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                                                                   EXHIBIT 10.13

                                CREDIT AGREEMENT


                  THIS CREDIT AGREEMENT is made effective as of the 1st day of
December, 2000, by and between CONTANGO OIL & GAS COMPANY, a Delaware
corporation (the "Borrower"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION,
NATIONAL BANKING ASSOCIATION (THE "LENDER").


                                   WITNESSETH:

                  In consideration of the mutual covenants and agreements herein
contained, the Borrower and the Lender hereby agree as follows:



                                    ARTICLE I

                         DEFINITIONS AND INTERPRETATION

1.1 Terms Defined Above. As used in this Credit Agreement, the terms "Borrower"
and "Lender" shall have the meaning assigned to them hereinabove.

1.2 Additional Defined Terms. As used in this Credit Agreement, each of the
following terms shall have the meaning assigned thereto in this Section, unless
the context otherwise requires:

                  "Affiliate" shall mean any Person directly or indirectly
         controlling, or under common control with, the Borrower and includes
         any Subsidiary of the Borrower and any "affiliate" of the Borrower
         within the meaning of Reg. ss.240.12b-2 of the Securities Exchange Act
         of 1934, as amended, with "control," as used in this definition,
         meaning possession, directly or indirectly, of the power to direct or
         cause the direction of management, policies or action through ownership
         of voting securities, contract, voting trust, or membership in
         management or in the group appointing or electing management or
         otherwise through formal or informal arrangements or business
         relationships.

                  "Agreement" shall mean this Credit Agreement, as it may be
         amended, supplemented, or restated from time to time.

                  "Available Commitment" shall mean, at any time, an amount
         equal to the remainder, if any, of (a) the Borrowing Base in effect at
         such time minus (b) the Loan Balance at such time.


                  "Borrowing Base" shall mean, at any time, the amount
         determined by the Lender in accordance with Section 2.7 and then in
         effect.



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                  "Borrowing Request" shall mean each written request, in
         substantially the form attached hereto as Exhibit II, by the Borrower
         to the Lender for a borrowing or prepayment pursuant to Sections 2.1 or
         2.9 or , each of which shall:

           a.  be signed by a Responsible Officer of the Borrower;

           b.  specify the amount requested or prepaid and the date of the
               borrowing or prepayment (which shall be a Business Day); and

           c.  be delivered to the Lender no later than 11:00 a.m., Central
               Standard or Daylight Savings Time, as the case may be, on the
               Business Day of the requested borrowing or prepayment.

                  "Business Day" shall mean a day other than a Saturday, Sunday,
         legal holiday for commercial banks under the laws of the State of
         Texas, or any other day when banking is suspended in the State of
         Texas.

                  "Closing Date" shall mean the effective date of this
         Agreement.

                  "Collateral" shall mean the Mortgaged Properties and any other
         Property now or at any time used or intended as security for the
         payment or performance of all or any portion of the Obligations.

                  "Commitment" shall mean the obligation of the Lender, subject
         to applicable provisions of this Agreement, to make Loans to or for the
         benefit of the Borrower pursuant to Section .

                  "Commitment Fee" shall mean each fee payable to the Lender by
         the Borrower pursuant to Section 2.10.

                  "Commitment Period" shall mean the period from and including
         the Closing Date to but not including the Commitment Termination Date.

                  "Commitment Termination Date" shall mean eighteen months
         following the Closing Date.

                  "Commodity Hedge Agreement" shall mean any crude oil, natural
         gas, or other hydrocarbon floor, collar, cap, price protection, or swap
         agreement, in form and substance with a Person acceptable to the
         Lender.

                  "Commonly Controlled Entity" shall mean any Person which is
         under common control with the Borrower within the meaning of Section
         4001 of ERISA.

                  "Compliance Certificate" shall mean each certificate,
         substantially in the form attached hereto as Exhibit III, executed by a
         Responsible Officer of the Borrower and furnished to the Lender from
         time to time in accordance with Sections 5.2 and 5.3.



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                  "Contingent Obligation" shall mean, as to any Person, any
         obligation of such Person guaranteeing or in effect guaranteeing any
         Indebtedness, leases, dividends, or other obligations of any other
         Person (for purposes of this definition, a "primary obligation") in any
         manner, whether directly or indirectly, including, without limitation,
         any obligation of such Person, regardless of whether such obligation is
         contingent, (a) to purchase any primary obligation or any Property
         constituting direct or indirect security therefor, (b) to advance or
         supply funds (i) for the purchase or payment of any primary obligation,
         or (ii) to maintain working or equity capital of any other Person in
         respect of any primary obligation, or otherwise to maintain the net
         worth or solvency of any other Person, (c) to purchase Property,
         securities or services primarily for the purpose of assuring the owner
         of any primary obligation of the ability of the Person primarily liable
         for such primary obligation to make payment thereof, or (d) otherwise
         to assure or hold harmless the owner of any such primary obligation
         against loss in respect thereof, with the amount of any Contingent
         Obligation being deemed to be equal to the stated or determinable
         amount of the primary obligation in respect of which such Contingent
         Obligation is made or, if not stated or determinable, the maximum
         reasonably anticipated liability in respect thereof as determined by
         such Person in good faith.

                  "Current Assets" shall mean all assets which would, in
         accordance with GAAP, be included as current assets on a balance sheet
         of the Borrower, as of the date of calculation, plus availability under
         this facility.

                  "Current Liabilities" shall mean all liabilities which would,
         in accordance with GAAP, be included as current liabilities on a
         balance sheet of the Borrower as of the date of calculation, but
         excluding the current maturities in respect to the Obligations, both
         principal and interest.

                  "Debt Service" shall mean an amount equal to the actual
         interest payments for the quarter, plus 12.5% of the outstanding
         balance of this facility at the end of the quarter.

                  "Default" shall mean any event or occurrence which with the
         lapse of time or the giving of notice or both would become an Event of
         Default.

                  "Default Rate" shall mean a per annum interest rate equal to
         the Prime Rate plus five percent (5%), but in no event exceeding the
         Highest Lawful Rate.

                  "Dollars" and "$" shall mean dollars in lawful currency of the
         United States of America.

                  "EBITDAX" shall mean, for any period, net income for such
         period plus interest expense, federal and state income taxes,
         depreciation, amortization, and other non-cash expenses and losses,
         exploration expenses (which otherwise would be capitalized under full
         cost accounting method) less non-cash gains and less preferred cash
         dividends paid.

                  "Engineering Fee" shall mean each fee payable to the Lender by
         the Borrower pursuant to Section .



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                  "Environmental Complaint" shall mean any written or oral
         complaint, order, directive, claim, citation, notice of environmental
         report or investigation, or other notice by any Governmental Authority
         or any other Person with respect to (a) air emissions, (b) spills,
         releases, or discharges to soils, any improvements located thereon,
         surface water, groundwater, or the sewer, septic, waste treatment,
         storage, or disposal systems servicing any Property of the Borrower,
         (c) solid or liquid waste disposal, (d) the use, generation, storage,
         transportation, or disposal of any Hazardous Substance, or (e) other
         environmental, health, or safety matters affecting any Property of the
         Borrower or the business conducted thereon.

                  "Environmental Laws" shall mean (a) the following federal laws
         as they may be cited, referenced, and amended from time to time: the
         Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
         Comprehensive Environmental Response, Compensation and Liability Act,
         the Endangered Species Act, the Resource Conservation and Recovery Act,
         the Occupational Safety and Health Act, the Hazardous Materials
         Transportation Act, the Superfund Amendments and Reauthorization Act,
         and the Toxic Substances Control Act; (b) any and all equivalent
         environmental statutes of any state in which Property of the Borrower
         is situated, as they may be cited, referenced and amended from time to
         time; (c) any rules or regulations promulgated under or adopted
         pursuant to the above federal and state laws; and (d) any other
         equivalent federal, state, or local statute or any requirement, rule,
         regulation, code, ordinance, or order adopted pursuant thereto,
         including, without limitation, those relating to the generation,
         transportation, treatment, storage, recycling, disposal, handling, or
         release of Hazardous Substances.

                  "ERISA" shall mean the Employee Retirement Income Security Act
         of 1974, as amended from time to time, and the regulations thereunder
         and interpretations thereof.

                  "Event of Default" shall mean any of the events specified in
         Section 7.1.

                  "Facility Fee" shall mean the fee payable to the Lender by the
         Borrower pursuant to Section 2.12.

                  "Final Maturity" shall mean the date which is eighteen months
         following the Closing Date.

                  "Financial Statements" shall mean statements of the financial
         condition of the Borrower as at the point in time and for the period
         indicated and consisting of at least a balance sheet and related
         statements of operations, common stock and other stockholders' equity,
         and cash flows for the Borrower and, when required by applicable
         provisions of this Agreement to be audited, accompanied by the
         unqualified certification of a nationally-recognized firm of
         independent certified public accountants or other independent certified
         public accountants acceptable to the Lender and footnotes to any of the
         foregoing, all of which shall be prepared in accordance with GAAP
         consistently applied and in comparative form with respect to the
         corresponding period of the preceding fiscal period.



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                  "Floating Rate" shall mean an interest rate per annum equal to
         the Prime Rate from time to time in effect plus one and one-fourth
         percent (1 1/4%), but in no event exceeding the Highest Lawful Rate.

                  "GAAP" shall mean generally accepted accounting principles
         established by the Financial Accounting Standards Board or the American
         Institute of Certified Public Accountants and in effect in the United
         States from time to time.

                  "Governmental Authority" shall mean any nation, country,
         commonwealth, territory, government, state, county, parish,
         municipality, or other political subdivision and any entity exercising
         executive, legislative, judicial, regulatory, or administrative
         functions of or pertaining to government.

                  "Hazardous Substances" shall mean flammables, explosives,
         radioactive materials, hazardous wastes, asbestos, or any material
         containing asbestos, polychlorinated biphenyls (PCBs), toxic substances
         or related materials, petroleum, petroleum products, associated oil or
         natural gas exploration, production, and development wastes, or any
         substances defined as "hazardous substances," "hazardous materials,"
         "hazardous wastes," or "toxic substances" under the Comprehensive
         Environmental Response, Compensation and Liability Act, as amended, the
         Superfund Amendments and Reauthorization Act, as amended, the Hazardous
         Materials Transportation Act, as amended, the Resource Conservation and
         Recovery Act, as amended, the Toxic Substances Control Act, as amended,
         or any other law or regulation now or hereafter enacted or promulgated
         by any Governmental Authority.

