Exhibit 10.1


 




 





$100,000,000


 


CREDIT
AGREEMENT


 


Among


 


CANO
PETROLEUM, INC.


 


as Borrower,


 


THE LENDERS PARTY HERETO FROM TIME
TO TIME


 


as Lenders,


 


and


 


UNION BANK
OF CALIFORNIA, N.A.


 


as Administrative Agent and as
Issuing Lender


 


November 29, 2005




 





 





















 


TABLE OF
CONTENTS


 


	
   

  	
   

  	
  Page

  
	
  ARTICLE I

  	
  DEFINITIONS
  AND ACCOUNTING TERMS

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
  Certain Defined Terms

  	
  1

  
	
  Section 1.02

  	
  Computation of Time
  Periods

  	
  18

  
	
  Section 1.03

  	
  Accounting Terms;
  Changes in GAAP

  	
  18

  
	
  Section 1.04

  	
  Types of Advances

  	
  18

  
	
  Section 1.05

  	
  Miscellaneous

  	
  18

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  CREDIT
  FACILITIES

  	
  19

  
	
   

  	
   

  	
   

  
	
  Section 2.01

  	
  Commitment for Advances

  	
  19

  
	
  Section 2.02

  	
  Borrowing Base

  	
  19

  
	
  Section 2.03

  	
  Method of Borrowing

  	
  22

  
	
  Section 2.04

  	
  Reduction of the
  Commitments

  	
  24

  
	
  Section 2.05

  	
  Prepayment of Advances

  	
  24

  
	
  Section 2.06

  	
  Repayment of Advances

  	
  26

  
	
  Section 2.07

  	
  Letters of Credit

  	
  26

  
	
  Section 2.08

  	
  Fees

  	
  30

  
	
  Section 2.09

  	
  Interest

  	
  30

  
	
  Section 2.10

  	
  Payments and
  Computations

  	
  32

  
	
  Section 2.11

  	
  Sharing of Payments,
  Etc

  	
  33

  
	
  Section 2.12

  	
  Breakage Costs

  	
  33

  
	
  Section 2.13

  	
  Increased Costs

  	
  33

  
	
  Section 2.14

  	
  Taxes

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  CONDITIONS
  OF LENDING

  	
  37

  
	
   

  	
   

  	
   

  
	
  Section 3.01

  	
  Conditions Precedent to
  Initial Credit Extension

  	
  37

  
	
  Section 3.02

  	
  Conditions Precedent to
  All Borrowings

  	
  40

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  REPRESENTATIONS
  AND WARRANTIES

  	
  41

  
	
   

  	
   

  	
   

  
	
  Section 4.01

  	
  Existence; Subsidiaries

  	
  41

  
	
  Section 4.02

  	
  Power

  	
  41

  
	
  Section 4.03

  	
  Authorization and
  Approvals

  	
  41

  
	
  Section 4.04

  	
  Enforceable Obligations

  	
  42

  
	
  Section 4.05

  	
  Financial Statements

  	
  42

  



 


i





















 


	
  Section 4.06

  	
  True and Complete
  Disclosure

  	
  42

  
	
  Section 4.07

  	
  Litigation; Compliance
  with Laws

  	
  43

  
	
  Section 4.08

  	
  Use of Proceeds

  	
  43

  
	
  Section 4.09

  	
  Investment Company Act

  	
  43

  
	
  Section 4.10

  	
  Public Utility Holding
  Company Act

  	
  43

  
	
  Section 4.11

  	
  Taxes

  	
  44

  
	
  Section 4.12

  	
  Pension Plans

  	
  44

  
	
  Section 4.13

  	
  Condition of Property;
  Casualties

  	
  45

  
	
  Section 4.14

  	
  No Burdensome
  Restrictions; No Defaults

  	
  45

  
	
  Section 4.15

  	
  Environmental Condition

  	
  45

  
	
  Section 4.16

  	
  Permits, Licenses, Etc

  	
  46

  
	
  Section 4.17

  	
  Gas Contracts

  	
  46

  
	
  Section 4.18

  	
  Liens; Titles, Leases, Etc

  	
  46

  
	
  Section 4.19

  	
  Solvency and Insurance

  	
  47

  
	
  Section 4.20

  	
  Hedging Agreements

  	
  47

  
	
  Section 4.21

  	
  Material Agreements

  	
  47

  
	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  AFFIRMATIVE
  COVENANTS

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 5.01

  	
  Compliance with Laws,
  Etc

  	
  47

  
	
  Section 5.02

  	
  Maintenance of
  Insurance

  	
  48

  
	
  Section 5.03

  	
  Preservation of
  Corporate Existence, Etc

  	
  48

  
	
  Section 5.04

  	
  Payment of Taxes, Etc

  	
  49

  
	
  Section 5.05

  	
  Visitation Rights

  	
  49

  
	
  Section 5.06

  	
  Reporting Requirements

  	
  49

  
	
  Section 5.07

  	
  Maintenance of Property

  	
  53

  
	
  Section 5.08

  	
  Agreement to Pledge

  	
  53

  
	
  Section 5.09

  	
  Use of Proceeds

  	
  53

  
	
  Section 5.10

  	
  Title Evidence and
  Opinions

  	
  53

  
	
  Section 5.11

  	
  Further Assurances;
  Cure of Title Defects

  	
  53

  
	
  Section 5.12

  	
  Hedging Arrangements

  	
  54

  
	
  Section 5.13

  	
  Bank Accounts

  	
  54

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  NEGATIVE
  COVENANTS

  	
  55

  
	
   

  	
   

  	
   

  
	
  Section 6.01

  	
  Liens, Etc

  	
  56

  
	
  Section 6.02

  	
  Debts, Guaranties, and
  Other Obligations

  	
  56

  



 


ii





















 


	
  Section 6.03

  	
  Agreements Restricting
  Liens and Distributions

  	
  57

  
	
  Section 6.04

  	
  Merger or
  Consolidation; Asset Sales

  	
  57

  
	
  Section 6.05

  	
  Restricted Payments

  	
  57

  
	
  Section 6.06

  	
  Investments

  	
  57

  
	
  Section 6.07

  	
  Affiliate Transactions

  	
  58

  
	
  Section 6.08

  	
  Compliance with ERISA

  	
  58

  
	
  Section 6.09

  	
  Sale-and-Leaseback

  	
  59

  
	
  Section 6.10

  	
  Change of Business

  	
  59

  
	
  Section 6.11

  	
  Organizational
  Documents, Name Change

  	
  59

  
	
  Section 6.12

  	
  Use of Proceeds;
  Letters of Credit

  	
  60

  
	
  Section 6.13

  	
  Gas Imbalances,
  Take-or-Pay or Other Prepayments

  	
  60

  
	
  Section 6.14

  	
  Limitation on
  Speculative Hedging

  	
  60

  
	
  Section 6.15

  	
  Additional
  Subsidiaries; Additional Oil and Gas Properties

  	
  60

  
	
  Section 6.16

  	
  Account Payables

  	
  61

  
	
  Section 6.17

  	
  Current Ratio

  	
  61

  
	
  Section 6.18

  	
  Debt Coverage Ratio

  	
  61

  
	
  Section 6.19

  	
  Interest Coverage Ratio

  	
  61

  
	
  Section 6.20

  	
  Subordinated Debt

  	
  62

  
	
  Section 6.21

  	
  Non-Guarantor
  Subsidiary

  	
  62

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  EVENTS
  OF DEFAULT; REMEDIES

  	
  62

  
	
   

  	
   

  	
   

  
	
  Section 7.01

  	
  Events of Default

  	
  62

  
	
  Section 7.02

  	
  Optional Acceleration
  of Maturity

  	
  65

  
	
  Section 7.03

  	
  Automatic Acceleration
  of Maturity

  	
  65

  
	
  Section 7.04

  	
  Right of Set-off

  	
  66

  
	
  Section 7.05

  	
  Non-exclusivity of
  Remedies

  	
  66

  
	
  Section 7.06

  	
  Application of Proceeds

  	
  66

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
  THE
  ADMINISTRATIVE AGENT AND THE ISSUING LENDER

  	
  66

  
	
   

  	
   

  	
   

  
	
  Section 8.01

  	
  Authorization and
  Action

  	
  66

  
	
  Section 8.02

  	
  Administrative Agent’s
  Reliance, Etc

  	
  67

  
	
  Section 8.03

  	
  The Administrative
  Agent and Its Affiliates

  	
  67

  
	
  Section 8.04

  	
  Lender Credit Decision

  	
  67

  
	
  Section 8.05

  	
  Indemnification

  	
  68

  
	
  Section 8.06

  	
  Successor
  Administrative Agent and Issuing Lender

  	
  68

  



 


iii





















 


	
  ARTICLE IX

  	
  MISCELLANEOUS

  	
  69

  
	
   

  	
   

  	
   

  
	
  Section 9.01

  	
  Amendments, Etc

  	
  69

  
	
  Section 9.02

  	
  Notices, Etc

  	
  70

  
	
  Section 9.03

  	
  No Waiver; Remedies

  	
  70

  
	
  Section 9.04

  	
  Costs and Expenses

  	
  70

  
	
  Section 9.05

  	
  Binding Effect

  	
  70

  
	
  Section 9.06

  	
  Lender Assignments and
  Participations

  	
  70

  
	
  Section 9.07

  	
  Indemnification; Waiver

  	
  73

  
	
  Section 9.08

  	
  Execution in
  Counterparts

  	
  74

  
	
  Section 9.09

  	
  Survival of
  Representations, Etc

  	
  74

  
	
  Section 9.10

  	
  Severability

  	
  74

  
	
  Section 9.11

  	
  Business Loans

  	
  74

  
	
  Section 9.12

  	
  Governing Law;
  Submission to Jurisdiction

  	
  74

  
	
  Section 9.13

  	
  WAIVER OF JURY TRIAL

  	
  75

  
	
  Section 9.14

  	
  ORAL AGREEMENTS

  	
  75

  
	
   

  	
   

  	
   

  
	
  EXHIBITS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  -

  	
  Form of Assignment and Acceptance

  	
   

  
	
  Exhibit B

  	
   

  	
  -

  	
  Form of Compliance Certificate

  	
   

  
	
  Exhibit C

  	
   

  	
  -

  	
  Form of Guaranty

  	
   

  
	
  Exhibit D

  	
   

  	
  -

  	
  Form of Mortgage

  	
   

  
	
  Exhibit E

  	
   

  	
  -

  	
  Form of Note

  	
   

  
	
  Exhibit F

  	
   

  	
  -

  	
  Form of Notice of Borrowing

  	
   

  
	
  Exhibit G

  	
   

  	
  -

  	
  Form of Notice of Conversion or
  Continuation

  	
   

  
	
  Exhibit H

  	
   

  	
  -

  	
  Form of Pledge Agreement

  	
   

  
	
  Exhibit I

  	
   

  	
  -

  	
  Form of Security Agreement

  	
   

  
	
  Exhibit J

  	
   

  	
  -

  	
  Form of Transfer Letters

  	
   

  
	
  Exhibit K

  	
   

  	
  -

  	
  Form of Borrower’s Counsel Opinion

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULES:

  	
   

  
	
   

  	
   

  
	
  Schedule I

  	
  -

  	
  Pricing Grid

  	
   

  
	
  Schedule II
  

  	
  -

  	
  Notice Information and Commitments

  	
   

  
	
  Schedule 4.01
  

  	
  -

  	
  Subsidiaries

  	
   

  
	
  Schedule 4.05
  

  	
  -

  	
  Existing Debt

  	
   

  
	
  Schedule 4.20

  	
  -

  	
  Hedging Contracts

  	
   

  
	
  Schedule 4.21

  	
  -

  	
  Material Agreements

  	
   

  
	
  Schedule 5.10
  

  	
  -

  	
  Post Closing Title Opinion Requirements

  	
   

  
	
  Schedule 5.12

  	
  -

  	
  Required Hedging Contracts

  	
   

  
						



 


iv





















 


CREDIT
AGREEMENT


 


This Credit Agreement dated as of November 29, 2005 is among Cano
Petroleum, Inc., a Delaware corporation (“Borrower”), the lenders party
hereto from time to time (“Lenders”), and Union Bank of California, N.A., as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”) and as issuing lender for such Lenders (in such capacity, the “Issuing
Lender”).


 


The Borrower, the Lenders, the Administrative Agent and the Issuing
Lender hereby agree to as follows:


 


ARTICLE I



DEFINITIONS AND ACCOUNTING TERMS


 


Section 1.01                                Certain
Defined Terms.  As used in this
Agreement, the terms defined above shall have the meanings set forth therein
and the following terms shall have the following meanings (unless otherwise
indicated, such meanings to be equally applicable to both the singular and
plural forms of the terms defined):


 


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


 


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


 


“Adjusted Reference Rate” means, for any day, the fluctuating
rate per annum of interest equal to the greater of (a) the Reference Rate
in effect on such day and (b) the Federal Funds Rate in effect on such day
plus 1⁄2 of 1%.


 


“Administrative Agent” means Union Bank of California, N.A., in
its capacity as agent pursuant to Article VIII, and any successor agent
pursuant to Section 8.06.


 


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


 


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


 





















 


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


 


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


 


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


 


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


 


“Barnett Shale Properties” means the stratigraphic equivalent of
that certain interval described as 100’ above and 100’ below the interval seen
between 3,450’ and 3,650’ on the Welex Spectral Density – Dual Spaced Neutron
Log dated July 29, 1986 for the Hogtown Moore Unit #13-2 Well located in
the George E. Moore Survey, Eastland Conty, Texas, as such stratigraphic
equivalent underlies, comprises a portion of or is attributable to the Oil &
Gas Properties held by Square One in the Desdemona Field.


 


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


 


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


 


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


 


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


 


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


 


2





















 


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


 


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


 


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


 


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


 


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


 


3





















 


“Collateral Trustee” means Union Bank of California, N.A., in
its capacity as collateral trustee under the Collateral Trust and Intercreditor
Agreement and any successor appointed pursuant to the terms of the Collateral
Trust and Intercreditor Agreement.


 


“Commitment” means the amount set opposite such Lender’s name on
the Schedule II hereof as its Commitment, or if such Lender has entered
into any Assignment and Acceptance, as set forth for such Lender as its
Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(c),
as such amount may be reduced or terminated pursuant to Section 2.04 or Article VII
or otherwise under this Agreement.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


(a)                                  indebtedness
of such Person for borrowed money;


 


4





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


“EBITDA” means, for any period, without duplication, (a) Consolidated
Net Income for such period plus (b) to the extent deducted in
determining Consolidated Net Income, Interest Expense, taxes, depreciation,
amortization, depletion and other non-cash charges for such period (including
any provision for the reduction in the carrying value of assets recorded in
accordance with GAAP and including non-cash charges resulting from the
requirements of SFAS 133 or 143) for such period minus (c) all
non-cash items of income which were included in determining such Consolidated
Net Income (including non-cash income resulting from the requirements of SFAS
133 or 143).


 


“Eligible Assignee” means (a) any Lender, (b) any
Subsidiary or Affiliate of a Lender, and (c) any commercial bank or other
financial institution (i) approved by the Administrative


 


5





















 


Agent and the Issuing Lender in
their sole discretion, and (ii) unless an Event of Default has occurred
and is continuing, reasonably acceptable to the Borrower.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


“Eurodollar Rate” means, for the Interest Period for each
Eurodollar Rate Advance comprising the same Borrowing, the interest rate per
annum (rounded upward to the nearest whole multiple of 1/100 of 1% per annum)
set forth on the applicable Telerate Page as the London Interbank Offered
Rate, for deposits in Dollars at 11:00 a.m.  (London, England time) two Business Days
before the first day of such Interest Period and for a period equal to such
Interest Period; provided that, if no such quotation appears on the
applicable Telerate Page, the Eurodollar Rate shall be an interest rate per
annum equal to the rate per annum at which


 


6





















 


deposits in Dollars are offered
by the principal office of Union Bank of California, N.A.  in London, England to prime banks in the
London interbank market at 11:00 a.m. 
(London, England time) two Business Days before the first day of such
Interest Period in an amount substantially equal to the Eurodollar Rate Advance
to be maintained by the Lender that is the Administrative Agent in respect of
such Borrowing and for a period equal to such Interest Period.


 


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


 


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


 


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


 


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


 


“Federal Funds Rate” means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers, as published for
such day (or, if such day is not a Business Day, for the next preceding Business
Day) by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations
for any such day on such transactions received by the Administrative Agent from
three Federal funds brokers of recognized standing selected by it.


 


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


 


“Financial Statements” means the financial statements included
in the Form 10-KSB filed by the Borrower with the SEC on September 20,
2005, including the audited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as of fiscal year ended June 30, 2005, and the
related audited consolidated statements of income, cash flow, and retained
earnings of the Borrower and its consolidated Subsidiaries for the fiscal year
then ended, copies of which have been delivered to the Administrative Agent and
the Lenders.


 


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


 


“Governmental Authority” means, as to any Person in connection
with any subject, any foreign, national, state or provincial governmental
authority, or any political subdivision of any


 


7





















 


state thereof, or any agency,
department, commission, board, authority or instrumentality, bureau or court,
in each case having jurisdiction over such Person or such Person’s Property in
connection with such subject.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


“Independent Engineer” means Forest Garb & Associates
or any other engineering firm acceptable to the Administrative Agent.


 


8





















 


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


 


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


 


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


 


“Interest Period” means, for each Eurodollar Rate Advance
comprising part of the same Borrowing, the period commencing on the date of
such Eurodollar Rate Advance or the date of the Conversion of any Reference
Rate Advance into a Eurodollar Rate Advance and ending on the last day of the
period selected by the Borrower pursuant to the provisions below and Section 2.03
and, thereafter, each subsequent period commencing on the last day of the
immediately preceding Interest Period and ending on the last day of the period
selected by the Borrower pursuant to the provisions below and Section 2.03.  The duration of each such Interest Period
shall be one, two, three, or six months, or if available, nine or twelve
months, in each case as the Borrower may, upon notice received by the
Administrative Agent not later than 10:00 a.m.  (Dallas, Texas time) on the third Business
Day prior to the first day of such Interest Period, select; provided, however,
that:


 


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


 


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


 


(c)                                  whenever
the last day of any Interest Period would otherwise occur on a day other than a
Business Day, the last day of such Interest Period shall be extended to occur
on the next succeeding Business Day, provided that if such extension
would cause the last day of such


 


9





















 


Interest Period to occur in the
next following calendar month, the last day of such Interest Period shall occur
on the next preceding Business Day; and


 


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


 


“Interim Financial Statements” means
the financial statements included in the Form 10-QSB filed by the Borrower
with the SEC on November 9, 2005 including the unaudited consolidated
balance sheet of the Borrower and its consolidated Subsidiaries dated September 30,
2005, and the related unaudited consolidated statements of income, cash flow,
and retained earnings of the Borrower and its consolidated Subsidiaries for the
three months then ended, copies of which have been delivered to the
Administrative Agent and the Lenders.


 


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


 


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


 


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


 


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


 


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


 


“Lending Office” means, as to any
Lender, the office or offices of such Lender described as such in such Lender’s
administrative questionnaire requested by the Administrative Agent, or


 


10





















 


such other office or offices as
a Lender may from time to time notify the Borrower and the Administrative
Agent.


 


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


 


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


 


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


 


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


 


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


 


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


 


“Liquid Investments” means:


 


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


 


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


 


11





















 


service or services, as the
case may be, as shall be selected by the Borrower with the consent of the
Majority Lenders;


 


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


 


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


 


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


 


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


 


“Majority Lenders” means, at any time, Lenders holding at least
662/3% of the then aggregate unpaid principal amount of
the Notes and outstanding Letter of Credit Obligations held by the Lenders at such
time (with the aggregate amount of each Lender’s risk participation and funded
participation in Letter of Credit Obligations being deemed to be “held” by such
Lender for purposes of this definition); provided that, if no such
principal amount or Letter of Credit Obligation is then outstanding, “Majority
Lenders” shall mean Lenders having at least 662/3% of the
aggregate amount of the Commitments at such time.


 


“Material Adverse Change” means (a) a material adverse
change in the business, assets (including the Oil and Gas Properties of the
Borrower or any of its Subsidiaries but excluding the Barnett Shale Properties),
condition (financial or otherwise), or results of operations of the Borrower or
any of its Subsidiaries since June 30, 2005 (but after giving pro forma
effect to the WO Energy Acquisition) or (b) a material adverse effect on
the Borrower’s or any Subsidiary’s ability to perform its obligations under
this Agreement, any Note, any Guaranty, or any other Loan Document.


 


“Maturity Date” means November 29, 2009.


 


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


 


12





















 


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


 


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


 


“Note” means a promissory note of the Borrower payable to the
order of any Lender, in substantially the form of the attached Exhibit E,
evidencing indebtedness of the Borrower to such Lender resulting from Advances
owing to such Lender.


 


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


 


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


 


“Obligations” means (a) all principal, interest, fees,
reimbursements, indemnifications, and other amounts payable by the Borrower,
any Guarantor or any of their respective Subsidiaries to the Administrative
Agent, the Issuing Lender or the Lenders under the Loan Documents, including
without limitation, the Letter of Credit Obligations, (b) all obligations
of the Borrower, any Guarantor or any of their respective Subsidiaries owing to
any Swap Counterparty under any Interest Hedge Agreement or Hydrocarbon Hedge
Agreement, and (c) all obligations of the Borrower, any Guarantor or any
of their respective Subsidiaries owing to any Lender or any Affiliate thereof
in connection with any letter of credit issued by such Lender or its Affiliate
for the account of the Borrower, any Guarantor or any of their respective
Subsidiaries.


 


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


 


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


 


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


 


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


 


13





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


14





















 


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


 


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


 


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


 


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


 


“Sabine Documents” means, collectively, (a) the Omnibus
Agreement entered into on October 31, 2005 among the Borrower, Carlile
Management, LLC, Haddock Enterprises, LLC, and Sabine Production Partners, LP, without
giving effect to any amendments, restatements, supplements, or other
modifications thereof, and (b) the Compensation Reimbursement Agreement
entered into on October 31, 2005 between Sabine Production Operating, LLC
and the Borrower, without giving effect to any amendments, restatements,
supplements, or other modifications thereof.


 


“Sabine Entity” means (a) Sabine Production Partners, LP, a
Texas limited partnership, (b) Sabine Production Operating, LLC, a Texas
limited liability company, or (c) Sabine Production Management, LLC, a
Texas Production Management, LLC, but only so long as such entity is an
Affiliate of the Borrower.


 


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


 


“Secured Parties” means the Administrative Agent, the Lenders,
the Issuing Lender, the Swap Counterparties, the Subordinated Agent and the
Subordinated Lenders.


 


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


 


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


 


15





















 


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


 


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


 


“Square One” means Square One Energy, Inc.,
a Texas corporation and a wholly owned Subsidiary of the Borrower.


 


“Subordinated Agent” means Energy Components SPC EEP Energy
Exploration and Production Segregated Portfolio, a Cayman Islands company
serving as administrative agent under the Subordinated Credit Agreement.


 


“Subordinated Credit Agreement” means the Subordinated Credit
Agreement dated as of the date hereof between the Borrower, the Subordinated
Agent and the Subordinated Lenders, as amended, restated, supplemented or
otherwise modified but only to the extent permitted under the terms of the
Collateral Trust and Intercreditor Agreement.


 


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


 


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


 


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


 


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


 


16





















 


“Subsidiary” means, with respect to any Person (the “parent”)
at any date, any other Person the accounts of which would be consolidated with
those of the parent in the parent’s consolidated financial statements if such
financial statements were prepared in accordance with GAAP as of such date, as
well as any Person, a majority of whose outstanding Voting Securities (other
than directors’ qualifying shares) shall at any time be owned by such parent or
one or more Subsidiaries of such parent.  Unless
otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries”
shall refer to a Subsidiary or Subsidiaries of the Borrower; provided that
Tri-Flow shall not be considered a
Subsidiary of the Borrower or any Guarantor.


 


“Swap Counterparty” means any Lender (or Affiliate of a Lender)
that is party to a Hydrocarbon Hedge Agreement or Interest Hedge Agreement with
the Borrower or any of its Subsidiaries.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


17





















 


other ownership interest having
general voting power to elect the general partner or other management of the partnership
or other Person, and (c) with respect to any limited liability company,
membership certificates or interests having general voting power under ordinary
circumstances to elect managers of such limited liability company.


 


“WO Energy” means WO Energy of Nevada, Inc., a Nevada
corporation.


 


“WO Energy Acquisition” means the acquisition of 100% of the
issued and outstanding Equity Interest in WO Energy by the Borrower pursuant to
the WO Energy Acquisition Instruments.


 


“WO Energy Acquisition Agreement” means that certain Stock
Purchase Agreement dated as of November 29, 2005, by and among the
Borrower as purchaser, WO Energy, and Miles O’Loughlin and Scott White, as
sellers.


 


“WO Energy Acquisition Instruments” means, collectively, the WO
Energy Acquisition Agreement, and all other documents, instruments, and
agreements executed and delivered by the sellers and other parties named in the
WO Energy Acquisition Agreement or the Borrower in connection with the WO
Energy Acquisition.


 


Section 1.02                                Computation
of Time Periods.  In this Agreement,
with respect to the computation of periods of time from a specified date to a
later specified date, the word “from” means “from and including” and the words “to”
and “until” each means “to but excluding”.


 


Section 1.03                                Accounting
Terms; Changes in GAAP.  Except as
otherwise expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lenders hereunder shall
(unless otherwise disclosed to the Lenders in writing at the time of delivery
thereof) be prepared, in accordance with GAAP applied on a basis consistent
with those used in the preparation of the latest financial statements furnished
to the Lenders hereunder (which prior to the delivery of the first financial
statements under Section 5.06 hereof, shall mean the Financial Statements
and the Interim Financial Statements). 
All calculations made for the purposes of determining compliance with
this Agreement shall (except as otherwise expressly provided herein) be made by
application of GAAP applied on a basis consistent with those used in the
preparation of the annual or quarterly financial statements furnished to the
Lenders pursuant to Section 5.06 hereof most recently delivered prior to
or concurrently with such calculations (or, prior to the delivery of the first
financial statements under Section 5.06 hereof, used in the preparation of
the Financial Statements and the Interim Financial Statements).  In addition, all calculations and defined
accounting terms used herein shall, unless expressly provided otherwise, when
referring to any Person, refer to such Person on a consolidated basis and mean
such Person and its consolidated subsidiaries.


 


Section 1.04                                Types
of Advances.  Advances are
distinguished by “Type.”  The “Type” of
an Advance refers to the determination whether such Advance is a Eurodollar
Rate Advance or Reference Rate Advance.


 


Section 1.05                                Miscellaneous.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Agreement,
unless otherwise


 


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


 


ARTICLE II



CREDIT FACILITIES


 


Section 2.01                                Commitment
for Advances.


 


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


 


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


 


Section 2.02                                Borrowing
Base.


 


(a)                                  Borrowing
Base.  The initial Borrowing Base in
effect as of the date of this Agreement has been set by the Administrative
Agent and the Lenders and acknowledged by the Borrower as $30,000,000.  Such initial Borrowing Base shall remain in
effect until the next redetermination made pursuant to this Section 2.02.  The Borrowing Base shall be determined in
accordance with the standards set forth in Section 2.02(d) and is
subject to periodic redetermination pursuant to Sections 2.02(b) and
2.02(c).


 


(b)                                 Calculation
of Borrowing Base.


 


(i)                                     The
Borrower shall deliver to the Administrative Agent and each of the Lenders on
or before each September 30, beginning September 30, 2006, an
Independent Engineering Report dated effective as of the immediately preceding July 1,
and such other information as may be reasonably requested by any Lender with
respect to the Oil and Gas


 


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Properties included or to be
included in the Borrowing Base.  Within
30 days after the Administrative Agent and the Lenders’ receipt of such
Independent Engineering Report and other information, the Administrative Agent
shall deliver to each Lender the Administrative Agent’s recommendation for the
redetermined Borrowing Base.  Within 15
days after the Lenders’ receipt of the Administrative Agent’s recommendation,
the Administrative Agent and the Lenders shall redetermine the Borrowing Base
in accordance with Section 2.02(d), and the Administrative Agent shall
promptly notify the Borrower in writing of the amount of the Borrowing Base as
so redetermined.


 


(ii)                                  The
Borrower shall deliver to the Administrative Agent and each Lender on or before
each March 31, beginning March 31, 2006, an Internal Engineering
Report dated effective as of the immediately preceding January 1, and such
other information as may be reasonably requested by the Administrative Agent or
any Lender with respect to the Oil and Gas Properties included or to be
included in the Borrowing Base.  Within
30 days after the Administrative Agent and the Lenders’ receipt of such
Internal Engineering Report and other information, the Administrative Agent
shall deliver to each Lender the Administrative Agent’s recommendation for the
redetermined Borrowing Base.  Within 15
days after the Lenders’ receipt of the Administrative Agent’s recommendation,
the Administrative Agent and the Lenders shall redetermine the Borrowing Base
in accordance with Section 2.02(d), and the Administrative Agent shall
promptly notify the Borrower in writing of the amount of the Borrowing Base as
so redetermined.


 


(iii)                               In
the event that the Borrower does not furnish to the Administrative Agent and
the Lenders the Independent Engineering Report, Internal Engineering Report or
other information specified in clauses (i) and (ii) above by the date
specified therein, the Administrative Agent and the Lenders may nonetheless
redetermine the Borrowing Base and redesignate the Borrowing Base from
time-to-time thereafter in their sole discretion until the Administrative Agent
and the Lenders receive the relevant Independent Engineering Report, Internal
Engineering Report, or other information, as applicable, whereupon the
Administrative Agent and the Lenders shall redetermine the Borrowing Base as
otherwise specified in this Section 2.02.


 


(iv)                              Each
delivery of an Engineering Report by the Borrower to the Administrative Agent
and the Lenders shall constitute a representation and warranty by the Borrower
to the Administrative Agent and the Lenders that (A) the Borrower and its
Subsidiaries, as applicable, own the Oil and Gas Properties specified therein
subject to an Acceptable Security Interest and free and clear of any Liens
(except Permitted Liens), and (B) on and as of the date of such
Engineering Report each Oil and Gas Property described as “proved developed”
therein was developed for oil and gas, and the wells pertaining to such Oil and
Gas Properties that are described therein as producing wells (“Wells”), were
each producing oil and gas in paying quantities, except for Wells that were
utilized as water or gas injection wells or as water disposal wells.


 


(c)                                  Interim
Redetermination.  In addition to the
Borrowing Base redeterminations provided for in Section 2.02(b), the
Administrative Agent and the Lenders may, either in their sole discretion or at
the request of the Borrower and based on such information as the Administrative
Agent and the Lenders deem relevant (but in accordance with Section 2.02(d)),


 


20





















 


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


 


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


 


21





















 


Section 2.03                                Method
of Borrowing.


 


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


 


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


 


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


 


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


 


(ii)                                  if
any Lender shall, at least one Business Day before the date of any requested
Borrowing, Conversion, or continuation, notify the Administrative Agent that
the introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or that any central bank or other Governmental
Authority asserts that it is unlawful, for such Lender or its Lending Office to
perform its obligations under this Agreement to make Eurodollar Rate Advances
or to fund or maintain Eurodollar Rate Advances, the right of the Borrower to
select Eurodollar Rate Advances from such Lender shall be suspended until such


 


22





















 


Lender shall notify the
Administrative Agent that the circumstances causing such suspension no longer
exist, and the Advance made by such Lender in respect of such Borrowing,
Conversion, or continuation shall be a Reference Rate Advance;


 


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


 


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


 


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


 


(d)                                 Notices
Irrevocable.  Each Notice of
Borrowing and Notice of Conversion or Continuation shall be irrevocable and
binding on the Borrower.  In the case of
any Borrowing for which the related Notice of Borrowing specifies is to be
comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender
against any loss, out-of-pocket cost, or expense incurred by such Lender as a
result of any failure by the Borrower to fulfill on or before the date
specified in such Notice of Borrowing for such Borrowing the applicable
conditions set forth in Article III including, without limitation, any
loss (including any loss of anticipated profits), cost, or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by such Lender to fund the Advance to be made by such Lender as part of such
Borrowing when such Advance, as a result of such failure, is not made on such
date.


 


(e)                                  Administrative
Agent Reliance.  Unless the
Administrative Agent shall have received notice from a Lender before the date
of any Borrowing that such Lender shall not make available to the
Administrative Agent such Lender’s Pro Rata Share of a Borrowing, the
Administrative Agent may assume that such Lender has made its Pro Rata Share of
such Borrowing available to the Administrative Agent on the date of such
Borrowing in accordance with paragraph (a) of this Section 2.03
and the Administrative Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount.  If and to the extent that such Lender shall
not have so made its Pro Rata Share of such Borrowing available to


 


23





















 


the Administrative Agent, such
Lender and the Borrower severally agree to immediately repay to the
Administrative Agent on demand such corresponding amount, together with
interest on such amount, for each day from the date such amount is made
available to the Borrower until the date such amount is repaid to the
Administrative Agent, at (i) in the case of the Borrower, the interest
rate applicable on such day to Advances comprising such Borrowing and (ii) in
the case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to the
Administrative Agent such corresponding amount and interest as provided above,
such corresponding amount so repaid shall constitute such Lender’s Advance as
part of such Borrowing for purposes of this Agreement even though not made on
the same day as the other Advances comprising such Borrowing.


 


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


 


Section 2.04                                Reduction
of the Commitments.


 


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


 


(b)                                 Any
reduction and termination of the Commitments pursuant to this Section 2.04
shall be applied ratably to each Lender’s Commitment and shall be permanent,
with no obligation of the Lenders to reinstate such Commitments.


 


Section 2.05                                Prepayment
of Advances.


 


(a)                                  Optional.  The Borrower may prepay the Advances, after
giving by 10:00 a.m.  (Dallas, Texas
time) (i) in the case of Eurodollar Rate Advances, at least three Business
Days’ or (ii) in the case of Reference Rate Advances, same Business Day’s,
irrevocable prior written notice to the Administrative Agent stating the
proposed date and aggregate principal amount of such prepayment.  If any such notice is given, the Borrower
shall prepay the Advances in whole or ratably in part in an aggregate principal
amount equal to the amount specified in such notice, together with accrued
interest to the date of such prepayment on the principal amount prepaid
and amounts, if any, required to be paid pursuant to Section 2.12 as
a result of such prepayment being made on such date; provided, however,
that each partial prepayment with respect to: 
(A) any amounts prepaid in respect of Eurodollar Rate Advances
shall be applied to Eurodollar Rate Advances comprising part of the same
Borrowing; (B) any prepayments made in respect of Reference Rate Advances
shall be made in a minimum amounts of $250,000 and in integral multiples of $100,000
in excess thereof, and (C) any prepayments made in respect of any
Borrowing comprised of Eurodollar Rate Advances shall be made in an aggregate
principal amount of at least $500,000 and in integral multiples of $100,000 in
excess thereof, and in an aggregate principal amount such that after giving
effect thereto such Borrowing shall have a


 


24





















 


remaining principal amount
outstanding with respect to such Borrowing of at least $500,000.  Full prepayments of any Borrowing are
permitted without restriction of amounts.


 


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


 


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


 


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


 


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


 


Each prepayment pursuant to this Section 2.05(b) shall be
accompanied by accrued interest on the amount prepaid to the date of such
prepayment and amounts, if any, required to be paid pursuant to Section 2.12
as a result of such prepayment being made on such date.  Each prepayment under clauses (i) and (iii) of
this Section 2.05(b) shall be applied to the Advances as determined
by the Administrative Agent and agreed to by the Lenders in their sole
discretion.


 


(c)                                  Reduction
of Commitments.  On the date of each
reduction of the aggregate Commitments pursuant to Section 2.04, the
Borrower agrees to make a prepayment in respect of the outstanding amount of
the Advances to the extent, if any, that the aggregate unpaid principal amount
of all Advances plus the Letter of Credit Exposure exceeds the lesser of
(A) the aggregate Commitments, as so reduced and (B) the Borrowing
Base.  Each prepayment pursuant to this Section 2.05(c) shall
be accompanied by accrued interest on the amount prepaid to the date of such
prepayment and amounts, if any, required to be paid pursuant to Section 2.12
as a result of such prepayment being made on such date.  Each prepayment under this Section 2.05(c) shall
be applied to the Advances as determined by the Administrative Agent and agreed
to by the Lenders in their sole discretion; provided that, outstanding Reference
Rate Advances, if any,


 


25





















 


shall be paid in full first
before any such prepayments are applied to outstanding Eurodollar Rate
Advances.


 


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


 


(e)                                  No
Additional Right; Ratable Prepayment. 
The Borrower shall have no right to prepay any principal amount of any
Advance except as provided in this Section 2.05, and all notices given
pursuant to this Section 2.05 shall be irrevocable and binding upon the
Borrower.  Each payment of any Advance
pursuant to this Section 2.05 shall be made in a manner such that all
Advances comprising part of the same Borrowing are paid in whole or ratably in
part.


 


Section 2.06                                Repayment
of Advances.  The Borrower shall
repay to the Administrative Agent for the ratable benefit of the Lenders the
outstanding principal amount of each Advance, together with any accrued
interest thereon, on the Maturity Date or such earlier date pursuant to Section 7.02
or Section 7.03.


 


Section 2.07                                Letters
of Credit.


 


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


 


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


 


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


 


26





















 


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


 


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


 


(v)                                 unless
the Borrower has delivered to the Issuing Lender a completed and executed
Letter of Credit Application; and


 


(vi)                              unless
such Letter of Credit is governed by the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No.  500 or any successor to such publication.


 


If the
terms of any Letter of Credit Application referred to in the foregoing clause (v) conflicts
with the terms of this Agreement, the terms of this Agreement shall control.


 


(b)                                 Participations.  Upon the date of the issuance or increase of
a Letter of Credit, the Issuing Lender shall be deemed to have sold to each
Lender and each Lender shall have been deemed to have purchased from the
Issuing Lender a participation in the related Letter of Credit Obligations
equal to such Lender’s Pro Rata Share at such date and such sale and purchase
shall otherwise be in accordance with the terms of this Agreement.  The Issuing Lender shall promptly notify each
Lender by telex, telephone, or telecopy of each Letter of Credit issued,
increased, or extended or converted and the actual dollar amount of such Lender’s
participation in such Letter of Credit.


 


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


 


(d)                                 Reimbursement.  The Borrower hereby agrees to pay on demand
to the Issuing Lender an amount equal to any amount paid by the Issuing Lender
under any Letter of Credit.  In the event
the Issuing Lender makes a payment pursuant to a request for draw presented
under a Letter of Credit and such payment is not promptly reimbursed by the
Borrower upon demand, the Issuing Lender shall give the Administrative Agent
notice of the Borrower’s failure to make such reimbursement and the
Administrative Agent shall promptly notify each Lender having a Commitment of
the amount necessary to reimburse the Issuing Lender.  Upon such notice from the Administrative
Agent, each Lender shall promptly reimburse the Issuing Lender for such Lender’s
Pro Rata Share of such amount, and such reimbursement shall be deemed for all


 


27





















 


purposes of this Agreement to
be an Advance to the Borrower transferred at the Borrower’s request to the
Issuing Lender.  If such reimbursement is
not made by any Lender to the Issuing Lender on the same day on which the
Administrative Agent notifies such Lender to make reimbursement to the Issuing
Lender hereunder, such Lender shall pay interest on its Pro Rata Share thereof
to the Issuing Lender at a rate per annum equal to the Federal Funds Rate.  The Borrower hereby unconditionally and
irrevocably authorizes, empowers, and directs the Administrative Agent and the
Lenders to record and otherwise treat such reimbursements to the Issuing Lender
as Reference Rate Advances under a Borrowing requested by the Borrower to
reimburse the Issuing Lender which have been transferred to the Issuing Lender
at the Borrower’s request.


