in Section 9-102 of the UCC),
changes the location of its principal place of business and chief executive
office, (ii) changes the location of its jurisdiction of formation or
organization, (iii) changes the location of the Equipment, Inventory, or
original copies of any Chattel Paper evidencing Accounts, or (iv) uses a
trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the Credit Agreement, no Grantor shall amend, supplement, modify or restate
its articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent organizational documents, nor amend its name or
change its jurisdiction of incorporation, organization or formation.


 


(iii)          Right of Inspection.  Each Grantor shall hold and preserve, at its
own cost and expense satisfactory and complete records of the Collateral,
including, but not limited to, Instruments, Chattel Paper, Contracts, and
records with respect to the Accounts, and will permit representatives of the
Administrative Agent, upon reasonable advance notice, at any time during normal
business hours to inspect and copy them. 
Upon the occurrence and during the continuation of any Event of Default,
at the Administrative Agent’s request, each Grantor shall promptly deliver
copies of any and all such records to the Administrative Agent.


 


(iv)          Liability Under
Contracts and Accounts. 
Notwithstanding anything in this Security Agreement to the contrary, (i) the
execution of this Security Agreement shall not release any Grantor from its
obligations and duties under any of the Contract Documents, or any other
contract or instrument which are part of the Collateral and Accounts included
in the Collateral, (ii) the exercise by the Administrative Agent of any of
its rights hereunder shall not release any Grantor from any of its duties or
obligations under any Contract Documents, or any other Contract or Instrument
which are part of the Collateral and Accounts included in the Collateral, and (iii) the
Administrative Agent shall not have any obligation or liability under any
Contract Documents, or any other contract or instrument which are part of the
Collateral and Accounts included in the Collateral by reason of the execution
and delivery of this Security Agreement, nor shall the Administrative Agent be
obligated to perform any of the obligations or duties of any Grantor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.


 


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


 


(vi)          Accounts.  Each Grantor agrees that it will use
commercially reasonable efforts to ensure that each Account (i) is and
will be, in all material respects, the genuine, legal, valid, and 


 


I-9

















 


binding obligations of the account debtor in respect
thereof, representing an unsatisfied obligation of such account debtor, (ii) is
and will be, in all material respects, enforceable in accordance with its
terms, (iii) is not and will not be subject to any setoffs, defenses,
taxes, counterclaims, except in the ordinary course of business, (iv) is
and will be, in all material respects, in compliance with all applicable laws,
whether federal, state, local or foreign, and (v) which if evidenced by
Chattel Paper, will not require the consent of the account debtor in respect
thereof in connection with its assignment hereunder.


 


(vii)         Negotiable Instrument.  If any Grantor shall at any time hold or
acquire any Negotiable Instruments, including promissory notes, such Grantor
shall forthwith endorse, assign and deliver the same to the Administrative
Agent, accompanied by such instruments of transfer or assignment duly executed
in blank as the Administrative Agent may from time to time reasonably request.


 


(viii)        Other Covenants of
Grantor.  Each Grantor agrees that (i) any
action or proceeding to enforce this Security Agreement may be taken by the
Administrative Agent either in such Grantor’s name or in the Administrative
Agent’s name, as the Administrative Agent may deem necessary, and (ii) such
Grantor will, until the indefeasible payment in full in cash of the Secured
Obligations and the termination or expiration of the Commitments, warrant and
defend its title to the Collateral and the interest of the Administrative Agent
in the Collateral against any claim or demand of any Persons (other than
Permitted Liens) which could reasonably be expected to materially adversely
affect such Grantor’s title to, or the Administrative Agent’s right or interest
in, such Collateral.


 


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


 


Section 6.              Reinstatement.  If, at any time after payment in full of all secured
obligations and termination of the administrative agent’s security interest,
any payments on the secured obligations previously made must be disgorged by
the administrative agent for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any grantor or any
other person, this security agreement and the administrative agent’s security
interests herein shall be reinstated as to all disgorged payments as though
such payments had not been made, and each grantor shall sign and deliver to the
administrative agent all documents, and shall do such other acts and things, as
may be necessary to reinstate and perfect the administrative agent’s security
interest.  EACH GRANTOR SHALL DEFEND AND INDEMNIFY THE
ADMINISTRATIVE AGENT AND EACH OTHER ADMINISTRATIVE AGENT FROM AND AGAINST ANY
CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 6
(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH
ACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, 


 


I-10

















 


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


 


Section 7.              Remedies Upon Event Of Default.


 


(a)           If any Event of Default
has occurred and is continuing, the Administrative Agent may (and shall at the
written request of the Majority Lender), (i) proceed to protect and
enforce the rights vested in it by this Security Agreement or otherwise
available to it, including but not limited to, the right to cause all revenues
and other moneys pledged hereby as Collateral to be paid directly to it, and to
enforce its rights hereunder to such payments and all other rights hereunder by
such appropriate judicial proceedings as it shall deem most effective to
protect and enforce any of such rights, either at law or in equity or
otherwise, whether for specific enforcement of any covenant or agreement
contained in any of the Contract Documents, or in aid of the exercise of any
power therein or herein granted, or for any foreclosure hereunder and sale
under a judgment or decree in any judicial proceeding, or to enforce any other
legal or equitable right vested in it by this Security Agreement or by law; (ii) cause
any action at law or suit in equity or other proceeding to be instituted and
prosecuted and enforce any rights hereunder or included in the Collateral,
subject to the provisions and requirements thereof; (iii) sell or
otherwise dispose of any or all of the Collateral or cause the Collateral to be
sold or otherwise disposed of in one or more sales or transactions, at such
prices and in such manner as may be commercially reasonable, and for cash or on
credit or for future delivery, without assumption of any credit risk, at public
or private sale, without demand of performance or notice of intention to sell
or of time or place of sale (except such notice as is required by applicable
statute and cannot be waived), it being agreed that the Administrative Agent
may be a purchaser on behalf of the Secured Parties or on its own behalf at any
such sale and that the Administrative Agent, any other Secured Party, or any
other Person who may be a bona fide purchaser for value and without notice of
any claims of any or all of the Collateral so sold shall thereafter hold the
same absolutely free from any claim or right of whatsoever kind, including any
equity of redemption of any Grantor, any such demand, notice or right and
equity being hereby expressly waived and released to the extent permitted by
law; (iv) incur reasonable expenses, including reasonable attorneys’ fees,
reasonable consultants’ fees, and other costs appropriate to the exercise of
any right or power under this Security Agreement; (v) perform any
obligation of any Grantor hereunder and make payments, purchase, contest or
compromise any encumbrance, charge or lien, and pay taxes and expenses, without,
however, any obligation to do so; (vi) in connection with any acceleration
and foreclosure, take possession of the Collateral and render it usable and
repair and renovate the same, without, however, any obligation to do so, and
enter upon any location where the Collateral may be located for that purpose,
control, manage, operate, rent and lease the Collateral, collect all rents and
income from the Collateral and apply the same to reimburse the Secured Parties
for any cost or expenses incurred hereunder or under any of the Loan Documents
and to the payment or performance of any Grantor’s obligations hereunder or
under any of the Loan Documents, and apply the balance to the other Secured
Obligations and any remaining excess balance to whomsoever is legally entitled
thereto; (vii) secure the appointment of a receiver for the Collateral or
any part thereof; (viii) require any Grantor to, and 


 


I-11

















 


each Grantor hereby agrees that it will at its expense
and upon request of the Administrative Agent forthwith, assemble all or part of
the Collateral as directed by the Administrative Agent and make it available to
the Administrative Agent at a place to be designated by the Administrative
Agent which is reasonably convenient to both parties; (ix) exercise any
other or additional rights or remedies granted to a Administrative Agent under
the UCC; or (x) occupy any premises owned or leased by any Grantor where
the Collateral or any part thereof is assembled for a reasonable period in
order to effectuate its rights and remedies hereunder or under law, without
obligation to any Grantor in respect of such occupation.  If, pursuant to applicable law, prior notice
of sale of the Collateral under this Section is required to be given to
any Grantor, each Grantor hereby acknowledges that the minimum time required by
such applicable law, or if no minimum time is specified, 10 days, shall be
deemed a reasonable notice period.   The
Administrative Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. 
The Administrative Agent may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.


