[Execution Copy]










                   HALLWOOD CONSOLIDATED RESOURCES CORPORATION

                                   $25,000,000

             10.32% SENIOR SUBORDINATED NOTES DUE DECEMBER 23, 2007




                           HALLWOOD ENERGY CORPORATION

                         COMMON STOCK PURCHASE WARRANTS




                              AMENDED AND RESTATED
                SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT






                            Dated as of June 8, 1999




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                                                     TABLE OF CONTENTS

                                                  (Not Part of Agreement)

                                                                            Page

1. PRIOR AUTHORIZATION OF ISSUE OF NOTES; AUTHORIZATION OF ISSUE OF
   WARRANTS; AUTHORIZATION OF PARENT GUARANTEE.................................2
     1A.  Prior Authorization of Issue of Notes................................2
     1B.  Authorization of Issue of Warrants...................................2
     1C.  Authorization of the Parent Guarantee................................3

2. EXCHANGE OF WARRANTS........................................................3

3. CONDITIONS PRECEDENT........................................................3
   3.Conditions Precedent......................................................3
     3A. Certain Documents.....................................................3
     3B. Effectiveness of the Merger...........................................5
     3C. Opinion of Existing Holder's Special Counsel..........................5
     3D. Representations and Warranties; No Default............................6
     3E. Transactions Permitted By Applicable Laws.............................6
     3F. Proceedings...........................................................6
     3G. Structuring Fee; Legal Fees...........................................7
     3H. Compliance With Outstanding Indebtedness Limitations..................7
     3I. Private Placement Number..............................................7
     3J. Opinion of Company's Tax Counsel......................................7

4. PREPAYMENTS.................................................................7
   4.Prepayments...............................................................8
     4A. Required Prepayments..................................................8
     4B. Optional Prepayment of Notes With Yield-Maintenance Amount............8
     4C. Change in Control.....................................................8
     4D. Partial Payments Pro Rata.............................................9
     4E. Retirement of Notes..................................................10

5. AFFIRMATIVE COVENANTS......................................................10
   5. Affirmative Covenants...................................................10
      5A. Financial Statements................................................10
      5B. Information Required by Rule 144A...................................13
      5C. Inspection of Property..............................................13
      5D. Covenant to Secure Notes Equally....................................14
      5E. Corporate Existence, Licenses and Permits; Maintenance of Properties14
      5F. Maintenance of Insurance............................................14

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     5G.  Payment of Taxes and Other Claims...................................14
     5H.  ERISA Compliance....................................................15
     5I.  Compliance with Laws................................................15
     5J.  Maintenance of Books of Record; Reserves............................15
     5K.  Guaranty of Notes by Certain Subsidiaries...........................15
     5L.  Tax Treatment.......................................................16

6. NEGATIVE COVENANTS.........................................................16
   6. Negative Covenants......................................................16
      6A. Financial Covenants.................................................16
          6A(1).           Total Debt to EBITDA Ratio.........................16
          6A(2).           Consolidated Net Worth.............................16
      6B. Other Restrictions..................................................17
          6B(1).           Prohibition Against Layering  Indebtedness.........17
          6B(2).           Liens..............................................17
          6B(3).           Consolidation, Merger or Transfer of Assets........18
          6B(4).           Limitation on Certain Asset Dispositions...........20
          6B(5).           Transactions With Affiliates.......................21
          6B(6).           Priority Debt......................................22
          6B(7).           Hedging Transactions...............................22
          6B(8).           Change of Business.  ..............................22

7. SUBORDINATION OF NOTES.....................................................22
          7A.      Subordination..............................................22
          7B.      Obligation of the Company Unconditional....................24
          7C.      Subrogation................................................24
          7D.      Rights of Holders of Senior Debt...........................25

8. EVENTS OF DEFAULT..........................................................25
   8.    Events of Default....................................................25
         8A.      Acceleration................................................25
         8B.      Rescission of Acceleration..................................28
         8C.      Notice of Acceleration or Rescission........................29
         8D.      Other Remedies..............................................29

9. REPRESENTATIONS, COVENANTS AND WARRANTIES..................................29
   9. Representations, Covenants and Warranties...............................29
         9A.      Organization................................................29
         9B.      Financial Statements........................................30
         9C.      Actions Pending.............................................31
         9D.      Outstanding Indebtedness....................................31
         9E.      Title to Properties.........................................31
         9F.      Taxes.......................................................32

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          9G.      Conflicting Agreements and Other Matters..................32
          9H.      Authorized Capital Stock..................................32
          9I.      Offering of Warrants......................................33
          9J.      Use of Proceeds...........................................33
          9K.      ERISA.....................................................33
          9L.      Governmental Consent......................................34
          9M.      Environmental Compliance..................................34
          9N.      Disclosure................................................34
          9O.      Year 2000 Compliance......................................35
          9P.      Agreement of Merger Conditions Satisfied..................35
          9Q.      Reorganization............................................35

         10.      REPRESENTATIONS OF THE EXISTING HOLDER......................36
                  10.      Representations of the Existing Holder.............36
                           10A.     Nature of Acquisition of Securities.......36
                           10B.     Source of Funds...........................36

         11.      GUARANTY OF PARENT..........................................36
                  11A.     The Guaranty.......................................36
                  11B.     Obligations Absolute...............................37
                  11C.     Waiver.............................................38
                  11D.     Obligations Unimpaired.............................38
                  11E.     Subrogation........................................38
                  11F.     Reinstatement of Guaranty..........................38
                  11G.     Subordination of Guaranteed Obligations............39
                           11G(1).  Subordination.............................39
                           11G(2) Obligation of the Parent Unconditional......41
                           11G(3)  Subrogation................................41
                           11G(4)  Rights of Holders of Senior Debt...........41

         12.      DEFINITIONS AND ACCOUNTING TERMS............................42
                  12.      Definitions........................................42
                           12A.     Yield-Maintenance Terms...................42
                           12B.     Other Terms...............................43
                           12C.     Accounting Principles, Terms and
                                     Determinations...........................53

         13.      MISCELLANEOUS...............................................54
                  13.      Miscellaneous......................................54
                           13A.     Note Payments.............................54
                           13B.     Expenses..................................54
                           13C.     Consent to Amendments.....................55
                           13D.     Form, Registration, Transfer and Exchange
                                      of Notes; Lost Notes....................55
                           13E.     Persons Deemed Owners; Participations.....55

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                           13F.     Survival of Representations and Warranties;
                                      Entire Agreement........................56
                           13G.     Successors and Assigns...................56
                           13H.     Disclosure to Other Persons..............56
                           13I.     Notices..................................56
                           13J.     Payments Due on Non-Business Days........57
                           13K.     Satisfaction Requirement.................57
                           13L.     Governing Law............................57
                           13M.     Waiver of Jury Trial; Consent to
                                      Jurisdiction; Limitation of Remedies....57
                           13N.     Severability.............................58
                           13O.     Descriptive Headings.....................58
                           13P.     Maximum Interest Payable.................58
                           13Q.     Counterparts.............................59


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INFORMATION SCHEDULE

SCHEDULE 9D                --       EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND
                                    LIENS
SCHEDULE 9G                --       LIST OF AGREEMENTS RESTRICTING INDEBTEDNESS

EXHIBIT A                  --       FORM OF SENIOR SUBORDINATED NOTE
EXHIBIT B                  --       FORM OF PARENT COMMON STOCK PURCHASE WARRANT
EXHIBIT C                  --       FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT D                  --       FORM OF PARTICIPATION RIGHTS AGREEMENT
EXHIBIT E                  --       FORM OF SUBSIDIARY GUARANTY
EXHIBIT F                  --       FORM OF HCP CONSENT
EXHIBIT G-1                         -- FORM OF OPINION OF COMPANY'S, PARENT'S
                                       AND HEP'S GENERAL COUNSEL
EXHIBIT G-2                         -- FORM OF OPINION OF COMPANY'S, PARENT'S
                                       AND HEP'S SPECIAL COUNSEL
EXHIBIT H                  --       FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY
EXHIBIT I                  --       FORM OF OPINION RELATING TO FUTURE GUARANTY
                                      AND GUARANTOR

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                              AMENDED AND RESTATED
                SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT


                  This  AMENDED  AND  RESTATED  SUBORDINATED  NOTE  AND  WARRANT
PURCHASE  AGREEMENT (the  "Agreement")  is entered into as of June 8, 1999 among
Hallwood Energy  Corporation,  a Delaware  corporation (the "Parent"),  Hallwood
Consolidated Resources Corporation,  a Delaware corporation (the "Company"), and
The Prudential  Insurance Company of America (referred to herein as "Prudential"
or the  "Existing  Holder").  Capitalized  terms used herein  have the  meanings
specified in paragraph 12. The parties hereto agree as follows:

WITNESSETH

                  WHEREAS, the Company and the Existing Holder entered into that
certain  Subordinated  Note and Warrant Purchase  Agreement dated as of December
23, 1997 (the  "Original  Agreement")  pursuant to which the Company  issued and
sold to the Existing Holder (i) the Company's 10.32% Senior  Subordinated  Notes
due December 23, 2007 in the aggregate principal amount of $25,000,000, and (ii)
the right to purchase  from the  Company an  aggregate  of 98,599  shares of the
Company's  common stock, par value $0.01 per share, at an initial exercise price
of $28.99 per share (collectively, the "Original Warrant"); and

                  WHEREAS,  payment of such notes and performance and observance
of all other  obligations of the Company arising under or in connection with the
Original Agreement were guaranteed by Hallwood  Consolidated  Partners,  L.P., a
Colorado  limited  partnership  that is a  subsidiary  of the  Company  ("HCP"),
pursuant  to a Guaranty  Agreement  dated as of December  23, 1997 (as  amended,
restated,  supplemented  or  otherwise  modified  from  time to  time,  the "HCP
Guaranty"); and

                  WHEREAS,  the Company,  the Parent,  Hallwood Energy Partners,
L.P., a Delaware limited  partnership  ("HEP"),  and certain of their affiliated
entities  contemplate a restructuring of their  organization  pursuant to and in
connection with which:  (i) in the manner described in the Proxy Statement dated
May 4, 1999, as  supplemented by supplement  dated May 17, 1999,  distributed to
the  stockholders  of the Company (the "Proxy  Statement"),  the Company and HEP
will merge with Wholly Owned  Subsidiaries  of the Parent,  as a result of which
the Company and HEP will be the surviving  entities and will become Wholly Owned
Subsidiaries  of  the  Parent,  pursuant  to a  Merger  and  Asset  Contribution
Agreement,  dated as of December  15,  1998 (the  "Merger"  and,  as  heretofore
amended by amendments dated March 9, 1999, and April 29, 1999, the "Agreement of
Merger");  (ii) the Company will enter into this Agreement in order to amend and
restate the Original  Agreement,  and the Parent will join in and become a party
to this  Agreement,  in  order,  among  other  things,  to (a)  provide  for the
Guarantee of the Parent set forth in paragraph 11 hereof with respect to payment
of the Notes (as defined  herein) and  performance  and  observance of all other
obligations of the Company  arising under or in connection  with this Agreement,
(b) provide for the issuance and delivery by the Parent to the Existing  Holder,
in exchange for and in cancellation of the Original

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Warrant,  common stock purchase  warrants  evidencing the right to purchase from
the Parent shares of the Parent's  Common Stock,  par value $0.01 per share (the
"Parent Common  Stock"),  in substance of like terms as the Original  Warrant so
surrendered  and for a number of shares and at an exercise  price  determined in
accordance  with the provisions of the Original  Warrant,  and (c) amend certain
provisions of the Original Agreement in the respects,  but only in the respects,
hereinafter  set forth;  (iii) HEP and the other Initial  Subsidiary  Guarantors
will  execute  and  deliver  to the  Existing  Holder a Guaranty  Agreement  (as
amended,  restated,  supplemented  or  otherwise  modified  from  time to  time,
including by the addition of Guarantors  thereto  pursuant to the  provisions of
paragraph 5K, the  "Subsidiary  Guaranty")  with respect to payment of the Notes
(as defined herein) and  performance and observance of all other  obligations of
the Company  arising under or in connection  with this  Agreement;  and (iv) the
Parent and the Existing Holder will enter into a Registration  Rights  Agreement
and,  together  with  The  Hallwood  Group  Incorporated,   will  enter  into  a
Participation  Rights Agreement,  in respect of the Parent Common Stock purchase
warrants  and the  shares of Parent  Common  Stock  issuable  upon the  exercise
thereof  and in  replacement  of similar  agreements  relating  to the  Original
Warrant;

                  NOW,   THEREFORE,   in  order  to   accomplish   the   matters
contemplated by the immediately  preceding  recital and in  consideration of the
mutual  premises  herein  contained and for other  valuable  consideration,  the
receipt and sufficiency of which are hereby acknowledged, the Original Agreement
is hereby amended and restated as follows:

         PARAGRAPH                  PRIOR AUTHORIZATION OF ISSUE OF NOTES;
                                    AUTHORIZATION OF ISSUE OF WARRANTS;
                                    AUTHORIZATION OF PARENT GUARANTEE.

         1A.  Prior  Authorization  of  Issue  of  Notes.  Pursuant  to  and  in
connection with the Original Agreement,  the Company authorized the issue of its
senior  subordinated  promissory notes (the "Notes") in the aggregate  principal
amount of $25,000,000,  maturing  December 23, 2007, and bearing interest on the
unpaid balance  thereof from the date thereof until the principal  thereof shall
have  become due and  payable  at the rate of 10.32%  per annum,  and on overdue
principal,  Yield- Maintenance Amount and interest at the rates specified in the
Notes.  The term "Notes" as used herein shall  include the Notes issued and sold
to the  Existing  Holder  pursuant  to the  Original  Agreement  and  each  Note
delivered  in  substitution  or  exchange  for any  such  Note  pursuant  to any
provision of the  Original  Agreement or this  Agreement.  The Notes  originally
issued to the Existing Holder under the Original  Agreement are substantially in
the  form of  Exhibit  A  attached  to the  Original  Agreement,  and any  Notes
delivered in substitution or exchange  therefor pursuant to this Agreement shall
be substantially in the form of Exhibit A attached hereto.

         1B.  Authorization  of Issue of  Warrants.  To  evidence  the  Parent's
obligation  to issue its Parent Common Stock  purchase  warrants in exchange for
the Original  Warrant  pursuant to paragraph  2, the Parent has  authorized  the
issue of its Parent Common Stock purchase warrants (any such Parent Common Stock
purchase  warrants  which are issued  pursuant to this  Agreement,  and any such
Parent Common Stock  purchase  warrants which may be issued in  substitution  or
exchange

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therefor, herein collectively called the "Warrants"),  all subject to the terms,
conditions  and  adjustments  set forth in the Warrants;  such Warrants shall be
substantially in the form of Exhibit B attached hereto.

         1C.  Authorization of the Parent  Guarantee.  The Parent will authorize
its Guarantee of the payment of the Notes and  performance and observance of all
other  obligations  of the  Company  arising  under or in  connection  with this
Agreement  upon the terms and subject to the  conditions  set forth in paragraph
11.

         PARAGRAPH                  EXCHANGE OF WARRANTS.

         2. Exchange of Warrants.  In connection  with,  and effective as of the
time of the Merger,  the Parent hereby agrees to issue the Warrants and, subject
to the terms and  conditions  herein set forth,  the Existing  Holder  agrees to
deliver  the  Original  Warrant  in  exchange   therefor  to  the  Parent,   for
cancellation by the Company.  The Parent will deliver to the Existing Holder, at
the offices of Jenkens & Gilchrist,  P.C.,  at 1445 Ross Avenue,  Dallas,  Texas
75202, one or more Warrants  registered in the Existing  Holder's name or (if so
specified) in the name of the Existing Holder's nominee, evidencing the right to
purchase  an  aggregate  of  309,278  shares of Parent  Common  Stock and in the
denomination or  denominations  specified with respect to the Existing Holder in
the Information Schedule attached hereto against delivery by the Existing Holder
to the Company of the Original  Warrant on the effective date of the Merger.  If
the Parent shall fail to tender such Warrants to the Existing Holder as provided
in this paragraph 2, or any of the conditions specified in paragraph 3 shall not
have been fulfilled to the  satisfaction  of the Existing  Holder,  the Existing
Holder shall, at its election, be relieved of all further obligations under this
Agreement,  without  thereby  waiving any rights the Existing Holder may have by
reason of such  failure or such  nonfulfillment.  The  exchange of the  Original
Warrant for the  Warrants  shall be effective  as of the  effective  time of the
Merger, regardless of the actual date of delivery of the Original Warrant or the
Warrants.

         PARAGRAPH                  CONDITIONS PRECEDENT.

         3. Conditions  Precedent.  This Agreement shall become  effective as of
June 8, 1999 (the "Effective  Date") subject to the  satisfaction,  on or before
the Effective Date, of the following conditions:

                  Certain Documents.  The Existing Holder shall have received
        the following, each dated the Effective Date unless otherwise indicated:

                  (i)    the Warrants to be exchanged for the Original Warrant;

                  (ii) the Registration Rights Agreement, in the form of Exhibit
         C attached hereto, duly executed and delivered by the Parent;


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                  (iii)  the  Participation  Rights  Agreement,  in the  form of
         Exhibit D attached  hereto,  duly  executed and delivered by the Parent
         and The Hallwood Group Incorporated;

                  (iv)  the  Subsidiary  Guaranty,  in the  form  of  Exhibit  E
         attached  hereto,  duly  executed  and  delivered  by HEP and the other
         Initial Subsidiary Guarantors;

                  (v) the HCP Consent, in the form of Exhibit F attached hereto,
         duly executed and delivered by HCP;

                  (vi) certified  copies of (a) the  resolutions of the Board of
         Directors of the Company  approving this Agreement and the transactions
         contemplated  hereby and (b) all documents  evidencing  other necessary
         corporate  action and governmental  approvals,  if any, with respect to
         this Agreement and the transactions contemplated hereby;

                  (vii) a certificate of the Secretary or an Assistant Secretary
         of the Company certifying the names and true signatures of the officers
         of the  Company  authorized  to  sign  this  Agreement  and  the  other
         documents to be delivered by the Company hereunder;

                  (viii)certified copies of the Certificate of Incorporation and
         bylaws of the Company;

                  (ix) certified  copies of (a) the  resolutions of the Board of
         Directors of the Parent  approving this  Agreement,  the Warrants,  the
         Registration Rights Agreement,  the Participation  Rights Agreement and
         the transactions  contemplated hereby and thereby and (b) all documents
         evidencing other necessary corporate action and governmental approvals,
         if any, with respect to this Agreement,  the Warrants, the Registration
         Rights  Agreement  and  the  Participation  Rights  Agreement,  and the
         transactions contemplated hereby and thereby;

                  (x) a certificate  of the Secretary or an Assistant  Secretary
         of the Parent  certifying the names and true signatures of the officers
         of the Parent  authorized to sign this  Agreement,  the  Warrants,  the
         Registration  Rights Agreement and the  Participation  Rights Agreement
         and the other  documents to be delivered  by the Parent  hereunder  and
         thereunder;

                  (xi) certified copies of the Certificate of Incorporation  and
bylaws of the Parent;

                  (xii) certified  copies of (a) the resolutions of the Board of
         Directors of HEC Acquisition  Corp., a Delaware  corporation  (the "HEP
         General Partner"),  approving the Subsidiary  Guaranty on behalf of HEP
         and, in its capacity as a general  partner  thereof,  the other Initial
         Subsidiary  Guarantors  that  are  partnerships  and (b) all  documents
         evidencing other necessary partnership,  corporate or limited liability
         company action and governmental  approvals, if any, with respect to the
         Subsidiary Guaranty;

                  (xiii)  a  certificate   of  the  Secretary  or  an  Assistant
         Secretary  of the HEP  General  Partner  certifying  the names and true
         signatures of the officers of the HEP General Partner

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         authorized to sign the Subsidiary Guaranty on behalf of HEP and each
         Initial Subsidiary Guarantor that is a partnership;

                  (xiv) certified copies of (a) the Certificate of Incorporation
         and bylaws of the HEP General Partner and Hallwood Petroleum,  Inc. and
         (b) the partnership  agreement and certificate of limited  partnership,
         or  the  limited   liability   company  agreement  and  certificate  of
         formation,  as applicable,  of each Initial Subsidiary  Guarantor other
         than HEP;

                  (xv) certified copies of the Agreement of Limited  Partnership
         and Certificate of Limited Partnership of HEP;

                  (xvi) favorable  opinions of Cathleen  Osborn,  Esq.,  General
         Counsel of the  Company,  the Parent and HEP,  and of King &  Spalding,
         special  counsel to the Company,  the Parent and HEP,  each  reasonably
         satisfactory to the Existing Holder and  substantially  in the forms of
         Exhibit G-1, and Exhibit G-2 attached hereto, respectively; and

                  (xvii) copies of the Credit Agreement and related  Guarantees,
         as in effect on the Effective  Date, each of which shall be in form and
         substance satisfactory to the Existing Holder.

                  Effectiveness  of the Merger.  The Existing  Holder shall have
received  evidence  satisfactory  to it in its good  faith  discretion  that the
following  conditions  to the Merger  have been met and that the Merger has been
consummated substantially on the terms described in the Proxy Statement:

                  (i) the approval of the  Agreement of Merger by the holders of
         a  majority  of each  class of the HEP units and the  Company's  common
         stock;

                  (ii) no court or other governmental  entity shall have enacted
         a  law  that  is  in  effect  and  prohibits  the  Merger  and  related
         transactions;

                  (iii) the transactions contemplated by the Agreement of Merger
         to occur on the effective date of the Merger shall have occurred; and

                  (iv) the necessary  consent of any lender or other third party
         that is required shall have been obtained.

                  Opinion of Existing  Holder's  Special  Counsel.  The Existing
Holder shall have received from Baker & Botts, L.L.P., who are acting as special
counsel for the Existing Holder in connection with this transaction, a favorable
opinion  reasonably  satisfactory  to the  Existing  Holder  as to:  (a) the due
incorporation,  existence and good  standing of the Company,  the Parent and the
HEP General  Partner;  (b) the  existence  and good  standing of HEP, May Energy
Partners  Operating  Partnership  Ltd.,  LaPlata  Associates,  LLC and  Hallwood
LaPlata, LLC; (c) the due authorization by

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all  requisite  corporate  action on the part of the Parent,  the  execution and
delivery  by the  Parent,  and  the  validity,  legally  binding  character  and
enforceability  of,  this  Agreement,  the  Warrants,  the  Registration  Rights
Agreement and the Participation  Rights Agreement;  (d) the due authorization by
all  requisite  corporate  action on the part of the Company,  the execution and
delivery  by the  Company,  and the  validity,  legally  binding  character  and
enforceability  of, this Agreement;  (e) the due  authorization by all requisite
corporate,  limited partnership and limited liability company action on the part
of HEP, the other Initial Subsidiary Guarantors and the HEP General Partner, the
execution and delivery by HEP and the other Initial Subsidiary  Guarantors,  and
the validity,  legally binding character and  enforceability,  of the Subsidiary
Guaranty;  (f) the absence of any requirement to register the Warrants under the
Securities  Act;  and (g) such other  matters  incident  to the  matters  herein
contemplated as the Existing Holder may reasonably  request,  including the form
of all papers and the validity of all  proceedings.  In rendering  such opinion,
such counsel may rely, to the extent appropriate,  upon the opinions referred to
in  paragraph  3A(xvi).  Such  opinion  shall also state  that,  based upon such
investigation and inquiry as is deemed relevant and appropriate by such counsel,
the opinions referred to in paragraph 3A(xvi) are satisfactory in form and scope
to such  counsel  and,  while such  investigation  and inquiry  into the matters
covered by such opinions (other than the matters  specifically  addressed above)
were not  sufficient  to  enable  such  counsel  independently  to  render  such
opinions, nothing has come to the attention of such counsel that has caused them
to question  the legal  conclusions  expressed  in the  opinions  referred to in
paragraph  3A(xvi)  and such  counsel  believes  that  the  Existing  Holder  is
justified in relying on such opinions.

                  Representations    and    Warranties;    No    Default.    The
representations and warranties  contained in paragraph 9 hereof and in section 8
of each of the Subsidiary  Guaranty and the HCP Guaranty shall be true on and as
of the  Effective  Date;  there  shall exist on the  Effective  Date no Event of
Default or Default;  and each of the Parent and the Company shall have delivered
to the Existing  Holder an Officer's  Certificate,  dated the Effective Date, to
both such effects.

                  Transactions Permitted By Applicable Laws. The consummation of
the transactions contemplated hereby on the terms and conditions herein provided
shall not violate any  applicable  law or  governmental  regulation  (including,
without limitation,  Section 5 of the Securities Act or Regulation U or X of the
Board of  Governors  of the  Federal  Reserve  System) and shall not subject the
Existing Holder to any tax, penalty,  liability or other adverse condition under
or pursuant to any applicable law or governmental  regulation,  and the Existing
Holder shall have received such  certificates  or other evidence as the Existing
Holder may request to establish compliance with this condition.