                  "Highest Lawful Rate" shall mean the maximum non-usurious
         interest rate, if any (or, if the context so requires, an amount
         calculated at such rate), that at any time or from time to time may be
         contracted for, taken, reserved, charged, or received under applicable
         laws of the State of Texas or the United States of America, whichever
         authorizes the greater rate, as such laws are presently in effect or,
         to the extent allowed by applicable law, as such laws may hereafter be
         in effect and which allow a higher maximum non-usurious interest rate
         than such laws now allow.

                  "Indebtedness" shall mean, as to any Person, without
         duplication, (a) all liabilities (excluding reserves for deferred
         income taxes, deferred compensation liabilities, and other deferred
         liabilities and credits) which in accordance with GAAP would be
         included in determining total liabilities as shown on the liability
         side of a balance sheet, (b) all obligations of such Person evidenced
         by bonds, debentures, promissory notes, or similar evidences of
         indebtedness, (c) all other indebtedness of such Person for borrowed
         money, and (d) all obligations of others, to the extent any such
         obligation is secured by a Lien on the assets of such Person (whether
         or not such Person has assumed or become liable for the obligation
         secured by such Lien).

                  "Insolvency Proceeding" shall mean application (whether
         voluntary or instituted by another Person) for or the consent to the
         appointment of a receiver, trustee, conservator, custodian, or
         liquidator of any Person or of all or a substantial part of the
         Property of such Person, or the filing of a petition (whether



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         voluntary or instituted by another Person) commencing a case under
         Title 11 of the United States Code, seeking liquidation,
         reorganization, or rearrangement or taking advantage of any bankruptcy,
         insolvency, debtor's relief, or other similar law of the United States,
         the State of Texas, or any other jurisdiction.

                  "Intellectual Property" shall mean patents, patent
         applications, trademarks, tradenames, copyrights, technology, know-how,
         and processes.

                  "Investment" in any Person shall mean any stock, bond, note,
         or other evidence of Indebtedness, or any other security (other than
         current trade and customer accounts) of, investment or partnership
         interest in or loan to, such Person.

                  "Lien" shall mean any interest in Property securing an
         obligation owed to, or a claim by, a Person other than the owner of
         such Property, whether such interest is based on common law, statute,
         or contract, and including, but not limited to, the lien or security
         interest arising from a mortgage, ship mortgage, encumbrance, pledge,
         security agreement, conditional sale or trust receipt, or a lease,
         consignment, or bailment for security purposes (other than true leases
         or true consignments), liens of mechanics, materialmen, and artisans,
         maritime liens and reservations, exceptions, encroachments, easements,
         rights of way, covenants, conditions, restrictions, leases, and other
         title exceptions and encumbrances affecting Property which secure an
         obligation owed to, or a claim by, a Person other than the owner of
         such Property (for the purpose of this Agreement, the Borrower shall be
         deemed to be the owner of any Property which it has acquired or holds
         subject to a conditional sale agreement, financing lease, or other
         arrangement pursuant to which title to the Property has been retained
         by or vested in some other Person for security purposes), and the
         filing or recording of any financing statement or other security
         instrument in any public office.

                  "Limitation Period" shall mean any period while any amount
         remains owing on the Note and interest on such amount, calculated at
         the applicable interest rate, plus any fees or other sums payable under
         any Loan Document and deemed to be interest under applicable law, would
         exceed the amount of interest which would accrue at the Highest Lawful
         Rate.

                  "Loan" shall mean any loan made by the Lender to or for the
         benefit of the Borrower pursuant to this Agreement.

                  "Loan Balance" shall mean, at any time, the outstanding
         principal balance of the Note at such time.

                  "Loan Documents" shall mean this Agreement, the Note, the
         Security Instruments, and all other documents and instruments now or
         hereafter delivered pursuant to the terms of or in connection with this
         Agreement, the Note, or the Security Instruments, and all renewals and
         extensions of, amendments and supplements to, and restatements of, any
         or all of the foregoing from time to time in effect.

                  "Material Adverse Effect" shall mean (a) any adverse effect on
         the business, operations, properties, condition (financial or
         otherwise), or prospects



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         of the Borrower, which increases the risk that any of the Obligations
         will not be repaid as and when due, or (b) any adverse effect upon the
         Collateral.

                  "Mortgaged Properties" shall mean all Oil and Gas Properties
         of the Borrower subject to a perfected first-priority Lien in favor of
         the Lender, subject only to Permitted Liens, as security for the
         Obligations.

                  "Note" shall mean the promissory note of the Borrower, in the
         form attached hereto as Exhibit I, together with all renewals,
         extensions for any period, increases, and rearrangements thereof.

                  "Obligations" shall mean, without duplication, (a) all
         Indebtedness evidenced by the Note, (b) the obligation of the Borrower
         for the payment of Commitment Fees, Facility Fees, and Engineering
         Fees, (c) all obligations and liabilities whether now existing or
         hereafter arising of the Borrower to the Lender in connection with any
         Commodity Hedge Agreement or Rate Management Transaction, and (d) all
         other obligations and liabilities of the Borrower to the Lender, now
         existing or hereafter incurred, under, arising out of or in connection
         with any Loan Document, and to the extent that any of the foregoing
         includes or refers to the payment of amounts deemed or constituting
         interest, only so much thereof as shall have accrued, been earned and
         which remains unpaid at each relevant time of determination.

                  "Oil and Gas Properties" shall mean fee, leasehold, or other
         interests in or under mineral estates or oil, gas, and other liquid or
         gaseous hydrocarbon leases with respect to Properties situated in the
         United States or offshore from any State of the United States,
         including, without limitation, overriding royalty and royalty
         interests, leasehold estate interests, net profits interests,
         production payment interests, and mineral fee interests, together with
         contracts executed in connection therewith and all tenements,
         hereditaments, appurtenances and Properties appertaining, belonging,
         affixed, or incidental thereto.

                  "Permitted Liens" shall mean (a) Liens for taxes, assessments,
         or other governmental charges or levies not yet due or which (if
         foreclosure, distraint, 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, (b) Liens in connection with workers' compensation,
         unemployment insurance or other social security (other than Liens
         created by Section 4068 of ERISA), old-age pension, or public liability
         obligations which are not yet due or which are being contested in good
         faith by appropriate proceedings, if such reserve as may be required by
         GAAP shall have been made therefor, (c) 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 which are not yet
         due or which are being contested in good faith by appropriate
         proceedings, if such reserve as may be required by GAAP shall have been
         made



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         therefor, (d) Liens in favor of operators and non-operators under joint
         operating agreements or similar contractual arrangements arising in the
         ordinary course of the business of the Borrower 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, (e) Liens under production sales
         agreements, division orders, operating agreements, and other agreements
         customary in the oil and gas business for processing, producing, and
         selling hydrocarbons securing obligations not constituting Indebtedness
         and provided that such Liens do not secure obligations to deliver
         hydrocarbons at some future date without receiving full payment
         therefor within 90 days of delivery, (f) easements, rights of way,
         restrictions, and other similar encumbrances, and minor defects in the
         chain of title which are customarily accepted in the oil and gas
         financing industry, none of which interfere with the ordinary conduct
         of the business of the Borrower or materially detract from the value or
         use of the Property to which they apply, and (g) Liens in favor of the
         Lender and other Liens expressly permitted under the Security
         Instruments.

                  "Person" shall mean an individual, corporation, partnership,
         trust, unincorporated organization, government, any agency or political
         subdivision of any government, or any other form of entity.

                  "Plan" shall mean, at any time, any employee benefit plan
         which is covered by ERISA and in respect of which the Borrower or any
         Commonly Controlled Entity is (or, if such plan were terminated at such
         time, would under Section 4069 of ERISA be deemed to be) an "employer"
         as defined in Section 3(5) of ERISA.

                  "Prime Rate" shall mean a rate per annum equal to the prime
         rate of interest announced from time to time by the Lender or its
         parent (which is not necessarily the lowest rate charged to any
         customer), changing when and as said prime rate changes.

                  "Principal Office" shall mean the principal office of the
         Lender in Houston, Texas, presently located at 910 Travis Street,
         Houston, Texas 77002.

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

                  "Rate Management Transaction" shall mean any transaction
         (including an agreement with respect thereto) now existing or hereafter
         entered into between the Borrower and the Lenders which is a rate swap,
         basis swap, forward rate transaction, commodity swap, commodity option,
         equity or equity index swap, equity or equity index option, bond
         option, interest rate option, foreign exchange transaction, cap
         transaction, floor transaction, collar transaction, forward
         transaction, currency swap transaction, cross-currency rate swap
         transaction, currency option or any other similar transaction
         (including any option with respect to any of these transactions) or any
         combination thereof, whether linked to on or more interest rates,
         foreign currencies, commodity prices, equity prices or other financial
         measures.

                  "Regulation D" shall mean Regulation D of the Board of
         Governors of the Federal Reserve System, as the same may be amended or
         supplemented from time to time.



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                  "Regulatory Change" shall mean the passage, adoption,
         institution, or amendment of any federal, state, local, or foreign
         Requirement of Law (including, without limitation, Regulation D), or
         any interpretation, directive, or request (whether or not having the
         force of law) of any Governmental Authority or monetary authority
         charged with the enforcement, interpretation, or administration
         thereof, occurring after the Closing Date and applying to a class of
         banks including the Lender.

                  "Release of Hazardous Substances" shall mean any emission,
         spill, release, disposal, or discharge, except in accordance with a
         valid permit, license, certificate, or approval of the relevant
         Governmental Authority, of any Hazardous Substance into or upon (a) the
         air, (b) soils or any improvements located thereon, (c) surface water
         or groundwater, or (d) the sewer or septic system, or the waste
         treatment, storage, or disposal system servicing any Property of the
         Borrower.

                  "Requirement of Law" shall mean, as to any Person, the
         certificate or articles of incorporation and by-laws or other
         organizational or governing documents of such Person, and any
         applicable law, treaty, ordinance, order, judgment, rule, decree,
         regulation, or determination of an arbitrator, court, or other
         Governmental Authority, including, without limitation, rules,
         regulations, orders, and requirements for permits, licenses,
         registrations, approvals, or authorizations, in each case as such now
         exist or may be hereafter amended and are applicable to or binding upon
         such Person or any of its Property or to which such Person or any of
         its Property is subject.

                  "Reserve Report" shall mean each report delivered to the
         Lender pursuant to Section .

