Exhibit 10.2


 




 





$15,000,000


 


SUBORDINATED
CREDIT AGREEMENT


 


Among


 


CANO
PETROLEUM, INC.


 


as Borrower,


 


and


 


THE LENDERS PARTY HERETO FROM TIME
TO TIME


 


as Lenders,


 


and


 


ENERGY
COMPONENTS SPC EEP ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO


 


as Administrative Agent


 


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

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.03

  	
  Accounting Terms; Changes
  in GAAP

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 1.04

  	
  Miscellaneous

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE II

  	
  CREDIT
  FACILITY

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.01

  	
  Commitment for Advances

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.02

  	
  Method of Borrowing

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.03

  	
  Prepayment of Advances

  	
  19

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.04

  	
  Repayment of Advances

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.05

  	
  Facility Fee

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.06

  	
  Interest

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.07

  	
  Payments and
  Computations

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.08

  	
  Sharing of Payments,
  Etc.

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.09

  	
  Breakage Costs

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.10

  	
  Increased Costs

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 2.11

  	
  Taxes

  	
  24

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE III

  	
  CONDITIONS
  OF LENDING

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 3.01

  	
  Conditions Precedent to
  Credit Extension

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE IV

  	
  REPRESENTATIONS
  AND WARRANTIES

  	
  29

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.01

  	
  Existence; Subsidiaries

  	
  29

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.02

  	
  Power

  	
  29

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.03

  	
  Authorization and
  Approvals

  	
  30

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.04

  	
  Enforceable Obligations

  	
  30

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.05

  	
  Financial Statements

  	
  30

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.06

  	
  True and Complete
  Disclosure

  	
  30

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.07

  	
  Litigation; Compliance
  with Laws

  	
  31

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.08

  	
  Use of Proceeds

  	
  31

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.09

  	
  Investment Company Act

  	
  31

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.10

  	
  Public Utility Holding
  Company Act

  	
  31

  



 


i





















 


	
   

  	
  Section 4.11

  	
  Taxes

  	
  32

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.12

  	
  Pension Plans

  	
  32

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.13

  	
  Condition of Property;
  Casualties

  	
  33

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.14

  	
  No Burdensome
  Restrictions; No Defaults

  	
  33

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.15

  	
  Environmental Condition

  	
  33

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.16

  	
  Permits, Licenses, Etc

  	
  34

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.17

  	
  Gas Contracts

  	
  34

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.18

  	
  Liens; Titles, Leases, Etc

  	
  34

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.19

  	
  Solvency and Insurance

  	
  35

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.20

  	
  Hedging Agreements

  	
  35

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 4.21

  	
  Material Agreements

  	
  35

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE V

  	
  AFFIRMATIVE
  COVENANTS

  	
  35

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.01

  	
  Compliance with Laws,
  Etc

  	
  36

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.02

  	
  Maintenance of
  Insurance

  	
  36

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.03

  	
  Preservation of
  Corporate Existence, Etc

  	
  37

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.04

  	
  Payment of Taxes, Etc

  	
  37

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.05

  	
  Visitation Rights

  	
  37

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.06

  	
  Reporting Requirements

  	
  37

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.07

  	
  Maintenance of Property

  	
  41

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.08

  	
  Agreement to Pledge

  	
  41

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.09

  	
  Use of Proceeds

  	
  41

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.10

  	
  Title Evidence and
  Opinions

  	
  41

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.11

  	
  Further Assurances;
  Cure of Title Defects

  	
  42

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.12

  	
  Hedging Arrangements

  	
  42

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 5.13

  	
  Bank Accounts

  	
  42

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VI

  	
  NEGATIVE
  COVENANTS

  	
  43

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.01

  	
  Liens, Etc

  	
  43

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.02

  	
  Debts, Guaranties, and
  Other Obligations

  	
  44

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.03

  	
  Agreements Restricting
  Liens and Distributions

  	
  45

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.04

  	
  Merger or
  Consolidation; Asset Sales

  	
  45

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.05

  	
  Restricted Payments

  	
  45

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.06

  	
  Investments

  	
  45

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.07

  	
  Affiliate Transactions

  	
  46

  



 


ii





















 


	
   

  	
  Section 6.08

  	
  Compliance with ERISA

  	
  46

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.09

  	
  Sale-and-Leaseback

  	
  47

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.10

  	
  Change of Business

  	
  47

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.11

  	
  Organizational
  Documents, Name Change

  	
  47

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.12

  	
  Use of Proceeds;
  Letters of Credit

  	
  48

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.13

  	
  Gas Imbalances,
  Take-or-Pay or Other Prepayments

  	
  48

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.14

  	
  Limitation on
  Speculative Hedging

  	
  48

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.15

  	
  Additional
  Subsidiaries; Additional Oil and Gas Properties

  	
  48

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.16

  	
  Account Payables

  	
  49

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.17

  	
  Current Ratio

  	
  49

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.18

  	
  Debt Coverage Ratio

  	
  49

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.19

  	
  Interest Coverage Ratio

  	
  49

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.20

  	
  Senior Debt

  	
  50

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 6.21

  	
  Non-guarantor
  Subsidiary

  	
  50

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VII

  	
  EVENTS
  OF DEFAULT; REMEDIES

  	
  50

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.01

  	
  Events of Default

  	
  50

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.02

  	
  Optional Acceleration
  of Maturity

  	
  53

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.03

  	
  Automatic Acceleration
  of Maturity

  	
  53

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.04

  	
  Right of Set-off

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.05

  	
  Non-exclusivity of
  Remedies

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 7.06

  	
  Application of Proceeds

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE VIII

  	
  THE
  ADMINISTRATIVE AGENT

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.01

  	
  Authorization and
  Action

  	
  54

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.02

  	
  Administrative Agent’s
  Reliance, Etc

  	
  55

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.03

  	
  The Administrative
  Agent and Its Affiliates

  	
  55

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.04

  	
  Lender Credit Decision

  	
  55

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.05

  	
  Indemnification

  	
  56

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 8.06

  	
  Successor
  Administrative Agent

  	
  56

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE IX

  	
  MISCELLANEOUS

  	
  57

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.01

  	
  Amendments, Etc

  	
  57

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.02

  	
  Notices, Etc

  	
  57

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.03

  	
  No Waiver; Remedies

  	
  57

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.04

  	
  Costs and Expenses

  	
  58

  



 


iii





















 


	
   

  	
  Section 9.05

  	
  Binding Effect

  	
  58

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.06

  	
  Lender Assignments and
  Participations

  	
  58

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.07

  	
  Indemnification; Waiver

  	
  60

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.08

  	
  Execution in
  Counterparts

  	
  61

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.09

  	
  Survival of
  Representations, Etc

  	
  61

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.10

  	
  Severability

  	
  62

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.11

  	
  Business Loans

  	
  62

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.12

  	
  Governing Law;
  Submission to Jurisdiction

  	
  62

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.13

  	
  WAIVER OF JURY TRIAL

  	
  62

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Section 9.14

  	
  ORAL AGREEMENTS

  	
  63

  
	
   

  	
   

  	
   

  	
   

  
	
  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

  	
  -

  	
  Notice of Interest Period

  
	
   

  	
  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        -

  	
  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





















 


SUBORDINATED
CREDIT AGREEMENT


 


This Subordinated 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 Energy Components SPC
EEP Energy Exploration and Production Segregated Portfolio, a Cayman Islands
company, as administrative agent for such Lenders (in such capacity, the “Administrative
Agent”).


