Exhibit 10.7


 


Execution Version


 




 





 


$120,000,000


 


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


 


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

  	
   

  	
  20

  
	
  Section 1.03

  	
   

  	
  Accounting Terms; Changes in GAAP

  	
   

  	
  20

  
	
  Section 1.04

  	
   

  	
  Types of Advances

  	
   

  	
  20

  
	
  Section 1.05

  	
   

  	
  Miscellaneous

  	
   

  	
  21

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  CREDIT FACILITIES

  	
   

  	
  21

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 2.01

  	
   

  	
  Commitment for Advances

  	
   

  	
  21

  
	
  Section 2.02

  	
   

  	
  Borrowing Base

  	
   

  	
  22

  
	
  Section 2.03

  	
   

  	
  Method of Borrowing

  	
   

  	
  24

  
	
  Section 2.04

  	
   

  	
  Reduction of the Commitments

  	
   

  	
  27

  
	
  Section 2.05

  	
   

  	
  Prepayment of Advances

  	
   

  	
  27

  
	
  Section 2.06

  	
   

  	
  Repayment of Advances

  	
   

  	
  30

  
	
  Section 2.07

  	
   

  	
  Letters of Credit

  	
   

  	
  30

  
	
  Section 2.08

  	
   

  	
  Fees

  	
   

  	
  34

  
	
  Section 2.09

  	
   

  	
  Interest

  	
   

  	
  35

  
	
  Section 2.10

  	
   

  	
  Payments and Computations

  	
   

  	
  36

  
	
  Section 2.11

  	
   

  	
  Sharing of Payments, Etc.

  	
   

  	
  37

  
	
  Section 2.12

  	
   

  	
  Breakage Costs

  	
   

  	
  38

  
	
  Section 2.13

  	
   

  	
  Increased Costs

  	
   

  	
  38

  
	
  Section 2.14

  	
   

  	
  Taxes

  	
   

  	
  39

  
	
  Section 2.15

  	
   

  	
  Replacement of Lender

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  CONDITIONS OF LENDING

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 3.01

  	
   

  	
  Conditions Precedent to Effectiveness

  	
   

  	
  42

  
	
  Section 3.02

  	
   

  	
  Conditions Precedent to All Borrowings

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 4.01

  	
   

  	
  Existence; Subsidiaries

  	
   

  	
  46

  
	
  Section 4.02

  	
   

  	
  Power

  	
   

  	
  46

  
	
  Section 4.03

  	
   

  	
  Authorization and Approvals

  	
   

  	
  47

  
	
  Section 4.04

  	
   

  	
  Enforceable Obligations

  	
   

  	
  47

  
	
  Section 4.05

  	
   

  	
  Financial Statements

  	
   

  	
  47

  
	
  Section 4.06

  	
   

  	
  True and Complete Disclosure

  	
   

  	
  48

  
	
  Section 4.07

  	
   

  	
  Litigation; Compliance with Laws

  	
   

  	
  48

  
	
  Section 4.08

  	
   

  	
  Use of Proceeds

  	
   

  	
  48

  
	
  Section 4.09

  	
   

  	
  Investment Company Act

  	
   

  	
  48

  
	
  Section 4.10

  	
   

  	
  Federal Power Act

  	
   

  	
  49

  
	
  Section 4.11

  	
   

  	
  Taxes

  	
   

  	
  49

  
	
  Section 4.12

  	
   

  	
  Pension Plans

  	
   

  	
  49

  
							



 


i

















 


	
  Section 4.13

  	
   

  	
  Condition of Property; Casualties

  	
   

  	
  50

  
	
  Section 4.14

  	
   

  	
  No Burdensome Restrictions; No Defaults

  	
   

  	
  50

  
	
  Section 4.15

  	
   

  	
  Environmental Condition

  	
   

  	
  50

  
	
  Section 4.16

  	
   

  	
  Permits, Licenses, Etc.

  	
   

  	
  51

  
	
  Section 4.17

  	
   

  	
  Gas Contracts

  	
   

  	
  51

  
	
  Section 4.18

  	
   

  	
  Liens; Titles, Leases, Etc.

  	
   

  	
  52

  
	
  Section 4.19

  	
   

  	
  Solvency and Insurance

  	
   

  	
  52

  
	
  Section 4.20

  	
   

  	
  Hedging Agreements

  	
   

  	
  52

  
	
  Section 4.21

  	
   

  	
  Material Agreements

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  AFFIRMATIVE COVENANTS

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 5.01

  	
   

  	
  Compliance with Laws, Etc.

  	
   

  	
  53

  
	
  Section 5.02

  	
   

  	
  Maintenance of Insurance

  	
   

  	
  53

  
	
  Section 5.03

  	
   

  	
  Preservation of Corporate Existence, Etc.

  	
   

  	
  54

  
	
  Section 5.04

  	
   

  	
  Payment of Taxes, Etc.

  	
   

  	
  54

  
	
  Section 5.05

  	
   

  	
  Visitation Rights

  	
   

  	
  54

  
	
  Section 5.06

  	
   

  	
  Reporting Requirements

  	
   

  	
  54

  
	
  Section 5.07

  	
   

  	
  Maintenance of Property

  	
   

  	
  58

  
	
  Section 5.08

  	
   

  	
  Agreement to Pledge

  	
   

  	
  58

  
	
  Section 5.09

  	
   

  	
  Use of Proceeds

  	
   

  	
  58

  
	
  Section 5.10

  	
   

  	
  Title Evidence and Opinions

  	
   

  	
  58

  
	
  Section 5.11

  	
   

  	
  Further Assurances; Cure of Title Defects

  	
   

  	
  59

  
	
  Section 5.12

  	
   

  	
  Hedging Arrangements

  	
   

  	
  59

  
	
  Section 5.13

  	
   

  	
  Bank Accounts

  	
   

  	
  59

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  NEGATIVE COVENANTS

  	
   

  	
  60

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 6.01

  	
   

  	
  Liens, Etc.

  	
   

  	
  60

  
	
  Section 6.02

  	
   

  	
  Debts, Guaranties, and Other Obligations

  	
   

  	
  61

  
	
  Section 6.03

  	
   

  	
  Agreements Restricting Liens and Distributions

  	
   

  	
  62

  
	
  Section 6.04

  	
   

  	
  Merger or Consolidation; Asset Sales

  	
   

  	
  62

  
	
  Section 6.05

  	
   

  	
  Restricted Payments

  	
   

  	
  63

  
	
  Section 6.06

  	
   

  	
  Investments

  	
   

  	
  63

  
	
  Section 6.07

  	
   

  	
  Affiliate Transactions

  	
   

  	
  64

  
	
  Section 6.08

  	
   

  	
  Compliance with ERISA

  	
   

  	
  64

  
	
  Section 6.09

  	
   

  	
  Sale-and-Leaseback

  	
   

  	
  65

  
	
  Section 6.10

  	
   

  	
  Change of Business

  	
   

  	
  65

  
	
  Section 6.11

  	
   

  	
  Organizational Documents, Name Change

  	
   

  	
  65

  
	
  Section 6.12

  	
   

  	
  Use of Proceeds; Letters of Credit

  	
   

  	
  65

  
	
  Section 6.13

  	
   

  	
  Gas Imbalances, Take-or-Pay or Other Prepayments

  	
   

  	
  65

  
	
  Section 6.14

  	
   

  	
  Limitation on Speculative Hedging

  	
   

  	
  66

  
	
  Section 6.15

  	
   

  	
  Additional Subsidiaries; Additional Oil and Gas
  Properties

  	
   

  	
  66

  
	
  Section 6.16

  	
   

  	
  Account Payables

  	
   

  	
  66

  
	
  Section 6.17

  	
   

  	
  Current Ratio

  	
   

  	
  66

  
	
  Section 6.18

  	
   

  	
  Leverage Ratio

  	
   

  	
  67

  
	
  Section 6.19

  	
   

  	
  Interest Coverage Ratio

  	
   

  	
  67

  
	
  Section 6.20

  	
   

  	
  Subordinated Debt

  	
   

  	
  67

  
						



 


ii

















 


	
  Section 6.21

  	
   

  	
  Non-Guarantor Subsidiary

  	
   

  	
  67

  
	
  Section 6.22

  	
   

  	
  Equity Issuance

  	
   

  	
  67

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  EVENTS OF DEFAULT; REMEDIES

  	
   

  	
  67

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 7.01

  	
   

  	
  Events of Default

  	
   

  	
  67

  
	
  Section 7.02

  	
   

  	
  Optional Acceleration of Maturity

  	
   

  	
  70

  
	
  Section 7.03

  	
   

  	
  Automatic Acceleration of Maturity

  	
   

  	
  71

  
	
  Section 7.04

  	
   

  	
  Right of Set-off

  	
   

  	
  71

  
	
  Section 7.05

  	
   

  	
  Non-exclusivity of Remedies

  	
   

  	
  71

  
	
  Section 7.06

  	
   

  	
  Application of Proceeds

  	
   

  	
  71

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
  THE ADMINISTRATIVE AGENT AND THE
  ISSUING LENDER

  	
   

  	
  72

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 8.01

  	
   

  	
  Authorization and Action

  	
   

  	
  72

  
	
  Section 8.02

  	
   

  	
  Administrative Agent’s Reliance, Etc.

  	
   

  	
  72

  
	
  Section 8.03

  	
   

  	
  The Administrative Agent and Its Affiliates

  	
   

  	
  73

  
	
  Section 8.04

  	
   

  	
  Lender Credit Decision

  	
   

  	
  73

  
	
  Section 8.05

  	
   

  	
  Indemnification

  	
   

  	
  73

  
	
  Section 8.06

  	
   

  	
  Successor Administrative Agent and Issuing Lender

  	
   

  	
  74

  
	
  Section 8.07

  	
   

  	
  Collateral Matters

  	
   

  	
  75

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE
  IX

  	
  MISCELLANEOUS

  	
   

  	
  76

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 9.01

  	
   

  	
  Amendments, Etc.

  	
   

  	
  76

  
	
  Section 9.02

  	
   

  	
  Notices, Etc.

  	
   

  	
  77

  
	
  Section 9.03

  	
   

  	
  No Waiver; Remedies

  	
   

  	
  77

  
	
  Section 9.04

  	
   

  	
  Costs and Expenses

  	
   

  	
  77

  
	
  Section 9.05

  	
   

  	
  Binding Effect

  	
   

  	
  78

  
	
  Section 9.06

  	
   

  	
  Lender Assignments and Participations

  	
   

  	
  78

  
	
  Section 9.07

  	
   

  	
  Indemnification; Waiver

  	
   

  	
  80

  
	
  Section 9.08

  	
   

  	
  Execution in Counterparts

  	
   

  	
  81

  
	
  Section 9.09

  	
   

  	
  Survival of Representations, Etc.

  	
   

  	
  81

  
	
  Section 9.10

  	
   

  	
  Severability

  	
   

  	
  81

  
	
  Section 9.11

  	
   

  	
  Business Loans

  	
   

  	
  81

  
	
  Section 9.12

  	
   

  	
  Governing Law; Submission to Jurisdiction

  	
   

  	
  82

  
	
  Section 9.13

  	
   

  	
  Subordination and Intercreditor Agreement

  	
   

  	
  82

  
	
  Section 9.14

  	
   

  	
  USA Patriot Act

  	
   

  	
  82

  
	
  Section 9.15

  	
   

  	
  WAIVER OF JURY TRIAL

  	
   

  	
  83

  
	
  Section 9.16

  	
   

  	
  ORAL AGREEMENTS

  	
   

  	
  83

  
						



 


	
  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

  	
   

  



 


iii

















 


	
  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      
   -

  	
  Pricing Grid

  	
   

  
	
  Schedule II    
   - 

  	
  Notice Information and Commitments

  	
   

  
	
  Schedule 4.01 -

  	
  Subsidiaries of Borrower

  	
   

  
	
  Schedule 4.05 -

  	
  Existing Debt

  	
   

  
	
  Schedule 4.07 -

  	
  Litigation

  	
   

  
	
  Schedule 4.14(a) -

  	
  MAC Documents

  	
   

  
	
  Schedule 4.20 -

  	
  Hedging Contracts

  	
   

  
	
  Schedule 4.21 -

  	
  Material Agreements

  	
   

  



 


iv

















 


AMENDED
AND RESTATED CREDIT AGREEMENT


 


This Amended
and Restated Credit Agreement dated as of December 17, 2008 is among Cano
Petroleum, Inc., a Delaware corporation (“Borrower”), the lenders party
hereto from time to time (“Lenders”), and Union Bank of California, N.A., as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”) and as issuing lender for such Lenders (in such capacity, the “Issuing
Lender”).


 


RECITALS


 


A.            The Borrower, the Administrative
Agent, the Issuing Lender, and the Lenders have previously executed and
delivered that certain Credit Agreement dated as of November 29, 2005, as
heretofore amended (as so amended, the “Restated Agreement”).


 


B.            The Borrower, the Administrative
Agent, the Issuing Lender, and the Lenders desire to amend and restate (but not extinguish) the Restated Agreement in
its entirety as hereinafter set forth through the execution of this
Agreement.


 


C.            It is the intention
of the parties hereto that this Agreement is an amendment and restatement of
the Restated Agreement, not a new or substitute credit agreement or novation of
the Restated Agreement.


 


NOW,
THEREFORE, in consideration of the premises and the agreements, provisions and
covenants herein contained, the Borrower, the Administrative Agent, the Issuing
Lender, and the Lenders, (i) do hereby agree that the Restated Agreement
is amended and restated (but not substituted or extinguished) in its entirety
as set forth herein, and (ii) do hereby further agree as follows:


 


ARTICLE I


 


DEFINITIONS AND ACCOUNTING TERMS


 


Section 1.01           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 Union Bank of California, N.A., 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 Amended and Restated Credit Agreement, as the same may be further
amended, supplemented, restated, and otherwise modified from time to time.


 


“Applicable
Margin” means, with respect to any Advance, (a) during any time when
an Event of Default exists, 3% per annum plus the rate per annum set forth in
the Pricing Grid for the relevant Type of such Advance based on the present
Utilization Level applicable from time to time, and (b) at any other time,
the rate per annum set forth in the Pricing Grid for the relevant Type of such
Advance based on the relevant Utilization Level applicable from time to
time.  The Applicable Margin for any
Advance shall change when and as the relevant Utilization Level changes and when
and as any such Event of Default commences or terminates.


 


“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.


 


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


 


“Borrowing
Base” means at any particular time, the Dollar amount determined in
accordance with Section 2.02 on account of Proven Reserves attributable to
Oil and Gas Properties of the Borrower and its Subsidiaries subject to an
Acceptable Security Interest and described in the most recent Independent
Engineering Report or Internal Engineering Report, as applicable, delivered to
the Administrative Agent and the Lenders pursuant to Section 2.02.


 


“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 


 


2

















 


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.


 


“Cash
Collateral Account” means a special interest bearing cash collateral
account pledged by the Borrower to the Issuing Lender containing cash deposited
pursuant to Sections 2.05(b), 7.02(b), or 7.03(b) to be maintained with
the Issuing Lender in accordance with Section 2.07(g) and bear
interest or be invested in the Issuing Lender’s reasonable discretion.


 


“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 Administrative Agent on August 25,
2006.


 


“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 


 


3

















 


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 II 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), as
such amount may be reduced or terminated pursuant to Section 2.04 or Article VII
or otherwise under this Agreement.  The
aggregate amount of the Commitments on the date hereof is $120,000,000.00.


 


“Commitment
Fee Rate” means the per annum commitment fee rate set forth on the Pricing
Grid applicable from time to time.  The
Commitment Fee Rate shall change when and as the relevant Utilization Level
changes.


 


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


 


“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).


 


4

















 


“Credit
Extensions” means (a) an Advance made by any Lender, and (b) the
issuance, increase or extension of any Letter of Credit by the Issuing Lender.


 


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


 


(a)           indebtedness of such Person for
borrowed money;


 


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


 


(c)           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);


 


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


 


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


 


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


 


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


 


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


 


(i)            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;


 


(j)            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


 


(k)           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.


 


5

















 


“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 or participation in Letter of Credit Obligations 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 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.


 


“Effective
Date” means December 17, 2008.


 


“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 and the Issuing Lender in their 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).


 


6

















 


“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 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 


 


7

















 


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.


 


“Existing Letters of Credit” means the letters of credit issued
by Union Bank of California, N.A., as the issuing lender under the Restated
Agreement and which have not been terminated or expired as of the Effective
Date.


 


“Expiration
Date” means, with respect to any Letter of Credit, the date on which such
Letter of Credit will expire or terminate in accordance with its terms.


 


“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 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.


 


“Fee Letter”
means that certain letter agreement dated November 19, 2008 from Union
Bank of California, N.A. to the Borrower.


 


8
















 


“Financial
Statements” means the financial statements included in the Form 10-KSB
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
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 


 


9

















 


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, 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.


