Document:

EXHIBIT 10.6

 

Execution Version

 

$25,000,000

 

SUBORDINATED CREDIT AGREEMENT

 

Among

 

CANO PETROLEUM, INC.

 

as Borrower,

 

THE LENDERS PARTY HERETO FROM TIME
TO TIME

 

as Lenders,

 

and

 

UNIONBANCAL EQUITIES, INC.

 

as Administrative Agent

 

March 17, 2008

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
  ARTICLE I

  	
   

  	
  DEFINITIONS AND ACCOUNTING TERMS

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 1.01

  	
   

  	
  Certain Defined Terms

  	
   

  	
  1

  
	
  Section 1.02

  	
   

  	
  Computation of Time Periods

  	
   

  	
  18

  
	
  Section 1.03

  	
   

  	
  Accounting Terms; Changes in GAAP

  	
   

  	
  18

  
	
  Section 1.04

  	
   

  	
  Types of Advances

  	
   

  	
  18

  
	
  Section 1.05

  	
   

  	
  Miscellaneous

  	
   

  	
  18

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
   

  	
  CREDIT FACILITIES

  	
   

  	
  19

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 2.01

  	
   

  	
  Commitment for Advances

  	
   

  	
  19

  
	
  Section 2.02

  	
   

  	
  [Reserved]

  	
   

  	
  19

  
	
  Section 2.03

  	
   

  	
  Method of Borrowing

  	
   

  	
  19

  
	
  Section 2.04

  	
   

  	
  Reduction of the Commitment

  	
   

  	
  22

  
	
  Section 2.05

  	
   

  	
  Prepayment of Advances

  	
   

  	
  22

  
	
  Section 2.06

  	
   

  	
  Repayment of Advances

  	
   

  	
  23

  
	
  Section 2.07

  	
   

  	
  [Reserved]

  	
   

  	
  23

  
	
  Section 2.08

  	
   

  	
  Fees

  	
   

  	
  23

  
	
  Section 2.09

  	
   

  	
  Interest

  	
   

  	
  23

  
	
  Section 2.10

  	
   

  	
  Payments and Computations

  	
   

  	
  25

  
	
  Section 2.11

  	
   

  	
  Sharing of Payments, Etc.

  	
   

  	
  26

  
	
  Section 2.12

  	
   

  	
  Breakage Costs

  	
   

  	
  26

  
	
  Section 2.13

  	
   

  	
  Increased Costs

  	
   

  	
  26

  
	
  Section 2.14

  	
   

  	
  Taxes

  	
   

  	
  27

  
	
  Section 2.15

  	
   

  	
  Extension of Maturity Date

  	
   

  	
  29

  
	
  Section 2.16

  	
   

  	
  Increase in Commitments

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
   

  	
  CONDITIONS OF LENDING

  	
   

  	
  32

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 3.01

  	
   

  	
  Conditions Precedent to Initial Credit Extension

  	
   

  	
  32

  
	
  Section 3.02

  	
   

  	
  Conditions Precedent to All Borrowings

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
   

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 4.01

  	
   

  	
  Existence; Subsidiaries

  	
   

  	
  35

  
	
  Section 4.02

  	
   

  	
  Power

  	
   

  	
  35

  
	
  Section 4.03

  	
   

  	
  Authorization and Approvals

  	
   

  	
  36

  
	
  Section 4.04

  	
   

  	
  Enforceable Obligations

  	
   

  	
  36

  
	
  Section 4.05

  	
   

  	
  Financial Statements

  	
   

  	
  36

  
	
  Section 4.06

  	
   

  	
  True and Complete Disclosure

  	
   

  	
  37

  
	
  Section 4.07

  	
   

  	
  Litigation; Compliance with Laws

  	
   

  	
  37

  
	
  Section 4.08

  	
   

  	
  Use of Proceeds

  	
   

  	
  37

  
	
  Section 4.09

  	
   

  	
  Investment Company Act

  	
   

  	
  37

  
	
  Section 4.10

  	
   

  	
  Federal Power Act

  	
   

  	
  37

  
							

 

i

 

	
  Section 4.11

  	
   

  	
  Taxes

  	
   

  	
  38

  
	
  Section 4.12

  	
   

  	
  Pension Plans

  	
   

  	
  38

  
	
  Section 4.13

  	
   

  	
  Condition of Property; Casualties

  	
   

  	
  39

  
	
  Section 4.14

  	
   

  	
  No Burdensome Restrictions; No Defaults

  	
   

  	
  39

  
	
  Section 4.15

  	
   

  	
  Environmental Condition

  	
   

  	
  39

  
	
  Section 4.16

  	
   

  	
  Permits, Licenses, Etc.

  	
   

  	
  40

  
	
  Section 4.17

  	
   

  	
  Gas Contracts

  	
   

  	
  40

  
	
  Section 4.18

  	
   

  	
  Liens; Titles, Leases, Etc.

  	
   

  	
  40

  
	
  Section 4.19

  	
   

  	
  Solvency and Insurance

  	
   

  	
  41

  
	
  Section 4.20

  	
   

  	
  Hedging Agreements

  	
   

  	
  41

  
	
  Section 4.21

  	
   

  	
  Material Agreements

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
   

  	
  AFFIRMATIVE COVENANTS

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 5.01

  	
   

  	
  Compliance with Laws, Etc.

  	
   

  	
  42

  
	
  Section 5.02

  	
   

  	
  Maintenance of Insurance

  	
   

  	
  42

  
	
  Section 5.03

  	
   

  	
  Preservation of Corporate Existence, Etc.

  	
   

  	
  43

  
	
  Section 5.04

  	
   

  	
  Payment of Taxes, Etc.

  	
   

  	
  43

  
	
  Section 5.05

  	
   

  	
  Visitation Rights

  	
   

  	
  43

  
	
  Section 5.06

  	
   

  	
  Reporting Requirements

  	
   

  	
  43

  
	
  Section 5.07

  	
   

  	
  Maintenance of Property

  	
   

  	
  47

  
	
  Section 5.08

  	
   

  	
  Agreement to Pledge

  	
   

  	
  47

  
	
  Section 5.09

  	
   

  	
  Use of Proceeds

  	
   

  	
  47

  
	
  Section 5.10

  	
   

  	
  Title Evidence and Opinions

  	
   

  	
  47

  
	
  Section 5.11

  	
   

  	
  Further Assurances; Cure of Title Defects

  	
   

  	
  48

  
	
  Section 5.12

  	
   

  	
  Hedging Arrangements

  	
   

  	
  48

  
	
  Section 5.13

  	
   

  	
  Bank Accounts

  	
   

  	
  48

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
   

  	
  NEGATIVE COVENANTS

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 6.01

  	
   

  	
  Liens, Etc.

  	
   

  	
  49

  
	
  Section 6.02

  	
   

  	
  Debts, Guaranties, and Other Obligations

  	
   

  	
  50

  
	
  Section 6.03

  	
   

  	
  Agreements Restricting Liens and Distributions

  	
   

  	
  51

  
	
  Section 6.04

  	
   

  	
  Merger or Consolidation; Asset Sales

  	
   

  	
  52

  
	
  Section 6.05

  	
   

  	
  Restricted Payments

  	
   

  	
  52

  
	
  Section 6.06

  	
   

  	
  Investments

  	
   

  	
  52

  
	
  Section 6.07

  	
   

  	
  Affiliate Transactions

  	
   

  	
  53

  
	
  Section 6.08

  	
   

  	
  Compliance with ERISA

  	
   

  	
  53

  
	
  Section 6.09

  	
   

  	
  Sale-and-Leaseback

  	
   

  	
  54

  
	
  Section 6.10

  	
   

  	
  Change of Business

  	
   

  	
  54

  
	
  Section 6.11

  	
   

  	
  Organizational Documents, Name Change

  	
   

  	
  54

  
	
  Section 6.12

  	
   

  	
  Use of Proceeds

  	
   

  	
  54

  
	
  Section 6.13

  	
   

  	
  Gas Imbalances, Take-or-Pay or Other Prepayments

  	
   

  	
  54

  
	
  Section 6.14

  	
   

  	
  Limitation on Speculative Hedging

  	
   

  	
  55

  
	
  Section 6.15

  	
   

  	
  Additional Subsidiaries; Additional Oil and Gas
  Properties

  	
   

  	
  55

  
	
  Section 6.16

  	
   

  	
  Account Payables

  	
   

  	
  55

  
	
  Section 6.17

  	
   

  	
  Current Ratio

  	
   

  	
  55

  
							

 

ii

 

	
  Section 6.18

  	
   

  	
  Leverage Ratio

  	
   

  	
  56

  
	
  Section 6.19

  	
   

  	
  Interest Coverage Ratio

  	
   

  	
  56

  
	
  Section 6.20

  	
   

  	
  Senior Debt

  	
   

  	
  56

  
	
  Section 6.21

  	
   

  	
  Non-Guarantor Subsidiary

  	
   

  	
  56

  
	
  Section 6.22

  	
   

  	
  Equity Issuance

  	
   

  	
  56

  
	
  Section 6.23

  	
   

  	
  Minimum Asset Coverage Ratio

  	
   

  	
  56

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
   

  	
  EVENTS OF DEFAULT; REMEDIES

  	
   

  	
  57

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 7.01

  	
   

  	
  Events of Default

  	
   

  	
  57

  
	
  Section 7.02

  	
   

  	
  Optional Acceleration of Maturity

  	
   

  	
  60

  
	
  Section 7.03

  	
   

  	
  Automatic Acceleration of Maturity

  	
   

  	
  60

  
	
  Section 7.04

  	
   

  	
  Right of Set-off

  	
   

  	
  61

  
	
  Section 7.05

  	
   

  	
  Non-exclusivity of Remedies

  	
   

  	
  61

  
	
  Section 7.06

  	
   

  	
  Application of Proceeds

  	
   

  	
  61

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
   

  	
  THE ADMINISTRATIVE AGENT

  	
   

  	
  62

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 8.01

  	
   

  	
  Authorization and Action

  	
   

  	
  62

  
	
  Section 8.02

  	
   

  	
  Administrative Agent’s Reliance, Etc.

  	
   

  	
  62

  
	
  Section 8.03

  	
   

  	
  The Administrative Agent and Its Affiliates

  	
   

  	
  63

  
	
  Section 8.04

  	
   

  	
  Lender Credit Decision

  	
   

  	
  63

  
	
  Section 8.05

  	
   

  	
  Indemnification

  	
   

  	
  63

  
	
  Section 8.06

  	
   

  	
  Successor Administrative Agent

  	
   

  	
  64

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  64

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Section 9.01

  	
   

  	
  Amendments, Etc.

  	
   

  	
  64

  
	
  Section 9.02

  	
   

  	
  Notices, Etc.

  	
   

  	
  65

  
	
  Section 9.03

  	
   

  	
  No Waiver; Remedies

  	
   

  	
  65

  
	
  Section 9.04

  	
   

  	
  Costs and Expenses

  	
   

  	
  65

  
	
  Section 9.05

  	
   

  	
  Binding Effect

  	
   

  	
  65

  
	
  Section 9.06

  	
   

  	
  Lender Assignments and Participations

  	
   

  	
  66

  
	
  Section 9.07

  	
   

  	
  Indemnification; Waiver

  	
   

  	
  68

  
	
  Section 9.08

  	
   

  	
  Execution in Counterparts

  	
   

  	
  69

  
	
  Section 9.09

  	
   

  	
  Survival of Representations, Etc.

  	
   

  	
  69

  
	
  Section 9.10

  	
   

  	
  Severability

  	
   

  	
  69

  
	
  Section 9.11

  	
   

  	
  Business Loans

  	
   

  	
  69

  
	
  Section 9.12

  	
   

  	
  Governing Law; Submission to Jurisdiction

  	
   

  	
  69

  
	
  Section 9.13

  	
   

  	
  Subordination and Intercreditor Agreement

  	
   

  	
  70

  
	
  Section 9.14

  	
   

  	
  USA Patriot Act

  	
   

  	
  70

  
	
  Section 9.15

  	
   

  	
  WAIVER OF JURY TRIAL

  	
   

  	
  70

  
	
  Section 9.16

  	
   

  	
  ORAL AGREEMENTS

  	
   

  	
  70

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXHIBITS:

  	
   

  
	
  Exhibit A

  	
   

  	
  -

  	
   

  	
  Form of
  Assignment and Acceptance

  
	
  Exhibit B

  	
   

  	
  -

  	
   

  	
  Form of
  Compliance Certificate

  
												

 

iii

 

	
  Exhibit C

  	
   

  	
  -

  	
   

  	
  Form of
  Guaranty

  
	
  Exhibit D

  	
   

  	
  -

  	
   

  	
  Form of
  Mortgage

  
	
  Exhibit E

  	
   

  	
  -

  	
   

  	
  Form of
  Note

  
	
  Exhibit F

  	
   

  	
  -

  	
   

  	
  Form of
  Notice of Borrowing

  
	
  Exhibit G

  	
   

  	
  -

  	
   

  	
  Form of
  Notice of Conversion or Continuation

  
	
  Exhibit H

  	
   

  	
  -

  	
   

  	
  Form of
  Pledge Agreement

  
	
  Exhibit I

  	
   

  	
  -

  	
   

  	
  Form of
  Security Agreement

  
	
  Exhibit J

  	
   

  	
  -

  	
   

  	
  Form of
  Transfer Letters

  
	
  Exhibit K

  	
   

  	
  -

  	
   

  	
  Form of
  Borrower’s Counsel Opinion

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULES:

  	
   

  	
   

  	
   

  	
   

  
	
  Schedule I

  	
   

  	
  -

  	
   

  	
  Pricing
  Grid

  
	
  Schedule II

  	
   

  	
  -

  	
   

  	
  Notice
  Information and Commitments

  
	
  Schedule 4.01

  	
   

  	
  -

  	
   

  	
  Subsidiaries
  of Borrower

  
	
  Schedule 4.05

  	
   

  	
  -

  	
   

  	
  Existing
  Debt

  
	
  Schedule 4.07

  	
   

  	
  -

  	
   

  	
  Litigation

  
	
  Schedule 4.14(a)

  	
  -

  	
   

  	
  Material
  Debt Documents

  
	
  Schedule 4.20

  	
   

  	
  -

  	
   

  	
  Hedging
  Contracts

  
	
  Schedule 4.21

  	
   

  	
  -

  	
   

  	
  Material
  Agreements

  
	
  Schedule 5.12

  	
   

  	
  -

  	
   

  	
  Required
  Hedging Contracts

  

 

iv

 

SUBORDINATED CREDIT AGREEMENT

 

This Subordinated Credit
Agreement dated as of March 17, 2008 (the “Effective Date”) is among Cano
Petroleum, Inc., a Delaware corporation (“Borrower”), the lenders party
hereto from time to time (“Lenders”), and UnionBanCal Equities, Inc. as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”).

