Document:

exv10w77

 

Exhibit 10.77

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of the 1st
day of April, 2003, by and between Gene Logic Inc., a Delaware corporation (the
“Company”), and Stephen J. Trevisan (the “Executive”).

     WHEREAS, pursuant to that certain Agreement and Plan of Merger among the
Company, Therimmune Research Corporation (“Therimmune”), GLAII Corp. (the
“Merger Sub”), and Edward J. Krause, III, as Securityholders’ Representative,
dated February 25, 2003, Therimmune will be merged with and into the Merger Sub
(the Merger”) which shall be the “Surviving Corporation”; and

     WHEREAS, Executive has been employed by Therimmune as its Chief Executive
Officer through the effective time of the Merger (the “Prior Employment
Arrangement”); and

     WHEREAS, the Executive and the Company wish to terminate the Prior
Employment Arrangement and enter into this Agreement effective upon the
effective time of the Merger (the “Effective Date”) under which Executive will
be employed by the Company; and

     WHEREAS, upon and following the effective time of the Merger, the GLGC
Group, as defined in Section 5.2(a), will be engaged in the “Business” of
providing information services, discovery services and contract research
services (CRO) to pharmaceutical and biotechnology companies

     NOW, THEREFORE, in consideration of the mutual promises made below, the
parties agree as follows:

     1.          Employment, Duties and Acceptance.

                  1.1     Employment.   (a) Effective upon the Effective Date, the Prior
Employment Arrangement shall hereby automatically be terminated by mutual
consent of Executive and Surviving Corporation, with neither party having any
further obligations thereunder. The Prior Employment Arrangement shall be
replaced and superseded in its entirety by this Agreement under which the
Company shall employ the Executive as President of the Surviving Corporation
(to be renamed after the Effective Date as Therimmune Research Corporation) for
at least the first six (6) months from the Effective Date unless the parties
mutually agreed to change such title sooner, after which time the title may
change commensurate with the Executive’s responsibilities, but in no case shall
the title be less than that of Executive Vice President. In such capacity, the
Executive shall perform such executive and management duties and assume such
other responsibilities as

 

 

may be assigned by the Chief Executive Officer of the
Company (“CEO”) from time to time. The Executive accepts such employment and shall perform his duties
faithfully and to the best of his abilities.

                  (b)     The Company will cause Executive to be elected to the Company’s Board
of Directors for the term ending in 2005, and Executive agrees to serve on such
Board without additional compensation.

                  (c)     The Executive shall devote his full working time and creative energies
to the performance of his duties hereunder and will at all times devote such
additional time and efforts as are reasonably sufficient for fulfilling the
significant responsibilities entrusted to him. So long as such activities, in
the aggregate, do not interfere with the performance by the Executive of his
duties hereunder: (i) the Executive shall be permitted a reasonable amount of
time to supervise his personal, passive investments; and (ii) the Executive
shall be permitted a reasonable amount of time to participate (as board member,
officer or volunteer) in civic, political and charitable activities.

                  1.2     Place of Employment.   The Executive’s principal place of
employment shall be at the Company or Surviving Corporation’s headquarters, as
mutually agreed by the parties, in the Baltimore-Washington, D.C. metropolitan
area, subject to such travel as may be reasonably required by his employment
pursuant to the terms hereof. The Executive shall not be required to relocate
outside of the Baltimore-Washington, D.C. metropolitan area during the Term
unless the Executive so agrees and Company provides relocation benefits
reasonably acceptable to the Executive.

     2.          Term of Employment.

                  The Executive’s term of employment with the Company (the “Term”) shall
commence immediately following the Effective Date and continue thereafter on an
at-will basis until terminated by either party pursuant to Section 4, subject
to certain rights upon termination as provided in Section 4. If Executive’s
employment hereunder with the Company is terminated by the Executive or by the
Company, Executive shall thereby be terminated, and Executive agrees to resign
immediately from all other positions with the GLGC Group, including without
limitation, as a member of the Board of Directors of the Company or any other
member of such group.

     3.          Compensation.

                  3.1     Salary.   As compensation for all services to be rendered
pursuant to this Agreement, the Company shall pay to the Executive during the
Term a salary at the rate of $300,000 per annum (the “Base Salary”) less such
deductions as shall be required to be withheld by applicable tax and other laws
and regulations or as otherwise authorized by the Executive. The Base Salary
shall accrue from and after the Effective Date, and shall be payable during the
Term, in arrears in equal periodic installments, not less frequently than

-2-

 

semi-monthly. The Executive’s Base Salary shall be reviewed annually and may
be increased based upon the evaluation of the Executive’s performance and the
compensation policies of the Company in effect at the time of each such review.
The Base Salary shall be prorated for calendar year 2003 (and for any other
year in which Executive is not employed by the Company for the entire year)
based on the portion of the year in which Executive is employed on a full-time
basis by the Company.

                  3.2     Bonus.   Executive will be eligible to participate in a bonus
plan established by the Compensation Committee of the Board (the “Compensation
Committee”). Payment of a bonus under such plan will be contingent on achieving
such targets and levels of performance as may be specified for the Executive by
the Compensation Committee. Bonus payments will be made on at least an annual
basis, subject to prior approval by the Compensation Committee. The target
bonus for Executive for the Company’s fiscal year 2003, which shall be based on
achieving 100% of the targets and levels of performance established by the
Compensation Committee, will be $120,000 for a full calendar year, less
applicable withholding, prorated based on the portion of the year in which
Executive is employed by the Company. For 2003, the bonus plan shall be
divided into two periods, with the first period ending June 30, 2003 and the
second period ending December 31, 2003. The target bonus for the period ending
June 30, 2003 shall be $60,000 multiplied by the percentage of the six (6)
month period ending on such date during which the Executive is employed by the
Company. The target bonus for the period ending December 31, 2003 shall be
$60,000. To receive a bonus for any period, except as specifically provided in
section 4.7, the Executive must be employed by the Company on a full-time basis
as of the last business day of the period for which the bonus is paid.

                  3.3     Stock Options.    Executive will receive a stock option grant
under the Company’s 1997 Equity Incentive Plan (the “Plan”) to acquire 100,000
shares of Company Common Stock at an exercise price equal to the fair market
value per share at date of grant, which will be Executive’s first day of
employment hereunder (which for purposes of the plan is deemed to be the
closing price on the last business day preceding the date of grant). The stock
options will vest and become exercisable at the rate of one-forty eighth per
month at the end of each month of employment. The options will have a 10 year
term and be subject to the other terms and conditions of the Plan and the
standard form of stock option grant agreement thereunder (which are attached as
Exhibits A and B hereto). The stock option will be an incentive stock option
under Section 422 of the Internal Revenue Code of 1986, as amended, (“Code”) to
the maximum extent permitted by the law and the Plan; any remaining portion of
the stock option will be treated as a Non-Statutory Stock Option.

                  3.4     Participation in Executive Benefit Plans.   The Executive shall
be permitted during the Term, to the extent eligible, to participate in any
group life, medical, dental, vision, or disability insurance plans, accidental
death and dismemberment plan, 401(k) plan, or similar benefit plans of the
Company which may be generally available to other senior executives of the
Company.

-3-

 

                  3.5     Paid Time Off (“PTO”).   The Executive shall accrue an aggregate
of twenty-eight (28) days of PTO per calendar year, at the rate of 9.33 hours
per semi-monthly pay period, in accordance with the Company’s policies, plus
carryover for 2003 of unused, accrued vacation time as a result of employment
with Therimmune, of up to a maximum of 43 days. PTO accruing in calendar year
2003 (and in any other year in which Executive is not employed by the Company
for the entire year) shall be prorated based on the portion of the year in
which Executive is employed by the Company.

                  3.6     Holidays.   The Executive shall be eligible for holidays in
accordance with the Company’s policy and schedule.

                  3.7     Expenses.   In accordance with the Company’s policies, the
Executive will be reimbursed for all ordinary, necessary and reasonable
business expenses (including, without limitation, travel, meetings, dues,
subscriptions, fees, educational expenses, and expenses incurred for operation
of mobile telephones,) actually incurred or paid by the Executive during the
Term in the performance of the Executive’s services under this Agreement, upon
presentation of expense statements or vouchers or such other supporting
information as the Board may reasonably require.

                  3.8     Tax/Financial Planning.   The Executive shall be reimbursed in
an amount not in excess of $5,000 in the aggregate per year for tax return
preparation and certain financial planning advice in accordance with the
Company’s policies.

                  3.9.     Withholding.   The Company is authorized to withhold from the
amount of any Base Salary and bonuses and any other payments or benefits paid
or provided to or for the benefit of the Executive, all sums authorized by the
Executive or required to be withheld by law, court decree, or executive order,
including (but not limited to) such things as income taxes, employment taxes,
and employee contributions to fringe benefit plans sponsored by the Company.

     4.          Termination.

                  4.1     General.    The employment of the Executive hereunder may be
terminated as provided in this Section 4.

                  4.2     Termination Upon Mutual Agreement.    The Company and the
Executive may, by mutual written agreement, terminate this Agreement and/or the
employment of the Executive at any time.

                  4.3     Death or Disability of Executive.

                  (a)     The employment of the Executive hereunder shall terminate upon (i) the
death of the Executive, and (ii) at the option of the Company upon not less
than thirty (30) days’ prior written notice to the Executive or his personal
representative or guardian, if the Executive suffers a Total Disability (as
defined in Section 4.3(b) below).

-4-

 

                  (b)     For purposes of this Agreement, “Total Disability” shall mean (i) if
the Executive is subject to a legal decree of incompetency (the date of such
decree being deemed the date on which such disability occurred), or (ii) the
written determination by a physician selected by the Company that, because of a
medically determinable disease, injury or other physical or mental disability,
the Executive is unable to perform each of his essential duties, without
reasonable accommodation, and that such disability has lasted for the
immediately preceding ninety (90) days and is, as of the date of determination,
reasonably expected to last an additional ninety (90) days or longer after the
date of determination. If requested by the Company, Executive agrees to appear
at a medical examination by a physician selected by the Company and to furnish
to such physician such medical information as is needed for a determination
under this Section 4.3(b). Nothing in this provision is intended to restrict
rights or obligations under the Americans with Disabilities Act or other
applicable law.

                  (c)     Any leave on account of illness or temporary disability which is short
of Total Disability shall not constitute a breach of this Agreement by the
Executive and in no event shall any party be entitled to terminate this
Agreement for Cause (as defined below) due to any such leave. All physicians
selected hereunder shall be Board certified in the specialty most closely
related to the nature of the disability alleged to exist.

                  4.4     Termination For Cause.    The Company may, upon action of the
Board, and upon written notice to the Executive specifying in reasonable detail
the reason therefor, terminate the employment of the Executive at any time for
Cause (as defined in Attachment A); provided, however, that if the reason for
termination for Cause is susceptible of cure as determined by the Company, the
Executive shall have a period of fifteen (15) business days after such written
notice to effect a cure satisfactory to the Company.

                  4.5     Termination Without Cause.   The Company may also terminate the
employment of the Executive without Cause upon 30 days advance written notice
to the Executive, which termination shall constitute an “Involuntary
Termination Without Cause”. Termination without Cause shall not include a
termination due to death or Total Disability.

                  4.6     Termination by Executive.    The Executive may resign (and
thereby terminate his employment under this Agreement) at any time upon not
less than thirty (30) days’ prior written notice to the Company. The written
notice should state whether or not the termination is considered by the
Executive to be a Constructive Termination (as defined in Attachment B), and,
if it is, specify in detail the reasons therefor; provided, however, that if
the reason for the Constructive Termination is susceptible of cure as
determined by the Executive, the Company shall have a period of fifteen (15)
business days after such written notice to effect a cure satisfactory to the
Executive.

-5-

 

                  4.7        Payments Upon Termination.

                  (a)     (i)     In the event the Executive’s employment is terminated by the
Company in an Involuntary Termination Without Cause or by the Executive in a
Constructive Termination before Executive completes thirteen (13) months of
service with the Company, the Company shall pay the Executive one year’s Base
Salary as specified in Section 3.1 of this Agreement plus the full target
annual bonus for the year of termination, less any bonus payments already paid
for such year.

                            (ii)     Following the completion of thirteen (13) months of service with the
Company, (x) if Executive’s employment is thereafter terminated by the Company
without Cause, the Company shall pay the Executive six (6) months Base Salary
and (y) if Executive elects to resign, the Company shall not owe him any
payment other than amounts accrued prior to termination. In addition,
following the completion of thirteen (13) months of service with the Company,
the Executive shall be included in the Gene Logic, Inc. Executive Severance
Plan attached as Exhibit C (the “Executive Severance Plan”). Notwithstanding
anything to the contrary above, if the Executive is eligible for cash severance
benefits under the Executive Severance Plan, then the provisions set forth in
such plan shall apply in lieu of payments under this subsection (ii).

                            (iii)     The Company shall have no further liability to the Executive
pursuant to this Agreement, in the event of termination by the Company in an
Involuntary Termination Without Cause or a Termination by the Executive except
as set forth in this Section 4.7(a), including, without limitation, any
liability to pay the Executive any severance, bonus or any other compensation.
The Company also waives, releases and remises (A) any obligation or duty under
applicable law on the part of the Executive to seek or obtain other engagements
or employment or to otherwise mitigate any damages to which the Executive may
be entitled by reason of any termination of this Agreement; and (B) any right
in or claim to any remuneration or compensation received by Executive pursuant
to any engagements or employment subsequent to the termination of this
Agreement. Any payments made under this Section 4.7(a) or the Executive
Severance Plan will be conditioned upon execution by Executive of a release of
claims arising from or connected with his employment in such form as may be
specified by the Company (excluding from any such release any rights Executive
may have to indemnification or insurance coverage with respect to his actions
while employed by the Company under Directors and officers or other insurance
maintained by the Company or under the Company’s indemnification policies and
applicable law concerning indemnification).

                  (b)     In the event the Executive’s employment is terminated (i) by the
Company for Cause, or (ii) by the Executive in other than a Constructive
Termination, then the Company shall have no duty to make any payments or
provide any benefits to the Executive pursuant to this Agreement other than
payment of the amount of the Executive’s Base Salary and benefits accrued
through the date of termination of his employment.

-6-

 

                  (c)     Upon termination of Executive’s employment for death or Total
Disability, the Company shall pay to the Executive, or to his guardian or
personal representative, as the case may be, in addition to any insurance or
disability benefits to which he may be entitled hereunder, all amounts accrued
or vested prior to such termination (including a pro rata amount with respect
to any Bonus earned under Section 3.2 for the portion of the year preceding the
date on which death or Total Disability occurred); provided, however, if cash
severance benefits are payable under the Executive Severance Plan as the result
of such termination, then the provisions set forth in such plan shall apply in
lieu of the foregoing. Any bonus payment will be made at the time it is
normally due under the bonus plan and the amount will be determined based on
attainment of the goals established for such year The Company shall have no
further liability to the Executive, guardian or personal representative
pursuant to this Agreement, including, without limitation, any liability to pay
the Executive, guardian or personal representative any severance, bonus or any
other compensation.

                  4.8     No Disparaging Comments Upon Termination.

                  Upon termination of this Agreement, the Executive shall refrain from
making any disparaging remarks about the businesses, services, products,
stockholders, officers, directors or other personnel of the Company, or any of
its affiliates.

     5.          Certain Covenants of the Executive.

                  5.1     Necessity for Covenants.    The Executive acknowledges that (i)
the GLGC Group (as defined below) is engaged and will in the future be engaged
in the Business as described in this Agreement; (ii) his employment pursuant to
this Agreement will give him access to customers and suppliers of the GLGC
Group; (iii) his employment will give him access to confidential information
and other trade secrets concerning the GLGC Group’s products, services and the
Business and (iv) the agreements and covenants contained in this Section 5 are
essential to protect the business and goodwill of the GLGC Group. In order to
induce the Company to enter into this Agreement and pay the compensation and
other benefits at the levels requested by the Executive, the Executive enters
into the following covenants:

                  5.2     Definitions.

                  (a)     “GLGC Group” for purposes of this Article 5 shall include the
Company, the Surviving Corporation and all of their majority owned subsidiaries
and affiliates and successors and assigns of the above.

                  (b)     “Business Contact” shall mean any (i) customer which has
purchased goods or services provided by the GLGC Group during the Term, (ii)
prospective customer whom the Executive or persons working for or directly with
the Executive has contacted during the Term for the purpose of endeavoring to
sell the goods

-7-

 

or services of the GLGC Group to the prospective customer, or (iii) provider of
material amounts of goods or services to the GLGC Group.

                  (c)     “Service Area” means the entire world.

                  5.3     Restrictions.   During the Term and for a period of two (2)
years after the date (the “Termination Date”) the Executive’s employment
hereunder is terminated (the “Restricted Period”) regardless of whether such
termination is voluntary or involuntary or with or without Cause, the Executive
shall not, directly or indirectly, for himself or on behalf of any other
person, firm, corporation or other entity, whether as a principal, agent,
employee, stockholder, partner, officer, member, adviser, consultant, director,
sole proprietor, or otherwise:

                  (a)     call upon or solicit any Business Contact for the purpose of
persuading the Business Contact to engage the Executive or any other person,
firm, corporation or other entity to provide goods or services which are the
same as or similar to those the GLGC Group provided or proposed to provide to
the Business Contact or to engage the Business Contact to provide goods or
services which are the same as or similar to those the Business Contact
provided to the GLGC Group to any other person, firm, corporation or other
entity;

                  (b)     solicit, participate in or promote the solicitation of any person who
was employed by the GLGC Group at any time during the twelve (12) months
preceding the Termination Date to leave the employ of the GLGC Group, or hire
or engage any of those persons;

                  (c)     make any disparaging remarks about the GLGC Group’s business, services
or personnel;

                  (d)     interfere in any way with the GLGC Group’s business, prospects or
personnel; or

                  (e)     render services (other than services unrelated to the Business) to, or
become affiliated with, any person, company or other entity engaged in any
business that competes with the Business within the Service Area, directly or
indirectly, in any capacity; provided, however, that the Executive may own,
directly or indirectly, solely as an investment, securities which are publicly
traded if the Executive (a) is not a controlling person of, or a member of a
group which controls, the issuer and (b) does not, directly or indirectly, own
5% or more of any class of securities of the issuer.

                  5.4     Rights and Remedies Upon Breach.   If the Executive breaches, or
threatens to commit a breach of, any of the provisions of Section 5.3 (the
“Restrictive Covenants”), the Company shall, in addition to its right
immediately to terminate this Agreement for Cause, have the right and remedy
(which right and remedy shall be independent of others and severally
enforceable, and which shall be in addition to, and not

-8-

 

in lieu of, any other rights and remedies available to the Company under law or
in equity) to have the Restrictive Covenants specifically enforced by any court
having jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach could cause irreparable injury to the Company and that money
damages may not provide adequate remedy to the Company.

                  5.5     Covenants Currently Binding Executive.   The Executive warrants
that his employment by the Company will not (a) violate any non-disclosure
agreements, covenants against competition, or other restrictive covenants or
agreements made by the Executive with, to or for the benefit of any previous
employer or partner, or (b) violate or constitute a breach or default under,
any statute, law, judgment, order, decree, writ, injunction, deed, instrument,
contract, lease, license or permit to which the Executive is a party or by
which the Executive is bound.

                  5.6     Litigation..    There is no litigation, proceeding or
investigation of any nature (either civil or criminal) which is pending or, to
the best of the Executive’s knowledge, threatened against or affecting the
Executive or which would adversely affect his ability to substantially perform
the duties herein.

                  5.7     Review.    The Executive has received or been given the
opportunity to review the provisions of this Agreement, and the meaning and
effect of each provision, with independent legal counsel of the Executive’s
choosing.

                  5.8     Severability of Covenants.   The Executive acknowledges and
agrees that the Restrictive Covenants are reasonable and valid in geographical
and temporal scope and in all respects. If any court determines that any of
the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
the remainder of the Restrictive Covenants shall not thereby be affected and
shall be given full effect, without regard to the invalid portions.

                  5.9     Blue-Penciling.   If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall then be enforceable and shall be
enforced. If any such court declines to so revise such covenant, the parties
agree to negotiate in good faith a modification that will make such duration or
scope enforceable.

                  5.10     Confidentiality and Proprietary Inventions Agreement.   In
addition to the restrictive covenants set forth above, the Executive shall
enter into and be bound by the provisions set forth in the Company’s
Proprietary Information and Inventions Agreement attached hereto as Exhibit
D, which is expressly incorporated by reference hereto.

-9-

 

     6.          Dispute Resolution.

                  6.1     Arbitration Policy.   Subject to the Company’s right to seek
injunctive relief as specified in Section 5.4 of this Agreement, the Parties
agree that arbitration is the required and exclusive forum for the resolution
of any and all disputes between them, including claims arising under statute,
common law, or this Agreement. This mandatory arbitration provision includes
without limitation any claims or actions under Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1866 (“Section 1981”), the Americans with
Disabilities Act, the Family and Medical Leave Act, the Age Discrimination in
Employment Act, the Fair Labor Standards Act, the Equal Pay Act, the Employee
Retirement Income Security Act, and any other federal, state or local statute,
law or regulation regarding employment, employment discrimination, terms and
conditions of employment, compensation or termination of employment. This
mandatory arbitration provision includes any dispute between the Executive and
the Company or its parents, subsidiaries and affiliates, and its and their
current and former officers, directors, employees and agents.

                  Any covered dispute must be submitted to arbitration in accordance with
the National Rules for the Resolution of Employment Disputes of the American
Arbitration Association. Any such arbitration will be conducted in Montgomery
County, Maryland, and will be decided in accordance with and determined by the
laws of the State of Maryland and/or applicable federal law. The Executive
specifically agrees that the Company may seek specific performance of this
provision, as well as other injunctive relief, from the state or federal courts
in Maryland. The arbitrator shall not have the authority to award punitive
damages, costs or attorneys’ fees to either Party except where expressly
provided for by the applicable law.