 


10

















 


“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 one, two, three, or six months, or if available, nine or twelve
months, in each case as the Borrower may, upon notice received by the
Administrative Agent not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (Los
Angeles, California time) on the third Business Day prior to the first day of
such Interest Period, select; provided, however, that:


 


(a)           the Borrower may not select any
Interest Period which ends after the Commitment Termination Date;


 


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


 


(c)           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


 


(d)           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 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



 


11

















 


provided in such reports or is otherwise reasonably requested by the
Administrative Agent or any Lender.


 


“Issuing
Lender” means Union Bank of California, N.A., and any successor issuing
bank pursuant to Section 8.06.


 


“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 a party hereto that (a) is a lender listed on the signature pages of
this Agreement on the date hereof or (b) is an Eligible Assignee that
became a lender under this Agreement pursuant to Section 2.15 or 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.


 


“Letter of
Credit” means, individually, any standby letter of credit issued or deemed
issued by the Issuing Lender for the account of the Borrower in connection with
the Commitments and that is subject to this Agreement, including the Existing
Letters of Credit, and “Letters of Credit” means all such letters of
credit collectively.


 


“Letter of
Credit Application” means the Issuing Lender’s standard form letter of
credit application for standby letters of credit that has been executed by the
Borrower and accepted by the Issuing Lender in connection with the issuance of
a Letter of Credit.


 


“Letter of
Credit Documents” means all Letters of Credit, Letter of Credit
Applications, and agreements, documents, and instruments entered into in
connection with or relating thereto.


 


“Letter of
Credit Exposure” means, at any time, the sum of (a) the aggregate
undrawn maximum face amount of each Letter of Credit at such time plus (b) the
aggregate unpaid amount of all Reimbursement Obligations at such time.


 


“Letter of
Credit Obligations” means any obligations of the Borrower under this
Agreement in connection with the Letters of Credit, including the Reimbursement
Obligations.


 


12

















 


“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).


 


“Liquid
Investments” means:


 


(a)           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;


 


(b)           (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 Affiliate of any 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 Affiliate of any 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;


 


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


 


(d)           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


 


13

















 


(e)           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.


 


“Liquidity
Deposit Amount” means, at the time determination, the aggregate amount of
Equity Issuance Proceeds and Debt Issuance Proceeds which have been deposited
into a deposit account with the Administrative Agent or any Lender or any other
depository bank that has executed an account control agreement reasonably
acceptable in form and substance to the Administrative Agent, as required under
Section 5.13, regardless of whether such proceeds are, at such time, held
in such deposit account.


 


“Loan
Documents” means this Agreement, the Notes, the Letter of Credit Documents,
the Guaranties, the Security Instruments, the Fee Letter, 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.


 


“Majority
Lenders” means, (a) at any time when there are more than two Lenders,
Lenders holding at least 662/3%
of the then aggregate unpaid principal amount of the Notes and outstanding
Letter of Credit Obligations held by the Lenders at such time (with the
aggregate amount of each Lender’s risk participation and funded participation
in Letter of Credit Obligations being deemed to be “held” by such Lender for
purposes of this definition); provided that, if no such principal amount
or Letter of Credit Obligation is then outstanding, “Majority Lenders” shall
mean Lenders having at least 662/3% of the aggregate amount of
the Commitments at such time and (b) at any time when there are one or two
Lenders, all of the Lenders; provided further that, if there are two or
more Lenders, the Commitment of, and the portion of the Advances and Letter of
Credit Exposure 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 December 17, 2012.


 


“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 


 


14

















 


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.


 


“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.


 


“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.


 


“Obligations”
means (a) 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, the Issuing Lender or the
Lenders under the Loan Documents, including without limitation, the Letter of
Credit Obligations, (b) all obligations of the Borrower, any Guarantor or
any of their respective Subsidiaries owing to any Swap Counterparty under any
Hedge Contract, and (c) all obligations of the Borrower, any Guarantor or
any of their respective Subsidiaries owing to any Lender or any Affiliate
thereof in connection with any letter of credit issued by such Lender or its
Affiliate for the account of the Borrower, any Guarantor or any of their
respective Subsidiaries; provided that, (i) when any Swap
Counterparty assigns or otherwise transfers any interest held by it under any
Hedge Contract to any other Person pursuant to the terms of such agreement, the
obligations thereunder shall constitute Obligations only if such assignee or
transferee is also then a Lender or an Affiliate of a Lender and (ii) if a
Swap Counterparty ceases to be a Lender hereunder or an Affiliate of a Lender
hereunder, obligations owing to such Swap Counterparty shall be included as
Obligations only to the extent such obligations arise from transactions under
such individual Hedge Contracts (and not the Master Agreement between such
parties) entered into at the time such Swap Counterparty was a Lender hereunder
or an Affiliate of a Lender hereunder (or lender under the Restated Agreement,
or an Affiliate thereof, at the time such Hedge Contract was entered into),
without giving effect to any extension, increases, or modifications thereof
which are made after such Swap Counterparty ceases to be a Lender hereunder or
an Affiliate of a Lender hereunder.


 


“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 


 


15

















 


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.


 


“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 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.


 


“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.


 


“Pricing
Grid” means the pricing information set forth in Schedule I.


 


“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).


 


“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,
the ratio (expressed as a percentage) of outstanding Advances owing to such
Lender to the aggregate outstanding Advances owing to all such Lenders.


 


16

















 


“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.


 


“Reimbursement
Obligations” means all of the obligations of the Borrower to reimburse the
Issuing Lender for amounts paid by the Issuing Lender under Letters of Credit
as established by the Letter of Credit Applications and Section 2.07(d).


 


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


 


“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, the Lenders, the Issuing Lender,
and the Swap Counterparties.


 


“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.


 


17

















 


“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, (f) each agreement, instrument or document executed in
connection with the Cash Collateral Account; and (g) each other agreement,
instrument or document executed at any time in connection with securing the
Obligations.


 


“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.


 


“Subordinated
Agent” means UnionBanCal Equities Inc., or such other Subordinated Lender
serving in the capacity as the “subordinated agent” under the Subordinated
credit Agreement to the extent permitted under the Subordinated Credit
Agreement and the Subordination and Intercreditor Agreement.


 


“Subordinated
Credit Agreement” means the Subordinated Credit Agreement dated as of December 17,
2008 among the Borrower, the Subordinated Agent and the Subordinated Lenders,
as amended, restated, supplemented or otherwise modified but only to the extent
permitted under the terms of the Subordination and Intercreditor Agreement.


 


“Subordinated
Debt” means the “Obligations” as defined in the Subordinated Credit
Agreement.


 


“Subordinated
Debt Maturity Date” means the “Maturity Date” as defined in the
Subordinated Credit Agreement.


 


18
















 


“Subordinated
Lenders” means the lenders party to the Subordinated Credit Agreement from
time to time.


 


“Subordinated
Loan Documents” means the Subordinated Credit Agreement, the promissory
notes executed and delivered pursuant to the Subordinated Credit Agreement, and
each other agreement, instrument, or document executed by the Borrower or any
of its Subsidiaries or any of their Responsible Officers in connection with the
Subordinated Credit Agreement.


 


“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 Effective Date among the
Administrative Agent, the Borrower, the Guarantors, the Lenders, the Subordinated
Agent and the Subordinated 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” 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.


 


“Swap
Counterparty” means (a) any Lender or Affiliate of a Lender that is a
counterparty to any Hedge Contract with the Borrower or any Subsidiary listed
on Schedule 4.20 and (b) any counterparty to any other Hedge Contract with
the Borrower or any Subsidiary; provided that such counterparty is a Lender or
an Affiliate of a Lender at the time such Hedge Contract is entered into.  For the avoidance of doubt, “Swap
Counterparty” shall not include any participant of a Lender pursuant to Section 9.06(e) other
than to the extent such participant is otherwise a Lender or an Affiliate of a
Lender.


 


“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.


 


“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.


 


19

















 


“Unused
Commitment Amount” means, with respect to a Lender at any time, the lesser
of (a) such Lender’s Commitment at such time and (b) such Lender’s
Pro Rata Share of the Borrowing Base then in effect at such time minus,
in each case the sum of (i) the aggregate outstanding principal
amount of all Advances owed to such Lender at such time plus (ii) such
Lender’s Pro Rata Share of the aggregate Letter of Credit Exposure at such
time.


 


“Utilization
Level” means the applicable category (being Level I, Level II, Level III or
Level IV) of pricing criteria contained in Schedule I, which is based on at any
time of its determination on the percentage obtained by dividing (a) the
outstanding principal amount of the Advances and the Letter of Credit Exposure
at such time by (b) the lesser of the Commitments and the Borrowing Base
at such time.


 


“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.


 


Section 1.02           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”.


 


Section 1.03           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 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.


 


Section 1.04           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.


 


20

















 


Section 1.05           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.


 


ARTICLE
II


 


CREDIT
FACILITIES


 


Section 2.01           Commitment for Advances.


 


(a)           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 date of this
Agreement until the Commitment Termination Date in an amount for each Lender
not to exceed such Lender’s Unused Commitment Amount.  Each Borrowing shall, in the case of
Borrowings consisting of Reference Rate Advances, be in an aggregate amount not
less than $250,000 and in integral multiples of $100,000 in excess thereof, and
in the case of Borrowings consisting of Eurodollar Rate Advances, be in an
aggregate amount not less than $500,000 and in integral multiples of $100,000
in excess thereof, and in each case shall consist of Advances of the same Type
made on the same day by the Lenders ratably according to their respective
Commitments.  Within the limits of each
Lender’s Commitment, and subject to the terms of this Agreement, the Borrower
may from time to time borrow, prepay, and reborrow Advances.


 


(b)           Outstanding Advances under the
Restated Agreement.  Without any
further action on the part of the Borrower or the Lenders, the parties hereto
acknowledge and agree that, effective as of the date hereof, (i) all
outstanding “Advances” which are “Eurodollar Rate Advances” under the Restated
Agreement shall be automatically deemed to be outstanding as Eurodollar Rate
Advances under this Agreement with the same Interest Period but adjusted for
the Lenders’ pro rata share thereof based on the Lenders’ Commitments under
this Agreement and (b) all outstanding “Advances” which are “Reference
Rate Advances” under the Restated Agreement shall be automatically deemed to be
outstanding as Reference Rate Advances under this Agreement but adjusted for
the Lenders’ pro rata share thereof based on the Lenders’ Commitments under
this Agreement.  Such advances under the
Restated Agreement shall be assigned, renewed, extended, and rearranged
pursuant to the terms of this Agreement and the Notes and shall, for all
purposes, be deemed a Borrowing hereunder. 
The Lenders shall make all appropriate adjustments and payments between
and among themselves to account for the revised Pro Rata Shares resulting from
the Lenders’ Commitments under this Agreement.


 


21

















 


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


 


Section 2.02           Borrowing Base.


 


(a)           Borrowing Base.  The initial Borrowing Base in effect as of
Effective Date has been set by the Administrative Agent and the Lenders and
acknowledged by the Borrower as $60,000,000. 
Such initial Borrowing Base shall remain in effect until the next
redetermination made pursuant to this Section 2.02.  The Borrowing Base shall be determined in
accordance with the standards set forth in Section 2.02(d) and is
subject to periodic redetermination pursuant to Sections 2.02(b), 2.02(c) and
2.02(e).


 


(b)           Calculation of Borrowing Base.


 


(i)            The Borrower shall deliver to the
Administrative Agent and each of the Lenders on or before each September 30,
beginning September 30, 2009, an Independent Engineering Report dated
effective as of the immediately preceding July 1, and such other
information as may be reasonably requested by any Lender with respect to the
Oil and Gas Properties included or to be included in the Borrowing Base.  Within 30 days after the Administrative Agent
and the Lenders’ receipt of such Independent Engineering Report and other
information, the Administrative Agent shall deliver to each Lender the
Administrative Agent’s recommendation for the redetermined Borrowing Base.  Within 15 days after the Lenders’ receipt of
the Administrative Agent’s recommendation, the Administrative Agent and the
Lenders shall redetermine the Borrowing Base in accordance with Section 2.02(d),
and the Administrative Agent shall promptly notify the Borrower in writing of
the amount of the Borrowing Base as so redetermined.


 


(ii)           The Borrower shall deliver to the
Administrative Agent and each Lender (A) on or prior to May 1, 2009,
and (B) on or before each March 31, beginning March 31, 2010, an
Internal Engineering Report dated effective as of the immediately preceding January 1
and 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. 
Within 30 days after the Administrative Agent and the Lenders’ receipt
of such Internal Engineering Report and other information, the Administrative
Agent shall deliver to each Lender the Administrative Agent’s recommendation
for the redetermined Borrowing Base. 
Within 15 days after the Lenders’ receipt of the Administrative Agent’s
recommendation, the Administrative Agent and the Lenders shall redetermine the
Borrowing Base in accordance with Section 2.02(d), and the Administrative
Agent shall promptly notify the Borrower in writing of the amount of the
Borrowing Base as so redetermined.


 


(iii)          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 clauses (i) and (ii) above by the date specified therein, the
Administrative Agent and the Lenders may nonetheless redetermine the Borrowing
Base and redesignate the Borrowing Base from time-to-time thereafter in their
sole discretion until the Administrative Agent and the Lenders receive the
relevant Independent Engineering Report, 


 


22

















 


Internal Engineering
Report, or other information, as applicable, whereupon the Administrative Agent
and the Lenders shall redetermine the Borrowing Base as otherwise specified in
this Section 2.02.


 


(iv)          Each delivery of an Engineering Report
by the Borrower to the Administrative Agent and the Lenders shall constitute a
representation and warranty by the Borrower to the Administrative Agent and the
Lenders that (A) the Borrower and its Subsidiaries, as applicable, own the
Oil and Gas Properties specified therein subject to an Acceptable Security
Interest and free and clear of any Liens (except Permitted Liens), (B) on
and as of the date of such Engineering Report each Oil and Gas Property
described as “proved developed” therein was developed for oil and gas, and the
wells pertaining to such Oil and Gas Properties that are described therein as
producing wells (“Wells”), were each producing oil and gas in paying
quantities, except for Wells that were utilized as water or gas injection
wells, carbon dioxide wells or as water disposal wells (each as noted in such
Engineering Report), (C) the descriptions of quantum and nature of the record title interests of
the Borrower and its Subsidiaries, as applicable, set forth in such Engineering
Report include the entire record title interests of the Borrower and its
Subsidiaries in such Oil and Gas Properties, are complete and accurate in all
respects, and take into account all Permitted Liens, (D) there are no “back-in”
or “reversionary” interests held by third parties which could reduce the
interests of the Borrower or any of its Subsidiaries in such Oil and Gas
Properties as set forth in Engineering Report, and (E) no operating or
other agreement to which the Borrower or any of its Subsidiaries is a party or
by which the Borrower or any of its Subsidiaries is bound affecting any part of
such Oil and Gas Properties requires the Borrower or any of its Subsidiaries to
bear any of the costs relating to such Oil and Gas Properties greater than the
record title interest of the Borrower or any of its Subsidiaries in such
portion of the such Oil and Gas Properties as set forth in such Engineering
Report, except in the event the Borrower or any of its Subsidiaries is
obligated under an operating agreement to assume a portion of a defaulting
party’s share of costs.


 


(c)           Interim Redetermination.  In addition to the Borrowing Base
redeterminations provided for in Section 2.02(b), the Administrative Agent
and the Lenders may, either in their sole discretion or at the request of the
Borrower and based on such information as the Administrative Agent and the
Lenders deem relevant (but in accordance with Section 2.02(d)), make one
additional redetermination of the Borrowing Base during any six-month period between
scheduled redetermination.  Additionally,
the Administrative Agent and the Lenders may request an additional
redetermination in connection with any sale or proposed sale of Oil and Gas
Properties of the Borrower or any of its Subsidiaries having a market value of
$500,000 or more to the extent any such sale is permitted by this
Agreement.  The party requesting the
redetermination shall give the other party at least 10 days’ prior written
notice that a redetermination of the Borrowing Base pursuant to this paragraph (c) is
to be performed.  In connection with any
redetermination of the Borrowing Base under this Section 2.02(c), the
Borrower shall provide the Administrative Agent and the Lenders with such
information regarding the Borrower and its Subsidiaries’ business (including,
without limitation, its Oil and Gas Properties, the Proven Reserves, and
production relating thereto) as the Administrative Agent or any Lender may
request, including, in the case of requests for an increase to the Borrowing Base
of $1,000,000 or more, an updated Independent Engineering Report.  The Administrative Agent shall promptly
notify the Borrower in writing of each redetermination of 


 


23

















 


the Borrowing Base
pursuant to this Section 2.02(c) and the amount of the Borrowing Base
as so redetermined.