                  "Responsible Officer" shall mean, as to any Person, its
         President, Chief Executive Officer or any Vice President.

                  "Security Instruments" shall mean the security instruments
         executed and delivered in satisfaction of the condition set forth in
         Section 3.3, and all other documents and instruments at any time
         executed as security for all or any portion of the Obligations, as such
         instruments may be amended, restated, or supplemented from time to
         time.

                  "Subsidiary" shall mean, as to any Person, a corporation of
         which shares of stock having ordinary voting power (other than stock
         having such power only by reason of the happening of a contingency) to
         elect a majority of the board of directors or other managers of such
         corporation are at the time owned, or the management of which is
         otherwise controlled, directly or indirectly through one or more
         intermediaries, or both, by such Person.

                  "Superfund Site" shall mean those sites listed on the
         Environmental Protection Agency National Priority List and eligible for
         remedial action or any comparable state registries or list in any state
         of the United States.

                  "Tangible Net Worth" shall mean (a) total assets, as would be
         reflected on a balance sheet of the Borrower prepared in accordance
         with GAAP, exclusive of Intellectual Property, experimental or
         organization expenses,



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<PAGE>   10


         franchises, licenses, permits, and other intangible assets, treasury
         stock, unamortized underwriters' debt discount and expenses, and
         goodwill minus (b) total liabilities, as would be reflected on a
         balance sheet of the Borrower prepared in accordance with GAAP.

                  "Total Funded Debt" shall mean for any period, the debt owed
         to the Lender.

                  "Total Liabilities" shall mean all liabilities which would, in
         accordance with GAAP, be included as liabilities on a balance sheet of
         the Borrower as of the date of calculation.

                  "Transferee" shall mean any Person to which the Lender has
         sold, assigned, transferred, or granted a participation in any of the
         Obligations, as authorized pursuant to Section , and any Person
         acquiring, by purchase, assignment, transfer, or participation, from
         any such purchaser, assignee, transferee, or participant, any part of
         such Obligations.

                  "UCC" shall mean the Uniform Commercial Code as from time to
         time in effect in the State of Texas.

1.3 Undefined Financial Accounting Terms. Undefined financial accounting terms
used in this Agreement shall be defined according to GAAP at the time in effect.

1.4 References. References in this Agreement to Exhibit, Article, or Section
numbers shall be to Exhibits, Articles, or Sections of this Agreement, unless
expressly stated to the contrary. References in this Agreement to "hereby,"
"herein," "hereinafter," "hereinabove," "hereinbelow," "hereof," "hereunder" and
words of similar import shall be to this Agreement in its entirety and not only
to the particular Exhibit, Article, or Section in which such reference appears.

1.5 Articles and Sections. This Agreement, for convenience only, has been
divided into Articles and Sections; and it is understood that the rights and
other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.

1.6 Number and Gender. Whenever the context requires, reference herein made to
the single number shall be understood to include the plural; and likewise, the
plural shall be understood to include the singular. Definitions of terms defined
in the singular or plural shall be equally applicable to the plural or singular,
as the case may be, unless otherwise indicated. Words denoting sex shall be
construed to include the masculine, feminine and neuter, when such construction
is appropriate; and specific enumeration shall not exclude the general but shall
be construed as cumulative.

1.7 Incorporation of Exhibits. The Exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for all
purposes.



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                                   ARTICLE II

                                TERMS OF FACILITY

2.1 Revolving Line of Credit. Upon the terms and conditions (including, without
limitation, the right of the Lender to decline to make any Loan so long as any
Default or Event of Default exists) and relying on the representations and
warranties contained in this Agreement, the Lender agrees, during the Commitment
Period, to make Loans, in immediately available funds at the Principal Office,
to or for the benefit of the Borrower, from time to time on any Business Day
designated by the Borrower following receipt by the Lender of a Borrowing
Request; provided, however, no Loan shall exceed the then existing Available
Commitment.

(b) Subject to the terms of this Agreement, during the Commitment Period, the
Borrower may borrow, repay, and reborrow such funds. Except for prepayments made
pursuant to Section 2.8, each borrowing and prepayment of principal of Loans
shall be in an amount at least equal to $50,000. Each borrowing or prepayment
shall be deemed a separate borrowing or prepayment for purposes of the
foregoing.

(c) The Loans shall be made and maintained at the Principal Office and shall be
evidenced by the Note.

2.2 Use of Loan Proceeds. Proceeds of all Loans shall be used solely for funding
development, exploration and acquisition activities and other general corporate
purposes.

2.3 Interest. Subject to the terms of this Agreement (including, without
limitation, Section 2.15), interest on the Loans shall accrue and be payable at
a rate per annum equal to the Floating Rate. Interest on all Loans shall be
computed on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed (including the first day but excluding the last day) during
the period for which payable. Interest provided for herein shall be calculated
on unpaid sums actually advanced and outstanding pursuant to the terms of this
Agreement and only for the period from the date or dates of such advances until
repayment. Notwithstanding the foregoing, interest on past-due principal and, to
the extent permitted by applicable law, past-due interest, shall accrue at the
Default Rate, computed on the basis of a year of 365 or 366 days, as the case
may be, and actual days elapsed (including the first day but excluding the last
day) during the period for which payable, and shall be payable upon demand by
the Lender at any time as to all or any portion of such interest.

2.4 Repayment of Loans and Interest. Accrued and unpaid interest on the
aggregate outstanding Loan Balance shall be due and payable monthly commencing
on the first day of January, 2001, and continuing on the first day of each
calendar month thereafter while any amount of the Loan Balance remains
outstanding, the payment in each instance to be the amount of interest which has
accrued and remains unpaid in respect of the Loan Balance. The Loan Balance,
together with all accrued and unpaid interest thereon, shall be due and payable
on the Commitment Termination Date.

2.5 Outstanding Amounts. The outstanding principal balance of the Note reflected
by the notations by the Lender on its records shall be deemed rebuttably
presumptive evidence of the principal amount owing on the Note. The liability
for payment of principal and interest evidenced by the Note shall be limited to
principal amounts actually advanced and outstanding



                                       11
<PAGE>   12


pursuant to this Agreement and interest on such amounts calculated in accordance
with this Agreement.

2.6 Time, Place, and Method of Payments. All payments required pursuant to this
Agreement or the Note shall be made in lawful money of the United States of
America and in immediately available funds, shall be deemed received by the
Lender on the next Business Day following receipt if such receipt is after 2:00
p.m., Central Standard or Daylight Savings Time, as the case may be, on any
Business Day, and shall be made at the Principal Office. Except as provided to
the contrary herein, if the due date of any payment hereunder or under the Note
would otherwise fall on a day which is not a Business Day, such date shall be
extended to the next succeeding Business Day, and interest shall be payable for
any principal so extended for the period of such extension.

2.7 Borrowing Base Determinations. (a) The Borrowing Base as of the Closing Date
is acknowledged by the Borrower and the Lender to be $5,000,000. There will be
no monthly Borrowing Base reductions prior to the first scheduled Borrowing Base
re-determination which is as of March 1, 2001.

(b) The Borrowing Base shall be redetermined semi-annually on the basis of
information supplied by the Borrower in compliance with the provisions of this
Agreement, including, without limitation, Reserve Reports, and all other
information available to the Lender. In addition, the Lender shall, in the
normal course of business following a request of the Borrower, redetermine the
Borrowing Base; provided, however, the Lender shall not be obligated to respond
to more than two such requests during any calendar year, and in no event shall
the Lender be required to redetermine the Borrowing Base more than once in any
three-month period, including, without limitation, each scheduled semi-annual
redetermination provided for above. Notwithstanding the foregoing, the Lender
may at its discretion redetermine the Borrowing Base and the amount by which the
Borrowing Base shall be reduced each calendar month as set forth in Section
2.7(a) at any time and from time to time.

(c) Upon each determination of the Borrowing Base by the Lender, the Lender
shall notify the Borrower orally (confirming such notice promptly in writing) of
such determination, and the Borrowing Base and the amount by which the Borrowing
Base shall be reduced or increased so communicated to the Borrower shall become
effective upon such written notification and shall remain in effect until the
next subsequent determination of the Borrowing Base and the amount by which the
Borrowing Base shall be reduced.

(d) The Borrowing Base shall represent the determination by the Lender, in
accordance with the applicable definitions and provisions herein contained and
its customary lending practices for loans of this nature, of the value, for loan
purposes, of the Oil and Gas Properties, subject, in the case of any increase in
the Borrowing Base, to the credit approval process of the Lender. Furthermore,
the Borrower acknowledges that the determination of the Borrowing Base contains
an equity cushion (market value in excess of loan value), which is acknowledged
by the Borrower to be essential for the adequate protection of the Lender.

2.8 Mandatory Prepayments. If at any time the Loan Balance exceeds the Borrowing
Base then in effect, the Borrower shall, within 30 days of notice from the
Lender of such occurrence, (a) prepay, or make arrangements acceptable to the
Lender for the prepayment of, the amount of such excess for application on the
Loan Balance, (b) provide additional collateral, of character and value
satisfactory to the Lender in its sole discretion, to secure the Obligations by
the execution and delivery to the Lender of security instruments in form and
substance



                                       12
<PAGE>   13


satisfactory to the Lender, or (c) effect any combination of the alternatives
described in clauses (a) and (b) of this Section and acceptable to the Lender in
its sole discretion.

2.9 Voluntary Prepayments of Loans. Subject to applicable provisions of this
Agreement, the Borrower shall have the right at any time or from time to time to
prepay Loans without prepayment penalty provided, however, (a) the Borrower
shall pay all accrued and unpaid interest on the amounts prepaid, and (b) no
such prepayment shall serve to postpone the repayment when due of any
Obligation.

2.10 Commitment Fee. In addition to interest on the Note as provided herein and
all other fees payable hereunder and to compensate the Lender for maintaining
funds available, the Borrower shall pay to the Lender, in immediately available
funds, on the first day of January, 2001, and on the first day of each third
calendar month thereafter during the Commitment Period, a fee in the amount of
one-fourth percent (1/4%) per annum, calculated on the basis of a year of 365 or
366 days, as the case may be, and actual days elapsed (including the first day
but excluding the last day), on the average daily amount of the Available
Commitment during the preceding quarterly period.