 

The parties hereto agree to
as follows:

 

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

 

Section 1.01                Certain Defined Terms.  As used in
this Agreement, the terms defined above shall have the meanings set forth
therein and the following terms shall have the following meanings (unless
otherwise indicated, such meanings to be equally applicable to both the
singular and plural forms of the terms defined):

 

“Acceptable Security
Interest” in any Property means a Lien which (a) exists in favor of
the Administrative Agent for the benefit of the Secured Parties, (b) is
superior to all Liens or rights of any other Person in the Property encumbered
thereby, other than Permitted Prior Liens, (c) secures the Obligations,
and (d) is perfected and enforceable.

 

“Acquisition” means
the purchase by the Borrower or any of its Subsidiaries of any business,
including the purchase of all or substantially all the associated assets or
operations or of stock (or other ownership interests) of a Person (other than
of a wholly-owned Subsidiary of the Borrower).

 

“Adjusted Reference Rate”
means, for any day, the fluctuating rate per annum of interest equal to the
greater of (a) the Reference Rate in effect on such day and (b) the
Federal Funds Rate in effect on such day plus 1⁄2 of 1%.

 

“Administrative Agent”
means UnionBanCal Equities, Inc., in its capacity as agent pursuant to Article VIII,
and any successor agent pursuant to Section 8.06.

 

“Advance” means an
advance by a Lender to the Borrower pursuant to Section 2.01(a) as
part of a Borrowing and refers to a Reference Rate Advance or a Eurodollar Rate
Advance.

 

“Affiliate” means, as
to any Person, any other Person that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, such Person or any Subsidiary of such Person.  The term “control” (including the terms “controlled
by” or “under common control with”) means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of a Control Percentage, by
contract, or otherwise.  Without limiting
the generality of the foregoing, a Person shall be deemed to be controlled by
another Person if such other Person possesses, directly or indirectly, the
power to vote 10% or more of the securities having ordinary voting power for
the election of directors, managing general partners or the equivalent.

 

 

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

 

“Applicable Margin”
means, with respect to any Advance, (a) during any time when an Event of
Default exists, 3% per annum plus the rate per annum set forth in the Pricing
Grid for the relevant Type of such Advance, and (b) at any other time, the
rate per annum set forth in the Pricing Grid for the relevant Type of such
Advance.  The Applicable Margin for any
Advance shall change when and as any such Event of Default commences or
terminates and as otherwise set forth in the Pricing Grid and subject to
further adjustments as set forth Section 2.8(d).

 

“Assignment and
Acceptance” means an assignment and acceptance entered into by a Lender and
an Eligible Assignee, and accepted by the Administrative Agent, in
substantially the form of the attached Exhibit A.

 

“Barnett Shale Properties”
means the stratigraphic equivalent of that certain interval described as 100’
above and 100’ below the interval seen between 3,450’ and 3,650’ on the Welex
Spectral Density – Dual Spaced Neutron Log dated July 29, 1986 for the
Hogtown Moore Unit #13-2 Well located in the George E. Moore Survey, Eastland
Conty, Texas, as such stratigraphic equivalent underlies, comprises a portion
of or is attributable to the Oil & Gas Properties held by Square One
in the Desdemona Field.

 

“Borrowing” means a
borrowing consisting of Advances made on the same day by the Lenders pursuant
to Section 2.01(a).

 

“Borrowing Base”
shall have the definition given to such term in the Senior Credit Agreement as
in effect on the date hereof of as modified in accordance with the
Subordination and Intercreditor Agreement.

 

“Business Day” means
a day of the year on which banks are not required or authorized to close in
Dallas, Texas and Los Angeles, California and, if the applicable Business Day
relates to any Eurodollar Rate Advances, on which dealings are carried on by
banks in the London interbank market.

 

“Capital Leases”
means, as applied to any Person, any lease of any Property by such Person as
lessee which would, in accordance with GAAP, be required to be classified and
accounted for as a capital lease on the balance sheet of such Person.

 

“CERCLA” means the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, state and local analogs, and all rules and regulations and
requirements thereunder in each case as now or hereafter in effect.

 

“Change in Control”
shall mean the occurrence of any of the following events: (a) the Borrower
ceases to own, either directly or indirectly, 100% of the Equity Interest in
any Subsidiary other than as a result of a sale of assets or merger permitted
under Section 6.04, (b) any “person” or “group” (as such terms are
used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934) other than a Permitted Holder becomes the “beneficial owner” (as defined
in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except
that a person or group shall be deemed to have “beneficial ownership” of all
securities that such person or group has the right to 

 

2

 

acquire
(such right, an “option right”), whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of 33% or more of
the Equity Interest of the Borrower entitled to vote for members of the board
of directors or equivalent governing body of the Borrower on a fully-diluted
basis (and taking into account all such securities that such person or group
has the right to acquire pursuant to any option right), or (c) during any
period of 12 consecutive months, a majority of the members of the board of
directors or other equivalent governing body of the Borrower cease to be
composed of individuals (i) who were members of that board or equivalent
governing body on the first day of such period, (ii) whose election or
nomination to that board or equivalent governing body was approved by
individuals referred to in clause (i) above constituting at the time of
such election or nomination at least a majority of that board or equivalent
governing body or (iii) whose election or nomination to that board or
other equivalent governing body was approved by individuals referred to in
clauses (i) and (ii) above constituting at the time of such election
or nomination at least a majority of that board or equivalent governing
body.   For purposes of this definition, “Permitted
Holder” means any of the following: (A) any Person that is the “beneficial
owner” (as referred to above) of an Equity Interest in the Borrower on the date
hereof, (B) any such Person’s estate, spouse and lineal descendants and
the legal representative of any of the foregoing, (C) the trustees of any
bona fide trusts of which any of the foregoing are the sole beneficiaries and
grantors, and (D) any corporation, limited partnership, limited liability
company, or similar entity, all of the Voting Securities of which is owned by
any of the foregoing.

 

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

 

“Collateral”
means (a) all “Collateral”, “Pledged Collateral” and “Mortgaged Properties”
(as defined in each of the Mortgages, the Security Agreements, and the Pledge
Agreement, as applicable) or similar terms used in the Security Instruments,
and (b) all amounts contained in the Borrower’s and its Subsidiaries’ bank
accounts.

 

“Commitment” means
the amount set opposite such Lender’s name on the Schedule II hereof as its
Commitment, or if such Lender has entered into any Assignment and Acceptance,
as set forth for such Lender as its Commitment in the Register maintained by
the Administrative Agent pursuant to Section 9.06(c), or if such Lender
has increased its Commitment under Section 2.16 below, as set forth in the
agreement increasing such Commitment or joinder agreement, as applicable, as
such amount may be reduced, increased or terminated pursuant to Section 2.04,
2.16 or Article VII or otherwise under this Agreement.

 

“Compliance Certificate”
means a compliance certificate in the form of the attached Exhibit B
signed by a Responsible Officer of the Borrower.

 

“Consolidated Net Income”
means, with respect to the Borrower and its consolidated Subsidiaries, for any
period, the net income for such period after taxes, as determined in accordance
with GAAP, excluding, however, (a) extraordinary items, including (i) any
net non-cash gain or loss during such period arising from the sale, exchange,
retirement or other disposition of capital assets (such term to include all
fixed assets and all securities) other than in the ordinary course of business,
and (ii) any write-up or write-down of assets and (b) the cumulative effect
of any change in GAAP.

 

3

 

“Control Percentage”
means, with respect to any Person, the percentage of the outstanding Equity
Interest (including any options, warrants or similar rights to purchase such Equity
Interest) of such Person having ordinary voting power which gives the direct or
indirect holder of such Equity Interest the power to elect a majority of the
board of directors (or other applicable governing body) of such Person.

 

“Controlled Group” means
all members of a controlled group of corporations and all businesses (whether
or not incorporated) under common control which, together with the Borrower,
are treated as a single employer under Section 414 of the Code.

 

“Convert,” “Conversion,”
and “Converted” each refers to a conversion of Advances of one Type into
Advances of another Type pursuant to Section 2.03(b).

 

“Credit Extensions”
means an Advance made by any Lender.

 

“Debt,” for any
Person, means without duplication:

 

(a)                                  indebtedness of such Person for borrowed
money;

 

(b)                                 obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments;

 

(c)                                  obligations of such Person to pay the
deferred purchase price of Property or services (including, without limitation,
obligations that are non-recourse to the credit of such Person but are secured
by the assets of such Person, but excluding trade accounts payable);

 

(d)                                 obligations of such Person as lessee
under Capital Leases and obligations of such Person in respect of synthetic
leases;

 

(e)                                  obligations of such Person under letters
of credit and agreements relating to the issuance of letters of credit or
acceptance financing

 

(f)                                    obligations of such Person under any
Hedge Contract;

 

(g)                                 obligations of such Person owing in respect
of redeemable preferred stock or other preferred Equity Interest of such
Person;

 

(h)                                 any obligations of such Person owing in
connection with any volumetric or production prepayments;

 

(i)                                     obligations of such Person under direct
or indirect guaranties in respect of, and obligations (contingent or otherwise)
of such Person to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, indebtedness or obligations of others of
the kinds referred to in clauses (a) through (h) above;

 

(j)                                     indebtedness or obligations of others of
the kinds referred to in clauses (a) through (i) above
secured by any Lien on or in respect of any Property of such Person; and

 

4

 

(k)                                  all liabilities of such Person in respect
of unfunded vested benefits under any Plan.

 

“Debt Issuance” means
the issuance by the Borrower of Debt in the form of convertible notes.

 

“Debt Issuance Proceeds”
means, with respect to any Debt Issuance, all cash and cash equivalent
investments received by the Borrower from such Debt Issuance after payment of,
or provision for, all underwriter fees and expenses, SEC and blue sky fees,
printing costs, fees and expenses of accountants, lawyers and other
professional advisors, brokerage commissions and other out-of-pocket fees and
expenses actually incurred in connection with such Debt Issuance.

 

“Default” means (a) an
Event of Default or (b) any event or condition which with notice or lapse
of time or both would become an Event of Default.

 

“Dollars” and “$”
means lawful money of the United States of America.

 

“EBITDA” means, for
any period, without duplication, (a) Consolidated Net Income for such
period plus (b) to the extent deducted in determining Consolidated
Net Income, Interest Expense, taxes, depreciation, amortization, depletion and
other non-cash charges for such period (including any provision for the
reduction in the carrying value of assets recorded in accordance with GAAP and
including non-cash charges resulting from the requirements of SFAS 133 or 143)
for such period minus (c) all non-cash items of income which were
included in determining such Consolidated Net Income (including non-cash income
resulting from the requirements of SFAS 133 or 143).

 

“Eligible Assignee” means
(a) any Lender, (b) any Subsidiary or Affiliate of a Lender, and (c) any
commercial bank or other financial institution (i) approved by the
Administrative Agent in its sole discretion, and (ii) unless an Event of
Default has occurred and is continuing, reasonably acceptable to the Borrower.

 

“Engineering Report”
means either an Independent Engineering Report or an Internal Engineering
Report.

 

“Environment” or “Environmental”
shall have the meanings set forth in 42 U.S.C. 
9601(8) (1988).

 

“Environmental Claim”
means any third party (including governmental agencies and employees) action,
lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent
agreement or notice of potential or actual responsibility or violation
(including claims or proceedings under the Occupational Safety and Health Acts
or similar laws or requirements relating to health or safety of employees)
which seeks to impose liability under any Environmental Law.

 

“Environmental Law”
means, as to the Borrower or its Subsidiaries, all Legal Requirements or common
law theories applicable to the Borrower or its Subsidiaries arising from,
relating to, or in connection with the Environment, health, or safety,
including without limitation CERCLA, relating to (a) pollution, contamination,
injury, destruction, loss, protection, 

 

5

 

cleanup,
reclamation or restoration of the air, surface water, groundwater, land surface
or subsurface strata, or other natural resources; (b) solid, gaseous or
liquid waste generation, treatment, processing, recycling, reclamation,
cleanup, storage, disposal or transportation; (c) exposure to pollutants,
contaminants, hazardous, or toxic substances, materials or wastes; (d) the
safety or health of employees; or (e) the manufacture, processing,
handling, transportation, distribution in commerce, use, storage or disposal of
hazardous or toxic substances, materials or wastes.