 


(b)           All reasonable costs and expenses (including
reasonable attorneys’ fees and expenses) incurred by the Administrative Agent
in connection with any suit or proceeding in connection with the performance by
the Administrative Agent of any of the agreements contained in any of the
Contract Documents, or in connection with any exercise of its rights or
remedies hereunder, pursuant to the terms of this Security Agreement, shall
constitute additional indebtedness secured by this Security Agreement and shall
be paid on demand by the Grantors to the Administrative Agent on behalf of the
Secured Parties.


 


Section 8.              Remedies Cumulative; Delay Not
Waiver.


 


(a)           No right, power or
remedy herein conferred upon or reserved to the Administrative Agent is
intended to be exclusive of any other right, power or remedy and every such
right, power and remedy shall, to the extent permitted by law, be cumulative
and in addition to every other right, power and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or
remedy hereunder or otherwise shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.  Resort to any or all security now or
hereafter held by the Administrative Agent may be taken concurrently or
successively and in one or several consolidated or independent judicial actions
or lawfully taken nonjudicial proceedings, or both.


 


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


 


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


 


I-12





















 


accounts, the
general intangibles, or which otherwise relate to the collateral, including,
without limitation, any rights of any grantor to demand or otherwise require
payment of any amount under, or performance of any provisions of, the
instruments, chattel paper, or contracts which represent accounts, or the
general intangibles.


 


Section 10.            Accounts.


 


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


 


(b)           After receipt by any Grantor of the notice
referred to in Section 10(a) above that an Event of Default has
occurred and is continuing, all amounts and Proceeds (including instruments)
received by such Grantor in respect of the Accounts shall be received in trust
for the benefit of the Administrative Agent hereunder, shall be segregated from
other funds of such Grantor, and shall promptly be paid over to the
Administrative Agent in the same form as so received (with any necessary
indorsement) to be held as Collateral. 
No Grantor shall adjust, settle, or compromise the amount or payment of
any Account, nor release wholly or partly any account debtor or obligor
thereof, nor allow any credit or discount thereon other than in the ordinary
course of business and consistent with past practices.


 


Section 11.            Application Of Collateral.  The proceeds of any sale, or other
realization (other than that received from a sale or other realization
permitted by the senior credit agreement) upon all or any part of the
collateral pledged by any grantor shall be applied by the administrative agent
as set forth in section 7.06 of the credit agreement.


 


Section 12.            Administrative Agent As
Attorney-In-Fact For Grantor.  Each grantor
hereby constitutes and irrevocably appoints the administrative agent, acting
for and on behalf of itself and the secured parties and each successor or
assign of the administrative agent and the secured parties, the true and lawful
attorney-in-fact of such grantor, with full power and authority in the place
and stead of such grantor and in the name of such grantor, the administrative
agent or otherwise to, following the occurrence and during the continuation of
an event of default, take any action and execute any instrument at the written
direction of the secured parties and enforce all rights, interests and remedies
of such grantor with respect to the collateral, including the right:


 


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


 


(ii)           to elect remedies
thereunder and to endorse any checks or other instruments or orders in
connection therewith;


 


I-13

















 


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


 


(iv)          to pay, settle or
compromise all bills and claims which may be or become liens or security
interests against any or all of the Collateral, or any part thereof, unless a
bond or other security satisfactory to the Administrative Agent has been
provided; and


 


(v)           upon foreclosure, to do
any and every act which any Grantor may do on its behalf with respect to the
Collateral or any part thereof and to exercise any or all of such Grantor’s
rights and remedies under any or all of the Collateral;


provided, however,
that the Administrative Agent shall not exercise any such rights except upon
the occurrence and continuation of an Event of Default.  This power of attorney is
a power coupled with an interest and shall be irrevocable.


 


Section 13.            Administrative Agent May Perform.  The administrative agent may from
time-to-time perform any act which any grantor has agreed hereunder to perform
and which such grantor shall fail to perform after being requested in writing
so to perform (it being understood that no such request need be given after the
occurrence and during the continuance of any event of default and after notice
thereof by the administrative agent to any grantor) and the administrative
agent may from time-to-time take any other action which the administrative
agent deems necessary for the maintenance, preservation or protection of any of
the collateral or of its security interest therein, and the reasonable expenses
of the administrative agent incurred in connection therewith shall be part of
the secured obligations and shall be secured hereby.


 


Section 14.            Administrative Agent Has No Duty.  The powers conferred on the administrative
agent hereunder are solely to protect its interest in the collateral and shall
not impose any duty on it to exercise any such powers.  Except for reasonable care of any collateral
in its possession and the accounting for moneys actually received by it hereunder,
the administrative agent shall have no duty as to any collateral or
responsibility for taking any necessary steps to preserve rights against prior
parties or any other rights pertaining to any collateral.


 


Section 15.            Reasonable Care.  The administrative agent shall be deemed to
have exercised reasonable care in the custody and preservation of the
collateral in its possession if the collateral is accorded treatment
substantially equal to that which the administrative agent accords its own
property.


 


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


 


Section 17.            Miscellaneous.


 


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


 


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expenses, including the reasonable fees and
disbursements of its counsel and of any experts, which the Administrative Agent
may incur in connection with (i) the custody, preservation, use, or
operation of, or the sale, collection, or other realization of, any of the
Collateral, (ii) the exercise or enforcement of any of the rights of the
Administrative Agent hereunder, and (iii) the failure by any Grantor to
perform or observe any of the provisions hereof.


 


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


 


(viii)        Addresses for Notices.  All notices and other communications provided
for hereunder shall be made in the manner and to the addresses set forth in the
Credit Agreement.


 


(ix)           Continuing Security
Interest; Transfer of Interest.  This
Security Agreement shall create a continuing security interest in the
Collateral and, unless expressly released by the Administrative Agent, shall (a) 
remain in full force and effect until the indefeasible payment in full in cash
of the Secured Obligations, the termination or expiration of all Commitments,
and the termination of the Credit Agreement in writing, (b) be binding
upon each Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, the Lenders and
their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Lender assigns or otherwise transfers any interest
held by it under the Credit Agreement or other Loan Document to any other
Person pursuant to the terms of the Credit Agreement or such other Loan
Document, that other Person shall thereupon become vested with all the benefits
held by such Lender under this Security Agreement.


 


(x)            Severability.  Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Security Agreement.


 


(xi)           Choice of Law.  This Security Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas,
except to the extent that the validity or perfection of the security interests
hereunder, or remedies hereunder, in respect of any particular Collateral are
governed by the laws of a jurisdiction other than the state of Texas.


 


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


 


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(xiii)         Headings.  Paragraph headings have been inserted in this
Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.


 


(xiv)        Conflicts.   In the event of any explicit or
implicit conflict between any provision of this Security Agreement and any
provision of the Credit Agreement, the terms of the Senior Credit Agreement
shall be controlling.


 


(xv)         Additional Grantors.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into this
Security Agreement as a Grantor upon becoming a Subsidiary of the
Borrower.  Upon execution and delivery
after the date hereof by the Administrative Agent and such Subsidiary of an
instrument in the form of Annex 1, such Subsidiary shall become a
Grantor hereunder with the same force and effect as if originally named as a
Grantor herein.  The execution and
delivery of any instrument adding an additional Grantor as a party to this
Security Agreement shall not require the consent of any other Grantor
hereunder.  The rights and obligations of
each Grantor hereunder shall remain in full force and effect notwithstanding
the addition of any new Grantor as a party to this Security Agreement.