 


The Borrower, the Administrative Agent and the Lenders 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).


 


“Administrative Agent” means Energy Components SPC EEP Energy
Exploration and Production Segregated Portfolio, in its capacity as agent pursuant
to Article VIII, and any successor agent pursuant to Section 8.06
hereof.


 


“Advance” means the advance by a Lender to the Borrower,
pursuant to Section 2.01(a) relating to the Borrowing or pursuant to
an Assignment and Acceptance, and refers to 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 Subordinated 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, 9.5% per annum, and
(b) at any other time, 6.5% per annum. 
The Applicable Margin for any Advance shall change 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, 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 County, 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.


 


“Bbl” means one barrel.


 


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


 


“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 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.


 


“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


 


2





















 


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 Borrower, Senior Lenders, the Administrative Agent, Senior
Administrative Agent and the Lenders, dated as of the date hereof among the
Administrative Agent, the Senior Administrative Agent, the Borrower, the
Guarantors, the Senior Lenders, and the Lenders.


 


“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 I 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
Article VII or otherwise under this Agreement.


 


“Commitment Termination Date” means the earlier of (a) the
Maturity Date and (b) the earlier termination in whole of the Commitments
pursuant to 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-


 


3





















 


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.


 


“Credit Extension” means the funding of the Borrowing by the
Lenders


 


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


 


(a)     indebtedness of such Person for borrowed
money;


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


4





















 


(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).


 


“Effective Date” means November 29, 2005.


 


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


 


5





















 


(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 an Interest Period, the interest
rate per annum (rounded upward to the nearest whole multiple of 1/100 of 1% per
annum) set forth in the Wall Street Journal 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, the
Eurodollar Rate shall be an interest rate per annum equal to the rate per annum
at which deposits in Dollars are offered by the principal office of Union Bank
of California, N.A. in London, England to prime banks in the London interbank
market at 11:00 a.m. (London, England time) two Business Days before the
first day of such Interest Period in an amount substantially equal to the
Advance to be maintained by the Lender that is the Administrative Agent in
respect of such Advance and for a period equal to such Interest Period.


 


“Eurodollar Rate Advance” means an Advance which bears interest
as provided in Section 2.06(a).


 


“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.


 


“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


 


6





















 


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 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, 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.


 


7





















 


“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 Forrest A. Garb &
Associates, Inc. or any other engineering firm acceptable to the
Administrative Agent.


 


“Independent Engineering Report” means a report, in form and
substance satisfactory to the Administrative Agent and each of the Lenders,
prepared by an Independent Engineer, addressed to the Administrative Agent and
the Lenders with respect to the Oil and Gas Properties owned by the Borrower or
its Subsidiaries (or to be acquired by the Borrower or any of its Subsidiaries,
as applicable), which 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 the period commencing on the Effective Date
and ending on the last day of the period selected by the Borrower pursuant to
the provisions below and Section 2.02 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 2.02. 
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:


 


8





















 


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


 


(b)     whenever the last day of any Interest
Period would otherwise occur on a day other than a Business Day, the last day
of such Interest Period shall be extended to occur on the next succeeding
Business Day, provided that if such extension would cause the last day
of such Interest Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding Business Day; and


 


(c)     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 each Lender 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 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.


 


“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.


 


9





















 


“Lending Office” means, as to any
Lender, the office or offices of such Lender described as such in such Lender’s
administrative questionnaire requested by the Administrative Agent, or such
other office or offices as a Lender may from time to time notify the Borrower
and the Administrative Agent.


 


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


 


“Liquid Investments” means:


 


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


 


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


 


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


 


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


 


10





















 


(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 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 held by the Lenders 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 or any Subsidiary’s ability to perform its
obligations under this Agreement, any Note, any Guaranty, or any other Loan
Document.


 


“Maturity Date” means the earlier of
(i) November 1, 2010, or (ii) one year after the “Maturity Date”
as defined in the Senior Credit Agreement.


 


“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).


 


“Mcf” means thousand cubic feet.


 


“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.


 


11





















 


“Notice of Interest Period” means a notice of Interest Period in
the form of the attached Exhibit G signed by a responsible officer of the
Borrower.


 


“Obligations” means all principal, interest, fees,
reimbursements, indemnifications, and other amounts payable by the Borrower,
any Guarantor or any of their respective Subsidiaries to the Lenders under the
Loan Documents.


 


“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.


 


“Permitted Prior Liens” means the Liens permitted under
paragraphs (c) through (j) 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.


 


“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 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


 


12





















 


Advances owing to such Lender to the
aggregate outstanding Advances owing to all such Lenders.


 


“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.


 


“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.


 


13





















 


“Secured Parties” means the Administrative Agent, the Senior
Administrative Agent, the Senior Lenders, and the 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 Agreements, or the Mortgages, and (f) each other agreement,
instrument or document executed at any time in connection with securing the Obligations.


 


“Senior Administrative Agent” means Union Bank of California,
N.A., or any successor appointed pursuant to the terms of the Senior Credit
Agreement.


 


“Senior Credit Agreement” means the Credit Agreement among
Borrower, the lenders executing such agreement from time to time, and Union
Bank of California, N.A., as administrative agent and as issuing lender, as the
same may be amended, supplemented, restated and otherwise modified from time to
time.


 


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


 


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


 


“Senior Loan Documents” mean the
Senior Credit Agreement, the promissory notes executed and delivered pursuant
to the Senior 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 Senior Credit Agreement.


 


“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


 


14





















 


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.


 


“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.


 


“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.