 


(d)           Standards for Redetermination.  Each redetermination of the Borrowing Base by
the Administrative Agent and the Lenders pursuant to this Section 2.02
shall be made (i) in the sole discretion of the Administrative Agent and
the Lenders (but in accordance with the other provisions of this Section 2.02(d)),
(ii) in accordance with the Administrative Agent’s and the Lenders’
customary internal standards and practices for valuing and redetermining the
value of Oil and Gas Properties in connection with reserve based oil and gas
loan transactions, (iii) in conjunction with the most recent Independent
Engineering Report or Internal Engineering Report, as applicable, or other
information received by the Administrative Agent and the Lenders relating to
the Proven Reserves of the Borrower and its Subsidiaries, and (iv) based
upon the estimated value of the Proven Reserves owned by the Borrower and its
Subsidiaries as determined by the Administrative Agent and the Lenders.  In valuing and redetermining the Borrowing
Base, the Administrative Agent and the Lenders may also consider the business,
financial condition, and Debt obligations of the Borrower and its Subsidiaries
and such other factors as the Administrative Agent and the Lenders customarily
deem appropriate.  In that regard, the
Borrower acknowledges that the determination of the Borrowing Base contains an
equity cushion (market value in excess of loan value), which is essential for
the adequate protection of the Administrative Agent and the Lenders.  No Proven Reserves shall be included or
considered for inclusion in the Borrowing Base unless the Administrative Agent
and the Lenders shall have received, at the Borrower’s expense, evidence of
title reasonably satisfactory in form and substance to the Administrative Agent
that the Administrative Agent has an Acceptable Security Interest in the Oil
and Gas Properties relating thereto pursuant to the Security Instruments.  At all times after the Administrative Agent
has given the Borrower notification of a redetermination of the Borrowing Base
under this Section 2.02, the Borrowing Base shall be equal to the
redetermined amount or such lesser amount designated by the Borrower and
disclosed in writing to the Administrative Agent and the Lenders until the
Borrowing Base is subsequently redetermined in accordance with this Section 2.02.


 


(e)           In addition to the
Borrowing Base redeterminations provided for in Section 2.02(b) and Section 2.02(c),
the Administrative Agent and the Lenders may in their sole discretion and based
on such information as the Administrative Agent and the Lenders deem relevant
(but in accordance with Section 2.02(d)), redetermine the Borrowing Base
upon a Junior Capital Issuance by the Borrower.


 


Section 2.03           Method of Borrowing.


 


(a)           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 or (ii) on the Business Day of the proposed Borrowing, in the case
of a Borrowing comprised of Reference Rate Advances, 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 


 


24

















 


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.


 


(b)           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).


 


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


 


(i)            at no time shall there be more than
six Interest Periods 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


 


25

















 


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.


 


(d)           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 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.


 


(e)           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 


 


26

















 


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.


 


(f)            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.


 


Section 2.04           Reduction of the Commitments.


 


(a)           The Borrower shall have the right,
upon at least three Business Days’ irrevocable notice to the Administrative
Agent, to terminate in whole or reduce ratably in part the unused portion of
the Commitments; provided that each partial reduction shall be in the
aggregate amount of $500,000 or in integral multiples of $100,000 in excess
thereof.


 


(b)           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.


 


(c)           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 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) and shall deposit with the
Administrative Agent into the Cash Collateral Account cash collateral in the
amount equal to such Defaulting Lender’s ratable share of the Letter of Credit
Exposure, (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.


 


Section 2.05           Prepayment of Advances.


 


(a)           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 


 


27

















 


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 accrued interest to the date of such prepayment on the principal
amount prepaid and amounts, if any, required to be paid pursuant to Section 2.12
as a result of such prepayment being made on such date; provided,
however, that each partial prepayment with respect to:  (A) any amounts prepaid in respect of
Eurodollar Rate Advances shall be applied to Eurodollar Rate Advances
comprising part of the same Borrowing; (B) any prepayments made in respect
of Reference Rate Advances shall be made in a minimum amounts of $250,000 and
in integral multiples of $100,000 in excess thereof, and (C) any
prepayments made in respect of any Borrowing comprised of Eurodollar Rate
Advances shall be made in an aggregate principal amount of at least $500,000
and in integral multiples of $100,000 in excess thereof, and in an aggregate
principal amount such that after giving effect thereto such Borrowing shall
have a remaining principal amount outstanding with respect to such Borrowing of
at least $500,000.  Full prepayments of
any Borrowing are permitted without restriction of amounts.


 


(b)           Borrowing Base Deficiency.  If the aggregate outstanding amount of the
Advances plus the Letter of Credit Exposure ever exceeds the lesser of
the (i) Borrowing Base and (ii) the aggregate Commitments, the
Borrower shall, after receipt of written notice from the Administrative Agent
regarding such deficiency, deliver to the Administrative Agent within ten days
of receipt of such notice from the Administrative Agent, a written response
indicating which of the following actions it intends to take to remedy the
Borrowing Base deficiency (and the failure of the Borrower to deliver such election
notice or to perform the action chosen to remedy such Borrowing Base deficiency
shall constitute an Event of Default):


 


(i)            prepay Advances or, if the Advances
have been repaid in full, make deposits into the Cash Collateral Account to
provide cash collateral for the Letter of Credit Exposure, such that the
Borrowing Base deficiency is cured within 10 Business Days after the date such
deficiency notice is received by the Borrower from the Administrative Agent;


 


(ii)           pledge as Collateral for the Obligations
additional Oil and Gas Properties acceptable to the Administrative Agent and
each of Lenders such that the Borrowing Base deficiency is cured within 30 days
after the date such deficiency notice is received by the Borrower from the
Administrative Agent; or


 


(iii)          (A) deliver, within 10 Business
Days after the date such deficiency notice is received by the Borrower from the
Administrative Agent, written notice to the Administrative Agent indicating the
Borrower’s election to repay the Advances and make deposits into the Cash
Collateral Account to provide cash collateral for the Letters of Credit, each
in six monthly installments equal to one-sixth of such Borrowing Base
deficiency with the first such installment due 30 days after the date such
deficiency notice is received by the Borrower from the Administrative Agent and
each following installment due 30 days after the preceding installment and (B) make
such payments and deposits within such time periods.


 


28

















 


Each prepayment pursuant to this Section 2.05(b) shall be
accompanied by accrued interest on the 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.  Each prepayment under clauses (i) and (iii) of
this Section 2.05(b) shall be applied to the Advances as determined
by the Administrative Agent and agreed to by the Lenders in their sole
discretion.


 


(c)           Reduction of Commitments.  On the date of each reduction of the
aggregate Commitments pursuant to Section 2.04, the Borrower agrees to
make a prepayment in respect of the outstanding amount of the Advances to the
extent, if any, that the aggregate unpaid principal amount of all Advances plus
the Letter of Credit Exposure exceeds the lesser of (A) the aggregate
Commitments, as so reduced and (B) the Borrowing Base.  Each prepayment pursuant to this Section 2.05(c) shall
be accompanied by accrued interest on the 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.  Each prepayment under this Section 2.05(c) shall
be applied to the Advances as determined by the Administrative Agent and agreed
to by the Lenders in their sole discretion; provided that, outstanding
Reference Rate Advances, if any, shall be paid in full first before any such
prepayments are applied to outstanding Eurodollar Rate Advances.


 


(d)           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.


 


(e)           No Additional Right; Ratable
Prepayment.  The Borrower shall have no right to prepay
any principal amount of any Advance except as provided in Section 2.04(c) and
in this Section 2.05, and 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)            Debt Issuance.  If the Borrower or any Subsidiary of the
Borrower receives Debt Issuance Proceeds, then immediately upon receipt of such
proceeds, the Borrower shall prepay the Advances or, if the Advances have been
repaid in full, make deposits into the Cash Collateral 


 


29

















 


Account to provide cash
collateral for the Letter of Credit Exposure, in an amount equal to (A) 100%
of such Debt Issuance Proceeds minus (B) the amount applied to
satisfy outstanding Subordinated Debt minus (C) the amount, if any,
necessary to cause the Liquidity Deposit Amount at the time of such Debt
Issuance to equal $2,500,000.  The
prepayment required pursuant to this Section 2.05(f) shall be
accompanied by accrued interest on the 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.  Such prepayment shall be applied to the
Advances as determined by the Administrative Agent and agreed to by the Lenders
in their sole discretion.


 


(g)           Equity Issuance.  If
the Borrower or any Subsidiary of the Borrower receives Equity Issuance
Proceeds, then immediately upon receipt of such proceeds, the Borrower shall
prepay the Advances or, if the Advances have been repaid in full, make deposits
into the Cash Collateral Account to provide cash collateral for the Letter of
Credit Exposure, in an amount equal to (A) 100% of such Equity Issuance
Proceeds minus (B) the amount applied to satisfy outstanding
Subordinated Debt minus (C) the amount, if any, necessary to cause
the Liquidity Deposit Amount at the time of such Equity Issuance to equal
$2,500,000.  The prepayment required
pursuant to this Section 2.05(g) shall be accompanied by accrued
interest on the 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.  Such
prepayment shall be applied to the Advances as determined by the Administrative
Agent and agreed to by the Lenders in their sole discretion.


 


Section 2.06           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.


 


Section 2.07           Letters of Credit.


 


(a)           Commitment.  From time to time from the date of this
Agreement until 30 days prior to the Maturity Date, at the request of the
Borrower, the Issuing Lender shall, on the terms and conditions hereinafter set
forth, issue, increase, or extend the Expiration Date of, Letters of Credit for
the account of the Borrower on any Business Day.  No Letter of Credit will be issued,
increased, or extended:


 


(i)            if such issuance, increase, or
extension would cause the Letter of Credit Exposure to exceed the lesser of (A) $3,000,000
and (B) the aggregate Unused Commitment Amounts of the Lenders;


 


(ii)           if such Letter of Credit has an
Expiration Date later than the earlier of (A) one year after the date of
issuance thereof and (B) the Maturity Date;


 


(iii)          unless such Letter of Credit Documents
are in form and substance acceptable to the Issuing Lender in its sole discretion;


 


(iv)          unless such Letter of Credit is a
standby letter of credit not supporting the repayment of indebtedness for
borrowed money of any Person;


 


30

















 


(v)           unless the Borrower has delivered to
the Issuing Lender a completed and executed Letter of Credit Application; provided that, if the terms of any such
Letter of Credit Application conflicts with the terms of this Agreement, the
terms of this Agreement shall control;


 


(vi)          unless such
Letter of Credit is governed by (A) the Uniform Customs and Practice for
Documentary Credits (2007 Revision), International Chamber of Commerce
Publication No. 600, or (B) the International Standby Practices
(ISP98), International Chamber of Commerce Publication No. 590, in either
case, including any subsequent revisions thereof approved by a Congress of the
International Chamber of Commerce and adhered to by the Issuing Lender;


 


(vii)         if any order, judgment or decree of any
Governmental Authority or arbitrator shall by its terms purport to enjoin or
restrain the Issuing Lender from issuing such Letter of Credit, or any Legal
Requirement applicable to the Issuing Lender or any request or directive
(whether or not having the force of law) from any Governmental Authority with
jurisdiction over the Issuing Lender shall prohibit, or request that the
Issuing Lender refrain from, the issuance of letters of credit generally or
such Letter of Credit in particular or shall impose upon the Issuing Lender
with respect to such Letter of Credit any restriction, reserve or capital
requirement (for which the Issuing Lender is not otherwise compensated
hereunder) not in effect on the date hereof, or shall impose upon the Issuing
Lender any unreimbursed loss, cost or expense which was not applicable on the
date hereof and which the Issuing Lender in good faith deems material to it;


 


(viii)        if the issuance of such Letter of Credit
would violate one or more policies of the Issuing Lender applicable to letters
of credit generally;


 


(ix)           except as otherwise agreed by the
Issuing Lender, if Letter of Credit is to be denominated in a currency other
than Dollars; or


 


(x)            a default of any Lender’s
obligations to fund under Section 2.07(d) exists or any Lender is at
such time a Defaulting Lender hereunder, unless the Issuing Lender has entered
into satisfactory arrangements with the Borrower or such Lender to eliminate
the Issuing Lender’s risk with respect to such Lender.


 


(b)           Participations.  Upon (i) the date of the issuance or
increase of a Letter of Credit, and (ii) the Effective Date as to the deemed issuance of the Existing Letters of
Credit under Section 2.07(h), the Issuing Lender shall be deemed to
have sold to each other Lender having a Commitment and each other Lender having
a Commitment shall have been deemed to have purchased from the Issuing Lender a
participation in the related Letter of Credit Obligations equal to such Lender’s
Pro Rata Share at such date and such sale and purchase shall otherwise be in
accordance with the terms of this Agreement. 
The Issuing Lender shall promptly notify each such participant Lender
having a Commitment by telephone or telecopy of each Letter of Credit issued,
increased, or extended or converted and the actual dollar amount of such Lender’s
participation in such Letter of Credit.


 


31

















 


(c)           Issuing.  Each Letter of Credit shall be issued,
increased, or extended pursuant to a Letter of Credit Application (or by
telephone notice promptly confirmed in writing by a Letter of Credit
Application), given not later than 10:00 a.m.  (Dallas, Texas time) / 8:00 a.m. (Los
Angeles, California time) on the fifth Business Day before the date of the
proposed issuance, increase, or extension of the Letter of Credit, and the
Issuing Lender shall give to each other Lender prompt notice thereof by telex,
telephone, or telecopy.  Each Letter of
Credit Application shall be delivered by facsimile or by mail specifying the
information required therein; provided that if such Letter of Credit Application
is delivered by facsimile, the Borrower shall follow such facsimile with an
original by mail.  After the Issuing
Lender’s receipt of such Letter of Credit Application (by facsimile or by mail)
and upon fulfillment of the applicable conditions set forth in Article III,
the Issuing Lender shall issue, increase, or extend such Letter of Credit for
the account of the Borrower.  Each Letter
of Credit Application shall be irrevocable and binding on the Borrower.


 


(d)           Reimbursement.  The Borrower hereby agrees to pay on demand
to the Issuing Lender an amount equal to any amount paid by the Issuing Lender
under any Letter of Credit.  In the event
the Issuing Lender makes a payment pursuant to a request for draw presented
under a Letter of Credit and such payment is not promptly reimbursed by the
Borrower upon demand, the Issuing Lender shall give the Administrative Agent
notice of the Borrower’s failure to make such reimbursement and the
Administrative Agent shall promptly notify each Lender having a Commitment of
the amount necessary to reimburse the Issuing Lender.  Upon such notice from the Administrative
Agent, each Lender shall promptly reimburse the Issuing Lender for such Lender’s
Pro Rata Share of such amount, and such reimbursement shall be deemed for all
purposes of this Agreement to be an Advance to the Borrower transferred at the
Borrower’s request to the Issuing Lender. 
If such reimbursement is not made by any Lender to the Issuing Lender on
the same day on which the Administrative Agent notifies such Lender to make
reimbursement to the Issuing Lender hereunder, such Lender shall pay interest
on its Pro Rata Share thereof to the Issuing Lender at a rate per annum equal
to the Federal Funds Rate.  The Borrower
hereby unconditionally and irrevocably authorizes, empowers, and directs the
Administrative Agent and the Lenders to record and otherwise treat such
reimbursements to the Issuing Lender as Reference Rate Advances under a
Borrowing requested by the Borrower to reimburse the Issuing Lender which have
been transferred to the Issuing Lender at the Borrower’s request.


 


(e)           Obligations Unconditional.  The obligations of the Borrower under this
Agreement in respect of each Letter of Credit shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation, the following
circumstances:


 


(i)            any lack of validity or
enforceability of any Letter of Credit Documents;


 


(ii)           any amendment or waiver of, or any
consent to or departure from, any Letter of Credit Documents;


 


(iii)          the existence of any claim, set-off,
defense, or other right which the Borrower may have at any time against any
beneficiary or transferee of such Letter of Credit (or any Persons for whom any
such beneficiary or any such transferee may be acting), the Issuing


 


32
















 


Lender, or any other
person or entity, whether in connection with this Agreement, the transactions
contemplated in this Agreement or in any Letter of Credit Documents, or any
unrelated transaction;


 


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


 


(v)           payment by the Issuing Lender under
such Letter of Credit against presentation of a draft or certificate which does
not comply with the terms of such Letter of Credit; or


 


(vi)          any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.


 


provided, however, that nothing
contained in this paragraph (e) shall be deemed to constitute a
waiver of any remedies of the Borrower in connection with the Letters of Credit
or the Borrower’s rights under Section 2.07(f) below.