                  Proceedings.  All corporate,  partnership,  limited  liability
company  and  other  proceedings  taken or to be taken  in  connection  with the
transactions  contemplated  hereby and all documents  incident  thereto shall be
reasonably  satisfactory in substance and form to the Existing  Holder,  and the
Existing Holder shall have received all such counterpart  originals or certified
or other copies of such documents as the Existing Holder may reasonably request.


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                  Structuring  Fee;  Legal Fees. The Company or the Parent shall
have paid a structuring  fee in the amount of $112,500 to the Existing Holder in
connection  with the  transactions  herein  contemplated.  Without  limiting the
generality  of  paragraph  13B,  the  Company  shall  have paid on or before the
Effective  Date the fees,  charges and  disbursements  of the Existing  Holder's
special  counsel  referred  to in  paragraph  3C to the  extent  reflected  in a
statement  of such  counsel  rendered to the Company at least one  Business  Day
prior to the Effective Date.

                  Compliance  With  Outstanding  Indebtedness  Limitations.  The
Parent shall have delivered to the Existing  Holder an Officer's  Certificate of
an  authorized  financial  officer of the Parent  describing  any  instrument or
agreement to which the Parent, the Company or any other Subsidiary is a party or
by which the Parent,  the Company or any other Subsidiary of the Parent is bound
that limits the amount of, or otherwise  imposes  restrictions  on the creation,
incurrence or maintenance of,  Indebtedness of the Company of the type evidenced
by the Notes,  Indebtedness  of the Parent of the type evidenced by the Parent's
Guarantee  contained in paragraph  11 hereof,  Indebtedness  of HEP or any other
Initial Subsidiary  Guarantor that executes the Subsidiary  Guaranty of the type
evidenced  by the  Subsidiary  Guaranty  or  Indebtedness  of  HCP  of the  type
evidenced  by the HCP  Guaranty,  together  with such  evidence as the  Existing
Holder  may  reasonably  request  showing  that  the  execution,   delivery  and
performance by the Company of this  Agreement,  by the Parent of this Agreement,
the Warrants,  the Registration  Rights Agreement and the  Participation  Rights
Agreement,  and by HEP  and  the  other  Initial  Subsidiary  Guarantors  of the
Subsidiary  Guaranty,  and HCP of the HCP Guaranty and the HCP Consent,  will in
each case not conflict  with, or result in a breach of the terms,  conditions or
provisions of, or constitute a default  under,  or result in the creation of any
Lien on any property owned by the Parent, the Company or any other Subsidiary of
the Parent pursuant to, or permit the holder of any  Indebtedness of the Parent,
the Company or any other  Subsidiary  of the Parent to require  the Parent,  the
Company or any other  Subsidiary of the Parent,  as the case may be, to purchase
such Indebtedness under, or permit the holder of any Indebtedness of the Parent,
the Company or any other  Subsidiary  of the Parent to require  the Parent,  the
Company or any other Subsidiary of the Parent,  as the case may be, to guarantee
or assume such  Indebtedness  under,  or  otherwise  violate,  any  agreement or
instrument  evidencing any Indebtedness of the Parent,  the Company or any other
Subsidiary of the Parent or any agreement relating thereto.

                  Private  Placement  Number. A private placement number for the
Warrants  shall have been obtained  from the CUSIP Service  Bureau of Standard &
Poor's Corporation.

                  Opinion of Company's  Tax Counsel.  The Existing  Holder shall
have received an opinion of the Company's outside tax counsel to the effect that
the Merger  should  qualify as a  reorganization  within the  meaning of Section
368(a) of the Code and that the Existing Holder should not recognize any gain as
the result of the receipt of the  Warrants  solely in exchange  for the Original
Warrants.

         PARAGRAPH                  PREPAYMENTS.


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         4.  Prepayments.  The Notes  shall be subject to  prepayment  only with
respect to the prepayments specified in paragraphs 4A, 4B and 4C.

                  Required  Prepayments.  Until the Notes shall be paid in full,
the Company shall apply to the prepayment of the Notes, without premium, the sum
of $5,000,000 on December 23 in each of the years 2003 through 2006,  inclusive,
and such  principal  amounts  of the Notes,  together  with  accrued  and unpaid
interest thereon to such prepayment  dates,  shall become due on such prepayment
dates. The remaining  outstanding  principal amount of the Notes,  together with
interest  accrued and unpaid  thereon,  shall become due on the maturity date of
the Notes.

                  Optional Prepayment of Notes With Yield-Maintenance Amount.

                         The  Notes  shall  be  subject  to  prepayment,  on any
         Business  Day,  in whole  at any time or from  time to time in part (in
         multiples of $1,000,000),  at the option of the Company, at 100% of the
         principal amount so prepaid plus unpaid accrued interest thereon to the
         prepayment date plus the Yield-Maintenance Amount, if any, with respect
         to each Note being so  prepaid.  Any  partial  prepayment  of the Notes
         pursuant  to this  paragraph  4B shall be  applied in  satisfaction  of
         required  payments of principal in inverse order of their scheduled due
         dates.

                         The  Company   shall  give  the  holder  of  each  Note
         irrevocable written notice of any prepayment pursuant to this paragraph
         4B not  less  than  25 days  and not  more  than 45 days  prior  to the
         prepayment  date,  specifying  such  prepayment  date and the principal
         amount of the Notes, and of the Notes, if any, held by such holder,  to
         be prepaid on such date and stating that such  prepayment is to be made
         pursuant to paragraph  4B.  Notice of  prepayment  having been given as
         aforesaid,  the principal amount of the Notes specified in such notice,
         together with interest thereon to the prepayment date and together with
         the Yield  Maintenance  Amount,  if any,  with respect  thereto,  shall
         become due and payable on such prepayment date.

                  Change in Control.

                         Notice of Occurrence  of Change in Control.  The Parent
         will,  within  five  Business  Days after any  Responsible  Officer has
         knowledge  of the  occurrence  of any Change in Control,  give  written
         notice of such Change in Control to each  holder of Notes.  If a Change
         in Control has occurred,  such notice shall  contain and  constitute an
         offer to prepay Notes as described in clause (iii) of this paragraph 4C
         and shall be  accompanied by the  certificate  described in clause (vi)
         hereof.

                         Notice of Impending Change in Control.  The Parent will
         not take any action that  consummates  or finalizes a Change in Control
         unless at least 30 days  prior to such  action it shall  have  given to
         each  holder  of Notes  written  notice  of such  impending  Change  in
         Control.

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                         Offer  to  Prepay  Notes.  The  offer to  prepay  Notes
         contemplated  by the foregoing  clause (i) shall be an offer to prepay,
         in accordance  with and subject to this paragraph 4C, all, but not less
         than all, the Notes held by each holder (in this case only, "holder" in
         respect of any Note registered in the name of a nominee for a disclosed
         beneficial owner shall mean such beneficial  owner) on a date specified
         in  such  offer  (the  "Proposed   Prepayment  Date").   Such  Proposed
         Prepayment  Date  shall be not less  than 50 days and not more  than 60
         days  after the date of such  offer (if the  Proposed  Prepayment  Date
         shall not be specified  in such offer,  the  Proposed  Prepayment  Date
         shall be the 50th day after the date of such offer).

                         Rejection; Acceptance. A holder of Notes may accept the
         offer to prepay made pursuant to this  paragraph 4C by causing a notice
         of such  acceptance  to be  delivered to the Company at least five days
         prior to the Proposed  Prepayment  Date. A failure by a holder of Notes
         to respond to an offer to prepay  made  pursuant to this  paragraph  4C
         shall be deemed  to  constitute  an  acceptance  of such  offer by such
         holder.

                         Prepayment;    Reduction   of   Required   Prepayments.
         Prepayment  of the Notes to be prepaid  pursuant to this  paragraph  4C
         shall be at 100% of the principal  amount of such Notes,  plus interest
         on such Notes accrued to the date of prepayment plus  Yield-Maintenance
         Amount,  if any,  with  respect to each Note being so  prepaid.  On the
         Business Day preceding the date of prepayment  under this paragraph 4C,
         the  Company  shall  deliver to each holder of Notes being so prepaid a
         statement showing the  Yield-Maintenance  Amount due in connection with
         such  prepayment  and setting forth the details of the  computation  of
         such amount.  Such prepayment shall be made on the Proposed  Prepayment
         Date.  Upon any partial  prepayment of Notes pursuant to this paragraph
         4C, the principal  amount of the required  prepayment of Notes becoming
         due under paragraph 4A on or after the date of such prepayment shall be
         reduced in the same proportion as the aggregate unpaid principal amount
         of Notes is reduced as a result of such prepayment.

                         Officer's  Certificate.  Each offer to prepay the Notes
         pursuant to this  paragraph 4C shall be  accompanied  by a certificate,
         executed by a Responsible  Officer of the Company and dated the date of
         such offer, specifying: (a) the Proposed Prepayment Date; (b) that such
         offer is made pursuant to this  paragraph 4C; (c) the principal  amount
         of each Note offered to be prepaid; (d) the estimated Yield-Maintenance
         Amount due in connection  with such  prepayment  (calculated  as if the
         date of such notice were the date of the prepayment) and the details of
         such  calculation;  (e) the  interest  that  would be due on each  Note
         offered to be prepaid,  accrued to the Proposed  Prepayment  Date;  (f)
         that the conditions of this paragraph 4C have been  fulfilled;  and (g)
         in reasonable detail, the nature and date of the Change in Control.

                  Partial  Payments  Pro Rata.  Upon any partial  prepayment  of
Notes  pursuant to paragraph 4A or 4B, the principal  amount so prepaid shall be
allocated to all Notes at the time  outstanding  (including,  for the purpose of
this paragraph 4D only, all such Notes prepaid or

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<PAGE>



otherwise  retired or purchased  or otherwise  acquired by the Company or any of
its Subsidiaries or Affiliates  other than by prepayment  pursuant to paragraphs
4A, 4B or 4C) in  proportion to the  respective  outstanding  principal  amounts
thereof.

                  Retirement of Notes. The Parent and the Company shall not, and
shall not permit any of their  respective  Subsidiaries or Affiliates to, prepay
or otherwise  retire in whole or in part prior to their  stated  final  maturity
(other  than  by  prepayment  pursuant  to  paragraphs  4A,  4B or  4C  or  upon
acceleration  of such final  maturity  pursuant to paragraph 8A), or purchase or
otherwise acquire,  directly or indirectly,  Notes held by any holder unless the
Parent, the Company or such Subsidiary or Affiliate shall have offered to prepay
or otherwise  retire or purchase or otherwise  acquire,  as the case may be, the
same  proportion of the aggregate  principal  amount of Notes held by each other
holder of Notes at the time outstanding upon the same terms and conditions.  Any
Notes so prepaid or otherwise retired or purchased or otherwise  acquired by the
Parent, the Company or any of their respective  Subsidiaries or Affiliates shall
not be deemed to be outstanding for any purpose under this Agreement,  except as
provided in paragraph 4D.

         PARAGRAPH                  AFFIRMATIVE COVENANTS.

         5. Affirmative Covenants.  So long as any Note shall remain unpaid (or,
if no Note shall remain unpaid but any Warrant shall remain outstanding,  (i) if
at the time in question the Parent Common Stock is listed or admitted to trading
on any national securities exchange or is traded in the over-the-counter  market
and is subject to bid and asked prices with respect  thereto being quoted in the
NASDAQ  National  Market,  then only with respect to the covenants of the Parent
set  forth in  paragraphs  5A(i),  (ii),  (iii) and (vii) and 5B, or (ii) if the
Parent Common Stock is not so listed, admitted to trading or subject to such bid
and asked prices being so quoted, then only with respect to the covenants of the
Parent set forth in paragraphs 5A, 5B and 5C (other than the provisions  thereof
that permit inspection of properties or require that the Parent bear the expense
of any inspection  therein  contemplated)),  the Company and the Parent covenant
that:

                  Financial Statements.  The Company or the Parent will deliver
to each holder in duplicate:

                         as soon as practicable  and in any event within 50 days
         after the end of each  quarterly  period (other than the last quarterly
         period) in each fiscal year, consolidated and consolidating  statements
         of income and cash flows of the  Parent and its  Subsidiaries  for such
         quarterly  period and for the period from the  beginning of the current
         fiscal year to the end of such quarterly  period,  and consolidated and
         consolidating  balance sheets of the Parent and its  Subsidiaries as at
         the  end of such  quarterly  period,  setting  forth  in  each  case in
         comparative form figures for the corresponding periods in the preceding
         fiscal year, all in reasonable  detail and  satisfactory in form to the
         Required Holder(s) and certified by an authorized  financial officer of
         the Parent  subject to changes  resulting  from  year-end  adjustments;
         provided, that delivery pursuant to clause (iii) below of copies of the
         Quarterly  Report on Form 10-Q of the Parent for such quarterly  period
         filed with the Securities and

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                                                        10

<PAGE>



         Exchange Commission shall be deemed to satisfy the requirements of this
         clause (i) with respect to  consolidated  financial  statements if such
         financial statements are included in such report;

                         as soon as practicable and in any event within 100 days
         after  the end of each  fiscal  year,  consolidated  and  consolidating
         statements of income and cash flows of the Parent and its  Subsidiaries
         for such year, and consolidated and consolidating  balance sheets and a
         consolidated  statement of  stockholders'  equity of the Parent and its
         Subsidiaries as at the end of such year,  setting forth in each case in
         comparative form corresponding  consolidated figures from the preceding
         annual audit, all in reasonable  detail and satisfactory in form to the
         Required Holder(s) and reported on by independent public accountants of
         recognized  national standing selected by the Parent whose report shall
         be without  limitation as to the scope of the audit and satisfactory in
         substance to the Required Holder(s);  provided,  that delivery pursuant
         to clause  (iii)  below of copies of the Annual  Report on Form 10-K of
         the Parent for such fiscal year filed with the  Securities and Exchange
         Commission  shall be deemed to satisfy the  requirements of this clause
         (ii)  with  respect  to  consolidated   financial  statements  if  such
         financial statements are included in such report;

                         promptly upon transmission thereof,  copies of all such
         financial  statements,  proxy  statements,  notices  and reports as the
         Parent  shall  send  to  its  public  stockholders  and  copies  of all
         registration  statements  (without  exhibits)  and all reports which it
         files with the Securities and Exchange  Commission (or any governmental
         body or  agency  succeeding  to the  functions  of the  Securities  and
         Exchange Commission);

                         promptly  upon  receipt  thereof,  a copy of each other
         report  submitted  to the  Parent  or  any  Subsidiary  by  independent
         accountants  in  connection  with any annual,  interim or special audit
         made by them of the books of the Parent or any Subsidiary;

                         as soon as  practicable  and in any event  within  five
         Business Days after any officer of the Parent or the Company  obtaining
         knowledge  (a) of any  condition  or event  which,  in the  opinion  of
         management of the Parent or the Company,  could have a material adverse
         effect  on  the  business,  condition  (financial  or  other),  assets,
         properties,  operations or prospects of the Parent and its Subsidiaries
         taken as a whole,  (b) that any  Person  has  given  any  notice to the
         Parent,  the Company or any other Subsidiary of the Parent or taken any
         other action with respect to a claimed default or event or condition of
         the type referred to in paragraph 8A (iii),  (c) of the  institution of
         any litigation  involving claims against the Parent, the Company or any
         other  Subsidiary  of the Parent equal to or greater than $200,000 with
         respect to any single  cause of action or of any adverse  determination
         in  any  court  proceeding  in any  litigation  involving  a  potential
         liability  to the Parent,  the Company or any other  Subsidiary  of the
         Parent  equal to or greater  than  $200,000  with respect to any single
         cause of action which makes the likelihood of an adverse  determination
         in such  litigation  against  the  Parent,  the  Company  or such other
         Subsidiary   substantially   more  probable,   (d)  of  any  regulatory
         proceeding  which could have a material adverse effect on the business,
         condition,

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<PAGE>



         (financial or other),  assets,  properties,  operations or prospects of
         the Parent,  the Company and the other Subsidiaries of the Parent taken
         as a whole, an Officer's  Certificate  specifying the nature and period
         of existence of any such  condition or event,  or specifying the notice
         given or action taken by such Person and the nature of any such claimed
         default,  event  or  condition,  or  specifying  the  details  of  such
         proceeding,  litigation  or dispute  and what  action the  Parent,  the
         Company or any of the Parent's other  Subsidiaries has taken, is taking
         or proposes to take with respect thereto;

                         promptly after the filing or receiving thereof,  copies
         of all reports and notices  which the Parent,  the Company or any other
         Subsidiary  of the Parent files under ERISA with the  Internal  Revenue
         Service  or the PBGC or the  U.S.  Department  of  Labor  or which  the
         Parent, the Company or any other Subsidiary of the Parent receives from
         any of them;

                         (a) by April 1 and August 1 of each  year,  a report in
         form and substance  reasonably  satisfactory  to the Required  Holders,
         which  may be  prepared  by or under  the  supervision  of a  petroleum
         engineer  who may be an employee of the Parent or an  Affiliate,  which
         shall evaluate each interest in oil and gas reserves (including without
         limitation  any  production  payment with respect to any such reserves)
         which is, or is to be, taken into account in the  determination  of the
         "Debt  Limit"  pursuant  to the Credit  Agreement  as of the  preceding
         December 31 or June 30, respectively;  and (b) together with the report
         furnished pursuant to the foregoing clause (a) as of December 31 of any
         year,  an audit report by April 1 of each year,  which shall be in form
         and substance reasonably satisfactory to the Required Holders and shall
         be  prepared  by  Williamson  Petroleum  Consultants,   Inc.  or  other
         independent  petroleum engineers reasonably  acceptable to the Required
         Holders, which audit report shall state that such independent petroleum
         engineers  have  reviewed at least 50% in value of the interests in oil
         and gas  reserves  subject to such report in detail in order to confirm
         the  reserve  figures  and  have  conducted  a  general  review  of the
         remaining properties of the Parent and its Subsidiaries,  provided that
         each year the  detailed  review of 50% of the  interests in oil and gas
         reserves  contained in such audit report shall cover a different  group
         of such  interests so that 100% of such  interests will be covered over
         each four-year period; and provided, further that each such review will
         always include the two interests in oil and gas properties  greatest in
         value at the  time of such  review;  and  provided,  further,  that the
         reviews  contained in each audit report shall  separately  cover proved
         developed producing reserves,  proved developed  non-producing reserves
         and proved undeveloped reserves;

                         all other  reports  and  information  the  Parent,  the
         Company or any other Subsidiary of the Parent is required to provide to
         the banks under the Credit Agreement; and

                         with  reasonable  promptness,  such  other  information
         respecting the condition or operations,  financial or otherwise, of the
         Parent,  the  Company  or any other  Subsidiary  of the  Parent as such
         holder may reasonably request.


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<PAGE>



Together with each delivery of financial  statements required by clauses (i) and
(ii) above, the Parent will deliver to each holder an Officer's  Certificate (a)
demonstrating  (with computations in reasonable detail) compliance by the Parent
and its Subsidiaries with the provisions of paragraphs 6A(1),  6A(2),  6B(2)(iv)
and (v),  6B(3)(vii),  6B(4),  6B(6) and 6B(7) and stating  that there exists no
Event of Default  or  Default,  or, if any Event of  Default or Default  exists,
specifying  the nature  and  period of  existence  thereof  and what  action the
Parent,  the Company or any other Subsidiary of the Parent proposes to take with
respect thereto. Together with each delivery of financial statements required by
clause (ii) above,  the Parent will deliver to each holder a certificate of such
accountants stating that, in making the audit necessary for their report on such
financial statements, they have obtained no knowledge of any Event of Default or
Default, or, if they have obtained knowledge of any Event of Default or Default,
specifying  the  nature  and  period of  existence  thereof.  Such  accountants,
however,  shall not be liable  to  anyone by reason of their  failure  to obtain
knowledge of any Event of Default or Default which would not be disclosed in the
course of an audit  conducted in accordance  with  generally  accepted  auditing
standards.

                  The  Parent  and  the  Company   each  also   covenants   that
immediately  after any  Responsible  Officer  obtains  knowledge  of an Event of
Default or  Default,  it will  deliver to each holder an  Officer's  Certificate
specifying  the nature  and  period of  existence  thereof  and what  action the
Parent,  the Company or any other Subsidiary of the Parent proposes to take with
respect thereto.

                  Information  Required by Rule 144A. The Parent and the Company
will, upon the request of the holder of any Security,  provide such holder,  and
any qualified  institutional buyer designated by such holder, such financial and
other  information  as such holder may  reasonably  determine to be necessary in
order to permit compliance with the information  requirements of Rule 144A under
the Securities Act in connection  with the resale of the  Securities,  except at
such  times  as the  Parent  (in the case of a resale  of the  Warrants)  or the
Company  (in the case of a resale of the  Notes)  is  subject  to the  reporting
requirements of Section 13 or 15(d) of the Exchange Act. For the purpose of this
paragraph 5B, the term  "qualified  institutional  buyer" shall have the meaning
specified in Rule 144A under the Securities Act.

                  Inspection of Property. The Parent and the Company will permit
any Person designated by the holder of any Security in writing, at the Company's
expense  during  the  continuance  of a  Default  or  Event of  Default  if such
designation  has been made by a Significant  Holder and otherwise at the expense
of  the  holder  making  such  designation,  to  visit  and  inspect  any of the
properties of the Parent,  the Company or any other Subsidiary of the Parent, to
examine the corporate books and financial records of the Parent, the Company and
the other  Subsidiaries  of the  Parent  and make  copies  thereof  or  extracts
therefrom  and to discuss  the  affairs,  finances  and  accounts of any of such
entities  with the principal  officers of the Parent,  the Company and the other
Subsidiaries of the Parent and their independent public accountants (and by this
provision the Parent and the Company  authorize such  accountants to discuss the
affairs,  finances and accounts of such  corporations),  all at such  reasonable
times and as often as such holder may reasonably request.


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                  Covenant to Secure  Notes  Equally.  The Parent or the Company
will, if it or any  Subsidiary of either of them shall create or assume any Lien
upon any of its property or assets,  whether now owned or hereafter  acquired to
secure  Indebtedness other than Liens permitted by paragraph 6B(2) (unless prior
written  consent to the creation or assumption  thereof shall have been obtained
pursuant to paragraph 13C), make or cause to be made effective provision whereby
the Notes will be  secured by such Lien  equally  and  ratably  with any and all
other Indebtedness  thereby secured so long as any such other Indebtedness shall
be so secured  pursuant to such  agreements and instruments as shall be approved
by the  Required  Holder(s),  and the  Parent and the  Company  will cause to be
delivered  to the holder of each Note an opinion of  independent  counsel to the
effect that such  agreements and  instruments are enforceable in accordance with
their terms and that the Notes are equally and ratably  secured  with such other
Indebtedness.

                  Corporate  Existence,  Licenses  and Permits;  Maintenance  of
Properties.  The Parent and the Company will at all times do or cause to be done
all  things  necessary  to  maintain,  preserve  and renew  their  existence  as
corporations  organized  under  the  laws of a state  of the  United  States  of
America,  will  preserve  and keep in force and effect,  and cause each of their
respective  Subsidiaries to preserve and keep in force and effect,  all licenses
and permits necessary to the conduct of its and their respective  businesses and
will maintain and keep, and will cause each of such Subsidiaries to maintain and
keep,  its and their  respective  properties  in good repair,  working order and
condition, and from time to time make all necessary and proper repairs, renewals
and replacements, so that the business carried on in connection therewith may be
properly  and  advantageously  conducted  at all times in the  normal  course of
business  as  conducted  prior to the date of repair;  provided,  however,  that
nothing contained in this paragraph 5E shall prevent the Parent,  the Company or
any other  Subsidiary  of the Parent from  ceasing or  omitting to exercise  any
right, license or permit or to make any repair,  renewal or replacement that (i)
in the reasonable  judgment of the Parent,  the Company or such other Subsidiary
of the Parent is no longer in the best  interests of the Parent,  the Company or
such other  Subsidiary of the Parent and (ii) such  cessation or omission  could
not result in a material adverse effect on the business, condition (financial or
other), assets,  properties,  operations or prospects of the Parent, the Company
and the other Subsidiaries of the Parent taken as a whole.

                  Maintenance  of  Insurance.  The Parent and the  Company  will
carry and maintain, and cause each of their respective Subsidiaries to carry and
maintain,  insurance  (subject to customary  deductibles  and  retentions) in at
least such amounts and against such  liabilities and hazards and by such methods
as customarily maintained by other companies operating similar businesses.

                  Payment of Taxes and Other Claims.  The Parent and the Company
will and will cause each of their respective Subsidiaries to file all income tax
or similar tax returns  required to be filed in any  jurisdiction and to pay and
discharge  all taxes shown to be due and  payable on such  returns and all other
taxes,  assessments,  governmental  charges,  levies, trade accounts payable and
claims  for work,  labor or  materials  (all the  foregoing  being  referred  to
collectively as "Claims") payable by any of them, to the extent such Claims have
become due and payable and before they have  become  delinquent;  provided  that
neither the Parent, the Company nor any other Subsidiary of

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<PAGE>



the  Parent  need pay any Claim if (i) the  amount,  applicability  or  validity
thereof is contested by the Parent,  the Company or such other  Subsidiary  on a
timely basis in good faith and in appropriate  proceedings,  and the Parent, the
Company or such other Subsidiary of the Parent has established adequate reserves
therefor in accordance  with  generally  accepted  accounting  principles on the
books of the Parent,  the Company or such other Subsidiary of the Parent or (ii)
the  nonpayment  of all such  Claims  in the  aggregate  could  not  result in a
material adverse change in the business, condition (financial or other), assets,
properties,  operations  or prospects  of the Parent,  the Company and the other
Subsidiaries of the Parent taken as a whole.