                  Except as otherwise provided by applicable law, the administrative costs
of the arbitration (filing fees, cost for the arbitration site, other AAA fees,
arbitrator’s fee) shall be divided equally between the parties. The fees and
expenses of any witness shall be paid by the Party requiring the presence of
such witness. Each Party shall bear its own costs and expenses in all other
respects. The resolution of any dispute achieved through such arbitration
shall be final and binding and enforceable by a court of competent
jurisdiction.

                  6.2     No Jury Trial.   NEITHER PARTY SHALL ELECT A TRIAL BY JURY IN
ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS AGREEMENT.

                  6.3     Personal Jurisdiction.   Both parties agree to submit to the
jurisdiction and venue of the state courts in the State of Maryland as to
matters involving enforcement of this Agreement including any award under an
arbitration proceeding.

-10-

 

     7.          Other Provisions.

                  7.1     Notices.   Any notice or other communication required or which
may be given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission, sent by nationally
recognized overnight courier service such as FedEx or UPS or sent by certified,
registered or express mail, postage paid, and shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission
or, if sent by courier on the second business after delivery by the courier
service or, if mailed, four days after the date of mailing, as follows:

	 
	(a)     if to the Company, to:
	 
	Gene Logic, Inc.
	708 Quince Orchard Road
	Gaithersburg, MD 20878
	Attention: Chief Executive Officer
	 
	with copies to:
	 
	Ariel Vannier, Esquire
	Venable, Baetjer, Howard and Civiletti, LLP
	1201 New York Avenue
	Washington, DC 20005
	 
	(b)     if to the Executive, to:
	 
	Stephen J. Trevisan
	[Deleted]

                  Any party may by notice given in accordance with this Section to the other
party designate another address or person for receipt of notices hereunder.

                  7.2     Entire Agreement.   This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes
all prior agreements and understandings, written or oral, with respect thereto.

                  7.3     Waivers and Amendments.   This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
Executive and a duly authorized officer of the Company (each, in such capacity,
a party) or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder, nor any single or
partial exercise of

-11-

 

any right, power or privilege hereunder, preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.

                  7.4     Governing Law.   This Agreement has been negotiated and is to be
performed in the State of Maryland, and shall be governed and construed in
accordance with the laws of the State of Maryland applicable to agreements made
and to be performed entirely within such State.

                  7.5     Counterparts.   This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

                  7.6     Confidentiality.   Neither party shall disclose the contents of
this Agreement to any person, firm or entity, except the agents or
representatives of the parties, or except as required by law.

                  7.7     Word Forms.   Whenever used herein, the singular shall include
the plural and the plural shall include the singular. The use of any gender or
tense shall include all genders and tenses.

                  7.8     Headings.   The Section headings have been included for
convenience only, are not part of this Agreement, and are not to be used to
interpret any provision hereof.

                  7.9     Binding Effect and Benefit.   This Agreement shall be binding
upon and inure to the benefit of the parties, their successors, heirs, personal
representatives and other legal representatives. This Agreement may be
assigned by the Company to any entity that buys substantially all of the
Company’s assets or to any affiliate of the Company with the consent of the
Executive which shall not be unreasonably withheld. However, the Executive may
not assign this Agreement without the prior written consent of the Company.

                  7.10     Separability.   The covenants contained in this Agreement are
separable, and if any court of competent jurisdiction declares any of them to
be invalid or unenforceable, that declaration of invalidity or unenforceability
shall not affect the validity or enforceability of any of the other covenants,
each of which shall remain in full force and effect.

-12-

 

     IN WITNESS WHEREOF, the parties, intending to be legally bound, have
executed this Agreement as of the day and year first above written.

	 	 	 	 	 
	 	 	
GENE LOGIC INC.	 	 
	 	 	 	 	 
	 	 	 	 	 
	      4/1/03	By:   	
/s/ MARK D. GESSLER
	(SEAL)	 
	
	 	
	 	 
	Dated	 	
      President and	 	 
	 	 	
      Chief Executive Officer	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	
      EXECUTIVE:	 	 
	 	 	 	 	 
	      3/25/03	 	
/s/ STEPHEN J. TREVISAN
	(SEAL)	 
	
	
	 	 
	Dated	 	
      Stephen J. Trevisan	 	 

Acknowledgment and Agreement to Termination

of Prior Employment Arrangement

THERIMMUNE RESEARCH CORPORATION

	 	 	 
	By:	 	
/s/ JOSEPH W. ANGLE
	 	

	 	 	
Joseph W. Angle
	 	 	
Chief Financial Officer

-13-

 

Attachment A

Definition of “Cause”

“Cause” shall mean

	(i)	 	commission of an act or omission which would constitute a felony or a
misdemeanor which, in the Company’s reasonable opinion, could have a
material adverse effect on the Company’s business, financial condition,
prospects or reputation or the Executive’s performance of his duties,
under the laws of the United States or of any state or a crime involving
moral turpitude, including, but not limited to, fraud, theft, embezzlement
or any crime involving moral turpitude, including, but not limited to,
fraud, theft, embezzlement or any crime that results in or is intended to
result in personal enrichment at the expense of the Company;
	(ii)	 	material breach by the Executive of any agreement entered into between
the Executive and the Company;
	(iii)	 	willful misconduct by the Executive or gross negligence of the Executive
which could have a material adverse impact on the Company;
	(iv)	 	a material failure of the Executive in the performance of the Executive’s
duties provided that, if susceptible of cure as determined by the Company,
notice is provided and Executive fails to cure such failure within fifteen
(15) business days of such notice satisfactory to the Company;
	(v)	 	the violation by the Executive of the restrictive covenants in Section
5.3 hereof or the provisions of the Proprietary Information and Inventions
Agreement; or
	(vi)	 	engagement in any activity that constitutes a material conflict of
interest with the Company.

With respect to any criminal act, the Company may base such a determination on
facts available to it or on an arrest or charges by an appropriate government
authority and may, at its option, suspend the Executive without pay in lieu of
immediate termination in the event of any criminal charges, pending additional
information, criminal conviction or other action.

 

 

Attachment B

Definition of “Constructive Termination”

For the first 13 months of Executive’s employment with the Company,
“Constructive Termination” shall have essentially the same meaning as under the
Executive Severance Plan, wherein the term is defined to mean that Executive
resigns with the Company after any of the following are undertaken without the
Executive’s express written consent:

                  (i)     the assignment to Executive of material duties or responsibilities
clearly not consistent with his title as initially established under this
Agreement or as changed by mutual agreement of the parties (provided that this
shall not prevent changes in duties assigned from time to time to meet the
needs of the Company), or any removal of the Executive from or any failure to
reelect the Executive to such position as an officer of the Company, except in
connection with the termination of the Executive’s service on account of death,
Disability, for Cause, or any resignation by the Executive other than
Constructive Termination;

                  (ii)     a reduction by the Company in Executive’s annual Base Salary;

                  (iii)     any failure by the Company to continue in effect any benefit plan or
arrangement, including incentive plans or plans to receive securities of the
Company, in which the Executive is participating (hereinafter referred to as
“Benefit Plans”), or the taking of any action by the Company which would
adversely affect the Executive’s participation in or reduce the Executive’s
benefits under any Benefit Plan or deprive the Executive of any fringe benefit
previously enjoyed by Executive; provided, however, that the Executive will not
incur a Constructive Termination based on this subsection (c) if the Company
offers a range of benefit plans and programs which, taken as a whole, are
comparable to the Benefit Plans;

                  (iv)     a relocation of the Executive or the Company’s offices to a location
more than twenty-five (25) miles from the location at which the Executive
previously performed his or her duties, except for required travel by the
Executive on the Company’s business to an extent substantially consistent with
the Executive’s previous business travel obligations;

                  (v)     any breach by the Company of any provision of this Agreement; or

                  (vi)     any failure by the Company to obtain the assumption of this Agreement
by any successor or assign of the Company.

 

 

Following the first 13 months of Executive’s employment with the Company, the
term “Constructive Termination” shall not be applicable except in circumstances
in which it is applicable under the Company’s Executive Severance Plan.

 

 

EXHIBIT A

GENE LOGIC, INC.

1997 EQUITY INCENTIVE PLAN

 

 

EXHIBIT B

FORM OF STOCK OPTION GRANT AGREEMENT

 

 

EXHIBIT C

GENE LOGIC INC. EXECUTIVE SEVERANCE PLAN

 

 

EXHIBIT D

GENE LOGIC INC. PROPRIETARY INFORMATION

AND INVENTIONS AGREEMENT<PAGE>
                                                                   Exhibit 10.22

                                CREDIT AGREEMENT

                                     BETWEEN

                             PRIMEENERGY CORPORATION
                       PRIMEENERGY MANAGEMENT CORPORATION
                             PRIME OPERATING COMPANY
                        EASTERN OIL WELL SERVICE COMPANY
                     SOUTHWEST OILFIELD CONSTRUCTION COMPANY
                              EOWS MIDLAND COMPANY

                                       AND

                               GUARANTY BANK, FSB
                               AS AGENT AND LENDER

                                DECEMBER 19, 2002

             REDUCING REVOLVING LINE OF CREDIT OF UP TO $50,000,000
                             TERM LOAN OF $4,000,000

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
<S>                                                                           <C>
ARTICLE I      DEFINITIONS AND INTERPRETATION                                   1
         1.1   Terms Defined Above                                              1
         1.2   Additional Defined Terms                                         1
         1.3   Undefined Financial Accounting Terms                            15
         1.4   References                                                      15
         1.5   Articles and Sections                                           16
         1.6   Number and Gender                                               16
         1.7   Incorporation of Exhibits                                       16

ARTICLE II     TERMS OF FACILITY                                               16
         2.1A. Revolving Line of Credit                                        16
         2.2   Letter of Credit Facility                                       17
         2.3   Use of Loan Proceeds and Letters of Credit                      19
         2.4   Interest                                                        19
         2.5   Repayment of Loans and Interest                                 20
         2.6   Outstanding Amounts                                             20
         2.7   Time, Place, and Method of Payments                             20
         2.8   Pro Rata Treatment; Adjustments                                 21
         2.9   Borrowing Base Determinations                                   21
         2.10  Mandatory Prepayments                                           22
         2.11  Voluntary Prepayments and Conversions of Loans                  23
         2.12  Commitment Fee                                                  23
         2.13  Facility Fee                                                    23
         2.14  Letter of Credit Fee                                            23
         2.15  Loans to Satisfy Obligations of Borrower                        23
         2.16  Security Interest in Accounts; Right of Offset                  24
         2.17  General Provisions Relating to Interest                         24
         2.18  Yield Protection                                                25
         2.19  Limitation on Types of Loans                                    27
         2.20  Illegality                                                      28
         2.21  Regulatory Change                                               28
         2.22  Limitations on Interest Periods                                 28
         2.23  Letters in Lieu of Transfer Orders                              29
         2.24  Power of Attorney                                               29

ARTICLE III    CONDITIONS                                                      29
         3.1   Receipt of Loan Documents and Other Items                       29
         3.2   Each Loan and Letter of Credit                                  32

ARTICLE IV     REPRESENTATIONS AND WARRANTIES                                  34
         4.1   Due Authorization                                               34
</TABLE>

                                     - i -
<PAGE>

<TABLE>
<S>                                                                           <C>
         4.2   Corporate Existence                                             34
         4.3   Valid and Binding Obligations                                   34
         4.4   Security Instruments                                            34
         4.5   Title to Assets                                                 35
         4.6   No Material Misstatements                                       35
         4.7   Liabilities, Litigation, and Restrictions                       35
         4.8   Authorizations; Consents                                        35
         4.9   Compliance with Laws                                            35
         4.10  ERISA                                                           35
         4.11  Environmental Laws                                              36
         4.12  Compliance with Federal Reserve Regulations                     36
         4.13  Investment Company Act Compliance                               36
         4.14  Public Utility Holding Company Act Compliance                   36
         4.15  Proper Filing of Tax Returns; Payment of Taxes Due              37
         4.16  Refunds                                                         37
         4.17  Gas Contracts                                                   37
         4.18  Intellectual Property                                           37
         4.19  Casualties or Taking of Property                                37
         4.20  Locations of Borrower                                           37
         4.21  Subsidiaries                                                    38

ARTICLE V      AFFIRMATIVE COVENANTS                                           38
         5.1   Maintenance and Access to Records                               38
         5.2   Quarterly Financial Statements; Compliance Certificates         38
         5.3   Annual Financial Statements                                     38
         5.4   Oil and Gas Reserve Reports                                     38
         5.5   Title Opinions; Title Defects                                   39
         5.6   Notices of Certain Events                                       39
         5.7   Letters in Lieu of Transfer Orders; Division Orders             40
         5.8   Additional Information                                          40
         5.9   Compliance with Laws                                            41
         5.10  Payment of Assessments and Charges                              41
         5.11  Maintenance of Corporate Existence and Good Standing            41
         5.12  Payment of Notes; Performance of Obligations                    41
         5.13  Further Assurances                                              41
         5.14  Initial Fees and Expenses of Counsel to Lender                  41
         5.15  Subsequent Fees and Expenses of Lender                          42
         5.16  Operation of Oil and Gas Properties                             42
         5.17  Maintenance and Inspection of Properties                        42
         5.18  Maintenance of Insurance                                        42
         5.19  INDEMNIFICATION                                                 43

ARTICLE VI     NEGATIVE COVENANTS                                              44
         6.1   Indebtedness                                                    44
         6.2   Contingent Obligations                                          44
</TABLE>

                                      -ii -
<PAGE>

<TABLE>
<S>                                                                           <C>
         6.3   Liens                                                           45
         6.4   Sales of Assets                                                 45
         6.5   Leasebacks                                                      45
         6.6   Loans or Advances                                               45
         6.7   Investments                                                     45
         6.8   Dividends and Distributions                                     46
         6.9   Issuance of Stock; Changes in Corporate Structure               46
         6.10  Transactions with Affiliates                                    46
         6.11  Lines of Business                                               46
         6.12  ERISA Compliance                                                46
         6.13  Interest Coverage Ratio                                         46
         6.14  Current Ratio                                                   46
         6.15  Tangible Net Worth                                              46
         6.16  Bank Debt Coverage Ratio                                        46

ARTICLE VII    EVENTS OF DEFAULT                                               47
         7.1   Enumeration of Events of Default                                47
         7.2   Remedies                                                        49

ARTICLE VIII   THE AGENT                                                       49
         8.1   Appointment                                                     49
         8.2   Waivers, Amendments                                             50
         8.3   Delegation of Duties                                            50
         8.4   Exculpatory Provisions                                          50
         8.5   Reliance by Agent                                               51
         8.6   Notice of Default                                               51
         8.7   Non-Reliance on Agent and Other Lenders                         51
         8.8   Indemnification                                                 52
         8.9   Restitution                                                     52
         8.10  Agent in Its Individual Capacity                                53
         8.11  Successor Agent                                                 53
         8.12  Applicable Parties                                              53

ARTICLE IX     MISCELLANEOUS                                                   54
         9.1   Assignments; Participations                                     54
         9.2   Survival of Representations, Warranties, and Covenants          55
         9.3   Notices and Other Communications                                55
         9.4   Parties in Interest                                             56
         9.5   Rights of Third Parties                                         56
         9.6   Renewals; Extensions                                            56
         9.7   No Waiver; Rights Cumulative                                    57
         9.8   Survival Upon Unenforceability                                  57
         9.9   Amendments; Waivers                                             57
         9.10  Controlling Agreement                                           57
         9.11  Disposition of Collateral                                       57
</TABLE>

                                     - iii -
<PAGE>

<TABLE>
<S>                                                                           <C>
         9.12  GOVERNING LAW                                                   57
         9.13  JURISDICTION AND VENUE                                          57
         9.14  WAIVER OF RIGHTS TO JURY TRIAL                                  58
         9.15  ENTIRE AGREEMENT                                                58
         9.16  Counterparts                                                    58
</TABLE>

<TABLE>
<S>               <C>
LIST OF EXHIBITS

Exhibit I      -  Form of Note
Exhibit II     -  Form of Borrowing Request
Exhibit III    -  Form of Compliance Certificate
Exhibit IV     -  Form of Opinion of Counsel
Exhibit V      -  Facility Amounts
Exhibit VI     -  Disclosures
Exhibit VII    -  Form of Assignment Agreement
</TABLE>

                                     - iv -
<PAGE>

                                CREDIT AGREEMENT

      THIS CREDIT AGREEMENT is made and entered into this 19th day of December,
2002, by and between PRIMEENERGY CORPORATION, a Delaware corporation ("PEC"),
PRIMEENERGY MANAGEMENT CORPORATION, a New York corporation, PRIME OPERATING
COMPANY, a Texas corporation, EASTERN OIL WELL SERVICE COMPANY, a West Virginia
corporation, SOUTHWEST OILFIELD CONSTRUCTION COMPANY, an Oklahoma corporation,
and EOWS MIDLAND COMPANY, a Texas corporation (collectively, the "Borrower"),
with each other lender that is a signatory hereto or becomes a signatory hereto
as provided in Section 9.1, (individually, together with its successors and
assigns, a "Lender" and collectively together, with their respective successors
and assigns, the "Lenders") and GUARANTY BANK, FSB, a federal savings bank, as
agent for the Lenders (in such capacity, together with its successors in such
capacity pursuant to the terms hereof, the "Agent").

                              W I T N E S S E T H:

      In consideration of the mutual covenants and agreements herein contained,
the Borrower and the Lender hereby agree as follows amending and restating in
its entirety, the Credit Agreement dated April 26, 1995 by and between
PrimeEnergy Corporation and PrimeEnergy Management Corporation and Bank One,
N.A. (the "Existing Lender"), as heretofore amended, restated, or supplemented
(the "Existing Credit Agreement"):

                                   ARTICLE I

                         DEFINITIONS AND INTERPRETATION

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

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

            "Additional Costs" shall mean costs which the Lenders determine are
      attributable to its obligation to make or its making or maintaining any
      LIBO Rate Loan, or any reduction in any amount receivable by the Lenders
      in respect of any such obligation or any LIBO Rate Loan, resulting from
      any Regulatory Change which (a) changes the basis of taxation of any
      amounts payable to the Lenders under this Agreement or the Note in respect
      of any LIBO Rate Loan (other than taxes imposed on the overall net income
      of the Lenders), (b) imposes or modifies any reserve, special deposit,
      minimum capital, capital rates, or similar requirements relating to any
      extensions of credit or other assets of, or any deposits with or other
      liabilities of, the Lender (including LIBO Rate Loans and Dollar deposits
      in the London interbank market in connection with LIBO Rate Loans), or any
      commitments of the Lenders hereunder, (c) increases the Assessment Rate,
      or (d) imposes any other condition affecting this Agreement or any of such
      extensions of credit, liabilities, or commitments.

<PAGE>

            "Adjusted LIBO Rate" shall mean, for any LIBO Rate Loan, an interest
      rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
      determined by the Lenders to be equal to the sum of the LIBO Rate for such
      Loan plus the Applicable Margin, but in no event exceeding the Highest
      Lawful Rate.

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

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

            "Applicable Lending Office" shall mean, for each type of Loan, the
      lending office of the Lender (or an affiliate of the Lender) designated
      for such type of Loan on the signature pages hereof or such other office
      of the Lender (or an affiliate of the Lender) as the Lender may from time
      to time specify to the Borrower as the office by which Loans of such type
      are to be made and maintained.

            "Applicable Margin" shall mean as to each LIBO Rate Loan the LIBO
      Rate plus 2.00% on the revolving line of credit and the LIBO Rate plus
      2.50% on the Term Loan.

            "Assignment" shall mean the Assignment of Notes, Liens, Security
      Interests, and Other Rights, in form and substance satisfactory to the
      Lender, executed by the Existing Lender, assigning to the Lender the
      Existing Note, the indebtedness evidenced thereby, the Liens securing the
      Existing Note, and the rights of the Existing Lender under the Existing
      Loan Documents, and financing statement changes constituent thereto.

            "Assessment Rate" shall mean, for any Interest Period, the average
      rate (rounded upwards if necessary to the nearest 1/100 of 1%) charged by
      the Federal Deposit Insurance Corporation (or any successor thereto) to
      the Lender for deposit insurance for Dollar time deposits with the Lender
      at the Principal Office during such Interest Period, as determined by the
      Lender.

            "Assignment Agreement" shall mean an Assignment Agreement,
      substantially in the form of Exhibit VII, with appropriate insertions.

                                     - 2 -
<PAGE>

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

            "Bank Debt" shall mean the amount owed under this Agreement by the
      Borrower to the Lenders.

            "Base Rate" shall mean, at any time, the rate of interest per annum
      then most recently established by the Lender as its base rate, which rate
      may not be the lowest rate of interest charged by the Lender to its
      borrowers. Each change in any interest rate provided for herein based upon
      the Base Rate resulting from a change in the Base Rate shall take effect
      without notice to the Borrower at the time of such change in the Base
      Rate.

            "Benefitted Lender" shall have the meaning assigned to such term in
      Section 2.8(c).

            "Borrowing Base" shall mean, at any time, the amount determined by
      the Lender in accordance with Section 2.9 and then in effect.

            "Borrowing Request" shall mean each written request, in
      substantially the form attached hereto as Exhibit II, by the Borrower to
      the Agent for a borrowing, conversion, or prepayment pursuant to Sections
      2.1 or 2.11, each of which shall:

                  (a) be signed by a Responsible Officer of the Borrower;

                  (b) when requesting a borrowing, be accompanied by a
            Compliance Certificate;

                  (c) specify the amount and type of Loan requested, and, as
            applicable, the Loan to be converted or prepaid and the date of the
            borrowing, conversion, or prepayment (which shall be a Business
            Day);

                  (d) when requesting a Floating Rate Loan, be delivered to the
            Agent no later than 5:00 p.m., Central Standard or Daylight Savings
            Time, as the case may be, on the Business Day preceding the day of
            the requested borrowing, conversion, or prepayment;

                  (e) when requesting a LIBO Rate Loan, be delivered to the
            Agent no later than 10:00 a.m., Central Standard or Daylight Savings
            Time, as the case may be, three Business Days preceding the
            requested borrowing, conversion, or prepayment and designate the
            Interest Period requested with respect to such Loan.

