Document:

Agreement and Second Amendment to Credit Agreement

 Exhibit 10.3 
  
 AGREEMENT AND SECOND AMENDMENT TO CREDIT AGREEMENT 
  
 THIS AGREEMENT AND SECOND AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of February 1,
2005, is made and entered into by and among LUFKIN INDUSTRIES, INC., a Texas corporation (the “Borrower”) and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (formerly known as JPMorgan Chase Bank)
(“JPMCB”), as the Lender, as the Issuing Bank, and as the Administrative Agent under the Credit Agreement referred to below (JPMCB, in all such capacities, the “Bank”). The Borrower and the Bank are herein sometimes
called the “Parties”. 
  
 Preliminary Statements.

  
 1. The Parties entered into a Credit Agreement dated as
of December 30, 2002, and an Agreement and First Amendment to Credit Agreement dated as of June 30, 2004 (such Credit Agreement, as so amended, the “Credit Agreement”). Unless defined herein, terms used herein which are defined in
the Credit Agreement shall have the meanings therein ascribed to them. 
  
 2. On November 13, 2004, JPMorgan Chase Bank changed its name to JPMorgan Chase Bank, N.A. 
  
 3. The Borrower has asked the Bank to increase the ceiling on the aggregate LC Exposures of all Lenders under the Credit Agreement, and the Bank is
willing to grant that extension upon the terms and conditions set forth in this Amendment. 
  
 Agreements. 
  
 NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the Parties, the Parties agree as follows: 
  
 1. Amendment of Section 2.04(b). The third sentence of
Section 2.04(b) of the Credit Agreement is hereby amended to provide in its entirety as follows: 
  
 “A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of
Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension the aggregate LC Exposures of all the Lenders at that time shall not exceed $10,000,000 and the total Revolving
Credit Exposure of all Lenders shall not exceed the total Commitments at that time.” 
  
 2. Conditions Precedent. This Amendment shall be effective as of the date set forth above, subject to the satisfaction, in a manner satisfactory to the Bank, of each of the following conditions
precedent: 
  
 (a) The Bank shall have received
counterparts of this Amendment, duly executed by each of the Parties. 
  

 (b) The Bank shall have received a certificate signed by a Financial Officer of the
Borrower certifying that 
  
 (i) Since September
30, 2004, there has been no material adverse change in the assets, liabilities, financial condition, business or affairs of the Borrower other than as disclosed in writing to the Administrative Agent before the execution of this Amendment. Each such
written disclosure shall be included in the definition of “Disclosed Matter” for purposes of the Credit Agreement and this Amendment. Since September 30, 2004, there has occurred no change, event, circumstance, or condition in or with
respect to the assets, liabilities, financial condition, business or affairs or the Parent Company and its Subsidiaries, taken as a whole, which, individually or in the aggregate with all other such changes, events, circumstances and conditions
occurring since September 30, 2004, could reasonably be expected to result in a Material Adverse Effect, except for Disclosed Matters; 
  
 (ii) The representations and warranties of the Borrower set forth in the Credit Agreement are true and correct (except to the extent such
representations and warranties expressly relate solely to an earlier date); 
  
 (iii) The Borrower has no material domestic Subsidiary that has not executed and delivered to the Bank a Guaranty; 
  
 (iv) The Borrower has no material international Subsidiary that has not executed and delivered to the Bank a Guaranty; and 
  
 (v) No Default has occurred and is continuing. 

 
 (c) No Legal Bar. The effectiveness of this
Amendment shall not violate any Legal Requirement applicable to the Bank. 
  
 3. Representations True; No Default. The Borrower represents and warrants to the Bank that 
  

	 	(a)	the representations and warranties contained in the Credit Agreement are true and correct on and as of the date of this Amendment as though made on and as of such date (except to
the extent such representations and warranties expressly relate solely to an earlier date); 

  

	 	(b)	no event has occurred and is continuing which constitutes a Default under the Credit Agreement; 

  

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	 	(c)	the execution, delivery of this Amendment have been duly authorized by all necessary corporate action on the part of the Borrower; 

  

	 	(d)	this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligations of the Borrower, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at
law; and 

  

	 	(e)	There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or any of its consolidated Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result
in a Material Adverse Effect (other than the Disclosed Matters), or (ii) that involve this Agreement, any of the other Loan Documents, any Collateral, or the Transactions. 

  
 4. Ratification. Except as expressly amended hereby, the Credit Agreement, as hereby amended, and the other
Loan Documents are in all respects ratified and confirmed and are, and shall continue to be, in full force and effect. The Borrower hereby agrees and acknowledges that all of its liabilities and obligations under the Credit Agreement and the other
Loan Documents remain in full force and effect as of the date of this Amendment and after giving effect to it. 
  
 5. Definitions and References. Unless otherwise defined herein, terms used herein which are defined in the Credit Agreement shall have the
meanings therein ascribed to them. The term “Agreement” as used in the Credit Agreement and the term “Credit Agreement” as used in the other Loan Documents or any other instrument, document or writing furnished to the Bank by or
on behalf of the Borrower shall mean the Credit Agreement as hereby amended. 
  