 


“Total
Reserve Value” means, with respect to any Proven Reserves, the net present
value, discounted at 10% per annum, of the future net revenues expected to
accrue to the Borrower and its Subsidiaries collective interests in such
reserves during the remaining expected economic lives of such reserves.  Each calculation of such expected future net
revenues shall be made in accordance with the then existing standards of the
Society of Petroleum Engineers, provided that in any event (a) appropriate
deductions shall be made for severance and ad valorem taxes, and for operating,
gathering, transportation and marketing costs required for the production and
sale of such reserves, (b) appropriate adjustments shall be made for
hedging operations, provided that Hedge Contracts, if any, with non-investment
grade counterparties shall not be taken into account to the extent that such
Hedge Contracts improve the position of or otherwise benefit the Borrower or
any Subsidiary, (c) the pricing assumptions used in determining the Total
Reserve Value for any particular reserves shall be based on the lower of the
following: (i)(A) for natural gas, $6.00 per Mcf, and (B) for crude
oil, $40.00 per Bbl, and (ii)(A) for natural gas, the quotation for
deliveries of natural gas for each such year from the New York Mercantile
Exchange for Henry Hub, provided that with respect to quotations for calendar years
after the fifth calendar year, the quotation for the fifth calendar year shall
be applied and (B) for crude oil, the quotation for deliveries of crude
oil for each such calendar year from the New York Mercantile Exchange for
Cushing, Oklahoma, provided that with respect to quotations for calendar years
after the fifth calendar year, the quotation for the fifth calendar year shall
be applied, (d) the cash-flows derived from the pricing assumptions set
forth in clause (b) above shall be further adjusted to account for the
historical basis differentials for each month during the preceding 12-month
period calculated by comparing realized crude oil and natural gas prices to


 


15





















 


Cushing, Oklahoma and Henry Hub New York Mercantile Exchange
prices for each month during such period, and (e) not less than 60% the
Total Reserve Value shall be attributable to proved developed producing
reserves as set forth in the most recently delivered Independent Engineering
Report.


 


“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.


 


“Unused Commitment Amount” shall have the meaning attributed to
it in the Senior Credit Agreement.


 


“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 Agreement
of 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.


 


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


 


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


 


Section 1.03           Accounting
Terms; Changes in GAAP.  Except as
otherwise expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lenders hereunder shall
(unless otherwise disclosed to the Lenders in writing at the time of delivery
thereof) be prepared, in accordance with GAAP applied on a basis consistent
with those


 


16





















 


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


 


ARTICLE II



CREDIT FACILITY


 


Section 2.01           Term
Loan.


 


(a)     Term Loan.  Subject to the terms and conditions set forth
herein, the Lenders agree to make on the Effective Date an Advance to the
Borrower in the principal amount of $15,000,000.00.  Any Advance is not revolving in nature, and
amounts repaid or prepaid may not be reborrowed under any circumstances.


 


(b)     Notes.  The indebtedness of the Borrower to
each Lender resulting from an Advance owing to such Lender shall be evidenced
by a Note of the Borrower payable to the order of such Lender, dated, in the
case of (i) any Lender party hereto as of the Effective Date, the
Effective Date or (ii) any Lender that becomes a party hereto pursuant to
an Assignment and Acceptance, as of the effective date of the Assignment and
Acceptance, payable to the order of such Lender in a principal amount equal to
such Lender’s funded Advance.


 


Section 2.02           Method
of Borrowing.


 


(a)     Notice of Borrowing.  The Borrowing shall be made pursuant
to a Notice of Borrowing (or by telephone notice promptly confirmed in writing
by a Notice of Borrowing),


 


17





















 


given not later than 10:00 a.m. 
(Dallas, Texas time) on the third Business Day before the Effective
Date, 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.  The Notice of Borrowing shall be
given by telecopier or telex, confirmed immediately in writing, specifying the
information required therein.  Upon the
receipt of the Notice of Borrowing, the Administrative Agent shall promptly
notify each Lender of the applicable interest rate under
Section 2.06(a).  Each Lender shall,
before 12:00 p.m. (Dallas, Texas time) on the date of the 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,
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)     Notice Irrevocable.  The Notice of Borrowing and Notice of
Interest Period shall be irrevocable and binding on the Borrower.  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 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.


 


(c)     Administrative Agent Reliance.  Unless the Administrative Agent shall have
received notice from a Lender before the date of the Borrowing that such Lender
shall not make available to the Administrative Agent such Lender’s Pro Rata
Share of the 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 2.02 and the Administrative Agent
may, in reliance upon such assumption, make available to the Borrower on such
date a corresponding amount.  If and to
the extent that such Lender shall not have so made its Pro Rata Share of such
Borrowing available to the Administrative Agent, such Lender and the Borrower
severally agree to immediately repay to the Administrative Agent on demand such
corresponding amount, together with interest on such amount, for each day from
the date such amount is made available to the Borrower until the date such
amount is repaid to the Administrative Agent, at the interest rate applicable
on such day to Advances comprising such Borrowing.  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.


 


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


 


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(e)     Interest Period Notice.  Subject to the terms of this
Agreement, the Borrower may select the applicable Interest Period to continue
for the Advances under this Section 2.02 by delivering an irrevocable
Notice of Interest Period to the Administrative Agent at the Administrative
Agent’s office no later than 10:00 a.m. 
(Dallas, Texas time) on the date which is at least three Business
Days in advance of the termination of the then applicable Interest Period.  Each such Notice of Interest Period 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 Interest Period under this
Section, the Administrative Agent shall provide each Lender with a copy thereof
and notify each Lender of the applicable interest rate under
Section 2.06.  If any such Notice of
Interest Period does not specify an Interest Period, or if the Borrower fails
to provide a Notice of Interest Period to the Administrative Agent by or on the
date which is at least three Business Days in advance of the termination of the
then applicable Interest Period, then Borrower shall be deemed to have selected
an Interest Period of three months’ duration.


 


Section 2.03           Prepayment
of Advance.  Borrower may not prepay
any Advance during the first year following the Effective Date.  During the second year following the
Effective Date, Borrower may prepay any Advance, after giving by
10:00 a.m. (Dallas, Texas time) at least three Business Days’ 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 Advance by
delivering to the Administrative an amount equal to 101% of the portion of the
Advance Borrower wishes to prepay, 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 2.09 as
a result of such prepayment being made on such date; provided, however,
that each partial prepayment 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 any
Advance shall have a remaining principal amount outstanding with respect to any
Advance of at least $500,000.  After the
second year following the Effective Date, full prepayments of any Advance are
permitted without restriction of amounts and without being subject to any
prepayment premium, but are subject to any amount required to be paid pursuant
to Section 2.09.


 


(a)     Illegality.  If any Lender shall notify 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 Advance 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 calendar quarter for the outstanding 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 Advance 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 2.09 as a result of such prepayment being made on such
date, and (ii) the right of the Borrower to continue the Advance from such
Lender shall be suspended until such Lender gives notice to the Administrative
Agent that the circumstances causing such suspension no longer exist.


 


19





















 


(b)     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 2.03, and all notices given pursuant to this Section 2.03
shall be irrevocable and binding upon the Borrower.  Each payment of any Advance pursuant to this
Section 2.03 shall be made in a manner such that all Advances are paid in
whole or ratably in part.