                                     - 3 -
<PAGE>

            "Business Day" shall mean (a) for all purposes other than as covered
      by clause (b) of this definition, a day other than a Saturday, Sunday,
      legal holiday for commercial banks under the laws of the State of Texas,
      or any other day when banking is suspended in the State of Texas, and (b)
      with respect to all requests, notices, and determinations in connection
      with, and payments of principal and interest on, LIBO Rate Loans, a day
      which is a Business Day described in clause (a) of this definition and
      which is a day for trading by and between banks for Dollar deposits in the
      London interbank market.

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

            "Code" shall mean the United States Internal Revenue Code of 1986,
      as amended from time to time.

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

            "Commitment" shall mean the obligation of the Lenders, subject to
      applicable provisions of this Agreement, to make Loans to or for the
      benefit of the Borrower pursuant to Section 2.1 and to issue Letters of
      Credit pursuant to Section 2.2

            "Commitment Amount" shall mean, subject to the applicable provisions
      of this Agreement, at any time, the lesser of (a) the sum of the Facility
      Amounts of the Lenders, or (b) the Borrowing Base in effect at such time.

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

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

            "Commitment Termination Date" shall mean December 19, 2004.

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

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

            "Compliance Certificate" shall mean each certificate, substantially
      in the form attached hereto as Exhibit III, executed by a Responsible
      Officer of the

                                     - 4 -
<PAGE>

      Borrower and furnished to the Agent from time to time in accordance with
      Sections 5.2 and 5.3.

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

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

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

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

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

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

            "EBITDA" shall mean, for any period, net income for such period plus
      interest expense, federal and state income taxes, depreciation,
      amortization, and other non-cash expenses, less non-cash gains for such
      period deducted in the determination of net income for such period.

                                     - 5 -
<PAGE>

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

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

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

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

            "Existing Loan Documents" shall mean the Loan Documents, as such
      term is defined in the Existing Credit Agreement, in existence on the
      Closing Date immediately prior to the Assignment.

            "Existing Note" shall mean the Note, as such term is defined in the
      Existing Credit Agreement, in existence on the Closing Date immediately
      prior to the Assignment.

            "Existing Security Instruments" shall mean the Security Documents,
      as such term is defined in the Existing Credit Agreement, in existence on
      the Closing Date immediately prior to the Assignment.

            "Facility Amount" shall mean, for each Lender, the amount set forth
      opposite the name of such Lender on Exhibit V under the caption "Facility

                                     - 6 -
<PAGE>

      Amounts," as modified from time to time to reflect assignments permitted
      by Section 9.1 or otherwise pursuant to the terms hereof and to give
      effect to any written request of the Borrower (any such request being
      irrevocable, absent written agreement of the Agent and the Required
      Lenders, which written agreement may be expressly conditioned on the
      payment of a fee (other than with respect to a reduction) by the Borrower
      to the Agent, for the account of the Lenders) to a reduction in the sum of
      the then existing Facility Amounts of the Lenders.

            "Facility Fee" shall mean the fee payable to the Lender by the
      Borrower pursuant to Section 2.13.

            "Final Maturity" shall mean December 19, 2004.

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

            "Fixed Rate Loan" shall mean any LIBO Rate Loan.

            "Floating Rate" shall mean an interest rate per annum equal to the
      Base Rate from time to time in effect plus one-half of one percent (1/2 of
      1%), on the revolver and Base Rate plus one percent (1%) on the Term Loan,
      but in no event exceeding the Highest Lawful Rate.

            "Floating Rate Loan" shall mean any Loan and any portion of the Loan
      Balance which the Borrower has requested, in the initial Borrowing Request
      for such Loan or a subsequent Borrowing Request for such portion of the
      Loan Balance, bearing interest at the Floating Rate, or which pursuant to
      the terms hereof is otherwise required to bear interest at the Floating
      Rate.

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

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

                                     - 7 -
<PAGE>

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

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

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

            "Insolvency Proceeding" shall mean application (whether voluntary or
      instituted by another Person) for or the consent to the appointment of a
      receiver, trustee, conservator, custodian, or liquidator of any Person or
      of all or a substantial part of the Property of such Person, or the filing
      of a petition (whether voluntary or instituted by another Person)
      commencing a case under Title 11 of the United States Code, seeking
      liquidation, reorganization, or rearrangement or taking advantage of any
      bankruptcy, insolvency, debtor's relief, or other similar law of the
      United States, the State of Texas, or any other jurisdiction.

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

                                     - 8 -
<PAGE>

            "Interest Expense" shall mean, for any period, the total interest
      expense (including, without limitation, interest expense attributable to
      capitalized leases) of the Borrower for such period, determined in
      accordance with GAAP.

            "Interest Period" shall mean, subject to the limitations set forth
      in Section 2.22, with respect to any LIBO Rate Loan, a period commencing
      on the date such Loan is made or converted from a Loan of another type
      pursuant to this Agreement or the last day of the next preceding Interest
      Period with respect to such Loan and ending on the numerically
      corresponding day in the calendar month that is one, two, or three months
      thereafter, as the Borrower may request in the Borrowing Request for such
      Loan.

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

            "L/C Exposure" shall mean, at any time, the aggregate maximum amount
      available to be drawn under outstanding Letters of Credit at such time.

            "Letter of Credit" shall mean any standby letter of credit issued by
      the Lender for the account of the Borrower pursuant to Section 2.2.

            "Letter of Credit Application" shall mean the standard letter of
      credit application employed by the Lender from time to time in connection
      with letters of credit, provided that in the event of a conflict between
      the terms of each Letter of Credit Application and this Agreement, this
      Agreement shall control.

            "Letter of Credit Fee" shall mean each fee payable to the Lender by
      the Borrower pursuant to Section 2.14 upon or in connection with the
      issuance of a Letter of Credit.

            "LIBO Rate" shall mean, with respect to any Interest Period for any
      LIBO Rate Loan, the lesser of (a) the rate per annum (rounded upwards, if
      necessary, to the nearest 1/16 of 1%) equal to the average of the offered
      quotations appearing on Telerate Page 3750 (or if such Telerate Page shall
      not be available, any successor or similar service selected by the Lender
      and the Borrower) as of approximately 10:00 a.m., Central Standard or
      Daylight Savings Time, as the case may be, on the day two Business Days
      prior to the first day of such Interest Period for Dollar deposits in an
      amount comparable to the principal amount of such LIBO Rate Loan and
      having a term comparable to the Interest Period for such LIBO Rate Loan,
      or (b) the Highest Lawful Rate. If neither such Telerate Page 3750 nor any
      successor or similar service is available, the term "LIBO Rate" shall
      mean, with respect to any Interest Period for any LIBO Rate Loan, the
      lesser of (a) the rate per annum (rounded upwards if necessary, to the
      nearest 1/16 of 1%) quoted by the Lender at approximately 11:00 a.m.,
      London time (or as soon

                                     - 9 -
<PAGE>

      thereafter as practicable) two Business Days prior to the first day of the
      Interest Period for such LIBO Rate Loan for the offering by the Lender to
      leading banks in the London interbank market of Dollar deposits in an
      amount comparable to the principal amount of such LIBO Rate Loan and
      having a term comparable to the Interest Period for such LIBO Rate Loan,
      or (b) the Highest Lawful Rate.

            "LIBO Rate Loan" shall mean any Loan and any portion of the Loan
      Balance which the Borrower has requested, in the initial Borrowing Request
      for such Loan or a subsequent Borrowing Request for such portion of the
      Loan Balance, bearing interest at the Adjusted LIBO Rate and which is
      permitted by the terms hereof to bear interest at the Adjusted LIBO Rate.

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

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

            "Loan" shall mean any loan made by any Lender to or for the benefit
      of the Borrower pursuant to this Agreement and any payment made by the
      Lender under a Letter of Credit.

            "Loan Balance" shall mean, at any time, the outstanding principal
      balance of the Notes at such time plus the L/C Exposure at such time.

            "Loan Documents" shall mean this Agreement, the Note, the Letter of
      Credit Applications, the Letters of Credit, the Security Instruments, and
      all other documents and instruments now or hereafter delivered pursuant to
      the terms of or

                                     - 10 -
<PAGE>

      in connection with this Agreement, the Note, the Letter of Credit
      Applications, the Letters of Credit, or the Security Instruments, and all
      renewals and extensions of, amendments and supplements to, and
      restatements of, any or all of the foregoing from time to time in effect.

            "Material Adverse Effect" shall mean (a) any adverse effect on the
      business, operations, properties, condition (financial or otherwise), or
      prospects of the Borrower, which substantially increases the risk that any
      of the Obligations will not be repaid as and when due, or (b) any
      substantially adverse effect upon the Collateral.

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

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

            "Net Income" shall mean, for any period, the net income (or loss) of
      the Borrower for such period, determined in accordance with GAAP.

            "Notes" shall mean, collectively, each of the promissory notes of
      the Borrower payable to a Lender in the amount of the Facility Amount of
      such Lender in the form attached hereto as Exhibit I with all blanks in
      such form completed appropriately, together with all renewals, extensions
      for any period, increases, and rearrangements thereof.

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

            "Oil and Gas Properties" shall mean fee, leasehold, or other
      interests in or under mineral estates or oil, gas, and other liquid or
      gaseous hydrocarbon leases with respect to Properties situated in the
      United States or offshore from any State of the United States, including,
      without limitation, overriding royalty and royalty interests, leasehold
      estate interests, net profits interests, production payment

                                     - 11 -
<PAGE>

      interests, and mineral fee interests, together with contracts executed in
      connection therewith and all tenements, hereditaments, appurtenances and
      Properties appertaining, belonging, affixed, or incidental thereto.

            "Percentage Share" shall mean, as to each Lender, the percentage
      such Lender's Facility Amount constitutes of the sum of the Facility
      Amounts of all Lenders.

            "PBGC" shall mean the Pension Benefit Guaranty Corporation
      established pursuant to Subtitle A of Title IV of ERISA or any entity
      succeeding to any or all of its functions under ERISA.

            "Permitted Liens" shall mean (a) Liens for taxes, assessments, or
      other governmental charges or levies not yet due or which (if foreclosure,
      distraint, sale, or other similar proceedings shall not have been
      initiated) are being contested in good faith by appropriate proceedings,
      and such reserve as may be required by GAAP shall have been made therefor,
      (b) Liens in connection with workers' compensation, unemployment insurance
      or other social security (other than Liens created by Section 4068 of
      ERISA), old-age pension, or public liability obligations which are not yet
      due or which are being contested in good faith by appropriate proceedings,
      if such reserve as may be required by GAAP shall have been made therefore,
      (c) Liens in favor of vendors, carriers, warehousemen, repairmen,
      mechanics, workmen, materialmen, construction, or similar Liens arising by
      operation of law in the ordinary course of business in respect of
      obligations which are not yet due or which are being contested in good
      faith by appropriate proceedings, if such reserve as may be required by
      GAAP shall have been made therefore, (d) Liens in favor of operators and
      non-operators under joint operating agreements or similar contractual
      arrangements arising in the ordinary course of the business of the
      Borrower to secure amounts owing, which amounts are not yet due or are
      being contested in good faith by appropriate proceedings, if such reserve
      as may be required by GAAP shall have been made therefore, (e) Liens under
      production sales agreements, division orders, operating agreements, and
      other agreements customary in the oil and gas business for processing,
      producing, and selling hydrocarbons securing obligations not constituting
      Indebtedness and provided that such Liens do not secure obligations to
      deliver hydrocarbons at some future date without receiving full payment
      therefore within 90 days of delivery, (f) easements, rights of way,
      restrictions, and other similar encumbrances, and minor defects in the
      chain of title which are customarily accepted in the oil and gas financing
      industry, none of which interfere with the ordinary conduct of the
      business of the Borrower or materially detract from the value or use of
      the Property to which they apply, (h) Liens in favor of the Agent and
      other Liens expressly permitted under the Security Instruments, and (i)
      the lien shown on Exhibit VI as a Permitted Lien.

                                     - 12 -
<PAGE>

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

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

            "Principal Office" shall mean the principal office of the Lender in
      Houston, Texas, presently located at 333 Clay Street, Suite 4400, Houston,
      Texas 77002.

            "Prohibited Transaction" shall have the meaning assigned to such
      term in Section 4975 of the Code.

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

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

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

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

                                     - 13 -
<PAGE>

            "Reimbursement Obligation" shall mean the obligation of the Borrower
      to provide to the Lenders or reimburse the Lenders for any amounts
      payable, paid, or incurred by the Lenders with respect to Letters of
      Credit.

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

            "Reorganization" shall mean, with respect to any Multiemployer Plan,
      that such Plan is in reorganization within the meaning of such term in
      Section 4241 of ERISA.

            "Reportable Event" shall mean any of the events set forth in Section
      4043(b) of ERISA, other than those events as to which the thirty-day
      notice period is waived under subsections .13, .14, .16, .18, .19 or .20
      of PBGC Reg. Section 2615.

            "Required Lenders" shall mean, Lenders (including the Agent) holding
      more than 66 2/3% of the then Loan Balance, or, if there is no Loan
      Balance, Lenders (including the Agent) having more than 66 2/3% of the
      aggregate amount of the Commitments.

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

            "Reserve Report" shall mean each report delivered to the Agent and
      each Lender pursuant to Section 5.4, provided that Borrower shall not be
      required to deliver more than three reports.

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

            "Security Instruments" shall mean the security instruments executed
      and delivered in satisfaction of the condition set forth in Section
      3.1(g), and all other documents and instruments at any time executed as
      security for all or any portion

                                     - 14 -
<PAGE>

      of the Obligations, as such instruments may be amended, restated, or
      supplemented from time to time.

            "Single Employer Plan" shall mean any Plan which is covered by Title
      IV of ERISA, but which is not a Multiemployer Plan.

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

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

            "Tangible Net Worth" shall mean (a) total assets, as would be
      reflected on a balance sheet of the Borrower prepared in accordance with
      GAAP, exclusive of Intellectual Property, experimental or organization
      expenses, franchises, licenses, permits, and other intangible assets,
      treasury stock, unamortized underwriters' debt discount and expenses, and
      goodwill minus (b) total liabilities, as would be reflected on a balance
      sheet of the Borrower prepared in accordance with GAAP.

            "Term Loan" shall mean the Term Loan described in Section 2.1.B.

            "Term Notes" shall mean, collectively, each of the promissory notes
      of the Borrower payable to a Lender in the amount of Term Loan Facility
      Amount of such Lender in the form attached hereto as Exhibit I(a) with all
      blanks in such form completed appropriately, together with all renewals,
      extensions for any period, increases, and rearrangements thereof.

            "Transferee" shall mean any Person to which any Lender has sold,
      assigned, transferred, or granted a participation in any of the
      Obligations, as authorized pursuant to Section 9.1, and any Person
      acquiring, by purchase, assignment, transfer, or participation, from any
      such purchaser, assignee, transferee, or participant, any part of such
      Obligations.

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

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

      1.4 References. References in this Agreement to Exhibit, Article, or
Section numbers shall be to Exhibits, Articles, or Sections of this Agreement,
unless expressly stated to the

                                     - 15 -
<PAGE>

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

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

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

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

                                   ARTICLE II

                                TERMS OF FACILITY

      2.1 A. Revolving Line of Credit. Upon the terms and conditions (including,
without limitation, the right of the Lenders to decline to make any Loan so long
as any Default or Event of Default exists) and relying on the representations
and warranties contained in this Agreement, each Lender severally agrees, during
the Commitment Period, to make Loans, in immediately available funds at the
Applicable Lending Office or the Principal Office, to or for the benefit of the
Borrower in an aggregate principal amount not to exceed at any time outstanding
the lessor of the Facility Amount of such Lender or the Percentage Share of such
Lender of the Borrowing Base then in effect. Loans shall be made from time to
time on any Business Day designated by the Borrower following receipt by the
Agent of a Borrowing Request.

            (b) Subject to the terms of this Agreement, during the Commitment
Period, the Borrower may borrow, repay, and reborrow and convert Loans of one
type or with one Interest Period into Loans of another type or with a different
Interest Period. Except for prepayments made pursuant to Section 2.10, each
borrowing, conversion, and prepayment of principal of Loans shall be in an
amount at least equal to $100,000. Each borrowing, prepayment, or conversion of
or into a Loan of a different type or, in the case of a LIBO Rate Loan, having a
different Interest Period, shall be deemed a separate borrowing, conversion, and
prepayment for purposes of the foregoing, one for each type of Loan or Interest
Period. Anything in this Agreement to the contrary notwithstanding, the
aggregate principal amount of LIBO Rate Loans having the same Interest Period
shall be at least equal to $100,000; and if any

                                     - 16 -
<PAGE>

LIBO Rate Loan would otherwise be in a lesser principal amount for any period,
such Loan shall be a Floating Rate Loan during such period.

            (c) The Loans shall be made and maintained at the Applicable Lending
Office or the Principal Office and shall be evidenced by the Notes.

            (d) Not later than 2:00 p.m., Central Standard or Daylight Savings
Time, as the case may be, on the date specified for each borrowing, each Lender
shall make available an amount equal to its Percentage Share of the borrowing to
be made on such date to the Agent, at an account designated by the Agent, in
immediately available funds, for the account of the Borrower. The amount so
received by the Agent shall, subject to the terms and conditions hereof, be made
available to the Borrower in immediately available funds at the Principal Office
by the end of that Business Day. All Loans by each Lender shall be maintained at
the Applicable Lending Office of such Lender and shall be evidenced by the Note
of such Lender.

            (e) The failure of any Lender to make any Loan required to be made
by it hereunder shall not relieve any other Lender of its obligation to make any
Loan required to be made by it, and no Lender shall be responsible for the
failure of any other Lender to make any Loan.

            (f) The face amounts of the Notes have been established as an
administrative convenience and do not commit any Lender to advance funds
hereunder in excess of the then current Borrowing Base.

      A. Term Loan.

            (a) The Term Loan shall be in the total amount of $4,000,000, with
interest payable monthly by the Borrower to the Lenders beginning on January 1,
2003, and continuing on the first day of each calendar month thereafter until
such Term Loan is fully paid.

            (b) The Borrower shall pay to the Lenders principal payments on such
Term Loan in the amount of $66,667 per month beginning January 1, 2003, and
continuing on the first day of each calendar month thereafter until December 19,
2004, when such Term Loan shall be paid in full.

            (c) The terms of Section 2.1.A.(c), (d), (e) and (f) are applicable
to the Term Loan.

      2.2 Letter of Credit Facility. (a) Upon the terms and conditions and
relying on the representations and warranties contained in this Agreement, the
Agent, as issuing bank for the Lenders, agrees from the date of this Agreement
until the date which is thirty days prior to the Commitment Termination Date, to
issue on behalf of the Lenders in their respective Percentage Shares Letters of
Credit for the account of the Borrower and/or the benefit of any Subsidiary of
the Borrower and to renew and extend such Letters of Credit. Letters of Credit
shall be issued, renewed, or extended from time to time on any Business Day
designated by the Borrower following the receipt in accordance with the terms
hereof by the Agent of the written (or oral,

                                     - 17 -
<PAGE>

confirmed promptly in writing) request by a Responsible Officer of the Borrower
and a Letter of Credit Application. Letters of Credit shall be issued in such
amounts as the Borrower may request; provided, however, that (i) no Letter of
Credit shall have an expiration date which is more than 365 days after the
issuance thereof or subsequent to Final Maturity, (ii) each automatically
renewable Letter of Credit shall provide that it may be terminated by the Agent
at its then current expiry date by not less than 30 days' written notice by the
Agent to the beneficiary of such Letter of Credit, and (iii) the Agent shall not
be obligated to issue any Letter of Credit if (A) the face amount thereof would
exceed the Available Commitment, or (B) after giving effect to the issuance
thereof, (B) the L/C Exposure, when added to the Loan Balance then outstanding,
would exceed the Commitment Amount, or (C) the L/C Exposure would exceed
$3,000,000.

            (b) Prior to any payment in respect of any Letter of Credit, each
Lender shall be deemed to be a participant through the Agent with respect to the
relevant Letter of Credit in the obligation of the Agent, as the issuer of such
Letter of Credit, in an amount equal to the Percentage Share of such Lender of
the maximum amount which is or at any time may become available to be drawn
thereunder. Upon delivery by such Lender of funds requested pursuant to Section
2.2(c), such Lender shall be treated as having purchased a participating
interest in an amount equal to such funds delivered by such Lender to the Agent
in the obligation of the Borrower to reimburse the Agent, as the issuer of such
Letter of Credit, for any amounts payable, paid, or incurred by the Agent, as
the issuer of such Letter of Credit, with respect to such Letter of Credit.

            (c) Each Lender shall be unconditionally and irrevocably liable,
without regard to the occurrence of any Default or Event of Default, to the
extent of the Percentage Share of such Lender at the time of issuance of each
Letter of Credit, to reimburse, on demand, the Agent, as the issuer of such
Letter of Credit, for the amount of each Letter of Credit Payment under such
Letter of Credit. Each payment in respect of any Letter of Credit shall be
deemed to be a Floating Rate Loan by each Lender to the extent of funds
delivered by such Lender to the Agent with respect to such payment and shall to
such extent be deemed a Floating Rate Loan under and shall be evidenced by the
Note of such Lender.

            (d) EACH LENDER AGREES TO SEVERALLY INDEMNIFY THE AGENT, AS THE
ISSUER OF EACH LETTER OF CREDIT, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT AND AFFILIATES OF THE AGENT (TO THE EXTENT NOT REIMBURSED BY
THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE BORROWER TO DO SO),
RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER AT THE TIME OF ISSUANCE
OF SUCH LETTER OF CREDIT, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME
(INCLUDING, WITHOUT LIMITATION, ANY TIME FOLLOWING THE PAYMENT AND PERFORMANCE
OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE IMPOSED ON,
INCURRED BY OR ASSERTED AGAINST THE

                                     - 18 -
<PAGE>

AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY RELATING TO OR
ARISING OUT OF THIS AGREEMENT OR SUCH LETTER OF CREDIT OR ANY ACTION TAKEN OR
OMITTED BY THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR
IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING, WITHOUT LIMITATION, ANY
LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR
ASSERTED AS A RESULT OF THE NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT
AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO LENDER
(OTHER THAN THE AGENT AS THE ISSUER OF A LETTER OF CREDIT) SHALL BE LIABLE FOR
THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING
FROM THE GROSS NEGLIGENCE WHETHER SOLE OR CONCURRENT OR WILLFUL MISCONDUCT OF
THE AGENT AS THE ISSUER OF A LETTER OF CREDIT. THE AGREEMENTS IN THIS SECTION
2.2(D) SHALL SURVIVE THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT.

