Document:

Exhibit 10.1

AEP INDUSTRIES INC.|

Performance Unit Grant Certificate

Under 2005 Stock Option Plan

Date of Grant:

Name of Employee:

Grant Amount:

This
is to certify that, effective on the date of grant specified above, the Board
of Directors/Compensation Committee of AEP Industries Inc. (the “Company”) has
granted to the above-named employee (the “Employee”) the number of Performance
Units of the Company (the “Performance Units”) set forth above pursuant to the
Company’s 2005 Stock Option Plan (the “Plan”). Each Performance Unit represents
the right to receive, upon vesting and the satisfaction of any required
withholding obligation, one share of Stock.

The
terms and conditions of the award granted hereby, in addition to the terms and
conditions contained in the Plan, are as follows:

1.    As used herein, the following terms shall
have the following meanings:

“Adjusted
Grant Amount” shall mean the actual number of shares of Performance Units
granted to the Employee pursuant to this Agreement (rounded to the nearest
whole share), as finally determined as of the end of the current fiscal year of
the Company as follows:

(i)           in the event that the Company’s
actual EBITDA for such fiscal year equals or exceeds Forecasted EBITDA for such
fiscal year, the Adjusted Grant Amount shall mean the Grant Amount set forth
above;

(ii)          in the event that the Company’s actual
EBITDA for such fiscal year is less than Forecasted EBITDA for such fiscal
year, but is not less than eighty percent (80%) of such forecast, the Adjusted
Grant Amount shall mean the Grant Amount set forth above, reduced by the same
percentage by which actual EBITDA is lower than Forecasted EBITDA for such
fiscal year; or

(ii)          in the event that the Company’s actual
EBITDA for such fiscal year is less than eighty percent (80%) of Forecasted
EBITDA, the Adjusted Grant Amount shall be zero.

“Change of Control” shall have the meaning ascribed to
such term in the Plan.

“Code” shall mean the Internal Revenue Code of 1986,
as amended from time to time.

“EBITDA”
shall mean, for any fiscal year, the Company’s earnings for such fiscal year
before provision for interest, taxes, depreciation and amortization, as
determined in accordance with United States generally accepted accounting
principals (“GAAP”).

“Fair Market
Value” shall have the meaning ascribed to such term in the Plan.

“Forecasted
EBITDA” shall mean, for any fiscal year, the Company’s forecast of EBITDA for
such fiscal year, as approved by the Board of Directors of the Company and as
provided to the Employee as of the date of the grant hereunder.

“Parent” shall have the meaning set forth in section
425(e) of the Code.

“Subsidiary” shall have the meaning set forth in
section 425(f) of the Code.

“Termination
Due to Business Divestiture” shall mean the termination of employment of the
Employee due to a transaction or series of related transactions (other than a
transaction or series of transactions that are part of a Change of Control)
that result in a divestiture, sale, transfer, assignment or other disposition
of any division, subsidiary, business unit, product line or group, or any other
asset of the Company or any of its affiliates.

 

 

“Unit
Value” shall mean, as of any date of determination, the Adjusted Grant Amount
multiplied by the Fair Market Value.

2.             The Employee may not sell, assign,
transfer, pledge, hypothecate, mortgage or otherwise dispose of, by gift or
otherwise, or in any way encumber all or any of the Performance Units granted
hereby until such time as such Performance Unit becomes vested pursuant to the provisions
of this Agreement.

3.             Subject to the terms and conditions
set forth herein, the Performance Units covered by this grant shall vest and
become deliverable only in accordance with the following schedule:

 

	
  Vesting
  Period

  	
   

  	
  Percentage of Adjusted Grant Amount to

  be Issued to Employee

  
	
   

  	
   

  	
   

  
	
  Within first
  year from date of grant:

  	
   

  	
  0%

  
	
   

  	
   

  	
   

  
	
  Beginning one
  year from date of grant:

  	
   

  	
  20%

  
	
   

  	
   

  	
   

  
	
  Beginning two
  years form date of grant:

  	
   

  	
  40%

  
	
   

  	
   

  	
   

  
	
  Beginning three
  years from date of grant:

  	
   

  	
  60%

  
	
   

  	
   

  	
   

  
	
  Beginning four
  years from date of grant:

  	
   

  	
  80%

  
	
   

  	
   

  	
   

  
	
  Beginning five
  years from date of grant:

  	
   

  	
  100%

  

 

4.    The
Employee shall not be entitled to any rights as a stockholder of the Company in
respect of any Performance Units covered by this grant until such Performance
Units become vested pursuant to the provisions of this Agreement.

5.      At the
end of each vesting period, the Employee shall be entitled to receive the
shares of Stock vested as of such period or the Unit Value of such shares of
Stock or any combination thereof, at the Employee’s option. The Employee shall
notify the Company in writing of its desire to receive either the shares, the
Unit Value thereof or any combination thereof. As soon as practicable after
receipt of such notice, the Company shall deliver either (i) the
certificate the shares of Stock vested as of such period to the Employee, which
certificate shall be registered in the Employee’s name, (ii) pay the
Employee the Unit Value of such vested shares of Stock, or (iii) any
combination thereof as designated by the Employee. Any shares to be delivered
will be delivered as soon as practicable after vesting, but no later than the
date that is 21¤2
months after the end of the Employee’s tax year in which the vesting date
occurs.

6.    In the event that the Employee’s employment
as an employee of the Company or of any Parent or Subsidiary (hereinafter the “Employee’s employment”) is terminated
prior to the time that the shares of Stock granted hereby have fully vested
(other than as set forth in Section 7 below), the unvested portion of the
grant will terminate automatically and will be forfeited to the Company
immediately and without further notice.

7.             A.            All
Performance Units granted hereunder shall become immediately vested in the
event of:

(i)            the
death of the Employee;

(ii)                                  the
permanent disability (within the meaning of section 22(e)(3) of the Code)
of the Employee; or

(iii)          a
Termination Due to Business Divestiture.

B.            In the event of a Change of Control
or immediately prior to a Change of Control, the Company may, in its complete
discretion as provided in the Plan, cause all Performance Units granted
hereunder not then vested to become immediately vested.

In
the event that any of the foregoing occurs before the end of the current fiscal
year in which the grant was made, for the purposes of determining the Adjusted
Grant Amount for such Employee, year-to-date EBITDA as of the end of the fiscal
quarter immediately preceding to date of the event shall be annualized and
compared to Forecasted EBITDA for such fiscal year.

 

 

8.             The grant of Performance Units
hereunder shall terminate and shall have no further force or effect in the
event that the Company’s actual EBITDA for the current fiscal year is less than
eighty percent (80%) of Forecasted EBITDA for such fiscal year.

9.             This grant does not confer on the
Employee any right to continue in the employ of the Company or interfere in any
way with the right of the Company to determine the terms of the Employee’s
employment.

10.           In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering, or any other change in the corporate structure
or shares of the Company, the Committee shall make such adjustments, if any, as
it deems appropriate in the number and kind of shares covered by this grant.

11.           The
Company currently has an effective registration statement on file with the
Securities and Exchange Commission with respect to the shares of Common Stock.
The Company intends to maintain this registration but has no obligation to do
so. If the registration ceases to be effective, you will not be able to
transfer or sell Common Stock issued to you pursuant to this grant unless an
exemption from registration under applicable securities laws is available. You
agree that any resale by you of the shares of Common Stock issued pursuant to
this grant shall comply in all respects with the requirements of all applicable
securities laws, rules and regulations (including, without limitation, the
provisions of the Securities Act, the Exchange Act and the respective rules and
regulations promulgated thereunder) and any other law, rule or regulation
applicable thereto, as such laws, rules, and regulations may be amended from
time to time. The Company shall not be obligated to either issue the Common
Stock or permit the resale of any Common Stock if such issuance or resale would
violate any such requirements.

12.           This grant and the terms and
conditions herein set forth are subject in all respects to the terms and
conditions of the Plan, which shall be controlling. All interpretations or
determinations of the Committee shall be binding and conclusive upon the
Employee and his legal representatives on any question arising hereunder or
under the Plan.

13.           All notices hereunder to the Company
shall be delivered or mailed to the following address:

	
  AEP Industries Inc.

  
	
  Attention:
  Secretary

  
	
  125 Phillips
  Avenue

  
	
  South
  Hackensack, NJ 07606

  

 

Such address may be changed at any time provided
notice of such change is furnished in advance to the Employee.

14.  All notices hereunder to the Employee shall be
to the Employee’s address as appearing on the records of the Company.

 

	
   

  	
  AEP INDUSTRIES INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  SecretaryEXHIBIT 10.1

CREDIT AGREEMENT

DATED AS OF

JUNE 15, 2006

AMONG

TETON ENERGY CORPORATION,

AS BORROWER,

BNP PARIBAS,

AS ADMINISTRATIVE AGENT,

AND

THE LENDERS PARTY HERETO

 

SOLE LEAD ARRANGER AND SOLE BOOKRUNNER

BNP PARIBAS

 

 

TABLE OF
CONTENTS

	
  

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  ARTICLE I

  
	
  DEFINITIONS AND ACCOUNTING MATTERS

  
	
   

  	
   

  	
   

  
	
  SECTION 1.01

  	
   

  	
  TERMS DEFINED ABOVE

  	
   

  	
   

  
	
  SECTION 1.02

  	
   

  	
  CERTAIN DEFINED TERMS

  	
   

  	
   

  
	
  SECTION 1.03

  	
   

  	
  TYPES OF LOANS AND
  BORROWINGS

  	
   

  	
  18

  
	
  SECTION 1.04

  	
   

  	
  TERMS GENERALLY;
  RULES OF CONSTRUCTION

  	
   

  	
  19

  
	
  SECTION 1.05

  	
   

  	
  ACCOUNTING TERMS AND
  DETERMINATIONS; GAAP

  	
   

  	
  19

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  
	
  THE CREDITS

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 2.01

  	
   

  	
  COMMITMENTS

  	
   

  	
  19

  
	
  SECTION 2.02

  	
   

  	
  LOANS AND BORROWINGS

  	
   

  	
  20

  
	
  SECTION 2.03

  	
   

  	
  REQUESTS FOR BORROWINGS

  	
   

  	
  21

  
	
  SECTION 2.04

  	
   

  	
  INTEREST ELECTIONS

  	
   

  	
  21

  
	
  SECTION 2.05

  	
   

  	
  FUNDING OF BORROWINGS

  	
   

  	
  23

  
	
  SECTION 2.06 

  	
   

  	
  TERMINATION AND REDUCTION OF
  AGGREGATE MAXIMUM CREDIT AMOUNTS 

  	
   

  	
  23

  
	
  SECTION 2.07

  	
   

  	
  BORROWING BASE

  	
   

  	
  24

  
	
  SECTION 2.08

  	
   

  	
  LETTERS OF CREDIT

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  
	
  PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 3.01

  	
   

  	
  REPAYMENT OF LOANS

  	
   

  	
  31

  
	
  SECTION 3.02

  	
   

  	
  INTEREST

  	
   

  	
  31

  
	
  SECTION 3.03

  	
   

  	
  ALTERNATE RATE OF INTEREST

  	
   

  	
  32

  
	
  SECTION 3.04

  	
   

  	
  PREPAYMENTS

  	
   

  	
  32

  
	
  SECTION 3.05

  	
   

  	
  FEES

  	
   

  	
  34

  
	
  SECTION 3.06

  	
   

  	
  EXTENSION OF MATURITY DATE

  	
   

  	
  35

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  
	
  PAYMENTS; PRO RATA TREATMENT; SHARING OF SET-OFFS

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 4.01

  	
   

  	
  PAYMENTS GENERALLY; PRO RATA
  TREATMENT; SHARING OF SET-OFFS

  	
   

  	
  36

  
	
  SECTION 4.02

  	
   

  	
  PRESUMPTION OF PAYMENT BY
  THE BORROWER

  	
   

  	
  37

  
	
  SECTION 4.03

  	
   

  	
  CERTAIN DEDUCTIONS BY THE
  ADMINISTRATIVE AGENT

  	
   

  	
  37

  
	
  SECTION 4.04

  	
   

  	
  DISPOSITION OF PROCEEDS

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  
	
  INCREASED COSTS; BREAK FUNDING PAYMENTS; TAXES; ILLEGALITY

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 5.01

  	
   

  	
  INCREASED COSTS

  	
   

  	
  38

  
	
  SECTION 5.02

  	
   

  	
  BREAK FUNDING PAYMENTS

  	
   

  	
  39

  
	
  SECTION 5.03

  	
   

  	
  TAXES

  	
   

  	
  39

  
	
  SECTION 5.04

  	
   

  	
  MITIGATION OBLIGATIONS

  	
   

  	
  40

  
	
  SECTION 5.05

  	
   

  	
  ILLEGALITY

  	
   

  	
  40

  

 

 

 

	
  ARTICLE VI

  
	
  CONDITIONS
  PRECEDENT

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 6.01

  	
   

  	
  EFFECTIVE DATE

  	
   

  	
  41

  
	
  SECTION 6.02

  	
   

  	
  EACH CREDIT EVENT

  	
   

  	
  43

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  
	
  REPRESENTATIONS AND WARRANTIES

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 7.01

  	
   

  	
  ORGANIZATION; POWERS

  	
   

  	
  44

  
	
  SECTION 7.02

  	
   

  	
  AUTHORITY; ENFORCEABILITY

  	
   

  	
  44

  
	
  SECTION 7.03

  	
   

  	
  APPROVALS; NO CONFLICTS

  	
   

  	
  44

  
	
  SECTION 7.04

  	
   

  	
  FINANCIAL CONDITION; NO
  MATERIAL ADVERSE CHANGE

  	
   

  	
  44

  
	
  SECTION 7.05

  	
   

  	
  LITIGATION

  	
   

  	
  45

  
	
  SECTION 7.06

  	
   

  	
  ENVIRONMENTAL MATTERS

  	
   

  	
  45

  
	
  SECTION 7.07

  	
   

  	
  COMPLIANCE WITH THE LAWS AND
  AGREEMENTS; NO DEFAULTS

  	
   

  	
  46

  
	
  SECTION 7.08

  	
   

  	
  INVESTMENT COMPANY ACT

  	
   

  	
  47

  
	
  SECTION 7.09

  	
   

  	
  TAXES

  	
   

  	
  47

  
	
  SECTION 7.10

  	
   

  	
  ERISA

  	
   

  	
  47

  
	
  SECTION 7.11

  	
   

  	
  DISCLOSURE; NO MATERIAL
  MISSTATEMENTS

  	
   

  	
  48

  
	
  SECTION 7.12

  	
   

  	
  INSURANCE

  	
   

  	
  48

  
	
  SECTION 7.13

  	
   

  	
  RESTRICTION ON LIENS

  	
   

  	
  48

  
	
  SECTION 7.14

  	
   

  	
  SUBSIDIARIES

  	
   

  	
  48

  
	
  SECTION 7.15

  	
   

  	
  LOCATION OF BUSINESS AND
  OFFICES

  	
   

  	
  49

  
	
  SECTION 7.16

  	
   

  	
  PROPERTIES; TITLES, ETC

  	
   

  	
  49

  
	
  SECTION 7.17

  	
   

  	
  MAINTENANCE OF PROPERTIES

  	
   

  	
  50

  
	
  SECTION 7.18

  	
   

  	
  GAS IMBALANCES, PREPAYMENTS

  	
   

  	
  50

  
	
  SECTION 7.19

  	
   

  	
  MARKETING OF PRODUCTION

  	
   

  	
  50

  
	
  SECTION 7.20

  	
   

  	
  SWAP AGREEMENTS

  	
   

  	
  51

  
	
  SECTION 7.21

  	
   

  	
  USE OF LOANS AND LETTERS OF
  CREDIT

  	
   

  	
  51

  
	
  SECTION 7.22

  	
   

  	
  SOLVENCY

  	
   

  	
  51

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  
	
  AFFIRMATIVE COVENANTS

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SECTION 8.01

  	
   

  	
  FINANCIAL STATEMENTS; OTHER
  INFORMATION

  	
   

  	
  52

  
	
  SECTION 8.02

  	
   

  	
  NOTICES OF MATERIAL EVENTS

  	
   

  	
  54

  
	
  SECTION 8.03

  	
   

  	
  EXISTENCE; CONDUCT OF
  BUSINESS

  	
   

  	
  55

  
	
  SECTION 8.04

  	
   

  	
  PAYMENT OF OBLIGATIONS

  	
   

  	
  55

  
	
  SECTION 8.05

  	
   

  	
  PERFORMANCE OF OBLIGATIONS
  UNDER LOAN DOCUMENTS

  	
   

  	
  55

  
	
  SECTION 8.06

  	
   

  	
  OPERATION AND MAINTENANCE OF
  PROPERTIES

  	
   

  	
  55

  
	
  SECTION 8.07

  	
   

  	
  INSURANCE

  	
   

  	
  56

  
	
  SECTION 8.08

  	
   

  	
  BOOKS AND RECORDS;
  INSPECTION RIGHTS

  	
   

  	
  56

  
	
  SECTION 8.09

  	
   

  	
  COMPLIANCE WITH LAWS

  	
   

  	
  56

  
	
  SECTION 8.10

  	
   

  	
  ENVIRONMENTAL MATTERS

  	
   

  	
  56

  
	
  SECTION 8.11

  	
   

  	
  FURTHER ASSURANCES

  	
   

  	
  57

  
	
  SECTION 8.12

  	
   

  	
  RESERVE REPORTS

  	
   

  	
  58

  
	
  SECTION 8.13

  	
   

  	
  TITLE INFORMATION

  	
   

  	
  59

  
	
  SECTION 8.14

  	
   

  	
  ADDITIONAL COLLATERAL;
  ADDITIONAL GUARANTORS

  	
   

  	
  60

  

 

 ii
 

 

 

	
  SECTION 8.15

  	
   

  	
  ERISA COMPLIANCE

  	
   

  	
  61

  
	
  SECTION 8.16

  	
   

  	
  MARKETING ACTIVITIES

  	
   

  	
  61

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX

  
	
  NEGATIVE COVENANTS

  
	
   

  
	
  SECTION 9.01

  	
   

  	
  FINANCIAL COVENANTS

  	
   

  	
  62

  
	
  SECTION 9.02

  	
   

  	
  DEBT

  	
   

  	
  62

  
	
  SECTION 9.03

  	
   

  	
  LIENS

  	
   

  	
  63

  
	
  SECTION 9.04

  	
   

  	
  DIVIDENDS, DISTRIBUTIONS AND
  REDEMPTIONS

  	
   

  	
  63

  
	
  SECTION 9.05

  	
   

  	
  INVESTMENTS, LOANS AND
  ADVANCES

  	
   

  	
  63

  
	
  SECTION 9.06

  	
   

  	
  NATURE OF BUSINESS;
  INTERNATIONAL OPERATIONS

  	
   

  	
  65

  
	
  SECTION 9.07

  	
   

  	
  PROCEEDS OF NOTES

  	
   

  	
  65

  
	
  SECTION 9.08

  	
   

  	
  ERISA COMPLIANCE

  	
   

  	
  65

  
	
  SECTION 9.09

  	
   

  	
  SALE OR DISCOUNT OF
  RECEIVABLES

  	
   

  	
  66

  
	
  SECTION 9.10

  	
   

  	
  MERGERS, ETC.

  	
   

  	
  66

  
	
  SECTION 9.11

  	
   

  	
  SALE OF PROPERTIES

  	
   

  	
  66

  
	
  SECTION 9.12

  	
   

  	
  ENVIRONMENTAL MATTERS

  	
   

  	
  67

  
	
  SECTION 9.13

  	
   

  	
  TRANSACTIONS WITH AFFILIATES

  	
   

  	
  67

  
	
  SECTION 9.14

  	
   

  	
  SUBSIDIARIES

  	
   

  	
  67

  
	
  SECTION 9.15

  	
   

  	
  NEGATIVE PLEDGE AGREEMENTS;
  DIVIDEND RESTRICTIONS

  	
   

  	
  68

  
	
  SECTION 9.16

  	
   

  	
  GAS IMBALANCES, TAKE-OR-PAY
  OR OTHER PREPAYMENTS

  	
   

  	
  68

  
	
  SECTION 9.17

  	
   

  	
  SWAP AGREEMENTS

  	
   

  	
  68

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE X

  
	
  EVENTS OF DEFAULT; REMEDIES

  
	
   

  
	
  SECTION 10.01

  	
   

  	
  EVENTS OF DEFAULT

  	
   

  	
  69

  
	
  SECTION 10.02

  	
   

  	
  REMEDIES

  	
   

  	
  71

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XI

  
	
  THE AGENTS

  
	
   

  
	
  SECTION 11.01

  	
   

  	
  APPOINTMENT; POWERS

  	
   

  	
  72

  
	
  SECTION 11.02

  	
   

  	
  DUTIES AND OBLIGATIONS OF
  ADMINISTRATIVE AGENT

  	
   

  	
  72

  
	
  SECTION 11.03

  	
   

  	
  ACTION BY ADMINISTRATIVE AGENT

  	
   

  	
  73

  
	
  SECTION 11.04

  	
   

  	
  RELIANCE BY ADMINISTRATIVE
  AGENT

  	
   

  	
  73

  
	
  SECTION 11.05

  	
   

  	
  SUBAGENTS

  	
   

  	
  74

  
	
  SECTION 11.06

  	
   

  	
  RESIGNATION OR REMOVAL OF
  ADMINISTRATIVE AGENT

  	
   

  	
  74

  
	
  SECTION 11.07

  	
   

  	
  ADMINISTRATIVE AGENT AS
  LENDER

  	
   

  	
  74

  
	
  SECTION 11.08

  	
   

  	
  NO RELIANCE

  	
   

  	
  75

  
	
  SECTION 11.09

  	
   

  	
  ADMINISTRATIVE AGENT
  MAY FILE PROOFS OF CLAIM

  	
   

  	
  75

  
	
  SECTION 11.10 

  	
   

  	
  AUTHORITY OF ADMINISTRATIVE
  AGENT TO RELEASE COLLATERAL AND LIENS 

  	
   

  	
  76

  
	
  SECTION 11.11

  	
   

  	
  THE ARRANGER

  	
   

  	
  76

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XII

  
	
  MISCELLANEOUS

  
	
   

  
	
  SECTION 12.01

  	
   

  	
  NOTICES

  	
   

  	
  76

  
	
  SECTION 12.02

  	
   

  	
  WAIVERS; AMENDMENTS

  	
   

  	
  77

  

 

 iii
 

 

 

	
  SECTION 12.03

  	
   

  	
  EXPENSES, INDEMNITY; DAMAGE
  WAIVER

  	
   

  	
  78

  
	
  SECTION 12.04

  	
   

  	
  SUCCESSORS AND ASSIGNS

  	
   

  	
  81

  
	
  SECTION 12.05

  	
   

  	
  SURVIVAL; REVIVAL;
  REINSTATEMENT

  	
   

  	
  83

  
	
  SECTION 12.06

  	
   

  	
  COUNTERPARTS; INTEGRATION;
  EFFECTIVENESS

  	
   

  	
  84

  
	
  SECTION 12.07

  	
   

  	
  SEVERABILITY

  	
   

  	
  85

  
	
  SECTION 12.08

  	
   

  	
  RIGHT OF SETOFF

  	
   

  	
  85

  
	
  SECTION 12.09

  	
   

  	
  GOVERNING LAW; JURISDICTION;
  CONSENT TO SERVICE OF PROCESS

  	
   

  	
  85

  
	
  SECTION 12.10

  	
   

  	
  HEADINGS

  	
   

  	
  86

  
	
  SECTION 12.11

  	
   

  	
  CONFIDENTIALITY

  	
   

  	
  86

  
	
  SECTION 12.12

  	
   

  	
  INTEREST RATE LIMITATION

  	
   

  	
  87

  
	
  SECTION 12.13

  	
   

  	
  EXCULPATION PROVISIONS

  	
   

  	
  88

  
	
  SECTION 12.14

  	
   

  	
  COLLATERAL MATTERS; SWAP
  AGREEMENTS

  	
   

  	
  88

  
	
  SECTION 12.15

  	
   

  	
  NO THIRD PARTY BENEFICIARIES

  	
   

  	
  88

  
	
  SECTION 12.16

  	
   

  	
  USA PATRIOT ACT NOTICE

  	
   

  	
  89

  

 

 iv
 

 

 

ANNEXES, EXHIBITS AND
SCHEDULES

	
  Annex I

  	
   

  	
  List of Maximum Credit Amounts

  
	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  Form of Note

  
	
  Exhibit B

  	
   

  	
  Form of Borrowing Request

  
	
  Exhibit C

  	
   

  	
  Form of Interest Election Request

  
	
  Exhibit D

  	
   

  	
  Form of Compliance Certificate

  
	
  Exhibit E-1

  	
   

  	
  Form of Legal Opinion of Gersten Savage LLP,
  special counsel to the Borrower

  
	
  Exhibit E-2

  	
   

  	
  Form of Legal Opinion of Local Counsel

  
	
  Exhibit F-1

  	
   

  	
  Security Instruments

  
	
  Exhibit F-2

  	
   

  	
  Form of Guaranty and Pledge Agreement

  
	
  Exhibit G

  	
   

  	
  Form of Assignment and Assumption

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Schedule 7.05

  	
   

  	
  Litigation

  
	
  Schedule 7.14

  	
   

  	
  Subsidiaries and Partnerships

  
	
  Schedule 7.18

  	
   

  	
  Gas Imbalances

  
	
  Schedule 7.19

  	
   

  	
  Marketing Contracts

  
	
  Schedule 7.20

  	
   

  	
  Swap Agreements

  
	
  Schedule 9.05

  	
   

  	
  Investments

  

 

 

 v

 

THIS CREDIT AGREEMENT dated as of June 15, 2006, is among: Teton Energy
Corporation, a Delaware corporation (the “Borrower”); each of the
Lenders from time to time party hereto; and BNP Paribas (in its individual capacity, “BNP
Paribas”), as administrative agent for the Lenders (in such capacity,
together with its successors in such capacity, the “Administrative Agent”).

R E C I T A L S

A.                                   The Borrower has requested that
the Lenders provide certain loans to and extensions of credit on behalf of the
Borrower.

B.                                     The Lenders have agreed to make
such loans and extensions of credit subject to the terms and conditions of this
Agreement.

C.                                     In consideration of the mutual
covenants and agreements herein contained and of the loans, extensions of
credit and commitments hereinafter referred to, the parties hereto agree as
follows:

ARTICLE
I

Definitions and Accounting Matters

Section 1.01                                Terms Defined Above. As used in this Agreement,
each term defined above has the meaning indicated above.

Section 1.02                                Certain Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:

“ABR”, when used in
reference to any Loan or Borrowing, refers to whether such Loan, or the Loans
comprising such Borrowing, are bearing interest at a rate determined by
reference to the Alternate Base Rate.

“Administrative Questionnaire”
means an Administrative Questionnaire in a form supplied by the Administrative
Agent.

“Affected Loans” has the
meaning assigned such term in Section 5.05.

“Affiliate” means, with
respect to a specified Person, another Person that directly, or indirectly
through one or more intermediaries, Controls or is Controlled by or is under
common Control with the Person specified.

“Aggregate Maximum Credit
Amounts” at any time shall equal the sum of the Maximum Credit Amounts, as
the same may be reduced or terminated pursuant to Section 2.06.

“Agreement” means this
Credit Agreement, as the same may from time to time be amended, modified,
supplemented or restated.

 

 

 

“Alternate Base Rate”
means, for any day, a rate per annum equal to the greater of (a) the Prime
Rate in effect on such day and (b) the Federal Funds Effective Rate in
effect on such day plus 1⁄2 of 1%. Any change in the Alternate Base Rate due to a
change in the Prime Rate or the Federal Funds Effective Rate shall be effective
from and including the effective date of such change in the Prime Rate or the
Federal Funds Effective Rate, respectively.

“Applicable Margin”
means, for any day, with respect to any ABR Loan or Eurodollar Loan, as the
case may be, the rate per annum set forth in the Borrowing Base Utilization
Grid below based upon the Borrowing Base Utilization Percentage then in effect:

	
  Borrowing Base Utilization Grid

  
	
  Borrowing Base Utilization Percentage

  	
   

  	
  <25%

  	
   

  	
  >25%
  <50%

  	
   

  	
  >50% <75%

  	
   

  	
  >75%

  
	
  ABR Loans

  	
   

  	
  0.000%

  	
   

  	
  0.250%

  	
   

  	
  0.500%

  	
   

  	
  0.750%

  
	
  Eurodollar Loans

  	
   

  	
  1.500%

  	
   

  	
  1.750%

  	
   

  	
  2.000%

  	
   

  	
  2.250%

  

 

Each change in the Applicable
Margin shall apply during the period commencing on the effective date of such
change and ending on the date immediately preceding the effective date of the
next such change, provided, however, that if at any time the Borrower fails to
deliver a Reserve Report pursuant to Section 8.12(a), then the “Applicable
Margin” means the rate per annum set forth on the grid when the Borrowing
Base Utilization Percentage is at its highest level.

“Applicable Percentage”
means, with respect to any Lender, the percentage of the Aggregate Maximum
Credit Amounts represented by such Lender’s Maximum Credit Amount as such
percentage is set forth on Annex I.

“Approved Petroleum Engineers”
means (a) Netherland, Sewell & Associates, Inc., (b) Ryder
Scott Company Petroleum Consultants, L.P. and (c) any other independent
petroleum engineers reasonably acceptable to the Administrative Agent and the
Borrower.

“Arranger” means BNP
Paribas, in its capacities as the sole lead arranger and sole bookrunner
hereunder.

“Assignment and Assumption”
means an assignment and assumption entered into by a Lender and an assignee
(with the consent of any party whose consent is required by Section 12.04(b)),
and accepted by the Administrative Agent, in the form of Exhibit G or any
other form approved by the Administrative Agent.

“Availability Period”
means the period from and including the Effective Date to but excluding the
Termination Date.

“Board” means the Board
of Governors of the Federal Reserve System of the United States of America or
any successor Governmental Authority.

 2
 

 

 

“Borrowing” means Loans
of the same Type, made, converted or continued on the same date and, in the
case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Base” means at
any time an amount equal to the amount determined in accordance with Section 2.07,
as the same may be adjusted from time to time pursuant to Section 8.13(c) or
Section 9.11(d).

“Borrowing Base Deficiency”
occurs if at any time the total Revolving Credit Exposures exceeds the
Borrowing Base then in effect.

“Borrowing Base Utilization
Percentage” means, as of any day, the fraction expressed as a percentage,
the numerator of which is the sum of the Revolving Credit Exposures of the
Lenders on such day, and the denominator of which is the Borrowing Base in
effect on such day.

“Borrowing Request” means
a request by the Borrower for a Borrowing in accordance with Section 2.03.

“Business Day” means any
day that is not a Saturday, Sunday or other day on which commercial banks in
New York City or Houston, Texas are authorized or required by law to remain
closed; and if such day relates to a Borrowing or continuation of, a payment or
prepayment of principal of or interest on, or a conversion of or into, or the
Interest Period for, a Eurodollar Loan or a notice by the Borrower with respect
to any such Borrowing or continuation, payment, prepayment, conversion or
Interest Period, any day which is also a day on which dealings in dollar
deposits are carried out in the London interbank market.

“Capital Leases” means,
in respect of any Person, all leases which shall have been, or should have
been, in accordance with GAAP, recorded as capital leases on the balance sheet
of the Person liable (whether contingent or otherwise) for the payment of rent
thereunder.

“Casualty Event” means
any loss, casualty or other insured damage to, or any nationalization, taking
under power of eminent domain or by condemnation or similar proceeding of, any
Property of the Borrower or any of its Subsidiaries having a fair market value
in excess of the greater of $175,000 or two and one-half percent (2.5%) of the
then effective Borrowing Base.

“Change in Control” means
(a) the acquisition of ownership, directly or indirectly, beneficially or
of record, by any Person or group of Equity Interests representing more than
30% of the aggregate ordinary voting power represented by the issued and
outstanding Equity Interests of the Borrower, (b) occupation of a majority
of the seats (other than vacant seats) on the board of directors of the
Borrower by Persons who were neither (i) nominated by the board of
directors of the Borrower nor (ii) appointed by directors so nominated or (c) the
acquisition of direct or indirect Control of the Borrower by any Person or
group.

“Change in Law” means (a) the
adoption of any law, rule or regulation of general applicability to all
commercial banks (such requirement of generally applicability not to apply to
BNP Paribas), after the date of this Agreement and with respect to which none
of the Lenders has knowledge of as of the Effective Date, (b) any change
in any law, rule or regulation or in the interpretation or application
thereof by any Governmental Authority after the date of this

 3
 

 

 

Agreement or (c) compliance
by any Lender or the Issuing Bank (or, for purposes of Section 5.01(b)),
by any lending office of such Lender or by such Lender’s or the Issuing Bank’s
holding company, if any) with any request, guideline or directive (whether or
not having the force of law) of any Governmental Authority made or issued after
the date of this Agreement.

“Code” means the Internal
Revenue Code of 1986, as amended from time to time, and any successor statute.

“Commitment” means, with respect
to each Lender, the commitment of such Lender to make Loans and to acquire
participations in Letters of Credit hereunder, expressed as an amount
representing the maximum aggregate amount of such Lender’s Revolving Credit
Exposure hereunder, as such commitment may be (a) modified from time to
time pursuant to Section 2.06 and (b) modified from time to time
pursuant to assignments by or to such Lender pursuant to Section 12.04(b).
The amount representing each Lender’s Commitment shall at any time be the
lesser of such Lender’s Maximum Credit Amount and such Lender’s Applicable
Percentage of the then effective Borrowing Base.

“Consolidated Net Income”
means with respect to the Borrower and the Consolidated Subsidiaries, for any
period beginning after January 1, 2007, the aggregate of the net income
(or loss) of the Borrower and the Consolidated Subsidiaries after allowances
for taxes for such period determined on a consolidated basis in accordance with
GAAP; provided that there shall be excluded from such net income (to the extent
otherwise included therein) the following: (a) the net income of any
Person in which the Borrower or any Consolidated Subsidiary has an interest
(which interest does not cause the net income of such other Person to be
consolidated with the net income of the Borrower and the Consolidated
Subsidiaries in accordance with GAAP), except to the extent of the amount of
dividends or distributions actually paid in cash during such period by such
other Person to the Borrower or to a Consolidated Subsidiary, as the case may
be; (b) the net income (but not loss) during such period of any
Consolidated Subsidiary to the extent that the declaration or payment of
dividends or similar distributions or transfers or loans by that Consolidated
Subsidiary is not at the time permitted by operation of the terms of its
charter or any agreement, instrument or Governmental Requirement applicable to
such Consolidated Subsidiary or is otherwise restricted or prohibited, in each
case determined in accordance with GAAP; (c) the net income (or loss) of
any Person acquired in a pooling-of-interests transaction for any period prior
to the date of such transaction; (d) any extraordinary non-cash gains or
losses during such period; (e) non-cash gains or losses resulting from the
net change in Borrower’s mark to market portfolio of commodity price risk
management activities during that period and (f) any gains or losses
attributable to writeups, writedowns or impairments of assets, including
ceiling test writedowns; provided that if the Borrower or any Consolidated
Subsidiary shall acquire or dispose of any Property during such period, then
Consolidated Net Income shall be calculated after giving pro forma effect to such acquisition or
disposition, as if such acquisition or disposition had occurred on the first
day of such period.