                  ERISA  Compliance.  The Parent and the Company will,  and will
cause each ERISA Affiliate to, at all times:

                         with  respect to each Plan,  make  timely  payments  of
         contributions  required to meet the minimum funding  standard set forth
         in ERISA or the Code with  respect  thereto  and,  with  respect to any
         Multiemployer Plan, make timely payment of contributions required to be
         paid thereto as provided by Section 515 of ERISA, and

                         comply with all other provisions of ERISA applicable to
 the Parent, the Company or such ERISA Affiliate, as the case may be,

except for such failures to make  contributions  and failures to comply as could
not have a material  adverse  effect on the  business,  condition  (financial or
other), assets,  properties,  operations or prospects of the Parent, the Company
and the other Subsidiaries of the Parent taken as a whole.

                  Compliance  with Laws. The Parent and the Company will comply,
and will  cause  each of  their  respective  Subsidiaries  to  comply,  with all
applicable  laws,  rules,  regulations and orders  (including  those relating to
protection of the environment) except, in any such case, where failure to comply
could not have a material adverse effect on the business,  condition  (financial
or other),  assets,  properties,  operations  or  prospects  of the Parent,  the
Company and the other Subsidiaries of the Parent taken as a whole.

                  Maintenance of Books of Record;  Reserves. The Parent will, on
a consolidated and consolidating  basis, keep proper books of record and account
and set aside appropriate reserves, all in accordance with GAAP.

                  Guaranty of Notes by Certain  Subsidiaries.  If any Subsidiary
of the  Parent  (whether  in  existence  as of the  date  of this  Agreement  or
subsequently  organized  or  acquired)  delivers  or is  required  to  deliver a
Guarantee to, or grants or is required to grant a Lien to, or becomes  liable as
a borrower from or an issuer of Indebtedness  held by, any holder of Senior Debt
(or a trustee,  collateral agent or similar Person on behalf of such holder), or
otherwise  becomes  obligated  or is required to become  obligated,  directly or
indirectly,  with  respect  to any  Senior  Debt,  the  Parent  will  cause such
Subsidiary  to  deliver  to the  holders  of the  Notes  (i)  an  Assumption  of
Subsidiary  Guaranty in the form of Exhibit H attached hereto,  duly executed by
such Subsidiary, (ii)

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a copy of a resolution  of the board of directors of such  Subsidiary,  or other
appropriate  organizational  action  if such  Subsidiary  is not a  corporation,
approving such Assumption of Subsidiary  Guaranty and the execution and delivery
thereof,  which copy shall be certified to be a true copy by the Secretary or an
Assistant  Secretary  of such  Subsidiary  or other  appropriate  person if such
Subsidiary is not a corporation,  and (iii) an opinion, in the form of Exhibit I
attached  hereto,  from counsel to the Parent  addressing  such  Subsidiary  and
Guaranty.

                  Without limitation or duplication of the preceding  paragraph,
the Parent in any event shall cause each  Material  Subsidiary to deliver to the
holders of the Notes (i) an  Assumption  of  Subsidiary  Guaranty in the form of
Exhibit H attached hereto,  duly executed by such  Subsidiary,  (ii) a copy of a
resolution of the board of directors of such  Subsidiary,  or other  appropriate
organizational  action if such  Subsidiary is not a corporation,  approving such
Assumption of Subsidiary Guaranty and the execution and delivery thereof,  which
copy  shall be  certified  to be a true copy by the  Secretary  or an  Assistant
Secretary of such Subsidiary or other  appropriate  person if such Subsidiary is
not a  corporation,  and (iii) an  opinion,  in the form of  Exhibit I  attached
hereto,  from  counsel  to  the  Parent  addressing  such  Subsidiary  and  such
Assumption of Subsidiary Guaranty.

                  Tax  Treatment.  The  Company and the Parent  acknowledge  and
agree that,  for tax  purposes,  they will treat the issuance of the Warrants as
being  (a)  solely  in  exchange  for the  Original  Warrants  in a  transaction
qualifying as a reorganization  within the meaning of Section 368(a) of the Code
(and within the meaning of any similar  provision  of state or local  income tax
law) and (b) wholly  tax-free to the Existing  Holder  under  Section 354 of the
Code (and under any similar  provision  of state or local  income tax law).  The
Company  and the Parent  agree  that they will file all tax  returns in a manner
consistent  with  the  foregoing  treatment,  and  that  they  will not take any
position  before  any  taxing  authority  or in  any  tax  proceeding  which  is
inconsistent with the foregoing treatment.

         PARAGRAPH                  NEGATIVE COVENANTS.

         6. Negative  Covenants.  So long as any Note shall remain  unpaid,  the
Company and the Parent covenant that:

                  Financial Covenants.  Neither the Parent nor the Company will
permit, at any time;

         6A(1).  Total Debt to EBITDA Ratio. The ratio of (i) Total Debt to (ii)
EBITDA  for the most  recently  ended four  consecutive  fiscal  quarters  to be
greater than 4.25 to 1.00.

         6A(2).  Consolidated Net Worth. Consolidated Net Worth of the Parent on
the last day of any fiscal  quarter,  commencing  with the fiscal  quarter ended
March 31, 1999, to be less than the sum of (i) $45,000,000 plus (ii) 100% of any
Equity  Proceeds  plus (iii) the  cumulative  total of 50% of  Consolidated  Net
Income for each fiscal  quarter (or portion  thereof,  in the case of the fiscal
quarter ending June 30, 1999) after the Effective Date in which Consolidated Net
Income  is  positive,  to  and  including  the  fiscal  quarter  ended  on  such
measurement date.

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                  Other Restrictions.  The Parent and the Company will not and
will not permit any of their respective Subsidiaries to:

         6B(1). Prohibition Against Layering Indebtedness. Incur, create, issue,
assume,  guarantee or in any other manner become  directly or indirectly  liable
with  respect to or  responsible  for, or permit to remaining  outstanding,  any
Indebtedness (including, without limitation,  Indebtedness permitted pursuant to
paragraphs 6A(1) and 6B(6)) that is subordinate or junior in right of payment to
any Senior Debt or any Guarantee in respect thereof unless such  Indebtedness is
subordinate in right of payment to the Notes or any Guarantee in respect thereof
(including,  without  limitation,  the  Guarantee  of the  Parent  set  forth in
paragraph 11, the HCP Guaranty and the Subsidiary Guaranty), as the case may be,
at least to the same extent as the Notes are  subordinate in right of payment to
Senior Debt pursuant to the subordination provisions contained in paragraph 7 or
any such Guarantee in respect of the Notes is subordinate in right of payment to
Senior Debt pursuant to the subordination provisions contained in the applicable
guaranty agreement (including,  without limitation,  the Guarantee of the Parent
set forth in paragraph 11, the HCP Guaranty and the Subsidiary Guaranty), as the
case may be.

         6B(2).  Liens.  Create,  assume or suffer to exist any Lien upon any of
its properties or assets,  whether now owned or hereafter  acquired  (whether or
not  provision  is made for the  equal  and  ratable  securing  of the  Notes in
accordance with the provisions of paragraph 5D), except:

                         Liens,  on  properties  or  assets of the  Parent,  the
         Company and any party executing a Guarantee with respect to Senior Debt
         and the  Notes,  securing  Senior  Debt and  obligations  in respect of
         Hedging Transactions and Swaps of the Company, the Parent and HEP under
         the Credit Agreement;

                         the Lien in favor of FAR Gas Acquisitions Corporation
described on Schedule 9D attached hereto;

                         statutory  Liens  incidental to the conduct of business
         or the ownership of properties of the Parent, the Company and the other
         Subsidiaries of the Parent (including Liens in connection with worker's
         compensation,  unemployment  insurance  and other like laws (other than
         Liens  imposed  by  ERISA),  warehousemen's  and  mechanic's  liens and
         statutory landlord's liens) and Liens to secure statutory  obligations,
         property taxes and assessments of  governmental  charges or other Liens
         of like general  nature which in each case are incurred in the ordinary
         course of business and not in  connection  with the borrowing of money,
         the  obtaining  of advances  or credit or the  payment of the  deferred
         purchase  price of  property  and which do not in any event  materially
         impair  the  value or use of the  property  encumbered  thereby  in the
         operation  of the  business  of the  Parent,  the Company and the other
         Subsidiaries of the Parent;  provided in each case, that the obligation
         secured  is  not  overdue  or is  being  contested  in  good  faith  by
         appropriate  proceedings  and reserves  with respect  thereto have been
         established to the extent required by GAAP;


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                         Liens,  on  properties  of the Parent,  the Company and
         other Subsidiaries of the Parent,  that secure  Non-recourse Debt in an
         aggregate amount not to exceed at any time 5% of Consolidated Net Worth
         of the Parent,  unless  otherwise  agreed to in writing by the Required
         Holders; and

                         other Liens on properties of the Parent, the Company or
         any other Subsidiary of the Parent,  provided that the aggregate amount
         of  Indebtedness  or  other  obligations  secured  by such  Liens  plus
         (without  duplication)  the  aggregate  amount of  Indebtedness  of all
         Subsidiaries  of the  Parent,  other  than the  Company  and other than
         Indebtedness that constitutes  Senior Debt, does not exceed at any time
         the  greater  of  $1,000,000  or 2% of  Consolidated  Net  Worth of the
         Parent.

         6B(3).   Consolidation,   Merger  or  Transfer  of  Assets.   Merge  or
consolidate  with or into any Person or  convey,  transfer,  lease or  otherwise
dispose of all or substantially all of its assets to any Person, except that:

                  (i) any  Subsidiary  of the Company may merge with the Company
         (provided  that the Company  shall be the sole  continuing or surviving
         Person) or with any one or more  other  Person(s)  (provided  that each
         surviving Person shall be a Wholly Owned Subsidiary of the Company that
         has executed and delivered a guaranty agreement in respect of the Notes
         pursuant to this Agreement);

                  (ii) any Subsidiary of the Company may convey, transfer, lease
         or otherwise  dispose of all or substantially  all of its assets to the
         Company  or to a  Wholly  Owned  Subsidiary  of the  Company  that  has
         executed  and  delivered a guaranty  agreement  in respect of the Notes
         pursuant to this Agreement;

                  (iii) the  Company may merge or  consolidate  with or into any
         other  corporation or convey,  transfer,  lease or otherwise dispose of
         all or  substantially  all  of its  assets  to any  other  corporation;
         provided,  that: (a) there shall be a single  successor  formed by such
         consolidation  or a single survivor formed by such merger,  as the case
         may be, (b) the successor formed by such consolidation, the survivor of
         such merger, or the corporation that acquires by conveyance,  transfer,
         lease or other  disposition all or  substantially  all of the assets of
         the Company,  as the case may be, shall be organized and existing under
         the laws of a state of the United  States and shall have a majority  of
         its  assets and  business  located  in the  United  States,  (c) if the
         Company  is not  such  successor  or  survivor,  then  either  (1)  the
         successor,  survivor or acquirer or (2) the corporation (which shall be
         organized  and existing  under the laws of a state of the United States
         and shall have a majority  of its  assets and  business  located in the
         United  States)  that  owns a  majority  of  the  Voting  Stock  of the
         successor,  survivor  or  acquirer  shall have  expressly  assumed  all
         obligations  of the Company  under or with  respect to the Notes,  this
         Agreement and any other  agreement  entered into in connection with the
         transactions   contemplated   hereby,  (d)  the  Person  assuming  such
         obligations  shall  have  caused  to be  delivered  to each  holder  of
         Securities an opinion of

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         independent counsel reasonably acceptable to the Required Holder(s), to
         the  effect  that  all  agreements  and   instruments   effecting  such
         assumption are  enforceable in accordance  with their terms (subject to
         customary  exceptions regarding bankruptcy and equitable principles and
         such other exceptions and  qualifications,  if any, that are reasonably
         approved by the Required Holders) and comply with the terms hereof, (e)
         no  Default  or  Event  of  Default  shall  exist,  either  prior to or
         immediately after giving effect to such merger,  consolidation or asset
         conveyance,   transfer,  lease  or  other  disposition,   and  (f)  the
         Consolidated   Net  Worth  of  the  successor,   survivor  or  acquirer
         (including  circumstances  in which the Company is the successor or the
         survivor)  or,  in  the  case  of  clause  (c)(2)  above,   the  parent
         corporation of the successor,  survivor or acquirer,  shall be equal to
         or greater than the Consolidated  Net Worth of the Company  immediately
         prior to such merger,  consolidation or asset transfer,  lease or other
         disposition;

                  (iv) any  Subsidiary  of the Parent other than the Company may
         merge  with the  Parent  (provided  that the  Parent  shall be the sole
         continuing or surviving Person) or with any one or more other Person(s)
         (provided that each surviving Person shall be a Wholly Owned Subsidiary
         of the Parent that has executed and  delivered a guaranty  agreement in
         respect of the Notes pursuant to this Agreement);

                  (v) any  Subsidiary  of the Parent  other than the Company may
         convey,  transfer,  lease or otherwise  dispose of all or substantially
         all of its assets to the Parent or to a Wholly Owned  Subsidiary of the
         Parent that has executed and delivered a guaranty  agreement in respect
         of the Notes pursuant to this Agreement;

                  (vi) the  Parent  may  merge or  consolidate  with or into any
         other  corporation or convey,  transfer,  lease or otherwise dispose of
         all or  substantially  all  of its  assets  to any  other  corporation;
         provided,  that: (a) there shall be a single  successor  formed by such
         consolidation  or a single survivor formed by such merger,  as the case
         may be, (b) the successor formed by such consolidation, the survivor of
         such merger, or the corporation that acquires by conveyance,  transfer,
         lease or other  disposition all or  substantially  all of the assets of
         the Parent,  as the case may be, shall be organized and existing  under
         the laws of a state of the United  States and shall have a majority  of
         its assets and business located in the United States, (c) if the Parent
         is not such  successor  or  survivor,  then  either (1) the  successor,
         survivor or acquirer or (2) the  corporation  (which shall be organized
         and existing  under the laws of a state of the United  States and shall
         have a  majority  of its  assets  and  business  located  in the United
         States)  that owns a  majority  of the Voting  Stock of the  successor,
         survivor or acquirer  shall have expressly  assumed all  obligations of
         the Parent under or with respect to the Warrant,  this  Agreement,  the
         Registration Rights Agreement,  the Participation  Rights Agreement and
         any other agreement  entered into in connection  with the  transactions
         contemplated  hereby,  (d) the Person assuming such  obligations  shall
         have caused to be delivered to each holder of  Securities an opinion of
         independent counsel reasonably acceptable to the Required Holder(s), to
         the  effect  that  all  agreements  and   instruments   effecting  such
         assumption are enforceable in accordance with their terms (subject to

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         customary  exceptions regarding bankruptcy and equitable principles and
         such other exceptions and  qualifications,  if any, that are reasonably
         approved by the Required Holders) and comply with the terms hereof, (e)
         no  Default  or  Event  of  Default  shall  exist,  either  prior to or
         immediately after giving effect to such merger,  consolidation or asset
         conveyance,   transfer,  lease  or  other  disposition,   and  (f)  the
         Consolidated   Net  Worth  of  the  successor,   survivor  or  acquirer
         (including  circumstances  in which the Company is the successor or the
         survivor)  or,  in  the  case  of  clause  (c)(2)  above,   the  parent
         corporation of the successor,  survivor or acquirer,  shall be equal to
         or greater than the  Consolidated  Net Worth of the Parent  immediately
         prior to such merger,  consolidation or asset transfer,  lease or other
         disposition; and

                  (vii) any  Subsidiary of the Parent other than the Company may
         merge  or  consolidate  with or  into  any  other  Person,  or  convey,
         transfer, lease or otherwise dispose of all or substantially all of its
         assets  to any  other  Person,  if such  transaction  is  permitted  by
         paragraph 6B(4).

                  In  the  event  of  a  merger  or  consolidation  involving  a
Subsidiary of the Parent  pursuant to the  foregoing  clause (vii) in which such
Subsidiary is not the  successor or survivor,  the holders of the Notes agree to
release such  Subsidiary  from any Guarantee in respect of the Notes to which it
is a party,  upon written  request of the Parent,  if (i) no Default or Event of
Default  shall  exist   immediately  after  giving  effect  to  such  merger  or
consolidation  and the  Parent  shall  deliver  to the  holder  of each  Note an
Officer's  Certificate to such effect,  and (ii) the holders of Senior Debt also
release such Subsidiary from any Guarantee in respect of Senior Debt to which it
is a party.

         6B(4).   Limitation on Certain Asset Dispositions.   Make any Asset
Disposition unless:

                  (i)  in the  good  faith  opinion  of the  Parent,  the  Asset
         Disposition is in exchange for consideration having a Fair Market Value
         at least  equal to that of the  property  exchanged  and is in the best
         interest of the Parent, the Company or another Subsidiary of the Parent
         that  is the  transferor  with  respect  to the  Asset  Disposition  in
         question, as applicable;

                  (ii) immediately after giving effect to the Asset Disposition,
         no Default or Event of Default would exist; and

                  (iii)   immediately   after   giving   effect   to  the  Asset
Disposition:

                         (a) the  aggregate  Disposition  Value of all  property
                  that was the subject of any Asset Disposition occurring (1) in
                  the  period of 365 days then  ending  would not  exceed 15% of
                  Consolidated  Assets as of the end of the then  most  recently
                  ended fiscal quarter of the Parent,  and (2) at any time after
                  December 31, 1998 would not exceed 40% of Consolidated  Assets
                  as of the end of the then most recently  ended fiscal  quarter
                  of the Parent; and


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                         (b) the aggregate  Disposition Value of all property of
                  the Company and its  Subsidiaries  that was the subject of any
                  Asset Disposition occurring (1) in the period of 365 days then
                  ending  would not  exceed  15% of  consolidated  assets of the
                  Company and its Subsidiaries (determined in the same manner as
                  Consolidated  Assets of the Parent and its Subsidiaries) as of
                  the end of the then most recently  ended fiscal quarter of the
                  Company, and (2) at any time after December 31, 1998 would not
                  exceed  40% of  consolidated  assets  of the  Company  and its
                  Subsidiaries  (determined  in the same manner as  Consolidated
                  Assets of the  Parent and its  Subsidiaries)  as of the end of
                  the then most recently ended fiscal quarter of the Company.

                  Notwithstanding  anything  contained  in the  foregoing to the
contrary,  if the net  proceeds  for any  Transfer  are  applied  to a  Property
Reinvestment  Application  within  180  days  after  such  Transfer,  then  such
Transfer,  only for the purpose of determining  compliance  with clause (iii) of
this  paragraph  6B(4)  as of any  date,  shall  be  deemed  not to be an  Asset
Disposition.

                  In  the  event  of an  Asset  Disposition  in  the  form  of a
disposition  of all of the capital  stock of or other  equity  interests  in any
Subsidiary,  the holders of the Notes agree to release such  Subsidiary from any
Guarantee in respect of the Notes to which it is a party,  upon written  request
of the Parent,  if (i) no Default or Event of Default  shall  exist  immediately
after giving  effect to such Asset  Disposition  and the Parent shall deliver to
the holder of each Note an Officer's  Certificate  to such effect,  and (ii) the
holders of Senior  Debt also  release  such  Subsidiary  from any  Guarantee  in
respect of Senior Debt to which it is a party.

         6B(5).  Transactions  With  Affiliates.  Other  than  in  the  case  of
transactions  between  Wholly Owned  Subsidiaries  of the Parent (other than the
Company)  that have  executed  guaranty  agreements  with  respect  to the Notes
pursuant to this Agreement,  directly or indirectly  purchase,  acquire or lease
any property from, or sell, transfer or lease any property to, or otherwise deal
with, (i) any  Affiliate,  (ii) any Person  owning,  beneficially  or of record,
directly or indirectly,  either  individually or together with all other Persons
to whom such  Person is related by blood,  adoption  or  marriage,  stock of the
Parent (of any class having ordinary voting power for the election of directors)
aggregating  5% or more of such  voting  power or (iii) any  Person  related  by
blood,  adoption  or  marriage  to any  Person  described  or coming  within the
provisions of clause (i) or (ii) of this paragraph 6B(5), except in the ordinary
course of  business  (as  determined  by  reference  to the  ordinary  course of
business  in  the  oil  and  gas  industry)  and  pursuant  to  the   reasonable
requirements of the business of the Parent,  the Company or the other Subsidiary
of the Parent involved in such  transaction,  as the case may be, and upon terms
and  conditions  at least as favorable to the Parent,  the Company or such other
Subsidiary  as the terms and  conditions  that  would  then be  obtainable  in a
comparable  arm's-length  transaction with a Person not an Affiliate;  provided,
that the Parent may sell to, or purchase  from,  any such  Person  shares of the
Parent's  stock so long as no  Default or Event of  Default  exists  immediately
prior to or immediately  after giving effect to any such purchase by the Parent;
and  provided,  further,  that  the  Parent,  the  Company  or any of the  other
Subsidiaries  of the Parent may  participate  in, or effect any  transaction  in
connection with, any joint enterprise or other

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joint  arrangement  with any Affiliate if the Parent,  the Company or such other
Subsidiary participates in or effects such transaction in the ordinary course of
its  business  and on a basis no less  advantageous  than the basis on which the
Parent,  the Company or such other  Subsidiary  would  participate  in a similar
transaction with a Person not an Affiliate.

         6B(6).  Priority  Debt.  Permit  Indebtedness  of  Subsidiaries  of the
Parent,  other than the Company  and other than  Indebtedness  that  constitutes
Senior Debt, plus (without duplication)  Indebtedness secured by Liens permitted
by clause  (v) of  paragraph  6B(2) to  exceed,  at any  time,  the  greater  of
$1,000,000 or 2% of Consolidated Net Worth of the Parent.

         6B(7).  Hedging  Transactions.  Be or become a party to any Swap or any
Hedging  Transaction  for any  purpose  except for bona fide  hedging  purposes.
Without limiting the generality of the foregoing, at no time during any calendar
year will the Parent be a party to or permit the Company or any other Subsidiary
to be a party to any Hedging  Transaction  with  respect to natural gas or crude
oil if,  immediately  after  giving  effect  to such  Hedging  Transaction,  the
aggregate   reference   quantity  of   hydrocarbons   with  respect  to  Hedging
Transactions  with  respect to  natural  gas or crude oil that the  Parent,  the
Company and the other  Subsidiaries of the Parent shall have entered into during
such year exceeds 65% of the aggregate  natural gas and crude oil  production of
the Parent,  the Company and the other  Subsidiaries of the Parent for such year
(calculated on the basis of actual natural gas and crude oil production for such
year  to  date  and a good  faith  estimate  of the  aggregate  amount  of  such
production for the remainder of such year).

         6B(8). Change of Business. Change in any material respect the nature of
its respective  business or operations  from the  exploration,  development  and
production,  gathering,  processing  and marketing of oil and gas and activities
relating directly thereto,  or engage,  directly or indirectly,  in any material
business activity,  or purchase or otherwise acquire any material  property,  in
any case not directly related to the conduct of the above-described  business or
operations.

         PARAGRAPH  SUBORDINATION OF NOTES.

                  Subordination.  Anything  in this  Agreement  to the  contrary
notwithstanding,  the Indebtedness  evidenced by the Notes, including principal,
Yield-Maintenance  Amount, if any, and interest, shall be subordinate and junior
to the extent set forth in subparagraphs  (i) through (vi) inclusive,  below, to
all Senior Debt.

                         If the  Company  shall  default  in the  payment of any
         principal  of or  interest on any Senior Debt in an amount in excess of
         $100,000  owing under any single  instrument  when the same becomes due
         and payable,  whether at maturity or at a date fixed for  prepayment or
         at any other date on which the Company is required to prepay any Senior
         Debt or by declaration of acceleration or otherwise,  then,  unless and
         until  such  default  shall  have been  remedied  by payment in full or
         waived,  no holder of the Notes  shall  accept or receive any direct or
         indirect payment of or on account of any Indebtedness in respect of the
         Notes.


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                         In   the   event   of   any   insolvency,   bankruptcy,
         liquidation,  reorganization  or  other  similar  proceedings,  or  any
         receivership  proceedings  in  connection  therewith,  relative  to the
         Company, and in the event of any proceedings for voluntary liquidation,
         dissolution  or  other  winding  up of  the  Company,  whether  or  not
         involving  insolvency or bankruptcy  proceedings,  then all Senior Debt
         shall  first be paid in full  before  any  payment  of or on account of
         principal or  Yield-Maintenance  Amount, if any, or interest is made by
         the Company in respect of the Notes.