 


Section 2.04           Repayment
of Advances.  The Borrower shall
repay to the Administrative Agent for the ratable benefit of the Lenders the
outstanding principal amount of any Advance, together with any accrued interest
thereon and such other amounts, if any, due pursuant to the terms of this
Agreement, on the Maturity Date or such earlier date pursuant to
Section 7.02 or Section 7.03.


 


Section 2.05           Facility
Fee.  At the Effective Date, the
Borrower agrees to pay to the Administrative Agent a facility fee equal to
$225,000.


 


Section 2.06           Interest.  The Borrower shall pay accrued interest on
the unpaid principal amount of any 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, on the last day of each Interest Period and
(i) in the case of six-month Interest Periods, on the day which occurs
during such Interest Period three months from the first day of such Interest
Period, (ii) in the case of nine-month Interest Periods, on the day which
occurs during such Interest Period three months from the first day of such
Interest Period and on the day which occurs during such Interest Period six
months from the first day of such Interest Period, (iii) in the case of
twelve-month Interest Periods, on the day which occurs during such Interest
Period three months from the first day of such Interest Period, on the day
which occurs during such Interest Period six months from the first day of such
Interest Period and on the day which occurs during such Interest Period nine
months from the first day of such Interest Period:


 


(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.


 


(b)     Additional Interest on 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 any 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).


 


20





















 


(c)     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 2.06 hereunder shall be retroactively increased such that the
effective rate of interest under the Loan Documents was at the Maximum Rate
since the effectiveness of this Agreement to the extent necessary to recapture
the Lost Interest not recaptured pursuant to the preceding sentence and, to the
extent allowed by law, the Borrower shall pay to such Lender the amount of the
Lost Interest remaining to be recaptured by such Lender.


 


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


 


Section 2.07           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 or a
specific Lender pursuant to Section 2.06(b), 2.09, 2.10, 2.11, 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 to such
Lender for the account of its Lending Office, in each case to be applied in
accordance with the terms of this Agreement.


 


21





















 


(b)     Computations.  All computations of interest based on the
Eurodollar Rate shall be made by the Administrative Agent, on the basis of a
year of 360 days, 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
preceding Business Day.


 


(d)     Administrative Agent Reliance.  Unless the Administrative Agent shall have
received written notice from the Borrower prior to the date on which any
payment is due to the Lenders that the Borrower shall not make such payment in
full, the Administrative Agent may assume that the Borrower has made such
payment in full to the Administrative Agent on such date and the Administrative
Agent may, in reliance upon such assumption, cause to be distributed to each
Lender on such date an amount equal to the amount then due such Lender.  If and to the extent the Borrower shall not
have so made such payment in full to the Administrative Agent, each Lender
shall repay to the Administrative Agent forthwith on demand such amount
distributed to such Lender, together with interest, for each day from the date
such amount is distributed to such Lender until the date such Lender repays
such amount to the Administrative Agent, at the Eurodollar Rate for such day.


 


Section 2.08           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 Advance made by it in
excess of its Pro Rata Share of payments on account of the Advances obtained by
all the Lenders, such Lender shall notify the Administrative Agent and
forthwith purchase from the other Lenders such participations in the Advance
made 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 2.08 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 2.09           Breakage
Costs.  If (a) any payment of
principal of any 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 2.03, 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


 


22





















 


respect
to any 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 2.10           Increased
Costs.


 


(a)     Eurodollar Rate Advance.  If, due to either (i) the introduction
of or any change (other than any change by way of imposition or increase of
reserve requirements included in the Eurodollar Rate Reserve Percentage) in or
in the interpretation of any law or regulation or (ii) the compliance with
any guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law), there shall be any increase in the
cost to any Lender of agreeing to make or making, funding, or maintaining an
Advance, 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 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 any
corporation controlling such Lender and that the amount of such capital is
increased by or based upon the existence of such Lender’s commitment to lend
under this Agreement, then, upon 30 days’ prior written notice by such 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 from time to time as specified by such Lender, additional amounts
sufficient to compensate such Lender, in light of such circumstances, 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.  A
certificate as to such amounts and detailing the calculation of such amounts
submitted to the Borrower by such Lender shall be conclusive and binding for
all purposes, absent manifest error.


 


(c)     Mitigation.  Each Lender claiming compensation pursuant to
this Section 2.10 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.


 


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Section 2.11           Taxes.


 


(a)     No Deduction for Certain Taxes.  Any and all payments by the Borrower shall be
made, in accordance with Section 2.07, 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 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 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, 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 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 2.11), such 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 or the Administrative Agent’s failure to provide the forms described
in paragraph (d) of this Section 2.11 and such 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 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 2.11) PAID BY SUCH
LENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY
(INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER
OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED.  EACH PAYMENT REQUIRED TO BE MADE BY THE
BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE ADMINISTRATIVE
AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION WITHIN 30 DAYS
FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM THE
ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS ADMINISTRATIVE AGENT OR ANY SUCH
LENDER.  IF ANY LENDER OR THE
ADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECT OF ANY TAXES PAID BY THE
BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER OR THE


 


24





















 


ADMINISTRATIVE
AGENT 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 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.


 


ARTICLE III



CONDITIONS OF LENDING


 


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


 


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


 


25





















 


(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;


 


(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 $30,000,000 in the
aggregate has been made to the Borrower in the form of common equity, Senior
Debt or other types of capital acceptable to the Administrative Agent;
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;


 


26





















 


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


 


(x)
insurance certificates naming the 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;


 


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


 


(xii)
the Collateral Trust and Intercreditor Agreement;


 


(xiii) 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; and


 


(xiv)
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 2.05
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.


 


(e)           Title.  The Administrative Agent shall be satisfied
in its sole discretion with the title to the Oil and Gas Properties 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.


 


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(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 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.


 


(m)          Material
Agreements.  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)           Senior
Debt.  The Borrower shall have
entered into the Senior Credit Agreement in the amount of at least $30,000,000,
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 Senior Credit Agreement shall contemporaneously


 


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herewith have been
satisfied or waived in writing as of the date hereof.  The Borrower shall have delivered to the
Administrative Agent copies of the Senior 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 Senior
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.


 


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 any Advance, such Advance and
the use of the proceeds of such Advance, 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


 


29





















 


certificate
of incorporation and bylaws or other organizational documents or (ii) any
law or any contractual restriction binding on or affecting the Borrower and
will not result in or require the creation or imposition of any Lien prohibited
by this Agreement.


 


Section 4.03           Authorization
and Approvals.  No consent, order,
authorization, or approval or other action by, and no notice to or filing with,
any Governmental Authority or any other Person is required for the due
execution, delivery, and performance by the Borrower of this Agreement, the
Notes, or the other Loan Documents to which the Borrower is a party or by each
Guarantor of its Guaranty or the other Loan Documents to which it is a party or
the consummation of the transactions contemplated thereby.  At the time of the Borrowing, 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 the use of
the proceeds of such Borrowing.