 


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


 


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


 


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


 


(iii)                               the
existence of any claim, set-off, defense, or other right which the Borrower may
have at any time against any beneficiary or transferee of such Letter of Credit
(or any Persons for whom any such beneficiary or any such transferee may be
acting), the Issuing Lender, or any other person or entity, whether in connection
with this Agreement, the transactions contemplated in this Agreement or in any
Letter of Credit Documents, or any unrelated transaction;


 


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


 


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


 


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


 


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


 


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


 


28





















 


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


 


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


 


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


 


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


 


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


 


(g)                                 Cash
Collateral Account.


 


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


 


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


 


29





















 


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


 


Section 2.08                                Fees.


 


(a)                                  Commitment
Fees.


 


(i)                                     The
Borrower agrees to pay to the Administrative Agent for the account of each
Lender a commitment fee at a per annum rate equal to the Applicable Margin for
Commitment Fees on the daily Unused Commitment Amount of such Lender, from the
date of this Agreement until the Commitment Termination Date.  The commitment fees shall be due and payable
quarterly in arrears on the last day of each March, June, September, and December commencing
on December 31, 2005 and continuing thereafter through and including the
Commitment Termination Date.


 


(b)                                 Letter
of Credit Fees.


 


(i)                                     The
Borrower agrees to pay (A) to the Administrative Agent for the pro rata
benefit of the Lenders a per annum letter of credit fee for each Letter of
Credit issued hereunder in an amount equal to the greater of (1) the
Applicable Margin then in effect for Eurodollar Rate Advances times the daily
maximum amount available to be drawn under such Letter of Credit and (2) $1,000,
and (B) to the Issuing Lender, a fronting fee for each Letter of Credit
equal to the greater of (y) .125% per annum times the daily maximum amount
available to be drawn under such Letter of Credit and (z) $500.00, each payable
quarterly in arrears on the last day of each March, June, September, and December commencing
on December 31, 2005 and continuing thereafter through and including the
Commitment Termination Date.


 


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


 


(c)                                  Facility
Fees.  The Borrower agrees to pay to
the Administrative Agent the facility fees described in the letter dated November 29,
2005 from the Borrower to the Administrative Agent.


 


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


 


Section 2.09                                Interest.  The Borrower shall pay interest on the unpaid
principal amount of each Advance made by each Lender from the date of such
Advance until such principal amount shall be paid in full, at the following
rates per annum:


 


30





















 


(a)                                  Reference
Rate Advances.  If such Advance is a
Reference Rate Advance, a rate per annum equal at all times to the Adjusted
Reference Rate in effect from time to time plus the Applicable Margin in
effect from time to time, payable monthly in arrears on the last day of each
month and on the date such Reference Rate Advance shall be paid in full.


 


(b)                                 Eurodollar
Rate Advances.  If such Advance is a Eurodollar
Rate Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the Eurodollar Rate for such Interest Period plus
the Applicable Margin in effect from time to time, payable on the last day of
such Interest Period, and, in the case of six, nine or twelve month Interest
Periods, on (i) the day which occurs during such Interest Period three
months from the first day of such Interest Period, (ii) the day which
occurs during such Interest Period six months from the first day of such
Interest Period, and (iii) the day which occurs during such Interest
Period nine months from the first day of such Interest Period.


 


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


 


(d)                                 Usury
Recapture.


 


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


 


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


 


31





















 


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


 


Section 2.10                                Payments
and Computations.


 


(a)                                  Payment
Procedures.  The Borrower shall make
each payment under this Agreement and under the Notes not later than 10:00 a.m.  (Dallas, Texas time) on the day when due in
Dollars to the Administrative Agent at the location referred to in the Notes
(or such other location as the Administrative Agent shall designate in writing
to the Borrower) in same day funds without deduction, setoff, or counterclaim
of any kind.  The Administrative Agent
shall promptly thereafter cause to be distributed like funds relating to the
payment of principal, interest or fees ratably (other than amounts payable solely
to the Administrative Agent, the Issuing Lender, or a specific Lender pursuant
to Section 2.08(c), 2.09(c), 2.12, 2.13, 2.14, 8.05, or 9.07, but after
taking into account payments effected pursuant to Section 9.04) in
accordance with each Lender’s Pro Rata Share to the Lenders for the account of
their respective Lending Offices, and like funds relating to the payment of any
other amount payable to any Lender or the Issuing Lender to such Lender for the
account of its Lending Office, in each case to be applied in accordance with
the terms of this Agreement.


 


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


 


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


 


(d)                                 Administrative
Agent Reliance.  Unless the Administrative
Agent shall have received written notice from the Borrower prior to the date on
which any payment is due to the Lenders that the Borrower shall not make such
payment in full, the Administrative Agent may assume that the Borrower has made
such payment in full to the Administrative Agent on such


 


32





















 


date and the Administrative
Agent may, in reliance upon such assumption, cause to be distributed to each
Lender on such date an amount equal to the amount then due such Lender.  If and to the extent the Borrower shall not
have so made such payment in full to the Administrative Agent, each Lender
shall repay to the Administrative Agent forthwith on demand such amount
distributed to such Lender, together with interest, for each day from the date
such amount is distributed to such Lender until the date such Lender repays
such amount to the Administrative Agent, at the Federal Funds Rate for such
day.


 


Section 2.11                                Sharing
of Payments, Etc.  If any Lender shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Advances or Letter of Credit
Obligations made by it in excess of its Pro Rata Share of payments on account
of the Advances or Letter of Credit Obligations obtained by all the Lenders,
such Lender shall notify the Administrative Agent and forthwith purchase from
the other Lenders such participations in the Advances made by them or Letter of
Credit Obligations held by them as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided,
however, that if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each Lender shall be
rescinded and such Lender shall repay to the purchasing Lender the purchase
price to the extent of such Lender’s ratable share (according to the proportion
of (a) the amount of the participation sold by such Lender to the
purchasing Lender as a result of such excess payment to (b) the total
amount of such excess payment) of such recovery, together with an amount equal
to such Lender’s ratable share (according to the proportion of (i) the
amount of such Lender’s required repayment to the purchasing Lender to (ii) the
total amount of all such required repayments to the purchasing Lender) of any
interest or other amount paid or payable by the purchasing Lender in respect of
the total amount so recovered.  The
Borrower agrees that any Lender so purchasing a participation from another
Lender pursuant to this Section 2.11 may, to the fullest extent permitted
by law, exercise all its rights of payment (including the right of set-off)
with respect to such participation as fully as if such Lender were the direct
creditor of the Borrower in the amount of such participation.


 


Section 2.12                                Breakage
Costs.  If (a) any payment of
principal of any Eurodollar Rate Advance is made other than on the last day of
the Interest Period for such Advance, whether as a result of any payment
pursuant to Section 2.05, the acceleration of the maturity of the Notes
pursuant to Article VII, or otherwise, or (b) the Borrower fails to
make a principal or interest payment with respect to any Eurodollar Rate
Advance on the date such payment is due and payable, the Borrower shall, within
10 days of any written demand sent by any Lender to the Borrower through the
Administrative Agent, pay to the Administrative Agent for the account of such
Lender any amounts required to compensate such Lender for any additional
losses, out-of-pocket costs or expenses which it may reasonably incur as a
result of such payment or nonpayment, including, without limitation, any loss
(including loss of anticipated profits), cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by any
Lender to fund or maintain such Advance.


 


Section 2.13                                Increased
Costs.


 


(a)                                  Eurodollar
Rate Advances.  If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements included in the


 


33





















 


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


 


(b)                                 Capital
Adequacy.  If any Lender or the
Issuing Lender determines in good faith that compliance with any law or
regulation adopted or changed after the date hereof or any guideline or request
from any central bank or other Governmental Authority (whether or not having
the force of law) affects or would affect the amount of capital required or
expected to be maintained by such Lender or the Issuing Lender or any
corporation controlling such Lender or the Issuing Lender and that the amount
of such capital is increased by or based upon the existence of such Lender’s
commitment to lend or the Issuing Lender’s commitment to issue the Letters of
Credit and other commitments of this type, then, upon 30 days’ prior written
notice by such Lender or the Issuing Lender (with a copy of any such demand to
the Administrative Agent), the Borrower shall immediately pay to the
Administrative Agent for the account of such Lender or to the Issuing Lender,
as the case may be, from time to time as specified by such Lender or the
Issuing Lender, additional amounts sufficient to compensate such Lender or the
Issuing Lender, in light of such circumstances, (i) with respect to such
Lender, to the extent that such Lender reasonably determines such increase in
capital to be allocable to the existence of such Lender’s commitment to lend
under this Agreement and (ii) with respect to the Issuing Lender, to the
extent that the Issuing Lender reasonably determines such increase in capital
to be allocable to the issuance or maintenance of the Letters of Credit.  A certificate as to such amounts and
detailing the calculation of such amounts submitted to the Borrower by such
Lender or the Issuing Lender shall be conclusive and binding for all purposes,
absent manifest error.


 


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


 


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


 


Section 2.14                                Taxes.


 


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


 


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


 


(c)                                  Indemnification.  THE BORROWER INDEMNIFIES
EACH LENDER, THE ISSUING LENDER, AND THE ADMINISTRATIVE AGENT FOR THE FULL
AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR
OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14)
PAID BY SUCH LENDER, THE ISSUING LENDER, OR THE ADMINISTRATIVE AGENT (AS THE
CASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING
THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES
WERE CORRECTLY OR LEGALLY ASSERTED.  EACH
PAYMENT REQUIRED TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION
SHALL BE MADE TO THE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY


 


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CLAIMING
SUCH INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN
DEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS
ADMINISTRATIVE AGENT, THE ISSUING LENDER, OR ANY SUCH LENDER.  IF ANY LENDER, THE ADMINISTRATIVE AGENT, OR
THE ISSUING LENDER RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE
BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER, THE ADMINISTRATIVE AGENT,
OR THE ISSUING LENDER, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE
BORROWER THE BORROWER’S SHARE OF SUCH REFUND.


 


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


 


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ARTICLE III



CONDITIONS OF LENDING


 


Section 3.01                                Conditions
Precedent to Initial Credit Extension. 
The obligation of the Issuing
Lender and each Lender to make its initial Credit Extension hereunder is
subject to satisfaction of the following conditions precedent:


 


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


 


(i)                                     this
Agreement, a Note payable to the order of each Lender in the amount of its
Commitment, the Guaranties, the Pledge Agreement, the Security Agreements, and
Mortgages encumbering substantially all of the Borrower’s and its Subsidiaries’
Proven Reserves and Oil and Gas Properties (other than the Barnett Shale
Properties but including the Oil and Gas Properties to be acquired under the WO
Energy Acquisition) in connection therewith, and each of the other Loan
Documents,  and all attached exhibits and
schedules;


 


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


 


(iii)                               copies,
certified as of the date of this Agreement by a Responsible Officer of the
Borrower of (A) the resolutions of the Board of Directors of the Borrower
approving the Loan Documents to which the Borrower is a party, (B) the certificate
of incorporation of the Borrower, (C) the bylaws of the Borrower and (D) all
other documents evidencing other necessary corporate action and governmental
approvals, if any, with respect to this Agreement, the Note, and the other Loan
Documents;


 


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


 


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


 


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


 


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


 


37





















 


(viii)                        delivery
by Borrower of evidence satisfactory to the Administrative Agent that, on or
prior to the date hereof, a cash infusion of not less than $25,000,000 in the
aggregate has been made to the Borrower in the form of common equity,
subordinated debt (including the funds made available under the Subordinated
Credit Agreement) or other types of capital acceptable to the Administrative
Agent;


 


(ix)                                appropriate
UCC-1 and UCC-3, as applicable, Financing Statements covering the Collateral
for filing with the appropriate authorities and any other documents, agreements
or instruments necessary to create an Acceptable Security Interest in such
Collateral;


 


(x)                                   stock
certificates required in connection with the Pledge Agreements and stock powers
executed in blank for each such stock certificate;


 


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


 


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


 


(xiii)                          the
Collateral Trust and Intercreditor Agreement;


 


(xiv)                         copies,
certified by a Responsible Officer of the Borrower, of all of the WO Energy
Acquisition Instruments, together with all amendments, modifications or waivers
thereto in effect on the effective date of this Agreement;


 


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


 


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


 


(c)                                  Delivery
of Financial Statements.  The
Administrative Agent and the Lenders shall have received true and correct
copies of (i) the Financial Statements, (ii) the Interim Financial
Statements and (iii) such other financial information as the Lenders may
reasonably request.


 


(d)                                 Security
Instruments.  The Administrative
Agent shall have received all appropriate evidence required by the
Administrative Agent and the Lenders in their sole discretion necessary to
determine that the Collateral Trustee (for its benefit and the benefit of the
Secured Parties) shall have an Acceptable Security Interest in the Collateral
(which shall include all of the Oil and Gas Properties of the Borrowers and the
Guarantors, including the Oil and Gas Properties to be acquired under the WO
Energy Acquisition, but excluding the Barnett Shale Properties) and that all
actions or filings necessary to protect, preserve and validly perfect such
Liens have been made, taken or obtained, as the case may be, and are in full
force and effect.


 


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


 


(f)                                    Environmental.  The Administrative Agent shall have received
such Phase I environmental assessments or other reports as it may reasonably
require and shall be satisfied with the condition of the Oil and Gas Properties
with respect to the Borrower’s and its Subsidiaries’ compliance with Environmental
Laws.


 


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


 


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


 


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


 


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


 


(k)                                  Consents, Licenses, Approvals, etc.  The
Administrative Agent shall have received true copies (certified to be such by
the Borrower or other appropriate party) of all consents, licenses and
approvals required in accordance with applicable law, or in accordance with any
document, agreement, instrument or arrangement to which the Borrower, the
Guarantors and their respective Subsidiaries is a party, in connection with the
execution, delivery, performance, validity and enforceability of this
Agreement, the other Loan Documents and the WO Energy Acquisition Instruments.  In addition, the Borrower, the Guarantors and
their respective Subsidiaries shall have all such material consents, licenses
and approvals required in connection with the continued operation of the
Borrower, the Guarantors and respective Subsidiaries, and such approvals shall
be in full force and effect, and all applicable waiting periods shall have
expired without any action being taken or threatened by any competent authority
which would restrain, prevent or otherwise impose adverse conditions on this
Agreement and the actions contemplated hereby. 
The Administrative Agent shall be satisfied that the consummation of the
WO Energy Acquisition does not contravene any law or any contractual
restriction binding on or affecting the Borrower or any Subsidiary, WO Energy
or any other party to the WO Energy Acquisition Instruments.


 


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


 


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


 


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


 


(o)                                 Notice
of Borrowing.  The Administrative
Agent shall have received a Notice of Borrowing from the Borrower in the form
of Exhibit F, with appropriate insertions and executed by a duly
authorized Responsible Officer of the Borrower.


 


(p)                                 WO
Energy Acquisition.  All conditions
to the consummation and effectiveness of the WO Energy Acquisition (other than
the payment of the purchase price) shall have been met.  Furthermore, the Administrative Agent shall
have received payoff letters in form and substance reasonably satisfactory to
the Administrative Agent covering all Debt of WO Energy or any of its
subsidiaries and outstanding on the date hereof other than the Debt permitted
under Section 6.02(h) below.


 


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


 


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


 


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


 


40





















 


(ii)                                  no
Default has occurred and is continuing or would result from such Borrowing or
from the application of the proceeds therefrom, or would result from the
issuance, increase, or extension of such Letter of Credit; and


 


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


 


ARTICLE IV



REPRESENTATIONS AND WARRANTIES


 


The Borrower represents and warrants as
follows:


 


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


 


Section 4.02                                Power.  The execution, delivery, and performance by
the Borrower of this Agreement, the Notes, and the other Loan Documents to
which it is a party and by the Guarantors of the Guaranties and the other Loan
Documents to which they are a party and the consummation of the transactions
contemplated hereby and thereby (a) are within the Borrower’s and such
Guarantors’ governing powers, (b) have been duly authorized by all
necessary governing action, (c) do not contravene (i) the Borrower’s
or any Guarantor’s certificate or articles of incorporation, bylaws, limited
liability company agreement, or other similar governance documents or (ii) any
law or any contractual restriction binding on or affecting the Borrower or any
Guarantor, and (d) will not result in or require the creation or
imposition of any Lien prohibited by this Agreement.  At the time of each Advance and the issuance,
extension or increase of a Letter of Credit, such Advance and such Letter of
Credit, and the use of the proceeds of such Advance and such Letter of Credit,
will be within the Borrower’s governing powers, will have been duly authorized
by all necessary corporate action, will not contravene (i) the Borrower’s certificate
of incorporation and bylaws or other organizational documents or (ii) any
law or any contractual restriction binding on or affecting the Borrower and
will not result in or require the creation or imposition of any Lien prohibited
by this Agreement.


 


Section 4.03                                Authorization
and Approvals.  No consent, order,
authorization, or approval or other action by, and no notice to or filing with,
any Governmental Authority or any other Person is required for the due
execution, delivery, and performance by the Borrower of this


 


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Agreement, the Notes, or the
other Loan Documents to which the Borrower is a party or by each Guarantor of
its Guaranty or the other Loan Documents to which it is a party or the
consummation of the transactions contemplated thereby.  At the time of each Borrowing and each issuance,
increase or extension of a Letter of Credit, no authorization or approval or
other action by, and no notice to or filing with, any Governmental Authority
will be required for such Borrowing or such issuance, increase or extension of
such Letter of Credit or the use of the proceeds of such Borrowing or such
Letter of Credit.


 


Section 4.04                                Enforceable
Obligations.  This Agreement, the
Notes, and the other Loan Documents to which the Borrower is a party have been
duly executed and delivered by the Borrower and the Guaranties and the other
Loan Documents to which each Guarantor is a party have been duly executed and
delivered by the Guarantors.  Each Loan
Document is the legal, valid, and binding obligation of the Borrower and each
Guarantor which is a party to it enforceable against the Borrower and each such
Guarantor in accordance with its terms, except as such enforceability may be
limited by any applicable bankruptcy, insolvency, reorganization, moratorium,
or similar law affecting creditors’ rights generally and by general principles
of equity.


 


Section 4.05                                Financial
Statements.


 


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


 


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


 


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


 


Section 4.06                                True
and Complete Disclosure.  All factual
information (excluding estimates) heretofore or contemporaneously furnished by
or on behalf of the Borrower or any of the Guarantors in writing to any Lender
or the Administrative Agent for purposes of or in connection with this
Agreement, any other Loan Document or any transaction contemplated hereby or
thereby is, and all other such factual information hereafter furnished by or on
behalf of the Borrower and the Guarantors in writing to the Administrative
Agent or any of the Lenders was or shall be, true and accurate in all material
respects on the date as of which such information was or is dated or certified
and did not or does not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements contained therein
not misleading at such time.  All
projections, estimates, and pro forma financial information furnished by the
Borrower were prepared on the basis of assumptions, data, information, tests,
or


 


42





















 


conditions believed to be
reasonable at the time such projections, estimates, and pro forma financial
information were furnished.


 


Section 4.07                                Litigation;
Compliance with Laws.


 


(a)                                  There
is no pending or, to the best knowledge of the Borrower, threatened action or
proceeding affecting the Borrower or any of the Guarantors before any court,
Governmental Authority or arbitrator which could reasonably be expected to
cause a Material Adverse Change or which purports to affect the legality,
validity, binding effect or enforceability of this Agreement, any Note, or any
other Loan Document.  Additionally, there
is no pending or, to the best of the knowledge of the Borrower, threatened
action or proceeding instituted against the Borrower or any of the Guarantors
which seeks to adjudicate the Borrower or any of the Guarantors as bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for it or for any substantial part of its
Property.


 


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


 


Section 4.08                                Use
of Proceeds.  The proceeds of the
Advances will be used by the Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U). 
No proceeds of any Advance will be used to purchase or carry any margin
stock in violation of Regulation T, U or X.


 


Section 4.09                                Investment
Company Act.  Neither the Borrower
nor any of the Guarantors is an “investment company” or a company “controlled”
by an “investment company” within the meaning of the Investment Company Act of
1940, as amended.


 


Section 4.10                                Public
Utility Holding Company Act.  Neither
the Borrower nor any of the Guarantors is a “holding company,” or a “subsidiary
company” of 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.  Neither the Administrative Agent nor any of
the Lenders, solely by virtue of the execution, delivery and performance of,
and the consummation of the transactions contemplated by, the Loan Documents
shall be or become subject to regulation (a) as a “holding company”, or an
“affiliate” of a “holding company,” within the meaning of the Public Utility
Holding Company Act of 1935, as amended, (b) under the Federal Power Act,
as amended, (c) as a “public utility” or “public service corporation” or
the equivalent under the applicable law of any state, or (d) under the
applicable laws of any state relating to public utilities or public service
corporations.


 


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Section 4.11                                Taxes.


 


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


 


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


 


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


 


Section 4.12                                Pension
Plans.  All Plans are in compliance
in all material respects with all applicable provisions of ERISA.  No Termination Event has occurred with
respect to any Plan, and each Plan has complied with and been administered in
all material respects in accordance with applicable provisions of ERISA and the
Code.  No “accumulated funding deficiency”
(as defined in Section 302 of ERISA) has occurred and there has been no
excise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043
of ERISA and the regulations issued thereunder has occurred with respect to any
Multiemployer Plan, and each Multiemployer Plan has complied with and been
administered in all material respects with applicable provisions of ERISA and the
Code.  The present value of all benefits
vested under each Plan (based on the assumptions used to fund such Plan) did
not, as of the last annual valuation date applicable thereto, exceed the value
of the assets of such Plan allocable to such vested benefits.  Neither the Borrower nor any member of the
Controlled Group has had a complete or partial withdrawal from any
Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation date
applicable thereto, neither the Borrower nor any member of the Controlled Group
would become subject to any liability under ERISA if the Borrower or any member
of the Controlled Group has received notice that any Multiemployer Plan is
insolvent or in reorganization.  Based
upon GAAP existing as of the date of this Agreement and current factual
circumstances, the Borrower has no reason to believe that the annual cost
during the term of this Agreement to the Borrower or any member of the
Controlled


 


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Group for post-retirement
benefits to be provided to the current and former employees of the Borrower or
any member of the Controlled Group under Plans that are welfare benefit plans
(as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably
be expected to cause a Material Adverse Change.


 


Section 4.13                                Condition
of Property; Casualties.  Each of the
Borrower and the Guarantors has good and marketable title to all of its Oil and
Gas Properties as is customary in the oil and gas industry in all material
respects, free and clear of all Liens except for Permitted Liens.  Each Borrower and the Guarantors has good and
indefeasible title to all of its other Properties, free and clear of all Liens
except for Permitted Liens.  The material
Properties used or to be used in the continuing operations of the Borrower and
each of the Guarantors are in good repair, working order and condition.  Since the date of the Financial Statements,
neither the business nor the material Properties of the Borrower and each of
the Guarantors, taken as a whole, has been materially and adversely affected as
a result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking of
Property or cancellation of contracts, Permits, or concessions by a
Governmental Authority, riot, activities of armed forces, or acts of God or of
any public enemy.


 


Section 4.14                                No
Burdensome Restrictions; No Defaults.


 


(a)                                  Neither
the Borrower nor any Guarantor is a party to any indenture, loan, or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction or provision of applicable law or governmental
regulation that could reasonably be expected to cause a Material Adverse
Change.  Neither the Borrower nor any of
its Subsidiaries is in default under or with respect to any contract,
agreement, lease, or other instrument to which the Borrower or any Subsidiary
is a party and which could reasonably be expected to cause a Material Adverse
Change or under any agreement in connection with any Debt, including, without
limitation, the Subordinated Loan Documents. 
Neither the Borrower nor any of its Subsidiaries has received any notice
of default under any material contract, agreement, lease, or other instrument
to which the Borrower or such Subsidiary is a party a copy of which has not
been delivered to the Administrative Agent.


 


(b)                                 No
Default has occurred and is continuing.


 


Section 4.15                                Environmental Condition.


 


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


 


(b)                                 Certain
Liabilities.  To the Borrower’s
actual knowledge, none of the present or previously owned or operated Property
of the Borrower or any Guarantor or of any of their


 


45





















 


former Subsidiaries, wherever
located, (i) has been placed on or proposed to be placed on the National
Priorities List, the Comprehensive Environmental Response Compensation
Liability Information System list, or their state or local analogs, or have
been otherwise investigated, designated, listed, or identified as a potential
site for removal, remediation, cleanup, closure, restoration, reclamation, or
other response activity under any Environmental Laws; (ii) is subject to a
Lien, arising under or in connection with any Environmental Laws, that attaches
to any revenues or to any Property owned or operated by the Borrower or any of
the Guarantors, wherever located, which could reasonably be expected to cause a
Material Adverse Change; or (iii) has been the site of any Release of
Hazardous Substances or Hazardous Wastes from present or past operations which
has caused at the site or at any third-party site any condition that has
resulted in or could reasonably be expected to result in the need for Response
that would cause a Material Adverse Change.


 


(c)                                  Certain
Actions.  Without limiting the
foregoing, (i) all necessary notices have been properly filed, and no
further action is required under current Environmental Law as to each Response
or other restoration or remedial project undertaken by the Borrower or the
Guarantors or any of their former Subsidiaries on any of their presently or
formerly owned or operated Property and (ii) the present and, to the
Borrower’s best knowledge, future liability, if any, of the Borrower and the
Guarantors which could reasonably be expected to arise in connection with
requirements under Environmental Laws will not result in a Material Adverse
Change.


 


Section 4.16                                Permits, Licenses, Etc.  The
Borrower and the Guarantors possess all authorizations, Permits, licenses,
patents, patent rights or licenses, trademarks, trademark rights, trade names
rights and copyrights which are material to the conduct of their business.  The Borrower and the Guarantors manage and
operate their business in all material respects in accordance with all
applicable Legal Requirements and good industry practices.


 


Section 4.17                                Gas
Contracts.  Neither the Borrower nor
any of the Guarantors, as of the date hereof, (a) is obligated in any
material respect by virtue of any prepayment made under any contract containing
a “take-or-pay” or “prepayment” provision or under any similar agreement to
deliver hydrocarbons produced from or allocated to any of the Borrower’s and
its Subsidiaries’ Oil and Gas Properties at some future date without receiving
full payment therefor at the time of delivery, or (b) except as has been
disclosed to the Administrative Agent, has produced gas, in any material
amount, subject to, and none of the Borrower’s and the Guarantors’ Oil and Gas
Properties is subject to, balancing rights of third parties or subject to
balancing duties under governmental requirements.


 


Section 4.18                                Liens; Titles, Leases, Etc.  None
of the Property of the Borrower or any of the Guarantors is subject to any Lien
other than Permitted Liens.  On the date
of this Agreement, all governmental actions and all other filings, recordings,
registrations, third party consents and other actions which are necessary to
create and perfect the Liens provided for in the Security Instruments will have
been made, obtained and taken in all relevant jurisdictions.  All leases and agreements for the conduct of
business of the Borrower and the Guarantors are valid and subsisting, in full
force and effect and there exists no default or event of default or
circumstance which with the giving of notice or lapse of time or both would
give rise to a default under any such leases or agreements which could
reasonably be expected to cause a Material Adverse Change.  Neither the Borrower nor any of the
Guarantors is a party to any agreement or


 


46





















 


arrangement (other than this
Agreement and the Security Instruments), or subject to any order, judgment,
writ or decree, which either restricts or purports to restrict its ability to
grant Liens to secure the Obligations against their respective assets or
Properties.


 


Section 4.19                                Solvency
and Insurance.  Before and after
giving effect to the making of the initial Advances and before and after giving effect to the WO Energy Acquisition, each
of the Borrower and its Subsidiaries is Solvent.  Additionally, each of the Borrower and its
Subsidiaries carry insurance required under Section 5.02 of this
Agreement.


 


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


 


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


 


ARTICLE V



AFFIRMATIVE COVENANTS


 


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


 


Section 5.01                                Compliance
with Laws, Etc.  The Borrower shall
comply, and cause each of its Subsidiaries to comply, in all material respects
with all material Legal Requirements. 
Without limiting the generality and coverage of the foregoing, the
Borrower shall comply, and shall cause each of its Subsidiaries to comply, in
all material respects, with all material Environmental Laws and all laws,
regulations, or directives with respect to equal employment


 


47





















 


opportunity and employee safety
in all jurisdictions in which the Borrower, or any of its Subsidiaries do business;
provided, however, that this Section 5.01 shall not prevent the
Borrower or any of its Subsidiaries from, in good faith and with reasonable
diligence, contesting the validity or application of any such laws or
regulations by appropriate legal proceedings. 
Without limitation of the foregoing, the Borrower shall, and shall cause
each of its Subsidiaries to, (a) maintain and possess all authorizations,
Permits, licenses, trademarks, trade names, rights and copyrights which are
necessary to the conduct of its business and (b) obtain, as soon as
practicable, all consents or approvals required from any states of the United
States (or other Governmental Authorities) necessary to grant the Collateral
Trustee an Acceptable Security Interest in the Borrower’s and its Subsidiaries’
Oil and Gas Properties (other than the Barnett Shale Properties).


 


Section 5.02                                Maintenance
of Insurance.


 


(a)                                  The
Borrower shall, and shall cause each of its Subsidiaries to, procure and
maintain or shall cause to be procured and maintained continuously in effect
policies of insurance in form and amounts and issued by companies, associations
or organizations reasonably satisfactory to the Administrative Agent covering
such casualties, risks, perils, liabilities and other hazards reasonably
required by the Administrative Agent.  In
addition, the Borrower shall, and shall cause each of its Subsidiaries to,
comply with all requirements regarding insurance contained in the Security
Instruments.


 


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


 


Section 5.03                                Preservation
of Corporate Existence, Etc.  The
Borrower shall preserve and maintain, and cause each of its Subsidiaries to
preserve and maintain, its corporate or limited


 


48





















 


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


 


Section 5.04                                Payment
of Taxes, Etc.  The Borrower shall
pay and discharge, and cause each of its Subsidiaries to pay and discharge,
before the same shall become delinquent, (a) all taxes, assessments, and
governmental charges or levies imposed upon it or upon its income or profits or
Property that are material in amount, prior to the date on which penalties
attach thereto and (b) all lawful claims that are material in amount
which, if unpaid, might by law become a Lien upon its Property; provided,
however, that neither the Borrower nor any such Subsidiary shall be required to
pay or discharge any such tax, assessment, charge, levy, or claim which is
being contested in good faith and by appropriate proceedings, and with respect
to which reserves in conformity with GAAP have been provided.


 


Section 5.05                                Visitation
Rights.  At any reasonable time and
from time to time, upon reasonable notice, the Borrower shall, and shall cause
its Subsidiaries to, permit the Administrative Agent and any Lender or any of
their respective agents or representatives thereof, to (a) examine and
make copies of and abstracts from the records and books of account of, and
visit and inspect at their reasonable discretion the Properties of, the
Borrower and any such Subsidiary, and (b) discuss the affairs, finances
and accounts of the Borrower and any such Subsidiary with any of their
respective officers or directors.


 


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


 


(a)                                  Annual
Financials.  As soon as available and
in any event not later than 90 days after the end of each fiscal year of the Borrower and its consolidated Subsidiaries,
commencing with fiscal year ending June 30, 2006, (i) to the extent
not otherwise provided in the Form 10-KSB filed by the Borrower with the
SEC for such fiscal year end, a copy of the annual audit report for such year
for the Borrower and its consolidated Subsidiaries, including therein the
Borrower’s and its consolidated Subsidiaries’ balance sheets as of the end
of such fiscal year and the Borrower’s and its consolidated Subsidiaries’
statements of income, cash flows, and retained earnings, in each case certified
by an independent certified public accountants of national standing reasonably
acceptable to the Administrative Agent and including any management letters
delivered by such accountants to the Borrower or any Subsidiary in connection
with such audit, (ii) any management letters delivered by such accountants
to the Borrower, (iii) the Form 10-KSB filed with the SEC for such
fiscal year end, (iv) a Compliance Certificate executed by a Responsible
Officer of the Borrower and (v) a copy of the unaudited annual
consolidating financial statements of each of its Subsidiaries, including
therein such Subsidiary’s balance sheet and statements of income, cash flows,
and retained earnings for such fiscal year;


 


(b)                                 Quarterly
Financials.  As soon as available and
in any event not later than 45 days after the end of each of the first three
fiscal quarters of each fiscal year of the Borrower and its consolidated
Subsidiaries, commencing with the fiscal quarter ending December 31, 2005,
(i) to


 


49





















 


the extent not otherwise
provided in the Form 10-QSB for such fiscal quarter end, the unaudited
balance sheet and the statements of income, cash flows, and retained earnings
of each such Person for the period commencing at the end of the previous year
and ending with the end of such fiscal quarter, all in reasonable detail and
duly certified with respect to such consolidated statements (subject to year-end
audit adjustments) by a Responsible Officer of the Borrower as having been prepared
in accordance with GAAP, (ii) the Form 10-QSB filed with the SEC for
such fiscal quarter end, and (iii) a Compliance Certificate executed by
the Responsible Officer of the Borrower;


 


(c)                                  Oil
and Gas Reserve Reports.


 


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


 


(ii)                                  As
soon as available but in any event on or before March 31 of each year an
Internal Engineering Report dated effective as of the immediately preceding January 1;


 


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


 


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


 


50





















 


provided
that, notwithstanding anything herein to the contrary, this Section 5.06(c) shall
not apply to the Barnett Shale Properties.


 


(d)                                 Production
Reports.  As soon as available and in
any event within 45 days after the end of each fiscal quarter, commencing with
the fiscal quarter ending December 31, 2005, a report certified by a
Responsible Officer of the Borrower in form and substance satisfactory to the
Administrative Agent prepared by the Borrower covering each of the Oil and Gas
Properties of the Borrower and its Subsidiaries (other than the Barnett Shale
Properties) and detailing on a quarterly basis (i) the production,
revenue, and price information and associated operating expenses for each such quarter,
(ii) any changes to any producing reservoir, production equipment, or
producing well during each such quarter, which changes could cause a Material
Adverse Change and (iii) any sales of the Borrower’s or any Subsidiaries’
Oil and Gas Properties during each such quarter (other than the Barnett Shale
Properties);


 


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


 


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


 


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


 


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


 


(i)                                     Environmental
Notices.  Promptly upon the receipt
thereof by the Borrower or any of its Subsidiaries, a copy of any form of
request, notice, summons or citation received from the Environmental Protection
Agency, or any other Governmental Authority, concerning (i) violations or
alleged violations of Environmental Laws, which seeks to impose liability
therefor and could cause a Material Adverse Change, (ii) any action or
omission on the part of the Borrower or any Subsidiary or any of their former
Subsidiaries in connection with Hazardous


 


51





















 


Waste or Hazardous Substances
which could reasonably result in the imposition of liability therefor that
could cause a Material Adverse Change, including without limitation any
information request related to, or notice of, potential responsibility under
CERCLA, or (iii) concerning the filing of a Lien upon, against or in connection
with the Borrower or any Subsidiary or their former Subsidiaries, or any of
their leased or owned Property, wherever located;


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 5.07                                Maintenance
of Property.  The Borrower shall, and
shall cause each of its Subsidiaries to, maintain their owned, leased, or
operated Property in good condition and repair; and shall abstain, and cause
each of its Subsidiaries to abstain from, knowingly or willfully permitting the
commission of waste or other injury, destruction, or loss of natural resources,
or the occurrence of pollution, contamination, or any other condition in, on or
about the owned or operated Property involving the Environment that could
reasonably be expected to result in Response activities and that could
reasonably be expected to cause a Material Adverse Change.


 


Section 5.08                                Agreement
to Pledge.  The Borrower shall, and
shall cause each Subsidiary to, grant to the Collateral Trustee an Acceptable
Security Interest in any Property of the Borrower or any Subsidiary now owned
or hereafter acquired (other than the Barnett Shale Properties) promptly after
receipt of a written request from the Administrative Agent.


 


Section 5.09                                Use
of Proceeds.  The Borrower shall use
the proceeds of the Advances and Letters of Credit to fund (a) a portion
of the purchase price for the WO Energy Acquisition in accordance with the WO
Energy Acquisition Instruments, (b) acquisitions of Oil and Gas
Properties, (c) for working capital purposes and (d) for general
corporate purposes.


 


Section 5.10                                Title
Evidence and Opinions.  The Borrower
shall from time to time upon the reasonable request of the Administrative
Agent, take such actions and execute and deliver such documents and instruments
as the Administrative Agent shall require to ensure that the Administrative
Agent shall, at all times, have received satisfactory title evidence, which
title evidence shall be in form and substance acceptable to the Administrative
Agent in its sole discretion and shall include information regarding the before
payout and after payout ownership interests held by the Borrower and the
Borrower’s Subsidiaries, for all wells located on the Oil and Gas Properties (other
than the Barnett Shale Properties), covering at least 80% of the present value
of the Proven Reserves of the Borrower and its Subsidiaries and at least 80% of
the present value of the proved developed producing reserves of the Borrower
and its Subsidiaries as determined by the Administrative Agent.  Within 90 days after the date hereof, the
Borrower shall deliver to the Administrative Agent title opinions in favor of
the Administrative Agent and the Lenders in form and substance satisfactory to
the Administrative Agent and issued by title counsel satisfactory to the
Administrative Agent covering the Oil and Gas Properties of the Borrower and
its Subsidiaries located in the fields identified on Schedule 5.10.  Upon satisfaction of the requirements in the
immediately preceding sentence, the Borrower shall have complied with this Section 5.10
with respect to the Oil and Gas Properties of the Borrower and its Subsidiaries
existing on the date hereof.


 


 


Section 5.11                                Further
Assurances; Cure of Title Defects. 
The Borrower shall, and shall cause each Subsidiary to, cure promptly
any defects in the creation and issuance of the Notes and the execution and
delivery of the Security Instruments and this Agreement.  The Borrower hereby authorizes the
Administrative Agent and the Collateral Trustee to file any financing
statements without the signature of the Borrower to the extent permitted by
applicable law in


 


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order to perfect or maintain
the perfection of any security interest granted under any of the Loan
Documents.  The Borrower at


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


 


Section 5.12                                Hedging
Arrangements.  The Borrower shall, on
or before the date of this Agreement, enter into, and from and after the date
hereof, maintain the Hydrocarbon Hedge Agreements as described in Schedule 5.12
for a minimum period of at least three years as of the end of December 31,
2006 and for each fiscal quarter ending thereafter, but not required to extend
beyond the Maturity Date.


 


Section 5.13                                Bank
Accounts.  The Borrower shall, and
shall cause each of its Subsidiaries to, (a) maintain their principal
operating accounts and other deposit accounts with the Administrative Agent or
any Lender or any other bank that has executed an account control agreement
reasonably acceptable in form and substance to the Administrative Agent, or (b) within
30 days from the date hereof, provide an account control agreement reasonably
acceptable in form and substance to the Administrative Agent and executed by
each depository bank that holds any operating accounts or deposit accounts of
the Borrower or any Guarantor and in existence on the date hereof.