 


(xvi)        Subordination
and Intercreditor Agreement. 
Reference is made to the Subordination and Intercreditor Agreement,
dated as of December 17, 2008 (as amended, restated, supplemented or
otherwise modified from time to time, the “Subordination and Intercreditor
Agreement”), among Union Bank of California, N.A., as
Senior Agent, and UnionBanCal Equities, Inc.,  as Subordinated Agent, and certain other persons, party or that may
become party thereto from time to time.  Notwithstanding
anything herein to the contrary, this Security Agreement, the Liens granted
to the Administrative Agent pursuant to this Security Agreement and the exercise
of any right or remedy by the Administrative Agent or any of the Lenders
hereunder are subject to the provisions of the Subordination and Intercreditor
Agreement.  In the event of any conflict
between the terms of the Subordination and Intercreditor Agreement and this
Security Agreement, the terms of the Subordination and Intercreditor Agreement
shall govern and control.


 


(xvii)       Entire Agreement.  THIS SECURITY AGREEMENT
AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


[SIGNATURE PAGES FOLLOW]


 


I-16

















 


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


 


	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial

  
	
   

  	
   

  	
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LADDER
  COMPANIES, INC.

  
	
   

  	
  SQUARE
  ONE ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  CANO
  PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Each by:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial

  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O.
  OPERATING COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial

  
	
   

  	
   

  	
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O.
  PRODUCTION COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ben Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial

  
	
   

  	
   

  	
  Officer

  
					



 


I-17

















 


	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Ted A. McNulty

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Derrick Pan

  
	
   

  	
   

  	
  Vice President

  



 


I-18

















 


SCHEDULE 1


to Security Agreement


 


	
  Grantor:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  3664494

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  77-0635673

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  Ladder Companies, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  2097505

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  73-1282131

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  d/b/a Ladder Energy Company

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  Square One Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  



 


I-19

















 


	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  800262012

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  81-0639886

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  113518200

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2303966

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Nevada

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  



 


I-20

















 


	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  W.O. Operating Company, Ltd.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Limited Partnership

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  9373210

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2675224

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  W.O. Production Company, Ltd.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Limited Partnership

  
	
   

  	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  9295410

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  75-2675222

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  Cano Petro of New Mexico, Inc.

  
	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  Corporation

  



 


I-21

















 


	
  Address where records for Collateral are
  kept:

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
  TX 800782069

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  20-8564572

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  



 


I-22

















 


Annex 1 to the


Security Agreement


 


SUPPLEMENT
NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Subordinated Security Agreement dated as of December 17,
2008 (as amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and UnionBanCal Equities, Inc., as
administrative agent (the “Administrative Agent”) for the ratable
benefit of itself, the Lenders (as defined below) (together with the Lenders,
individually a “Secured Party”, and collectively, the “Secured
Parties”).


 


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


 


F.             Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned
to such terms in the Security Agreement and the Credit Agreement.


 


G.            The Grantors have
entered into the Security Agreement in order to induce the Lenders to make
Advances.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into the
Security Agreement as a Grantor upon becoming a Subsidiary.  Section 17(j) of the Security
Agreement provides that additional Subsidiaries of the Borrower may become
Grantors under the Security Agreement by execution and delivery of an
instrument in the form of this Supplement. 
The undersigned Subsidiary of the Borrower (the “New Grantor”) is
executing this Supplement in accordance with the requirements of the Credit
Agreement to become a Grantor under the Security Agreement.


 


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


 


(j)            In accordance with Section 17(j) of
the Security Agreement, the New Grantor by its signature below becomes a
Grantor under the Security Agreement with the same force and effect as if
originally named therein as a Grantor and the New Grantor hereby agrees (a) to
all the terms and provisions of the Security Agreement applicable to it as a
Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof in all material respects.  In furtherance of the foregoing, the New
Grantor, as security for the payment and performance in full of the Secured
Obligations (as defined in the Security Agreement), does hereby create and
grant to the Administrative Agent, its successors and assigns, for the benefit
of the Secured Parties, their successors and assigns, a continuing security
interest in and lien on all of the New Grantor’s right, title and interest in
and to the Collateral (as defined in the Security Agreement) 


 


I-23

















 


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


 


(k)           The New Grantor
represents and warrants to the Administrative Agent that this Supplement has been
duly authorized, executed and delivered by it and constitutes its legal, valid
and binding obligation, enforceable against it in accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors’ rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).


 


(l)            This Supplement may be
executed in counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute a single contract.  This Supplement shall become effective when
the Administrative Agent shall have received counterparts of this Supplement
that, when taken together, bear the signatures of the New Grantor and the
Administrative Agent.  Delivery of an
executed signature page to this Supplement by facsimile transmission shall
be as effective as delivery of a manually signed counterpart of this
Supplement.


 


(m)          The New Grantor hereby
represents and warrants that set forth on Schedule 1 attached hereto are
(a) its sole jurisdiction of formation and type of organization, (b) the
location of all records concerning its Accounts, General Intangibles, or any
other Collateral, (c) its federal tax identification number and the
organizational number, and (d) all names used by it during the last five
years prior to the date of this Supplement.


 


(n)           Except as expressly
supplemented hereby, the Security Agreement shall remain in full force and
effect.


 


(o)           THIS SUPPLEMENT SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS.


 


(p)           In case any one or more
of the provisions contained in this Supplement should be held invalid, illegal
or unenforceable in any respect, neither party hereto shall be required to
comply with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired.  The
parties hereto shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.


 


I-24

















 


(q)           All communications and
notices hereunder shall be in writing and given as provided in the Security
Agreement.  All communications and
notices hereunder to the New Grantor shall be given to it at the address set
forth under its signature hereto.


 


(r)            The New Grantor agrees
to reimburse the Administrative Agent for its reasonable out-of-pocket expenses
in connection with this Supplement, including the reasonable fees, other
charges and disbursements of counsel for the Administrative Agent.


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.


 


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


 


 


	
   

  	
  [Name of New
  Grantor],

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ADMINISTRATIVE AGENT]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						



 


I-25
















 


Schedule 1


Supplement No.     


to the Security Agreement


 


	
  New Grantor:

  	
  [GRANTOR]

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  [STATE]

  
	
   

  	
   

  
	
  Type of Organization:

  	
  [ENTITY
  TYPE]

  
	
   

  	
   

  
	
  Address where records for Collateral are kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY,
  STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
                                                      

  	
   

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
                                                      

  	
   

  
	
   

  	
   

  
	
  Prior
  Names:

  	
                                                      

  	
   

  



 


I-26

















 


EXHIBIT J


 


FORM OF TRANSFER
LETTERS


 


_________________, 20__


 


	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  



 


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


 


Ladies and Gentlemen:


 


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


 


Pursuant to Article III
of the Mortgage, the Administrative Agent is entitled to receive all of Mortgagor’s
interest in all Hydrocarbons (as defined in the Mortgage), which are covered by
the above-referenced Contract, all products obtained or processed therefrom,
and the revenues and proceeds attributable thereto. The assignment of the
Hydrocarbons, products and proceeds was effective as of 7:00 A.M.,
(Dallas, Texas Time), on December 17, 2008 (“Effective Date”). The
Lenders and the Administrative Agent, however, as provided in Article III,
have permitted Mortgagor to collect the Hydrocarbons and the revenues and
proceeds attributable thereto until the Administrative Agent or the Mortgagor
shall have instructed the seller or purchaser of production to deliver such
Hydrocarbons and all proceeds therefrom directly to the Administrative Agent. The
purpose of this letter is to notify you that, commencing immediately upon the
receipt hereof, and in accordance with the terms and conditions of the
Mortgage, you are to deliver all proceeds attributable to the sale of such
Hydrocarbons pursuant to the above-referenced Contract directly to the
Administrative Agent at its office at 445 South Figueroa Street, 21st Floor,
Los Angeles, California 90071, Telephone (213) 236-7881, Facsimile: (213)
236-7619, Attention: Maggie Elower, or to such other address of which we may
subsequently notify you in writing. If you require the execution of transfer or
division orders, please forward the transfer or division orders to the
Administrative Agent at its address at indicated above, Attention: Maggie
Elower.


 


J-1

















 


Should you have any
questions in connection with any of the foregoing, please do not hesitate to
contact us.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


J-2

















 


EXHIBIT A


 


	
  Name
  and Location of Well

  	
   

  	
  Division Order or Lease No.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  



 


J-3

















 


Exhibit K — Form of Borrower’s Counsel Opinion


 


December 17,
2008


 


UnionBanCal
Equities, Inc.