“Consolidated Subsidiaries”
means each Subsidiary of the Borrower (whether now existing or hereafter
created or acquired) the financial statements of which shall be (or should have
been) consolidated with the financial statements of the Borrower in accordance
with GAAP.

 4
 

 

 

“Control” means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ability to exercise voting power, by contract or otherwise. For the purposes of
this definition, and without limiting the generality of the foregoing, any
Person that owns directly or indirectly 30% or more of the Equity Interests
having ordinary voting power for the election of the directors or other
governing body of a Person (other than as a limited partner of such other
Person) will be deemed to “control” such other Person. “Controlling” and
“Controlled” have meanings correlative thereto.

“Debt” means, for any Person,
the sum of the following (without duplication), excluding any assets retirement
obligations associated with Oil & Gas Properties or any obligation to
carry the 50% working interest of American Oil and Gas in drilling the first 2
wells in the Williston project, or in the event such wells are not
drilled to pay any additional amounts as consideration for the acquisition
of the undeveloped acreage, whether such amounts are reflected as a liability
under GAAP or not: (a) all obligations of such Person for borrowed money
or evidenced by bonds, bankers’ acceptances, debentures, notes or other similar
instruments; (b) all obligations of such Person (whether contingent or
otherwise) in respect of letters of credit, surety or other bonds and similar
instruments; (c) all accounts payable and all accrued expenses,
liabilities or other obligations of such Person to pay the deferred purchase
price of Property or services; (d) all obligations under Capital Leases; (e) all
obligations under Synthetic Leases; (f) all Debt (as defined in the other
clauses of this definition) of others secured by (or for which the holder of
such Debt has an existing right, contingent or otherwise, to be secured by) a
Lien on any Property of such Person, whether or not such Debt is assumed by
such Person; (g) all Debt (as defined in the other clauses of this
definition) of others guaranteed by such Person or in which such Person
otherwise assures a creditor against loss of the Debt (howsoever such assurance
shall be made) to the extent of the lesser of the amount of such Debt and the
maximum stated amount of such guarantee or assurance against loss; (h) all
obligations or undertakings of such Person to maintain or cause to be
maintained the financial position or covenants of others or to purchase the
Debt or Property of others; (i) obligations to deliver commodities, goods
or services, including, without limitation, Hydrocarbons, in consideration of
one or more advance payments, other than gas balancing arrangements in the
ordinary course of business; (j) obligations to pay for goods or services
even if such goods or services are not actually received or utilized by such
Person; (k) any Debt of a partnership for which such Person is liable
either by agreement, by operation of law or by a Governmental Requirement but
only to the extent of such liability; (l) Disqualified Capital Stock; and (m) the
undischarged balance of any production payment created by such Person or for
the creation of which such Person directly or indirectly received payment. The
Debt of any Person shall include all obligations of such Person of the
character described above to the extent such Person remains legally liable in
respect thereof notwithstanding that any such obligation is not included as a
liability of such Person under GAAP.

“Default” means any event
or condition which constitutes an Event of Default or which upon notice, lapse
of time or both would, unless cured or waived, become an Event of Default.

“Disqualified Capital Stock”
means any Equity Interest that, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable) or upon the
happening of any event, matures or is mandatorily redeemable for any
consideration other than other Equity Interests (which would not constitute
Disqualified Capital Stock), pursuant to a

 5
 

 

 

sinking fund
obligation or otherwise, or is convertible or exchangeable for Debt or
redeemable for any consideration other than other Equity Interests (which would
not constitute Disqualified Capital Stock) at the option of the holder thereof,
in whole or in part, on or prior to the date that is one year after the earlier
of (a) the Maturity Date and (b) the date on which there are no
Loans, LC Exposure or other obligations hereunder outstanding and all of the
Commitments are terminated.

“dollars” or “$” refers
to lawful money of the United States of America.

“Domestic Subsidiary”
means any Subsidiary that is organized under the laws of the United States of
America or any state thereof or the District of Columbia.

“EBITDAX” means, for any
period, the sum of Consolidated Net Income for such period plus the following
expenses or charges to the extent deducted from Consolidated Net Income in such
period: interest, income taxes, depreciation, depletion, amortization,
exploration expenses and other similar noncash charges, minus all noncash
income added to Consolidated Net Income; provided that EBITDAX for the fiscal
quarters ending March 31, 2007, June 30, 2007 and September 30,
2007 shall be calculated as follows:

(a)                                  for the fiscal quarter ending March 31,
2007, EBITDAX shall be EBITDAX for such quarter multiplied by four;

(b)                                 for the fiscal quarter ending June 30,
2007, EBITDAX shall be EBITDAX for such quarter multiplied by two;

(c)                                  for the fiscal quarter ending September 30,
2007, EBITDAX shall be EBITDAX for such quarter multiplied by 4/3.

Thereafter,
EBITDAX shall be calculated using EBITDAX for the period of four fiscal
quarters ending on the last day of the fiscal quarter immediately preceding the
date of determination for which financial statements are available.

“Effective Date” means
the date on which the conditions specified in Section 6.01 are satisfied
(or waived in accordance with Section 12.02).

“Engineering Reports” has
the meaning assigned such term in Section 2.07(c)(i).

“Environmental Laws”
means any and all Governmental Requirements pertaining in any way to health,
safety the environment or the preservation or reclamation of natural resources,
in effect in any and all jurisdictions in which the Borrower or any Subsidiary
is conducting or at any time has conducted business, or where any Property of
the Borrower or any Subsidiary is located, including without limitation, the
Oil Pollution Act of 1990 (“OPA”), as amended, the Clean Air Act, as
amended, the Comprehensive Environmental, Response, Compensation, and Liability
Act of 1980 (“CERCLA”), as amended, the Federal Water Pollution Control
Act, as amended, the Occupational Safety and Health Act of 1970, as amended,
the Resource Conservation and Recovery Act of 1976 (“RCRA”), as amended,
the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, the Superfund Amendments and Reauthorization Act of 1986, as amended,
the Hazardous Materials Transportation Act, as

 6
 

 

 

amended, and
other environmental conservation or protection Governmental Requirements. The
term “oil” shall have the meaning specified in OPA, the terms “hazardous
substance” and “release” (or “threatened release”) have the
meanings specified in CERCLA, the terms “solid waste” and “disposal”
(or “disposed”) have the meanings specified in RCRA and the term “oil
and gas waste” shall have the meaning specified in Section 91.1011 of
the Texas Natural Resources Code (“Section 91.1011”); provided,
however, that (a) in the event either OPA, CERCLA, RCRA or Section 91.1011
is amended so as to broaden the meaning of any term defined thereby, such
broader meaning shall apply subsequent to the effective date of such amendment
and (b) to the extent the laws of the state or other jurisdiction in which
any Property of the Borrower or any Subsidiary is located establish a meaning
for “oil,” “hazardous substance,” “release,” “solid
waste,” “disposal” or “oil and gas waste” which is broader
than that specified in either OPA, CERCLA, RCRA or Section 91.1011, such
broader meaning shall apply.

“Equity Interests” means
shares of capital stock, partnership interests, membership interests in a
limited liability company, beneficial interests in a trust or other equity
ownership interests in a Person, and any warrants, options or other rights
(including, without limitation, rights under the Rights Agreement) entitling
the holder thereof to purchase or acquire any such Equity Interest.

“ERISA” means the
Employee Retirement Income Security Act of 1974, as amended, and any successor
statute.

“ERISA Affiliate” means
each trade or business (whether or not incorporated) which together with the
Borrower or a Subsidiary would be deemed to be a “single employer” within the
meaning of section 4001(b)(1) of ERISA or subsections (b), (c), (m) or
(o) of section 414 of the Code.

“ERISA Event” means (a) a
“Reportable Event” described in section 4043 of ERISA and the regulations
issued thereunder, (b) the withdrawal of the Borrower, a Subsidiary or any
ERISA Affiliate from a Plan during a plan year in which it was a “substantial
employer” as defined in section 4001(a)(2) of ERISA, (c) the filing
of a notice of intent to terminate a Plan or the treatment of a Plan amendment
as a termination under section 4041 of ERISA, (d) the institution of
proceedings to terminate a Plan by the PBGC, (e) receipt of a notice of
withdrawal liability pursuant to Section 4202 of ERISA or (f) any
other event or condition which might constitute grounds under section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer,
any Plan.

“Eurodollar”, when used
in reference to any Loan or Borrowing, refers to whether such Loan, or the
Loans comprising such Borrowing, are bearing interest at a rate determined by
reference to the LIBO Rate.

“Event of Default” has
the meaning assigned such term in Section 10.01.

“Excepted Liens”
means:  (a) Liens for Taxes,
assessments or other governmental charges or levies which are not delinquent or
which are being contested in good faith by appropriate action and for which
adequate reserves have been maintained in accordance with

 7
 

 

 

GAAP; (b) Liens
in connection with workers’ compensation, unemployment insurance or other
social security, old age pension or public liability obligations which are not
delinquent or which are being contested in good faith by appropriate action and
for which adequate reserves have been maintained in accordance with GAAP; (c) statutory
landlord’s liens, operators’, vendors’, carriers’, warehousemen’s, repairmen’s,
mechanics’, suppliers’, workers’, materialmen’s, construction or other like
Liens arising by operation of law in the ordinary course of business or
incident to the exploration, development, operation and maintenance of Oil and
Gas Properties each of which is in respect of obligations that are not
delinquent or which are being contested in good faith by appropriate action and
for which adequate reserves have been maintained in accordance with GAAP; (d) contractual
Liens which arise in the ordinary course of business under operating
agreements, joint venture agreements, oil and gas partnership agreements, oil
and gas leases, farm-out agreements, division orders, contracts for the sale,
transportation or exchange of oil and natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements, overriding
royalty agreements, marketing agreements, processing agreements, net profits
agreements, development agreements, gas balancing or deferred production
agreements, injection, repressuring and recycling agreements, salt water or
other disposal agreements, seismic or other geophysical permits or agreements,
and other agreements which are usual and customary in the oil and gas business
and are for claims which are not delinquent or which are being contested in
good faith by appropriate action and for which adequate reserves have been
maintained in accordance with GAAP, provided that any such Lien referred to in
this clause does not materially impair the use of all of the Borrower’s or any
Subsidiary’s Property; (e) Liens arising solely by virtue of any statutory
or common law provision relating to banker’s liens, rights of set-off or
similar rights and remedies and burdening only deposit accounts or other funds
maintained with a creditor depository institution, provided that no such
deposit account is a dedicated cash collateral account or is subject to
restrictions against access by the depositor in excess of those set forth by
regulations promulgated by the Board and no such deposit account is intended by
Borrower or any of its Subsidiaries to provide collateral to the depository
institution; (f) easements, restrictions, servitudes, permits, conditions,
covenants, exceptions or reservations in any Property of the Borrower or any Subsidiary
for the purpose of roads, pipelines, transmission lines, transportation lines,
distribution lines for the removal of gas, oil, coal or other minerals or
timber, and other like purposes, or for the joint or common use of real estate,
rights of way, facilities and equipment, that do not secure any monetary
obligations and which in the aggregate do not materially impair the use of all
of the Borrower’s or any Subsidiary’s Property; (g) Liens on cash or
securities pledged to secure performance of tenders, surety and appeal bonds,
government contracts, performance and return of money bonds, bids, trade
contracts, leases, statutory obligations, regulatory obligations and other
obligations of a like nature incurred in the ordinary course of business and (h) judgment
and attachment Liens not giving rise to an Event of Default, provided that any
appropriate legal proceedings which may have been duly initiated for the review
of such judgment shall not have been finally terminated or the period within
which such proceeding may be initiated shall not have expired and no action to
enforce such Lien has been commenced; provided, further that Liens described in
clauses (a) through (e) shall remain “Excepted Liens” only for so
long as no action to enforce such Lien has been commenced and no intention to
subordinate the first priority Lien granted in favor of the Administrative
Agent and the Lenders is to be hereby implied or expressed by the permitted
existence of such Excepted Liens.

 8
 

 

 

“Excluded Taxes” means,
with respect to the Administrative Agent, any Lender, the Issuing Bank or any
other recipient of any payment to be made by or on account of any obligation of
the Borrower or any Guarantor hereunder or under any other Loan Document, (a) income
or franchise taxes and interest and penalties in respect thereof imposed on (or
measured by) its net income by the United States of America or such other
jurisdiction under the laws of which such recipient is organized or in which
its principal office is located or, in the case of any Lender, in which its
applicable lending office is located, (b) any branch profits taxes imposed
by the United States of America or any similar tax imposed by any other
jurisdiction in which the Borrower or any Guarantor is located (c) excise,
sales, or use taxes and (d) in the case of a Foreign Lender, any
withholding tax that is imposed on amounts payable to such Foreign Lender at
the time such Foreign Lender becomes a party to this Agreement (or designates a
new lending office) or is attributable to such Foreign Lender’s failure to
comply with Section 5.03(e), except to the extent that such Foreign Lender
(or its assignor, if any) was entitled, at the time of designation of a new
lending office (or assignment), to receive additional amounts with respect to
such withholding tax pursuant to Section 5.03(a) or Section 5.03(c).

“Federal Funds Effective Rate”
means, for any day, the weighted average (rounded upwards, if necessary, to the
next 1/100 of 1%) of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of
New York, or, if such rate is not so published for any day that is a Business
Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of
the quotations for such day for such transactions received by the
Administrative Agent from three Federal funds brokers of recognized standing
selected by it.

“Fee Letter” means that
certain letter agreement between BNP Paribas and the Borrower dated June 15,
2006 concerning certain fees in connection with this Agreement and any
agreements or instruments executed in connection therewith, as the same may be
amended or replaced from time to time.

“Financial Officer”
means, for any Person, the chief financial officer, principal accounting
officer, treasurer or controller of such Person. Unless otherwise specified,
all references herein to a Financial Officer means a Financial Officer of the
Borrower.

“Financial Statements”
means the financial statement or statements of the Borrower and its
Consolidated Subsidiaries referred to in Section 7.04(a).

“Foreign Lender” means
any Lender that is organized under the laws of a jurisdiction other than that
in which the Borrower is located. For purposes of this definition, the United
States of America, each State thereof and the District of Columbia shall be
deemed to constitute a single jurisdiction.

“Foreign Subsidiary”
means any Subsidiary that is not a Domestic Subsidiary.

“GAAP” means generally
accepted accounting principles in the United States of America as in effect
from time to time subject to the terms and conditions set forth in Section 1.05.

 9
 

 

 

“Governmental Authority”
means the government of the United States of America, any other nation or any
political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other
entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government over the
Borrower, any Subsidiary, any of their Properties, any Agent, the Issuing Bank
or any Lender.

“Governmental Requirement”
means any law, statute, code, ordinance, enforceable order, enforceable
determination, final rule, final regulation, final judgment, final decree,
injunction, franchise, permit, certificate, license, authorization or other
directive or requirement, whether now or hereinafter in effect, including,
without limitation, Environmental Laws, energy regulations and occupational,
safety and health standards or controls, of any Governmental Authority.

“Guarantors” means:

(a)                                  Teton North America LLC, a
Colorado limited liability company;

(b)                                 Teton Piceance LLC, a Colorado
limited liability company;

(c)                                  Teton DJ LLC, a Colorado limited
liability company;

(d)                                 Teton Williston LLC, a Colorado
limited liability company; and

(b)                                 each
other Subsidiary that guarantees the Indebtedness pursuant to Section 8.14(b).

“Guaranty Agreement”
means an agreement executed by the Guarantors in substantially the form of Exhibit F-2
unconditionally guarantying on a joint and several basis, payment of the
Indebtedness, as the same may be amended, modified or supplemented from time to
time.

“Highest Lawful Rate”
means, with respect to each Lender, the maximum nonusurious interest rate, if
any, that at any time or from time to time may be contracted for, taken,
reserved, charged or received on the Notes or on other Indebtedness under laws
applicable to such Lender which are presently in effect or, to the extent
allowed by law, under such applicable laws which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws
allow as of the date hereof.

“Hydrocarbon Interests”
means all rights, titles, interests and estates now or hereafter acquired in
and to oil and gas leases, oil, gas and mineral leases, or other liquid or
gaseous hydrocarbon leases, mineral fee interests, overriding royalty and
royalty interests, net profit interests and production payment interests,
including any reserved or residual interests of whatever nature.

“Hydrocarbons” means oil,
gas, casinghead gas, natural gas (regardless of source rock) drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.

 10
 

 

 

“Indebtedness” means any
and all amounts owing or to be owing by the Borrower, any Subsidiary or any
Guarantor (whether direct or indirect (including those acquired by assumption),
absolute or contingent, due or to become due, now existing or hereafter
arising): (a) to the Administrative Agent, the Issuing Bank or any Lender
under any Loan Document; (b) to any Lender or any Affiliate of a Lender
under any Swap Agreement between the Borrower or any Subsidiary and such Lender
or Affiliate of a Lender while such Person (or in the case of its Affiliate,
the Person affiliated therewith) is a Lender hereunder and (c) all
renewals, extensions and/or rearrangements of any of the above.

“Indemnified Taxes” means
Taxes other than Excluded Taxes.

“Initial Reserve Report”
means the engineering information prepared by the Borrower and delivered to the
Administrative Agent, with respect to the value of the Oil and Gas Properties
of the Borrower and its Subsidiaries as of December 31, 2005.

“Interest Election Request”
means a request by the Borrower to convert or continue a Borrowing in
accordance with Section 2.04.

“Interest Expense” means,
for any period, the sum (determined without duplication) of the aggregate gross
interest expense of the Borrower and the Consolidated Subsidiaries for such
period, including to the extent included in interest expense under GAAP:  (a) amortization of original issue debt
discount, (b) capitalized interest and (c) the portion of any
payments or accruals under Capital Leases allocable to interest expense, plus
the portion of any payments or accruals under Synthetic Leases allocable to
interest expense whether or not the same constitutes interest expense under
GAAP.

“Interest Payment Date”
means (a) with respect to any ABR Loan, the last day of each March, June, September and
December and (b) with respect to any Eurodollar Loan, the last day of
the Interest Period applicable to the Borrowing of which such Loan is a part
and, in the case of a Eurodollar Borrowing with an Interest Period of more than
three months’ duration, each day prior to the last day of such Interest Period
that occurs at intervals of three months’ duration after the first day of such
Interest Period.

“Interest Period” means
with respect to any Eurodollar Borrowing, the period commencing on the date of
such Borrowing and ending on the numerically corresponding day in the calendar
month that is one, two, three or six months (or, with the consent of each
Lender, nine or twelve months) thereafter, as the Borrower may elect; provided,
that (a) if any Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next succeeding Business Day
unless such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day
and (b) any Interest Period pertaining to a Eurodollar Borrowing that
commences on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the last calendar month of such
Interest Period) shall end on the last Business Day of the last calendar month
of such Interest Period. For purposes hereof, the date of a Borrowing initially
shall be the date on which such Borrowing is made and thereafter shall be the
effective date of the most recent conversion or continuation of such Borrowing.

 11
 

 

 

“Interim Redetermination”
has the meaning assigned such term in Section 2.07(b).

“Interim Redetermination Date”
means the date on which a Borrowing Base that has been redetermined pursuant to
an Interim Redetermination becomes effective as provided in Section 2.07(d).

“Investment” means, for
any Person: (a) the acquisition (whether for cash, Property, services or
securities or otherwise) of Equity Interests of any other Person or any
agreement to make any such acquisition (including, without limitation, any “short
sale” or any sale of any securities at a time when such securities are not
owned by the Person entering into such short sale); (b) the making of any
deposit with, or advance, loan or capital contribution to, the assumption of
Debt of, the purchase or other acquisition of any other Debt or equity participation
or interest in, or other extension of credit to, any other Person (including
the purchase of Property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such Property to such Person, but
excluding any such advance, loan or extension of credit having a term not
exceeding ninety (90) days representing the purchase price of inventory or
supplies sold by such Person in the ordinary course of business); (c) the
purchase or acquisition (in one or a series of transactions) of Property of
another Person that constitutes a business unit or (d) the entering into
of any guarantee of, or other contingent obligation (including the deposit of
any Equity Interests to be sold) with respect to, Debt or other liability of
any other Person and (without duplication) any amount committed to be advanced,
lent or extended to such Person.

“Issuing Bank” means BNP Paribas, in its capacity as the
issuer of Letters of Credit hereunder, and its successors in such capacity as
provided in Section 2.08(i). The Issuing Bank may, in its discretion,
arrange for one or more Letters of Credit to be issued by Affiliates of the
Issuing Bank, in which case the term “Issuing Bank” shall include any
such Affiliate with respect to Letters of Credit issued by such Affiliate.

“LC Commitment” at any
time means twenty-five percent (25%) of the then current Borrowing Base.

“LC Disbursement” means a
payment made by the Issuing Bank pursuant to a Letter of Credit.

“LC Exposure” means, at
any time, the sum of (a) the aggregate undrawn amount of all outstanding
Letters of Credit at such time plus (b) the aggregate amount of all LC
Disbursements that have not yet been reimbursed by or on behalf of the Borrower
at such time. The LC Exposure of any Lender at any time shall be its Applicable
Percentage of the total LC Exposure at such time.

“Lenders” means the
Persons listed on Annex I and any Person that shall have become a party hereto
pursuant to an Assignment and Assumption, other than any such Person that ceases
to be a party hereto pursuant to an Assignment and Assumption.

“Letter of Credit” means
any letter of credit issued pursuant to this Agreement.

 12
 

 

 

“Letter of Credit Agreements”
means all letter of credit applications and other agreements (including any
amendments, modifications or supplements thereto) submitted by the Borrower, or
entered into by the Borrower, with the Issuing Bank relating to any Letter of
Credit.

“LIBO Rate” means, with
respect to any Eurodollar Borrowing for any Interest Period, the rate appearing
on Page 3750 of the Dow Jones Market Service (or on any successor or
substitute page of such Service, or any successor to or substitute for
such Service, providing rate quotations comparable to those currently provided
on such page of such Service, as determined by the Administrative Agent
from time to time for purposes of providing quotations of interest rates
applicable to dollar deposits in the London interbank market) at approximately
11:00 a.m., London time, two Business Days prior to the commencement of
such Interest Period, as the rate for dollar deposits with a maturity
comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the “LIBO Rate” with respect
to such Eurodollar Borrowing for such Interest Period shall be the rate
(rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period
are offered by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of
such Interest Period.

“Lien” means any interest
in Property securing an obligation owed to, or a claim by, a Person other than
the owner of the Property, whether such interest is based on the common law,
statute or contract, and whether such obligation or claim is fixed or
contingent, and including but not limited to (a) the lien or security
interest arising from a mortgage, encumbrance, pledge, security agreement,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes or (b) production payments and the like payable out of
Oil and Gas Properties. The term “Lien” shall include easements,
restrictions, servitudes, permits, conditions, covenants, exceptions or
reservations. For the purposes of this Agreement, the Borrower and its
Subsidiaries shall be deemed to be the owner of any Property which it has
acquired or holds subject to a conditional sale agreement, or leases under a
financing lease or other arrangement pursuant to which title to the Property
has been retained by or vested in some other Person in a transaction intended
to create a financing.

“Loan Documents” means
this Agreement, the Notes, the Letter of Credit Agreements, the Letters of
Credit and the Security Instruments.

“Loans” means the loans
made by the Lenders to the Borrower pursuant to this Agreement.

“Majority Lenders” means,
at any time while no Loans or LC Exposure is outstanding, Lenders having at
least sixty-six and two-thirds percent (66-2/3%) of the Aggregate Maximum
Credit Amounts; and at any time while any Loans or LC Exposure is outstanding,
Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of
the outstanding aggregate principal amount of the Loans or participation
interests in Letters of Credit (without regard to any sale by a Lender of a
participation in any Loan under Section 12.04(c)).

“Material Adverse Effect”
means a material adverse change in, or material adverse effect on (a) the
business, operations, Property or condition (financial or otherwise) of the
Borrower

 13
 

 

 

and the
Subsidiaries taken as a whole, (b) the ability of the Borrower, any
Subsidiary or any Guarantor to perform any of its obligations under any Loan
Document, (c) the validity or enforceability of any Loan Document or (d) the
rights and remedies of or benefits available to the Administrative Agent, the
Issuing Bank or any Lender under any Loan Document.

“Material Indebtedness”
means Debt (other than the Loans and Letters of Credit and accounts payable and
other current obligations incurred in the ordinary course of business that are
not in dispute and are not more than 90 days past due), or obligations in
respect of one or more Swap Agreements, of any one or more of the Borrower and
its Subsidiaries in an aggregate principal amount exceeding the greater of
$175,000 or five percent (5%) of the then effective Borrowing Base. For
purposes of determining Material Indebtedness, the “principal amount” of the
obligations of the Borrower or any Subsidiary in respect of any Swap Agreement
at any time shall be the Swap Termination Value.

“Maturity Date” means June 15,
2010, or as extended in accordance with Section 3.06.

“Maximum Credit Amount”
means, as to each Lender, the amount set forth opposite such Lender’s name on
Annex I under the caption “Maximum Credit Amounts”, as the same may be (a) reduced
or terminated from time to time in connection with a reduction or termination
of the Aggregate Maximum Credit Amounts pursuant to Section 2.06(b) or
(b) modified from time to time pursuant to any assignment permitted by Section 12.04(b).

“Moody’s” means Moody’s
Investors Service, Inc. and any successor thereto that is a nationally
recognized rating agency.

“Mortgaged Property”
means any Property owned by the Borrower or any Guarantor which is subject to
the Liens existing and to exist under the terms of the Security Instruments.

“Multiemployer Plan”
means a Plan which is a multiemployer plan as defined in section 3(37) or 4001
(a)(3) of ERISA.

“New Borrowing Base Notice”
has the meaning assigned such term in Section 2.07(d).

“Notes” means the
promissory notes of the Borrower described in Section 2.02(d) and
being substantially in the form of Exhibit A, together with all
amendments, modifications, replacements, extensions and rearrangements thereof.

“Oil and Gas Properties”
means (a) Hydrocarbon Interests; (b) the Properties now or hereafter
pooled or unitized with Hydrocarbon Interests; (c) all presently existing
or future unitization, pooling agreements and declarations of pooled units and
the units created thereby (including without limitation all units created under
orders, regulations and rules of any Governmental Authority) which may
affect all or any portion of the Hydrocarbon Interests; (d) all operating
agreements, contracts and other agreements, including production sharing
contracts and agreements, which relate to any of the Hydrocarbon Interests or
the production, sale, purchase, exchange or processing of Hydrocarbons from or
attributable to such Hydrocarbon Interests; (e) all Hydrocarbons in and
under and which may be produced and saved or attributable to the Hydrocarbon
Interests, including all oil in tanks, and all rents, issues, profits,
proceeds, products, revenues and other incomes from or attributable to the
Hydrocarbon

 14
 

 

 

Interests; (f) all
tenements, hereditaments, appurtenances and Properties in any manner
appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and
(g) all Properties, rights, titles, interests and estates described or
referred to above, including any and all Property, real or personal, now owned
or hereinafter acquired and situated upon, used, held for use or useful in connection
with the operating, working or development of any of such Hydrocarbon Interests
or Property (excluding drilling rigs, automotive equipment, rental equipment or
other personal Property which may be on such premises for the purpose of
drilling a well or for other similar temporary uses) and including any and all
oil wells, gas wells, injection wells or other wells, buildings, structures,
fuel separators, liquid extraction plants, plant compressors, pumps, pumping
units, field gathering systems, tanks and tank batteries, fixtures, valves,
fittings, machinery and parts, engines, boilers, meters, apparatus, equipment,
appliances, tools, implements, cables, wires, towers, casing, tubing and rods,
surface leases, rights-of-way, easements and servitudes together with all
additions, substitutions, replacements, accessions and attachments to any and
all of the foregoing.

“Other Taxes” means,
exclusive of Excluded Taxes, any and all present or future stamp or documentary
taxes or any other excise or Property taxes, charges or similar levies arising
from any payment made hereunder or from the execution, delivery or enforcement
of, or otherwise with respect to, this Agreement and any other Loan Document.

“Participant” has the
meaning set forth in Section 12.04(c)(i).

“PBGC” means the Pension
Benefit Guaranty Corporation, or any successor thereto.

 “Person” means any natural person,
corporation, limited liability company, trust, joint venture, association,
company, partnership, Governmental Authority or other entity.

“Plan” means any employee
pension benefit plan, as defined in section 3(2) of ERISA, which (a) is
currently or hereafter sponsored, maintained or contributed to by the Borrower,
a Subsidiary or an ERISA Affiliate or (b) was at any time during the six
calendar years preceding the date hereof, sponsored, maintained or contributed
to by the Borrower or a Subsidiary or an ERISA Affiliate.

“Prime Rate” means the
rate of interest per annum publicly announced from time to time by BNP Paribas as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as
being effective. Such rate is set by the Administrative Agent as a general
reference rate of interest, taking into account such factors as the
Administrative Agent may deem appropriate; it being understood that many of the
Administrative Agent’s commercial or other loans are priced in relation to such
rate, that it is not necessarily the lowest or best rate actually charged to
any customer and that the Administrative Agent may make various commercial or
other loans at rates of interest having no relationship to such rate.

“Property” means any
interest in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, cash, securities,
accounts and contract rights.

“Proposed Borrowing Base”
has the meaning assigned to such term in Section 2.07(c)(i).

 15
 

 

 

“Proposed Borrowing Base
Notice” has the meaning assigned to such term in Section 2.07(c)(ii).

“Redemption” means with
respect to any Debt, the repurchase, redemption, prepayment, repayment,
defeasance or any other acquisition or retirement for value (or the segregation
of funds with respect to any of the foregoing) of such Debt. “Redeem”
has the correlative meaning thereto.

“Redetermination Date”
means, with respect to any Scheduled Redetermination or any Interim
Redetermination, the date that the redetermined Borrowing Base related thereto
becomes effective pursuant to Section 2.07(d).

“Register” has the
meaning assigned such term in Section 12.04(b)(iv).

“Related Parties” means,
with respect to any specified Person, such Person’s Affiliates and the
respective directors, officers, employees, agents and advisors (including
attorneys, accountants and experts) of such Person and such Person’s
Affiliates.

“Remedial Work” has the
meaning assigned such term in Section 8.10(a).

“Reserve Report” means a
report, in form and substance reasonably satisfactory to the Administrative
Agent, setting forth, as of each January 1st or July 1st (or such
other date in the event of an Interim Redetermination) the oil and gas reserves
attributable to the Oil and Gas Properties of the Borrower and the
Subsidiaries, together with a projection of the rate of production and future
net income, taxes, operating expenses and capital expenditures with respect
thereto as of such date, based upon the economic assumptions consistent with
the Administrative Agent’s lending requirements applicable to all similarly
situated borrowers operating in similar regional geographic and geologic areas
at the time.

“Responsible Officer”
means, as to any Person, the Chief Executive Officer, the President, any
Financial Officer or any Vice President of such Person. Unless otherwise
specified, all references to a Responsible Officer herein shall mean a
Responsible Officer of the Borrower.

“Restricted Payment”
means any dividend or other distribution (whether in cash, securities or other
Property) with respect to any Equity Interests in the Borrower or any of its
Subsidiaries, or any payment (whether in cash, securities or other Property),
including any sinking fund or similar deposit, on account of the purchase,
redemption, retirement, acquisition, cancellation or termination of any such
Equity Interests in the Borrower or any of its Subsidiaries or any option,
warrant or other right to acquire any such Equity Interests in the Borrower or
any of its Subsidiaries.

“Revolving Credit Exposure”
means, with respect to any Lender at any time, the sum of the outstanding
principal amount of such Lender’s Loans and its LC Exposure at such time.

“Rights Agreement” means
that certain agreement dated as of June 3, 2005, between Teton Energy
Corporation (f/k/a Teton Petroleum Company) and Computershare Investor Services
LLC.

 16
 

 

 

“Scheduled Redetermination”
has the meaning assigned such term in Section 2.07(b).

“Scheduled Redetermination
Date” means the date on which a Borrowing Base that has been redetermined
pursuant to a Scheduled Redetermination becomes effective as provided in Section 2.07(d).

“SEC” means the
Securities and Exchange Commission or any successor Governmental Authority.

“Security Instruments”
means the Guaranty Agreement, mortgages, deeds of trust and other agreements,
instruments or certificates described or referred to in Exhibit F-1,
and any and all other agreements, instruments, consents or certificates now or
hereafter executed and delivered by the Borrower or any other Person (other
than Swap Agreements with the Lenders or any Affiliate of a Lender or
participation or similar agreements between any Lender and any other lender or
creditor with respect to any Indebtedness pursuant to this Agreement) in
connection with, or as security for the payment or performance of the
Indebtedness, the Notes, this Agreement, or reimbursement obligations under the
Letters of Credit, as such agreements may be amended, modified, supplemented or
restated from time to time.

 “S&P” means Standard &
Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc., and
any successor thereto that is a nationally recognized rating agency.

“Subsidiary” means: (a) any
Person of which at least a majority of the outstanding Equity Interests having
by the terms thereof ordinary voting power to elect a majority of the board of
directors, manager or other governing body of such Person (irrespective of
whether or not at the time Equity Interests of any other class or classes of
such Person shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
the Borrower or one or more of its Subsidiaries or by the Borrower and one or
more of its Subsidiaries and (b) any partnership of which the Borrower or
any of its Subsidiaries is a general partner. Unless otherwise indicated
herein, each reference to the term “Subsidiary” shall mean a Subsidiary
of the Borrower.

“Swap Agreement” means
any agreement with respect to any swap, forward, future or derivative
transaction or option or similar agreement, whether exchange traded, “over-the-counter”
or otherwise, involving, or settled by reference to, one or more interest
rates, currencies, commodities, equity or debt instruments or securities, or
economic, financial or pricing indices or measures of economic, financial or
pricing risk or value or any similar transaction or any combination of these
transactions; provided that no phantom stock or similar plan providing for
payments only on account of services provided by current or former directors,
officers, employees or consultants of the Borrower or the Subsidiaries shall be
a Swap Agreement.