 


(f)            Liability of Issuing Lender.  The Borrower assumes all risks of the acts or
omissions of any beneficiary or transferee of any Letter of Credit with respect
to its use of such Letter of Credit. 
Neither the Issuing Lender nor any of its officers or directors shall be
liable or responsible for:


 


(i)            the use which may be made of any
Letter of Credit or any acts or omissions of any beneficiary or transferee in
connection therewith;


 


(ii)           the validity, sufficiency, or
genuineness of documents, or of any endorsement thereon, even if such documents
should prove to be in any or all respects invalid, insufficient, fraudulent, or
forged;


 


(iii)          payment by the Issuing Lender against
presentation of documents which do not comply with the terms of a Letter of
Credit, including failure of any documents to bear any reference or adequate
reference to the relevant Letter of Credit; or


 


(iv)          any other circumstances whatsoever in
making or failing to make payment under any Letter of Credit (INCLUDING THE ISSUING LENDER’S OWN NEGLIGENCE),


 


except that the Borrower shall have a claim
against the Issuing Lender, and the Issuing Lender shall be liable to the
Borrower, to the extent of any direct, as opposed to consequential, damages
suffered by the Borrower which the Borrower proves were caused by the
Issuing Lender’s willful misconduct or gross negligence in determining whether
documents presented under a Letter of Credit comply with the terms of such
Letter of Credit.  In furtherance and not
in limitation of the foregoing, the Issuing Lender may accept documents that
appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary.


 


33

















 


(g)           Cash Collateral Account.


 


(i)            If the Borrower is required to
deposit funds in the Cash Collateral Account pursuant to Sections 2.04(c), 2.05(b),
7.02(b), or 7.03(b), then the Borrower and the Issuing Lender shall establish
the Cash Collateral Account and the Borrower shall execute any documents and
agreements, including the Issuing Lender’s standard form assignment of deposit
accounts, that the Issuing Lender requests in connection therewith to establish
the Cash Collateral Account and grant the Issuing Lender a first priority
security interest in such account and the funds therein.  The Borrower hereby pledges to the Issuing
Lender and grants the Issuing Lender a security interest in the Cash Collateral
Account, whenever established, all funds held in the Cash Collateral Account
from time to time, and all proceeds thereof as security for the payment of the
Obligations.


 


(ii)           So long as no Default exists, (A) the
Issuing Lender may apply the funds held in the Cash Collateral Account only to
the reimbursement of any Letter of Credit Obligations, and (B) the Issuing
Lender shall release to the Borrower at the Borrower’s written request any
funds held in the Cash Collateral Account in an amount up to but not exceeding
the excess, if any (immediately prior to the release of any such funds), of the
total amount of funds held in the Cash Collateral Account over the Letter of
Credit Exposure.  During the existence of
any Default, the Issuing Lender may apply any funds held in the Cash Collateral
Account to the Obligations in any order determined by the Issuing Lender,
regardless of any Letter of Credit Exposure that may remain outstanding.  The Issuing Lender may in its sole discretion
at any time release to the Borrower any funds held in the Cash Collateral
Account.


 


(iii)          The Issuing Lender shall exercise
reasonable care in the custody and preservation of any funds held in the Cash
Collateral Account and shall be deemed to have exercised such care if such
funds are accorded treatment substantially equivalent to that which the Issuing
Lender accords its own Property, it being understood that the Issuing Lender
shall not have any responsibility for taking any necessary steps to preserve
rights against any parties with respect to any such funds.


 


(h)           Existing Letters of Credit.
The Issuing Lender, the Lenders and the Borrower agree that effective as of the
Effective Date, the Existing Letters of Credit shall be deemed to have been
issued and maintained
under, and to be governed by the terms and conditions of, this Agreement.


 


Section 2.08           Fees.


 


(a)           Commitment Fees.  The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a commitment fee at a per
annum rate equal to the Commitment Fee Rate on the daily Unused Commitment
Amount 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.


 


34

















 


(b)           Letter of Credit Fees.


 


(i)            The Borrower agrees to pay (A) to
the Administrative Agent for the pro rata benefit of the Lenders a per annum
letter of credit fee for each Letter of Credit issued hereunder in an amount
equal to the greater of (1) the Applicable Margin then in effect for
Eurodollar Rate Advances times the daily maximum amount available to be drawn under
such Letter of Credit and (2) $1,000, and (B) to the Issuing Lender,
a fronting fee for each Letter of Credit equal to the greater of (y) .125%
per annum times the daily maximum amount available to be drawn under such
Letter of Credit and (z) $500.00, each 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.


 


(ii)           The Borrower also agrees to pay to
the Issuing Lender such other usual and customary fees associated with any
transfers, amendments, drawings, negotiations or reissuances of any Letters of
Credit.


 


(c)           Other Fees.  The Borrower agrees to pay to Union Bank of
California, N.A. the fees provided for in the Fee Letter.


 


(d)           Borrowing Base Increase Fees.  The Borrower agrees to pay to the
Administrative Agent for the account of the Lenders in connection with any
increase of the Borrowing Base, a borrowing base increase fee on the amount of
such increase.  The borrowing base
increase fee shall be in an amount equal to 0.50% multiplied by the amount of
the increase and shall be due and payable on the date of the initial Advance of
such additional Borrowing Base.


 


Section 2.09           Interest.  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:


 


(a)           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 monthly in arrears on the last day of each month and on the date
such Reference Rate Advance shall be paid in full.


 


(b)           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, and, in the case of six, nine or twelve month Interest Periods, on (i) the
day which occurs during such Interest Period three months from the first day of
such Interest Period, (ii) the day which occurs during such Interest
Period six months from the first day of such Interest Period, and (iii) the
day which occurs during such Interest Period nine months from the first day of
such Interest Period.


 


(c)           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 


 


35

















 


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 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).


 


(d)           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.


 


Section 2.10           Payments and Computations.


 


(a)           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 


 


36

















 


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 payment of
principal, interest or fees ratably (other than amounts payable solely to the
Administrative Agent, the Issuing Lender, or a specific Lender pursuant to Section 2.08(c),
2.09(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 or the Issuing 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.


 


(b)           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.


 


(c)           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.


 


(d)           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.


 


Section 2.11           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 or Letter of Credit Obligations made
by it in excess of its Pro Rata Share of payments on account of the Advances or
Letter of Credit Obligations obtained by all the Lenders (other than as a result of a termination of a
Defaulting Lender’s Commitment under Section 2.04(c)), such Lender
shall notify the Administrative Agent and forthwith purchase from the other
Lenders such participations in the Advances made by them or Letter of Credit
Obligations 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 


 


37

















 


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 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.


 


Section 2.12           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.


 


Section 2.13           Increased Costs.


 


(a)           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.


 


38

















 


(b)           Capital Adequacy.  If any Lender or the Issuing 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 Lender or the Issuing Lender or any corporation controlling
such Lender or the Issuing Lender and that the amount of such capital is
increased by or based upon the existence of such Lender’s commitment to lend or
the Issuing Lender’s commitment to issue the Letters of Credit and other commitments
of this type, then, upon 30 days’ prior written notice by such Lender or the
Issuing 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 or to the Issuing Lender, as the case may be, from time to time
as specified by such Lender or the Issuing Lender, additional amounts
sufficient to compensate such Lender or the Issuing Lender, in light of such
circumstances, (i) with respect to such Lender, 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 and (ii) with
respect to the Issuing Lender, to the extent that the Issuing Lender reasonably
determines such increase in capital to be allocable to the issuance or
maintenance of the Letters of Credit.  A
certificate as to such amounts and detailing the calculation of such amounts
submitted to the Borrower by such Lender or the Issuing Lender shall be
conclusive and binding for all purposes, absent manifest error.


 


(c)           Letters of Credit.  If any change adopted after the date hereof
in any law or regulation or in the interpretation thereof by any court or
administrative or Governmental Authority charged with the administration
thereof shall either (i) impose, modify, or deem applicable any reserve,
special deposit, or similar requirement against letters of credit issued by, or
assets held by, or deposits in or for the account of, the Issuing Lender or (ii) impose
on the Issuing Lender any other condition regarding the provisions of this
Agreement relating to the Letters of Credit or any Letter of Credit
Obligations, and the result of any event referred to in the preceding
clause (i) or (ii) shall be to increase the cost to the Issuing
Lender of issuing or maintaining any Letter of Credit (which increase in cost
shall be determined by the Issuing Lender’s reasonable allocation of the
aggregate of such cost increases resulting from such event), then, upon demand
by the Issuing Lender, the Borrower shall pay to the Issuing Lender, from time
to time as specified by the Issuing Lender, additional amounts which shall be
sufficient to compensate the Issuing Lender for such increased cost.  A certificate as to such increased cost
incurred by the Issuing Lender, as a result of any event mentioned in
clause (i) or (ii) above, and detailing the calculation of such
increased costs submitted by the Issuing Lender to the Borrower, shall be
conclusive and binding for all purposes, absent manifest error.


 


(d)           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.


 


Section 2.14           Taxes.


 


(a)           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 


 


39

















 


with respect thereto,
excluding, in the case of each Lender, the Issuing 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, the Issuing
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 and the Issuing 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, the Issuing 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, the Issuing 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, the Issuing Lender’s, or the Administrative
Agent’s failure to provide the forms described in paragraph (d) of
this Section 2.14 and such Lender, the Issuing 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.


 


(b)           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”).


 


(c)           Indemnification.  THE BORROWER INDEMNIFIES
EACH LENDER, THE ISSUING 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, THE ISSUING 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, THE ISSUING LENDER, OR ANY SUCH LENDER.  IF ANY LENDER, THE ADMINISTRATIVE AGENT, OR
THE ISSUING LENDER RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE
BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER, THE ADMINISTRATIVE AGENT,
OR THE ISSUING LENDER, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE
BORROWER THE BORROWER’S SHARE OF SUCH REFUND.


 


40

















 


(d)           Foreign Lender Withholding
Exemption.  Each Lender and Issuing
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 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.


 


Section 2.15           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) 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 


 


41

















 


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 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.


 


ARTICLE III


 


CONDITIONS OF LENDING


 


Section 3.01           Conditions Precedent to Effectiveness.  The
effectiveness of this Agreement and the amendment and restatement of the Existing
Credit Agreement is subject to the conditions precedent that:


 


(a)           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, the Issuing Lender 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 


 


42

















 


and Oil and Gas
Properties in connection therewith, 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 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 and UCC-3, as
applicable, 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)           stock certificates required in
connection with the Pledge Agreements and stock powers executed in blank for
each such stock certificate;


 


(x)            insurance certificates naming the
Administrative Agent loss payee or additional insured, as applicable, and
evidencing insurance which meets the requirements of this Agreement and the
Security Instruments, and which is otherwise satisfactory to the Administrative
Agent;


 


43

















 


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


 


(xii)          the Subordination and Intercreditor
Agreement;


 


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


 


(b)           Payment of Fees.  On 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.


 


(c)           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 and (iii) such other financial information as
the Lenders may reasonably request.


 


(d)           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.


 


(e)           Title.  The Administrative Agent shall be satisfied
in its sole discretion with the title to the Oil and Gas Properties included in
the Borrowing Base and that such Oil and Gas Properties constitute a percentage
of such Collateral reasonably satisfactory to the Administrative Agent.


 


(f)            Environmental.  The Administrative Agent shall have received
such Phase I environmental assessments or other reports as it may reasonably
require and 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.


 


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


 


(h)           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.


 


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


 


(j)            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)


 


44
















 


which, in any case, 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).


 


(k)           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 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.


 


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


 


(m)          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.


 


(n)           Subordinated Debt.  The Borrower shall have entered into the
Subordinated Credit Agreement, the terms and conditions thereof shall be
reasonably satisfactory to the Administrative Agent and the Lenders and the
conditions precedent set forth in Section 3.01 of the Subordinated Credit
Agreement shall contemporaneously herewith have been satisfied or waived in
writing as of the date hereof.  The
Borrower shall have delivered copies of the Subordinated Credit Agreement and
each other agreement, instrument, or document executed by the Borrower or any
of its Subsidiaries or any of their Responsible Officers at any time in
connection with the Subordinated Credit Agreement on or before the date hereof.


 


(o)           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.


 


Section 3.02           Conditions Precedent to All
Borrowings.  The obligation of each
Lender to make an Advance on the occasion of each Borrowing and of the Issuing
Lender to issue, increase, or extend any Letter of Credit shall be subject to
the further conditions precedent that on the date of such Borrowing or the date
of the issuance, increase, or extension of such Letter of Credit:


 


(a)           the following statements shall be
true (and each of the giving of the applicable Notice of Borrowing, Notice of
Conversion or Continuation, or Letter of Credit Application and the acceptance
by the Borrower of the proceeds of such Borrowing or the issuance, increase, or
extension of such Letter of Credit shall constitute a representation and
warranty by the Borrower 


 


45

















 


that on the date of such
Borrowing or on the date of such issuance, increase, or extension of such
Letter of Credit, as applicable, 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 or the date of the issuance, increase, or
extension of such Letter of Credit, before and after giving effect to such
Borrowing or to the issuance, increase, or extension of such Letter of Credit
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, or would result from the issuance, increase, or extension
of such Letter of Credit; and


 


(b)           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.


 


ARTICLE IV




REPRESENTATIONS AND WARRANTIES


 


The Borrower represents and warrants as follows:


 


Section 4.01           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.


 


Section 4.02           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 


 


46

















 


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 and the issuance,
extension or increase of a Letter of Credit, such Advance and such Letter of
Credit, and the use of the proceeds of such Advance and such Letter of Credit,
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.


 


Section 4.03           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 and each issuance, increase or extension of a Letter
of Credit, 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
such issuance, increase or extension of such Letter of Credit or the use of the
proceeds of such Borrowing or such Letter of Credit.


 


Section 4.04           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, 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.


 


Section 4.05           Financial Statements.


 


(a)           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.


 


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


 


47

















 


(c)           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.


 


Section 4.06           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.


 


Section 4.07           Litigation; Compliance with Laws.


 


(a)           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 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.


 


(b)           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


 


Section 4.08           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.


 


Section 4.09           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.


 


48

















 


Section 4.10           Federal Power Act.  Neither the Administrative Agent, the Issuing
Lender 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.


 


Section 4.11           Taxes.


 


(a)           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.


 


(b)           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).


 


(c)           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.


 


Section 4.12           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 


 


49

















 


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.


 


Section 4.13           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 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.


 


Section 4.14           No Burdensome Restrictions; No
Defaults.


 


(a)           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,
including, without limitation, the Subordinated Loan Documents.  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.


 


(b)           No Default has occurred and is
continuing.


 


Section 4.15           Environmental
Condition.


 


(a)           Permits, Etc.  The
Borrower and the Guarantors (i) have obtained all Environmental Permits
necessary for the ownership and operation of their respective Properties 


 


50

















 


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.


 


(b)           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.


 


(c)           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 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.


 


Section 4.16           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.


 


Section 4.17           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.


 


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Section 4.18           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.


 


Section 4.19           Solvency and Insurance.  Before and after giving effect to the making
of the initial Advances (or deemed issuance thereof under Section 2.01(b)), 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.


 


Section 4.20           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.


 


Section 4.21           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.


 


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ARTICLE V


 


AFFIRMATIVE COVENANTS


 


So long as any
Note or any amount under any Loan Document shall remain unpaid, any Letter of
Credit shall remain outstanding, 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.


 


Section 5.01           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.


 


Section 5.02           Maintenance of Insurance.


 


(a)           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, 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.


 


(b)           All certified copies of policies or
certificates thereof, and endorsements and renewals thereof shall be delivered
to and retained by the Administrative Agent. 
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.  In addition, 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.  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 


 


53

















 


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, the Borrower shall deliver such
proceeds to the Administrative Agent immediately upon receipt.


 


Section 5.03           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.


 


Section 5.04           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 contested in good faith and
by appropriate proceedings, and with respect to which reserves in conformity
with GAAP have been provided.


 


Section 5.05           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 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.


 


Section 5.06           Reporting Requirements.  The Borrower shall furnish to the
Administrative Agent and each Lender:


 


(a)           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 


 


54

















 


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;


 


(b)           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;


 


(c)           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 


 


55

















 


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.


 


(d)           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, (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;


 


(e)           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;


 


(f)            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;


 


(g)           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;


 


(h)           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


 


56
















 


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;


 


(i)            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;


 


(j)            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;


 


(k)           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;


 


(l)            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.


 


(m)          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;


 


57

















 


(n)           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;


 


(o)           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;


 


(p)           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


 


(q)           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 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.


 


Section 5.07           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.


 


Section 5.08           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.


 


Section 5.09           Use of Proceeds.  The Borrower shall use the proceeds of the Advances and Letters of
Credit (a) to develop and acquire Oil and Gas Properties, (b) for
working capital purposes and (c) for general corporate purposes.


 


Section 5.10           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 


 


58

















 


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.


 


Section 5.11           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, 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) 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 or (b) a
notice by the Administrative Agent that the Borrower has failed to comply with Section 5.10
above, 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.


 


Section 5.12           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.


 


Section 5.13           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 Administrative Agent or any Lender or any other
bank that has executed an account control agreement reasonably acceptable in
form and substance to the Administrative Agent, or (b) within 30 days from
the date hereof, provide an account control agreement reasonably acceptable in
form and substance to the 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.