 Administrative Agent and a Lender, and all the


 other Lenders party to the Subordinated Credit
Agreement


 described below


445
South Figueroa Street


21st Floor


Los
Angeles, California 90071


 


Ladies
and Gentlemen:


 


We
have acted as Texas counsel to Cano Petroleum, Inc., a Delaware
corporation (“Borrower”),
Ladder Companies, Inc., a Delaware corporation (“Ladder”), Square One
Energy, Inc., a Texas corporation (“Square One”), W.O. Energy of Nevada, Inc.,
a Nevada corporation (“WOEN”),
WO Energy, Inc., a Texas corporation (“WOE”), W.O. Operating Company, Ltd., a
Texas limited partnership (“Operating”), W.O. Production Company, Ltd., a Texas
limited partnership (“Production”)
and Cano Petro of New Mexico, Inc., a Texas corporation (“CPNM”, and together with Ladder,
Square One, WOEN, WOE, Operating and Production, the “Guarantors”; Borrower
and the Guarantors are each a “Loan Party” and collectively, the “Loan Parties”;
Borrower and Ladder are collectively, the “Delaware Loan Parties”; and Square One, WOE,
Operating, Production and CPNM are collectively, the “Texas Loan Parties”)
in connection with that certain Subordinated Credit Agreement (herein so
called) dated as of even date herewith, executed by Borrower, UnionBanCal
Equities, Inc., as Administrative Agent (in such capacity, the “Administrative Agent”), and
each financial institution party thereto as a Lender (collectively, the “Lenders”). Capitalized
terms used herein shall, unless otherwise provided herein, have the respective
meanings set forth in the Subordinated Credit Agreement.


 


For
the purpose of rendering the opinions set forth herein, we have been furnished
with and have reviewed the following documents each dated of even date with the
Subordinated Credit Agreement unless otherwise indicated (collectively, the “Transaction Documents”):


 


(a)           the Subordinated Credit Agreement;


 


(b)           the Subordinated Note, executed by
Borrower and payable to the order of the Administrative Agent in the original
principal amount of $25,000,000;


 


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


 


K-1

















 


(d)           the Subordinated Guaranty, executed
by the Guarantors, in favor of the Administrative Agent, for the benefit of the
Beneficiaries (as defined therein);


 


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


 


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


 


(g)           the Subordinated Mortgage, Line of
Credit Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated December 17, 2008, executed by CPNM as Mortgagor in favor
of the Administrative Agent as the Mortgagee (the “New Mexico Mortgage”);


 


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


 


(j)            the Subordination and Intercreditor
Agreement;


 


(j)            the UCC-1 Financing Statement
reflecting Borrower as debtor and the Administrative Agent as secured party, to
be filed in the Office of the Secretary of State of Delaware (the “Borrower Financing Statement”);


 


(k)           the UCC-1 Financing Statement
reflecting Ladder as debtor and the Administrative Agent as secured party, to
be filed in the Office of the Secretary of State of Delaware (the “Ladder Financing Statement”,
and together with the Borrower Financing Statement, the “Delaware Financing Statements”);


 


(l)            the UCC-1 Financing Statement
reflecting Square One as debtor and the Administrative Agent as secured party,
to be filed in the Office of the Secretary of State of Texas (the “Square One Financing Statement”);


 


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


 


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


 


K-2

















 


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


 


(p)           the UCC-1 Financing Statement
reflecting CPNM as debtor and the Administrative Agent as secured party, to be
filed in the Office of the Secretary of State of Texas (the “CPNM Financing Statement”,
and together with the Square One Financing Statement, the WOE Financing
Statement, the Operating Financing Statement and the Production Financing Statement,
the “Texas Financing
Statements”; the Delaware Financing Statements and the Texas
Financing Statements are collectively, the “Financing Statements”).


 


(q)           the UCC-1 Financing Statement
reflecting Borrower as debtor and the Administrative Agent as secured party, to
be filed in certain Oklahoma county filing offices (the “Borrower County Financing Statement”);


 


(r)            the UCC-1 Financing Statement
reflecting Ladder as debtor and the Administrative Agent as secured party, to
be filed in certain Oklahoma county filing offices (the “Ladder County Financing Statement”);


 


(s)           the UCC-1 Financing Statement
reflecting CPNM as debtor and the Administrative Agent as secured party, to be
filed in certain New Mexico county filing offices (the “CPNM
County Financing Statement”);


 


(t)            the UCC-1 Financing Statement
reflecting Square One as debtor and the Administrative Agent as secured party,
to be filed in the County Filing Offices, as defined below (the “Square One County Financing
Statement”);


 


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


 


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


 


(w)          the UCC-1 Financing Statement
reflecting Production as debtor and the Administrative Agent as secured party,
to be filed in the County Filing Offices (the “Production County Financing Statement”,
and together with the Square One County Financing Statement, the WOE County
Financing Statement, the Operating County Financing Statement, the Borrower
County Financing Statement, the Ladder County Financing Statement and the CPNM
County Financing Statement, collectively, the “County
Financing
Statements”).


 


As
used herein, the term “Collateral”
shall mean the non-fixture equipment, accounts, inventory, and general
intangibles and other personal property that is “Collateral” (as defined in the Security Agreement); provided that the Collateral shall exclude
all real property, real estate, leases, and fixtures that are not personal
property. As used herein, the term “Real Property


 


K-3

















 


Collateral” shall mean
the real property, real estate, leases, and fixtures described in the Texas
Mortgage. As used herein, the term “Pledged Collateral” shall mean the “Pledged
Collateral” as defined in the Pledge Agreement.


 


In
addition to the Transaction Documents, other documents we have reviewed in
rendering this opinion, and upon which we have relied, include the following:


 


(a)           the Certificate of Incorporation of
Borrower, certified by the Secretary of State of the State of Delaware on November 25,
2008;


 


(b)           an Officer’s Certificate of Borrower
(the “Borrower’s Officer’s
Certificate”) dated as of December 17, 2008, certifying (i) the
Certificate of Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutions
adopted by the Board of Directors of Borrower authorizing the execution,
delivery, and performance of the Transaction Documents executed by Borrower,
and (iv) the incumbency of officers of Borrower;


 


(c)           a certificate from the Secretary of
State of the State of Delaware indicating that Borrower is in existence and
good standing as of November 25, 2008 (the “Borrower’s Existence and Good Standing Certificate”);


 


(d)           the Certificate of Incorporation of
Ladder, certified by the Secretary of State of the State of Delaware on November 25,
2008;


 


(e)           an Officer’s Certificate of Ladder (“Ladder’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Certificate of
Incorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutions
adopted by the Board of Directors of Ladder authorizing the execution,
delivery, and performance of the Transaction Documents executed by Ladder, and (iv) the
incumbency of officers of Ladder;


 


(f)            a certificate from the Secretary of
State of the State of Delaware indicating that Ladder is in existence and good
standing as of November 25, 2008 (“Ladder’s Existence and Good Standing Certificate”);


 


(g)           the Articles of Incorporation of
Square One, certified by the Secretary of State of the State of Texas on November 25,
2008;


 


(h)           an Officer’s Certificate of Square
One (“Square One’s
Officer’s Certificate”) dated as of December 17, 2008
certifying (i) the Articles of Incorporation of Square One, (ii) the
Bylaws of Square One, (iii) Resolutions adopted by the Board of Directors
of Square One authorizing the execution, delivery, and performance of the
Transaction Documents executed by Square One, and (iv) the incumbency of
officers of Square One;


 


(i)            a certificate from the Secretary of
State of the State of Texas indicating that Square One is in existence as of November 25,
2008 (“Square One’s
Existence Certificate”);


 


K-4

















 


(j)            a certificate, dated November 25,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by Square One of all franchise and similar taxes (“Square One’s Good Standing
Certificate”);


 


(k)           the Articles of Incorporation of
WOEN, certified by the Secretary of State of the State of Nevada on November 25,
2008;


 