“Swap Termination Value”
means, in respect of any one or more Swap Agreements, after taking into account
the effect of any legally enforceable netting agreement relating to such Swap
Agreements, (a) for any date on or after the date such Swap Agreements
have been closed out and termination value(s) determined in accordance
therewith, such termination value(s) and (b) for any date prior to
the date referenced in clause (a), the amount(s) unpaid under such Swap
Agreements.

 17
 

 

 

“Synthetic Leases” means,
in respect of any Person, all leases which shall have been, or should have
been, in accordance with GAAP, treated as operating leases on the financial
statements of the Person liable (whether contingently or otherwise) for the
payment of rent thereunder and which were properly treated as indebtedness for
borrowed money for purposes of U.S. federal income taxes, if the lessee in respect
thereof is obligated to either purchase for an amount in excess of, or pay upon
early termination an amount in excess of, 80% of the residual value of the
Property subject to such operating lease upon expiration or early termination
of such lease.

“Taxes” means any and all
present or future taxes, levies, imposts, duties, deductions, charges or
withholdings imposed by any Governmental Authority and as applicable to any
Lender, taxes, levies, imposts, duties, deductions, charges or withholdings
generally imposed on the commercial banking industry as a whole or on
particular groups, i.e. Foreign Lenders.

“Termination Date” means
the earlier of the Maturity Date and the date of termination of the
Commitments.

“Total Debt” means, at
any date, all Debt of the Borrower and the Consolidated Subsidiaries on a
consolidated basis, excluding (i) non-cash obligations and (ii) accounts
payable and other accrued liabilities (for the deferred purchase price of
Property or services) from time to time incurred in the ordinary course of
business which are not greater than ninety (90) days past the date of invoice
or delinquent or which are being contested in good faith by appropriate action
and for which adequate reserves have been maintained in accordance with GAAP.

“Transactions” means,
with respect to (a) the Borrower, the execution, delivery and performance
by the Borrower of this Agreement and each other Loan Document to which it is a
party, the borrowing of Loans, the use of the proceeds thereof and the issuance
of Letters of Credit hereunder, and the grant of Liens by the Borrower on
Mortgaged Properties and other Properties pursuant to the Security Instruments
and (b) each Guarantor, the execution, delivery and performance by such
Guarantor of each Loan Document to which it is a party, the guaranteeing of the
Indebtedness and the other obligations under the Guaranty Agreement by such
Guarantor and such Guarantor’s grant of the security interests and provision of
collateral under the Security Instruments, and the grant of Liens by such
Guarantor on Mortgaged Properties and other Properties pursuant to the Security
Instruments.

“Type”, when used in
reference to any Loan or Borrowing, refers to whether the rate of interest on
such Loan, or on the Loans comprising such Borrowing, is determined by
reference to the Alternate Base Rate or the LIBO Rate.

“Wholly-Owned Subsidiary”
means any Subsidiary of which all of the outstanding Equity Interests (other
than any directors’ qualifying shares mandated by applicable law), on a fully-diluted
basis, are owned by the Borrower or one or more of the Wholly-Owned
Subsidiaries or are owned by the Borrower and one or more of the Wholly-Owned
Subsidiaries.

Section
1.03                                Types of Loans and Borrowings. For purposes of this
Agreement, Loans and Borrowings, respectively, may be classified and referred
to by Type (e.g., a “Eurodollar Loan” or a “Eurodollar Borrowing”).

 18
 

 

 

Section
1.04                                Terms Generally; Rules of
Construction. The
definitions of terms herein shall apply equally to the singular and plural
forms of the terms defined. Whenever the context may require, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The words “include”,
“includes” and “including” shall be deemed to be followed by the phrase “without
limitation”. The word “will” shall be construed to have the same meaning and
effect as the word “shall”. Unless the context requires otherwise (a) any
definition of or reference to any agreement, instrument or other document
herein shall be construed as referring to such agreement, instrument or other
document as from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or modifications
set forth in the Loan Documents), (b) any reference herein to any law
shall be construed as referring to such law as amended, modified, codified or
reenacted, in whole or in part, and in effect from time to time, (c) any
reference herein to any Person shall be construed to include such Person’s
successors and assigns (subject to the restrictions contained in the Loan
Documents), (d) the words “herein”, “hereof” and “hereunder”, and words of
similar import, shall be construed to refer to this Agreement in its entirety
and not to any particular provision hereof, (e) with respect to the
determination of any time period, the word “from” means “from and including”
and the word “to” means “to and including” and (f) any reference herein to
Articles, Sections, Annexes, Exhibits and Schedules shall be construed to refer
to Articles and Sections of, and Annexes, Exhibits and Schedules to, this
Agreement. No provision of this Agreement or any other Loan Document shall be
interpreted or construed against any Person solely because such Person or its
legal representative drafted such provision.

Section
1.05                                Accounting Terms and
Determinations; GAAP.
Unless otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder
shall be made, and all financial statements and certificates and reports as to
financial matters required to be furnished to the Administrative Agent or the
Lenders hereunder shall be prepared, in accordance with GAAP, applied on a
basis consistent with the Financial Statements except for changes in which
Borrower’s independent certified public accountants concur and which are
disclosed to Administrative Agent on the next date on which financial
statements are required to be delivered to the Lenders pursuant to Section 8.01(a);
provided that, unless the Borrower and the Majority Lenders shall otherwise
agree in writing, no such change shall modify or affect the manner in which
compliance with the covenants contained herein is computed such that all such
computations shall be conducted utilizing financial information presented
consistently with prior periods.

ARTICLE II

The Credits

Section
2.01                                Commitments. Subject to the terms and
conditions set forth herein, each Lender agrees to make Loans to the Borrower
during the Availability Period in an aggregate principal amount that will not
result in (a) such Lender’s Revolving Credit Exposure exceeding such
Lender’s Commitment or (b) the total Revolving Credit Exposures exceeding
the total Commitments. Within the foregoing limits and subject to the terms and
conditions set forth herein, the Borrower may borrow, repay and reborrow the
Loans.

 

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Section
2.02                                Loans and Borrowings.

(a)                                  Borrowings; Several Obligations. Each Loan shall be made as
part of a Borrowing consisting of Loans made by the Lenders ratably in
accordance with their respective Commitments. The failure of any Lender to make
any Loan required to be made by it shall not relieve any other Lender of its
obligations hereunder; provided that the Commitments are several and no Lender
shall be responsible for any other Lender’s failure to make Loans as required.

(b)                                 Types of Loans. Subject to Section 3.03,
each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as
the Borrower may request in accordance herewith. Each Lender at its option may
make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate
of such Lender to make such Loan; provided that any exercise of such option
shall not affect the obligation of the Borrower to repay such Loan in
accordance with the terms of this Agreement.

(c)                                  Minimum Amounts; Limitation on
Number of Borrowings.
At the commencement of each Interest Period for any Eurodollar Borrowing, such
Borrowing shall be in an aggregate amount that is an integral multiple of
$1,000,000 and not less than $1,000,000. At the time that each ABR Borrowing is
made, such Borrowing shall be in an aggregate amount that is an integral
multiple of $1,000,000 and not less than $1,000,000; provided that an ABR
Borrowing may be in an aggregate amount that is equal to the entire unused
balance of the total Commitments or that is required to finance the
reimbursement of an LC Disbursement as contemplated by Section 2.08(e). Borrowings
of more than one Type may be outstanding at the same time, provided that there
shall not at any time be more than a total of six (6) Eurodollar
Borrowings outstanding. Notwithstanding any other provision of this Agreement,
the Borrower shall not be entitled to request, or to elect to convert or
continue, any Borrowing if the Interest Period requested with respect thereto
would end after the Maturity Date.

(d)                                 Notes. The Loans made by each Lender
shall be evidenced by a single promissory note of the Borrower in substantially
the form of Exhibit A, dated, in the case of (i) any Lender party
hereto as of the date of this Agreement, as of the date of this Agreement or (ii) any
Lender that becomes a party hereto pursuant to an Assignment and Assumption, as
of the effective date of the Assignment and Assumption, payable to the order of
such Lender in a principal amount equal to its Maximum Credit Amount as in
effect on such date, and otherwise duly completed. In the event that any Lender’s
Maximum Credit Amount increases or decreases for any reason (whether pursuant
to Section 2.06, Section 12.04(b) or otherwise), the Borrower
shall deliver or cause to be delivered on the effective date of such increase
or decrease, a new Note payable to the order of such Lender in a principal
amount equal to its Maximum Credit Amount after giving effect to such increase
or decrease, and otherwise duly completed. The date, amount, Type, interest rate
and, if applicable, Interest Period of each Loan made by each Lender, and all
payments made on account of the principal thereof, shall be recorded by such
Lender on its books for its Note, and, prior to any transfer, may be endorsed
by such Lender on a schedule attached to such Note or any continuation thereof
or on any separate record maintained by such Lender. Failure to make any such
notation or to attach a schedule shall not affect any Lender’s or the Borrower’s
rights or obligations in respect of such Loans or affect the validity of such
transfer by any Lender of its Note.

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Section
2.03                                Requests for Borrowings 
To request a Borrowing, the Borrower shall notify the Administrative
Agent of such request by telephone (a) in the case of a Eurodollar Borrowing,
not later than 11:00 a.m., Houston time, three Business Days before the
date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not
later than 11:00 a.m., Houston time, on the date of the proposed
Borrowing; provided that no such notice shall be required for any deemed
request of an ABR Borrowing to finance the reimbursement of an LC Disbursement
as provided in Section 2.08(e). Each such telephonic Borrowing Request
shall be irrevocable and shall be confirmed promptly by hand delivery or
telecopy to the Administrative Agent of a written Borrowing Request in
substantially the form of Exhibit B and signed by the Borrower. Each such
telephonic and written Borrowing Request shall specify the following
information in compliance with Section 2.02:

(i)                                     the aggregate amount of the
requested Borrowing;

(ii)                                  the date of such Borrowing,
which shall be a Business Day;

(iii)                               whether such Borrowing is to be
an ABR Borrowing or a Eurodollar Borrowing;

(iv)                              in the case of a Eurodollar
Borrowing, the initial Interest Period to be applicable thereto, which shall be
a period contemplated by the definition of the term “Interest Period”;

(v)                                 the amount of the then effective
Borrowing Base, the current total Revolving Credit Exposures (without regard to
the requested Borrowing) and the pro forma
total Revolving Credit Exposures (giving effect to the requested Borrowing);
and

(vi)                              the location and number of the
Borrower’s account to which funds are to be disbursed, which shall comply with
the requirements of Section 2.05.

If no election
as to the Type of Borrowing is specified, then the requested Borrowing shall be
an ABR Borrowing. If no Interest Period is specified with respect to any
requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected
an Interest Period of one month’s duration. Each Borrowing Request shall
constitute a representation that the amount of the requested Borrowing shall
not cause the total Revolving Credit Exposures to exceed the total Commitments
(i.e., the lesser of the Aggregate Maximum Credit Amounts and the then
effective Borrowing Base).

Promptly
following receipt of a Borrowing Request in accordance with this Section 2.03,
the Administrative Agent shall advise each Lender of the details thereof and of
the amount of such Lender’s Loan to be made as part of the requested Borrowing.

Section
2.04                                Interest Elections.

(a)                                  Conversion and Continuance. Each Borrowing initially shall
be of the Type specified in the applicable Borrowing Request and, in the case
of a Eurodollar Borrowing, shall have an initial Interest Period as specified
in such Borrowing Request. Thereafter, the Borrower may elect to convert such
Borrowing to a different Type or to continue such

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Borrowing and,
in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all
as provided in this Section 2.04. The Borrower may elect different options
with respect to different portions of the affected Borrowing, in which case
each such portion shall be allocated ratably among the Lenders holding the
Loans comprising such Borrowing, and the Loans comprising each such portion
shall be considered a separate Borrowing.

(b)                                 Interest Election Requests. To make an election pursuant
to this Section 2.04, the Borrower shall notify the Administrative Agent of
such election by telephone by the time that a Borrowing Request would be
required under Section 2.03 if the Borrower were requesting a Borrowing of
the Type resulting from such election to be made on the effective date of such
election. Each such telephonic Interest Election Request shall be irrevocable
and shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Interest Election Request in substantially
the form of Exhibit C and signed by the Borrower.

(c)                                  Information in Interest Election
Requests. Each
telephonic and written Interest Election Request shall specify the following
information in compliance with Section 2.02:

(i)                                     the Borrowing to which such
Interest Election Request applies and, if different options are being elected
with respect to different portions thereof, the portions thereof to be
allocated to each resulting Borrowing (in which case the information to be
specified pursuant to Section 2.04(c)(iii) and (iv) shall be
specified for each resulting Borrowing);

(ii)                                  the effective date of the
election made pursuant to such Interest Election Request, which shall be a
Business Day;

(iii)                               whether the resulting Borrowing
is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv)                              if the resulting Borrowing is a
Eurodollar Borrowing, the Interest Period to be applicable thereto after giving
effect to such election, which shall be a period contemplated by the definition
of the term “Interest Period”.

If any such
Interest Election Request requests a Eurodollar Borrowing but does not specify
an Interest Period, then the Borrower shall be deemed to have selected an
Interest Period of one month’s duration.

(d)                                 Notice to Lenders by the
Administrative Agent.
Promptly following receipt of an Interest Election Request, the Administrative
Agent shall advise each Lender of the details thereof and of such Lender’s
portion of each resulting Borrowing.

(e)                                  Effect of Failure to Deliver
Timely Interest Election Request and Events of Default and Borrowing Base
Deficiencies on Interest Election. If the Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Borrowing prior to the end of the
Interest Period applicable thereto, then, unless such Borrowing is repaid as
provided herein, at the end of such Interest Period such Borrowing shall be
converted to an ABR Borrowing. Notwithstanding any contrary provision hereof,
if an Event of Default or a Borrowing Base

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Deficiency has
occurred and is continuing:  (i) no
outstanding Borrowing may be converted to or continued as a Eurodollar
Borrowing (and any Interest Election Request that requests the conversion of
any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing
shall be ineffective) and (ii) unless repaid, each Eurodollar Borrowing
shall be converted to an ABR Borrowing at the end of the Interest Period
applicable thereto.

Section
2.05                                Funding of Borrowings.

(a)                                  Funding by Lenders. Each Lender shall make each
Loan to be made by it hereunder on the proposed date thereof by wire transfer
of immediately available funds by 1:00 p.m., Houston time, to the account
of the Administrative Agent most recently designated by it for such purpose by
notice to the Lenders. The Administrative Agent will make such Loans available
to the Borrower by promptly crediting the amounts so received, in like funds,
to an account of the Borrower and designated by the Borrower in the applicable
Borrowing Request; provided that ABR Loans made to finance the reimbursement of
an LC Disbursement as provided in Section 2.08(e) shall be remitted
by the Administrative Agent to the Issuing Bank. Nothing herein shall be deemed
to obligate any Lender to obtain the funds for its Loan in any particular place
or manner or to constitute a representation by any Lender that it has obtained
or will obtain the funds for its Loan in any particular place or manner.

(b)                                 Presumption of Funding by the
Lenders. Unless
the Administrative Agent shall have received notice from a Lender prior to the
proposed date of any Borrowing that such Lender will not make available to the
Administrative Agent such Lender’s share of such Borrowing, the Administrative
Agent may assume that such Lender has made such share available on such date in
accordance with Section 2.05(a) and may, in reliance upon such
assumption, make available to the Borrower a corresponding amount. In such
event, if a Lender has not in fact made its share of the applicable Borrowing
available to the Administrative Agent, then the applicable Lender agrees to pay
to the Administrative Agent forthwith on demand such corresponding amount with
interest thereon, for each day from and including the date such amount is made
available to the Borrower to but excluding the date of payment to the
Administrative Agent, at the greater of the Federal Funds Effective Rate and a
rate determined by the Administrative Agent in accordance with banking industry
rules on interbank compensation.

Section
2.06                                Termination and Reduction of
Aggregate Maximum Credit Amounts.

(a)                                  Scheduled Termination of Commitments. Unless previously terminated,
the Commitments shall terminate on the Maturity Date. If at any time the
Aggregate Maximum Credit Amounts or the Borrowing Base is terminated or reduced
to zero, then the Commitments shall terminate on the effective date of such
termination or reduction.

(b)                                 Optional Termination and
Reduction of Aggregate Credit Amounts.

(i)                                     The Borrower may at any time
terminate, or from time to time reduce, the Aggregate Maximum Credit Amounts;
provided that (A) each reduction of the Aggregate Maximum Credit Amounts
shall be in an amount that is an integral multiple of $1,000,000 and not less
than $5,000,000 and (B) the Borrower shall not

 23
 

 

 

terminate
or reduce the Aggregate Maximum Credit Amounts if, after giving effect to any
concurrent prepayment of the Loans in accordance with Section 3.04(c), the
total Revolving Credit Exposures would exceed the total Commitments.

(ii)                                  The Borrower shall notify the
Administrative Agent of any election to terminate or reduce the Aggregate
Maximum Credit Amounts under Section 2.06(b)(i) at least three
Business Days prior to the effective date of such termination or reduction,
specifying such election and the effective date thereof. Promptly following
receipt of any notice, the Administrative Agent shall advise the Lenders of the
contents thereof. Each notice delivered by the Borrower pursuant to this Section 2.06(b)(ii) shall
be irrevocable. Any termination or reduction of the Aggregate Maximum Credit
Amounts shall be permanent and may not be reinstated. Each reduction of the
Aggregate Maximum Credit Amounts shall be made ratably among the Lenders in
accordance with each Lender’s Applicable Percentage.

Section
2.07                                Borrowing Base.

(a)                                  Initial Borrowing Base. For the period from and
including the Effective Date to but excluding the first Redetermination Date,
the amount of the Borrowing Base shall be Three Million Dollars and No/100
($3,000,000.00). Notwithstanding the foregoing, the Borrowing Base may be
subject to further adjustments from time to time pursuant to Section 8.13(c) or
Section 9.11(d).

(b)                                 Scheduled and Interim
Redeterminations.
The Borrowing Base shall be redetermined semi-annually in accordance with this Section 2.07
(a “Scheduled Redetermination”), and, subject to Section 2.07(d),
such redetermined Borrowing Base shall become effective and applicable to the
Borrower, the Administrative Agent, the Issuing Bank and the Lenders on April 1st
and October 1st of each year, commencing January 1, 2007. In
addition, the Borrower may, by notifying the Administrative Agent thereof, and
the Administrative Agent may, at the direction of the Majority Lenders, by
notifying the Borrower thereof, two times during any 12-month period,
each elect to cause the Borrowing Base to be redetermined between Scheduled
Redeterminations (an “Interim Redetermination”) in accordance with this Section 2.07.

(c)                                  Scheduled and Interim  Redetermination Procedure.

(i)                                     Each Scheduled Redetermination
and each Interim Redetermination shall be effectuated as follows:  Upon receipt by the Administrative Agent of (A) the
Reserve Report and the certificate required to be delivered by the Borrower to
the Administrative Agent, in the case of a Scheduled Redetermination, pursuant
to Section 8.12(a) and (c), and, in the case of an Interim
Redetermination, pursuant to Section 8.12(b) and (c), and (B) such
other reports, data and supplemental information, including, without
limitation, the information provided pursuant to Section 8.12(c), as may,
from time to time, be reasonably requested by the Majority Lenders (the Reserve
Report, such certificate and such other reports, data and supplemental
information being the “Engineering Reports”), the Administrative Agent
shall evaluate the information contained in the Engineering Reports and shall,
in its sole discretion,

 24
 

 

 

propose
a new Borrowing Base (the “Proposed Borrowing Base”) based upon such
information and such other information (including, without limitation, the
status of title information with respect to the Oil and Gas Properties as described
in the Engineering Reports and the existence of any other Debt) as the
Administrative Agent deems appropriate in its sole discretion and consistent
with its normal oil and gas lending criteria applicable to all similarly
situated borrowers operating in similar regional geographic and geologic areas
at the particular time. In no event shall the Proposed Borrowing Base exceed
the Aggregate Maximum Credit Amounts.

(ii)                                  The Administrative Agent shall
notify the Borrower and the Lenders of the Proposed Borrowing Base (the “Proposed
Borrowing Base Notice”):

(A)                              in the case of a Scheduled
Redetermination (1) if the Administrative Agent shall have received the
Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) and
(c) in a timely and complete manner, then on or before March 15th and
September 15th of such year following the date of delivery or (2) if
the Administrative Agent shall not have received the Engineering Reports
required to be delivered by the Borrower pursuant to Section 8.12(a) and
(c) in a timely and complete manner, then promptly after the
Administrative Agent has received complete Engineering Reports from the
Borrower and has had a reasonable opportunity to determine the Proposed
Borrowing Base in accordance with Section 2.07(c)(i); and

(B)                                in the case of an Interim
Redetermination, promptly, and in any event, within fifteen (15) days after the
Administrative Agent has received the required Engineering Reports.

(iii)                               Any Proposed Borrowing Base that
would increase the Borrowing Base then in effect must be approved or deemed to
have been approved by all of the Lenders as provided in this Section 2.07(c)(iii);
and any Proposed Borrowing Base that would decrease or maintain the Borrowing
Base then in effect must be approved or be deemed to have been approved by the
Majority Lenders as provided in this Section 2.07(c)(iii). Upon receipt of
the Proposed Borrowing Base Notice, each Lender shall have fifteen (15) days to
agree with the Proposed Borrowing Base or disagree with the Proposed Borrowing
Base by proposing an alternate Borrowing Base. If at the end of such fifteen
(15) days, any Lender has not communicated its approval or disapproval in
writing to the Administrative Agent, such silence shall be deemed to be an
approval of the Proposed Borrowing Base. If, at the end of such 15-day
period, all of the Lenders, in the case of a Proposed Borrowing Base that would
increase the Borrowing Base then in effect, or the Majority Lenders, in the
case of a Proposed Borrowing Base that would decrease or maintain the Borrowing
Base then in effect, have approved or deemed to have approved, as aforesaid,
then the Proposed Borrowing Base shall become the new Borrowing Base, effective
on the date specified in Section 2.07(d). If, however, at the end of such
15-day period, all of the Lenders or the Majority Lenders, as applicable,
have not approved or deemed to have approved, as aforesaid, then the
Administrative Agent shall poll the Lenders to ascertain the highest Borrowing
Base then acceptable to a number of Lenders sufficient to constitute the
Majority Lenders and, so long as such

 25
 

 

 

amount
does not increase the Borrowing Base then in effect, such amount shall become
the new Borrowing Base, effective on the date specified in Section 2.07(d).

(d)                                 Effectiveness of a Redetermined
Borrowing Base.
After a redetermined Borrowing Base is approved or is deemed to have been
approved by all of the Lenders or the Majority Lenders, as applicable, pursuant
to Section 2.07(c)(iii), the Administrative Agent shall notify the
Borrower and the Lenders of the amount of the redetermined Borrowing Base (the “New
Borrowing Base Notice”), and such amount shall become the new Borrowing
Base, effective and applicable to the Borrower, the Administrative Agent, the
Issuing Bank and the Lenders:

(i)                                     in the case of a Scheduled
Redetermination, (A) if the Administrative Agent shall have received the
Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) and
(c) in a timely and complete manner, then on the April 1st or October 1st,
as applicable, following such notice, or (B) if the Administrative Agent
shall not have received the Engineering Reports required to be delivered by the
Borrower pursuant to Section 8.12(a) and (c) in a timely and
complete manner, then on the Business Day next succeeding delivery of such
notice; and

(ii)                                  in the case of an Interim
Redetermination, on the Business Day next succeeding delivery of such notice.

Such amount
shall then become the Borrowing Base until the next Scheduled Redetermination
Date, the next Interim Redetermination Date or the next adjustment to the
Borrowing Base under Section 8.13(c) or Section 9.11(d),
whichever occurs first. Notwithstanding the foregoing, no Scheduled
Redetermination or Interim Redetermination shall become effective until the New
Borrowing Base Notice related thereto is received by the Borrower.

Section
2.08                                Letters of Credit.

(a)                                  General. Subject to the terms and
conditions set forth herein, the Borrower may request the issuance of dollar
denominated Letters of Credit for its own account or for the account of any of
its Subsidiaries, in a form reasonably acceptable to the Administrative Agent
and the Issuing Bank, at any time and from time to time during the Availability
Period; provided that the Borrower may not request the issuance, amendment,
renewal or extension of Letters of Credit hereunder if a Borrowing Base
Deficiency exists at such time or would exist as a result thereof. In the event
of any inconsistency between the terms and conditions of this Agreement and the
terms and conditions of any form of letter of credit application or other
agreement submitted by the Borrower to, or entered into by the Borrower with,
the Issuing Bank relating to any Letter of Credit, the terms and conditions of
this Agreement shall control.

(b)                                 Notice of Issuance, Amendment,
Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the
amendment, renewal or extension of an outstanding Letter of Credit), the
Borrower shall hand deliver or telecopy (or transmit by electronic
communication, if arrangements for doing so have been approved by the Issuing 

 26
 

 

 

Bank) to the
Issuing Bank and the Administrative Agent (not less than five (5) Business
Days in advance of the requested date of issuance, amendment, renewal or
extension) a notice:

(i)                                     requesting the issuance of a
Letter of Credit or identifying the Letter of Credit to be amended, renewed or
extended;

(ii)                                  specifying the date of issuance,
amendment, renewal or extension (which shall be a Business Day);

(iii)                               specifying the date on which
such Letter of Credit is to expire (which shall comply with Section 2.08(c));

(iv)                              specifying the amount of such
Letter of Credit;

(v)                                 specifying the name and address
of the beneficiary thereof and such other information as shall be necessary to
prepare, amend, renew or extend such Letter of Credit; and

(vi)                              specifying the amount of the
then effective Borrowing Base and whether a Borrowing Base Deficiency exists at
such time, the current total Revolving Credit Exposures (without regard to the
requested Letter of Credit or the requested amendment, renewal or extension of
an outstanding Letter of Credit) and the pro
forma total Revolving Credit Exposures (giving effect to the
requested Letter of Credit or the requested amendment, renewal or extension of
an outstanding Letter of Credit).

Each
notice shall constitute a representation that after giving effect to the
requested issuance, amendment, renewal or extension, as applicable, (i) the
LC Exposure shall not exceed the LC Commitment and (ii) the total
Revolving Credit Exposures shall not exceed the total Commitments (i.e. the
lesser of the Aggregate Maximum Credit Amounts and the then effective Borrowing
Base).

If requested by
the Issuing Bank, the Borrower also shall submit a letter of credit application
on the Issuing Bank’s standard form in connection with any request for a Letter
of Credit.

(c)                                  Expiration Date. Each Letter of Credit shall
expire at or prior to the close of business on the earlier of (i) the date
one year after the date of the issuance of such Letter of Credit (or, in the
case of any renewal or extension thereof, one year after such renewal or
extension) and (ii) the date that is five Business Days prior to the
Maturity Date.

(d)                                 Participations. By the issuance of a Letter of
Credit (or an amendment to a Letter of Credit increasing the amount thereof)
and without any further action on the part of the Issuing Bank or the Lenders,
the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires
from the Issuing Bank, a participation in such Letter of Credit equal to such
Lender’s Applicable Percentage of the aggregate amount available to be drawn
under such Letter of Credit. In consideration and in furtherance of the
foregoing, each Lender hereby absolutely and unconditionally agrees to pay to
the Administrative Agent, for the account of the Issuing Bank, such Lender’s
Applicable Percentage of each LC Disbursement made by the Issuing Bank and not
reimbursed by the Borrower on the date due as provided in Section 2.08(e),
or of any

 27
 

 

 

reimbursement
payment required to be refunded to the Borrower for any reason. Each Lender
acknowledges and agrees that its obligation to acquire participations pursuant
to this Section 2.08(d) in respect of Letters of Credit is absolute
and unconditional and shall not be affected by any circumstance whatsoever,
including any amendment, renewal or extension of any Letter of Credit or the
occurrence and continuance of a Default, the existence of a Borrowing Base
Deficiency or reduction or termination of the Commitments, and that each such
payment shall be made without any offset, abatement, withholding or reduction
whatsoever.

(e)                                  Reimbursement. If the Issuing Bank shall make
any LC Disbursement in respect of a Letter of Credit, the Borrower shall
reimburse such LC Disbursement by paying to the Administrative Agent an amount
equal to such LC Disbursement not later than 11:00 a.m., Houston time, on
the date that such LC Disbursement is made, if the Borrower shall have received
notice of such LC Disbursement prior to 10:00 a.m., Houston time, on such
date, or, if such notice has not been received by the Borrower prior to such
time on such date, then not later than 11:00 a.m., Houston time, on (i) the
Business Day that the Borrower receives such notice, if such notice is received
prior to 9:00 a.m., Houston time, on the day of receipt, or (ii) the
Business Day immediately following the day that the Borrower receives such
notice, if such notice is not received prior to such time on the day of
receipt; provided that if such LC Disbursement is not less than $1,000,000, the
Borrower shall, subject to the conditions to Borrowing set forth herein, be
deemed to have requested, and the Borrower does hereby request under such
circumstances, that such payment be financed with an ABR Borrowing in an
equivalent amount and, to the extent so financed, the Borrower’s obligation to
make such payment shall be discharged and replaced by the resulting ABR
Borrowing. If the Borrower fails to make such payment when due, the
Administrative Agent shall notify each Lender of the applicable LC
Disbursement, the payment then due from the Borrower in respect thereof and
such Lender’s Applicable Percentage thereof. Promptly following receipt of such
notice, each Lender shall pay to the Administrative Agent its Applicable
Percentage of the payment then due from the Borrower, in the same manner as
provided in Section 2.05 with respect to Loans made by such Lender (and Section 2.05
shall apply, mutatis mutandis, to
the payment obligations of the Lenders), and the Administrative Agent shall
promptly pay to the Issuing Bank the amounts so received by it from the Lenders.
Promptly following receipt by the Administrative Agent of any payment from the
Borrower pursuant to this Section 2.08(e), the Administrative Agent shall
distribute such payment to the Issuing Bank or, to the extent that Lenders have
made payments pursuant to this Section 2.08(e) to reimburse the
Issuing Bank, then to such Lenders and the Issuing Bank as their interests may
appear. Any payment made by a Lender pursuant to this Section 2.08(e) to
reimburse the Issuing Bank for any LC Disbursement (other than the funding of
ABR Loans as contemplated above) shall not constitute a Loan and shall not
relieve the Borrower of its obligation to reimburse such LC Disbursement. Any
LC Disbursement not reimbursed by the Borrower or funded as a Loan on the date
of such LC Disbursement shall bear interest for such day at the ABR plus the
Applicable Margin.

(f)                                    Obligations Absolute. The Borrower’s obligation to
reimburse LC Disbursements as provided in Section 2.08(e) shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability
of any Letter of Credit, any Letter of Credit Agreement or this Agreement, or
any term or provision therein, (ii) any draft or other document presented
under a Letter of Credit proving to be forged,

 28
 

 

 

fraudulent or
invalid in any respect or any statement therein being untrue or inaccurate in
any respect, (iii) payment by the Issuing Bank under a Letter of Credit
against presentation of a draft or other document that does not comply with the
terms of such Letter of Credit or any Letter of Credit Agreement, or (iv) any
other event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section 2.08(f),
constitute a legal or equitable discharge of, or provide a right of setoff
against, the Borrower’s obligations hereunder. Neither the Administrative
Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties shall
have any liability or responsibility by reason of or in connection with the
issuance or transfer of any Letter of Credit or any payment or failure to make
any payment thereunder (irrespective of any of the circumstances referred to in
the preceding sentence), or any error, omission, interruption, loss or delay in
transmission or delivery of any draft, notice or other communication under or
relating to any Letter of Credit (including any document required to make a
drawing thereunder), any error in interpretation of technical terms or any
consequence arising from causes beyond the control of the Issuing Bank;
provided that the foregoing shall not be construed to excuse the Issuing Bank
from liability to the Borrower to the extent of any direct damages (as opposed
to consequential damages, claims in respect of which are hereby waived by the
Borrower to the extent permitted by applicable law) suffered by the Borrower
that are caused by the Issuing Bank’s failure to exercise care when determining
whether drafts and other documents presented under a Letter of Credit comply
with the terms thereof. The parties hereto expressly agree that, in the absence
of gross negligence or willful misconduct on the part of the Issuing Bank (as
finally determined by a court of competent jurisdiction), the Issuing Bank
shall be deemed to have exercised all requisite care in each such determination.
In furtherance of the foregoing and without limiting the generality thereof,
the parties agree that, with respect to documents presented which appear on
their face to be in substantial compliance with the terms of a Letter of
Credit, the Issuing Bank may, in its sole discretion, either accept and make
payment upon such documents without responsibility for further investigation,
regardless of any notice or information to the contrary, or refuse to accept
and make payment upon such documents if such documents are not in strict
compliance with the terms of such Letter of Credit.

(g)                                 Disbursement Procedures. The Issuing Bank shall,
promptly following its receipt thereof, examine all documents purporting to
represent a demand for payment under a Letter of Credit. The Issuing Bank shall
promptly notify the Administrative Agent and the Borrower by telephone
(confirmed by telecopy) of such demand for payment and whether the Issuing Bank
has made or will make an LC Disbursement thereunder; provided that any failure
to give or delay in giving such notice shall not relieve the Borrower of its
obligation to reimburse the Issuing Bank and the Lenders with respect to any
such LC Disbursement.

(h)                                 Interim Interest. If the Issuing Bank shall make
any LC Disbursement, then, until the Borrower shall have reimbursed the Issuing
Bank for such LC Disbursement (either with its own funds or a Borrowing under Section 2.08(e)),
the unpaid amount thereof shall bear interest, for each day from and including
the date such LC Disbursement is made to but excluding the date that the
Borrower reimburses such LC Disbursement, at the rate per annum then applicable
to ABR Loans. Interest accrued pursuant to this Section 2.08(h) shall
be for the account of the Issuing Bank, except that interest accrued on and
after the date of payment by any Lender pursuant to Section 2.08(e) to
reimburse the Issuing Bank shall be for the account of such Lender to the
extent of such payment.

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(i)                                     Replacement of the Issuing Bank. The Issuing Bank may be
replaced at any time by written agreement among the Borrower, the
Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank.
The Administrative Agent shall notify the Lenders of any such replacement of
the Issuing Bank. At the time any such replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 3.05(b). From and after the effective
date of any such replacement, (i) the successor Issuing Bank shall have
all the rights and obligations of the Issuing Bank under this Agreement with
respect to Letters of Credit to be issued thereafter and (ii) references
herein to the term “Issuing Bank” shall be deemed to refer to such successor or
to any previous Issuing Bank, or to such successor and all previous Issuing
Banks, as the context shall require. After the replacement of the Issuing Bank
hereunder, the replaced Issuing Bank shall remain a party hereto and shall
continue to have all the rights and obligations of the Issuing Bank under this
Agreement with respect to Letters of Credit issued by it prior to such
replacement, but shall not be required to issue additional Letters of Credit.