 


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


 


30





















 


was or
shall be, true and accurate in all material respects on the date as of which
such information was or is dated or certified and did not or does not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements contained therein not misleading at such time.  All projections, estimates, and pro forma
financial information furnished by the Borrower were prepared on the basis of
assumptions, data, information, tests, or conditions believed to be reasonable
at the time such projections, estimates, and pro forma financial information
were furnished.


 


Section 4.07           Litigation;
Compliance with Laws.


 


(a)     There is no pending or, to the best
knowledge of the Borrower, threatened action or proceeding affecting the
Borrower or any of the Guarantors before any court, Governmental Authority or
arbitrator which could reasonably be expected to cause a Material Adverse
Change 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


 


31





















 


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.


 


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


 


32





















 


liability.  As of the most recent valuation date
applicable thereto, neither the Borrower nor any member of the Controlled Group
would become subject to any liability under ERISA if the Borrower or any member
of the Controlled Group has received notice that any Multiemployer Plan is
insolvent or in reorganization.  Based
upon GAAP existing as of the date of this Agreement and current factual
circumstances, the Borrower has no reason to believe that the annual cost
during the term of this Agreement to the Borrower or any member of the
Controlled Group for post-retirement benefits to be provided to the current and
former employees of the Borrower or any member of the Controlled Group under
Plans that are welfare benefit plans (as defined in Section 3(1) of ERISA)
could, in the aggregate, reasonably be expected to cause a Material Adverse
Change.


 


Section 4.13           Condition
of Property; Casualties.  Each of the
Borrower and the Guarantors has good and marketable title to all of its Oil and
Gas Properties as is customary in the oil and gas industry in all material
respects, free and clear of all Liens except for Permitted Liens.  Each 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 Senior 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


 


33





















 


violation or
alleged violation of any Environmental Law or Permit; and (iv) are not
subject to any actual or contingent Environmental Claim, which could reasonably
be expected to cause a Material Adverse Change.


 


(b)     Certain Liabilities.  To the Borrower’s actual knowledge, none of
the present or previously owned or operated Property of the Borrower or any
Guarantor or of any of their former Subsidiaries, wherever located,
(i) has been placed on or proposed to be placed on the National Priorities
List, the Comprehensive Environmental Response Compensation Liability
Information System list, or their state or local analogs, or have been
otherwise investigated, designated, listed, or identified as a potential site
for removal, remediation, cleanup, closure, restoration, reclamation, or other
response activity under any Environmental Laws; (ii) is subject to a Lien,
arising under or in connection with any Environmental Laws, that attaches to
any revenues or to any Property owned or operated by the Borrower or any of the
Guarantors, wherever located, which could reasonably be expected to cause a
Material Adverse Change; or (iii) has been the site of any Release of
Hazardous Substances or Hazardous Wastes from present or past operations which
has caused at the site or at any third-party site any condition that has
resulted in or could reasonably be expected to result in the need for Response
that would cause a Material Adverse Change.


 


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


 


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


 


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


 


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


 


34





















 


other
actions which are necessary to create and perfect the Liens provided for in the
Security Instruments will have been made, obtained and taken in all relevant
jurisdictions.  All leases and agreements
for the conduct of business of the Borrower and the Guarantors are valid and
subsisting, in full force and effect and there exists no default or event of
default or circumstance which with the giving of notice or lapse of time or
both would give rise to a default under any such leases or agreements which
could reasonably be expected to cause a Material Adverse Change.  Neither the Borrower nor any of the
Guarantors is a party to any agreement or arrangement (other than this Agreement
and the Security Instruments), or subject to any order, judgment, writ or
decree, which either restricts or purports to restrict its ability to grant
Liens to secure the Obligations against their respective assets or Properties.


 


Section 4.19           Solvency
and Insurance.  Before and after
giving effect to the making of any Advance 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, 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.


 


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


 


36





















 


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 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,


 


37





















 


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 the extent
not otherwise provided in the Form 10QSB 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 10QSB 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;


 


(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 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


 


38





















 


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;


 


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;


 


39





















 


(i)      Environmental Notices.  Promptly upon the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any form of request, notice,
summons or citation received from the Environmental Protection Agency, or any
other Governmental Authority, concerning (i) violations or alleged
violations of Environmental Laws, which seeks to impose liability therefor and
could cause a Material Adverse Change, (ii) any action or omission on the
part of the Borrower or any Subsidiary or any of their former Subsidiaries in
connection with Hazardous Waste or Hazardous Substances which could reasonably
result in the imposition of liability therefor that could cause a Material
Adverse Change, including without limitation any information request related
to, or notice of, potential responsibility under CERCLA, or
(iii) concerning the filing of a Lien upon, against or in connection with
the Borrower or any Subsidiary or their former Subsidiaries, or any of their
leased or owned Property, wherever located;


 


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


 


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


 


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


 


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


 


(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; and


 


40





















 


(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, 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 Barnettt 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 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


 


41





















 


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 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 on
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, 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 Senior 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; and


 


(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; and


 


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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
in 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
Senior 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 consolidate 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, 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 such 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)     loan, 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,


 


46





















 


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


 


47





















 


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.  The Borrower will not
permit the proceeds of any Advance 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 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 Properteis 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;


 


48





















 


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
Ratios.


 


(a)     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, its current assets to 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 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; or


 


(b)     The Borrower shall not
permit the ratio of, as of the end of each fiscal quarter of the Borrower,
utilizing the most recent Engineering Report delivered to the Administrative
Agent and each Lender and beginning with the fiscal quarter ending
December 31, 2005, its Total Reserve Value to consolidated Debt to be less
than 1.50 to 1.00.


 


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 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 4.00 to 1.00.


 


Section 6.19           Interest Coverage Ratio.  The Borrower 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 combined (but not duplicative) consolidated Interest
Expense of the Borrower and its Subsidiaries 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


 


49





















 


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
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           Senior
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 (a) make
any optional, mandatory or scheduled payments on account of principal (whether
by redemption, purchase, retirement, defeasance, set-off or otherwise),
interest, premiums and fees in respect of the Senior Debt, or (b) amend,
supplement or otherwise modify the terms of the Senior 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 then 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


 


50





















 


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 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
Senior 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);


 


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


 


(g)     Termination Events.  Any Termination Event with respect to a Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
the Borrower by the Administrative Agent, (i) such Termination Event shall
not have been corrected and (ii) the then present value of such Plan’s
vested benefits exceeds the then current value of assets accumulated in such
Plan by more than the amount of $1,000,000 (or in the case of a Termination
Event involving the withdrawal of a “substantial employer” (as defined in
Section 4001(a)(2) of ERISA), the withdrawing employer’s
proportionate share of such excess shall exceed such amount);


 


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


 


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


 


(j)      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;


 


(k)     Security Instruments.  (i) The Collateral Trustee shall fail to
have an Acceptable Security Interest in any 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;


 


(l)      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;


 


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


 


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


 


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


 


(p)     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 to make extensions of credit
hereunder, including making Advances 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; and


 


(b)     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 to
make extensions of credit hereunder, including making Advances, 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; and


 


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(b)     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 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 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 or such Lender, and the other Loan
Documents, irrespective of whether or not the Administrative Agent 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 and each Lender
agrees to promptly notify the Borrower after any such set-off and application
made by the Administrative Agent 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 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 or such Lender may have.