2.11 Engineering Fee. In addition to interest on the Note as provided herein and
all other fees payable hereunder and to compensate the Lender for the costs of
evaluating the Mortgaged Properties and reviewing the Reserve Reports, the
Borrower shall pay to the Lender, in immediately available funds, on the date of
each Borrower requested redetermination of the Borrowing Base, an engineering
fee in the amount of $4,500.

2.12 Facility Fee. In addition to interest on the Note as provided herein and
all other fees payable hereunder and to compensate the Lender for the costs of
the extension of credit hereunder, the Borrower shall pay to the Lender on the
Closing Date, in immediately available funds, a facility fee in the amount of
$50,000, one-half of which has been paid.

2.13 Loans to Satisfy Obligations of Borrower. The Lender may, but shall not be
obligated to, make Loans for the benefit of the Borrower and apply proceeds
thereof to the satisfaction of any condition, warranty, representation, or
covenant of the Borrower contained in this Agreement or any other Loan Document.
Any such Loan shall be evidenced by the Note and shall be made at the Floating
Rate.

2.14 Security Interest in Accounts; Right of Offset. As security for the payment
and performance of the Obligations, the Borrower hereby transfers, assigns, and
pledges to the Lender and grants to the Lender a security interest in all funds
of the Borrower now or hereafter or from time to time on deposit with the
Lender, with such interest of the Lender to be retransferred, reassigned, and/or
released by the Lender, as the case may be, at the expense of the Borrower upon
payment in full and complete performance by the Borrower of all Obligations. All
remedies as secured party or assignee of such funds shall be exercisable by the
Lender upon the occurrence of any Event of Default, regardless of whether the
exercise of any such remedy would result in any penalty or loss of interest or
profit with respect to any withdrawal of funds deposited in a time deposit
account prior to the maturity thereof. Furthermore, the Borrower hereby grants
to the Lender the right, exercisable at such time as any Obligation shall
mature, whether by acceleration of maturity or otherwise, of offset or banker's
lien against all funds of the Borrower now or hereafter or from time to time on
deposit with the Lender, regardless of whether the exercise of any such remedy
would result in any penalty or loss of interest or profit with respect to any
withdrawal of funds deposited in a time deposit account prior to the maturity
thereof.



                                       13
<PAGE>   14


2.15 General Provisions Relating to Interest. (a) It is the intention of the
parties hereto to comply strictly with the usury laws of the State of Texas and
the United States of America. In this connection, there shall never be
collected, charged, or received on the sums advanced hereunder interest in
excess of that which would accrue at the Highest Lawful Rate. For purposes of
Chapter 303 of the Texas Finance Code (Vernon's 1999), the Borrower agrees that
the Highest Lawful Rate shall be the "weekly ceiling" as defined in such
Chapter, provided that the Lender may also rely, to the extent permitted by
applicable laws of the State of Texas or the United States of America, on
alternative maximum rates of interest under other laws of the State of Texas or
the United States of America applicable to the Lender, if greater.

(b) Notwithstanding anything herein or in the Note to the contrary, during any
Limitation Period, the interest rate to be charged on amounts evidenced by the
Note shall be the Highest Lawful Rate, and the obligation, if any, of the
Borrower for the payment of fees or other charges deemed to be interest under
applicable law shall be suspended. During any period or periods of time
following a Limitation Period, to the extent permitted by applicable laws of the
State of Texas or the United States of America, the interest rate to be charged
hereunder shall remain at the Highest Lawful Rate until such time as there has
been paid to the Lender (i) the amount of interest in excess of that accruing at
the Highest Lawful Rate that the Lender would have received during the
Limitation Period had the interest rate remained at the otherwise applicable
rate, and (ii) all interest and fees otherwise payable to the Lender but for the
effect of such Limitation Period.

(c) If, under any circumstances, the aggregate amounts paid on the Note or under
this Agreement or any other Loan Document include amounts which by law are
deemed interest and which would exceed the amount permitted if the Highest
Lawful Rate were in effect, the Borrower stipulates that such payment and
collection will have been and will be deemed to have been, to the extent
permitted by applicable laws of the State of Texas or the United States of
America, the result of mathematical error on the part of the Borrower and the
Lender; and the Lender shall promptly refund the amount of such excess (to the
extent only of such interest payments in excess of that which would have accrued
and been payable on the basis of the Highest Lawful Rate) upon discovery of such
error by the Lender or notice thereof from the Borrower. In the event that the
maturity of any Obligation is accelerated, by reason of an election by the
Lender or otherwise, or in the event of any required or permitted prepayment,
then the consideration constituting interest under applicable laws may never
exceed the Highest Lawful Rate; and excess amounts paid which by law are deemed
interest, if any, shall be credited by the Lender on the principal amount of the
Obligations, or if the principal amount of the Obligations shall have been paid
in full, refunded to the Borrower.

(d) All sums paid, or agreed to be paid, to the Lender for the use, forbearance
and detention of the proceeds of any advance hereunder shall, to the extent
permitted by applicable law, be amortized, prorated, allocated, and spread
throughout the full term hereof until paid in full so that the actual rate of
interest is uniform but does not exceed the Highest Lawful Rate throughout the
full term hereof.

2.16 Letters in Lieu of Transfer Orders. The Lender agrees that none of the
letters in lieu of transfer or division orders provided by the Borrower pursuant
to Section 3.3 or Section 5.7 will be sent to the addressees thereof prior to
the occurrence of an Event of Default, at which time the Lender may, at its
option and in addition to the exercise of any of its other rights and remedies,
send any or all of such letters.



                                       14
<PAGE>   15


2.17 Power of Attorney. The Borrower hereby designates the Lender as its agent
and attorney-in-fact, to act in its name, place, and stead for the purpose of
completing and, upon the occurrence of an Event of Default, delivering any and
all of the letters in lieu of transfer orders delivered by the Borrower to the
Lender pursuant to Section 3.3 or Section 5.7, including, without limitation,
completing any blanks contained in such letters and attaching exhibits thereto
describing the relevant Collateral. The Borrower hereby ratifies and confirms
all that the Lender shall lawfully do or cause to be done by virtue of this
power of attorney and the rights granted with respect to such power of attorney.
This power of attorney is coupled with the interests of the Lender in the
Collateral, shall commence and be in full force and effect as of the Closing
Date and shall remain in full force and effect and shall be irrevocable so long
as any Obligation remains outstanding or unpaid or any Commitment exists. The
powers conferred on the Lender by this appointment are solely to protect the
interests of the Lender under the Loan Documents and shall not impose any duty
upon the Lender to exercise any such powers. The Lender shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers and shall not be responsible to the Borrower or any other Person for any
act or failure to act with respect to such powers, except for gross negligence
or willful misconduct.

                                   ARTICLE III

                                   CONDITIONS

                  The obligations of the Lender to enter into this Agreement and
to make Loans are subject to the satisfaction of the following conditions
precedent:

3.1 Receipt of Loan Documents and Other Items. The Lender shall have no
obligation under this Agreement unless and until all matters incident to the
consummation of the transactions contemplated herein, including, without
limitation, the review by the Lender or its counsel of the title of the Borrower
to its Oil and Gas Properties, shall be satisfactory to the Lender, and the
Lender shall have received, reviewed, and approved the following documents and
other items, appropriately executed when necessary and, where applicable,
acknowledged by one or more authorized officers of the Borrower, all in form and
substance satisfactory to the Lender and dated, where applicable, of even date
herewith or a date prior thereto and acceptable to the Lender:

(a) multiple counterparts of this Agreement as requested by the Lender;

(b) the Note;

(c) copies of the Articles of Incorporation or Certificate of Incorporation and
all amendments thereto and the bylaws and all amendments thereto of the
Borrower, accompanied by a certificate issued by the secretary or an assistant
secretary of the Borrower to the effect that each such copy is correct and
complete;

(d) certificates of incumbency and signatures of all officers of the Borrower
who are authorized to execute Loan Documents on behalf of the Borrower, each
such certificate being executed by the secretary or an assistant secretary of
the Borrower;

(e) copies of corporate resolutions approving the Loan Documents and authorizing
the transactions contemplated herein and therein, duly adopted by the board of
directors of the Borrower, accompanied by certificates of the secretary or an
assistant secretary of



                                       15
<PAGE>   16


the Borrower, to the effect that such copies are true and correct copies of
resolutions duly adopted at a meeting or by unanimous consent of the board of
directors of the Borrower, and that such resolutions constitute all the
resolutions adopted with respect to such transactions, have not been amended,
modified, or revoked in any respect, and are in full force and effect as of the
date of such certificate;

(f) unaudited Financial Statements of the Borrower as of September 30, 2000;

(g) certificates dated as of a recent date from the Secretary of State or other
appropriate Governmental Authority evidencing the existence or qualification and
good standing of the Borrower in its jurisdiction of incorporation and in any
other jurisdictions where it does business;

(h) engineering reports covering the Oil and Gas Properties;

(i) the opinion of Morgan, Lewis and Bockius, L.L.P., counsel to the Borrower,
in substantially the form attached hereto as Exhibit , with such changes thereto
as may be approved by the Lender;

(j) certificates evidencing the insurance coverage required pursuant to Section
; and

(k) such other agreements, documents, instruments, opinions, certificates,
waivers, consents, and evidence as the Lender may reasonably request.

3.2 Each Loan. In addition to the conditions precedent stated elsewhere herein,
the Lender shall not be obligated to make any Loan unless:

(a) the Borrower shall have delivered to the Lender a Borrowing Request at least
the requisite time prior to the requested date for the relevant Loan and each
statement or certification made in such Borrowing Request shall be true and
correct in all material respects on the requested date for such Loan;

(b) no Event of Default or Default shall exist or will occur as a result of the
making of the requested Loan;

(c) if requested by the Lender, the Borrower shall have delivered evidence
satisfactory to the Lender substantiating any of the matters contained in this
Agreement which are necessary to enable the Borrower to qualify for such Loan;

(d) the Lender shall have received, reviewed, and approved such additional
documents and items as may be requested by the Lender with respect to such Loan;

(e) no event shall have occurred which, in the reasonable opinion of the Lender,
could have a Material Adverse Effect;

(f) each of the representations and warranties contained in this Agreement shall
be true and correct in all material respects and shall be deemed to be repeated
by the Borrower as if made on the requested date for such Loan;

(g) neither the consummation of the transactions contemplated hereby nor the
making of such Loan shall contravene, violate, or conflict with any Requirement
of Law;



                                       16
<PAGE>   17


(h) the Lender shall have received the payment of all Engineering Fees, Facility
Fees, and other fees payable to the Lender hereunder and reimbursement from the
Borrower, or special legal counsel for the Lender shall have received payment
from the Borrower, for all reasonable fees and expenses of counsel to the Lender
for which the Borrower is responsible pursuant to applicable provisions of this
Agreement and for which invoices have been presented as of or prior to the date
of the relevant Loan; and

(i) all matters incident to the consummation of the transactions hereby
contemplated shall be satisfactory to the Lender.

