THIS NOTE HAS  NOT BEEN REGISTERED UNDER THE  SECURITIES ACT OF 1933,  AS
       AMENDED, OR THE LAWS OF ANY  STATE OR OF ENGLAND, AND NO TRANSFER  HEREOF
       MAY  BE EFFECTED  UNLESS SUCH  TRANSFER  SHALL BE   REGISTERED  UNDER  OR
       EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF  1933,
       AS AMENDED, AND ANY APPLICABLE LAWS OF ANY STATE OR OF ENGLAND.

       No. 1                                                       $75,000,000

                                HONDO OIL & GAS COMPANY
                           (FORMERLY PAULEY PETROLEUM INC.)
               Amended and Restated 6% Senior Note due January 15, 1999

            Hondo Oil & Gas  Company (formerly known as Pauley Petroleum  Inc.),
       a  Delaware  corporation  (the "Company"),  promises  to  pay  to  London
       Australian & General Property Company Limited or registered assigns,  the
       principal  sum of  SEVENTY-FIVE MILLION  Dollars (or  so much  as may  be
       advanced,  including   the  addition  of   interest  to  principal,   and
       outstanding hereunder) on January 15, 1999.

                 Interest Payment Dates:       April 1 and October 1
                 Record Dates:                 March 15 and September 15

            This  Note  has  been  issued  by  the  Company  to  renew,  extend,
       consolidate,  amend, restate  and  replace that  certain  13-1/2%  Senior
       Subordinated Note due 1998 (the  "Prior Note") (in order to, among  other
       things,  implement  an  Amendment to  the  Note  Purchase  Agreement  (as
       defined on  the next page hereof)  pursuant to which  the Prior Note  was
       issued),  to evidence  all  indebtedness and  other  amounts  outstanding
       under the Prior  Note, and to evidence any  further interest that may  be
       added to principal pursuant to the terms of this Note.  All additions  to
       principal (including the addition of interest to principal) and  payments
       made pursuant  to this  Note may  be recorded  by the  Noteholder on  its
       books  and records,  and such  books  and records  (or any  statement  or
       certificate of  the Noteholder based thereon)  shall be conclusive as  to
       the  existence and  amounts  thereof  absent manifest  error.    Although
       issued in substitution for and  restatement of the Prior Note, this  Note
       shall  not  be deemed  to  have  been issued  in  payment,  satisfaction,
       cancellation or novation of any of the Prior Note.

            Additional provisions of this Note  are set forth on the other  side
       of this Note.

            The  portion of   principal  amount  of this  Note set  forth  below
       (subject to approval by  the Company's stockholders at their 1998  Annual
       Meeting) is convertible in accordance with Section 5 of this Note at  the
       Conversion  Price set  forth  below  (subject to  adjustment  if  certain
       events set forth in Section 5 of this Note occur after the date hereof):

                                    Conversion Box
                                    --------------
                           Principal           Conversion
                           Amount              Price

                           $7,000,000          $7.70


       Dated:    As of December 18, 1997

                                          HONDO OIL & GAS COMPANY


                                           1





                                          By:  /s/ John J. Hoey
                                               ------------------------------
                                               President

       By:  /s/ Stanton J. Urquhart
            ----------------------------
            Secretary

                                     [END OF PAGE]

                                HONDO OIL & GAS COMPANY
                           (Formerly PAULEY PETROLEUM INC.)
                         6% Senior Notes Due January 15, 1999

            1.   Interest.  Hondo  Oil & Gas Company (formerly Pauley  Petroleum
       Inc.), a  Delaware corporation ("Company"), promises  to pay interest  on
       the principal  amount of  this Note  at the  rate per  annum shown  above
       (provided,  however, that  if the  Company's stockholders  shall fail  to
       approve the right of  the Holders to convert $7,000,000 principal  amount
       of  the Note  at a  conversion price  of $7.70  per share  at their  1998
       Annual Meeting, the interest rate applicable to the portion of this  Note
       that would have otherwise been so convertible shall be 13.5% per  annum).
        The Company will pay interest semiannually  on April 1 and October 1  of
       each year,  commencing May 1, 1989.   Interest on  the Notes will  accrue
       from the  most recent date  to which interest  has been paid  or , if  no
       interest  has been  paid, from  November 4,  1988, in  any case  to  (but
       excluding)  the applicable  interest  payment  date.   Interest  will  be
       computed on the basis of a 360-day year of twelve 30-day months.