                         In any of the  proceedings  referred to in subparagraph
         (ii)  above,  any  payment or  distribution  of any kind or  character,
         whether in cash, property,  stock or obligations,  which may be payable
         or  deliverable by the Company in respect of the Notes shall be paid or
         delivered  directly  to the  holders  of  Senior  Debt (or to a banking
         institution  selected  by the court or Person  making  the  payment  or
         delivery or designated by any holder of Senior Debt) for application in
         payment  thereof in accordance  with the priorities then existing among
         such holders,  unless and until all Senior Debt shall have been paid in
         full; provided, however, that

                           if the  payment or  delivery  by the  Company of such
                  cash,  property,  stock or  obligations  to the holders of the
                  Notes is authorized by an order or decree giving  effect,  and
                  stating in such order or decree that  effect is given,  to the
                  subordination  of the  Notes  to  Senior  Debt,  and made in a
                  reorganization  proceeding under any applicable  bankruptcy or
                  reorganization  law,  no payment or delivery by the Company of
                  such  cash,   property,   stock  or  obligations   payable  or
                  deliverable  with  respect  to the Notes  shall be made to the
                  holders of Senior Debt; and

                           no such  delivery  shall be made to holders of Senior
                  Debt of  stock  or  obligations  if the  delivery  thereof  is
                  authorized by an order or decree giving effect, and stating in
                  such   order  or  decree   that   effect  is  given,   to  the
                  subordination  of the Notes to Senior Debt,  and if such stock
                  or obligations  are  subordinate and junior (whether by law or
                  agreement) at least to the extent provided in this paragraph 7
                  to the payment of all Senior Debt then  outstanding and to the
                  payment of any stock or obligations  which are issued pursuant
                  to such reorganization proceedings in exchange or substitution
                  for any Senior Debt then outstanding.

A  transaction   permitted  by  paragraph  6B(3)(iii)  shall  not  be  deemed  a
dissolution,  winding-up, liquidation or reorganization for the purposes of this
paragraph 7.

                         Upon the occurrence  and during the  continuance of any
         Default  Subordination  Event (other than under  circumstances when the
         terms of subparagraph  (ii) above are  applicable),  no holder of Notes
         shall  accept or receive  any direct or  indirect  payment by setoff or
         otherwise of or on account of any  indebtedness in respect of the Notes
         during the Stand-Still Period, provided that in the case of any payment
         on or in respect of any Note  which  would (in the  absence of any such
         Default  Subordination  Event)  have been due and  payable  on any date
         during such Stand-Still Period, the provisions of this subparagraph

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         (iv) shall not prevent  such  payment on or after the date  immediately
         following the termination of such Stand-Still Period. There shall be no
         more than three Stand-Still  Periods, in the aggregate,  so long as the
         Notes  are  outstanding,  whether  the  Stand-Still  Period  arises  in
         connection with, or a notice under, this paragraph 7, the HCP Guaranty,
         the Subsidiary  Guaranty or the Parent Guarantee contained in paragraph
         11 hereof.

                         If  any  payment  or  distribution  of  any  character,
         whether in cash, securities or other property, shall be received by any
         holder of Notes in  contravention of any of the terms of this paragraph
         7 and  before all the  Senior  Debt shall have been paid in full,  such
         payment or  distribution  shall be received in trust for the benefit of
         the  holders  of the  Senior  Debt at the time  outstanding  and  shall
         forthwith be paid over or delivered and  transferred  to the holders of
         Senior Debt.

                         If any payment by the Company in respect of Senior Debt
         must be  disgorged  by any  holder  of  Senior  Debt as a result of any
         action under the United States  Bankruptcy  Code or other debtor relief
         law,  the  obligations  in respect of which such payment was made shall
         continue to  constitute  Senior Debt and shall  remain  entitled to the
         benefit of the provisions of this provision.  Without limitation of the
         foregoing,  in the event of any such disgorgement by a holder of Senior
         Debt, all holders of Notes,  if any, who have become  subrogated to the
         rights of such holder of Senior Debt  pursuant  to this  Agreement  and
         have  obtained  payment  from the Company  through the exercise of such
         subrogation rights shall disgorge and pay to such holder of Senior Debt
         any  payment  so  obtained,  to the extent of the  payment or  payments
         disgorged by such holders of Senior Debt.

                  Obligation  of the Company  Unconditional.  The  provisions of
this  paragraph  7 are for the purpose of defining  the  relative  rights of the
holders  of Senior  Debt on the one hand,  and the  holders  of the Notes on the
other  hand,  against the Company and its  property,  and nothing  herein  shall
impair,  as between the Company and the holders of the Notes,  the obligation of
the Company,  which is unconditional and absolute, to pay to the holders thereof
the  principal  thereof and Yield-  Maintenance  Amount,  if any,  and  interest
thereon in  accordance  with their terms and the  provisions  hereof,  nor shall
anything  herein  prevent the holders of the Notes from  exercising all remedies
otherwise  permitted by applicable  law or hereunder  upon default  hereunder or
under the Notes (including,  without limitation, the right to demand payment and
sue for  performance  hereof  and of the Notes and to  accelerate  the  maturity
thereof as provided in paragraph 8A), subject to the rights,  if any, under this
paragraph  7 of  holders  of Senior  Debt to receive  cash,  property,  stock or
obligations  otherwise  payable or  deliverable by the Company to the holders of
the Notes.

                  Subrogation.  Upon payment in full of Senior Debt, the holders
of the Notes shall be subrogated to the rights of the holders of the Senior Debt
to receive  payments or  distributions  of assets of the Company  made on Senior
Debt until the principal of and  Yield-Maintenance  Amount, if any, and interest
on the Notes shall be paid in full,  and, for the purposes of such  subrogation,
no  payments  to the  holders  of Senior  Debt of any cash,  property,  stock or
obligations  to which the holders of the Notes would be entitled  except for the
provisions of paragraph 7A(iii) shall, as

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between the Company,  its creditors  (other than the holders of the Senior Debt)
and the holders of the Notes,  be deemed to be a payment by the Company to or on
account of Senior Debt.

                  Rights of  Holders  of Senior  Debt.  The  provisions  of this
paragraph 7 shall be deemed a continuing  offer to all holders of Senior Debt to
act in reliance on such provisions (but no such reliance shall be required to be
proven to receive the  benefits  hereof) and may be enforced by such holders and
no  right  of any  present  or  future  holder  of any  Senior  Debt to  enforce
subordination  as provided  in this  paragraph 7 shall at any time in any way be
prejudiced  or  impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any  non-compliance by
the Company with the terms,  provisions  and covenants of this  Agreement or the
Notes. Without in any way limiting the generality of the foregoing,  the holders
of Senior Debt may, at any time and from time to time, without the consent of or
notice to the  holders of the Notes,  and without  impairing  or  releasing  the
subordination  provided in this paragraph 7 or the obligations  hereunder of the
holders of the Notes to the  holders of Senior  Debt,  do any one or more of the
following,  subject in all cases to the limitations  contained in the definition
of Senior Debt:  (i) change the manner,  place or terms of payment or extend the
time of  payment  of,  or renew  or alter  (including,  without  limitation,  by
increasing or decreasing the "Availability  Limit" and the "Debt Limit," in each
case as  defined  in the  Credit  Agreement  pursuant  to which  Senior  Debt is
incurred),  or  waive  defaults  under,  Senior  Debt,  or  otherwise  amend  or
supplement in any manner Senior Debt or any  instrument  evidencing  the same or
any  agreement  under which  Senior Debt is  outstanding;  (ii) sell,  exchange,
release or  otherwise  deal with any  property  pledged,  mortgaged or otherwise
securing  Senior  Debt;  (iii)  release any Person  liable in any manner for the
payment  or  collection  of Senior  Debt;  and (iv)  exercise  or  refrain  from
exercising  any rights  against the Company and any other Person,  including any
guarantor or surety.

         PARAGRAPH  EVENTS OF DEFAULT.

         8.       Events of Default.

                  Acceleration.  If any of the following  events shall occur and
be continuing for any reason  whatsoever (and whether such  occurrence  shall be
voluntary  or  involuntary  or come about or be effected by  operation of law or
otherwise):

                         the Company defaults in the payment of any principal of
         or Yield-  Maintenance  Amount payable with respect to any Note, in any
         case when the same shall  become  due,  either by the terms  thereof or
         otherwise as herein provided; or

                         the Company defaults in the payment of any interest on
any Note for more than five days after the date due; or

                         the Parent,  the Company or any other Subsidiary of the
         Parent  defaults  (whether as primary  obligor or as guarantor or other
         surety) in any payment of  principal  of or interest on or premium,  if
         any, with respect to any other Indebtedness beyond any period of grace

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<PAGE>



         provided with respect thereto,  or the Parent, the Company or any other
         Subsidiary  of the  Parent  fails  to  perform  or  observe  any  other
         agreement, term or condition contained in any agreement under which any
         such Indebtedness is created (or if any other event thereunder or under
         any such  agreement  shall occur and be  continuing)  and the effect of
         such failure or other event is to cause such  obligation  to become due
         (or to be purchased by the Parent,  the Company or any other Subsidiary
         of the  Parent)  prior  to any  stated  maturity;  provided,  that  the
         aggregate  amount of all obligations as to which such a payment default
         shall occur and be  continuing or such a failure or other event causing
         acceleration  (or  sale  to  the  Parent,  the  Company  or  any  other
         Subsidiary  of  the  Parent)  shall  occur  and be  continuing  exceeds
         $2,500,000; or

                         any  representation  or warranty  made by the Parent or
         the Company  herein,  by HEP or any other  Subsidiary in the Subsidiary
         Guaranty,  by HCP in the HCP Guaranty,  or by the Parent or the Company
         or  any of  their  respective  officers  in any  writing  furnished  in
         connection  with or  pursuant to this  Agreement  shall be false in any
         material respect on the date as of which made; or

                         the  Company or the Parent  fails to perform or observe
         any term,  covenant or agreement  contained in  paragraphs  6A,  6B(1),
         6B(2), 6B(3), 6B(4), 6B(6) or 6B(7); or

                         the  Company or the Parent  fails to perform or observe
         any other agreement,  covenant,  term or condition contained herein and
         such  failure  shall  not be  remedied  within  30 days  after  (a) any
         Responsible Officer obtains actual knowledge thereof or (b) the Company
         or the Parent receives  written notice of such failure from any holder;
         or

                         the Parent,  the Company or any other Subsidiary of the
         Parent makes an assignment for the benefit of creditors or is generally
         not paying its debts as such debts become due; or

                         any  decree  or order  for  relief  in  respect  of the
         Parent,  the Company or any other  Subsidiary  of the Parent is entered
         under  any   bankruptcy,   reorganization,   compromise,   arrangement,
         insolvency, readjustment of debt, dissolution or liquidation or similar
         law, whether now or hereafter in effect (the "Bankruptcy  Law"), of any
         jurisdiction; or

                         the Parent,  the Company or any other Subsidiary of the
         Parent  petitions or applies to any  tribunal  for, or consents to, the
         appointment  of,  or  taking   possession  by,  a  trustee,   receiver,
         custodian, liquidator or similar official of the Parent, the Company or
         any other  Subsidiary of the Parent,  or of any substantial part of the
         assets  of the  Parent,  the  Company  or any other  Subsidiary  of the
         Parent,  or commences a voluntary  case under the Bankruptcy Law of the
         United  States  or any  proceedings  (other  than  proceedings  for the
         voluntary  liquidation  and  dissolution  of a Subsidiary of the Parent
         other than the  Company)  relating  to the  Parent,  the Company or any
         other  Subsidiary of the Parent under the  Bankruptcy  Law of any other
         jurisdiction; or

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<PAGE>




                         any such petition or application is filed,  or any such
         proceedings are commenced, against the Parent, the Company or any other
         Subsidiary of the Parent and the Parent,  the Company or any such other
         Subsidiary  of the Parent by any act  indicates  its approval  thereof,
         consent  thereto or  acquiescence  therein,  or an order,  judgment  or
         decree is entered  appointing  any such trustee,  receiver,  custodian,
         liquidator or similar  official,  or approving the petition in any such
         proceedings, and such order, judgment or decree remains unstayed and in
         effect for more than 30 days; or

                         any  order,  judgment  or  decree  is  entered  in  any
         proceedings against the Parent decreeing the dissolution of the Parent,
         the  Company or any other  Subsidiary  of the  Parent  and such  order,
         judgment  or decree  remains  unstayed  and in effect  for more than 60
         days; or

                         any  order,  judgment  or  decree  is  entered  in  any
         proceedings  against the Parent, the Company or any other Subsidiary of
         the Parent  decreeing  a split-up  of the  Parent,  the Company or such
         other Subsidiary of the Parent which requires the divestiture of assets
         representing a substantial part, or the divestiture of the stock of, or
         other  equity  interests  in, a  Subsidiary  whose  assets  represent a
         substantial  part,  of the  consolidated  assets of the  Parent and its
         Subsidiaries   (determined  in  accordance   with  generally   accepted
         accounting  principles) or which requires the divestiture of assets, or
         stock of a Subsidiary,  which shall have contributed a substantial part
         of Consolidated  Net Income for any of the three fiscal years then most
         recently ended, and such order, judgment or decree remains unstayed and
         in effect for more than 60 days; or

                         one or more  final  judgments  or final  orders,  in an
         aggregate  amount in excess  of  $1,000,000  is  rendered  against  the
         Parent,  the Company or any other  Subsidiary  of the Parent and either
         (a)  enforcement  proceedings  have been commenced by any creditor upon
         such judgment or order or (b) within 45 days after entry thereof,  such
         judgment is not discharged or execution  thereof stayed pending appeal,
         or within 45 days after the expiration of any such stay,  such judgment
         is not discharged; or

                         any Termination Event with respect to a Plan shall have
         occurred and,  within 30 days after the  occurrence  thereof,  (a) such
         Termination  Event (if  correctable)  shall not have been corrected and
         (b) 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); or

                         the  Parent,  the  Company  or any of their  respective
         ERISA Affiliates 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 aggregate amount exceeding $1,000,000; or

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<PAGE>




                  (xvi) the  Guarantee of the Parent set forth in paragraph  11,
         the HCP Guaranty or the Subsidiary  Guaranty shall for any reason cease
         to be in full  force and  effect and  valid,  binding  and  enforceable
         (except as enforceability may be subject to any applicable  bankruptcy,
         insolvency or similar laws or equitable  principles generally affecting
         the enforcement of creditors'  rights) in accordance with its terms, or
         the Parent or any Guarantor shall so state in writing;

then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 8A, the holder of any Note (other than the Parent, the Company or
any other Subsidiary or Affiliate of the Parent) may at its option, by notice in
writing to the Company,  declare such Note to be, and such Note shall  thereupon
be and become, immediately due and payable at par together with interest accrued
thereon,  without presentment,  demand, protest or other notice of any kind, all
of which are hereby  waived by the Company and the Parent,  (b) if such event is
an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 8A
with  respect to the  Company,  the Parent or HEP,  all of the Notes at the time
outstanding shall automatically become immediately due and payable together with
interest accrued thereon and together with the Yield-Maintenance Amount, if any,
with respect to each Note, without presentment, demand, protest or notice of any
kind,  all of which are hereby waived by the Company and the Parent,  and (c) if
such event is not an Event of Default specified in clause (viii), (ix) or (x) of
this  paragraph 8A with respect to the Company,  the Parent or HEP, the Required
Holder(s)  may at its or their  option,  by notice in  writing  to the  Company,
declare  all of the Notes to be,  and all of the Notes  shall  thereupon  be and
become,  immediately due and payable  together with interest accrued thereon and
together with the  Yield-Maintenance  Amount, if any, with respect to each Note,
without presentment,  demand,  protest or other notice of any kind, all of which
are hereby waived by the Company and the Parent.

         The Parent and the Company  acknowledge,  and the parties hereto agree,
that each holder of a Note has the right to maintain its investment in the Notes
free from repayment  (except as herein  specifically  provided for) and that the
provisions  for  payment of the  Yield-Maintenance  Amount in the event that the
Notes are  prepaid or are  accelerated  as a result of an Event of  Default  are
intended to provide  compensation  for the  deprivation of such right under such
circumstances.

                  Rescission  of  Acceleration.  At any time after any or all of
the Notes  shall have been  declared  immediately  due and  payable  pursuant to
paragraph 8A, the Required  Holder(s)  may, by notice in writing to the Company,
rescind and annul such declaration and its consequences if (i) the Company shall
have  paid  all  overdue   interest  on  the  Notes,   the   principal   of  and
Yield-Maintenance  Amount,  if any, payable with respect to any Notes which have
become due otherwise  than by reason of such  declaration,  and interest on such
overdue interest and overdue principal and Yield- Maintenance Amount, if any, at
the rate specified in the Notes, (ii) neither the Company,  the Parent, HCP, the
Initial  Subsidiary  Guarantors  nor any other  Subsidiary  that has  executed a
guaranty agreement in respect of the Notes pursuant to this Agreement shall have
paid any  amounts  which have  become due solely by reason of such  declaration,
(iii) all Events of Default  and  Defaults,  other than  non-payment  of amounts
which  have  become due  solely by reason of such  declaration,  shall have been
cured or waived  pursuant to paragraph 13C, and (iv) no judgment or decree shall
have

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been  entered for the  payment of any amounts due  pursuant to the Notes or this
Agreement.  No such  rescission  or  annulment  shall  extend to or  affect  any
subsequent Event of Default or Default or impair any right arising therefrom.

                  Notice of Acceleration or Rescission.  Whenever any Note shall
be declared  immediately  due and payable  pursuant to  paragraph 8A or any such
declaration  shall be  rescinded  and  annulled  pursuant to  paragraph  8B, the
Company shall  forthwith  give written notice thereof to the holder of each Note
at the time outstanding.

                  Other Remedies. If any Event of Default or Default shall occur
and be continuing, the holder of any Note may proceed to protect and enforce its
rights under this  Agreement,  such Note,  the  Subsidiary  Guaranty and the HCP
Guaranty by exercising  such remedies as are available to such holder in respect
thereof under  applicable  law, either by suit in equity or by action at law, or
both,  whether for  specific  performance  of any  covenant  or other  agreement
contained in this Agreement,  the Subsidiary  Guaranty or the HCP Guaranty or in
aid of the exercise of any power granted herein or therein.  No remedy conferred
in this Agreement upon the holder of any Note is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy  conferred  herein or therein or now or hereafter
existing at law or in equity or by statute or otherwise.

         PARAGRAPH  REPRESENTATIONS, COVENANTS AND WARRANTIES.

         9.  Representations,  Covenants  and  Warranties.  The  Parent  and the
Company each represents,  covenants and warrants, both on the date hereof and on
the Effective Date after giving effect to the Merger, as follows:

                  Organization.  The Parent is a corporation  duly organized and
validly  existing and in good standing  under the laws of the State of Delaware.
Each  Subsidiary is a  corporation,  limited  partnership  or limited  liability
company,  as the  case may be,  duly  organized  and  validly  existing  in good
standing under the laws of its state of incorporation or formation.  Each of the
Parent and its Subsidiaries is duly qualified as a foreign corporation,  limited
partnership  or  limited  liability  company,  as  the  case  may  be,  in  each
jurisdiction  in which the nature of the  business  transacted  or the  property
owned or leased by it is such as to require  such  qualification,  except  where
such failure to be so qualified, whether individually or in the aggregate, would
not  result  in  any  material  adverse  effect  upon  the  business,  condition
(financial or other), assets, properties, operations or prospects of the Parent,
the  Company  and the other  Subsidiaries  of the Parent  taken as a whole.  The
execution,  delivery  and  performance  by the  Parent  and the  Company of this
Agreement,  the Notes, the Warrants,  the Registration  Rights Agreement and the
Participation  Rights  Agreement are within the corporate  powers of the Company
and the Parent and have been duly authorized by all necessary  corporate action.
The execution,  delivery and performance of the Subsidiary  Guaranty by HEP, the
HEP General Partner and the other Initial Subsidiary  Guarantors are within such
Subsidiary's limited partnership, limited liability company or corporate powers,
as the case may be, and have been duly  authorized by all  necessary  corporate,
limited partnership or limited liability company action on its

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part.  No Subsidiary of the Parent, other than the Company, HCP and the Initial
Subsidiary Guarantors, is a Material Subsidiary.

                  Financial  Statements.  The Parent has  furnished the Existing
Holder  with the  following  financial  statements,  identified  by a  principal
financial officer of the Parent: a pro forma  consolidated  balance sheet of the
Parent  and  its  Subsidiaries  as  at  December  31,  1998,  and  a  pro  forma
consolidated statement of income of the Parent and its Subsidiaries for the year
then ended, all prepared by the Parent,  in each case after giving effect to the
Merger as if the Merger had been  consummated  (x) on December 31, 1998,  in the
case of the consolidated balance sheet of the Parent and (y) January 1, 1998, in
the case of the consolidated  statement of income of the Parent.  Such financial
statements  (including any related  schedules and/or notes) are true and correct
in all material respects,  have been prepared on a pro forma basis in accordance
with GAAP  consistently  followed  throughout the periods  involved and show all
liabilities,  direct and contingent, of the Parent and its Subsidiaries required
to be shown in accordance  with GAAP. The balance sheet fairly  presents the pro
forma  financial  condition  of the Parent and its  Subsidiaries  as at the date
thereof,  and the  statements  of  income,  stockholders'  equity and cash flows
fairly  present the pro forma  results of the  operations  of the Parent and its
Subsidiaries  and their cash flows for the period  indicated.  There has been no
material adverse change in the business, condition (financial or other), assets,
properties,  operations or prospects of the Parent and its Subsidiaries taken as
a whole since December 31, 1998.

                  The  Company  has  furnished  the  Existing  Holder  with  the
following financial  statements,  identified by a principal financial officer of
the  Company:   (i)  a  consolidated  balance  sheet  of  the  Company  and  its
Subsidiaries  as at December 31, 1998,  and  consolidated  statements of income,
stockholders'  equity and cash flows of the Company and its Subsidiaries for the
year then ended, all reported on by independent  certified  public  accountants;
and (ii) a consolidated  balance sheet of the Company and its Subsidiaries as at
March 31, 1999,  and  consolidated  statements  of income and cash flows for the
fiscal quarter ended on such date,  all prepared by the Company.  Such financial
statements  (including any related  schedules and/or notes) are true and correct
in  all  material  respects  (subject,  as to  interim  statements,  to  changes
resulting from audits and year-end adjustments,  which in the aggregate will not
be material),  have been prepared in accordance with GAAP consistently  followed
throughout the periods involved and show all liabilities, direct and contingent,
of the Company and its  Subsidiaries  required  to be shown in  accordance  with
GAAP.  The balance  sheets  fairly  present the condition of the Company and its
Subsidiaries   as  at  the  dates   thereof,   and  the  statements  of  income,
stockholders' equity and cash flows fairly present the results of the operations
of the  Company  and its  Subsidiaries  and their  cash  flows  for the  periods
indicated. There has been no material adverse change in the business,  condition
(financial or other), assets, properties, operations or prospects of the Company
and its Subsidiaries taken as a whole since December 31, 1998.

                  HEP has  furnished  the  Existing  Holder  with the  following
financial statements,  identified by a principal financial officer of HEP: (i) a
consolidated  balance sheet of HEP and its Subsidiaries as at December 31, 1998,
and consolidated  statements of income,  stockholders'  equity and cash flows of
HEP and its Subsidiaries for the year then ended, all reported on by independent

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certified public accountants;  and (ii) a consolidated  balance sheet of HEP and
its Subsidiaries as at March 31, 1999 and consolidated  statements of income and
cash flows for the fiscal  quarter ended on such date, all prepared by HEP. Such
financial statements (including any related schedules and/or notes) are true and
correct in all material respects (subject, as to interim statements,  to changes
resulting from audits and year-end adjustments,  which in the aggregate will not
be material),  have been prepared in accordance with GAAP consistently  followed
throughout the periods involved and show all liabilities, direct and contingent,
of HEP and its  Subsidiaries  required to be shown in accordance  with GAAP. The
balance  sheets fairly present the condition of HEP and its  Subsidiaries  as at
the dates thereof,  and the statements of income,  stockholders' equity and cash
flows fairly present the results of the  operations of HEP and its  Subsidiaries
and their  cash  flows for the  periods  indicated.  There has been no  material
adverse  change  in  the  business,  condition  (financial  or  other),  assets,
properties, operations or prospects of HEP and its Subsidiaries taken as a whole
since December 31, 1998.


                  Actions Pending.  There is no action,  suit,  investigation or
proceeding pending or, to the knowledge of the Parent or the Company, threatened
against the Parent,  the Company or any of the other Subsidiaries of the Parent,
or any  properties  or rights of the  Parent,  the  Company  or any of the other
Subsidiaries of the Parent, by or before any court, arbitrator or administrative
or  governmental  body  which  could  reasonably  be  expected  to result in any
material adverse change in the business, condition (financial or other), assets,
properties,  operations  or prospects  of the Parent,  the Company and the other
Subsidiaries  of  the  Parent  taken  as a  whole.  There  is no  action,  suit,
investigation  or  proceeding  pending or  threatened  against the  Parent,  the
Company or any of the other  Subsidiaries of the Parent which purports to affect
the validity or  enforceability  of this  Agreement,  any Note,  the  Subsidiary
Guaranty, the HCP Guaranty, any Warrant, the Registration Rights Agreement,  the
Participation  Rights  Agreement  or the Merger  Agreement  or the  transactions
contemplated hereby or thereby.