 6. Expenses; Additional Information. The Borrower shall pay to the Bank on demand all expenses (including reasonable counsel’s fees) incurred in connection with the preparation, reproduction,
execution and delivery of this Amendment. 
  
 7.
Severability. If any term or provision of this Amendment or the application thereof to any person or circumstances shall, to any extent, be deemed invalid or unenforceable, the remainder of this Amendment, or the application of such
term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and this Amendment shall be valid and enforced to the fullest extent permitted by applicable law. Any
provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions thereof or affecting
the validity or enforceability of such provision in any other jurisdiction and, to this end, the provisions of this Amendment are severable. 
  

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 8. Miscellaneous. This Amendment (a) shall be binding upon and inure to the benefit of the
Parties and their respective successors, assigns, receivers and trustees (however, the Borrower may not assign its rights hereunder without the express prior written consent of the Bank); (b) may be modified or amended only by a writing signed by
each of the Parties; (c) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES) AND OF THE UNITED STATES OF AMERICA; (d) may be executed and delivered by
facsimile, and may be executed in several counterparts, and by the Parties on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute
but one and the same agreement, (e) embodies the entire agreement and understanding among the Parties with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter, and (f)
is a Loan Document. The headings herein shall be accorded no significance in interpreting this Amendment. 
  
 9. ENTIRE AGREEMENT 
  
 THIS AMENDMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AS 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. 
  

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 IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective duly
authorized officers effective as of the date written above. 
  

			
	 LUFKIN INDUSTRIES, INC., a Texas
 corporation

		
	By:	 	/s/    R. D. LESLIE         
	 Name:
	 	R. D. Leslie
	 Title:
	 	V.P. Treasurere/CFO

  

			
	 JPMORGAN CHASE BANK, N.A.
 (formerly known as JPMorgan Chase Bank),
 as Lender, as Issuing Bank, and as
 Administrative Agent under the Credit
 Agreement

		
	By:	 	/s/    P. BEDFORD         
	 Name:
	 	Paul Bedford
	 Title:
	 	Vice PresidentForm of General Stock Option Agreement (1990 Stock Option Plan)

 Exhibit 10.4 
  
 LUFKIN INDUSTRIES, INC. 
 STOCK OPTION AGREEMENT 
  
 Agreement made effective the
             day of                     , (the “Grant
Date”) between Lufkin Industries, Inc., a Texas corporation (the “Company”), and                     
(“Optionee”). 
  
 To carry out the purposes of
the Lufkin Industries, Inc. 1990 Stock Option Plan (the “Plan”), to which this Agreement is expressly subject and a copy of which is attached hereto as Exhibit A, by affording Optionee the opportunity to purchase shares of Common Stock,
par value $1.00 per share, of the Company (“Stock”), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Optionee hereby agree as follows: 
  
 1. Grant of Option. The company hereby grants to the Optionee the
right and option (the “Option”) to purchase all or any part of an aggregate of              shares of Stock, on the terms and conditions set forth herein and in the
Plan. 
  
 2. Exercise Price. The exercise price of the
Option shall be $             per share. 
  
 3. Exercise of Option. (a) Subject to the further provisions of this Agreement, the Option granted pursuant to this Agreement may be exercised only
as set forth below: 
  

			
	 Exercise Date

	  	Percentage of
Option Shares
Exercisable

	 1. Prior to first anniversary of Grant Date
	  	0%
	 2. After 1, and prior to ______________
	  	25%
	 3. After 2, and prior to ______________
	  	50%
	 4. After 3, and prior to ______________
	  	75%
	 5. After 4, and prior to ______________
	  	100%

  
 The “Percentage of Option Shares
Exercisable” shall be determined with reference to the aggregate number of shares of Stock subject to the Option as set forth in Section 1 above. 
  
 (b) Subject to the earlier expiration of the Option as herein provided and subject to the terms and conditions contained herein, the Option may be
exercised by written notice (which complies in all respects with the provisions of this Agreement) to the Company at its principal executive office addressed to the attention of the Secretary of the Company, identifying the Option and specifying the
number of shares that the Optionee decides to purchase, such exercise to be effective at the time of receipt of such written notice at the Company’s principal executive office during normal business hours. The notice shall not be considered to
be properly given unless accompanied by all documentation deemed appropriate by the committee to reflect exercise of the Option and compliance with all applicable laws, rules and regulations. 
  
 (c) The vesting and exercisability of the Option shall be subject to
acceleration on the terms and conditions stated in Section 8 of the Plan, which relate to a “Change in Control” of the Company (as defined in the Plan). 
  
 (d) Notwithstanding anything herein to the contrary, in no event shall the Option, or any part thereof, be exercisable after
the tenth anniversary of the Grant Date. 
  