            Notwithstanding anything  in the foregoing to  the contrary, if,  in
       the  opinion  of its  Board  of  Directors, the  Company  does  not  have
       sufficient cash  resources to pay  interest on the  Notes when due,  then
       the Company  may offer to  the Noteholder a  payment of  the interest  in
       shares of  the Company's common  stock, valued at  (i) the last  reported
       sales price  regular way  on the  interest due day  or, in  case no  such
       reported  sale takes  place on  such  day, the  average of  the  reported
       closing bid and asked prices regular  way on such day, in either case  on
       the  American  Stock Exchange  or  other  principal  national  securities
       exchange on which the Company's common stock is listed or, if not  listed
       on  any  national  securities exchange,  on  The  Nasdaq  Stock  Market's
       National Market System or, (ii) if (i) is not applicable, the average  of
       the bid and asked prices at the end of the interest due day in the  over-
       the-counter market  as furnished by  any New York  Stock Exchange  member
       firm selected  by the  Noteholder in  good faith  for that  purpose.   In
       making this  determination, the  Company's management  will not,  without
       the consent  of the Noteholder,  allocate cash resources  to new  capital
       projects not  related to  the Opon  Association Contract  dated July  15,
       1987  between  Empressa Colombiana  de  Petroleos  and  Opon  Development
       Company.   The Noteholder will  then notify the  Company whether it  will
       either accept the  payment of interest in  the Company's common stock  or
       add the  amount of interest due  to the principal of  the Notes.  If  the
       Noteholder  accepts the  payment  of  interest in  the  Company's  common
       stock,  the  Company  will  issue  the  requisite  number  of  shares  to
       Noteholder within ten business days after the Company receives notice  of
       acceptance from  Noteholder.  The Noteholder  recognizes that any  shares
       of the  Company's common  stock that  it may  acquire by  the payment  of
       interest in  the Company's  common stock  will not  have been  registered
       under the Securities Act of 1933, as amended (the "Act"), and may not  be


                                           2




       sold in  the absence of  an effective registration  under the  Act or  an
       exemption  from  the  registration requirements  of  the  Act.    If  the
       Noteholder so requests at any time  and from time to time after the  date
       shares  of  he  Company's common  stock  are  issued  to  the  Noteholder
       pursuant to  this provision,  the Company will  use its  best efforts  to
       effect registration under the Act of the shares so issued.

            2.   Method of Payment.  The Company will pay interest on the  Notes
       (except defaulted interest) to the persons who are registered Holders  of
       Notes at the close of business  on the record date for the next  interest
       payment date even though Notes are canceled after the record date and  on
       or before  the interest payment  date.  Holders  must surrender Notes  to
       the  Company  to  collect principal  payments.    The  Company  will  pay
       principal and interest in money of  the United States of America that  at
       the time  of payment is legal  tender for payment  of public and  private
       debts, which may include a check  payable in such money.  It may mail  an
       interest check to a Holder's registered address.

            3.   Note Purchase  Agreement.  The  Notes are issued  under a  Note
       Purchase  Agreement  dated  as of  November  1,  1988  (as  same  may  be
       supplemented, modified, amended or restated from time to time, the  "Note
       Purchase Agreement") between the Company  and Lonrho Plc.  The Notes  are
       subject  to  all  of the  terms  of  the  Note  Purchase  Agreement,  and
       Noteholders are referred to  the Note Purchase Agreement for a  statement
       of  such terms.   The  Notes  are unsecured  general obligations  of  the
       Company limited to $75,000,000 in aggregate principal amount.

            4.   Optional Redemption.  The Company at its option may redeem  all
       the Notes  at any time  or some of  them from time  to time  on or  after
       November  1,  1991  at the  following  redemption  prices  (expressed  in
       percentages  of   principal  amount),  plus   accrued  interest  to   the
       redemption date:

       If redeemed during the 12-month period beginning November 1:

                 Year      Percentage          Year           Percentage
                 ----      ----------          ----           ----------
                 1991      107.714%            1994           101.928%
                 1992      105.786%            1995 and
                 1993      103.857%            thereafter     100.000%

       provided,  however, that  none of  the Notes  will be  redeemed prior  to
       November  1, 1993,  directly or  indirectly from  or in  anticipation  of
       funds  borrowed by  the Company  at  an effective  interest cost  to  the
       Company of less than 13-1/2% per annum.

            5.   Conversion.   Subject to approval  by the  stockholders of  the
       Company  at  the  Company's 1998  Annual  Meeting  of  Stockholders,  the
       Noteholder may, at its option, at  any time prior to the payment in  full
       of this Note,  elect to convert up to the  principal amount of this  Note
       set forth in  the Conversion Box on page 1  of this Note (or any  portion
       thereof) into  a number of  fully paid and  non-assessable shares of  the
       Company's common stock, $1.00  par value per share (the "Common  Stock"),
       determined by  dividing the principal  amount to be  so converted by  the
       Conversion Price per share set forth  in the Conversion Box on page 1  of
       this Note  (as adjusted as set  forth below if  certain events set  forth
       below occur after the date set forth on page 1 of this Note).