(j)                                     Cash Collateralization. If (i) any Event of
Default shall occur and be continuing and the Borrower receives notice from the
Administrative Agent or the Majority Lenders demanding the deposit of cash
collateral pursuant to this Section 2.08(j), or (ii) the Borrower is
required to pay to the Administrative Agent the excess attributable to an LC
Exposure in connection with any prepayment pursuant to Section 3.04(c),
then the Borrower shall deposit, in an account with the Administrative Agent,
in the name of the Administrative Agent and for the benefit of the Lenders, an
amount in cash equal to, in the case of an Event of Default, the LC Exposure,
and in the case of a payment required by Section 3.04(c), the amount of
such excess as provided in Section 3.04(c), as of such date plus any
accrued and unpaid interest thereon; provided that the obligation to deposit
such cash collateral shall become effective immediately, and such deposit shall
become immediately due and payable, without demand or other notice of any kind,
upon the occurrence of any Event of Default with respect to the Borrower or any
Subsidiary described in Section 10.01(h) or Section 10.01(i). The
Borrower hereby grants to the Administrative Agent, for the benefit of the
Issuing Bank and the Lenders, an exclusive first priority and continuing
perfected security interest in and Lien on such account and all cash, checks,
drafts, certificates and instruments, if any, from time to time deposited or
held in such account, all deposits or wire transfers made thereto, any and all
investments purchased with funds deposited in such account, all interest,
dividends, cash, instruments, financial assets and other Property from time to
time received, receivable or otherwise payable in respect of, or in exchange
for, any or all of the foregoing, and all proceeds, products, accessions,
rents, profits, income and benefits therefrom, and any substitutions and
replacements therefor. The Borrower’s obligation to deposit amounts pursuant to
this Section 2.08(j) shall be absolute and unconditional, without
regard to whether any beneficiary of any such Letter of Credit has attempted to
draw down all or a portion of such amount under the terms of a Letter of
Credit, and, to the fullest extent permitted by applicable law, shall not be
subject to any defense or be affected by a right of set-off, counterclaim or
recoupment which the Borrower or any of its Subsidiaries may now or hereafter
have against any such beneficiary, the Issuing Bank, the Administrative Agent,
the Lenders or any other Person for any reason whatsoever. Such deposit shall
be held as collateral securing the payment and performance of the Borrower’s
and the Guarantor’s obligations under this Agreement and the other Loan
Documents. The Administrative Agent shall have exclusive dominion and control,
including the exclusive right of withdrawal, over such account in accordance
with the terms of this Agreement. Other than any

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interest earned
on the investment of such deposits, which investments shall be made at the
option and sole discretion of the Administrative Agent and at the Borrower’s
risk and expense, such deposits shall not bear interest. Interest or profits,
if any, on such investments shall accumulate in such account. Moneys in such
account shall be applied by the Administrative Agent to reimburse the Issuing
Bank for LC Disbursements for which it has not been reimbursed and, to the
extent not so applied, shall be held for the satisfaction of the reimbursement
obligations of the Borrower for the LC Exposure at such time or, if the
maturity of the Loans has been accelerated, be applied to satisfy other
obligations of the Borrower and the Guarantors under this Agreement or the
other Loan Documents. If the Borrower is required to provide an amount of cash
collateral hereunder as a result of the occurrence of an Event of Default, and
the Borrower is not otherwise required to pay to the Administrative Agent the
excess attributable to an LC Exposure in connection with any prepayment
pursuant to Section 3.04(c), then such amount (to the extent not applied
as aforesaid) shall be returned to the Borrower within three Business Days
after all Events of Default have been cured or waived.

ARTICLE III

Payments of Principal and Interest; Prepayments; Fees

Section
3.01                                Repayment of Loans. The Borrower hereby
unconditionally promises to pay to the Administrative Agent for the account of
each Lender the then unpaid principal amount of each Loan on the Termination
Date.

Section
3.02                                Interest.

(a)                                  ABR Loans. The Loans comprising each ABR
Borrowing shall bear interest at the Alternate Base Rate plus the Applicable
Margin, but in no event to exceed the Highest Lawful Rate.

(b)                                 Eurodollar Loans. The Loans comprising each
Eurodollar Borrowing shall bear interest at the LIBO Rate for the Interest
Period in effect for such Borrowing plus the Applicable Margin, but in no event
to exceed the Highest Lawful Rate.

(c)                                  Post-Default Rate and Borrowing
Base Deficiency Rate.
Notwithstanding the foregoing, (i) if an Event of Default has occurred and
is continuing, or if any principal of or interest on any Loan or any fee or
other amount payable by the Borrower or any Guarantor hereunder or under any
other Loan Document is not paid when due, whether at stated maturity, upon
acceleration or otherwise, and including any payments in respect of a Borrowing
Base Deficiency under Section 3.04(c), then all Loans outstanding, in the
case of an Event of Default, and such overdue amount, in the case of a failure
to pay amounts when due, shall bear interest, after as well as before judgment,
at a rate per annum equal to two percent (2%) plus the rate applicable to ABR
Loans as provided in Section 3.02(a), but in no event to exceed the
Highest Lawful Rate, and (ii)  during any Borrowing Base Deficiency, all
Loans outstanding at such time shall bear interest, after as well as before
judgment, at the rate then applicable to such Loans, plus the Applicable
Margin, if any, plus an additional two percent (2%), but in no event to exceed
the Highest Lawful Rate.

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(d)                                 Interest Payment Dates. Accrued interest on each Loan
shall be payable in arrears on each Interest Payment Date for such Loan and on
the Termination Date; provided that (i) interest accrued pursuant to Section 3.02(c) shall
be payable on demand, (ii) in the event of any repayment or prepayment of
any Loan (other than an optional prepayment of an ABR Loan prior to the
Termination Date), accrued interest on the principal amount repaid or prepaid
shall be payable on the date of such repayment or prepayment, and (iii) in
the event of any conversion of any Eurodollar Loan prior to the end of the
current Interest Period therefor, accrued interest on such Loan shall be
payable on the effective date of such conversion.

(e)                                  Interest Rate Computations. All interest hereunder shall
be computed on the basis of a year of 360 days, unless such computation would
exceed the Highest Lawful Rate, in which case interest shall be computed on the
basis of a year of 365 days (or 366 days in a leap year), except that interest
computed by reference to the Alternate Base Rate at times when the Alternate
Base Rate is based on the Prime Rate shall be computed on the basis of a year
of 365 days (or 366 days in a leap year), and in each case shall be payable for
the actual number of days elapsed (including the first day but excluding the
last day). The applicable Alternate Base Rate or LIBO Rate shall be determined
by the Administrative Agent, and such determination shall be conclusive absent
manifest error, and be binding upon the parties hereto.

Section
3.03                                Alternate Rate of Interest. If prior to the commencement
of any Interest Period for a Eurodollar Borrowing:

(a)                                  the Administrative Agent
determines (which determination shall be conclusive absent manifest error) that
adequate and reasonable means do not exist for ascertaining the LIBO Rate for
such Interest Period; or

(b)                                 the Administrative Agent is
advised by the Majority Lenders that the LIBO Rate for such Interest Period
will not adequately and fairly reflect the cost to such Lenders of making or
maintaining their Loans included in such Borrowing for such Interest Period;

then the
Administrative Agent shall give notice thereof to the Borrower and the Lenders
by telephone or telecopy as promptly as practicable thereafter and, until the
Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or continuation
of any Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if
any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be
made as an ABR Borrowing.

Section
3.04                                Prepayments.

(a)                                  Optional Prepayments. The Borrower shall have the
right at any time and from time to time to prepay any Borrowing in whole or in
part, subject to prior notice in accordance with Section 3.04(b).

(b)                                 Notice and Terms of Optional
Prepayment. The
Borrower shall notify the Administrative Agent by telephone (confirmed by
telecopy) of any prepayment hereunder (i) in the case of prepayment of a
Eurodollar Borrowing, not later than 11:00 a.m., Houston time, three
Business Days before the date of prepayment, or (ii) in the case of
prepayment of an ABR

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Borrowing, not
later than 11:00 a.m., Houston time, one Business Day before the date of
prepayment. Each such notice shall be irrevocable and shall specify the
prepayment date and the principal amount of each Borrowing or portion thereof
to be prepaid. Promptly following receipt of any such notice relating to a
Borrowing, the Administrative Agent shall advise the Lenders of the contents
thereof. Each partial prepayment of any Borrowing shall be in an amount that
would be permitted in the case of an advance of a Borrowing of the same Type as
provided in Section 2.02. Each prepayment of a Borrowing shall be applied
ratably to the Loans included in the prepaid Borrowing. Prepayments shall be
accompanied by accrued interest to the extent required by Section 3.02.

(c)                                  Mandatory Prepayments.

(i)                                     If, after giving effect to any
termination or reduction of the Aggregate Maximum Credit Amounts pursuant to Section 2.06(b),
the total Revolving Credit Exposures exceeds the total Commitments, then the
Borrower shall (A) prepay the Borrowings on the date of such termination
or reduction in an aggregate principal amount equal to such excess, and (B) if
any excess remains after prepaying all of the Borrowings as a result of an LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an amount
equal to such excess to be held as cash collateral as provided in Section 2.08(j).

(ii)                                  Upon any redetermination of or
adjustment to the amount of the Borrowing Base in accordance with Section 2.07
or Section 8.13(c), if the total Revolving Credit Exposures exceeds the
redetermined or adjusted Borrowing Base, then the Borrower shall (A) prepay
the Borrowings in an aggregate principal amount equal to such excess, and (B) if
any excess remains after prepaying all of the Borrowings as a result of an LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an amount
equal to such excess to be held as cash collateral as provided in Section 2.08(j).
The Borrower shall be obligated to make such prepayment and/or deposit of cash
collateral within ninety (90) days following its receipt of the New Borrowing
Base Notice in accordance with Section 2.07(d) or the date the
adjustment occurs; provided that all payments required to be made pursuant to
this Section 3.04(c)(ii) must be made on or prior to the Termination
Date.

(iii)                               Upon any adjustments to the
Borrowing Base pursuant to Section 9.11(d), if the total Revolving Credit
Exposures exceeds the Borrowing Base as adjusted, then the Borrower shall (A) prepay
the Borrowings in an aggregate principal amount equal to such excess, and (B) if
any excess remains after prepaying all of the Borrowings as a result of an LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an amount
equal to such excess to be held as cash collateral as provided in Section 2.08(j).
The Borrower shall be obligated to make such prepayment and/or deposit of cash
collateral on the date it or any Subsidiary receives cash proceeds as a result
of such disposition; provided that all payments required to be made pursuant to
this Section 3.04(c)(iii)  must be made on or prior to the
Termination Date.

(iv)                              Each prepayment of Borrowings
pursuant to this Section 3.04(c) shall be applied, first, ratably to
any ABR Borrowings then outstanding, and, second, to

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any
Eurodollar Borrowings then outstanding, and if more than one Eurodollar
Borrowing is then outstanding, to each such Eurodollar Borrowing in order of
priority beginning with the Eurodollar Borrowing with the least number of days
remaining in the Interest Period applicable thereto and ending with the
Eurodollar Borrowing with the most number of days remaining in the Interest
Period applicable thereto.

(v)                                 Each prepayment of Borrowings
pursuant to this Section 3.04(c) shall be applied ratably to the
Loans included in the prepaid Borrowings. Prepayments pursuant to this Section 3.04(c) shall
be accompanied by accrued interest to the extent required by Section 3.02.

(d)                                 No Premium or Penalty. Prepayments permitted or
required under this Section 3.04 shall be without premium or penalty,
except as required under Section 5.02.

Section
3.05                                Fees.

(a)                                  Commitment Fees. The Borrower agrees to pay to
the Administrative Agent for the account of each Lender a commitment fee, which
shall accrue at 0.050% per annum on the average daily amount of the unused
amount of the Commitment of such Lender during the period from and including
the date of this Agreement to but excluding the Termination Date. Accrued
commitment fees shall be payable in arrears on the last day of March, June, September and
December of each year and on the Termination Date, commencing on the first
such date to occur after the date hereof. All commitment fees shall be computed
on the basis of a year of 360 days, unless such computation would exceed the
Highest Lawful Rate, in which case interest shall be computed on the basis of a
year of 365 days (or 366 days in a leap year), and shall be payable for the
actual number of days elapsed (including the first day but excluding the last
day).

(b)                                 Letter of Credit Fees. The Borrower agrees to pay (i) to
the Administrative Agent for the account of each Lender a participation fee
with respect to its participations in Letters of Credit, which shall accrue at
the same Applicable Margin used to determine the interest rate applicable to
Eurodollar Loans on the average daily amount of such Lender’s LC Exposure
(excluding any portion thereof attributable to unreimbursed LC Disbursements)
during the period from and including the date of this Agreement to but excluding
the later of the date on which such Lender’s Commitment terminates and the date
on which such Lender ceases to have any LC Exposure, (ii) to the Issuing
Bank a fronting fee, which shall accrue at the rate of 0.125% per annum on the
average daily amount of the LC Exposure (excluding any portion thereof
attributable to unreimbursed LC Disbursements) during the period from and
including the date of this Agreement to but excluding the later of the
Termination Date and the date on which there ceases to be any LC Exposure,
provided that in no event shall such fee be less than $500 during any quarter,
and (iii) to the Issuing Bank, for its own account, its standard fees with
respect to the issuance, amendment, renewal or extension of any Letter of
Credit or processing of drawings thereunder. Participation fees and fronting
fees accrued through and including the last day of March, June, September and
December of each year shall be payable on the third Business Day following
such last day, commencing on the first such date to occur after the date of
this Agreement; provided that all such fees shall be payable on the Termination
Date and any such fees accruing after the Termination Date shall be payable on

 34
 

 

 

demand. Any
other fees payable to the Issuing Bank pursuant to this Section 3.05(b) shall
be payable within 10 days after demand. All participation fees and fronting
fees shall be computed on the basis of a year of 360 days, unless such
computation would exceed the Highest Lawful Rate, in which case interest shall
be computed on the basis of a year of 365 days (or 366 days in a leap year),
and shall be payable for the actual number of days elapsed (including the first
day but excluding the last day).

(c)                                  Administrative Agent Fees. The Borrower agrees to pay to
the Administrative Agent, for its own account, fees payable in the amounts and
at the times separately agreed upon between the Borrower and the Administrative
Agent in the Fee Letter.

(d)                                 Borrowing Base Increase Fees. The Borrower agrees to pay to
the Administrative Agent, for the account of each Lender then party to this
Agreement, ratably in accordance with its Applicable Percentage, a Borrowing
Base increase fee in an amount to be agreed by the Lenders and the Borrower on
the amount of any increase of the Borrowing Base over the highest Borrowing
Base previously in effect, payable on the effective date of any such increase
to the Borrowing Base.

Section
3.06           Extension of Maturity
Date.

(a)                                  On each anniversary of this
Agreement, the Borrower may, upon notice to the Administrative Agent (which
shall promptly notify the Lenders), request successive one-year extension of
the Maturity Date. Within 30 days of delivery of such notice, each Lender shall
notify the Administrative Agent whether or not it consents to such extension
(which consent may be given or withheld in such Lender’s sole and absolute
discretion). Any Lender not responding within the above time period shall be
deemed not to have consented to such extension. The Administrative Agent shall
promptly notify the Borrower and the Lenders of the Lenders’ responses.

(b)                                 The Maturity Date shall be
extended only if all of the Lenders have consented thereto. If so extended, the
Maturity Date shall be extended to the same date in the following year,
effective as of the Maturity Date then in effect (such existing Maturity Date
being the “Extension Effective Date”). The Administrative Agent shall
promptly confirm to the Lenders such extension and the Extension Effective Date.
As a condition precedent to such extension, the Borrower shall deliver to the
Administrative Agent a certificate of the Borrower dated as of the Extension
Effective Date (in sufficient copies for each Lender) signed by a Responsible
Officer of the Borrower (i) certifying and attaching the resolutions
adopted by the Borrower approving or consenting to such extension or confirming
that those previously delivered pursuant to Section 6.01 remain in full
force and effect and have not been amended or rescinded, as the case may be,
and (ii) certifying that, (A) before and after giving effect to such
extension, the representations and warranties contained in Article VII
made by it are true and correct on and as of the Extension Effective Date,
except to the extent that such representations and warranties specifically
refer to an earlier date, (B) before and after giving effect to such
extension no Event of Default exists or will exist, and (C) since (1) the
most immediately preceding March 31 and prior to the date thirty (30) days
preceding such Extension Effectiveness Date, whichever shall later occur, there
has not occurred an event, development or circumstance that has had or would
reasonably be expected to have, a Material Adverse Effect on the

 35
 

 

 

consolidated
financial position or consolidated results of operations of the Borrower and
its Subsidiaries taken as a whole.

ARTICLE
IV

Payments; Pro Rata Treatment; Sharing of Set-offs

Section
4.01                                Payments Generally; Pro Rata
Treatment; Sharing of Set-offs.

(a)                                  Payments by the Borrower. The Borrower shall make each
payment required to be made by it hereunder (whether of principal, interest,
fees or reimbursement of LC Disbursements, or of amounts payable under Section 5.01,
Section 5.02, Section 5.03 or otherwise) prior to 11:00 a.m.,
Houston time, on the date when due, in immediately available funds, without
defense, deduction, recoupment, set-off or counterclaim. Fees, once paid, shall
be fully earned and shall not be refundable under any circumstances. Any
amounts received after such time on any date may, in the discretion of the
Administrative Agent, be deemed to have been received on the next succeeding
Business Day for purposes of calculating interest thereon. All such payments
shall be made to the Administrative Agent at its offices specified in Section 12.01,
except payments to be made directly to the Issuing Bank as expressly provided
herein and except that payments pursuant to Section 5.01, Section 5.02,
Section 5.03 and Section 12.03 shall be made directly to the Persons
entitled thereto. The Administrative Agent shall distribute any such payments
received by it for the account of any other Person to the appropriate recipient
promptly following receipt thereof. If any payment hereunder shall be due on a
day that is not a Business Day, the date for payment shall be extended to the
next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such extension. All
payments hereunder shall be made in dollars.

(b)                                 Application of Insufficient
Payments. If at
any time insufficient funds are received by and available to the Administrative
Agent to pay fully all amounts of principal, unreimbursed LC Disbursements,
interest and fees then due hereunder, such funds shall be applied (i) first,
towards payment of interest and fees then due hereunder, ratably among the
parties entitled thereto in accordance with the amounts of interest and fees
then due to such parties, and (ii) second, towards payment of principal
and unreimbursed LC Disbursements then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of principal and unreimbursed
LC Disbursements then due to such parties.

(c)                                  Sharing of Payments by Lenders. If any Lender shall, by
exercising any right of set-off or counterclaim or otherwise, obtain payment in
respect of any principal of or interest on any of its Loans or participations
in LC Disbursements resulting in such Lender receiving payment of a greater
proportion of the aggregate amount of its Loans and participations in LC
Disbursements and accrued interest thereon than the proportion received by any
other Lender, then the Lender receiving such greater proportion shall purchase
(for cash at face value) participations in the Loans and participations in LC
Disbursements of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in accordance with the
aggregate amount of principal of and accrued interest on their respective Loans
and participations in LC Disbursements; provided that (i) if any such
participations are purchased and all or any portion of the payment giving rise
thereto is recovered, such participations shall be rescinded and the purchase
price restored to the extent of such recovery,

 36
 

 

 

without
interest, and (ii) the provisions of this Section 4.01(c) shall
not be construed to apply to any payment made by the Borrower pursuant to and
in accordance with the express terms of this Agreement or any payment obtained
by a Lender as consideration for the assignment of or sale of a participation
in any of its Loans or participations in LC Disbursements to any assignee or
participant, other than to the Borrower or any Subsidiary or Affiliate thereof
(as to which the provisions of this Section 4.01(c) shall apply). The
Borrower consents to the foregoing and agrees, to the extent it may effectively
do so under applicable law, that any Lender acquiring a participation pursuant
to this Section 4.01(c) may exercise against the Borrower rights of
set-off and counterclaim with respect to such participation as fully as if such
Lender were a direct creditor of the Borrower in the amount of such
participation.

Section
4.02                                Presumption of Payment by the
Borrower. Unless
the Administrative Agent shall have received notice from the Borrower prior to
the date on which any payment is due to the Administrative Agent for the
account of the Lenders or the Issuing Bank that the Borrower will not make such
payment, the Administrative Agent may assume that the Borrower has made such
payment on such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders or the Issuing Bank, as the case may be,
the amount due. In such event, if the Borrower has not in fact made such
payment, then each of the Lenders or the Issuing Bank, as the case may be,
severally agrees to repay to the Administrative Agent forthwith on demand the
amount so distributed to such Lender or Issuing Bank with interest thereon, for
each day from and including the date such amount is distributed to it to but
excluding the date of payment to the Administrative Agent, at the greater of
the Federal Funds Effective Rate and a rate determined by the Administrative
Agent in accordance with banking industry rules on interbank compensation.

Section
4.03                                Certain Deductions by the
Administrative Agent.
If any Lender shall fail to make any payment required to be made by it pursuant
to Section 2.05(b), Section 2.08(d), Section 2.08(e) or Section 4.02
then the Administrative Agent may, in its discretion (notwithstanding any
contrary provision hereof), apply any amounts thereafter received by the
Administrative Agent for the account of such Lender to satisfy such Lender’s
obligations under such Sections until all such unsatisfied obligations are
fully paid.

Section
4.04                                Disposition of Proceeds. The Security Instruments
contain an assignment by the Borrower and/or the Guarantors unto and in favor
of the Administrative Agent for the benefit of the Lenders of all of the
Borrower’s or each Guarantor’s interest in and to production and all proceeds
attributable thereto which may be produced from or allocated to the Mortgaged
Property. The Security Instruments further provide in general for the
application of such proceeds to the satisfaction of the Indebtedness and other
obligations described therein and secured thereby. Notwithstanding the
assignment contained in such Security Instruments, until the occurrence of an
Event of Default, (a) the Administrative Agent and the Lenders agree that
they will neither notify the purchaser or purchasers of such production nor
take any other action to cause such proceeds to be remitted to the
Administrative Agent or the Lenders, but the Lenders will instead permit such
proceeds to be paid to the Borrower and its Subsidiaries and (b) the
Lenders hereby authorize the Administrative Agent to take such actions as may
be necessary to cause such proceeds to be paid to the Borrower and/or such
Subsidiaries.

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ARTICLE
V

Increased Costs; Break Funding Payments; Taxes; Illegality

Section
5.01                                Increased Costs.

(a)                                  Eurodollar Changes in Law. If any Change in Law, which is
generally applicable to all commercial banking institutions shall:

(i)                                     impose, modify or deem
applicable any reserve (including marginal, special, emergency or supplemental
reserves), special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by, any Lender for Eurocurrency
liabilities under Regulation D of the Board (as the same may be amended, supplemented
or replaced from time to time) or otherwise (except any such reserve
requirement reflected in the LIBO Rate); or

(ii)                                  impose on any Lender or the
London interbank market any other condition affecting this Agreement or
Eurodollar Loans made by such Lender;

and the result
of any of the foregoing shall be to increase the cost to such Lender of making
or maintaining any Eurodollar Loan (or of maintaining its obligation to make
any such Loan) or to reduce the amount of any sum received or receivable by
such Lender (whether of principal, interest or otherwise), then the Borrower
will pay to such Lender such additional amount or amounts as will compensate
such Lender for such additional costs incurred or reduction suffered.

(b)                                 Capital Requirements. If any Lender or the Issuing
Bank determines that any Change in Law regarding capital requirements has or
would have the effect of reducing the rate of return on such Lender’s or the
Issuing Bank’s capital or on the capital of such Lender’s or the Issuing Bank’s
holding company, if any, as a consequence of this Agreement or the Loans made
by, or participations in Letters of Credit held by, such Lender, or the Letters
of Credit issued by the Issuing Bank, to a level below that which such Lender
or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company
could have achieved but for such Change in Law (taking into consideration such
Lender’s or the Issuing Bank’s policies and the policies of such Lender’s or
the Issuing Bank’s holding company with respect to capital adequacy), then from
time to time the Borrower will pay to such Lender or the Issuing Bank, as the
case may be, such additional amount or amounts as will compensate such Lender
or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company for
any such reduction suffered.

(c)                                  Certificates. A certificate of a Lender or
the Issuing Bank setting forth the amount or amounts necessary to compensate
such Lender or the Issuing Bank or its holding company, as the case may be, as
specified in Section 5.01(a) or (b) shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender or the Issuing Bank, as the case may be, the amount shown as due on
any such certificate within 10 days after receipt thereof.

(d)                                 Effect of Failure or Delay in
Requesting Compensation.
Failure or delay on the part of any Lender or the Issuing Bank to demand
compensation pursuant to this Section 5.01 shall not constitute a waiver
of such Lender’s or the Issuing Bank’s right to demand such compensation.

 38
 

 

 

Section
5.02                                Break Funding Payments. In the event of (a) the
payment of any principal of any Eurodollar Loan other than on the last day of
an Interest Period applicable thereto (including as a result of an Event of Default),
(b) the conversion of any Eurodollar Loan into an ABR Loan other than on
the last day of the Interest Period applicable thereto, or (c) the failure
to borrow, convert, continue or prepay any Eurodollar Loan on the date
specified in any notice delivered pursuant hereto, then, in any such event, the
Borrower shall compensate each Lender for the loss, cost and expense
attributable to such event. In the case of a Eurodollar Loan, such loss, cost
or expense to any Lender shall be deemed to include an amount determined by
such Lender to be the excess, if any, of (i) the amount of interest which
would have accrued on the principal amount of such Loan had such event not
occurred, at the LIBO Rate that would have been applicable to such Loan, for
the period from the date of such event to the last day of the then current
Interest Period therefor (or, in the case of a failure to borrow, convert or
continue, for the period that would have been the Interest Period for such
Loan), over (ii) the amount of interest which would accrue on such
principal amount for such period at the interest rate which such Lender would
bid were it to bid, at the commencement of such period, for dollar deposits of
a comparable amount and period from other banks in the eurodollar market.

A certificate
of any Lender setting forth any amount or amounts that such Lender is entitled
to receive pursuant to this Section 5.02 shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender the amount shown as due on any such certificate within 10 days
after receipt thereof.

Section
5.03           Taxes.

(a)                                  Payments Free of Taxes. Any and all payments by or on
account of any obligation of the Borrower or any Guarantor under any Loan
Document shall be made free and clear of and without deduction for any
Indemnified Taxes or Other Taxes; provided that if the Borrower or any
Guarantor shall be required to deduct any Indemnified Taxes or Other Taxes from
such payments, then (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section 5.03(a)), the Administrative
Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to
the sum it would have received had no such deductions been made, (ii) the
Borrower or such Guarantor shall make such deductions and (iii) the
Borrower or such Guarantor shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.

(b)                                 Payment of Other Taxes by the
Borrower. The
Borrower shall pay any Other Taxes to the relevant Governmental Authority in
accordance with applicable law.

(c)                                  Indemnification by the Borrower. The Borrower shall indemnify
the Administrative Agent, each Lender and the Issuing Bank, within 10 days
after written demand therefor, for the full amount of any Indemnified Taxes or
Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank,
as the case may be, on or with respect to any payment by or on account of any
obligation of the Borrower hereunder (including Indemnified Taxes or Other
Taxes imposed or asserted on or attributable to amounts payable under this Section 5.03)
and any penalties, interest and reasonable expenses arising therefrom or with
respect thereto, whether or not such Indemnified Taxes or Other Taxes were
correctly or legally imposed or

 39
 

 

 

asserted by the
relevant Governmental Authority. A certificate of the Administrative Agent, a
Lender or the Issuing Bank as to the amount of such payment or liability under
this Section 5.03 shall be delivered to the Borrower and shall be
conclusive absent manifest error.

(d)                                 Evidence of Payments. As soon as practicable after
any payment of Indemnified Taxes or Other Taxes by the Borrower or a Guarantor
to a Governmental Authority, the Borrower shall deliver to the Administrative
Agent the original or a certified copy of a receipt issued by such Governmental
Authority evidencing such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory to the Administrative
Agent.

(e)                                  Foreign Lenders. Any Foreign Lender that is
entitled to an exemption from or reduction of withholding tax under the law of
the jurisdiction in which the Borrower is located, or any treaty to which such
jurisdiction is a party, with respect to payments under this Agreement or any
other Loan Document shall deliver to the Borrower (with a copy to the
Administrative Agent), at the time or times prescribed by applicable law, such
properly completed and executed documentation prescribed by applicable law or
reasonably requested by the Borrower as will permit such payments to be made
without withholding or at a reduced rate.

Section
5.04                                Mitigation Obligations. If any Lender requests
compensation under Article V, or if the Borrower is required to pay
any additional amount to any Lender or any Governmental Authority for the
account of any Lender pursuant to Article V,
then such Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in
the judgment of such Lender, such designation or assignment (i) would eliminate
or reduce amounts payable pursuant to Article V, as the case may be, in
the future and (ii) would not subject such Lender to any unreimbursed cost
or expense and would not otherwise be disadvantageous to such Lender. The
Borrower hereby agrees to pay all reasonable costs and expenses incurred by any
Lender in connection with any such designation or assignment.

Section
5.05                                Illegality. Notwithstanding any other
provision of this Agreement, in the event that it becomes unlawful for any
Lender or its applicable lending office to honor its obligation to make or
maintain Eurodollar Loans either generally or having a particular Interest
Period hereunder, then (a) such Lender shall promptly notify the Borrower
and the Administrative Agent thereof and such Lender’s obligation to make such
Eurodollar Loans shall be suspended (the “Affected Loans”) until such
time as such Lender may again make and maintain such Eurodollar Loans and (b) all
Affected Loans which would otherwise be made by such Lender shall be made
instead as ABR Loans (and, if such Lender so requests by notice to the Borrower
and the Administrative Agent, all Affected Loans of such Lender then
outstanding shall be automatically converted into ABR Loans on the date
specified by such Lender in such notice) and, to the extent that Affected Loans
are so made as (or converted into) ABR Loans, all payments of principal which
would otherwise be applied to such Lender’s Affected Loans shall be applied
instead to its ABR Loans.

 

 40

 

 

ARTICLE VI

Conditions Precedent

Section 6.01           Effective Date. The
obligations of the Lenders to make Loans and of the Issuing Bank to issue
Letters of Credit hereunder shall not become effective until the date on which
each of the following conditions is satisfied (or waived in accordance with Section 12.02):

(a)           The
Administrative Agent and the Arranger shall have received all fees and other
amounts due and payable under the Fee Letter on or prior to the Effective Date,
including, to the extent invoiced, reimbursement or payment of all
out-of-pocket expenses required to be reimbursed or paid by the Borrower
thereunder.

(b)           The
Administrative Agent shall have received a certificate of the Secretary or an
Assistant Secretary of the Borrower and each Guarantor setting forth (i) resolutions
of its board of directors or other appropriate governing body with respect to
the authorization of the Borrower or such Guarantor to execute and deliver the
Loan Documents to which it is a party and to enter into the transactions
contemplated in those documents, (ii) the officers of the Borrower or such
Guarantor (y) who are authorized to sign the Loan Documents to which the
Borrower or such Guarantor is a party and (z) who will, until replaced by
another officer or officers duly authorized for that purpose, act as its
representative for the purposes of signing documents and giving notices and
other communications in connection with this Agreement and the transactions
contemplated hereby, (iii) specimen signatures of such authorized
officers, and (iv) the articles or certificate of incorporation and
bylaws, as applicable, of the Borrower and such Guarantor, certified as being
true and complete. The Administrative Agent and the Lenders may conclusively
rely on such certificate until the Administrative Agent receives notice in
writing from the Borrower to the contrary.

(c)           The
Administrative Agent shall have received certificates of the appropriate State
agencies with respect to the existence, qualification and good standing of the
Borrower and each Guarantor.

(d)           The
Administrative Agent shall have received a compliance certificate which shall
be substantially in the form of Exhibit D, duly and properly executed by a
Responsible Officer and dated as of the date of Effective Date.

(e)           The
Administrative Agent shall have received from each party hereto counterparts
(in such number as may be requested by the Administrative Agent) of this
Agreement signed on behalf of such party.

(f)            The
Administrative Agent shall have received duly executed Notes payable to the
order of each Lender in a principal amount equal to its Maximum Credit Amount
dated as of the date hereof.

(g)           The
Administrative Agent shall have received from each party thereto duly executed
counterparts (in such number as may be requested by the Administrative Agent)
of the Security Instruments, including the Guaranty Agreement and the other
Security Instruments described on Exhibit F-1. In connection with
the execution and delivery of the Security Instruments, the Administrative
Agent shall:

 41
 

 

 

(i)            be reasonably satisfied that the Security Instruments
create first priority, perfected Liens (subject only to Excepted Liens
identified in clauses (a) to (d) and (f) of the definition
thereof, but subject to the provisos at the end of such definition) on at least
90% of the total value of the Oil and Gas Properties evaluated in the Initial
Reserve Report; and

(ii)           have received certificates, together with undated, blank
stock powers for each such certificate, representing all of the issued and
outstanding Equity Interests of each of the Guarantors.

(h)           The
Administrative Agent shall have received an opinion of (i) Gersten Savage
LLP, special counsel to the Borrower, substantially in the form of Exhibit E-1
hereto, and (ii) local counsel in each of the following states: Colorado
and any other jurisdictions requested by the Administrative Agent,
substantially in the form of Exhibit E-2.

(i)            The
Administrative Agent shall have received a certificate of insurance coverage of
the Borrower evidencing that the Borrower is carrying insurance in accordance
with Section 7.12.

(j)            The
Administrative Agent shall have received title information as the
Administrative Agent may reasonably require satisfactory to the Administrative
Agent setting forth the status of title to at least 90% of the total value of
the Oil and Gas Properties evaluated in the Initial Reserve Report.

(k)           The
Administrative Agent shall be reasonably satisfied with the environmental
condition of the Oil and Gas Properties of the Borrower and its Subsidiaries.

(l)            The
Administrative Agent shall have received a certificate of a Responsible Officer
of the Borrower certifying that the Borrower has received all consents and
approvals required by Section 7.03.

(m)          The
Administrative Agent shall have received the financial statements referred to
in Section 7.04(a) and the Initial Reserve Report accompanied by a
certificate covering the matters described in Section 8.12(c).

