Document:

Exhibit 10.3

 

GUARANTY AGREEMENT

 

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

 

INTRODUCTION

 

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

 

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

 

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

 

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

 

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

 

Section 2.                                            Guaranty.

 

(a)                                  Each
Guarantor hereby absolutely, unconditionally and irrevocably guarantees the
punctual payment and performance, when due, whether at stated maturity, by
acceleration or otherwise, of all Obligations, whether absolute or contingent
and whether for principal, interest (including, without limitation, interest
that but for the existence of a bankruptcy, reorganization or similar proceeding
would accrue), fees, amounts owing in respect of Letter of Credit Obligations,
amounts required to be provided as collateral, indemnities, expenses or
otherwise (collectively, the “Guaranteed Obligations”). Without limiting
the 

 

1

 

generality
of the foregoing, each Guarantor’s liability shall extend to all amounts that
constitute part of the Guaranteed Obligations and would be owed by the Borrower
to the Administrative Agent, the Issuing Lender or any Lender under the Loan
Documents and by the Borrower or any of its Subsidiaries to the Swap
Counterparty but for the fact that they are unenforceable or not allowable due
to insolvency or the existence of a bankruptcy, reorganization or similar
proceeding involving the Borrower or such other Subsidiary.

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 5.                                            Waivers
and Acknowledgments.

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

6

 

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

 

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

 

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

 

7

 

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

 

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

 

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

 

THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder
of this page intentionally left blank.]

 

8

 

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

 

	
  Address for each Guarantor:

  	
  GUARANTORS:

  	
   

  
	
  c/o Cano Petroleum, Inc.

  	
   

  	
   

  
	
  309 West 7th Street, Suite 1600

  	
  SQUARE ONE ENERGY, INC.

  	
   

  
	
  Forth Worth, Texas 76102

  	
   

  	
   

  
	
  Attention: Mike Ricketts, CFO

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
  Facsimile: (817) 334-0222

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
  Title:

  	
      President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LADDER COMPANIES, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
  Title:

  	
      President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. ENERGY OF NEVADA, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
  Title:

  	
      President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  WO ENERGY, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
  Title:

  	
      President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O. OPERATING COMPANY, LTD.

  	
   

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Title:

  	
      President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  W.O. PRODUCTION COMPANY, LTD.

  	
   

  
	
   

  	
  By: WO Energy, Inc., its general partner

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
    /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  Title:

  	
      President

  	
   

  
									

 

Signature page to Guaranty
Agreement

 

 

	
   

  	
  ADMINISTRATIVE AGENT:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,
  as

  Administrative Agent

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
       /s/ Ali Ahmed

  	
   

  
	
   

  	
  Name:

  	
    Ali Ahmed

  	
   

  
	
   

  	
  Title:

  	
      Vice President

  	
   

  
						

 

Signature page to Guaranty
Agreement

 

 

Annex 1 to the

Guaranty Agreement

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES.

 

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

 

 

	
   

  	
  [Name of New Guarantor]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  UNION BANK OF CALIFORNIA, N.A., as

  Administrative Agent

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

3Exhibit 10.4

 

GUARANTY AGREEMENT

 

This Guaranty Agreement dated as of November 29, 2005 (this “Guaranty”)
is executed by each of the undersigned (individually a “Guarantor” and
collectively, the “Guarantors”), in favor of Energy Components SPC EEP
Energy Exploration and Production Segregated Portfolio, as administrative agent
(the “Administrative Agent”) for the ratable benefit of itself, the Lenders (as
defined below)(the Administrative Agent and the Lenders, individually a “Beneficiary”,
and collectively, the “Beneficiaries”).

 

INTRODUCTION

 

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

 

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

 

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

 

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

 

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

 

Section 2.                                            Guaranty.

 

(a)                                  Each
Guarantor hereby absolutely, unconditionally and irrevocably guarantees the
punctual payment and performance, when due, whether at stated maturity, by
acceleration or otherwise, of all Obligations, whether absolute or contingent
and whether for principal, interest (including, without limitation, interest
that but for the existence of a bankruptcy, reorganization or similar
proceeding would accrue), fees, amounts required to be provided as collateral,
indemnities, expenses or otherwise (collectively, the “Guaranteed
Obligations”). Without limiting the generality of the foregoing, each
Guarantor’s liability shall extend to all amounts that constitute part of the
Guaranteed Obligations and would be owed by the Borrower to the Administrative
Agent or any Lender under the Loan Documents but for the fact that they are
unenforceable or not allowable due to insolvency or the existence of a
bankruptcy, reorganization or similar proceeding involving the Borrower or such
other Subsidiary.