3.3 Mortgage of Oil and Gas Properties. In the event the Loan Balance exceeds
$3,000,000 or if the Total Funded Debt to annualized quarterly EBITDAX exceeds
0.40 to 1.00 at the end of any fiscal quarter subsequent to the Closing Date,
the following documents will be required:

1.1

         (a) Mortgage, Deed of Trust, Indenture, Security Agreement, Assignment
of Production, and Financing Statement from the Borrower covering all Oil and
Gas Properties of the Borrower and all improvements, personal property, and
fixtures related thereto;

         (b) Financing Statements from the Borrower, as debtors, constituent to
the instrument described in clause (a) above;

         (c) undated letters, in form and substance satisfactory to the Lender,
from the Borrower to each purchaser of production and disburser of the proceeds
of production from or attributable to the Mortgaged Properties, together with
additional letters with the addressees left blank, authorizing and directing the
addressees to make future payments attributable to production from the Mortgaged
Properties directly to the Lender;

         (d) confirmation, acceptable to the Lender, of the title of the
Borrower to the Mortgaged Properties, free and clear of Liens other than
Permitted Liens;

         (e) all operating, lease, sublease, royalty, sales, exchange,
processing, farmout, bidding, pooling, unitization, communitization, and other
agreements relating to the Mortgaged Properties requested by the Lender;

         (f) results of searches of the UCC Records of the Secretary of State of
the State of Texas from a source acceptable to the Lender and reflecting no
Liens against any of the Collateral as to which perfection of a Lien is
accomplished by the filing of a financing statement other than in favor of the
Lender;

         (g) all of the Security Instruments shall be in full force and effect
and provide to the Lender the security intended thereby;

         (h) the Borrower shall hold full legal title to the Collateral and be
the sole beneficial owner thereof; and

         (i) the Borrower shall pay to special legal counsel for the Lender
estimated fees charged by filing officers and other public officials incurred or
to be incurred in



                                       17
<PAGE>   18


connection with the filing and recordation of any Security Instruments, for
which invoices have been presented as of or prior to the date of the requested
Loan;

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

                  To induce the Lender to enter into this Agreement and to make
the Loans, the Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note) that:

4.1 Due Authorization. The execution and delivery by the Borrower of this
Agreement and the borrowings hereunder, the execution and delivery by the
Borrower of the Note, the repayment of the Note and interest and fees provided
for in the Note and this Agreement, the execution and delivery of the Security
Instruments by the Borrower and the performance of all obligations of the
Borrower under the Loan Documents are within the power of the Borrower, have
been duly authorized by all necessary corporate action by the Borrower, and do
not and will not (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) contravene or conflict
with any indenture, instrument, or other agreement to which the Borrower is a
party or by which any Property of the Borrower may be presently bound or
encumbered, or (d) result in or require the creation or imposition of any Lien
in, upon or of any Property of the Borrower under any such indenture,
instrument, or other agreement, other than the Loan Documents.

4.2 Corporate Existence. The Borrower is a corporation duly organized, legally
existing, and in good standing under the laws of its state of incorporation and
is duly qualified as a foreign corporation and is in good standing in all
jurisdictions wherein the ownership of Property or the operation of its business
necessitates same, other than those jurisdictions wherein the failure to so
qualify will not have a Material Adverse Effect.

4.3 Valid and Binding Obligations. All Loan Documents, when duly executed and
delivered by the Borrower, will be the legal, valid, and binding obligations of
the Borrower, enforceable against the Borrower in accordance with their
respective terms.

4.4 Security Instruments. Subject to Section 3.3, the provisions of each
Security Instrument are effective to create in favor of the Lender, a legal,
valid, and enforceable Lien in all right, title, and interest of the Borrower in
the Collateral described therein, which Liens, assuming the accomplishment of
recording and filing in accordance with applicable laws prior to the
intervention of rights of other Persons, shall constitute fully perfected
first-priority Liens on all right, title, and interest of the Borrower in the
Collateral described therein.

4.5 Title to Assets. The Borrower has good and indefeasible title to all of its
Properties, free and clear of all Liens except Permitted Liens.

4.6 Scope and Accuracy of Financial Statements. The Financial Statements of the
Borrower as of September 30, 2000, present fairly the financial position and
results of operations and cash flows of the Borrower in accordance with GAAP as
at the relevant point in time or for the period indicated, as applicable. No
event or circumstance has occurred since September 30, 2000, which could
reasonably be expected to have a Material Adverse Effect.



                                       18
<PAGE>   19


4.7 No Material Misstatements. No information, exhibit, statement, or report
furnished to the Lender by or at the direction of the Borrower in connection
with this Agreement contains any material misstatement of fact or omits to state
a material fact or any fact necessary to make the statements contained therein
not misleading as of the date made or deemed made.

4.8 Liabilities, Litigation, and Restrictions. Other than as listed under the
heading "Liabilities" on Exhibit V attached hereto, the Borrower has no
liabilities, direct, or contingent, which may materially and adversely affect
its business or operations or subject to the Security Instruments being
delivered pursuant to Section 3.3, its ownership of the Collateral. Except as
set forth under the heading "Litigation" on Exhibit hereto, no litigation or
other action of any nature affecting the Borrower is pending before any
Governmental Authority or, to the best knowledge of the Borrower, threatened
against or affecting the Borrower which might reasonably be expected to result
in any impairment of its ownership of any Oil and Gas Property or have a
Material Adverse Effect. To the best knowledge of the Borrower, after due
inquiry, no unusual or unduly burdensome restriction, restraint or hazard exists
by contract, Requirement of Law, or otherwise relative to the business or
operations of the Borrower or, subject to the Security Instruments being
delivered pursuant to Section 3.3, the ownership and operation of the Collateral
other than such as relate generally to Persons engaged in business activities
similar to those conducted by the Borrower.

4.9 Authorizations; Consents. Except as expressly contemplated by this
Agreement, no authorization, consent, approval, exemption, franchise, permit, or
license of, or filing with, any Governmental Authority or any other Person is
required to authorize or is otherwise required in connection with the valid
execution and delivery by the Borrower of the Loan Documents or any instrument
contemplated hereby, the repayment by the Borrower of the Note and interest and
fees provided in the Note and this Agreement, or the performance by the Borrower
of the Obligations.

4.10 Compliance with Laws. The Borrower and its Property, including, without
limitation, the Oil and Gas Property, are in compliance with all applicable
Requirements of Law, including, without limitation, Environmental Laws, the
Natural Gas Policy Act of 1978, as amended, and ERISA, except to the extent
non-compliance with any such Requirements of Law could not reasonably be
expected to have a Material Adverse Effect.

4.11 ERISA. Except as set forth on Exhibit V, the Borrower does not maintain nor
has it maintained any Plan. The Borrower does not currently contribute to or
have any obligation to contribute to or otherwise have any liability with
respect to any Plan.

4.12 Environmental Laws. To the best knowledge and belief of the Borrower,
except as would not have a Material Adverse Effect, or as described on Exhibit
under the heading "Environmental Matters:"

(a) no Property of the Borrower is currently on or has ever been on, or is
adjacent to any Property which is on or has ever been on, any federal or state
list of Superfund Sites;

(b) no Hazardous Substances have been generated, transported, and/or disposed of
by the Borrower at a site which was, at the time of such generation,
transportation, and/or disposal, or has since become, a Superfund Site;

(c) except in accordance with applicable Requirements of Law or the terms of a
valid permit, license, certificate, or approval of the relevant Governmental
Authority,



                                       19
<PAGE>   20


no Release of Hazardous Substances by the Borrower or from, affecting, or
related to any Property of the Borrower or adjacent to any Property of the
Borrower has occurred; and

(d) no Environmental Complaint has been received by the Borrower.

4.13 Compliance with Federal Reserve Regulations. No transaction contemplated by
the Loan Documents is in violation of any regulations promulgated by the Board
of Governors of the Federal Reserve System, including, without limitation,
Regulations T, U, or X.

4.14 Investment Company Act Compliance. The Borrower is not, nor is the Borrower
directly or indirectly controlled by or acting on behalf of any Person which is,
an "investment company" or an "affiliated person" of an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.

4.15 Public Utility Holding Company Act Compliance. The Borrower is not a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.

4.16 Proper Filing of Tax Returns; Payment of Taxes Due. The Borrower has duly
and properly filed its United States income tax return and all other tax returns
which are required to be filed and has paid all taxes due except such as are
being contested in good faith and as to which adequate provisions and
disclosures have been made. The respective charges and reserves on the books of
the Borrower with respect to taxes and other governmental charges are adequate.

4.17 Refunds. Except as described on Exhibit under the heading "Refunds," no
orders of, proceedings pending before, or other requirements of, the Federal
Energy Regulatory Commission, the Texas Railroad Commission, or any Governmental
Authority exist which could result in the Borrower being required to refund any
material portion of the proceeds received or to be received from the sale of
hydrocarbons constituting part of the Mortgaged Property.

4.18 Gas Contracts. Except as described on Exhibit under the heading "Gas
Contracts," the Borrower (a) is not 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 Mortgaged Property at some future date
without receiving full payment therefor within 90 days of delivery, and (b) has
not produced gas, in any material amount, subject to, and neither the Borrower
nor any of the Mortgaged Properties is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements, except
as to such matters for which the Borrower has established monetary reserves
adequate in amount to satisfy such obligations and has segregated such reserves
from other accounts.

4.19 Intellectual Property. The Borrower owns or is licensed to use all
Intellectual Property necessary to conduct all business material to its
condition (financial or otherwise), business, or operations as such business is
currently conducted. No claim has been asserted or is pending by any Person with
the respect to the use of any such Intellectual Property or challenging or
questioning the validity or effectiveness of any such Intellectual Property; and
the Borrower knows of no valid basis for any such claim. The use of such
Intellectual Property by the Borrower does not infringe on the rights of any
Person, except for such claims and infringements as do not, in the aggregate,
give rise to any material liability on the part of the Borrower.