      2.3 Use of Loan Proceeds and Letters of Credit. (a) As of the date hereof,
indebtedness in the amount of $20,076,885.43 is outstanding under the Existing
Note. The Lender shall use proceeds of the initial Loan to purchase such
indebtedness. Such indebtedness shall be renewed, extended, and rearranged
pursuant to the terms of this Agreement, the Note, and the relevant Borrowing
Request and shall for all purposes be deemed a borrowing hereunder. Proceeds of
all subsequent Loans shall be used solely for acquisitions and development of
Oil and Gas Properties and for general corporate purposes.

            (b) Letters of Credit shall be used solely for other general
corporate purposes and to support Commodity Hedge Agreements and Rate Management
Transactions.

      2.4 Interest. Subject to the terms of this Agreement (including, without
limitation, Section 2.17), interest on the Loans shall accrue and be payable at
a rate per annum equal to the Floating Rate for each Floating Rate Loan and the
Adjusted LIBO Rate for each LIBO Rate Loan. Interest on all Floating Rate Loans
shall be computed on the basis of a year of 365 or 366 days, as applicable, for
the actual days elapsed (including the first day but excluding the last day)
during the period for which payable. Interest on all LIBO Rate Loans shall be
computed on the basis of a year of 360 days for the actual days elapsed
(including the first day but excluding the last day) during the period for which
payable. Notwithstanding the foregoing, interest on past-due principal and, to
the extent permitted by applicable law, past-due interest, shall accrue at the
Default Rate, computed on the basis of a year of 365 or 366 days, as the case
may be, for the actual days elapsed (including the first day but excluding the
last day) during the period for

                                     - 19 -
<PAGE>

which payable, and shall be payable upon demand by the Lender at any time as to
all or any portion of such interest. In the event that the Borrower fails to
select the duration of any Interest Period for any LIBO Rate Loan within the
time period and otherwise as provided herein, such Loan (if outstanding as a
LIBO Rate Loan) will be automatically converted into a Floating Rate Loan on the
last day of the then current Interest Period for such Loan or (if outstanding as
a Floating Rate Loan) will remain as, or (if not then outstanding) will be made
as, a Floating Rate Loan. Interest provided for herein shall be calculated on
unpaid sums actually advanced and outstanding pursuant to the terms of this
Agreement and only for the period from the date or dates of such advances until
repayment.

      2.5 Repayment of Loans and Interest. Accrued and unpaid interest on each
outstanding Floating Rate Loan shall be due and payable monthly commencing on
the first day of January 1, 2003, and continuing on the first day of each
calendar month thereafter while any Floating Rate Loan remains outstanding, the
payment in each instance to be the amount of interest which has accrued and
remains unpaid in respect of the relevant Loan. Accrued and unpaid interest on
each outstanding LIBO Rate Loan shall be due and payable on the last day of the
Interest Period for such LIBO Rate Loan and, in the case of any Interest Period
in excess of three months, on the day of the third calendar month following the
commencement of such Interest Period corresponding to the day of the calendar
month on which such Interest Period commenced, the payment in each instance to
be the amount of interest which has accrued and remains unpaid in respect of the
relevant Loan. The Loan Balance, together with all accrued and unpaid interest
thereon, shall be due and payable at Final Maturity. At the time of making each
payment hereunder or under the Note, the Borrower shall specify to the Lender
the Loans or other amounts payable by the Borrower hereunder to which such
payment is to be applied. In the event the Borrower fails to so specify, or if
an Event of Default has occurred and is continuing, the Lender may apply such
payment as it may elect in its sole discretion.

      2.6 Outstanding Amounts. The outstanding principal balance of the Notes
reflected by the notations by the Lenders on their records shall be deemed
rebuttably presumptive evidence of the principal amount owing on the Notes. The
liability for payment of principal and interest evidenced by the Notes shall be
limited to principal amounts actually advanced and outstanding pursuant to this
Agreement and interest on such amounts calculated in accordance with this
Agreement.

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

                                     - 20 -
<PAGE>

      2.8 Pro Rata Treatment; Adjustments. (a) Except to the extent otherwise
expressly provided herein, (i) each borrowing pursuant to this Agreement shall
be made from the Lenders pro rata in accordance with their respective Percentage
Shares, (ii) each reduction of the sum of the Facility Amounts of the Lenders at
the request of the Borrower, as well as any subsequent increase in the sum of
the Facility Amounts of the Lenders at the request of the Borrower and with
written agreement of the Agent and the Required Lenders shall serve to adjust
the Facility Amounts of the Lenders pro rata in accordance with the Facility
Amounts of the Lenders in effect immediately prior to any such adjustment, (iii)
each payment by the Borrower of fees shall be made for the account of the
Lenders pro rata in accordance with their respective Percentage Shares, (iv)
each payment of principal of Loans shall be made for the account of the Lenders
pro rata in accordance with their respective shares of the Loan Balance, and (v)
each payment of interest on Loans shall be made for the account of the Lenders
pro rata in accordance with their respective shares of the aggregate amount of
interest due and payable to the Lenders.

            (b) The Agent shall distribute all payments with respect to the
Obligations to the Lenders promptly upon receipt in like funds as received. In
the event that any payments made hereunder by the Borrower at any particular
time are insufficient to satisfy in full the Obligations due and payable at such
time, such payments shall be applied (i) first, to fees and expenses due
pursuant to the terms of this Agreement or any other Loan Document, (ii) second,
to accrued interest, (iii) third, to the Loan Balance, and (iv) last, to any
other Obligations.

            (c) If any Lender (for purposes of this Section, a "Benefitted
Lender") shall at any time receive any payment of all or part of its portion of
the Obligations, or receive any Collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7.1(f) or Section 7.1(g), or otherwise) in an
amount greater than such Lender was entitled to receive pursuant to the terms
hereof, such Benefitted Lender shall purchase for cash from the other Lenders
such portion of the Obligations of such other Lenders, or shall provide such
other Lenders with the benefits of any such Collateral or the proceeds thereof,
as shall be necessary to cause such Benefitted Lender to share the excess
payment or benefits of such Collateral or proceeds with each of the Lenders
according to the terms hereof. If all or any portion of such excess payment or
benefits is thereafter recovered from such Benefitted Lender, such purchase
shall be rescinded and the purchase price and benefits returned by such Lender,
to the extent of such recovery, but without interest. The Borrower agrees that
each such Lender so purchasing a portion of the Obligations of another Lender
may exercise all rights of payment (including rights of set-off) with respect to
such portion as fully as if such Lender were the direct holder of such portion.
If any Lender ever receives, by voluntary payment, exercise of rights of set-off
or banker's lien, counterclaim, cross-action or otherwise, any funds of the
Borrower to be applied to the Obligations, or receives any proceeds by
realization on or with respect to any Collateral, all such funds and proceeds
shall be forwarded immediately to the Agent for distribution in accordance with
the terms of this Agreement.

      2.9 Borrowing Base Determinations. (a) The Borrowing Base as of the
Closing Date, is acknowledged by the Borrower and the Lenders to be $21,000,000.

                                     - 21 -
<PAGE>

            (b) The Borrowing Base shall be redetermined semi-annually on the
basis of information supplied by the Borrower in compliance with the provisions
of this Agreement, including, without limitation, Reserve Reports, and all other
relevant information available to the Lenders. In addition, the Lenders shall,
in the normal course of business following a request of the Borrower,
redetermine the Borrowing Base; provided, however, the Lenders shall not be
obligated to respond to more than four such requests during any calendar year,
and in no event shall the Lenders be required to redetermine the Borrowing Base
more than once in any two-month period, including, without limitation, each
scheduled semi-annual redetermination provided for above. Notwithstanding the
foregoing, the Lenders may at their discretion redetermine the Borrowing Base
and the amount by which the Borrowing Base shall be reduced each calendar month
as set forth in Section 2.9(a) at any time and from time to time.

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

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

      2.10 Mandatory Prepayments. If at any time the sum of the Loan Balance and
the L/C Exposure exceeds the Borrowing Base then in effect, the Borrower shall,
within 60 days of notice from the Agent of such occurrence, (a) prepay, or make
arrangements acceptable to the Lenders for the prepayment of, the amount of such
excess for application on the Loan Balance, (b) provide additional collateral,
of character and value satisfactory to the Lenders in their reasonable
discretion, to secure the Obligations by the execution and delivery to the
Lenders of security instruments in form and substance satisfactory to the
Lenders in the exercise of their reasonable discretion, or (c) effect any
combination of the alternatives described in clauses (a) and (b) of this Section
and acceptable to the Lenders in their reasonable discretion. In the event that
a mandatory prepayment is required under this Section and the Loan Balance is
less than the amount required to be prepaid, the Borrower shall repay the entire
Loan Balance and, in accordance with the provisions of the relevant Letter of
Credit Applications executed by the Borrower or otherwise to the reasonable
satisfaction of the Lenders, deposit with the Lenders, as additional collateral
securing the Obligations, an amount of cash, in immediately available funds,
equal to the L/C Exposure minus the Borrowing Base. The cash deposited with the
Lenders in satisfaction of the requirement provided in this Section may be
invested, at the reasonable discretion of the Lenders and then only at the
express direction of the Borrower as to investment vehicle and maturity (which
shall be no later than the latest expiry date of any then outstanding

                                     - 22 -
<PAGE>

Letter of Credit), for the account of the Borrower in cash or cash equivalent
investments offered by or through the Lenders.

      2.11 Voluntary Prepayments and Conversions of Loans. Subject to applicable
provisions of this Agreement, the Borrower shall have the right at any time or
from time to time to prepay Loans and to convert Loans of one type or with one
Interest Period into Loans of another type or with a different Interest Period;
provided, however, that (a) the Borrower shall give the Agent notice of each
such prepayment or conversion of all or any portion of a LIBO Rate Loan no less
than two Business Days prior to prepayment or conversion, (b) any LIBO Rate Loan
may be prepaid or converted only on the last day of an Interest Period for such
Loan, (c) the Borrower shall pay all accrued and unpaid interest on the amounts
prepaid or converted, and (d) no such prepayment or conversion shall serve to
postpone the repayment when due of any Obligation.

      2.12 Commitment Fee. In addition to interest on the Note as provided
herein and all other fees payable hereunder and to compensate the Lender for
maintaining funds available, the Borrower shall pay to the Agent for the account
of the Lenders, in immediately available funds, on the first day of April, 2003,
and on the first day of each third calendar month thereafter during the
Commitment Period, a fee in the amount of .375% per annum, calculated on the
basis of a year of 365 or 366 days, as the case may be, for the actual days
elapsed (including the first day but excluding the last day), on the average
daily amount of the Available Commitment during the preceding quarterly period.

      2.13 Facility Fee. In addition to interest on the Note as provided herein
and all other fees payable hereunder and to compensate the Lenders for the costs
of the extension of credit hereunder, the Borrower shall pay to the Agent for
the account of the Lenders, in immediately available funds, a facility fee in
the amount of $100,000 which is due on the Closing Date and one-half of one
percent (1/2 of 1%) of any future increase in the Borrowing Base then in effect.

      2.14 Letter of Credit Fee. In addition to interest on the Note as provided
herein and all other fees payable hereunder, the Borrower agrees to pay to the
Lender, on the date of issuance of each Letter of Credit, a fee equal to the
greater of $500 or the Applicable Margin, calculated on the basis of a year of
365 or 366 days, as the case may be, for the actual days elapsed (including the
first day but excluding the last day), on the face amount of such Letter of
Credit during the period for which such Letter of Credit is issued; provided,
however, in the event such Letter of Credit is canceled prior to its original
expiry date or a payment is made by the Lender with respect to such Letter of
Credit, the Lender shall, within 30 days after such cancellation or the making
of such payment, rebate to the Borrower the unearned portion of such fee. The
Borrower also agrees to pay to the Lender on demand its customary letter of
credit transactional fees, including, without limitation, amendment fees,
payable with respect to each Letter of Credit.

      2.15 Loans to Satisfy Obligations of Borrower. The Lenders may, but shall
not be obligated to, but only if an Event of Default exists, make Loans for the
benefit of the Borrower and apply proceeds thereof to the satisfaction of any
condition, warranty, representation, or

                                     - 23 -
<PAGE>

covenant of the Borrower contained in this Agreement or any other Loan Document.
Any such Loan shall be evidenced by the Note and shall be made as a Floating
Rate Loan.

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

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

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

            (c) If, under any circumstances, the aggregate amounts paid on the
Note or under this Agreement or any other Loan Document include amounts which by
law are deemed

                                     - 24 -
<PAGE>

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

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

      2.18 Yield Protection. (a) Without limiting the effect of the other
provisions of this Section (but without duplication), the Borrower shall pay to
the Lenders from time to time such amounts as the Lenders may determine are
necessary to compensate it for any Additional Costs incurred by the Lenders.

            (b) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders from
time to time on request such amounts as the Lenders may determine are necessary
to compensate the Lenders for any costs attributable to the maintenance by the
Lenders (or any Applicable Lending Office), pursuant to any Regulatory Change,
of capital in respect of the Commitment, such compensation to include, without
limitation, an amount equal to any reduction of the rate of return on assets or
equity of the Lenders (or any Applicable Lending Office) to a level below that
which the Lenders (or any Applicable Lending Office) could have achieved but for
such Regulatory Change.

            (c) Without limiting the effect of the other provisions of this
Section (but without duplication), in the event that any Requirement of Law or
Regulatory Change or the compliance by the Lenders therewith shall (i) impose,
modify, or hold applicable any reserve, special deposit, or similar requirement
against any Letter of Credit or obligation to issue Letters of Credit, or (ii)
impose upon the Lenders any other condition regarding any Letter of Credit or
obligation to issue Letters of Credit, and the result of any such event shall be
to increase the cost to the Lenders of issuing or maintaining any Letter of
Credit or obligation to issue Letters of Credit or any liability with respect to
payments by the Lender under Letters of Credit, or to reduce any amount
receivable in connection therewith, then within 15 days of demand by the
Lenders, the Borrower shall pay to the Lenders, from time to time as specified
by the Lender,

                                     - 25 -
<PAGE>

additional amounts which shall be sufficient to compensate the Lenders for such
increased cost or reduced amount receivable.

            (d) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders such
amounts as shall be sufficient in the reasonable opinion of the Lenders to
compensate them for any loss, cost, or expense incurred by and as a result of:

                  (i) any payment, prepayment, or conversion by the Borrower of
            a LIBO Rate Loan on a date other than the last day of an Interest
            Period for such Loan; or

                  (ii) any failure by the Borrower to borrow a LIBO Rate Loan
            from the Lender on the date for such borrowing specified in the
            relevant Borrowing Request;

such compensation to include, without limitation, with respect to any LIBO Rate
Loan, an amount equal to the excess, if any, of (A) the amount of interest which
would have accrued on the principal amount so paid, prepaid, converted, or not
borrowed for the period from the date of such payment, prepayment, conversion,
or failure to borrow to the last day of the then current Interest Period for
such Loan (or, in the case of a failure to borrow, the Interest Period for such
Loan which would have commenced on the date of such failure to borrow) at the
applicable rate of interest for such Loan provided for herein over (B) the
interest component (as reasonably determined by the Lenders) of the amount (as
reasonably determined by the Lenders) the Lenders would have bid in the London
interbank market for Dollar deposits of amounts comparable to such principal
amount and maturities comparable to such period; provided, however, that the
Lenders shall be limited to recover their actual losses and not anticipated
profits.

            (e) Determinations by the Lenders for purposes of this Section of
the effect of any Regulatory Change on capital maintained, their costs or rate
of return, maintaining Loans, issuing Letters of Credit, its obligation to make
Loans and issue Letters of Credit, or on amounts receivable by it in respect of
Loans, Letters of Credit, or such obligations, and the additional amounts
required to compensate the Lenders under this Section shall be rebuttable
presumptions of the additional amounts due, provided that such determinations
are made on a reasonable basis. The Lenders shall furnish the Borrower with a
certificate setting forth in reasonable detail the basis and amount of increased
costs incurred or reduced amounts receivable as a result of any such event, and
the statements set forth therein shall be rebuttable presumptions of the
additional amounts due. The Lenders shall (i) notify the Borrower, as promptly
as practicable after the Lender obtains knowledge of any Additional Costs or
other sums payable pursuant to this Section and determines to request
compensation therefore, of any event occurring after the Closing Date which will
entitle the Lenders to compensation pursuant to this Section; provided that the
Borrower shall not be obligated for the payment of any Additional Costs or other
sums payable pursuant to this Section after the earlier of (A) the Final
Maturity (provided that the

                                     - 26 -
<PAGE>

Obligations have been paid in full) and (B) the expiration of the Commitment
(provided that the Obligations have been paid in full) to the extent such
Additional Costs or other sums accrued more than 90 days prior to the date upon
which the Borrower was given such notice; and (ii) designate a different
Applicable Lending Office for the Loans of the Lenders affected by such event if
such designation will avoid the need for or reduce the amount of such
compensation and will not, in the sole opinion of the Lenders, be materially
disadvantageous to the Lenders. If the Lenders request compensation from the
Borrower under this Section, the Borrower may, by notice to the Lenders, require
that the Loans by the Lenders of the type with respect to which such
compensation is requested be converted into Floating Rate Loans in accordance
with Section 2.11. Any compensation requested by the Lenders pursuant to this
Section shall be due and payable to the Lender within fifteen days of delivery
of any such notice by the Lenders to the Borrower.

            (f) The Lenders agree that they shall not request, and the Borrower
shall not be obligated to pay, any Additional Costs or other sums payable
pursuant to this Section unless similar additional costs and other sums payable
are also generally assessed by the Lenders against other customers of the
Lenders similarly situated where such customers are subject to documents
providing for such assessment.

            (g) Upon the receipt by the Borrower from any Lender (an "Affected
Bank") of a claim for compensation under this Section 2.17, the Borrower may (i)
request the Affected Bank to use its best efforts to obtain a replacement bank
or financial institution satisfactory to the Borrower to acquire and assume all
or a ratable part of all of such Affected Bank's Loans and Commitment (a
"Replacement Bank"); (ii) request one or more of the other Lenders to acquire
and assume all or part of such Affected Bank's Loans and Commitment; or (iii)
designate a Replacement Bank under clause (i) or (iii) shall be subject to the
prior written consent of the Agent (which consent will not be unreasonably
withheld).

      2.19 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, no more than 5 separate Loans shall be outstanding at any one
time, with, for purposes of this Section, all Floating Rate Loans constituting
one Loan and all LIBO Rate Loans for the same Interest Period constituting one
Loan. Anything herein to the contrary notwithstanding, if, on or prior to the
determination of any interest rate for any LIBO Rate Loan for any Interest
Period therefor:

            (a) the Lenders determine (which determination shall be conclusive)
      that quotations of interest rates for the deposits referred to in the
      definition of "LIBO Rate" in Section 1.2 are not being provided in the
      relevant amounts or for the relevant maturities for purposes of
      determining the rate of interest for such Loan as provided in this
      Agreement; or

            (b) the Lenders determine (which determination shall be conclusive)
      that the rates of interest referred to in the definition of "LIBO Rate" in
      Section 1.2 upon the basis of which the rate of interest for such Loan for
      such Interest Period is to be determined do not accurately reflect the
      cost to the Lenders of making or maintaining such Loan for such Interest
      Period,

                                     - 27 -
<PAGE>

then the Lenders shall give the Borrower prompt notice thereof; and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make LIBO Rate Loans or to convert Loans of any other type into LIBO Rate Loans,
and the Borrower shall, on the last day of the then current Interest Period for
each outstanding LIBO Rate Loan, either prepay such LIBO Rate Loan or convert
such Loan into another type of Loan in accordance with Section 2.11. Before
giving such notice pursuant to this Section, the Lenders will designate a
different available Applicable Lending Office for LIBO Rate Loans or take such
other action as the Borrower may request if such designation or action will
avoid the need to suspend the obligation of the Lender to make LIBO Rate Loans
hereunder and will not, in the opinion of the Lenders, be materially
disadvantageous to the Lenders.

      2.20 Illegality. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for the Lenders or their Applicable Lending
Office to (a) honor its obligation to make any type of LIBO Rate Loans
hereunder, or (b) maintain any type of LIBO Rate Loans hereunder, then the
Lenders shall promptly notify the Borrower thereof; and the obligation of the
Lenders hereunder to make such type of LIBO Rate Loans and to convert other
types of Loans into LIBO Rate Loans of such type shall be suspended until such
time as the Lenders may again make and maintain LIBO Rate Loans of such type,
and the outstanding LIBO Rate Loans of such type shall be converted into
Floating Rate Loans in accordance with Section 2.11. Before giving such notice
pursuant to this Section, the Lenders will designate a different available
Applicable Lending Office for LIBO Rate Loans or take such other action as the
Borrower may request if such designation or action will avoid the need to
suspend the obligation of the Lenders to make LIBO Rate Loans and will not, in
the opinion of the Lenders, be disadvantageous to the Lenders.

      2.21 Regulatory Change. In the event that by reason of any Regulatory
Change, the Lenders (a) incur Additional Costs based on or measured by the
excess above a specified level of the amount of a category of deposits or other
liabilities of the Lenders which includes deposits by reference to which the
interest rate on any LIBO Rate Loan is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Lenders which
includes any LIBO Rate Loan, or (b) becomes subject to restrictions on the
amount of such a category of liabilities or assets which it may hold, then, at
the election of the Lenders with notice to the Borrower, the obligation of the
Lenders to make such LIBO Rate Loans and to convert Floating Rate Loans into
such LIBO Rate Loans shall be suspended until such time as such Regulatory
Change ceases to be in effect, and all such outstanding LIBO Rate Loans shall be
converted into Floating Rate Loans in accordance with Section 2.11.