(l)            an Officer’s Certificate of WOEN (“WOEN’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Articles of
Incorporation of WOEN, (ii) the Bylaws of WOEN, (iii) Resolutions
adopted by the Board of Directors of WOEN authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOEN, and (iv) the
incumbency of officers of WOEN;


 


(m)          a certificate from the Secretary of
State of the State of Nevada indicating that WOEN is in existence and good
standing as of November 25, 2008 (“WOEN’s Existence and Good Standing Certificate”);


 


(n)           the Articles of Incorporation of WOE,
certified by the Secretary of State of the State of Texas on November 25,
2008;


 


(o)           an Officer’s Certificate of WOE (“WOE’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Articles of
Incorporation of WOE, (ii) the Bylaws of WOE, (iii) Resolutions
adopted by the Board of Directors of WOE authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOE, and (iv) the
incumbency of officers of WOE;


 


(p)           a certificate from the Secretary of
State of the State of Texas indicating that WOE is in existence as of November 25,
2008 (“WOE’s Existence
Certificate”);


 


(q)           a certificate, dated November 25,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by WOE of all franchise and similar taxes (“WOE’s Good Standing Certificate”);


 


(r)            the Certificate of Limited
Partnership of Operating, certified by the Secretary of State of the State of
Texas on November 25, 2008;


 


(s)           an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Operating (“Operating’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Certificate of
Limited Partnership of Operating, (ii) the Agreement of Limited
Partnership of Operating, (iii) Resolutions adopted by Board of Directors
of WOE, acting in its capacity as the sole General Partner of Operating,
authorizing the execution, delivery, and performance of the Transaction
Documents executed by the officers of WOE acting in its capacity as the sole
General Partner of Operating, and (iv) the incumbency of officers of WOE;


 


(t)            a certificate from the Secretary of
State of the State of Texas indicating that Operating is in existence as of November 25,
2008 (“Operating’s
Existence Certificate”);


 


K-5

















 


(u)           the Certificate of Limited
Partnership of Production, certified by the Secretary of State of the State of
Texas on November 25, 2008;


 


(v)           an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Production (“Production’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Certificate of Limited
Partnership of Production, (ii) the Agreement of Limited Partnership of
Production, (iii) Resolutions adopted by Board of Directors of WOE, acting
in its capacity as the sole General Partner of Production, authorizing the
execution, delivery, and performance of the Transaction Documents executed by
the officers of WOE, acting in its capacity as the sole General Partner of
Production, and (iv) the incumbency of officers of WOE;


 


(w)          a certificate from the Secretary of
State of the State of Texas indicating that Production is in existence as of November 25,
2008 (“Production’s
Existence Certificate”);


 


(x)            the Certificate of Formation of
CPNM, certified by the Secretary of State of the State of Texas on November 25,
2008;


 


(y)           an Officer’s Certificate of CPNM (“CPNM’s Officer’s Certificate”)
dated as of December 17, 2008 certifying (i) the Certificate of
Formation of CPNM, (ii) the Bylaws of CPNM, (iii) Resolutions adopted
by the Board of Directors of CPNM authorizing the execution, delivery, and
performance of the Transaction Documents executed by CPNM, and (iv) the
incumbency of officers of CPNM;


 


(z)            a certificate from the Secretary of
State of the State of Texas indicating that CPNM is in existence as of November 25,
2008 (“CPNM’s Existence
Certificate”);


 


(aa)         a certificate, dated November 25,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by CPNM of all franchise and similar taxes (“CPNM’s Good Standing Certificate”);


 


(bb)         a certificate from the officer of the
Borrower, Ladder, Square One, WOEN, WOE, CPNM and WOE as general partner of
Operating and Production dated as of December 17, 2008, certifying as to
certain factual matters, including the Material Agreements.


 


Scope of Examination and General


Assumptions and Qualifications


 


We have been furnished with and examined
originals or copies, certified or otherwise identified to our satisfaction, of
all such records of the Loan Parties, agreements and other instruments,
certificates of officers and representatives of the Loan Parties, certificates
of public officials, and other documents as we have deemed necessary or
desirable as a basis for the opinions hereinafter expressed. As to questions of
fact material to such opinions, we have, without independent verification of
their accuracy, relied to the extent we deem reasonably appropriate upon the
representations and warranties of the Loan Parties made in the Transaction
Documents and upon their respective Officer’s Certificates.


 


K-6

















 


In
making such examinations, we have assumed, with your consent (a) the
genuineness of all signatures (other than the signatures of officers of the
Loan Parties), (b) the authenticity of all documents submitted to us as
originals, (c) the conformity to original documents of all documents
submitted to us as certified or photostatic copies, (d) the authenticity
of the originals of the documents referred to in the immediately preceding clause (c), (e) the
prompt and proper recordation of any Transaction Documents in which recordation
is anticipated, (f) that each party to the Transaction Documents (other
than the Delaware Loan Parties and the Texas Loan Parties) has full power,
authority, and legal right to enter into and perform all agreements to which it
is a party and has duly authorized, executed, and delivered each such
Transaction Document, (g) that the Transaction Documents (other than the
Oklahoma and New Mexico Mortgages) constitute the valid, binding, and
enforceable agreement of all the parties thereto (other than the Loan Parties),
and (h) the correctness and accuracy of all the facts set forth in all
certificates and reports identified in this opinion.


 


We
have been advised by officers of the Loan Parties (and with your consent have
relied on that advice) that the agreements described on Exhibit A
attached hereto (the “Material
Agreements”) are the only agreements and there are no orders,
writs, judgments, or decrees that are material to Borrower or applicable Loan
Party and which, if violated by the execution, delivery, or performance of the
Transaction Documents, could reasonably be expected to have a material adverse
effect on the validity, performance, or enforceability of any Transaction
Document or the ability of any Loan Party to fulfill its material obligations
under the Transaction Documents. We advise you that we have not reviewed, and
have not devoted substantive attention to, any other agreements (other than
those described on Exhibit A)
for the purposes of rendering the opinion set forth in Paragraph 13
below. We have made no examination of, and express no opinion with respect to,
any financial, accounting, or similar covenant or provision contained in the
Material Agreements to the extent that any such covenant or provision would
require a determination as to any financial or accounting matters. In addition,
we express no opinion as to any breach of any confidentiality provision
contained in any Material Agreement caused by any Transaction Document or
Borrower’s or applicable Loan Party’s actions pursuant thereto or in
contemplation thereof. We note that some of the Material Agreements are not
governed by Texas law.  Therefore,
we have assumed that a court would enforce the Material Agreements as written,
and we have limited our opinion to matters readily ascertainable from the face
of the Material Agreements. We also note that some of the Material Agreements
are not assignable by Borrower or applicable Loan Party (the “Non-Assignable Material Agreements”).
As a result, to the extent that the Collateral includes Borrower’s or
applicable Loan Party’s rights under the Material Agreements, we have relied
upon Section 9.408(a) of
the UCC (defined below). We note that any assignment of Non-Assignable Material
Agreements is subject to the limitations set forth in Section 9.408(d) of the UCC.


 


Our
opinions set forth below are limited solely to matters governed by the laws of
the State of Texas, the federal laws of the United States of America, and the
General Corporation Law of the State of Delaware (collectively, “Applicable Law”) and we express no
opinion as to questions concerning the laws of any other jurisdiction. The
opinions expressed herein are limited to the Uniform
Commercial Code as adopted in the State of Texas (the “Texas UCC”) and the
State of


 


K-7
















 


Delaware
(the “Delaware UCC”)
in effect on the date hereof (the Texas UCC and the Delaware UCC are
collectively, the “UCC”).


