Exhibit 10.1


 





 


November 19, 2008


 


Cano
Petroleum, Inc.


Burnett
Plaza


801
Cherry Street


Suite 3200,
Unit 25


Fort
Worth, TX 76102


 


Attention: Ben Daitch,
Senior Vice President and Chief Financial Officer


 


Ladies and Gentlemen:


 


Cano
Petroleum, Inc. (the “Company”)
has advised Union Bank of
California, N.A. (“UBOC”)
that the Company desires to amend its existing Credit Agreement, dated as of November 29,
2005, as heretofore amended (as so amended, the “Existing
Credit Agreement”) to be implemented through an amended and
restated credit agreement or an amendment of the Existing Credit Agreement (the
“Amended Senior Credit Facility”).  All capitalized terms used herein which are
not otherwise defined herein shall have the meaning assigned to such terms by
the Existing Credit Agreement.


 


In connection with the
foregoing, UBOC is pleased to advise you of its commitment of $41,250,000
towards the Amended Senior Credit Facility and to continue to act as the sole
administrative agent (in such capacity, the “Administrative Agent”) for the Amended
Senior Credit Facility, all upon and subject to (a) the terms and
conditions set forth in this letter (this “Commitment Letter”),
(b) the Summary of Terms and Conditions attached as Exhibit A hereto
and incorporated herein by this reference (the “Summary of Terms”) and (c) the Fee
Letter referred to below.  THE COMMITMENT PROVIDED FOR HEREIN IS IN LIEU OF,
AND NOT IN ADDITION TO, UBOC’S COMMITMENT UNDER THE EXISTING CREDIT AGREEMENT.


 


The commitment of UBOC
hereunder is subject to the satisfaction of each of the following conditions
precedent in a manner acceptable to UBOC: 
(a) the completion of a due diligence review of the assets,
liabilities (including contingent liabilities) and businesses of the Company
and its subsidiaries in scope and with results satisfactory to us in our sole
and absolute discretion; (b) the accuracy and completeness of all
representations that you and your affiliates make to UBOC and your compliance
with the terms of this Commitment Letter (including the Summary of Terms) and
the Fee Letter; (c) prior to closing of the Amended Senior Credit Facility
there shall be no competing offering, placement or arrangement of any debt
securities or bank financing by or on behalf of the Company or any of their
respective subsidiaries (other than the subordinated term debt facility
proposed by UnionBanCal Equities, Inc.); (d) the negotiation,
execution and delivery of definitive documentation for the Amended Senior
Credit Facility consistent with the Summary of Terms and otherwise satisfactory
to UBOC; (e) no material adverse change in or material disruption of
conditions in the financial, banking or capital markets generally; (f) no
change, occurrence or development that is reasonably likely in our opinion, to
have a material adverse effect on the business, prospects, assets, liabilities,
operations, or condition (financial or otherwise) of the Company and its
subsidiaries and affiliates, shall have occurred or become known to us; and (g) our
not becoming aware after the date hereof of any information or other matter
affecting the Company or any of


 

















 


its subsidiaries or
affiliates which in our judgment is inconsistent in a material and adverse
manner with any information or other matter disclosed to us prior to the date
hereof.


 


You represent, warrant and
covenant that (a) all financial projections concerning the Company and its
subsidiaries that have been or are hereafter made available to UBOC by you or
any of your representatives (or on your or their behalf) or by the Company or
any of its subsidiaries or representatives (or on their behalf) (the “Projections”) have been or will be prepared in
good faith based upon reasonable assumptions and (b) all information and
evaluations prepared by you and your advisors, or on your behalf, relating to
the Amended Senior Credit Facility (together with the Projections, the “Information”), which
has been or is hereafter made available to UBOC or the Lenders by you or any of
your representatives (or on your or their behalf) or by the Company or any of
its subsidiaries or representatives (or on their behalf), as and when
furnished, is and will be complete and correct in all material respects and
does not and will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements contained therein not
misleading.  You agree to furnish us with
further and supplemental information from time to time until the date of the
initial borrowing under the Amended Senior Credit Facility (the “Closing Date”) so
that the representation, warranty and covenant in the immediately preceding
sentence are correct on the Closing Date as if the Information were being
furnished, and such representation, warranty and covenant were being made, on
such date.  In issuing this commitment,
UBOC is and will be using and relying on the Information without independent
verification thereof.