 


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


 


Section 8.01           Authorization
and Action.  Each Lender hereby
appoints and authorizes the Administrative Agent to take such action as agent
on its behalf and to exercise such powers under this Agreement as are delegated
to the Administrative Agent by the terms hereof and of the other Loan
Documents, together with such powers as are reasonably incidental thereto.  As to any matters not expressly provided for
by this Agreement or any other Loan Document (including, without limitation,
enforcement or collection of the Notes), the Administrative Agent shall not be
required to exercise any discretion or take any action, but shall be required
to act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Majority Lenders, and such
instructions shall be binding


 


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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 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.


 


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Section 8.05           Indemnification.  THE LENDERS SEVERALLY
AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT 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 IN ANY WAY RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT UNDER THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT’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 GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.  WITHOUT
LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE
AGENT 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 IS NOT REIMBURSED FOR SUCH BY THE BORROWER.


 


Section 8.06           Successor
Administrative Agent.  The
Administrative Agent 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 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 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 giving of
notice of resignation or the Majority Lenders’ removal of the retiring
Administrative Agent, then the retiring Administrative Agent may, on behalf of
the Lenders and the Borrower, appoint a successor Administrative Agent, 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.  Upon the acceptance of any appointment as
Administrative Agent by a successor Administrative Agent, such successor
Administrative Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges, and duties of the retiring Administrative Agent,
and the retiring Administrative Agent shall be discharged from its duties and
obligations under this Agreement


 


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and
the other Loan Documents.  After any
retiring Administrative Agent’s resignation or removal hereunder as
Administrative Agent, 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 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 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 2.08 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 in addition to the Lenders required above to
take such action, affect the rights or duties of the Administrative Agent, as
the case may be, under this Agreement or any other Loan Document.


 


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 I
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 or the Administrative Agent to exercise, and no delay in
exercising, any right hereunder or under any


 


57





















 


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 and each Lender (including, without limitation,
reasonable counsel fees and expenses of the Administrative Agent 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, 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, and the Notes held by it); provided, however, that
(i) each such assignment shall be of a constant, and not a varying,
percentage of such Lender’s rights and obligations assigned under this
Agreement and shall be an equal percentage with respect to both its obligations
owing in respect of the Commitments and the related Advances, (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 $2,500,000 and shall be an integral multiple of
$500,000 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


 


58





















 


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.


 


(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 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


 


59





















 


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, 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 other Lenders shall continue to deal solely and directly with
such Lender in connection with such Lender’s rights and obligations under this
Agreement, and (v) such Lender shall not require the participant’s consent
to any matter under this Agreement, except for change in the principal amount of
the Notes, reductions in fees or interest, releasing all or substantially all
of any Collateral, permitting the Borrower or any Subsidiary to enter into any
merger or consolidation with or into any other, 
postponement of any date fixed for any payment of principal of, or
interest on, the Notes or any fees or other amounts payable hereunder, or
extensions of the Maturity Date or the Commitment Termination Date.  The Borrower hereby agrees that participants
shall have the same rights under Sections 2.12, 2.13, 2.14(c), and 9.07 as
a Lender to the extent of their respective participations.


 


Section 9.07           Indemnification;
Waiver.


 


(a)     Indemnification.  THE BORROWER SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT
(AND ANY SUB-AGENT THEREOF), EACH LENDER, AND 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


 


60





















 


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 THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (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 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,


 


61





















 


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


 


Section 9.13           WAIVER OF JURY TRIAL.  THE BORROWER, THE LENDERS, 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.


 


62





















 


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 pages follow.]


 


63





















 


	
  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

  	
   

  
						



 


 


[Signature
Page- Subordinated Credit Agreement]


 





















 


	
   

  	
  ADMINISTRATIVE AGENT AND LENDER:

  
	
   

  	
   

  
	
   

  	
  ENERGY
  COMPONENTS SPC EEP ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, a
  Cayman Islands Company

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/
  Mark Margason

  	
   

  
	
   

  	
  Name: Mark
  Margason

  
	
   

  	
  Title:
  Authorized Signer

  



 


 


[Signature
Page- Subordinated Credit Agreement]


 





















 


	
   

  	
  LENDER:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL
  EQUITIES, INC., a              

  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/
  Michael A. Ross

  	
   

  
	
   

  	
  Name:

  	
     Michael
  A. Ross

  	
   

  
	
   

  	
  Title:

  	
       Vice
  President

  	
   

  
						



 


 


[Signature
Page- Subordinated Credit Agreement]


 





















 


SCHEDULE I


NOTICE INFORMATION AND COMMITMENTS


 


Each of the commitments
to lend set forth herein is governed by the terms of the Subordinated Credit
Agreement.


 


Administrative
Agent/Lender:


Energy Components SPC EEP
Energy Exploration and Production Segregated Portfolio


Grand Pavilion Commercial
Centre


802 West Bay Road, Suite 14


George Town, Grand
Cayman, B.W.I., Cayman Islands


Attention: Michael
Proctor


Facsimile: (345) 949-8066


 


with a copy to:


 


Mitchell Energy Partners


7515 Greenville Avenue, Suite 905


Dallas, Texas 75231


Attention: Mynan C.
Feldman


Facsimile: (469) 916-7489


 


Lender:


UnionBanCal Equities, Inc.


445 S. Figueroa Street, 13th Floor


Los Angeles, CA 
90071


Attention: Michael Ross, Vice President


Facsimile: (213) 236-7619


 


Borrower:


Cano Petroleum, Inc.


309 West 7th
Street, Suite 1600


Forth Worth, Texas 76102


Attention: Mike Ricketts,
CFO


Facsimile: (817) 334-0222


 




	
  Lenders:

  	
   

  	
  Commitments

  	
   

  
	
  Energy
  Components SPC EEP Energy Exploration and Production Segregated Portfolio

  	
   

  	
  $

  	
  10,000,000

  	
   

  
	
  UnionBanCal
  Equities, Inc.

  	
   

  	
  $

  	
  5,000,000

  	
   

  
	
  Total:

  	
   

  	
  $

  	
  15,000,000

  	
   

  






 





















 


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 guarantees 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.