 


59

















 


ARTICLE VI




NEGATIVE COVENANTS


 


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


 


Section 6.01           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:


 


(a)           Liens securing the Obligations and
Liens securing the Subordinated Debt to the extent permitted under the
Subordination and Intercreditor Agreement;


 


(b)           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;


 


(c)           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;


 


(d)           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;


 


(e)           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;


 


(f)            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 this Agreement;


 


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(g)           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;


 


(h)           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 this 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; and


 


(i)            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.


 


Section 6.02           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:


 


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


 


(b)           the Subordinated Debt;


 


(c)           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;


 


(d)           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;


 


(e)           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 which are secured
under the 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;


 


(f)            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 


 


61

















 


the operation of the Oil
and Gas Properties, including with respect to plugging, facility removal and
abandonment of its Oil and Gas Properties;


 


(g)           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;


 


(h)           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


 


(i)            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.


 


Section 6.03           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 Security Instruments or the Subordinated Loan Documents) 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.


 


Section 6.04           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


 


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(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.


 


Section 6.05           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.


 


Section 6.06           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:


 


(a)           Liquid Investments;


 


(b)           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;


 


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


 


(d)           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);


 


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(e)           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


 


(f)            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.


 


Section 6.07           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 those that could be obtained in a comparable
arm’s length transaction with a Person that is not such an Affiliate.


 


Section 6.08           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 


 


64

















 


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.


 


Section 6.09           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 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.


 


Section 6.10           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.


 


Section 6.11           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.


 


Section 6.12           Use of Proceeds; Letters of Credit.  The Borrower will not permit the proceeds of
any Advance or Letters of Credit 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 or Letters of Credit to purchase or carry any margin stock in
violation of Regulation T, U or X.


 


Section 6.13           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 


 


65

















 


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.


 


Section 6.14           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 of the Borrower and its Subsidiaries during the period such
hedge arrangement is in effect, or (iii) is longer than three years in
duration.


 


Section 6.15           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.


 


Section 6.16           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.


 


Section 6.17           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
of the Lenders and the aggregate Availability under, and as defined in, the
Subordinated 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, and (ii) “current liabilities”
shall exclude, as of the date of calculation, the current portion of long-term
Debt existing under this Agreement, the current portion of long-term Debt
existing under the Subordinated Credit Agreement and any liabilities
representing a valuation account 


 


66

















 


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.


 


Section 6.18           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 4.00 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.


 


Section 6.19           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 3.00 to 1.00.


 


Section 6.20           Subordinated Debt.  Except as otherwise permitted by the terms of
the Subordination and Intercreditor Agreement, neither the Borrower nor any of its
Subsidiaries shall (a) make any optional, mandatory or scheduled payments
on account of principal (whether by redemption, purchase, retirement,
defeasance, set-off or otherwise), interest, premiums and fees in respect of
the Subordinated Debt, or (b) amend, supplement or otherwise modify the
terms of the Subordinated Debt.


 


Section 6.21           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).


 


Section 6.22           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.


 


ARTICLE VII


 


EVENTS OF DEFAULT; REMEDIES


 


Section 7.01           Events of Default.  The occurrence of any of the following events
shall constitute an “Event of Default” under any Loan Document:


 


(a)           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 


 


67

















 


other amounts (including
fees, reimbursements, and indemnifications) payable hereunder, under the Notes,
or under any other Loan Document;


 


(b)           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;


 


(c)           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;


 


(d)           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 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 Subordinated
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;


 


(e)           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 


 


68

















 


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);


 


(f)            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;


 


(g)           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);


 


(h)           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.


 


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


 


(j)            Borrowing Base.  Any failure to cure any Borrowing Base
deficiency in accordance with Section 2.05;


 


(k)           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;


 


(l)            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;


 


69

















 


(m)          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;


 


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


 


(o)           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;


 


(p)           Subordinated Credit Agreement.  An “Event of Default” under the Subordinated
Credit Agreement shall have occurred;


 


(q)           Subordination and Intercreditor
Agreement.  The subordination
provisions of the Subordination and Intercreditor Agreement shall be
invalidated or otherwise cease to be in full force and effect; or


 


Section 7.02           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,


 


(a)           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 of each Lender and the Issuing Lender to
make extensions of credit hereunder, including making Advances and issuing,
increasing or extending Letters of Credit, to be terminated, whereupon the same
shall forthwith 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;


 


(b)           the Borrower shall, on demand of the
Administrative Agent at the request or with the consent of the Majority
Lenders, deposit with the Administrative Agent into the Cash Collateral Account
an amount of cash equal to the Letter of Credit Exposure as security for the
Obligations; and


 


(c)           the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders 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.


 


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Section 7.03           Automatic Acceleration of Maturity.  If any Event of Default pursuant to
paragraph (e) of Section 7.01 shall occur,


 


(a)           (i) the obligation of each
Lender and the Issuing Lender to make extensions of credit hereunder, including
making Advances and issuing, increasing or extending Letters of Credit, 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;


 


(b)           the Borrower shall deposit with the
Administrative Agent into the Cash Collateral Account an amount of cash equal
to the outstanding Letter of Credit Exposure as security for the Obligations;
and


 


(c)           the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders 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.


 


Section 7.04           Right of Set-off.  Upon the occurrence and during the
continuance of any Event of Default, the Administrative Agent, the Issuing
Lender 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, the
Issuing Lender 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, the Issuing Lender or such Lender, and the other Loan Documents,
irrespective of whether or not the Administrative Agent, the Issuing Lender 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, the Issuing Lender
and each Lender agrees to promptly notify the Borrower after any such set-off
and application made by the Administrative Agent, the Issuing Lender 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, the Issuing Lender 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, the Issuing Lender or such Lender may have.


 


Section 7.05           Non-exclusivity of Remedies.  No remedy conferred upon the Administrative
Agent, the Issuing Lender 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.


 


Section 7.06           Application of Proceeds.  From and during the continuance of any Event
of Default, any monies or Property actually received by the Administrative
Agent pursuant to this Agreement or any other Loan Document, the exercise of
any rights or remedies under any 


 


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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:


 


(a)           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;


 


(b)           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, including
Obligations with respect to Letters of Credit and any obligations of the
Borrower or its Subsidiaries owing to any Swap Counterparty under any Hedge
Contract; and


 


(c)           Third, the remainder, if any, to the
Subordinated Agent as required under the Subordination and Intercreditor Agreement
and if such Subordination and Intercreditor Agreement has been terminated, then
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.


 


ARTICLE VIII


 


THE ADMINISTRATIVE AGENT AND THE
ISSUING LENDER


 


Section 8.01           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 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.


 


Section 8.02           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), 


 


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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.


 


Section 8.03           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.


 


Section 8.04           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 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.


 


Section 8.05           Indemnification.  THE LENDERS SEVERALLY
AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND THE ISSUING LENDER 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 AND THE ISSUING
LENDER IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION
TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT OR THE ISSUING LENDER UNDER THIS
AGREEMENT 


 


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OR ANY OTHER LOAN DOCUMENT
(INCLUDING THE ADMINISTRATIVE AGENT’S AND THE ISSUING LENDER’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 OR THE ISSUING LENDER’S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 
WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THE
ADMINISTRATIVE AGENT AND THE ISSUING LENDER 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 OR THE ISSUING LENDER IS NOT REIMBURSED FOR SUCH BY THE
BORROWER.  To the extent that the indemnity obligations
provided in this Section 8.05 are for the benefit of the Administrative
Agent as the named secured party under the Liens granted under the Security
Instruments, each Lender hereby agrees that if such Lender ceases to be a
Lender hereunder but Obligations owing to such Lender or an Affiliate of such
Lender continue to be secured by such Liens, then such Lender shall continue to
be bound by the provisions of this Section 8.05 until such time as such
Obligations have been satisfied or terminated in full and subject to the terms
of the last sentence of Section 9.09.   
In such event, in determining the pro rata shares under this Section 8.05,
the Lenders shall include the aggregate
amount (giving effect to any netting agreements) that would be owing to such
Swap Counterparty if such Hedge Contracts were terminated at the time of determination.


 


Section 8.06           Successor Administrative Agent and
Issuing Lender.  The Administrative
Agent or the Issuing Lender 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 or Issuing
Lender 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 or Issuing Lender 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 or Issuing Lender’s
giving of notice of resignation or the Majority Lenders’ removal of the
retiring Administrative Agent or Issuing Lender, then the retiring
Administrative Agent or Issuing Lender may, on behalf of the Lenders and the
Borrower, appoint a successor Administrative Agent or Issuing Lender, 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 and, in the case of
the Issuing Lender, a Lender; provided that, if the Administrative Agent or Issuing Lender shall
notify the Borrower and the Lenders that no qualifying Person has accepted such
appointment, then such resignation shall nonetheless 


 


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become
effective in accordance with such notice and (1) the retiring
Administrative Agent or Issuing Lender shall be discharged from its duties and
obligations hereunder and under the other Loan Documents (except that (A) in
the case of any collateral security held by the Administrative Agent on behalf
of the Lenders or the Issuing Lender 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 (B) the
retiring Issuing Lender shall remain the Issuing Lender with respect to any
Letters of Credit outstanding on the effective date of its resignation or
removal and the provisions affecting the Issuing Lender with respect to such
Letters of Credit shall inure to the benefit of the retiring Issuing Lender
until the termination of all such Letters of Credit) 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 and
the Issuing Lender directly, until such time as the Majority Lenders appoint a
successor Administrative Agent or Issuing Lender, as applicable, as provided
for above in this paragraph.  Upon
the acceptance of any appointment as Administrative Agent or Issuing Lender by
a successor Administrative Agent or Issuing Lender, such successor
Administrative Agent or Issuing Lender shall thereupon succeed to and become
vested with all the rights, powers, privileges, and duties of the retiring
Administrative Agent or Issuing Lender, and the retiring Administrative Agent
or Issuing Lender shall be discharged from its duties and obligations under
this Agreement and the other Loan Documents, except that the retiring Issuing
Lender shall remain the Issuing Lender with respect to any Letters of Credit
outstanding on the effective date of its resignation or removal and the
provisions affecting the Issuing Lender with respect to such Letters of Credit
shall inure to the benefit of the retiring Issuing Lender until the termination
of all such Letters of Credit.  After any
retiring Administrative Agent’s or Issuing Lender’s resignation or removal
hereunder as Administrative Agent or Issuing Lender, 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 or Issuing Lender under this Agreement and
the other Loan Documents.


 


Section 8.07           Collateral Matters.


 


(a)           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.  By accepting the benefit of the Liens granted
pursuant to the Security Instruments, each Secured Party not party hereto
hereby agrees to the terms of this
paragraph (a).


 


(b)           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, termination or expiration of all Letters of
Credit (other than Letters of Credit as to which other arrangements
satisfactory to the Administrative Agent and the Issuing Lender 


 


75

















 


have been made),
termination of all Hedge Contracts with Swap Counterparties that are secured by
the Liens on the Collateral (other than Hedge Contracts with any Swap
Counterparty with respect to which other arrangements satisfactory to the Swap
Counterparty and the Borrower have been made; provided that, unless a
Swap Counterparty notifies the Administrative Agent in writing at least 2
Business Days prior to the expected termination of the Commitments that such
arrangements have not been made, then solely for purposes of this clause (b),
it shall be deemed that such satisfactory arrangements have been made), and
payment in full of all Obligations (other than Obligations arising under Hedge
Contracts with any Swap Counterparty with respect to which other arrangements
satisfactory to the Swap Counterparty and the Borrower have been made; provided
that, unless a Swap Counterparty notifies the Administrative Agent in writing
at least 2 Business Days prior to the expected termination of the Commitments
that such arrangements have not been made, then solely for purposes of this
clause (b), it shall be deemed that such satisfactory arrangements have been
made); (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 writing the Administrative
Agent’s authority to release particular types or items of Collateral pursuant
to this Section 8.07.  By accepting the benefit of the Liens granted
pursuant to the Security Instruments, each Secured Party not party hereto
hereby agrees to the terms of this paragraph (b).


 


(c)           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.  By
accepting the benefit of the Liens granted pursuant to the Security
Instruments, each Secured Party not party hereto hereby agrees to the terms of
this paragraph (c).


 


ARTICLE
IX


 


MISCELLANEOUS


 


Section 9.01           Amendments, Etc.  No
amendment or waiver of any provision of this Agreement, the Notes, or any other
Loan Document (other than the Fee Letter), 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 Borrowing Base or the
Commitments of the Lenders, (c) reduce 


 


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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 or the Commitment Termination Date, (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 Subordination and Intercreditor Agreement; and provided, further,
that no amendment, waiver or consent shall, unless in writing and signed by the
Administrative Agent or the Issuing Lender in addition to the Lenders required
above to take such action, affect the rights or duties of the Administrative
Agent or the Issuing Lender, as the case may be, under this Agreement or any
other Loan Document.  No Lender or any
Affiliate of a Lender shall have any voting rights under any Loan Document as a
result of the existence of obligations owed to it under Hedge Contracts.


 


Section 9.02           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 1 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 Agent pursuant to Article II
or VIII shall not be effective until received by the Administrative Agent.


 


Section 9.03           No Waiver; Remedies.  No failure on the part of any Lender, the
Administrative Agent, or the Issuing Lender 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.


 


Section 9.04           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, the Issuing Lender, and each Lender (including, without
limitation, reasonable counsel fees and expenses of the Administrative Agent,
the Issuing Lender, and each Lender) in connection with the enforcement 


 


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(whether through
negotiations, legal proceedings, or otherwise) of this Agreement, the Notes,
the Guaranties, and the other Loan Documents.


 


Section 9.05           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, the Issuing Lender, 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.


 


Section 9.06           Lender Assignments and
Participations.


 


(a)           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, the
Advances owing to it, the Notes held by it, and the participation interest in
the Letter of Credit Obligations 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 and the related Advances and Letters of Credit, (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 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).


 


(b)           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 


 


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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.


 


(c)           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, the Issuing Lender, 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.


 


(d)           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 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) if such Eligible Assignee has acquired a Commitment,
a new Note to the order of such Eligible Assignee in an amount equal to the
Commitment assumed by it pursuant to such Assignment and Acceptance and (B) if
such Lender has retained any Commitment hereunder, a new Note to the order of
such Lender in an amount equal to the Commitment 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.


 


(e)           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 its Commitments, the Advances owing to it, its participation
interest in the Letter of Credit Obligations, and the Notes held by it); provided,
however, that (i) such Lender’s obligations under this Agreement
(including, without limitation, 


 


79

















 


its Commitments to the
Borrower hereunder) 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 Issuing Lender 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 or the Commitment
Termination Date.  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.


 


Section 9.07           Indemnification; Waiver.


 


(a)           Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT
(AND ANY SUB-AGENT THEREOF), EACH LENDER AND THE ISSUING 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 AND AFFILIATE THEREOF) THE
ADMINISTRATION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY
ADVANCE OR LETTER OF CREDIT OR THE USE OR PROPOSED USE OF THE PROCEEDS
THEREFROM (INCLUDING ANY REFUSAL BY THE ISSUING LENDER TO HONOR A DEMAND FOR
PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITH
SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT), (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 


 


80

















 


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 Letter of Credit 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.


 


Section 9.08           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.


 


Section 9.09           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.


 


Section 9.10           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.


 


Section 9.11           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 


 


81

















 


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.


 


Section 9.12           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.  Each Letter of Credit shall be governed by
either the Uniform Customs and Practice for Documentary Credits (2007
Revision), International Chamber of Commerce Publication No. 600, or the
International Standby Practices (ISP98), International Chamber of Commerce
Publication No. 590 (and any
subsequent revisions thereof approved by a Congress of the International
Chamber of Commerce and adhered to by the Issuing Lender).  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.


 


Section 9.13           Subordination and Intercreditor
Agreement.  The Administrative Agent
is hereby authorized on behalf of the Lenders for the Lenders and their
Affiliates that are Swap Counterparties to enter into the Subordination and
Intercreditor Agreement.  A copy of such
Subordination and Intercreditor Agreement will be made available to each
Secured Party on the date hereof and thereafter upon request.  Each Lender and each Swap Counterparty (by
receiving the benefits thereunder and of the Collateral) acknowledges and
agrees to the terms of such Subordination and Intercreditor Agreement and
agrees that the terms thereof shall be binding on such Secured Party and its
successors and assigns, as if it were a party thereto.


 


Section 9.14           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 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.


 


82
















 


Section 9.15           WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS, THE ISSUING LENDER
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.


 


Section 9.16           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.]


 


83

















 


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 Amended and Restated Credit Agreement


(Cano Petroleum, Inc.)


 

















 


	
   

  	
   

  	
  ADMINISTRATIVE
  AGENT/LENDERS:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
   

  	
  as Administrative Agent, Issuing Lender and

  Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Randall Osterberg

  
	
   

  	
   

  	
  Name:

  	
  Randall Osterberg

  
	
   

  	
   

  	
  Title:

  	
  Senior Vice President

  
						



 


Signature page to Amended and Restated Credit Agreement


(Cano Petroleum, Inc.)