 


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ARTICLE VI



NEGATIVE COVENANTS


 


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


 


Section 6.01                                Liens,
Etc.  The Borrower shall not create,
assume, incur, or suffer to exist, or permit any of its Subsidiaries to create,
assume, incur, or suffer to exist, any Lien on or in respect of any of its
Property whether now owned or hereafter acquired, or assign any right to
receive income, except that the Borrower and its Subsidiaries may create,
incur, assume, or suffer to exist:


 


(a)                                  Liens
created by the Security Instruments;


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 6.02                                Debts,
Guaranties, and Other Obligations. 
The Borrower shall not, and shall not permit any of its Subsidiaries to,
create, assume, suffer to exist, or in any manner become or be liable in
respect of, any Debt except:


 


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


 


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


 


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


 


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


 


(e)                                  Debt
under Hydrocarbon Hedge Agreements which are not prohibited by the terms of Section 6.14;


 


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


 


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


 


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(h)                                 Debt
of WO Energy and W.O. Operating Company, Ltd owing to First National Bank of
Arizona-New Mexico Division under the $250,000 promissory note dated November 1,
2004 and related to a letter of credit facility; provided that, such Debt is
unsecured and the amount of such Debt is not increased in amount; and


 


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


 


Section 6.03                                Agreements
Restricting Liens and Distributions. 
The Borrower shall not, nor shall it permit any of its Subsidiaries to,
create, incur, assume or permit to exist any contract, agreement or
understanding (other than this Agreement, the Security Instruments and the
Subordinated Loan Documents) which in any way prohibits or restricts the
granting, conveying, creation or imposition of any Lien on any of its Property,
whether now owned or hereafter acquired, to secure the Obligations or restricts
any Subsidiary from paying dividends to the Borrower, or which requires the
consent of or notice to other Persons in connection therewith.


 


Section 6.04                                Merger
or Consolidation; Asset Sales.  The
Borrower shall not, nor shall it permit any of its Subsidiaries to (a) merge
or consolidate with or into any other Person without the prior consent of all
of the Lenders; provided that the Borrower or any Subsidiary may merge or
consolidated into the Borrower or any Guarantor if the Borrower or such
Guarantor is the surviving entity; or (b) sell, lease, transfer, assign,
farm-out, convey, or otherwise dispose of any of its Property (including,
without limitation, any working interest, overriding royalty interest,
production payments, net profits interest, royalty interest, or mineral fee
interest) other than: (i) the sale of Hydrocarbons in the ordinary course
of business, (ii) the sale of the Barnett Shale Properties and (iii) the
sale or transfer of equipment that is (A) obsolete, worn out, depleted or
uneconomic and disposed of in the ordinary course of business, (B) no
longer necessary for the business of such Person or (C) contemporaneously
replaced by equipment of at least comparable value and use.


 


Section 6.05                                Restricted
Payments.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, make any Restricted Payments
except that if no Default has occurred both before and after giving effect to
the making of such Restricted Payment, (a) the Subsidiaries may make
Restricted Payments to the Borrower, (b) the Borrower may make Restricted
Payments to officers, directors, consultants and employees of the Borrower or
any Guarantor in any form other than cash or other assets of the Borrower, and (c) the
Borrower may make Restricted Payments to officers, directors, consultants and
employees of the Borrower or any Guarantor in the form of cash in an aggregate
amount not to exceed $1,000,000 per fiscal year.


 


Section 6.06                                Investments.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, make or permit to exist any loans, advances, or
capital contributions to, or make any investment in (including, without
limitation, the making of any Acquisition), or purchase or commit to purchase
any stock or other securities or evidences of indebtedness of or interests in
any 


Person or any Oil and Gas
Properties or activities related to Oil and Gas Properties, except:


 


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(a)                                  Liquid
Investments;


 


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


 


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


 


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


 


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


 


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


 


(g)                                 the
WO Energy Acquisition pursuant to the terms of the WO Energy Acquisition
Instruments; and


 


(h)                                 loans,
advances, capital contributions, and investments in the Sabine Entities in an
aggregate amount not to exceed $500,000.


 


Section 6.07                                Affiliate
Transactions.  The Borrower shall
not, nor shall it permit any of its Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of transactions
(including, but not limited to, the purchase, sale, lease or exchange of
Property, the making of any investment, the giving of any guaranty, the
assumption of any obligation or the rendering of any service) with any of their
Affiliates unless such transaction or series of transactions is on terms no
less favorable to the Borrower or the Subsidiary, as applicable, than those
that could be obtained in a comparable arm’s length transaction with a Person
that is not such an Affiliate; provided that, so long as no Default would occur
as a result thereof, the restriction set forth in this Section 6.07 shall
not apply to transactions contemplated and permitted by the Sabine Documents.


 


Section 6.08                                Compliance
with ERISA.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, directly or indirectly, (a) engage
in, or permit any Subsidiary or ERISA Affiliate to engage in, any transaction
in connection with which the Borrower, any Subsidiary or any ERISA Affiliate
could be subjected to either a civil penalty assessed pursuant to section 502(c),
(i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code;
(b) terminate, or permit any Subsidiary or ERISA Affiliate to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could result in any liability to the Borrower, any Subsidiary or any ERISA
Affiliate to the PBGC; (c) fail to make, or permit any Subsidiary or ERISA
Affiliate to fail to make, full payment when due of all amounts which,


 


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under the provisions of any
Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary
or any ERISA Affiliate is required to pay as contributions thereto; (d) permit
to exist, or allow any Subsidiary or ERISA Affiliate to permit to exist, any
accumulated funding deficiency within the meaning of Section 302 of ERISA
or section 412 of the Code, whether or not waived, with respect to any
Plan; (e) permit, or allow any Subsidiary or ERISA Affiliate to permit,
the actuarial present value of the benefit liabilities (as “actuarial present
value of the benefit liabilities” shall have the meaning specified in section 4041
of ERISA) under any Plan maintained by the Borrower, any Subsidiary or any
ERISA Affiliate which is regulated under Title IV of ERISA to exceed the
current value of the assets (computed on a plan termination basis in accordance
with Title IV of ERISA) of such Plan allocable to such benefit liabilities; (f) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
Multiemployer Plan; (g) acquire, or permit any Subsidiary or ERISA
Affiliate to acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any
ERISA Affiliate if such Person sponsors, maintains or contributes to, or at any
time in the six-year period preceding such acquisition has sponsored,
maintained, or contributed to, (1) any Multiemployer Plan, or (2) any
other Plan that is subject to Title IV of ERISA under which the actuarial
present value of the benefit liabilities under such Plan exceeds the current
value of the assets (computed on a plan termination basis in accordance with
Title IV of ERISA) of such Plan allocable to such benefit liabilities; (h) incur,
or permit any Subsidiary or ERISA Affiliate to incur, a liability to or on
account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; (i) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
employee welfare benefit plan, as defined in section 3(1) of ERISA,
including, without limitation, any such plan maintained to provide benefits to
former employees of such entities, that may not be terminated by such entities
in their sole discretion at any time without any material liability; (j) amend
or permit any Subsidiary or ERISA Affiliate to amend, a Plan resulting in an
increase in current liability such that the Borrower, any Subsidiary or any ERISA
Affiliate is required to provide security to such Plan under section 401(a)(29)
of the Code; or (k) permit to exist any occurrence of any Reportable Event
(as defined in Title IV of ERISA), or any other event or condition, which
presents a material (in the opinion of the Majority Lenders) risk of such a
termination by the PBGC of any Plan.


 


Section 6.09                                Sale-and-Leaseback.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, sell or transfer to a Person any Property, whether
now owned or hereafter acquired, if at the time or thereafter the Borrower or a
Subsidiary shall lease as lessee such Property or any part thereof or other
Property which the Borrower or a Subsidiary intends to use for substantially
the same purpose as the Property sold or transferred.


 


Section 6.10                                Change
of Business.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, make any material change in the
character of its business as an independent oil and gas exploration and
production company, nor will the Borrower or any Subsidiary operate any business
in any jurisdiction other than the United States, including the Gulf of Mexico.


 


Section 6.11                                Organizational
Documents, Name Change.  The Borrower
shall not, nor shall it permit any of its Subsidiaries to, amend, supplement,
modify or restate their articles or certificate of incorporation, bylaws,
limited liability company agreements, or other equivalent


 


59





















 


organizational documents where such amendment, supplement, modification
or restatement could have an adverse effect on the Lenders as determined by the
Administrative Agent in its sole reasonable discretion, or amend its name or
change its jurisdiction of incorporation, organization or formation without
prior written notice to, and prior consent of, the Administrative Agent.


 


Section 6.12                                Use
of Proceeds; Letters of Credit.  The
Borrower will not permit the proceeds of any Advance or Letters of Credit to be
used for any purpose other than those permitted by Section 5.09.  The Borrower will not engage in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U). 
Neither the Borrower nor any Person acting on behalf of the Borrower has
taken or shall take, nor permit any of the Borrower’s Subsidiaries to take any
action which might cause any of the Loan Documents to violate Regulation T, U
or X or any other regulation of the Board of Governors of the Federal Reserve
System or to violate Section 7 of the Securities Exchange Act of 1934 or
any rule or regulation thereunder, in each case as now in effect or as the
same may hereinafter be in effect, including without limitation, the use of the
proceeds of any Advance or Letters of Credit to purchase or carry any margin
stock in violation of Regulation T, U or X.


 


Section 6.13                                Gas
Imbalances, Take-or-Pay or Other Prepayments.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, allow gas imbalances, take-or-pay or other prepayments
with respect to the Oil and Gas Properties of the Borrower or any Subsidiary
which would require the Borrower or any Subsidiary to deliver their respective
Hydrocarbons produced on a monthly basis from such Oil and Gas Properties at
some future time without then or thereafter receiving full payment therefor.


 


Section 6.14                                Limitation
on Speculative Hedging.  Other than
the Hedge Contracts required to be entered into and maintained pursuant to Section 5.12
hereof, the Borrower shall not, nor shall it permit any of its Subsidiaries to,
(a) purchase, assume, or hold a speculative position in any commodities
market or futures market or enter into any Hydrocarbon Hedge Agreement,
Interest Hedge Agreement or similar hedge arrangement for speculative purposes,
or (b) be party to or otherwise enter into any Hedge Contract which (i) is
entered into for reasons other than as a part of its normal business operations
as a risk management strategy and/or hedge against changes resulting from
market conditions related to the Borrower’s operations, (ii) covers
notional volumes in excess of 80% of the anticipated production volumes
attributable to Proven Reserves of the Borrower and its Subsidiaries during the
period such hedge arrangement is in effect, or (iii) is longer than two
years in duration.


 


Section 6.15                                Additional
Subsidiaries; Additional Oil and Gas Properties.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, create or acquire any additional Subsidiaries or
acquire any additional Oil and Gas Properties without (a) such new
Subsidiary executing and delivering to the Administrative Agent, at its
request, a Guaranty, a Pledge Agreement, a Security Agreement and a Mortgage,
and such other Security Instruments as the Administrative Agent or the Majority
Lenders may reasonably request, (b) the delivery by the Borrower of any
certificates, opinions of counsel, title opinions or other documents as the
Administrative Agent may reasonably request, and (c) the Borrower or such
Subsidiary acquiring such Oil and Gas Properties executing and delivering to
the Administrative Agent a new Mortgage or a supplement to an existing Mortgage
encumbering such Oil and Gas Properties;


 


60





















 


provided that, in any event, no
Subsidiary may be created or acquired and no Oil and Gas Properties may be
acquired if a Default has occurred before or after giving effect to such
creation or acquisition of the new Subsidiary or the acquisition of the
additional Oil and Gas Properties.


 


Section 6.16                                Account
Payables.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, allow (a) any of its trade
payables or other accounts payable to be outstanding for more than 90 days
(except in cases where any such trade payable is being disputed in good faith
and adequate reserves under GAAP have been established) and (b) the
weighted average maturity of all such trade payables to exceed 120 days.


 


Section 6.17                                Current
Ratio.  The Borrower shall not permit
the ratio of, as of the end of each fiscal quarter of the Borrower, beginning
with the fiscal quarter ending December 31, 2005, (a) its current
assets to (b) its current liabilities, to be less 1.00 to 1.00.  For purposes of this calculation (i) “current
assets” shall include, as of the date of calculation, the aggregate Unused
Commitment Amounts of the Lenders but shall exclude (A) any cash deposited
with or at the request of a counterparty to any Hedge Contract  or any other similar hedge arrangement and (B) any
assets representing a valuation account arising from the application of SFAS
133 and 143, and (ii) “current
liabilities” shall exclude, as of the date of calculation, the current portion
of long-term Debt existing under this Agreement and any liabilities
representing a valuation account arising from the application of SFAS 133 and
143.


 


Section 6.18                                Debt
Coverage Ratio.  The Borrower (a) shall not permit the
ratio of, as of the fiscal quarter ending March 31, 2006, (i) the
consolidated Debt of the Borrower as of such fiscal quarter end to (ii) the
consolidated EBITDA of the Borrower for the fiscal quarter period then ended
multiplied by four, to be greater than 5.00 to 1.00; (b) shall not permit
the ratio of, as of the fiscal quarter ending June 30, 2006, (i) the
consolidated Debt of the Borrower as of such fiscal quarter end to (ii) the
consolidated EBITDA of the Borrower for the two fiscal quarter period then
ended multiplied by two, to be greater than 4.50 to 1.00; (c) shall not
permit the ratio of, as of the fiscal quarter ending September 30, 2006, (i) the
consolidated Debt of the Borrower as of such fiscal quarter end to (ii) the
consolidated EBITDA of the Borrower for the three fiscal quarter period then
ended multiplied by 4/3, to be greater than 4.00 to 1.00; and (d) shall not permit the ratio of, as of
each fiscal quarter ending on or after December 31, 2006, (i) the
consolidated Debt of the Borrower as of such fiscal quarter end to (ii) the
consolidated EBITDA of the Borrower for the four fiscal quarter period then
ended, to be greater than 3.50 to 1.00.


 


Section 6.19                                Interest Coverage
Ratio.  The Borrower (a) shall not permit the ratio of, as of the fiscal
quarter ending March 31, 2006, (i) the consolidated EBITDA of the
Borrower for the fiscal quarter period then ended multiplied by four, to (ii) the
consolidated Interest Expense of the Borrower for the fiscal quarter period
then ended multiplied by four, to be less than 2.00 to 1.00; (b) shall not
permit the ratio of, as of the fiscal quarter ending June 30, 2006, (i) the
consolidated EBITDA of the Borrower for the two fiscal quarter period then
ended multiplied by two, to (ii) the consolidated Interest Expense of the
Borrower for the two fiscal quarter period then ended multiplied by two, to be
less than 2.00 to 1.00; (c) shall not permit the ratio of, as of the
fiscal quarter ending September 30, 2006, (i) the consolidated EBITDA
of the Borrower for the three fiscal quarter period then ended multiplied by
4/3, to (ii) the consolidated Interest Expense of the Borrower for the
three fiscal quarter period then ended multiplied by 4/3, to be less than 2.00
to 1.00; and (d) shall not permit the ratio of, as of the end of any
fiscal quarter


 


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ending on or after December 31,
2006, (i) the consolidated EBITDA of the Borrower calculated for the four
fiscal quarters then ended, to (ii) the consolidated Interest Expense of
the Borrower for the four fiscal quarters then ended, to be less than 2.00 to
1.00.


 


Section 6.20                                Subordinated
Debt.  Except as otherwise permitted
by the terms of the Collateral Trust and Intercreditor Agreement none of the
Borrower or any of its Subsidiaries shall (b) make any optional, mandatory
or scheduled payments on account of principal (whether by redemption, purchase,
retirement, defeasance, set-off or otherwise), interest, premiums and fees in
respect of the Subordinated Debt, or (b) amend, supplement or otherwise
modify the terms of the Subordinated Debt.


 


Section 6.21                                Non-Guarantor
Subsidiary.  Notwithstanding anything
to the contrary contained herein, including any provision of this Article VI,
the Borrower shall not, nor shall it permit any of its Subsidiaries to, (a) create,
assume, incur or suffer to exist any Lien on or in respect of any of its
Property for the benefit of Tri-Flow, (b) sell, assign, pledge, or
otherwise transfer any of its Properties to Tri-Flow, or (c) make or
permit to exist any loans, advances, or capital contributions to, or make any
investment in, or purchase or commit to purchase any stock or other securities
or evidences of indebtedness of or interests in, Tri-Flow or in any Properties
of Tri-Flow other than the loans, advances, capital contributions, investments,
and commitments made prior to the date hereof in Tri-Flow; provided
that, the respective amounts of such loans, advances, capital contributions,
investments, and commitments shall not be increased (other than by
appreciation).


 


ARTICLE VII



EVENTS OF DEFAULT; REMEDIES


 


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


 


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


 


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


 


(c)                                  Covenant
Breaches.  The Borrower, any
Guarantor or any of their respective Subsidiaries shall fail to (i) perform
or observe any covenant contained in Section 5.02(a), Section 5.03, Section 5.06(e),
Section 5.12, or Article VI of this Agreement or (ii) fail to
perform or observe any other term or covenant set forth in this Agreement or in
any other Loan


 


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Document which is not covered
by clause (i) above or any other provision of this Section 7.01
if such failure shall remain unremedied for 30 days after the occurrence of
such breach or failure;


 


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


 


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


 


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


 


(g)                                 Termination
Events.  Any Termination Event with
respect to a Plan shall have occurred, and, 30 days after notice thereof shall
have been given to the Borrower by the Administrative Agent, (i) such
Termination Event shall not have been corrected and (ii) the then


 


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present value of such Plan’s
vested benefits exceeds the then current value of assets accumulated in such
Plan by more than the amount of $1,000,000 (or in the case of a Termination
Event involving the withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) of
ERISA), the withdrawing employer’s proportionate share of such excess shall
exceed such amount);


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 7.02                                Optional
Acceleration of Maturity.  If any
Event of Default (other than an Event of Default pursuant to paragraph (e) of
Section 7.01) shall have occurred and be continuing, then, and in any such
event,


 


(a)                                  the
Administrative Agent (i) shall at the request, or may with the consent, of
the Majority Lenders, by notice to the Borrower, declare the obligation of each
Lender and the Issuing Lender to make extensions of credit hereunder, including
making Advances and issuing, increasing or extending Letters of Credit, to be
terminated, whereupon the same shall forthwith terminate, and (ii) shall
at the request, or may with the consent, of the Majority Lenders, by notice to
the Borrower, declare all principal, interest, fees, reimbursements,
indemnifications, and all other amounts payable under this Agreement, the
Notes, and the other Loan Documents to be forthwith due and payable, whereupon
all such amounts shall become and be forthwith due and payable in full, without
notice of intent to demand, demand, presentment for payment, notice of
nonpayment, protest, notice of protest, grace, notice of dishonor, notice of
intent to accelerate, notice of acceleration, and all other notices, all of
which are hereby expressly waived by the Borrower;


 


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


 


(c)                                  the
Collateral Trustee shall at the request of, or may with the consent of, the
Required Plurality (as defined in the Collateral Trust and Intercreditor
Agreement) proceed to enforce its rights and remedies under the Security
Instruments, the Guaranties, and any other Loan Document for the ratable
benefit of the Secured Parties by appropriate proceedings.


 


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


 


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


 


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


 


(c)                                  the
Collateral Trustee shall at the request of, or may with the consent of, the
Required Plurality proceed to enforce its rights and remedies under the
Security Instruments, the Guaranties, and any other Loan Document for the
ratable benefit of the Secured Parties by appropriate proceedings.


 


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


 


Section 7.05                                Non-exclusivity
of Remedies.  No remedy conferred
upon the Administrative Agent, the Issuing Lender and the Lenders is intended
to be exclusive of any other remedy, and each remedy shall be cumulative of all
other remedies existing by contract, at law, in equity, by statute or
otherwise.


 


Section 7.06                                Application
of Proceeds.  From and during the
continuance of any Event of Default, any monies or Property actually received
by the Collateral Trustee pursuant to this Agreement or any other Loan
Document, the exercise of any rights or remedies under any Security Instrument
or any other agreement with the Borrower, any Guarantor or any of their
respective Subsidiaries which secures any of the Obligations, shall be applied
in the order set forth in the Collateral Trust and Intercreditor Agreement.


 


ARTICLE VIII



THE ADMINISTRATIVE AGENT AND THE ISSUING LENDER


 


Section 8.01                                Authorization
and Action.  Each Lender hereby
appoints and authorizes the Administrative Agent to take such action as agent
on its behalf and to exercise such powers under this Agreement as are delegated
to the Administrative Agent by the terms hereof and of the other Loan
Documents, together with such powers as are reasonably incidental thereto.  As to


 


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


 


Section 8.02                                Administrative
Agent’s Reliance, Etc.  Neither the
Administrative Agent nor any of its directors, officers, agents, or employees
shall be liable for any action taken or omitted to be taken (INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE) by it
or them under or in connection with this Agreement or the other Loan Documents,
except for its or their own gross negligence or willful misconduct.  Without limitation of the generality of the
foregoing, the Administrative Agent:  (a) may
treat the payee of any Note as the holder thereof until the Administrative
Agent receives written notice of the assignment or transfer thereof signed by
such payee and in form satisfactory to the Administrative Agent; (b) may
consult with legal counsel (including counsel for the Borrower), independent
public accountants, and other experts selected by it and shall not be liable
for any action taken or omitted to be taken in good faith by it in accordance
with the advice of such counsel, accountants, or experts; (c) makes no
warranty or representation to any Lender and shall not be responsible to any
Lender for any statements, warranties, or representations made in or in
connection with this Agreement or the other Loan Documents; (d) shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants or conditions of this Agreement or any other Loan
Document on the part of the Borrower or its Subsidiaries or to inspect the
Property (including the books and records) of the Borrower or its Subsidiaries;
(e) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency, or value of this
Agreement or any other Loan Document; and (f) shall incur no liability
under or in respect of this Agreement or any other Loan Document by acting upon
any notice, consent, certificate, or other instrument or writing (which may be
by telecopier or telex) believed by it to be genuine and signed or sent by the
proper party or parties.


 


Section 8.03                                The
Administrative Agent and Its Affiliates. 
With respect to its Commitment, the Advances made by it and the Notes
issued to it, the Administrative Agent shall have the same rights and powers
under this Agreement as any other Lender and may exercise the same as though it
were not the Administrative Agent.  The
term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include
the Administrative Agent in its individual capacity.  The Administrative Agent and its Affiliates
may accept deposits from, lend money to, act as trustee under indentures of,
and generally engage in any kind of business with, the Borrower or any of its
Subsidiaries, and any Person who may do business with or own securities of the
Borrower or any such Subsidiary, all as if the Administrative Agent were not an
agent hereunder and without any duty to account therefor to the Lenders.


 


Section 8.04                                Lender
Credit Decision.  Each Lender
acknowledges that it has, independently and without reliance upon the
Administrative Agent or any other Lender and based on the Financial Statements
and the Interim Financial Statements and such other


 


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


 


Section 8.05                                Indemnification.  THE LENDERS SEVERALLY
AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND THE ISSUING LENDER AND EACH
AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND
AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR
RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE
IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT AND THE
ISSUING LENDER IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY
ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT OR THE ISSUING LENDER UNDER
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT’S
AND THE ISSUING LENDER’S OWN NEGLIGENCE), AND INCLUDING, WITHOUT LIMITATION,
ENVIRONMENTAL LIABILITIES, PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY
PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE
ADMINISTRATIVE AGENT’S OR THE ISSUING LENDER’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.  WITHOUT LIMITATION OF THE
FOREGOING, EACH LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT AND THE
ISSUING LENDER PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET
EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN
CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION,
MODIFICATION, AMENDMENT, OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL
PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR
RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, TO THE
EXTENT THAT THE ADMINISTRATIVE AGENT OR THE ISSUING LENDER IS NOT REIMBURSED
FOR SUCH BY THE BORROWER.


 


Section 8.06                                Successor
Administrative Agent and Issuing Lender. 
The Administrative Agent or the Issuing Lender may resign at any time by
giving written notice thereof to the Lenders and the Borrower and may be
removed at any time with or without cause by the Majority Lenders upon receipt
of written notice from the Majority Lenders to such effect.  Upon receipt of notice of any such
resignation or removal, the Majority Lenders shall have the right to appoint a
successor Administrative Agent or Issuing Lender with, if any Event of Default
has not occurred and is not continuing, the consent of the Borrower, which
consent shall not be unreasonably withheld. 
If no successor Administrative Agent or Issuing Lender shall have been
so appointed by the Majority Lenders with the consent of the Borrower, and
shall have accepted such appointment, within 30 days after the retiring
Administrative Agent’s or Issuing Lender’s


 


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giving of notice of resignation
or the Majority Lenders’ removal of the retiring Administrative Agent or
Issuing Lender, then the retiring Administrative Agent or Issuing Lender may,
on behalf of the Lenders and the Borrower, appoint a successor Administrative
Agent or Issuing Lender, which shall be, in the case of a successor agent, a
commercial bank organized under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$500,000,000.00 and, in the case of the Issuing Lender, a Lender.  Upon the acceptance of any appointment as
Administrative Agent or Issuing Lender by a successor Administrative Agent or
Issuing Lender, such successor Administrative Agent or Issuing Lender shall
thereupon succeed to and become vested with all the rights, powers, privileges,
and duties of the retiring Administrative Agent or Issuing Lender, and the
retiring Administrative Agent or Issuing Lender shall be discharged from its
duties and obligations under this Agreement and the other Loan Documents,
except that the retiring Issuing Lender shall remain the Issuing Lender with respect
to any Letters of Credit outstanding on the effective date of its resignation
or removal and the provisions affecting the Issuing Lender with respect to such
Letters of Credit shall inure to the benefit of the retiring Issuing Lender
until the termination of all such Letters of Credit.  After any retiring Administrative Agent’s or
Issuing Lender’s resignation or removal hereunder as Administrative Agent or
Issuing Lender, the provisions of this Article VIII shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent or Issuing Lender under this Agreement and the other Loan
Documents.


 


ARTICLE IX



MISCELLANEOUS


 


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


 


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Section 9.02                                Notices,
Etc.  All notices and other
communications shall be in writing (including, without limitation, telecopy or
telex) and mailed by certified mail, return receipt requested, telecopied,
telexed, hand delivered, or delivered by a nationally recognized overnight
courier, at the address for the appropriate party specified in Schedule 1
or at such other address as shall be designated by such party in a written
notice to the other parties.  All such
notices and communications shall, when so mailed, telecopied, telexed, or hand
delivered or delivered by a nationally recognized overnight courier, be
effective when received if mailed, when telecopy transmission is completed,
when confirmed by telex answer-back, or when delivered by such messenger or
courier, respectively, except that notices and communications to the
Administrative Agent pursuant to Article II or VIII shall not be effective
until received by the Administrative Agent.


 


Section 9.03                                No
Waiver; Remedies.  No failure on the
part of any Lender, the Administrative Agent, or the Issuing Lender to
exercise, and no delay in exercising, any right hereunder or under any Note
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right preclude any other or further exercise thereof or the exercise
of any other right.  The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.


 


Section 9.04                                Costs
and Expenses.  The Borrower agrees to
pay on demand (a) all reasonable out-of-pocket costs and expenses of the
Administrative Agent in connection with the preparation, execution, delivery,
administration, modification, and amendment of this Agreement, the Notes, the
Guaranties, and the other Loan Documents including the reasonable fees and out-of-pocket
expenses of counsel for the Administrative Agent with respect to advising the
Administrative Agent as to its rights and responsibilities under this Agreement
and (b) all out-of-pocket costs and expenses, if any, of the
Administrative Agent, the Issuing Lender, and each Lender (including, without
limitation, reasonable counsel fees and expenses of the Administrative Agent,
the Issuing Lender, and each Lender) in connection with the enforcement (whether
through negotiations, legal proceedings, or otherwise) of this Agreement, the
Notes, the Guaranties, and the other Loan Documents.


 


Section 9.05                                Binding
Effect.  This Agreement shall become
effective when it shall have been executed by the Borrower and the
Administrative Agent, and when the Administrative Agent shall have, as to each
Lender, either received a counterpart hereof executed by such Lender or been
notified by such Lender that such Lender has executed it and thereafter shall
be binding upon and inure to the benefit of the Borrower, the Administrative
Agent, the Issuing Lender, and each Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
or delegate its duties under this Agreement or any interest in this Agreement
without the prior written consent of each Lender.


 


Section 9.06                                Lender
Assignments and Participations.


 


(a)                                  Assignments.  Any Lender may assign to one or more Eligible
Assignees all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitments, the
Advances owing to it, the Notes held by it, and the participation interest in
the Letter of Credit Obligations held by it); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of
such Lender’s


 


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rights and obligations assigned
under this Agreement and shall be an equal percentage with respect to both its
obligations owing in respect of the Commitments and the related Advances and
Letters of Credit, (ii) the amount of the Commitments and Advances of such
Lender being assigned pursuant to each such assignment (determined as of the
date of the Assignment and Acceptance with respect to such assignment) shall
be, if to an entity other than a Lender, not less than $5,000,000 and shall be
an integral multiple of $1,000,000 in excess thereof, (iii) each such
assignment shall be to an Eligible Assignee, (iv) the parties to each such
assignment shall execute and deliver to the Administrative Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance,
together with the Notes subject to such assignment, and (v) each Eligible
Assignee (other than the Eligible Assignee of the Administrative Agent or an
Affiliate of a Lender) shall pay to the Administrative Agent a $3,500
administrative fee.  Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder
shall be a party hereto for all purposes and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (B) such
Lender thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of such Lender’s rights and obligations under this Agreement, such Lender shall
cease to be a party hereto).


 


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


 


71





















 


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


 


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


 


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


 


72





















 


Section 9.07                                Indemnification;
Waiver.


 


(a)                                  Indemnification.  THE
BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT (AND ANY
SUB-AGENT THEREOF), EACH LENDER AND THE ISSUING LENDER, AND EACH OFFICER,
DIRECTOR, EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE OF
ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”)
AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS,
DAMAGES, LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND
DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE), INCURRED BY ANY INDEMNITEE OR
ASSERTED AGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANY
SUBSIDIARY OF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT
OF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR
ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY
THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE
CASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR,
EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE THEREOF) THE ADMINISTRATION OF
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY ADVANCE OR LETTER OF
CREDIT OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM (INCLUDING ANY
REFUSAL BY THE ISSUING LENDER TO HONOR A DEMAND FOR PAYMENT UNDER A LETTER OF
CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITH SUCH DEMAND DO NOT
STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT), (III) ANY ACTUAL
OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY
OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR ANY ENVIRONMENTAL
LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR
(IV) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR
PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR
ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY
GUARANTOR, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, IN ALL CASES, WHETHER OR NOT CAUSED BY OR
ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE
NEGLIGENCE OF THE INDEMNITEE; PROVIDED THAT SUCH
INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH
LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A
COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE
RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.


 


(b)                                 Waiver of Damages.  To the fullest extent permitted by applicable
law, the Borrower shall not assert, and hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement, any other Loan Document or
any agreement or instrument contemplated hereby, the transactions contemplated
hereby or thereby, any Advance or Letter of Credit


 


73





















 


or the use of the proceeds thereof. 
No Indemnitee referred to in subsection (b) above shall be
liable for any damages arising from the use by unintended recipients of any
information or other materials distributed by it through telecommunications,
electronic or other information transmission systems in connection with this
Agreement or the other Loan Documents or the transactions contemplated hereby
or thereby.


 


Section 9.08                                Execution
in Counterparts.  This Agreement may
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.  Delivery of an executed
counterpart signature page of this Agreement by facsimile is as effective
as executing and delivering this Agreement in the presence of the other parties
to this Agreement.


 


Section 9.09                                Survival
of Representations, Etc.  All
representations and warranties contained in this Agreement or made in writing
by or on behalf of the Borrower in connection herewith shall survive the
execution and delivery of this Agreement and the Loan Documents, the making of
the Advances and any investigation made by or on behalf of the Lenders, none of
which investigations shall diminish any Lender’s right to rely on such
representations and warranties.  All obligations
of the Borrower provided for in Sections 2.12, 2.13, 2.14(c), 9.04, and
9.07 and all of the obligations of the Lenders in Section 8.05 shall
survive any termination of this Agreement and repayment in full of the
Obligations.


 


Section 9.10                                Severability.  In case one or more provisions of this
Agreement or the other Loan Documents shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality,
and enforceability of the remaining provisions contained herein or therein
shall not be affected or impaired thereby.


 


Section 9.11                                Business
Loans.  The Borrower warrants and
represents that the Loans evidenced by the Notes are and shall be for business,
commercial, investment, or other similar purposes and not primarily for
personal, family, household, or agricultural use, as such terms are used in
Chapter One (“Chapter One”) of the Texas Credit Code.  At all such times, if any, as Chapter One
shall establish a Maximum Rate, the Maximum Rate shall be the “indicated rate
ceiling” (as such term is defined in Chapter One) from time to time in effect.


 


Section 9.12                                Governing
Law; Submission to Jurisdiction. 
This Agreement, the Notes and the other Loan Documents shall be governed
by, and construed and enforced in accordance with, the laws of the State of
Texas.  Without limiting the intent of
the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as
amended (relating to revolving loans and revolving tri-party accounts (formerly
Tex.  Rev. Civ.  Stat. 
Ann.  Art.  5069, Ch. 
15)), shall not apply to this Agreement, the Notes, or the transactions
contemplated hereby and (b) to the extent that any Lender may be subject
to Texas law limiting the amount of interest payable for its account, such
Lender shall utilize the indicated (weekly) rate ceiling from time to time in
effect.  Each Letter of Credit shall be
governed by the Uniform Customs and Practice for Documentary Credits,
International Chamber of Commerce Publication No.  500 (1993
version).  The Borrower hereby
irrevocably submits to the jurisdiction of any Texas state or federal court
sitting in Dallas, Texas in any action or proceeding arising out of or relating
to this Agreement or the other Loan Documents, and the Borrower hereby
irrevocably agrees that all claims in respect of such action


 


74





















 


or proceeding may be heard and
determined in such court.  The Borrower
hereby unconditionally and irrevocably waives, to the fullest extent it may
effectively do so, any right it may have to the defense of an inconvenient
forum to the maintenance of such action or proceeding.  The Borrower hereby agrees that service of
copies of the summons and complaint and any other process which may be served
in any such action or proceeding may be made by mailing or delivering a copy of
such process to such Borrower at its address set forth in this Agreement.  The Borrower agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law.  Nothing in this Section shall affect the
rights of any Lender to serve legal process in any other manner permitted by
the law or affect the right of any Lender to bring any action or proceeding
against the Borrower or its Property in the courts of any other jurisdiction.


 


Section 9.13                                WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS, THE ISSUING LENDER
AND THE ADMINISTRATIVE AGENT HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED
BY AND HAVE CONSULTED WITH COUNSEL OF THEIR CHOICE, AND HEREBY KNOWINGLY,
VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY
JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.


 


Section 9.14                                ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT AND THE LOAN
DOCUMENTS, AS DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.


 


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


 


75





















 


EXECUTED as of the date first above written.


 


	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC. a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
      S. Jeffrey
  Johnson

  
	
   

  	
  Title:

  	
        Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT/LENDERS:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
  as Administrative
  Agent, Issuing Lender and

  Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Ali
  Ahmed

  
	
   

  	
   

  	
  Ali Ahmed

  
	
   

  	
   

  	
  Vice
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Alison
  Fugua

  
	
   

  	
  Name:

  	
  Alison Fugua

  
	
   

  	
  Title:

  	
  IBO

  
					



 





















 


SCHEDULE I


 


PRICING GRID


 


Applicable
Margins


 




	
  Utilization

  Level*

  	
   

  	
  Base Rate

  Advances

  	
   

  	
  Eurodollar

  Rate Advances

  	
   

  	
  Commitment Fee

  	
   

  
	
  Level I

  	
   

  	
  0.00

  	
  %

  	
  1.50

  	
  %

  	
  0.50

  	
  %

  
	
  Level II

  	
   

  	
  0.25

  	
  %

  	
  1.75

  	
  %

  	
  0.375

  	
  %

  
	
  Level III

  	
   

  	
  0.50

  	
  %

  	
  2.00

  	
  %

  	
  0.375

  	
  %

  
	
  Level IV

  	
   

  	
  0.75

  	
  %

  	
  2.25

  	
  %

  	
  0.375

  	
  %

  






 










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


 


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


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


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


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


 





















 


SCHEDULE II


NOTICE
INFORMATION AND COMMITMENTS


 


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


 


Administrative Agent/Issuing Lender:


 


Union Bank of California, N.A.


Lincoln Plaza


500 N. Akard Street, Suite 4200


Dallas, Texas  75201


Attention: Ali Ahmed


Facsimile: (214) 922-4209


 


Borrower:


 


Cano Petroleum, Inc.


309 West 7th Street, Suite 1600


Forth Worth, Texas 76102


Attention: Mike Ricketts, CFO


Facsimile: (817) 334-0222


 


	
  Lenders:

  	
   

  	
  Commitments

  	
   

  
	
  Union Bank of California, N.A.

  	
   

  	
  $

  	
  100,000,000.00

  	
   

  
	
  Total:

  	
   

  	
  $

  	
  100,000,000.00

  	
   

  



 





















 


SCHEDULE 4.01


 


SUBSIDIARIES
OF BORROWER


 


Ladder Companies, Inc.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Delaware

  



 


Type of Organization: Corporation


 


Square One Energy, Inc.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  



 


Type of Organization: Corporation


 


W.O. Energy of Nevada, Inc.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Nevada

  



 


Type of Organization: Corporation


 


WO Energy, Inc.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  



 


Type of Organization: Corporation


 


W.O. Operating Company, Ltd.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  



 


Type of Organization: Limited Partnership


 


W.O. Production Company, Ltd.


 


	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  



 


Type of Organization: Limited Partnership


 





















 


SCHEDULE 4.05


 


EXISTING
DEBT


 


Cano
Petroleum, Inc.


 


None


 


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


 


None


 


Square One Energy, Inc.


 


None


 


W.O. Energy of Nevada, Inc.


 


None


 


WO Energy, Inc.


 


None


 


W.O. Operating Company, Ltd.


 


$250,000 Promissory Note and Letter of Credit Facility between W.O.
Operating Company, Ltd. and First National Bank of Arizona.


 


W.O. Production Company, Ltd.


 


None


 


3





















 


SCHEDULE 4.20


 


HEDGING
AGREEMENTS


 


Cano
Petroleum, Inc.


 


None


 


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


 


None


 


Square One Energy, Inc.


 


None


 


W.O. Energy of Nevada, Inc.


 


None


 


WO Energy, Inc.


 


None


 


W.O. Operating Company, Ltd.


 


None


 


W.O. Production Company, Ltd.


 


None


 





















 


SCHEDULE 4.21


 


MATERIAL
AGREEMENTS


 


Engagement for Professional Services by and between Cano Petroleum, Inc.
and Bainbridge Capital dated April 14, 2005.


 


Gas Purchase and Processing Agreement by and between Ladder Energy
Company and ScissorTail Energy, LLC dated September 1, 2004.


 


Agreement by and between Square One Energy, Inc. and KenMor
Properties, LLC dated October 7, 2005 in which KenMor Properties, LCC
assigns, transfers and conveys to Square One Energy, Inc. all of its
right, title and interest in and to the Gas Sales and Purchase Agreement by and
between Alliant Energy Desdemona, LP and KenMor Properties, LLC dated March 1,
2005.


 


Gas Purchase Contract by and between Ladder Energy Company and Western
Gas Resources, Inc. dated January 7, 1998.


 


Gas Purchase Contract by and between Square One Energy, Inc. and
Newpoint Gas Services, Inc. dated April 21, 2004.


 


Crude Oil Purchase Agreement by and between Square One Energy and
Sunoco Partners Marketing & Terminals L.P. dated September 13,
2005.


 


Crude Oil Purchase Agreement by and between Ladder Energy and
Coffeyville Resources Crude Transportation dated October 4, 2005.


 


Natural Gas Liquid Mix Agreement by and between Square One Energy, Inc.
and Dufour Petroleum, L.P. dated August July 1, 2004, as amended by
Amendment Letter dated October 1, 2005 and as amended by Amendment Letter
dated November 1, 2005.


 


Office Lease Agreement by and between Ft. Worth Plaza Limited
Partnership, a Texas limited partnership, as Landlord and Cano Petroleum, Inc.
(assignee of Cano Energy Corporation), as Tenant, purportedly dated April 10,
2001, as amended by the First Amendment to Lease Agreement dated September 19,
2001.