  	
  Assignor[s]:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

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

  	 

	
   

  	
   

  	 

	
  3.

  	
  Borrower:

  	
  CANO PETROLEUM, INC., a Delaware corporation

  	 

	
   

  	
   

  	 

	
  4.

  	
  Administrative Agent: 

  	
  ENERGY
  COMPONENTS SPC EEP ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, as the administrative agent under the Credit
  Agreement

  	 

	
   

  	
   

  	 

	
  5.

  	
  Credit Agreement: 

  	
  The Subordinated Credit Agreement dated as of November , 2005 among
  Borrower, the Lenders party thereto from time to time, and Energy
  Components SPC EEP Energy Exploration and Production Segregated Portfolio, as Administrative Agent.

  	 

	
   

  	
   

  	
   

  	 

	
  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:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 










(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 OF ASSIGNOR]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ASSIGNEE[S]

  	
   

  
	
   

  	
  [NAME OF ASSIGNEE]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNEE]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


 


[Consented
to and]  (9) Accepted:


 


ENERGY COMPONENTS SPC EEP
ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, 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 9.06 of the Credit Agreement (subject to such consents, if
any, as may be required under Section 9.06 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
Subordinated Credit Agreement dated as of November   , 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 ENERGY COMPONENTS SPC EEP ENERGY
EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, as administrative agent for
such Lenders (in such capacity, the “Administrative Agent”).  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 Ratios—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

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES   NO

  



 










(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





















 


 


	
  (c)           Total Reserve Value

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  (d)           consolidated Debt

  	
   

  	
  $

  



 


Current
ratio = (c) to (d) =   


 


	
  Minimum current ratio not
  less than:

  	
   

  	
  1.50 to 1.00

  
	
   

  	
   

  	
   

  
	
  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] [4.00 to
  1.00](7)

  



 










(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 4.00 to 1.00.  


 


2





















 


	
  COMPLIANCE?

  	
   

  	
  YES   NO

  



 


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 Energy Components SPC EEP Energy Exploration and Production
Segregated Portfolio, as administrative agent (the “Administrative Agent”) for
the ratable benefit of itself, the Lenders (as defined below)(the
Administrative Agent and the Lenders, individually a “Beneficiary”, and
collectively, the “Beneficiaries”).


 


INTRODUCTION


 


A.            This Guaranty is given in connection with that certain
Subordinated 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 the Administrative Agent. 


 


B.            Each Guarantor is a Subsidiary of the Borrower and will
derive substantial direct and indirect benefit from the transactions
contemplated by the Credit Agreement and the other Loan Documents (as defined
in the Credit Agreement).


 


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, and (ii) 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
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 or any Lender under the Loan Documents
but for the fact that they are unenforceable or not allowable due to insolvency
or the existence of a


 


1





















 


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 or any Lender 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 other amendment or waiver of or any consent to departure from, any Loan
Document, including, without limitation, any increase in the Guaranteed
Obligations resulting from the extension of additional credit to the Borrower
or otherwise;


 


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


 


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


 


2





















 


(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 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 any 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 or the Administrative Agent 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 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


 


3





















 


contemplated by the Loan Documents 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 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 and (b) 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 or any Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Guaranty, and such Guarantor has
established adequate means of obtaining from the Borrower and each other
relevant Person on a continuing basis information pertaining to, and is now and
on a continuing basis will be completely familiar with, the business, condition
(financial and otherwise), operations, properties and prospects of the Borrower
and each other relevant Person.


 


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


 


Section 8.               Right of Set-Off.  Upon the occurrence and during the
continuance of any Event of Default, any 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


 


4





















 


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 (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 or any Lender, at
its address specified in or pursuant to the Credit Agreement.  All such notices and communications shall be
effective when delivered, except that notices and communications to the
Administrative Agent shall not be effective until received by the
Administrative Agent.  Delivery of an
executed counterpart signature page of this Guaranty by facsimile is as
effective as executing and delivering this Guaranty in the presence of the
other parties to this Guaranty.


 


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, and the termination of all the
Commitments, (b) be binding upon each Guarantor and its successors and
assigns, and (c) inure to the benefit of and be enforceable by the
Administrative Agent, each Lender, and their respective successors, and, in the
case of transfers and assignments made in accordance with the Credit Agreement,
transferees and assigns.  Without
limiting the


 


5





















 


generality of the foregoing clause (c), subject to Section 9.06
of the Credit Agreement, any Lender may assign or otherwise transfer all or any
portion of its rights and obligations under the Credit Agreement (including,
without limitation, all or any portion of its Commitment, the Advances owing to
it and the Note or Notes held by it) to any other Person, and such other Person
shall thereupon become vested with all the benefits in respect thereof granted
to such Lender herein or otherwise, subject, however, in all respects to the
provisions of the Credit Agreement.  Each
Guarantor acknowledges that upon any Person becoming a Lender or the
Administrative Agent, 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.


 


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


 


6





















 


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 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


 


7





















 


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:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
							



 


[Signature
Page- Guaranty Agreement]


 


9





















 


	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  ENERGY COMPONENTS SPC EEP ENERGY

  EXPLORATION AND PRODUCTION

  SEGREGATED PORTFOLIO, as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name: Mark Margason

  	
   

  
	
   

  	
  Title: Authorized Signer

  	
   

  



 


[Signature
Page- Guaranty Agreement]


 


10





















 


Annex 1 to the 


Guaranty Agreement


 


SUPPLEMENT NO.     
dated as of               (the
“Supplement”),
to the Guaranty Agreement dated as of November   , 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 ENERGY
COMPONENTS SPC EEP ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, as
Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).


 


A.            Reference is made to
the Subordinated Credit Agreement dated as of November    ,
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.  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 as
consideration for Advances previously made.


 


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 accordance with its terms (subject to applicable
bankruptcy, reorganization, insolvency,


 


11





















 


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.


 


12





















 


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


 


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


 


THE
RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE PRECEDING
PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN AGREEMENT, AND ANY PRIOR
ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THIS
GURANTY.  THIS SUPPLEMENT, THE GUARANTY
AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE
PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.


 


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


 


	
   

  	
  [Name of New Guarantor]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  Address of Guarantor:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  ENERGY COMPONENTS SPC
  EEP ENERGY

  EXPLORATION AND PRODUCTION

  SEGREGATED PORTFOLIO, as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
							



 


13





















 


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.


 


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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.