 

















 


	
   

  	
   

  	
  LENDER:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  NATIXIS, as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Donovan Broussard

  
	
   

  	
   

  	
   

  	
   Donovan Broussard

  
	
   

  	
   

  	
   

  	
   Managing Director

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Liana Tchernysheva

  
	
   

  	
   

  	
   

  	
   Liana Tchernysheva

  
	
   

  	
   

  	
   

  	
   Director

  



 


Signature page to Amended and Restated Credit Agreement


(Cano Petroleum, Inc.)


 
















 


SCHEDULE I


 


PRICING GRID


 


Applicable Margins


 




	
  Utilization

  Level*

  	
   

  	
  Reference Rate

  Advances

  	
   

  	
  Eurodollar

  Rate Advances

  	
   

  	
  Commitment Fee

  	
   

  
	
  Level I

  	
   

  	
  .875

  	
  %

  	
  2.00

  	
  %

  	
  0.375

  	
  %

  
	
  Level II

  	
   

  	
  1.125

  	
  %

  	
  2.25

  	
  %

  	
  0.375

  	
  %

  
	
  Level III

  	
   

  	
  1.375

  	
  %

  	
  2.50

  	
  %

  	
  0.375

  	
  %

  
	
  Level IV

  	
   

  	
  1.625

  	
  %

  	
  2.75

  	
  %

  	
  0.500

  	
  %

  






 






* Utilization Levels are described below and are
determined in accordance with the definition of “Utilization Level”.


 


1.
 Level
I: If the Utilization Level is less than 50%.


2.  Level II:
If the Utilization Level is greater than or equal to 50% but less than 75%.


3.  Level III: If
the Utilization Level is greater than or equal to 75% but less than 90%.


4.  Level IV: If
the Utilization Level is greater than or equal to 90%.


 

















 


SCHEDULE II


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 II.


 


Administrative Agent/Issuing Lender:


 


Union
Bank of California, N.A.


Lincoln
Plaza


500
N. Akard Street, Suite 4200


Dallas,
Texas 75201


Attention:
Randall Osterberg


Facsimile:
(214) 922-4209


 


Borrower:


 


Cano
Petroleum, Inc.


Burnett
Plaza


801
Cherry Street, Suite 3200


Fort
Worth, Texas 76102


Attention:
Benjamin Daitch, CFO


Facsimile:
(817) 334-0222


 




	
  Lenders:

  	
   

  	
  Commitments

  	
   

  
	
  Union Bank of California, N.A.

  	
   

  	
  $

  	
  82,500,000.00

  	
   

  
	
  Natixis

  	
   

  	
  $

  	
  37,500,000.00

  	
   

  
	
  Total:

  	
   

  	
  $

  	
  120,000,000.00

  	
   

  






 

















 


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.


 


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

  	
   

  



 


1

















 


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


 


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, 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.

  
	
   

  
	
  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.

  
	
   

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

  
	
   

  
	
  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 , dated December 17, 2008 and all associated
  agreements.

  



 
















 


EXHIBIT A


 


FORM OF ASSIGNMENT AND
ASSUMPTION


 


This
Assignment and Assumption (the “Assignment and Assumption”) is dated as
of the Effective Date set forth below and is entered into by and between
[the][each](1) Assignor identified in item 1 below ([the][each, an] “Assignor”)
and [the][each](2) 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 Assumption 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 Assumption, 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:

  	
  UNION
  BANK OF CALIFORNIA. N.A., as the administrative agent under the Credit
  Agreement

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Credit
  Agreement:

  	
  The
  Amended and Restated Credit Agreement dated as of December 17, 2008
  among Borrower, the Lenders party thereto from time to time, and Union Bank
  of California, N.A. as Administrative Agent and as Issuing Lender.

  
	
   

  	
   

  	
   

  	
   

  
	
  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 Assumption 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:

  	
   

  
	
   

  	
   

  
	
  UNION
  BANK OF CALIFORNIA. N.A., as

  	
   

  
	
  Administrative Agent

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
								



 






(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

















 


	
  [Consented
  to:]  (10)

  	
   

  
	
   

  	
   

  
	
  CANO
  PETROLEUM, INC., a Delaware corporation

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					



 


Annex 1


To Exhibit A – Assignment and Assumption


 


STANDARD TERMS AND CONDITIONS FOR


ASSIGNMENT AND ASSUMPTION


 


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 Assumption 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
Assumption 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 assignee under Section 9.05 of the Credit Agreement (subject to such
consents, if any, as may be required under Section 9.05 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 Assumption and
to purchase [the][such] 


 






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


 


A-4

















 


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 Assumption and to purchase
[the][such] Assigned Interest, and (vii) if it is a Foreign Lender,
attached to the Assignment and Assumption 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 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 Assumption shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.  This
Assignment and Assumption 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 Assumption by telecopy shall be effective as delivery of a
manually executed counterpart of this Assignment and Assumption.  This Assignment and Assumption shall be
governed by, and construed in accordance with, the law of the State of Texas.


 


A-5

















 


EXHIBIT B


 


FORM OF COMPLIANCE
CERTIFICATE



FOR THE PERIOD FROM _________, 200__ TO _________, 200__


 


This certificate dated as of
____________ ___, _____ is prepared pursuant to the Amended and Restated 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 UNION BANK OF CALIFORNIA, N.A., as administrative
agent for such Lenders (in such capacity, the “Administrative Agent”)
and as issuing lender.  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)

  	
   

  	
  $

  	
   

  



 


	
  Current
  Ratio = (a) to (b) = 

  	
   

  	
   

  



 






(11)
“current assets” shall include the aggregate Unused Commitment Amounts
of the Lenders, 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 Credit Agreement and any
liabilities representing a valuation account arising from the application of
SFAS 133 and 143.


 


B-1

















 


	
  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:

  	
   

  	
  4.00 to 1.00

  	
   

  	
   

  



 






(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

















 


	
  COMPLIANCE?

  	
   

  	
  YES  o NO  o

  



 


B-3

















 


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 =

  	
  3.00 to 1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
  YES  o NO  o

  	
   

  
						



 


 


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


 


 


	
   

  	
  CANO
  PETROLEUM, INC., a Delaware corporation 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
						



 


B-4
















 


EXHIBIT C


 


FORM OF GUARANTY
AGREEMENT


 


This Amended and Restated
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 Union Bank of California,
N.A, as Administrative Agent for the ratable benefit of itself, the Lenders (as
defined below) and as Issuing Lender (as defined below), and the Swap
Counterparties (as defined in the Credit Agreement referred to below) (together
with the Administrative Agent, the Issuing Lender, and the Lenders,
individually a “Beneficiary”, and collectively, the “Beneficiaries”).


 


INTRODUCTION


 


A.                                   Cano Petroleum, Inc.
a Delaware corporation (the “Borrower”) has previously entered in that
certain Credit Agreement dated as of November 29, 2005 (as it has been
amended, supplemented, restated or otherwise modified from time to time, the “Existing
Credit Agreement”), among Borrower, the Lenders, the Administrative Agent
and the Issuing Lender.


 


B.                                     In order to
guarantee the full and punctual payment and performance of the obligations
under the Existing Credit Agreement and the other Loan Documents (as defined in
the Existing Credit Agreement), the Guarantors executed and delivered to the
Administrative Agent that certain Guaranty Agreement dated as of November 29,
2005 (as heretofore amended, restated, supplemented or otherwise modified, the “Existing
Guaranty”).


 


C.                                     The parties to
the Existing Credit Agreement have agreed to amend and restate the Existing
Credit Agreement in its entirely pursuant to that certain Amended and Restated
Credit Agreement dated as of December 17, 2008 (as further amended,
supplemented or otherwise modified from time to time, the “Credit Agreement”),
among the Borrower, the lenders party thereto from time to time (individually,
a “Lender” and collectively, the “Lenders”), and Union Bank of
California, N.A., as administrative agent (in such capacity, the “Administrative
Agent”) and as issuing lender (in such capacity, the “Issuing Lender”).


 


D.                                    It is a
requirement under the Credit Agreement that the Guarantors shall continue to
guarantee the due payment and performance of all Obligations (as defined in the
Credit Agreement) by amending and restating in its entirety the Existing
Guaranty as set forth herein.


 


E.                                      Each Guarantor
is a subsidiary of the Borrower and will derive substantial direct and indirect
benefit from (i) the transactions contemplated by the Credit Agreement and
the other Loan Documents (as defined in the Credit Agreement) and (ii) the
Hedge Contracts (as defined in the Credit Agreement) entered into by the
Borrower or any of its other subsidiaries with a Swap Counterparty.


 


F.                                      Each Guarantor
is executing and delivering this Guaranty (i) to induce the Lenders to
provide and to continue to provide Advances under the Credit Agreement, (ii) to
induce the Issuing Lender to provide and continue to provide Letters of Credit
under the Credit Agreement, and (iii) intending it to be a legal, valid,
binding, enforceable and continuing 


 


C-1

















 


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 owing in respect of Letter of Credit Obligations, 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, the Issuing Lender or any Lender under the Loan
Documents and by the Borrower or any of its Subsidiaries to the Swap
Counterparty but for the fact that they are unenforceable or not allowable due
to insolvency or 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, the issuing
lender, any lender or any swap counterparty 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 or in connection with any hedge contract, 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 


 


C-2

















 


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 agreement or instrument relating to any Hedge Contract with a Swap
Counterparty, or any other amendment or waiver of or any consent to departure
from any Loan Document or any agreement or instrument relating to any Hedge
Contract with a Swap Counterparty, 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;


 


(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 Lender, the
Administrative Agent, the Issuing Lender or any other 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 the Administrative Agent, the Issuing
Lender, any Lender or any other 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, the administrative agent, the issuing
lender or any swap counterparty 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 


 


C-3

















 


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 the Hedge Contracts with a Swap Counterparty and that the
waivers set forth in this Guaranty are knowingly made in contemplation of such
benefits.


 


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
letters of credit have terminated or expired and no letter of credit
obligations shall remain outstanding, and all commitments shall have expired or
terminated.  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, (b) the satisfaction
of all letter of credit obligations and the termination of all obligations of
the issuing lender and the lenders in respect of letters of credit, 


 


C-4

















 


(c)  the termination of the hedge
contracts with the beneficiaries, and (d) 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, the Issuing Lender 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 lender or the administrative agent, the issuing lender
and any other 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 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 


 


C-5

















 


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
letter of credit obligations, 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, the issuing lender or any lender, at its address
specified in or pursuant to the credit agreement, and if to a swap
counterparty, at its address specified in the applicable hedge contract.  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 the administrative agent or
any other 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, the termination of all letter of credit
obligations, the termination of the hedge contracts with the beneficiaries, and
the termination of all the commitments, (b) be binding upon each guarantor
and its successors and assigns, (c) inure to the benefit of and be
enforceable by the administrative agent, each lender, and the issuing lender,
and their respective successors, and, in the case of transfers and assignments
made in accordance with the credit agreement, transferees and assigns, and (d) inure
to the benefit of and be enforceable by a swap counterparty and each of its
successors, transferees and assigns to the extent such successor, transferee or
assign is a lender or an affiliate of a lender. 
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 respects to the provisions of the credit agreement.  Each guarantor acknowledges that upon any
person becoming a lender, the administrative agent, or the issuing lender 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 


 


C-6

















 


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) 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 


 


C-7

















 


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.                                   Amendment And Restatement.  THIS GUARANTY IS AN AMENDMENT
AND RESTATEMENT OF THE EXISTING GUARANTY AND SUPERSEDES THE EXISTING GUARANTY
IN ITS ENTIRETY; PROVIDED, HOWEVER, THAT THE EXECUTION AND DELIVERY OF THIS
GUARANTY SHALL NOT EFFECT A NOVATION OF THE EXISTING GUARANTY BUT SHALL BE, TO
THE FULLEST EXTENT APPLICABLE, IN MODIFICATION, RENEWAL, CONFIRMATION AND
EXTENSION OF THE EXISTING GUARANTY.


 


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 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.


 


C-8

















 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


[Remainder of this page intentionally left
blank.]


 


C-9

















 


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

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as 

  
	
   

  	
  Administrative
  Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
							



 


C-10
















 


Annex 1 to the


Guaranty Agreement


 


SUPPLEMENT NO.         
dated as of                             (the
“Supplement”), to the Amended
and Restated 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 UNION BANK OF CALIFORNIA, N.A., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).


 


A.            Reference is made to
the Amended and Restated 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 and the Issuing Lender to issue Letters of Credit.  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 in order to induce the Lenders to make additional Advances
and the Issuing Lender to issue additional Letters of Credit and as
consideration for Advances previously made and Letters of Credit previously
issued.


 


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 


 


C-11

















 


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)).


 


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.


 


C-12

















 


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.


 


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-13

















 


	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


C-14

















 


EXHIBIT D


 


FORM OF MORTGAGE


 


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


 


UNION BANK OF CALIFORNIA, N.A., as
Administrative Agent


(Mortgagee, Secured Party and Grantee)


 


_____________, 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 


 


D-1

















 


3664494; the mailing address of Mortgagee is Lincoln Plaza, 500 N.
Akard Street, Suite 4200, Dallas, Texas 75201.


 


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


 


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

















 


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


 


	
  THE STATE OF                 

  	
   

  	
  §

  
	
   

  	
   

  	
  §

  
	
  COUNTY OF                     

  	
   

  	
  §

  



 


This instrument (the “Mortgage”) is made effective as of                     
      , 20      
(the “Effective Date”) and executed and delivered by CANO PETROLEUM,
INC., a Delaware corporation (“Mortgagor”), to and in favor of Union
Bank of California, N.A. (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.


 


RECITALS


 


WHEREAS, this Mortgage is executed in connection with, and pursuant to
the terms of, that certain Amended and Restated 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 the Mortgagor,
the lenders party thereto from time to time (the “Lenders”), and
Mortgagee as administrative agent for the Lenders (the “Administrative Agent”)
and as issuing lender (the “Issuing Lender”).


 


WHEREAS, the Mortgagor and other subsidiaries of Mortgagor, may from
time-to-time enter into one or more Hedge Contracts (as defined in the Credit
Agreement) with Swap Counterparties (as defined in the Credit Agreement, and
together with the Lenders, Mortgagee, the Issuing Lender and the Administrative
Agent, being collectively referred to herein as the “Credit Parties”).


 


WHEREAS, it is a condition precedent 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), including the
obligations arising under Hedge Contract with a Swap Counterparty, and (b) hereby
agrees as follows:


 


D-3
















 


ARTICLE I


Definitions


 


1.1           “Advances” shall have the meaning assigned to such term in
the Credit Agreement.


 


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


 


1.3           “Commitments” shall have the meaning assigned to such term in
the Credit Agreement.


 


1.4           “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, 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.


 


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


 


1.6           “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.


 


1.7           “Fixture Operating Equipment” means any of the items
described in the first sentence of Section 1.17 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.


 


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


 


1.9           “Hedge Contract” shall have the meaning assigned to such term
in the Credit Agreement.


 


1.10         “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,


 


D-4

















 


water, carbon dioxide, helium, and any and all minerals, ores, or
substances of value and the products and proceeds therefrom.


 


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


 


1.12         “Letters of Credit” shall have the meaning assigned to such
term in the Credit Agreement.


 


1.13         “Loan Documents” shall have the meaning assigned to such term
in the Credit Agreement.


 


1.14         “Notes” shall have the meaning assigned to such term in the
Credit Agreement.


 


1.15         “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 the Security Documents, this Mortgage, or any of
the other Loan Document;


 


(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)           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 any 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.


 


1.16         “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 


 


D-5

















 


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.


 


1.17         “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 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.


 


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


 


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


 


D-6

















 


1.20         “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, the AdministrativeAgent, the Issuing
Lender, or any Lender, including Mortgagor’s operating bank account and all
funds and investments therein, (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.


 


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


 


1.22         “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).


 


1.23         “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.


 


1.24         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


 


D-7

















 


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 (including the making of the Advances and the
issuing of the Letters of Credit), 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.


 


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


 


D-8

















 


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 / 5:00 a.m. Los Angeles, California 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 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.


 


D-9

















 


(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, 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.


 


D-10

















 


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 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


 


D-11

















 


interest and is irrevocable until all of the
Obligations have been fully and finally paid and discharged in full, all Hedge
Contracts with Credit Parties have been terminated or unwound, all Commitments
have been terminated or expired, all Letters of Credit have terminated or
expired, and all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit have been terminated.  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.


 


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


 


D-12

















 


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 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


 


D-13

















 


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 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


 


D-14

















 


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, 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


 


D-15

















 


have been fully and finally paid and discharged in full, all Hedge
Contracts with Credit Parties have been terminated or unwound, all Commitments
have been terminated or expired, all Letters of Credit have terminated or
expired, and all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit have been terminated.