      2.22 Limitations on Interest Periods. Each Interest Period selected by the
Borrower (a) which commences on the last Business Day of a calendar month (or,
with respect to any LIBO Rate Loan, any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end on the
last Business Day of the appropriate subsequent calendar month, (b) which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, with respect to any LIBO Rate Loan, if such next
succeeding Business Day falls in the next succeeding calendar month, on the next
preceding Business Day), (c) which would otherwise commence before and end after
Final Maturity shall

                                     - 28 -
<PAGE>

end on Final Maturity, and (d) shall have a duration of not less than one month,
as to any LIBO Rate Loan, and, if any Interest Period would otherwise be a
shorter period, the relevant Loan shall be a Floating Rate Loan during such
period.

      2.23 Letters in Lieu of Transfer Orders. The Lender agrees that none of
the letters in lieu of transfer or division orders provided by the Borrower
pursuant to Section 3.1(g)(iii) or Section 5.7 will be sent to the addressees
thereof prior to the occurrence of an Event of Default, at which time the Lender
may, at its option and in addition to the exercise of any of its other rights
and remedies, send any or all of such letters.

      2.24 Power of Attorney. The Borrower hereby designates the Lender as its
agent and attorney-in-fact, to act in its name, place, and stead for the purpose
of completing and, upon the occurrence of an Event of Default, delivering any
and all of the letters in lieu of transfer orders delivered by the Borrower to
the Lender pursuant to Section 3.1(g)(iii) or Section 5.7, including, without
limitation, completing any blanks contained in such letters and attaching
exhibits thereto describing the relevant Collateral. The Borrower hereby
ratifies and confirms all that the Lender shall lawfully do or cause to be done
by virtue of this power of attorney and the rights granted with respect to such
power of attorney. This power of attorney is coupled with the interests of the
Lender in the Collateral, shall commence and be in full force and effect as of
the Closing Date and shall remain in full force and effect and shall be
irrevocable so long as any Obligation remains outstanding or unpaid or any
Commitment exists. The powers conferred on the Lender by this appointment are
solely to protect the interests of the Lender under the Loan Documents and shall
not impose any duty upon the Lender to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers and shall not be responsible to the Borrower or any
other Person for any act or failure to act with respect to such powers, except
for gross negligence or willful misconduct.

                                  ARTICLE III

                                   CONDITIONS

      The obligations of the Agent and the Lenders to enter into this Agreement
and to make Loans and issue Letters of Credit are subject to the satisfaction of
the following conditions precedent:

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

                                     - 29 -
<PAGE>

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

            (b) the Existing Notes, endorsed payable to the Agent;

            (c) the Note and the Term Note;

            (d) copies of the Articles of Incorporation of the Borrower and all
      amendments thereto, accompanied by a certificate dated the Closing Date
      issued by the secretary or an assistant secretary or another authorized
      representative of the Borrower to the effect that each such copy is
      correct and complete;

            (e) a certificate of incumbency dated the Closing Date, including
      specimen signatures of all officers or other representatives of the
      Borrower who are authorized to execute Loan Documents on behalf of the
      Borrower, such certificate being executed by the manager or another
      authorized representative of the Borrower;

            (f) copies of resolutions of the Borrower, adopted by the board of
      directors of the Borrower approving the Loan Documents to which the
      Borrower is a party and authorizing the transactions contemplated herein
      and therein, accompanied by a certificate dated the Closing Date issued by
      the manager or another authorized representative of the Borrower to the
      effect that such copies are true and correct copies of resolutions duly
      adopted and that such resolutions constitute all the resolutions adopted
      with respect to such transactions, have not been amended, modified, or
      rescinded in any respect, and are in full force and effect as of the date
      of such certificate;

            (g) multiple counterparts, as requested by the Lender, of the
      following Security Instruments creating, evidencing, perfecting, and
      otherwise establishing Liens in favor of the Lender in and to the
      Collateral:

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

                  (ii) Financing Statements from the Borrower, as debtor,
            constituent to the instrument described in clause (i) above;

                  (iii) undated letters, in form and substance satisfactory to
            the Agent, from the Borrower to each purchaser of production and
            disburser of the proceeds of production from or attributable to the
            Mortgaged Properties, together with additional letters with the
            addressees left blank, authorizing and directing the addressees to

                                     - 30 -
<PAGE>

            make future payments attributable to production from the Mortgaged
            Properties directly to the Agent;

                  (iv) Security Agreement from the Borrower pledging contract
            rights, etc.;

                  (v) Financing Statements from the Borrower, as debtor,
            constituent to the instrument described in clause (iv) above;

                  (vi) Assignment of Partnership Interest (Security Agreement)
            from the Borrower pledging certain partnership interest;

                  (vii) Financing Statement from the Borrower, as debtor,
            constituent to the instrument described in Clause (vi) above;

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

            (i) unaudited Financial Statements of the Borrower as of September
      30, 2002;

            (j) schedule of Shareholder advances for the next 12 months;

            (k) results of searches of the UCC Records of the Secretary of State
      of the States of Texas, New York, Delaware, West Virginia and the County
      Clerk of Oklahoma County, Oklahoma, from a source acceptable to the Agent
      and reflecting no Liens against any of the Collateral as to which
      perfection of a Lien is accomplished by the filing of a financing
      statement other than in favor of the Agent for the benefit of the Lenders;

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

            (m) all operating, lease, sublease, royalty, sales, exchange,
      processing, farm-out, bidding, pooling, unitization, communitization, and
      other material agreements relating to the Mortgaged Properties reasonably
      requested by the Lender;

            (n) engineering reports covering the Mortgaged Properties;

            (o) the opinion of James F. Gilbert, counsel to the Borrower, in the
      form attached hereto as Exhibit IV, with such changes thereto as may be
      approved by the Agent;

                                     - 31 -
<PAGE>

            (p) certificates evidencing the insurance coverage required pursuant
      to Section 5.18;

            (q) payment of the Facility Fee as described in Section 2.13 and
      Agency Fee;

            (r) payment of the fees described in Section 5.14;

            (s) such other agreements, documents, instruments, opinions,
      certificates, waivers, consents, and evidence as the Agent may reasonably
      request; and

            (t) the Borrower shall furnish to the Agent on or before 30 days
      after the Closing Date, the necessary descriptions of the property listed
      on Exhibit VIII so that a Security Agreement and Certificate of Title may
      be prepared granting the Agent a first lien on such property. The Borrower
      agrees to execute the documents necessary to grant the Agent a first lien
      on such properties.

      3.2 Each Loan and Letter of Credit. In addition to the conditions
precedent stated elsewhere herein, the Lender shall not be obligated to make any
Loan or issue any Letter of Credit unless:

            (a) the Borrower shall have delivered to the Agent a Borrowing
      Request at least the requisite time prior to the requested date for the
      relevant Loan, or a Letter of Credit Application at least three Business
      Days prior to the requested issuance date for the relevant Letter of
      Credit; and each statement or certification made in such Borrowing Request
      or Letter of Credit Application, as the case may be, shall be true and
      correct in all material respects on the requested date for such Loan or
      the issuance of such Letter of Credit;

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

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

            (d) no event shall have occurred which, in the reasonable opinion of
      the Agent or any of the Lenders, would have a Material Adverse Effect;

            (e) each of the representations and warranties contained in this
      Agreement shall be true and correct and shall be deemed to be repeated by
      the Borrower as if made on the requested date for such Loan or the
      issuance of such Letter of Credit (except to the extent such
      representations and warranties

                                     - 32 -
<PAGE>

      expressly refer to an earlier date, in which case, they shall be true and
      correct as of such earlier date) provided, however, for purposes of this
      Section 3.2, in each representation and warranty in Article IV that makes
      reference to an Exhibit, the representation under this Section 3.2 that
      such representation and warranty in Article IV is true on and as of the
      date of the making of such Loan or the issuance of such Letter of Credit
      shall take into account (i) any subsequent amendments to any Exhibit
      referred to therein, (ii) any exception contained in a written notice
      received by the Agent which makes specific reference to the applicable
      Exhibit, or (iii) any written disclosure made by the Borrower or any of
      its Subsidiaries prior to the date as of which such representation or
      warranty is made, provided that such amendment, exception or disclosure
      has been consented to by the Required Banks if such amendment, exception
      or disclosure amends or waives provisions of this Agreement or is
      otherwise required under the terms of this Agreement.

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

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

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

            (i) the Agent and the Lenders shall have received the payment of all
      fees payable to the Agent and the Lenders hereunder and reimbursement from
      the Borrower, or special legal counsel for the Agent shall have received
      payment from the Borrower, for (i) all reasonable fees and expenses of
      counsel to the Agent for which the Borrower is responsible pursuant to
      applicable provisions of this Agreement and for which invoices have been
      presented at least 15 days prior to the date of the relevant Loan or
      Letter of Credit Application (otherwise the initial Borrowing which must
      be presented at least five days prior to the Closing Date), and (ii)
      estimated fees charged by filing officers and other public officials
      incurred or to be incurred in connection with the filing and recordation
      of any Security Instruments, for which invoices have been presented as of
      or prior to the date of the requested Loan or Letter of Credit Application
      (otherwise the initial Borrowing which must be presented at least five
      days prior to the Closing Date); and

            (j) all matters incident to the consummation of the transactions
      hereby contemplated shall be satisfactory to the Agent and each Lender.

                                     - 33 -
<PAGE>

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

      To induce the Agent and the Lenders to enter into this Agreement and to
make the Loans and issue Letters of Credit, the Borrower represents and warrants
to the Agent and each Lender (which representations and warranties shall survive
the delivery of the Notes) that:

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

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

      4.3 Valid and Binding Obligations. All Loan Documents, when duly executed
and delivered by the Borrower, will be the legal, valid, and binding obligations
of the Borrower, enforceable against the Borrower in accordance with their
respective terms except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relative to enforceability.

      4.4 Security Instruments. The provisions of each Security Instrument are
effective to create in favor of the Agent for the benefit of the Lender, a
legal, valid, and enforceable Lien in all right, title, and interest of the
Borrower in the Collateral described therein, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable principles relative
to enforceability, which Liens, assuming the accomplishment of recording and
filing in accordance with applicable laws prior to the intervention of rights of
other Persons, shall constitute fully perfected first-priority Liens on all
right, title, and interest of the Borrower in the Collateral described therein
subject to Permitted Liens.

                                     - 34 -
<PAGE>

      4.5 Title to Assets. The Borrower has good and indefeasible title to all
of its interests in its Properties then owned by it, free and clear of all Liens
except Permitted Liens.

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

      4.7 Liabilities, Litigation, and Restrictions. As of the Closing Date,
other than as listed under the heading "Liabilities" on Exhibit VI attached
hereto, the Borrower has no liabilities, direct, or contingent, which would
result in a Material Adverse Effect, except as set forth under the heading
"Litigation" on Exhibit VI hereto, no litigation or other action of any nature
affecting the Borrower is pending before any Governmental Authority or, to the
best knowledge of the Borrower, threatened against or affecting the Borrower
which might reasonably be expected to result in any material impairment of its
ownership of any Collateral or have a Material Adverse Effect. To the best
knowledge of the Borrower, after due inquiry, no unusual or unduly burdensome
restriction, restraint or hazard exists by contract, Requirement of Law, or
otherwise relative to the business or operations of the Borrower or the
ownership and operation of the Collateral would result in a Material Adverse
Effect, other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.

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

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

      4.10 ERISA. No Reportable Event has occurred with respect to any Single
Employer Plan, and each Single Employer Plan has complied with and been
administered in all material respects in accordance with applicable provisions
of ERISA and the Code. To the best knowledge of the Borrower, (a) no Reportable
Event has occurred with respect to any Multiemployer Plan, and (b) each
Multiemployer Plan has complied with and been administered in all material
respects with applicable provisions of ERISA and the Code. The present value of
all benefits vested under each Single Employer Plan maintained by the Borrower
or any Commonly Controlled Entity (based on the assumptions used to fund such
Plan) did not, as of the last annual valuation date applicable thereto, exceed
the value of the assets of such Plan

                                     - 35 -
<PAGE>

allocable to such vested benefits. Neither the Borrower nor any Commonly
Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan for which there is any withdrawal liability. As of the most
recent valuation date applicable to any Multiemployer Plan, neither the Borrower
nor any Commonly Controlled Entity would become subject to any liability under
ERISA if the Borrower or such Commonly Controlled Entity were to withdraw
completely from such Multiemployer Plan. Neither the Borrower nor any Commonly
Controlled Entity has received notice that any Multiemployer Plan is Insolvent
or in Reorganization. To the best knowledge of the Borrower, no such Insolvency
or Reorganization is reasonably likely to occur. Based upon GAAP existing as of
the date of this Agreement and current factual circumstances, the Borrower has
no reason to believe that the annual cost during the term of this Agreement to
the Borrower and all Commonly Controlled Entities for post-retirement benefits
to be provided to the current and former employees of the Borrower and all
Commonly Controlled Entities under Plans which are welfare benefit plans (as
defined in Section 3(1) of ERISA) will, in the aggregate, have a Material
Adverse Effect.

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

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

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

            (c) except in accordance with applicable Requirements of Law or the
      terms of a valid permit, license, certificate, or approval of the relevant
      Governmental Authority, no Release of Hazardous Substances by the Borrower
      or from, affecting, or related to any Property of the Borrower or adjacent
      to any Property of the Borrower has occurred; and

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

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

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

      4.14 Public Utility Holding Company Act Compliance. The Borrower is not a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a

                                     - 36 -
<PAGE>

"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.

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

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

      4.17 Gas Contracts. Except as described on Exhibit VI under the heading
"Gas Contracts," the Borrower (a) is not obligated in any material respect by
virtue of any prepayment made under any contract containing a "take-or-pay" or
"prepayment" provision or under any similar agreement to deliver hydrocarbons
produced from or allocated to any of the Mortgaged Property at some future date
without receiving full payment therefor within 90 days of delivery, and (b) has
not produced gas, in any material amount, subject to, and neither the Borrower
nor any of the Mortgaged Properties is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements, except
as to such matters for which the Borrower has reflected in the most recent
engineering report or established monetary reserves adequate in amount to
satisfy such obligations and has segregated such reserves from other accounts.

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

      4.19 Casualties or Taking of Property. Except as disclosed on Exhibit VI
under the heading "Casualties," except as would not result in a Material Adverse
Effect, neither the business nor any Property of the Borrower has been
materially adversely affected as a result of any fire, explosion, earthquake,
flood, drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property, or cancellation of contracts, permits, or
concessions by any Governmental Authority, riot, activities of armed forces, or
acts of God.

      4.20 Locations of Borrower. The principal place of business and chief
executive office of the Borrower is located at the address of the Borrower set
forth in Section 9.3 or at such other

                                     - 37 -
<PAGE>

location as the Borrower may have, by proper written notice hereunder, advised
the Lender, provided that such other location is within a state in which
appropriate financing statements from the Borrower in favor of the Lender have
been filed.

      4.21 Subsidiaries. As of the Closing Date, the Borrower has no
Subsidiaries except those described on Exhibit VI under the heading
"Subsidiaries".

                                   ARTICLE V

                              AFFIRMATIVE COVENANTS

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

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

      5.2 Quarterly Financial Statements; Compliance Certificates. Deliver to
the Agent, (a) on or before the 45th day after the close of each of the first
three quarterly periods of each fiscal year of the Borrower, a copy of the
unaudited consolidated Financial Statements of PEC and its Subsidiaries as at
the close of such quarterly period and from the beginning of such fiscal year to
the end of such period, such Financial Statements to be certified by a
Responsible Officer of the Borrower as having been prepared in accordance with
GAAP consistently applied and as a fair presentation of the condition of the
Borrower, subject to changes resulting from normal year-end audit adjustments,
and (b) on or before the 60th day after the close of each fiscal quarter, with
the exception of the last fiscal quarter, a Compliance Certificate.

      5.3 Annual Financial Statements. Deliver to the Agent, on or before the
90th day after the close of each fiscal year of the Borrower, a copy of the
annual audited consolidated Financial Statements of PEC and its Subsidiaries and
a Compliance Certificate on the 105th day after the close of each fiscal year.

      5.4 Oil and Gas Reserve Reports. (a) Deliver to the Agent no later than
May 1of each year during the term of this Agreement, engineering reports in form
and substance satisfactory to the Agent, certified by any nationally or
regionally-recognized independent consulting petroleum engineers acceptable to
the Lender, as fairly and accurately setting forth (i) the proven and producing,
shut-in, behind-pipe, and undeveloped oil and gas reserves (separately
classified as such) attributable to the Mortgaged Properties as of January 1 of
the year for which such reserve reports are furnished, (ii) the aggregate
present value of the future net income with respect to such Mortgaged
Properties, discounted at a stated per annum discount rate of proven and
producing reserves, (iii) projections of the annual rate of production, gross
income, and net income with respect to such proven and producing reserves, and
(iv) information with respect to the "take-or-pay," "prepayment," and
gas-balancing liabilities of the Borrower.

                                     - 38 -
<PAGE>

            (b) Deliver to the Agent no later than November 1 of each year
during the term of this Agreement, engineering reports in form and substance
satisfactory to the Agent prepared by or under the supervision of any nationally
or regionally-recognized independent consulting petroleum engineer evaluating
the Mortgaged Properties as of July 1 of the year for which such reserve reports
are furnished and updating the information provided in the reports pursuant to
Section 5.4(a).

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

      5.5 Title Opinions; Title Defects. Promptly upon the request of the Agent,
furnish to the Agent title opinions, in form and substance and by counsel
satisfactory to the Lender, or other confirmation of title acceptable to the
Agent, covering Oil and Gas Properties constituting not less than 90% of the
value, determined by the Agent in its sole discretion, of the Mortgaged
Properties; and promptly, but in any event within 60 days after notice by the
Agent of any defect, material in the opinion of the Agent in value, in the title
of the Borrower to any of its Oil and Gas Properties, clear such title defects,
and, in the event any such title defects are not cured in a timely manner, pay
all related costs and fees incurred by the Agent to do so.

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

            (a) any Default or Event of Default;

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

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

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

            (e) any actual, proposed, or threatened testing or other
      investigation by any Governmental Authority or other Person concerning the
      environmental condition of, or relating to, any Property of the Borrower
      or adjacent to any

                                     - 39 -
<PAGE>

      Property of the Borrower following any allegation of a violation of any
      Requirement of Law;

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

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

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

            (i) any Reportable Event or imminently expected Reportable Event
      with respect to any Plan; any withdrawal from, or the termination,
      Reorganization or Insolvency of, any Multiemployer Plan; the institution
      of proceedings or the taking of any other action by the PBGC, the Borrower
      or any Commonly Controlled Entity or Multiemployer Plan with respect to
      the withdrawal from, or the termination, Reorganization or Insolvency of,
      any Single Employer Plan or Multiemployer Plan; or any Prohibited
      Transaction in connection with any Plan or any trust created thereunder
      and the action being taken by the Internal Revenue Service with respect
      thereto;

            (j) any pledge of Oil and Gas Property by the partnerships listed on
      Exhibit A to the document listed in Section 3.1(g)(vi); and

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

      5.7 Letters in Lieu of Transfer Orders; Division Orders. Promptly upon
request by the Agent at any time and from time to time, execute such letters in
lieu of transfer orders, in addition to the letters signed by the Borrower and
delivered to the Lender in satisfaction of the condition set forth in Section
3.1(g)(iii) and/or division and/or transfer orders as are necessary or
appropriate to transfer and deliver to the Lender proceeds from or attributable
to any Mortgaged Property.

      5.8 Additional Information. Furnish to the Agent, promptly upon the
request of the Agent, such additional financial or other information concerning
the assets, liabilities, operations, and transactions of the Borrower as the
Agent may from time to time request; and notify the Agent not less than ten
Business Days prior to the occurrence of any condition or event that may change
the proper location for the filing of any financing statement or other

                                     - 40 -
<PAGE>

public notice or recording for the purpose of perfecting a Lien in any
Collateral, including, without limitation, any change in its name or the
location of its principal place of business or chief executive office; and upon
the request of the Agent, execute such additional Security Instruments as may be
necessary or appropriate in connection therewith.

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

      5.10 Payment of Assessments and Charges. Pay all taxes, assessments,
governmental charges, rent, and other Indebtedness which, if unpaid, might
become a Lien against the Property of the Borrower, except any of the foregoing
being contested in good faith and as to which adequate reserve in accordance
with GAAP has been established or unless failure to pay would not have a
Material Adverse Effect.

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

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

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

      5.14 Initial Fees and Expenses of Counsel to Lender. Upon request by the
Agent, promptly reimburse the Agent for all reasonable fees and expenses of
Jackson Walker L.L.P., special counsel to the Agent, in connection with the
preparation of this Agreement and all documentation contemplated hereby, the
satisfaction of the conditions precedent set forth herein, the filing and
recordation of Security Instruments, and the consummation of the transactions
contemplated in this Agreement.

                                     - 41 -
<PAGE>

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

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

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

      5.18 Maintenance of Insurance. Maintain insurance with respect to its
Properties and businesses against such liabilities, casualties, risks, and
contingencies as is customary in the relevant industry and sufficient to prevent
a Material Adverse Effect, all such insurance to be in amounts and from insurers
acceptable to the Agent, maintained by Borrower, naming the Agent as loss payee,
and, upon any renewal of any such insurance and at other times upon request by
the Agent, furnish to the Agent evidence, satisfactory to the Agent, within 30
days of the Closing Date of the maintenance of such insurance. The Agent shall
have the right to collect, and the Borrower hereby assigns to the Agent, any and
all monies that may become payable under any policies of insurance relating to
business interruption, if any, or by reason of damage, loss, or destruction of
any of the Collateral. In the event of any damage, loss, or destruction for
which insurance proceeds relating to business interruption, if any, or
Collateral exceed $500,000, the Agent may, at its option, apply all such sums or
any part thereof received by it toward the

                                     - 42 -
<PAGE>

payment of the Obligations, whether matured or unmatured, application to be made
first to interest and then to principal, and shall deliver to the Borrower the
balance, if any, after such application has been made. In the event of any such
damage, loss, or destruction for which insurance proceeds are $500,000 or less,
provided that no Default or Event of Default has occurred and is continuing, the
Agent shall deliver any such proceeds received by it to the Borrower. In the
event the Agent receives insurance proceeds not attributable to Collateral or
business interruption, the Agent shall deliver any such proceeds to the
Borrower.