 


Consulting Agreement by and between Cano Petroleum, Inc. and
Reservoir Solutions, Inc. dated August 15, 2005.


 


Lignin Surfactant System Development Agreement by and between Cano
Petroleum, Inc. and Reservoir Solutions, Inc. dated July 20,
2005.


 


Stock Purchase Agreement by and between Cano Petroleum, Inc., W.
O. Energy of Nevada, Inc., Miles O’Loughlin and Scott White dated November 29,
2005.


 





















 


Executive Employment Agreement by and between Huron Ventures, Inc.
and S. Jeffrey Johnson dated May 28, 2004.


 


Employment Agreement by and between Huron Ventures, Inc. and
Michael J. Ricketts dated May 28, 2004.


 


Employment Agreement by and between Huron Ventures, Inc. and
Thomas Cochrane dated May 28, 2004.


 


Employment Agreement by and between Cano Petroleum, Inc. and James
K. Teringo, Jr. dated July 11, 2005.


 


Compensation Reimbursement Agreement by and between Cano Petroleum, Inc.
and Sabine Production Operating, LLC dated October 31, 2005.


 


Omnibus Agreement by and between Cano Petroleum, Inc., Carlile
Management, LLC, Haddock Enterprises, LLC and Sabine Production Partners, LP
dated October 31, 2005.


 


Amended and Restated Regulations of Sabine Production Operating, LLC
executed by Cano Petroleum, Inc., Haddock Enterprises, LLC and Carlile
Management, LLC, effective as of August 3, 2005.


 


2005 Directors’ Stock Option Plan of Cano Petroleum, Inc.


 


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


 


Management Stock Pool Agreement dated May 28, 2004 among Huron
Ventures Inc. and The Shareholders of Davenport Field Unit Inc.


 


Management Stock Pool Escrow Agreement dated May 28, 2004 by and
among Huron Ventures Inc. and S. Jeffrey Johnson, et al.


 


Purchase and Sale Agreement dated August 16, 2004, by and between
Cano Energy Corporation and Cano Petroleum, Inc.


 


Purchase and Sale Agreement dated September 2, 2004, by and
between Nowata Oil Properties LLC and Cano Petroleum, Inc.


 


Purchase and Sale Agreement dated February 6, 2005, by and between
Square One Energy, Inc. and Cano Petroleum, Inc.


 


Subscription Agreement dated October 8, 2004 by and between Cano
Petroleum, Inc. and Randall Boyd.


 


2





















 


Stock Option Agreement dated December 16, 2004, between Cano
Petroleum, Inc. and Gerald W. Haddock.


 


Form of Subscription Agreement dated March 18, 2005.


 


Letter Agreement dated March 29, 2005 among the Haddock
Enterprises, LLC, Cano Petroleum, Inc. and Kenneth Carlile.


 


Sabine Production Partners, LP Transaction Summary dated August 4,
2005.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Howard Hughes Medical Institute.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and The Robert Wood Johnson Foundation.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Laborers’ District Council and Contractors’ of
Ohio Pension Fund.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Ohio Carpenters’ Pension Fund.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and New York Nurses Association Pension Plan.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Public Sector Pension Investment Board.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Spindrift Investors (Bermuda) L.P.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Spindrift Partners, L.P.


 


Non-Qualified Stock Option Agreement dated September 16, 2005 by
and between Cano Petroleum, Inc. and James K. Teringo, Jr.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Touradji Global Resources Master Fund, Ltd.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Renaissance US Growth Investment Trust PLC.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and BFS US Special Opportunities Trust PLC.


 


3





















 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Crestview Capital Master, LLC.


 


Summary Sheet: Vice President, General Counsel and Secretary of Cano
Petroleum, Inc. Annual Base Salary.


 


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


 


Gas Purchase and Sales
Agreement dated September 1, 1975, between Skelly Oil Company, as Seller,
and Phillips Petroleum Company, as Buyer.


 


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


 


Gas Purchase Contract between Hugoton Energy
Corporation, as Seller, and GPM Gas Corporation, as Buyer, dated August 3,
1995, covering Sections 3 and 4, Block Y, M&C Survey, Hutchinson County,
Texas.


 


Crude Oil Purchase Contract between W.O.
Operating Company, as Seller, and Diamond Shamrock Refining Company LP, dated August 6,
2001 (Valero is successor to Diamond Shamrock on this contract).


 


Gas Purchase Contract by and between W.O.
Operating Company Limited, as Seller, and OneOK Texas Field Services LP, as
Buyer, dated January 1, 2005.


 


Gas Purchase Contract between W.O. Operating
Company, as Seller, and GPM Gas Corporation, as Buyer, dated March 15,
1995.


 


Gas Purchase Contract dated August 3, 1995 by and between W.O.
Operating Company and Duke Energy Field Services, as amended on August 1,
2005 and September 1, 2005.


 


Oil Marketing Agreement dated January 13, 1994 by and between W.O.
Operating Company and Pan Mark, Inc.


 


4





















 


SCHEDULE 5.10


 


POST
CLOSING TITLE OPINION REQUIREMENTS


 


1.                                       All
Oil and Gas Properties of the Borrower and its Affiliates located in the
Desdemona, Davenport, Nowata, and Rich Valley Fields; and


 


2.                                       All
Oil and Gas Properties of the Borrower and its Affiliates covered by the 27
title opinions issued by Gassaway, Gurley and Mitchell, each dated November 22,
1993, covering land in Carson and Hutchinson Counties, Texas and the title
opinion dated November 11, 1993 issued by Gene Martindale covering the Fee
244 property in Carson County, Texas.


 





















 


SCHEDULE 5.12


 


Required
Hedging Contracts


 


	
  Calendar

  Year

  	
   

  	
  BOE Price

  	
   

  	
  Oil Bbl Yr

  	
   

  	
  Gas Mcf

  Yr

  	
   

  	
  Boe/ day

  	
   

  
	
  2006

  	
   

  	
  $

  	
  60

  	
   

  	
  195,000

  	
   

  	
  651,000

  	
   

  	
  832

  	
   

  
	
  2007

  	
   

  	
  $

  	
  55

  	
   

  	
  185,000

  	
   

  	
  600,000

  	
   

  	
  781

  	
   

  
	
  2008

  	
   

  	
  $

  	
  50

  	
   

  	
  175,000

  	
   

  	
  560,000

  	
   

  	
  735

  	
   

  



 


Indications based on settles 11/22/05


 


***********************************
Crude Oil Alternatives ************************************


 




	
  PUTS

  	
   

  
	
  Calendar

  	
   

  	
   

  	
   

  	
  Offer

  	
   

  
	
  Year

  	
   

  	
  Floor

  	
   

  	
  Per Bbl

  	
   

  
	
  2006

  	
   

  	
  $

  	
  60.00

  	
   

  	
  $

  	
  5.65

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2007

  	
   

  	
  55.00

  	
   

  	
  6.50

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2008

  	
   

  	
  55.00

  	
   

  	
  8.15

  	
   

  
								






 


********************************
Natural Gas Alternatives ************************************


 




	
  PUTS

  	
   

  
	
  Calendar

  	
   

  	
   

  	
   

  	
  Offer

  	
   

  
	
  Year

  	
   

  	
  Floor

  	
   

  	
  Per Bbl

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2006

  	
   

  	
  $

  	
  8.50

  	
   

  	
  $

  	
  0.465

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2007

  	
   

  	
  8.00

  	
   

  	
  0.85

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2008

  	
   

  	
  7.50

  	
   

  	
  1.03

  	
   

  
								






 


6





















 


EXHIBIT A


 


FORM OF
ASSIGNMENT AND ASSUMPTION


 


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


 


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


 


	
  1.

  	
  Assignor[s]:

  	
   

  	
   

  



 










	
   

  	
  (1) For
  bracketed language here and elsewhere in this form relating to the
  Assignor(s), if the assignment is from a single 

  
	
  Assignor,
  choose the first bracketed language. 
  If the assignment is from multiple Assignors, choose the second bracketed
  language.

  
	
   

  
	
   

  	
  (2) For
  bracketed language here and elsewhere in this form relating to the
  Assignee(s), if the assignment is to a single 

  
	
  Assignee,
  choose the first bracketed language. 
  If the assignment is to multiple Assignees, choose the second bracketed
  language.

  
	
   

  
	
   

  	
  (3) Select
  as appropriate.

  
	
   

  	
   

  
	
   

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

  



 





















 


	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Assignee[s]:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

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

  
	
   

  	
   

  
	
  3.

  	
  Borrower:

  	
  CANO
  PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Administrative
  Agent:

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

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Credit
  Agreement:

  	
  The Credit
  Agreement dated as of November 29, 2005 among Borrower, the Lenders
  party thereto from time to time, and Union Bank of California, N.A. as
  Administrative Agent and as Issuing Lender.

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Assigned
  Interest[s]:

  	
   

  
						



 


	
  Assignor[s]

  	
   

  	
  Assignee[s]

  	
   

  	
  Facility

  Assigned

  	
   

  	
  Aggregate Amount

  of Commitment

  /Advance for all

  Lenders

  	
   

  	
  Amount of

  Commitment /

  Advances

  Assigned(5)

  	
   

  	
  Percentage Assigned

  of Commitment /

  Advances(6)

  	
   

  	
  CUSIP

  Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  



 


	
  7.

  	
  Trade Date:

  	
   

  	
  (7)

  



 


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


 


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


 


	
   

  	
  ASSIGNOR[S](8)

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  



 










	
   

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

  
	
  Date and the
  Effective Date.

  
	
   

  
	
   

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

  
	
   

  	
   

  
	
   

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

  
	
  as of the
  Trade Date.

  
	
   

  
	
   

  	
  (8) Add
  additional signature blocks as needed.

  



 


2





















 


	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ASSIGNEE[S]

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
  [Consented to and](9) Accepted:

  
	
   

  
	
  UNION BANK
  OF CALIFORNIA. N.A., as

  Administrative Agent

  
	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  
	
   

  
	
  [Consented to:]  (10)

  
	
   

  
	
  CANO PETROLEUM, INC., a Delaware
  corporation

  
	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  
													



 










	
   

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

  
	
   

  
	
   

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

  



 


3





















 


Annex 1


To Exhibit A – Assignment
and Assumption


 


STANDARD
TERMS AND CONDITIONS FOR


ASSIGNMENT
AND ASSUMPTION


 


1.  Representations and
Warranties.


 


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


 


1.2. Assignee[s]. 
[The][Each] Assignee (a) represents and warrants that (i) it
has full power and authority, and has taken all action necessary, to execute
and deliver this Assignment and Assumption and to consummate the transactions
contemplated hereby and to become a Lender under the Credit Agreement, (ii) it
meets all the requirements to be an assignee under Section 9.05 of the
Credit Agreement (subject to such consents, if any, as may be required under Section 9.05
of the Credit Agreement), (iii) from and after the Effective Date, it
shall be bound by the provisions of the Credit Agreement as a Lender thereunder
and, to the extent of [the][the relevant] Assigned Interest, shall have the
obligations of a Lender thereunder, (iv) it is sophisticated with respect
to decisions to acquire assets of the type represented by the Assigned Interest
and either it, or the person exercising discretion in making its decision to
acquire the Assigned Interest, is experienced in acquiring assets of such type,
(v) it has received a copy of the Credit Agreement, and has received or
has been accorded the opportunity to receive copies of the most recent
financial statements delivered pursuant to Section 3.01(c) thereof,
as applicable, and such other documents and information as it deems appropriate
to make its own credit analysis and decision to enter into this Assignment and
Assumption and to purchase [the][such] Assigned Interest, (vi) it has,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Assignment and Assumption and to purchase [the][such] Assigned Interest, and (vii) if
it is a Foreign Lender, attached to the Assignment and Assumption is any
documentation required to be delivered by it pursuant to the terms of the
Credit Agreement, duly completed and executed by [the][such] Assignee; and (b) agrees
that (i) it will, independently and without reliance on the Administrative
Agent, [the][any] Assignor or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Loan Documents, and (ii) it
will perform in accordance with their terms all of the


 


4





















 


obligations which by the terms of the Loan Documents are required to be
performed by it as a Lender.


 


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


 


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


 


5





















 


EXHIBIT B


 


FORM OF
COMPLIANCE CERTIFICATE


 


FOR THE PERIOD FROM        ,
200   TO         ,
200


 


This certificate dated as of                ,
      is prepared pursuant to the Credit Agreement
dated as of November 29, 2005 (as amended, supplemented or otherwise
modified from time to time, the “Credit Agreement”) among CANO
PETROLEUM, INC., a Delaware corporation (“Borrower”), the lenders party
thereto (the “Lenders”), and UNION BANK OF CALIFORNIA, N.A., as administrative
agent for such Lenders (in such capacity, the “Administrative Agent”)
and as issuing lender.  Unless otherwise
defined in this certificate, capitalized terms that are defined in the Credit
Agreement shall have the meanings assigned to them by the Credit Agreement.


 


The undersigned hereby certifies that:


 


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


 


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


 


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


 


                                                         ;
and]


 


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


 


I.                                         Current
Ratio—Section 6.17.


 


	
  (a)

  	
  consolidated
  current assets(1)

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  current liabilities(2)

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Current
  Ratio = (a) to (b) =

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum
  Current Ratio not less than:

  	
   

  	
  1.00 to 1.00

  	
   

  



 










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


 


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


 


1





















 


	
  COMPLIANCE?

  	
   

  	
  YES                         NO

  	
   

  



 


II.                                     Debt
Coverage Ratio—Section 6.18.


 


	
  (a)

  	
  consolidated
  Debt

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  EBITDA(3)=

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (i) + [(ii) +
  (iii) + (iv)](4) — (v) =

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (i)

  	
  Consolidated
  Net Income

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (ii)

  	
  consolidated
  Interest Expense

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (iii)

  	
  taxes

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (iv)

  	
  depreciation,
  amortization, depletion & other non-cash items(5)

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (v)

  	
  all non-cash items of income included in determining Consolidated Net
  Income(6)

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Maximum Debt Coverage Ratio:

  	
   

  	
  [5.00 to 1.00] [4.50 to 1.00]

  	
   

  
	
   

  	
   

  	
  [4.00 to 1.00] [3.50 to 1.00](7)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES                         NO

  	
   

  
							



 










(3) EBITDA
shall be measured by the four fiscal quarter period then ended.  Furthermore, (a) for the fiscal quarter
ending March 31, 2006, EBITDA shall be calculated using EBITDA for the fiscal
quarter period then ended multiplied by 4;  (b) for the fiscal quarter ending June 30,
2006, EBITDA shall be calculated using EBITDA for the two fiscal quarter period
then ended multiplied by 2; (c) for the fiscal quarter ending September 30,
2006, EBITDA shall be calculated using EBITDA for the three fiscal quarter
period then ended multiplied by 4/3 and (d) for fiscal quarters ending on or
after December 31, 2006, EBITDA shall be calculated using EBITDA for the four
fiscal quarters then ended.  


 


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


 


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


 


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


 


(7) (a) For
the fiscal quarter ending March 31, 2006, use 5.00 to 1.00; (b) for the fiscal
quarter ending June 30, 2006, use 4.50 to 1.00; (c) for the fiscal quarter
ending September 30, 2006, use 4.00 to 1.00 and (d) for fiscal quarters ending
on or after December 31, 2006, use 3.50 to 1.00.


 


2





















 


III.                                 Interest
Coverage Ratio—Section 6.19.


 


	
  (a)

  	
  consolidated
  EBITDA = See II(b) above =

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated
  Interest Expense(8) =

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum Interest Coverage Ratio
  =

  	
   

  	
  2.00 to 1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES                         NO

  	
   

  



 


 


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


 


 


	
   

  	
  CANO
  PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 










(8)(a) for the
fiscal quarter ending March 31, 2006, Interest Expense shall be calculated
using Interest Expense for the fiscal quarter period then ended multiplied by
4;  (b) for the fiscal quarter ending
June 30, 2006, Interest Expense shall be calculated using Interest Expense for
the two fiscal quarter period then ended multiplied by 2; (c) for the fiscal
quarter ending September 30, 2006, Interest Expense shall be calculated using
Interest Expense for the three fiscal quarter period then ended multiplied by
4/3 and (d) for fiscal quarters ending on or after December 31, 2006, Interest
Expense shall be calculated using Interest Expense for the four fiscal quarters
then ended.


 


3





















 


EXHIBIT C


 


FORM OF GUARANTY AGREEMENT


 


This Guaranty Agreement dated as of November 29, 2005 (this “Guaranty”)
is executed by each of the undersigned (individually a “Guarantor” and
collectively, the “Guarantors”), in favor of Union Bank of California,
N.A, as Administrative Agent for the ratable benefit of itself, the Lenders (as
defined below) and as Issuing Lender (as defined below), and the Swap
Counterparties (as defined below) (together with the Administrative Agent, the
Issuing Lender, and the Lenders, individually a “Beneficiary”, and
collectively, the “Beneficiaries”).


 


INTRODUCTION


 


A.                                   This
Guaranty is given in connection with that certain Credit Agreement dated as of November 29,
2005 (as it has been or may be amended, supplemented, restated or otherwise
modified from time to time, the “Credit Agreement”), among Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), the
lenders party thereto from time to time (individually a “Lender” and
collectively, the “Lenders”), and Union Bank of California, N.A. as
administrative agent (“Administrative Agent”) and as issuing lender (“Issuing
Lender”) for such Lenders.


 


B.                                     Each
Guarantor is a Subsidiary of the Borrower and will derive substantial direct
and indirect benefit from (i) the transactions contemplated by the Credit
Agreement and the other Loan Documents (as defined in the Credit Agreement) and
(ii) the Hedge Contracts (as defined in the Credit Agreement) entered into
by the Borrower or any of its other Subsidiaries with a Lender or an Affiliate
of a Lender (such counterparty being referred to as a “Swap Counterparty”).


 


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


 


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


 


Section 1.                                            Definitions.  All capitalized terms not otherwise defined
in this Guaranty that are defined in the Credit Agreement shall have the
meanings assigned to such terms by the Credit Agreement.


 


Section 2.                                            Guaranty.


 


(a)                                  Each
Guarantor hereby absolutely, unconditionally and irrevocably guarantees the
punctual payment and performance, when due, whether at stated maturity, by
acceleration or otherwise, of all Obligations, whether absolute or contingent
and whether for principal, interest (including, without limitation, interest
that but for the existence of a bankruptcy, reorganization or similar proceeding
would accrue), fees, amounts owing in respect


 


1





















 


of
Letter of Credit Obligations, amounts required to be provided as collateral,
indemnities, expenses or otherwise (collectively, the “Guaranteed Obligations”).
Without limiting the generality of the foregoing, each Guarantor’s liability
shall extend to all amounts that constitute part of the Guaranteed Obligations
and would be owed by the Borrower to the Administrative Agent, the Issuing
Lender or any Lender under the Loan Documents and by the Borrower or any of its
Subsidiaries to the Swap Counterparty but for the fact that they are
unenforceable or not allowable due to insolvency or the existence of a
bankruptcy, reorganization or similar proceeding involving the Borrower or such
other Subsidiary.


 


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


 


Section 3.                                            Guaranty
Absolute.  Each Guarantor guarantees
that the Guaranteed Obligations will be paid strictly in accordance with the
terms of the Loan Documents, regardless of any law, regulation or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Administrative Agent, the Issuing Lender, any Lender or any Swap
Counterparty with respect thereto but subject to Section 2(b) above.  The obligations of each Guarantor under this
Guaranty are independent of the Guaranteed Obligations or any other obligations
of any other Person under the Loan Documents or in connection with any Hedge
Contract, and a separate action or actions may be brought and prosecuted
against any Guarantor to enforce this Guaranty, irrespective of whether any
action is brought against the Borrower, any other Guarantor or any other Person
or whether the Borrower, any other Guarantor or any other Person is joined in
any such action or actions. The liability of each Guarantor under this Guaranty
shall be irrevocable, absolute and unconditional irrespective of, and each
Guarantor hereby irrevocably waives any defenses it may now or hereafter have
in any way relating to, any or all of the following:


 


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


 


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


 


2





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 5.                                            Waivers
and Acknowledgments.


 


(a)                                  Each
Guarantor hereby waives promptness, diligence, presentment, notice of
acceptance and any other notice with respect to any of the Guaranteed
Obligations and this


 


3





















 


Guaranty
and any requirement that any Beneficiary protect, secure, perfect or insure any
Lien or any Property or exhaust any right or take any action against the
Borrower or any other Person or any collateral.


 


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


 


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


 


Section 6.                                            Subrogation.
No Guarantor will exercise any rights that it may now have or hereafter acquire
against the Borrower or any other Person to the extent that such rights arise
from the existence, payment, performance or enforcement of such Guarantor’s
obligations under this Guaranty or any other Loan Document, including, without
limitation, any right of subrogation, reimbursement, exoneration, contribution
or indemnification and any right to participate in any claim or remedy of any
Beneficiary against the Borrower or any other Person, whether or not such
claim, remedy or right arises in equity or under contract, statute or common
law, including, without limitation, the right to take or receive from the
Borrower or any other Person, directly or indirectly, in cash or other property
or by set-off or in any other manner, payment or security on account of such
claim, remedy or right, unless and until all of the Guaranteed Obligations and
any and all other amounts payable by the Guarantors under this Guaranty shall
have been paid in full in cash, all Letters of Credit have terminated or
expired and no Letter of Credit Obligations shall remain outstanding, and all
Commitments shall have expired or terminated. 
If any amount shall be paid to a Guarantor in violation of the preceding
sentence at any time prior to (a) the payment in full in cash of the
Guaranteed Obligations and any and all other amounts payable by the Guarantors
under this Guaranty, (b) the satisfaction of all Letter of Credit
Obligations and the termination of all obligations of the Issuing Lender and
the Lenders in respect of Letters of Credit, (c)  the termination of the
Hedge Contracts with the Beneficiaries, and (d) the termination of the
Commitments, such amount shall be held in trust for the benefit of the
Beneficiaries and shall forthwith be paid to the Administrative Agent to be
credited and applied to the Guaranteed Obligations and any and all other
amounts payable by the Guarantors under this Guaranty, whether matured or
unmatured, in accordance with the terms of the Loan Documents.


 


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


 


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


 


(b)                                 Such
Guarantor has, independently and without reliance upon the Administrative
Agent, the Issuing Lender or any Lender and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Guaranty, and such Guarantor has established adequate
means of obtaining from the


 


4





















 


Borrower and each other
relevant Person on a continuing basis information pertaining to, and is now and
on a continuing basis will be completely familiar with, the business, condition
(financial and otherwise), operations, properties and prospects of the Borrower
and each other relevant Person.


 


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


 


Section 8.                                            Right
of Set-Off.  Upon the occurrence and during
the continuance of any Event of Default, any Lender or the Administrative
Agent, the Issuing Lender and any other Beneficiary is hereby authorized at any
time, to the fullest extent permitted by law, to set off and apply any deposits
(general or special, time or demand, provisional or final) and other
indebtedness owing by such Beneficiary to the account of each Guarantor against
any and all of the obligations of the Guarantors under this Guaranty,
irrespective of whether or not such Beneficiary shall have made any demand
under this Guaranty and although such obligations may be contingent and
unmatured.  Such Beneficiary shall
promptly notify the affected Guarantor after any such set-off and application
is made, provided that the failure to give such notice shall not affect the
validity of such set-off and application. 
The rights of the Beneficiaries under this Section 8 are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which any Beneficiary may have.


 


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


 


Section 10.                                      Notices,
Etc.  All notices and other
communications provided for hereunder shall be sent in the manner provided for
in Section 9.02 of the Credit Agreement and if to a Guarantor, at its
address specified on the signature page hereto and if to the
Administrative Agent, the Issuing Lender or any Lender, at its address
specified in or pursuant to the Credit Agreement, and if to a Swap
Counterparty, at its address specified in the applicable Hedge Contract.  All such notices and communications shall be
effective when delivered, except that


 


5





















 


notices and communications to
the Administrative Agent shall not be effective until received by the
Administrative Agent.


 


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


 


Section 12.                                      Continuing
Guaranty: Assignments under the Credit Agreement.  This Guaranty is a continuing guaranty and
shall (a) remain in full force and effect until the payment in full of all
Guaranteed Obligations and all other amounts payable under the Loan Documents,
the termination of all Letter of Credit Obligations, the termination of the
Hedge Contracts with the Beneficiaries, and the termination of all the
Commitments, (b) be binding upon each Guarantor and its successors and
assigns, (c) inure to the benefit of and be enforceable by the
Administrative Agent, each Lender, and the Issuing Lender, and their respective
successors, and, in the case of transfers and assignments made in accordance
with the Credit Agreement, transferees and assigns, and (d) inure to the
benefit of and be enforceable by a Swap Counterparty and each of its successors,
transferees and assigns to the extent such successor, transferee or assign is a
Lender or an Affiliate of a Lender. 
Without limiting the generality of the foregoing clause (c), subject to Section 9.05
of the Credit Agreement, any Lender may assign or otherwise transfer all or any
portion of its rights and obligations under the Credit Agreement (including,
without limitation, all or any portion of its Commitment, the Advances owing to
it and the Note or Notes held by it) to any other Person, and such other Person
shall thereupon become vested with all the benefits in respect thereof granted
to such Lender herein or otherwise, subject, however, in all respects to the
provisions of the Credit Agreement.  Each
Guarantor acknowledges that upon any Person becoming a Lender, the
Administrative Agent, or the Issuing Lender in accordance with the Credit
Agreement, such Person shall be entitled to the benefits hereof.


 


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


 


6





















 


Section 14.                                      INDEMNIFICATION.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE BENEFICIARIES,
AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND
DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND OR
NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO OR
ARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,
CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE
BORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH
BY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR
ANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER
PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO
THE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED
PROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE
BORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT
AGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATED TO THE BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND
EACH GUARANTOR SHALL REIMBURSE THE BENEFICIARIES AND THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE
OUT-OF-POCKET EXPENSES (INCLUDING REASONABLE OUTSIDE LEGAL FEES) INCURRED IN
CONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND
EXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE
INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S OWN NEGLIGENCE,  BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,
DAMAGES OR EXPENSES THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A
COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.


 


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


 


Section 16.                                      Additional
Guarantors.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into this
Guaranty as a Guarantor upon becoming a Subsidiary.  After the date


 


7





















 


hereof, upon execution and
delivery after the date hereof by the Administrative Agent and such Subsidiary
of an instrument in the form of Annex 1, such Subsidiary shall become a
Guarantor hereunder with the same force and effect as if originally named as a
Guarantor herein.  The execution and
delivery of any instrument adding an additional Guarantor as a party to this
Guaranty shall not require the consent of any other Guarantor hereunder.  The rights and obligations of each Guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any new Guarantor as a party to this Guaranty.


 


Section 17.                                      NOTICE OF FINAL AGREEMENTS.  PURSUANT
TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, AN AGREEMENT IN
WHICH THE AMOUNT INVOLVED IN AGREEMENT EXCEEDS $50,000 IN VALUE IS NOT
ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE
BOUND OR THAT PARTY’S AUTHORIZED REPRESENTATIVE.


 


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


 


THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


[Remainder
of this page intentionally left blank.]


 


8





















 


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


 


 


	
   

  	
  GUARANTOR:

  
	
   

  	
   

  
	
   

  	
  [SUBSIDIARY OF BORROWER]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  Address of Guarantor:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [SUBSIDIARY OF BORROWER]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  Address of Guarantor:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						



 


9





















 


Annex 1 to the


Guaranty Agreement


 


SUPPLEMENT NO.      dated as of               (the
“Supplement”),
to the Guaranty Agreement dated as of November 29, 2005 (as amended,
supplemented or otherwise modified from time to time, the “Guaranty Agreement”), among each
of the subsidiaries party thereto (each such subsidiary individually, a “Guarantor”
and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of UNION BANK
OF CALIFORNIA, N.A., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).


 


A.                                   Reference
is made to the Credit Agreement dated as of November 29, 2005 (as amended,
supplemented or otherwise modified from time to time, the “Credit Agreement”), among the
Borrower, the lenders from time to time party thereto (the “Lenders”), and the Administrative
Agent.


 


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


 


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


 


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


 


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


 


SECTION 2.                                The
New Guarantor represents and warrants to the Administrative Agent and the other
Beneficiaries that this Supplement has been duly authorized, executed and
delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in


 


10





















 


accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors’ rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).


 


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


 


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


 


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


 


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


 


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


 


11





















 


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


 


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


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.


 


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


 


	
   

  	
  [Name of New Guarantor]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  Address of Guarantor:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						



 


12





















 


EXHIBIT D


 


FORM OF
MORTGAGE


 


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


 


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


 


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


 


NOTICE TO MORTGAGOR:


 


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


 


FROM


 


CANO
PETROLEUM, INC.


(Mortgagor, Debtor and Grantor)


 


TO


 


UNION BANK OF CALIFORNIA, N.A.,
as Collateral Trustee


(Mortgagee, Secured Party and
Grantee)


 


November 29, 2005


 


For purposes of filing this Mortgage as a financing statement, the
mailing address of Mortgagor is 309 West 7th Street, Suite 1600,
Fort Worth, Texas 76102.  Mortgagor is a
corporation organized under the laws of the State of Delaware and the Mortgagor’s
organizational number is


 





















 


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


 


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


 


This instrument, prepared by Harris Junell, Bracewell &
Giuliani LLP, 711 Louisiana, South Tower Pennzoil Place, Suite 2300,
Houston, Texas 77002, (713) 221-1557, contains after-acquired property
provisions and covers future advances and proceeds to the fullest extent
allowed by applicable law.


 


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


 


RECORDED DOCUMENT SHOULD BE RETURNED TO:


 


Bracewell & Giuliani
LLP


711 Louisiana, South Tower
Pennzoil Place, Suite 2300


Houston, Texas 77002


Attn: Angela Smitherman


 





















 


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


 


WHEREAS, this instrument (the “Mortgage”)
is made as of November 29, 2005 (the “Effective Date”) and executed
and delivered by CANO PETROLEUM, INC., a Delaware corporation (“Mortgagor”),
to and in favor of Union Bank of California, N.A. (the “Mortgagee”) in
its capacity as the collateral trustee under the Collateral Trust Agreement (as
hereinafter defined) and on behalf of the Credit Parties (as hereinafter
defined).  The addresses of Mortgagor and
the Mortgagee appear in Section 7.12 of this Mortgage.


 


WHEREAS, this Mortgage is executed in
connection with, and pursuant to the terms of, (i) that certain Credit
Agreement dated as of November 29, 2005 (as the same may be renewed,
extended, amended, supplemented and/or restated from time-to-time, the “Senior
Credit Agreement”) among the Mortgagor, the lenders party thereto from time
to time (the “Senior Lenders”), and Mortgagee as administrative agent
for the Lenders (the “Senior Agent”) and as issuing lender (the “Issuing
Lender”), and (ii) that certain Subordinated Credit Agreement dated as
of November 29, 2005 (as the same may be renewed, extended, amended,
supplemented and/or restated from time-to-time (the “Subordinated Credit
Agreement”, and together with the Senior Credit Agreement, the “Master
Debt Agreements”), among Mortgagor, the lenders party thereto from time to
time (the “Subordinated Lenders”) and Energy Components SPC EEP Energy
Exploration and Production Segregated Portfolio as administrative agent for the
Subordinated Lenders (in such capacity, the “Subordinated Agent”).


 


WHEREAS, in connection with the Master Debt
Agreements, the Mortgagor or any of its Subsidiaries may from time to time
enter into one or more Hedge Contracts (as defined in the Senior Credit
Agreement) with a Senior Lender or any of its Affiliates (such counterparty
being referred to herein as “Swap Counterparty”, and together with the
Mortgagee, the Senior Agent, the Issuing Lender, the Senior Lenders,
Subordinated Agent, and the Subordinated Lenders, collectively referred to
herein as the “Credit Parties”).


 


WHEREAS, in order to, among other things,
appoint the Collateral Trustee as collateral trustee for all of the Credit
Parties under the security documents executed in connection with the Master
Debt Agreements, including this Mortgage, and to set forth the rights and
remedies of the Credit Parties with respect thereto, the Senior Agent, the
Senior Lenders, the Subordinated Agent, the Subordinated Lenders, the
Mortgagee, the Mortgagor and the other parties thereto, have entered into that
certain Collateral Trust and Intercreditor Agreement dated as of November 29,
2005 (as it may be amended, restated, or otherwise modified from time to time,
the “Collateral Trust Agreement”).


 


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


 


NOW, THEREFORE, in consideration of the
foregoing and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Mortgagor (a)


 





















 


wishes to make this Mortgage in
favor of Mortgagee to secure the Obligations (as defined herein), including the
obligations arising under Hedge Contract with a Swap Counterparty, and (b) hereby
agrees as follows:


 


ARTICLE I


Definitions


 


1.1                                 “Advances”
means, collectively, the “Advances” as defined in the Senior Credit Agreement
and the “Advances” as defined in the Subordinated Credit Agreement.


 


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


 


1.3                                 “Commitments”
means, collectively, the “Commitments” as defined in the Senior Credit
Agreement and the “ Commitments” as defined in the Subordinated Credit
Agreement.


 


1.4                                 “Contracts”
means all contracts, agreements, operating agreements, farm-out or farm-in
agreements, sharing agreements, mineral purchase agreements, contracts for the
purchase, exchange, transportation, processing or sale of Hydrocarbons,
rights-of-way, easements, surface leases, equipment leases, permits,
franchises, licenses, pooling or unitization agreements, and unit or pooling
designations and orders now or hereafter affecting any of the Oil and Gas
Properties, Operating Equipment, Fixture Operating Equipment, or Hydrocarbons
now or hereafter covered hereby, or which are useful or appropriate in drilling
for, producing, treating, handling, storing, transporting or marketing oil, gas
or other minerals produced from any of the Oil and Gas Properties, and all as
such contracts and agreements as they may be amended, restated, modified, substituted
or supplemented from time-to-time.


 


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


 


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


 


1.7                                 “Fixture
Operating Equipment” means any of the items described in the first
sentence of Section 1.17 which as a result of being incorporated into
realty or structures or improvements located therein or thereon, with the
intent that they remain there permanently, constitute fixtures under the laws
of the state in which such equipment is located.


 


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


 


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


 


2





















 


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


 


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


 


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


 


1.13                           “Master Debt
Documents” means, collectively the Senior Loan Documents and the
Subordinated Loan Documents.


 


1.14                           “Notes”
means, collectively, the “Notes” as that term is defined in the Senior Credit
Agreement and the “Notes” as that term is defined in the Subordinated Credit
Agreement.


 


1.15                           “Obligations”
means


 


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


 


(b)                                 All other
indebtedness, obligations, and liabilities of Mortgagor or any of its
Subsidiaries arising under the Master Debt Agreements, the Security Documents,
this Mortgage, any Hedge Contract with a Swap Counterparty, or any of the other
Master Debt Documents;


 


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


 


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


 


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


 


3





















 


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


 


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


 


1.17                           “Operating
Equipment” means all surface or subsurface machinery, equipment,
facilities, supplies or other Property of whatsoever kind or nature now or
hereafter located on any of the Property affected by the Oil and Gas Properties
which are useful for the production, treatment, storage or transportation of
Hydrocarbons, including all oil wells, gas wells, water wells, injection wells,
casing, tubing, rods, pumping units and engines, christmas trees, derricks,
separators, gun barrels, flow lines, pipelines, tanks, gas systems (for
gathering, treating and compression), water systems (for treating, disposal and
injection), supplies, derricks, wells, power plants, poles, cables, wires,
meters, processing plants, compressors, dehydration units, lines, transformers,
starters and controllers, machine shops, tools, storage yards and equipment
stored therein, buildings and camps, telegraph, telephone and other
communication systems, roads, loading racks, shipping facilities and all
additions, substitutes and replacements for, and accessories and attachments
to, any of the foregoing.  Operating
Equipment shall not include any items incorporated into realty or structures or
improvements located therein or thereon in such a


 


4





















 


manner that they no longer
remain personalty under the laws of the state in which such equipment is
located.


 


1.18                           “Permitted
Liens” means, collectively, those liens permitted under the Senior
Credit Agreement and the Subordinated Credit Agreement.


 


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


 


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


 


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


 


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


 


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


 


1.24                           All other capitalized terms
defined in the Collateral Trust Agreement which are used in this Mortgage and
which are not otherwise defined herein shall have the meanings


 


5





















 


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


 


ARTICLE II


Creation
of Security


 


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


 


Mortgagor further grants to Mortgagee, its
successors and assigns, the right and power to foreclose this Mortgage under
the Oklahoma Power of Sale Mortgage Foreclosure Act, 46. O.S. § 40 et seq.


 


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


 


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


 


6





















 


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


 


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


 


ARTICLE III


Proceeds
from Production


 


3.1                                 Assignment
of Production.


 


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


 


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


 


(c)                                  Mortgagor directs and
instructs each of such parties to pay to Mortgagee, for its benefit and the
ratable benefit of the other Credit Parties, all of the proceeds of such
Hydrocarbons until such time as such party has been furnished evidence that all
of the Obligations have been paid and that the Lien evidenced hereby has been
released; provided, however, that until Mortgagee shall have exercised the
rights as herein to instruct such parties to deliver such Hydrocarbons and all
proceeds therefrom directly to Mortgagee, such parties shall be entitled to
deliver such Hydrocarbons and all proceeds therefrom to Mortgagor for Mortgagor’s
use and enjoyment, and Mortgagor shall be entitled to execute division orders,
transfer orders and other instruments as may be required to direct all proceeds
to Mortgagor without the necessity of joinder by Mortgagee in such division
orders, transfer orders or other instruments. Mortgagor agrees to perform all
such acts, and to execute all such further assignments, transfers and division
orders, and other instruments as may be reasonably required or desired by
Mortgagee or any party in order to have said revenues and proceeds so paid to
Mortgagee.  None of such parties shall have
any responsibility for the application of any such


 


7





















 


proceeds received by
Mortgagee.  Subject to the provisions of
subsection (f) below, Mortgagor authorizes Mortgagee to receive and
collect all proceeds of such Hydrocarbons.


 


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


 


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


 


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


 


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


 


(h)                                 Mortgagee shall have
the right at Mortgagee’s election and in the name of Mortgagor, or otherwise,
to prosecute and defend any and all actions or legal proceedings deemed
advisable by Mortgagee in order to collect such proceeds and to protect the
interests of Mortgagee or Mortgagor, with all costs, expenses and attorneys
fees incurred in connection therewith being paid by Mortgagor.  In addition, should any purchaser taking
production from the Oil and Gas Properties fail to pay promptly to Mortgagee in
accordance with this Article, Mortgagee shall have the right to demand a change
of connection and to designate another purchaser with whom a new connection may
be made without any liability on the part of Mortgagee in making such election,
so long as ordinary care is used in the making thereof, and upon failure of
Mortgagor to consent to such change of connection, the entire amount of all the
Obligations may, at the option of Mortgagee, be immediately declared to be due
and payable and subject to foreclosure hereunder.


 


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


 


3.2                                 Application
of Proceeds.  All payments
received by Mortgagee pursuant to this Article III attributable to the
interest of Mortgagor in and to the Hydrocarbons shall be applied in the order
set forth in Section 4.4 of the Collateral Trust Agreement.