(n)           The
Administrative Agent shall have received appropriate UCC search certificates
reflecting no prior Liens encumbering the Properties of the Borrower and its
Subsidiaries for each of the following jurisdictions:  Delaware, Colorado and any other jurisdiction
requested by the Administrative Agent; other than those being assigned or
released on or prior to the Effective Date or Liens permitted by Section 9.03.

(o)           The
Administrative Agent shall have received evidence of the Borrower having a
minimum of ten wells online producing at rates equal to or greater than the
projections contained within the Initial Reserve Report for a period of no less
than thirty (30) days.

(p)           The
Administrative Agent shall have received such other documents as the
Administrative Agent or special counsel to the Administrative Agent may
reasonably request.

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The
Administrative Agent shall notify the Borrower and the Lenders of the Effective
Date, and such notice shall be conclusive and binding. Notwithstanding the
foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank
to issue Letters of Credit hereunder shall not become effective unless each of
the foregoing conditions is satisfied (or waived pursuant to Section 12.02)
at or prior to 1:00 p.m., Houston time, on June 30, 2006 (and, in the
event such conditions are not so satisfied or waived, the Commitments shall
terminate at such time).

Section 6.02           Each Credit Event. The
obligation of each Lender to make a Loan on the occasion of any Borrowing
(including the initial funding), and of the Issuing Bank to issue, amend, renew
or extend any Letter of Credit, is subject to the satisfaction of the following
conditions:

(a)           At
the time of and immediately after giving effect to such Borrowing or the
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, no Default shall have occurred and be continuing.

(b)           At
the time of and immediately after giving effect to such Borrowing or the
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, no event, development or circumstance has occurred or shall then
exist that has resulted in, or could reasonably be expected to have, a Material
Adverse Effect.

(c)           The
representations and warranties of the Borrower and the Guarantors set forth in
this Agreement and in the other Loan Documents shall be true and correct on and
as of the date of such Borrowing or the date of issuance, amendment, renewal or
extension of such Letter of Credit, as applicable, except to the extent any
such representations and warranties are expressly limited to an earlier date,
in which case, on and as of the date of such Borrowing or the date of issuance,
amendment, renewal or extension of such Letter of Credit, as applicable, such
representations and warranties shall continue to be true and correct as of such
specified earlier date.

(d)           The
making of such Loan or the issuance, amendment, renewal or extension of such
Letter of Credit, as applicable, would not conflict with, or cause any Lender
or the Issuing Bank to violate or exceed, any applicable Governmental
Requirement, and no Change in Law shall have occurred, and no litigation shall
be pending or threatened, which does or, with respect to any threatened
litigation, seeks to, enjoin, prohibit or restrain, the making or repayment of
any Loan, the issuance, amendment, renewal, extension or repayment of any
Letter of Credit or any participations therein or the consummation of the
transactions contemplated by this Agreement or any other Loan Document.

(e)           The
receipt by the Administrative Agent of a Borrowing Request in accordance with Section 2.03
or a request for a Letter of Credit in accordance with Section 2.08(b), as
applicable.

Each
request for a Borrowing and each request for the issuance, amendment, renewal
or extension of any Letter of Credit shall be deemed to constitute a
representation and warranty by the Borrower on the date thereof as to the
matters specified in Section 6.02(a) through (e).

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ARTICLE VII

Representations and Warranties

The
Borrower represents and warrants to the Lenders that:

Section 7.01           Organization; Powers. Each of
the Borrower and the Subsidiaries is duly organized, validly existing and in
good standing` under the laws of the jurisdiction of its organization, has all
requisite power and authority, and has all material governmental licenses, authorizations,
consents and approvals necessary, to own its assets and to carry on its
business as now conducted, and is qualified to do business in, and is in good
standing in, every jurisdiction where such qualification is required, except
where failure to have such power, authority, licenses, authorizations,
consents, approvals and qualifications could not reasonably be expected to have
a Material Adverse Effect.

Section 7.02           Authority; Enforceability. The
Transactions are within the Borrower’s and each Guarantor’s corporate powers
and have been duly authorized by all necessary corporate and, if required,
stockholder action (including, without limitation, any action required to be
taken by any class of directors of the Borrower or any other Person, whether
interested or disinterested, in order to ensure the due authorization of the
Transactions). Each Loan Document to which the Borrower and each Guarantor is a
party has been duly executed and delivered by the Borrower and such Guarantor
and constitutes a legal, valid and binding obligation of the Borrower and such
Guarantor, as applicable, 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.

Section 7.03           Approvals; No Conflicts. Except
as could not be reasonably expected to have a Material Adverse Effect, the
Transactions (a) do not require any consent or approval of, registration
or filing with, or any other action by, any Governmental Authority or any other
third Person (including shareholders or any class of directors, whether
interested or disinterested, of the Borrower or any other Person), nor is any
such consent, approval, registration, filing or other action necessary for the
validity or enforceability of any Loan Document or the consummation of the
transactions contemplated thereby, except such as have been obtained or made and
are in full force and effect other than the recording and filing of the
Security Instruments as required by this Agreement, (b) will not violate
any applicable law or regulation or the charter, by-laws or other
organizational documents of the Borrower or any Subsidiary or any order of any
Governmental Authority, (c) will not violate or result in a default under
any indenture, agreement or other instrument binding upon the Borrower or any
Subsidiary or its Properties, or give rise to a right thereunder to require any
payment to be made by the Borrower or such Subsidiary and (d) will not
result in the creation or imposition of any Lien on any Property of the
Borrower or any Subsidiary (other than the Liens created by the Loan
Documents).

Section 7.04           Financial Condition; No Material
Adverse Change.

(a)           The
Borrower has heretofore furnished to the Lenders its consolidated balance sheet
and statements of income, stockholders’ equity and cash flows (i) as of
and for the fiscal year ended December 31, 2005, reported on by EKS&H,
independent public accountants,

 44
 

 

 

and
(ii) as of and for the fiscal quarter and the portion of the fiscal year
ended March 31, 2006, certified by its chief financial officer. Such
financial statements present fairly, in all material respects, the financial
position and results of operations and cash flows of the Borrower and its
Consolidated Subsidiaries as of such dates and for such periods in accordance
with GAAP, subject to year-end audit adjustments and the absence of footnotes
in the case of the unaudited quarterly financial statements.

(b)           Since
December 31, 2005, (i) there has been no event, development or
circumstance that has had or could reasonably be expected to have a Material
Adverse Effect and (ii) the business of the Borrower and its Subsidiaries
has been conducted only in the ordinary course consistent with past business
practices.

(c)           Neither
the Borrower nor any Subsidiary has on the date hereof any material Debt
(including Disqualified Capital Stock) or any contingent liabilities,
off-balance sheet liabilities or partnerships, liabilities for taxes, except as
referred to or reflected or provided for in the Financial Statements.

Section 7.05           Litigation.

(a)           Except
as set forth on Schedule 7.05, there are no actions, suits, investigations
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 Subsidiary (i) not fully covered by insurance (except
for normal deductibles) as to which there is a reasonable possibility of an
adverse determination that, if adversely determined, could reasonably be
expected, individually or in the aggregate, to result in a Material Adverse
Effect or (ii) that involve any Loan Document or the Transactions.

(b)           Since
the date of this Agreement, there has been no change in the status of the
matters disclosed in Schedule 7.05 that, individually or in the aggregate,
has resulted in, or materially increased the likelihood of, a Material Adverse
Effect.

Section 7.06           Environmental Matters. Except
as could not be reasonably expected to have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such
actions could not be reasonably expected to have a Material Adverse Effect):

(a)           neither
any Property of the Borrower or any Subsidiary nor the operations conducted
thereon violate any order or requirement of any court or Governmental Authority
or any Environmental Laws.

(b)           no
Property of the Borrower or any Subsidiary nor the operations currently
conducted thereon are in violation of or subject to any existing, pending or
threatened action, suit, investigation, inquiry or proceeding by or before any
court or Governmental Authority or to any remedial obligations under
Environmental Laws.

(c)           all
notices, permits, licenses, exemptions, approvals or similar authorizations, if
any, required to be obtained or filed in connection with the operation or use
of any and all Property of the Borrower and each Subsidiary, including, without
limitation, past or present treatment, storage, disposal or release of a
hazardous substance, oil and gas waste or

 45
 

 

 

solid
waste into the environment, have been duly obtained or filed, and the Borrower
and each Subsidiary are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations.

(d)           all
hazardous substances, solid waste and oil and gas waste, if any, generated at
any and all Property of the Borrower or any Subsidiary have in the past been
transported, treated and disposed of in accordance with Environmental Laws and
so as not to pose an imminent and substantial endangerment to public health or
welfare or the environment, and, to the knowledge of the Borrower, all such
transport carriers and treatment and disposal facilities have been and are
operating in compliance with Environmental Laws and so as not to pose an
imminent and substantial endangerment to public health or welfare or the
environment, and are not the subject of any existing, pending or threatened
action, investigation or inquiry by any Governmental Authority in connection
with any Environmental Laws.

(e)           the
Borrower has taken all steps reasonably necessary to determine and has
determined that no oil, hazardous substances, solid waste or oil and gas waste,
have been disposed of or otherwise released and there has been no threatened
release of any oil, hazardous substances, solid waste or oil and gas waste on
or to any Property of the Borrower or any Subsidiary except in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment.

(f)            to
the extent applicable, all Property of the Borrower and each Subsidiary
currently satisfies all design, operation, and equipment requirements imposed
by the OPA, and the Borrower does not have any reason to believe that such
Property, to the extent subject to the OPA, will not be able to maintain
compliance with the OPA requirements during the term of this Agreement.

(g)           neither
the Borrower nor any Subsidiary has any known contingent liability or Remedial
Work in connection with any release or threatened release of any oil, hazardous
substance, solid waste or oil and gas waste into the environment.

Section 7.07           Compliance with the Laws and
Agreements; No Defaults.

(a)           Except
where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect, each of the
Borrower and each Subsidiary is in compliance with all Governmental
Requirements applicable to it or its Property and all agreements and other
instruments binding upon it or its Property, and possesses all licenses,
permits, franchises, exemptions, approvals and other governmental
authorizations necessary for the ownership of its Property and the conduct of
its business,.

(b)           Neither
the Borrower nor any Subsidiary is in default nor has any event or circumstance
occurred which, but for the expiration of any applicable grace period or the
giving of notice, or both, would constitute a default or would require the
Borrower or a Subsidiary to Redeem or make any offer to Redeem all or any
portion of any Debt outstanding under any indenture, note, credit agreement or
instrument pursuant to which any Material Indebtedness is outstanding or by
which the Borrower or any Subsidiary or any of their Properties is bound.

(c)           No
Default has occurred and is continuing.

 46
 

 

 

Section 7.08           Investment Company Act. Neither
the Borrower nor any Subsidiary is an “investment company” or a company “controlled”
by an “investment company,” within the meaning of, or subject to regulation
under, the Investment Company Act of 1940, as amended.

Section 7.09           Taxes. Each of the Borrower and its
Subsidiaries has timely filed or caused to be filed all Tax returns and reports
required to have been filed and has paid or caused to be paid all Taxes
required to have been paid by it, except (a) Taxes that are being
contested in good faith by appropriate proceedings and for which the Borrower
or such Subsidiary, as applicable, has set aside on its books adequate reserves
in accordance with GAAP or (b) to the extent that the failure to do so
could not reasonably be expected to result in a Material Adverse Effect. The
charges, accruals and reserves on the books of the Borrower and its
Subsidiaries in respect of Taxes and other governmental charges are, in the
reasonable opinion of the Borrower, adequate. No Tax Lien has been filed and,
to the knowledge of the Borrower, no claim is being asserted with respect to
any such Tax or other such governmental charge.

Section 7.10           ERISA.

(a)           The
Borrower, the Subsidiaries and each ERISA Affiliate have complied in all
material respects with ERISA and, where applicable, the Code regarding each
Plan.

(b)           Each
Plan is, and has been, maintained in substan­tial compliance with ERISA and,
where applicable, the Code.

(c)           No
act, omission or transaction has occurred which could result in imposition on
the Borrower, any Subsidiary or any ERISA Affiliate (whether directly or
indirectly) of (i) either a civil penalty assessed pursuant to subsections
(c), (i) or (l) of section 502 of ERISA or a tax imposed pursuant to
Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty
liability damages under section 409 of ERISA.

(d)           No
Plan (other than a defined contribu­tion plan) or any trust created under any
such Plan has been terminated since September 2, 1974. No liability to the
PBGC (other than for the payment of current premiums which are not past due) by
the Borrower, any Subsidiary or any ERISA Affiliate has been or is expected by
the Borrower, any Subsidiary or any ERISA Affiliate to be incurred with respect
to any Plan. No ERISA Event with respect to any Plan has occurred.

(e)           Full
payment when due has been made of all amounts which the Borrower, the
Subsidiaries or any ERISA Affiliate is required under the terms of each Plan or
applicable law to have paid as contribu­tions to such Plan as of the date
hereof, and no accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code), whether or not waived, exists with respect
to any Plan.

(f)            The
actuarial present value of the benefit liabili­ties under each Plan which is
subject to Title IV of ERISA does not, as of the end of the Borrower’s
most recently ended fiscal year, exceed the current value of the assets
(computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities. The term “actuarial
present value of the benefit liabilities” shall have the meaning specified in
section 4041 of ERISA.

 47
 

 

 

(g)           Neither
the Borrower, the Subsidiaries nor any ERISA Affiliate sponsors, maintains, or
contributes to an employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
the Borrower, a Subsidiary or any ERISA Affiliate in its sole discretion at any
time without any material liability.

(h)           Neither
the Borrower, the Subsidiaries nor any ERISA Affiliate sponsors, maintains or
contributes to, or has at any time in the six-year period preceding the date
hereof sponsored, maintained or contributed to, any Multiemployer Plan.

(i)            Neither
the Borrower, the Subsidiaries nor any ERISA Affiliate is required to provide
security under section 401(a)(29) of the Code due to a Plan amendment that
results in an increase in current liability for the Plan.

Section 7.11           Disclosure; No Material
Misstatements. None of the other reports, financial statements,
certificates or other written information furnished by or on behalf of the
Borrower or any Subsidiary to the Administrative Agent in connection with the
execution and delivery of this Agreement or any other Loan Document (as
modified or supplemented by other information so furnished) contains any
material misstatement of fact or omits to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided that, with respect to projected financial
information, the Borrower represents only that such information was prepared in
good faith based upon assumptions believed to be reasonable at the time. There
are no statements or conclusions in any Reserve Report delivered hereunder
which are based upon or include misleading information or fail to take into
account material information regarding the matters reported therein.

Section 7.12           Insurance.
The Borrower has, and has caused all of its Subsidiaries to have, (a) all
insurance policies sufficient for the compliance by each of them with all
material Governmental Requirements and all material agreements and (b) insurance
coverage in at least amounts and against such risk (including, without
limitation, public liability) that are usually insured against by companies
similarly situated and engaged in the same or a similar business for the assets
and operations of the Borrower and its Subsidiaries. To the extent the Borrower
or its Subsidiaries acquire insurance, the Administrative Agent and the Lenders
have been named, or will be named, as additional insureds in respect of such
liability insurance policies and the Administrative Agent has been named as
loss payee with respect to Property loss insurance.

Section 7.13           Restriction on Liens. Neither
the Borrower nor any of the Subsidiaries is a party to any material agreement
or arrangement (other than Capital Leases creating Liens permitted by Section 9.03(c),
but then only on the Property subject of such Capital Lease), or subject to any
order, judgment, writ or decree, which either restricts or purports to restrict
its ability to grant Liens to the Administrative Agent and the Lenders on or in
respect of their Properties to secure the Indebtedness and the Loan Documents.

Section 7.14           Subsidiaries. Except as set
forth on Schedule 7.14 or as disclosed in writing to the Administrative Agent
(which shall promptly furnish a copy to the Lenders), which

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shall be a supplement to Schedule 7.14, the Borrower
has no Subsidiaries and the Borrower has no Foreign Subsidiaries.

Section 7.15           Location of Business and Offices.
The Borrower’s jurisdiction of organization is Delaware; the name of the
Borrower as listed in the public records of its jurisdiction of organization is
Teton Energy Corporation; and the organizational identification number of the
Borrower in its jurisdiction of organization is 2896826 (or, in each case, as
set forth in a notice delivered to the Administrative Agent pursuant to Section 8.01(l) in
accordance with Section 12.01). The Borrower’s principal place of business
and chief executive offices are located at the address specified in Section 12.01
(or as set forth in a notice delivered pursuant to Section 8.01(l) and
Section 12.01(c)). Each Subsidiary’s jurisdiction of organization, name as
listed in the public records of its jurisdiction of organization,
organizational identification number in its jurisdiction of organization, and
the location of its principal place of business and chief executive office is
stated on Schedule 7.15 (or as set forth in a notice delivered pursuant to Section 8.01(l)).

Section 7.16           Properties; Titles, Etc.

(a)           Each
of the Borrower and the Subsidiaries has (i) in all material respects,
good and defensible title to the Oil and Gas Properties evaluated in the most
recently delivered Reserve Report; and (ii) good title to all its personal
Properties, in each case, free and clear of all Liens except Liens permitted by
Section 9.03, except as could not reasonably be excepted to result in a
Material Adverse Effect. After giving full effect to the Excepted Liens, the
Borrower or the Subsidiary specified as the owner owns the net interests in
production attributable to the Hydrocarbon Interests as reflected in the most
recently delivered Reserve Report, and the ownership of such Properties shall
not in any material respect obligate the Borrower or such Subsidiary to bear
the costs and expenses relating to the maintenance, development and operations
of each such Property in an amount in excess of the working interest of each
Property set forth in the most recently delivered Reserve Report that is not
offset by a corresponding proportionate increase in the Borrower’s or such
Subsidiary’s net revenue interest in such Property.

(b)           All
material leases and agreements necessary for the conduct of the business of the
Borrower and the Subsidiaries are valid and subsisting, in full force and
effect, and there exists no default or event or circumstance which with the
giving of notice or the passage of time or both would give rise to a default
under any such lease or leases, which could reasonably be expected to have a
Material Adverse Effect.

(c)           The
rights and Properties presently owned, leased or licensed by the Borrower and
the Subsidiaries including, without limitation, all easements and rights of
way, include all rights and Properties necessary to permit the Borrower and the
Subsidiaries to conduct their business in all material respects in the same
manner as its business has been conducted prior to the date hereof.

(d)           All
of the Properties of the Borrower and the Subsidiaries which are reasonably
necessary for the operation of their businesses are in good working condition
and are maintained in accordance with prudent business standards.

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(e)           The
Borrower and each Subsidiary owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual Property material to its
business, and the use thereof by the Borrower and such Subsidiary does not infringe
upon the rights of any other Person, except for any such infringements that,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect. The Borrower and its Subsidiaries either own or have
valid licenses or other rights to use all databases, geological data,
geophysical data, engineering data, seismic data, maps, interpretations and
other technical information used in their businesses as presently conducted,
subject to the limitations contained in the agreements governing the use of the
same, which limitations are customary for companies engaged in the business of
the exploration and production of Hydrocarbons, with such exceptions as could
not reasonably be expected to have a Material Adverse Effect.

Section 7.17           Maintenance of Properties. Except
for such acts or failures to act as could not be reasonably expected to have a
Material Adverse Effect, the Oil and Gas Properties (and Properties unitized
therewith) of the Borrower and its Subsidiaries have been maintained, and to
the extent operated and developed, in a good and workmanlike manner and in
conformity with all Governmental Requirements and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Interests and other contracts and agreements forming a part of the
Oil and Gas Properties of the Borrower and its Subsidiaries. Specifically in
connection with the foregoing, except for those as could not be reasonably
expected to have a Material Adverse Effect, (i) no Oil and Gas Property of
the Borrower or any Subsidiary is subject to having allowable production
reduced below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) and (ii) none of the wells comprising a part of
the Oil and Gas Properties (or Properties unitized therewith) of the Borrower
or any Subsidiary is deviated from the vertical more than the maximum permitted
by Governmental Requirements, and such wells are, in fact, bottomed under and
are producing from, and the well bores are wholly within, the Oil and Gas
Properties (or in the case of wells located on Properties unitized therewith,
such unitized Properties) of the Borrower or such Subsidiary. All pipelines,
wells, gas processing plants, platforms and other material improvements,
fixtures and equipment owned in whole or in part by the Borrower or any of its
Subsidiaries that are necessary to conduct normal operations are being
maintained in a state adequate to conduct normal operations, and with respect
to such of the foregoing which are operated by the Borrower or any of its
Subsidiaries, in a manner consistent with the Borrower’s or its Subsidiaries’
past practices (other than those the failure of which to maintain in accordance
with this Section 7.17  could not
reasonably be expected to have a Material Adverse Effect).

Section 7.18           Gas Imbalances, Prepayments. Except
as set forth on Schedule 7.18 or on the most recent certificate delivered
pursuant to Section 8.12(c), at no time will the net negative gas
imbalances, as calculated in accordance with GAAP, exceed the greater of
$175,000 or five percent (5%) of the then effective Borrowing Base.

Section 7.19           Marketing of Production. Except
for contracts listed and in effect on the date hereof on Schedule 7.19, and
thereafter either disclosed in writing to the Administrative Agent or included
in the most recently delivered Reserve Report (with respect to all of which
contracts the Borrower represents that it or its Subsidiaries are receiving a
price for all

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production sold thereunder which is computed
substantially in accordance with the terms of the relevant contract and are not
having deliveries curtailed substantially below the subject Property’s delivery
capacity), no material agreements exist which are not cancelable on 60 days
notice or less without penalty or detriment for the sale of production from the
Borrower’s or its Subsidiaries’ Hydrocarbons (including, without limitation,
calls on or other rights to purchase, production, whether or not the same are
currently being exercised) that (a) pertain to the sale of production at a
fixed price and (b) have a maturity or expiry date of longer than six (6) months
from the date hereof.

Section 7.20           Swap Agreements. Schedule
7.20, as of the date hereof, and after the date hereof, each report required to
be delivered by the Borrower pursuant to Section 8.01(e), sets forth, a
true and complete list of all Swap Agreements of the Borrower and each
Subsidiary, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements other than the Loan Documents
relating thereto (including any margin required or supplied) and the
counterparty to each such agreement.

Section 7.21           Use of Loans and Letters of Credit.
The proceeds of the Loans and the Letters of Credit shall be used for general
corporate purposes, working capital, capital expenditures and acquisitions of
the Borrower and its Subsidiaries. The Borrower and its Subsidiaries are not
engaged principally, or as one of its or their important activities, in the
business of extending credit for the purpose, whether immediate, incidental or
ultimate, of buying or carrying margin stock (within the meaning of Regulation
T, U or X of the Board). No part of the proceeds of any Loan or Letter of
Credit will be used for any purpose which violates the provisions of
Regulations T, U or X of the Board.

Section 7.22           Solvency. After giving effect
to the transactions contemplated hereby, (a) the aggregate assets (after
giving effect to amounts that could reasonably be received by reason of
indemnity, offset, insurance or any similar arrangement), at a fair valuation,
of the Borrower and the Guarantors, taken as a whole, will exceed the aggregate
Debt of the Borrower and the Guarantors on a consolidated basis, as the Debt
becomes absolute and matures, (b) each of the Borrower and the Guarantors
will not have incurred or intended to incur, and will not believe that it will
incur, Debt beyond its ability to pay such Debt (after taking into account the
timing and amounts of cash to be received by each of the Borrower and the
Guarantors and the amounts to be payable on or in respect of its liabilities,
and giving effect to amounts that could reasonably be received by reason of
indemnity, offset, insurance or any similar arrangement) as such Debt becomes
absolute and matures and (c) each of the Borrower and the Guarantors will
not have (and will have no reason to believe that it will have thereafter)
unreasonably small capital for the conduct of its business.

ARTICLE VIII

Affirmative Covenants

Until
the Commitments have expired or been terminated and the principal of and
interest on each Loan and all fees payable hereunder and all other amounts
payable under the Loan Documents shall have been paid in full and all Letters
of Credit shall have expired or terminated

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and
all LC Disbursements shall have been reimbursed, the Borrower covenants and
agrees with the Lenders that:

Section 8.01           Financial Statements; Other
Information. The Borrower will furnish to the Administrative Agent and each
Lender:

(a)           Annual
Financial Statements. As soon as available, but in any event in accordance
with then applicable law and not later than 90 days after the end of each
fiscal year of the Borrower, its audited consolidated balance sheet and related
statements of operations, stockholders’ equity and cash flows as of the end of
and for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, all reported on by EKS&H or other independent
public accountants registered with the PCAOB (without a “going concern” or like
qualification or exception and without any qualification or exception as to the
scope of such audit) to the effect that such consolidated financial statements
present fairly in all material respects the financial condition and results of
operations of the Borrower and its Consolidated Subsidiaries on a consolidated
basis in accordance with GAAP consistently applied.

(b)           Quarterly
Financial Statements. As soon as available, but in any event in accordance
with then applicable law and not later than 45 days after the end of each of
the first three fiscal quarters of each fiscal year of the Borrower, its
consolidated balance sheet and related statements of operations, stockholders’
equity and cash flows as of the end of and for such fiscal quarter and the then
elapsed portion of the fiscal year, setting forth in each case in comparative
form the figures for the corresponding period or periods of (or, in the case of
the balance sheet, as of the end of) the previous fiscal year, all certified by
one of its Financial Officers as presenting fairly in all material respects the
financial condition and results of operations of the Borrower and its
Consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes.

(c)           Certificate
of Financial Officer — Compliance. Concurrently with any delivery of
financial statements under Section 8.01(a) or Section 8.01(b), a
certificate of a Financial Officer in substantially the form of Exhibit D
hereto (i) certifying as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken or
proposed to be taken with respect thereto, (ii) setting forth reasonably
detailed calculations demonstrating compliance with Section 8.13(b) and
Section 9.01 and (iii) stating whether any change in GAAP or in the
application thereof has occurred since the date of the audited financial
statements referred to in Section 7.04 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate.

(d)           Certificate
of Accounting Firm — Defaults. Concurrently with any delivery of financial
statements under Section 8.01(a), a certificate of the accounting firm
that reported on such financial statements stating whether they obtained
knowledge during the course of their examination of such financial statements
of any Default (which certificate may be limited to the extent required by
accounting rules or guidelines).

(e)           Certificate
of Financial Officer — Swap Agreements. Concurrently with any delivery of
financial statements under Section 8.01(a) and Section 8.01(b),
a certificate of a

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Financial
Officer, in form and substance satisfactory to the Administrative Agent,
setting forth as of the last Business Day of such fiscal quarter or fiscal
year, a true and complete list of all Swap Agreements of the Borrower and each
Subsidiary, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark-to-market
value therefor, any new credit support agreements relating thereto not listed
on Schedule 7.20, any margin required or supplied under any credit support
document, and the counterparty to each such agreement.

(f)            Certificate
of Insurer — Insurance Coverage. Concurrently with any delivery of
financial statements under Section 8.01(a), a certificate of insurance
coverage from each insurer with respect to the insurance required by Section 8.07,
in form and substance satisfactory to the Administrative Agent, and, if
requested by the Administrative Agent, all copies of the applicable policies.

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

(h)           SEC
and Other Filings; Reports to Shareholders. Promptly after the same become
publicly available, copies of all periodic and other reports, proxy statements
and other materials filed by the Borrower or any Subsidiary with the SEC, or
with any national securities exchange, or distributed by the Borrower to its
shareholders generally, as the case may be.

(i)            Notices
Under Material Instruments. Promptly after the furnishing thereof, copies
of any financial statement, report or notice furnished to or by any Person
pursuant to the terms of any preferred stock designation, indenture, loan or
credit or other similar agreement, other than this Agreement and not otherwise
required to be furnished to the Lenders pursuant to any other provision of this
Section 8.01.

(j)            Notice
of Sales of Oil and Gas Properties. In the event the Borrower or any
Subsidiary intends to sell, transfer, assign or otherwise dispose of any Oil or
Gas Properties or any Equity Interests in any Subsidiary in accordance with Section 9.11,
prior written notice of such disposition, the price thereof and the anticipated
date of closing and any other details thereof requested by the Administrative
Agent.

(k)           Notice
of Casualty Events. Prompt written notice, and in any event within three
Business Days, of the occurrence of any Casualty Event or the commencement of
any action or proceeding that could reasonably be expected to result in a
Casualty Event.

(l)            Information
Regarding Borrower and Guarantors. Prompt written notice (and in any event
at least ten (10) days prior thereto) of any change (i) in the
Borrower or any Guarantor’s corporate name or in any trade name used to identify
such Person in the conduct of its business or in the ownership of its
Properties, (ii) in the location of the Borrower or any Guarantor’s chief
executive office or principal place of business, (iii) in the Borrower or
any

 53
 

 

 

Guarantor’s
identity or corporate structure or in the jurisdiction in which such Person is
incorporated or formed, (iv) in the Borrower or any Guarantor’s
jurisdiction of organization or such Person’s organizational identification
number in such jurisdiction of organization, and (v) in the Borrower or
any Guarantor’s federal taxpayer identification number.

(m)          Notices
of Certain Changes. Promptly, but in any event within five (5) Business
Days after the execution thereof, copies of any amendment, modification or
supplement to the certificate or articles of incorporation, by-laws, any
preferred stock designation or any other organic document of the Borrower or
any Subsidiary.

(n)           Annual
Budget. Promptly, at the request of the Administrative Agent, a budget for
the then current fiscal year, including a pro forma balance sheet and income
and cash flow projections.

(o)           Other
Requested Information. Promptly following any request therefor, such other
information regarding the operations, business affairs and financial condition
of the Borrower or any Subsidiary (including, without limitation, any Plan or
Multiemployer Plan and any reports or other information required to be filed
under ERISA), or compliance with the terms of this Agreement or any other Loan
Document, as the Administrative Agent may reasonably request.

Section 8.02           Notices of Material Events. The
Borrower will furnish to the Administrative Agent and each Lender prompt
written notice of the following:

(a)           the
occurrence of any Default;

(b)           the
filing or commencement of, or the threat in writing of, any action, suit,
proceeding, investigation or arbitration by or before any arbitrator or
Governmental Authority against or affecting the Borrower or any Affiliate
thereof not previously disclosed in writing to the Lenders or any material
adverse development in any action, suit, proceeding, investigation or
arbitration (whether or not previously disclosed to the Lenders) that, in
either case, if adversely determined, could reasonably be expected to result in
liability in excess of the greater of $175,000 or two and one half percent
(2.5%) of the then effective Borrowing Base, not fully covered by insurance,
subject to normal deductibles;

(c)           the
occurrence of any ERISA Event that, alone or together with any other ERISA
Events that have occurred, could reasonably be expected to result in liability
of the Borrower and its Subsidiaries in an aggregate amount exceeding the
greater of $175,000 or two and one half percent of the then effective Borrowing
Base; and

(d)           any
other development that results in, or could reasonably be expected to result
in, a Material Adverse Effect.

Each
notice delivered under this Section 8.02 shall be accompanied by a
statement of a Responsible Officer setting forth the details of the event or
development requiring such notice and any action taken or proposed to be taken
with respect thereto.

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Section 8.03           Existence; Conduct of Business.
The Borrower will, and will cause each Subsidiary to, do or cause to be done
all things necessary to preserve, renew and keep in full force and effect its
legal existence and the rights, licenses, permits, privileges and franchises
material to the conduct of its business and maintain, if necessary, its
qualification to do business in each other jurisdiction in which its Oil and Gas
Properties is located or the ownership of its Properties requires such
qualification, except where the failure to so qualify could not reasonably be
expected to have a Material Adverse Effect; provided that the foregoing shall
not prohibit any merger, consolidation, liquidation or dissolution permitted
under Section 9.11.

Section 8.04           Payment of Obligations. The
Borrower will, and will cause each Subsidiary to, pay its obligations,
including Tax liabilities of the Borrower and all of its Subsidiaries before
the same shall become delinquent or in default, except where (a) the
validity or amount thereof is being contested in good faith by appropriate
proceedings, (b) the Borrower or such Subsidiary has set aside on its
books adequate reserves with respect thereto in accordance with GAAP and (c) the
failure to make payment pending such contest could not reasonably be expected
to result in a Material Adverse Effect or result in the seizure or levy of any
Property of the Borrower or any Subsidiary.

Section 8.05           Performance of Obligations under
Loan Documents. The Borrower will pay the Notes according to the reading,
tenor and effect thereof, and the Borrower will, and will cause each Subsidiary
to, do and perform every act and discharge all of the obligations to be
performed and discharged by them under the Loan Documents, including, without
limitation, this Agreement, at the time or times and in the manner specified.

Section 8.06           Operation and Maintenance of
Properties. The Borrower, at its own expense, will, and will cause each
Subsidiary to:

(a)           operate,
to the extent applicable, its Oil and Gas Properties and other material
Properties or cause such Oil and Gas Properties and other material Properties
to be maintained in a careful and efficient manner in accordance with the
practices of the industry and in compliance with all applicable contracts and
agreements and in compliance with all Governmental Requirements, including,
without limitation, applicable pro ration requirements and Environmental Laws,
and all applicable laws, rules and regulations of every other Governmental
Authority from time to time constituted to regulate the development and
operation of its Oil and Gas Properties and the production and sale of
Hydrocarbons and other minerals therefrom, except, in each case, where the
failure to comply could not reasonably be expected to have a Material Adverse
Effect.

(b)           keep
and maintain all Property material to the conduct of its business in good
working order and condition, (ordinary wear and tear excepted) preserve,
maintain and keep in good repair, working order and efficiency (ordinary wear
and tear excepted) all of its material Oil and Gas Properties and other
material Properties, including, without limitation, all equipment, machinery
and facilities.

(c)           promptly
pay and discharge, or make reasonable and customary efforts to cause to be paid
and discharged, all delay rentals, royalties, expenses and indebtedness
accruing under the leases or other agreements affecting or pertaining to its
Oil and Gas Properties and will

 55
 

 

 

do
all other things necessary to keep unimpaired their rights with respect thereto
and prevent any forfeiture thereof or default thereunder.

(d)           promptly
perform or make reasonable and customary efforts to cause to be performed, in
accordance with industry standards, the obligations required by each and all of
the assignments, deeds, leases, sub-leases, contracts and agreements affecting
its interests in its Oil and Gas Properties and other material Properties.

(e)           operate
its Oil and Gas Properties and other material Properties or cause or make
reasonable and customary efforts to cause such Oil and Gas Properties and other
material Properties to be operated in accordance with the practices of the
industry and in material compliance with all applicable contracts and
agreements and in compliance in all material respects with all Governmental
Requirements.

(f)            to
the extent the Borrower is not the operator of any Property, the Borrower shall
use reasonable efforts to cause the operator to comply with this Section 8.06.