                  Outstanding Indebtedness.  Neither the Parent, the Company nor
any of the other  Subsidiaries of the Parent has outstanding any Indebtedness or
Non-recourse  Debt except as permitted by paragraphs  6A(1) and 6B(6) and all of
which is described in Schedule 9D attached hereto. There exists no default under
(and no waiver of default is currently in effect with respect to) the provisions
of any instrument  evidencing  such  Indebtedness  or of any agreement  relating
thereto,  and no event or condition  exists with respect to any  Indebtedness of
the Parent,  the Company or any other Subsidiary of the Parent that would permit
(or that with notice or the lapse of time,  or both,  would  permit) one or more
Persons to cause such  Indebtedness  to become due and payable before its stated
maturity or before its regularly scheduled dates of payment.

                  Title to Properties. The Parent, the Company and each of their
respective  Subsidiaries  has, (i) in the case of each property  having a market
value of at least  $100,000,  good and marketable  title to its respective  real
properties (including,  without limitation, oil and gas properties but excluding
office  space  that  it  leases),  and  (ii)  in the  case  of all of its  other
respective  properties  and assets,  good title,  including for purposes of both
clause (i) and clause (ii) the

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properties  and assets  reflected in the balance  sheets as at December 31, 1998
referred to in paragraph 9B (other than properties and assets disposed of in the
ordinary course of business).  All leases  necessary in any material respect for
the conduct of the  respective  businesses  of the  Parent,  the Company and the
other  Subsidiaries of the Parent are valid and subsisting and are in full force
and effect.

                  Taxes.  The Parent,  the Company and each of their  respective
Subsidiaries  has, filed all federal,  state and other income tax returns which,
to the knowledge of the officers of the Parent and the Company,  are required to
be  filed,  and  each has paid  all  taxes as shown on such  returns  and on all
assessments received by it to the extent that such taxes have become due, except
such taxes as are being  contested in good faith by appropriate  proceedings and
for which adequate reserves have been established in accordance with GAAP.

                  Conflicting Agreements and Other Matters.  Neither the Parent,
the  Company nor any of the other  Subsidiaries  of the Parent is subject to any
charter, limited partnership agreement or other corporate or limited partnership
restriction  which  materially and adversely  affects its business,  property or
assets, or financial  condition.  Neither the Parent, the Company nor any of the
other  Subsidiaries  of the Parent is a party to any contract or agreement which
materially and adversely  affects (after taking into  consideration the benefits
reasonably  expected to be  obtained  by the  Parent,  the Company or such other
Subsidiary thereunder) its business, property or assets, or financial condition.
Neither the execution nor delivery of this Agreement,  the Subsidiary  Guaranty,
the HCP  Guaranty,  the  Warrants,  the  Registration  Rights  Agreement  or the
Participation  Rights Agreement nor the offering and delivery of the Securities,
nor  fulfillment of nor compliance  with the terms and provisions  hereof and of
the  Notes,  the  Subsidiary  Guaranty,  the HCP  Guaranty,  the  Warrants,  the
Registration  Rights  Agreement  and the  Participation  Rights  Agreement  will
conflict with, or result in a breach of the terms,  conditions or provisions of,
or constitute a default  under,  or result in any violation of, or result in the
creation of any Lien upon any of the  properties  or assets of the  Parent,  the
Company or any of the other Subsidiaries of the Parent pursuant to, the charter,
limited partnership  agreement or by-laws of the Parent, the Company or any such
other Subsidiaries,  any award of any arbitrator or any agreement (including any
agreement with stockholders), instrument, order, judgment, decree, statute, law,
rule or  regulation  to which  the  Parent,  the  Company  or any of such  other
Subsidiaries is subject.  Neither the Parent,  the Company nor any of such other
Subsidiaries is a party to, or otherwise subject to any provision  contained in,
any instrument evidencing  Indebtedness of the Parent, the Company or such other
Subsidiary,  any agreement  relating  thereto or any other contract or agreement
(including  its  charter)  which  limits  the amount  of, or  otherwise  imposes
restrictions  on the  incurring  of,  Indebtedness  of the  Company  of the type
evidenced by the Notes or of Indebtedness of HEP or any other  Subsidiary of the
type to be  evidenced  by the  Subsidiary  Guaranty,  except as set forth in the
agreements listed in Schedule 9G attached hereto.

                  Authorized  Capital Stock. The authorized capital stock of the
Parent consists of 30,000,000  shares, of which (i) 25,000,000 shares are Parent
Common Stock of which  10,000,000  shares are issued and  outstanding,  and (ii)
5,000,000 shares are preferred stock (the "Parent

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Preferred  Stock"),  of which 2,334,186  shares have been designated as Series A
Cumulative  Preferred  Stock,  of which all such shares of such series of Parent
Preferred Stock are issued and outstanding. All the outstanding shares of Parent
Common Stock and Parent  Preferred  Stock are duly  authorized,  validly issued,
fully paid and nonassessable. The Parent does not have outstanding any warrants,
options,  convertible securities or other rights for the purchase or acquisition
of shares of its capital stock other than the Warrants.  Up to 1,200,000  shares
of Parent Common Stock and 180,000 shares of Parent Preferred Stock are issuable
under the Parent's 1999 Long-Term Incentive Plan. The Warrants and the shares of
Parent  Common Stock  issuable  upon the exercise of the Warrants have been duly
and validly  authorized,  and such shares of Parent  Common Stock have been duly
reserved for issuance  upon  exercise of the  Warrants.  No  shareholder  of the
Parent or any other  Person is entitled  to  preemptive  or similar  rights with
respect to the  Warrants  or the shares of Parent  Common  Stock  issuable  upon
exercise of the Warrants  and, if and when issued upon  exercise of the Warrants
in accordance with the provisions  thereof,  such shares will be validly issued,
fully paid and nonassessable shares.

                  Offering of Warrants.  Neither the Parent nor any agent acting
on its behalf has,  directly or indirectly,  offered the Warrants or any similar
security of the Parent for sale to, or solicited  any offers to buy the Warrants
or  any  similar  security  of the  Parent  from,  or  otherwise  approached  or
negotiated  with  respect  thereto  with,  any Person  other than  institutional
investors,  and neither the Parent nor any agent  acting on its behalf has taken
or will take any action which would subject the issuance or sale of the Warrants
to the provisions of Section 5 of the Securities Act or to the provisions of any
securities or Blue Sky law of any applicable jurisdiction.

                  Use of Proceeds.  Neither the Parent nor any  Subsidiary  owns
any "margin  stock" as defined in Regulation U (12 CFR Part 221) of the Board of
Governors of the Federal Reserve System ("margin  stock").  The proceeds of sale
of the Notes and the  Original  Warrant  originally  issued  and sold  under the
Original Agreement were used by the Company to refinance  Indebtedness  existing
at the  time of such  sales,  to  acquire  producing  property  and for  general
corporate purposes. None of such proceeds were used, directly or indirectly, for
the purpose,  whether  immediate,  incidental  or  ultimate,  of  purchasing  or
carrying  any  margin  stock or for the  purpose  of  maintaining,  reducing  or
retiring any Indebtedness which was originally incurred to purchase or carry any
stock that is  currently  a margin  stock or for any other  purpose  which might
constitute  this  transaction  a "purpose  credit"  within  the  meaning of such
Regulation  U. Neither the Parent nor the Company nor any agent acting on behalf
of either  of them has taken or will take any  action  which  might  cause  this
Agreement,  the  Original  Agreement,  the Notes,  the  Original  Warrant or the
Warrants  to  violate  Regulation  U or any  other  regulation  of the  Board of
Governors of the Federal  Reserve System or to violate the Exchange Act, in each
case as in effect on the date of the Original  Agreement,  on the Effective Date
or thereafter.

                  ERISA.  No  accumulated  funding  deficiency  (as  defined  in
section 302 of ERISA and section 412 of the Code), whether or not waived, exists
with respect to any Plan (other than a Multiemployer  Plan). No liability to the
PBGC has been or is expected by the Parent,  the Company or any ERISA  Affiliate
to be incurred with respect to any Plan (other than a Multiemployer Plan) by

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the  Parent,  the  Company,  any  other  Subsidiary  of the  Parent or any ERISA
Affiliate  which is or would be materially  adverse to the  business,  condition
(financial or other), assets, properties, operations or prospects of the Parent,
the Company and the other  Subsidiaries of the Parent taken as a whole.  Neither
the  Parent,  the  Company,  any other  Subsidiary  of the  Parent nor any ERISA
Affiliate has incurred or presently  expects to incur any  withdrawal  liability
under Title IV of ERISA with respect to any Multiemployer Plan which is or would
be materially adverse to the business,  condition (financial or other),  assets,
properties,  operations  or prospects  of the Parent,  the Company and the other
Subsidiaries  of the Parent taken as a whole.  The execution and delivery of the
Original  Agreement and the issuance and sale of the Notes and Original  Warrant
were exempt from, or did not involve any  transaction  which was subject to, the
prohibitions  of section  406 of ERISA and did not involve  any  transaction  in
connection  with which a penalty could be imposed under section  502(i) of ERISA
or a tax could be imposed  pursuant to section 4975 of the Code.  The  execution
and delivery of this Agreement and the issuance and sale of the Warrants will be
exempt  from,  or will not  involve  any  transaction  which is subject  to, the
prohibitions  of section 406 of ERISA and will not involve  any  transaction  in
connection  with which a penalty could be imposed under section  502(i) of ERISA
or  a  tax  could  be  imposed  pursuant  to  section  4975  of  the  Code.  The
representations  by the Parent and the Company in the two immediately  preceding
sentences  is made in reliance  upon and subject to the accuracy of the Existing
Holder's representation in paragraph 10B.

                  Governmental  Consent.  Neither the nature of the Parent,  the
Company or of any other  Subsidiary of the Parent,  nor any of their  respective
businesses or properties,  nor any relationship  between the Parent, the Company
or any such other  Subsidiary  and any other  Person,  nor any  circumstance  in
connection with the offering, issuance, sale or delivery of the Warrants is such
as to require any authorization, consent, approval, exemption or other action by
or notice  to or filing  with any court or  administrative  or  governmental  or
regulatory  body (other than routine  filings after the Effective  Date with the
Securities  and  Exchange  Commission  and/or  state  Blue Sky  authorities)  in
connection  with the execution and delivery of this  Agreement,  the  Subsidiary
Guaranty, the Registration Rights Agreement, the Participation Rights Agreement,
the offering,  issuance, sale or delivery of the Securities or fulfillment of or
compliance  with the terms and  provisions  of this  Agreement,  the  Subsidiary
Guaranty, the HCP Guaranty, the Registration Rights Agreement, the Participation
Rights Agreement or the Securities.

                  Environmental  Compliance.  The  Parent,  the  Company and the
other  Subsidiaries  of the Parent and all of their  respective  properties  and
facilities  have  complied at all times and in all  respects  with all  federal,
state,   local  and  regional  statutes,   laws,   ordinances  and  judicial  or
administrative orders, judgments, rulings and regulations relating to protection
of the environment except, in all such cases considered in the aggregate,  where
failure  to comply  would not  reasonably  be  expected  to result in a material
adverse  effect  on  the  business,  condition  (financial  or  other),  assets,
properties,  operations  or prospects  of the Parent,  the Company and the other
Subsidiaries of the Parent taken as a whole.

                  Disclosure.  Neither this Agreement nor any other document,
certificate or statement furnished to the Existing Holder by or on behalf of the
Parent, the Company or HEP in connection

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herewith  contains any untrue  statement of a material  fact or omits to state a
material fact  necessary in order to make the  statements  contained  herein and
therein not misleading.  There is no fact peculiar to the Parent, the Company or
any of the other  Subsidiaries of the Parent which materially  adversely affects
or in the  future  may (so far as the  Parent or the  Company  can now  foresee)
materially  adversely  affect the  business,  property or assets,  or  financial
condition  of the Parent,  the Company or any of the other  Subsidiaries  of the
Parent  and  which  has not been set  forth in this  Agreement  or in the  other
documents, certificates and statements furnished to the Existing Holder by or on
behalf of the Parent,  the Company or HEP prior to the date hereof in connection
with the transactions contemplated hereby.

                  Year 2000  Compliance.  The Parent has (i)  initiated a review
and assessment of all areas within the business and operations of the Parent and
each of its  Subsidiaries  (including  those  affected by suppliers and vendors)
that could  suffer a material  adverse  effect  (determined  by reference to the
business, condition (financial or otherwise), assets, properties or prospects of
the Parent and its Subsidiaries  taken as a whole) as a result of the "Year 2000
Problem" (that is, the risk that computer  applications used by it or any of its
Subsidiaries  (or  their  respective  suppliers  and  vendors)  may be unable to
recognize and perform properly date-sensitive  functions involving certain dates
prior to and any date on or after December 31, 1999),  (ii) developed a plan and
timeline  for  addressing  the Year 2000  Problem on a timely basis and (iii) to
date,  implemented  or  is  implementing  such  plan  in  accordance  with  such
timetable.  The  Parent  reasonably  believes  that  all  computer  applications
(including  those of suppliers and vendors) that are material to the business or
operations  of the Parent or any of its  Subsidiaries  will on a timely basis be
able to perform properly date-sensitive  functions for all dates before and from
and after  January 1, 2000,  except to the extent  that a failure to do so could
not  reasonably be expected to have a material  adverse  effect on the business,
condition  (financial  or  otherwise),  assets,  properties  or prospects of the
Parent and its Subsidiaries taken as a whole.

                  Agreement  of  Merger  Conditions  Satisfied.  All  conditions
precedent  set  forth in  Article  VIII of the  Agreement  of  Merger  have been
satisfied as of the Effective Date.

                  Reorganization.

         (i) Each of the Parent,  HEC  Acquisition  Partnership,  L.P.,  the HEP
General  Partner,  the  Company,  HCRC  Acquisition  Corp.,  HEP and HEPGP  Ltd.
(collectively,  the "Merger Parties") has all requisite partnership or corporate
power and  authority,  as the case may be, to  execute,  deliver and perform the
Merger  Agreement  and to  consummate  the  Merger  and the  other  transactions
contemplated thereby.

         (ii) The  execution,  delivery  and  performance  by each of the Merger
Parties of the Merger Agreement and the other documents delivered by such Merger
Party pursuant  thereto or in connection  therewith (with respect to each Merger
Party,  the  "Merger  Documents")  have been duly  authorized  by all  necessary
corporate or partnership action, as the case may be.


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         (iii)  There is no action,  suit or  proceeding  pending or  threatened
which  questions  the  validity or legality of, or seeks  damages in  connection
with, the Merger Documents, the Merger or any actions contemplated thereby.

         (iv) The  execution,  delivery  and  performance  by each of the Merger
Parties of the Merger  Documents to which it is a party and the  consummation of
the Merger do not  conflict  with or violate the  constituent  documents of such
Merger Party or any law,  statute or published rule or regulation,  or any writ,
order or decision of any court or  governmental  instrumentality  binding on the
Parent  or  any of  its  Subsidiaries  or  any  indenture,  mortgage,  contract,
instrument  or  agreement  to which the Parent or any of its  Subsidiaries  is a
party or by which it or its assets is bound.

         (v)  Neither the  execution,  delivery  or  performance  by each of the
Merger  Parties  of  the  Merger  Documents  to  which  it is a  party  nor  the
consummation  of the Merger requires the consent or approval or other action of,
or the making of any filing, with, any governmental  authority,  other than such
consents and  approvals  that have been  obtained,  such other actions that have
been taken and such other  filings  that have been made and that,  in each case,
are in full force and effect on the Effective Date.

         PARAGRAPH  REPRESENTATIONS OF THE EXISTING HOLDER.

         10.  Representations  of  the  Existing  Holder.  The  Existing  Holder
represents as follows:

                  Nature of Acquisition of Securities. The Existing Holder is an
"insurance company" as defined in section 2(13) of the Securities Act and is not
acquiring the Warrants  hereunder with a view to or for sale in connection  with
any  distribution  thereof  within the  meaning of the  Securities  Act of 1933,
provided that the  disposition  of the property of the Existing  Holder shall at
all times be and remain within its control.

                  Source of Funds.  No part of the  funds  used by the  Existing
Holder to pay the purchase price of the Notes or the Original Warrant originally
issued under the Original  Agreement  constituted assets allocated to a separate
account  maintained by the Existing  Holder.  For the purpose of this  paragraph
10B, the term "separate  account" shall have the meaning  specified in section 3
of ERISA.

         PARAGRAPH  GUARANTY OF PARENT.

                  The   Guaranty.    The   Parent   hereby    irrevocably    and
unconditionally guarantees to each holder from time to time of any of the Notes,
the due and punctual payment in full of (i) the principal of,  Yield-Maintenance
Amount, if any, and interest on (including without limitation, interest accruing
after the filing of any  petition  in  bankruptcy,  or the  commencement  of any
insolvency,  reorganization or like proceeding, relating to the Company, whether
or not a claim for  post-filing  or  post-petition  interest  is allowed in such
proceeding)  and any other  amounts  due  under,  the Notes when and as the same
shall become due and payable (whether at stated maturity or by

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required or optional  prepayment or by  acceleration  or otherwise) and (ii) any
other sums which may become due under the terms and provisions of the Notes (all
such  obligations  described in clauses (i) and (ii) above are herein called the
"Guaranteed  Obligations").  The  guaranty  in  the  preceding  sentence  is  an
absolute,  present and continuing  guaranty of payment and not of collectibility
and is in no way  conditional or contingent upon any attempt to collect from the
Company or any other guarantor of the Notes or upon any other action, occurrence
or circumstance  whatsoever.  In the event that the Company shall fail so to pay
any of such Guaranteed  Obligations,  the Parent agrees to pay the same when due
to the  holders of the Notes  entitled  thereto,  without  demand,  presentment,
protest or notice of any kind,  in lawful money of the United States of America,
at the place for payment specified in the Notes and this Agreement. Each default
in payment of principal of, Yield-  Maintenance  Amount,  if any, or interest on
any Note shall give rise to a separate  cause of action  hereunder  and separate
suits may be brought hereunder as each cause of action arises.

         The Parent  hereby  agrees to pay and to indemnify and save the holders
of the Notes  harmless  from and  against  any  damage,  loss,  cost or  expense
(including  attorneys'  fees)  which such holder may incur or be subject to as a
consequence,  direct  or  indirect,  of (i)  any  breach  by the  Parent  of any
warranty,  covenant,  term or  condition  in, or the  occurrence  of any default
under,  this  paragraph  11,  together  with  all  expenses  resulting  from the
compromise  or defense of any claims or  liabilities  arising as a result of any
such breach or default,  and (ii) any legal action  commenced  to challenge  the
validity of this paragraph 11.

                  Obligations Absolute. The obligations of the Parent under this
paragraph  11  shall  be  primary,  absolute,   irrevocable  and  unconditional,
irrespective of the validity,  regularity or enforceability of the Notes or this
Agreement,  shall not be  subject to any  counterclaim,  set off,  deduction  or
defense  based  upon any claim the Parent may have  against  the  Company or any
holder of the Notes or  otherwise,  and shall  remain in full  force and  effect
without regard to, and shall not be released,  discharged or in any way affected
by, any  circumstance or condition  whatsoever  (whether or not the Parent shall
have any knowledge or notice thereof),  including,  without limitation:  (i) any
amendment,  modification  of or supplement to the Notes or this Agreement or any
other instrument or agreement referred to herein (except that the obligations of
the Parent  hereunder  shall apply to the Notes or this  Agreement or such other
instruments  or  agreements  as so  amended,  modified or  supplemented)  or any
assignment  or  transfer  of any  thereof  or of any  interest  therein,  or any
furnishing,  acceptance or release of any security for or other  guaranty of the
Notes;  (ii) any  waiver,  consent,  extension,  indulgence  or other  action or
inaction  under  or in  respect  of the  Notes  or  this  Agreement;  (iii)  any
bankruptcy,  insolvency,  readjustment,   composition,  liquidation  or  similar
proceeding  with  respect  to the  Company  or its  property;  (iv) any  merger,
amalgamation or  consolidation  of the Parent or of the Company into or with any
other  corporation or any sale, lease or transfer of any or all of the assets of
the Parent or of the Company to any  Person;  (v) any failure on the part of the
Company  for any reason to comply  with or perform any of the terms of any other
agreement with the Parent; or (vi) any other  circumstance which might otherwise
constitute a legal or equitable  discharge or defense of the Parent.  The Parent
covenants  that its  obligations  hereunder  will not be  discharged  except  by
payment in full of all of the Guaranteed Obligations.


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                  Waiver.  The  Parent  unconditionally  waives:  (i)  notice of
acceptance  hereof, of any action taken or omitted in reliance hereon and of any
defaults  by the  Company in the  payment of any  amounts due under the Notes or
this Agreement,  and of any of the matters  referred to in paragraph 11B hereof;
(ii) all notices  which may be required by statute,  rule of law or otherwise to
preserve any of the rights of each holder from time to time of the Notes against
the Parent, including, without limitation,  presentment to or demand for payment
from the Company or the Parent with  respect to any Note,  notice to the Company
or to the Parent of default or protest for nonpayment or dishonor and the filing
of claims with a court in the event of the bankruptcy of the Company;  (iii) any
right to the  enforcement,  assertion  or exercise by any holder of the Notes of
any right,  power or remedy  conferred in this Agreement or the Notes;  (iv) any
requirement  or  diligence  on the part of any holder of the Notes;  and (v) any
other act or omission or thing or delay to do any other act or thing which might
in any  manner  or to any  extent  vary the risk of the  Parent  or which  might
otherwise operate as a discharge of the Parent.

                  Obligations  Unimpaired.  The Parent authorizes the holders of
the Notes,  without  notice or demand to the Parent and  without  affecting  its
obligations  hereunder,  from time to time:  (i) to renew,  compromise,  extend,
accelerate or otherwise  change the time for payment of, or otherwise change the
terms of, all or any part of the Notes or this Agreement or any other instrument
referred  to  therein;  (ii) to take and hold  security  for the  payment of the
Notes,   for  the  performance  of  this  paragraph  11  or  otherwise  for  the
indebtedness  guaranteed hereby and to exchange,  enforce, waive and release any
such  security;  (iii) to apply any such  security  and to  direct  the order or
manner of sale thereof as the holders of the Notes in their sole  discretion may
determine; (iv) to obtain additional or substitute endorsers or guarantors;  (v)
to  exercise  or refrain  from  exercising  any rights  against  the Company and
others;  and (vi) to apply any sums, by whomsoever paid or however realized,  to
the payment of the principal of, Yield-Maintenance  Amount, if any, and interest
on the Notes and any other Guaranteed  Obligation  hereunder.  The Parent waives
any right to require the holders of the Notes to proceed  against any additional
or  substitute  endorsers  or  guarantors  or to pursue or exhaust any  security
provided by the  Company,  the Parent or any other person or to pursue any other
remedy available to such holders.

                  Subrogation.   The  Parent  will  not  exercise,   and  hereby
subordinates  to the rights of the  holders of the Notes,  any rights  which the
Parent may have  acquired  by way of  subrogation  under this  Agreement  by any
payment made  hereunder or  otherwise,  or accept any payment on account of such
subrogation  rights, or any rights of reimbursement,  indemnity,  exoneration or
contribution, any right to participate in any claim or any rights or recourse to
any  security  for the Notes or any  Guarantee  in respect of the Notes and this
Agreement,  unless and until all of the obligations,  undertakings or conditions
to be  performed  or  observed  by the  Company  pursuant  to the Notes and this
Agreement shall have been performed, observed or paid in full at the time of the
Parent's exercise of any such right.

                  Reinstatement of Guaranty.   The Guarantee by the Parent
contained in this paragraph 11 shall continue to be effective, or be reinstated,
as the case may be, if and to the extent at any time payment, in whole or in
part, of any of the sums due to any holder of the Notes for

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principal,  Yield-Maintenance Amount, if any, or interest on the Notes or any of
the other  Guaranteed  Obligations is rescinded or must otherwise be restored or
returned  by  such  holder  upon  the   insolvency,   bankruptcy,   dissolution,
liquidation  or  reorganization  of the  Company,  or upon or as a result of the
appointment  of a  custodian,  receiver,  trustee or other  officer with similar
powers with respect to the Company or any substantial  part of its property,  or
otherwise, all as though such payments had not been made. If an event permitting
the  acceleration of the maturity of the principal  amount of the Notes shall at
any time have occurred and be  continuing  and such  acceleration  shall at such
time be  prevented  or the right of any holder of a Note to receive  any payment
under any Note shall at such time be delayed or otherwise  affected by reason of
the pendency  against the Company of a case or proceeding  under a bankruptcy or
insolvency  law, the Parent agrees that,  for purposes of this  paragraph 11 and
its obligations hereunder, the maturity of such principal amount shall be deemed
to have been accelerated with the same effect as if the holders of the Notes had
accelerated  the same in accordance  with the terms of this  Agreement,  and the
Parent shall forthwith pay such accelerated  principal amount,  accrued interest
and  Yield-Maintenance  Amount, if any, thereon and any other amounts guaranteed
hereunder.