 


By executing this Commitment
Letter, you agree to reimburse UBOC from time to time on demand for all
out-of-pocket fees and expenses (including, but not limited to, (a) the
fees, disbursements and other charges of outside counsel to UBOC, and of
special and local counsel, if any, retained by the Administrative Agent and (b) due
diligence expenses) incurred in connection with the Amended Senior Credit
Facility, the syndication thereof and the preparation of the definitive
documentation therefor, and with any other aspect of the Amended Senior Credit
Facility and any similar transaction and any of the other transactions
contemplated thereby.


 


You agree to indemnify and
hold harmless UBOC, each lender that may be party to the Amended Senior Credit
Facility from time to time (the “Lenders”)
and each of their affiliates and their respective officers, directors,
employees, agents, advisors and other representatives (each an “Indemnified Party”)
from and against (and will reimburse each Indemnified Party as the same are
incurred for) any and all claims, damages, losses, liabilities and expenses
(including, without limitation, the reasonable fees, disbursements and other
charges of counsel) that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or by
reason of (including, without limitation, in connection with any investigation,
litigation or proceeding or preparation of a defense in connection therewith)
the Amended Senior Credit Facility and any other financings, or any use made or
proposed to be made with the proceeds thereof (IN
ALL CASES, WHETHER OR NOT CAUSED OR ARISING, IN WHOLE OR IN PART, OUT OF THE
COMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNIFIED PARTY),
except to the extent such claim, damage, loss, liability or expense is found in
a final, nonappealable judgment by a court of competent jurisdiction to have
resulted from such Indemnified Party’s gross negligence or willful
misconduct.  In the case of an
investigation, litigation or proceeding to which the indemnity in this
paragraph applies, such indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by you, your equityholders or creditors or
an Indemnified Party, whether or not an Indemnified Party is otherwise a party
thereto and whether or not any aspect of the Amended Senior Credit Facility is
consummated.  You also agree that no
Indemnified Party shall have any liability (whether direct or indirect, in
contract or tort or otherwise) to you or your subsidiaries or affiliates or to
your or their respective equity holders or creditors arising out of, related to
or in connection with any aspect of the Amended Senior Credit Facility, except
to the extent of direct, as opposed to special, indirect, consequential or
punitive, damages 


 


2

















 


determined in a final,
nonappealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party’s gross negligence or willful misconduct.  Notwithstanding any other provision of this
Commitment Letter, no Indemnified Party shall be liable for any damages arising
from the use by others of information or other materials obtained through
electronic telecommunications or other information transmission systems, other
than for direct or actual damages resulting from the gross negligence or
willful misconduct of such Indemnified Party as determined by a final and
nonappealable judgment of a court of competent jurisdiction.


 


This Commitment Letter and
the contents hereof are confidential and, except for disclosure hereof or
thereof on a confidential basis to your accountants, attorneys and other
professional advisors retained by you in connection with the Amended Senior
Credit Facility or as otherwise required by law, may not be disclosed in whole
or in part to any person or entity without our prior written consent; provided, however, it is understood and
agreed that you may disclose this Commitment Letter (including the Summary of
Terms) (a) on a confidential basis to the board of directors and advisors
of the Company in connection with their consideration of the Amended Senior
Credit Facility, and (b) after your acceptance of this Commitment Letter,
in filings with the Securities and Exchange Commission and other applicable
regulatory authorities and stock exchanges. 
UBOC hereby notify you that pursuant to the requirements of the USA
PATRIOT Act, Title III of Pub. L. 107-56 (signed into law October 26,
2001) (the “Act”),
UBOC is required to obtain, verify and record information that identifies you,
which information includes your name and address and other information that
will allow UBOC to identify you in accordance with the Act.