Section 8.07           Insurance. The Borrower will,
and will cause each Subsidiary to, maintain, with financially sound and
reputable insurance companies, insurance in such amounts and against such risks
as are customarily maintained by companies engaged in the same or similar
businesses operating in the same or similar locations. The loss payable clauses
or provisions in said insurance policy or policies insuring any of the
collateral for the Loans shall be endorsed in favor of and made payable to the
Administrative Agent as its interests may appear and such policies shall name
the Administrative Agent and the Lenders as “additional insureds” and provide
that the insurer will endeavor to give at least 30 days prior notice of any
cancellation to the Administrative Agent.

Section 8.08           Books and Records; Inspection
Rights. The Borrower will, and will cause each Subsidiary to, keep proper
books of record and account in which full, true and correct entries are made of
all dealings and transactions in relation to its business and activities. The
Borrower will, and will cause each Subsidiary to, permit any representatives
designated by the Administrative Agent, upon reasonable prior notice during
normal business hours, to visit and inspect its Properties, to examine and make
extracts from its books and records, and to discuss its affairs, finances and
condition with its officers and independent accountants, all at such reasonable
times and as often as reasonably requested.

Section 8.09           Compliance with Laws. The
Borrower will, and will cause each Subsidiary to, comply with all laws, rules,
regulations and orders of any Governmental Authority applicable to it or its
Property, except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.

Section 8.10           Environmental Matters.

(a)           The
Borrower shall at its sole expense: (i) comply, and shall cause its
Properties and operations and each Subsidiary and each Subsidiary’s Properties
and operations to comply, with all applicable Environmental Laws, the breach of
which could be reasonably expected to have a Material Adverse Effect; (ii) not
dispose of or otherwise release, and shall cause each Subsidiary not to dispose
of or otherwise release, any oil, oil and gas waste,

 56
 

 

 

hazardous
substance, or solid waste on, under, about or from any of the Borrower’s or its
Subsidiaries’ Properties or any other Property to the extent caused by the
Borrower’s or any of its Subsidiaries’ operations except in compliance with
applicable Environmental Laws, the disposal or release of which could
reasonably be expected to have a Material Adverse Effect; (iii) timely
obtain or file, and shall cause each Subsidiary to timely obtain or file, all
notices, permits, licenses, exemptions, approvals, registrations or other
authorizations, if any, required under applicable Environmental Laws to be
obtained or filed in connection with the operation or use of the Borrower’s or
its Subsidiaries’ Properties, which failure to obtain or file could reasonably
be expected to have a Material Adverse Effect; (iv) promptly commence and
diligently prosecute to completion, and shall cause each Subsidiary to promptly
commence and diligently prosecute to completion, any assessment, evaluation,
investigation, monitoring, containment, cleanup, removal, repair, restoration,
remediation or other remedial obligations (collectively, the “Remedial Work”)
in the event any Remedial Work is required or reasonably necessary under
applicable Environmental Laws because of or in connection with the actual or
suspected past, present or future disposal or other release of any oil, oil and
gas waste, hazardous substance or solid waste on, under, about or from any of
the Borrower’s or its Subsidiaries’ Properties, which failure to commence and
diligently prosecute to completion could reasonably be expected to have a
Material Adverse Effect; and (v) establish and implement, and shall cause
each Subsidiary to establish and implement, such procedures as may be necessary
to continuously determine and assure that the Borrower’s and its Subsidiaries’
obligations under this Section 8.10(a) are timely and fully
satisfied, which failure to establish and implement could reasonably be
expected to have a Material Adverse Effect.

(b)           The
Borrower will promptly, but in no event later than five days of the occurrence
of a triggering event, notify the Administrative Agent and the Lenders in
writing of any threatened action, investigation or inquiry by any Governmental Authority
or any threatened demand or lawsuit by any landowner or other third party
against the Borrower or its Subsidiaries or their Properties of which the
Borrower has knowledge in connection with any Environmental Laws (excluding
routine testing and corrective action) if the Borrower reasonably anticipates
that such action will result in liability (whether individually or in the
aggregate) in excess of the greater of $175,000 or two and one half percent
(2.5%) of the then effective Borrowing Base, not fully covered by insurance,
subject to normal deductibles.

(c)           The
Borrower will, and will cause each of its Subsidiaries to obtain a phase I
environmental report in connection with any future acquisitions of Oil and Gas
Properties or other Properties that the Borrower requests be included in the
Borrowing Base.

Section 8.11           Further Assurances.

(a)           The
Borrower at its sole expense will, and will cause each Subsidiary to, promptly
execute and deliver to the Administrative Agent all such other documents, agreements
and instruments reasonably requested by the Administrative Agent to comply
with, cure any defects or accomplish the conditions precedent, covenants and
agreements of the Borrower or any Subsidiary, as the case may be, in the Loan
Documents, including the Notes, or to further evidence and more fully describe
the collateral intended as security for the Indebtedness, or to correct any
omissions in this Agreement or the Security Instruments, or to state more fully
the obligations secured therein, or to perfect, protect or preserve any Liens
created pursuant to this

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Agreement
or any of the Security Instruments or the priority thereof, or to make any
recordings, file any notices or obtain any consents, all as may be reasonably
necessary or appropriate, in the sole discretion of the Administrative Agent,
in connection therewith.

(b)           The
Borrower hereby authorizes the Administrative Agent to file one or more
financing or continuation statements, and amendments thereto, relative to all
or any part of the Mortgaged Property without the signature of the Borrower or
any other Guarantor where permitted by law. A carbon, photographic or other
reproduction of the Security Instruments or any financing statement covering
the Mortgaged Property or any part thereof shall be sufficient as a financing
statement where permitted by law.

Section 8.12           Reserve
Reports.

(a)           On or before March 1st and September 1st of each
year, commencing January 1, 2007, the Borrower shall furnish to the
Administrative Agent and the Lenders a Reserve Report evaluating the Oil and
Gas Properties of the Borrower and its Subsidiaries as of the immediately
preceding January 1 and July 1. The Reserve Report as of January 1
of each year shall be prepared by one or more Approved Petroleum Engineers, and
the July 1 Reserve Report of each year shall be prepared by or under the
supervision of the chief engineer of the Borrower who shall certify such
Reserve Report to be true and accurate and to have been prepared in accordance
with the procedures used in the immediately preceding January 1 Reserve
Report.

(b)           In
the event of an Interim Redetermination, the Borrower shall furnish to the
Administrative Agent and the Lenders a Reserve Report prepared by or under the
supervision of the chief engineer of the Borrower who shall certify such
Reserve Report to be true and accurate and to have been prepared in accordance
with the procedures used in the immediately preceding January 1 Reserve
Report. For any Interim Redetermination requested by the Administrative Agent
or the Borrower pursuant to Section 2.07(b), the Borrower shall provide
such Reserve Report with an “as of” date as required by the Administrative
Agent as soon as possible, but in any event no later than thirty (30) days
following the receipt of such request.

(c)           With
the delivery of each Reserve Report, the Borrower shall provide to the
Administrative Agent and the Lenders a certificate from a Responsible Officer
certifying that in all material respects: (i) the information contained in
the Reserve Report and any other information delivered in connection therewith
is true and correct, (ii) the Borrower or its Subsidiaries owns good and
defensible title to the Oil and Gas Properties evaluated in such Reserve Report
and such Properties are free of all Liens except for Liens permitted by Section 9.03,
(iii) except as set forth on an exhibit to the certificate, on a net basis
there are no gas imbalances, take or pay or other prepayments in excess of the
volume specified in Section 7.18 with respect to its Oil and Gas
Properties evaluated in such Reserve Report which would require the Borrower or
any Subsidiary to deliver Hydrocarbons either generally or produced from such
Oil and Gas Properties at some future time without then or thereafter receiving
full payment therefor, (iv) none of their Oil and Gas Properties have been
sold since the date of the last Borrowing Base determination except as set
forth on an exhibit to the certificate, which certificate shall list all of its
Oil and Gas Properties sold and in such detail as reasonably required by the
Administrative Agent, (v) attached to the certificate is a list of all
marketing agreements

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entered
into subsequent to the later of the date hereof or the most recently delivered
Reserve Report which the Borrower could reasonably be expected to have been
obligated to list on Schedule 7.19 had such agreement been in effect on the
date hereof and (vi) attached thereto is a schedule of the Oil and Gas
Properties evaluated by such Reserve Report that are Mortgaged Properties and
demonstrating the percentage of the total proved value of such Mortgaged
Properties represent in compliance with Section 8.14(a).

Section 8.13           Title
Information.

(a)           On or before the delivery to the
Administrative Agent and the Lenders of each Reserve Report required by Section 8.12(a),
the Borrower will deliver title information in form and substance acceptable to
the Administrative Agent covering enough of the Oil and Gas Properties
evaluated by such Reserve Report that were not included in the immediately
preceding Reserve Report, so that the Administrative Agent shall have received
together with title information previously delivered to the Administrative
Agent, satisfactory title information on at least 90% of the total value of the
Oil and Gas Properties evaluated by such Reserve Report.

(b)           If
the Borrower has provided title information for additional Properties under Section 8.13(a),
the Borrower shall, within 90 days of notice from the Administrative Agent that
title defects or exceptions exist with respect to such additional Properties,
either (i) cure any such title defects or exceptions (including defects or
exceptions as to priority) which are not permitted by Section 9.03 raised
by such information, (ii) substitute acceptable Mortgaged Properties with
no title defects or exceptions except for Excepted Liens (other than Excepted
Liens described in clauses (e), (g) and (h) of such definition)
having an equivalent value or (iii) deliver title information in form and
substance acceptable to the Administrative Agent so that the Administrative
Agent shall have received, together with title information previously delivered
to the Administrative Agent, satisfactory title information on at least 90% of
the value of the Oil and Gas Properties evaluated by such Reserve Report.

(c)           If
the Borrower is unable to cure any title defect requested by the Administrative
Agent or the Lenders to be cured within the 90-day period or the Borrower
does not comply with the requirements to provide acceptable title information
covering 90% of the value of the Oil and Gas Properties evaluated in the most
recent Reserve Report, such default shall not be a Default, but instead the
Administrative Agent and/or the Majority Lenders shall have the right to
exercise the following remedy in their sole discretion from time to time, and
any failure to so exercise this remedy at any time shall not be a waiver as to
future exercise of the remedy by the Administrative Agent or the Lenders. To
the extent that the Administrative Agent or the Majority Lenders are not
satisfied with title to any Mortgaged Property after the 90-day period
has elapsed, such unacceptable Mortgaged Property shall not count towards the
90% requirement, and the Administrative Agent may send a notice to the Borrower
and the Lenders that the then outstanding Borrowing Base shall be reduced by an
amount as determined by the Majority Lenders to cause the Borrower to be in
compliance with the requirement to provide acceptable title information on 90%
of the value of the Oil and Gas Properties. This new Borrowing Base shall
become effective immediately after receipt of such notice.

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Section 8.14           Additional Collateral; Additional Guarantors.

(a)           In
connection with each redetermination of the Borrowing Base, the Borrower shall
review the Reserve Report and the list of current Mortgaged Properties (as
described in Section 8.12(c)(vi)) to ascertain whether the Mortgaged
Properties represent at least 90% of the total value of the Oil and Gas
Properties evaluated in the most recently completed Reserve Report after giving
effect to exploration and production activities, acquisitions, dispositions and
production. In the event that the Mortgaged Properties do not represent at
least 90% of such total value, then the Borrower shall, and shall cause its
Subsidiaries to, grant, within thirty (30) days of delivery of the certificate
required under Section 8.12(c), to the Administrative Agent as security
for the Indebtedness a first-priority Lien interest (provided that Excepted Liens
of the type described in clauses (a) to (d) and (f) of the
definition thereof may exist, but subject to the provisos at the end of such
definition) on additional Oil and Gas Properties not already subject to a Lien
of the Security Instruments such that after giving effect thereto, the
Mortgaged Properties will represent at least 90% of such total value. All such
Liens will be created and perfected by and in accordance with the provisions of
deeds of trust, security agreements and financing statements or other Security
Instruments, all in form and substance reasonably satisfactory to the
Administrative Agent and in sufficient executed (and acknowledged where
necessary or appropriate) counterparts for recording purposes. In order to
comply with the foregoing, if any Subsidiary places a Lien on its Oil and Gas
Properties and such Subsidiary is not a Guarantor, then it shall become a
Guarantor and comply with Section 8.14(b).

(b)           The
Borrower shall promptly cause each Subsidiary to guarantee the Indebtedness pursuant
to the Guaranty Agreement. In connection with any such guaranty, the Borrower
shall, or shall cause such Subsidiary to (A) execute and deliver a
supplement to the Guaranty Agreement executed by such Subsidiary, (B) pledge
all of the Equity Interests of such new Subsidiary (including, without
limitation, delivery of original stock certificates evidencing the Equity
Interests of such Subsidiary, together with an appropriate undated stock powers
for each certificate duly executed in blank by the registered owner thereof)
and (C) execute and deliver such other additional closing documents,
certificates and legal opinions as shall reasonably be requested by the
Administrative Agent.

(c)           If
any Event of Default shall occur and be continuing, then the Borrower shall,
and shall cause each of its Subsidiaries to, within ten (10) Business Days
after notice by Administrative Agent, grant to the Administrative Agent as
security for the Indebtedness a first-priority Lien interest (provided Excepted
Liens of the type described in clauses (a) to (d) and (f) of the
definition thereof may exist, but subject to the provisos at the end of such
definition) on all of their Oil and Gas Properties not already subject to a
Lien of the Security Instruments such that after giving effect thereto, the
Mortgaged Properties will represent substantially all of the Oil and Gas
Properties of the Borrower and its Subsidiaries. All such Liens will be created
and perfected by and in accordance with the provisions of deeds of trust,
security agreements and financing statements or other Security Instruments, all
in form and substance reasonably satisfactory to the Administrative Agent and
in sufficiently executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.

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Section 8.15           ERISA Compliance. The Borrower
will promptly furnish and will cause the Subsidiaries and any ERISA Affiliate
to promptly furnish to the Administrative Agent (i) promptly after the
filing thereof with the United States Secretary of Labor, the Internal Revenue
Service or the PBGC, copies of each annual and other report with respect to
each Plan or any trust created thereunder, (ii) immediately upon becoming
aware of the occurrence of any ERISA Event or of any “prohibited transaction,”
as described in section 406 of ERISA or in section 4975 of the Code, in
connection with any Plan or any trust created thereunder, a written notice
signed by the President or the principal Financial Officer, the Subsidiary or
the ERISA Affiliate, as the case may be, specifying the nature thereof, what
action the Borrower, the Subsidiary or the ERISA Affiliate is taking or
proposes to take with respect thereto, and, when known, any action taken or
proposed by the Internal Revenue Service, the Department of Labor or the PBGC
with respect thereto, and (iii) immediately upon receipt thereof, copies
of any notice of the PBGC’s intention to terminate or to have a trustee
appointed to administer any Plan. With respect to each Plan (other than a
Multiemployer Plan), the Borrower will, and will cause each Subsidiary and
ERISA Affiliate to, (i) satisfy in full and in a timely manner, without
incurring any late payment or underpayment charge or penalty and without giving
rise to any lien, all of the contribution and funding requirements of section
412 of the Code (determined without regard to subsections (d), (e), (f) and
(k) thereof) and of section 302 of ERISA (determined without regard to
sections 303, 304 and 306 of ERISA), and (ii) pay, or cause to be paid, to
the PBGC in a timely manner, without incurring any late payment or underpayment
charge or penalty, all premiums required pursuant to sections 4006 and 4007 of
ERISA.

Section 8.16           Marketing Activities. The
Borrower will not, and will not permit any of its Subsidiaries to, engage in
marketing activities for any Hydrocarbons or enter into any contracts related
thereto other than (i) contracts for the sale of Hydrocarbons scheduled or
reasonably estimated to be produced from their proved Oil and Gas Properties
during the period of such contract, (ii) contracts for the sale of
Hydrocarbons scheduled or reasonably estimated to be produced from proved Oil
and Gas Properties of third parties during the period of such contract
associated with the Oil and Gas Properties of the Borrower and its Subsidiaries
that the Borrower or one of its Subsidiaries has the right to market pursuant
to joint operating agreements, unitization agreements or other similar
contracts that are usual and customary in the oil and gas business and (iii) other
contracts for the purchase and/or sale of Hydrocarbons of third parties (A) which
have generally offsetting provisions (i.e. corresponding pricing mechanics,
delivery dates and points and volumes) such that no “position” is taken and (B) for
which appropriate credit support has been taken to alleviate the material
credit risks of the counterparty thereto.

ARTICLE IX

Negative Covenants

Until
the Commitments have expired or terminated and the principal of and interest on
each Loan and all fees payable hereunder and all other amounts payable under
the Loan Documents have been paid in full and all Letters of Credit have
expired or terminated and all LC Disbursements shall have been reimbursed, the
Borrower covenants and agrees with the Lenders that:

 

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Section 9.01                                Financial
Covenants.

(a)                                  Interest Coverage Ratio. The Borrower will not, as of
the last day of any fiscal quarter, commencing March 31, 2007, permits its
consolidated ratio of EBITDAX for the period of four fiscal quarters ending on
such date to Interest Expense for such period to be less than 3.0 to 1.0.

(b)                                 Ratio of Total Debt to EBITDAX. On or after January 1,
2007, the Borrower will not, at any time, permit its ratio of Total Debt as of
such time to EBITDAX for the four fiscal quarters ending on the last day of the
fiscal quarter immediately preceding the date of determination for which
financial statements are available to be greater than 4.0 to 1.0 for any period
to and including December 31, 2007 and 3.5 to 1.0 for any period
thereafter.

(c)                                  Current Ratio. The Borrower will not, as of
the last day of any fiscal quarter, commencing March 31, 2007, permit its
ratio of (i) consolidated current assets (including the unused amount of
the total Commitments, but excluding non-cash assets under FAS 133) to (ii) consolidated
current liabilities (excluding non-cash obligations and current maturities
under this Agreement or any obligation to carry the 50% working interest of
American Oil and Gas in drilling the first 2 wells in the Williston project, or
in the event such wells are not drilled to pay any additional amounts as
consideration for the acquisition of the undeveloped acreage, whether such
amounts are reflected as a liability under GAAP or not) to be less than 1.0 to
1.0.

Section 9.02                                Debt.
The Borrower will not, and will not permit any Subsidiary to, incur, create,
assume or suffer to exist any Debt, except:

(a)                                  the Notes or other Indebtedness
arising under the Loan Documents or any guaranty of or suretyship arrangement
for the Notes or other Indebtedness arising under the Loan Documents.

(b)                                 accounts payable and accrued
expenses, liabilities or other obligations to pay the deferred purchase price
of Property or services, from time to time incurred in the ordinary course of
business which are not greater than ninety (90) days past the date of invoice
or delinquent or which are being contested in good faith by appropriate action
and for which adequate reserves have been maintained in accordance with GAAP.

(c)                                  Debt under Capital Leases not to
exceed the greater of $175,000 or five percent (5%) of the then effective
Borrowing Base.

(d)                                 Debt associated with bonds or
surety obligations required by Governmental Requirements in connection with the
operation of the Oil and Gas Properties.

(e)                                  intercompany Debt between the
Borrower and any of its Subsidiaries or between Subsidiaries to the extent
permitted by Section 9.05(g); provided that such Debt is not held,
assigned, transferred, negotiated or pledged to any Person other than the
Borrower or one of its Wholly-Owned Subsidiaries, and, provided further, that
any such Debt owed by either the Borrower or a Guarantor shall be subordinated
to the Indebtedness on terms set forth in the Guaranty Agreement.

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(f)                                    endorsements of negotiable
instruments for collection in the ordinary course of business.

(g)                                 other Debt not to exceed the
greater of $175,000 or five percent (5%) of the then effective Borrowing Base
in the aggregate at any one time outstanding.

Section 9.03                                Liens

. The Borrower
will not, and will not permit any Subsidiary to, create, incur, assume or
permit to exist any Lien on any of its Properties (now owned or hereafter
acquired), except:

(a)                                  Liens securing the payment of
any Indebtedness.

(b)                                 Excepted Liens.

(c)                                  Liens securing Capital Leases
permitted by Section 9.02(c) but only on the Property under lease.

(d)                                 Liens on Property not
constituting collateral for the Indebtedness and not otherwise permitted by the
foregoing clauses of this Section 9.03; provided that the aggregate
principal or face amount of all Debt secured under this Section 9.03(d) shall
not exceed the greater of $175,000 or five percent (5%) of the then effective
Borrowing Base at any time.

Section 9.04                                Dividends,
Distributions and Redemptions. The Borrower will not, and will not permit
any of its Subsidiaries to, declare or make, or agree to pay or make, directly
or indirectly, any Restricted Payment, return any capital to its stockholders
or make any distribution of its Property to its Equity Interest holders, except
(a) the Borrower may declare and pay dividends or distributions with
respect to its Equity Interests, including without limitation, distributions
under the Rights Agreement, payable solely in additional shares of its Equity
Interests (other than Disqualified Capital Stock), (b) Subsidiaries may
declare and pay dividends ratably with respect to their Equity Interests and (c) the
Borrower may make Restricted Payments pursuant to and in accordance with stock
option plans or other benefit plans for management or employees of the Borrower
and its Subsidiaries.

Section 9.05                                Investments,
Loans and Advances. The Borrower will not, and will not permit any
Subsidiary to, make or permit to remain outstanding any Investments in or to
any Person, except that the foregoing restriction shall not apply to:

(a)                                  Investments reflected in the
Financial Statements or which are disclosed to the Lenders in Schedule 9.05.

(b)                                 accounts receivable arising in
the ordinary course of business.

(c)                                  direct obligations of the United
States or any agency thereof, or obligations guaranteed by the United States or
any agency thereof, in each case maturing within one year from the date of
creation thereof.

(d)                                 commercial paper maturing within
one year from the date of creation thereof rated in the highest grade by
S&P or Moody’s.

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(e)                                  deposits maturing within one
year from the date of creation thereof with, including certificates of deposit
issued by, any Lender or any office located in the United States of any other
bank or trust company which is organized under the laws of the United States or
any state thereof, has capital, surplus and undivided profits aggregating at
least $100,000,000 (as of the date of such bank or trust company’s most recent
financial reports) and has a short term deposit rating of no lower than A2 or
P2, as such rating is set forth from time to time, by S&P or Moody’s,
respectively.

(f)                                    deposits in money market funds
investing exclusively in Investments described in Section 9.05(c), Section 9.05(d) or
Section 9.05(e).

(g)                                 Investments (i) made by the
Borrower in or to the Guarantors, and (ii) made by any Guarantor in or to
the Borrower or any other Guarantor.

(h)                                 subject to the limits in Section 9.06,
Investments (including, without limitation, capital contributions) in general
or limited partnerships or other types of entities (each a “venture”)
entered into by the Borrower or a Subsidiary with others in the ordinary course
of business; provided that (i) any such venture is engaged exclusively in
oil and gas exploration, development, production, processing and related
activities, including transportation, (ii) the interest in such venture is
acquired in the ordinary course of business and on fair and reasonable terms
and (iii) such venture interests acquired and capital contributions made (valued
as of the date such interest was acquired or the contribution made) do not
exceed, in the aggregate at any time outstanding an amount equal to the greater
of $175,000 or five percent (5%) of the then effective Borrowing Base.

(i)                                     subject to the limits in Section 9.06,
Investments
in direct ownership interests in additional Oil and Gas Properties and gas
gathering systems related thereto or related to farm-out, farm-in, joint
operating, joint venture or area of mutual interest agreements, gathering systems,
pipelines or other similar arrangements which are usual and customary in the
oil and gas exploration and production business located within the geographic
boundaries of the United States of America.

(j)                                     loans or advances to employees,
officers or directors in the ordinary course of business of the Borrower or any
of its Subsidiaries, in each case only as permitted by applicable law,
including Section 402 of the Sarbanes Oxley Act of 2002, but in any event
not to exceed the greater of $175,000 or five percent (5%) of the then
effective Borrowing Base in the aggregate at any time.

(k)                                  Investments in stock,
obligations or securities received in settlement of debts arising from
Investments permitted under this Section 9.05 owing to the Borrower or any
Subsidiary as a result of a bankruptcy or other insolvency proceeding of the
obligor in respect of such debts or upon the enforcement of any Lien in favor
of the Borrower or any of its Subsidiaries; provided that the Borrower shall
give the Administrative Agent prompt written notice in the event that the
aggregate amount of all Investments held at any one time under this Section 9.05(k) exceeds
the greater of $175,000 or five percent (5%) of the then effective Borrowing
Base.

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(l)                                     other Investments not to exceed
$1,000,000 in the aggregate at any time.

Section 9.06                                Nature
of Business; International Operations. The Borrower will not, and will not
permit any Subsidiary to, allow any material change to be made in the character
of its business as an independent oil and gas exploration and production
company. From and after the date hereof, the Borrower and its Subsidiaries will
not acquire or make any other expenditures (whether such expenditure is
capital, operating or otherwise) in or related to, any Oil and Gas Properties
not located within the geographical boundaries of the United States.

Section 9.07                                Proceeds
of Notes. The Borrower will not permit the proceeds of the Notes to be used
for any purpose other than those permitted by Section 7.21. Neither the
Borrower nor any Person acting on behalf of the Borrower has taken or will take
any action which might cause any of the Loan Documents to violate Regulations
T, U or X or any other regulation of the Board or to violate Section 7 of
the Securities Exchange Act of 1934 or any rule or regulation thereunder,
in each case as now in effect or as the same may hereinafter be in effect. If
requested by the Administrative Agent, the Borrower will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form U-1 or such other form
referred to in Regulation U, Regulation T or Regulation X of the Board, as the
case may be.

Section 9.08                                ERISA
Compliance. The Borrower will not, and will not permit any Subsidiary to,
at any time:

(a)                                  engage in, or permit any ERISA
Affiliate to engage in, any transaction in connection with which the Borrower,
a Subsidiary or any ERISA Affiliate could be subjected to either a civil
penalty assessed pursuant to subsections (c), (i) or (l) of section
502 of ERISA or a tax imposed by Chapter 43 of Subtitle D of the
Code.

(b)                                 terminate, or permit any ERISA
Affiliate to terminate, any Plan in a manner, or take any other action with
respect to any Plan, which could result in any liability of the Borrower, a
Subsidiary or any ERISA Affiliate to the PBGC.

(c)                                  fail to make, or permit any
ERISA Affiliate to fail to make, full payment when due of all amounts which,
under the provisions of any Plan, agreement relating thereto or applicable law,
the Borrower, a Subsidiary or any ERISA Affiliate is required to pay as
contribu­tions thereto.

(d)                                 permit to exist, or allow any
ERISA Affiliate to permit to exist, any accumulated funding deficiency within
the meaning of section 302 of ERISA or section 412 of the Code, whether or not
waived, with respect to any Plan.

(e)                                  permit, or allow any ERISA
Affiliate to permit, the actuarial present value of the benefit liabilities
under any Plan maintained by the Borrower, a Subsidiary or any ERISA Affiliate which
is regulated under Title IV of ERISA to exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV
of ERISA) of such Plan allocable to such benefit liabilities. The term “actuarial
present value of the benefit liabilities” shall have the meaning specified in
section 4041 of ERISA.

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(f)                                    contribute to or assume an
obligation to contribute to, or permit any ERISA Affiliate to contribute to or
assume an obligation to contribute to, any Multiemployer Plan.

(g)                                 acquire, or permit any ERISA
Affiliate to acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to the Borrower or a Subsidiary or with
respect to any ERISA Affiliate of the Borrower or a Subsidiary if such Person
sponsors, maintains or contributes to, or at any time in the six-year period
preceding such acquisition has sponsored, maintained, or contributed to, (1) any
Multiemployer Plan, or (2) any other Plan that is subject to Title IV
of ERISA under which the actuarial present value of the benefit liabilities
under such Plan exceeds the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan
allocable to such benefit liabilities.

(h)                                 incur, or permit any ERISA
Affiliate to incur, a liability to or on account of a Plan under sections 515,
4062, 4063, 4064, 4201 or 4204 of ERISA.

(i)                                     contribute to or assume an
obligation to contribute to, or permit any ERISA Affiliate to contribute to or
assume an obligation to contribute to, any employee welfare benefit plan, as
defined in section 3(1) of ERISA, including, without limitation, any such
plan maintained to provide benefits to former employees of such entities, that
may not be terminated by such entities in their sole discretion at any time
without any material liability.

(j)                                     amend, or permit any ERISA
Affiliate to amend, a Plan resulting in an increase in current liability such
that the Borrower, a Subsidiary or any ERISA Affiliate is required to provide security
to such Plan under section 401(a)(29) of the Code.

Section 9.09                                Sale
or Discount of Receivables. Except for receivables obtained by the Borrower
or any Subsidiary out of the ordinary course of business or the settlement of
joint interest billing accounts in the ordinary course of business or discounts
granted to settle collection of accounts receivable or the sale of defaulted
accounts arising in the ordinary course of business in connection with the
compromise or collection thereof and not in connection with any financing
transaction, the Borrower will not, and will not permit any Subsidiary to,
discount or sell (with or without recourse) any of its notes receivable or
accounts receivable.

Section 9.10                                Mergers,
Etc. Neither the Borrower nor any of its Subsidiaries will merge into or
with or consolidate with any other Person, or sell, lease or otherwise dispose
of (whether in one transaction or in a series of transactions) all or
substantially all of its Property to any other Person, except that any Wholly-Owned
Subsidiary may merge with any other Wholly-Owned Subsidiary and that the
Borrower may merge with any Wholly-Owned Subsidiary so long as the Borrower is
the survivor.

Section 9.11                                Sale
of Properties. The Borrower will not, and will not permit any Subsidiary
to, sell, assign, farm-out, convey or otherwise transfer any Property except
for (a) the sale of Hydrocarbons in the ordinary course of business; (b) farmouts
in the ordinary course of business of undeveloped acreage or undrilled depths
and assignments in connection with such farmouts; (c) the sale or
transfer, in the ordinary course of business, of (i) equipment that is no

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longer necessary for the business of the Borrower or
such Subsidiary (ii) Oil and Gas Properties or interests therein or
Subsidiaries owning Oil and Gas Properties, which were not taken into account
in determining the most recent Borrowing Base or to which there were no proved
reserves attributed in the most recent Reserve Report delivered to the Lenders;
(d) the sale or other disposition (including Casualty Events) of any Oil
and Gas Property or any interest therein or any Subsidiary owning Oil and Gas
Properties; provided that (i) 100% of the consideration received in
respect of such sale or other disposition shall be cash, (ii) the
consideration received in respect of such sale or other disposition shall be
equal to or greater than the fair market value of the Oil and Gas Property,
interest therein or Subsidiary subject of such sale or other disposition (as
reasonably determined by the board of directors of the Borrower and, if
requested by the Administrative Agent, the Borrower shall deliver a certificate
of a Responsible Officer of the Borrower certifying to that effect), (iii) if
such sale or other disposition of Oil and Gas Property or Subsidiary owning Oil
and Gas Properties included in the most recently delivered Reserve Report
during any period between two successive Scheduled Redetermination Dates has a
fair market value in excess of five percent (5%) of the Borrowing Base as then
in effect (as determined by the Administrative Agent), individually or in the
aggregate, the Borrowing Base shall be reduced, effective immediately upon such
sale or disposition, by an amount equal to the value, if any, assigned such
Property in the most recently delivered Reserve Report and (iv) if any
such sale or other disposition is of a Subsidiary owning Oil and Gas
Properties, such sale or other disposition shall include all the Equity
Interests of such Subsidiary; and (e) sales and other dispositions of
Properties not regulated by Section 9.11(a) to (d) having a fair
market value not to exceed the greater of $175,000 or five percent (5%) of the
then effective Borrowing Base during any 12-month period.

Section 9.12                                Environmental
Matters. The Borrower will not, and will not permit any Subsidiary to,
cause or permit any of its Property to be in violation of, or do anything or
permit anything to be done which will subject any such Property to any Remedial
Work under any Environmental Laws, assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and circumstances, if
any, pertaining to such Property where such violations or remedial obligations
could reasonably be expected to have a Material Adverse Effect.

Section 9.13                                Transactions
with Affiliates. The Borrower will not, and will not permit any Subsidiary
to, enter into any transaction, including, without limitation, any purchase,
sale, lease or exchange of Property or the rendering of any service, with any
Affiliate (other than the Guarantors and Wholly-Owned Subsidiaries of the
Borrower) unless such transactions are otherwise permitted under this Agreement
and are upon fair and reasonable terms no less favorable to it than it would
obtain in a comparable arm’s length transaction with a Person not an Affiliate.

Section 9.14                                Subsidiaries.
The Borrower will not, and will not permit any Subsidiary to, create or acquire
any additional Subsidiaries unless the Borrower gives written notice to the
Administrative Agent of such creation or acquisition and complies with Section 8.14(b).
The Borrower shall not, and shall not permit any Subsidiary to, sell, assign or
otherwise dispose of any Equity Interests in any Subsidiary except in
compliance with Section 9.11(d). The Borrower shall have no Foreign
Subsidiaries.

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Section 9.15                                Negative
Pledge Agreements; Dividend Restrictions. The Borrower will not, and will
not permit any Subsidiary to, create, incur, assume or suffer to exist any
contract, agreement or understanding (other than this Agreement, the Security
Instruments or Capital Leases creating Liens permitted by Section 9.03(c))
which in any way prohibits or restricts the granting, conveying, creation or
imposition of any Lien on any of its Property in favor of the Administrative
Agent and the Lenders or restricts any Subsidiary from paying dividends or
making distributions to the Borrower or any Guarantor, or which requires the
consent of or notice to other Persons in connection therewith.

Section 9.16                                Gas
Imbalances, Take-or-Pay or Other Prepayments. The Borrower will not, and
will not permit any Subsidiary to, allow gas imbalances, take-or-pay or other
prepayments with respect to the Oil and Gas Properties of the Borrower or any
Subsidiary that would require the Borrower or such Subsidiary to deliver
Hydrocarbons at some future time without then or thereafter receiving full
payment therefor to exceed the greater of $175,000 or five percent (5%) of the
then effective Borrowing Base in the aggregate.