                  Subordination of Guaranteed Obligations.

         11G(1).  Subordination.  Anything  in this  Agreement  to the  contrary
notwithstanding,  the Guaranteed  Obligations shall be subordinate and junior to
the extent set forth in subparagraphs (i) through (iv) inclusive,  below, to all
Senior Debt.

                  (i)  If  the  Parent  shall  default  in  the  payment  of any
         principal  of or  interest on any Senior Debt in an amount in excess of
         $100,000  owing under any single  instrument  when the same becomes due
         and payable,  whether at maturity or at a date fixed for  prepayment or
         at any other date on which the Parent is  required to prepay any Senior
         Debt or by declaration of acceleration or otherwise,  then,  unless and
         until  such  default  shall  have been  remedied  by payment in full or
         waived,  the holders of Notes shall not accept or receive any direct or
         indirect payment of or on account of the Guaranteed Obligations.

                  (ii) In the event of any insolvency, bankruptcy,  liquidation,
         reorganization  or  other  similar  proceedings,  or  any  receivership
         proceedings in connection therewith, relative to the Parent, and in the
         event of any  proceedings  for voluntary  liquidation,  dissolution  or
         other winding up of the Parent,  whether or not involving insolvency or
         bankruptcy  proceedings,  then all Senior  Debt shall  first be paid in
         full before any payment of or on account of the Guaranteed  Obligations
         is made by the Parent.

                  (iii) In any of the  proceedings  referred to in  subparagraph
         (ii)  above,  any  payment or  distribution  of any kind or  character,
         whether in cash, property,  stock or obligations,  which may be payable
         or deliverable  by the Parent in respect of the Guaranteed  Obligations
         shall be paid or  delivered  directly to the holders of Senior Debt (or
         to a banking  institution  selected  by the court or Person  making the
         payment or delivery  or  designated  by any holder of Senior  Debt) for
         application in payment thereof in accordance with the priorities then

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         existing  among such  holders,  unless and until all Senior  Debt shall
         have been paid in full; provided, however, that

                           (a) if the  payment or delivery by the Parent of such
                  cash, property, stock or obligations to any holder of Notes is
                  authorized by an order or decree giving effect, and stating in
                  such   order  or  decree   that   effect  is  given,   to  the
                  subordination  of the  Guaranteed  Obligations to Senior Debt,
                  and made in a  reorganization  proceeding under any applicable
                  bankruptcy  or  reorganization  law, no payment or delivery by
                  the  Parent  of such  cash,  property,  stock  or  obligations
                  payable  or   deliverable   with  respect  to  the  Guaranteed
                  Obligations shall be made to the holders of Senior Debt; and

                           (b)      no such stock or shall be made to holders of
                                            Senior Debt of
                                            obligations if the delivery  thereof
                                            is  authorized by an order or decree
                                            giving  effect,  and stating in such
                                            order  or  decree   that  effect  is
                                            given, to the  subordination  of the
                                            Guaranteed   Obligations  to  Senior
                                            Debt,   and   if   such   stock   or
                                            obligations   are   subordinate  and
                                            junior (whether by law or agreement)
                                            at least to the extent  provided  in
                                            this paragraph 11G to the payment of
                                            all Senior Debt then outstanding and
                                            to  the  payment  of  any  stock  or
                                            obligations    which   are    issued
                                            pursuant   to  such   reorganization
                                            proceedings     in    exchange    or
                                            substitution  for  any  Senior  Debt
                                            then outstanding.

                  A  transaction   permitted  by  paragraph  6B(3)(vi)  of  this
         Agreement shall not be deemed a dissolution, winding-up, liquidation or
         reorganization for the purposes of this paragraph 11G.

                  (iv) Upon the  occurrence  and during the  continuance  of any
         Default  Subordination  Event (other than under  circumstances when the
         terms of subparagraph (ii) above are applicable),  the holders of Notes
         shall not accept or receive any direct or indirect payment by setoff or
         otherwise  of or on account of the  Guaranteed  Obligations  during the
         Stand-Still  Period,  provided that in the case of any payment on or in
         respect of the  Guaranteed  Obligations  which would (in the absence of
         any such Default  Subordination Event) have been due and payable on any
         date  during  such   Stand-Still   Period,   the   provisions  of  this
         subparagraph  (iv) shall not prevent  such payment on or after the date
         immediately following the termination of such Stand-Still Period. There
         shall be no more than three Stand-Still  Periods, in the aggregate,  so
         long as the Notes remain  outstanding,  whether the Stand-Still  Period
         arises  in  connection  with,  or  results  from a notice  under,  this
         paragraph 11G, the HCP Guaranty,  the Subsidiary  Guaranty or paragraph
         7.

                         (v) If any payment or  distribution  of any  character,
whether in cash,
                                    securities  or  other  property,   shall  be
                                    received   by  any   holders   of  Notes  in
                                    contravention  of any of the  terms  of this
                                    paragraph 11G and before all the Senior Debt
                                    shall have been paid in full,  such  payment
                                    or  distribution  shall be received in trust
                                    for the benefit of the holders of the Senior
                                    Debt  at  the  time  outstanding  and  shall
                                    forthwith  be  paid  over or  delivered  and
                                    transferred to the holders of Senior Debt.

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                         (vi) If any  payment by the Parent in respect of Senior
Debt must be
                                    disgorged  by any holder of Senior Debt as a
                                    result of any action under the United States
                                    Bankruptcy  Code or other debtor relief law,
                                    the  obligations  in  respect  of which such
                                    payment   was   made   shall   continue   to
                                    constitute  Senior  Debt  and  shall  remain
                                    entitled to the benefit of the provisions of
                                    this  provision.  Without  limitation of the
                                    foregoing,   in  the   event   of  any  such
                                    disgorgement  by a holder  of  Senior  Debt,
                                    each holder of Notes shall, if it has become
                                    subrogated  to the rights of such  holder of
                                    Senior Debt  pursuant to this  paragraph  11
                                    and has  obtained  payment  from the  Parent
                                    through  the  exercise  of such  subrogation
                                    rights,  disgorge  and pay to such holder of
                                    Senior Debt any payment so obtained,  to the
                                    extent of the payment or payments  disgorged
                                    by such holders of Senior Debt.

         11G(2) Obligation of the Parent  Unconditional.  The provisions of this
paragraph 11G are for the purpose of defining the relative rights of the holders
of Senior  Debt on the one hand,  and the  holders  of Notes on the other  hand,
against the Parent and its property, and nothing herein shall impair, as between
the Parent and the holders of the Notes, the obligation of the Parent,  which is
unconditional and absolute, to pay the Guaranteed Obligations in accordance with
the terms and provisions  hereof,  nor shall anything herein prevent the holders
of the Notes from exercising all remedies otherwise  permitted by applicable law
or  hereunder  upon  default  hereunder  or  under  this  Agreement,  the  Notes
(including,  without  limitation,  the  right  to  demand  payment  and  sue for
performance  hereof and of the Notes and to accelerate  the maturity  thereof as
provided in paragraph 8A),  subject to the rights,  if any, under this paragraph
11G of holders of Senior Debt to receive cash,  property,  stock or  obligations
otherwise payable or deliverable by the Parent to such holders of Notes.

         11G(3) Subrogation. Upon payment in full of Senior Debt, the holders of
the Notes shall be subrogated to the rights of the holders of the Senior Debt to
receive  payments or  distributions  of assets of the Parent made on Senior Debt
until the Guaranteed Obligations shall be paid in full, and, for the purposes of
such  subrogation,  no  payments  to the  holders  of  Senior  Debt of any cash,
property,  stock or  obligations  to which the  holders  of the  Notes  would be
entitled  except for the provisions of paragraph  11G(1)(iii)  shall, as between
the  Parent,  its  creditors  (other  than the  holders of the Senior  Debt) and
Prudential,  be deemed to be a payment  by the Parent to or on account of Senior
Debt.

         11G(4)  Rights  of  Holders  of Senior  Debt.  The  provisions  of this
paragraph  11G shall be deemed a continuing  offer to all holders of Senior Debt
to act in reliance on such provisions (but no such reliance shall be required to
be proven to receive the  benefits  hereof) and may be enforced by such  holders
and no right of any  present  or future  holder of any  Senior  Debt to  enforce
subordination  as provided in this paragraph 11G shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Parent or
by any act or failure to act by any such holder, or by any non-compliance by the
Parent with the terms,  provisions and covenants of this paragraph 11G.  Without
in any way limiting the generality of the foregoing,  the holders of Senior Debt
may, at any time and from time to time,  without the consent of or notice to the
holders of the Notes,  and without  impairing  or  releasing  the  subordination
provided in this paragraph 11G or the obligations hereunder

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of the holders of the Notes to the holders of Senior Debt, do any one or more of
the  following,  subject  in all  cases  to  the  limitations  contained  in the
definition of Senior Debt:  (i) change the manner,  place or terms of payment or
extend the time of payment of, or renew or alter (including, without limitation,
by increasing or decreasing  the  "Availability  Limit" and the "Debt Limit," in
each case as defined in the Credit  Agreement  pursuant to which  Senior Debt is
incurred),  or  waive  defaults  under,  Senior  Debt,  or  otherwise  amend  or
supplement in any manner Senior Debt or any  instrument  evidencing  the same or
any  agreement  under which  Senior Debt is  outstanding;  (ii) sell,  exchange,
release or  otherwise  deal with any  property  pledged,  mortgaged or otherwise
securing  Senior  Debt;  (iii)  release any Person  liable in any manner for the
payment  or  collection  of Senior  Debt;  and (iv)  exercise  or  refrain  from
exercising  any rights  against the Parent and any other  Person,  including any
guarantor or surety.

         PARAGRAPH  DEFINITIONS AND ACCOUNTING TERMS.

         12. Definitions.  For the purpose of this Agreement,  the terms defined
in the introductory paragraph, in the recitals hereto, and in paragraphs 1 and 2
shall have the respective  meanings specified  therein,  and the following terms
shall have the meanings  specified with respect  thereto below (such meanings to
be  equally  applicable  to both the  singular  and  plural  forms of the  terms
defined):

                  Yield-Maintenance Terms.

         "Business Day" shall mean any day other than a Saturday,  a Sunday or a
day on which  commercial banks in New York City are required or authorized to be
closed.

         "Called  Principal" shall mean, with respect to any Note, the principal
of such Note that is to be prepaid pursuant to paragraph 4B or 4C or is declared
to be  immediately  due and  payable  pursuant to  paragraph  8A, as the context
requires.

         "Designated  Spread"  shall  mean,  (i)  with  respect  to  the  Called
Principal of any Note that is prepaid pursuant to paragraph 4C, 2.50% (250 basis
points), and (ii) in all other cases 1.00% (100 basis points).

         "Discounted  Value" shall mean, with respect to the Called Principal of
any Note, the amount  obtained by discounting all Remaining  Scheduled  Payments
with respect to such Called Principal from their respective  scheduled due dates
to the Settlement Date with respect to such Called Principal, in accordance with
accepted  financial  practice  and at a  discount  factor  (applied  on the same
periodic  basis as that on which  interest on the Notes is payable) equal to the
Reinvestment Yield with respect to such Called Principal.

         "Reinvestment  Yield" shall mean the sum of the Designated  Spread plus
the yield to maturity implied by (i) the yields reported,  as of 10:00 a.m. (New
York City time) on the  Business Day next  preceding  the  Settlement  Date with
respect to such Called Principal, on the display

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designated  as "Page 678" on the Telerate  Service (or such other display as may
replace Page 678 on the Telerate  Service)  for  actively  traded U.S.  Treasury
securities  having a maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date, or if such yields shall not be reported as
of such time or the yields reported as of such time shall not be  ascertainable,
(ii) the Treasury Constant  Maturity Series yields reported,  for the latest day
for which such yields  shall have been so reported as of the  Business  Day next
preceding the Settlement Date with respect to such Called Principal,  in Federal
Reserve Statistical Release H.15 (519) (or any comparable successor publication)
for actively traded U.S. Treasury securities having a constant maturity equal to
the Remaining  Average Life of such Called Principal as of such Settlement Date.
Such implied yield shall be determined, (a) if necessary, by (x) converting U.S.
Treasury bill quotations to bond- equivalent  yields in accordance with accepted
financial  practice and (y)  interpolating  linearly between yields reported for
various  maturities and (b) by converting all such implied yields to a quarterly
payment basis in accordance with accepted financial practice.

         "Remaining  Average  Life"  shall  mean,  with  respect  to the  Called
Principal  of  any  Note,  the  number  of  years  (calculated  to  the  nearest
one-twelfth  year) obtained by dividing (i) such Called  Principal into (ii) the
sum of the products obtained by multiplying (a) each Remaining Scheduled Payment
of such  Called  Principal  (but not of  interest  thereon) by (b) the number of
years (calculated to the nearest one-twelfth year) which will elapse between the
Settlement Date with respect to such Called Principal and the scheduled due date
of such Remaining Scheduled Payment.

         "Remaining  Scheduled  Payments" shall mean, with respect to the Called
Principal  of any Note,  all  payments of such  Called  Principal  and  interest
thereon that would be due on or after the  Settlement  Date with respect to such
Called  Principal if no payment of such Called  Principal were made prior to its
scheduled due date.

         "Settlement  Date" shall mean, with respect to the Called  Principal of
any Note, the date on which such Called  Principal is to be prepaid  pursuant to
paragraph 4B or 4C or is declared to be immediately due and payable  pursuant to
paragraph 8A as the context requires.

         "Yield-Maintenance  Amount"  shall mean,  with respect to any Note,  an
amount  equal to the  excess,  if any,  of the  Discounted  Value of the  Called
Principal  of such  Note  over the sum of (i) such  Called  Principal  plus (ii)
interest accrued thereon as of and including the Settlement Date with respect to
such Called Principal.  The  Yield-Maintenance  Amount shall in no event be less
than zero.

                  Other Terms.

         "Affiliate"  shall mean with  respect to any Person,  any other  Person
directly or indirectly  controlling,  controlled by, or under direct or indirect
common  control with,  such first Person.  A Person shall be deemed to control a
corporation  if such  Person  possesses,  directly or  indirectly,  the power to
direct  or  cause  the  direction  of  the   management  and  policies  of  such
corporation, whether

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through the ownership of voting securities, by contract or otherwise. Unless the
context clearly requires  otherwise,  "Affiliate" shall mean an Affiliate of the
Parent.

         "Agreement of Merger" shall have the meaning specified in the recitals
of this Agreement.

         "Asset Disposition" shall mean, with respect to the Parent, the Company
or any other  Subsidiary  of the Parent,  any  transaction  or series of related
transactions in which such Person sells, conveys,  transfers, leases (as lessor)
or  otherwise  (including,  without  limitation,  by  merger  or  consolidation)
disposes of  (collectively,  for  purposes of this  definition,  a  "transfer"),
directly  or  indirectly,  any of its  property  or assets,  including,  without
limitation,  any  Indebtedness  of any  Subsidiary  or capital stock of or other
equity  interests  in any  Subsidiary  (including  the issuance of such stock or
other equity interests by such Subsidiary),  other than (i) transfers from (a) a
Subsidiary  of the Company to the Company or a Wholly  Owned  Subsidiary  of the
Company that has executed a guaranty  agreement in respect of the Notes pursuant
to this  Agreement,  (b) a Subsidiary  (other than the Company) of the Parent to
the  Parent or a Wholly  Owned  Subsidiary  of the  Parent  that has  executed a
guaranty  agreement in respect of the Notes pursuant to this  Agreement,  or (c)
the Parent to the Company, to any Subsidiary of the Parent that has executed the
Subsidiary  Guaranty  or to a Wholly  Owned  Subsidiary  of the Parent  that has
executed and delivered a guaranty  agreement in respect of the Notes pursuant to
this  Agreement,  (ii)  transactions  permitted  by clauses  (i)  through  (vi),
inclusive,  of paragraph 6B(3), and (iii) sales of oil and gas production in the
ordinary course of business of the Parent,  the Company or another Subsidiary of
the Parent.

         "Bankruptcy Law"  shall have the meaning specified in clause (viii) of
paragraph 8A.

         "Business  Day" shall mean any day on which banks are open for business
in New York City  (other  than a  Saturday,  a Sunday or a legal  holiday in the
States of New York or New Jersey).

         "Capitalized  Lease Obligation" shall mean, with respect to any Person,
any rental obligation which,  under generally  accepted  accounting  principles,
would be required to be  capitalized  on the books of such Person,  taken at the
amount  thereof  accounted  for as  indebtedness  (net of  interest  expense) in
accordance with such principles.

         "Change in  Control"  shall  mean if any  Person or  Persons  acting in
concert,  together with Affiliates thereof, shall in the aggregate,  directly or
indirectly,  control or own (beneficially or otherwise) more than 50% (by number
of shares) of the issued and outstanding Voting Stock of the Parent.

         "Claims"  shall have the meaning specified in paragraph 5G.

         "Code"  shall mean the Internal Revenue Code of 1986, as amended.

         "Consolidated  Assets" shall mean, at any time, the total assets of the
Parent and its  Subsidiaries  which  would be shown as assets on a  consolidated
balance sheet of the Parent and its

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Subsidiaries  as  of  such  time  prepared  in  accordance   with  GAAP,   after
eliminating,  without duplication, (i) amounts properly attributable to minority
interests,  if any,  in the stock and surplus of  Subsidiaries,  and (ii) assets
subject to Non-recourse Debt.

         "Consolidated Interest Expense" shall mean, with respect to any period,
the sum  (without  duplication)  of the  following  (in each case,  eliminating,
without  duplication,  all offsetting  debits and credits between the Parent and
its Subsidiaries, all other items required to be eliminated in the course of the
preparation  of  consolidated   financial  statements  of  the  Parent  and  its
Subsidiaries  in accordance  with GAAP,  all amounts  properly  attributable  to
minority  interests,  if any, in the stock and surplus of Subsidiaries,  and all
items in respect of Non-recourse  Debt): (i) all interest and prepayment charges
in respect of Indebtedness of the Parent and its Subsidiaries (including imputed
interest in respect of  Capitalized  Lease  Obligations  and net costs of Swaps)
deducted in determining  Consolidated Net Income for such period,  together with
all  interest  capitalized  or deferred  during such period and not  deducted in
determining  Consolidated Net Income for such period, and (ii) all debt discount
and expense  amortized  or  required to be  amortized  in the  determination  of
Consolidated Net Income for such period.

         "Consolidated  Net Income" shall mean, with respect to any period,  the
net  income  (or loss) of the Parent  and its  Subsidiaries  for such  period as
determined in accordance with GAAP, after eliminating,  without duplication, (i)
all  items  required  to be  eliminated  in the  course  of the  preparation  of
consolidated  financial  statements  of  the  Parent  and  its  Subsidiaries  in
accordance  with  GAAP,  (ii) all  amounts  properly  attributable  to  minority
interests, if any, in the stock and surplus of Subsidiaries, and (iii) all items
in respect of Non-recourse Debt;  provided that there shall also be excluded the
following: any gains (net of expenses and taxes applicable thereto) in excess of
losses  resulting  from the sale,  conversion  or other  disposition  of capital
assets (i.e.,  assets other than current  assets),  any gains resulting from the
write-up of assets,  any  earnings  of any Person  acquired by the Parent or any
Subsidiary through purchase, merger or consolidation or otherwise for any period
prior to the date of acquisition, any deferred credit representing the excess of
equity  in any  Subsidiary  at the  date of  acquisition  over  the  cost of the
investment in such  Subsidiary,  any gains from the acquisition of securities or
the retirement or extinguishment of Indebtedness,  any gains on collections from
insurance policies or settlements,  any restoration to income of any contingency
reserve,  except to the extent that  provision  for such reserve was made out of
income  accrued  during  such  period,  the  cumulative  effect  of  changes  in
accounting  principles  included in income during the period, any income or gain
during such period from any discontinued  operations or the disposition thereof,
from any extraordinary  items or from any prior period  adjustments,  or, in the
case of a successor to the Parent or any Subsidiary by  consolidation  or merger
or as a  transferee  of its assets,  any earnings of the  successor  corporation
prior to such  consolidation,  merger or transfer of assets or any equity of the
Parent or any Subsidiary in the  undistributed  earnings (but not losses) of any
Person which is not a Subsidiary.

         "Consolidated  Net Worth" shall mean,  with  respect to any Person,  an
amount equal to consolidated  stockholders'  equity of such Person determined in
accordance with GAAP (less

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amounts  attributable to any preferred stock that is Redeemable)  minus, the net
equity of such Person and its Subsidiaries in any assets subject to Non-recourse
Debt.

         "Convertible  Securities" shall mean any debt instrument that is by its
terms convertible into an equity interest in the Parent or a Subsidiary.

         "Credit Agreement" shall mean the Credit Agreement dated as of June __,
1999,  among the Parent,  the Company,  HEP and the banks listed therein,  First
Union National Bank of North Carolina,  as Collateral Agent, and Morgan Guaranty
Trust Company of New York, as Agent, as amended from time to time.

         "Default  Subordination  Event" shall mean the  existence of all of the
following:  (i) a  Subordination  Event of Default  shall have  occurred  and be
continuing  in respect of any Senior  Debt,  (ii) the holders of the Notes shall
have  received  a notice  from or on behalf of any  holder of such  Senior  Debt
specifying  that  such  Subordination  Event  of  Default  has  occurred  and is
continuing and that such notice constitutes a "Default Subordination Notice" and
(iii) no other  Default  Subordination  Notice shall have been  delivered by any
holder of Senior Debt within the 365 day period immediately preceding the giving
of such notice. The "Stand-Still  Period" relating to any Default  Subordination
Event shall be deemed to continue  until the  earliest of (a) the  Subordination
Event of Default under the Senior Debt giving rise thereto shall have been cured
or waived;  (b) a period of 120 days shall have  elapsed  from the giving of the
Default  Subordination  Notice relating thereto;  and (c) the Senior Debt giving
rise thereto shall have been accelerated.

         "Default Subordination Notice"  shall have the meaning specified in the
definition of "Default Subordination Event."

         "Disposition Value"  shall mean, at any time, with respect to any
property

                  (i)  in  the  case  of  property  that  does  not   constitute
         Subsidiary   Stock,  the  book  value  thereof  at  the  time  of  such
         disposition, and

                  (ii)  in the  case of  property  that  constitutes  Subsidiary
         Stock,  an amount equal to that  percentage of book value of the assets
         of the Subsidiary  that issued such stock as is equal to the percentage
         that the book value of such  Subsidiary  Stock  represents  of the book
         value  of all of the  outstanding  capital  stock  of  such  Subsidiary
         (assuming, in making such calculations, that all securities convertible
         into such capital  stock are so converted and giving full effect to all
         transactions  that would occur or be required in  connection  with such
         conversion)  determined at the time of the disposition thereof, in good
         faith by the Parent.

         "EBITDA" shall mean, for any period,  the sum of (i)  Consolidated  Net
Income plus (ii) to the extent deducted in the determination of Consolidated Net
Income (other than as a result of clauses (ii), (iii) and (iv) of the definition
thereof), (a) all provisions for federal, state and other

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income tax, (b) Consolidated  Interest Expense and (c) provisions for depletion,
depreciation and amortization and impairment of oil and gas properties.

         "Effective Date" shall have the meaning specified in paragraph 3.

         "Equity  Proceeds" shall mean the aggregate sum of (i) the net proceeds
received after the Effective Date by the Parent or any Subsidiary  upon the sale
of any equity  interest in the Parent or any Subsidiary  (other than in the case
of sales by a Subsidiary  to the Parent or to a Wholly Owned  Subsidiary),  plus
(ii) the net  proceeds  received  after the  Effective  Date by the Parent,  the
Company or any other  Subsidiary  of the  Parent  upon (a) the  exercise  of the
Warrants,  or any other warrants,  options or similar  instruments issued by the
Parent  or any  Subsidiary  (other  than in the  case  of  warrants  or  similar
instruments issued to and held by the Parent or a Wholly Owned Subsidiary),  and
(b) the  conversion  of any  Convertible  Securities  into common stock or other
equity interest in the Parent or any Subsidiary  (other than  conversions by the
Parent or a Wholly Owned Subsidiary).

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.

         "ERISA  Affiliate" shall mean any corporation  which is a member of the
same  controlled  group of  corporations as the Company or the Parent within the
meaning of section  414(b) of the Code, or any trade or business  which is under
common  control  with the  Company or the Parent  within the  meaning of section
414(c) of the Code.

         "Event of Default" shall mean any of the events  specified in paragraph
8A,  provided that there has been satisfied any  requirement in connection  with
such event for the giving of notice,  or the lapse of time,  or the happening of
any  further  condition,  event or act,  and  "Default"  shall  mean any of such
events, whether or not any such requirement has been satisfied.

         "Exchange Act"  shall mean the Securities Exchange Act of 1934, as
amended.

         "Existing Holder" shall have the meaning specified in the introduction
to this Agreement.

         "Fair  Market  Value"  shall mean,  at any time and with respect to any
property,  the  sale  value  of such  property  that  would  be  realized  in an
arm's-length  sale at such time  between an informed  and  willing  buyer and an
informed and willing seller (neither being under a compulsion to buy or sell).