 


You acknowledge that UBOC or
its affiliates may be providing financing or other services to parties whose
interests may conflict with yours.  UBOC
further advises you that they will not make available to you confidential
information that they have obtained or may obtain from any other customer.  In connection with the services and
transactions contemplated hereby, you agree that UBOC is permitted to access,
use and share with any of their bank or non-bank affiliates, agents, advisors
(legal or otherwise) or representatives any information concerning you or any
of your or its respective affiliates that is or may come into the possession of
UBOC or any of its affiliates.


 


In connection with all
aspects of each transaction contemplated by this Commitment Letter, you
acknowledge and agree, and acknowledge your affiliates’ understanding,
that:  (a) (i) the arranging
and other services described herein regarding the Amended Senior Credit Facility
are arm’s-length commercial transactions between you and your affiliates, on
the one hand, and UBOC, on the other hand, (ii) you have consulted your
own legal, accounting, regulatory and tax advisors to the extent you have
deemed appropriate, and (iii) you are capable of evaluating, and
understand and accept, the terms, risks and conditions of the transactions
contemplated hereby; (b) (i) UBOC has been, is, and will be acting
solely as a principal and, except as otherwise expressly agreed in writing by
the relevant parties, has not been, is not, and will not be acting as an
advisor, agent or fiduciary for you, any of your affiliates or any other person
or entity and (ii) UBOC shall not any obligation to you or your affiliates
with respect to the transactions contemplated hereby except those obligations
expressly set forth herein; and (c) UBOC and its affiliates may be engaged
in a broad range of transactions that involve interests that differ from yours
and those of your affiliates, and UBOC has no obligation to disclose any of
such interests to you or your affiliates. To the fullest extent permitted by
law, you hereby waive and release any claims that you may have against UBOC and
its affiliates with respect to any breach or alleged breach of agency or
fiduciary duty in connection with any aspect of any transaction contemplated by
this Commitment Letter.


 


The provisions of the
immediately preceding five paragraphs shall remain in full force and effect
regardless of whether any definitive documentation for the Amended Senior
Credit Facility shall be executed and delivered, and notwithstanding the
termination of this Commitment Letter or any commitment or undertaking of UBOC
hereunder; provided, however,
that you shall be deemed released of 


 


3

















 


your reimbursement and
indemnification obligations hereunder upon the execution of all definitive
documentation for the Amended Senior Credit Facility which contain the
comparable provisions related thereto, and the initial extension of credit
thereunder.


 


This Commitment Letter may
be executed in counterparts which, taken together, shall constitute an
original.  Delivery of an executed
counterpart of this Commitment Letter by telecopier or facsimile shall be
effective as delivery of a manually executed counterpart thereof.


 


This Commitment Letter
(including the Summary of Terms) shall be governed by, and construed in
accordance with, the laws of the State of Texas.


 


WAIVER OF JURY TRIAL: Each of you and UBOC hereby irrevocably
waives any and all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Commitment Letter (including the Summary of Terms), the
Amended Senior Credit Facility and the other transactions contemplated hereby
and thereby or the actions of UBOC in the negotiation, performance or
enforcement hereof.


 


The commitments and
undertakings of UBOC may be terminated by us if you fail to perform your
obligations under this Commitment Letter on a timely basis.  This Commitment Letter (including the Summary
of Terms) embodies the entire agreement and understanding among UBOC, you, and
your affiliates with respect to the Amended Senior Credit Facility and
supersedes all prior agreements and understandings relating to the specific
matters hereof.  However, please note
that the terms and conditions of the commitment of, and the undertaking of,
UBOC hereunder are not limited to those set forth herein or in the Summary of
Terms.  Those matters that are not
covered or made clear herein or in the Summary of Terms are subject to mutual
agreement of the parties.  No party has
been authorized by UBOC to make any oral or written statements that are
inconsistent with this Commitment Letter.


 


This Commitment Letter is
not assignable by you without our prior written consent and is intended to be
solely for the benefit of the parties hereto and the Indemnified Parties.