 


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


 


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


 


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


 


3.6                                 Power of
Attorney.  Without
limitation upon any of the foregoing, Mortgagor hereby designates and appoints
Mortgagee as true and lawful agent and attorney-in-fact (with full power of
substitution, either generally or for such periods or purposes as Mortgagee may
from time to time prescribe), with full power and authority, for and on behalf
of and in the name of Mortgagor, to execute, acknowledge and deliver all such
division orders, transfer orders,


 


9





















 


certificates and other
documents of every nature, with such provisions as may from time to time, in
the opinion of Mortgagee, be necessary or proper to effect the intent and
purpose of the assignment contained in this Article III; and Mortgagor
shall be bound thereby as fully and effectively as if Mortgagor had personally
executed, acknowledged and delivered any of the foregoing orders, certificates
or documents.  The powers and authorities
herein conferred on Mortgagee may be exercised by Mortgagee through any person
who, at the time of exercise, is the president, a senior vice president or a
vice president of Mortgagee.  The power of attorney conferred by this Section 3.6
is granted for valuable consideration and coupled with an interest and is
irrevocable until all of the Obligations have been fully and finally paid and
discharged in full, all Hedge Contracts with Credit Parties have been
terminated or unwound, all Commitments have been terminated or expired, all
Letters of Credit have terminated or expired, and all obligations of the
Issuing Lender and the Senior Lenders in respect of Letters of Credit have been
terminated.  All persons dealing
with Mortgagee, or any substitute, shall be fully protected in treating the
powers and authorities conferred by this Section 3.6 as continuing in full
force and effect until advised by Mortgagee that the Obligations are fully and
finally paid and the Liens granted hereunder have been released.


 


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


 


ARTICLE IV


Mortgagor’s
Warranties and Covenants


 


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


 


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


 


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


 


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


 


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


 


(d)                                 Production
Burdens, Taxes, Expenses and Revenues.  All rentals, royalties, overriding royalties,
shut-in royalties and other payments due under or with respect to the Oil and
Gas Properties have been properly and timely paid, except for payments held in
suspense in the ordinary course of business or remitted to state agencies
responsible for handling unclaimed property. 
All taxes have been properly and timely paid except to the extent such
taxes are being contested in good


 


11





















 


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


 


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


 


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


 


(g)                                 Production
Balances.  Except as set forth
below or permitted by the Master Debt Agreements, none of the purchasers under
any production sales contracts are entitled to “make-up” or otherwise receive
deliveries of Hydrocarbons at any time after the date hereof without paying at
such time the full contract price therefor. 
Except as set forth below, no person is entitled to receive any portion
of the interest of Mortgagor in any Hydrocarbons or to receive cash or other
payments to “balance” any disproportionate allocation of Hydrocarbons under any
operating agreement, gas balancing and storage agreement, gas processing or
dehydration agreement, or other similar agreements.  Mortgagor believes that certain third parties
may be entitled to receive “make-up” deliveries of Hydrocarbons or cash or
other payments to “balance” a disproportionate allocation of Hydrocarbons
produced from certain Oil and Gas Properties; provided, however, Mortgagor
represents and warrants that such deliveries or payments are not material (with
2% being deemed material) in aggregate amount when compared to the value of the
Collateral and all other Properties of Mortgagor securing the Obligations.


 


(h)                                 Drilling
Obligations.  There are no
obligations under any Oil and Gas Property or Contract which require the
drilling of additional wells or operations to earn or to


 


12





















 


continue to hold any of the Oil
and Gas Properties in force and effect, except for oil and gas leases that are
still within their primary term (each of which will require drilling operations
to perpetuate it beyond its primary term) and the standard provision in certain
oil and gas leases that requires either production or operations to perpetuate
each respective lease after the expiration of its primary term.


 


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


 


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


 


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


 


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


 


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


 


4.3                                 Further
Assurances.


 


(a)                                  Mortgagor covenants
that Mortgagor shall execute and deliver such other and further instruments,
and shall do such other and further acts as in the opinion of Mortgagee may be
necessary or desirable to carry out more effectively the purposes of this
Mortgage, including without limiting the generality of the foregoing, (i) prompt
correction of any defect in the execution or acknowledgment of this Mortgage,
any written instrument comprising part or all of the Obligations, or any other
document used in connection herewith; (ii) prompt correction of any defect
which may hereafter be discovered in the title to the Collateral; (iii) prompt
execution and delivery of all division or transfer orders or other instruments
which in Mortgagee’s opinion


 


13





















 


are required to transfer to
Mortgagee, for its benefit and the ratable benefit of the other Credit Parties,
the assigned proceeds from the sale of Hydrocarbons from the Oil and Gas
Properties; and (iv) prompt payment when due and owing of all taxes,
assessments and governmental charges imposed on this Mortgage, upon the
interest of Mortgagee or upon the income and profits from any of the above.


 


(b)                                 Mortgagor covenants
that Mortgagor shall maintain and preserve the Lien and security interest
herein created as an Acceptable Security Interest until all of the Obligations
have been fully and finally paid and discharged in full, all Hedge Contracts
with Credit Parties have been terminated or unwound, all Commitments have been
terminated or expired, all Letters of Credit have terminated or expired, and
all obligations of the Issuing Lender and the Senior Lenders in respect of
Letters of Credit have been terminated.


 


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


 


4.4                                 Operation
of Oil and Gas Properties. 
Until all of the Obligations have been fully and finally paid and
discharged in full, all Hedge Contracts with Credit Parties have been
terminated or unwound, all Commitments have been terminated or expired, all
Letters of Credit have terminated or expired, and all obligations of the
Issuing Lender and the Senior Lenders in respect of Letters of Credit have been
terminated, Mortgagor shall (at Mortgagor’s own expense):


 


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


 


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


 


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


 


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


 


(e)                                  promptly pay or cause
to be paid when due and owing  (i) all
rentals and royalties payable in respect of the Collateral; (ii) all
expenses incurred in or arising from the operation or development of the
Collateral; (iii) all taxes, assessments and governmental charges


 


14





















 


imposed upon the Collateral,
upon the income and profits from any of the Collateral, or upon Mortgagee
because of its interest therein; and (iv) all local, state and federal
taxes, payments and contributions for which Mortgagor may be liable except to
the extent disputed as permitted under the Master Debt Agreements; and
indemnify Mortgagee from all liability in connection with any of the foregoing;


 


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


 


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


 


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


 


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


 


(j)                                     carry and maintain
the insurance required by the Master Debt Agreements;


 


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


 


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


 


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


 


4.6                                 Records,
Statements and Reports. Mortgagor shall keep proper books of
record and account in which complete and correct entries shall be made of Mortgagor’s
transactions in accordance with the method of accounting required in the Master
Debt Agreements and shall


 


15





















 


furnish or cause to be
furnished to Mortgagee the reports required to be delivered pursuant to the
terms of the Master Debt Agreements.


 


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


 


ARTICLE V


Default


 


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


 


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


 


ARTICLE VI


Mortgagee’s
Rights


 


6.1                                 Rights to
Realty Collateral Upon Default.


 


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


 


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


 


16





















 


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


 


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


 


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


 


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


 


(c)                                  Intentionally
omitted.


 


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


 


17





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


18





















 


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


 


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


 


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


 


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


 


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


 


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


 


(g)           Application of Proceeds. 
The proceeds of any sale of the Realty Collateral or any part thereof,
whether under the power of sale herein granted and conferred or by virtue of
judicial proceedings, shall either be, at the option of Mortgagee, applied at
the time of receipt, or held by Mortgagee in the Collateral Account as
additional Collateral, and in either case, applied in the order set forth in Section 4.4
of the Collateral Trust Agreement.


 


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


 


19





















 


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


 


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


 


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


 


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


 


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


 


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


 


ARTICLE VII


Miscellaneous


 


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


 


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


 


7.3           Termination.  If all of the Obligations have been fully and
finally paid and discharged in full, all Hedge Contracts with Credit Parties
have been terminated or unwound, all Commitments have been terminated or
expired, all Letters of Credit have terminated or expired, and all obligations
of the Issuing Lender and the Senior Lenders in respect of Letters of Credit
have been terminated, then all of the Collateral (to the extent not sold,
assigned or otherwise


 


21





















 


transferred as permitted herein
or under applicable law) will revert to Mortgagor and the entire estate, right,
title and interest of the Mortgagee will thereupon cease; and Mortgagee in such
case shall, upon the request of Mortgagor and the payment by Mortgagor of all
attorneys’ fees and other expenses, deliver to Mortgagor proper instruments
acknowledging satisfaction of this Mortgage.


 


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


 


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


 


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


 


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


 


7.8           Waiver by Mortgagee.  Any and all covenants in this Mortgage may
from time to time by instrument in writing by Mortgagee (acting upon the
written direction of the Required Percentage of each Class of Master Debt
given in accordance with the Collateral Trust Agreement), be waived to such
extent and in such manner as the Mortgagee may desire, but no such waiver will
ever affect or impair the Mortgagee’s rights hereunder, except to the extent
specifically stated in such written instrument.


 


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


 


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


 


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


 


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


 


23





















 


	
  Mortgagor:

  	
  Cano Petroleum, Inc.

  
	
   

  	
  309 West 7th Street,
  Suite 1600

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
  Attention: [                                    ]

  
	
   

  	
  Facsimile: [                                    ]

  
	
   

  	
   

  
	
  Mortgagee:

  	
  Union Bank of California, N.A.

  
	
   

  	
  Lincoln Plaza

  
	
   

  	
  500 N. Akard Street, Suite 4200

  
	
   

  	
  Dallas, Texas 75201

  
	
   

  	
  Attention: Mr. Ali Ahmed

  
	
   

  	
  Facsimile: 214-922-4209

  



 


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


 


7.14         Successors and Assigns.


 


(a)           This
Mortgage is binding upon Mortgagor, Mortgagor’s successors and assigns, and
shall inure to the benefit of each Credit Party (other than Swap
Counterparties), and each of its successors and assigns, and to the benefit of
the Swap Counterparties, and each of their respective successors and assigns if
such Swap Counterparty or an Affiliate of such Swap Counterparty is a Senior
Lender, and the provisions hereof shall likewise be covenants running with the
land.


 


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


 


24





















 


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


 


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


 


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


 


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


 


25





















 


and, if theretofore paid, shall
be credited on the Obligations or, if the Obligations shall have been paid in
full, refunded to Mortgagor.  In
determining whether or not the interest paid or payable under any specific
contingencies exceeds the maximum non-usurious rate permitted by applicable
law, Mortgagor and Mortgagee shall to the maximum extent permitted under applicable
law amortize, prorate, allocate and spread in equal part during the period of
the full stated term of the Obligations, all amounts considered to be interest
under applicable law of any kind contracted for, charged, received or reserved
in connection with the Obligation.


 


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


 


7.18        Due
Authorization.  Mortgagor
hereby represents, warrants and covenants to Mortgagee that the obligations of
Mortgagor under this Mortgage are the valid, binding and legally enforceable
obligations of Mortgagor, that the execution, ensealing and delivery of this
Mortgage by Mortgagor has been duly and validly authorized in all respects by
Mortgagor, and that the persons who are executing and delivering this Mortgage
on behalf of Mortgagor have full power, authority and legal right to so do, and
to observe and perform all of the terms and conditions of this Mortgage on
Mortgagor’s part to be observed or performed.


 


7.19        No
Offsets, Etc.  Mortgagor
hereby represents, warrants and covenants to Mortgagee that there are no
offsets, counterclaims or defenses at law or in equity against this Mortgage or
the indebtedness secured hereby.


 


7.20        Bankruptcy
Limitation.  Notwithstanding
anything contained herein to the contrary, it is the intention of the
Mortgagor, the Mortgagee and the other Credit Parties that the amount of the
Obligation secured by the Mortgagor’s interests in any of its Property shall be
in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to the Mortgagor.  Accordingly, notwithstanding anything to the
contrary contained in this Mortgage in any other agreement or instrument
executed in connection with the payment of any of the Obligations, the amount
of the Obligations secured by the Mortgagor’s interests in any of its Property
pursuant to this Mortgage shall be limited to an aggregate amount equal to the
largest amount that would not render the Mortgagor’s obligations hereunder or
the Liens and security interest granted to the Mortgagee hereunder subject to
avoidance under Section 548 of the United States Bankruptcy Code or any
comparable provision of any other applicable law.


 


26





















 


THIS WRITTEN AGREEMENT AND THE MASTER DEBT
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.


 


[Remainder
of this page intentionally left blank.]


 


27





















 


NOTICE TO MORTGAGOR:


 


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


 


EXECUTED AND DELIVERED effective as of the date first written above.


 


	
   

  	
  MORTGAGOR:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MORTGAGEE:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
  as Collateral Trustee

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Ali Ahmed

  
	
   

  	
  Vice President

  
						



 


Signature page of Mortgage


(Oklahoma)


 





















 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF [                  ]

  	
  §

  	
   

  



 


This instrument was acknowledged before me on
this            day of November,
2005, by                                                 ,
as                                       
of Cano Petroleum, Inc., on behalf of said limited liability company.


 


 


	
   

  	
   

  	
   

  
	
   

  	
  Notary Public in and for

  
	
   

  	
  the State of Texas

  



 


Acknowledgment page of Mortgage


(Oklahoma)


 





















 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF DALLAS

  	
  §

  	
   

  



 


This instrument was acknowledged before me on
this         day of November, 2005, by Ali
Ahmed, as Vice President of Union Bank of California, N.A, a national banking
association, on behalf of said banking association.


 


 


	
   

  	
   

  	
   

  
	
   

  	
  Notary Public in and for

  
	
   

  	
  the State of Texas

  



 


Acknowledgment page of Mortgage


(Oklahoma)


 





















 


EXHIBIT A


TO


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


 


The designation “Working Interest” or “WI” or “GWI” when used in this Exhibit means
an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest.  The designation “Net Revenue Interest” or “NRI”
or “NRIO” or “NRIG” means that portion of the production attributable to the
owner of a working interest after deduction for all royalty burdens, overriding
royalty burdens or other burdens on production, except severance, production,
and other similar taxes.  The designation
“Overriding Royalty Interest” “ORRI” means an interest in production which is
free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the overriding
royalty interest so provides, costs associated with compression, dehydration,
other treating or processing, or transportation of production of oil, gas, or
other minerals relating to the marketing of such production.  The designation “Royalty Interest” or “RI”
means an interest in production which results from an ownership in the  mineral fee estate or royalty estate in the
relevant land and which is free of any obligation for the expense of
exploration, development, and production, bearing only its pro rata share of
severance,  production, and other similar
taxes and, in instances where the document creating the royalty interest so
provides, costs associated with compression, dehydration, other treating or
processing or transportation of production of oil, gas, or other minerals
relating to the marketing of such production. 
Each amount set forth as “Working Interest” or “WI” or “GWI” or “Net
Revenue Interest” or “NRI” or “NRIO” or “NRIG” is the Mortgagor’s interest
after giving full effect to, among other things, all Liens permitted by the Master
Debt Agreements and after giving full effect to the agreements or instruments
set forth in this Exhibit A and any other instruments or agreements
affecting Mortgagor’s ownership of the Hydrocarbons.


 


Any reference in this Exhibit A to wells or units is for warranty
of interest, administrative convenience, and identification and shall not limit
or restrict the right, title, interest, or Properties covered by this
Mortgage.  All right, title, and interest
of Mortgagor in the Properties described herein and in Exhibit A are and
shall be subject to this Mortgage, regardless of the presence of any units or
wells not described herein.


 


The reference to book or volume and page herein and in Exhibit A
refer to the recording location of each respective Realty Collateral described
herein and in Exhibit A in the county where the land covered by the Realty
Collateral is located.


 





















 


 


EXHIBIT E


 


FORM OF NOTE


 


	
  $                          

  	
                         ,
  2005

  



 


For value received, the undersigned Cano Petroleum, Inc., a
Delaware corporation (“Borrower”), hereby promises to pay to the order
of                                               
(“Bank”), the principal amount of                                                                                       
Dollars ($                            )
or, if less, the aggregate outstanding principal amount of the Advances (as
defined in the Credit Agreement referred to below) made by the Bank to the
Borrower, together with interest on the unpaid principal amount of the Advances
from the date of such Advances until such principal amount is paid in full, at
such interest rates, and at such times, as are specified in the Credit
Agreement.


 


This Note is one of the Notes referred to in, and is entitled to the
benefits of, and is subject to the terms of, the Credit Agreement dated as of November 29,
2005 (as the same may be amended, restated or modified from time to time, the “Credit
Agreement”), among the Borrower, the lenders party thereto (the “Lenders”),
and Union Bank of California, N.A., as administrative agent for the Lenders
(the “Administrative Agent”) and as issuing lender (“Issuing Lender”).  Capitalized terms used in this Note that are
defined in the Credit Agreement and not otherwise defined in this Note have the
meanings assigned to such terms in the Credit Agreement.  The Credit Agreement, among other things, (a) provides
for the making of the Advances by the Bank to the Borrower in an aggregate
amount not to exceed at any time outstanding the Dollar amount first above
mentioned, the indebtedness of the Borrower resulting from each such Advance
being evidenced by this Note and (b) contains provisions for acceleration
of the maturity of this Note upon the happening of certain events stated in the
Credit Agreement and for optional and mandatory prepayments of principal prior
to the maturity of this Note upon the terms and conditions specified in the
Credit Agreement.


 


Both principal and interest are payable in lawful money of the United
States of America to the Administrative Agent at the place and in the manner
specified in the Credit Agreement.  The
Bank shall record payments of principal made under this Note, but no failure of
the Bank to make such recordings shall affect the Borrower’s repayment
obligations under this Note.


 


Without being limited thereto or thereby, this Note is secured by the
Security Instruments and guaranteed under the Guaranties.


 


Except as specifically provided in the Credit Agreement, the Borrower
hereby waives presentment, demand, protest, notice of intent to accelerate,
notice of acceleration, and any other notice of any kind.  No failure to exercise, and no delay in
exercising, any rights hereunder on the part of the holder of this Note shall
operate as a waiver of such rights.


 


1





















 


This Note shall be governed by, and construed and enforced in accordance
with, the laws of the state of Texas (except that Chapter 346 of the Texas
Finance Code Chapter, which regulates certain revolving credit loan accounts
shall not apply to this Note).


 


THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.


 


	
   

  	
  CANO
  PETROLEUM, INC., a Delaware

  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


2





















 


EXHIBIT F


 


FORM OF NOTICE OF BORROWING


 


[Date]


 


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


445 South Figueroa Street, 15th Floor


Los Angeles, California 90071


 


Attention:              [LOAN
PROCESSOR]


 


Ladies and
Gentlemen:


 


The undersigned, Cano Petroleum, Inc., a Delaware corporation (the
“Borrower”), refers to the Credit Agreement dated as of November 29,
2005 (as the same may be amended, restated or modified from time-to-time, the “Credit
Agreement,” the defined terms of which are used in this Notice of Borrowing
unless otherwise defined in this Notice of Borrowing) among the Borrower, the
lenders party thereto (the “Lenders”), and Union Bank of California,
N.A., as administrative agent for the Lenders (the “Administrative Agent”)
and as issuing lender for the Lenders (the “Issuing Lender”), and hereby
gives you irrevocable notice pursuant to Section 2.03(a) of the
Credit Agreement that the undersigned hereby requests a Borrowing, and in
connection with that request sets forth below the information relating to such
Borrowing (the “Proposed Borrowing”) as required by Section 2.03(a) of
the Credit Agreement:


 


(a)                                  The Business Day of
the Proposed Borrowing is                           ,
          .


 


(b)                                 The Proposed Borrowing
will be composed of [Reference Rate Advances] [Eurodollar Rate Advances].


 


(c)                                  The aggregate amount
of the Proposed Borrowing is $                        .


 


(d)                                 [The Interest Period
for each Eurodollar Rate Advance made as part of the Proposed Borrowing is [          
month[s]].]


 


The Borrower hereby certifies that the following statements are true on
the date hereof, and will be true on the date of the Proposed Borrowing:


 


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


 


1





















 


(2)                                  no Default has
occurred and is continuing or would result from the Proposed Borrowing or from
the application of the proceeds therefrom.


 


	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


 


2





















 


EXHIBIT G


 


FORM OF NOTICE OF CONVERSION OR CONTINUATION


 


[Date]


 


Union Bank of California, as
Administrative Agent

445 South Figueroa Street, 15th Floor

Los Angeles, California 90071


 


Attention:              [LOAN PROCESSOR]


 


Ladies and
Gentlemen:


 


The undersigned, Cano Petroleum, Inc., a Delaware corporation (the
“Borrower”), refers to the Credit Agreement dated as of November 29,
2005 (as the same may be amended, restated or modified from time-to-time, the “Credit
Agreement,” the defined terms of which are used in this Notice of
Conversion or Continuation unless otherwise defined in this Notice of
Conversion or Continuation) among the Borrower, the lenders party thereto (the “Lenders”),
and Union Bank of California, N.A., as administrative agent for the Lenders
(the “Administrative Agent”) and as issuing lender for the Lenders (the “Issuing
Lender”), and hereby gives you irrevocable notice pursuant to Section 2.03(b) of
the Credit Agreement that the undersigned hereby requests a Conversion or
continuation of an outstanding Borrowing, and in connection with that request
sets forth below the information relating to such Conversion or continuation
(the “Proposed Borrowing”) as required by Section 2.03(b) of
the Credit Agreement:


 


(a)                                  The Business Day of
the Proposed Borrowing is                               ,
20    .


 


(b)                                 The Proposed Borrowing
consists of [a Conversion to [Reference Rate Advances] [Eurodollar Rate
Advances]] [a continuation of Eurodollar Rate Advances].


 


(c)                                  The aggregate amount
of the Borrowing to be [Converted] [continued] is $            
and consists of [Reference Rate Advances] [Eurodollar Rate Advances].


 


(d)                                 [The Interest Period
for each Eurodollar Rate Advance made as part of the Proposed Borrowing is [        
month[s]].]


 


The Borrower hereby certifies that the following statements are true on
the date hereof, and will be true on the date of the Proposed Borrowing:


 


(e)                                  the representations
and warranties contained in Article IV of the Credit Agreement and the
representations and warranties contained in the Security Instruments, the
Guaranties, and each of the other Loan Documents are true and correct in all
material respects on and as of the date of the Proposed Borrowing, before and
after giving effect to the Proposed Borrowing and to the application of the
proceeds from the Proposed Borrowing, as though made on and as of such date,
except to the extent that any such representation or warranty


 


 


 


1





















 


expressly
relates solely to an earlier date, in which case it shall have been true and
correct in all material respects as of such earlier date; and


 


(f)                                    no Default has
occurred and is continuing or would result from the Proposed Borrowing or from
the application of the proceeds therefrom.


 


	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


2





















 


EXHIBIT H


 


FORM OF PLEDGE AGREEMENT


 


THIS PLEDGE AGREEMENT dated as of November 29,
2005 (this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower
signatory hereto (together with the Borrower, the “Pledgors” and
individually, each a “Pledgor”) and Union Bank of California, N.A. as
collateral trustee (in such capacity the “Collateral Trustee”) under the
Collateral Trust Agreement (as hereinafter defined), for its benefit and the
benefit of the Secured Parties (as hereinafter defined).


 


RECITALS


 


A.            The
Borrower, the lenders party thereto from time to time (the “Senior Lenders”),
Union Bank of California, N.A., as issuing lender (in such capacity, the “Issuing
Lender”) and as administrative agent for such Senior Lenders (in such
capacity, the “Senior Agent”), have entered into that certain Credit
Agreement dated of even date herewith (as it may be amended, restated,
supplemented or otherwise modified from time to time, the “Senior Credit
Agreement”).


 


B.            The
Borrower, the lenders party thereto from time to time (the “Subordinated
Lenders”), and Energy Components SPC EEP Energy Exploration and Production
Segregated Portfolio, as administrative agent for such Subordinated Lenders (in
such capacity, the “Subordinated Agent”) have entered into that certain
Subordinated Credit Agreement dated of even date herewith (as it may be
amended, restated, supplemented or otherwise modified from time to time, the “Subordinated
Credit Agreement”), and together with the Senior Credit Agreement, the “Master
Debt Agreements”).


 


C.            In
connection with the Master Debt Agreements, the Borrower or any of its subsidiaries
may from time to time enter into one or more Hedge Contracts (as defined in the
Senior Credit Agreement) with a Senior Lender or any of its affiliates (each
such counterparty, a “Swap Counterparty”, and together with the
Collateral Trustee, the Senior Agent, the Issuing Lender, the Senior Lenders,
the Subordinated Agent and the Subordinated Lenders, the “Secured Parties”).


 


D.            In order to, among
other things, appoint the Collateral Trustee as collateral trustee for all of
the Secured Parties under the security documents executed in connection with
the Master Debt Agreements, including this Pledge Agreement, and to set forth
the rights and remedies of the Secured Parties with respect thereto, the Senior
Agent, the Senior Lenders, the Subordinated Agent, the Subordinated Lenders,
the Collateral Trustee, the Borrower, and the other parties thereto, have
entered into that certain Collateral Trust and Intercreditor Agreement dated of
even date herewith (as it may be amended, restated, supplemented or otherwise
modified from time to time, the “Collateral Trust Agreement”).


 


E.             It
is a condition precedent to the extension of credit to the Borrower under the
Master Debt Agreements that the Pledgors and the Collateral Trustee, on behalf
of the Secured Parties, execute and deliver this Pledge Agreement.


 


1





















 


F.             Each
Pledgor (other than the Borrower) is a subsidiary of the Borrower, and
therefore shall derive direct and indirect benefits from the transactions contemplated
by the Master Debt Agreements.


 


AGREEMENT


 


NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Pledgor hereby
agrees with the Collateral Trustee for the benefit of the Secured Parties as
follows:


 


Section 1.  Definitions.  All capitalized terms not otherwise defined
in this Pledge Agreement that are defined in the Collateral Trust Agreement
shall have the meanings assigned to such terms by the Collateral Trust
Agreement.  Any terms used in this Pledge
Agreement that are defined in the Uniform Commercial Code in effect in the
State of Texas from time to time (the “UCC”) and not otherwise defined herein
or in the Collateral Trust Agreement, shall have the meanings assigned to those
terms by the UCC.  Any terms used in this
Pledge Agreement that are not otherwise defined herein, in the UCC or in the
Collateral Trust Agreement shall have the meanings assigned to those terms by
in the Senior Credit Agreement.  All
meanings to defined terms, unless otherwise indicated, are to be equally
applicable to both the singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Pledge
Agreement, unless otherwise specified. 
All references to instruments, documents, contracts, and agreements are
references to such instruments, documents, contracts, and agreements as the
same may be amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.  The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Pledge
Agreement shall refer to this Pledge Agreement as a whole and not to any particular
provision of this Pledge Agreement.  As
used herein, the term “including” means “including, without limitation,”.
Paragraph headings have been inserted in this Pledge Agreement as a matter of
convenience for reference only and it is agreed that such paragraph headings
are not a part of this Pledge Agreement and shall not be used in the
interpretation of any provision of this Pledge Agreement.


 


Section 2.  Pledge.


 


2.01.        Grant
of Pledge.


 


(a)           Each
Pledgor hereby pledges to the Collateral Trustee, and grants to the Collateral
Trustee, for the benefit of the Secured Parties, a continuing security interest
in, the Pledged Collateral, as defined in Section 2.02 below.  This Pledge Agreement shall secure (i) all
Obligations (as defined in the Senior Credit Agreement) now or hereafter
existing. (ii) all Obligations (as defined in the Subordinated Credit
Agreement) now or hereafter existing, (iii) all other amounts now or
hereafter owed by the Borrower, any Pledgor, or any of their respective
Subsidiaries under this Pledge Agreement or the other Master Loan Documents to
the Collateral Trustee or any other Secured Party, and (iv) any increases,
extensions, modifications, substitutions, amendments, restatements and renewals
of any of the foregoing obligations, whether for principal, interest, fees,


 


2





















 


expenses,
indemnification or otherwise.  All such obligations shall be referred to in
this Pledge Agreement as the “Secured Obligations”.


 


(b)           Notwithstanding
anything contained herein to the contrary, it is the intention of each Pledgor,
the Collateral Trustee and the Secured Parties that the amount of the Secured
Obligation secured by each Pledgor’s interests in any of its property or assets
(whether real or personal, or mixed, tangible or intangible) (“Property”)
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority (as defined in the Senior Credit Agreement)
applicable to such Pledgor. Accordingly, notwithstanding anything to the
contrary contained in this Pledge Agreement or in any other agreement or
instrument executed in connection with the payment of any of the Secured
Obligations, the amount of the Secured Obligations secured by each Pledgor’s
interests in any of its Property pursuant to this Pledge Agreement shall be
limited to an aggregate amount equal to the largest amount that would not
render such Pledgor’s obligations hereunder or the liens and security interest
granted to the Collateral Trustee hereunder subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provision of any other
applicable law.


 


2.02.        Pledged
Collateral.  “Pledged Collateral”
shall mean all of each Pledgor’s right, title, and interest in the following,
whether now owned or hereafter acquired:


 


(a)           (i) all
of the membership interests listed in the attached Schedule 2.02(a) issued
to such Pledgor and all such additional membership interests of any issuer of
such interests hereafter acquired by such Pledgor (the “Membership Interests”),
(ii) the certificates representing the Membership Interests, if any, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Membership Interests, 
including, without limitation, (A) any proceeds from a sale by or
on behalf of such Pledgor of any of the Membership Interests, and (B) any
distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Membership
Interests, whether regular, special or made in connection with the partial or
total liquidation of the issuer and whether attributable to profits, the return
of any contribution or investment or otherwise attributable to the Membership
Interests or the ownership thereof 
(collectively, the “Membership Interests Distributions”);


 


(b)           (i) all
of the general and limited partnership interests listed in the attached Schedule 2.02(b) issued
to such Pledgor and all such additional limited or general partnership
interests of any issuer of such interests hereafter acquired by such Pledgor
(the “Partnership Interests”), and (ii) all rights to money or
Property which such Pledgor now has or hereafter acquires in respect of the
Partnership Interests,  including,
without limitation, (A) any proceeds from a sale by or on behalf of such
Pledgor of any of the Partnership Interests, and (B) any distributions,
dividends, cash, instruments and other property from time-to-time received or
otherwise distributed in respect of the Partnership Interests, whether regular,
special or made in connection with the partial or total liquidation of the
issuer and whether attributable to profits, the return of any contribution


 


3





















 


or investment or
otherwise attributable to the Partnership Interests or the ownership
thereof  (collectively, the “Partnership
Interests Distributions”);


 


(c)           (i) all
of the shares of stock listed in the attached Schedule 2.02(c) issued
to such Pledgor and all such additional shares of stock of any issuer of such
shares of stock hereafter issued to such Pledgor (the “Pledged Shares”),
(ii) the certificates representing the Pledged Shares, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Pledged Shares, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Pledged
Shares, and (B) any distributions, dividends, cash, instruments and other
property from time-to-time received or otherwise distributed in respect of the
Pledged Shares, whether regular, special or made in connection with the partial
or total liquidation of the issuer and whether attributable to profits, the
return of any contribution or investment or otherwise attributable to the
Pledged Shares or the ownership thereof (collectively, the “Pledged Shares
Distributions”; together with the Membership Interests Distributions and
the Partnership Interest Distributions, the “Distributions”); and


 


(d)           all
proceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) of
this Section 2.02.


 


2.03.        Delivery
of Pledged Collateral.  All
certificates or instruments, if any, representing the Pledged Collateral shall
be delivered to the Collateral Trustee and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance reasonably
satisfactory to the Collateral Trustee. 
After the occurrence and during the continuance of an Event of Default,
the Collateral Trustee shall have the right, upon prior written notice to the
applicable Pledgor, to transfer to or to register in the name of the Collateral
Trustee or any of its nominees any of the Pledged Collateral, subject to the
rights specified in Section 2.04. 
In addition, after the occurrence and during the continuance of an Event
of Default, the Collateral Trustee shall have the right at any time to exchange
the certificates or instruments representing the Pledged Collateral for
certificates or instruments of smaller or larger denominations.


 


2.04.        Rights
Retained by Pledgor.  Notwithstanding
the pledge in Section 2.01,


 


(a)           so
long as no Event of Default shall have occurred and remain uncured or unwaived
and except as otherwise provided in the Master Debt Agreements, (i) each
Pledgor shall be entitled to receive and retain any dividends and other
Distributions paid on or in respect of the Pledged Collateral and the proceeds
of any sale of the Pledged Collateral; and (ii) each Pledgor shall be
entitled to exercise any voting and other consensual rights pertaining to its
Pledged Collateral for any purpose not inconsistent with the terms of this
Pledge Agreement or the Master Debt Agreements; provided, however,
that no Pledgor shall exercise nor shall it refrain from exercising any such
right if such action or inaction, as applicable, would have a materially
adverse effect on the value of the Pledged Collateral; and


 


(b)           if
an Event of Default shall have occurred and remain uncured or unwaived,


 


4





















 


(i)            until such time thereafter as the
Collateral Trustee gives written notice of its election to exercise such voting
and other consensual rights pursuant to Section 5.02 hereof, each Pledgor
shall be entitled to exercise any voting and other consensual rights pertaining
to its Pledged Collateral for any purpose not inconsistent with the terms of
this Pledge Agreement or the Master Debt Agreements; provided, however,
that no Pledgor shall exercise nor shall it refrain from exercising any such
right if such action or inaction, as applicable, would have a materially
adverse effect on the value of the Pledged Collateral; and


 


(ii)           at and after such time as the
Collateral Trustee gives written notice of its election to exercise such voting
and other consensual rights pursuant to Section 5.02 hereof, each Pledgor
shall execute and deliver (or cause to be executed and delivered) to the
Collateral Trustee all proxies and other instruments as the Collateral Trustee
may reasonably request to enable the Collateral Trustee to (A) exercise
the voting and other rights which such Pledgor is entitled to exercise pursuant
to paragraph (a) or paragraph (b)(i) of this Section 2.04,
and (B) receive any Distributions and proceeds of sale of the Pledged
Collateral which such Pledgor is authorized to receive and retain pursuant to
paragraph (a)(i) of this Section 2.04.


 


Section 3.  Pledgor’s Representations and
Warranties.  Each Pledgor represents
and warrants to the Collateral Trustee and the Secured Parties as follows:


 


(a)           The
Pledged Collateral applicable to such Pledgor listed on the attached
Schedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorized
and validly issued to such Pledgor and are fully paid and nonassessable.


 


(b)           Such
Pledgor is the legal and beneficial owner of the Pledged Collateral free and
clear of any Lien or option, except for (i) the security interest created
by this Pledge Agreement and (ii) other Liens permitted under the Master
Debt Agreements ( the “Permitted Liens”).


 


(c)           No
authorization, authentication, approval, or other action by, and no notice to
or filing with, any Governmental Authority or regulatory body is required
either (a) for the pledge by such Pledgor of the Pledged Collateral
pursuant to this Pledge Agreement or for the execution, delivery, or
performance of this Pledge Agreement by such Pledgor or (b) for the
exercise by the Collateral Trustee or any Secured Party of the voting or other
rights provided for in this Pledge Agreement or the remedies in respect of the
Pledged Collateral pursuant to this Pledge Agreement (except as may be required
in connection with such disposition by laws affecting the offering and sale of
securities generally).


 


(d)           Such
Pledgor has the full right, power and authority to deliver, pledge, assign and
transfer the Pledged Collateral to the Collateral Trustee.


 


(e)           The
Membership Interests listed on the attached Schedule 2.02(a) constitute
the percentage of the issued and outstanding membership interests of the


 


5





















 


respective issuer
thereof set forth on Schedule 2.02(a) and all of the Equity Interest
in such issuer in which the Pledgor has any ownership interest.


 


(f)            The
Partnership Interests listed on the attached Schedule 2.02(b) constitute
the percentage of the issued and outstanding general and limited partnership
interests of the respective issuer thereof set forth on Schedule 2.02(b) and
all of the Equity Interest in such issuer in which the Pledgor has any
ownership interest.


 


(g)           The
Pledged Shares list on the attached Schedule 2.02(c) constitute the
percentage of the issued and outstanding shares of capital stock of the
respective issuer thereof set forth on Schedule 2.02(c) and all of
the Equity Interest in such issuer in which the Pledgor has any ownership
interest.


 


(h)           Schedule 3
sets forth its sole jurisdiction of formation, type of organization, federal
tax identification number, the organizational number, and all names used by it
during the last five years prior to the date of this Pledge Agreement.


 


Section 4.  Pledgor’s Covenants.  During the term of this Pledge Agreement and
until all of the Secured Obligations (including all Letter of Credit
Obligations) have been fully and finally paid and discharged in full, the
termination of the Hedge Contracts with the Secured Parties, the Commitments
(as defined in the applicable Master Debt Agreement) under each Master Debt
Agreement have been terminated or expired, all Letters of Credit have
terminated or expired, and all obligations of the Issuing Lender and the Senior
Lenders in respect of Letters of Credit have been terminated, each Pledgor
covenants and agrees with the Collateral Trustee that:


 


4.01.        Protect
Collateral; Further Assurances.  Each
Pledgor will warrant and defend the rights and title herein granted unto the
Collateral Trustee in and to the Pledged Collateral (and all right, title, and
interest represented by the Pledged Collateral) against the claims and demands
of all Persons whomsoever.  Each Pledgor
agrees that, at the expense of such Pledgor, such Pledgor will promptly execute
and deliver all further instruments and documents, and take all further action,
that may be reasonably necessary and that the Collateral Trustee or any Secured
Party may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable the Collateral
Trustee or any Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Pledged Collateral.  Each Pledgor hereby authorizes the Collateral
Trustee to file any financing statements, amendments or continuations without
the signature of such Pledgor to the extent permitted by applicable law in
order to perfect or maintain the perfection of any security interest granted
under this Pledge Agreement.


 


4.02.        Transfer,
Other Liens, and Additional Shares. 
Each Pledgor agrees that it will not (a) except as otherwise
permitted by the Master Debt Agreements, sell or otherwise dispose of, or grant
any option with respect to, any of the Pledged Collateral or (b) create or
permit to exist any Lien upon or with respect to any of the Pledged Collateral,
except for Permitted Liens.  Each Pledgor
agrees that it will (i) cause each issuer of the Pledged Collateral that
is a Subsidiary of such Pledgor not to issue any other Equity Interests in
addition to or in substitution for the Pledged Collateral issued by such
issuer, except to such Pledgor or any other Pledgor and (ii) pledge
hereunder, immediately upon its acquisition (directly or indirectly) thereof,
any


 


6





















 


additional Equity Interests of an issuer acquired by
such Pledgor.  No Pledgor shall approve
any amendment or modification of any of the Pledged Collateral without the
Collateral Trustee’s prior written consent.


 


4.03.        Jurisdiction
of Formation; Name Change.  Each
Pledgor shall give the Collateral Trustee at least 30 days’ prior written
notice before it (i) in the case of a Pledgor that is not a “registered
organization” (as defined in Section 9-102 of the UCC) changes the
location of its principal place of business and chief executive office, or (ii) uses
a trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the respective Master Debt Agreements, no Pledgor shall amend, supplement,
modify or restate its articles or certificate of incorporation, bylaws, limited
liability company agreements, or other equivalent organizational documents, nor
amend its name or change its jurisdiction of incorporation, organization or
formation.


 


Section 5.  Remedies upon Default.  If any Event of Default shall have occurred
and be continuing:


 


5.01.        UCC
Remedies.  To the extent permitted by
law, the Collateral Trustee may exercise in respect of the Pledged Collateral,
in addition to other rights and remedies provided for in this Pledge Agreement
or otherwise available to it, all the rights and remedies of a Collateral
Trustee under the UCC (whether or not the UCC applies to the affected Pledged
Collateral).


 


5.02.        Dividends
and Other Rights.


 


(a)           All
rights of the Pledgors to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 2.04(a) may
be exercised by the Collateral Trustee if the Collateral Trustee so elects and
gives written notice of such election to the affected Pledgor and all rights of
the Pledgors to receive any Distributions on or in respect of the Pledged
Collateral and the proceeds of sale of the Pledged Collateral which it would
otherwise be authorized to receive and retain pursuant to Section 2.04(b) shall
cease.


 


(b)           All
Distributions on or in respect of the Pledged Collateral and the proceeds of
sale of the Pledged Collateral which are received by any Pledgor shall be
received in trust for the benefit of the Collateral Trustee, shall be
segregated from other funds of such Pledgor, and shall be promptly paid over to
the Collateral Trustee as Pledged Collateral in the same form as so received
(with any necessary indorsement).