         "GAAP"  shall have the meaning specified in paragraph 12C.

         "Guarantee"  shall  mean,  with  respect to any  Person,  any direct or
indirect liability,  contingent or otherwise, of such Person with respect to any
indebtedness, lease, dividend or other obligation of another, including, without
limitation,  any such  obligation  directly or indirectly  guaranteed,  endorsed
(otherwise than for collection or deposit in the ordinary course of business) or
discounted  or sold with  recourse by such  Person,  or in respect of which such
Person is otherwise

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directly  or  indirectly  liable,  including,   without  limitation,   any  such
obligation in effect guaranteed by such Person through any agreement (contingent
or otherwise) to purchase,  repurchase or otherwise  acquire such  obligation or
any security therefor,  or to provide funds for the payment or discharge of such
obligation  (whether in the form of loans,  advances,  stock purchases,  capital
contributions or otherwise), or to maintain the solvency or any balance sheet or
other financial condition of the obligor of such obligation,  or to make payment
for any products,  materials or supplies or for any  transportation  or services
regardless of the non-delivery or  non-furnishing  thereof,  in any such case if
the purpose,  intent or effect of such  agreement is to provide  assurance  that
such  obligation  will be paid or discharged,  or that any  agreements  relating
thereto will be complied  with, or that the holders of such  obligation  will be
protected against loss in respect thereof.  The amount of any Guarantee shall be
equal to the outstanding  principal amount of the obligation  guaranteed or such
lesser  amount to which the maximum  exposure of the  guarantor  shall have been
specifically limited.

         "Guarantor" shall mean HCP, HEP and each other Subsidiary of the Parent
that is a party to the Subsidiary Guaranty.

         "HCP"  shall mean  Hallwood  Consolidated  Partners,  L.P.,  a Colorado
limited partnership.

         "HCP Consent" shall mean the Consent  executed by HCP  substantially in
the form of Exhibit F hereto.

         "HCP  Guaranty"  shall mean that certain Senior  Subordinated  Guaranty
Agreement,  dated  as of  December  23,  1997,  executed  by HCP in favor of the
holders  of the  Notes,  as the  same  may be  amended,  restated,  modified  or
otherwise supplemented from time to time.

         "Hedging  Transaction"  shall mean any  commodity  basis swap,  forward
commodity transaction,  commodity swap, commodity option,  commodity index swap,
commodity  cap  transaction,   commodity  floor  transaction,  commodity  collar
transaction,   any  other  similar   transaction  that  relates  to  commodities
(including any option with respect to any of the foregoing  transactions) or any
combination of the foregoing  transactions.  For the purposes of this Agreement,
the amount of the obligation under any Hedging  Transaction  shall be the amount
determined  in  respect  thereof as of the end of the then most  recently  ended
fiscal  quarter  of such  Person,  based on the  assumption  that  such  Hedging
Transaction had terminated at the end of such fiscal quarter, and in making such
determination,  if any agreement relating to such Hedging  Transaction  provides
for the netting of amounts  payable by and to such Person  thereunder  or if any
such agreement  provides for the simultaneous  payment of amounts by and to such
Person,  then in each such case, the amount of such obligation  shall be the net
amount so determined.

         "HEP" shall have the meaning specified in the recitals to this
Agreement.

         "HEP General Partner" shall have the meaning specified in paragraph
3A(xii).


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         "Indebtedness"  shall  mean,  with  respect to any  Person and  without
duplication:  (i) all  items  (excluding  items of  contingency  reserves  or of
reserves  for deferred  income  taxes) which under GAAP are shown on the balance
sheet  as  a  liability  (including,   without  limitation,   Capitalized  Lease
Obligations,  but excluding  accounts payable in the ordinary course of business
and accrued expenses shown as current liabilities;  (ii) indebtedness secured by
any Lien  existing on property  owned  subject to such Lien,  whether or not the
indebtedness  secured  thereby  shall  have  been  assumed,  provided,  that the
obligations  secured by any Liens  permitted  by paragraph  6B(2)(iv)  shall not
constitute Indebtedness;  (iii) redemption obligations in respect of mandatorily
redeemable preferred stock; (iv) all liabilities in respect of letters of credit
or instruments  serving a similar function issued or accepted for its account by
banks and other financial institutions (whether or not representing  obligations
for borrowed money); (v) Swaps and Hedging Transactions;  and (vi) Guarantees of
Indebtedness  of other Persons of the types  described in the foregoing  clauses
(i) through (v).  Indebtedness  of any Person shall include all  obligations  of
such Person of the character described in clauses (i) through (vi) to the extent
such Person remains legally liable in respect thereof  notwithstanding  that any
such obligation is deemed to be extinguished under GAAP.

         "Initial Subsidiary  Guarantors" shall mean HEP, EM Nominee Partnership
Company,  a Colorado  general  partnership,  Concise  Oil & Gas  Partnership,  a
Colorado general partnership,  May Energy Partners Operating Partnership Ltd., a
Texas limited partnership, LaPlata Associates, LLC, a Colorado limited liability
company, and Hallwood LaPlata, LLC, a Colorado limited liability company.

         "Lien" shall mean any mortgage,  pledge,  priority,  security interest,
encumbrance,  contractual deposit arrangement,  lien (statutory or otherwise) or
charge of any kind  (including any agreement to give any of the  foregoing,  any
conditional  sale or other title  retention  agreement,  any lease in the nature
thereof,  and the filing of or agreement to give any financing  statement  under
the  Uniform  Commercial  Code  of  any  jurisdiction)  or  any  other  type  of
preferential  arrangement for the purpose, or having the effect, of protecting a
creditor against loss or securing the payment or performance of an obligation.

         "Material  Subsidiary"  shall  mean at any time any  Subsidiary  of the
Parent that (i) on a consolidated basis,  together with its Subsidiaries,  holds
record or beneficial  title to assets with an aggregate  fair market value of at
least   $2,500,000  or  (ii)  on  a  consolidated   basis,   together  with  its
Subsidiaries,  accounts for at least 2.5% of the consolidated  cash flows of the
Parent and its consolidated Subsidiaries.  The determinations in clauses (i) and
(ii) shall be made on the basis of the  financial  statements of the Parent most
recently delivered by the Parent pursuant to paragraph 5A or 9B, as the case may
be.

         "Merger" shall have the meaning specified in the recitals to this
Agreement.

         "Merger Documents" shall have the meaning specified in paragraph
9Q(ii).
         "Merger Parties" shall have the meaning specified in paragraph 9Q(i).


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         "Multiemployer  Plan"  shall  mean any Plan  which is a  "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).

         "Non-recourse  Debt"  means  Indebtedness  which is secured by specific
assets and is issued pursuant to or evidenced or secured by an instrument  which
limits the recourse  against the obligor  thereunder to such specific assets and
which, in the case of Indebtedness created,  assumed, or incurred after the date
hereof,  contains  a  provision  to the  effect  that  if  the  holder  of  such
Indebtedness  should  ever  become  entitled  to  recourse  against  the obligor
pursuant  to  ss.1111(b)  of the  Bankruptcy  Reform  Act of  1978  (11.  U.S.C.
ss.111(b)) or any other provision of any bankruptcy insolvency,  or other law of
any jurisdiction, then such holder's claim in respect of such Indebtedness shall
thereupon become and thereafter remain in all respects subordinate and junior to
all indebtedness evidenced by the Notes and such holder shall not be entitled to
receive any payment,  under any condition,  in respect of any such  Indebtedness
until all Notes and all other  amounts  which may become  due,  or are stated in
this  Agreement  to become due,  shall have been paid in full or funds for their
payment shall have been duly and sufficiently provided.

         "Notes"  shall have the meaning specified in paragraph 1A.

         "Officer's  Certificate" shall mean a certificate signed in the name of
the Parent or the Company,  as  applicable,  by its  President,  one of its Vice
Presidents or its Treasurer.

         "Original Agreement" shall have the meaning specified in the recitals
to this Agreement.

         "Original Warrant" shall have the meaning specified in the recitals to
this Agreement.

         "Parent Common Stock" shall have the meaning  specified in the recitals
to this Agreement.

         "Parent Preferred Stock" shall have the meaning specified in paragraph
 9H.

         "Participation  Rights Agreement" shall mean the  Participation  Rights
Agreement,  dated of even date herewith,  by and among the Existing Holder,  the
Parent and The Hallwood Group Incorporated;  such Participation Rights Agreement
shall be substantially in the form of Exhibit D attached hereto.

         "PBGC"  shall mean the Pension Benefit Guaranty Corporation or any
successor entity.

         "Person" shall mean and include an individual,  a partnership,  a joint
venture, a corporation,  a trust, a limited liability company, an unincorporated
organization and a government or any department or agency thereof.

         "Plan" shall mean any "employee  pension benefit plan" (as such term is
defined in section 3 of ERISA) which is or has been  established  or maintained,
or to which  contributions  are or have been  made,  by the  Parent or any ERISA
Affiliate.

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         "Property Reinvestment Application" means, with respect to any Transfer
of property, the satisfaction of each of the following conditions:

                  (a) an  amount  equal to the  proceeds  with  respect  to such
         Transfer  shall have been applied,  or  irrevocably  committed and then
         actually  applied within 30 days, to the acquisition by the Parent,  or
         any of its Subsidiaries  making such Transfer,  of oil and gas property
         that is not  encumbered  by any Lien other than (i) Liens  described in
         paragraph  6B(2)(iv) and (ii) Liens described in paragraph 6B(2)(i) but
         only if the  proceeds  result from a Transfer  of oil and gas  property
         that also was subject to such a Lien; and

                  (b) the Parent shall have  delivered an Officer's  Certificate
         to each  holder  referring  to  paragraph  6B(4)  and  identifying  the
         property that was the subject of such Transfer,  the Disposition  Value
         of such property,  and the nature, terms, amount and application of the
         proceeds from the Transfer.

         "Proxy Statement" shall have the meaning specified in the recitals to
this Agreement.

         "Redeemable"  shall  mean,  with  respect to the  capital  stock of any
Person, each share of such Person's capital stock that is:

                  (a)  redeemable,  payable  or  required  to  be  purchased  or
         otherwise retired or extinguished,  or convertible into Indebtedness of
         such Person (i) at a fixed or determinable  date,  whether by operation
         of sinking fund or otherwise,  other than at the option of such Person,
         (ii) at the option of any Person other than such Person,  or (iii) upon
         the  occurrence  of a condition  not solely  within the control of such
         Person; or

                  (b) convertible into other Redeemable capital stock.

         "Registration  Rights  Agreement"  shall mean the  Registration  Rights
Agreement,  dated of even date herewith,  by and between the Existing Holder and
the Parent and substantially in the form of Exhibit E attached hereto.

         "Required  Holder(s)"  shall  mean the  holder or  holders  of at least
662/3%  of the  aggregate  principal  amount  of the  Notes  from  time  to time
outstanding.

         "Responsible  Officer" shall mean the chief  executive  officer,  chief
operating  officer,  chief financial officer or chief accounting  officer of the
Parent or the Company, as applicable,  or any other officer of the Parent or the
Company, as applicable,  involved principally in its financial administration or
its controllership function.

         "Securities"  shall mean the Notes and the Warrants.

         "Securities Act"  shall mean the Securities Act of 1933, as amended.

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         "Senior Debt" shall mean the unpaid  principal of, interest on premium,
if any, and  commitment  and other  similar  fees with  respect to  Indebtedness
pursuant to the Credit Agreement  outstanding,  from time to time, in accordance
with paragraph 6A(1).

         "Significant Holder"  shall mean each holder of at least 10% of the
Notes or 10% of the Warrants.

         "Stand-Still Period"  shall have the meaning specified in the
definition of "Default Subordination Event."

         "Subordination  Event of  Default"  shall  mean (i) any  default in the
payment of any  principal  of or  interest  on any Senior Debt in an amount less
than or equal to  $100,000  owing  under  any  single  instrument  when the same
becomes  due and  payable  or (ii) any  event of  default  under  any  agreement
evidencing  Senior  Debt that would  entitle  the holders of such Senior Debt to
accelerate the obligations under such Senior Debt (other than as a result of any
nonpayment of principal or interest on any Senior Debt).

         "Subsidiary"  shall  mean,  as to any  Person,  a  corporation,  trust,
association,  partnership  or other business  entity of which,  at the time such
determination is made, at least 50.1% of the total Voting Stock is owned by such
Person  and/or one or more of its  Subsidiaries.  Unless the  context  otherwise
clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary
of the Parent, including the Company.

         "Subsidiary Guaranty" shall have the meaning specified in the recitals
to this Agreement.

         "Subsidiary Stock" means, with respect to any Person, the stock (or any
options or warrants to purchase stock or other  securities  exchangeable  for or
convertible into stock) of any Subsidiary of such Person.

         "Swaps" shall mean with respect to any Person, payment obligations with
respect to interest rate swaps,  currency swaps and similar  obligations  (other
than  Hedging  Transactions),  in  each  case  obligating  such  Person  to make
payments,  whether periodically or upon the happening of a contingency.  For the
purposes of this Agreement, the amount of the obligation under any Swap shall be
the amount determined in respect thereof as of the end of the then most recently
ended fiscal quarter of such Person,  based on the assumption that such Swap had
terminated at the end of such fiscal quarter,  and in making such determination,
if any  agreement  relating  to such Swap  provides  for the  netting of amounts
payable by and to such Person  thereunder or if any such agreement  provides for
the  simultaneous  payment of amounts by and to such  Person,  then in each such
case, the amount of such obligation shall be the net amount so determined.

         "Termination  Event"  shall mean (i) 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 Pension
Benefit Guaranty Corporation under such regulations),

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or (ii) the withdrawal of the Parent or any of its ERISA  Affiliates from a Plan
during a plan  year in which  it was a  "substantial  employer"  as  defined  in
section  4001(a)(2)  of  ERISA,  or (iii)  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,  or (iv) the  institution  of  proceedings to terminate a
Plan by the  Pension  Benefit  Guaranty  Corporation,  or (v) any other event or
condition  that might  constitute  grounds  under  section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.

         "Total  Debt"  shall  mean,  at the  time of  determination,  the  then
outstanding   aggregate  principal  amount  of  all  Indebtedness,   other  than
Non-recourse Debt, of the Parent and its Subsidiaries on a consolidated basis.

         "Transfer" means, with respect to any Person,  any transaction in which
such Person sells, conveys, transfers or leases (as lessor) any of its property,
including, without limitation, Subsidiary Stock. For purposes of determining the
application of the proceeds in respect of any Transfer, the Parent may designate
any Transfer as one or more separate  Transfers each yielding separate proceeds.
In any such case, (a) the Disposition Value of any property subject to each such
separate Transfer and (b) the amount of Consolidated  Assets attributable to any
property  subject to each such separate  Transfer shall be determined by ratably
allocating the aggregate  Disposition  Value of, and the aggregate  Consolidated
Assets  attributable to, all property subject to all such separate  Transfers to
each such separate Transfer on a proportionate basis.

         "Transferee" shall mean any direct or indirect transferee of all or any
part of any Note or Warrant issued and/or delivered to the Existing Holder under
the Original Agreement or this Agreement.

         "Voting Stock" shall mean,  securities or other equity  interest of any
class or  classes,  the  holders  of which are  ordinarily,  in the  absence  of
contingencies,  entitled  to vote  for the  election  or  removal  of  corporate
directors or persons (such as general partners or managers)  performing  similar
functions in the case of business entities other than corporations.

         "Warrants"  shall have the meaning specified in paragraph 1B.

         "Wholly Owned  Subsidiary"  shall mean any Subsidiary all of the equity
interests (except directors'  qualifying shares) of which are owned, directly or
indirectly,  by the Parent or the  Company (as the  context  requires)  or other
Wholly  Owned  Subsidiaries  of  the  Parent  or the  Company  (as  the  context
requires).

                  Accounting   Principles,   Terms   and   Determinations.   All
references in this Agreement to "generally accepted accounting principles" or to
"GAAP" shall be deemed to refer to generally accepted  accounting  principles in
effect in the United States at the time of application thereof. Unless otherwise
specified  herein,  all accounting  terms used herein shall be interpreted,  all
determinations  with respect to accounting  matters hereunder shall be made, and
all unaudited

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financial  statements  and  certificates  and  reports as to  financial  matters
required  to be  furnished  hereunder  shall be  prepared,  in  accordance  with
generally accepted accounting principles, applied on a basis consistent with the
most recent  audited  consolidated  financial  statements  of the Parent and its
Subsidiaries  delivered  pursuant to clause (ii) of  paragraph 5A or, if no such
statements have been so delivered,  the most recent audited financial statements
referred to in clause (i) of the second grammatical paragraph of paragraph 9B.

         PARAGRAPH  MISCELLANEOUS.

         13.      Miscellaneous.

                  Note Payments.  So long as the Existing  Holder shall hold any
Note, the Company will make payments of principal of,  interest on and any Yield
- Maintenance  Amount  payable with respect to such Note,  which comply with the
terms of this  Agreement,  by wire transfer of immediately  available  funds for
credit not later than 12:00 noon (New York City time) on the day when due to the
Existing  Holder's account or accounts as specified in the Information  Schedule
attached  hereto,  or such other account or accounts in the United States as the
Existing Holder may designate in writing, notwithstanding any contrary provision
herein or in any Note with respect to the place of payment.  The Existing Holder
agrees  that,  before  disposing of any Note,  the  Existing  Holder will make a
notation thereon (or on a schedule attached  thereto) of all principal  payments
previously made thereon and of the date to which interest thereon has been paid.
The  Company  agrees  to  afford  the  benefits  of  this  paragraph  13A to any
Transferee  which shall have made the same agreement as the Existing Holder have
made in this paragraph 13A.

                  Expenses.  The Company agrees, whether or not the transactions
contemplated  hereby shall be consummated,  to pay, and save the Existing Holder
and any such  Transferee  harmless  against  liability  for the  payment of, all
out-of-pocket  expenses arising in connection with such transactions,  including
(i) all costs and expenses of obtaining all necessary private placement numbers,
(ii) all document  production and duplication  charges and the fees and expenses
of any special  counsel engaged by the Existing Holder or any such Transferee in
connection with this Agreement,  the  transactions  contemplated  hereby and any
subsequent proposed  modification of, or proposed consent under, this Agreement,
whether or not such proposed  modification shall be effected or proposed consent
granted,  and (iii) the costs and expenses,  including attorneys' fees, incurred
by the  Existing  Holder or any such  Transferee  in enforcing  (or  determining
whether or how to  enforce)  any rights  under this  Agreement,  the Notes,  the
Warrants,   the  Registration  Rights  Agreement  or  the  Participation  Rights
Agreement,  or  in  responding  to  any  subpoena  or  other  legal  process  or
investigative  demand  issued in  connection  with this  Agreement,  such  other
documents or the transactions contemplated hereby or thereby or by reason of the
Existing  Holder's or such  Transferee's  having  acquired  any Note or Warrant,
including without limitation costs and expenses incurred in any bankruptcy case.
The  obligations  of the  Company  under this  paragraph  13B shall  survive the
transfer of any Note or Warrant or portion  thereof or  interest  therein by the
Existing Holder or any Transferee and the payment of any Note or exercise of any
Warrant.


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                  Consent to Amendments.  This Agreement may be amended, and the
Company or the Parent may take any action herein prohibited,  or omit to perform
any act herein  required  to be  performed  by it, if the  Company or the Parent
shall obtain the written consent to such  amendment,  action or omission to act,
of the Required Holder(s) except that, without the written consent of the holder
or holders of all Notes at the time outstanding,  no amendment to this Agreement
shall change the maturity of any Note,  or change the  principal of, or the rate
or time of payment of interest on or any  Yield-Maintenance  Amount payable with
respect  to  any  Note,  or  affect  the  time,  amount  or  allocation  of  any
prepayments,  or change  the  proportion  of the  principal  amount of the Notes
required with respect to any consent,  amendment,  waiver or  declaration.  Each
holder of any Securities at the time or thereafter outstanding shall be bound by
any consent  authorized by this  paragraph 13C,  whether or not such  Securities
shall have been marked to  indicate  such  consent,  but any  Securities  issued
thereafter  may bear a  notation  referring  to any such  consent.  No course of
dealing  between the Company or the Parent and the holder of any  Securities nor
any delay in  exercising  any rights  hereunder  or under any  Securities  shall
operate  as a waiver of any  rights of any  holder of such  Securities.  As used
herein and in the Notes, the term "this Agreement" and references  thereto shall
mean this Agreement as it may from time to time be amended or supplemented.

                  Form,  Registration,  Transfer  and  Exchange  of Notes;  Lost
Notes.   The  Notes  are  issuable  as  registered   notes  without  coupons  in
denominations  of at least  $100,000,  except as may be necessary to reflect any
principal amount not evenly divisible by $100,000. The Company shall keep at its
principal  office  a  register  in  which  the  Company  shall  provide  for the
registration of Notes and of transfers of Notes. Upon surrender for registration
of  transfer of any Note at the  principal  office of the  Company,  the Company
shall,  at its expense,  execute and deliver one or more new Notes of like tenor
and of a like  aggregate  principal  amount,  registered  in the  name  of  such
transferee or  transferees.  At the option of the holder of any Note,  such Note
may  be  exchanged  for  other  Notes  of  like  tenor  and  of  any  authorized
denominations,  of a like aggregate principal amount, upon surrender of the Note
to be exchanged at the principal  office of the Company.  Whenever any Notes are
so  surrendered  for exchange,  the Company shall,  at its expense,  execute and
deliver the Notes which the holder  making the  exchange is entitled to receive.
Every Note  surrendered  for  registration of transfer or exchange shall be duly
endorsed,  or be accompanied by a written  instrument of transfer duly executed,
by the holder of such Note or such holder's attorney duly authorized in writing.
Any Note or Notes issued in exchange for any Note or upon transfer thereof shall
carry the rights to unpaid interest and interest to accrue which were carried by
the Note so exchanged or transferred,  so that neither gain nor loss of interest
shall result from any such transfer or exchange.  Upon receipt of written notice
from the holder of any Note of the loss,  theft,  destruction  or  mutilation of
such Note and, in the case of any such loss, theft or destruction,  upon receipt
of such  holder's  unsecured  indemnity  agreement,  or in the  case of any such
mutilation  upon surrender and  cancellation of such Note, the Company will make
and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Note.

                  Persons Deemed Owners; Participations.  Prior to due
presentment for registration of transfer, the Company may treat the Person in
whose name any Note is registered as the owner

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and holder of such Note for the purpose of receiving  payment of  principal  of,
interest on and any Yield - Maintenance Amount payable with respect to such Note
and for all  other  purposes  whatsoever,  whether  or not  such  Note  shall be
overdue,  and the  Company  shall not be  affected  by  notice to the  contrary.
Subject to the preceding sentence,  the holder of any Note may from time to time
grant  participations in such Note to any Person on such terms and conditions as
may be determined by such holder in its sole and absolute  discretion,  provided
that any such participation shall be in a principal amount of at least $100,000.

                  Survival of Representations and Warranties;  Entire Agreement.
All representations and warranties  contained herein or made in writing by or on
behalf of the Parent or the Company in  connection  herewith  shall  survive the
execution  and  delivery of this  Agreement  and the Notes,  the transfer by the
Existing  Holder of any Warrant or Note or portion  thereof or interest  therein
and the payment of any Note or exercise of any  Warrant,  and may be relied upon
by any  Transferee,  regardless of any  investigation  made at any time by or on
behalf  of the  Existing  Holder or any  Transferee.  Subject  to the  preceding
sentence,  this Agreement,  the Notes,  the Warrants,  the  Registration  Rights
Agreement and the Participation Rights Agreement embody the entire agreement and
understanding  among  the  Existing  Holder,  the  Parent  and the  Company  and
supersede all prior agreements and understandings relating to the subject matter
hereof.

                  Successors and Assigns.  All covenants and other agreements in
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee),  whether so expressed or
not.

                  Disclosure  to  Other  Persons.  The  Parent  and the  Company
acknowledge  that the holder of any Security may deliver copies of any financial
statements and other documents  delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the Parent, the Company
or any other  Subsidiary  of the Parent in  connection  with or pursuant to this
Agreement,  to (i) such  holder's  directors,  officers,  employees,  agents and
professional  consultants,  (ii) any  other  holder of any  Security,  (iii) any
Person to which such holder  offers to sell such  Security or any part  thereof,
(iv) any Person to which such holder sells or offers to sell a participation  in
all or any part of a Note,  (v) any  Person  from which  such  holder  offers to
purchase any other security of the Parent,  (vi) any federal or state regulatory
authority having jurisdiction over such holder,  (vii) the National  Association
of  Insurance  Commissioners  or any  similar  organization  or (viii) any other
Person to which such delivery or disclosure may be necessary or appropriate  (a)
in compliance with any law, rule, regulation or order applicable to such holder,
(b) in response to any subpoena or other legal process or informal investigative
demand,  or (c) in  connection  with any  litigation  to which such  holder is a
party.