 

“Environmental Permit”
means any permit, license, order, approval, registration or other authorization
under Environmental Law.

 

“Equity Interest”
means with respect to any Person, any shares, interests, participation, or
other equivalents (however designated) of corporate stock, membership interests
or partnership interests (or any other ownership interests) of such Person.

 

“Equity Issuance”
means any issuance of equity securities or any other Equity Interests
(including any preferred equity securities) by the Borrower or any of its
Subsidiaries other than equity securities issued (i) to the Borrower or
one of its Subsidiaries, (ii) pursuant to employee or director and officer
stock option plans in the ordinary course of business, and (iii) the
conversion of previously issued preferred, convertible Equity Interests or
convertible notes to the extent such Equity Interests and notes were issued in
compliance with the terms hereof.

 

“Equity Issuance Proceeds”
means, with respect to any Equity Issuance, all cash and cash equivalent
investments received by the Borrower or any of its Subsidiaries from such
Equity Issuance after payment of, or provision for, all underwriter fees and
expenses, SEC and blue sky fees, printing costs, fees and expenses of
accountants, lawyers and other professional advisors, brokerage commissions and
other out-of-pocket fees and expenses actually incurred in connection with such
Equity Issuance.

 

“ERISA” means the
Employee Retirement Income Security Act of 1974, as amended from time to time.

 

“Eurocurrency Liabilities”
has the meaning assigned to that term in Regulation D of the Federal
Reserve Board (or any successor), as in effect from time to time.

 

“Eurodollar Rate”
means, for the Interest Period for each Eurodollar Rate Advance comprising the
same Borrowing, the interest rate per annum (rounded upward to the nearest
whole multiple of 1/100 of 1% per annum) set forth on the applicable Telerate Page as
the London Interbank Offered Rate, for deposits in Dollars at 11:00 a.m.  (London, England time) two Business Days
before the first day of such Interest Period and for a period equal to such
Interest Period; provided that, if no such quotation appears on the
applicable Telerate Page, the Eurodollar Rate shall be an interest rate per
annum equal to the rate per annum at which deposits in Dollars are offered by
the principal office of Union Bank of California, N.A.  in London, England to prime banks in the
London interbank market at 11:00 a.m. 
(London, England time) two Business Days before the first day of such
Interest Period in an amount substantially equal to the Eurodollar Rate Advance
to be maintained by the Lender that is the 

 

6

 

Administrative
Agent in respect of such Borrowing and for a period equal to such Interest
Period.

 

“Eurodollar Rate Advance”
means an Advance which bears interest as provided in Section 2.09(b).

 

“Eurodollar Rate Reserve
Percentage” of any Lender for the Interest Period for any Eurodollar Rate
Advance means the reserve percentage applicable during such Interest Period (or
if more than one such percentage shall be so applicable, the daily average of
such percentages for those days in such Interest Period during which any such
percentage shall be so applicable) under regulations issued from time to time
by the Federal Reserve Board for determining the maximum reserve requirement
(including, without limitation, any emergency, supplemental, or other marginal
reserve requirement) for such Lender with respect to liabilities or assets
consisting of or including Eurocurrency Liabilities having a term equal to such
Interest Period.

 

“Event of Default”
has the meaning specified in Section 7.01.

 

“Federal Funds Rate”
means, for any period, a fluctuating interest rate per annum equal for each day
during such period to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for any such day on such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.

 

“Federal Reserve Board”
means the Board of Governors of the Federal Reserve System or any of its
successors.

 

“Financial Statements”
means the financial statements included in the Form 10-K filed by the
Borrower with the SEC on September 11, 2007, including the audited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries as
of fiscal year ended June 30, 2007, and the related audited consolidated
statements of income, cash flow, and retained earnings of the Borrower and its
consolidated Subsidiaries for the fiscal year then ended, copies of which have
been delivered to the Administrative Agent and the Lenders.

 

“Fire Litigation”
means those certain lawsuits and claims now pending or hereafter filed against
Borrower or any of its Subsidiaries related to or arising from fires beginning
on March 12, 2006 in the Texas panhandle.

 

“GAAP” means United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent with the requirements of Section 1.03.

 

“Governmental Authority”
means, as to any Person in connection with any subject, any foreign, national,
state or provincial governmental authority, or any political subdivision of any
state thereof, or any agency, department, commission, board, authority or
instrumentality, bureau or court, in each case having jurisdiction over such
Person or such Person’s Property in connection with such subject.

 

7

 

“Guarantor” means
each Subsidiary of the Borrower executing a Guaranty.

 

“Guaranty” means a
Guaranty in substantially the form of the attached Exhibit C and executed
by a Guarantor, and “Guaranties” shall mean all such guaranties
collectively.

 

“Hazardous Substance”
means the substances identified as such pursuant to CERCLA and those regulated
under any other Environmental Law, including without limitation pollutants,
contaminants, petroleum, petroleum products, radionuclides, radioactive
materials, and medical and infectious waste.

 

“Hazardous Waste”
means the substances regulated as such pursuant to any Environmental Law.

 

“Hedge Contract”
means (a) any and all rate swap transactions, basis swaps, credit
derivative transactions, forward rate transactions, puts, commodity swaps,
commodity options, forward commodity contracts, equity or equity index swaps or
options, bond or bond price or bond index swaps or options or forward bond or
forward bond price or forward bond index transactions, interest rate options,
forward foreign exchange transactions, cap transactions, floor transactions,
collar transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, spot contracts, or any other similar
transactions or any combination of any of the foregoing (including any options
to enter into any of the foregoing), whether or not any such transaction is
governed by or subject to any master agreement, and (b) any and all
transactions of any kind, and the related confirmations, which are subject to
the terms and conditions of, or governed by, any form of master agreement
published by the International Swaps and Derivatives Association, Inc.,
any International Foreign Exchange Master Agreement, or any other master
agreement (any such master agreement, together with any related schedules, a “Master
Agreement”), including any such obligations or liabilities under any Master
Agreement; provided that, a “Hedge Contract” shall not include any “Master
Agreement” that provides solely for the sale by the Borrower or its
Subsidiaries of physical Hydrocarbons in exchange for cash in the ordinary
course of its business.

 

“Hydrocarbon Hedge
Agreement” means a Hedge Contract which is intended to reduce or eliminate
the risk of fluctuations in the price of Hydrocarbons.

 

“Hydrocarbons” means
oil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline,
condensate, distillate, and all other liquid and gaseous hydrocarbons produced
or to be produced in conjunction therewith from a well bore and all products,
by-products, and other substances derived therefrom or the processing thereof,
and all other minerals and substances produced in conjunction with such
substances, including, but not limited to, sulfur, geothermal steam, water,
carbon dioxide, helium, and any and all minerals, ores, or substances of value
and the products and proceeds therefrom.

 

“Independent Engineer”
means (a) Forest Garb & Associates, (b) Miller and Lents,
Ltd. or (c) any other engineering firm acceptable to the Administrative
Agent.

 

“Independent Engineering
Report” means a report, in form and substance satisfactory to the
Administrative Agent and each of the Lenders, prepared by an Independent
Engineer, addressed to the Administrative Agent and the Lenders with respect to
the Oil and Gas Properties 

 

8

 

owned
by the Borrower or its Subsidiaries (or to be acquired by the Borrower or any
of its Subsidiaries, as applicable) which are or are to be included in the
Borrowing Base, which report shall (a) specify the location, quantity, and
type of the estimated Proven Reserves attributable to such Oil and Gas
Properties, (b) contain a projection of the rate of production of such Oil
and Gas Properties, (c) contain an estimate of the net operating revenues
to be derived from the production and sale of Hydrocarbons from such Proven
Reserves based on product price and cost escalation assumptions specified by
the Administrative Agent and the Lenders, and (d) contain such other
information as is customarily obtained from and provided in such reports or is
otherwise reasonably requested by the Administrative Agent or any Lender.

 

“Interest Expense”
means, for the Borrower and its consolidated Subsidiaries for any period, total
interest, letter of credit fees, and other fees and expenses incurred in connection
with any Debt for such period, whether paid or accrued, including, without
limitation, (i) all commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers’ acceptance financing, imputed
interest under Capital Leases, and net costs under Interest Hedge Agreements,
all as determined in conformity with GAAP, and (ii) all interests,
dividends, distributions, or other payments made in respect of preferred Equity
Interests or Debt Issuances; but excluding (A) dividends payable solely in
Equity Interests of the Borrower made in respect of preferred Equity Interests
and (B) the expensing of deferred amortized costs pertaining to the
payment in full of the Subordinated Debt and pertaining to the Obligations.

 

“Interest Hedge Agreement”
means a Hedge Contract between the Borrower and one or more financial
institutions providing for the exchange of nominal interest obligations between
the Borrower and such financial institution or the cap of the interest rate on
any Debt of the Borrower.

 

“Interest Period”
means, for each Eurodollar Rate Advance comprising part of the same Borrowing,
the period commencing on the date of such Eurodollar Rate Advance or the date
of the Conversion of any Reference Rate Advance into a Eurodollar Rate Advance
and ending on the last day of the period selected by the Borrower pursuant to
the provisions below and Section 2.03 and, thereafter, each subsequent
period commencing on the last day of the immediately preceding Interest Period
and ending on the last day of the period selected by the Borrower pursuant to
the provisions below and Section 2.03. 
The duration of each such Interest Period shall be three months; provided,
however, that:

 

(a)                                  the Borrower may not select any Interest
Period which ends after the Maturity Date;

 

(b)                                 Interest Periods commencing on the same
date for Advances comprising part of the same Borrowing shall be of the same
duration;

 

(c)                                  whenever the last day of any Interest
Period would otherwise occur on a day other than a Business Day, the last day
of such Interest Period shall be extended to occur on the next succeeding
Business Day, provided that if such extension would cause the last day
of such Interest Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding Business Day; and

 

9

 

(d)                                 any Interest Period which begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month in which it
would have ended if there were a numerically corresponding day in such calendar
month.

 

“Interim
Financial Statements” means the financial statements included in the Form 10-Q
filed by the Borrower with the SEC on February 8, 2008 including the
unaudited consolidated balance sheet of the Borrower and its consolidated
Subsidiaries dated December 31, 2007, and the related unaudited
consolidated statements of income, cash flow, and retained earnings of the
Borrower and its consolidated Subsidiaries for the three months then ended,
copies of which have been delivered to the Administrative Agent and the
Lenders.

 

“Internal Engineering
Report” means a report, in form and substance satisfactory to the
Administrative Agent and each Lender, prepared by the Borrower and certified by
a Responsible Officer of the Borrower, addressed to the Administrative Agent
and the Lenders with respect to the Oil and Gas Properties owned by the
Borrower or any of its Subsidiaries (or to be acquired by the Borrower or any
of its Subsidiaries, as applicable) which are or are to be included in the
Borrowing Base, which report shall (a) specify the location, quantity, and
type of the estimated Proven Reserves attributable to such Oil and Gas
Properties, (b) contain a projection of the rate of production of such Oil
and Gas Properties, (c) contain an estimate of the net operating revenues
to be derived from the production and sale of Hydrocarbons from such Proven
Reserves based on product price and cost escalation assumptions specified by
the Administrative Agent and the 
Lenders, and (d) contain such other information as is customarily
obtained from and provided in such reports or is otherwise reasonably requested
by the Administrative Agent or any Lender.

 

“Junior Capital Issuance”
means either (a) an Equity Issuance permitted under Section 6.22 or (b) a
Debt Issuance.

 

“Leases” means all
oil and gas leases, oil, gas and mineral leases, oil, gas and casinghead gas
leases or any other instruments, agreements, or conveyances under and pursuant
to which the owner thereof has or obtains the right to enter upon lands and
explore for, drill, and develop such lands for the production of Hydrocarbons.

 

“Legal Requirement”
means, as to any Person, any law, statute, ordinance, decree, requirement,
order, judgment, rule, regulation (or official interpretation of any of the
foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, including, but not limited to, Regulations D, T,
U, and X, which is applicable to such Person.

 

“Lenders” means the
lenders listed on the signature pages of this Agreement and each Eligible
Assignee that shall become a party to this Agreement pursuant to Section 9.06.

 

“Lending
Office” means, as to any Lender, the office or offices of such Lender
described as such in such Lender’s administrative questionnaire requested by
the Administrative Agent, or such other office or offices as a Lender may from
time to time notify the Borrower and the Administrative Agent.

 

10

 

“Leverage Ratio”
means, as of the end of any fiscal quarter, the ratio of (a) the
consolidated Debt of the Borrower as of such fiscal quarter end to (b) the
consolidated EBITDA of the Borrower for the four fiscal quarter period then
ended.

 

“Lien” means any
mortgage, lien, pledge, assignment, charge, deed of trust, security interest,
hypothecation, preference, deposit arrangement or encumbrance (or other type of
arrangement having the practical effect of the foregoing) to secure or provide
for the payment of any obligation of any Person, whether arising by contract,
operation of law, or otherwise (including, without limitation, the interest of
a vendor or lessor under any conditional sale agreement, synthetic lease,
Capital Lease, or other title retention agreement).