                                       20
<PAGE>   21


4.20 Casualties or Taking of Property. Except as disclosed on Exhibit under the
heading "Casualties," since September 30, 2000, neither the business nor any
Property of the Borrower has been materially 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 any Governmental
Authority, riot, activities of armed forces, or acts of God.

4.21 Locations of Borrower. The principal place of business and chief executive
office of the Borrower is located at the address of the Borrower set forth in
Section or at such other location as the Borrower may have, by proper written
notice hereunder, advised the Lender, provided that such other location is
within a state in which appropriate financing statements from the Borrower in
favor of the Lender have been filed.

4.22 Subsidiaries. The Borrower has no Subsidiaries except those described on
Exhibit under the heading "Subsidiaries".


                                    ARTICLE V

                              AFFIRMATIVE COVENANTS

                  So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower shall:

5.1 Maintenance and Access to Records. Keep adequate records, in accordance with
GAAP, of all its transactions so that at any time, and from time to time, its
true and complete financial condition may be readily determined, and promptly
following the reasonable request of the Lender, make such records available for
inspection by the Lender and, at the expense of the Borrower, allow the Lender
to make and take away copies thereof.

5.2 Quarterly Financial Statements; Compliance Certificates. Deliver to the
Lender, (a) on or before the 45th day after the close of each of the first three
quarterly periods of each fiscal year of the Borrower, a copy of the unaudited
Financial Statements of the Borrower as at the close of such quarterly period
and from the beginning of such fiscal year to the end of such period, such
Financial Statements to be certified by a Responsible Officer of the Borrower as
having been prepared in accordance with GAAP consistently applied and as a fair
presentation of the condition of the Borrower, subject to changes resulting from
normal year-end audit adjustments, and (b) on or before the 45th day after the
close of each fiscal quarter, with the exception of the last fiscal quarter, a
Compliance Certificate.

5.3 Annual Financial Statements. Deliver to the Lender, on or before the 90th
day after the close of each fiscal year of the Borrower, a copy of the annual
audited Financial Statements of the Borrower and a Compliance Certificate.

5.4 Oil and Gas Reserve Reports. (a) Deliver to the Lender no later than August
1 of each year during the term of this Agreement, engineering reports in form
and substance satisfactory to the Lender, certified by any nationally- or
regionally-recognized independent consulting petroleum engineers acceptable to
the Lender as fairly and accurately setting forth (i) the proven and producing,
shut-in, behind-pipe, and undeveloped oil and gas reserves (separately
classified as such) attributable to the Oil and Gas Properties as of July 1 of
the year for which such reserve reports are furnished, (ii) the aggregate
present value of the future net income with



                                       21
<PAGE>   22


respect to such Oil and Gas Properties, discounted at a stated per annum
discount rate of proven and producing reserves, (iii) projections of the annual
rate of production, gross income, and net income with respect to such proven and
producing reserves, and (iv) information with respect to the "take-or-pay,"
"prepayment," and gas-balancing liabilities of the Borrower.

(b) Deliver to the Lender no later than February 1 of each year during the term
of this Agreement, engineering reports in form and substance satisfactory to the
Lender prepared by or under the supervision of the chief petroleum engineer of
the Borrower evaluating the Oil and Gas Properties as of January 1 of the year
for which such reserve reports are furnished and updating the information
provided in the reports pursuant to Section (a).

(c) Each of the reports provided pursuant to this Section shall be submitted to
the Lender together with additional data concerning pricing, quantities of
production from the Oil and Gas Properties, volumes of production sold,
purchasers of production, gross revenues, expenses, and such other information
and engineering and geological data with respect thereto as the Lender may
reasonably request.

5.5 Title Opinions; Title Defects. In the event mortgages are required pursuant
to Section 3.3, promptly upon the request of the Lender, furnish to the Lender
title opinions, in form and substance and by counsel satisfactory to the Lender,
or other confirmation of title acceptable to the Lender, covering Oil and Gas
Properties constituting not less than 81% of the value, determined by the Lender
in its sole discretion, of the Mortgaged Properties; and promptly, but in any
event within 60 days after notice by the Lender of any defect, material in the
opinion of the Lender in value, in the title of the Borrower to any of its Oil
and Gas Properties, clear such title defects, and, in the event any such title
defects are not cured in a timely manner, pay all related costs and fees
incurred by the Lender to do so.

5.6 Notices of Certain Events. Deliver to the Lender, immediately upon having
knowledge of the occurrence of any of the following events or circumstances, a
written statement with respect thereto, signed by a Responsible Officer of the
Borrower and setting forth the relevant event or circumstance and the steps
being taken by the Borrower with respect to such event or circumstance:

(a) any Default or Event of Default;

(b) any default or event of default under any contractual obligation of the
Borrower, or any litigation, investigation, or proceeding between the Borrower
and any Governmental Authority which, in either case, if not cured or if
adversely determined, as the case may be, could reasonably be expected to have a
Material Adverse Effect;

(c) any litigation or proceeding involving the Borrower as a defendant or in
which any Property of the Borrower is subject to a claim and in which the amount
involved is $500,000 or more and which is not covered by insurance or in which
injunctive or similar relief is sought;

(d) the receipt by the Borrower of any Environmental Complaint;

(e) any actual, proposed, or threatened testing or other investigation by any
Governmental Authority or other Person concerning the environmental condition
of, or relating to, any Property of the Borrower or adjacent to any Property of
the Borrower following any allegation of a violation of any Requirement of Law;



                                       22
<PAGE>   23


(f) any Release of Hazardous Substances by the Borrower or from, affecting, or
related to any Property of the Borrower or adjacent to any Property of the
Borrower except in accordance with applicable Requirements of Law or the terms
of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, or the violation of any Environmental Law, or the
revocation, suspension, or forfeiture of or failure to renew, any permit,
license, registration, approval, or authorization which could reasonably be
expected to have a Material Adverse Effect;

(g) the change in identity or address of any Person remitting to the Borrower
proceeds from the sale of hydrocarbon production from or attributable to any
Mortgaged Property;

(h) any change in the senior management of the Borrower; and

(i) any other event or condition which could reasonably be expected to have a
Material Adverse Effect.

5.7 Letters in Lieu of Transfer Orders; Division Orders. In the event mortgages
are required pursuant to Section 3.3. promptly upon request by the Lender at any
time and from time to time, and without limitation on the rights of the Lender
pursuant to Sections 2.16 and 2.17 and , execute such letters in lieu of
transfer orders, in addition to the letters signed by the Borrower and delivered
to the Lender in satisfaction of the condition set forth in Section 3.3(c)
and/or division and/or transfer orders as are necessary or appropriate to
transfer and deliver to the Lender proceeds from or attributable to any
Mortgaged Property.

5.8 Additional Information. Furnish to the Lender, promptly upon the request of
the Lender, such additional financial or other information concerning the
assets, liabilities, operations, and transactions of the Borrower as the Lender
may from time to time reasonably request; and notify the Lender not less than
ten Business Days prior to the occurrence of any condition or event that may
change the proper location for the filing of any financing statement or other
public notice or recording for the purpose of perfecting a Lien in any
Collateral, including, without limitation, any change in its name or the
location of its principal place of business or chief executive office; and upon
the request of the Lender, execute such additional Security Instruments as may
be necessary or appropriate in connection therewith.

5.9 Compliance with Laws. Except to the extent the failure to comply or cause
compliance would not have a Material Adverse Effect, comply with all applicable
Requirements of Law, including, without limitation, (a) the Natural Gas Policy
Act of 1978, as amended, (b) ERISA, (c) Environmental Laws, and (d) all permits,
licenses, registrations, approvals, and authorizations (i) related to any
natural or environmental resource or media located on, above, within, in the
vicinity of, related to or affected by any Property of the Borrower, (ii)
required for the performance of the operations of the Borrower, or (iii)
applicable to the use, generation, handling, storage, treatment, transport, or
disposal of any Hazardous Substances; and cause all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant to appropriate
lease provisions) of the Borrower, while such Persons are acting within the
scope of their relationship with the Borrower, to comply with all such
Requirements of Law as may be necessary or appropriate to enable the Borrower to
so comply.

5.10 Payment of Assessments and Charges. Pay all taxes, assessments,
governmental charges, rent, and other Indebtedness which, if unpaid, might
become a Lien against the Property



                                       23
<PAGE>   24


of the Borrower, except any of the foregoing being contested in good faith and
as to which adequate reserve in accordance with GAAP has been established or
unless failure to pay would not have a Material Adverse Effect.

5.11 Maintenance of Corporate Existence and Good Standing. Maintain its
corporate existence or qualification and good standing in its jurisdictions of
incorporation and in all jurisdictions wherein the Property now owned or
hereafter acquired or business now or hereafter conducted necessitates same,
unless the failure to do so would not have a Material Adverse Effect.

5.12 Payment of Notes; Performance of Obligations. Pay the Note according to the
reading, tenor, and effect thereof, as modified hereby, and do and perform in
all material respects every act and discharge all of its other Obligations.

5.13 Further Assurances. Promptly cure any defects in the execution and delivery
of any of the Loan Documents and all agreements contemplated thereby, and
execute, acknowledge, and deliver such other assurances and instruments as
shall, in the reasonable opinion of the Lender, be necessary to fulfill the
terms of the Loan Documents.

5.14 Subsequent Fees and Expenses of Lender. Upon request by the Lender,
promptly reimburse the Lender (to the fullest extent permitted by law) for all
amounts reasonably expended, advanced, or incurred by or on behalf of the Lender
to satisfy any obligation of the Borrower under any of the Loan Documents; to
collect the Obligations; to ratify, amend, restate, or prepare additional Loan
Documents, as the case may be; for the filing and recordation of Security
Instruments; to enforce the rights of the Lender under any of the Loan
Documents; and to protect the Properties or business of the Borrower, including,
without limitation, the Collateral, which amounts shall be deemed compensatory
in nature and liquidated as to amount upon notice to the Borrower by the Lender
and which amounts shall include, but not be limited to (a) all court costs, (b)
reasonable attorneys' fees, (c) reasonable fees and expenses of auditors and
accountants incurred to protect the interests of the Lender, (d) fees and
expenses incurred in connection with the participation by the Lender as a member
of the creditors' committee in a case commenced under any Insolvency Proceeding,
(e) fees and expenses incurred in connection with lifting the automatic stay
prescribed in ss.362 Title 11 of the United States Code, and (f) fees and
expenses incurred in connection with any action pursuant to ss.1129 Title 11 of
the United States Code all reasonably incurred by the Lender in connection with
the collection of any sums due under the Loan Documents, together with interest
at the per annum interest rate equal to the Floating Rate, calculated on a basis
of a calendar year of 365 or 366 days, as the case may be, counting the actual
number of days elapsed, on each such amount from the date of notification that
the same was expended, advanced, or incurred by the Lender until the date it is
repaid to the Lender, with the obligations under this Section surviving the
non-assumption of this Agreement in a case commenced under any Insolvency
Proceeding and being binding upon the Borrower and/or a trustee, receiver,
custodian, or liquidator of the Borrower appointed in any such case.