      5.19 INDEMNIFICATION. INDEMNIFY AND HOLD THE AGENT AND EACH LENDER AND
THEIR SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT,
AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE AGENT AND EACH LENDER
UNDER ANY SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS,
LOSSES, DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND
JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND
ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND
EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE
PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE
BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED
ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR
DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE,
EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER
PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE
HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION,
OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR
UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF
THE BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING
IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING
WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF
WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY
LOAN DOCUMENT OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT
LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE AGENT AND EACH LENDER OR ANY OF
ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE

                                     - 43 -
<PAGE>

BENEFIT OF THE AGENT AND EACH LENDER UNDER ANY SECURITY INSTRUMENT; WITH THE
FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT.

      5.20 Partnership Debt. No Oil and Gas Properties of the partnerships in
which PrimeEnergy Corporation and PrimeEnergy Management Corporation own general
or limited partnership interest and which have been pledged to the Agent by the
document described in Section 3.1(g)(vi) have been mortgaged. The partnerships
have no debt except that PrimeEnergy Asset & Income Fund LP AA-4 which owes
PrimeEnergy Management Corporation and/or Prime Operating Company the sum of
$153,280.37 and the Borrower agrees that if any payment is made on such debt at
a time the Borrower is in Default under this Agreement, such funds shall be paid
to the Agent for the benefit of the Lenders.

                                   ARTICLE VI

                               NEGATIVE COVENANTS

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

      6.1 Indebtedness. Create, incur, assume, or suffer to exist any
Indebtedness in excess of $1,500,000, whether by way of loan or otherwise;
provided, however, the foregoing restriction shall not apply to (a) the
Obligations, (b) unsecured accounts payable incurred in the ordinary course of
business, which are not unpaid in excess of 60 days beyond invoice date or are
being contested in good faith and as to which such reserve as is required by
GAAP has been made , (c) crude oil, natural gas, or other hydrocarbon floor,
collar, cap, price protection, or swap agreements ("Commodity Hedge
Agreements"), in form and substance and with a Person acceptable to the Lender,
provided that (i) each commitment issued under such agreement must also be
approved by the Lender, (ii) such agreements shall not be entered into with
respect to Mortgaged Properties constituting more than 70% of monthly production
of proven producing reserves as forecast in Lender's most recent engineering
evaluation, (iii) that the strike prices in such agreements are not less than
the prices used by the Lender in its most recent Borrowing Base determination,
and (iv) the Lender shall receive a security interest in the Commodity Hedge
Agreements, (d) Rate Management Transactions, in form and substance and with a
Person acceptable to the Lender, or (e) indebtedness with respect to payments to
sellers of Oil and Gas Properties acquired subsequent to the date of this
Agreement of a portion of the cash flow attributable to such properties that is
acceptable to the Agent and the Lenders in their sole good faith discretion.

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

                                     - 44 -
<PAGE>

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

      6.4 Sales of Assets. Without the prior written consent of the Lenders,
sell, transfer, or otherwise dispose of, in one or any series of transactions
within any 12-month period, assets, whether now owned or hereafter acquired, the
book value of which exceeds $250,000 in the aggregate for both Borrowers, or
enter into any agreement to do so; provided, however, the foregoing restriction
shall not apply to the sale of hydrocarbons or inventory in the ordinary course
of business or the sale or other disposition of Property destroyed, lost, worn
out, damaged or having only salvage value or no longer used or useful in the
business of either Borrower.

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

      6.6 Loans or Advances. Make or agree to make or allow to remain
outstanding any loans or advances to any Person; provided, however, the
foregoing restrictions shall not apply to (a) advances or extensions of credit
in the form of accounts receivable incurred in the ordinary course of business
and upon terms common in the industry for such accounts receivable, or (b)
advances to employees of the Borrower for the payment of expenses in the
ordinary course of business, (c) the outstanding Guarantee in the amount of
$1,000,000 to Alabama Shopping Center Associates, and (d) loans or advances to
PrimeEnergy asset and Income Fund L.P. A-1, PrimeEnergy Asset and Income Fund
L.P. A-2, PrimeEnergy Asset and Income Fund L.P. A-3, PrimeEnergy Asset and
Income Fund L.P. AA-1, PrimeEnergy Asset and Income Fund L.P. AA-2, PrimeEnergy
Asset and Income Fund L.P. AA-3, PrimeEnergy Asset and Income Fund L.P. AA-4,
PrimeEnergy Asset and Income Trust A-1, PrimeEnergy Asset and Income Trust A02
and any other oil and gas limited partnership for which either Borrower is the
managing general partner and any business trust formed in the ordinary course of
business of the Borrowers for which either Borrower is the managing trustee,
provided that no default or event of default exists under any material
contractual obligation of such partnership or trust.

      6.7 Investments. Acquire Investments in, or purchase or otherwise acquire
all or substantially all of the assets of, any Person; provided, however, the
foregoing restriction shall not apply to the purchase or acquisition of (a) Oil
and Gas Properties, (b) Investments in the form of (i) debt securities issued or
directly and fully guaranteed or insured by the United States Government or any
agency or instrumentality thereof, with maturities of no more than one year,
(ii) commercial paper of a domestic issuer rated at the date of acquisition at
least P-2 by Moody's Investor Service, Inc. or A-2 by Standard & Poor's
Corporation and with maturities of no more than one year from the date of
acquisition, or (iii) repurchase agreements covering debt securities or
commercial paper of the type permitted in this Section, certificates of deposit,
demand deposits, eurodollar time deposits, overnight bank deposits and bankers'
acceptances, with maturities of no more than one year from the date of
acquisition, issued by or acquired from or through the Lender or any bank or
trust company organized under the laws of the United States or any state thereof
and having capital surplus and undivided profits aggregating at least

                                     - 45 -
<PAGE>

$100,000,000, (c) other short-term Investments similar in nature and degree of
risk to those described in clause (b) of this Section, or (d) money-market
funds.

      6.8 Dividends and Distributions. Declare, pay, or make, whether in cash or
Property of the Borrower, any dividend or distribution on, or purchase, redeem,
or otherwise acquire for value, any share of any class of its capital stock,
except that the foregoing restriction shall not apply to dividends paid in
capital stock of the Borrower other than the purchase of capital stock of PEC
for an amount not exceeding $1,000,000 in any fiscal year provided that no
Default or Event of Default exists or will occur as the result of such purchase.

      6.9 Issuance of Stock; Changes in Corporate Structure. Issue or agree to
issue additional shares of capital stock, in one or any series of transactions;
enter into any transaction of consolidation, merger, or amalgamation; liquidate,
wind up, or dissolve (or suffer any liquidation or dissolution).

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

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

      6.12 ERISA Compliance. Permit any Plan maintained by it or any Commonly
Controlled Entity to (a) engage in any Prohibited Transaction, (b) incur any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA, or (c) terminate in a manner which could result in the imposition of a
Lien on any Property of the Borrower pursuant to Section 4068 of ERISA; or
assume an obligation to contribute to any Multiemployer Plan; or acquire any
Person or the assets of any Person which has now or has had at any time an
obligation to contribute to any Multiemployer Plan.

      6.13 Interest Coverage Ratio. Permit, as of the close of any fiscal
quarter, the ratio of (a) quarterly EBITDA on a trailing four-quarter basis to
(b) Interest Expense to be less than 3.00 to 1.00, measured on a trailing four
quarter basis.

      6.14 Current Ratio. Permit, as of the close of any fiscal quarter, the
ratio of Current Assets to Current Liabilities to be less than 1.00 to 1.00,
measured on a trailing four-quarter basis.

      6.15 Tangible Net Worth. Permit Tangible Net Worth, as of the close of any
fiscal quarter, to be less than $6,000,000 at December 31, 2002, plus 75% of
positive quarterly net income thereafter.

      6.16 Bank Debt Coverage Ratio. Permit, as of the close of any fiscal
quarter, the ratio of (a) Bank Debt to (b) EBITDA to be greater than 4.00 to
1.00, measured on a trailing four quarter basis.

                                     - 46 -
<PAGE>

                                  ARTICLE VII

                                EVENTS OF DEFAULT

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

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

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

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

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

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

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

            (g) an order, judgment, or decree shall be entered against either
      the Borrower by any court of competent jurisdiction or by any other duly
      authorized

                                     - 47 -
<PAGE>

      authority, on the petition of a creditor or otherwise, granting relief in
      any Insolvency Proceeding or approving a petition seeking reorganization
      or an arrangement of its debts or appointing a receiver, trustee,
      conservator, custodian, or liquidator of it or all or any substantial part
      of its assets, and such order, judgment, or decree shall not be dismissed
      or stayed within 60 days;

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

            (i) a final and non-appealable order, judgment, or decree shall be
      entered against the Borrower for money damages and/or Indebtedness due in
      an amount in excess of $500,000, except as disclosed on the Closing Date
      in Exhibit V and such order, judgment, or decree shall not be paid in
      full, dismissed, or stayed within 60 days;

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

            (k) the Borrower shall have (i) concealed, removed, or diverted, or
      permitted to be concealed, removed, or diverted, any part of its Property,
      with intent to hinder, delay, or defraud its creditors or any of them,
      (ii) made or suffered a transfer of any of its Property which may be
      fraudulent under any bankruptcy, fraudulent conveyance, or similar law,
      (iii) made any transfer of its Property to or for the benefit of a
      creditor at a time when other creditors similarly situated have not been
      paid, or (iv) shall have suffered or permitted, while insolvent, any
      creditor to obtain a Lien upon any of its Property through legal
      proceedings or distraint which is not vacated within 30 days from the date
      thereof;

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

            (m) the Borrower shall cease to be owned by its presently existing
      shareholders;

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

                                     - 48 -
<PAGE>

            (o) the failure to furnish the information required by Section
      3.1(t) or execute the Security Agreements and/or Certificate of Title
      necessary to grant to the Agent a first lien on the property listed on
      Exhibit VIII.

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

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

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

                                  ARTICLE VIII

                                    THE AGENT

      8.1 Appointment. Each Lender hereby designates and appoints the Agent as
the agent of such Lender under this Agreement and the other Loan Documents. Each
Lender authorizes the Agent, as the agent for such Lender, to take such action
on behalf of such Lender under the provisions of this Agreement and the other
Loan Documents and to exercise such powers and perform such duties as are
expressly delegated to the Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto.

                                     - 49 -
<PAGE>

Notwithstanding any provision to the contrary elsewhere in this Agreement or in
any other Loan Document, the Agent shall not have any duties or responsibilities
except those expressly set forth herein or in any other Loan Document or any
fiduciary relationship with any Lender; and no implied covenants, functions,
responsibilities, duties, obligations, or liabilities on the part of the Agent
shall be read into this Agreement or any other Loan Document or otherwise exist
against the Agent.

      8.2 Waivers, Amendments. The provisions of this Agreement and of each
other Loan Document may from time to time be amended, modified or waived, if
such amendment, modification, or waiver is in writing and consented to by the
Borrower and the Required Lenders; provided, however, that no such amendment,
modification or waiver would: (a) modify any requirement hereunder that any
particular action be taken by all of the Lenders or by the Required Lenders
unless consented to by each Lender; (b) modify this Section 8.2, change the
definition of "Required Lenders", or change the Commitment Amount or Percentage
Share of any Lender, reduce the fees described in Article II, extend the
Commitment Termination Date or Final Maturity, release any Security Instrument
or Lien, or initiate any foreclosure, enforcement or collection procedure
without the consent of each Lender; (c) extend the due date for, (or reduce the
amount of any scheduled repayment or prepayment of principal of or interest on
any Loan) without the consent of the holder of that Note evidencing such Loan;
(d) affect, adversely the interests, rights, or obligations of the Agent without
the consent of the Agent; or (e) to modify the Borrowing Base or modify the
monthly amount by which the Borrowing Base shall be reduced.

      8.3 Delegation of Duties. The Agent may execute any of its duties under
this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible to any
Lender for the negligence or misconduct of any agents or attorneys-in-fact
selected by it with reasonable care.

      8.4 Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or affiliates shall be (a)
required to initiate or conduct any litigation or collection proceedings
hereunder, except with the concurrence of the Required Lenders and contribution
by each Lender of its Percentage Share of costs reasonably expected by the Agent
to be incurred in connection therewith, (b) liable for any action lawfully taken
or omitted to be taken by it or such Person under or in connection with this
Agreement or any other Loan Document (except for gross negligence or willful
misconduct of the Agent or such Person), or (c) responsible in any manner to any
Lender for any recitals, statements, representations or warranties made by the
Borrower or any officer thereof contained in this Agreement or any other Loan
Document or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under or in connection with, this
Agreement or any other Loan Document, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or for any failure of the Borrower to perform its obligations hereunder
or thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained

                                     - 50 -
<PAGE>

in, or conditions of, this Agreement or any other Loan Document, or to inspect
the properties, books or records of the Borrower.

      8.5 Reliance by Agent. The Agent shall be entitled to rely, and shall be
fully protected in relying, upon any Note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including counsel to
the Borrower), independent accountants and other experts selected by the Agent.
The Agent may deem and treat the payee of any Note as the owner thereof for all
purposes unless and until a written notice of assignment, negotiation, or
transfer thereof shall have been received by the Agent. The Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the Required Lenders as it deems appropriate and contribution by each Lender of
its Percentage Share of costs reasonably expected by the Agent to be incurred in
connection therewith. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under this Agreement and the other Loan Documents
in accordance with a request of the Required Lenders. Such request and any
action taken or failure to act pursuant thereto shall be binding upon the
Lenders and all future holders of the Notes. In no event shall the Agent be
required to take any action that exposes the Agent to personal liability or that
is contrary to any Loan Document or applicable Requirement of Law.

      8.6 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default unless the Agent has
received notice from a Lender or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default." In the event that the Agent receives such a notice, the
Agent shall promptly give notice thereof to the Lenders. The Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders; provided that unless and until the
Agent shall have received such directions, subject to the provisions of Section
7.2, the Agent may (but shall not be obligated to) take such action, or refrain
from taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interests of the Lenders. In the event that the
officer of the Agent primarily responsible for the lending relationship with the
Borrower or the officer of any Lender primarily responsible for the lending
relationship with the Borrower becomes aware that a Default or Event of Default
has occurred and is continuing, the Agent or such Lender, as the case may be,
shall use its good faith efforts to inform the other Lenders and/or the Agent,
as the case may be, promptly of such occurrence. Notwithstanding the preceding
sentence, failure to comply with the preceding sentence shall not result in any
liability to the Agent or any Lender.

      8.7 Non-Reliance on Agent and Other Lenders. Each Lender expressly
acknowledges that neither the Agent nor any other Lender nor any of their
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representation or warranty to such Lender and that no
act by the Agent or any other Lender hereafter taken, including any review of
the affairs of the Borrower, shall be deemed to constitute any representation or
warranty by the Agent or any Lender to any other Lender. Each Lender represents
to the Agent that it has,

                                     - 51 -
<PAGE>

independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
condition (financial and otherwise) and creditworthiness of the Borrower and the
value of the Collateral and other Properties of the Borrower and has made its
own decision to enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigation as it deems necessary to inform itself as to the
business, operations, property, condition (financial and otherwise) and
creditworthiness of the Borrower and the value of the Collateral and other
Properties of the Borrower. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Agent hereunder, the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, operations, property,
condition (financial and otherwise), or creditworthiness of the Borrower or the
value of the Collateral or other Properties of the Borrower which may come into
the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates.

      8.8 Indemnification. EACH LENDER AGREES TO INDEMNIFY THE AGENT AND ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES (TO THE
EXTENT NOT REIMBURSED BY THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE
BORROWER TO DO SO), RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER,
FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY
KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING ANY TIME FOLLOWING THE PAYMENT
AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY
RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
OTHER DOCUMENT CONTEMPLATED OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR
IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING ANY LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR ASSERTED AS A RESULT OF THE
NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO
LENDER SHALL BE LIABLE FOR THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES OR DISBURSEMENTS RESULTING SOLELY FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE AGENT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT OR AFFILIATES. THE AGREEMENTS IN THIS SECTION SHALL SURVIVE
THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT.

      8.9 Restitution. Should the right of the Agent or any Lender to realize
funds with respect to the Obligations be challenged and any application of such
funds to the Obligations be reversed, whether by Governmental Authority or
otherwise, or should the Borrower otherwise be entitled to a refund or return of
funds distributed to the Lenders in connection with the

                                     - 52 -
<PAGE>

Obligations, the Agent or such Lender, as the case may be, shall promptly notify
the Lenders of such fact. Not later than Noon, Central Standard or Central
Daylight Savings Time, as the case may be, of the Business Day following such
notice, each Lender shall pay to the Agent an amount equal to the ratable share
of such Lender of the funds required to be returned to the Borrower. The ratable
share of each Lender shall be determined on the basis of the percentage of the
payment all or a portion of which is required to be refunded originally
distributed to such Lender, if such percentage can be determined, or, if such
percentage cannot be determined, on the basis of the Percentage Share of such
Lender. The Agent shall forward such funds to the Borrower or to the Lender
required to return such funds. If any such amount due to the Agent is made
available by any Lender after Noon, Central Standard or Central Daylight Savings
Time, as the case may be, of the Business Day following such notice, such Lender
shall pay to the Agent (or the Lender required to return funds to the Borrower,
as the case may be) for its own account interest on such amount at a rate equal
to the Federal Funds Rate for the period from and including the date on which
restitution to the Borrower is made by the Agent (or the Lender required to
return funds to the Borrower, as the case may be) to but not including the date
on which such Lender failing to timely forward its share of funds required to be
returned to the Borrower shall have made its ratable share of such funds
available.

      8.10 Agent in Its Individual Capacity. The Agent and its affiliates may
make loans to, accept deposits from and generally engage in any kind of business
with the Borrower as though the Agent were not the agent hereunder. With respect
to any Note issued to the Lender serving as the Agent, the Agent shall have the
same rights and powers under this Agreement as a Lender and may exercise such
rights and powers as though it were not the Agent. The terms "Lender" and
"Lenders" shall include the Agent in its individual capacity.

      8.11 Successor Agent. The Agent may resign as Agent upon ten days' notice
to the Lenders and the Borrower. If the Agent shall resign as Agent under this
Agreement and the other Loan Documents, Lenders for which the Percentage Shares
aggregate at least fifty-one percent (51%) shall appoint from among the Lenders
a successor agent for the Lenders, subject to the reasonable consent of the
Borrower, whereupon such successor agent shall succeed to the rights, powers and
duties of the Agent. The term "Agent" shall mean such successor agent effective
upon its appointment. The rights, powers, and duties of the former Agent as
Agent shall be terminated, without any other or further act or deed on the part
of such former Agent or any of the parties to this Agreement or any holders of
the Notes. After the removal or resignation of any Agent hereunder as Agent, the
provisions of this Article VIII and those of any Section hereof relating to the
Agent, including Section 5.14, Section 5.15 and Section 5.19 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement and the other Loan Documents.

      8.12 Applicable Parties. The provisions of this Article are solely for the
benefit of the Agent and the Lenders, and the Borrower shall not have any rights
as a third party beneficiary or otherwise under any of the provisions of this
Article. In performing functions and duties hereunder and under the other Loan
Documents, the Agent shall act solely as the agent of the Lenders and does not
assume, nor shall it be deemed to have assumed, any obligation or

                                     - 53 -
<PAGE>

relationship of trust or agency with or for the Borrower or any legal
representative, successor, and assign of the Borrower.

                                   ARTICLE IX

                                  MISCELLANEOUS

      9.1 Assignments; Participations. Each Lender may assign or sell
participations in its Loans and Commitments to one or more other Persons in
accordance with this Section 9.1.

            (a) Assignments. Any Lender,

                  (i) with the written consent of the Borrower and the Agent
            (which consent shall not be unreasonably delayed or withheld), may
            at any time, assign and delegate to one or more commercial banks or
            other financial institutions, and

                  (ii) with notice to the Borrower and the Agent, but without
            the consent of the Borrower or the Agent, may assign and delegate to
            any of its Affiliates or to any other Lender

(each Person described in (i) or (ii) above as being the Person to whom such
assignment and delegation is to be made, being hereinafter referred to as an
"Assignee Lender"), all or any fraction of such Lender's total Loans and
Commitments (which assignment and delegation shall be of a constant, and not a
varying percentage, of all the assigning Lender's Loans and Commitments), in a
minimum aggregate amount of $1,000,000 of such Lender's Percentage Share of the
Maximum Commitment Amount, if less; provided, however, that such Assignee Lender
will comply with all the provisions of this Agreement, and further, provided,
however, that the Borrower and Agent shall be entitled to continue to deal
solely and directly with such assigning Lender in connection with the interests
so assigned and delegated to an Assignee Lender until:

                  (iii) written notice of such assignment and delegation
            together with payment instructions, addresses and related
            information with respect to such Assignee Lender, shall have been
            given to the Borrower and the Agent by such Lender and such Assignee
            Lender,

                  (iv) such Assignee Lender shall have executed and delivered to
            the Borrower and the Agent a Lender Assignment Agreement, accepted
            by the Borrower and the Agent and attached hereto as Exhibit VII,
            and

                  (v) the processing fees described below shall have been paid.