Section 9.17                                Swap
Agreements. The Borrower will not, and will not permit any Subsidiary to,
enter into any Swap Agreements with any Person until such time as the Borrower
has a minimum of twenty wells online each producing at rates equal to or
greater than the projections contained within the Initial Reserve Report for a
period of no less than thirty (30) days (the “Minimum Production
Requirements”), other than put options and price floors on up to 100% of
the reasonably anticipated projected production from proved, developed,
producing Oil and Gas Properties. After the Borrower has met the Minimum
Production Requirements, the Borrower will not, and will not permit any
Subsidiary to, enter into any Swap Agreements with any Person other than (a) Swap
Agreements in respect of commodities, the notional volumes for which (when
aggregated with other commodity Swap Agreements then in effect other than basis
differential swaps on volumes already hedged pursuant to other Swap Agreements)
do not exceed, as of the date such Swap Agreement is executed, 75% of the
reasonably anticipated projected production from proved, developed, producing
Oil and Gas Properties for each month during the period during which such Swap
Agreement is in effect for each of crude oil and natural gas, calculated
separately; provided, that such Swap Agreements in respect of commodities shall
be permitted for a period not to exceed three (3) calendar years from the
date upon which the Minimum Production Requirements have been met, and (b) Swap
Agreements in respect of interest rates which effectively convert interest
rates from floating to fixed, the notional amounts of which (when aggregated
with all other Swap Agreements of the Borrower and its Subsidiaries then in
effect effectively converting interest rates from floating to fixed) do not
exceed 75% of the then outstanding principal amount of the Borrower’s Debt for
borrowed money which bears interest at a floating rate. In no event shall any
Swap Agreement contain any requirement, agreement or covenant for the Borrower
or any Subsidiary to post collateral or margin to secure their obligations
under such Swap Agreement or to cover market exposures.

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ARTICLE
X

Events of Default; Remedies

Section 10.01                          Events
of Default. One or more of the following events shall constitute an “Event
of Default”:

(a)                                  the Borrower shall fail to pay
any principal of any Loan or any reimbursement obligation in respect of any LC
Disbursement when and as the same shall become due and payable, whether at the
due date thereof or at a date fixed for prepayment thereof, by acceleration or
otherwise.

(b)                                 the Borrower shall fail to pay
any interest on any Loan or any fee or any other amount (other than an amount
referred to in Section 10.01(a)) payable under any Loan Document, when and
as the same shall become due and payable, and such failure shall continue
unremedied for a period of three (3) Business Days.

(c)                                  any representation or warranty
made or deemed made by or on behalf of the Borrower or any Subsidiary in or in
connection with any Loan Document or any amendment or modification of any Loan
Document or waiver under such Loan Document, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with any Loan Document or any amendment or modification thereof or waiver
thereunder, shall prove to have been incorrect when made or deemed made.

(d)                                 the Borrower or any Subsidiary
shall fail to observe or perform any covenant, condition or agreement contained
in Section 8.01(i), Section 8.01(l), Section 8.02, Section 8.03,
Section 8.14 or in ARTICLE IX.

(e)                                  the Borrower or any Subsidiary
shall fail to observe or perform any covenant, condition or agreement contained
in this Agreement (other than those specified in Section 10.01(a), Section 10.01(b) or
Section 10.01(d)) or any other Loan Document, and such failure shall
continue unremedied for a period of 30 days after the earlier to occur of (A) notice
thereof from the Administrative Agent to the Borrower (which notice will be
given at the request of any Lender) or (B) a Responsible Officer of the
Borrower or such Subsidiary otherwise becoming aware of such default.

(f)                                    the Borrower or any Subsidiary
shall fail to make any payment (whether of principal or interest and regardless
of amount) in respect of any Material Indebtedness, when and as the same shall
become due and payable.

(g)                                 any event or condition occurs
that results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any Material Indebtedness or
any trustee or agent on its or their behalf to cause any Material Indebtedness
to become due, or to require the Redemption thereof or any offer to Redeem to
be made in respect thereof, prior to its scheduled maturity or require the
Borrower or any Subsidiary to make an offer in respect thereof.

(h)                                 an involuntary proceeding shall
be commenced or an involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of the Borrower or

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any Subsidiary
or its debts, or of a substantial part of its assets, under any  Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect or (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any Subsidiary or for a substantial part
of its assets, and, in any such case, such proceeding or petition shall
continue undismissed for thirty (30) days or an order or decree approving or
ordering any of the foregoing shall be entered.

(i)                                     the Borrower or any Subsidiary
shall (i) voluntarily commence any proceeding or file any petition seeking
liquidation, reorganization or other relief under any Federal, state or foreign
bankruptcy, insolvency, receivership or similar law now or hereafter in effect,
(ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in Section 10.01(h),
(iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower or
any Subsidiary or for a substantial part of its assets, (iv) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the benefit of
creditors or (vi) take any action for the purpose of effecting any of the
foregoing; or any stockholder of the Borrower shall make any request or take any
action for the purpose of calling a meeting of the stockholders of the Borrower
to consider a resolution to dissolve and wind up the Borrower’s affairs.

(j)                                     the Borrower or any Subsidiary
shall become unable, admit in writing its inability or fail generally to pay
its debts as they become due.

(k)                                  (i) one or more judgments
for the payment of money in an aggregate amount in excess of the greater of
$175,000 or two and one half percent (2.5%) of the then effective Borrowing
Base (to the extent not covered by independent third party insurance provided
by insurers of the highest claims paying rating or financial strength as to
which the insurer does not dispute coverage and is not subject to an insolvency
proceeding) or (ii) any one or more non-monetary judgments that have, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect, shall be rendered against the Borrower, any Subsidiary
or any combination thereof and the same shall remain undischarged for a period
of 30 consecutive days during which execution shall not be effectively stayed,
or any action shall be legally taken by a judgment creditor to attach or levy
upon any assets of the Borrower or any Subsidiary to enforce any such judgment.

(l)                                     the Loan Documents after
delivery thereof shall for any reason, except to the extent permitted by the
terms thereof, cease to be in full force and effect and valid, binding and
enforceable in accordance with their terms against the Borrower or a Guarantor
party thereto or shall be repudiated by any of them, or cease to create a valid
and perfected Lien of the priority required thereby on any of the collateral
purported to be covered thereby, except to the extent permitted by the terms of
this Agreement, or the Borrower or any Subsidiary or any of their Affiliates
shall so state in writing.

(m)                               an ERISA Event shall have
occurred that, in the opinion of the Majority Lenders, when taken together with
all other ERISA Events that have occurred, could reasonably be expected to
result in liability of the Borrower and its Subsidiaries in an aggregate amount

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exceeding the
greater of $175,000 or two and one half percent (2.5%) of the then effective
Borrowing Base in any year.

(n)                                 a Change in Control shall occur.

Section 10.02                          Remedies.

(a)                                  In the case of an Event of
Default other than one described in Section 10.01(h), Section 10.01(i) or
Section 10.01(j), at any time thereafter during the continuance of such
Event of Default, the Administrative Agent may, and at the request of the Majority
Lenders, shall, by notice to the Borrower, take either or both of the following
actions, at the same or different times: 
(i) terminate the Commitments, and thereupon the Commitments shall
terminate immediately, and (ii) declare the Notes and the Loans then
outstanding to be due and payable in whole (or in part, in which case any
principal not so declared to be due and payable may thereafter be declared to
be due and payable), and thereupon the principal of the Loans so declared to be
due and payable, together with accrued interest thereon and all fees and other
obligations of the Borrower and the Guarantors accrued hereunder and under the
Notes and the other Loan Documents (including, without limitation, the payment
of cash collateral to secure the LC Exposure as provided in Section 2.08(j)),
shall become due and payable immediately, without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other notice of any
kind, all of which are hereby waived by the Borrower and each Guarantor; and in
case of an Event of Default described in Section 10.01(h), Section 10.01(i) or  Section 10.01(j), the Commitments shall
automatically terminate and the Notes and the principal of the Loans then
outstanding, together with accrued interest thereon and all fees and the other
obligations of the Borrower and the Guarantors accrued hereunder and under the
Notes and the other Loan Documents (including, without limitation, the payment
of cash collateral to secure the LC Exposure as provided in Section 2.08(j)),
shall automatically become due and payable, without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower and each Guarantor.

(b)                                 In the case of the occurrence of
an Event of Default, the Administrative Agent and the Lenders will have all
other rights and remedies available at law and equity.

(c)                                  All proceeds realized from the
liquidation or other disposition of collateral or otherwise received after
maturity of the Notes, whether by acceleration or otherwise, shall be applied:

(i)                                     first, to payment or reimbursement of
that portion of the Indebtedness constituting fees, expenses and indemnities
payable to the Administrative Agent in its capacity as such;

(ii)                                  second, pro rata to payment or
reimbursement of that portion of the Indebtedness constituting fees, expenses
and indemnities payable to the Lenders;

(iii)                               third, pro rata to payment of accrued
interest on the Loans;

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(iv)                              fourth, pro rata to payment of
principal outstanding on the Loans and Indebtedness referred to in Clause (b) of
the definition of Indebtedness owing to a Lender or an Affiliate of a Lender;

(v)                                 fifth, pro rata to any other
Indebtedness;

(vi)                              sixth, to serve as cash collateral to
be held by the Administrative Agent to secure the LC Exposure; and

(vii)                           seventh, any excess, after all of the
Indebtedness shall have been indefeasibly paid in full in cash, shall be paid
to the Borrower or as otherwise required by any Governmental Requirement.

ARTICLE
XI

The Agents

Section 11.01                          Appointment;
Powers. Each of the Lenders and the Issuing Bank hereby irrevocably
appoints the Administrative Agent as its agent and authorizes the
Administrative Agent to take such actions on its behalf and to exercise such
powers as are delegated to the Administrative Agent by the terms hereof and the
other Loan Documents, together with such actions and powers as are reasonably
incidental thereto.

Section 11.02                          Duties
and Obligations of Administrative Agent. The Administrative Agent shall not
have any duties or obligations except those expressly set forth in the Loan
Documents. Without limiting the generality of the foregoing, (a) the
Administrative Agent shall not be subject to any fiduciary or other implied
duties, regardless of whether a Default has occurred and is continuing (the use
of the term “agent” herein and in the other Loan Documents with reference to
the Administrative Agent is not intended to connote any fiduciary or other
implied (or express) obligations arising under agency doctrine of any
applicable law; rather, such term is used merely as a matter of market custom,
and is intended to create or reflect only an administrative relationship
between independent contracting parties), (b) the Administrative Agent
shall have no duty to take any discretionary action or exercise any
discretionary powers, except as provided in Section 11.03, and (c) except
as expressly set forth herein, the Administrative Agent shall not have any duty
to disclose, and shall not be liable for the failure to disclose, any
information relating to the Borrower or any of its Subsidiaries that is
communicated to or obtained by the bank serving as Administrative Agent or any
of its Affiliates in any capacity. The Administrative Agent shall be deemed not
to have knowledge of any Default unless and until written notice thereof is
given to the Administrative Agent by the Borrower or a Lender, and shall not be
responsible for or have any duty to ascertain or inquire into (i) any
statement, warranty or representation made in or in connection with this
Agreement or any other Loan Document, (ii) the contents of any
certificate, report or other document delivered hereunder or under any other
Loan Document or in connection herewith or therewith, (iii) the
performance or observance of any of the covenants, agreements or other terms or
conditions set forth herein or in any other Loan Document, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement, any
other Loan Document or any other agreement, instrument or document, (v) the
satisfaction of any condition set forth in ARTICLE VI or elsewhere herein,
other than to confirm receipt of items expressly required to be delivered

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to the Administrative Agent or as to those conditions
precedent expressly required to be to the Administrative Agent’s satisfaction, (vi) the
existence, value, perfection or priority of any collateral security or the
financial or other condition of the Borrower and its Subsidiaries or any other
obligor or guarantor, or (vii) any failure by the Borrower or any other
Person (other than itself) to perform any of its obligations hereunder or under
any other Loan Document or the performance or observance of any covenants,
agreements or other terms or conditions set forth herein or therein. For purposes
of determining compliance with the conditions specified in ARTICLE VI, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with, each document or other matter required thereunder to be
consented to or approved by or acceptable or satisfactory to a Lender unless
the Administrative Agent shall have received written notice from such Lender
prior to the proposed closing date specifying its objection thereto.

Section 11.03                          Action
by Administrative Agent. The Administrative Agent shall have no duty to
take any discretionary action or exercise any discretionary powers, except
discretionary rights and powers expressly contemplated hereby or by the other
Loan Documents that the Administrative Agent is required to exercise in writing
as directed by the Majority Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in Section 12.02)
and in all cases the Administrative Agent shall be fully justified in failing
or refusing to act hereunder or under any other Loan Documents unless it shall (a) receive
written instructions from the Majority Lenders or the Lenders, as applicable,
(or such other number or percentage of the Lenders as shall be necessary under
the circumstances as provided in Section 12.02) specifying the action to
be taken and (b) be indemnified to its satisfaction by the Lenders against
any and all liability and expenses which may be incurred by it by reason of
taking or continuing to take any such action. The instructions as aforesaid and
any action taken or failure to act pursuant thereto by the Administrative Agent
shall be binding on all of the Lenders. If a Default has occurred and is
continuing, then the Administrative Agent shall take such action with respect
to such Default as shall be directed by the requisite Lenders in the written
instructions (with indemnities) described in this Section 11.03, provided
that, unless and until the Administrative Agent shall have received such
directions, the Administrative Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default
as it shall deem advisable in the best interests of the Lenders. In no event,
however, shall the Administrative Agent be required to take any action which
exposes the Administrative Agent to personal liability or which is contrary to
this Agreement, the Loan Documents or applicable law. The Administrative Agent
shall not be liable for any action taken or not taken by it with the consent or
at the request of the Majority Lenders or the Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 12.02), and otherwise the Administrative Agent shall
not be liable for any action taken or not taken by it hereunder or under any
other Loan Document or under any other document or instrument referred to or
provided for herein or therein or in connection herewith or therewith INCLUDING
ITS OWN ORDINARY NEGLIGENCE, except for its own gross negligence or willful
misconduct.

Section 11.04                          Reliance
by Administrative Agent. The Administrative Agent shall be entitled to rely
upon, and shall not incur any liability for relying upon, any notice, request,
certificate, consent, statement, instrument, document or other writing believed
by it to be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely

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upon any statement made to it orally or by telephone
and believed by it to be made by the proper Person, and shall not incur any
liability for relying thereon and each of the Borrower, the Lenders and the
Issuing Bank hereby waives the right to dispute the Administrative Agent’s
record of such statement, except in the case of gross negligence or willful
misconduct by the Administrative Agent. The Administrative Agent may consult
with legal counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be liable for any
action taken or not taken by it in accordance with the advice of any such
counsel, accountants or experts. The Administrative Agent may deem and treat
the payee of any Note as the holder thereof for all purposes hereof unless and
until a written notice of the assignment or transfer thereof permitted
hereunder shall have been filed with the Administrative Agent.

Section 11.05                          Subagents.
The Administrative Agent may perform any and all its duties and exercise its
rights and powers by or through any one or more sub-agents appointed by the
Administrative Agent. The Administrative Agent and any such sub-agent may
perform any and all its duties and exercise its rights and powers through their
respective Related Parties. The exculpatory provisions of the preceding
Sections of this ARTICLE XI shall apply to any such sub-agent and to the
Related Parties of the Administrative Agent and any such sub-agent, and shall
apply to their respective activities in connection with the syndication of the
credit facilities provided for herein as well as activities as Administrative
Agent.

Section 11.06                          Resignation
or Removal of Administrative Agent. Subject to the appointment and
acceptance of a successor Administrative Agent as provided in this Section 11.06,
the Administrative Agent may resign at any time by notifying the Lenders, the
Issuing Bank and the Borrower, and the Administrative Agent may be removed at
any time with or without cause by the Majority Lenders. Upon any such
resignation or removal, the Majority Lenders shall have the right, with the
approval of the Borrower, to appoint a successor. If no successor shall have
been so appointed by the Majority Lenders and shall have accepted such
appointment within 30 days after the retiring Administrative Agent gives notice
of its resignation or removal of the retiring Administrative Agent, then the
retiring Administrative Agent may, on behalf of the Lenders and the Issuing
Bank, appoint a successor Administrative Agent. Upon the acceptance of its
appointment as Administrative Agent hereunder by a successor, such successor
shall succeed to and become vested with all the rights, powers, privileges and
duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations hereunder. The fees
payable by the Borrower to a successor Administrative Agent shall be the same
as those payable to its predecessor unless otherwise agreed between the
Borrower and such successor. After the Administrative Agent’s resignation
hereunder, the provisions of this ARTICLE XI and Section 12.03 shall
continue in effect for the benefit of such retiring Administrative Agent, its
sub-agents and their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while it was acting as Administrative
Agent.

Section 11.07                          Administrative
Agent as Lender. BNP Paribas serving as the Administrative Agent hereunder
shall have the same rights and powers in its capacity as a Lender as any other
Lender and may exercise the same as though it were not the Administrative
Agent, and such bank and its Affiliates may accept deposits from, lend money to
and generally

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engage in any kind of business with the Borrower or
any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent
hereunder.

Section 11.08                          No
Reliance. Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and each other Loan Document
to which it is a party. Each Lender also acknowledges that it will,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it shall from time to
time deem appropriate, continue to make its own decisions in taking or not
taking action under or based upon this Agreement, any other Loan Document, any
related agreement or any document furnished hereunder or thereunder. The
Administrative Agent shall not be required to keep itself informed as to the
performance or observance by the Borrower or any of its Subsidiaries of this
Agreement, the Loan Documents or any other document referred to or provided for
herein or to inspect the Properties or books of the Borrower or its
Subsidiaries. Except for notices, reports and other documents and information
expressly required to be furnished to the Lenders by the Administrative Agent
hereunder, the Administrative Agent and the Arranger shall have no duty or
responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Borrower (or any
of its Affiliates) which may come into the possession of the Administrative
Agent or any of its Affiliates. In this regard, each Lender acknowledges that
Vinson & Elkins L.L.P. is acting in this transaction as special
counsel to the Administrative Agent only, except to the extent otherwise
expressly stated in any legal opinion or any Loan Document. Each other party
hereto will consult with its own legal counsel to the extent that it deems
necessary in connection with the Loan Documents and the matters contemplated
therein.

Section 11.09                          Administrative
Agent May File Proofs of Claim.

In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Borrower or any of its Subsidiaries, the
Administrative Agent (irrespective of whether the principal of any Loan shall
then be due and payable as herein expressed or by declaration or otherwise and
irrespective of whether the Administrative Agent shall have made any demand on
the Borrower) shall be entitled and empowered, by intervention in such
proceeding or otherwise:

(a)                                  to file and prove a claim for
the whole amount of the principal and interest owing and unpaid in respect of
the Loans and all other Indebtedness that are owing and unpaid and to file such
other documents as may be necessary or advisable in order to have the claims of
the Lenders and the Administrative Agent (including any claim for the
reasonable compensation, expenses, disbursements and advances of the Lenders
and the Administrative Agent and their respective agents and counsel and all
other amounts due the Lenders and the Administrative Agent under Section 12.03)
allowed in such judicial proceeding; and

(b)                                 to collect and receive any
monies or other property payable or deliverable on any such claims and to
distribute the same;

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and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Lender to make such payments to the Administrative Agent and, in the event that
the Administrative Agent shall consent to the making of such payments directly
to the Lenders, to pay to the Administrative Agent any amount due for the
reasonable compensation, expenses, disbursements and advances of the
Administrative Agent and its agents and counsel, and any other amounts due the
Administrative Agent under Section 12.03.

Nothing
contained herein shall be deemed to authorize the Administrative Agent to
authorize or consent to or accept or adopt on behalf of any Lender any plan of
reorganization, arrangement, adjustment or composition affecting the
Indebtedness or the rights of any Lender or to authorize the Administrative
Agent to vote in respect of the claim of any Lender in any such proceeding.

Section 11.10                          Authority
of Administrative Agent to Release Collateral and Liens. Each
Lender and the Issuing Bank hereby authorizes the Administrative Agent to
release any collateral that is permitted to be sold or released pursuant to the
terms of the Loan Documents. Each Lender and the Issuing Bank hereby authorizes
the Administrative Agent to execute and deliver to the Borrower, at the
Borrower’s sole cost and expense, any and all releases of Liens, termination
statements, assignments or other documents reasonably requested by the Borrower
in connection with any sale or other disposition of Property to the extent such
sale or other disposition is permitted by the terms of Section 9.11 or is
otherwise authorized by the terms of the Loan Documents.

Section 11.11                          The
Arranger. The Arranger shall have no duties, responsibilities or
liabilities under this Agreement and the other Loan Documents other than their
duties, responsibilities and liabilities in their capacity as Lenders
hereunder.

ARTICLE
XII

Miscellaneous

Section 12.01                          Notices.

(a)                                  Except in the case of notices
and other communications expressly permitted to be given by telephone (and
subject to Section 12.01(b)), all notices and other communications
provided for herein shall be in writing and shall be delivered by hand or overnight
courier service, mailed by certified or registered mail or sent by telecopy, as
follows:

(i)                                      if to the Borrower, to it at
410 17th Street, Suite 1850, Denver, Colorado  80202, Attention of Bill I. Pennington; with
a copy to Gersten Savage LLP, 600 Lexington Avenue, New York, New York  10022, Attention of David Danovitch;

(ii)                                  if to the Administrative Agent,
to it at 1200 Smith Street, Suite 3100, Houston, Texas  77002), Attention of David Dodd (Telecopy No. 713-659-6915)
with a copy to 919 Third Avenue, New York, New York, Attention of Socorro
Lantin, Loan Assistant (Telecopy No. 212-841-2683); with a
copy to Vinson & Elkins LLP, 1001 Fannin Street, Suite 2300,
Houston, Texas 77002; and

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(iii)                               if to any other Lender, to it at
its address (or telecopy number) set forth in its Administrative Questionnaire.

(b)                                 Notices and other communications
to the Lenders hereunder may be delivered or furnished by electronic
communications pursuant to procedures approved by the Administrative Agent;
provided that the foregoing shall not apply to notices pursuant to ARTICLE II,
ARTICLE III, ARTICLE IV and ARTICLE V unless otherwise agreed by the
Administrative Agent and the applicable Lender. The Administrative Agent or the
Borrower may, in its discretion, agree to accept notices and other
communications to it hereunder by electronic communications pursuant to
procedures approved by it; provided that approval of such procedures may be
limited to particular notices or communications.

(c)                                  Any party hereto may change its
address or telecopy number for notices and other communications hereunder by
notice to the other parties hereto. All notices and other communications given
to any party hereto in accordance with the provisions of this Agreement shall
be deemed to have been given on the date of receipt.

Section 12.02                          Waivers;
Amendments.

(a)                                  No failure on the part of the
Administrative Agent, the Issuing Bank or any Lender to exercise and no delay
in exercising, and no course of dealing with respect to, any right, power or
privilege, or any abandonment or discontinuance of steps to enforce such right,
power or privilege, under any of the Loan Documents shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies of the Administrative Agent, the Issuing Bank and the
Lenders hereunder and under the other Loan Documents are cumulative and are not
exclusive of any rights or remedies that they would otherwise have. No waiver
of any provision of this Agreement or any other Loan Document or consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be permitted by Section 12.02(b), and then such waiver or
consent shall be effective only in the specific instance and for the purpose
for which given. Without limiting the generality of the foregoing, the making
of a Loan or issuance of a Letter of Credit shall not be construed as a waiver
of any Default, regardless of whether the Administrative Agent, any Lender or
the Issuing Bank may have had notice or knowledge of such Default at the time.

(b)                                 Neither this Agreement nor any
provision hereof nor any Security Instrument nor any provision thereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Majority Lenders or by the
Borrower and the Administrative Agent with the consent of the Majority Lenders;
provided that no such agreement shall (i) increase the Maximum Credit
Amount of any Lender without the written consent of such Lender, (ii) increase
the Borrowing Base without the written consent of each Lender, decrease or
maintain the Borrowing Base without the consent of the Majority Lenders, or
modify Section 2.07 in any manner without the consent of each Lender, (iii) reduce
the principal amount of any Loan or LC Disbursement or reduce the rate of
interest thereon, or reduce any fees payable hereunder, or reduce any other
Indebtedness hereunder or under any other Loan Document, without the written
consent of each Lender affected thereby, (iv) postpone

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the scheduled
date of payment or prepayment of the principal amount of any Loan or LC
Disbursement, or any interest thereon, or any fees payable hereunder, or any
other Indebtedness hereunder or under any other Loan Document, or reduce the
amount of, waive or excuse any such payment, or postpone or extend the Termination
Date without the written consent of each Lender affected thereby, (v) change
Section 4.01(b) or Section 4.01(c) in a manner that would
alter the pro rata sharing of payments required thereby, without the written
consent of each Lender, (vi) waive or amend Section 3.04(c), Section 6.01,
Section 8.14, Section 10.02(c) or Section 12.14 or change
the definition of the terms “Domestic Subsidiary”, “Foreign Subsidiary”, or “Subsidiary”,
without the written consent of each Lender, (vii) release any Guarantor (except
as set forth in the Guaranty Agreement), release any of the collateral (other
than as provided in Section 11.10), or reduce the percentage set forth in Section 8.14(a) to
less than 90%, without the written consent of each Lender, or (viii) change
any of the provisions of this Section 12.02(b) or the definition of “Majority
Lenders” or any other provision hereof specifying the number or percentage of
Lenders required to waive, amend or modify any rights hereunder or under any
other Loan Documents or make any determination or grant any consent hereunder
or any other Loan Documents, without the written consent of each Lender;
provided further that no such agreement shall amend, modify or otherwise affect
the rights or duties of the Administrative Agent or the Issuing Bank hereunder
or under any other Loan Document without the prior written consent of the
Administrative Agent or the Issuing Bank, as the case may be. Notwithstanding
the foregoing, any supplement to Schedule 7.14 (Subsidiaries) shall be effective
simply by delivering to the Administrative Agent a supplemental schedule
clearly marked as such and, upon receipt, the Administrative Agent will
promptly deliver a copy thereof to the Lenders.

Section 12.03                          Expenses, Indemnity; Damage
Waiver.

(a)                                  The Borrower shall pay (i) all
reasonable out-of-pocket expenses incurred by the Administrative Agent and its
Affiliates, including, without limitation, the reasonable fees, charges and
disbursements of counsel and other outside consultants for the Administrative
Agent, the reasonable travel, photocopy, mailing, courier, telephone and other
similar expenses, and the cost of environmental audits and surveys and
appraisals, in connection with the syndication of the credit facilities
provided for herein, the preparation, negotiation, execution, delivery and
administration (both before and after the execution hereof and including advice
of counsel to the Administrative Agent as to the rights and duties of the
Administrative Agent and the Lenders with respect thereto) of this Agreement
and the other Loan Documents and any amendments, modifications or waivers of or
consents related to the provisions hereof or thereof (whether or not the
transactions contemplated hereby or thereby shall be consummated), (ii) all
costs, expenses, Taxes, assessments and other charges incurred by the
Administrative Agent in connection with any filing, registration, recording or
perfection of any security interest contemplated by this Agreement or any
Security Instrument or any other document referred to therein, (iii) all
reasonable out-of-pocket expenses incurred by the Issuing Bank in connection
with the issuance, amendment, renewal or extension of any Letter of Credit or
any demand for payment thereunder, (iv) all out-of-

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pocket expenses
incurred by the Administrative Agent, including the fees, charges and
disbursements of any counsel for the Administrative Agent in connection with
the enforcement or protection of its rights in connection with this Agreement
or any other Loan Document, including its rights under this Section 12.03,
or in connection with the Loans made or Letters of Credit issued hereunder,
including, without limitation, all such out-of-pocket expenses incurred during
any workout, restructuring or negotiations in respect of such Loans or Letters
of Credit.

(b)                                 THE BORROWER SHALL INDEMNIFY THE
ADMINSTRATIVE AGENT, THE ARRANGER, THE ISSUING BANK AND EACH LENDER, AND EACH
RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN
“INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND
ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE
FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE, INCURRED BY
OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR AS A
RESULT OF (i) THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, (ii) THE
PERFORMANCE BY THE PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF
THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY OR BY ANY OTHER LOAN DOCUMENT, (iii) THE
FAILURE OF THE BORROWER OR ANY SUBSIDIARY TO COMPLY WITH THE TERMS OF ANY LOAN
DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (iv) ANY
INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OR COVENANT OF
THE BORROWER OR ANY GUARANTOR SET FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY
INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (v) ANY
LOAN OR LETTER OF CREDIT OR THE USE OF THE PROCEEDS THEREFROM, INCLUDING,
WITHOUT LIMITATION, (A) ANY REFUSAL BY THE ISSUING BANK TO HONOR A DEMAND
FOR PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION
WITH SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF
CREDIT, OR (B) THE PAYMENT OF A DRAWING UNDER ANY LETTER OF CREDIT
NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER IMPROPER PRESENTATION
OF THE DOCUMENTS PRESENTED IN CONNECTION THEREWITH, (vi) ANY OTHER ASPECT
OF THE LOAN DOCUMENTS, (vii) THE OPERATIONS OF THE BUSINESS OF THE
BORROWER AND ITS SUBSIDIARIES BY THE BORROWER AND ITS SUBSIDIARIES, (viii) ANY
ASSERTION THAT THE LENDERS WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED
PURSUANT TO THE SECURITY INSTRUMENTS, (ix) ANY ENVIRONMENTAL LAW
APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY OR ANY OF THEIR PROPERTIES,
INCLUDING WITHOUT LIMITATION, THE PRESENCE, GENERATION, STORAGE, RELEASE,
THREATENED RELEASE, USE, TRANSPORT, DISPOSAL, ARRANGEMENT OF DISPOSAL OR
TREATMENT OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS SUBSTANCES ON
ANY OF THEIR PROPERTIES, (x) THE BREACH OR NON-COMPLIANCE BY THE BORROWER
OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY
SUBSIDIARY, (xi) THE PAST OWNERSHIP BY THE BORROWER OR ANY SUBSIDIARY OF ANY OF
THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH
LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY,
(xii) THE PRESENCE, USE, RELEASE, STORAGE,

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TREATMENT,
DISPOSAL, GENERATION, THREATENED RELEASE, TRANSPORT, ARRANGEMENT FOR TRANSPORT
OR ARRANGEMENT FOR DISPOSAL OF OIL, OIL AND GAS WASTES, SOLID WASTES OR
HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE
BORROWER OR ANY SUBSIDIARY OR ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF
HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER
OR ANY OF ITS SUBSIDIARIES, (xiii) ANY ENVIRONMENTAL LIABILITY RELATED IN ANY
WAY TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, (xiv) ANY OTHER ENVIRONMENTAL,
HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS OR (xv) ANY
ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING
TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY
AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, AND SUCH INDEMNITY
SHALL EXTEND TO EACH INDEMNITEE NOTWITHSTANDING THE SOLE OR CONCURRENT
NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE,
WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL
TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF
ONE OR MORE OF THE INDEMNITEES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNITEES; PROVIDED THAT SUCH INDEMNITY SHALL
NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS,
DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT
JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.

(c)                                  To the extent that the Borrower
fails to pay any amount required to be paid by it to the Administrative Agent,
the Arranger or the Issuing Bank under Section 12.03(a) or (b), each
Lender severally agrees to pay to the Administrative Agent, the Arranger or the
Issuing Bank, as the case may be, such Lender’s Applicable Percentage
(determined as of the time that the applicable unreimbursed expense or
indemnity payment is sought) of such unpaid amount; provided that the
unreimbursed expense or indemnified loss, claim, damage, liability or related
expense, as the case may be, was incurred by or asserted against the
Administrative Agent, the Arranger or the Issuing Bank in its capacity as such.

(d)                                 To the extent permitted by
applicable law, the Borrower shall not assert, and hereby waives, any claim
against any Indemnitee, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual damages)
arising out of, in connection with, or as a result of, this Agreement, any
other Loan Document or any agreement or instrument contemplated hereby or
thereby, the Transactions, any Loan or Letter of Credit or the use of the
proceeds thereof.

(e)                                  All amounts due under this Section 12.03
shall be payable not later than 10 days after written demand therefor.

 

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Section 12.04         Successors and Assigns.

(a)           The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby (including any Affiliate of
the Issuing Bank that issues any Letter of Credit), except that (i) the
Borrower may not assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of each Lender (and any attempted
assignment or transfer by the Borrower without such consent shall be null and
void) and (ii) no Lender may assign or otherwise transfer its rights or
obligations hereunder except in accordance with this Section 12.04. Nothing
in this Agreement, expressed or implied, shall be construed to confer upon any Person
(other than the parties hereto, their respective successors and assigns
permitted hereby (including any Affiliate of the Issuing Bank that issues any
Letter of Credit), Participants (to the extent provided in Section 12.04(c))
and, to the extent expressly contemplated hereby, the Related Parties of each
of the Administrative Agent, the Issuing Bank and the Lenders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.

(b)           (i) Subject to the conditions
set forth in Section 12.04(b)(ii), any Lender may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at the time owing
to it) with the prior written consent (such consent not to be unreasonably
withheld) of:

(A)          the Borrower, provided that no consent
of the Borrower shall be required if an Event of Default has occurred and is
continuing, is to any other assignee; and

(B)           the Administrative Agent, provided
that no consent of the Administrative Agent shall be required for an assignment
to an assignee that is a Lender immediately prior to giving effect to such
assignment.

(ii)           Assignments
shall be subject to the following additional conditions:

(A)          except in the case of an assignment to
a Lender or an Affiliate of a Lender or an assignment of the entire remaining
amount of the assigning Lender’s Commitment or Loans, the amount of the
Commitment or Loans of the assigning Lender subject to each such assignment
(determined as of the date the Assignment and Assumption with respect to such
assignment is delivered to the Administrative Agent) shall not be less than
$5,000,000 unless each of the Borrower and the Administrative Agent otherwise
consent, provided that no such consent of the Borrower shall be required if an
Event of Default has occurred and is continuing;

(B)           each partial assignment shall be made
as an assignment of a proportionate part of all the assigning Lender’s rights
and obligations under this Agreement;

(C)           the parties to each assignment shall
execute and deliver to the Administrative Agent an Assignment and Assumption,
together with a processing and recordation fee of $3,500; and

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(D)          the assignee, if it shall not be a
Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire.

(iii)          Subject
to Section 12.04(b)(iv) and the acceptance and recording thereof,
from and after the effective date specified in each Assignment and Assumption
the assignee thereunder shall be a party hereto and, to the extent of the
interest assigned by such Assignment and Assumption, have the rights and
obligations of a Lender under this Agreement, and the assigning Lender
thereunder shall, to the extent of the interest assigned by such Assignment and
Assumption, be released from its obligations under this Agreement (and, in the
case of an Assignment and Assumption covering all of the assigning Lender’s
rights and obligations under this Agreement, such Lender shall cease to be a
party hereto but shall continue to be entitled to the benefits of Section 5.01,
Section 5.02, Section 5.03 and Section 12.03). Any assignment or
transfer by a Lender of rights or obligations under this Agreement that does
not comply with this Section 12.04 shall be treated for purposes of this Agreement
as a sale by such Lender of a participation in such rights and obligations in
accordance with Section 12.04(c).