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

Section 5.                                            Waivers
and Acknowledgments.

 

(a)                                  Each
Guarantor hereby waives promptness, diligence, presentment, notice of
acceptance and any other notice with respect to any of the Guaranteed
Obligations and this Guaranty and any requirement that any Beneficiary protect,
secure, perfect or insure any Lien or any Property or exhaust any right or take
any action against the Borrower or any other Person or any collateral.

 

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

 

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

 

3

 

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

 

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

 

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

 

(b)                                 Such
Guarantor has, independently and without reliance upon the Administrative Agent
or any Lender and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Guaranty, and such Guarantor has established adequate means of obtaining from
the Borrower and each other relevant Person on a continuing basis information
pertaining to, and is now and on a continuing basis will be completely familiar
with, the business, condition (financial and otherwise), operations, properties
and prospects of the Borrower and each other relevant Person.

 

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

 

Section 8.                                            Right
of Set-Off.  Upon the occurrence and
during the continuance of any Event of Default, any Beneficiary is hereby
authorized at any time, to the fullest extent permitted by law, to set off and
apply any deposits (general or special, time or demand, provisional or final)
and other indebtedness owing by such Beneficiary to the account of each
Guarantor against any and all of the obligations of the Guarantors under this
Guaranty, irrespective of whether or not such Beneficiary shall have made any
demand under this Guaranty and although such 

 

4

 

obligations may be
contingent and unmatured.  Such
Beneficiary shall promptly notify the affected Guarantor after any such set-off
and application is made, provided that the failure to give such notice shall
not affect the validity of such set-off and application.  The rights of the Beneficiaries under this Section 8
are in addition to other rights and remedies (including, without limitation,
other rights of set-off) which any Beneficiary may have.

 

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

 

Section 10.                                      Notices,
Etc.  All notices and other
communications provided for hereunder shall be sent in the manner provided for
in Section 9.02 of the Credit Agreement and if to a Guarantor, at its
address specified on the signature page hereto and if to the Administrative
Agent or any Lender, at its address specified in or pursuant to the Credit
Agreement.  All such notices and
communications shall be effective when delivered, except that notices and
communications to the Administrative Agent shall not be effective until
received by the Administrative Agent. 
Delivery of an executed counterpart signature page of this Guaranty
by facsimile is as effective as executing and delivering this Guaranty in the
presence of the other parties to this Guaranty.

 

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

 

Section 12.                                      Continuing
Guaranty: Assignments under the Credit Agreement.  This Guaranty is a continuing guaranty and
shall (a) remain in full force and effect until the payment in full of all
Guaranteed Obligations and all other amounts payable under the Loan Documents,
and the termination of all the Commitments, (b) be binding upon each
Guarantor and its successors and assigns, and (c) inure to the benefit of
and be enforceable by the Administrative Agent, each Lender, and their
respective successors, and, in the case of transfers and assignments made in
accordance with the Credit Agreement, transferees and assigns.  Without limiting the generality of the
foregoing clause (c), subject to Section 9.06 of the Credit Agreement, any
Lender may assign or otherwise transfer all or any portion of its rights and
obligations under the Credit Agreement (including, without limitation, all or
any portion of its Commitment, the 

 

5

 

Advances owing to
it and the Note or Notes held by it) to any other Person, and such other Person
shall thereupon become vested with all the benefits in respect thereof granted
to such Lender herein or otherwise, subject, however, in all respects to the
provisions of the Credit Agreement.  Each
Guarantor acknowledges that upon any Person becoming a Lender or the
Administrative Agent, in accordance with the Credit Agreement, such Person
shall be entitled to the benefits hereof.