                                     - 54 -
<PAGE>

From and after the date that the Borrower and the Agent accept such Lender
Assignment Agreement, (a) the Assignee Lender thereunder shall be deemed
automatically to have become a party hereto and to the extent that rights and
obligations hereunder have been assigned and delegated to such Assignee Lender
in connection with such Lender Assignment Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (b)
the Assignor Lender, to the extent that rights and obligations hereunder have
been assigned and delegated by it in connection with such Lender Assignment
Agreement, shall be released from its obligations hereunder and under the other
Loan Documents. Within five Business Days after its receipt of notice that the
Agent has received an executed Lender Assignment Agreement, the Borrower shall
execute and deliver to the Agent (for delivery to the relevant Assignee Lender)
new Notes evidencing such Assignee Lender's assigned Loans and Commitments and,
if the assignor Lender has retained Loans and Commitments hereunder, replacement
Notes in the principal amount of the Loans and Commitments retained by the
assignor Lender hereunder (such Notes to be in exchange for, but not in payment
of, those Notes then held by such assignor Lender). Each such Note shall be
dated the date of the predecessor Notes. The assignor Lender shall mark the
predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest
on that part of the predecessor Notes evidenced by the new Notes, and accrued
fees, shall be paid as provided in the Lender Assignment Agreement. Accrued
interest on that part of the predecessor Notes evidenced by the replacement
Notes shall be paid to the assignor Lender. Accrued interest and accrued fees
shall be paid at the same time or times provided in the predecessor Notes and in
this Agreement. Such assignor Lender or such assignee Lender must also pay a
processing fee to the Agent upon delivery of any Lender Assignment Agreement in
the amount of $3,000. Any attempted assignment and delegation not made in
accordance with this Section 9.1 shall be null and void.

            (b) Participations. Any Lender, with the prior written consent of
the Borrower in its sole discretion, may at any time sell to one or more
commercial banks (each of such commercial banks being herein called a
"Participant") participating interests in any of the Loans, Commitments, or
other interests of such Lender hereunder; provided, however, that (a) no
participation contemplated in this Section 9.1 shall relieve such Lender from
its Commitments or its other obligations hereunder or under any other Loan
Document, (b) such Lender shall remain solely responsible for the performance of
its Commitments and such other obligations, (c) the Borrower and the Agent shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement and each of the other Loan
Documents, (d) no Participant shall be entitled to require such Lender to take
or refrain from taking any action hereunder or under any other Loan Document.

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

      9.3 Notices and Other Communications. Except as to oral notices expressly
authorized herein, which oral notices shall be confirmed in writing, all
notices, requests, and communications hereunder shall be in writing (including
by telecopy). Unless otherwise

                                     - 55 -
<PAGE>

expressly provided herein, any such notice, request, demand, or other
communication shall be deemed to have been duly given or made when delivered by
hand, or, in the case of delivery by mail, when deposited in the mail, certified
mail, return receipt requested, postage prepaid, or, in the case of telecopy
notice, when receipt thereof is acknowledged orally or by written confirmation
report, addressed as follows:

            (a)   if to the Agent and Lender, to:

                  Guaranty Bank, FSB
                  333 Clay Street, Suite 4400
                  Houston, Texas  77002
                  Attention: Richard E. Menchaca
                  Telecopy: (713) 890-8868

            (b)   if to the Borrower, to:

                  PrimeEnergy Corporation
                  PrimeEnergy Management Corporation
                  Prime Operating Company
                  Eastern Oil Well Service Company
                  Southwest Oilfield Construction Company
                  EOWS Midland Company
                  One Landmark Square
                  Stamford, Connecticut  06901
                  Attention: Ms. Beverly A. Cummings
                  Telecopy: (203) 358-5786

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

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

      9.5 Rights of Third Parties. All provisions herein are imposed solely and
exclusively for the benefit of the Agent, Lenders and the Borrower. No other
Person shall have any right, benefit, priority, or interest hereunder or as a
result hereof or have standing to require satisfaction of provisions hereof in
accordance with their terms.

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

                                     - 56 -
<PAGE>

      9.7 No Waiver; Rights Cumulative. No course of dealing on the part of the
Agent or the Lender, its officers or employees, nor any failure or delay by the
Agent or the Lender with respect to exercising any of its rights under any Loan
Document shall operate as a waiver thereof. The rights of the Agent or the
Lender under the Loan Documents shall be cumulative and the exercise or partial
exercise of any such right shall not preclude the exercise of any other right.
Neither the making of any Loan nor the issuance of a Letter of Credit shall
constitute a waiver of any of the covenants, warranties, or conditions of the
Borrower contained herein. In the event the Borrower is unable to satisfy any
such covenant, warranty, or condition, neither the making of any Loan nor the
issuance of a Letter of Credit shall have the effect of precluding the Lender
from thereafter declaring such inability to be an Event of Default as
hereinabove provided.

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

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

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

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

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

      9.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION

                                     - 57 -
<PAGE>

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

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

      9.15 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT
BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL
SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS
AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE
FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

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

                                     - 58 -
<PAGE>

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

                                   BORROWER:

                                   PRIMEENERGY CORPORATION
                                   PRIMEENERGY MANAGEMENT
                                   CORPORATION, PRIME OPERATING
                                   COMPANY, EASTERN OIL WELL SERVICE
                                   COMPANY, SOUTHWEST OILFIELD
                                   CONSTRUCTION COMPANY
                                   EOWS MIDLAND COMPANY

                                   By:__________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer

                                     - 59 -
<PAGE>

                                      AGENT AND LENDER:

                                      GUARANTY BANK, FSB

                                      By:___________________________________
                                           Richard E. Menchaca
                                           Vice President

                                     - 60 -
<PAGE>

                                    EXHIBIT I

                                 [FORM OF NOTE]

                                 PROMISSORY NOTE

$50,000,000                       Houston, Texas               December 19, 2002

      FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker") promises
to pay to the order of GUARANTY BANK, FSB ("Payee"), at its banking quarters in
Houston, Harris County, Texas, the sum of FIFTY MILLION DOLLARS ($50,000,000),
or so much thereof as may be advanced against this Note pursuant to the Credit
Agreement dated of even date herewith by and between Maker and Payee (as
amended, restated, or supplemented from time to time, the "Credit Agreement"),
together with interest at the rates and calculated as provided in the Credit
Agreement.

      Reference is hereby made to the Credit Agreement for matters governed
thereby, including, without limitation, certain events which will entitle the
holder hereof to accelerate the maturity of all amounts due hereunder.
Capitalized terms used but not defined in this Note shall have the meanings
assigned to such terms in the Credit Agreement.

      This Note is issued pursuant to, is the "Note" under, and is payable as
provided in the Credit Agreement. Subject to compliance with applicable
provisions of the Credit Agreement, Maker may at any time pay the full amount or
any part of this Note without the payment of any premium or fee, but such
payment shall not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for in the Credit
Agreement.

      Without being limited thereto or thereby, this Note is secured by the
Security Instruments.

      THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF
TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW;
PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL
NOT APPLY TO THIS NOTE.

                           (Page One of Two Page Note)

                                      I-i
<PAGE>

                                    PRIMEENERGY CORPORATION
                                    PRIMEENERGY MANAGEMENT
                                    CORPORATION, PRIME OPERATING
                                    COMPANY, EASTERN OIL WELL SERVICE
                                    COMPANY, SOUTHWEST OILFIELD
                                    CONSTRUCTION COMPANY
                                    EOWS MIDLAND COMPANY

                                    By:_________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer

                                      I-ii
<PAGE>

                                  EXHIBIT I(A)

                               [FORM OF TERM NOTE]

                                      TERM
                                 PROMISSORY NOTE

$4,000,000                        Houston, Texas               December 19, 2002

      FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker") promises
to pay to the order of GUARANTY BANK, FSB ("Payee"), at its banking quarters in
Houston, Harris County, Texas, the sum of FOUR MILLION DOLLARS ($4,000,000), or
so much thereof as may be advanced against this Note pursuant to the Credit
Agreement dated of even date herewith by and between Maker and Payee (as
amended, restated, or supplemented from time to time, the "Credit Agreement"),
together with interest at the rates and calculated as provided in the Credit
Agreement.

      Reference is hereby made to the Credit Agreement for matters governed
thereby, including, without limitation, certain events which will entitle the
holder hereof to accelerate the maturity of all amounts due hereunder.
Capitalized terms used but not defined in this Note shall have the meanings
assigned to such terms in the Credit Agreement.

      This Note is issued pursuant to, is the "Note" under, and is payable as
provided in the Credit Agreement. Subject to compliance with applicable
provisions of the Credit Agreement, Maker may at any time pay the full amount or
any part of this Note without the payment of any premium or fee, but such
payment shall not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for in the Credit
Agreement.

      Without being limited thereto or thereby, this Note is secured by the
Security Instruments.

      THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF
TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW;
PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL
NOT APPLY TO THIS NOTE.

                           (PAGE ONE OF TWO PAGE NOTE)

                                     I(A)-i
<PAGE>

                                PRIMEENERGY CORPORATION
                                PRIMEENERGY MANAGEMENT
                                CORPORATION, PRIME OPERATING
                                COMPANY, EASTERN OIL WELL SERVICE
                                COMPANY, SOUTHWEST OILFIELD
                                CONSTRUCTION COMPANY
                                EOWS MIDLAND COMPANY

                                By:_____________________________________________
                                      Beverly A. Cummings
                                      Executive Vice President, Treasurer, and
                                      Chief Financial Officer

                                     I(A)-ii
<PAGE>

                                   EXHIBIT II

                           [FORM OF BORROWING REQUEST]

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS  77002
Attention:  Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

Ladies and Gentlemen:

      Pursuant to the Credit Agreement, the Borrower hereby makes the requests
indicated below:

      1.    Loans

      (a)   Amount of new Loan: $

      (b)   Requested funding date: , 20

      (c)   $________________ of such Loan is to be a Floating Rate Loan;

            $________________ of such Loan is to be a LIBO Rate Loan.

      Requested Interest Period for LIBO Rate Loan: ____ months.

      2.    Continuation or conversion of LIBO Rate Loan maturing on :

      (a)   Amount to be continued as a LIBO Rate Loan is $        , with an
            Interest Period of              months;

      (b)   Amount to be converted to a Floating Rate Loan is $      ; and

      3.    Conversion of Floating Rate Loan:

      (a)   Requested conversion date:     , 20 .

                                      II-i
<PAGE>

      (b)   Amount to be converted to a LIBO Rate Loan is $       , with an
            Interest Period of _____ months.

      The undersigned certifies that she/he is the ____________ of the Borrower,
has obtained all consents necessary, and as such she/he is authorized to execute
this request on behalf of the Borrower. The undersigned further certifies,
represents, and warrants on behalf of the Borrower that the Borrower is entitled
to receive the requested borrowing, continuation, or conversion under the terms
and conditions of the Credit Agreement and are in full compliance with all the
terms and conditions of the Credit Agreement. Each capitalized term used but not
defined herein shall have the meaning assigned to such term in the Credit
Agreement.

                                   BORROWER:

                                   PRIMEENERGY CORPORATION
                                   PRIMEENERGY MANAGEMENT
                                   CORPORATION, PRIME OPERATING
                                   COMPANY, EASTERN OIL WELL SERVICE
                                   COMPANY, SOUTHWEST OILFIELD
                                   CONSTRUCTION COMPANY
                                   EOWS MIDLAND COMPANY

                                   By:__________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer

                                     II-ii
<PAGE>

                                   EXHIBIT III

                        [FORM OF COMPLIANCE CERTIFICATE]

                                 ________, 2002

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS  77002
Attention:  Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

Ladies and Gentlemen:

      Pursuant to applicable requirements of the Credit Agreement, the
undersigned, as a Responsible Officer of the Borrower, hereby certifies to you
the following information as true and correct as of the date hereof or for the
period indicated, as the case may be:

      1. To the best of the knowledge of the undersigned, no Default or Event of
      Default exists as of the date hereof or has occurred since the date of our
      previous certification to you, if any.

      1. To the best of the knowledge of the undersigned, the following Defaults
      or Events of Default exist as of the date hereof or have occurred since
      the date of our previous certification to you, if any, and the actions set
      forth below are being taken to remedy such circumstances:

      2. The compliance of the Borrower with the financial covenants of the
      Credit Agreement, as of the close of business on __________ , is evidenced
      by the following:

      (a)   Section 6.13: Interest Coverage Ratio. Permit, as of the close of
            any fiscal quarter, the ratio of (a) quarterly EBITDA on a tailing
            four-quarter basis to (b) Interest Expense to be less than 3.00 to
            1.00, measured on a trailing four quarter basis.

                                    Actual
                                    ------

                                    _____ to 1.0

                                      III-i
<PAGE>

      (b)   Section 6.14: Current Ratio. Permit, as of the close of any fiscal
            quarter, the ratio of Current Assets to Current Liabilities to be
            less than 1.00 to 1.00 measured on a trailing four quarter basis.

                                    Actual
                                    ------

                                    _____ to 1.0

      (c)   Section 6.15: Tangible Net Worth. Permit Tangible Net Worth, as of
            the close of any fiscal quarter, to be less than $6,000,000, plus
            75% of positive quarterly net income thereafter.

                                     Actual
                                     ------

      (d)   Section 6.16: Bank Debt Coverage Ratio. Permit, as of the close of
            any fiscal quarter, the ratio of (a) Bank Debt to (b) EBITDA to be
            greater than 4.00 to 1.00, measured on a trailing four quarter
            basis.

                                    Actual
                                    ------

                                    _____ to 1.0

      3. No Material Adverse Effect has occurred since the date of the Financial
      Statements dated as of __________.

                                     III-ii
<PAGE>

      Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

                                Very truly yours,

                                PRIMEENERGY CORPORATION
                                PRIMEENERGY MANAGEMENT
                                CORPORATION, PRIME OPERATING
                                COMPANY, EASTERN OIL WELL SERVICE
                                COMPANY, SOUTHWEST OILFIELD
                                CONSTRUCTION COMPANY
                                EOWS MIDLAND COMPANY

                                By:_____________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer

                                    III-iii
<PAGE>

                                   EXHIBIT IV

                          [FORM OF OPINION OF COUNSEL]

                                 [Closing Date]

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS 77002
Attention: Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

Ladies and Gentlemen:

      We have acted as counsel to PRIMEENERGY CORPORATION, PRIMEENERGY
MANAGEMENT CORPORATION, PRIME OPERATING COMPANY, EASTERN OIL WELL SERVICE
COMPANY, SOUTHWEST OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY
(collectively, the "Borrower") in connection with the transactions contemplated
in the Credit Agreement. This Opinion is delivered pursuant to Section 3.1(m) of
the Credit Agreement, and the Lender is hereby authorized to rely upon this
Opinion in connection with the transactions contemplated in the Credit
Agreement. Each capitalized term used but not defined herein shall have the
meaning assigned to such term in the Credit Agreement.

      In our representation of the Borrower, we have examined an executed
counterpart of each of the following (the "Loan Documents"):

            (a) the Credit Agreement;

            (b) the Note and the Term Note;

            (c) Mortgage, Deed of Trust, Indenture, Security Agreement,
      Assignment of Production, and Financing Statement dated of even date
      herewith from the Borrower in favor of the Lender (the "Mortgage"); and

            (d) Financing Statements from the Borrower, as debtors, constituent
      to the Mortgage (the "Financing Statement").

                                      IV-i
<PAGE>

            (e) a certificate of incumbency dated the Closing Date, including
      specimen signatures of all officers or other representatives of the
      Borrower who are authorized to execute Loan Documents on behalf of the
      Borrower, such certificate being executed by the manager or another
      authorized representative of the Borrower;

            (f) copies of resolutions, to the extent required under the
      Operating Agreement of the Borrower, adopted by the board of directors of
      the Borrower approving the Loan Documents to which the Borrower is a party
      and authorizing the transactions contemplated herein and therein,
      accompanied by a certificate dated the Closing Date issued by the manager
      or another authorized representative of the Borrower to the effect that
      such copies are true and correct copies of resolutions duly adopted and
      that such resolutions constitute all the resolutions adopted with respect
      to such transactions, have not been amended, modified, or rescinded in any
      respect, and are in full force and effect as of the date of such
      certificate;

            (g) multiple counterparts, as requested by the Lender, of the
      following Security Instruments creating, evidencing, perfecting, and
      otherwise establishing Liens in favor of the Lender in and to the
      Collateral:

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

                  (ii) Financing Statements from the Borrower, as debtor,
            constituent to the instrument described in clause (i) above;

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

                  (iv) Security Agreement from the Borrower pledging contract
            rights, etc.;

                  (v) Financing Statements from the Borrower, as debtor,
            constituent to the instrument described in clause (iv) above;

                                      IV-ii
<PAGE>

                  (vi) Assignment of Partnership Interest (Security Agreement)
            from the Borrower pledging certain partnership interest;

                  (vii) Financing Statement from the Borrower, as debtor,
            constituent to the instrument described in Clause (vi) above;

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

      We have also examined the originals, or copies certified to our
satisfaction, of such other records of the Borrower, certificates of public
officials and officers of the Borrower, agreements, instruments, and documents
as we have deemed necessary as a basis for the opinions hereinafter expressed.

      In making such examinations, we have, with your permission, assumed:

            (a) the genuineness of all signatures to the Loan Documents other
      than those of the Borrower;

            (b) the authenticity of all documents submitted to us as originals
      and the conformity with the originals of all documents submitted to us as
      copies;

            (c) the Lender is authorized and has the power to enter into and
      perform its obligations under the Credit Agreement;

            (d) the due authorization, execution, and delivery of all Loan
      Documents by each party thereto other than the Borrower; and

            (e) the Borrower has title to all Property covered or affected by
      the Mortgage.

      Based upon the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:

            1. The Borrower is a corporation or limited liability companies duly
      organized, legally existing, and in good standing under the laws of their
      respective states of incorporation and are duly qualified as foreign
      corporations or limited liability companies and are in good standing in
      all jurisdictions wherein the ownership of their respective Property or
      the operation of their respective businesses necessitates same.

            2. The execution and delivery by the Borrower of the Credit
      Agreement and the borrowings thereunder, the execution and delivery by the
      Borrower of the other Loan Documents to which the Borrower is a party, and
      the payment and performance of all Obligations of the Borrower thereunder
      are within the power of the Borrower, have been

                                     IV-iii
<PAGE>

      duly authorized by all necessary corporate action, and do not (a) require
      the consent of any Governmental Authority, (b) contravene or conflict with
      any Requirement of Law, (c) to our knowledge after due inquiry, contravene
      or conflict with any indenture, instrument, or other agreement to which
      the Borrower is a party or by which any Property of the Borrower may be
      presently bound or encumbered, or (d) result in or require the creation or
      imposition of any Lien upon any Property of the Borrower other than as
      contemplated by the Loan Documents.

            3. The Loan Documents to which the Borrower is a party constitute
      legal, valid, and binding obligations of the Borrower, enforceable against
      the Borrower in accordance with their respective terms.

            4. The forms of the Mortgage and the Financing Statement and the
      description of the Mortgaged Property (as such term is defined in the
      Mortgage and so used herein) situated in the State of Texas (the "State")
      satisfy all applicable Requirements of Law of the State and are legally
      sufficient under the laws of the State to enable the Lender to realize the
      practical benefits purported to be afforded by the Mortgage.

            5. The Mortgage creates a valid lien upon and security interest in
      all Mortgaged Property situated in the State to secure the Indebtedness
      (as such term is defined in the Mortgage and so used herein).

            6. The Mortgage and the Financing Statement are in satisfactory form
      for filing and recording in the offices described below.

            7. The filing and/or recording, as the case may be, of (a) the
      Mortgage in the office of the county clerk of each county in the State in
      which any portion of the Mortgaged Property is located, and as a financing
      statement and utility security instrument in the office of the Secretary
      of State of the State, and (b) the Financing Statement in the Uniform
      Commercial Code records in each county in the State in which any portion
      of the Mortgaged Property is located are the only recordings or filings in
      the State necessary to perfect the liens and security interests in the
      Mortgaged Property created by the Mortgage or to permit the Lender to
      enforce in the State its rights under the Mortgage. No subsequent filing,
      re-filing, recording, or re-recording will be required in the State in
      order to continue the perfection of the liens and security interests
      created by the Mortgage except that (a) a continuation statement must be
      filed with respect to the Mortgage filed as a financing statement in the
      office of the Secretary of State of the State and with respect to the
      Financing Statement in the Uniform Commercial Code records in each county
      in the State in which any portion of the Mortgaged Property is located,
      each within six months prior to the expiration of five years from the date
      of the relevant initial financing statement filing, (b) a subsequent
      continuation statement must be filed within six months prior to the
      expiration of each subsequent five-year period from the date of each
      initial financing statement filing, and (c) amendments or supplements to
      the Mortgage filed as a financing statement and the Financing Statement
      and/or additional

                                      IV-iv
<PAGE>

      financing statements may be required to be filed in the event of a change
      in the name, identity, or structure of the Borrower or in the event the
      financing statement filing otherwise becomes inaccurate or incomplete.

            8. To our knowledge after due inquiry, except as disclosed in
      Exhibit VI to the Credit Agreement, no litigation or other action of any
      nature affecting the Borrower is pending before any Governmental Authority
      or threatened against the Borrower. To our knowledge after due inquiry, no
      unusual or unduly burdensome restriction, restraint, or hazard exists by
      contract, Requirement of Law, or otherwise relative to the business or
      operations of the Borrower or the ownership and operation of any
      Properties of the Borrower other than such as relate generally to Persons
      engaged in business activities similar to those conducted by the Borrower,
      as the case may be.

            9. No authorization, consent, approval, exemption, franchise, permit
      or license of, or filing (other than filing of Security Instruments in
      appropriate filing offices) with, any Governmental Authority or any other
      Person is required to authorize or is otherwise required in connection
      with the valid execution and delivery by the Borrower of the Loan
      Documents or any instrument contemplated thereby, or the payment
      performance by the Borrower of the Obligations.

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

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

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

      The opinions expressed herein are subject to the following qualifications
      and limitations:

            A. We are licensed to practice law only in the State and other
      jurisdictions whose laws are not applicable to the opinions expressed
      herein; accordingly, the foregoing opinions are limited solely to the laws
      of the State, applicable United States federal law.