5.15 Operation of Oil and Gas Properties. Develop, maintain, and operate its Oil
and Gas Properties in a prudent and workmanlike manner in accordance with
industry standards.

5.16 Maintenance and Inspection of Properties. Maintain all of its tangible
Properties in good repair and condition, ordinary wear and tear excepted; make
all necessary replacements thereof and operate such Properties in a good and
workmanlike manner; and permit any authorized representative of the Lender to
visit and inspect, at the expense of the Borrower, any tangible Property of the
Borrower.



                                       24
<PAGE>   25


5.17 Maintenance of Insurance. Maintain insurance with respect to its Properties
and businesses against such liabilities, casualties, risks, and contingencies as
is customary in the relevant industry and sufficient to prevent a Material
Adverse Effect, all such insurance to be in amounts and from insurers acceptable
to the Lender, maintained by Borrower, naming the Lender as loss payee, and,
upon any renewal of any such insurance and at other times upon request by the
Lender, furnish to the Lender evidence, satisfactory to the Lender, within 30
days of the Closing Date of the maintenance of such insurance.

5.18 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND ITS SHAREHOLDERS,
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND AFFILIATES AND
EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY INSTRUMENT
HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES,
FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS,
JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND,
AND ALL COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT
LIMITATION, ATTORNEYS' FEES AND EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN
WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER,
OR FROM ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM
HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE
BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY THE
BORROWER OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT, CONTRACTOR, OR
SUBCONTRACTOR OF THE BORROWER OR ANY OTHER PERSON AT ANY TIME OCCUPYING OR
PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING, TREATMENT, REMOVAL,
STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS
SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY
RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE BORROWER, (D) ANY
CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING IN CONNECTION WITH
THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL OF ANY
HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT, CONTRACTOR, OR
SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF
THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF WHETHER ANY OF SUCH
ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE REQUIREMENTS
OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY LOAN DOCUMENT OR ANY OTHER
ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE
FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, WHETHER SOLE OR CONCURRENT,
ON THE PART OF THE LENDER OR ANY OF ITS SHAREHOLDERS, OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR AFFILIATES OR ANY TRUSTEE FOR THE
BENEFIT OF THE LENDER UNDER ANY SECURITY INSTRUMENT; WITH THE FOREGOING
INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN SATISFIED WHOLLY IN CASH FROM
THE BORROWER AND NOT BY WAY OF REALIZATION AGAINST ANY COLLATERAL OR THE
CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT SUCH INDEMNITY SHALL
NOT EXTEND TO ANY ACT



                                       25
<PAGE>   26


OR OMISSION BY THE LENDER WITH RESPECT TO ANY PROPERTY SUBSEQUENT TO THE LENDER
BECOMING THE OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH
CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER,
JUDGMENT, ACTION, OR REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE
THERETO BY THE LENDER.

5.19 Pledge of Collateral. In the event the Loan Balance is in excess of
$3,000,000, the Borrower agrees to furnish the Security Instruments described in
Section 3.3.

5.20 Transactions with Affiliates. Enter into any transactions (including the
sale, lease, or exchange of Property or the rendering of service) with its
Affiliates, only upon fair and reasonable terms no less favorable than could be
obtained in an arm's length transaction with a Person which was not an
Affiliate.

                                   ARTICLE VI

                               NEGATIVE COVENANTS

                  So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower will not:

6.1 Indebtedness. Create, incur, assume, or suffer to exist any Indebtedness,
whether by way of loan or otherwise; provided, however, the foregoing
restriction shall not apply to (a) the Obligations, (b) unsecured accounts
payable incurred in the ordinary course of business, which are not unpaid in
excess of 60 days beyond invoice date or are being contested in good faith and
as to which such reserve as is required by GAAP has been made, (c) crude oil,
natural gas, or other hydrocarbon floor, collar, cap, price protection, or swap
agreements, in form and substance and with a Person acceptable to the Lender,
provided that (i) each commitment issued under such agreement must also be
approved by the Lender, (ii) such agreements shall not be entered into with
respect to Mortgaged Properties constituting more than 70% of the present value
of estimated future net revenues, computed using a discount factor of 10%, of
all proved developed producing Mortgaged Properties, and (iii) that the floor
prices in such agreements are not less than the prices used by the Lender in its
most recent Borrowing Base determination, or (d) Rate Management Transactions,
in form and substance and with a Person acceptable to the Lender.

6.2 Contingent Obligations. Create, incur, assume, or suffer to exist any
Contingent Obligation; provided, however, the foregoing restriction shall not
apply to (a) performance guarantees and performance surety or other bonds
provided in the ordinary course of business, or (b) trade credit incurred or
operating leases entered into in the ordinary course of business.

6.3 Liens. Create, incur, assume, or suffer to exist any Lien on any of its Oil
and Gas Properties or any other Property, whether now owned or hereafter
acquired; provided, however, the foregoing restrictions shall not apply to
Permitted Liens.

6.4 Sales of Assets. Without the prior written consent of the Lender, sell,
transfer, or otherwise dispose of, in one or any series of transactions assets,
whether now owned or hereafter acquired except in the ordinary course of
business, provided, however, that such sales of assets shall not be more than 5%
of the Borrowing Base per annum.



                                       26
<PAGE>   27


6.5 Leasebacks. Enter into any agreement to sell or transfer any Property and
thereafter rent or lease as lessee such Property or other Property intended for
the same use or purpose as the Property sold or transferred.

6.6 Loans or Advances. Make or agree to make or allow to remain outstanding any
loans or advances to any Person; provided, however, the foregoing restrictions
shall not apply to (a) advances or extensions of credit in the form of accounts
receivable incurred in the ordinary course of business and upon terms common in
the industry for such accounts receivable, or (b) advances to employees of the
Borrower for the payment of expenses in the ordinary course of business, or (c)
loans or advances to subsidiaries of the Borrower.

6.7 Investments. Acquire Investments in, or purchase or otherwise acquire all or
substantially all of the assets of, any Person; provided, however, the foregoing
restriction shall not apply to the purchase or acquisition of (a) Oil and Gas
Properties, (b) Investments in the form of (i) debt securities issued or
directly and fully guaranteed or insured by the United States Government or any
agency or instrumentality thereof, with maturities of no more than one year,
(ii) commercial paper of a domestic issuer rated at the date of acquisition at
least P-2 by Moody's Investor Service, Inc. or A-2 by Standard & Poor's
Corporation and with maturities of no more than one year from the date of
acquisition, or (iii) repurchase agreements covering debt securities or
commercial paper of the type permitted in this Section, certificates of deposit,
demand deposits, eurodollar time deposits, overnight bank deposits and bankers'
acceptances, with maturities of no more than one year from the date of
acquisition, issued by or acquired from or through the Lender or any bank or
trust company organized under the laws of the United States or any state thereof
and having capital surplus and undivided profits aggregating at least
$100,000,000, (c) other short-term Investments similar in nature and degree of
risk to those described in clause (b) of this Section, (d) money-market funds,
or (e) the exercise by the Borrower of its option to acquire an additional 23.3%
interest in Republic Exploration L.L.C. for $2,500,000.

6.8 Dividends and Distributions. Declare, pay, or make, whether in cash or
Property of the Borrower, any dividend or distribution on, or purchase, redeem,
or otherwise acquire for value, any share of any class of its capital stock
except preferred stock; provided, however, the foregoing restriction shall not
apply to dividends paid in capital stock of the Borrower and cash dividends paid
on its preferred stock.

6.9 Issuance of Stock; Changes in Corporate Structure. Enter into any
transaction of consolidation, merger, or amalgamation; liquidate, wind up, or
dissolve (or suffer any liquidation or dissolution).

6.10 Lines of Business. Expand, on its own or through any Subsidiary, into any
line of business other than those in which the Borrower is engaged as of the
date hereof.

6.11 Plan Obligations. Except as disclosed on Exhibit V, assume or otherwise
become subject to an obligation to contribute to or maintain any Plan or acquire
any Person which has at any time had an obligation to contribute to or maintain
any Plan.

6.12 Current Ratio. Permit, as of the close of any fiscal quarter, the ratio of
Current Assets to Current Liabilities to be less than 1.25 to 1.00.

6.13 Debt Coverage Ratio. Permit, as of the close of any fiscal quarter, the
ratio of (a) quarterly EBITDAX to (b) Debt Service to be less than 2.50 to 1.0.



                                       27
<PAGE>   28


6.14 Funded Debt Ratio. Permit, as of the close of any fiscal quarter, the ratio
of (a) Total Funded Debt to (b) annualized quarterly EBITDAX to be less than
0.40 to 1.00.

6.15 Total Liabilities to Tangible Net Worth Ratio. Permit, as of the close of
any fiscal quarter, the ratio of (a) Total Liabilities to (b) Tangible Net Worth
to be less than 0.45 to 1.00.