                  Notices.  All  notices or other  communications  provided  for
hereunder  shall  be in  writing  and  sent by first  class  mail or  nationwide
overnight  delivery  service (with charges  prepaid) and, (i) if to the Existing
Holder,  addressed  to the  Existing  Holder at the address  specified  for such
communications  in the Information  Schedule  attached hereto,  or at such other
address as such

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                                                        56

<PAGE>



Existing  Holder shall have  specified to the Parent and the Company in writing,
(ii) if to any other holder of any  Security,  addressed to such other holder at
such  address as such other  holder  shall have  specified to the Parent and the
Company in writing or, if any such other  holder  shall not have so specified an
address to the Parent and the  Company,  then  addressed to such other holder in
care of the last  holder of such  Security  which  shall  have so  specified  an
address  to the  Parent  and the  Company,  and  (iii) if to the  Parent  or the
Company,  addressed  to it at 4610  South  Ulster  Street,  Suite  200,  Denver,
Colorado 80237,  Attention:  Legal  Department,  or at such other address as the
Parent or the Company  shall have  specified  to the holder of each  Security in
writing;  provided, that any such communication to the Parent or the Company may
also,  at the option of the holder of any  Security,  be  delivered by any other
means either to the Parent or the Company at its address  specified  above or to
any officer of the Parent or the Company, as applicable.

                  Payments Due on Non-Business Days.  Anything in this Agreement
or the Notes to the  contrary  notwithstanding,  any payment of  principal of or
interest  or  Yield-Maintenance  Amount on any Note that is due on a date  other
than a Business  Day shall be made on the next  succeeding  Business Day without
including the additional days elapsed in the computation of the interest payable
on such next succeeding Business Day.

                  Satisfaction  Requirement.  If any  agreement,  certificate or
other  writing,  or any  action  taken or to be  taken,  is by the terms of this
Agreement  required to be satisfactory to the Existing Holder or to the Required
Holder(s),  the determination of such satisfaction shall be made by the Existing
Holder or the Required Holder(s),  as the case may be, in the sole and exclusive
judgment  (exercised  in good  faith)  of the  Person  or  Persons  making  such
determination.

                  Governing Law.  THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO
SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK.  This Agreement
may not be changed orally, but (subject to the provisions of paragraph 13C) only
by an agreement in writing  signed by the party against whom  enforcement of any
waiver, change, modification or discharge is sought.

                  Waiver of Jury Trial; Consent to Jurisdiction; Limitation of
Remedies.

                         THE PARENT,  THE COMPANY AND EACH HOLDER OF  SECURITIES
         HEREBY KNOWINGLY,  VOLUNTARILY,  AND INTENTIONALLY WAIVES ANY RIGHTS IT
         MAY HAVE TO A TRIAL BY JURY IN ANY  LITIGATION  OF ANY  CLAIM  WHICH IS
         BASED  HEREON,  OR ARISES OUT OF,  UNDER,  OR IN  CONNECTION  WITH THIS
         AGREEMENT,  THE NOTES, THE WARRANTS,  THE REGISTRATION RIGHTS AGREEMENT
         OR THE  PARTICIPATION  RIGHTS AGREEMENT,  OR ANY TRANSACTIONS  RELATING
         HERETO OR  THERETO,  OR ANY  COURSE  OF  CONDUCT,  COURSE  OF  DEALING,
         STATEMENTS  (WHETHER  ORAL OR WRITTEN),  OR ACTIONS OF THE PARENT,  THE
         COMPANY OR SUCH HOLDERS.  THE PARENT AND THE COMPANY EACH  ACKNOWLEDGES
         THAT THIS

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                                                        57

<PAGE>



         PROVISION IS A MATERIAL  INDUCEMENT  FOR THE  EXISTING  HOLDER TO ENTER
         INTO THIS AGREEMENT.

                         ANY LEGAL  ACTION OR  PROCEEDING  WITH  RESPECT TO THIS
         AGREEMENT,  THE NOTES, THE WARRANTS,  THE REGISTRATION RIGHTS AGREEMENT
         OR THE  PARTICIPATION  RIGHTS AGREEMENT,  OR ANY TRANSACTIONS  RELATING
         HERETO OR  THERETO,  OR ANY  COURSE  OF  CONDUCT,  COURSE  OF  DEALING,
         STATEMENTS  (WHETHER  ORAL OR WRITTEN),  OR ACTIONS OF THE PARENT,  THE
         COMPANY OR THE  HOLDERS OF  SECURITIES  MAY BE BROUGHT IN THE COURTS OF
         THE STATE OF NEW YORK OR THE UNITED  STATES OF AMERICA FOR THE SOUTHERN
         DISTRICT  OF NEW YORK,  AND THE  COMPANY  AND THE  PARENT  EACH  HEREBY
         ACCEPTS  FOR  ITSELF  AND IN RESPECT  OF ITS  PROPERTY,  GENERALLY  AND
         UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
         THE  COMPANY  AND  THE  PARENT  EACH  HEREBY   IRREVOCABLY  WAIVES  ANY
         OBJECTIONS,  INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING
         OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS,  WHICH IT MAY
         NOW OR HEREAFTER  HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
         IN SUCH RESPECTIVE JURISDICTIONS.

                  Severability.   Any  provision  of  this  Agreement  which  is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability   in  any   jurisdiction   shall  not   invalidate   or  render
unenforceable such provision in any other jurisdiction.

                  Descriptive Headings.  The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.

                  Maximum  Interest  Payable.   The  Parent,  the  Company,  the
Existing Holder and any other holders of the Notes specifically intend and agree
to limit contractually the amount of interest payable under this Agreement,  the
Notes and all other instruments and agreements related hereto and thereto to the
maximum  amount of interest  lawfully  permitted to be charged under  applicable
law. Therefore, none of the terms of this Agreement, the Notes or any instrument
pertaining to or relating to this Agreement or the Notes shall ever be construed
to create a contract to pay  interest  at a rate in excess of the  maximum  rate
permitted to be charged  under  applicable  law,  and neither the  Company,  any
Parent  nor any other  party  liable or to become  liable  hereunder,  under the
Notes, any guaranty or under any other instruments and agreements related hereto
and thereto shall ever be liable for interest in excess of the amount determined
at such maximum rate,  and the  provisions  of this  paragraph 13P shall control
over all other  provisions  of this  Agreement,  any Notes,  any guaranty or any
other  instrument   pertaining  to  or  relating  to  the  transactions   herein
contemplated. If any amount of interest taken or received by the Existing Holder
or any holder of a Note shall be in excess

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<PAGE>



of said maximum amount of interest which,  under  applicable law, could lawfully
have been  collected  by the  Existing  Holder or such  holder  incident to such
transactions,  then such  excess  shall be  deemed to have been the  result of a
mathematical  error by all parties hereto and shall be refunded  promptly by the
Person receiving such amount to the party paying such amount,  or, at the option
of the recipient,  credited  ratably against the unpaid  principal amount of the
Note or Notes held by the  Existing  Holder or such  holder,  respectively.  All
amounts paid or agreed to be paid in  connection  with such  transactions  which
would under applicable law be deemed  "interest"  shall, to the extent permitted
by such applicable law, be amortized,  prorated, allocated and spread throughout
the stated term of this  Agreement  and the Notes.  "Applicable  law" as used in
this  paragraph  means that law in effect  from time to time which  permits  the
charging and  collection  of the highest  permissible  lawful,  nonusers rate of
interest on the transactions herein contemplated  including laws of the State of
New York and of the United States of America, and "maximum rate" as used in this
paragraph  means,  with  respect  to  each of the  Notes,  the  maximum  lawful,
nonusurious rates of interest (if any) which under applicable law may be charged
to the Company from time to time with respect to such Notes.

                  Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.


      [Remainder of Page Intentionally Left Blank; Signature Page Follows]




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<PAGE>



                  EXECUTED to be effective as of the date first above written.

                                            HALLWOOD ENERGY CORPORATION



                                            By:
                                                     Name:    Cathleen M. Osborn
                                                     Title:   Vice President



                                            HALLWOOD CONSOLIDATED RESOURCES
                                            CORPORATION



                                            By:
                                                     Name:    Cathleen M. Osborn
                                                     Title:   Vice President


                                            THE PRUDENTIAL INSURANCE COMPANY OF
                                            AMERICA



                                            By:
                                                     Name:    Ric Abel
                                                     Title:   Vice President














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<PAGE>






                                               INFORMATION SCHEDULE



THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA




                                                Aggregate Principal
                                                  Amount of Notes
                                                  to be Delivered

                                                       Note
                                                   Denomination







                                                    $25,000,000
                                                    $25,000,000







Aggregate Number of
Shares of  Parent
Common Stock for
which
Warrant is Exercisable



                                                  Warrant Number


                                                      309,278
                                                    RW-1





(1)      All payments on account of Notes held by such institution shall be made
         by wire transfer of immediately available funds for credit to:



         Account No. 890-0304-391
         The Bank of New York
         New York, New York
         (ABA No.: 021-000-018)



         Each such wire  transfer  shall  set forth the name of the  Company,  a
         reference to "10.32% Senior  Subordinated  Notes due December 23, 2007,
         Security  No.  !INV5810!,  and the due date and  application  (as among
         principal, interest and Yield-Maintenance Amount) of the payment
         being made.















(2)      Address for all notices relating to payments:

         The Prudential Insurance Company of America
         c/o Prudential Capital Group
         Four Gateway Center
         100 Mulberry Street
         Newark, New Jersey  07102

         Attention:  Investment Operations Group
         (Attention:  Manager)



(3)      Address for all other communications and notices:

         The Prudential Insurance Company of America
         c/o Prudential Capital Group
         2200 Ross Avenue, Suite 4200E
         Dallas, Texas  75201

         Attention:  Managing Director



(4)      Tax Identification No.:  22-1211670










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<PAGE>



                                                                     SCHEDULE 9D


               EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND LIENS




                              [Company to prepare]

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<PAGE>



                                                                     SCHEDULE 9G


                                        LIST OF AGREEMENTS RESTRICTING DEBT




                                               [Company to prepare]

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<PAGE>



                                                                       EXHIBIT A


                                        [FORM OF SENIOR SUBORDINATED NOTE]


                                    HALLWOOD CONSOLIDATED RESOURCES CORPORATION

                           10.32% SENIOR SUBORDINATED NOTE DUE DECEMBER 23, 2007


No.                                                          ____________, _____
$                                                                PPN 40636V A* 0


         FOR VALUE RECEIVED,  the undersigned,  HALLWOOD CONSOLIDATED  RESOURCES
CORPORATION (the "Company"), a corporation organized and existing under the laws
of    the    State    of    Delaware,     hereby     promises    to    pay    to
_____________________________,  or  registered  assigns,  the  principal  sum of
___________________________ DOLLARS ($______________) on December 23, 2007, with
interest  (computed  on the basis of a 360-day  year --  30-day  month)  payable
quarterly (or, upon the occurrence of a Default or an Event of Default and until
such  Default  or Event of Default  has been  cured or waived in  writing  (such
period  constituting  a  "Default  Interest  Period"),  at  the  option  of  the
registered holder hereof, on demand) on the 23rd day of March,  June,  September
and  December  in each  year,  commencing  with  the 23rd  day of  March,  June,
September  or December  next  succeeding  the date hereof,  until the  principal
hereof shall have become due and payable (a) on the unpaid balance hereof at the
rate of 10.32% per annum from the date hereof, and (b) during a Default Interest
Period on the unpaid  balance  hereof and all other  obligations  of the Company
under the Agreement referred to below,  including any payment or overdue payment
or prepayment of principal,  interest and any Yield-Maintenance  Amount (as such
term is defined in the  Agreement  referred to below),  at a rate per annum from
time to time equal to the lesser of (i) the maximum rate permitted by applicable
law or (ii) the  greater  of (y)  12.32% or (z) 2.0%  over the rate of  interest
publicly announced by The Bank of New York from time to time in New York City as
its Prime Rate.

         Payments of principal of, interest on and any Yield-Maintenance  Amount
payable  with respect to this Note are to be made at the main office of The Bank
of New York in New York City or at such other place as the holder  hereof  shall
designate  to the Company in writing,  in lawful  money of the United  States of
America.

         This Note is one of a series of 10.32% Senior  Subordinated  Notes (the
"Notes")  issued  pursuant  to an Amended  and  Restated  Subordinated  Note and
Warrant Purchase  Agreement,  dated as of June 8, 1999 (the "Agreement"),  among
the Company, Hallwood Energy Corporation (the

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<PAGE>



"Parent") and The Prudential Insurance Company of America and is entitled to the
 benefits thereof.

         This Note is a registered Note and, as provided in the Agreement,  upon
surrender  of  this  Note  for  registration  of  transfer,  duly  endorsed,  or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's  attorney duly authorized in writing,  a new Note
of like tenor for a like  principal  amount will be issued to, and registered in
the name of,  the  transferee.  Prior to due  presentment  for  registration  of
transfer, the Company may treat the person in whose name this Note is registered
as the owner  hereof for the  purpose  of  receiving  payment  and for all other
purposes,  and the Company and the Parent shall not be affected by any notice to
the contrary.

         This Note is  subject  to  certain  prepayments,  as  specified  in the
Agreement.

         This  Note and the debt  evidenced  hereby,  including  the  principal,
interest and Yield- Maintenance Amount, if any, shall at all times remain junior
and subordinate to any and all Senior Debt (as defined in the Agreement), all on
the terms and to the extent more fully set forth in the Agreement.

         This Note and the holder hereof are entitled,  equally and ratably with
the holders of all other Notes,  to the benefits of (i) the guarantee  hereof by
the Parent set forth in paragraph 11 of the Agreement, (ii) the HCP Guaranty and
the Subsidiary Guaranty,  as such terms are defined in the Agreement,  and (iii)
all other guaranty  agreements which may from time to time be executed  pursuant
to the  Agreement  by other  Subsidiaries  of the Parent for the  benefit of the
holders of the Notes.

         If an Event of Default, as defined in the Agreement, shall occur and be
continuing,  the principal of this Note may be declared or otherwise  become due
and payable in the manner and with the effect provided in the Agreement.

         The Company and the  purchaser and the  registered  holder of this Note
specifically  intend and agree to limit  contractually  the  amount of  interest
payable under this Note to the maximum amount of interest lawfully  permitted to
be charged under applicable law. Therefore, none of the terms of this Note shall
ever be  construed  to create a contract to pay  interest at a rate in excess of
the maximum rate permitted to be charged under  applicable  law, and neither the
Company nor any other party liable or to become liable  hereunder  shall ever be
liable for interest in excess of the amount determined at such maximum rate, and
the provisions of paragraph 13P of the Agreement shall control over any contrary
provision of this Note.


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<PAGE>



         THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW
OF SUCH STATE.

                         HALLWOOD CONSOLIDATED RESOURCES
                                   CORPORATION


                                                     By
                                                              [Vice] President

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<PAGE>



                                                                       EXHIBIT B


                                  [FORM OF PARENT COMMON STOCK PURCHASE WARRANT]



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                                                         1

<PAGE>



                                                                       EXHIBIT C


                                      [FORM OF REGISTRATION RIGHTS AGREEMENT]

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                                                         1

<PAGE>



                                                                       EXHIBIT D


                                     [FORM OF PARTICIPATION RIGHTS AGREEMENT]




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                                                         1

<PAGE>



                                                                       EXHIBIT E


                                           [FORM OF SUBSIDIARY GUARANTY]

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<PAGE>



                                                                       EXHIBIT F


                                               [FORM OF HCP CONSENT]

                                               CONSENT TO AMENDMENT

         The  undersigned  is  the  Guarantor   ("Guarantor")   under  a  Senior
Subordinated Guaranty Agreement,  dated as of December 23, 1997 (the "Guaranty")
in favor of The Prudential  Insurance Company of America (the "Existing Holder")
with respect to the obligations of Hallwood  Consolidated  Resources Corporation
(the  "Company")  under that  certain  Subordinated  Note and  Warrant  Purchase
Agreement  dated as of December 23, 1997 (the "Original  Agreement").  The terms
used herein have the meanings specified in the Guaranty unless otherwise defined
herein.  The Existing  Holder,  Hallwood Energy  Corporation and the Company are
entering  into that  certain  Amended and  Restated  Note and  Warrant  Purchase
Agreement  dated as of June 8, 1999,  which  amends and  restates  the  Original
Agreement  in  its  entirety  (the  "Amended  and  Restated   Agreement").   The
undersigned  hereby  consents to the Amended and Restated  Agreement  and hereby
confirms  and agrees  that the  Guaranty  is, and shall  continue to be, in full
force and effect and is hereby  confirmed  and ratified in all  respects  except
that, upon the effectiveness of, and on and after the date of this consent,  all
references  in  the  Guaranty  of  the  undersigned  to  the  "Note  Agreement,"
"thereunder,"  "thereof,"  or words of like  import  referring  to the  Original
Agreement  shall mean the  Original  Agreement  as amended  by the  Amended  and
Restated Agreement, as the same may be amended or modified from time to time.

         Dated as of June 8, 1999.

                                            Hallwood Consolidated Partners, L.P.

                                        By:      Hallwood Consolidated Resources
                                                Corporation, its general partner

                                        By:
                                                 Name:
                                                Title:

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<PAGE>



                                                                     EXHIBIT G-1


                                      [FORM OF OPINION OF COMPANY'S, PARENT'S
                                            AND HEP'S GENERAL COUNSEL]


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                                                         1

<PAGE>



                                                                     EXHIBIT G-2


       [FORM OF OPINION OF COMPANY'S, PARENT'S AND HEP'S SPECIAL COUNSEL]



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                                                         1

<PAGE>



                                                                       EXHIBIT H

                                    [FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY]

                                           SENIOR SUBORDINATED GUARANTY
                                               ASSUMPTION AGREEMENT


         THIS  SENIOR   SUBORDINATED   GUARANTY   ASSUMPTION   AGREEMENT   (this
"Agreement"),  dated as of _______,  ___ is made by ________,  a __________ (the
"Additional Guarantor"), in favor of THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
("Prudential").

         WHEREAS,  Hallwood  Consolidated  Resources  Corporation,   a  Delaware
corporation (the "Company"), Hallwood Energy Corporation, a Delaware corporation
(the  "Parent"),   and  Prudential  are  parties  to  an  Amended  and  Restated
Subordinated  Note and Warrant  Purchase  Agreement dated as of June 8, 1999 (as
the same may be further  amended,  restated or otherwise  modified  from time to
time, the "Note Agreement");

         WHEREAS,  the  Company  and  the  Parent  are  required  to  cause  the
Additional Guarantor, pursuant to paragraph 5K of the Note Agreement, to deliver
to Prudential  this Agreement  pursuant to which the  Additional  Guarantor will
become a Guarantor  under that certain Senior  Subordinated  Guaranty  Agreement
dated as June 8, 1999 by and among the  Guarantors  listed  therein  in favor of
Prudential (as the same may be amended, restated or otherwise modified from time
to time, the "Guaranty");

         WHEREAS,  the  Additional  Guarantor  has  received  and  will  receive
substantial  direct and indirect  benefits  from the  Company's and the Parent's
compliance  with the terms and  conditions  of the Note  Agreement and the Notes
issued thereunder;

         NOW  THEREFORE,  in order  to  induce,  and in  consideration  of,  the
maintenance  of the Note  Agreement  and to enable the Company and the Parent to
comply with paragraph 5K thereof,  the Additional  Guarantor  hereby  covenants,
represents and warrants to Prudential as follows:

         The Additional  Guarantor hereby becomes a Guarantor (as defined in the
Guaranty) for all purposes of the Guaranty.  Without limiting the foregoing, the
Additional  Guarantor  hereby,  jointly and severally with the other  Guarantors
under the Guaranty,  guarantees to Prudential and its successors and assigns the
prompt payment in full when due (whether at stated maturity,  by acceleration or
otherwise)  of all  Guaranteed  Obligations  (as  defined  in  Section  1 of the
Guaranty)  in the same  manner  and to the same  extent  as is  provided  in the
Guaranty  and,  in  addition,   the  Additional   Guarantor   hereby  makes  the
representations  and  warranties  set forth in Section 8 of the Guaranty,  other
than the representations and warranties contained in clause (a)(i) of such

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<PAGE>



Section 8, and also  represents  and warrants  that it is a  _____________  duly
organized,  validly existing and in good standing under the laws of the State of
______________.

                  Notice of acceptance of this Agreement and of the Guaranty, as
supplemented hereby, is hereby waived by the Additional Guarantor.

         IN WITNESS WHEREOF,  the Additional  Guarantor has caused this Guaranty
Assumption  Agreement to be duly  executed and  delivered as of the day and year
first above written.

                                                     ----------------,
                                                     a _______________



                                                     By:
                                                              Name:
                                                              Title:


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<PAGE>



                                                                       EXHIBIT I

                                           [FORM OF OPINION RELATING TO
                                 SUBSIDIARY'S ASSUMPTION OF SUBSIDIARY GUARANTY]


                                      [Letterhead of Law Firm Giving Opinion]

[Name(s) and address(es) of each Note holder]                             [Date]

Ladies and Gentlemen:

         We have acted as counsel for  _________________________,  a ___________
(the  "Company") in  connection  with the execution by the Company of the Senior
Subordinated Guaranty Assumption Agreement (the "Assumption Agreement") dated as
of  __________,  pursuant  to which the Company  becomes a Guarantor  under that
certain Senior Subordinated  Guaranty  Agreement,  dated as of June 8, 1999 (the
"Subsidiary  Guaranty"),  executed by certain  Subsidiaries  of Hallwood  Energy
Corporation,  a  Delaware  corporation  (the  "Parent"),  pursuant  to which the
signatories   thereto  guaranteed  the  obligations  of  Hallwood   Consolidated
Resources  Corporation,  a Delaware  corporation  ("HCRC"),  under that  certain
Amended and  Restated  Subordinated  Note and Warrant  Purchase  Agreement  (the
"Agreement")  dated as of June __,  1999 by and among  HCRC,  the Parent and The
Prudential  Insurance  Company  of  America.  Capitalized  terms  used  and  not
otherwise  defined  herein that are defined in the Agreement have the respective
meanings  specified in the Agreement.  This opinion letter is being delivered to
you at the direction of the Company in satisfaction of the affirmative  covenant
set forth in paragraph 5K of the Agreement and with the  understanding  that you
are relying upon the opinions expressed herein.

         In this  connection,  we have  examined  such  certificates  of  public
officials,  certificates of officers of the Company and copies  certified to our
satisfaction of corporate or other organizational documents, as the case may be,
and  records  of the  Company  and of other  papers,  and have made  such  other
investigations,  as we have deemed  relevant  and  necessary  as a basis for our
opinion  hereinafter set forth. We have relied upon such  certificates of public
officials  and of  officers  of the  Company  with  respect to the  accuracy  of
material  factual  matters   contained  therein  which  were  not  independently
established.

         Based upon the foregoing and upon such  investigation as we have deemed
necessary, it is our opinion that:

                  1. The Company is a  ____________  duly  organized and validly
existing in good standing under the laws of the ______________.  The Company has
the [corporate  power/power under respective  statute under which  non-corporate
entity  formed and  charter  documents]  to carry on its  business  as now being
conducted. The Company has the

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[corporate  power/power  under  respective  statute under which  non-corporation
formed and  charter  documents]  to enter into,  and to perform its  obligations
under, the Assumption Agreement and the Subsidiary Guaranty.

                  2. The Assumption  Agreement and the Subsidiary  Guaranty have
been duly authorized, executed and delivered by the Company and constitute valid
obligations of the Company,  legally  binding upon and  enforceable  against the
Company in accordance with their respective terms, except as such enforceability
may be limited by (a) bankruptcy,  insolvency,  reorganization  or other similar
laws affecting the enforcement of creditors' rights  generally,  and (b) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).

                  3. The execution and delivery of the Assumption  Agreement and
fulfillment of and compliance  with the respective  provisions of the Assumption
Agreement  and the  Subsidiary  Guaranty do not  conflict  with,  or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
or result in any violation of, or result in the creation of any Lien upon any of
the   properties  or  assets  of  the  Company   pursuant  to,  or  require  any
authorization,  consent, approval,  exemption or other action by or notice to or
filing  with any court,  administrative  or  governmental  body or other  Person
pursuant to the  [organizational  documents] of the Company,  any applicable law
(including  any  securities  or Blue Sky law),  statute,  rule or  regulation or
(insofar as is known to us) any agreement, instrument, order, judgment or decree
to which the Company is a party or otherwise subject.

                  4.  To  our  knowledge,   there  are  no  actions,   suits  or
proceedings  pending  or  threatened  against  the  Company at law or in equity,
before any arbitrator or before or by any governmental  department,  commission,
board,  bureau,  agency or instrumentality (a) that question the validity of the
Assumption  Agreement  or  the  Subsidiary  Guaranty,  (b)  that,  if  adversely
determined, could result in a material adverse effect on the business, condition
(financial or other), assets, properties, operations or prospects of the Company
or (c) that,  if adversely  determined,  could  otherwise  adversely  affect the
ability of the Company to perform its obligations under the Assumption Agreement
or the Subsidiary Guaranty.

                  The opinions  expressed herein may also be relied upon by each
subsequent holder of the Notes.

Very truly yours,





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