 4. Payment of
Option Exercise Price. Upon exercise of an Option, the full option exercise price for the shares with respect to which the Option is being exercised shall be payable to the Company (i) in cash or by check payable and acceptable to the Company or
(ii) subject to the approval of the Committee, by tendering to the Company shares of Stock owned by the Optionee having an aggregate Market Value Per Share as of the date of exercise and tender that is not greater than the full Option exercise price
for the shares with respect to which the Option is being exercised and by paying any remaining amount of the Option exercise price as provided in (i) above (provided that the Committee may, upon confirming that the Optionee owns the number of shares
being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being 

  

 
tendered upon the exercise and return to the Optionee (or not require surrender of) the certificate for the shares being tendered upon the exercise). Payment
instructions will be received subject to collection. 
  
 5.
Reload Option. If Optionee shall exercise an Option and make payment of the Option exercise price pursuant to the provisions of Section 4(ii), the Company and Optionee shall enter into a separate stock option agreement granting options to
purchase that number of shares tendered to pay the Option exercise price pursuant to Section 4(ii). The exercise price of such Reload Options shall be the Market Value Per Share on the date of grant and the expiration date shall be the same as the
expiration date of the Option exercised for which payment was made in accordance with the provisions of Section 4(ii). 
  
 6. Non-Transferability. The Option may not be transferred by Optionee separately or otherwise than by will or the laws of descent and distribution.

  
 7. Termination of Employment. (a) If the
Optionee’s employment with the Company is terminated for reasons other than (i) retirement with the consent of the Company (“retirement”), (ii) permanent disability or (iii) death, the Option shall be exercisable by him,
subject to Section 3(d) above, only within three months after such termination and only to the extent the Option was exercisable on the date of termination of employment. 
  
 (b) If, however, any termination of employment is due to retirement or permanent disability, the Option shall be exercisable
by the Optionee in full at any time, subject to Section 3(d) above, after such termination of employment. 
  
 (c) If the Optionee shall die while entitled to exercise the Option, the Optionee’s estate, personal representative or beneficiary, as the case may
be, shall have the right subject to the provisions of Section 3(d) above, to exercise the Option at any time within 12 months after the date of the Optionee’s death, to the extent that the Optionee was entitled to exercise the same on the day
immediately prior to the Optionee’s death. 
  
 (d) Except as
provided above in this Section 7, to the extent the Option is not exercisable on such termination of employment, the Option, or applicable portion thereof, shall be terminated and forfeited in full. 
  
 8. Withholding of Tax. Any cash payment under this Agreement shall be
reduced by any amounts required to be withheld or paid with respect thereto under all present or future federal, state and local tax and other laws and regulations that may be in effect as of the date of each such payment (“Tax
Amounts”). Any issuance of Stock pursuant to the exercise of the Option under this Agreement shall not be made until appropriate arrangements have been made for the payment of any amounts that may be required to be withheld or paid with
respect thereto. Such arrangements may, at the discretion of the Committee and subject to the terms of the Plan, include allowing the Optionee to tender to the Company shares of Stock owned by Optionee, or to request the Company to withhold a
portion of the shares of Stock being acquired pursuant to the exercise or otherwise distributed to Optionee, which have a Market Value Per Share as of the date of such exercise, tender or withholding that is not greater than the sum of all Tax
Amounts, together with payment of any remaining portion of all tax amounts in cash or by check payable and acceptable to the Company. Payment instruments will be received subject to collection. 
  
 9. Securities Matters. The Option granted herein shall be subject to
the requirement that, if at any time the Board or the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such Option upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue of purchase of shares hereunder, such Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or obtained free of any conditions not reasonably acceptable to the Board or the Committee. 
  
 10. Employment Relationship. For purposes of this Agreement, the Optionee shall be considered to be in the employment
of the Company as long as the Optionee remains an employee of either the Company, a parent or subsidiary corporation (as defined in Section 425 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or
substituting a new agreement for this Agreement. Any question as to whether and when there has been a termination of such employment, for purposes of this Agreement, and the cause of such termination, for purposes of this Agreement, shall be
determined by the 

  

 
Committee, and its determination shall be final. Nothing herein shall give the Optionee any right to continued employment or affect in any manner the right
of the Company or any parent or subsidiary corporation to terminate the employment of the Optionee. 
  
 11. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully
claiming under the Optionee. This Agreement and all actions taken shall be governed by and constructed in accordance with the laws of the State of Texas. In the event of conflict between this Agreement and the Plan, the terms of the Plan shall
control. All undefined capitalized terms used herein shall have the meaning assigned to them in the Plan. The Committee shall have authority to construe the terms of this Agreement, and the Committee’s determinations shall be final and binding
on the Optionee and the Company. 
  
 IN WITNESS WHEREOF,
the Company has caused this Agreement to be duly executed and the Optionee has executed this Agreement as of the day and year first above written. 
  

			
	 LUFKIN INDUSTRIES, INC.

		
	By:	 	 
	 Its:
	 	President and CEO
	
	 OPTIONEE:

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