 

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

 

Section 14.                                      INDEMNIFICATION.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE BENEFICIARIES,
AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND
DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL
LIABILITIES, OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND OR
NATURE WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT RELATING TO OR
ARISING OUT OF THIS GUARANTY, INCLUDING ANY LIABILITIES, OBLIGATIONS, LOSSES,
CLAIMS, EXPENSES, OR DAMAGES WHICH ARISE OUT OF OR RESULT FROM (A) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER, ANY GUARANTOR OR ANY AFFILIATE OF THE
BORROWER OR ANY GUARANTOR OF THE PROCEEDS OF THE ADVANCES, (B) ANY BREACH
BY THE BORROWER OR ANY GUARANTOR OF ANY PROVISION OF THE CREDIT AGREEMENT OR
ANY OTHER LOAN DOCUMENT, (C) ANY INVESTIGATION, LITIGATION OR OTHER
PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO
THE FOREGOING, (D) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED
PROPERTIES OF THE BORROWER, ANY GUARANTOR OR THE OPERATIONS OR BUSINESS, OF THE
BORROWER OR ANY GUARANTOR INCLUDING ANY MATTERS DISCLOSED WITHIN THE CREDIT
AGREEMENT, OR (E) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL
LAWS CONCERNING OR RELATED TO 

 

6

 

THE
BORROWER’S OR ANY GUARANTOR’S PROPERTIES AND EACH GUARANTOR SHALL REIMBURSE THE
BENEFICIARIES AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS,
UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING REASONABLE
OUTSIDE LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCH INVESTIGATION,
LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDING ANY SUCH LOSSES,
LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING
INDEMNIFIED’S OWN NEGLIGENCE,  BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES THAT
IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PERSON’S GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT.

 

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

 

Section 16.                                      Additional
Guarantors.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into this
Guaranty as a Guarantor upon becoming a Subsidiary.  After the date hereof, upon execution and
delivery after the date hereof by the Administrative Agent and such Subsidiary
of an instrument in the form of Annex 1, such Subsidiary shall become a
Guarantor hereunder with the same force and effect as if originally named as a
Guarantor herein.  The execution and
delivery of any instrument adding an additional Guarantor as a party to this
Guaranty shall not require the consent of any other Guarantor hereunder.  The rights and obligations of each Guarantor
hereunder shall remain in full force and effect notwithstanding the addition of
any new Guarantor as a party to this Guaranty.

 

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

 

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

 

7

 

EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder
of this page intentionally left blank.]

 

8

 

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

 

	
   

  	
  GUARANTOR:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LADDER COMPANIES, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  309 West 7th Street, Suite 1600

  Fort Worth, TX  76102

  
	
   

  	
   

  
	
   

  	
  SQUARE ONE ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  309 West 7th Street, Suite 1600

  Fort Worth, TX  76102

  
	
   

  	
   

  
	
   

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  Hwy. 152 West

  Pampa, TX  79066

  
	
   

  	
   

  
	
   

  	
  WO Energy, Inc.

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
     S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  Hwy. 152 West

  Pampa, TX  79066

  
						

 

[Signature Page- Guaranty Agreement]

 

 

	
   

  	
  W.O. Operating Company, Ltd.

  
	
   

  	
   

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  Hwy. 152 West

  Pampa, TX  79066

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O. Production Company, Ltd.

  
	
   

  	
   

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
      /s/ S. Jeffrey
  Johnson

  
	
   

  	
  Name:

  	
    S. Jeffrey Johnson

  
	
   

  	
  Title:

  	
      President

  
	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  
	
   

  	
  Hwy. 152 West

  Pampa, TX  79066

  
					

 

[Signature Page- Guaranty Agreement]

 

 

	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  ENERGY COMPONENTS SPC EEP ENERGY

  EXPLORATION AND PRODUCTION

  SEGREGATED PORTFOLIO, as

  Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
     /s/ Mark Margason

  
	
   

  	
  Name: Mark Margason

  
	
   

  	
  Title: Authorized Signer

  

 

[Signature Page- Guaranty Agreement]

 

 

Annex 1 to the

Guaranty Agreement

 

SUPPLEMENT NO.             
dated as of                          
(the “Supplement”),
to the Guaranty Agreement dated as of November      ,
2005 (as amended, supplemented or otherwise modified from time to time, the “Guaranty Agreement”),
among each of the subsidiaries party thereto (each such subsidiary
individually, a “Guarantor” and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of ENERGY
COMPONENTS SPC EEP ENERGY EXPLORATION AND PRODUCTION SEGREGATED PORTFOLIO, as
Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

	
   

  	
  [Name of New Guarantor]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address of
  Guarantor:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ENERGY COMPONENTS SPC EEP ENERGY

  EXPLORATION AND PRODUCTION

  SEGREGATED PORTFOLIO, as

  Administrative Agent

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

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