 

“Liquid
Investments” means:

 

(a)           direct obligations of, or obligations
the principal of and interest on which are unconditionally guaranteed by, the
United States maturing within 180 days from the date of any acquisition
thereof;

 

(b)           (i) negotiable or nonnegotiable
certificates of deposit, time deposits, or other similar banking arrangements
maturing within 180 days from the date of acquisition thereof (“bank debt
securities”), issued by (A) any Lender or any Senior Lender (or any
Affiliate of any Lender or any Senior Lender) or (B) any other bank or
trust company so long as such certificate of deposit is pledged to secure the
Borrower’s or any Subsidiaries’ ordinary course of business bonding
requirements, or any other bank or trust company which has primary capital of
not less than $500,000,000, if at the time of deposit or purchase, such bank
debt securities are rated not less than “AA” (or the then equivalent) by
the rating service of Standard & Poor’s Ratings Group or of Moody’s
Investors Service, Inc., and (ii) commercial paper issued by (A) any
Lender or any Senior Lender (or any Affiliate of any Lender or any Senior
Lender) or (B) any other Person if at the time of purchase such commercial
paper is rated not less than “A-1” (or the then equivalent) by the rating
service of Standard & Poor’s Ratings Group or not less than “P-1” (or
the then equivalent) by the rating service of Moody’s Investors Service, Inc.,
or upon the discontinuance of both of such services, such other nationally
recognized rating service or services, as the case may be, as shall be selected
by the Borrower with the consent of the Majority Lenders;

 

(c)           deposits in money market funds
investing exclusively in investments described in clauses (a) and (b) above;

 

(d)           repurchase agreements relating to
investments described in clauses (a) and (b) above with a market
value at least equal to the consideration paid in connection therewith, with
any Person who regularly engages in the business of entering into repurchase
agreements and has a combined capital surplus and undivided profit of not less
than $500,000,000, if at the time of entering into such agreement the debt
securities of such Person are rated not less than “AA” (or the then equivalent)
by the rating service of Standard & Poor’s Ratings Group or of Moody’s
Investors Service, Inc.; and

 

11

 

(e)           such other instruments (within the
meaning of Article 9 of the Texas Business and Commerce Code) as the
Borrower may request and the Administrative Agent may approve in writing.

 

“Loan
Documents” means this Agreement, the Notes, the Guaranties, the Security
Instruments, the Subordination and Intercreditor Agreement, and each other
agreement, instrument, or document executed by the Borrower, any Guarantor, or
any of the Borrower’s or a Guarantor’s Subsidiaries or any of their officers at
any time in connection with this Agreement.

 

“Majority Lenders” means, (a) at any time
when there are more than two Lenders, Lenders holding at least 662/3%
of the then aggregate unpaid principal amount of the Notes held by the Lenders
at such time; provided that, if no such principal amount is then
outstanding, “Majority Lenders” shall mean Lenders having at least 662/3%
of the aggregate amount of the Commitments at such time and (b) at any
time when there are one or two Lenders, all of the Lenders.

 

“Material Adverse Change”
means (a) a material adverse change in the business, assets (including the
Oil and Gas Properties of the Borrower or any of its Subsidiaries), condition
(financial or otherwise), or results of operations of the Borrower or any of
its Subsidiaries or (b) a material adverse effect on the Borrower’s or any
Subsidiary’s ability to perform its obligations under this Agreement, any Note,
any Guaranty, or any other Loan Document.

 

“Maturity Date”
means March 17, 2011 or such later date as determined from time to
time under Section 2.15.

 

“Maximum Rate” means
the maximum nonusurious interest rate under applicable law (determined under
such laws after giving effect to any items which are required by such laws to
be construed as interest in making such determination, including without
limitation if required by such laws, certain fees and other costs).

 

“Mortgage” means each
of the Mortgages, Deeds of Trust, Security Agreements, Assignment of Liens and
Security Interests, Financing Statements and Assignments of Production or any
other mortgage or deed of trust executed by any one or more of the Borrower, a
Guarantor or any of their respective Subsidiaries in favor of the
Administrative Agent for the ratable benefit of the Secured Parties in
substantially the form of the attached Exhibit D or such other form as may
be requested by the Administrative Agent, together with any assumptions or
assignments of the obligations thereunder by the Borrower, any Guarantor or any
of their respective Subsidiaries, and “Mortgages” shall mean all of such
Mortgages collectively.

 

“Multiemployer Plan”
means a “multiemployer plan” as defined in Section 4001(a)(3) of
ERISA.

 

“Note” means a
promissory note of the Borrower payable to the order of any Lender, in
substantially the form of the attached Exhibit E, evidencing indebtedness
of the Borrower to such Lender resulting from Advances owing to such Lender.

 

“Notice of Borrowing”
means a notice of borrowing in the form of the attached Exhibit F signed
by a Responsible Officer of the Borrower.

 

12

 

“Notice of Conversion or
Continuation” means a notice of conversion or continuation in the form of
the attached Exhibit G signed by a Responsible Officer of the Borrower.

 

“NPV” means, with
respect to any Proven Reserves expected to be produced from any undivided
interests in oil and gas properties, the net present value, discounted at 10%
per annum, of the future net revenues expected to accrue to the Borrower’s or
any of its Subsidiary’s interests in such Proven Reserves (after deducting all
existing burdens) during the remaining expected economic lives of such Proven
Reserves.  Each calculation of such
expected future net revenues shall be made in accordance with the then existing
standards of the Society of Petroleum Engineers, provided that in any event (a) appropriate
deductions shall be made for severance and ad valorem taxes, and for operating
(including purchasing and injecting water), gathering, transportation and
marketing costs required for the production and sale of such reserves, and (b) the
pricing assumptions and escalations used in determining the NPV for any particular
reserves shall be the NYMEX Pricing (or any other pricing assumptions to which
the Borrower and Majority Lenders may agree). 
NPV shall be calculated hereunder in connection with each Engineering
Report, either by the Borrower, by Administrative Agent, or by the third party
engineering firm who prepares such Engineering Report; in the event of any
conflict, Administrative Agent’s calculation shall be conclusive and final,
absent manifest error.

 

“NYMEX Pricing”
means, as of any date of determination with respect to any month:

 

(i)            for
crude oil, the closing settlement price for the Light, Sweet Crude Oil futures
contract for the first nearby month, and

 

(ii)           for
natural gas, the closing settlement price for the Henry Hub Natural Gas futures
contract for the first nearby month,

 

in each case as published by
New York Mercantile Exchange (NYMEX) on its website currently located at www.nymex.com,
or any successor thereto (as such price may be corrected or revised from time
to time by the NYMEX in accordance with its rules and regulations).

 

“Obligations” means
all principal, interest, fees, reimbursements, indemnifications, and other
amounts payable by the Borrower, any Guarantor or any of their respective
Subsidiaries to the Administrative Agent, or the Lenders under the Loan
Documents.

 

“Oil and Gas Properties”
means fee mineral interests, term mineral interests, Leases, subleases,
farm-outs, royalties, overriding royalties, net profit interests, carried
interests, production payments and similar mineral interests, and all unsevered
and unextracted Hydrocarbons in, under, or attributable to such oil and gas
Properties and interests.

 

“Patriot Act” means
the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)).

 

“PBGC” means the Pension
Benefit Guaranty Corporation or any entity succeeding to any or all of its
functions under ERISA.

 

“PDP Reserves” means
Proven Reserves which are categorized as both “Developed” and “Producing” in
the definitions promulgated by the Society of Petroleum Evaluation Engineers 

 

13

 

and
the World Petroleum Congress as in effect at the time in question; “PDNP
Reserves” means Proven Reserves which are categorized as both “Developed”
and “Non-Producing” in such definitions; and “PUD Reserves” means Proved
Reserves which are categorized as “Undeveloped” in such definitions.

 

“PDNP NPV” means the
NPV attributable to all PDNP Reserves from the Oil and Gas Properties of the
Borrower and its Subsidiaries and based on an Engineering Report or other
applicable information relating to the Proven Reserves of the Borrower and its
Subsidiaries provided by Borrower.

 

“PDP Present Value”
means the NPV attributable to all PDP Reserves from the Oil and Gas Properties
of the Borrower and its Subsidiaries and based on an Engineering Report or
other applicable information relating to the Proven Reserves of the Borrower
and its Subsidiaries provided by Borrower.

 

“Permit” means any
approval, certificate of occupancy, consent, waiver, exemption, variance,
franchise, order, permit, authorization, right or license of or from any
Governmental Authority, including without limitation, an Environmental Permit.

 

“Permitted Liens”
means the Liens permitted under Section 6.01.

 

“Permitted Prior Liens”
means the Liens securing the Senior Debt and Liens permitted under paragraphs (c) through
(i) of Section 6.01.

 

“Person” means an
individual, partnership, corporation (including a business trust), joint stock
company, limited liability corporation or company, limited liability
partnership, trust, unincorporated association, joint venture or other entity,
or a government or any political subdivision or agency thereof or any trustee,
receiver, custodian or similar official.

 

“Plan” means an
employee benefit plan (other than a Multiemployer Plan) maintained for
employees of the Borrower or any member of the Controlled Group and covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code.

 

“Pledge Agreement”
means a Pledge Agreement in substantially the form of the attached Exhibit H,
executed by the Borrower or any of its Subsidiaries or any of the Guarantors.

 

“Pricing Grid” means
the pricing information and rules set forth in Schedule I.

 

“Projections”
means, as to the Borrower and for a given
period, the Borrower’s forecasted consolidating balance sheets, profit
and loss statements, and cash flow statements,
and including therein projections for anticipated income, revenues,
expenses, taxes, EBITDA and budgeted capital expenditures during such period, all based on good faith estimates and utilizing the
assumptions which are set forth in such Projections and prepared in accordance
with GAAP.

 

“Property” of any
Person means any property or assets (whether real, personal, or mixed, tangible
or intangible) of such Person.

 

14

 

“Proven Reserves”
means, at any particular time, the estimated quantities of Hydrocarbons which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs attributable to Oil and Gas
Properties included or to be included in the Borrowing Base under then existing
economic and operating conditions (i.e., prices and costs as of the date the
estimate is made).

 

“PUD Present Value”
means the NPV attributable to all PUD Reserves from the Oil and Gas Properties
of the Borrower and its Subsidiaries and based on an Engineering Report or
other applicable information relating to the Proven Reserves of the Borrower
and its Subsidiaries provided by Borrower.

 

“Pro Rata Share”
means, with respect to any Lender, the ratio (expressed as a percentage) of
aggregate Commitments of such Lender to the aggregate Commitments of all the
Lenders (or if such Commitments have been terminated or cancelled, the ratio
(expressed as a percentage) of outstanding Advances owing to such Lender to the
aggregate outstanding Advances owing to all such Lenders.

 

“Reference Rate”
means a fluctuating interest rate per annum as shall be in effect from time to
time equal to the rate of interest publicly announced by Union Bank of
California, N.A., as its reference rate, whether or not the Borrower has notice
thereof.

 

“Reference Rate Advance”
means an Advance which bears interest as provided in Section 2.09(a).

 

“Register” has the
meaning set forth in paragraph (c) of Section 9.06.

 

“Regulations D, T, U, and
X” mean Regulations D, T, U, and X of the Federal Reserve Board, as the
same is from time to time in effect, and all official rulings and
interpretations thereunder or thereof.

 

“Release” shall have
the meaning set forth in CERCLA or under any other Environmental Law.

 

“Response” shall have
the meaning set forth in CERCLA or under any other Environmental Law.

 

“Responsible Officer”
means (a) with respect to any Person that is a corporation, such Person’s
Chief Executive Officer, President, Chief Financial Officer, or Vice President,
(b) with respect to any Person that is a limited liability company, a
manager or the Responsible Officer of such Person’s managing member or manager,
and (c) with respect to any Person that is a general partnership or a
limited liability partnership, the Responsible Officer of such Person’s general
partner or partners.

 

“Restricted Payment”
means, with respect to any Person, (a) any direct or indirect dividend or
distribution (whether in cash, securities or other Property) or any direct or
indirect payment of any kind or character (whether in cash, securities or other
Property) in consideration for or otherwise in connection with any retirement,
purchase, redemption or other acquisition of any Equity Interest of such
Person, or any options, warrants or rights to purchase or acquire any 

 

15

 

such
Equity Interest of such Person or (b) principal or interest payments (in
cash, Property or otherwise) on,  or
redemptions of, subordinated debt of such Person; provided that the term
“Restricted Payment” shall not include any dividend or distribution payable solely
in Equity Interests of the Borrower or warrants, options or other rights to
purchase such Equity Interests.

 

“SEC” means the
United States Securities and Exchange Commission.

 

“Secured Parties”
means the Administrative Agent and the Lenders.

 

“Security Agreements”
means the Security Agreements, each in substantially the form of the attached Exhibit I,
executed by the Borrower, any of its Subsidiaries, or any of the Guarantors.

 

“Security Instruments”
means, collectively, (a) the Mortgages, (b) the Transfer Letters, (c) the
Pledge Agreements, (d) the Security Agreements, (e) each other
agreement, instrument or document executed at any time in connection with the
Pledge Agreements, the Security Agreements, or the Mortgages, and (f) each
other agreement, instrument or document executed at any time in connection with
securing the Obligations.

 

“Senior Administrative
Agent” means Union Bank of California, N.A., in its capacity as agent under
the Senior Credit Agreement, and any successor agent pursuant thereto.

 

“Senior Credit Agreement”
means the Credit Agreement dated as of November 29, 2005 among the
Borrower, the Senior Administrative Agent, and the Senior Lenders, as
heretofore amended and as hereafter amended, modified, restated or supplemented
in accordance with the terms of the Subordination and Intercreditor Agreement.