 


5.03.        Sale
of Pledged Collateral. The Collateral Trustee may sell all or part of the
Pledged Collateral at public or private sale, at any of the Collateral Trustee’s
offices or elsewhere, for cash, on credit, or for future delivery, and upon
such other terms as the Collateral Trustee may deem commercially reasonable in
accordance with applicable laws.  Each
Pledgor agrees that to the extent permitted by law such sales may be made
without notice.  If notice is required by
law, each Pledgor hereby deems 10 days’ advance notice of the time and place of
any public sale or the time after which any private sale is to be made
reasonable notification, recognizing that if the Pledged Collateral threatens
to decline speedily in value or is of a type


 


7





















 


customarily sold on a recognized market shorter notice
may be reasonable.  The Collateral
Trustee shall not be obligated to make any sale of the Pledged Collateral
regardless of notice of sale having been given. 
The Collateral Trustee may adjourn any public or private sale from
time-to-time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.  Each Pledgor shall fully
cooperate with Collateral Trustee in selling or realizing upon all or any part
of the Pledged Collateral.  In addition,
each Pledgor shall fully comply with the securities laws of the United States,
the State of Texas, and other states and take such actions as may be necessary
to permit Collateral Trustee to sell or otherwise dispose of any securities
representing the Pledged Collateral in compliance with such laws.


 


5.04.        Exempt
Sale.  If, in the opinion of the
Collateral Trustee, there is any question that a public or semipublic sale or
distribution of any Pledged Collateral will violate any state or federal
securities law, the Collateral Trustee in its reasonable discretion (a) may
offer and sell securities privately to purchasers who will agree to take them
for investment purposes and not with a view to distribution and who will agree
to imposition of restrictive legends on the certificates representing the
security, or (b) may sell such securities in an intrastate offering under Section 3(a)(11)
of the Securities Act of 1933, as amended, and no sale so made in good faith by
the Collateral Trustee shall be deemed to be not “commercially reasonable”
solely because so made.  Each Pledgor
shall cooperate fully with the Collateral Trustee in selling or realizing upon
all or any part of the Pledged Collateral.


 


5.05.        Application
of Collateral. The proceeds of any sale, or other realization (other than
that received from a sale or other realization permitted by the Master Debt
Agreements) upon all or any part of the Pledged Collateral pledged by the
Pledgors shall be applied by the Collateral Trustee as set forth in Section 4.4
of the Collateral Trust Agreement.


 


5.06.        Cumulative
Remedies.  Each right, power and
remedy herein specifically granted to the Collateral Trustee or otherwise
available to it shall be cumulative, and shall be in addition to every other
right, power and remedy herein specifically given or now or hereafter existing
at law, in equity, or otherwise, and each such right, power and remedy, whether
specifically granted herein or otherwise existing, may be exercised at any time
and from time-to-time as often and in such order as may be deemed expedient by
the Collateral Trustee in its sole discretion. 
No failure on the part of the Collateral Trustee to exercise, and no
delay in exercising, and no course of dealing with respect to, any such right,
power or remedy, shall operate as a waiver thereof, nor shall any single or
partial exercise of any such rights, power or remedy preclude any other or
further exercise thereof or the exercise of any other right.


 


Section 6.  Collateral Trustee as Attorney-in-Fact
for Pledgor.


 


6.01.        Collateral Trustee Appointed
Attorney-in-Fact.  Each Pledgor
hereby irrevocably appoints the Collateral Trustee as such Pledgor’s
attorney-in-fact, with full authority after the occurrence and during the
continuance of an Event of Default to act for such Pledgor and in the name of
such Pledgor, and, in the Collateral Trustee’s discretion, to take any action
and to execute any instrument which the Collateral Trustee may deem reasonably
necessary or advisable to accomplish the purposes of this Pledge Agreement,
including, without limitation, to receive, indorse, and collect all instruments
made payable to such Pledgor representing any


 


8





















 


dividend, or the proceeds of the sale of the Pledged
Collateral, or other distribution in respect of the Pledged Collateral and to
give full discharge for the same.  Each Pledgor hereby acknowledges, consents and agrees
that the power of attorney granted pursuant to this Section is irrevocable
and coupled with an interest.


 


6.02.        Collateral
Trustee May Perform. The Collateral Trustee may from time-to-time, at
its option but at the Pledgors’ expense, perform any act which any Pledgor
agrees hereunder to perform and which such Pledgor shall fail to perform after
being requested in writing so to perform (it being understood that no such
request need be given after the occurrence and during the continuance of any
Event of Default and after notice thereof by the Collateral Trustee to the
affected Pledgor) and the Collateral Trustee may from time-to-time take any
other action which the Collateral Trustee reasonably deems necessary for the
maintenance, preservation or protection of any of the Pledged Collateral or of
its security interest therein.  The Collateral
Trustee shall provide notice to the affected Pledgor of any action taken
hereunder; provided however, the failure to provide such notice shall not be
construed as a waiver of any rights of the Collateral Trustee provided under
this Pledge Agreement or under applicable law.


 


6.03.        Collateral
Trustee Has No Duty.  The powers
conferred on the Collateral Trustee hereunder are solely to protect its
interest in the Pledged Collateral and shall not impose any duty on it to
exercise any such powers.  Except for
reasonable care of any Pledged Collateral in its possession and the accounting
for moneys actually received by it hereunder, the Collateral Trustee shall have
no duty as to any Pledged Collateral or responsibility for taking any necessary
steps to preserve rights against prior parties or any other rights pertaining
to any Pledged Collateral.


 


6.04.        Reasonable
Care.  The Collateral Trustee shall
be deemed to have exercised reasonable care in the custody and preservation of
the Pledged Collateral in its possession if the Pledged Collateral is accorded
treatment substantially equal to that which the Collateral Trustee accords its
own property, it being understood that the Collateral Trustee shall have no
responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders, or other matters relative
to any Pledged Collateral, whether or not the Collateral Trustee has or is
deemed to have knowledge of such matters, or (b) taking any necessary
steps to preserve rights against any parties with respect to any Pledged
Collateral.


 


Section 7.  Miscellaneous.


 


7.01.        Expenses.  The Pledgors will upon demand pay to the
Collateral Trustee for its benefit and the benefit of the other Secured Parties
the amount of any reasonable out-of-pocket expenses, including the reasonable
fees and disbursements of its counsel and of any experts, which the Collateral
Trustee and the other Secured Parties may incur in connection with (a) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Pledged Collateral, (b) the exercise or
enforcement of any of the rights of the Collateral Trustee or any Lender or any
other Secured Parties hereunder, and (c) the failure by any Pledgor to perform
or observe any of the provisions hereof.


 


7.02.        Amendments,
Etc.  No amendment or waiver of any
provision of this Pledge Agreement nor consent to any departure by any Pledgor
herefrom shall be effective unless made


 


9





















 


in writing and executed by the affected Pledgor and
the Collateral Trustee (acting upon the written direction of the Required
Percentage of each Class of Master Debt and given in accordance with the
Collateral Trust Agreement), and such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.


 


7.03.        Addresses
for Notices.  All notices and other
communications provided for hereunder shall be in the manner and to the
addresses set forth in the Collateral Trust Agreement.


 


7.04.        Continuing
Security Interest; Transfer of Interest.


 


(a)           This
Pledge Agreement shall create a continuing security interest in the Pledged
Collateral and, unless expressly released by the Collateral Trustee, shall (i) remain
in full force and effect until the indefeasible payment in full in cash of, and
termination of, the Secured Obligations and the termination of the Commitments
under each Master Debt Agreement, (ii) be binding upon the Pledgors, the
Collateral Trustee, the Secured Parties and their successors, and assigns, and (iii) inure,
together with the rights and remedies of the Collateral Trustee hereunder, to
the benefit of and be binding upon, the Collateral Trustee, and the Secured
Parties and their respective successors, transferees, and assigns, and to the
benefit of and be binding upon, the Swap Counterparties, and each of their
respective successors and assigns only to the extent such successors,
transferees, and assigns of a Swap Counterparty is a Senior Lender or an
Affiliate of a Senior Lender.  Without
limiting the generality of the foregoing clause, when any Secured Party assigns
or otherwise transfers any interest held by it under either Master Debt
Agreement or other Master Debt Document (other than an Interest Hedge Agreement
or a Hydrocarbon Hedge Agreement) to any other Person pursuant to the terms of
the applicable Master Debt Agreement or such other Master Debt Document, that
other Person shall thereupon become vested with all the benefits held by such
Secured Party under this Pledge Agreement. 
Furthermore, when any Swap Counterparty assigns or otherwise transfers
any interest held by it under an Interest Hedge Agreement or a Hydrocarbon
Hedge Agreement to any other Person pursuant to the terms of such agreement,
that other Person shall thereupon become vested with all the benefits held by
such Secured Party under this Pledge Agreement only if such Person is also then
a Senior Lender or an Affiliate of a Senior Lender.


 


(b)           Upon
the indefeasible payment in full and termination of the Secured Obligations and
the termination of all Commitments under each Master Debt Agreement, the
security interest granted hereby shall terminate and all rights to the Pledged
Collateral shall revert to the applicable Pledgor to the extent such Pledged
Collateral shall not have been sold or otherwise applied pursuant to the terms
hereof.  Upon any such termination, the
Collateral Trustee will, at the Pledgors’ expense, deliver all Pledged
Collateral to the applicable Pledgor, execute and deliver to the applicable
Pledgor such documents as such Pledgor shall reasonably request and take any
other actions reasonably requested to evidence or effect such termination.


 


10





















 


7.05.        Waivers.  Each Pledgor hereby waives:


 


(a)           promptness,
diligence, notice of acceptance, and any other notice with respect to any of
the Secured Obligations and this Pledge Agreement;


 


(b)           any
requirement that the Collateral Trustee or any Secured Party protect, secure,
perfect, or insure any Lien or any Property subject thereto or exhaust any
right or take any action against any Pledgor, any Guarantor, or any other
Person or any collateral; and


 


(c)           any
duty on the part of the Collateral Trustee to disclose to any Pledgor any
matter, fact, or thing relating to the business, operation, or condition of any
Pledgor, any Guarantor, or any other Person and their respective assets now
known or hereafter known by such Person.


 


7.06.        Severability.  Wherever possible each provision of this
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Pledge Agreement shall
be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Pledge
Agreement.


 


7.07.        Choice
of Law.  This Pledge Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Pledged Collateral are governed by the laws of a jurisdiction other
than the State of Texas.


 


7.08.        Counterparts.  The parties may execute this Pledge Agreement
in counterparts, each of which constitutes an original, and all of which,
collectively, constitute only one agreement. 
Delivery of an executed counterpart signature page by facsimile is
as effective as executing and delivering this Pledge Agreement in the presence
of the other parties to this Pledge Agreement. 
In proving this Pledge Agreement, a party must produce or account only
for the executed counterpart of the party to be charged.


 


7.09.        Headings.  Paragraph headings have been inserted in this
Pledge Agreement as a matter of convenience for reference only and it is agreed
that such paragraph headings are not a part of this Pledge Agreement and shall
not be used in the interpretation of any provision of this Pledge Agreement.


 


7.10.        Reinstatement.  If, at any time after payment in full of all
Secured Obligations and termination of the Collateral Trustee’s security
interest, any payments on the Secured Obligations previously made must be
disgorged by any Secured Party for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any Pledgor or any
other Person, this Pledge Agreement and the Collateral Trustee’s security
interests herein shall be reinstated as to all disgorged payments as though
such payments had not been made, and each Pledgor shall sign and deliver to the
Collateral Trustee all documents, and shall do such other acts and things, as
may be necessary to reinstate and perfect the Collateral Trustee’s security
interest.  EACH PLEDGOR SHALL DEFEND AND INDEMNIFY THE COLLATERAL


 


11





















 


TRUSTEE
AND EACH OTHER SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY,
COST OR EXPENSE UNDER THIS SECTION 7.10 (INCLUDING REASONABLE ATTORNEYS’
FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH
CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED SECURED
PARTY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS,
LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT
BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED
SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.


 


7.11.        Conflicts.  In the event of any explicit or implicit
conflict between any provisions of this Pledge Agreement and any provision of
the Senior Credit Agreement, the terms of the Senior Credit Agreement shall be
controlling.


 


7.12.        Additional
Pledgors.  Pursuant to Section 6.15 of each Master
Debt Agreement, certain Subsidiaries of the Borrower that were not in existence
on the date of the such Master Debt Agreements are required to enter into this
Pledge Agreement as Pledgors.  Upon execution
and delivery after the date hereof by the Collateral Trustee and such
Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall
become a Pledgor hereunder with the same force and effect as if originally
named as a Pledgor herein.  The execution
and delivery of any instrument adding an additional Pledgor as a party to this
Pledge Agreement shall not require the consent of any other Pledgor
hereunder.  The rights and obligations of
each Pledgor hereunder shall remain in full force and effect notwithstanding
the addition of any new Pledgor as a party to this Pledge Agreement.


 


7.13.        Entire Agreement.  THIS PLEDGE
AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE OTHER MASTER DEBT DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.


 


[SIGNATURE PAGES FOLLOW]


 


12





















 


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


 


	
   

  	
  PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  COLLATERAL TRUSTEE:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


13





















 


SCHEDULE 2.02(a)


 


Attached to and forming a part of that certain Pledge Agreement dated
[DATE] by [PLEDGOR] as Pledgor, to the Collateral Trustee.


 


	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 2.02(b)


 


Attached to and forming a part of that certain Pledge Agreement dated
[DATE] by [PLEDGOR], as Pledgor, to the Collateral Trustee.


 


	
  Issue 

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 2.02(c)


 


Attached to and forming a part of that certain Pledge Agreement [DATE]
by [PLEDGOR] as Pledgor, to the Collateral Trustee.


 


	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of

  Shares

  	
   

  	
  % of Shares

  Owned

  	
   

  	
  Certificate No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 3


 


	
  Pledgor:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  



 


14





















 


Annex 1 to the


Pledge Agreement


 


SUPPLEMENT NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Pledge Agreement dated as of November      ,
2005 (as amended, supplemented or otherwise modified from time to time, the “Pledge
Agreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and Union Bank of California, N.A.
as collateral trustee (in such capacity, the “Collateral Trustee”) under the
Collateral Trust Agreement (as hereinafter defined) for the benefit of the
Secured Parties (as hereinafter defined).


 


RECITALS


 


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


 


(i)            that
certain Credit Agreement dated as of November       ,
2005 (as it may be amended, restated or otherwise modified from time to time,
the “Senior Credit Agreement”) by and among the Borrower, the lenders
party thereto from time to time (the “Senior Lenders”), and Union Bank
of California, N.A., as administrative agent for such Senior Lenders (the “Senior
Agent”);


 


(ii)           that
certain Subordinated Credit Agreement dated as of November       ,
2005 (as it may be amended, restated or otherwise modified from time to time,
the “Subordinated Credit Agreement”, and together with the Senior Credit
Agreement, the “Master Debt Agreements”), among the Borrower, the
lenders party thereto from time to time (the “Subordinated Lenders”),
and Energy Components SPC EEP Energy Exploration and Production Segregated
Portfolio as administrative agent for such Subordinated Lenders (in such
capacity, the “Subordinated Agent”); and


 


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


 


B.            In connection with
the Master Debt Agreements, the Senior Agent, the Senior Lenders, the
Subordinated Loan Agent, the Subordinated Lenders, the Collateral Trustee, the
Borrower, and other parties thereto, have entered into that certain Collateral
Trust and Intercreditor Agreement dated as of even date herewith (as it may be
amended, restated, or otherwise modified from time to time, the “Collateral
Trust Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Master Debt Agreements, including the Pledge
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.


 


15





















 


C.            The Pledgors have
entered into the Pledge Agreement in order to induce the Senior Lenders and the
Subordinated Lenders to make loans and the Issuing Lender to issue letters of
credit under the Master Debt Agreements. 
Pursuant to Section 6.15 of the respective Master Debt Agreements,
each Subsidiary of the Borrower that was not in existence on the date of the
respective Master Debt Agreement is required to enter into the Pledge Agreement
as a Pledgor upon becoming a Subsidiary. 
Section 7.12 of the Pledge Agreement provides that additional
Subsidiaries of the Borrower may become Pledgors under the Pledge Agreement by
execution and delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary of the Borrower
(the “New Pledgor”) is executing this Supplement in accordance with the
requirements of the Senior Credit Agreement to become a Pledgor under the
Pledge Agreement in order to induce the Senior Lenders to make additional loans
and the Issuing Lender to issue additional letters of credit and as
consideration for loans previously made and letters of credit previously
issued.


 


D.            Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned
to such terms in the Pledge Agreement and the Collateral Trust Agreement.


 


Accordingly, the Collateral Trustee and the New Pledgor agree as
follows:


 


SECTION 1.           In
accordance with Section 7.12 of the Pledge Agreement, the New Pledgor by
its signature below becomes a Pledgor under the Pledge Agreement with the same
force and effect as if originally named therein as a Pledgor and the New
Pledgor hereby agrees (a) to all the terms and provisions of the Pledge
Agreement applicable to it as a Pledgor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Pledgor
thereunder are true and correct on and as of the date hereof in all material
respects.  In furtherance of the
foregoing, the New Pledgor, as security for the payment and performance in full
of the Secured Obligations, does hereby create and grant to the Collateral
Trustee, its successors and assigns, for the benefit of the Secured Parties,
their successors and assigns, a continuing security interest in and lien on all
of the New Pledgor’s right, title and interest in and to the Pledged Collateral
of the New Pledgor.  Each reference to a “Pledgor”
in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporated
herein by reference.


 


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


 


SECTION 3.           This
Supplement may be executed in counterparts, each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract.  This Supplement shall become
effective when the Collateral Trustee shall have received counterparts of this
Supplement that, when taken together, bear the signatures of the New Pledgor
and the Collateral Trustee.  Delivery of
an executed signature page to this Supplement


 


16





















 


by facsimile transmission shall be as effective as
delivery of a manually signed counterpart of this Supplement.


 


SECTION 4.           The New
Pledgor hereby represents and warrants that (a) set forth on Schedules
2.02(a), 2.02(b), and 2.02(c) attached hereto are true and correct
schedules of all its Membership Interests, Partnership Interests and Pledged
Shares, as each term is defined in the Pledge Agreement, and (b) set forth
on Schedule 3 attached hereto are its sole jurisdiction of formation, type
of organization, its federal tax identification number and the organizational
number, and all names used by it during the last five years prior to the date
of this Supplement.


 


SECTION 5.           Except
as expressly supplemented hereby, the Pledge Agreement shall remain in full
force and effect.


 


SECTION 6.           THIS
SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF TEXAS.


 


SECTION 7.           In case
any one or more of the provisions contained in this Supplement should be held
invalid, illegal or unenforceable in any respect, neither party hereto shall be
required to comply with such provision for so long as such provision is held to
be invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Pledge
Agreement shall not in any way be affected or impaired.  The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.


 


SECTION 8.           All
communications and notices hereunder shall be in writing and given as provided
in the Pledge Agreement.  All
communications and notices hereunder to the New Pledgor shall be given to it at
the address set forth under its signature hereto.


 


SECTION 9.           The New Pledgor agrees to reimburse the Collateral
Trustee for its reasonable out-of-pocket expenses in connection with this
Supplement, including the reasonable fees, other charges and disbursements of
counsel for the Collateral Trustee.


 


THIS SUPPLEMENT, THE PLEDGE
AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE OTHER MASTER DEBT DOCUMENTS
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


[SIGNATURES PAGES FOLLOW]


 


17





















 


IN WITNESS WHEREOF, the New Pledgor and the
Collateral Trustee have duly executed this Supplement to the Pledge Agreement
as of the day and year first above written.


 


	
   

  	
  NEW PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  [

  	
   

  	
  ]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
							



 


 


	
   

  	
  COLLATERAL TRUSTEE:

  
	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


18





















 


Schedules


Supplement No.         


to the Pledge Agreement


 


Pledged Collateral of the New Pledgor


 


SCHEDULE 2.02(a)


 


	
  Issuer

  	
   

  	
  Type of Membership

  Interest

  	
   

  	
  % of Membership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 2.02(b)


 


	
  Issue

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest

  Owned

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 2.02(c)


 


	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of

  Shares

  	
   

  	
  % of Shares

  Owned

  	
   

  	
  Certificate No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


SCHEDULE 3


 


	
  New Pledgor:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  



 


19





















 


EXHIBIT I


 


FORM OF
SECURITY AGREEMENT


 


THIS SECURITY AGREEMENT dated as of November 
29, 2005 (this “Security Agreement”) is by and among CANO PETROLEUM,
INC., a Delaware corporation (“Borrower”), each subsidiary of the
Borrower signatory hereto (together with the Borrower, the “Grantors”
and individually, each a “Grantor”) and Union Bank of California, N.A.
as collateral trustee (in such capacity the “Collateral Trustee”) under
the Collateral Trust Agreement (as hereinafter defined), for its benefit and
the benefit of the Secured Parties (as hereinafter defined).


 


RECITALS


 


A.            The
Borrower, the lenders party thereto from time to time (the “Senior Lenders”),
Union Bank of California, N.A., as issuing lender (in such capacity, the “Issuing
Lender”) and as administrative agent for such Senior Lenders (in such
capacity, the “Senior Agent”), have entered into that certain Credit
Agreement dated of even date herewith (as it may be amended, restated,
supplemented or otherwise modified from time to time, the “Senior Credit
Agreement”).


 


B.            The
Borrower, the lenders party thereto from time to time (the “Subordinated
Lenders”), and Energy Components SPC EEP Energy Exploration and Production
Segregated Portfolio, as administrative agent for such Subordinated Lenders (in
such capacity, the “Subordinated Agent”) have entered into that certain
Subordinated Credit Agreement dated of even date herewith (as it may be
amended, restated, supplemented or otherwise modified from time to time, the “Subordinated
Credit Agreement”) and together with the Senior Credit Agreement, the “Master
Debt Agreements”).


 


C.            In
connection with the Master Debt Agreements, the Borrower or any of its
subsidiaries may from time to time enter into one or more Hedge Contracts (as
defined in the Senior Credit Agreement) with a Senior Lender or any of its
affiliates (each such counterparty, a “Swap Counterparty”, and together
with the Collateral Trustee, the Senior Agent, the Issuing Lender, the Senior
Lenders, the Subordinated Agent and the Subordinated Lenders, the “Secured
Parties”).


 


D.            In order to, among other things,
appoint the Collateral Trustee as collateral trustee for all of the Secured
Parties under the security documents executed in connection with the Master
Debt Agreements, including this Security Agreement, and to set forth the rights
and remedies of the Secured Parties with respect thereto, the Senior Agent, the
Senior Lenders, the Subordinated Agent, the Subordinated Lenders, the
Collateral Trustee, the Borrower, and the other parties thereto, have entered
into that certain Collateral Trust and Intercreditor Agreement dated of even
date herewith (as it may be amended, restated, supplemented or otherwise
modified from time to time, the “Collateral Trust Agreement”).


 


E.             It
is a condition precedent to the extension of credit to the Borrower under the
Master Debt Agreements that the Grantors and the Collateral Trustee, on behalf
of the Secured Parties, execute and deliver this Security Agreement.


 


1





















 


F.             Each
Grantor (other than the Borrower) is a subsidiary of the Borrower, and
therefore shall derive direct and indirect benefits from the transactions
contemplated by the Master Debt Agreements.


 


AGREEMENT


 


NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Grantor hereby
agrees with the Collateral Trustee for its benefit and the benefit of the
Secured Parties as follows:


 


Section 1.               Definitions;
Interpretation.  (a) All
capitalized terms not otherwise defined in this Security Agreement that are
defined in the Collateral Trust Agreement shall have the meanings assigned to
such terms by the Collateral Trust Agreement. 
Any terms used in this Security Agreement that are defined in the UCC
(as defined below) and not otherwise defined herein or in the Collateral Trust
Agreement, shall have the meanings assigned to those terms by the UCC.  Any terms used in this Security Agreement
that are not otherwise defined herein, in the UCC or in the Collateral Trust
Agreement shall have the meanings assigned to those terms by in the Senior
Credit Agreement.  All meanings to
defined terms, unless otherwise indicated, are to be equally applicable to both
the singular and plural forms of the terms defined.  The following terms shall have the meanings
specified below:


 


“Accounts”
means an “account” as defined in the UCC, including, without limitation, all of
any Grantor’s rights to payment for goods sold or leased, services performed,
or otherwise, whether now in existence or arising from time to time hereafter,
including, without limitation, rights arising under any of the Contracts or
evidenced by an account, note, contract, security agreement, Chattel Paper
(including, without limitation, tangible Chattel Paper and electronic Chattel
Paper), or other evidence of indebtedness or security, together with all of the
right, title and interest of any Grantor in and to (i) all security
pledged, assigned, hypothecated or granted to or held by any Grantor to secure
the foregoing, (ii) all of any Grantor’s right, title and interest in and
to any goods or services, the sale of which gave rise thereto, (iii) all
guarantees, endorsements and indemnifications on, or of, any of the foregoing, (iv) all
powers of attorney granted to any Grantor for the execution of any evidence of
indebtedness or security or other writing in connection therewith, (v) all
books, correspondence, credit files, records, ledger cards, invoices, and other
papers relating thereto, including without limitation all similar information
stored on a magnetic medium or other similar storage device and other papers
and documents in the possession or under the control of any Grantor or any
computer bureau from time to time acting for any Grantor, (vi) all
evidences of the filing of financing statements and other statements granted to
any Grantor and the registration of other instruments in connection therewith
and amendments thereto, notices to other creditors or secured parties, and
certificates from filing or other registration officers, (vii) all credit
information, reports and memoranda relating thereto, and (viii) all other
writings related in any way to the foregoing.


 


“Cash
Collateral” means all amounts from time to time held in any checking,
savings, deposit or other account of such Grantor, including, if applicable, the
Cash Collateral


 


2





















 


Account, all
monies, proceeds or sums due or to become due therefrom or thereon and all
documents (including, but not limited to passbooks, certificates and receipts)
evidencing all funds and investments held in such accounts.


 


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


 


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


 


“Commitments”
means, collectively, “Commitments” as defined in the Senior Credit Agreement
and “Commitments” as defined in the Subordinated Credit Agreement.


 


“Contracts”
means all contracts to which any Grantor now is, or hereafter will be bound, or
to which such Grantor is or hereafter will be a party, beneficiary or assignee,
all Insurance Contracts, and all exhibits, schedules and other attachments to
such contracts, as the same may be amended, supplemented or otherwise modified
or replaced from time to time.


 


“Contract
Documents” means all Instruments, Chattel Paper, letters of credit, bonds,
guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.


 


“Contract
Rights” means (i) all (A) of any Grantor’s rights to payment
under any Contract or Contract Document and (B) payments due and to become
due to any Grantor under any Contract or Contract Document, in each case
whether as contractual obligations, damages or otherwise; (ii) all of any
Grantor’s claims, rights, powers, or privileges and remedies under any Contract
or Contract Document; and (iii) all of any Grantor’s rights under any
Contract or Contract Document to make determinations, to exercise any election
(including, but not limited to, election of remedies) or option or to give or
receive any notice, consent, waiver or approval together with full power and
authority with respect to any Contract or Contract Document to demand, receive,
enforce or collect any of the foregoing rights or any property which is the
subject of any Contract or Contract Document, to enforce or execute any checks,
or other instruments or orders, to file any claims and to take any action
which, in the opinion of the Secured Parties, may be necessary or advisable in
connection with any of the foregoing.


 


“Document”
means a bill of lading, dock warrant, dock receipt, warehouse receipt or order
for the delivery of goods, and also any other document which in the regular
course of business or financing is treated as adequately evidencing that the
person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.


 


“Equipment”
means any equipment now or hereafter owned or leased by any Grantor, or in
which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools,


 


3





















 


machinery and
parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the
equipment), and similar items which relate to the above, and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.


 


“Fixtures”
means any fixtures now or hereafter owned or leased by any Grantor, or in which
any Grantor holds or acquires any other right, title or interest, constituting “fixtures”
under the UCC, including without limitation any and all additions,
substitutions and replacements of any of the foregoing, wherever located
together with all improvements thereon and all attachments, components, parts, equipment
and accessories installed thereon or affixed thereto.


 


“General
Intangibles” means all general intangibles now or hereafter owned by any
Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business identifiers, prints, labels, trade styles and service
marks (whether or not registered), trade dress, including logos and/or designs,
copyrights, patents, patent applications, goodwill of any Grantor’s business
symbolized by any of the foregoing, trade secrets, license rights, license
agreements, permits, franchises, and any rights to tax refunds to which any
Grantor is now or hereafter may be entitled.


 


“Hedge Contract”
has the meaning set forth in the Senior Credit Agreement.


 


“Instrument”
means an “instrument” as defined in the UCC, including, without limitation, any
Negotiable Instrument, or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the ordinary course of business transferred by delivery with
any necessary endorsement or assignment (other than Instruments constituting
Chattel Paper).


 


“Insurance
Contracts” means all contracts and policies of insurance and re-insurance
maintained or required to be maintained by or on behalf of any Grantor under
the Loan Documents.


 


“Inventory”
means all of the inventory of any Grantor, or in which any Grantor holds or
acquires any right, title or interest, of every type or description, now owned
or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary
course of its business, all present and future substitutions therefor, parts
and accessories thereof and all additions thereto, all Proceeds thereof and


 


4





















 


products of such
inventory in any form whatsoever, and any other item constituting “inventory”
under the UCC.


 


“Investment
Property” means “investment property” as defined in the UCC, including,
without limitation, all securities (whether certificated or uncertificated),
security entitlements, securities accounts, commodity contracts, and commodity
accounts.


 


“Master Debt
Documents” means, collectively, the Senior Loan Documents and the
Subordinated Loan Documents.


 


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


 


“Permitted
Liens” means those Liens permitted under the Master Debt Agreements


 


“Proceeds”
means all proceeds (as defined in the UCC) of any or all of the Collateral,
including without limitation (i) any and all proceeds of, all claims for,
and all rights of any Grantor to receive the return of any premiums for, any
insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting
under color of any Governmental Authority), (iii) all proceeds received or
receivable when any or all of the Collateral is sold, exchanged or otherwise
disposed, whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) all
claims of any Grantor for damages arising out of, or for breach of or default
under, any Collateral, (v) all rights of any Grantor to terminate, amend,
supplement, modify or waive performance under any Contracts, to perform
thereunder and to compel performance and otherwise exercise all remedies
thereunder, and (vi) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral.


 


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


 


“Security
Agreement” means this Security Agreement, as the same may be modified,
supplemented or amended from time to time in accordance with its terms.


 


“UCC” shall
mean the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of Texas; provided, however, in the event that, by reason
of


 


5





















 


mandatory
provisions of law, any or all of the attachment, perfection or priority of the
security interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than the State of Texas, the term “UCC”
shall mean the Uniform Commercial Code as in effect in such other jurisdiction
for purposes of the provisions hereof relating to such attachment, perfection
or priority and for purposes of definitions related to such provisions.


 


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


 


Section 2.               Assignment,
Pledge and Grant of Security Interest.


 


(a)           As collateral
security for the prompt and complete payment and performance when due of all
Secured Obligations, each Grantor hereby assigns, pledges, and grants to the
Collateral Trustee for the benefit of the Secured Parties a lien on and
continuing security interest in all of such Grantor’s right, title and interest
in, to and under, all items described in this Section 2, whether now owned
or hereafter acquired by such Grantor and wherever located and whether now or
hereafter existing or arising (collectively, the “Collateral”):


 


(i)                                     all
Contracts, all Contract Rights, Contract Documents and Accounts associated with
such Contracts and each and every document granting security to such Grantor
under any such Contract;


 


(ii)                                  all
Accounts;


 


(iii)                               all
Inventory;


 


(iv)                              all
Equipment;


 


(v)                                 all
General Intangibles;


 


(vi)                              all
Investment Property;


 


(vii)                           all
Fixtures;


 


(viii)                        all Cash
Collateral;


 


6





















 


(ix)                                any
Legal Requirements now or hereafter held by such Grantor (except that any Legal
Requirement which would by its terms or under applicable law become void,
voidable, terminable or revocable by being subjected to the Lien of this
Security Agreement or in which a Lien is not permitted to be granted under
applicable law, is hereby excluded from such Lien to the extent necessary so as
to avoid such voidness, voidability, terminability or revocability);


 


(x)                                   any
right to receive a payment under any Hedge Contract in connection with a
termination thereof;


 


(xi)                                (A) all
policies of insurance and Insurance Contracts, now or hereafter held by or on
behalf of such Grantor, including casualty and liability, business
interruption, and any title insurance, (B) all Proceeds of insurance, and (C) all
rights, now or hereafter held by such Grantor to any warranties of any
manufacturer or contractor of any other Person;


 


(xii)                             any
and all liens and security interests (together with the documents evidencing
such security interests) granted to such Grantor by an obligor to secure such
obligor’s obligations owing under any Instrument, Chattel Paper, or Contract
which is pledged hereunder or with respect to which a security interest in such
Grantor’s rights in such Instrument, Chattel Paper, or Contract is granted
hereunder;


 


(xiii)                          any and
all guaranties given by any Person for the benefit of such Grantor which
guarantees the obligations of an obligor under any Instrument, Chattel Paper or
Contract, which are pledged hereunder;


 


(xiv)                         without
limiting the generality of the foregoing, all other personal property, goods,
Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands and
assets of such Grantor whether now existing or hereafter acquired from time to
time; and


 


(xv)                            any
and all additions, accessions and improvements to, all substitutions and
replacements for and all products and Proceeds of or derived from all of the
items described above in this Section 2.


 


(b)           Notwithstanding
anything contained herein to the contrary, it is the intention of each Grantor,
the Collateral Trustee, and the Secured Parties that the amount of the Secured
Obligation secured by each Grantor’s interests in any of its Property shall be
in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Grantor. Accordingly,
notwithstanding anything to the contrary contained in this Security Agreement
in any other agreement or instrument executed in connection with the payment of
any of the Secured Obligations, the amount of the Secured Obligations secured by
each Grantor’s interests in any of its Property pursuant to this Security
Agreement shall be limited to an aggregate amount equal to the largest amount
that would not render such Grantor’s obligations hereunder or


 


7





















 


the liens and security interest granted to the
Collateral Trustee hereunder subject to avoidance under Section 548 of the
United States Bankruptcy Code or any comparable provision of any other
applicable law.


 


Section 3.               Representations
and Warranties.  Each Grantor hereby
represents and warrants the following to the Collateral Trustee and the other
Secured Parties:


 


(a)           Records.  Such Grantor’s sole jurisdiction of formation
and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the
Accounts, General Intangibles, or any other Collateral applicable to such
Grantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by a
promissory note or other instrument.


 


(b)           Other Liens.  Such Grantor is, and will be the record,
legal, and beneficial owner of all of the Collateral pledged by such Grantor
free and clear of any Lien, except for the Permitted Liens.  No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is, or
will be, on file in any recording office, except such as may be filed in
connection with this Security Agreement or in connection with other Permitted
Liens or for which satisfactory releases have been received by the Collateral
Trustee.


 


(c)           Lien Priority and Perfection.


 


(i)            Subject only to Permitted Liens,
this Security Agreement creates valid and continuing security interests in the
Collateral, securing the payment and performance of all the Secured
Obligations.  Upon the filing of
financing statements with the jurisdiction listed in Schedule 1,
the security interests granted to the Secured Parties hereunder will constitute
valid first-priority perfected security interests in all Collateral with
respect to which a security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens.


 


(ii)           No consent of any other Person and no
authorization, approval, or other action by, and no notice to or filing with
any Governmental Authority is required (A) for the grant by such Grantor
of the pledge, assignment, and security interest granted hereby or for the
execution, delivery, or performance of this Security Agreement by such Grantor,
(B) for the validity, perfection, or maintenance of the pledge,
assignment, lien, and security interest created hereby (including the
first-priority (subject to Permitted Liens) nature thereof), except for
security interests that cannot be perfected by filing under the UCC, or (C) for
the exercise by the Collateral Trustee of the rights provided for in this
Security Agreement or the remedies in respect of the Collateral pursuant to
this Security Agreement, except (1) those consents to assignment of
licenses, permits, approvals, and other rights that are as a matter of law not
assignable, (2) those consents, approvals, authorizations, actions,
notices or filings which have been duly obtained or made and, in the case of
the maintenance of perfection, the filing of continuation statements under the
UCC, and (3) those filings and actions described in Section 3(c)(i).


 


(d)           Tax Identification Number and
Organizational Number.  The federal
tax identification number of such Grantor and the organizational number of such
Grantor are as set forth in Schedule 1.


 


8





















 


(e)           Tradenames; Prior Names.  Except as set forth on Schedule 1,
such Grantor has not conducted business under any name other than its current
name during the last five years prior to the date of this Security Agreement.


 


(f)            Exclusive Control.  Such Grantor has exclusive possession and
control of its respective Equipment and Inventory.


 


Section 4.               Covenants.


 


(a)           Further Assurances.


 


(i)            Each Grantor agrees that from time
to time, at its expense, such Grantor shall promptly execute and deliver all
instruments and documents, and take all action, that may be reasonably
necessary or desirable, or that the Collateral Trustee may reasonably request,
in order to perfect and protect any pledge, assignment, or security interest
granted or intended to be granted hereby or to enable the Collateral Trustee to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral.  Without limiting the generality
of the foregoing, each Grantor (A) at the request of the Collateral
Trustee, shall execute such instruments, endorsements or notices, as may be
reasonably necessary or desirable or as the Collateral Trustee may reasonably
request, in order to perfect and preserve the assignments and security
interests granted or purported to be granted hereby, (B) shall, at the
reasonable request of the Collateral Trustee, mark conspicuously each material
document included in the Collateral, each Chattel Paper included in the
Accounts, and each of its records pertaining to the Collateral with a legend,
in form and substance satisfactory to the Collateral Trustee, including that
such document, Chattel Paper, or record is subject to the pledge, assignment,
and security interest granted hereby, (C) shall, if any Collateral shall
be evidenced by a promissory note or other instrument or chattel paper, deliver
and pledge to the Collateral Trustee hereunder such note or instrument or
chattel paper duly endorsed and accompanied by duly executed instruments of transfer
or assignment, all in form and substance satisfactory to the Collateral
Trustee, and (D) authorizes the Collateral Trustee to file any financing
statements, amendments or continuations without the signature of such Grantor
to the extent permitted by applicable law in order to perfect or maintain the
perfection of any security interest granted under this Security Agreement
(including, without limitation, financing statements using an “all assets” or “all
personal property” collateral description).


 


(ii)           Each Grantor shall pay all filing,
registration and recording fees and all refiling, re-registration and
re-recording fees, and all other reasonable expenses incident to the execution
and acknowledgment of this Security Agreement, any assurance, and all federal,
state, county and municipal stamp taxes and other taxes, duties, imports,
assessments and charges arising out of or in connection with the execution and
delivery of this Security Agreement, any agreement supplemental hereto, any
financing statements, and any instruments of further assurance.


 


(iii)          Each Grantor shall promptly provide to
the Collateral Trustee all information and evidence the Collateral Trustee may
reasonably request concerning the Collateral to enable the Collateral Trustee
to enforce the provisions of this Security Agreement.


 


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(b)           Change of Name; State of Formation.  Each Grantor shall give the Collateral
Trustee at least 30 days’ prior written notice before it (i) in the case
of any Grantor that is not a “registered organization” (as such term is defined
in Section 9-102 of the UCC), changes the location of its principal place
of business and chief executive office, (ii) changes the location of its
jurisdiction of formation or organization, (iii) changes the location of
the Equipment, Inventory, or original copies of any Chattel Paper evidencing
Accounts, or (iv) uses a trade name other than its current name used on
the date hereof.  Other than as permitted
by Section 6.11 of the Senior Credit Agreement and Section 6.11 of
the Subordinated Credit Agreement, no Grantor shall amend, supplement, modify
or restate its articles or certificate of incorporation, bylaws, limited
liability company agreements, or other equivalent organizational documents, nor
amend its name or change its jurisdiction of incorporation, organization or
formation.