 


This Commitment Letter and
all commitments and undertakings of UBOC hereunder will expire at 5:00 p.m.
(Houston time) on November 19, 2008 unless you execute this Commitment
Letter and the Fee Letter and return them to us prior to that time (which may
be by facsimile transmission), whereupon this Commitment Letter (including the
Summary of Terms) and the Fee Letter shall become binding agreements.  Thereafter, all commitments and undertakings
of UBOC hereunder will expire on December 19, 2008, unless the Closing
Date occurs on or prior thereto.  In
consideration of the time and resources that UBOC will devote to the Amended
Senior Credit Facility, you agree that, until such expiration, you will not
solicit, initiate, entertain or permit, or enter into any discussions in
respect of, any offering, placement or arrangement of any competing
subordinated or second lien credit facility or facilities for the Borrower and
its subsidiaries with respect to the matters addressed in this Commitment
Letter (other than the subordinated term debt facility proposed by UnionBanCal
Equities, Inc.).


 


THIS
WRITTEN AGREEMENT (WHICH INCLUDES THE SUMMARY OF TERMS) AND THE FEE LETTER
REPRESENT THE FINAL AGREEMENT BETWEEN 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 BETWEEN THE PARTIES.


 


[THE BALANCE OF THIS PAGE IS
INTENTIONALLY LEFT BLANK]


 


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We are pleased to have the
opportunity to work with you in connection with this important financing.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  UNION
  BANK OF CALIFORNIA, NA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Timothy Brendel

  
	
   

  	
  Name:

  	
  Timothy Brendel

  
	
   

  	
  Title:

  	
  Assistant Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED AND AGREED TO

  	
   

  
	
  AS OF THE DATE FIRST ABOVE WRITTEN:

  	
   

  
	
   

  	
   

  
	
  CANO
  PETROLEUM, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Benjamin Daitch

  	
   

  
	
  Name:

  	
  Benjamin Daitch

  	
   

  
	
  Title:

  	
  SVP &
  CFO

  	
   

  



 


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  CANO PETROLEUM, INC.

  	
   

  	
  CONFIDENTIAL

  



 


SUMMARY OF TERMS & CONDITIONS


FOR AMENDED AND RESTATED CREDIT AGREEMENT


DATED NOVEMBER 10, 2008


 


	
  Borrower:

  	
   

  	
  Cano Petroleum, Inc. (“Cano” or the “Company”)

  
	
   

  	
   

  	
   

  
	
  Lead Arranger,

  	
   

  	
   

  
	
  Administrative

  	
   

  	
   

  
	
  Agent:

  	
   

  	
  Union Bank of California, N.A. (“UBOC”, “Agent”).

  
	
   

  	
   

  	
   

  
	
  Lenders:

  	
   

  	
  UBOC
  and a syndicate of financial institutions arranged by UBOC (collectively, the
  “Lenders”).

  
	
   

  	
   

  	
   

  
	
  Guarantors:

  	
   

  	
  All current and future material subsidiaries

  
	
   

  	
   

  	
   

  
	
  Facility:

  	
   

  	
  Senior Secured Revolving Credit Facility (the “Revolver”) documented
  at $120,000,000. Availability will be subject to a maximum Borrowing Base
  amount of $60,000,000 (“Borrowing Base”). The Borrowing Base will be
  redetermined at least semi-annually.

  
	
   

  	
   

  	
   

  
	
  Interest Rate:

  	
   

  	
  See Addendum I

  
	
   

  	
   

  	
   

  
	
  Maturity:

  	
   

  	
  Four years from Closing

  
	
   

  	
   

  	
   

  
	
  Purpose:

  	
   

  	
  To provide funds for the development of oil and gas assets, working
  capital and general corporate purposes.

  
	
   

  	
   

  	
   

  
	
  Optional

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prepayments:

  	
   

  	
  Prepayments will be permitted at any time without premium or penalty
  (except for breakage and related costs associated with prepayments of
  Eurodollar Loans), subject to minimum amount requirements.