 

“Senior Debt” means
the “Obligations” as defined in the Senior Credit Agreement as in effect on the
date hereof of as modified in accordance with the Subordination and
Intercreditor Agreement.

 

“Senior Lenders”
means the lenders from time to time parties to the Senior Credit Agreement.

 

“Senior Loan Documents”
means the Senior Credit Agreement, the promissory notes executed and delivered
pursuant to the Senior Credit Agreement, all agreements, instruments, or
documents executed at any time in connection with securing the Senior Debt, and
each other agreement, instrument, or document executed by the Borrower or any
of its Subsidiaries or any of their officers in connection with the Senior Credit
Agreement.

 

“Solvent” means, with
respect to any Person as of the date of any determination, that on such date (a) the
fair value of the Property of such Person (both at fair valuation and at
present fair saleable value) is greater than the total liabilities, including
contingent liabilities, of such Person, (b) the present fair saleable
value of the assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations, and
other commitments as they mature in the normal course of business, (d) such
Person does not intend to, and does not believe that it will, incur debts or 

 

16

 

liabilities
beyond such Person’s ability to pay as such debts and liabilities mature, and (e) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person’s Property would constitute
unreasonably small capital after giving due consideration to current and
anticipated future capital requirements and current and anticipated future
business conduct and the prevailing practice in the industry in which such
Person is engaged.  In computing the
amount of contingent liabilities at any time, such liabilities shall be
computed at the amount which, in light of the facts and circumstances existing
at such time, represents the amount that can reasonably be expected to become
an actual or matured liability.

 

“Square
One” means Square One Energy, Inc., a Texas corporation and a wholly
owned Subsidiary of the Borrower.

 

“Subordination and
Intercreditor Agreement” means that certain Subordination and Intercreditor
Agreement, which shall be in a form acceptable to the Administrative Agent and
the Lenders, dated as of the date hereof among the Administrative Agent, the
Borrower, the Guarantors, the Lenders, the Senior Agent and the Senior Lenders.

 

“Subsidiary” means,
with respect to any Person (the “parent”) at any date, any other Person
the accounts of which would be consolidated with those of the parent in the
parent’s consolidated financial statements if such financial statements were
prepared in accordance with GAAP as of such date, as well as any Person, a
majority of whose outstanding Voting Securities (other than directors’
qualifying shares) shall at any time be owned by such parent or one or more
Subsidiaries of such parent.  Unless otherwise specified,
all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a
Subsidiary or Subsidiaries of the Borrower; provided that Tri-Flow shall not be considered a Subsidiary of the
Borrower or any Guarantor.

 

“Termination Event”
means (a) a Reportable Event described in Section 4043 of ERISA and
the regulations issued thereunder (other than a Reportable Event not subject to
the provision for 30-day notice to the PBGC under such regulations), (b) the
withdrawal of the Borrower or any of its Affiliates 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,
or (e) any other event or condition which constitutes grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan.

 

“Total Present Value”
means an amount, based on the most recent Engineering Report or other
applicable information provided by Borrower as of the applicable determination
date, equal to the sum of (i) 100% of the PDP NPV plus (ii) 100% of
the PDNP NPV plus (iii) 100% of the PUD NPV; provided that, Total Present
Value will be limited to the extent that the amount determined under clause (i) shall
always constitute at least 60% of the Total Present Value.

 

“Transfer Letters”
means, collectively, the letters in lieu of transfer orders in substantially
the form of the attached Exhibit J and executed by the Borrower, any
Guarantor or any of their respective Subsidiaries executing a Mortgage.

 

17

 

“Tri-Flow” means
Tri-Flow, Inc., an Oklahoma corporation.

 

“Type” has the
meaning set forth in Section 1.04.

 

“Voting Securities”
means (a) with respect to any corporation (including any unlimited
liability company), capital stock of such corporation having general voting
power under ordinary circumstances to elect directors of such corporation
(irrespective of whether at the time stock of any other class or classes shall
have or might have special voting power or rights by reason of the happening of
any contingency), (b) with respect to any partnership, any partnership
interest or other ownership interest having general voting power to elect the
general partner or other management of the partnership or other Person, and (c) with
respect to any limited liability company, membership certificates or interests
having general voting power under ordinary circumstances to elect managers of
such limited liability company.

 

Section 1.02           Computation of Time Periods.  In this Agreement, with respect to the computation
of periods of time from a specified date to a later specified date, the word “from”
means “from and including” and the words “to” and “until” each means “to but
excluding”.

 

Section 1.03           Accounting Terms; Changes in GAAP.  Except as otherwise expressly provided
herein, all accounting terms used herein shall be interpreted, and all
financial statements and certificates and reports as to financial matters
required to be delivered to the Lenders hereunder shall (unless otherwise
disclosed to the Lenders in writing at the time of delivery thereof) be
prepared, in accordance with GAAP applied on a basis consistent with those used
in the preparation of the latest financial statements furnished to the Lenders
hereunder (which prior to the delivery of the first financial statements under Section 5.06
hereof, shall mean the Financial Statements and the Interim Financial
Statements).  All calculations made for
the purposes of determining compliance with this Agreement shall (except as
otherwise expressly provided herein) be made by application of GAAP applied on
a basis consistent with those used in the preparation of the annual or
quarterly financial statements furnished to the Lenders pursuant to Section 5.06
hereof most recently delivered prior to or concurrently with such calculations
(or, prior to the delivery of the first financial statements under Section 5.06
hereof, used in the preparation of the Financial Statements and the Interim
Financial Statements).  In addition, all
calculations and defined accounting terms used herein shall, unless expressly
provided otherwise, when referring to any Person, refer to such Person on a
consolidated basis and mean such Person and its consolidated subsidiaries.

 

Section 1.04           Types of Advances.  Advances are distinguished by “Type.”  The “Type” of an Advance refers to the
determination whether such Advance is a Eurodollar Rate Advance or Reference
Rate Advance.

 

Section 1.05           Miscellaneous.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Agreement,
unless otherwise specified.  All
references to instruments, documents, contracts, and agreements are references
to such instruments, documents, contracts, and agreements as the same may be
amended, supplemented, and otherwise modified from time to time, unless
otherwise specified.  The words “hereof”,
“herein”, and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.  

 

18

 

The term “including”
means “including, without limitation,”. 
Paragraph headings have been inserted in this Agreement as a matter of
convenience for reference only and it is agreed that such paragraph headings
are not a part of this Agreement and shall not be used in the interpretation of
any provision of this Agreement.

 

ARTICLE
II

 

CREDIT
FACILITIES

 

Section 2.01     Commitment for Advances.

 

(a)           Advances.  Each Lender severally agrees, on the terms
and conditions set forth in this Agreement, to make a single advance term loan
within one business day of the Effective Date on a non-revolving basis to the
Borrower in an amount equal to such Lender’s Commitment.  Any Advances which have been prepaid or
repaid may not be reborrowed.

 

(b)           Advances upon Increase in
Commitments.  Each Lender that
increases its Commitment under Section 2.16 (including any new Lender that
joins this Agreement as a Lender pursuant to a joinder agreement as provided in
Section 2.16) severally agrees, on the terms and conditions set forth in
this Agreement, to make a single advance term loan on the Increase Effective
Date on a non-revolving basis to the Borrower in an amount equal to its
unfunded Commitment on such Increase Effective Date (after giving effect to
such increase).  Any Advances which have
been prepaid or repaid may not be reborrowed.

 

(c)           Notes.  The indebtedness of the Borrower to each
Lender resulting from the Advance owing to such Lender shall be evidenced by a
Note of the Borrower payable to the order of such Lender.

 

Section 2.02     [Reserved].

 

Section 2.03     Method of Borrowing.

 

(a)           Notice.  Each Borrowing shall be made pursuant
to a Notice of Borrowing (or by telephone notice promptly confirmed in writing
by a Notice of Borrowing), given not later than 10:00 a.m.  (Dallas, Texas time) (i) on the third
Business Day before the date of the proposed Borrowing, in the case of a
Borrowing comprised of Eurodollar Rate Advances (other than the initial
Borrowing to be made on the Effective Date) or (ii) on the Business Day of
the proposed Borrowing, in the case of a Borrowing comprised of Reference Rate
Advances (or Eurodollar Rate Advances in the case of the Borrowing to be made
on the Effective Date), by the Borrower to the Administrative Agent, which
shall in turn give to each Lender prompt notice of such proposed Borrowing by
telecopier or telex.  Each Notice of a
Borrowing shall be given by telecopier or telex, confirmed immediately in
writing, specifying the information required therein.  In the case of a proposed Borrowing comprised
of Eurodollar Rate Advances, the Administrative Agent shall promptly notify
each Lender of the applicable interest rate under Section 2.09(b).  Each Lender shall, before 12:00 p.m.  (Dallas, Texas time) on the date of such
Borrowing, make available for the account of its Lending Office to the
Administrative Agent at its address referred to in Section 9.02, or such
other location as the Administrative Agent may specify by notice to the
Lenders, in same day funds, in the case of a Borrowing, such Lender’s 

 

19

 

Pro Rata Share of such
Borrowing.  After the Administrative
Agent’s receipt of such funds and upon fulfillment of the applicable conditions
set forth in Article III, the Administrative Agent shall make such funds
available to the Borrower at its account with the Administrative Agent.

 

(b)           Conversions and Continuations.  The Borrower may elect to Convert or continue
any Borrowing under this Section 2.03 by delivering an irrevocable Notice
of Conversion or Continuation to the Administrative Agent at the Administrative
Agent’s office no later than 10:00 a.m. 
(Dallas, Texas time) (i) on the date which is at least three
Business Days in advance of the proposed Conversion or continuation date in the
case of a Conversion to or a continuation of a Borrowing comprised of
Eurodollar Rate Advances and (ii) on the Business Day of the proposed
Conversion in the case of a Conversion to a Borrowing comprised of Reference
Rate Advances.  Each such Notice of
Conversion or Continuation shall be in writing or by telex or telecopier
confirmed immediately in writing specifying the information required therein.  Promptly after receipt of a Notice of Conversion
or Continuation under this Section, the Administrative Agent shall provide each
Lender with a copy thereof and, in the case of a Conversion to or a
continuation of a Borrowing comprised of Eurodollar Rate Advances, notify each
Lender of the applicable interest rate under Section 2.09(b).

 

(c)           Certain Limitations.  Notwithstanding anything to the contrary
contained in paragraphs (a) and (b) above:

 

(i)            at no time shall there be more than
one Interest Period applicable to outstanding Eurodollar Rate Advances and the
Borrower may not select Eurodollar Rate Advances for any Borrowing at any time
that a Default has occurred and is continuing;

 

(ii)           if any Lender shall, at least one
Business Day before the date of any requested Borrowing, Conversion, or continuation,
notify the Administrative Agent that the introduction of or any change in or in
the interpretation of any law or regulation makes it unlawful, or that any
central bank or other Governmental Authority asserts that it is unlawful, for
such Lender or its Lending Office to perform its obligations under this
Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar
Rate Advances, the right of the Borrower to select Eurodollar Rate Advances
from such Lender shall be suspended until such Lender shall notify the
Administrative Agent that the circumstances causing such suspension no longer
exist, and the Advance made by such Lender in respect of such Borrowing,
Conversion, or continuation shall be a Reference Rate Advance;

 

(iii)          if the Administrative Agent is unable
to determine the Eurodollar Rate for Eurodollar Rate Advances comprising any
requested Borrowing, the right of the Borrower to select Eurodollar Rate
Advances for such Borrowing or for any subsequent Borrowing shall be suspended
until the Administrative Agent shall notify the Borrower and the Lenders that
the circumstances causing such suspension no longer exist, and each Advance
comprising such Borrowing shall be a Reference Rate Advance;

 

(iv)          if the Majority Lenders shall, at
least one Business Day before the date of any requested Borrowing, notify the
Administrative Agent that the Eurodollar Rate for Eurodollar Rate Advances
comprising such Borrowing will not adequately reflect the cost to such Lenders
of making or funding their respective Eurodollar Rate Advances, as the case may

 

20

 

be, for such Borrowing,
the right of the Borrower to select Eurodollar Rate Advances for such Borrowing
or for any subsequent Borrowing shall be suspended until the Administrative
Agent shall notify the Borrower and the Lenders that the circumstances causing
such suspension no longer exist, and each Advance comprising such Borrowing
shall be a Reference Rate Advance; and

 

(v)           if the Borrower shall fail to select
the duration or continuation of any Interest Period for any Eurodollar Rate
Advances in accordance with the provisions contained in the definition of “Interest
Period” in Section 1.01 and paragraph (b) above, the
Administrative Agent shall forthwith so notify the Borrower and the Lenders and
such Advances shall be made available to the Borrower on the date of such
Borrowing as Reference Rate Advances or, if an existing Advance, Convert into
Reference Rate Advances.

 

(d)           Notices Irrevocable.  Each Notice of Borrowing and Notice of
Conversion or Continuation shall be irrevocable and binding on the
Borrower.  In the case of any Borrowing
for which the related Notice of Borrowing specifies is to be comprised of
Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any
loss, out-of-pocket cost, or expense incurred by such Lender as a result of any
failure by the Borrower to fulfill on or before the date specified in such
Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III
including, without limitation, any loss (including any loss of anticipated
profits), cost, or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Lender to fund the
Advance to be made by such Lender as part of such Borrowing when such Advance,
as a result of such failure, is not made on such date.