 


Specific
Limitations and Qualifications on


Opinions
Regarding Enforceability


 


With
respect to our opinion set forth in Paragraph 12 under the heading “Opinions”
below, we advise you that:


 


1.             The enforceability of the
Transaction Documents is subject to (a) the effects of (i) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium,
rearrangement, liquidation, conservatorship, or similar laws of general
application now or hereafter in effect relating to or affecting the rights of
creditors generally, (ii) general equity principles, and (iii) statutory
provisions of the Federal Bankruptcy Code and the Uniform
Fraudulent Transfer Act as adopted by the State of Texas (and
related court decisions) pertaining to the voidability of preferential or
fraudulent transfers, conveyances, and obligations, (b) the application of
a standard of “good faith” such
as that imposed by Section 1.304
of the Texas UCC, and (c) the rights of the United States under the
Federal Tax Lien Act of 1966, as
amended; provided, however, that any limitations referred to under clauses (a)(ii) and (a)(iii) of
this paragraph imposed by such laws on the enforceability of any Transaction
Document will not render any Transaction Document invalid as a whole or prevent
you from the ultimate realization of the practical benefits of such Transaction
Document, except for the economic consequences of any judicial, administrative,
or other procedural delay which may result from such laws.


 


2.             The opinion that the Transaction
Documents are enforceable is also subject to the qualification that certain of
the remedial, waiver, and other provisions of the Transaction Documents may not
be enforceable; but such unenforceability will not, in our judgment, render the
Transaction Documents invalid as a whole or substantially interfere with the
realization of the principal legal benefits and/or security intended to be
provided by the Transaction Documents, except to the extent of any procedural
delay which may result therefrom.


 


3.             We express no opinion as to: (a) the
enforceability of provisions of the Transaction Documents to the extent that
such provisions: (i) purport to waive or affect any rights to notices
required by law and that are not subject to waiver under Section 9.602
of the Texas UCC; (ii) purport to waive trial by jury; (iii) state
that any Lender’s failure or delay in exercising rights, powers, privileges or
remedies under the Transaction Documents shall not operate as a waiver thereof;
(iv) purport to indemnify any Lender for such Lender’s violations of
federal or state securities laws or environmental laws, or any obligation to
the extent such obligation arises from or is a result of such Lender’s own
fraud, negligence, or willful misconduct or to the extent that such
indemnification is inconsistent with public policy; (v) purport to
establish or satisfy certain factual standards or conditions (e.g.,
standards of “commercial reasonableness” or “reasonable care” under Article 9
of the Texas UCC) in a manner not permitted by Sections 9.602
and 9.603 of the Texas UCC; (vi) purport to sever unenforceable
provisions from the Transaction Documents, to the extent that the enforcement
of remaining provisions would frustrate the fundamental intent of the parties
to such documents; (vii) restrict access to legal or equitable remedies; (viii) purport
to waive any claim of any Loan 


 


K-8

















 


Party
against any Lender arising out of, or in any way related to, the Transaction
Documents; (ix) purport to provide remedies inconsistent with applicable
law; or (x) providing that decisions by a party are conclusive or may be
made in its sole discretion; (b) whether a court would grant specific
performance or any other equitable remedy with respect to enforcement of any
provision contained in the Transaction Documents; (c) the enforceability
of any provision in the Transaction Documents that purports to appoint an agent
for service of process or establish or otherwise affect jurisdiction, venue,
evidentiary standards, or limitation periods, or procedural rights in any suit
or other proceeding; (d) the enforceability of any provision in the
Transaction Documents that purports to waive, subordinate, or otherwise
restrict or deny access to rights, benefits, claims, causes of action, or
remedies that cannot be waived, subordinated, or otherwise restricted or
denied; (e) the enforceability of any provision in the Transaction
Documents that allows any Lender to accelerate the maturity date of the
obligations evidenced by the Transaction Documents, to institute foreclosure
proceedings, or to exercise any similar right, without notice to the person or
entity signatory thereto or bound thereby; or (f) the enforceability of
any provision contained in the Transaction Documents relating to the
appointment of a receiver, to the extent that appointment of a receiver is
governed by applicable statutory requirements, and to the extent that such
provision may not be in compliance with such requirements.


 


4.             We express no opinion on any Lender’s
ability to foreclose on, become the owner of, or validly transfer or assume,
all of the rights and duties of any Loan Party (other than the right to receive
payments thereunder and the right to receive an assignment of accounts
receivable arising thereunder) as a party to the Non-Assignable Material
Agreements, under which such Loan Party’s rights, obligations, or duties are
not freely assignable or transferable.


 


5.             We express no opinion regarding the
enforceability of any documents or agreements referenced in the Transaction
Documents (other than the Transaction Documents).


 


6.             We express no opinion regarding any
Lender’s ability to exercise any rights or remedies against any collateral that
is personal property pursuant to the Transaction Documents other than in
accordance with the Texas UCC or the Delaware UCC.


 


7.             We express no opinion regarding (a) the
enforceability of provisions of the Texas Mortgage that grant the right to
become a mortgagee in possession of the Real Property Collateral prior to a
foreclosure of the lien of the Transaction Documents or provide for the
collection of (or the perfection or effectiveness of your lien in) rents and
profits prior to actual or constructive possession of the Real Property
Collateral, (b) the enforceability of any waiver of any right to an
appraisal of the Real Property Collateral, to the extent one is provided pursuant
to Texas Property Code Annotated Sections
51.003-51.005, which rights are not waivable under Texas law, or (c) compliance
with, or the effect of land use, zoning, building, sanitation, environmental,
or ecological laws or regulations affecting the Real Property Collateral.


 


K-9

















 


Specific Limitations and Qualifications on


Opinions Regarding Texas Usury Laws


 


The opinions expressed in Paragraphs 12 and 14 under the heading “Opinions”
below are also subject to the following:


 


1.             We
have assumed that (a) no fees, charges, or other compensation will be paid
to Lenders, or for their benefit, except as specified in the Transaction
Documents, and (b) no interest will accrue on the unfunded portion of the
indebtedness evidenced by the Transaction Documents.


 


2.             We have assumed that Lenders will
comply with and give effect to all of the provisions of the Transaction
Documents with respect to the computation of the interest rate and the charging
and collection of interest thereunder, including without limitation, the “Savings Clause”
(herein so called) (i.e., a
clause to the effect that Borrower shall never be required to pay, and Lenders
shall never be entitled to collect or receive, interest on the loans evidenced
by the Subordinated Credit Agreement at a rate in excess of the maximum rate
permitted by applicable law).  We advise
Lenders that, if Borrower repays, or Lenders accelerate or otherwise demand
payment of, the loans made under the Subordinated Credit Agreement prior to the
scheduled maturity date thereof, then Lenders will have to return any excessive
interest received as the result of such prepayment in order to give effect to
the Savings Clause.


 


3.             We express no opinion as to whether
the fees denominated in the Subordinated Credit Agreement as “commitment fees” or other fees and
expenses (other than those explicitly designated as interest) payable to
Lenders under the Transaction Documents are interest or in certain cases,
whether any fees should be deducted from the principal of the loan evidenced by
the Transaction Documents in determining interest chargeable under such
loan.  We assume that Lenders will comply
with applicable law in the treatment of such items under such loan.


 


4.             Section 2.09(d) of
the Subordinated Credit Agreement limits the reduction in the contract rate of
interest in certain circumstances in order to recoup the contracted rate of
interest for the prior period where the contracted rate was capped at a lower
rate by the maximum lawful rate.  While
there is a Texas statute and established precedent for the spreading of
interest forward over the anticipated life of a loan, we are aware of no cases
permitting “backward”
spreading.  Notwithstanding the lack of
case law, however, backward spreading, we believe, is consistent with the
principles underlying forward spreading and should be permissible under Texas
law.


 


Specific Limitations and Qualifications on


Opinions Regarding Laws and Consents


 


With
respect to our opinions in Paragraphs
14 and 15
under the heading “Opinions” below with respect to no violation of any
applicable law and as to the lack of any required consents, approvals, or
authorizations of governmental authorities, our opinions are expressed only
with respect to statutes or regulations that a lawyer in Texas or Delaware, as
applicable, exercising customary professional diligence would reasonably
recognize as being applicable to the Loan 


 


K-10

















 


Parties
or the transactions contemplated by the Transaction Documents.  In addition, we express no opinion as to the
following: (a) federal securities laws and regulations administered by the
Securities and Exchange Commission, State of Texas “Blue Sky” laws and
regulations, and laws and regulations relating to commodity (and other) futures
and indices and other similar instruments; or (b) the statutes and
ordinances, the administrative decisions, and the rules and regulations of
counties, towns, municipalities, and special political subdivisions (whether
created or enabled through legislative action at the federal, state, or
regional level), and any judicial decisions to the extent they deal with any of
the foregoing.