  
	
   

  	
   

  	
   

  
	
  Collateral and

  	
   

  	
   

  
	
  Security:

  	
   

  	
  The Credit Facility will be secured by a first priority lien on the
  Borrower’s existing and to be acquired oil and gas properties and related
  assets. Negative pledge on all other assets of the Borrower.

  
	
   

  	
   

  	
   

  
	
  Borrowing Base:

  	
   

  	
  The Borrowing Base shall be determined by the Agent and Lenders in
  their sole discretion based upon the most recent reserve report. Any increase
  in the Borrowing Base will require 100% of Lenders’ approval; otherwise,
  Majority Lenders may set the Borrowing Base amount. The Borrowing Base will
  be redetermined semi-annually. The outstanding principal balance may at no
  time exceed the Borrowing Base.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Majority Lenders and the Borrower may request one additional
  Borrowing Base redetermination during the interval between each scheduled

  



 





 


1

















 


	
   

  	
   

  	
  redetermination and the Majority Lenders may require additional
  redeterminations based upon certain material dispositions.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  If the Borrowing Base ever falls below the Aggregate Balance (the
  amount by which the Aggregate Balance exceeds the Borrowing Base is herein
  called the “Borrowing Base Deficiency”), Borrower must either:
  (1) prepay the Revolving Credit Facility in the amount of the deficit in
  six equal monthly installments, (2) pledge additional collateral
  acceptable to Agent which in its determination, based on its sole discretion,
  have sufficient value to eliminate the Borrowing Base Deficiency, or
  (3) some combination of (1) and (2) above.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Borrower will furnish by September 30, of each year an
  annual engineering report on proved oil and gas properties of the Borrower,
  prepared by independent petroleum engineers acceptable to the Agent. The
  Borrower will submit an annual in-house engineering evaluation due
  March 31 on the oil and gas properties. In addition, the Borrower shall
  provide the Lenders with supplemental engineering data as is necessary to
  perform the Borrowing Base redeterminations.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In addition to the engineering reports, Borrower will furnish the
  following reports:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ·

  	
  A quarterly report of production and associated lease operating
  statements for the oil and gas properties of the Borrower. This information
  will be certified by an officer of the Borrower and submitted in conjunction
  with financial statements on a monthly basis.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ·

  	
  Concurrent with the delivery of the engineering reports, the Borrower
  will provide to the Lenders a quarterly cash flow budget for the next twelve
  months which will project monthly production volumes, revenues, expenses,
  taxes and budgeted capital expenditures of the Borrower.

  
	
   

  	
   

  	
   

  
	
  Representations and

  	
   

  	
   

  
	
  Warranties, and

  	
   

  	
   

  
	
  Conditions

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Precedent:

  	
   

  	
  Usual and customary including but not limited to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
  Existence, incorporation, organization and good standing of the
  Borrower and authorization to enter into the Credit Agreement and associated
  documents.

  
	
   

  	
   

  	
  2.

  	
  Absence of other indebtedness of the Borrower except as described in
  negative covenants and as disclosed and approved prior to closing, including
  contingent liabilities, indirect obligations, and tax assessments (the other
  indebtedness restriction referenced herein will not pertain to interest rate
  derivatives, which might be classified as indebtedness pursuant to FAS 133).

  
	
   

  	
   

  	
  3.

  	
  Full disclosure has been provided with respect to all statements,
  certificates, documents or other information in connection with this
  transaction.

  
					



 


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  4.

  	
  Compliance with all applicable laws including, without limitation,
  all environmental laws.

  
	
   

  	
   

  	
  5.

  	
  Absence of any material pending or threatened litigation which have
  not been previously disclosed and accepted by the Agent.

  
	
   

  	
   

  	
  6.

  	
  No material adverse change.

  
	
   

  	
   

  	
  7.

  	
  Absence of default with respect to any other obligation of the
  Borrower.

  
	
   

  	
   

  	
  8.

  	
  Satisfactory legal opinion of Borrower’s counsel.

  
	
   

  	
   

  	
  9.

  	
  Payment of taxes.

  
	
   

  	
   

  	
  10.