 

(e)           Administrative Agent Reliance.  Unless the Administrative Agent shall have
received notice from a Lender before the date of any Borrowing that such Lender
shall not make available to the Administrative Agent such Lender’s Pro Rata
Share of a Borrowing, the Administrative Agent may assume that such Lender has
made its Pro Rata Share of such Borrowing available to the Administrative Agent
on the date of such Borrowing in accordance with paragraph (a) of
this Section 2.03 and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding
amount.  If and to the extent that such
Lender shall not have so made its Pro Rata Share of such Borrowing available to
the Administrative Agent, such Lender and the Borrower severally agree to
immediately repay to the Administrative Agent on demand such corresponding
amount, together with interest on such amount, for each day from the date such
amount is made available to the Borrower until the date such amount is repaid
to the Administrative Agent, at (i) in the case of the Borrower, the
interest rate applicable on such day to Advances comprising such Borrowing and (ii) in
the case of such Lender, the Federal Funds Rate for such day.  If such Lender shall repay to the
Administrative Agent such corresponding amount and interest as provided above,
such corresponding amount so repaid shall constitute such Lender’s Advance as
part of such Borrowing for purposes of this Agreement even though not made on
the same day as the other Advances comprising such Borrowing.

 

(f)            Lender Obligations Several.  The failure of any Lender to make the Advance
to be made by it as part of any Borrowing shall not relieve any other Lender of
its obligation, if any, to make its Advance on the date of such Borrowing.  No Lender shall be responsible for the
failure 

 

21

 

of any other Lender to
make the Advance to be made by such other Lender on the date of any Borrowing.

 

Section 2.04     Reduction of the Commitment.  Upon the making of the Advances on the
Effective Date, each Lender’s Commitment shall be reduced to $0.

 

Section 2.05     Prepayment of Advances.

 

(a)           Optional.  The Borrower may prepay the Advances, after
giving by 10:00 a.m.  (Dallas,
Texas, time): (i) in the case of Eurodollar Rate Advances, at least three
Business Days’ or (ii) in the case of Reference Rate Advances, same
Business Day’s, irrevocable prior written notice to the Administrative Agent
stating the proposed date and aggregate principal amount of such
prepayment.  If any such notice is given,
the Borrower shall prepay the Advances in whole or ratably in part in an
aggregate principal amount equal to the amount specified in such notice,
together with (i) the accrued interest to the date of such prepayment on
the principal amount prepaid, (ii) the amounts, if any, required to be
paid pursuant to Section 2.12 as a result of such prepayment being made on
such date, (iii) if such prepayment is made on or prior to the first
anniversary of the Effective Date, a prepayment premium in an amount equal to
2.00% of the principal amount being prepaid; and (iv) if such prepayment
is after the first anniversary of the Effective Date but on or prior to the
second anniversary of the Effective Date, a prepayment premium in an amount
equal to 1.00% of the principal amount being prepaid; provided, however, that
each partial prepayment shall be made in minimum amounts of $2,500,000 and in
integral multiples of $2,500,000 in excess thereof and full prepayments of any
Borrowing are permitted without restriction of amounts.

 

(b)           Mandatory.  If a Change of Control shall occur and the
Borrower has not optionally prepaid in full the outstanding principal amount of
the Advances concurrently with the consummation of such Change of Control, at
the Lenders’ option (which option may be exercised in their sole discretion)
the Borrower shall prepay the outstanding principal amount of the Advances, in
whole or in part as elected by the Lenders, together with (i) the accrued
interest to the date of such prepayment on the principal amount prepaid, (ii) the
amounts, if any, required to be paid pursuant to Section 2.12 as a result
of such prepayment being made on such date, (iii) if such Change in
Control occurs on or prior to the first anniversary of the Effective Date, a
prepayment premium in an amount equal to 2.00% of the principal amount required
to be prepaid; and (iv) if such Change in Control occurs after the first
anniversary of the Effective Date but on or prior to the second anniversary of
the Effective Date, a prepayment premium in an amount equal to 1.00% of the
principal amount required to be prepaid. 
If the Lenders require the Borrower to prepay the Advances as provided
above, the Administrative Agent shall so notify the Borrower in writing, which
notice shall specify the amount to be paid by the Borrower pursuant to this Section 2.05(b).  The Borrower shall pay all such amounts in
full within two Business Days of receipt of such notice.  The foregoing will not be deemed to be a
consent by Lenders to any Change of Control or a waiver of any Default
resulting therefrom.

 

(c)           Illegality.  If any Lender shall notify the Administrative
Agent and the Borrower that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or that any central
bank or other Governmental Authority asserts that it is unlawful for such
Lender or its Lending Office to perform its obligations under this Agreement to
maintain 

 

22

 

any Eurodollar Rate
Advances of such Lender then outstanding hereunder, (i) the Borrower shall,
no later than 10:00 a.m.  (Dallas,
Texas time) (A) if not prohibited by law, on the last day of the Interest
Period for each outstanding Eurodollar Rate Advance made by such Lender or (B) if
required by such notice, on the second Business Day following its receipt of
such notice, prepay all of the Eurodollar Rate Advances made by such Lender
then outstanding, together with accrued interest on the principal amount
prepaid to the date of such prepayment and amounts, if any, required to be paid
pursuant to Section 2.12 as a result of such prepayment being made on such
date, (ii) such Lender shall simultaneously make a Reference Rate Advance
to the Borrower on such date in an amount equal to the aggregate principal
amount of the Eurodollar Rate Advances prepaid to such Lender, and (iii) the
right of the Borrower to select Eurodollar Rate Advances from such Lender for
any subsequent Borrowing shall be suspended until such Lender gives notice
referred to above shall notify the Administrative Agent that the circumstances
causing such suspension no longer exist.

 

(d)           No Additional Right; Ratable
Prepayment.  The Borrower shall have
no right to prepay any principal amount of any Advance except as provided in
this Section 2.05, and all notices given pursuant to this Section 2.05
shall be irrevocable and binding upon the Borrower.  Each payment of any Advance pursuant to this Section 2.05
shall be made in a manner such that all Advances comprising part of the same
Borrowing are paid in whole or ratably in part.

 

Section 2.06           Repayment of Advances.  The Borrower shall repay to the
Administrative Agent for the ratable benefit of the Lenders the outstanding
principal amount of each Advance, together with any accrued interest thereon,
on the Maturity Date or such earlier date pursuant to Section 7.02 or Section 7.03.

 

Section 2.07     [Reserved].

 

Section 2.08     Fees.  The Borrower shall pay the fees as agreed to
between the Borrower and the Administrative Agent in that certain fee letter
dated the date hereof.

 

Section 2.09     Interest.

 

(a)           Rates Based on Applicable Margin.  The Borrower shall pay interest on the unpaid
principal amount of each Advance made by each Lender from the date of such
Advance until such principal amount shall be paid in full, at the following
rates per annum:

 

(i)            Reference Rate Advances.  If such Advance is a Reference Rate Advance,
a rate per annum equal at all times to the Adjusted Reference Rate in effect
from time to time plus the Applicable Margin in effect from time to
time, payable quarterly in arrears on the last day of each calendar quarter,
commencing with the calendar quarter ending March 31, 2008 and on the date
such Reference Rate Advance shall be paid.

 

(ii)           Eurodollar Rate Advances.  If such Advance is a Eurodollar Rate Advance,
a rate per annum equal at all times during the Interest Period for such Advance
to the Eurodollar Rate for such Interest Period plus the Applicable
Margin in effect from time to time, payable on the last day of such Interest
Period, and, in the case of six, nine or twelve month Interest Periods, on (i) the
day which occurs during such Interest Period three months from the first day of
such Interest Period, (ii) the day which occurs during such Interest
Period six months 

 

23

 

from the first day of
such Interest Period, and (iii) the day which occurs during such Interest
Period nine months from the first day of such Interest Period.

 

(b)           Additional Interest on Eurodollar
Rate Advances.  The Borrower shall
pay to each Lender, so long as any such Lender shall be required under
regulations of the Federal Reserve Board to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities,
additional interest on the unpaid principal amount of each Eurodollar Rate
Advance of such Lender, from the effective date of such Advance until such
principal amount is paid in full, at an interest rate per annum equal at all
times to the remainder obtained by subtracting (i) the Eurodollar Rate for
the Interest Period for such Advance from (ii) the rate obtained by
dividing such Eurodollar Rate by a percentage equal to 100% minus the
Eurodollar Rate Reserve Percentage of such Lender for such Interest Period,
payable on each date on which interest is payable on such Advance.  Such additional interest payable to any
Lender shall be determined by such Lender and notified to the Borrower through
the Administrative Agent (such notice to include the calculation of such additional
interest, which calculation shall be conclusive in the absence of manifest
error).

 

(c)           Retroactive Adjustments of
Applicable Margin.  In the event that any financial statement
or Compliance Certificate delivered pursuant to Section 5.06 is shown to
be inaccurate (regardless of whether this Agreement or the Commitments are in
effect when such inaccuracy is discovered), and such inaccuracy, if corrected,
would have led to the application of a higher Applicable Margin for any period
(an “Applicable Period”) than the Applicable Margin applied for such
Applicable Period, then (i) the Borrower shall immediately deliver to the
Administrative Agent a corrected Compliance Certificate for such Applicable
Period, (ii) the Applicable Margin shall be determined as if the higher
Applicable Margin that would have applied were applicable for such Applicable
Period (and in any event at Level 6 if the inaccuracy was the result of
dishonesty, fraud or willful misconduct), and (iii) the Borrower shall
immediately, without further action by the Administrative Agent or any Lender,
pay to the Administrative Agent for the account of the applicable Lenders, the
accrued additional interest owing as a result of such increased Applicable
Margin for such Applicable Period.  This Section 2.09(c) shall
not limit the rights of the Administrative Agent and Lenders with respect to
the default rate of interest.  The
Borrower’s obligations under this Section 2.09(c) shall survive the
termination of the Commitments and the repayment of all other Obligations
hereunder.

 

(d)           Usury Recapture.

 

(i)            If, with respect to any Lender, the
effective rate of interest contracted for under the Loan Documents, including
the stated rates of interest and fees contracted for hereunder and any other
amounts contracted for under the Loan Documents which are deemed to be
interest, at any time exceeds the Maximum Rate, then the outstanding principal
amount of the loans made by such Lender hereunder shall bear interest at a rate
which would make the effective rate of interest for such Lender under the Loan
Documents equal the Maximum Rate until the difference between the amounts which
would have been due at the stated rates and the amounts which were due at the
Maximum Rate (the “Lost Interest”) has been recaptured by such Lender.

 

(ii)           If,
when the loans made hereunder are repaid in full, the Lost Interest has not
been fully recaptured by such Lender pursuant to the preceding paragraph, then,
to the extent

 

24

 

permitted by law, for the
loans made hereunder by such Lender the interest rates charged under Section 2.09
hereunder shall be retroactively increased such that the effective rate of
interest under the Loan Documents was at the Maximum Rate since the effectiveness
of this Agreement to the extent necessary to recapture the Lost Interest not
recaptured pursuant to the preceding sentence and, to the extent allowed by
law, the Borrower shall pay to such Lender the amount of the Lost Interest
remaining to be recaptured by such Lender.

 

(iii)                               NOTWITHSTANDING THE FOREGOING OR
ANY OTHER TERM IN THIS AGREEMENT AND THE LOAN DOCUMENTS TO THE CONTRARY, IT IS
THE INTENTION OF EACH LENDER AND THE BORROWER TO CONFORM STRICTLY TO ANY
APPLICABLE USURY LAWS.  ACCORDINGLY, IF
ANY LENDER CONTRACTS FOR, CHARGES, OR RECEIVES ANY CONSIDERATION WHICH
CONSTITUTES INTEREST IN EXCESS OF THE MAXIMUM RATE, THEN ANY SUCH EXCESS SHALL
BE CANCELED AUTOMATICALLY AND, IF PREVIOUSLY PAID, SHALL AT SUCH LENDER’S
OPTION BE APPLIED TO THE OUTSTANDING AMOUNT OF THE LOANS MADE HEREUNDER BY SUCH
LENDER OR BE REFUNDED TO THE BORROWER.

 

Section 2.10                Payments and Computations.

 

(a)                                  Payment Procedures. 
The Borrower shall make each payment under this Agreement and under the
Notes not later than 10:00 a.m. 
(Dallas, Texas time) on the day when due in Dollars to the
Administrative Agent at the location referred to in the Notes (or such other
location as the Administrative Agent shall designate in writing to the Borrower)
in same day funds without deduction, setoff, or counterclaim of any kind.  The Administrative Agent shall promptly
thereafter cause to be distributed like funds relating to the payment of
principal, interest or fees ratably (other than amounts payable solely to the
Administrative Agent or a specific Lender pursuant to Section 2.08(c),
2.09(d), 2.12, 2.13, 2.14, 8.05, or 9.07, but after taking into account
payments effected pursuant to Section 9.04) in accordance with each Lender’s
Pro Rata Share to the Lenders for the account of their respective Lending
Offices, and like funds relating to the payment of any other amount payable to
any Lender to such Lender for the account of its Lending Office, in each case
to be applied in accordance with the terms of this Agreement.

 

(b)                                 Computations. 
All computations of interest based on the Reference Rate and of fees
shall be made by the Administrative Agent on the basis of a year of 365 or 366
days, as the case may be, and all computations of interest based on the
Eurodollar Rate and the Federal Funds Rate shall be made by the Administrative
Agent, on the basis of a year of 360 days, in each case for the actual number
of days (including the first day, but excluding the last day) occurring in the
period for which such interest or fees are payable.  Each determination by the Administrative
Agent of an interest rate or fee shall be conclusive and binding for all
purposes, absent manifest error.