(iv)          The
Administrative Agent, acting for this purpose as an agent of the Borrower,
shall maintain at one of its offices a copy of each Assignment and Assumption
delivered to it and a register for the recordation of the names and addresses
of the Lenders, and the Maximum Credit Amount of, and principal amount of the
Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof
from time to time (the “Register”). The entries in the Register shall be
conclusive, and the Borrower, the Administrative Agent, the Issuing Bank and
the Lenders may treat each Person whose name is recorded in the Register
pursuant to the terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower, the Issuing Bank and any Lender, at
any reasonable time and from time to time upon reasonable prior notice. In
connection with any changes to the Register, if necessary, the Administrative
Agent will reflect the revisions on Annex I and forward a copy of such revised
Annex I to the Borrower, the Issuing Bank and each Lender.

(v)           Upon its
receipt of a duly completed Assignment and Assumption executed by an assigning
Lender and an assignee, the assignee’s completed Administrative Questionnaire
and, if required hereunder, applicable tax forms (unless the assignee shall
already be a Lender hereunder), the processing and recordation fee referred to
in Section 12.04(b) and any written consent to such assignment
required by Section 12.04(b), the Administrative Agent shall accept such
Assignment and Assumption and record the information contained therein in the
Register. No assignment shall be effective for purposes of this Agreement
unless it has been recorded in the Register as provided in this Section 12.04(b).

(c)           (i)            Any
Lender may, without the consent of the Borrower, the Administrative Agent or
the Issuing Bank, sell participations to one or more banks or other entities (a
“Participant”) in all or a portion of such Lender’s rights and
obligations under this Agreement (including all or a portion of its Commitment
and the Loans owing to it); provided that (A) such Lender’s obligations
under this Agreement shall remain unchanged, (B) such

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Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (C) the Borrower, the Administrative Agent, the
Issuing Bank and the other Lenders shall continue to deal solely and directly
with such Lender in connection with such Lender’s rights and obligations under
this Agreement. Any agreement or instrument pursuant to which a Lender sells
such a participation shall provide that such Lender shall retain the sole right
to enforce this Agreement and to approve any amendment, modification or waiver
of any provision of this Agreement. In addition such agreement must provide
that the Participant be bound by the provisions of Section 12.03. Subject
to Section 12.04(c)(ii), the Borrower agrees that each Participant shall
be entitled to the benefits of Section 5.01, Section 5.02 and Section 5.03
to the same extent as if it were a Lender and had acquired its interest by
assignment pursuant to Section 12.04(b). To the extent permitted by law,
each Participant also shall be entitled to the benefits of Section 12.08
as though it were a Lender, provided such Participant agrees to be subject to Section 4.01(c) as
though it were a Lender.

(ii)           A Participant shall not be entitled
to receive any greater payment under Section 5.01 or Section 5.03
than the applicable Lender would have been entitled to receive with respect to
the participation sold to such Participant, unless the sale of the participation
to such Participant is made with the Borrower’s prior written consent. A
Participant that would be a Foreign Lender if it were a Lender shall not be
entitled to the benefits of Section 5.03 unless the Borrower is notified
of the participation sold to such Participant and such Participant agrees, for
the benefit of the Borrower, to comply with Section 5.03(e) as though
it were a Lender.

(d)           Any Lender may at any time pledge or
assign a security interest in all or any portion of its rights under this
Agreement to secure obligations of such Lender, including, without limitation,
any pledge or assignment to secure obligations to a Federal Reserve Bank, and
this Section 12.04(d) shall not apply to any such pledge or
assignment of a security interest; provided that no such pledge or assignment
of a security interest shall release a Lender from any of its obligations
hereunder or substitute any such pledgee or assignee for such Lender as a party
hereto.

(e)           Notwithstanding any other provisions
of this Section 12.04, no transfer or assignment of the interests or
obligations of any Lender or any grant of participations therein shall be
permitted if such transfer, assignment or grant would require the Borrower and
the Guarantors to file a registration statement with the SEC or to qualify the
Loans under the “Blue Sky” laws of any state.

Section 12.05         Survival; Revival; Reinstatement.

(a)           All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement or any other Loan Document shall be considered to have been
relied upon by the other parties hereto and shall survive the execution and
delivery of this Agreement and the making of any Loans and issuance of any
Letters of Credit, regardless of any investigation made by any such other party
or on its behalf and notwithstanding that the Administrative Agent, the Issuing
Bank or any Lender may have had notice or knowledge of any Default or incorrect
representation or warranty at the time any credit is extended hereunder, and

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shall continue
in full force and effect as long as the principal of or any accrued interest on
any Loan or any fee or any other amount payable under this Agreement is outstanding
and unpaid or any Letter of Credit is outstanding and so long as the
Commitments have not expired or terminated. The provisions of Section 5.01,
Section 5.02, and Section 5.03 and Section 12.03 and ARTICLE XI
shall survive and remain in full force and effect regardless of the
consummation of the transactions contemplated hereby, the repayment of the
Loans, the expiration or termination of the Letters of Credit and the
Commitments or the termination of this Agreement, any other Loan Document or
any provision hereof or thereof; provided, that the provisions of Section 5.01,
5.02 and 5.03 shall survive and remain in effect only as to those claims that
the Borrower has received written notice thereof prior to one year after the
Maturity Date .

(b)           To the extent that any payments on
the Indebtedness or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid
to a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Administrative Agent’s and the Lenders’ Liens, security
interests, rights, powers and remedies under this Agreement and each Loan
Document shall continue in full force and effect. In such event, each Loan
Document shall be automatically reinstated and the Borrower shall take such
action as may be reasonably requested by the Administrative Agent and the
Lenders to effect such reinstatement.

Section 12.06         Counterparts; Integration;
Effectiveness.

(a)           This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.

(b)           This Agreement, the other Loan
Documents and any separate letter agreements with respect to fees payable to
the Administrative Agent constitute the entire contract among the parties
relating to the subject matter hereof and thereof and supersede any and all
previous agreements and understandings, oral or written, relating to the
subject matter hereof and thereof. THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE
PARTIES HERETO AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c)           Except as provided in Section 6.01,
this Agreement shall become effective when it shall have been executed by the
Administrative Agent and when the Administrative Agent shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns. Delivery
of an executed counterpart of a signature page of this Agreement by
telecopy shall be effective as delivery of a manually executed counterpart of
this Agreement.

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Section 12.07         Severability. Any provision of
this Agreement or any other Loan Document held to be invalid, illegal or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability
without affecting the validity, legality and enforceability of the remaining
provisions hereof or thereof; and the invalidity of a particular provision in a
particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

Section 12.08         Right of Setoff. If an Event of
Default shall have occurred and be continuing, each Lender and each of its
Affiliates is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other obligations (of whatsoever kind, including, without limitations
obligations under Swap Agreements) at any time owing by such Lender or
Affiliate to or for the credit or the account of the Borrower or any Subsidiary
against any of and all the obligations of the Borrower or any Subsidiary owed
to such Lender now or hereafter existing under this Agreement or any other Loan
Document, irrespective of whether or not such Lender shall have made any demand
under this Agreement or any other Loan Document and although such obligations
may be unmatured. The rights of each Lender under this Section 12.08 are
in addition to other rights and remedies (including other rights of setoff)
which such Lender or its Affiliates may have.

Section 12.09         GOVERNING LAW; JURISDICTION; CONSENT
TO SERVICE OF PROCESS.

(a)           THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
EXCEPT TO THE EXTENT THAT UNITED STATES FEDERAL LAW PERMITS ANY LENDER TO
CONTRACT FOR, CHARGE, RECEIVE, RESERVE OR TAKE INTEREST AT THE RATE ALLOWED BY
THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED. CHAPTER 346 OF THE TEXAS
FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.

(b)           ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THE LOAN DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE OF
TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS
(HOUSTON DIVISION), AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH
PARTY HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON
THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.

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(c)           EACH PARTY IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION
OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO IT AT THE ADDRESS SPECIFIED IN SECTION 12.01 OR SUCH
OTHER ADDRESS AS IS SPECIFIED PURSUANT TO SECTION 12.01 (OR ITS ASSIGNMENT
AND ASSUMPTION), SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH
MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF A PARTY OR ANY HOLDER OF A
NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANOTHER PARTY IN ANY OTHER
JURISDICTION.

(d)           EACH PARTY HEREBY (i) IRREVOCABLY
AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO
CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR
AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS, AND (iv) ACKNOWLEDGES THAT IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT, THE LOAN DOCUMENTS AND THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION 12.09.

Section 12.10         Headings. Article and Section headings
and the Table of Contents used herein are for convenience of reference only,
are not part of this Agreement and shall not affect the construction of, or be
taken into consideration in interpreting, this Agreement.

Section 12.11         Confidentiality. Each of the
Administrative Agent, the Issuing Bank and the Lenders agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates’ directors, officers,
employees and agents, including accountants, legal counsel and other advisors
(it being understood that the Persons to whom such disclosure is made will be
informed of the confidential nature of such Information and instructed to keep
such Information confidential), (b) to the extent requested by any
regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other
party to this Agreement or any other Loan Document, (e) in connection with
the exercise of any remedies hereunder or under any other Loan Document or any
suit, action or proceeding relating to this Agreement or any other Loan
Document or the enforcement of rights hereunder or thereunder, (f) subject
to an agreement containing provisions substantially the same as those of this Section 12.11,
to (i) any assignee of or Participant in, or any prospective assignee of
or Participant in, any of its rights or obligations under this Agreement (who
agrees to be bound by the terms hereof) or (ii) any actual or

 86
 

 

 

prospective counterparty (or its advisors) to any Swap
Agreement relating to the Borrower and its obligations (who agrees to be bound
by the terms hereof), (g) with the consent of the Borrower or (h) to
the extent such Information (i) becomes publicly available other than as a
result of a breach of this Section 12.11 or (ii) becomes available to
the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential
basis from a source other than the Borrower. For the purposes of this Section 12.11,
“Information” means all information received from the Borrower or any
Subsidiary relating to the Borrower or any Subsidiary and their businesses,
other than any such information that is available to the Administrative Agent,
the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure
by the Borrower or a Subsidiary; provided that, in the case of information
received from the Borrower or any Subsidiary after the date hereof, such information
is clearly identified at the time of delivery as confidential. Any Person
required to maintain the confidentiality of Information as provided in this Section 12.11
shall be considered to have complied with its obligation to do so if such
Person has exercised the same degree of care to maintain the confidentiality of
such Information as such Person would accord to its own confidential
information.

Section 12.12         Interest Rate Limitation. It is
the intention of the parties hereto that each Lender shall conform strictly to
usury laws applicable to it. Accordingly, if the transactions contemplated
hereby would be usurious as to any Lender under laws applicable to it
(including the laws of the United States of America and the State of Texas or
any other jurisdiction whose laws may be mandatorily applicable to such Lender
notwithstanding the other provisions of this Agreement), then, in that event,
notwithstanding anything to the contrary in any of the Loan Documents or any
agreement entered into in connection with or as security for the Notes, it is
agreed as follows:  (i) the
aggregate of all consideration which constitutes interest under law applicable
to any Lender that is contracted for, taken, reserved, charged or received by
such Lender under any of the Loan Documents or agreements or otherwise in
connection with the Notes shall under no circumstances exceed the maximum
amount allowed by such applicable law, and any excess shall be canceled
automatically and if theretofore paid shall be credited by such Lender on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Lender to the Borrower); and (ii) in the event that the
maturity of the Notes is accelerated by reason of an election of the holder
thereof resulting from any Event of Default under this Agreement or otherwise,
or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Lender may
never include more than the maximum amount allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
canceled automatically by such Lender as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by such Lender on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Lender to the Borrower). All sums paid or agreed to be paid to
any Lender for the use, forbearance or detention of sums due hereunder shall,
to the extent permitted by law applicable to such Lender, be amortized,
prorated, allocated and spread throughout the stated term of the Loans
evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to any Lender on any date shall be computed at the
Highest Lawful Rate applicable to such Lender pursuant to this Section 12.12
and (ii) in respect of any subsequent interest computation period the
amount of interest otherwise

 87
 

 

 

payable to such Lender would be less than the amount
of interest payable to such Lender computed at the Highest Lawful Rate
applicable to such Lender, then the amount of interest payable to such Lender
in respect of such subsequent interest computation period shall continue to be
computed at the Highest Lawful Rate applicable to such Lender until the total
amount of interest payable to such Lender shall equal the total amount of
interest which would have been payable to such Lender if the total amount of interest
had been computed without giving effect to this Section 12.12. To the
extent that Chapter 303 of the Texas Finance Code is relevant for the purpose
of determining the Highest Lawful Rate applicable to a Lender, such Lender
elects to determine the applicable rate ceiling under such Chapter by the
weekly ceiling from time to time in effect. Chapter 346 of the Texas Finance
Code does not apply to the Borrower’s obligations hereunder.

Section 12.13         EXCULPATION PROVISIONS. EACH OF
THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH
NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND
HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS
AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS
CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN
ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND THAT IT
RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS
OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH
LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE
OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

Section 12.14         Collateral Matters; Swap Agreements.
The benefit of the Security Instruments and of the provisions of this Agreement
relating to any collateral securing the Indebtedness shall also extend to and
be available to those Lenders or their Affiliates which are counterparties to
any Swap Agreement with the Borrower or any of its Subsidiaries on a pro rata basis in respect of any
obligations of the Borrower or any of its Subsidiaries which arise under any
such Swap Agreement while such Person or its Affiliate is a Lender, but only
while such Person or its Affiliate is a Lender, including any Swap Agreements
between such Persons in existence prior to the date hereof. No Lender or any
Affiliate of a Lender shall have any voting rights under any Loan Document as a
result of the existence of obligations owed to it under any such Swap
Agreements.

Section 12.15         No Third Party Beneficiaries. This
Agreement, the other Loan Documents, and the agreement of the Lenders to make
Loans and the Issuing Bank to issue, amend, renew or extend Letters of Credit
hereunder are solely for the benefit of the Borrower,

 88
 

 

 

and no other Person (including, without limitation,
any Subsidiary of the Borrower, any obligor, contractor, subcontractor,
supplier or materialsman) shall have any rights, claims, remedies or privileges
hereunder or under any other Loan Document against the Administrative Agent,
the Issuing Bank or any Lender for any reason whatsoever. There are no third
party beneficiaries.

Section 12.16         USA Patriot Act Notice. Each
Lender hereby notifies the Borrower that pursuant to the requirements of the
USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (the “Act”), it is required to obtain, verify and record information
that identifies the Borrower, which information includes the name and address
of the Borrower and other information that will allow such Lender to identify
the Borrower in accordance with the Act.

[SIGNATURES BEGIN NEXT PAGE]

 89

 

The parties hereto have caused
this Agreement to be duly executed as of the day and year first above written.

	
  BORROWER:

  	
  TETON ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Karl F. Arleth

  
	
   

  	
  Name:

  	
  Karl F. Arleth

  
	
   

  	
  Title:

  	
  President & CEO

  
				

 

 

 CREDIT AGREEMENT
 SIGNATURE PAGE

 

	
  ADMINISTRATIVE AGENT:

  	
  BNP PARIBAS,

  
	
   

  	
  as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Dodd

  
	
   

  	
  Name:

  	
  David Dodd

  
	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Matthieu Milandri

  
	
   

  	
  Name:

  	
  Matthieu Milandri

  
	
   

  	
  Title:

  	
  Vice President

  
				

 

 

 

	
  LENDER:

  	
  BNP PARIBAS, as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David Dodd

  
	
   

  	
  Name:

  	
  David Dodd

  
	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Matthieu Milandri

  
	
   

  	
  Name:

  	
  Matthieu Milandri

  
	
   

  	
  Title:

  	
  Vice President

  
				

 

 

 

ANNEX I

LIST OF MAXIMUM CREDIT AMOUNTS

Aggregate Maximum Credit Amounts

	
  Name of Lender

  	
   

  	
  Applicable Percentage

  	
   

  	
  Maximum Credit Amount

  
	
  BNP Paribas

  	
   

  	
  100.00%

  	
   

  	
  $50,000,000.00

  
	
  TOTAL

  	
   

  	
  100.00%

  	
   

  	
  $50,000,000.00

  

 

 

 ANNEX I-1

EXHIBIT A

FORM OF NOTE

	
  $[     ],000,000.00

  	
  [          ],
  2006

  

 

FOR
VALUE RECEIVED, Teton Energy Corporation, a Delaware corporation (the “Borrower”)
hereby promises to pay to the order of [           ]
(the “Lender”), at the principal office of BNP Paribas, as
administrative agent (the “Administrative Agent”), the principal sum of
[          ] Dollars
($[          ]) (or such
lesser amount as shall equal the aggregate unpaid principal amount of the Loans
made by the Lender to the Borrower under the Credit Agreement, as hereinafter
defined), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Loan, at such office, in like money and funds, for the period commencing
on the date of such Loan until such Loan shall be paid in full, at the rates
per annum and on the dates provided in the Credit Agreement.

The date, amount, Type, interest
rate, Interest Period and maturity of each Loan made by the Lender to the
Borrower, and each payment made on account of the principal thereof, shall be
recorded by the Lender on its books and, prior to any transfer of this Note,
may be endorsed by the Lender on the schedules attached hereto or any
continuation thereof or on any separate record maintained by the Lender.
Failure to make any such notation or to attach a schedule shall not affect any
Lender’s or the Borrower’s rights or obligations in respect of such Loans or
affect the validity of such transfer by any Lender of this Note.

This Note is one of the Notes
referred to in the Credit Agreement dated as of June [  ], 2006 among the Borrower, the
Administrative Agent, and the other lenders signatory thereto (including the
Lender), and evidences Loans made by the Lender thereunder (such Credit
Agreement as the same may be amended, supplemented or restated from time to
time, the “Credit Agreement”). Capitalized terms used in this Note have
the respective meanings assigned to them in the Credit Agreement.

This Note is issued pursuant to,
and is subject to the terms and conditions set forth in, the Credit Agreement
and is entitled to the benefits provided for in the Credit Agreement and the
other Loan Documents. The Credit Agreement provides for the acceleration of the
maturity of this Note upon the occurrence of certain events, for prepayments of
Loans upon the terms and conditions specified therein and other provisions
relevant to this Note.

THIS NOTE SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

 

 EXHIBIT A-1
 

 

 

	
   

  	
  TETON ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

 EXHIBIT A-2

 

EXHIBIT B

FORM OF BORROWING REQUEST

[                   ],
2006

Teton Energy Corporation, a
Delaware corporation (the “Borrower”), pursuant to Section 2.03 of
the Credit Agreement dated as of June 15, 2006 (together with all
amendments, restatements, supplements or other modifications thereto, the “Credit
Agreement”) among the Borrower, BNP Paribas, as Administrative Agent and
the other lenders (the “Lenders”) which are or become parties thereto
(unless otherwise defined herein, each capitalized term used herein is defined
in the Credit Agreement), hereby requests a Borrowing as follows:

(i)            Aggregate amount of the requested Borrowing is
$[                   ];

(ii)           Date of such Borrowing is
[                   ],
200[   ];

(iii)          Requested Borrowing is to be [an ABR Borrowing] [a
Eurodollar Borrowing];

(iv)          In the case of a Eurodollar Borrowing, the initial Interest
Period applicable thereto is
[                   ];

(v)           Amount of Borrowing Base in effect on the date hereof is
$[                   ];

(vi)          Total Revolving Credit Exposures on the date hereof (i.e.,
outstanding principal amount of Loans and total LC Exposure) is
$[                   ];
and

(vii)         Pro forma
total Revolving Credit Exposures (giving effect to the requested Borrowing) is
$[                   ];
and

(viii)        Location and number of the Borrower’s account to which funds
are to be disbursed, which shall comply with the requirements of
Section 2.05 of the Credit Agreement, is as follows:

[                                                               ]

[                                                               ]

[                                                               ]

[                                                               ]

[                                                               ]

 

 EXHIBIT B-1
 

 

The undersigned certifies that
he/she is the
[                ]
of the Borrower, and that as such he/she is authorized to execute this
certificate on behalf of the Borrower. The undersigned further certifies,
represents and warrants on behalf of the Borrower that the Borrower is entitled
to receive the requested Borrowing under the terms and conditions of the Credit
Agreement.

	
   

  	
  TETON ENERGY CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

 EXHIBIT B-2

 

EXHIBIT C

FORM OF INTEREST ELECTION REQUEST

[               ]
[  ], 2006

Teton Energy Corporation, a
Delaware corporation (the “Borrower”), pursuant to Section 2.04 of
the Credit Agreement dated as of June 15, 2006 (together with all
amendments, restatements, supplements or other modifications thereto, the “Credit
Agreement”) among the Borrower, BNP Paribas, as Administrative Agent and
the other lenders (the “Lenders”) which are or become parties thereto
(unless otherwise defined herein, each capitalized term used herein is defined
in the Credit Agreement), hereby makes an Interest Election Request as follows:

(i)            The Borrowing to which this Interest Election Request
applies, and if different options are being elected with respect to different
portions thereof, the portions thereof to be allocated to each resulting
Borrowing (in which case the information specified pursuant to (iii) and (iv) below
shall be specified for each resulting Borrowing) is
[                ];

(ii)           The effective date of the election made pursuant to this
Interest Election Request is
[                ],
200[   ];[and]

(iii)          The resulting Borrowing is to be [an ABR Borrowing] [a Eurodollar
Borrowing][; and]

[(iv)         [If the resulting Borrowing is a Eurodollar Borrowing] The
Interest Period applicable to the resulting Borrowing after giving effect to
such election is
[                ]].

The undersigned certifies that
he/she is the [                ]
of the Borrower, and that as such he/she is authorized to execute this
certificate on behalf of the Borrower. The undersigned further certifies,
represents and warrants on behalf of the Borrower that the Borrower is entitled
to receive the requested continuation or conversion under the terms and
conditions of the Credit Agreement.

 

	
   

  	
  TETON ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

 EXHIBIT C-1

 

EXHIBIT D

FORM OF

COMPLIANCE CERTIFICATE

The undersigned hereby certifies
that he/she is the
[          ] of Teton Energy
Corporation, a Delaware corporation (the “Borrower”), and that as such
he/she is authorized to execute this certificate on behalf of the Borrower. With
reference to the Credit Agreement dated as of June 15, 2006 (together with
all amendments, restatements, supplements or other modifications thereto being
the “Agreement”) among the Borrower, BNP Paribas, as Administrative
Agent, and the other lenders (the “Lenders”) which are or become a party
thereto, and such Lenders, the undersigned represents and warrants as follows
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):

(a)           The representations and warranties of the Borrower
contained in Article VII of the Agreement and in the Loan Documents and
otherwise made in writing by or on behalf of the Borrower pursuant to the
Agreement and the Loan Documents were true and correct when made, and are
repeated at and as of the time of delivery hereof and are true and correct in
all material respects at and as of the time of delivery hereof, except to the
extent such representations and warranties are expressly limited to an earlier
date or the Majority Lenders have expressly consented in writing to the contrary.

(b)           The Borrower has performed and complied with all
agreements and conditions contained in the Agreement and in the Loan Documents
required to be performed or complied with by it prior to or at the time of
delivery hereof [or specify default and describe].

(c)           Since December 31, 2005, no change has occurred,
either in any case or in the aggregate, in the condition, financial or
otherwise, of the Borrower or any Subsidiary which could reasonably be expected
to have a Material Adverse Effect [or specify event].

(d)           There exists no Default or Event of Default [or specify
Default and describe].

(e)           Attached hereto are the detailed computations necessary to
determine whether the Borrower is in compliance with Section 9.01 and Section 8.14
as of the end of the [fiscal quarter][fiscal year] ending
[          ].

EXECUTED AND DELIVERED this
[          ] day of
[          ].

	
   

  	
  TETON ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

 EXHIBIT D-1

 

EXHIBIT E-1

FORM OF LEGAL OPINION OF GERSTEN SAVAGE
LLP

 

 EXHIBIT E-1
 

 

 

EXHIBIT E-2

FORM OF LEGAL OPINION OF LOCAL COUNSEL

 

 EXHIBIT E-2

 

EXHIBIT F-1

SECURITY INSTRUMENTS

1)                                      Guaranty and Pledge Agreement
dated as of June 15, 2006 by the Borrower and Teton North America LLC,
Teton Piceance LLC, Teton DJ LLC and Teton Williston LLC, as the Guarantors, in
favor of the Administrative Agent and the Lenders.

2)                                      Financing Statements in respect
of item 1.

3)                                      Mortgage, Deed of Trust,
Assignment of As-Extracted Collateral, Security Agreement and Financing
Statement dated as of June 15, 2006 by the Borrower, as mortgagor, for the
benefit of the Administrative Agent, the Lenders and others (Colorado).

4)                                      Financing Statement in respect
of item 3.

 EXHIBIT F-1-1
 

 

 

EXHIBIT F-2

FORM OF GUARANTY AND COLLATERAL AGREEMENT

 

 EXHIBIT F-2-1

 

 

EXHIBIT G

FORM OF ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “Assignment and
Assumption”) is dated as of the Effective Date set forth below and is
entered into by and between [Insert name of Assignor]
(the “Assignor”) and [Insert name of Assignee]
(the “Assignee”). Capitalized terms used but not defined herein shall
have the meanings given to them in the Credit Agreement identified below (as
amended, the “Credit Agreement”), receipt of a copy of which is hereby
acknowledged by the Assignee. The Standard Terms and Conditions set forth in
Annex 1 attached hereto are hereby agreed to and incorporated herein by
reference and made a part of this Assignment and Assumption as if set forth
herein in full.

For an agreed
consideration, the Assignor hereby irrevocably sells and assigns to the
Assignee, and the Assignee hereby irrevocably purchases and assumes from the
Assignor, subject to and in accordance with the Standard Terms and Conditions
and the Credit Agreement, as of the Effective Date inserted by the
Administrative Agent as contemplated below (i) all of the Assignor’s
rights and obligations in its capacity as a Lender under the Credit Agreement
and any other documents or instruments delivered pursuant thereto to the extent
related to the amount and percentage interest identified below of all of such
outstanding rights and obligations of the Assignor under the respective
facilities identified below (including any letters of credit and guarantees
included in such facilities) and (ii) to the extent permitted to be
assigned under applicable law, all claims, suits, causes of action and any
other right of the Assignor (in its capacity as a Lender) against any Person,
whether known or unknown, arising under or in connection with the Credit
Agreement, any other documents or instruments delivered pursuant thereto or the
loan transactions governed thereby or in any way based on or related to any of
the foregoing, including contract claims, tort claims, malpractice claims,
statutory claims and all other claims at law or in equity related to the rights
and obligations sold and assigned pursuant to clause (i) above (the rights
and obligations sold and assigned pursuant to clauses (i) and (ii) above
being referred to herein collectively as the “Assigned Interest”). Such
sale and assignment is without recourse to the Assignor and, except as
expressly provided in this Assignment and Assumption, without representation or
warranty by the Assignor.

	
  1.

  	
   

  	
  Assignor:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Assignee:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  [and is an Affiliate of [identify
  Lender](1)]

  	
   

  
	
   

  
	
  3.

  	
   

  	
  Borrower:

  	
   

  	
  Teton Energy Corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Administrative Agent:

  	
   

  	
  BNP Paribas, as the administrative agent under the
  Credit Agreement

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Credit Agreement:

  	
   

  	
  The Credit Agreement dated as of June 15, 2006
  among Teton Energy Corporation, the Lenders parties thereto, BNP Paribas, as
  Administrative Agent, and the other lenders party thereto.

  

(1) Select as applicable.

 

 EXHIBIT G-1
 

 

 

	
  6.

  	
   

  	
  Assigned Interest:

  	
   

  	
   

  

 

	
  Commitment Assigned

  	
   

  	
  Aggregate Amount of

  Commitment/Loans for

  all Lenders

  	
   

  	
  Amount of

  Commitment/Loans

  Assigned

  	
   

  	
  Percentage Assigned of

  Commitment/Loans(2)

  	
   

  
	
  

  	
   

  	
  $

  	
                                   

  	
   

  	
  $

  	
                                   

  	
   

  	
   

  	
  %

  
	
   

  	
   

  	
  $

  	
                                   

  	
   

  	
  $

  	
                                   

  	
   

  	
   

  	
  %

  
	
  

  	
   

  	
  $

  	
                                   

  	
   

  	
  $

  	
                                   

  	
   

  	
   

  	
  %

  

Set
forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all
Lenders thereunder.

Effective Date:                                    ,
20      [TO BE INSERTED BY ADMINISTRATIVE AGENT AND
WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER
THEREFOR.]

The terms set forth in
this Assignment and Assumption are hereby agreed to:

	
   

  	
  ASSIGNOR

  
	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ASSIGNEE

  
	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNEE]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Title:

  
				

 

 EXHIBIT G-2
 

 

 

	
  Consented to and Accepted:

  	
   

  
	
   

  	
   

  
	
  BNP Paribas, as

  	
   

  
	
   Administrative Agent

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
   

  	
   

  
	
  Name: 

  	
   

  
	
  Title: 

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
   

  	
   

  
	
  Name: 

  	
   

  
	
  Title: 

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Consented to:

  	
   

  
	
   

  	
   

  
	
  TETON ENERGY
  CORPORATION

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
   

  	
   

  
	
  Name: 

  	
   

  
	
  Title:

  	
   

  

 

 EXHIBIT G-3
 

 

 

ANNEX 1

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1.      Representations
and Warranties.

1.1   Assignor. The Assignor (a) represents
and warrants that (i) it is the legal and beneficial owner of the Assigned
Interest, (ii) the Assigned Interest is free and clear of any lien,
encumbrance or other adverse claim and (iii) it has full power and
authority, and has taken all action necessary, to execute and deliver this
Assignment and Assumption and to consummate the transactions contemplated
hereby; and (b) assumes no responsibility with respect to (i) any
statements, warranties or representations made in or in connection with the
Credit Agreement or any other Loan Document, (ii) the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Loan
Documents or any collateral thereunder, (iii) the financial condition of
the Borrower, any of its Subsidiaries or Affiliates or any other Person
obligated in respect of any Loan Document or (iv) the performance or
observance by the Borrower, any of its Subsidiaries or Affiliates or any other
Person of any of their respective obligations under any Loan Document.

1.2. Assignee. The Assignee (a) represents
and warrants that (i) it has full power and authority, and has taken all
action necessary, to execute and deliver this Assignment and Assumption and to
consummate the transactions contemplated hereby and to become a Lender under
the Credit Agreement, (ii) it satisfies the requirements, if any,
specified in the Credit Agreement that are required to be satisfied by it in
order to acquire the Assigned Interest and become a Lender, (iii) from and
after the Effective Date, it shall be bound by the provisions of the Credit
Agreement as a Lender thereunder and, to the extent of the Assigned Interest,
shall have the obligations of a Lender thereunder, (iv) it has received a
copy of the Credit Agreement, together with copies of the most recent financial
statements delivered pursuant to Section 8.01 thereof, as applicable, and
such other documents and information as it has deemed appropriate to make its
own credit analysis and decision to enter into this Assignment and Assumption
and to purchase the Assigned Interest on the basis of which it has made such
analysis and decision independently and without reliance on the Administrative
Agent or any other Lender, and (v) if it is a Foreign Lender, attached to
the Assignment and Assumption is any documentation required to be delivered by
it pursuant to the terms of the Credit Agreement, duly completed and executed
by the Assignee; and (b) agrees that (i) it will, independently and
without reliance on the Administrative Agent, the Assignor or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Loan Documents, and (ii) it will perform in accordance with
their terms all of the obligations which by the terms of the Loan Documents are
required to be performed by it as a Lender.

2.  Payments.
  From and after the Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned
Interest (including payments of principal, interest, fees and other amounts) to
the Assignor for amounts which have accrued to but excluding the Effective Date
and to the Assignee for amounts which have accrued from and after the Effective
Date.

3. General Provisions. This Assignment and Assumption
shall be binding upon, and inure to the benefit of, the parties hereto and
their respective successors and assigns. This Assignment and Assumption may be
executed in any number of counterparts, which together shall constitute one
instrument. Delivery of an executed counterpart of a signature page of
this Assignment and Assumption by telecopy shall be effective as delivery of a
manually executed counterpart of this Assignment and

 EXHIBIT G-4
 

 

 

Assumption. This Assignment and Assumption shall be
governed by, and construed in accordance with, the law of the State of Texas.

 

 EXHIBIT G-5

 

 

SCHEDULE 7.05

LITIGATION

None.

 

 SCHEDULE 7.05-1

 

 

SCHEDULE 7.14

SUBSIDIARIES AND PARTNERSHIPS

Teton Energy Corporation
owns the following subsidiaries:

(a)                                  Teton
North America LLC, a Colorado limited liability company.

Teton North
America LLC owns the following:

100% of the membership interests of Teton Piceance LLC

100% of the membership interests of Teton DJ LLC

100% of the membership interests of Teton Williston LLC

Teton Piceance LLC owns
an undivided 25% working interest (19.69% net revenue interest) in a 6,314-acre
block located in Garfield County, Colorado, townships T5S-96W and T6S-96-97W,
immediately to the northwest of Grand Valley gas field, the westernmost of the
four gas fields that comprise the continuous, basin-centered, tight gas sand
accumulation (“the Piceance Fairway”).

Teton DJ LLC owns over
182,000 gross leased acres with a working interest of 100% and average net
revenue interest of approximately 81%, is located on the eastern flank of the
DJ basin in Chase, Dundy, Perkins, and Keith counties in Nebraska. The acreage
is subject to an acreage earning agreement with Noble Energy, Inc., dated January 27,
2006.

Teton Williston LLC owns
an undivided 25% leasehold interest in certain undeveloped oil and gas leases
covering approximately 58,000 net mineral acres.

Teton
owns 100% of the membership interests in Goltech LLC, which is a Texas limited
liability company that is in the process of being dissolved. Goltech formerly
owned Teton’s interest in Goloil, which was sold in July 2004.

2.                                       Teton
currently owns no interests in any partnerships.

 

 SCHEDULE 7.14-1

 

 

SCHEDULE 7.18

GAS IMBALANCES

None.

 SCHEDULE 7.18-1

 

 

SCHEDULE 7.19

MARKETING CONTRACTS

1.                                       Non-Guaranteed
Gas Purchase Agreement dated as of July 1, 2005 between Williams Production
RMT Company and Piceance Gas Resources, LLC

 

 SCHEDULE 7.19-1

 

 

SCHEDULE 7.20

SWAP AGREEMENTS

None.

 

 SCHEDULE 7.20-1

 

 

SCHEDULE 9.05

INVESTMENTS

None.

 

 SCHEDULE 9.05-1

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