  	
  Delivery of certificate of Senior Officer of the Borrower stating
  that all representations and warranties are true, no default, or event of
  default currently exists, and the Borrower is complying with all respective
  obligations.

  
	
   

  	
   

  	
  11.

  	
  Modifications to 2nd lien credit facility.

  
	
  Affirmative

  	
   

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  The Credit Agreement and other loan documents governing the Credit
  Facility will contain customary Affirmative Covenants with respect to the
  Borrower, including, but not limited to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
  Borrower will deliver the following financial statements and reports:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (a)

  	
   

  	
  Annual audited financial statements of Borrower (with accountants’
  certificate of no default and officers’ certificate of compliance) within 90
  days after each fiscal year beginning with the period ending June 30,
  2007.

  
	
   

  	
   

  	
   

  	
  (b)

  	
   

  	
  Quarterly unaudited financial statements of Borrower, beginning
  December 31, 2006 (with officer’s certificate of compliance) within 45
  days after each month.

  
	
   

  	
   

  	
   

  	
  (c)

  	
   

  	
  Quarterly report outlining current hedge position and certifying that
  the Borrower is in compliance with Required Hedges as defined below.

  
	
   

  	
   

  	
   

  	
  (d)

  	
   

  	
  Reports outlined under “Borrowing Base” above.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  The Lenders will have general access to additional information.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  Borrower will maintain insurance as is customary in industry and
  satisfactory to Agent.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.

  	
  All transactions among the Borrower and its affiliates shall be on
  terms no more favorable than could be obtained from third parties in an arm’s
  length transaction.

  
	
   

  	
   

  	
   

  	
   

  
	
  Negative

  	
   

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  The Credit Agreement and other loan documents governing the Credit
  Facility will contain Negative Covenants with respect to the Borrower,
  including but not limited to:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
  Debt (other than trade debt and taxes, but including guaranties) is
  limited to the Credit Facility and other debt not to exceed types and amounts
  acceptable to Lenders and Borrower.

  



 


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  2.

  	
  No liens will be permitted, subject to basket(s) approved by
  Lenders.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  Mergers are prohibited.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.

  	
  Sales of property or other assets will require consent of Lenders,
  subject to permitted property sale basket of $2 million in between regularly
  scheduled borrowing base redeterminations (which would not require such
  consent).

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  5.

  	
  Investments will be limited to cash equivalents. Loans and new lines
  of business will be generally prohibited.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  6.

  	
  Limitation on change of ownership of Borrower.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  7.

  	
  No trade payable to exceed 90 days unless such payable is in good
  faith dispute.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  8.

  	
  Required Hedges (“Required Hedges”). Hedges currently in place will
  be required to be maintained (no additional hedges will be required). The
  Company will be allowed to hedge up to 85% of projected PDP.

  
	
   

  	
   

  	
   

  	
   

  
	
  Financial

  	
   

  	
   

  	
   

  
	
  Covenants:

  	
   

  	
  Current Ratio.  The
  Borrower’s consolidated current assets plus the unused Borrowing Base to
  consolidated current liabilities shall not be less than 1.00:1.00, calculated
  quarterly. For purposes of this calculation, the Borrower’s consolidated
  current liabilities will exclude current maturities of the Credit Facility.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Maximum Debt to EBITDA Ratio*. The
  Borrower’s Total Indebtedness (defined according to GAAP) may not exceed an
  EBITDA ratio of 4.50 to 1.00 on a rolling four-quarter basis, stepping down
  4.00:1.00 on December 31, 2008. Convertible preferred equity to be
  excluded from Total Indebtedness. Borrower’s capacity to borrower hereunder
  limited based on most-recent quarterly compliance certificate evidencing the
  maximum amount of additional debt that can be funded (before default under
  this covenant is reached).

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Interest Coverage Ratio*. To be no less than
  3.0x on a rolling four-quarter basis beginning December 31, 2008. Cash
  dividends on convertible preferred equity or any other cash payment on any
  junior capital to be included as interest.