 


(c)           Right of Inspection.  Each Grantor shall hold and preserve, at its
own cost and expense satisfactory and complete records of the Collateral,
including, but not limited to, Instruments, Chattel Paper, Contracts, and
records with respect to the Accounts, and will permit representatives of the
Collateral Trustee, upon reasonable advance notice, at any time during normal
business hours to inspect and copy them. 
Upon the occurrence and during the continuation of any Event of Default,
at the Collateral Trustee’s request, each Grantor shall promptly deliver copies
of any and all such records to the Collateral Trustee.


 


(d)           Liability Under Contracts and
Accounts.  Notwithstanding anything
in this Security Agreement to the contrary, (i) the execution of this
Security Agreement shall not release any Grantor from its obligations and
duties under any of the Contract Documents, or any other contract or instrument
which are part of the Collateral and Accounts included in the Collateral, (ii) the
exercise by the Collateral Trustee of any of its rights hereunder shall not
release any Grantor from any of its duties or obligations under any Contract
Documents, or any other Contract or Instrument which are part of the Collateral
and Accounts included in the Collateral, and (iii) the Collateral Trustee
shall not have any obligation or liability under any Contract Documents, or any
other contract or instrument which are part of the Collateral and Accounts
included in the Collateral by reason of the execution and delivery of this
Security Agreement, nor shall the Collateral Trustee be obligated to perform
any of the obligations or duties of any Grantor thereunder or to take any
action to collect or enforce any claim for payment assigned hereunder.


 


(e)           Transfer of Certain Collateral;
Release of Certain Security Interest. 
Each Grantor agrees that it shall not sell, assign, or otherwise dispose
of any Collateral, except as otherwise permitted under the Master Debt
Agreements.  The Collateral Trustee shall
promptly, at the Grantors’ expense, execute and deliver all further instruments
and documents, and take all further action that a Grantor may reasonably
request in order to release its security interest in any Collateral which is
disposed of in accordance with the terms of the Master Debt Agreements.


 


(f)            Accounts.  Each Grantor agrees that it will use
commercially reasonable efforts to ensure that each Account (i) is and
will be, in all material respects, the genuine, legal, valid, and binding
obligations of the account debtor in respect thereof, representing an
unsatisfied obligation of such account debtor, (ii) is and will be, in all
material respects, enforceable in accordance with its terms, (iii) is not
and will not be subject to any setoffs, defenses, taxes, counterclaims, except
in the ordinary course of business, (iv) is and will be, in all material


 


10





















 


respects, in compliance with all applicable laws,
whether federal, state, local or foreign, and (v) which if evidenced by
Chattel Paper, will not require the consent of the account debtor in respect
thereof in connection with its assignment hereunder.


 


(g)           Negotiable Instrument.  If any Grantor shall at any time hold or
acquire any Negotiable Instruments, including promissory notes, such Grantor
shall forthwith endorse, assign and deliver the same to the Collateral Trustee,
accompanied by such instruments of transfer or assignment duly executed in
blank as the Collateral Trustee may from time to time reasonably request.


 


(h)           Other Covenants of Grantor.  Each Grantor agrees that (i) any action
or proceeding to enforce this Security Agreement may be taken by the Collateral
Trustee either in such Grantor’s name or in the Collateral Trustee’s name, as
the Collateral Trustee may deem necessary, and 
(ii) such Grantor will, until the indefeasible payment in full in
cash of the Secured Obligations (including all Letter of Credit Obligations),
the termination of all obligations of the Issuing Lender and the Senior Lenders
in respect of Letters of Credit, the termination of the Hedge Contracts with
the Secured Parties and the termination or expiration of the Commitments,
warrant and defend its title to the Collateral and the interest of the
Collateral Trustee in the Collateral against any claim or demand of any Persons
(other than Permitted Liens) which could reasonably be expected to materially
adversely affect such Grantor’s title to, or the Collateral Trustee’s right or
interest in, such Collateral.


 


Section 5.               Termination
of Security Interest.  Upon the
indefeasible payment in full in cash of the Secured Obligations (including all
Letter of Credit Obligations), the termination or expiration of all Letters of
Credit and the termination of all obligations of the Issuing Lender and the
Senior Lenders in respect of Letters of Credit, the termination of the Hedge
Contracts with the Secured Parties and the termination or expiration of the Commitments,
the security interest granted hereby shall terminate and all rights to the
Collateral shall revert to the applicable Grantor to the extent such Collateral
shall not have been sold or otherwise applied pursuant to the terms hereof.  Upon any such termination, the Collateral
Trustee will, at the Grantors’ expense, execute and deliver to the applicable
Grantor such documents (including, without limitation, UCC-3 termination
statements) as such Grantor shall reasonably request to evidence such termination.


 


Section 6.               Reinstatement.
If, at any time after payment in full of all Secured Obligations and
termination of the Collateral Trustee’s security interest, any payments on the
Secured Obligations previously made must be disgorged by any Secured Party for
any reason whatsoever, including, without limitation, the insolvency,
bankruptcy or reorganization of any Grantor or any other Person, this Security
Agreement and the Collateral Trustee’s security interests herein shall be
reinstated as to all disgorged payments as though such payments had not been
made, and each Grantor shall sign and deliver to the Collateral Trustee all
documents, and shall do such other acts and things, as may be necessary to
reinstate and perfect the Collateral Trustee’s security interest.  EACH
GRANTOR SHALL DEFEND AND INDEMNIFY THE COLLATERAL TRUSTEE AND EACH OTHER
SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR
EXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE ATTORNEYS’ FEES AND
EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH


 


11





















 


CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED SECURED PARTY’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE,
LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE
JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH
INDEMNIFIED SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.


 


Section 7.               Remedies
upon Event of Default.


 


(a)           If any Event of
Default has occurred and is continuing, the Collateral Trustee may (and shall
at the written request of the Required Percentage of the applicable Class of
Master Debt given in accordance with the Collateral Trust Agreement), (i) proceed
to protect and enforce the rights vested in it by this Security Agreement or
otherwise available to it, including but not limited to, the right to cause all
revenues and other moneys pledged hereby as Collateral to be paid directly to
it, and to enforce its rights hereunder to such payments and all other rights
hereunder by such appropriate judicial proceedings as it shall deem most
effective to protect and enforce any of such rights, either at law or in equity
or otherwise, whether for specific enforcement of any covenant or agreement
contained in any of the Contract Documents, or in aid of the exercise of any
power therein or herein granted, or for any foreclosure hereunder and sale
under a judgment or decree in any judicial proceeding, or to enforce any other
legal or equitable right vested in it by this Security Agreement or by law; (ii) cause
any action at law or suit in equity or other proceeding to be instituted and
prosecuted and enforce any rights hereunder or included in the Collateral,
subject to the provisions and requirements thereof; (iii) sell or
otherwise dispose of any or all of the Collateral or cause the Collateral to be
sold or otherwise disposed of in one or more sales or transactions, at such
prices and in such manner as may be commercially reasonable, and for cash or on
credit or for future delivery, without assumption of any credit risk, at public
or private sale, without demand of performance or notice of intention to sell
or of time or place of sale (except such notice as is required by applicable
statute and cannot be waived), it being agreed that the Collateral Trustee may
be a purchaser on behalf of the Secured Parties or on its own behalf at any
such sale and that the Collateral Trustee, any other Secured Party, or any
other Person who may be a bona fide purchaser for value and without notice of
any claims of any or all of the Collateral so sold shall thereafter hold the
same absolutely free from any claim or right of whatsoever kind, including any
equity of redemption of any Grantor, any such demand, notice or right and
equity being hereby expressly waived and released to the extent permitted by
law; (iv) incur reasonable expenses, including reasonable attorneys’ fees,
reasonable consultants’ fees, and other costs appropriate to the exercise of
any right or power under this Security Agreement; (v) perform any
obligation of any Grantor hereunder and make payments, purchase, contest or
compromise any encumbrance, charge or lien, and pay taxes and expenses,
without, however, any obligation to do so; (vi) in connection with any
acceleration and foreclosure, take possession of the Collateral and render it
usable and repair and renovate the same, without, however, any obligation to do
so, and enter upon any location where the Collateral may be located for that
purpose, control, manage, operate, rent and lease the Collateral, collect all
rents and income from the Collateral and apply the same to reimburse the
Secured Parties for any cost or expenses incurred hereunder or under any of the
Master Debt Documents and to the payment or performance of any Grantor’s
obligations hereunder or under any of the Master Debt Documents, and apply the
balance to the other Secured Obligations and any remaining excess balance to
whomsoever is legally entitled thereto;


 


12





















 


(vii) secure the appointment of a receiver for
the Collateral or any part thereof; (viii) require any Grantor to, and
each Grantor hereby agrees that it will at its expense and upon request of the
Collateral Trustee forthwith, assemble all or part of the Collateral as
directed by the Collateral Trustee and make it available to the Collateral
Trustee at a place to be designated by the Collateral Trustee which is
reasonably convenient to both parties; (ix) exercise any other or
additional rights or remedies granted to a secured party under the UCC; or (x)
occupy any premises owned or leased by any Grantor where the Collateral or any
part thereof is assembled for a reasonable period in order to effectuate its
rights and remedies hereunder or under law, without obligation to any Grantor
in respect of such occupation.  If,
pursuant to applicable law, prior notice of sale of the Collateral under this Section is
required to be given to any Grantor, each Grantor hereby acknowledges that the
minimum time required by such applicable law, or if no minimum time is
specified, 10 days, shall be deemed a reasonable notice period.   The Collateral Trustee shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given.  The Collateral Trustee may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.


 


(b)           All
reasonable costs and expenses (including reasonable attorneys’ fees and
expenses) incurred by the Collateral Trustee in connection with any suit or
proceeding in connection with the performance by the Collateral Trustee of any
of the agreements contained in any of the Contract Documents, or in connection
with any exercise of its rights or remedies hereunder, pursuant to the terms of
this Security Agreement, shall constitute additional indebtedness secured by
this Security Agreement and shall be paid on demand by the Grantors to the
Collateral Trustee on behalf of the Secured Parties.


 


Section 8.               Remedies
Cumulative; Delay Not Waiver.


 


(a)           No right, power or
remedy herein conferred upon or reserved to the Collateral Trustee is intended
to be exclusive of any other right, power or remedy and every such right, power
and remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right, power and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. 
The assertion or employment of any right or remedy hereunder or
otherwise shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.  Resort to
any or all security now or hereafter held by the Collateral Trustee may be
taken concurrently or successively and in one or several consolidated or
independent judicial actions or lawfully taken nonjudicial proceedings, or
both.


 


(b)           No
delay or omission of the Collateral Trustee to exercise any right or power
accruing upon the occurrence and during the continuance of any Event of Default
as aforesaid shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein; and every power
and remedy given by this Security Agreement may be exercised from time to time,
and as often as shall be deemed expedient, by the Collateral Trustee.


 


Section 9.               Contract
Rights.  After the occurrence and during the
continuance of an Event of Default, the Collateral Trustee may exercise
any of the Contract Rights and remedies of any Grantor under or in connection
with the Instruments, Chattel Paper, or Contracts which represent


 


13





















 


Accounts, the General Intangibles, or which otherwise
relate to the Collateral, including, without limitation, any rights of any
Grantor to demand or otherwise require payment of any amount under, or
performance of any provisions of, the Instruments, Chattel Paper, or Contracts
which represent Accounts, or the General Intangibles.


 


Section 10.             Accounts.


 


(a)           After
the occurrence and during the continuance of an Event of Default, the
Collateral Trustee may, or may direct any Grantor to, take any action the
Collateral Trustee deems necessary or advisable to enforce collection of the
Accounts, including, without limitation, notifying the account debtors or
obligors under any Accounts of the assignment of such Accounts to the
Collateral Trustee and directing such account debtors or obligors to make
payment of all amounts due or to become due directly to the Collateral
Trustee.  Upon such notification and
direction, and at the expense of the Grantors, the Collateral Trustee may
enforce collection of any such Accounts, and adjust, settle, or compromise the
amount or payment thereof in the same manner and to the same extent as any
Grantor might have done.


 


(b)           After
receipt by any Grantor of the notice referred to in Section 10(a) above
that an Event of Default has occurred and is continuing, all amounts and
Proceeds (including instruments) received by such Grantor in respect of the
Accounts shall be received in trust for the benefit of the Collateral Trustee
hereunder, shall be segregated from other funds of such Grantor, and shall
promptly be paid over to the Collateral Trustee in the same form as so received
(with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, or
compromise the amount or payment of any Account, nor release wholly or partly
any account debtor or obligor thereof, nor allow any credit or discount thereon
other than in the ordinary course of business and consistent with past
practices.


 


Section 11.             Application
of Collateral.  The proceeds of any
sale, or other realization (other than that received from a sale or other
realization permitted by the Senior Credit Agreement) upon all or any part of
the Collateral pledged by any Grantor shall be applied by the Collateral
Trustee as set forth in Section 4.4 of the Collateral Trust Agreement.


 


Section 12.             Collateral
Trustee as Attorney-in-Fact for Grantor. 
Each Grantor hereby constitutes and irrevocably appoints the Collateral
Trustee, acting for and on behalf of itself and the Secured Parties and each
successor or assign of the Collateral Trustee and the Secured Parties, the true
and lawful attorney-in-fact of such Grantor, with full power and authority in
the place and stead of such Grantor and in the name of such Grantor, the
Collateral Trustee or otherwise to, following the occurrence and during the
continuation of an Event of Default, take any action and execute any instrument
at the written direction of the Secured Parties and enforce all rights,
interests and remedies of such Grantor with respect to the Collateral,
including the right:


 


(a)           to ask, require, demand, receive and
give acquittance for any and all moneys and claims for moneys due and to become
due under or arising out of the any of the other Collateral, including without
limitation, any Insurance Contracts;


 


14





















 


(b)           to elect remedies thereunder and to
endorse any checks or other instruments or orders in connection therewith;


 


(c)           to file any claims or take any action
or institute any proceedings in connection therewith which the Collateral
Trustee may deem to be necessary or advisable;


 


(d)           to pay, settle or compromise all
bills and claims which may be or become liens or security interests against any
or all of the Collateral, or any part thereof, unless a bond or other security
satisfactory to the Collateral Trustee has been provided; and


 


(e)           upon foreclosure, to do any and every
act which any Grantor may do on its behalf with respect to the Collateral or
any part thereof and to exercise any or all of such Grantor’s rights and
remedies under any or all of the Collateral;


 


provided, however, that the Collateral
Trustee shall not exercise any such rights except upon the occurrence and
continuation of an Event of Default.  This power of attorney is a power coupled with an interest and shall be
irrevocable.


 


Section 13.             Collateral
Trustee May Perform.  The
Collateral Trustee may from time-to-time perform any act which any Grantor has
agreed hereunder to perform and which such Grantor shall fail to perform after
being requested in writing so to perform (it being understood that no such
request need be given after the occurrence and during the continuance of any
Event of Default and after notice thereof by the Collateral Trustee to any
Grantor) and the Collateral Trustee may from time-to-time take any other action
which the Collateral Trustee deems necessary for the maintenance, preservation
or protection of any of the Collateral or of its security interest therein, and
the reasonable expenses of the Collateral Trustee incurred in connection therewith
shall be part of the Secured Obligations and shall be secured hereby.


 


Section 14.             Collateral
Trustee Has No Duty.  The powers
conferred on the Collateral Trustee hereunder are solely to protect its
interest in the Collateral and shall not impose any duty on it to exercise any
such powers.  Except for reasonable care
of any Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Collateral Trustee shall have no duty as to any
Collateral or responsibility for taking any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral.


 


Section 15.             Reasonable
Care.  The Collateral Trustee shall
be deemed to have exercised reasonable care in the custody and preservation of
the Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Collateral Trustee accords its own
Property.


 


Section 16.             Payments
Held in Trust.  During the
continuance of an Event of Default, all payments received by any Grantor under
or in connection with any Collateral shall be received in trust for the benefit
of the Collateral Trustee, and shall be segregated from other funds of such
Grantor and shall be forthwith paid over to the Collateral Trustee in the same
form as received (with any necessary endorsement).


 


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Section 17.             Miscellaneous.


 


(a)           Expenses.  Each Grantor will upon demand pay to the
Collateral Trustee for its benefit and the benefit of the Secured Parties the
amount of any reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of its counsel and of any experts, which the Collateral
Trustee and the Secured Parties may incur in connection with (i) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Collateral, (ii) the exercise or enforcement of
any of the rights of the Collateral Trustee or any Secured Party hereunder, and
(iii) the failure by any Grantor to perform or observe any of the
provisions hereof.


 


(b)           Amendments; Etc.  No amendment or waiver of any provision of
this Security Agreement nor consent to any departure by any Grantor herefrom
shall be effective unless the same shall be in writing and executed by the
affected Grantor and the Collateral Trustee (acting upon the written direction
of the Required Percentage of each Class of Master Debt and given in
accordance with the Collateral Trust Agreement), and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.


 


(c)           Addresses for Notices.  All notices and other communications provided
for hereunder shall be made in the manner and to the addresses set forth in the
Collateral Trust Agreement.


 


(d)           Continuing Security Interest;
Transfer of Interest.  This Security
Agreement shall create a continuing security interest in the Collateral and,
unless expressly released by the Collateral Trustee, shall (a)  remain in
full force and effect until the indefeasible payment in full in cash of the
Secured Obligations (including all Letter of Credit Obligations), the
termination or expiration of all Letters of Credit and the termination of all
obligations of the Issuing Lender and the Senior Lenders in respect of Letters
of Credit, the termination of the Hedge Contracts with the Secured Parties and
the termination or expiration of the Commitments, (b) be binding upon each
Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Collateral Trustee hereunder, to
the benefit of and be binding upon, the Collateral Trustee, the Issuing Lender,
the Senior Lenders, the Subordinated Lenders, the Senior Administrative Agent
and the Subordinated Administrative Agent and their respective successors,
transferees, and assigns, and to the benefit of and be binding upon, the Swap
Counterparties, and each of their respective successors, transferees,  and assigns to the extent such successors,
transferees, and assigns of a Swap Counterparty is a Senior Lender or an
Affiliate of a Senior Lender.  Without
limiting the generality of the foregoing clause, when any Senior Lender or
Subordinated Lender assigns or otherwise transfers any interest held by it
under the Master Debt Agreements or other Master Debt Documents to any other
Person pursuant to the terms of the Master Debt Agreements or such other Master
Debt Documents, that other Person shall thereupon become vested with all the
benefits held by such Senior Lender or such Subordinated Lender under this
Security Agreement.  Notwithstanding the
foregoing, when any Swap Counterparty assigns or otherwise transfers any
interest held by it under any Hedge Contract to any other Person pursuant to
the terms of such agreement, that other Person shall thereupon become vested
with all the benefits held by such Secured Party under this Security Agreement
only if such Person is also then a Senior Lender or an Affiliate of a Senior
Lender.


 


(e)           Severability.  Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any


 


16





















 


provision of this Security Agreement shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Security
Agreement.


 


(f)            Choice of Law.  This Security Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas,
except to the extent that the validity or perfection of the security interests
hereunder, or remedies hereunder, in respect of any particular Collateral are
governed by the laws of a jurisdiction other than the state of Texas.


 


(g)           Counterparts.  The parties may execute this Security
Agreement in counterparts, each of which constitutes an original, and all of
which, collectively, constitute only one agreement.  Delivery of an executed counterpart signature
page by facsimile is as effective as executing and delivering this
Security Agreement in the presence of the other parties to this Security
Agreement.  In proving this Security
Agreement, a party must produce or account only for the executed counterpart of
the party to be charged.


 


(h)           Headings.  Paragraph headings have been inserted in this
Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.


 


(i)            Conflicts.  In the event of any explicit or implicit
conflict between any provision of this Security Agreement and any provision of
the Senior Credit Agreement, the terms of the Senior Credit Agreement shall be
controlling.


 


(j)            Additional Grantors.  Pursuant to Section 6.15
of each Master Debt Agreement, each Subsidiary of the Borrower that was not in
existence on the date of such Master Debt Agreement is required to enter into
this Security Agreement as a Grantor upon becoming a Subsidiary of the
Borrower.  Upon execution and delivery
after the date hereof by the Collateral Trustee and such Subsidiary of an
instrument in the form of Annex 1, such Subsidiary shall become a
Grantor hereunder with the same force and effect as if originally named as a
Grantor herein.  The execution and
delivery of any instrument adding an additional Grantor as a party to this
Security Agreement shall not require the consent of any other Grantor
hereunder.  The rights and obligations of
each Grantor hereunder shall remain in full force and effect notwithstanding
the addition of any new Grantor as a party to this Security Agreement.


 


(k)           Entire Agreement.  THIS SECURITY AGREEMENT,
THE COLLATERAL TRUST AGREEMENT, AND THE OTHER MASTER DEBT DOCUMENTS REPRESENT
THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


[SIGNATURE PAGES FOLLOW]


 


17





















 


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


 


	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  LADDER COMPANIES, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  SQUARE ONE ENERGY, INC., a Texas

  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  COLLATERAL TRUSTEE:

  
	
   

  	
   

  
	
   

  	
  UNION BANK
  OF CALIFORNIA, N.A.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					



 


18





















 


SCHEDULE 1


to
Security Agreement


 


	
  Grantor:

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  corporation

  
	
   

  	
   

  
	
  Address where records for

  	
   

  
	
  Collateral are kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Grantor:

  	
  Ladder Companies, Inc.

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  corporation

  
	
   

  	
   

  
	
  Address where records for

  	
   

  
	
  Collateral are kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Grantor:

  	
  Square One Energy, Inc.

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  corporation

  
	
   

  	
   

  
	
  Address where records for

  	
   

  
	
  Collateral are kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  



 


19





















 


	
  Organizational Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  



 


20





















 


Annex 1 to the


Security Agreement


 


SUPPLEMENT NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Security Agreement dated as of November 29,
2005 (as amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and Union Bank of California, N.A. as
Collateral Trustee under the Collateral Trust Agreement (as hereinafter
defined) for the benefit of itself and the Secured Parties (as hereinafter
defined).


 


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


 


(i)            that
certain Credit Agreement dated as of November 29, 2005 (as it may be
amended, restated or otherwise modified from time to time, the “Senior
Credit Agreement”) by and among the Borrower, the lenders party thereto
from time to time (the “Senior Lenders”), and Union Bank of California,
N.A., as administrative agent for such Senior Lenders (the “Senior Agent”);


 


(ii)           that
certain Subordinated Credit Agreement dates as of even date herewith (as it may
be amended, restated or otherwise modified from time to time, the “Subordinated
Credit Agreement”, and together with the Senior Credit Agreement, the “Master
Debt Agreements”), among the Borrower, the lenders party thereto from time
to time (the “Subordinated Lenders”), and Energy Components SPC EEP
Energy Exploration and Production Segregated Portfolio as administrative agent
for such Subordinated Lenders (in such capacity, the “Subordinated Agent”);
and


 


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


 


B.            In connection with the
Master Debt Agreements, the Senior Agent, the Senior Lenders, the Subordinated
Agent, the Subordinated Lenders, the Collateral Trustee, the Borrower, and
other parties thereto, have entered into that certain Collateral Trust and
Intercreditor Agreement dated as of even date herewith (as it may be amended,
restated, or otherwise modified from time to time, the “Collateral Trust
Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Master Debt Agreements, including the Security
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.


 


C.            Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned
to such terms in the Security Agreement and the Collateral Trust Agreement.


 


21





















 


D.            The Grantors have
entered into the Security Agreement in order to induce the Senior Lenders and
the Subordinated Lenders to make loans and the Issuing Lender to issue letters
of credit under the Master Debt Agreements. 
Pursuant to Section 6.15 of the respective Master Debt Agreements,
each Subsidiary of the Borrower that was not in existence on the date of the
Senior Credit Agreement is required to enter into the Security Agreement as a
Grantor upon becoming a Subsidiary.  Section 17(j)
of the Security Agreement provides that additional Subsidiaries of the Borrower
may become Grantors under the Security Agreement by execution and delivery of
an instrument in the form of this Supplement. 
The undersigned Subsidiary of the Borrower (the “New Grantor”) is
executing this Supplement in accordance with the requirements of the Master
Debt Agreements to become a Grantor under the Security Agreement in order to
induce the Senior Lenders to make additional loans and the Issuing Lender to
issue additional letters of credit and as consideration for loans previously
made and letters of credit previously issued.


 


Accordingly, the Collateral Trustee and the New Grantor agree as
follows:


 


SECTION 1.           In
accordance with Section 17(j) of the Security Agreement, the New Grantor
by its signature below becomes a Grantor under the Security Agreement with the
same force and effect as if originally named therein as a Grantor and the New
Grantor hereby agrees (a) to all the terms and provisions of the Security
Agreement applicable to it as a Grantor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof in all material
respects.  In furtherance of the
foregoing, the New Grantor, as security for the payment and performance in full
of the Secured Obligations (as defined in the Security Agreement), does hereby
create and grant to the Collateral Trustee, its successors and assigns, for the
benefit of the Secured Parties, their successors and assigns, a continuing
security interest in and lien on all of the New Grantor’s right, title and
interest in and to the Collateral (as defined in the Security Agreement) of the
New Grantor.  Each reference to a “Grantor”
in the Security Agreement shall be deemed to include the New Grantor.  The Security Agreement is hereby incorporated
herein by reference.


 


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


 


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


 


22





















 


SECTION 4.           The New
Grantor hereby represents and warrants that set forth on Schedule 1
attached hereto are (a) its sole jurisdiction of formation and type of
organization, (b) the location of all records concerning its Accounts,
General Intangibles, or any other Collateral, (c) its federal tax identification
number and the organizational number, and (d) all names used by it during
the last five years prior to the date of this Supplement.


 


SECTION 5.           Except
as expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.


 


SECTION 6.           THIS
SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF TEXAS.


 


SECTION 7.           In case
any one or more of the provisions contained in this Supplement should be held
invalid, illegal or unenforceable in any respect, neither party hereto shall be
required to comply with such provision for so long as such provision is held to
be invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Security
Agreement shall not in any way be affected or impaired.  The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.


 


SECTION 8.           All
communications and notices hereunder shall be in writing and given as provided
in the Security Agreement.  All
communications and notices hereunder to the New Grantor shall be given to it at
the address set forth under its signature hereto.


 


SECTION 9.           The New
Grantor agrees to reimburse the Collateral Trustee for its reasonable
out-of-pocket expenses in connection with this Supplement, including the
reasonable fees, other charges and disbursements of counsel for the Collateral
Trustee.


 


THIS
SUPPLEMENT, THE SECURITY AGREEMENT, THE COLLATERAL TRUST AGREEMENT AND THE
OTHER MASTER DEBT DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


IN WITNESS WHEREOF, the New Grantor and the Collateral Trustee have
duly executed this Supplement to the Security Agreement as of the day and year
first above written.


 


	
   

  	
  [Name of New
  Grantor],

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  



 


23





















 


	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						



 


 


	
   

  	
  [COLLATERAL
  TRUSTEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


24





















 


Schedule 1


Supplement No.        


to the Security Agreement


 


	
  New Grantor:

  	
  [GRANTOR]

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  [STATE]

  
	
   

  	
   

  
	
  Type of Organization:

  	
  [ENTITY TYPE]

  
	
   

  	
   

  
	
  Address where records for

  	
   

  
	
  Collateral are kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  



 


25





















 


EXHIBIT J


 


FORM OF TRANSFER LETTERS


 


, 20    


 


                                     


                                     


                                     


 


Re:                               Agreement
dated                               ,
by and between                                    ,
as Seller, and                                                       ,
as Buyer (the “Contract”).


 


Ladies and
Gentlemen:


 


Cano Petroleum, Inc., a Delaware corporation (“Mortgagor”),
has executed a mortgage or deed of trust dated effective as of               
    , 2005 (“Mortgage”) for the benefit of Union
Bank of California, N.A., as Collateral Agent for the ratable benefit of itself
and certain other credit parties as described in the Mortgage (“Credit
Parties”), which Mortgage has been recorded in the Real Property Records of
the Counties listed on the attached Exhibit A.  A copy of the Mortgage is enclosed.  The properties covered by the Mortgage
include all of the oil, gas and other hydrocarbons and/or other minerals
attributable to the above-referenced Contract to which we understand you are
currently a party and includes the well or wells listed on the attached Exhibit A
with respect to which you are remitting proceeds of production to the
Mortgagor.  Your division order or lease
numbers for such well or wells are set forth on the attached Exhibit A.


 


Pursuant to Article III of the Mortgage, the Collateral Agent is
entitled to receive all of Mortgagor’s interest in all Hydrocarbons (as defined
in the Mortgage), which are covered by the above-referenced Contract, all
products obtained or processed therefrom, and the revenues and proceeds
attributable thereto.  The assignment of
the Hydrocarbons, products and proceeds was effective as of 7:00 A.M.,
(Dallas, Texas Time), on November     , 2005 (“Effective
Date”).  The Credit Parties, however,
as provided in Article III, have permitted Mortgagor to collect the
Hydrocarbons and the revenues and proceeds attributable thereto until the
Collateral Agent or the Mortgagor shall have instructed the seller or purchaser
of production to deliver such Hydrocarbons and all proceeds therefrom directly
to the Collateral Agent.  The purpose of
this letter is to notify you that, commencing immediately upon the receipt
hereof, and in accordance with the terms and conditions of the Mortgage, you are
to deliver all proceeds attributable to the sale of such Hydrocarbons pursuant
to the above-referenced Contract directly to the Collateral Agent at its office
at Lincoln Plaza, 500 N. Akard Street, Suite 4200, Dallas, Texas 75201,
Telephone: (214) 922-4200, Facsimile: (214) 922-4209, Attention:  Ali Ahmed, or to such other address of which
we may subsequently notify you in writing. 
If you require the execution of transfer or division orders, please
forward the transfer or division orders to the Collateral Agent at its address
at indicated above, Attention:  Ali
Ahmed.


 


1





















 


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


 


 


	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

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

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


2





















 


EXHIBIT A


 


	
  Name and Location of Well

  	
   

  	
  Division Order or Lease No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  



 


3





















 


Exhibit K


 


November 29, 2005


 


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


  Agent, Issuing Lender, and a Lender, and all
the


  other Lenders party to the Credit Agreement


  described below


500
North Akard Street


Suite 4200


Dallas,
TX 75201


 


Ladies
and Gentlemen:


 


We
have acted as Texas counsel to Cano Petroleum, Inc., a Delaware
corporation (“Borrower”),
Ladder Companies, Inc., a Delaware corporation (“Ladder”), Square One
Energy, Inc., a Texas corporation (“Square One”), W.O. Energy of Nevada, Inc.,
a Nevada corporation (“WOEN”),
WO Energy, Inc., a Texas corporation (“WOE”), W.O. Operating Company, Ltd., a
Texas limited partnership (“Operating”) and W.O. Production Company, Ltd., a Texas
limited partnership (“Production”,
and together with Ladder, Square One, WOEN, WOE and Operating, the “Guarantors”; Borrower
and the Guarantors are each a “Loan Party” and collectively, the “Loan Parties”;
Borrower and Ladder are collectively, the “Delaware Loan Parties”; Square One, WOE,
Operating and Production are collectively, the “Texas Loan Parties”) in connection with
that certain Credit Agreement (herein so called) dated as of even date
herewith, executed by Borrower, Union Bank of California, N.A., as
Administrative Agent (in such capacity, the “Administrative
Agent”) and as Issuing Lender, and each financial
institution party thereto as a Lender (collectively, the “Lenders”).  Capitalized terms used herein shall, unless
otherwise provided herein, have the respective meanings set forth in the Credit
Agreement.


 


For
the purpose of rendering the opinions set forth herein, we have been furnished
with and have reviewed the following documents each dated of even date with the
Credit Agreement unless otherwise indicated (collectively, the “Transaction Documents”):


 


(a)           the Credit Agreement;


 


(b)           the Note, executed by Borrower and
payable to the order of Lender in the original principal amount of
$100,000,000;


 


(c)           the Security Agreement, executed by
the Loan Parties, in favor of the Collateral Trustee;


 


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


 





















 


(e)           the Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of Production
dated November 29, 2005, executed by Square One, WOEN, WOE, Operating and
Production as Mortgagors made to Ali Ahmed as the Trustee for the benefit of
the Collateral Trustee as the Mortgagee (the “Texas Mortgage”);


 


(f)            the Mortgage, Line of Credit
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated November 29, 2005, executed by Borrower and Ladder as
Mortgagors in favor of the Collateral Trustee as the Mortgagee (the “Oklahoma Mortgage”);


 


(g)           the Pledge Agreement, executed by
Borrower, WOEN, and WOE in favor of the Collateral Trustee (the “Pledge Agreement”);


 


(h)           the Collateral Trust and
Intercreditor Agreement;


 


(i)            the UCC-1 Financing Statement
reflecting Borrower as debtor and Collateral Trustee as secured party, to be
filed in the Office of the Secretary of State of Delaware (the “Borrower Financing Statement”);


 


(j)            the UCC-1 Financing Statement
reflecting Ladder as debtor and Collateral Trustee as secured party, to be
filed in the Office of the Secretary of State of Delaware (the “Ladder Financing Statement”,
and together with the Borrower Financing Statement, the “Delaware Financing Statements”);


 


(k)           the UCC-1 Financing Statement
reflecting Square One as debtor and Collateral Trustee as secured party, to be
filed in the Office of the Secretary of State of Texas (the “Square One Financing Statement”);


 


(l)            the UCC-1 Financing Statement
reflecting WOE as debtor and Collateral Trustee as secured party, to be filed
in the Office of the Secretary of State of Texas (the “WOE Financing Statement”);


 


(m)          the UCC-1 Financing Statement
reflecting Operating as debtor and Collateral Trustee as secured party, to be
filed in the Office of the Secretary of State of Texas (the “Operating Financing Statement”);
and


 


(n)           the UCC-1 Financing Statement reflecting
Production as debtor and Collateral Trustee as secured party, to be filed in
the Office of the Secretary of State of Texas (the “Production Financing Statement”,
and together with the Square One Financing Statement, the WOE Financing
Statement and the Operating Financing Statement, the “Texas Financing Statements”;
the Delaware Financing Statements and the Texas Financing Statements are
collectively, the “Financing
Statements”).


 


2





















 


(o)           the UCC-1 Financing Statement
reflecting Borrower as debtor and Collateral Trustee as secured party, to be
filed in County Filing Offices, as defined below (the “Borrower County Financing Statement”);


 


(p)           the UCC-1 Financing Statement reflecting Ladder as debtor
and Collateral Trustee as secured party, to be filed in the County Filing
Offices (the “Ladder
County Financing Statement”);


 


(q)           the UCC-1 Financing Statement
reflecting Square One as debtor and Collateral Trustee as secured party, to be
filed in the County Filing Offices (the “Square One County Financing Statement”);


 


(r)            the UCC-1 Financing Statement
reflecting WOE as debtor and Collateral Trustee as secured party, to be filed
in the County Filing Offices (the “WOE County Financing Statement”);


 


(s)           the UCC-1 Financing Statement
reflecting Operating as debtor and Collateral Trustee as secured party, to be
filed in the County Filing Offices (the “Operating County Financing Statement”); and


 


(t)            the UCC-1 Financing Statement
reflecting Production as debtor and Collateral Trustee as secured party, to be
filed in the County Filing Offices (the “Production County Financing Statement”, and
together with the Square One County Financing Statement, the WOE County
Financing Statement, the Operating County Financing Statement, the Borrower
County Financing Statement, and the Ladder County Financing Statement,
collectively, the “County Financing Statements”).


 


As
used herein, the term “Collateral”
shall mean the non-fixture equipment, accounts, inventory, and general intangibles
and other personal property that is “Collateral”
(as defined in the Security Agreement); provided
that the Collateral shall exclude all real property, real estate,
leases, and fixtures that are not personal property.  As used herein, the term “Real Property Collateral”
shall mean the real property, real estate, leases, and fixtures described in
the Texas Mortgage.  As used herein, the
term “Pledged Collateral”
shall mean the “Pledged Collateral” as defined in the Pledge Agreement.


 


In
addition to the Transaction Documents, other documents we have reviewed in
rendering this opinion, and upon which we have relied, include the following:


 


(a)           the Certificate of Incorporation of
Borrower, certified by the Secretary of State of the State of Delaware on November 10,
2005;


 


(b)           an Officer’s Certificate of Borrower
(the “Borrower’s Officer’s
Certificate”) dated as of November 29, 2005 certifying (i) the
Certificate of Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutions
adopted by the Board of Directors of Borrower authorizing the execution,
delivery, and performance of the Transaction Documents executed by Borrower, (iv) the
incumbency of officers of Borrower, and (v) certain other factual matters,
including the Material Agreements of Borrower;


 


3





















 


(c)           a certificate from the Secretary of
State of the State of Delaware indicating that Borrower is in existence and
good standing as of November 15, 2005 (the “Borrower’s Existence and Good Standing Certificate”);


 


(d)           a certificate, dated November 15,
2005, from the Secretary of State of the State of Texas indicating that
Borrower is authorized to do business as a foreign corporation in the State of
Texas as of such date, a certificate, dated November 17, 2005, from the
Comptroller of Public Accounts of the State of Texas indicating that Borrower
is in good standing as of such date and a certificate, dated November 15,
2005, from the Secretary of State of the State of Oklahoma indicating that
Borrower is authorized to do business as a foreign corporation and in good
standing in the State of Oklahoma as of such date (collectively, the “Borrower’s Foreign Qualification
Certificates”);


 


(e)           the Certificate of Incorporation of
Ladder, certified by the Secretary of State of the State of Delaware on November 10,
2005;


 


(f)            an Officer’s Certificate of Ladder (“Ladder’s Officer’s Certificate”)
dated as of November 29, 2005 certifying (i) the Certificate of
Incorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutions
adopted by the Board of Directors of Ladder authorizing the execution,
delivery, and performance of the Transaction Documents executed by Ladder, (iv) the
incumbency of officers of Ladder, and (v) certain other factual matters,
including the Material Agreements of Ladder;


 


(g)           a certificate from the Secretary of
State of the State of Delaware indicating that Ladder is in existence and good
standing as of November 15, 2005 (“Ladder’s Existence and Good Standing Certificate”);


 


(h)           a certificate, dated November 15,
2005, from the Secretary of State of the State of Oklahoma indicating that
Ladder is authorized to do business as a foreign corporation and in good
standing in the State of Oklahoma as of such date (“Ladder’s Foreign Qualification Certificate”):


 


(i)            the Articles of Incorporation of
Square One, certified by the Secretary of State of the State of Texas on November 10,
2005;


 


(j)            an Officer’s Certificate of Square
One (“Square One’s
Officer’s Certificate”) dated as of November 29, 2005
certifying (i) the Articles of Incorporation of Square One, (ii) the
Bylaws of Square One, (iii) Resolutions adopted by the Board of Directors
of Square One authorizing the execution, delivery, and performance of the
Transaction Documents executed by Square One, (iv) the incumbency of
officers of Square One, and (v) certain other factual matters, including
the Material Agreements of Square One;


 


(k)           a certificate from the Secretary of
State of the State of Texas indicating that Square One is in existence as of November 15,
2005 (“Square One’s
Existence Certificate”);


 


4





















 


(l)            a certificate, dated November 15,
2005, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by Square One of all franchise and similar taxes (“Square One’s Good Standing
Certificate”);


 


(m)          the Articles of Incorporation of WOEN,
certified by the Secretary of State of the State of Nevada on November 8,
2005;


 


(n)           an Officer’s Certificate of WOEN (“WOEN’s Officer’s Certificate”)
dated as of November 29, 2005 certifying (i) the Articles of
Incorporation of WOEN, (ii) the Bylaws of WOEN, (iii) Resolutions
adopted by the Board of Directors of WOEN authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOEN, (iv) the
incumbency of officers of WOEN, and (v) certain other factual matters,
including the Material Agreements of WOEN;


 


(o)           a certificate from the Secretary of
State of the State of Nevada indicating that WOEN is in existence and good
standing as of November 15, 2005 (“WOEN’s Existence and Good Standing Certificate”);


 


(p)           the Articles of Incorporation of WOE,
certified by the Secretary of State of the State of Texas on November 14,
2005;


 


(q)           an Officer’s Certificate of WOE (“WOE’s Officer’s Certificate”)
dated as of November 29, 2005 certifying (i) the Articles of
Incorporation of WOE, (ii) the Bylaws of WOE, (iii) Resolutions
adopted by the Board of Directors of WOE authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOE, (iv) the
incumbency of officers of WOE, and (v) certain other factual matters,
including the Material Agreements of WOE;


 


(r)            a certificate from the Secretary of
State of the State of Texas indicating that WOE is in existence as of November 29,
2005 (“WOE’s Existence
Certificate”);


 


(s)           a certificate, dated November 29,
2005, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by WOE of all franchise and similar taxes (“WOE’s Good Standing Certificate”);


 


(t)            the Certificate of Limited
Partnership of Operating, certified by the Secretary of State of the State of
Texas on November 14, 2005;


 


(u)           an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Operating (“Operating’s Officer’s Certificate”)
dated as of November 29, 2005 certifying (i) the Certificate of
Limited Partnership of Operating, (ii) the Agreement of Limited
Partnership of Operating, (iii) Resolutions adopted by Board of Directors
of WOE, acting in its capacity as the sole General Partner


 


5





















 


of Operating, authorizing the execution,
delivery, and performance of the Transaction Documents executed by the officers
of WOE acting in its capacity as the sole General Partner of Operating, (iv) the
incumbency of officers of WOE, and (v) certain other factual matters,
including the Material Agreements of Operating;


 


(v)           a certificate from the Secretary of
State of the State of Texas indicating that Operating is in existence as of November 14,
2005 (“Operating’s
Existence Certificate”);


 


(w)          the Certificate of Limited Partnership
of Production, certified by the Secretary of State of the State of Texas on November 14,
2005;


 


(x)            an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Production (“Production’s Officer’s Certificate”)
dated as of November 29, 2005 certifying (i) the Certificate of
Limited Partnership of Production, (ii) the Agreement of Limited
Partnership of Production, (iii) Resolutions adopted by Board of Directors
of WOE, acting in its capacity as the sole General Partner of Production,
authorizing the execution, delivery, and performance of the Transaction
Documents executed by the officers of WOE, acting in its capacity as the sole
General Partner of Production, (iv) the incumbency of officers of WOE, and
(v) certain other factual matters, including the Material Agreements of
Production; and


 


(y)           a certificate from the Secretary of
State of the State of Texas indicating that Production is in existence as of November 14,
2005 (“Production’s
Existence Certificate”).