 


Specific Limitations and Qualifications on


Opinions Regarding Perfection of Liens


and Security Interests in the Collateral


 


With respect to the opinions
expressed below regarding the perfection of the Administrative Agent’s liens
and security interests in the Collateral, we advise you that:


 


1.             We express no opinion regarding (a) the
accuracy or completeness of any property descriptions contained in the
Transaction Documents; however such descriptions are in sufficient form,
assuming accuracy and completeness, (b) title to the Collateral, (c) the
creation or perfection of the Administrative Agent’s liens and security
interests in the Collateral insofar as the laws of a jurisdiction other than the State of Texas (with
respect to creation) or the States of Texas and Delaware (with respect to
perfection) govern the creation or perfection of such liens and security
interests, or (d) the creation or perfection of the Administrative Agent’s
liens and security interests in Collateral that is not described in the
Transaction Documents.


 


2.             We have assumed, with your
permission, the following facts: (a) the Loan Parties, as applicable, have
good and sufficient title to the Collateral; (b) the Loan Parties, as
applicable, have “rights in the collateral”
as that term is used in Section 9.203
of the Texas UCC; (c) value has been given within the meaning of Section 9.203 of the Texas UCC; (d) the
Delaware Loan Parties are each solely incorporated, formed, or organized, as
the case may be, under the laws of the State of Delaware, the Texas Loan
Parties are each solely incorporated, formed, or organized, as the case may be,
under the laws of the State of Texas and WOEN is solely incorporated under the
laws of the State of Nevada; and (e) the Administrative Agent’s address is
correctly set forth on the Financing Statements and the County Financing Statements.


 


3.             The opinions given in Paragraphs 16, 17, and 18 under the
heading “Opinions” below as to the creation and perfection of security
interests do not cover real property and other property transactions excluded
from the coverage of the Texas UCC pursuant to
Section 9.109 of the Texas UCC.


 


4.             We advise you that (a) in the
case of Collateral consisting of motor vehicles for which certificates of title
have been issued and for which the exclusive manner of perfecting a security
interest is by noting the Administrative Agent’s security interests on the
certificate of title in accordance with the Texas
Certificate of Title Act or other comparable law of other states,
the Administrative Agent’s security interest therein cannot be perfected by the
filing of the Financing Statements, but will be perfected only if the
Administrative Agent’s security interests 


 


K-11

















 


are
so noted, (b) the continuation of any security interests and perfection of
any security interests in Collateral consisting of proceeds is limited to the
extent set forth in the UCC, (c) continuation statements complying with
the UCC must be filed not more than six (6) months prior to the expiration
of a five (5) year period dating from the date of filing of the Financing
Statements (or otherwise within the time permitted by the UCC) and subsequent
continuation statements must be filed within six (6) months prior to the
end of each subsequent five (5) year period and amendments or supplements
to the Financing Statements and/or additional financing statements may be
required to be filed in the event of a change of name, identity, or corporate
structure of any of the Delaware Loan Parties or any of the Texas Loan Parties,
or if any of the Delaware Loan Parties or any of the Texas Loan Parties changes
the jurisdiction of its incorporation, organization, or formation, as the case
may be, (d) in the case of property which becomes Collateral after the
date hereof, Section 552 of
the Federal Bankruptcy Code limits
the extent to which property acquired by a debtor after the commencement of a
case under the Federal Bankruptcy Code may
be subject to a security interest arising from a security agreement entered
into by the debtor before the commencement of the case, (e) although the
filing of a financing statement will perfect a security interest in chattel
paper, negotiable documents, instruments, and investment property, (i) such
a perfected security interest in chattel paper, negotiable documents, and
instruments is subject to rights of prior or subsequent holders who obtain
possession of such Collateral, and (ii) such a perfected security interest
in investment property is subject to rights of prior or subsequent holders who
obtain “control” (as such term is
defined in the UCC) of such Collateral, unless
the secured party obtains “control”
of such Collateral in accordance with the UCC, and (f) as against third
parties having or acquiring an interest in or a lien on the real property to
which any fixtures are attached, the rights and duties of the law of the state
relating to real property and fixtures may apply.


 


5.             We express no opinion as to the
perfection of liens and security interests in the Collateral constituting
general intangibles consisting of copyrights, patents, trademarks, and
tradenames to the extent security interests in such property may be perfected
only by the filing of the appropriate documents in the United States Copyright
Office and the United States Patent and Trademark Office.


 


6.             We have assumed that none of the
Collateral consists or will consist of consumer goods, farm products, crops, or
timber, or accounts resulting from the sale of timber.


 


7.             We also note that a security
interest in after-acquired property may attach and become enforceable and may
become perfected only when the debtor has obtained rights in such Collateral.


 


8.             We express no opinion regarding the
priority of any liens and security interests created by the Transaction
Documents, except as explicitly set forth in Paragraph
18 under the heading “Opinions” below.  We express no opinion as to the priority of
any security interest in the Pledged Collateral or portions thereof that are or
become subject to liens for taxes, assessments, levies, fees and other
governmental and similar charges, and other claims of any type of any
governmental authority, in each case that may be afforded priority over the
security interests of Lender by Applicable Law.


 


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9.             We have made no review of the
Collateral, the books and records relating to the Collateral, or any compliance
by any of the Loan Parties with applicable rules and regulations governing
the ownership, use, leasing, maintenance, or charter of the Collateral, and
therefore we give no opinion concerning same.


 


10.           We have assumed, with your
permission, that (a) that no party executing the Security Agreement is a
broker or securities intermediary, as such terms are defined in the UCC, and (b) any
original certificates evidencing the Pledged Collateral have been delivered to,
and possession thereof will be held by, the Administrative Agent in the State
of Texas.


 


11.           We note that in order to enforce
Lenders’ remedies and rights of foreclosure by sale, after default, of the
Pledged Collateral, Lenders will be required to comply with applicable federal
and state securities laws.


 


Opinions


 


Based upon the foregoing,
and subject to the qualifications set forth below, we are of the opinion that:


 


1.             Borrower
is, based solely upon, and as of the date of, the Borrower’s Existence and Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Delaware.


 


2.             Ladder is, based solely upon, and
as of the date of, Ladder’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Delaware.


 


3.             Square One is, based solely upon,
and as of the date of, Square One’s Existence Certificate and Square One’s Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Texas.


 


4.             WOEN is, based solely upon, and as
of the date of, WOEN’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Nevada.


 


5.             WOE is, based solely upon, and as
of the date of, WOE’s Existence Certificate and WOE’s Good Standing
Certificate, validly existing and in good standing under the laws of the State
of Texas.


 


6.             Operating is, based solely upon,
and as of the date of, Operating’s Existence Certificate, validly existing
under the laws of the State of Texas.


 


7.             Production is, based solely upon,
and as of the date of, Production’s Existence Certificate, validly existing
under the laws of the State of Texas.


 


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


 


9.             Borrower and Ladder each have the
corporate power and authority under the General
Corporation Law of the State of Delaware and their respective
Certificates of Incorporation and Bylaws to execute, deliver, and perform their
obligations under the Transaction Documents. 
The Transaction Documents to which Borrower and/or Ladder is a party
have been duly authorized by all necessary corporate action on the part of
Borrower and/or Ladder, as appropriate, and have been duly executed and
delivered by Borrower and/or Ladder, as appropriate.


 


10.           Square One, WOE and CPNM each have
the corporate power and authority under the Texas
Business Corporation Act or
the Texas Business Organizations Code and their respective Articles of Incorporation and Bylaws to execute,
deliver, and perform their obligations under the Transaction Documents.  The Transaction Documents to which Square
One, WOE and/or CPNM is a party have been duly authorized by all necessary
corporate action on the part of Square One, WOE and/or CPNM, as appropriate,
and have been duly executed and delivered by Square One, WOE and/or CPNM, as
appropriate.