  



 






	
   

  	
   

  	
  *Ratio to include EBITDA generated from oil and gas properties
  acquired by Borrower on a pro-forma basis (application to be determined).
  EBITDA also includes gain on sale of Pantwist properties, but will exclude
  gains on asset sales going forward.

  



 


4

















 


	
  Events of Default:

  	
   

  	
  The Credit Agreement and other loan documents will contain such
  events of default with respect to the Borrower as are usual and customary for
  transactions of this kind, including without limitation defaults in payment
  or performance under the Credit Facility, misrepresentations, cross-defaults
  to other debt or material obligations, events of default related to ERISA and
  insolvency, change of ownership, change in management and any material
  adverse change affecting Borrower.

  
	
   

  	
   

  	
   

  
	
  Majority Lenders:

  	
   

  	
  Lenders holding more than 66
  2/3% of the Revolver when there are more than 2 Lenders, otherwise all
  Lenders.

  
	
   

  	
   

  	
   

  
	
  Expenses:

  	
   

  	
  Borrower will pay all reasonable costs and expenses associated with
  the preparation, due diligence, administration, syndication and enforcement
  of all documentation executed in connection with the Facility, including
  without limitation, the reasonable legal fees of counsel to the Agent,
  regardless of whether or not the Facility is closed. Agent will provide to
  Borrower a good faith estimate of such expenses. In addition, Borrower will
  not owe Agent any reasonable costs and expenses if the Agent unreasonably
  refuses to close the Facility. Borrower will also pay the expenses of the
  Agent in connection with the enforcement of any loan documentation for the
  Facility.

  
	
   

  	
   

  	
   

  
	
  UBOC Counsel:

  	
   

  	
  Bracewell & Giuliani LLP

  
	
   

  	
   

  	
   

  
	
  Subject to:

  	
   

  	
  Documentation acceptable to Lenders.

  
	
   

  	
   

  	
   

  
	
  Notice:

  	
   

  	
  BY RECEIPT OF THIS DOCUMENT, THE BORROWER AND ITS SUBSIDIARIES AND
  AFFILIATES AGREE NOT TO DIVULGE OR DISCUSS THE CONTENTS OF THIS DOCUMENT TO
  OR WITH ANY THIRD PARTY WHOSE KNOWLEDGE OF THE CONTENTS IS NOT DEEMED
  NECESSARY BY THE BORROWER IN CONNECTION WITH THE CONSUMMATION OF THE
  TRANSACTION CONTEMPLATED HEREBY OR IN CONNECTION WITH THE ACQUISITION OF
  ASSETS IN CONNECTION HEREWITH, WITHOUT FIRST RECEIVING THE CONSENT OF UNION
  BANK OF CALIFORNIA, N.A.  UNTIL AGREED
  OTHERWISE, THIS DOCUMENT SHALL REMAIN THE PROPERTY OF UNION BANK OF
  CALIFORNIA, N.A. AND SHALL BE TREATED AS CONFIDENTIAL AND PROPRIETARY TO
  UNION BANK OF CALIFORNIA, N.A.

  



 


5

















 


ADDENDUM I


 


Interest Rate:


 


	
   

  	
   

  	
  Utilization

  	
   

  	
  LIBOR

  Margin

  (bps)

  	
   

  	
  Base Rate

  Margin

  (bps)

  	
   

  	
  Commitment

  Fee (bps)

  	
   

  
	
  Level 1

  	
   

  	
  < 50%

  	
   

  	
  200.0

  	
   

  	
  87.5

  	
   

  	
  37.5

  	
   

  
	
  Level 2

  	
   

  	
  > 50%

  	
   

  	
  225.0

  	
   

  	
  112.5

  	
   

  	
  37.5

  	
   

  
	
  Level 3

  	
   

  	
  > 75%

  	
   

  	
  250.0

  	
   

  	
  137.5

  	
   

  	
  37.5

  	
   

  
	
  Level 4

  	
   

  	
  > 90%

  	
   

  	
  275.0

  	
   

  	
  162.5

  	
   

  	
  50.0

  	
   

  



 


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