 

(c)                                  Non-Business Day Payments. 
Whenever any payment shall be stated to be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day,
and such extension of time shall in such case be included in the computation of
payment of interest or fees, as the case may be; provided, however, that
if such extension would cause 

 

25

 

payment of interest on or
principal of Eurodollar Rate Advances to be made in the next following calendar
month, such payment shall be made on the next preceding Business Day.

 

(d)                                 Administrative Agent Reliance. 
Unless the Administrative Agent shall have received written notice from
the Borrower prior to the date on which any payment is due to the Lenders that
the Borrower shall not make such payment in full, the Administrative Agent may
assume that the Borrower has made such payment in full to the Administrative
Agent on such date and the Administrative Agent may, in reliance upon such
assumption, cause to be distributed to each Lender on such date an amount equal
to the amount then due such Lender.  If
and to the extent the Borrower shall not have so made such payment in full to
the Administrative Agent, each Lender shall repay to the Administrative Agent
forthwith on demand such amount distributed to such Lender, together with
interest, for each day from the date such amount is distributed to such Lender
until the date such Lender repays such amount to the Administrative Agent, at
the Federal Funds Rate for such day.

 

Section 2.11                Sharing of Payments, Etc. 
If any Lender shall obtain any payment (whether voluntary, involuntary,
through the exercise of any right of set-off, or otherwise) on account of the
Advances made by it in excess of its Pro Rata Share of payments on account of
the Advances obtained by all the Lenders, such Lender shall notify the Administrative
Agent and forthwith purchase from the other Lenders such participations in the
Advances made or held by them as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided,
however, that if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each Lender shall be
rescinded and such Lender shall repay to the purchasing Lender the purchase
price to the extent of such Lender’s ratable share (according to the proportion
of (a) the amount of the participation sold by such Lender to the
purchasing Lender as a result of such excess payment to (b) the total
amount of such excess payment) of such recovery, together with an amount equal
to such Lender’s ratable share (according to the proportion of (i) the
amount of such Lender’s required repayment to the purchasing Lender to (ii) the
total amount of all such required repayments to the purchasing Lender) of any
interest or other amount paid or payable by the purchasing Lender in respect of
the total amount so recovered.  The
Borrower agrees that any Lender so purchasing a participation from another
Lender pursuant to this Section 2.11 may, to the fullest extent permitted
by law, exercise all its rights of payment (including the right of set-off)
with respect to such participation as fully as if such Lender were the direct
creditor of the Borrower in the amount of such participation.

 

Section 2.12                Breakage Costs.  If (a) any
payment of principal of any Eurodollar Rate Advance is made other than on the
last day of the Interest Period for such Advance, whether as a result of any
payment pursuant to Section 2.05, the acceleration of the maturity of the
Notes pursuant to Article VII, or otherwise, or (b) the Borrower
fails to make a principal or interest payment with respect to any Eurodollar
Rate Advance on the date such payment is due and payable, the Borrower shall,
within 10 days of any written demand sent by any Lender to the Borrower through
the Administrative Agent, pay to the Administrative Agent for the account of
such Lender any amounts required to compensate such Lender for any additional
losses, out-of-pocket costs or expenses which it may reasonably incur as a
result of such payment or nonpayment, including, without limitation, any loss
(including loss of anticipated profits), cost or 

 

26

 

expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by any Lender to fund or maintain such Advance.

 

Section 2.13                Increased Costs.

 

(a)                                  Eurodollar Rate Advances. 
If, due to either (i) the introduction of or any change (other than
any change by way of imposition or increase of reserve requirements included in
the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law
or regulation or (ii) the compliance with any guideline or request from
any central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to any Lender of
agreeing to make or making, funding, or maintaining Eurodollar Rate Advances,
then the Borrower shall from time to time, upon demand by such Lender (with a
copy of such demand to the Administrative Agent), immediately pay to the
Administrative Agent for the account of such Lender additional amounts
sufficient to compensate such Lender for such increased cost.  A certificate as to the amount of such
increased cost and detailing the calculation of such cost submitted to the Borrower
and the Administrative Agent by such Lender shall be conclusive and binding for
all purposes, absent manifest error.

 

(b)                                 Capital Adequacy. 
If any Lender determines in good faith that compliance with any law or
regulation adopted or changed after the date hereof or any guideline or request
from any central bank or other Governmental Authority (whether or not having
the force of law) affects or would affect the amount of capital required or
expected to be maintained by such Lender or any corporation controlling such
Lender and that the amount of such capital is increased by or based upon the
existence of such Lender’s commitment to lend and other commitments of this
type, then, upon 30 days’ prior written notice by such Lender (with a copy of
any such demand to the Administrative Agent), the Borrower shall immediately
pay to the Administrative Agent for the account of such Lender, from time to
time as specified by such Lender, additional amounts sufficient to compensate
such Lender, in light of such circumstances, to the extent that such Lender
reasonably determines such increase in capital to be allocable to the existence
of such Lender’s commitment to lend under this Agreement.  A certificate as to such amounts and
detailing the calculation of such amounts submitted to the Borrower by such
Lender shall be conclusive and binding for all purposes, absent manifest error.

 

(c)                                  Reserved.

 

(d)                                 Mitigation.  Each Lender
claiming compensation pursuant to this Section 2.13 shall designate a
different Lending Office if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the sole discretion of such
Lender, be otherwise disadvantageous to such Lender.

 

Section 2.14                Taxes.

 

(a)                                  No Deduction for Certain Taxes. 
Any and all payments by the Borrower shall be made, in accordance with Section 2.10,
free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Lender and the
Administrative Agent, taxes imposed on its income, and franchise taxes imposed
on it, by the jurisdiction under the laws of 

 

27

 

which such Lender or the
Administrative Agent (as the case may be) is organized or any political
subdivision of the jurisdiction (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as “Taxes”) and, in the case of each Lender, Taxes by the jurisdiction of such
Lender’s Lending Office or any political subdivision of such jurisdiction.  If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable to any Lender or the
Administrative Agent, (i) the sum payable shall be increased as may be
necessary so that, after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.14), such
Lender or the Administrative Agent (as the case may be) receives an amount
equal to the sum it would have received had no such deductions been made; provided,
however, that if the Borrower’s obligation to deduct or withhold Taxes is
caused solely by such Lender’s, or the Administrative Agent’s failure to provide
the forms described in paragraph (d) of this Section 2.14 and
such Lender or the Administrative Agent could have provided such forms, no such
increase shall be required; (ii) the Borrower shall make such deductions;
and (iii) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law.

 

(b)                                 Other Taxes. 
In addition, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies which arise from any payment made or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement, the Notes, or
the other Loan Documents (hereinafter referred to as “Other Taxes”).

 

(c)                                  Indemnification.  THE BORROWER INDEMNIFIES EACH LENDER AND THE ADMINISTRATIVE AGENT FOR
THE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY
TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 2.14)
PAID BY SUCH LENDER OR THE ADMINISTRATIVE AGENT (AS THE CASE MAY BE) AND
ANY LIABILITY (INCLUDING INTEREST AND EXPENSES) ARISING THEREFROM OR WITH
RESPECT THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR
LEGALLY ASSERTED.  EACH PAYMENT REQUIRED
TO BE MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO
THE ADMINISTRATIVE AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH
INDEMNIFICATION WITHIN 30 DAYS FROM THE DATE THE BORROWER RECEIVES WRITTEN
DEMAND THEREFOR FROM THE ADMINISTRATIVE AGENT ON BEHALF OF ITSELF AS
ADMINISTRATIVE AGENT OR ANY SUCH LENDER. 
IF ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES A REFUND IN RESPECT
OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH LENDER OR
THE ADMINISTRATIVE AGENT, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE
BORROWER THE BORROWER’S SHARE OF SUCH REFUND.

 

(d)                                 Foreign Lender Withholding Exemption. 
Each Lender that is not incorporated under the laws of the United States
of America or a state thereof agrees that it shall deliver to the Borrower and
the Administrative Agent (i) two duly completed copies of United States
Internal Revenue Service Form W8-ECI or W8-BEN or successor applicable
form, as the case may be, 

 

28

 

certifying in each case
that such Lender is entitled to receive payments under this Agreement and the
Notes payable to it, without deduction or withholding of any United States
federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8
or W-9 or successor applicable form, as the case may be, to establish an
exemption from United States backup withholding tax, and (iii) any other
governmental forms which are necessary or required under an applicable tax
treaty or otherwise by law to reduce or eliminate any withholding tax, which
have been reasonably requested by the Borrower. 
Each Lender which delivers to the Borrower and the Administrative Agent
a Form W8-ECI or W8-BEN and Form W-8 or W-9 pursuant to the next
preceding sentence further undertakes to deliver to the Borrower and the
Administrative Agent two further copies of the said letter and Form W8-ECI
or W8-BEN and Form W-8 or W-9 , or successor applicable forms, or other
manner of certification, as the case may be, on or before the date that any
such letter or form expires or becomes obsolete or after the occurrence of any
event requiring a change in the most recent letter and form previously
delivered by it to the Borrower and the Administrative Agent, and such
extensions or renewals thereof as may reasonably be requested by the Borrower
and the Administrative Agent certifying in the case of a Form W8-ECI or
W8-BEN that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income
taxes.  If an event (including without
limitation any change in treaty, law or regulation) has occurred prior to the
date on which any delivery required by the preceding sentence would otherwise
be required which renders all such forms inapplicable or which would prevent
any Lender from duly completing and delivering any such letter or form with
respect to it and such Lender advises the Borrower and the Administrative Agent
that it is not capable of receiving payments without any deduction or withholding
of United States federal income tax, and in the case of a Form W-8 or W-9,
establishing an exemption from United States backup withholding tax, such
Lender shall not be required to deliver such letter or forms.  The Borrower shall withhold tax at the rate
and in the manner required by the laws of the United States with respect to
payments made to a Lender failing to timely provide the requisite Internal
Revenue Service forms.

 

Section 2.15                Extension of Maturity Date.

 

(a)                                  Requests for Extension.  The Borrower may, by notice to the
Administrative Agent (who shall promptly notify the Lenders) not earlier than
90 days and not later than 75 days prior to the Maturity Date then in effect
hereunder (the “Existing Maturity Date”), request that each Lender
extend such Lender’s Maturity Date for an additional 364 days from the Existing
Maturity Date; provided that, the Borrower may only request two such extensions
during the term of this Agreement.

 

(b)                                 Lender Elections to Extend. 
Each Lender, acting in its sole and individual discretion, shall, by
notice to the Administrative Agent given not earlier than 75 days prior to the
Existing Maturity Date and not later than the date (the “Notice Date”)
that is 45 days prior to the Existing Maturity Date, advise the Administrative
Agent whether or not such Lender agrees to such extension (and each Lender that
determines not to so extend its Maturity Date (a “Non-Extending Lender”)
shall notify the Administrative Agent of such fact promptly after such
determination (but in any event no later than the Notice Date) and any Lender
that does not so advise the Administrative Agent on or before the Notice Date
shall be deemed to be a Non-Extending Lender. 
The election of any Lender to agree to such extension shall not obligate
any other Lender to so agree.

 

29

 

(c)                                  Notification by Administrative Agent. 
The Administrative Agent shall notify the Borrower of each Lender’s
determination under this Section no later than the date 45 days prior to
the Existing Maturity Date (or, if such date is not a Business Day, on the next
preceding Business Day).

 

(d)                                 Additional Lenders. 
The Borrower shall have the right on or before the Existing Maturity
Date to replace each Non-Extending Lender with, and add as “Lenders” under this
Agreement in place thereof, one or more Eligible Assignees (each, an “Additional
Lender”) as provided in Section 9.06, each of which Additional Lenders
shall have entered into an Assignment and Acceptance pursuant to which such
Additional Lender shall, effective as of the Existing Maturity Date, have
acquired the Advances owing to the applicable Non-Extending Lender.

 

(e)                                  Minimum Extension Requirement. 
If (and only if) the total of the Advances owing to the Lenders that
have agreed so to extend their Maturity Date and the Advances owing to the
Additional Lenders shall be more than 662/3 % of the
aggregate outstanding amount of the Advances immediately prior to the proposed
extension of the Maturity Date, then, effective as of the Existing Maturity
Date, the Maturity Date of each Extending Lender and of each Additional Lender
shall be extended to the date falling 364 days after the Existing Maturity Date
(except that, if such date is not a Business Day, such Maturity Date as so
extended shall be the next preceding Business Day) and each Additional Lender
shall thereupon become a “Lender” for all purposes of this Agreement.

 

(f)                                    Conditions to Effectiveness of Extensions. 
Notwithstanding the foregoing, the extension of the Maturity Date
pursuant to this Section shall not be effective with respect to any Lender
unless:

 

(i)                                     no Default or Event of Default shall have
occurred and be continuing on the date of such extension and after giving
effect thereto;

 

(ii)                                  the representations and warranties
contained in this Agreement are true and correct, in all material respects, on
and as of the date of such extension and after giving effect thereto, as though
made on and as of such date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date); and

 

(iii)                               on the Maturity Date of each Non-Extending Lender
whose outstanding Advances were not assigned to an Additional Lender, the
Borrower shall prepay any Advances outstanding on such date which is owing to
such Non-Extending Lender (and pay any additional amounts required pursuant to Section 2.12).