                                           3




            Upon any transfer, each Note issued shall reflect on it the  portion
       of  the  principal  amount   of  the  Note  being  transferred  that   is
       convertible, with  the remaining  balance of  such conversion  privileges
       being retained  by the transferee.   Absent any  such instruction to  the
       Company, such conversion privileges shall be transferred pro rata to  the
       portion of the Note being transferred  and the portion of the Note  being
       retained.

            The exercise  of such conversion privilege  shall be made by  giving
       notice thereof  to the Company  (specifying the principal  amount and  at
       the Conversion  Price) and surrendering the  Note being converted to  the
       Company.    The  balance of  any  such  Note  surrendered  which  is  not
       converted shall be reissued to the Noteholder exercising such  conversion
       privilege  with   appropriate  adjustments  to   reflect  the   remaining
       principal amount  convertible. The portion  of any  Note converted  shall
       bear  interest only  to (but  excluding) the  date the  Company issues  a
       stock certificate  representing the shares of  Common Stock being  issued
       to the Noteholder upon such  conversion.  No fractional shares of  Common
       Stock shall be issued upon conversion  of any Note.  In lieu of any  such
       fractional shares, the Noteholder, upon conversion, shall be entitled  to
       the cash equivalent of such  fractional share of Common Stock based  upon
       the market price therefor (determined  as of the date the Company  issues
       such  Common  Stock to  the  Noteholder  utilizing a  similar  method  of
       determining such market price as that  set forth in Section 2.01 of  this
       Note Purchase Agreement).

            If the  Company at any  time subdivides (by  any stock split,  stock
       dividend,  recapitalization  or  otherwise)  its  outstanding  shares  of
       Common Stock  into a greater  number of shares,  the Conversion Price  in
       effect  immediately prior  to such  subdivision will  be  proportionately
       reduced.  If  the Company at any  time combines (by combination,  reverse
       stock split or otherwise) its  outstanding shares of Common Stock into  a
       smaller  number of  shares, the  Conversion Price  in effect  immediately
       prior to such combination will be proportionately increased.

            If  the  Company  consolidates or  merges  into  or  sells,  leases,
       transfers  or otherwise  disposes  of all  or  substantially all  of  its
       assets,  or  if  there  occurs  any    recapitalization,  reorganization,
       reclassification in such a way that holders of Common Stock are  entitled
       to  receive securities,  cash  or other  assets  with respect  to  or  in
       exchange for  Common Stock,  the portion  of the  Notes then  convertible
       will become convertible into the  kind and amount of securities, cash  or
       other assets which the  Holder would have received immediately after  the
       transaction as if the Holder had converted the portion of this Note  then
       convertible immediately before  the effective date of the transaction  at
       the  applicable Conversion  Prices in  effect immediately  prior to  such
       effective date.

            6.   Denominations,   Transfer,  Exchange.     The   Notes  are   in
       registered  form without  coupons in  denominations of  $1,000 and  whole
       multiples of $1,000.  The transfer  of Notes may be registered and  Notes
       may  be exchanged  as  provided in  the  Note Purchase  Agreement.    The
       Company  need not  exchange  or register  the  transfer of  any  Note  or
       portion of a  Note selected for redemption.   Also, it need not  exchange
       or register the  transfer of any Notes for a  period of 15 days before  a
       selection of Notes to be redeemed.

            7.   Persons Deemed Owners.  The registered holder of a Note may  be
       treated as its owner for all purposes.


                                           4





            8.   No Recourse Against  Others.  A director, officer, employee  or
       stockholder, as  such, of the  Company shall not  have any liability  for
       any  obligations of  the Company  under the  Notes or  the Note  Purchase
       Agreement or for any claim based  on, in respect of or by reason of  such
       obligations  or their  creation.   Each Noteholder  by accepting  a  Note
       waives and releases all such liability.  The waiver and release are  part
       of the consideration for the issue of the Notes.

            The Company will furnish to any Noteholder upon written request  and
       without charge a  copy of the Note Purchase  Agreement.  Requests may  be
       made  to:   Secretary, Hondo  Oil  & Gas  Company, Enserch  Tower,  10375
       Richmond Avenue, Suite 900, Houston, Texas  77042.
















































                                           5