            B. The validity, binding effect, and enforceability of the Loan
      Documents may be limited or affected by bankruptcy, insolvency,
      moratorium, reorganization, or other similar laws affecting rights of
      creditors generally, including, without limitation, statutes or rules of
      law which limit the effect of waivers of rights by a debtor or grantor;
      provided, however, that the limitations and other effects of such statutes
      or rules of law upon the validity and binding effect of the Loan Documents
      should not differ materially

                                      IV-v
<PAGE>

      from the limitations and other effects of such statutes or rules of law
      upon the validity and binding effect of credit agreements, promissory
      notes, guaranties, and security instruments generally.

            C. The enforceability of the respective obligations of the Borrower
      under the Loan Documents is subject to general principles of equity
      (whether such enforceability is considered in a suit in equity or at law).

      This Opinion is furnished by us solely for the benefit of the Lender in
connection with the transactions contemplated by the Loan Documents and is not
to be quoted in whole or in part or otherwise referred to or disclosed in any
other transaction.

                                                 Very truly yours,

                                      IV-vi
<PAGE>

                                    EXHIBIT V

                                FACILITY AMOUNTS

1.    Revolving Line of Credit

<TABLE>
<CAPTION>
                                                          Facility
      Name of Lender                                      Amount
      --------------                                      ------
<S>                                                       <C>
      Guaranty Bank, FSB                                  $50,000,000

      Total                                               $50,000,000
</TABLE>

2.    Term Loan

<TABLE>
<CAPTION>
                                                          Facility
      Name of Lender                                      Amount
      --------------                                      ------
<S>                                                       <C>
      Guaranty Bank, FSB                                  $4,000,000

      Total                                               $4,000,000
</TABLE>

                                       V-i
<PAGE>

                                   EXHIBIT VI

                                   DISCLOSURES

Section 1.2                    Permitted Liens

                               Liens in favor the "Jackson Group" composed of
                               Jeral W. Jackson, Inc., Pangaea Properties, Inc.
                               and William H. Nichols by PrimeEnergy
                               Corporation, Sterling Asset and Income Funds A-1,
                               A-2, AA-1 and AA-2 (now PrimeEnergy Asset and
                               Income Funds A-1, A-2, AA-1 and AA-2) to secure
                               the payment to the Jackson Group of the "JPN
                               Fee", being an amount of certain of the proceeds
                               and accounts arising from the sale of oil and gas
                               from certain properties located in Garvin County,
                               Oklahoma, as determined pursuant to the terms of
                               that certain Memorandum of Agreement dated
                               October 1, 1990, and as evidenced by Financing
                               Statement filed January 23, 1991, Volume 1295,
                               Page 58, Garvin County, Oklahoma, and Financing
                               Statement filed January 28, 1991, N-00844,
                               Central Filing Office, Oklahoma County Clerk.

Section 4.7                    Liabilities

                               None

                               Litigation

                               None

Section 4.12                   Environmental Matters

                               None

Section 4.17                   Refunds

                               None

Section 4.18                   Gas Contracts

                               None

Section 4.20                   Casualties

                               None

Section 4.22                   Subsidiaries

                               None except those listed as Borrowers

                                      VI-i
<PAGE>

                                     VI-ii
<PAGE>

                                   EXHIBIT VII

                         [FORM OF ASSIGNMENT AGREEMENT]

                              ASSIGNMENT AGREEMENT

      This ASSIGNMENT AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, this "Agreement") is dated as of ________,_____, by
and between __________ (the "Assignor") and _____________ (the "Assignee").

                                    RECITALS

      WHEREAS, the Assignor is a party to the Credit Agreement dated as of
December 19, 2002, (as amended, supplemented or restated from time to time, the
"Credit Agreement") by and among PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT
CORPORATION, PRIME OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY,
SOUTHWEST OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY (collectively, the
"Borrower"), each of the lenders that is or becomes a party thereto as provided
in Section 9.1(b) of the Credit Agreement (individually, together with its
successors and assigns, a "Lender", and collectively, together with their
successors and assigns, the "Lenders"), and Guaranty Bank, FSB, a federal
savings bank, as a Lender (in such capacity, "Guaranty") and as agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Agent"); and

      WHEREAS, the Assignor proposes to sell, assign and transfer to the
Assignee, and the Assignee proposes to purchase and assume from the Assignor,
[ALL][A PORTION] of the Assignor's Facility Amount and its outstanding Loans,
all on the terms and conditions of this Agreement;

      NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

                                   ARTICLE I

                         DEFINITIONS AND INTERPRETATION

      1.1 Definitions from Credit Agreement. All capitalized terms used but not
defined herein have the respective meanings given to such terms in the Credit
Agreement.

      1.2 Additional Defined Terms. As used herein, the following terms have the
following respective meanings:

            "Assigned Interest" shall mean all of Assignor's (in its capacity as
      a "Lender") rights and obligations (i) under the Credit Agreement and the
      other Loan Documents in respect of [ALL OF] [THE PORTION OF THE] Facility
      Amount of the Assignor in the principal amount equal to $______ and (ii)
      to make Loans under its Commitment up to such

                                      VI-i
<PAGE>

      amount referenced above and any right to receive payments for the Loans
      currently outstanding under its Commitment in the principal amount of
      $_______ (the "Loan Balance"), plus the interest and fees which will
      accrue with respect thereto from and after the Assignment Date.

                  "Assignment Date" shall mean                   ,         .

      1.3 References. References in this Agreement to Schedule, Exhibit,
Article, or Section numbers shall be to Schedules, Exhibits, Articles, or
Sections of this Agreement, unless expressly stated to the contrary. References
in this Agreement to "hereby," "herein," "hereinafter," "hereinabove,"
"hereinbelow," "hereof," "hereunder" and words of similar import shall be to
this Agreement in its entirety and not only to the particular Schedule, Exhibit,
Article, or Section in which such reference appears. Except as otherwise
indicated, references in this Agreement to statutes, sections, or regulations
are to be construed as including all statutory or regulatory provisions
consolidating, amending, replacing, succeeding, or supplementing the statute,
section, or regulation referred to. References in this Agreement to "writing"
include printing, typing, lithography, facsimile reproduction, and other means
of reproducing words in a tangible visible form. References in this Agreement to
agreements and other contractual instruments shall be deemed to include all
exhibits and appendices attached thereto and all subsequent amendments and other
modifications to such instruments, but only to the extent such amendments and
other modifications are not prohibited by the terms of this Agreement.
References in this Agreement to Persons include their respective successors and
permitted assigns.

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

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

      1.6 Negotiated Transaction. Each party to this Agreement affirms to the
other that it has had the opportunity to consult, and discuss the provisions of
this Agreement with, independent counsel and fully understands the legal effect
of each provision.

                                     VI-ii
<PAGE>

                                   ARTICLE II

                               SALE AND ASSIGNMENT

      2.1 Sale and Assignment. On the terms and conditions set forth herein,
effective on and as of the Assignment Date, the Assignor hereby sells, assigns
and transfers to the Assignee, and the Assignee hereby purchases and assumes
from the Assignor, all of the right, title and interest of the Assignor in and
to, and all of the obligations of the Assignor in respect of, the Assigned
Interest. Such sale, assignment and transfer is without recourse and, except as
expressly provided in this Agreement, without representation or warranty.

      2.2 Assumption of Obligations. The Assignee agrees with the Assignor (for
the express benefit of the Assignor and the Borrower) that the Assignee will,
from and after the Assignment Date, assume and perform all of the obligations of
the Assignor in respect of the Assigned Interest. From and after the Assignment
Date: (a) the Assignor shall be released from the Assignor's obligations in
respect of the Assigned Interest, and (b) the Assignee shall be entitled to all
of the Assignor's rights, powers and privileges under the Credit Agreement and
the other Loan Documents in respect of the Assigned Interest.

      2.3 Consent by Agent. By executing this Agreement as provided below, in
accordance with Section 9.1(b) of the Credit Agreement, the Agent hereby
acknowledges notice of the transactions contemplated by this Agreement and
consents to such transactions.

                                  ARTICLE III

                                    PAYMENTS

      3.1 Payments. As consideration for the sale, assignment and transfer
contemplated by Section 2.1, the Assignee shall, on the Assignment Date, assume
Assignor's obligations in respect of the Assigned Interest and pay to the
Assignor an amount equal to the Loan Balance, if any, all accrued and unpaid
interest and fees with respect to the Assigned Interest as of the Assignment
Date. Except as otherwise provided in this Agreement, all payments hereunder
shall be made in Dollars and in immediately available funds, without setoff,
deduction or counterclaim.

      3.2 Allocation of Payments. The Assignor and the Assignee agree that (i)
the Assignor shall be entitled to any payments of principal with respect to the
Assigned Interest made prior to the Assignment Date, together with any interest
and fees with respect to the Assigned Interest accrued prior to the Assignment
Date, (ii) the Assignee shall be entitled to any payments of principal with
respect to the Assigned Interest made from and after the Assignment Date,
together with any and all interest and fees with respect to the Assigned
Interest accruing from and after the Assignment Date, and (iii) the Agent is
authorized and instructed to allocate payments received by it for the account of
the Assignor and the Assignee as provided in the foregoing clauses. Each party
hereto agrees that it will hold any interest, fees or other amounts that it may
receive to which the other party hereto shall be entitled pursuant to the

                                     VI-iii
<PAGE>

preceding sentence for account of such other party and pay, in like money and
funds, any such amounts that it may receive to such other party promptly upon
receipt.

      3.3 Delivery of Notes. Promptly following the receipt by the Assignor of
the consideration required to be paid under Section 3.1 hereof, the Assignor
shall, in the manner contemplated by Section 9.1(b) of the Credit Agreement, (i)
deliver to the Agent (or its counsel) the Note held by the Assignor and (ii)
notify the Agent to request that the Borrower execute and deliver new Notes to
the Assignor, if Assignor continues to be a Lender, and the Assignee, dated the
Assignment Date in respective principal amounts equal to the respective Facility
Amounts of the Assignor (if appropriate) and the Assignee after giving effect to
the sale, assignment and transfer contemplated hereby.

      3.4 Further Assurances. The Assignor and the Assignee hereby agree to
execute and deliver such other instruments, and take such other actions, as
either party may reasonably request in connection with the transactions
contemplated by this Agreement.

                                   ARTICLE IV

                              CONDITIONS PRECEDENT

      The effectiveness of the sale, assignment and transfer contemplated hereby
is subject to the satisfaction of each of the following conditions precedent:

            (a) the execution and delivery of this Agreement by the Assignor and
      the Assignee;

            (b) the receipt by the Assignor of the payments required to be made
      under Section 3.1; and

            (c) the acknowledgment and consent by the Agent contemplated by
      Section 2.3.

                                   ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

      5.1 Representations and Warranties of Assignor. The Assignor represents
and warrants to the Assignee as follows:

            (a) it has all requisite power and authority, and has taken all
      action necessary to execute and deliver this Agreement and to fulfill its
      obligations under, and consummate the transactions contemplated by, this
      Agreement;

            (b) the execution, delivery and compliance with the terms hereof by
      the Assignor and the delivery of all instruments required to be delivered
      by it hereunder do not and will not violate any Requirement of Law
      applicable to it;

                                     VI-iv
<PAGE>

            (c) this Agreement has been duly executed and delivered by it and
      constitutes the legal, valid and binding obligation of the Assignor,
      enforceable against it in accordance with its terms;

            (d) all approvals and authorizations of, all filings with and all
      actions by any Governmental Authority necessary for the validity or
      enforceability of its obligations under this Agreement have been obtained;

            (e) the Assignor has good title to, and is the sole legal and
      beneficial owner of, the Assigned Interest, free and clear of all Liens,
      claims, participations or other charges of any nature whatsoever; and

            (f) the transactions contemplated by this Agreement are commercial
      banking transactions entered into in the ordinary course of the banking
      business of the Assignor.

      5.2 Disclaimer. Except as expressly provided in Section 5.1 hereof, the
Assignor does not make any representation or warranty, nor shall it have any
responsibility to the Assignee, with respect to the accuracy of any recitals,
statements, representations or warranties contained in the Credit Agreement or
in any other Loan Document or for the value, validity, effectiveness,
genuineness, execution, legality, enforceability or sufficiency of the Credit
Agreement, the Notes or any other Loan Document or for any failure by the
Borrower or any other Person (other than Assignor) to perform any of its
obligations thereunder or for the existence, value, perfection or priority of
any collateral security or the financial or other condition of the Borrower or
any other Person, or any other matter relating to the Credit Agreement or any
other Loan Document or any extension of credit thereunder.

      5.3 Representations and Warranties of Assignee. The Assignee represents
and warrants to the Assignor as follows:

            (a) it has all requisite power and authority, and has taken all
      action necessary to execute and deliver this Agreement and to fulfill its
      obligations under, and consummate the transactions contemplated by, this
      Agreement;

            (b) the execution, delivery and compliance with the terms hereof by
      the Assignee and the delivery of all instruments required to be delivered
      by it hereunder do not and will not violate any Requirement of Law
      applicable to it;

            (c) this Agreement has been duly executed and delivered by it and
      constitutes the legal, valid and binding obligation of the Assignee,
      enforceable against it in accordance with its terms;

            (d) all approvals and authorizations of, all filings with and all
      actions by any Governmental Authority necessary for the validity or
      enforceability of its obligations under this Agreement have been obtained;

                                      VI-v
<PAGE>

            (e) the Assignee has received copies of the Credit Agreement and the
      other Loan Documents, as well as copies of all Financial Statements
      previously provided by the Borrower in satisfaction of obligations under
      the Credit Agreement.

            (f) the Assignee has fully reviewed the terms of the Credit
      Agreement and the other Loan Documents and has independently and without
      reliance upon the Assignor, and based on such information as the Assignee
      has deemed appropriate, made its own credit analysis and decision to enter
      into this Agreement;

            (g) if the Assignee is not incorporated under the laws of the United
      Sates of America or a state thereof, the Assignee has contemporaneously
      herewith delivered to the Agent and the Borrower such documents as are
      required by Section 2.25(b) of the Credit Agreement; and

            (h) the transactions contemplated by this Agreement are commercial
      banking transactions entered into in the ordinary course of the banking
      business of the Assignee.

                                   ARTICLE VI

                                  MISCELLANEOUS

      6.1 Notices. All notices and other communications provided for herein
(including any modifications of, or waivers, requests or consents under, this
Agreement) shall be given or made in writing (including by telecopy) to the
intended recipient at its "Address for Notices" specified below its name on the
signature pages hereof or, as to either party, at such other address as shall be
designated by such party in a notice to the other party.

      6.2 Amendment, Modification or Waiver. No provision of this Agreement may
be amended, modified or waived except by an instrument in writing signed by the
Assignor and the Assignee, and consented to by the Agent.

      6.3 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns. The representations and warranties made herein by the
Assignee are also made for the benefit of the Agent, and the Assignee agrees
that the Agent is entitled to rely upon such representations and warranties.

      6.4 Assignments. Neither party hereto may assign any of its rights or
obligations hereunder except in accordance with the terms of the Credit
Agreement.

      6.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be identical and all of which, taken together,
shall constitute one and the

                                     VI-vi
<PAGE>

same instrument, and each of the parties hereto may execute this Agreement by
signing any such counterpart.

      6.6 Governing Law. This Agreement (including the validity and
enforceability hereof) shall be governed by, and construed in accordance with,
the laws of the State of Texas, other than the conflict of laws rules thereof.

      6.7 Expenses. To the extent not paid by the Borrower pursuant to the terms
of the Credit Agreement, each party hereto shall bear its own expenses in
connection with the execution, delivery and performance of this Agreement.

      6.8 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.

                    [SIGNATURES APPEAR ON THE FOLLOWING PAGE]

                                     VI-vii
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.

                                 ASSIGNOR

                                      By:____________________________________
                                      Name:__________________________________
                                      Title:_________________________________

                                 Address for Notices:

                                      Telecopier No.:_________________________
                                      Telephone No.:__________________________
                                      Attention:______________________________

                                 ASSIGNEE

                                      By:____________________________________
                                      Name:__________________________________
                                      Title:_________________________________

                                 Address for Notices:

                                      Telecopier No.:_________________________
                                      Telephone No.:__________________________
                                      Attention:______________________________

ACKNOWLEDGED AND CONSENTED TO:

GUARANTY BANK, FSB
as Agent

By:____________________________________
Name:__________________________________
Title:_________________________________

                                     VI-viii
<PAGE>

                                  EXHIBIT VIII

                       PERSONAL PROPERTY AND EQUIPMENT OF
                       EASTERN OILWELL SERVICE COMPANY AND
                     SOUTHWEST OILFIELD CONSTRUCTION COMPANY

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
          (EASTERN OILWELL SERVICE COMPANY - TEXAS GULF COAST DIVISION)

<TABLE>
<S>                                                                                                 <C>
Rig No. 1 - 1984 HAROLD LEE ENGINEERING Well Service Rig w/Tools                                       310,000.00

Rig No. 2 - 1975 FRANKS 1287/160 DTD-HT Well Service Rig w/Tools                                       215,000.00

Rig No. 3 - 1982 FRANKS 1058/120 Well Service Rig w/Tools                                              212,000.00

Rig No. 6 - 1968 WILSON Mogul 42 Well Service Rig w/Tools                                              129,000.00

Rig No. 7 - IDECO H35K5C Swabbing Unit w/Tools                                                          57,500.00

Trucks                                                                                                 253,500.00

Trailers                                                                                               180,700.00

Pickups                                                                                                319,500.00

Construction Equipment                                                                                 145,200.00

Well Servicing Pumps                                                                                   120,500.00

Well Service Related Equipment                                                                          60,525.00

Related Equipment                                                                                       13,100.00

Cementing Equipment                                                                                     15,750.00

                                    TOTAL TEXAS GULF COAST DIVISION:                                $2,032,275.00
</TABLE>

                                     VIII-i
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
       (EASTERN OILWELL SERVICE COMPANY - CARRIZO SPRINGS, TEXAS DIVISION)

<TABLE>
<S>                                                                                                   <C>
Compressor Packages/Instruments                                                                        138,250.00

                  TOTAL CARRIZO SPRINGS, TEXAS DIVISION:                                              $138,250.00
</TABLE>

                                     VIII-ii
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
           (EASTERN OILWELL SERVICE COMPANY - MIDLAND, TEXAS DIVISION)

<TABLE>
<S>                                                                                                 <C>
Rig No. 2 - 1980 WILSON Mogul 42-B Well Service Rig w/Tools                                            286,000.00

Rig No. 3 - 1980 WILSON Mogul 42-B Well Service Rig w/Tools                                            291,000.00

Rig No. 4 - 1968 SKYTOP 4210 Well Service Rig w/Tools                                                  385,000.00

Rig No. 5 - 1970 SKYTOP 1042 Well Service Rig w/Tools                                                  165,000.00

Trucks                                                                                                  59,000.00

Trailers                                                                                                19,200.00

Pickups                                                                                                186,500.00

Construction Equipment                                                                                  14,500.00

Related Equipment                                                                                      113,050.00

                                    TOTAL MIDLAND, TEXAS DIVISION:                                  $1,519,250.00
</TABLE>

                                    VIII-iii
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
         (EASTERN OILWELL SERVICE COMPANY - PERNELL, OKLAHOMA DIVISION)

<TABLE>
<S>                                                                                                   <C>
Rig No. 126 - FRED E. COOPER Well Service Rig w/Tools                                                   15,900.00

Rig No. 196 - FRANKS 658 Well Service Rig w/Tools                                                       64,000.00

Trucks                                                                                                  35,000.00

Trailers                                                                                                13,000.00

Pickups                                                                                                108,000.00

Related Equipment                                                                                        4,100.00

                                    TOTAL PERNELL, OKLAHOMA DIVISION:                                 $240,000.00
</TABLE>

                                     VIII-iv
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
           (EASTERN OILWELL SERVICE COMPANY - WEST VIRGINIA DIVISION)

<TABLE>
<S>                                                                                                   <C>
Rig No. 1 - 1986 SPEEDSTAR SR50T2340 Well Service Rig w/Tools                                          109,000.00

Rig No. 2 - 1982 WALKER-NEER C25A Well Service Rig w/Tools                                              91,500.00

Rig No. 6 - 1982 WALKER-NEER C25A Well Service Rig w/Tools                                              96,000.00

Rig No. 8 - WALKER-NEER P13A Swabbing Unit w/Tools                                                      33,400.00

Trucks                                                                                                  61,250.00

Trailers                                                                                                 7,500.00

Pickups                                                                                                323,000.00

Construction Equipment                                                                                  77,500.00

All-Terrain Vehicles                                                                                    34,150.00

Cable Tools                                                                                              4,500.00

Related Equipment                                                                                        5,900.00

Handling Equipment/Related                                                                              14,570.00

Shop Equipment                                                                                           5,200.00

                                    TOTAL WEST VIRGINIA DIVISION:                                     $863,470.00
</TABLE>

                                     VIII-v
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
        (SOUTHWEST OILFIELD CONSTRUCTION COMPANY - KINGFISHER, OKLAHOMA)

<TABLE>
<S>                                                                                                 <C>
Rig No. 127 - 1979 IDECO H35KD Well Service Rig w/Tools                                                236,000.00

Rig No. 169 - 1978 FRANKS 1287-160 DTD-HT Well Service Rig w/Tools                                     251,000.00

Rig No. 170 - 1970 FRANKS 1287/160 Well Service Rig w/Tools                                            175,750.00

Rig No. 180/8697 - CARDWELL KB200A Swabbing Unit w/Tools                                                32,000.00

Trucks                                                                                                 120,000.00

Trailers                                                                                                62,000.00

Pickups                                                                                                279,000.00

Construction Equipment                                                                                 135,500.00

Related Equipment                                                                                       30,400.00

Shop Equipment                                                                                          17,500.00

         TOTAL SOUTHWEST OILFIELD CONSTRUCTION COMPANY:                                             $1,339,150.00
</TABLE>

                                    VIII-vi

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00050-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00050-of-00352.parquet"}]]