 


11.           Operating and Production each have
the partnership power and authority under the Texas
Revised Limited Partnership Act and their respective Certificates of
Limited Partnership and Limited Partnership Agreements to execute, deliver, and
perform their obligations under the Transaction Documents.  The Transaction Documents to which Operating
and/or Production is a party have been duly authorized by all necessary
partnership action on the part of Operating and/or Production and their general
partners, as appropriate, and have been duly executed and delivered by
Operating and/or Production (or their general partners on their behalf), as
appropriate.


 


12.           The Transaction Documents (other than
the Oklahoma and New Mexico Mortgages) to which any Loan Party is a party are
enforceable against such Loan Party in accordance with their respective terms.


 


13.           The execution and delivery by each
Loan Party of, and performance of its agreements in, the Transaction Documents
do not (a) violate the Certificate of Incorporation, Articles of
Incorporation, Bylaws, Certificate of Limited Partnership or Limited
Partnership Agreement, each as applicable, of any Loan Party, or (b) breach
or result in a default under any obligation of any Loan Party under, or require
a consent under, or result in the creation of any Lien (except for the Liens
created pursuant to the Transaction Documents) upon any of the properties,
revenues, or other assets of any Loan Party pursuant to, any Material Agreement.


 


14.           The execution and delivery of the
Transaction Documents, the consummation of the transactions contemplated
thereby, and compliance by the Loan Parties with the provisions thereof will
not violate any Applicable Law.


 


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15.           No consent, approval, waiver,
license, or authorization or any other action by or filing with any
governmental authority is required under Applicable Law in connection with the
execution and delivery by the Loan Parties of the Transaction Documents, except
for those already obtained or completed.


 


16.           The Security Agreement creates in
favor of the Administrative Agent, for the benefit of the Secured Parties (as
defined therein), a valid security interest in all of the Loan Parties’ right,
title, and interest in and to that portion of the Collateral in which a
security interest may be created under the Texas UCC.  Under the Texas UCC and the Delaware UCC,
upon the acceptance of filing of the Financing Statements in the Office of the
Secretary of State of Texas or the Office of the Secretary of State of
Delaware, as appropriate, the Administrative Agent shall have a perfected
security interest, for the benefit of the Secured Parties (as defined in the
Security Agreement) in the Collateral in which a security interest may be
perfected by filing of financing statements under the Texas UCC or Delaware
UCC, as appropriate.


 


17.           The Pledge Agreement creates
in favor of the Administrative Agent for the benefit of the Secured Parties (as
defined therein) a valid security interest in all right, title, and interest of
each Loan Party a party thereto in the Pledged Collateral enforceable against
each such Loan Party, securing the Secured Obligations (as defined in the
Pledge Agreement).


 


18.
          Upon the filing of the Delaware
Financing Statements in the Office of the Secretary of State of Delaware and
the Texas Financing Statements in the Office of the Secretary of State of
Texas, the Administrative Agent shall have a perfected security interest in the
Pledged Collateral.


 


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


 


20.           Upon filing and recording of the Texas
Mortgage with the real property records of the Texas counties, as applicable,
the Texas Mortgage will create a valid and binding perfected mortgage lien in
favor of the Administrative Agent on the Real Property Collateral.  The proper recordings of the Texas Mortgage
in the real property records of the respective Texas counties identified
therein (the “County Filing Offices”) are
the only filings, recordings, and registrations necessary to publish notice and
preserve the liens of the Texas Mortgage in the Real Property Collateral.  The Texas Mortgage creates a valid security
interest in favor of the Administrative Agent to the extent provided therein in
all right, title and interest of each Loan Party thereto in that portion of the
“Collateral” (as defined therein) (other than the Real Property Collateral)
which constitutes personal property. 
Upon the proper filing in the real property records of the County Filing
Offices of the County Financing Statements, the Administrative Agent will have
a perfected security interest within the meaning of Chapter 9 of the Texas UCC
in that portion of the Collateral (as defined in the Texas Mortgage) that is
personal property and constitutes fixtures located on the Real Property
Collateral or as-extracted collateral from such Real Property Collateral in
which a security interest may be perfected by filing a financing statement
subject, however, with respect to proceeds, to Section 9.315 of the Texas
UCC.


 


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21.           No state or local
mortgage registration tax, stamp tax, or other similar fee, tax, or
governmental charge (other than filing and recording fees to be paid upon
filing) is required to be paid to the State of Texas or any subdivision thereof
in connection with the execution, delivery, filing, or recording of the Texas
Mortgage or the consummation of the transactions contemplated therein.  Except for the payment of recording or filing
fees and taxes associated with filings made with respect to the Financing
Statements and the Texas Mortgage, no other taxes or governmental fees or
charges are required under Applicable Law in connection with (a) the
creation, perfection, or the recording of the Liens purported to be created by
the Transaction Documents, (b) the execution and delivery of any of the
Transaction Documents, or (c) the obtaining of credit under the
Subordinated Credit Agreement.


 


22.           The Advances to be
made on the date hereof and the application of the proceeds thereof as provided
for in the Subordinated Credit Agreement do not violate Regulation U or X of
the Board of Governors of the Federal Reserve System.


 


23.           No Loan Party is an “investment
company” or a company “controlled by” an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.


 


This
opinion (a) has been furnished to you at your request, and we consider it
to be a confidential communication that may not be furnished, reproduced,
distributed or disclosed to anyone (other than your permitted successors and
assigns under the Subordinated Credit Agreement) without our prior written
consent, (b) is rendered solely for your information and assistance in
connection with the above transaction, and may not be relied upon by any other
person (other than your permitted successors and assigns under the Subordinated
Credit Agreement) or for any other purpose without our prior written consent, (c) is
rendered as of the date hereof, and we undertake no, and hereby disclaim any
kind of obligation to advise you of any changes for any new developments that
might affect any matters or opinions set forth herein, and (d) is limited
to the matters stated herein and no opinions may be inferred or implied beyond
the matters expressly stated herein.


 


	
  Sincerely,

  
	
   

  
	
  HAYNES AND BOONE, LLP

  



 


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EXHIBIT A


 


MATERIAL AGREEMENTS


 


Securities
Purchase Agreement dated August 25, 2006 by and among Cano Petroleum, Inc.
and the Buyers listed therein.


 


Registration
Rights Agreement dated August 25, 2006 by and among Cano Petroleum, Inc.
and the Buyers listed therein.


 


Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of Cano Petroleum, Inc. filed August 31,
2006 with the Delaware Secretary of State.


 


Cano
Petroleum, Inc. 2005 Long-Term Incentive Plan dated December 7, 2005,
incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K
filed on December 9, 2005.


 


Amendment
No. 1 to the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan
effective December 28, 2006.


 


Employment
Agreement between Cano Petroleum, Inc. and S. Jeffrey Johnson dated
effective January 1, 2006.


 


First
Amendment to Employment Agreement between Cano Petroleum, Inc. and S.
Jeffrey Johnson dated effective May 31, 2008.


 


Employment
Agreement of Michael J. Ricketts effective July 1, 2006.


 


First
Amendment to Employment Agreement of Michael J. Ricketts effective June 29,
2007.


 


Fourth
Amendment to Employment Agreement of Michael J. Ricketts effective May 31,
2008.


 


Employment
Agreement of Patrick McKinney effective June 1, 2006.


 


First
Amendment to Employment Agreement of Patrick McKinney dated November 9,
2006.


 


Second
Amendment to Employment Agreement of Patrick McKinney dated June 29, 2007.


 


Third
Amendment to Employment Agreement of Patrick McKinney dated May 31, 2008.


 


Employment
Agreement of Phillip Feiner dated May 31, 2008.


 


First
Amendment to Employment Agreement of Phillip Feiner dated September 8,
2008.


 


Employment
Agreement of Benjamin Daitch dated June 23, 2008.


 


Securities
Purchase Agreement dated November 2, 2007 between Cano Petroleum, Inc.
and the investors listed therein.


 


Registration
Rights Agreement dated November 2, 2007 between Cano Petroleum, Inc.
and the investors listed therein.


 


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


 


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