 


(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 Hedge Contracts with Credit Parties have been
terminated or unwound, all Commitments have been terminated or expired, all Letters
of Credit have terminated or expired, and all obligations of the Issuing Lender
and the Lenders in respect of Letters of Credit have been terminated, 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;


 


(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


 


D-16

















 


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.


 


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


 


D-17
















 


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):


 


(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,


 


D-18

















 


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, all of the Obligations have been fully and
finally paid and discharged in full, all Hedge Contracts with Credit Parties
have been terminated or unwound, all Commitments have been terminated or
expired, all Letters of Credit have terminated or expired, and all obligations
of the Issuing Lender and the Lenders in respect of Letters of Credit have been
terminated, 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 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


 


D-19

















 


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;


 


(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;


 


D-20

















 


(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 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


 


D-21

















 


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.


 


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.


 


D-22

















 


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 Hedge Contracts with Credit Parties
have been terminated or unwound, all Commitments have been terminated or
expired, all Letters of Credit have terminated or expired, and all obligations
of the Issuing Lender and the Lenders in respect of Letters of Credit have been
terminated, 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 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.


 


D-23

















 


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 (acting upon the written
direction of the Majority Lenders or all Lenders, as applicable).


 


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-24

















 


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 (acting upon the written direction of the Majority Lenders or all
Lenders, as applicable), 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:

  	
   

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
  Attention: Ben Daitch, CFO

  
	
   

  	
   

  	
  Facsimile: (817) 334-0222

  
	
   

  	
   

  	
   

  
	
  Mortgagee:

  	
   

  	
  Union Bank of California, N.A.

  
	
   

  	
   

  	
  Lincoln Plaza

  



 


D-25

















 


	
   

  	
   

  	
  500 N. Akard Street, Suite 4200

  
	
   

  	
   

  	
  Dallas, Texas 75201

  
	
   

  	
   

  	
  Attention: Mr. Randall Osterberg

  
	
   

  	
   

  	
  Facsimile: (214) 922-4209

  



 


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 (other than Swap Counterparties), and each of
its successors and assigns, and to the benefit of the Swap Counterparties, and
each of their respective successors and assigns if such Swap Counterparty or an
Affiliate of such Swap Counterparty is a Lender, and the provisions hereof
shall likewise be covenants running with the land.


 


(b)           Subject to clause (d) below,
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 and subject to clause (d) below, 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


 


D-26

















 


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)           Notwithstanding
anything to the contrary contained herein, including the provisions of clauses (b) and
(c) above, when any Swap Counterparty assigns or otherwise transfers any
interest held by it under any Hedge Contract to any other Person pursuant to
the terms of such agreement, that other Person shall thereupon become vested
with all the benefits held by such Secured Party under this Mortgage only if
such Person is also then a Lender or an Affiliate of a Lender.


 


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 any 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.


 


D-27

















 


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.


 


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.


 


THIS WRITTEN 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.


 


[Remainder of this page intentionally
left blank.]


 


D-28

















 


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:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MORTGAGEE:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
  as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


D-29

















 


	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF [                      ]

  	
  §

  



 


This
instrument was acknowledged before me on this       
day of                       ,
20      , by                                                 ,
as                                       
of Cano Petroleum, Inc., on behalf of said limited liability company.


 


 


	
   

  	
   

  
	
   

  	
  Notary Public in and for

  
	
   

  	
  the State of Texas

  



 


D-30

















 


	
  THE STATE OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY OF DALLAS

  	
  §

  



 


This
instrument was acknowledged before me on this       
day of                       ,
20      , by                           ,
as                             
of Union Bank of California, N.A, a national banking association, on behalf of
said banking association.


 


 


	
   

  	
   

  
	
   

  	
  Notary Public in and for

  
	
   

  	
  the State of Texas

  



 


D-31
















 


EXHIBIT A


TO


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-32

















 


EXHIBIT E


 


FORM OF
AMENDED AND RESTATED 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 Amended and Restated 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 Union Bank of California, N.A., as administrative agent for the Lenders
(the “Administrative Agent”) and as issuing lender (“Issuing Lender”).  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.


 


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
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).


 


E-1

















 


This Note is
given in renewal and modification, but not in discharge or novation, of that
certain Note dated __________ ___, 20___ in the original principal amount of $__________________ and made by the Borrower payable to
the order of the Bank.


 


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]


 


Union Bank of California, N.A., as Administrative Agent


1980 Saturn
Street, Mail Code 4-957-161


Monterey Park, California 91755


 


Attention:    Angela Yan


 


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Amended and Restated 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 Union Bank of California, N.A., as administrative agent for the Lenders
(the “Administrative Agent”) and as issuing lender for the Lenders (the “Issuing
Lender”), 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;


 


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;


 


(3)                                  [the
proceeds of the Proposed Borrowing are not to be used to fund a capital
expenditure] [the proceeds of the Proposed Borrowing are to be used to fund a
capital expenditure which has been approved by the Lenders pursuant to an
approval letter, a copy of which is attached as Exhibit A hereto]; and


 


(4)                                  $______________ of the Proposed Borrowing
will be used for general corporate or working capital purposes.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


F-2

















 


APPROVAL LETTER


 


Reference is made to the Amended and Restated 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,”) among Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), the
lenders party thereto (the “Lenders”), and Union Bank of California,
N.A., as administrative agent for the Lenders (the “Administrative Agent”)
and as issuing lender for the Lenders (the “Issuing Lender”).  Reference is hereby made to the Credit
Agreement for all purposes, and terms defined therein shall have the same
meanings when used herein.  The Credit
Agreement provides that the Borrower may not use the proceeds of any Advance to
fund capital expenditures unless such capital expenditures are approved in
writing by the Lenders.  This letter
shall evidence the Lenders approval of the capital expenditures which are
specified below or specified in the schedule attached hereto:


 


[specify capital expenditures with a description, date of incurrence,
amount, oil and gas property affected thereby, and such other information as
the Lenders may request]


 


This letter is
a Loan Document, and all provisions of the Credit Agreement which apply to Loan
Documents shall apply hereto.  This
letter may be separately executed in any number of counterparts and by the
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to constitute one and the same agreement.


 


Please execute
a counterpart of this letter in the place provided below to evidence your
agreement to the foregoing and your continuing ratification of the Credit
Agreement and the other Loan Documents in consideration of the approval herein
contained.


 


Yours truly,


 


	
  UNION BANK OF CALIFORNIA, N.A.

  	
   

  	
  NATIXIS

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
												



 


*[OTHER LENDERS, IF ANY]


 


Accepted and
agreed to as of the date first written above


 


F-3

















 


	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					



 


F-4

















 


EXHIBIT G


 


FORM OF
NOTICE OF CONVERSION OR CONTINUATION


 


[Date]


 


Union Bank of
California, as Administrative Agent

1980 Saturn Street, Mail Code 4-957-161


Monterey Park, California 91755


Attention:    Angela Yan


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Amended and Restated 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 Union Bank of California, N.A., as administrative agent for the Lenders
(the “Administrative Agent”) and as issuing lender for the Lenders (the “Issuing
Lender”), 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 [____ 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:


 


(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 AMENDED AND RESTATED 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 Union Bank of California, N.A. as
Administrative Agent (as hereinafter defined) for the ratable benefit of
itself, the Issuing Lender (as hereinafter defined), the Lenders (as
hereinafter defined), and the Swap Counterparties (as defined in the Credit
Agreement referred to below, and together with the Administrative Agent, the
Issuing Lender, and the Lenders collectively referred to herein as the “Secured
Parties” and individually, a “Secured Party”).


 


RECITALS


 


A.            The Borrower has
previously entered into that certain Credit Agreement dated November 29,
2005 (as it has been amended, restated, supplemented or otherwise modified from
time to time, the “Existing Credit Agreement”), among Borrower, the
Lenders, the Administrative Agent and the Issuing Lender.


 


B.            In order to secure
the full and punctual payment and performance of the obligations under the
Existing Credit Agreement and the other Loan Documents (as defined in the
Existing Credit Agreement), the Borrower executed and delivered to the
Administrative Agent that certain Pledge Agreement dated as of November 29,
2005 (as heretofore amended and supplemented, the “Existing Pledge Agreement”).


 


C.            The parties to the
Existing Credit Agreement have agreed to amend and restate the Existing Credit
Agreement in its entirety pursuant to that certain Amended and Restated Credit
Agreement dated as of December 17, 2008 (as amended, restated,
supplemented or otherwise modified from time to time, the “Credit Agreement”),
among the Borrower, the lenders party thereto from time to time (the “Lenders”),
and Union Bank of California, N.A., as administrative agent (in such capacity,
the “Administrative Agent”) and as issuing lender (in such capacity, the
“Issuing Lender”).


 


D.            It is a requirement under the Credit Agreement that (i) the
Borrower shall continue to secure the due payment and performance of all
Obligations (as defined in the Credit Agreement) by amending and restating in
its entirety the Existing Pledge Agreement as set forth herein, and (ii) the
other Pledgors shall continue to secure the due payment and performance of all
Obligations (as defined in the Credit Agreement) by executing and delivering
this Pledge Agreement, in each case, in favor of the Administrative Agent for
the ratable benefit of the Secured Parties.


 


E.             Each Pledgor (other
than the Borrower) is a subsidiary of the Borrower and will derive substantial
direct and indirect benefits from (i) the transactions contemplated by the
Credit Agreement and the other Loan Documents (as defined the Credit Agreement)
and (ii) the Hedge 


 


H-1

















 


Contracts (as
defined in the Credit Agreement) entered into by the Borrower or any of its
subsidiaries with a Swap Counterparty.


 


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, 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, the Credit Agreement or the other Loan Documents to the Administrative
Agent or any other Secured Party; 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 Secured Parties that the 


 


H-2

















 


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 (as defined
in the Credit Agreement) 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, 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 


 


H-3

















 


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 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 


 


H-4

















 


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 secured parties 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 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 


 


H-5

















 


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 (including all letter of credit
obligations) have been fully and finally paid and discharged in full, the
termination of the hedge contracts with the secured parties, the commitments
(as defined in the credit agreement) under the credit agreement have been
terminated or expired, all letters of credit have terminated or expired, and
all obligations of the issuing lender and the lenders in respect of letters of
credit have been terminated, 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 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.


 


H-6

















 


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 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.


 


(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 


 


H-7

















 


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 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.


 


H-8

















 


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 (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 Secured Parties 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 Secured Parties 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 (acting upon the written direction of the Majority
Lenders or all Lenders, as applicable), and 


 


H-9

















 


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 Secured Parties 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 Secured Parties and their respective successors,
transferees, and assigns, and to the benefit of and be binding upon, the Swap
Counterparties, and each of their respective successors and assigns only to the
extent such successors, transferees, and assigns of a Swap Counterparty is a
Lender or an Affiliate of a Lender. 
Without limiting the generality of the foregoing clause, when any
Secured Party assigns or otherwise transfers any interest held by it under the
Credit Agreement or other Loan Document (other than an Interest Hedge Agreement
or a Hydrocarbon Hedge Agreement) 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.  Furthermore, when
any Swap Counterparty assigns or otherwise transfers any interest held by it
under an Interest Hedge Agreement or a Hydrocarbon Hedge Agreement to any other
Person pursuant to the terms of such agreement, that other Person shall
thereupon become vested with all the benefits held by such Secured Party under
this Pledge Agreement only if such Person is also then a Lender or an Affiliate
of a Lender.


 


(b)           Upon
the indefeasible payment in full and termination of the Secured Obligations and
the termination of all Commitments under the Credit Agreement, 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 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;


 


H-10

















 


(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
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 


 


H-11

















 


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                 Amendment &
Restatement; Confirmation of Liens. 
This Pledge Agreement is an amendment and restatement of the Existing
Pledge Agreement and supersedes the Existing Pledge Agreement in its entirety;
provided, however, that (i) the execution and delivery of this Pledge
Agreement shall not effect a novation of the Existing Pledge Agreement but
shall be, to the fullest extent applicable, in modification, renewal,
confirmation and extension of such Existing Pledge Agreement, and (ii) the
Liens, security interests and other interests in the Pledged Collateral (as
such term is defined in the Existing Pledge Agreement, hereinafter the “Original
Pledged Collateral”) granted under the Existing Pledge Agreement are and
shall remain legal, valid, binding and enforceable with regard to such Original
Pledged Collateral.  Each Pledgor party
to the Existing Pledge Agreement hereby acknowledges and confirms the
continuing existence and effectiveness of such Liens, security interests and
other interests in the Original Pledged Collateral granted under the Existing
Pledge Agreement, and further agrees that the execution and delivery of this
Pledge Agreement and the other Loan Documents shall not in any way release,
diminish, impair, reduce or otherwise affect such Liens, security interests and
other interests in the Original Pledged Collateral granted under the Existing Pledge
Agreement.


 


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 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:

  	
   

  
	
   

  	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
   

  	
  Senior Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
   

  
	
   

  	
   

  	
  Benjamin Daitch

  
	
   

  	
   

  	
  Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
									



 


H-13

















 


SCHEDULE
2.02(a)


 


PLEDGED
COLLATERAL


 


Attached to
and forming a part of that certain Amended and Restated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to Union Bank of California, N.A., as the
Administrative Agent.


 


	
  Pledgor

  	
   

  	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  
	
  None

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


H-14

















 


SCHEDULE 2.02(b)


 


PLEDGED COLLATERAL


 


Attached to
and forming a part of that certain Amended and Restated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to Union Bank of California, N.A., 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-15

















 


SCHEDULE
2.02(c)


 


PLEDGED COLLATERAL


 


Attached to
and forming a part of that certain Amended and Restated Pledge Agreement dated December 17,
2008 by Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., and WO
Energy, Inc., as Pledgors, to Union Bank of California, N.A., 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-16

















 


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-17

















 


 


	
  Organizational Number:

  	
   

  	
  C20757-1996-001

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
  88-0369151

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
  None.

  



 


H-18

















 


Annex 1 to the


Pledge Agreement


 


SUPPLEMENT
NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Amended and Restated 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 Union Bank of California, N.A. as Administrative
Agent (as hereinafter defined) under the Credit Agreement (as hereinafter
defined) for the benefit of the Secured Parties (as hereinafter defined).


 


RECITALS


 


D.            Reference is made to the following
documents related to extension of credit to the Borrower:


 


(i)            that certain
Amended and Restated Credit Agreement dated as of December 17, 2008 (as it
may be amended, restated or otherwise modified from time to time, the “Credit
Agreement”) by and among the Borrower, the lenders party thereto from time
to time (the “Lenders”), and Union Bank of California, N.A., as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”), and as issuing lender (in such capacity, the “Issuing Lender”);


 


(ii)           those Hedge Contracts (as defined in
the Credit Agreement) that the Borrower or any of its Subsidiaries may from
time to time enter into one or more with a Swap Counterparty (as defined in the
Credit Agreement, and together with the Administrative Agent, the Issuing
Lender and the Lenders, the “Secured Parties”).


 


B.            The Pledgors have entered into the Pledge Agreement in
order to induce the Lenders to make loans and the Issuing Lender to issue
letters of credit 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 Credit 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 Credit
Agreement to become a Pledgor under the Pledge Agreement in order to induce the
Lenders to make additional loans and the Issuing Lender to issue additional
letters of credit and as consideration for loans previously made and letters of
credit previously issued.


 


D.            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 


 


H-19

















 


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.


 


(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 


 


H-20

















 


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.


 


(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-21

















 


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:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
								



 


H-22

















 


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)


 


	
  Issuer

  	
   

  	
  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-23
















 


EXHIBIT I


 


FORM OF SECURITY AGREEMENT


 


THIS AMENDED AND RESTATED 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
signatory hereto (together with the Borrower, the “Grantors” and
individually, each a “Grantor”) and Union Bank of California, N.A. as
Administrative Agent (as hereinafter defined) for the ratable benefit of
itself, the Issuing Lender (as hereinafter defined), the Lenders (as
hereinafter defined), and the Swap Counterparties (as defined in the Credit
Agreement referred to below, and together with the Administrative Agent, the
Issuing Lender, and the Lenders collectively referred to herein as the “Secured
Parties” and individually, a “Secured Party”).


 


RECITALS


 


A.            The Borrower has
previously entered into that certain Credit Agreement dated November 29,
2005 (as it has been amended, restated, supplemented or otherwise modified from
time to time, the “Existing Credit Agreement”), among Borrower, the
Lenders (as hereinafter defined), the Administrative Agent (as hereinafter
defined) and the Issuing Lender (as hereinafter defined).


 


B.            In order to secure
the full and punctual payment and performance of the obligations under the
Existing Credit Agreement and the other Loan Documents (as defined in the
Existing Credit Agreement), the Borrower executed and delivered to the
Administrative Agent that certain Security Agreement dated as of November 29,
2005 (as heretofore amended and supplemented, the “Existing Security
Agreement”).