                                   ARTICLE VII

                                EVENTS OF DEFAULT

7.1 Enumeration of Events of Default. Any of the following events shall
constitute an Event of Default:

(a) default shall be made in the payment when due of any installment of
principal or interest under this Agreement or the Note or in the payment when
due of any fee or other sum payable under any Loan Document and such default as
to interest or fees only shall have continued for three Business Days;

(b) default shall be made by the Borrower in the due observance or performance
of any of its obligations under the Loan Documents, and such default shall
continue for 30 days after the earlier of notice thereof to the Borrower by the
Lender or knowledge thereof by the Borrower;

(c) any representation or warranty made by the Borrower in any of the Loan
Documents proves to have been untrue in any material respect or any
representation, statement (including Financial Statements), certificate, or data
furnished or made to the Lender in connection herewith proves to have been
untrue in any material respect as of the date the facts therein set forth were
stated or certified;

(d) default shall be made by the Borrower (as principal or guarantor or other
surety) in the payment or performance of any bond, debenture, note, Commodity
Hedge Agreement or other Indebtedness or under any credit agreement, loan
agreement, indenture, promissory note, or similar agreement or instrument
executed in connection with any of the foregoing, and such default shall remain
unremedied for in excess of the period of grace, if any, with respect thereto;

(e) the Borrower shall be unable to satisfy any condition or cure any
circumstance specified in Article , the satisfaction or curing of which is
precedent to the right of the Borrower to obtain a Loan and such inability shall
continue for a period in excess of 30 days;

(f) the Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee, or liquidator of it or all or a substantial part of its
assets, (ii) file a voluntary petition commencing an Insolvency Proceeding,
(iii) make a general assignment for the benefit of creditors, (iv) be unable, or
admit in writing its inability, to pay its debts generally as they become due,
or (v) file an answer admitting the material allegations of a petition filed
against it in any Insolvency Proceeding;



                                       28
<PAGE>   29


(g) an order, judgment, or decree shall be entered against the Borrower by any
court of competent jurisdiction or by any other duly authorized authority, on
the petition of a creditor or otherwise, granting relief in any Insolvency
Proceeding or approving a petition seeking reorganization or an arrangement of
its debts or appointing a receiver, trustee, conservator, custodian, or
liquidator of it or all or any substantial part of its assets, and such order,
judgment, or decree shall not be dismissed or stayed within 60 days;

(h) the levy against any significant portion of the Property of the Borrower, or
any execution, garnishment, attachment, sequestration, or other writ or similar
proceeding which is not permanently dismissed or discharged within 30 days after
the levy;

(i) a final and non-appealable order, judgment, or decree shall be entered
against the Borrower for money damages and/or Indebtedness due in an amount in
excess of $750,000, and such order, judgment, or decree shall not be dismissed
or stayed within 60 days;

(j) any charges are filed or any other action or proceeding is instituted by any
Governmental Authority against the Borrower under the Racketeering Influence and
Corrupt Organizations Statute (18 U.S.C. ss.1961 et seq.), the result of which
could be the forfeiture or transfer of any material Property of the Borrower
subject to a Lien in favor of the Lender without (i) satisfaction or provision
for satisfaction of such Lien, or (ii) such forfeiture or transfer of such
Property being expressly made subject to such Lien;

(k) the Borrower shall have (i) concealed, removed, or diverted, or permitted to
be concealed, removed, or diverted, any part of its Property, with intent to
hinder, delay, or defraud its creditors or any of them, (ii) made or suffered a
transfer of any of its Property which may be fraudulent under any bankruptcy,
fraudulent conveyance, or similar law, (iii) made any transfer of its Property
to or for the benefit of a creditor at a time when other creditors similarly
situated have not been paid, or (iv) shall have suffered or permitted, while
insolvent, any creditor to obtain a Lien upon any of its Property through legal
proceedings or distraint which is not vacated within 60 days from the date
thereof;

(l) except for Permitted Liens, any Security Instrument shall for any reason
not, or cease to, create valid and perfected first-priority Liens against the
Collateral purportedly covered thereby; or

(m) the occurrence of a Material Adverse Effect and the same shall remain
unremedied for in excess of 30 days after notice given by the Lender.

7.2 Remedies. (a) Upon the occurrence of an Event of Default specified in
Sections 7.1(f) or 7.1(g), immediately and without notice, (i) all Obligations
shall automatically become immediately due and payable, without presentment,
demand, protest, notice of protest, default, or dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity, or other notice of any
kind, except as may be provided to the contrary elsewhere herein, all of which
are hereby expressly waived by the Borrower; (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lender in
writing; and (iii) the Lender is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower), to set-off and apply any and all deposits (general or special,
time or



                                       29
<PAGE>   30


demand, provisional or final) held by the Lender and any and all other
indebtedness at any time owing by the Lender to or for the credit or account of
the Borrower against any and all of the Obligations although such Obligations
may be unmatured.

(b) Upon the occurrence of any Event of Default other than those specified in
Sections 7.1(f) or 7.1(g), (i) the Lender may, by notice to the Borrower,
declare all Obligations immediately due and payable, without presentment,
demand, protest, notice of protest, default, or dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity, or other notice of any
kind, except as may be provided to the contrary elsewhere herein, all of which
are hereby expressly waived by the Borrower; (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lender in
writing; and (iii) the Lender is hereby authorized at any time and from time to
time, without notice to the Borrower (any such notice being expressly waived by
the Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) held by the Lender and any and all other
indebtedness at any time owing by the Lender to or for the credit or account of
the Borrower against any and all of the Obligations although such Obligations
may be unmatured.

(c) Upon the occurrence of any Event of Default, the Lender may, in addition to
the foregoing in this Section, exercise any or all of its rights and remedies
provided by law or pursuant to the Loan Documents.

                                  ARTICLE VIII

                                  MISCELLANEOUS

8.1 Transfers; Participations. The Lender may, at any time, sell, transfer,
assign, or grant participations in the Obligations or any portion thereof; and
the Lender may forward to each Transferee and prospective Transferee all
documents and information relating to such Obligations, whether furnished by the
Borrower or otherwise obtained, as the Lender determines necessary or desirable.

8.2 Survival of Representations,. All representations and warranties of the
Borrower and all covenants and agreements herein made shall survive the
execution and delivery of the Note and the Security Instruments and shall remain
in force and effect so long as any Obligation is outstanding or any Commitment
exists.

8.3 Notices and Other Communications. Except as to verbal notices expressly
authorized herein, which verbal notices shall be confirmed in writing, all
notices, requests, and communications hereunder shall be in writing (including
by telecopy). Unless otherwise expressly provided herein, any such notice,
request, demand, or other communication shall be deemed to have been duly given
or made when delivered by hand, or, in the case of delivery by mail, when
deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when receipt thereof is
acknowledged orally or by written confirmation report, addressed as follows:

(a)      if to the Lender, to:

                  Bank One, Texas, National Association
                  910 Travis Street
                  Houston, Texas 77002
                  Attention: Energy Group, 6th Floor



                                       30
<PAGE>   31


                  (or for notice by mail, to:
                  P.O. Box 2629
                  Houston, Texas 77252-2629
                  Attention: Energy Group, 6th Floor
                  Telecopy: (713) 751-3544

         if to the Borrower, to:

                  Contango Oil & Gas Company
                  3700 Buffalo Speedway, Suite 960
                  Houston, Texas  77098
                  Attention: William H. Gibbons
                  Telecopy: (713) 960-1065

                  Any party may, by proper written notice hereunder to the
others, change the individuals or addresses to which such notices to it shall
thereafter be sent.

8.4 Parties in Interest. Subject to applicable restrictions contained herein,
all covenants and agreements herein contained by or on behalf of the Borrower or
the Lender shall be binding upon and inure to the benefit of the Borrower or the
Lender, as the case may be, and their respective legal representatives,
successors, and assigns.

8.5 Rights of Third Parties. All provisions herein are imposed solely and
exclusively for the benefit of the Lender and the Borrower. No other Person
shall have any right, benefit, priority, or interest hereunder or as a result
hereof or have standing to require satisfaction of provisions hereof in
accordance with their terms, and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.

8.6 Renewals; Extensions. All provisions of this Agreement relating to the Note
shall apply with equal force and effect to each promissory note hereafter
executed which in whole or in part represents a renewal or extension of any part
of the Indebtedness of the Borrower under this Agreement, the Note, or any other
Loan Document.

8.7 No Waiver; Rights Cumulative. No course of dealing on the part of the
Lender, its officers or employees, nor any failure or delay by the Lender with
respect to exercising any of its rights under any Loan Document shall operate as
a waiver thereof. The rights of the Lender under the Loan Documents shall be
cumulative and the exercise or partial exercise of any such right shall not
preclude the exercise of any other right. The making of any Loan shall not
constitute a waiver of any of the covenants, warranties, or conditions of the
Borrower contained herein. In the event the Borrower is unable to satisfy any
such covenant, warranty, or condition, the making of any Loan shall not have the
effect of precluding the Lender from thereafter declaring such inability to be
an Event of Default as hereinabove provided.

8.8 Survival Upon Unenforceability. In the event any one or more of the
provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other provision
of any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.



                                       31
<PAGE>   32


8.9 Amendments; Waivers. Neither this Agreement nor any provision hereof may be
amended, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the amendment, waiver,
discharge, or termination is sought.

8.10 Controlling Agreement. In the event of a conflict between the provisions of
this Agreement and those of any other Loan Document, the provisions of this
Agreement shall control.

8.11 Disposition of Collateral. Notwithstanding any term or provision, express
or implied, in any of the Security Instruments, the realization, liquidation,
foreclosure, or any other disposition on or of any or all of the Collateral
shall be in the order and manner and determined in the sole discretion of the
Lender; provided, however, that in no event shall the Lender violate applicable
law or exercise rights and remedies other than those provided in such Security
Instruments or otherwise existing at law or in equity.

8.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE CONTRACTS
MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO
CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE
(WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY
ACCOUNTS) SHALL NOT APPLY.

8.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING
DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION
AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY,
TEXAS. THE BORROWER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR
FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY
RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY
LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.

8.14 WAIVER OF RIGHTS TO JURY TRIAL THE BORROWER AND THE LENDER HEREBY
KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR
OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF
ANY OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR
OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL
INDUCEMENT FOR THE LENDER ENTERING INTO THIS AGREEMENT.

8.15 ENTIRE AGREEMENT . THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY
PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO
THE SUBJECT HEREOF, INCLUDING, WITHOUT LIMITATION, THE



                                       32
<PAGE>   33


CORRESPONDENCE DATED NOVEMBER 9, 2000, FROM THE LENDER TO THE BORROWER.
FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH
PARTIES.

8.16 Counterparts . For the convenience of the parties, this Agreement may be
executed in multiple counterparts, each of which for all purposes shall be
deemed to be an original, and all such counterparts shall together constitute
but one and the same Agreement.

                  IN WITNESS WHEREOF, this Agreement is deemed executed
effective as of the date first above written.

                                    BORROWER:

                                    CONTANGO OIL & GAS COMPANY



                                    By: /s/  WILLIAM H. GIBBONS
                                        ----------------------------
                                        William H. Gibbons
                                        Vice President and Treasurer

                                    LENDER:

                                    BANK ONE, TEXAS, NATIONAL
                                    ASSOCIATION


                                    By: /s/  JONATHAN GREGORY
                                        ----------------------------
                                        Jonathan Gregory
                                        Vice President