 


Scope of Examination and General


Assumptions and Qualifications


 


We
have been furnished with and examined originals or copies, certified or
otherwise identified to our satisfaction, of all such records of the Loan
Parties, agreements and other instruments, certificates of officers and
representatives of the Loan Parties, certificates of public officials, and
other documents as we have deemed necessary or desirable as a basis for the
opinions hereinafter expressed.  As to
questions of fact material to such opinions, we have, without independent
verification of their accuracy, relied to the extent we deem reasonably
appropriate upon the representations and warranties of the Loan Parties made in
the Transaction Documents and upon their respective Officer’s Certificates.


 


In
making such examinations, we have assumed, with your consent (a) the
genuineness of all signatures (other than the signatures of officers of the
Loan Parties), (b) the authenticity of all documents submitted to us as
originals, (c) the conformity to original documents of all documents
submitted to us as certified or photostatic copies, (d) the authenticity
of the originals of the documents referred to in the immediately preceding clause (c), (e) the
prompt and proper recordation of any Transaction Documents in which recordation
is anticipated, (f) that each party to the Transaction Documents (other
than the Delaware Loan Parties and the Texas Loan Parties) has full power,
authority, and legal right to enter into and perform all


 


6





















 


agreements
to which it is a party and has duly authorized, executed, and delivered each
such Transaction Document, (g) that the Transaction Documents (other than
the Oklahoma Mortgage) constitute the valid, binding, and enforceable agreement
of all the parties thereto (other than the Loan Parties), and (h) the
correctness and accuracy of all the facts set forth in all certificates and
reports identified in this opinion.


 


We
have been advised by officers of the Loan Parties (and with your consent have
relied on that advice) that the agreements described on Exhibit A
attached hereto (the “Material
Agreements”) are the only agreements and there are no orders,
writs, judgments, or decrees that are material to Borrower or applicable Loan
Party and which, if violated by the execution, delivery, or performance of the
Transaction Documents, could reasonably be expected to have a material adverse
effect on the validity, performance, or enforceability of any Transaction
Document or the ability of any Loan Party to fulfill its material obligations
under the Transaction Documents.  We
advise you that we have not reviewed, and have not devoted substantive
attention to, any other agreements (other than those described on Exhibit A) for
the purposes of rendering the opinion set forth in Paragraph 12
below.  We have made no examination of,
and express no opinion with respect to, any financial, accounting, or similar
covenant or provision contained in the Material Agreements to the extent that
any such covenant or provision would require a determination as to any
financial or accounting matters.  In
addition, we express no opinion as to any breach of any confidentiality
provision contained in any Material Agreement caused by any Transaction
Document or Borrower’s or applicable Loan Party’s actions pursuant thereto or
in contemplation thereof.  We note that
some of the Material Agreements are not governed by Texas law.  Therefore,
we have assumed that a court would enforce the Material Agreements as written,
and we have limited our opinion to matters readily ascertainable from the face
of the Material Agreements.  We also note
that some of the Material Agreements are not assignable by Borrower or
applicable Loan Party (those Material Agreements which pursuant to their terms
are not assignable by Borrower or applicable Loan Party are described on Exhibit B (collectively,
the “Non-Assignable
Material Agreements”)). 
As a result, to the extent that the Collateral includes Borrower’s or
applicable Loan Party’s rights under the Material Agreements, we have relied
upon Section 9.408(a) of
the UCC (defined below).  We note that
any assignment of Non-Assignable Material Agreements is subject to the
limitations set forth in Section 9.408(d) of
the UCC.


 


Our
opinions set forth below are limited solely to matters governed by the laws of
the State of Texas, the federal laws of the United States of America, and the
General Corporation Law of the State of Delaware (collectively, “Applicable Law”) and we express no
opinion as to questions concerning the laws of any other jurisdiction.  The opinions expressed herein are limited to
the Uniform Commercial Code as
adopted in the State of Texas (the “Texas UCC”) and the State of Delaware (the “Delaware UCC”) in
effect on the date hereof (the Texas UCC and the Delaware UCC are collectively,
the “UCC”).


 


7





















 


Specific Limitations and Qualifications on


Opinions Regarding Enforceability


 


With
respect to our opinion set forth in Paragraph 11 under the heading “Opinions”
below, we advise you that:


 


1.             The enforceability of the
Transaction Documents is subject to (a) the effects of (i) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium,
rearrangement, liquidation, conservatorship, or similar laws of general
application now or hereafter in effect relating to or affecting the rights of
creditors generally, (ii) general equity principles, and (iii) statutory
provisions of the federal Bankruptcy Code
and the Uniform Fraudulent Transfer Act
as adopted by the State of Texas (and related court decisions) pertaining to
the voidability of preferential or fraudulent transfers, conveyances, and
obligations, (b) the application of a standard of “good faith” such as that imposed by Section 1.304 of the Texas UCC, and (c) the
rights of the United States under the Federal
Tax Lien Act of 1966, as amended; provided, however, that any
limitations referred to under clauses (a)(ii) and (a)(iii) of
this paragraph imposed by such laws on the enforceability of any Transaction
Document will not render any Transaction Document invalid as a whole or prevent
you from the ultimate realization of the practical benefits of such Transaction
Document, except for the economic consequences of any judicial, administrative,
or other procedural delay which may result from such laws.


 


2.             The opinion that the Transaction
Documents are enforceable is also subject to the qualification that certain of
the remedial, waiver, and other provisions of the Transaction Documents may not
be enforceable; but such unenforceability will not, in our judgment, render the
Transaction Documents invalid as a whole or substantially interfere with the
realization of the principal legal benefits and/or security intended to be
provided by the Transaction Documents, except to the extent of any procedural
delay which may result therefrom.


 


3.             We express no opinion as to: (a) the
enforceability of provisions of the Transaction Documents to the extent that
such provisions: (i) purport to waive or affect any rights to notices
required by law and that are not subject to waiver under Section 9.602
of the Texas UCC; (ii) purport to waive trial by jury; (iii) state
that any Lender’s failure or delay in exercising rights, powers, privileges or
remedies under the Transaction Documents shall not operate as a waiver thereof;
(iv) purport to indemnify any Lender for such Lender’s violations of
federal or state securities laws or environmental laws, or any obligation to
the extent such obligation arises from or is a result of such Lender’s own
fraud, negligence, or willful misconduct or to the extent that such
indemnification is inconsistent with public policy; (v) purport to
establish or satisfy certain factual standards or conditions (e.g.,
standards of “commercial reasonableness” or “reasonable care” under Article 9
of the Texas UCC) in a manner not permitted by Sections 9.602
and 9.603 of the Texas UCC; (vi) purport to sever unenforceable
provisions from the Transaction Documents, to the extent that the enforcement
of remaining provisions would frustrate the fundamental intent of the parties
to such documents; (vii) restrict access to legal or equitable remedies; (viii) purport
to waive any claim of any Loan Party against any Lender arising out of, or in
any way related to, the Transaction Documents; (ix) purport to provide
remedies inconsistent with applicable law; or (x) providing that decisions
by a party are conclusive or may be made in its sole discretion; (b) whether
a court would grant specific performance or any other equitable remedy with
respect to enforcement of


 


8





















 


any provision contained in the Transaction
Documents; (c) the enforceability of any provision in the Transaction
Documents that purports to appoint an agent for service of process or establish
or otherwise affect jurisdiction, venue, evidentiary standards, or limitation
periods, or procedural rights in any suit or other proceeding; (d) the
enforceability of any provision in the Transaction Documents that purports to
waive, subordinate, or otherwise restrict or deny access to rights, benefits,
claims, causes of action, or remedies that cannot be waived, subordinated, or
otherwise restricted or denied; (e) the enforceability of any provision in
the Transaction Documents that allows any Lender to accelerate the maturity
date of the obligations evidenced by the Transaction Documents, to institute
foreclosure proceedings, or to exercise any similar right, without notice to
the person or entity signatory thereto or bound thereby; or (f) the
enforceability of any provision contained in the Transaction Documents relating
to the appointment of a receiver, to the extent that appointment of a receiver
is governed by applicable statutory requirements, and to the extent that such
provision may not be in compliance with such requirements.


 


4.             We express no opinion on any Lender’s
ability to foreclose on, become the owner of, or validly transfer or assume,
all of the rights and duties of any Loan Party (other than the right to receive
payments thereunder and the right to receive an assignment of accounts receivable
arising thereunder) as a party to the Non-Assignable Material Agreements, under
which such Loan Party’s rights, obligations, or duties are not freely
assignable or transferable.


 


5.             We express no opinion regarding the
enforceability of any documents or agreements referenced in the Transaction
Documents (other than the Transaction Documents).


 


6.             We express no opinion regarding any
Lender’s ability to exercise any rights or remedies against any collateral that
is personal property pursuant to the Transaction Documents other than in
accordance with the Texas UCC or the Delaware UCC.


 


7.             We express no opinion regarding (a) the
enforceability of provisions of the Texas Mortgage that grant the right to
become a mortgagee in possession of the Real Property Collateral prior to a
foreclosure of the lien of the Transaction Documents or provide for the
collection of (or the perfection or effectiveness of your lien in) rents and
profits prior to actual or constructive possession of the Real Property
Collateral, (b) the enforceability of any waiver of any right to an
appraisal of the Real Property Collateral, to the extent one is provided
pursuant to Texas Property Code Annotated
Sections 51.003-51.005, which rights are not waivable under Texas
law, or (c) compliance with, or the effect of land use, zoning, building,
sanitation, environmental, or ecological laws or regulations affecting the Real
Property Collateral.


 


9





















 


Specific Limitations and Qualifications on


Opinions Regarding Texas Usury Laws


 


The
opinions expressed in Paragraphs
11 and 13
under the heading “Opinions” below are also subject to the following:


 


1.             We have assumed that (a) no
fees, charges, or other compensation will be paid to Lenders, or for their
benefit, except as specified in the Transaction Documents, and (b) no
interest will accrue on the unfunded portion of the indebtedness evidenced by
the Transaction Documents.


 


2.             We have assumed that Lenders will
comply with and give effect to all of the provisions of the Transaction
Documents with respect to the computation of the interest rate and the charging
and collection of interest thereunder, including without limitation, the “Savings Clause”
(herein so called) (i.e., a
clause to the effect that Borrower shall never be required to pay, and Lenders
shall never be entitled to collect or receive, interest on the loans evidenced
by the Credit Agreement at a rate in excess of the maximum rate permitted by
applicable law).  We advise Lenders that,
if Borrower repays, or Lenders accelerate or otherwise demand payment of, the
loans made under the Credit Agreement prior to the scheduled maturity date
thereof, then Lenders will have to return any excessive interest received as
the result of such prepayment in order to give effect to the Savings Clause.


 


3.             We express no opinion as to whether
the fees denominated in the Credit Agreement as “commitment fees” or other fees and expenses (other than
those explicitly designated as interest) payable to Lenders under the
Transaction Documents are interest or in certain cases, whether any fees should
be deducted from the principal of the loan evidenced by the Transaction
Documents in determining interest chargeable under such loan.  We assume that Lenders will comply with
applicable law in the treatment of such items under such loan.


 


4.             Section 2.09(d) of the
Credit Agreement limits the reduction in the contract rate of interest in
certain circumstances in order to recoup the contracted rate of interest for
the prior period where the contracted rate was capped at a lower rate by the
maximum lawful rate.  While there is a
Texas statute and established precedent for the spreading of interest forward
over the anticipated life of a loan, we are aware of no cases permitting “backward” spreading.  Notwithstanding the lack of case law,
however, backward spreading, we believe, is consistent with the principles
underlying forward spreading and should be permissible under Texas law.


 


Specific Limitations and Qualifications on


Opinions Regarding Laws and Consents


 


With
respect to our opinions in Paragraphs
13 and 14
under the heading “Opinions” below with respect to no violation of any
applicable law and as to the lack of any required consents, approvals, or
authorizations of governmental authorities, our opinions are expressed only
with respect to statutes or


 


10





















 


regulations
that a lawyer in Texas or Delaware, as applicable, exercising customary
professional diligence would reasonably recognize as being applicable to the
Loan Parties or the transactions contemplated by the Transaction
Documents.  In addition, we express no
opinion as to the following: (a) federal securities laws and regulations
administered by the Securities and Exchange Commission, State of Texas “Blue
Sky” laws and regulations, and laws and regulations relating to commodity (and
other) futures and indices and other similar instruments; or (b) the
statutes and ordinances, the administrative decisions, and the rules and regulations
of counties, towns, municipalities, and special political subdivisions (whether
created or enabled through legislative action at the federal, state, or
regional level), and any judicial decisions to the extent they deal with any of
the foregoing.


 


Specific Limitations and Qualifications on


Opinions Regarding Perfection of Liens


and Security Interests in the Collateral


 


With
respect to the opinions expressed below regarding the perfection of Collateral
Trustee’s liens and security interests in the Collateral, we advise you that:


 


1.             We express no opinion regarding (a) the
accuracy or completeness of any property descriptions contained in the
Transaction Documents; however such descriptions are in sufficient form,
assuming accuracy and completeness, (b) title to the Collateral, (c) the
creation or perfection of Collateral Trustee’s liens and security interests in
the Collateral insofar as the laws of a jurisdiction other than the State of Texas (with respect to creation) or
the States of Texas and Delaware (with respect to perfection) govern the
creation or perfection of such liens and security interests, or (d) the
creation or perfection of Collateral Trustee’s liens and security interests in
Collateral that is not described in the Transaction Documents.


 


2.             We have assumed, with your
permission, the following facts: (a) the Loan Parties, as applicable, have
good and sufficient title to the Collateral; (b) the Loan Parties, as
applicable, have “rights in the collateral”
as that term is used in Section 9.203
of the Texas UCC; (c) value has been given within the meaning of Section 9.203 of the Texas UCC; (d) the
Delaware Loan Parties are each solely incorporated, formed, or organized, as
the case may be, under the laws of the State of Delaware, the Texas Loan
Parties are each solely incorporated, formed, or organized, as the case may be,
under the laws of the State of Texas and WOEN is solely incorporated under the
laws of the State of Nevada; and (e) Collateral Trustee’s address is
correctly set forth on the Financing Statements and the County Financing
Statements.


 


3.             The opinions given in Paragraphs 15, 16, and 17 under the
heading “Opinions” below as to the creation and perfection of security
interests do not cover real property and other property transactions excluded
from the coverage of the Texas UCC pursuant to
Section 9.109 of the Texas UCC.


 


11





















 


4.             We advise you that (a) in the
case of Collateral consisting of motor vehicles for which certificates of title
have been issued and for which the exclusive manner of perfecting a security
interest is by noting Collateral Trustee’s security interests on the
certificate of title in accordance with the Texas
Certificate of Title Act or other comparable law of other states,
Collateral Trustee’s security interest therein cannot be perfected by the
filing of the Financing Statements, but will be perfected only if Collateral
Trustee’s security interests are so noted, (b) the continuation of any
security interests and perfection of any security interests in Collateral
consisting of proceeds is limited to the extent set forth in the UCC, (c) continuation
statements complying with the UCC must be filed not more than six (6) months
prior to the expiration of a five (5) year period dating from the date of
filing of the Financing Statements (or otherwise within the time permitted by
the UCC) and subsequent continuation statements must be filed within six (6) months
prior to the end of each subsequent five (5) year period and amendments or
supplements to the Financing Statements and/or additional financing statements
may be required to be filed in the event of a change of name, identity, or
corporate structure of any of the Delaware Loan Parties or any of the Texas
Loan Parties, or if any of the Delaware Loan Parties or any of the Texas Loan
Parties changes the jurisdiction of its incorporation, organization, or
formation, as the case may be, (d) in the case of property which becomes
Collateral after the date hereof, Section 552
of the Federal Bankruptcy Code limits
the extent to which property acquired by a debtor after the commencement of a
case under the Federal Bankruptcy Code may
be subject to a security interest arising from a security agreement entered
into by the debtor before the commencement of the case, (e) although the
filing of a financing statement will perfect a security interest in chattel
paper, negotiable documents, instruments, and investment property, (i) such
a perfected security interest in chattel paper, negotiable documents, and
instruments is subject to rights of prior or subsequent holders who obtain
possession of such Collateral, and (ii) such a perfected security interest
in investment property is subject to rights of prior or subsequent holders who
obtain “control” (as such term is
defined in the UCC) of such Collateral, unless
the secured party obtains “control”
of such Collateral in accordance with the UCC, and (f) as against third
parties having or acquiring an interest in or a lien on the real property to
which any fixtures are attached, the rights and duties of the law of the state
relating to real property and fixtures may apply.


 


5.             We express no opinion as to the
perfection of liens and security interests in the Collateral constituting
general intangibles consisting of copyrights, patents, trademarks, and
tradenames to the extent security interests in such property may be perfected
only by the filing of the appropriate documents in the United States Copyright
Office and the United States Patent and Trademark Office.


 


6.             We have assumed that none of the
Collateral consists or will consist of consumer goods, farm products, crops, or
timber, or accounts resulting from the sale of timber.


 


7.             We also note that a security
interest in after-acquired property may attach and become enforceable and may
become perfected only when the debtor has obtained rights in such Collateral.


 


8.             We express no opinion regarding the
priority of any liens and security interests created by the Transaction
Documents, except as explicitly set forth in Paragraph
17 under the heading “Opinions”


 


12





















 


below. 
We express no opinion as to the priority of any security interest in the
Pledged Collateral or portions thereof that are or become subject to liens
for taxes, assessments, levies, fees and other governmental and similar
charges, and other claims of any type of any governmental authority, in each
case that may be afforded priority over the security interests of Lender by Applicable
Law.


 


9.             We have made no review of the
Collateral, the books and records relating to the Collateral, or any compliance
by any of the Loan Parties with applicable rules and regulations governing
the ownership, use, leasing, maintenance, or charter of the Collateral, and
therefore we give no opinion concerning same.


 


10.           We have assumed, with your
permission, that (a) that no party executing the Security Agreement is a
broker or securities intermediary, as such terms are defined in the UCC, and (b) any
original certificates evidencing the Pledged Collateral have been delivered to,
and possession thereof will be held by, Collateral Trustee in the State of
Texas.


 


11.           We note that in order to enforce
Lenders’ remedies and rights of foreclosure by sale, after default, of the
Pledged Collateral, Lenders will be required to comply with applicable federal
and state securities laws.


 


Opinions


 


Based
upon the foregoing, and subject to the qualifications set forth below, we are
of the opinion that:


 


1.             Borrower is, based solely upon, and
as of the date of, the Borrower’s Existence and Good Standing Certificate,
validly existing and in good standing under the laws of the State of
Delaware.  Based solely upon, and as of
the date of, the Borrower’s Foreign Qualification Certificates, Borrower is
qualified to do business as a foreign corporation in the State of Texas and in
the State of Oklahoma.


 


2.             Ladder is, based solely upon, and
as of the date of, Ladder’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Delaware.  Based solely upon, and as of the date of,
Ladder’s Foreign Qualification Certificate, Ladder is qualified to do business
as a foreign corporation in the State of Oklahoma.


 


3.             Square One is, based solely upon,
and as of the date of, Square One’s Existence Certificate and Square One’s Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Texas.


 


4.             WOEN is, based solely upon, and as
of the date of, WOEN’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Nevada.


 


13





















 


5.             WOE is, based solely upon, and as
of the date of, WOE’s Existence Certificate and WOE’s Good Standing
Certificate, validly existing and in good standing under the laws of the State
of Texas.


 


6.             Operating is, based solely upon,
and as of the date of, Operating’s Existence Certificate, validly existing
under the laws of the State of Texas.


 


7.             Production is, based solely upon,
and as of the date of, Production’s Existence Certificate, validly existing
under the laws of the State of Texas.


 


8.             Borrower and Ladder each have the
corporate power and authority under the General
Corporation Law of the State of Delaware and their respective
Certificates of Incorporation and Bylaws to execute, deliver, and perform their
obligations under the Transaction Documents. 
The Transaction Documents to which Borrower and/or Ladder is a party
have been duly authorized by all necessary corporate action on the part of
Borrower and/or Ladder, as appropriate, and have been duly executed and
delivered by Borrower and/or Ladder, as appropriate.


 


9.             Square One and WOE each have the
corporate power and authority under the Texas
Business Corporation Act and their respective Articles of
Incorporation and Bylaws to execute, deliver, and perform their obligations
under the Transaction Documents.  The
Transaction Documents to which Square One and/or WOE is a party have been duly
authorized by all necessary corporate action on the part of Square One and/or
WOE, as appropriate, and have been duly executed and delivered by Square One
and/or WOE, as appropriate.


 


10.           Operating and Production each have
the partnership power and authority under the Texas
Revised Limited Partnership Act and their respective Certificates of
Limited Partnership and Limited Partnership Agreements to execute, deliver, and
perform their obligations under the Transaction Documents.  The Transaction Documents to which Operating
and/or Production is a party have been duly authorized by all necessary
partnership action on the part of Operating and/or Production and their general
partners, as appropriate, and have been duly executed and delivered by
Operating and/or Production (or their general partners on their behalf), as
appropriate.


 


11.           The Transaction Documents (other than
the Oklahoma Mortgage) to which any Loan Party is a party are enforceable
against such Loan Party in accordance with their respective terms.


 


12.           The execution and delivery by each
Loan Party of, and performance of its agreements in, the Transaction Documents
do not (a) violate the Certificate of Incorporation, Articles of
Incorporation, Bylaws, Certificate of Limited Partnership or Limited
Partnership Agreement, each as applicable, of any Loan Party, or (b) breach
or result in a default under any obligation of any Loan Party under, or require
a consent under, or result in the creation of any Lien (except for the Liens
created pursuant to the


 


14





















 


Transaction Documents) upon any of the
properties, revenues, or other assets of any Loan Party pursuant to, any
Material Agreement.


 


13.           The execution and delivery of the
Transaction Documents, the consummation of the transactions contemplated
thereby, and compliance by the Loan Parties with the provisions thereof will
not violate any Applicable Law.


 


14.           No consent, approval, waiver,
license, or authorization or any other action by or filing with any
governmental authority is required under Applicable Law in connection with the
execution and delivery by the Loan Parties of the Transaction Documents, except
for those already obtained or completed.


 


15.           The Security Agreement creates in
favor of Collateral Trustee, for the benefit of the Secured Parties (as defined
therein), a valid security interest in all of the Loan Parties’ right, title,
and interest in and to that portion of the Collateral in which a security
interest may be created under the Texas UCC. 
Under the Texas UCC and the Delaware UCC, upon the acceptance of filing
of the Financing Statements in the Office of the Secretary of State of Texas or
the Office of the Secretary of State of Delaware, as appropriate, the
Collateral Trustee shall have a perfected security interest, for the benefit of
the Secured Parties (as defined in the Security Agreement) in the Collateral in
which a security interest may be perfected by filing of financing statements
under the Texas UCC or Delaware UCC, as appropriate.


 


16.           The Pledge Agreement creates
in favor of the Collateral Trustee for the benefit of the Secured Parties (as
defined therein) a valid security interest in all right, title, and interest of
each Loan Party a party thereto in the Pledged Collateral enforceable against
each such Loan Party, securing the Secured Obligations (as defined in the
Pledge Agreement).


 


17.           Upon the filing of the Delaware
Financing Statements in the Office of the Secretary of State of Delaware and
the Texas Financing Statements in the Office of the Secretary of State of
Texas, Collateral Trustee shall have a perfected security interest in the
Pledged Collateral.  With respect to Pledged Collateral that is a
certificated security or an instrument (referred to in this Paragraph 17 as the
“Certificated Pledged Collateral”),
upon the Collateral Trustee’s taking possession in the State of Texas of
certificates or instruments representing such Certificated Pledged Collateral,
which are in registered form, issued or indorsed in the name of the Collateral
Trustee or in blank by an effective indorsement, or accompanied by undated
stock powers executed in blank with respect thereto, the security interests of
the Collateral Trustee for the benefit of the Secured Parties (as defined in
the Pledge Agreement) created by the Pledge Agreement in such Certificated
Pledged Collateral will constitute valid, first-priority perfected security
interests under the Texas UCC.


 


15





















 


18.           The form of the
Texas Mortgage and the form of the description of the Mortgaged Property (as
such term is defined therein and so used herein) situated in the State of Texas
are in satisfactory form for filing and recording in the offices described in Paragraph 19 below.


 


19.           Upon filing and recording of the Texas
Mortgage with the real property records of the Texas counties, as applicable,
the Texas Mortgage will create a valid and binding perfected mortgage lien in
favor of the Collateral Trustee on the Real Property Collateral.  The proper recordings of the Texas Mortgage
in the real property records of the respective Texas counties identified
therein (the “County Filing Offices”) are
the only filings, recordings, and registrations necessary to publish notice and
preserve the liens of the Texas Mortgage in the Real Property Collateral.  Each Texas Mortgage creates a valid security
interest in favor of the Collateral Trustee to the extent provided therein in
all right, title and interest of each Loan Party party thereto in that portion
of the “Collateral” (as defined therein) (other than the Real Property
Collateral) which constitutes personal property.  Upon the proper filing in the real property
records of the County Filing Offices of the County Financing Statements, the
Collateral Trustee will have a perfected security interest within the meaning
of Chapter 9 of the Texas UCC in that portion of the Collateral (as defined in
the Texas Mortgage) that is personal property and constitutes fixtures located
on the Real Property Collateral or as-extracted collateral from such Real
Property Collateral in which a security interest may be perfected by filing a
financing statement subject, however, with respect to proceeds, to Section 9.315
of the Texas UCC.


 


20.           No state or local mortgage registration tax,
stamp tax, or other similar fee, tax, or governmental charge (other than filing
and recording fees to be paid upon filing) is required to be paid to the State
of Texas or any subdivision thereof in connection with the execution, delivery,
filing, or recording of any of the Texas Mortgage or the consummation of the
transactions contemplated therein. 
Except for the payment of recording or filing fees and taxes associated
with filings made with respect to the Financing Statements and the Texas
Mortgage, no other taxes or governmental fees or charges are required under
Applicable Law in connection with (a) the creation, perfection, or the
recording of the Liens purported to be created by the Transaction Documents, (b) the
execution and delivery of any of the Transaction Documents, or (c) the
obtaining of credit under the Credit Agreement.


 


21.           The
Advances to be made on the date hereof and the application of the proceeds
thereof as provided for in the Credit Agreement do not violate Regulation U or
X of the Board of Governors of the Federal Reserve System.


 


22.           No Loan Party is a “holding
company”, a “subsidiary company” of 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.


 


23.           No Loan Party is an “investment
company” or a company “controlled by” an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.


 


16





















 


This
opinion (a) has been furnished to you at your request, and we consider it
to be a confidential communication that may not be furnished, reproduced,
distributed or disclosed to anyone (other than your permitted successors and
assigns under the Credit Agreement) without our prior written consent, (b) is
rendered solely for your information and assistance in connection with the
above transaction, and may not be relied upon by any other person (other than
your permitted successors and assigns under the Credit Agreement) or for any
other purpose without our prior written consent, (c) is rendered as of the
date hereof, and we undertake no, and hereby disclaim any kind of obligation to
advise you of any changes for any new developments that might affect any
matters or opinions set forth herein, and (d) is limited to the matters
stated herein and no opinions may be inferred or implied beyond the matters
expressly stated herein.


 


	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HAYNES AND BOONE, LLP

  



 


17





















 


EXHIBIT A


 


MATERIAL AGREEMENTS


 


Engagement for Professional Services by and between Cano Petroleum, Inc.
and Bainbridge Capital dated April 14, 2005.


 


Gas Purchase and Processing Agreement by and between Ladder Energy
Company and ScissorTail Energy, LLC dated September 1, 2004.


 


Gas Sales and Purchase Agreement by and between Alliant Energy
Desdemona, LP and KenMor Properties, LLC dated March 1, 2005.


 


Agreement by and between Square One Energy, Inc. and KenMor
Properties, LLC dated October 7, 2005 (in which KenMor Properties, LLC
assigns, transfers and conveys to Square One Energy, Inc. all of its
right, title and interest in and to the Gas Sales and Purchase Agreement by and
between Alliant Energy Desdemona, LP and KenMor Properties, LLC dated March 1,
2005), as amended by a First Amendment to Agreement dated October 7, 2005.


 


Gas Purchase Contract by and between Ladder Energy Company and Western
Gas Resources, Inc. dated January 7, 1998.


 


Gas Purchase Contract by and between Square One Energy, Inc. and
Newpoint Gas Services, Inc. dated April 21, 2004.


 


Crude Oil Purchase Agreement by and between Ladder Energy Company and
Sunoco, Inc. (R&M) dated February 1, 2000, as amended by a letter
agreement between Sunoco Partners Marketing & Terminals, L.P. and
Ladder Energy Company dated September 12, 2005.


 


Crude Oil Purchase Agreement by and between Ladder Energy and
Coffeyville Resources Crude Transportation dated October 4, 2005.


 


Natural Gas Liquid Mix Agreement by and between Square One Energy, Inc.
and Dufour Petroleum, L.P. dated July 1, 2004, as amended by Amendment
Letter dated October 1, 2005 and as amended by Amendment Letter dated November 1,
2005.


 


Office Lease Agreement by and between Ft. Worth Plaza Limited
Partnership, a Texas limited partnership, as Landlord and Cano Petroleum, Inc.
(assignee of Cano Energy Corporation), as Tenant, purportedly dated April 10,
2001, as amended by the First Amendment to Lease Agreement dated September 19,
2001.


 


Consulting Agreement by and between Cano Petroleum, Inc. and
Reservoir Solutions, Inc. dated 


 


18





















 


August 15, 2005.


 


Lignin Surfactant System Development Agreement by and between Cano
Petroleum, Inc. and Reservoir Solutions, Inc. dated July 20,
2005.


 


Stock Purchase Agreement by and between Cano Petroleum, Inc., W.
O. Energy of Nevada, Inc., Miles O’Loughlin and Scott White dated November 29,
2005.


 


Executive Employment Agreement by and between Huron Ventures, Inc.
and S. Jeffrey Johnson dated May 28, 2004.


 


Employment Agreement by and between Huron Ventures, Inc. and
Michael J. Ricketts dated May 28, 2004.


 


Employment Agreement by and between Huron Ventures, Inc. and
Thomas Cochrane dated May 28, 2004.


 


Employment Agreement by and between Cano Petroleum, Inc. and James
K. Teringo, Jr. dated July 11, 2005.


 


Compensation Reimbursement Agreement by and between Cano Petroleum, Inc.
and Sabine Production Operating, LLC dated October 31, 2005.


 


Omnibus Agreement by and between Cano Petroleum, Inc., Carlile
Management, LLC, Haddock Enterprises, LLC and Sabine Production Partners, LP
dated October 31, 2005.


 


Amended and Restated Regulations of Sabine Production Operating, LLC
executed by Cano Petroleum, Inc., Haddock Enterprises, LLC and Carlile
Management, LLC, effective as of August 3, 2005.


 


2005 Directors’ Stock Option Plan of Cano Petroleum, Inc.


 


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


 


Management Stock Pool Agreement dated May 28, 2004 among Huron
Ventures Inc. and The Shareholders of Davenport Field Unit Inc.


 


Management Stock Pool Escrow Agreement dated May 28, 2004 by and
among Huron Ventures Inc. and S. Jeffrey Johnson, et al.


 


Purchase and Sale Agreement dated August 16, 2004, by and between
Cano Energy Corporation and Cano Petroleum, Inc.


 


19





















 


Purchase and Sale Agreement dated September 2, 2004, by and
between Nowata Oil Properties LLC and Cano Petroleum, Inc.


 


Purchase and Sale Agreement dated February 6, 2005, by and between
Square One Energy, Inc. and Cano Petroleum, Inc.


 


Subscription Agreement dated October 8, 2004 by and between Cano
Petroleum, Inc. and Randall Boyd.


 


Stock Option Agreement dated December 16, 2004, between Cano
Petroleum, Inc. and Gerald W. Haddock.


 


Form of Subscription Agreement dated March 18, 2005.


 


Letter Agreement dated March 29, 2005 among the Haddock
Enterprises, LLC, Cano Petroleum, Inc. and Kenneth Carlile.


 


Sabine Production Partners, LP Transaction Summary dated August 4,
2005.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Howard Hughes Medical Institute.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and The Robert Wood Johnson Foundation.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Laborers’ District Council and Contractors’ of
Ohio Pension Fund.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Ohio Carpenters’ Pension Fund.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and New York Nurses Association Pension Plan.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Public Sector Pension Investment Board.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Spindrift Investors (Bermuda) L.P.


 


Subscription Agreement dated September 16, 2005 by and between
Cano Petroleum, Inc. and Spindrift 


 


20





















 


Partners, L.P.


 


Non-Qualified Stock Option Agreement dated September 16, 2005 by
and between Cano Petroleum, Inc. and James K. Teringo, Jr.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Touradji Global Resources Master Fund, Ltd.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Renaissance US Growth Investment Trust PLC.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and BFS US Special Opportunities Trust PLC.


 


Subscription Agreement dated September 14, 2005 by and between
Cano Petroleum, Inc. and Crestview Capital Master, LLC.


 


Summary Sheet: Vice President, General Counsel and Secretary of Cano
Petroleum, Inc. Annual Base Salary.


 


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


 


Gas Purchase and Sales
Agreement dated September 1, 1975, between Skelly Oil Company, as Seller,
and Phillips Petroleum Company, as Buyer.


 


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


 


Gas Purchase Contract between Hugoton Energy Corporation, as Seller,
and GPM Gas Corporation, as Buyer, dated August 3, 1995, covering Sections
3 and 4, Block Y, M&C Survey, Hutchinson County, Texas.


 


Crude Oil Purchase Contract between W.O. Operating Company, as Seller,
and Diamond Shamrock Refining Company LP, dated August 6, 2001 (Valero is
successor to Diamond Shamrock on this contract).


 


Gas Purchase Contract by and between W.O. Operating Company Limited, as
Seller, and OneOK Texas Field Services LP, as Buyer, dated January 1,
2005.


 


Gas Purchase Contract between W.O. Operating Company, as Seller, and
GPM Gas Corporation, as Buyer, dated March 15, 1995.


 


21





















 


Gas Purchase Contract dated August 3, 1995 by and between W.O.
Operating Company and Duke Energy Field Services, as amended on August 1,
2005 and September 1, 2005.


 


Oil Marketing Agreement dated January 13, 1994 by and between W.O.
Operating Company and Pan Mark, Inc.


 


22





















 


EXHIBIT B


 


MATERIAL AGREEMENTS NOT FREELY ASSIGNABLE


 


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


 


2005 Directors’ Stock Option Plan of Cano Petroleum, Inc.


 


Employment Agreement by and between Cano Petroleum, Inc. and James
K. Teringo, Jr. dated July 11, 2005.


 


Compensation Reimbursement Agreement by and between Cano Petroleum, Inc.
and Sabine Production Operating, LLC dated October 31, 2005.


 


Omnibus Agreement by and between Cano Petroleum, Inc., Carlile
Management, LLC, Haddock Enterprises, LLC and Sabine Production Partners, LP
dated October 31, 2005.


 


Executive Employment Agreement by and between Huron Ventures, Inc.
and S. Jeffrey Johnson dated May 28, 2004.


 


Office Lease Agreement by and between Ft. Worth Plaza Limited Partnership,
a Texas limited partnership, as Landlord and Cano Petroleum, Inc.
(assignee of Cano Energy Corporation), as Tenant, purportedly dated April 10,
2001, as amended by the First Amendment to Lease Agreement dated September 19,
2001.


 


Gas Purchase Contract by and between Square One Energy, Inc. and
Newpoint Gas Services, Inc. dated April 21, 2004.


 


Gas Purchase and Processing Agreement by and between Ladder Energy
Company and ScissorTail Energy, LLC dated September 1, 2004.


 


Non-Qualified Stock Option Agreement dated September 16, 2005 by
and between Cano Petroleum, Inc. and James K. Teringo, Jr.


 


Purchase and Sale Agreement dated August 16, 2004, by and between
Cano Energy Corporation and Cano Petroleum, Inc.


 


Purchase and Sale Agreement dated February 6, 2005, by and between
Square One Energy, Inc. and Cano Petroleum, Inc.


 


23





















 


Management Stock Pool Agreement dated May 28, 2004 among Huron
Ventures Inc. and The Shareholders of Davenport Field Unit Inc.


 


Crude Oil Purchase Contract between W.O. Operating Company, as Seller,
and Diamond Shamrock Refining Company LP, dated August 6, 2001 (Valero is
successor to Diamond Shamrock on this contract).


 


Gas Purchase Contract by and between W.O. Operating Company Limited, as
Seller, and OneOK Texas Field Services LP, as Buyer, dated January 1,
2005.


 


24