 


C.            The parties to the
Existing Credit Agreement have agreed to amend and restate the Existing Credit
Agreement in its entirety pursuant to that certain Amended and Restated Credit
Agreement dated as of December 17, 2008 (as amended, restated,
supplemented or otherwise modified from time to time, the “Credit Agreement”),
among the Borrower, the lenders party thereto from time to time (the “Lenders”),
and Union Bank of California, N.A., as administrative agent (in such capacity,
the “Administrative Agent”) and as issuing lender (in such capacity, the
“Issuing Lender”).


 


D.            It is a requirement under the Credit Agreement that (i) the
Borrower shall continue to secure the due payment and performance of all
Obligations (as defined in the Credit Agreement) by amending and restating in
its entirety the Existing Security Agreement as set forth herein, and (ii) the
other Grantors shall continue to secure the due payment and performance of all
Obligations (as defined in the Credit Agreement) by executing and delivering
this Security Agreement, in each case, in favor of the Administrative Agent for
the ratable benefit of the Secured Parties.


 


E.             Each Grantor (other
than the Borrower) is a subsidiary of the Borrower and will derive substantial
direct and indirect benefits from (i) the transactions contemplated by the
Credit Agreement and the other Loan Documents (as defined the Credit Agreement)
and (ii) the Hedge 


 


I-1

















 


Contracts (as
defined in the Credit Agreement) entered into by the Borrower or any of its
subsidiaries with a Swap Counterparty.


 


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. 
All meanings to defined terms, unless otherwise indicated, are to be
equally applicable to both the singular and plural forms of the terms defined.  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
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.


 


I-2

















 


“Chattel Paper”
has the meaning set forth in the UCC.


 


“Collateral”
has the meaning set forth in Section 2 of this Security Agreement.


 


“Commitments”
shall have the meaning assigned to such term in the Credit 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 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 the Secured Parties, 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 


 


I-3

















 


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”
shall have the meaning assigned to such term in the 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 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.


 


I-4

















 


“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.


 


“Loan Documents”
shall have the meaning assigned to such term in the Credit Agreement.


 


“Negotiable
Instrument” means a “negotiable instrument” as defined in the UCC.


 


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


 


“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, collectively, all of the following: (i) all
Obligations (as defined in the Credit Agreement) now or hereafter owed by the
Borrower, any Guarantor, or any of their respective Subsidiaries to the Secured
Parties, (ii) all amounts now or hereafter owed by the Borrower, any
Debtor, or any of their respective Subsidiaries under this Security Agreement
or the other Loan Documents to the Administrative Agent, and (iii) any
increases, extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise, including any post-petition interest in the event of a bankruptcy,
to the extent such interest is enforceable by law.  All such obligations shall be referred to in
this Security Agreement as the “Secured Obligations”.


 


“Security
Agreement” means this 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 


 


I-5

















 


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;

  
	
   

  	
   

  	
   

  
	
  (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

  



 


I-6

















 


	
   

  	
   

  	
  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 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 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.


 


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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 Secured Parties 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-8

















 


(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 


 


I-9

















 


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.


 


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.


 


I-10

















 


(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 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 (including all Letter of Credit Obligations), the termination of
all obligations of the Issuing Lender and the Lenders in respect of Letters of
Credit, the termination of the Hedge Contracts with the Secured Parties 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 (including all
Letter of Credit Obligations), the termination or expiration of all Letters of
Credit and the termination of all obligations of the Issuing Lender and the
Lenders in respect of Letters of Credit, the termination of the Hedge Contracts
with the Secured Parties and the termination or expiration of the Commitments,
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.


 


I-11
















 


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 any Secured Party
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
SECURED PARTY 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, 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.


 


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 Lenders or all Lenders,
as applicable), (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 


 


I-12

















 


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 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 secured party 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 


 


I-13

















 


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 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 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.


 


I-14

















 


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;


 


(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 


 


I-15

















 


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.


 


(i)             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 expenses, including the reasonable fees
and disbursements of its counsel and of any experts, which the Administrative
Agent and the Secured Parties 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 or any Secured Party hereunder,
and (iii) the failure by any Grantor to perform or observe any of the provisions
hereof.


 


(ii)          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 (acting upon the
written direction of 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.


 


(iii)       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.


 


(iv)      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 (including all Letter of Credit
Obligations), the termination or expiration of all Letters of Credit and the
termination of all obligations of the Issuing Lender and the Lenders in respect
of Letters of Credit, the termination of the Hedge Contracts with the Secured
Parties and the termination or expiration of the Commitments, (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 Issuing
Lender, the Lenders, and their respective successors, transferees, and assigns,
and to the benefit of and be binding upon, 


 


I-16

















 


the Swap Counterparties,
and each of their respective successors, transferees, and assigns to the extent
such successors, transferees, and assigns of a Swap Counterparty is a Lender or
an Affiliate of a Lender.  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 Documents to any other Person pursuant to the terms of the Credit
Agreement or such other Loan Documents, that other Person shall thereupon
become vested with all the benefits held by such Lender under this Security
Agreement.  Notwithstanding the
foregoing, when any Swap Counterparty assigns or otherwise transfers any
interest held by it under any Hedge Contract to any other Person pursuant to
the terms of such agreement, that other Person shall thereupon become vested
with all the benefits held by such Secured Party under this Security Agreement
only if such Person is also then a Lender or an Affiliate of a Lender.


 


(v)         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.


 


(vi)      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.


 


(vii)   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.


 


(viii)                        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.


 


(ix)        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 Credit Agreement shall be
controlling.


 


(x)           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 


 


I-17

















 


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.


 


(xi)        Amendment
and Restatement; Confirmation of Liens. 
This Security Agreement is an amendment and restatement of the Existing
Security Agreement and supersedes the Existing Security Agreement in its
entirety; provided, however, that (i) the execution and delivery of this
Security Agreement shall not effect a novation of the Existing Security
Agreement but shall be, to the fullest extent applicable, in modification,
renewal, confirmation and extension of such Existing Security Agreement, and (ii) the
Liens, security interests and other interests in the collateral as described in
the Existing Security Agreement (the “Original Collateral”) granted
under the Existing Security Agreement are and shall remain legal, valid,
binding and enforceable with regard to such Original Collateral.  Each Grantor party to the Existing Security
Agreement hereby acknowledges and confirms the continuing existence and
effectiveness of such Liens, security interests and other interests in the
Original Collateral granted under the Existing Security Agreement, and further
agrees that the execution and delivery of this Security Agreement and the other
Loan Documents shall not in any way release, diminish, impair, reduce or
otherwise affect such Liens, security interests and other interests in the
Original Collateral granted under the Existing Security Agreement.


 


(xii)                          Entire
Agreement.  THIS
SECURITY 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.


 


[SIGNATURE PAGES FOLLOW]


 


I-18
















 


The parties
hereto have caused this Security Agreement to be duly executed as of the date
first above written.


 


	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Benjamin 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:

  	
   

  
	
   

  	
   

  	
  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

  



 


I-19

















 


	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


I-20

















 


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

  



 


I-21

















 


 


	
  Grantor:

  	
  Square One 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:

  	
  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.

  



 


I-22

















 


	
  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

  
	
   

  	
   

  
	
  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

  



 


I-23

















 


	
  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

  
	
   

  	
   

  
	
  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-24

















 


Annex 1 to the


Security Agreement


 


SUPPLEMENT NO.
[            ] dated
as of
[               ]
(the “Supplement”), to the Amended and Restated 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 Union Bank of California, N.A. as
administrative agent under the Credit Agreement (as hereinafter defined) for
the benefit of itself and the Secured Parties (as hereinafter defined).


 


E.             Reference is made to the following
documents related to extension of credit to the Borrower:


 


(i)            that certain Amended and Restated
Credit Agreement dated as of December 17, 2008 (as it may be amended,
restated or otherwise modified from time to time, the “Credit Agreement”)
by and among the Borrower, the lenders party thereto from time to time (the “Lenders”),
and Union Bank of California, N.A., as administrative agent for such Lenders
(in such capacity, the “Administrative Agent”), and as issuing lender
(in such capacity, the “Issuing Lender”);


 


(ii)           those Hedge Contracts (as defined in
the Credit Agreement) that the Borrower, the Guarantors (as defined in the
Credit Agreement), or any of their Subsidiaries may from time to time enter
into one or more with a Swap Counterparty (as defined in the Credit Agreement),
and together with the Administrative Agent, the Issuing Lender, and the
Lenders, the “Secured Parties”).


 


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 loans and the Issuing
Lender to issue letters of credit 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 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 in order to induce the Lenders to make additional loans and
the Issuing


 


I-25

















 


Lender to issue
additional letters of credit and as consideration for loans previously made and
letters of credit previously issued.


 


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) 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 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)).


 


(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.


 


I-26

















 


(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.


 


(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, 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.


 


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:

  	
   

  



 


I-27

















 


	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ADMINISTRATIVE AGENT]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
								



 


I-28

















 


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-29

















 


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 Union Bank of California, N.A., as Administrative Agent for the
ratable benefit of itself and certain other credit parties as described in the
Mortgage (“Credit Parties”), 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) / 5:00 A.M. (Los Angeles, California Time), on December 17,
2008 (“Effective Date”). The Credit Parties, 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 Lincoln Plaza, 500 N. Akard Street, Suite 4200,
Dallas, Texas 75201, Telephone: (214) 922-4200, Facsimile: (214) 922-4209,
Attention: Randall Osterberg, or to such other address of which we may
subsequently notify you in writing. If you require the execution of


 


J-1

















 


transfer or
division orders, please forward the transfer or division orders to the
Administrative Agent at its address at indicated above, Attention: Randall
Osterberg.


 


J-2

















 


Should you
have any questions in connection with any of the foregoing, please do not
hesitate to contact us.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
							



 


J-3

















EXHIBIT A


 




	
  Name and Location of Well

  	
   

  	
  Division Order or Lease No.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  






 


J-4
















 


Exhibit K — Form of Borrower’s Counsel Opinion


 


December 17,
2008


 


Union
Bank of California, N.A.


Administrative
Agent and a Lender, and all the


other
Lenders party to the Senior Credit Agreement


described
below


Lincoln
Plaza


500
N. Akard Street, Suite 4200


Dallas,
Texas 75201


 


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 Amended and Restated Credit Agreement (the “Senior Credit Agreement”) dated as
of even date herewith, executed by Borrower, Union Bank of California, N.A., 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 Senior 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
Senior Credit Agreement unless otherwise indicated (collectively, the “Transaction Documents”):


 


K-1

















 


(a)           the Senior Credit Agreement;


 


(b)           the Amended and Restated Note,
executed by Borrower and payable to the order of the Administrative Agent in
the original principal amount of $82,500,000 and the Amended and Restated Note,
executed by Borrower and payable to the order of Natixis in the original
principal amount of $37,500,000;


 


(c)           the Amended and Restated Security
Agreement, executed by the Loan Parties, in favor of the Administrative Agent
(the “Security Agreement”);


 


(d)           the Amended and Restated Guaranty,
executed by the Guarantors, in favor of the Administrative Agent, for the
benefit of the Beneficiaries (as defined therein);


 


(e)           the Reaffirmation and Second
Amendment of 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 and
Administrative Agent as the Mortgagee (the “Texas
Deed of Trust Reaffirmation”) and the Reaffirmation, Supplement
and Third Amendment of 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 and
Administrative Agent as the Mortgagee (the “Texas
Deed of Trust Supplement”; and collectively with the Texas Deed
of Trust Reaffirmation being the “Texas Reaffirmations”);


 


(f)            the Reaffirmation and Second
Amendment of Mortgage, Line of Credit Mortgage, Assignment, Security Agreement,
Fixture Filing and Financing Statement dated December 17, 2008, executed
by Borrower and Ladder as Mortgagors and Administrative Agent as the Mortgagee
(the “Oklahoma
Reaffirmation”);


 


(g)           the Reaffirmation and First Amendment
of Mortgage, Line of Credit Mortgage, Assignment, Security Agreement, Fixture
Filing and Financing Statement dated December 17, 2008, executed by CPNM
as Mortgagor and Administrative Agent as the Mortgagee (the “New Mexico Reaffirmation”);


 


(h)           the Amended and Restated Pledge
Agreement, executed by Borrower, WOEN, and WOE in favor of the Administrative
Agent (the “Pledge
Agreement”);


 


(j)            the Subordination and Intercreditor
Agreement;


 


K-2

















 


(j)            the UCC-1 Financing Statement
reflecting Borrower as debtor and the Administrative Agent as secured party,
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,
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,
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, 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,
filed in the Office of the Secretary of State of Texas (the “Operating Financing Statement”);


 


(o)           the UCC-1 Financing Statement reflecting
Production as debtor and the Administrative Agent as secured party, 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, 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,
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,
filed in certain Oklahoma county filing offices (the “Ladder County Financing Statement”);


 


K-3

















 


(s)           the UCC-1 Financing Statement
reflecting CPNM as debtor and the Administrative Agent as secured party, 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,
filed in certain Texas county filing offices (the “Square One County Financing
Statement”);


 


(u)           the UCC-1 Financing Statement
reflecting WOE as debtor and the Administrative Agent as secured party, filed
in certain Texas 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,
filed in certain Texas 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 certain Texas county filing offices (the “Production County Financing
Statement”;


 


(x)            the UCC-3 Financing Statement
Amendment for Square One to be filed in Hutchinson County, Texas in connection
with the Texas Deed of Trust Supplement (the “Square One Financing Statement Amendment”);


 


(y)           the UCC-3 Financing Statement
Amendment for WOEN to be filed in Hutchinson County, Texas in connection with
the Texas Deed of Trust Supplement (the “WOEN Financing Statement Amendment”);


 


(z)            the UCC-3 Financing Statement
Amendment for WOE to be filed in Hutchinson County, Texas in connection with
the Texas Deed of Trust Supplement (the “WOE Financing Statement Amendment”);


 


(aa)         the UCC-3 Financing Statement Amendment
for Operating to be filed in Hutchinson County, Texas in connection with the
Texas Deed of Trust Supplement (the “Operating Financing Statement Amendment”);


 


(bb)         the UCC-3 Financing Statement Amendment
for Production to be filed in Hutchinson County, Texas in connection with the
Texas Deed of Trust Supplement (the 


 


K-4

















 


“Production Financing Statement Amendment” and
together with the Square One County Financing Statement, the WOE County
Financing Statement, the Operating County Financing Statement, the Production
County Financing Statement, the Borrower County Financing Statement, the Ladder
County Financing Statement, the CPNM County Financing Statement, the Square One
Financing Statement Amendment, the WOEN Financing Statement Amendment, the WOE Financing
Statement Amendment and the Operating Financing Statement Amendment,
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 Collateral”
shall mean the real property, real estate, leases, and fixtures described in
the Texas Deed of Trust Supplement.  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, 


 


K-5

















 


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”);


 


(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;


 


K-6

















 


(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”);


 


(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;


 


K-7

















 


(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”);
and


 


(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.


 


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 


 


K-8

















 


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 Reaffirmation and the New Mexico Reaffirmation) 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 


 


K-9

















 


Uniform Commercial Code as adopted in the State of Texas (the “Texas UCC”) and the
State of 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 


 


K-10

















 


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 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.


 


K-11

















 


7.             We express no opinion regarding (a) the
enforceability of provisions of the Texas Reaffirmations 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.


 


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 Senior 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 Senior 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 Senior 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.


 


K-12

















 


4.             Section 2.09(d) of
the Senior 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 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 


 


K-13

















 


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 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 


 


K-14

















 


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.


 


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.


 


K-15

















 


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.


 


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 


 


K-16

















 


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 Reaffirmation and New Mexico Reaffirmation) 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.


 


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 


 


K-17

















 


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 had and continues to 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 had and continues to have a perfected security
interest in the Pledged Collateral.


 


19.           The form of the
Texas Deed of Trust Supplement 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 Deed
of Trust Supplement in the real property records of Hutchinson County, Texas,
the Texas Deed of Trust Supplement 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 Deed of Trust Supplement in the real property records of Hutchinson
County Texas (the “County Filing Office”) is the
only filing, recording, and registration necessary to publish notice and
preserve the liens of the Texas Deed of Trust Supplement in the Real Property
Collateral.  The Texas Deed of Trust
Supplement 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 Hutchinson County, Texas of County 


 


K-18

















 


Financing Statements naming Square One, WOE,
Operating, Production and WOEN, as debtors, 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 Deed of Trust
Supplement) 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.


 


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
Deed of Trust Supplement 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 Deed of Trust Supplement, 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 Senior Credit Agreement.


 


22.           The Advances to be
made on the date hereof and the application of the proceeds  thereof
as provided for in the Senior 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 Senior 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 Senior 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


 


K-19

















 


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.


 


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, dated December 17, 2008, including all associated
agreements.


 


K-20