 


20





















 


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


 


	
  $

  	
  November 29,
  2005

  



 


For value received, the undersigned Cano Petroleum, Inc., a
Delaware corporation (“Borrower”), hereby promises to pay to the order
of                        
(“Payee”), 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 Payee 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 Subordinated 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 Energy Components SPC EEP
Energy Exploration and Production Segregated Portfolio, as administrative agent
for the Lenders (the “Administrative Agent”).  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 Payee 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
Payee shall record payments of principal made under this Note, but no failure
of the Payee 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


 


November   ,
2005


 


Energy Components SPC EEP Energy Exploration and Production Segregated
Portfolio


Grand Pavilion Commercial Centre


802 West Bay Road, Suite 14


George Town, Grand Cayman, B.W.I., Cayman Islands


Attention: Michael Proctor


Facsimile:


 


with a copy to:


 


Mitchell Energy Partners


7515 Greenville Avenue, Suite 905


Dallas, Texas 75231


Attention: Mynan C. Feldman


Facsimile:
(469) 916-7489


 


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated 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 Energy Components SPC EEP
Energy Exploration and Production Segregated Portfolio, as administrative agent
for the Lenders (the “Administrative Agent, and hereby gives you
irrevocable notice pursuant to Section 2.02(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 2.02(a) of
the Credit Agreement:


 


(a)                                  The
Business Day of the Proposed Borrowing is              ,
     .


 


(b)                                 The
aggregate amount of the Proposed Borrowing is $            .


 


(c)                                  The
initial Interest Period is            
months.


 


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


 


1





















 


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


 


(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 INTEREST PERIOD


 


[Date]


 


Energy Components SPC EEP Energy Exploration and Production Segregated
Portfolio


Grand Pavilion Commercial Centre


802 West Bay Road, Suite 14


George Town, Grand Cayman, B.W.I., Cayman Islands


Attention: Michael Proctor


Facsimile:


 


with a copy to:


 


Mitchell Energy Partners


7515 Greenville Avenue, Suite 905


Dallas, Texas 75231


Attention: Mynan C. Feldman


Facsimile:
(469) 916-7489


 


Ladies and Gentlemen:


 


The
undersigned, Cano Petroleum, Inc., a Delaware corporation (the “Borrower”),
refers to the Subordinated 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 Interest
Period unless otherwise defined in this Notice of Interest Period) among the
Borrower, the lenders party thereto (the “Lenders”), and Energy
Components SPC EEP Energy Exploration and Production Segregated Portfolio, as
administrative agent for the Lenders (the “Administrative Agent”), and
hereby gives you irrevocable notice pursuant to Section 2.02(e) of
the Credit Agreement that the undersigned hereby requests the Interest Period
beginning on                ,
200   be        months.


 


The Borrower
hereby certifies that the following statements are true on the date hereof, and
will be true throughout the Interest Period:


 


(a)                                  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, 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


 


(b)                                 no
Default has occurred and is continuing.


 


1





















 


	
   

  	
  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;


 


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(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).


 


15





















 


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


 


Energy
Components SPC EEP Energy


 Exploration and Production


 Segregated Portfolio, as Administrative Agent


 and a Lender, and all the


 other Lenders party to the Subordinated Credit
Agreement


 described below


Grand
Pavilion Commercial Centre


802
West Bay Road, Suite 14


George
Town, Grand Cayman, B.W.I., Cayman Islands


 


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 Subordinated Credit Agreement (herein so called) dated as of even
date herewith, executed by Borrower, Energy Components SPC EEP Energy
Exploration and Production Segregated Portfolio, as Administrative Agent (in
such capacity, the “Administrative
Agent”) and as a 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
Subordinated 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
Subordinated Credit Agreement unless otherwise indicated (collectively, the “Transaction Documents”):


 


(a)                                  the Subordinated Credit Agreement;


 


(b)                                 the Note, executed by Borrower and payable to
the order of Lender in the original principal amount of $15,000,000;


 


(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


 


2





















 


the
Operating Financing Statement, the “Texas Financing Statements”; the Delaware
Financing Statements and the Texas Financing Statements are collectively, the “Financing Statements”).


 


(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


 


3





















 


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;


 


(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


 


4





















 


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”);


 


(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;


 


5





















 


(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 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


 


6





















 


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 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;


 


8





















 


(viii) purport
to waive any claim of any Loan Party against any Lender arising out of, or in
any way related to, the Transaction Documents; (ix) purport to provide
remedies inconsistent with applicable law; or (x) providing that decisions
by a party are conclusive or may be made in its sole discretion; (b) whether
a court would grant specific performance or any other equitable remedy with
respect to enforcement of any provision contained in the Transaction Documents;
(c) the enforceability of any provision in the Transaction Documents that
purports to appoint an agent for service of process or establish or otherwise
affect jurisdiction, venue, evidentiary standards, or limitation periods, or
procedural rights in any suit or other proceeding; (d) the enforceability of
any provision in the Transaction Documents that purports to waive, subordinate,
or otherwise restrict or deny access to rights, benefits, claims, causes of
action, or remedies that cannot be waived, subordinated, or otherwise
restricted or denied; (e) the enforceability of any provision in the
Transaction Documents that allows any Lender to accelerate the maturity date of
the obligations evidenced by the Transaction Documents, to institute
foreclosure proceedings, or to exercise any similar right, without notice to
the person or entity signatory thereto or bound thereby; or (f) the
enforceability of any provision contained in the Transaction Documents relating
to the appointment of a receiver, to the extent that appointment of a receiver
is governed by applicable statutory requirements, and to the extent that such
provision may not be in compliance with such requirements.


 


4.                                       We express no opinion on any Lender’s ability
to foreclose on, become the owner of, or validly transfer or assume, all of the
rights and duties of any Loan Party (other than the right to receive payments
thereunder and the right to receive an assignment of accounts receivable
arising thereunder) as a party to the Non-Assignable Material Agreements, under
which such Loan Party’s rights, obligations, or duties are not freely
assignable or transferable.


 


5.                                       We express no opinion regarding the
enforceability of any documents or agreements referenced in the Transaction
Documents (other than the Transaction Documents).


 


6.                                       We express no opinion regarding any Lender’s
ability to exercise any rights or remedies against any collateral that is
personal property pursuant to the Transaction Documents other than in
accordance with the Texas UCC or the Delaware UCC.


 


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 Subordinated 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 Subordinated 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 Subordinated 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 2.06(c) of the Subordinated
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 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


 


12





















 


the
ownership, use, leasing, maintenance, or charter of the Collateral, and
therefore we give no opinion concerning same.


 


9.                                       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.


 


10.                                 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.


 


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.


 


13





















 


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
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





















 


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.


 


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


 


15





















 


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 Subordinated Credit Agreement.


 


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


 


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 Subordinated 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 Subordinated 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


 


16





















 


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.


 


17





















 


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.


 


18





















 


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.


 


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


 


19





















 


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.


 


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


 


20





















 


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.


 


21





















 


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.


 


22





















 


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.


 


23





















 


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


 


2





















 


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.


 


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.


 


2





















 


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.


 


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.


 


3





















 


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