 

(g)                                 Conflicting Provisions. 
This Section shall supersede any provisions in Section 2.11 or
9.01 to the contrary.

 

Section 2.16                Increase in Commitments.

 

(a)                                  Request for Increase. 
Provided there exists no Default and subject to the Subordination and
Intercreditor Agreement, upon notice to the Administrative Agent (which 

 

30

 

shall promptly notify the
Lenders), the Borrower may from time to time, request an increase in the
aggregate Commitments by an amount (for all such requests) not exceeding
$10,000,000; provided that (i) any such request for an increase shall be
in a minimum amount of $5,000,000, and (ii) the Company may make a maximum
of two such requests.  At the time of
sending such notice, the Borrower (in consultation with the Administrative
Agent) shall specify the time period within which each Lender is requested to respond
(which shall in no event be less than ten Business Days from the date of
delivery of such notice to the Lenders).

 

(b)                                 Lender Elections to Increase. 
Each Lender shall notify the Administrative Agent within such time
period whether or not it agrees to increase its Commitment and, if so, whether
by an amount equal to, greater than, or less than its Pro Rata Share of such
requested increase.  Any Lender not
responding within such time period shall be deemed to have declined to increase
its Commitment.

 

(c)                                  Notification by Administrative Agent;
Additional Lenders.  The Administrative Agent shall notify the
Borrower and each Lender of the Lenders’ responses to each request made
hereunder.  To achieve the full amount of
a requested increase and subject to the approval of the Administrative Agent,
the Borrower may also invite additional Eligible Assignees to become Lenders
pursuant to a joinder agreement in form and substance satisfactory to the
Administrative Agent and its counsel.

 

(d)                                 Effective Date and Allocations. 
If the Commitments are increased in accordance with this Section, the
Administrative Agent and the Borrower shall determine the effective date (the “Increase
Effective Date”) and the final allocation of such increase.  The Administrative Agent shall promptly
notify the Borrower and the Lenders of the final allocation of such increase
and the Increase Effective Date.

 

(e)                                  Conditions to Effectiveness of Increase. 
An increase the Commitments provided in this Section 2.16 shall
become effective on the Increase Effective Date only upon the satisfaction of
the following conditions precedent on or prior to such Increase Effective
Date:  the receipt by the Administrative
Agent of (i) an agreement in form and substance reasonably satisfactory to
the Administrative Agent signed by the Borrower, each Lender and each new
lender, setting forth its Commitments, if any, increased pursuant to this Section 2.16
and setting forth the agreement of each new lender to become a party to this
Agreement and to be bound by all the terms and provisions hereof binding upon
each Lender, and (ii) a certificate of each Guarantor and the Borrower
dated as of the Increase Effective Date (in sufficient copies for each Lender)
signed by a Responsible Officer of such Person certifying and attaching the
resolutions adopted by such Person approving or consenting to such increase,
and in the case of the Borrower, certifying that, before and after giving
effect to such increase, (A) the representations and warranties contained
in Article IV and the other Loan Documents are true and correct, in all
material respects, on and as of the Increase Effective Date, except to the
extent that such representations and warranties specifically refer to an
earlier date, in which case they are true and correct, in all material
respects, as of such earlier date, and except that for purposes of this Section 2.16,
the representations and warranties contained in subsections (b) and (c) of
Section 4.05 shall be deemed to refer to the most recent statements
furnished pursuant to clauses (a) and (b), respectively, of Section 5.06,
and (B) no Default exists.

 

31

 

(f)                                    No Commitment. 
This Section 2.16 shall not be construed to create any obligation
on the Administrative Agent or any of the Lenders to advance or to commit to
advance any credit to the Borrower or to arrange for any other Person to
advance or to commit to advance any credit to the Borrower.

 

(g)                                 Conflicting Provisions. 
This Section shall supersede any provisions in Section 2.11 or
9.01 to the contrary.

 

ARTICLE III

 

CONDITIONS OF LENDING

 

Section 3.01                Conditions Precedent to Initial Credit Extension.  The obligation
of each Lender to make its Credit Extension on the Effective Date hereunder is
subject to satisfaction of the following conditions precedent:

 

(a)                                  Documentation. 
The Administrative Agent shall have received the following duly executed
by all the parties thereto, in form and substance satisfactory to the
Administrative Agent and the Lenders, and, where applicable, in sufficient
copies for each Lender:

 

(i)                                     this Agreement, a Note payable to the
order of each Lender in the amount of its Commitment, the Guaranties, the
Pledge Agreement, the Security Agreements, and Mortgages encumbering substantially
all of the Borrower’s and its Subsidiaries’ Proven Reserves and Oil and Gas
Properties in which the Senior Administrative Agent has Lien, and each of the
other Loan Documents,  and all attached
exhibits and schedules;

 

(ii)                                  a favorable opinion of the Borrower’s,
its Subsidiaries’ and the Guarantors’ counsel dated as of the date of this
Agreement and substantially in the form of the attached Exhibit K covering
the matters discussed in such Exhibit and such other matters as any Lender
through the Administrative Agent may reasonably request;

 

(iii)                               copies, certified as of the date of this
Agreement by a Responsible Officer of the Borrower of (A) the resolutions
of the Board of Directors of the Borrower approving the Loan Documents to which
the Borrower is a party, (B) the certificate of incorporation of the
Borrower, (C) the bylaws of the Borrower and (D) all other documents
evidencing other necessary corporate action and governmental approvals, if any,
with respect to this Agreement, the Note, and the other Loan Documents;

 

(iv)                              certificates of a Responsible Officer of
the Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign this Agreement, the Notes, Notices of Borrowing,
Notices of Conversion or Continuation, and the other Loan Documents to which
the Borrower is a party;

 

(v)                                 copies, certified as of the date of this
Agreement by a Responsible Officer or the secretary or an assistant secretary
of each Guarantor of (A) the resolutions of the Board of Directors (or
other applicable governing body) of such Guarantor approving the Loan Documents
to which it is a party, (B) the articles or certificate (as applicable) of
incorporation (or organization) and bylaws of such Guarantor, and (C) all
other documents evidencing other 

 

32

 

necessary corporate
action and governmental approvals, if any, with respect to the Guaranty, the
Security Instruments, and the other Loan Documents to which such Guarantor is a
party;

 

(vi)                              a certificate of the secretary or an
assistant secretary of each Guarantor certifying the names and true signatures
of officers of such Guarantor authorized to sign the Guaranty, Security
Instruments and the other Loan Documents to which such Guarantor is a party;

 

(vii)                           a certificate dated as of the date of
this Agreement from the Responsible Officer of the Borrower stating that the
conditions in this Section 3.01 have been met;

 

(viii)                        appropriate UCC-1 Financing Statements
covering the Collateral for filing with the appropriate authorities and any
other documents, agreements or instruments necessary to create an Acceptable
Security Interest in such Collateral;

 

(ix)                                insurance certificates evidencing
insurance which meets the requirements of this Agreement and the Security
Instruments, and which is otherwise satisfactory to the Administrative Agent;

 

(x)                                   the initial Independent Engineer’s Report
dated effective as of a date acceptable to the Administrative Agent;

 

(xi)                                the Subordination and Intercreditor Agreement;
and

 

(xii)                             such other documents, governmental
certificates, agreements and lien searches as the Administrative Agent or any
Lender may reasonably request.

 

(b)                                 Payment of Fees. 
On or prior to the date of this Agreement, the Borrower shall have paid
the fees required by Section 2.08(c) and all costs and expenses that
have been invoiced and are payable pursuant to Section 9.04.

 

(c)                                  Delivery of Financial Statements. 
The Administrative Agent and the Lenders shall have received true and
correct copies of (i) the Financial Statements, (ii) the Interim
Financial Statements, (iii) Projections through June 30, 2012, (iv) pro
forma unaudited consolidating financial statements of the Borrower as of the
Effective Date after giving effect to the Advances made hereunder and any
credit extensions outstanding on the Effective Date under the Senior Credit
Agreement, including therein the Borrower’s consolidated balance sheet and
statements of income, cash flows, and retained earnings, (v) a sources and
uses statement outlining the uses to which the proceeds of the Advances will be
applied on the Effective Date, and (vi) such other financial information
as the Lenders may reasonably request.

 

(d)                                 Security Instruments. 
The Administrative Agent shall have received all appropriate evidence
required by the Administrative Agent and the Lenders in their sole discretion
necessary to determine that the Administrative Agent (for its benefit and the
benefit of the Secured Parties) shall have an Acceptable Security Interest in
the Collateral and that all actions or filings necessary to protect, preserve
and validly perfect such Liens have been made, taken or obtained, as the case
may be, and are in full force and effect.

 

33

 

(e)                                  Due Diligence on Title and Environmental. 
The Administrative Agent shall be satisfied with the condition of the
Oil and Gas Properties with respect to the Borrower’s and its Subsidiaries’
compliance with Environmental Laws and the Borrower’s and its Subsidiaries’
title to such properties.

 

(f)                                    No Default.  No Default
shall have occurred and be continuing.

 

(g)                                 Representations and Warranties. 
The representations and warranties contained in Article IV hereof
and in each other Loan Document shall be true and correct in all material
respects.

 

(h)                                 Material Adverse Change. 
No event or circumstance that could cause a Material Adverse Change
shall have occurred.

 

(i)                                     No Proceeding or Litigation; No
Injunctive Relief.  No action, suit, investigation or other proceeding
(including, without limitation, the enactment or promulgation of a statute or
rule) by or before any arbitrator or any Governmental Authority shall be
threatened or pending and no preliminary or permanent injunction or order by a
state or federal court shall have been entered (i) in connection with this
Agreement or any transaction contemplated hereby or (ii) other than the
litigation proceedings set forth on Schedule 4.07, which in the judgment of the
Administrative Agent, could reasonably be expected to result in a Material
Adverse Change.

 

(j)                                     Consents, Licenses, Approvals, etc. 
The Administrative Agent shall have received true copies (certified to
be such by the Borrower or other appropriate party) of all consents, licenses
and approvals required in accordance with applicable law, or in accordance with
any document, agreement, instrument or arrangement to which the Borrower, the
Guarantors and their respective Subsidiaries is a party, in connection with the
execution, delivery, performance, validity and enforceability of this Agreement
and the other Loan Documents.  In
addition, the Borrower, the Guarantors and their respective Subsidiaries shall
have all such material consents, licenses and approvals required in connection
with the continued operation of the Borrower, the Guarantors and respective
Subsidiaries, and such approvals shall be in full force and effect, and all
applicable waiting periods shall have expired without any action being taken or
threatened by any competent authority which would restrain, prevent or
otherwise impose adverse conditions on this Agreement and the actions
contemplated hereby.

 

(k)                                  Hedging Arrangements. 
The Borrower shall have entered into the Hydrocarbon Hedge Agreements
and the Interest Hedge Agreements required by Section 5.12.

 

(l)                                     Material Contracts. 
The Borrower shall have delivered to the Administrative Agent copies of
all material contracts, agreements or instruments listed on the attached
Schedule 4.21.

 

(m)                               Notice of Borrowing. 
The Administrative Agent shall have received a Notice of Borrowing from
the Borrower in the form of Exhibit F, with appropriate insertions and
executed by a duly authorized Responsible Officer of the Borrower.

 

(n)                                 USA Patriot Act. 
The Borrower has delivered to each Lender that is subject to the Patriot
Act such information requested by such Lender in order to comply with the
Patriot Act.

 

34

 

Section 3.02                Conditions Precedent to All Borrowings. 
The obligation of each Lender to make an Advance on the occasion of each
Borrowing shall be subject to the further conditions precedent that on the date
of such Borrowing:

 

(a)                                  the following statements shall be true
(and each of the giving of the applicable Notice of Borrowing and Notice of Conversion
or Continuation and the acceptance by the Borrower of the proceeds of such
Borrowing shall constitute a representation and warranty by the Borrower that
on the date of such Borrowing such statements are true):

 

(i)                                     the representations and warranties
contained in Article IV of this Agreement and the representations and
warranties contained in the Security Instruments, the Guaranties, and each of
the other Loan Documents are true and correct in all material respects on and
as of the date of such Borrowing before and after giving effect to such
Borrowing and to the application of the proceeds from such Borrowing, as though
made on and as of such date except to the extent that any such representation
or warranty expressly relates solely to an earlier date, in which case it shall
have been true and correct in all material respects as of such earlier date;
and

 

(ii)                                  no Default has occurred and is continuing
or would result from such Borrowing or from the application of the proceeds
therefrom, and

 

(b)                                 the Administrative Agent shall have
received such other approvals, opinions, or documents reasonably deemed
necessary or desirable by any Lender as a result of circumstances occurring
after the date of this Agreement, as any Lender through the Administrative Agent
may reasonably request.

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and
warrants as follows:

 

Section 4.01                Existence; Subsidiaries.  The Borrower
is a corporation duly organized, validly existing and in good standing under
the laws of Delaware and in good standing and qualified to do business in each
other jurisdiction where its ownership or lease of Property or conduct of its
business requires such qualification except where the failure to be so
qualified could not, individually or in the aggregate, reasonably be expected
to cause a Material Adverse Change.  Each
Subsidiary of the Borrower is duly organized, validly existing, and in good
standing under the laws of its jurisdiction of formation and in good standing
and qualified to do business in each jurisdiction where its ownership or lease
of Property or conduct of its business requires such qualification except where
the failure to be so qualified could not, individually or in the aggregate,
reasonably be expected to cause a Material Adverse Change.  As of the date hereof, the Borrower has no
Subsidiaries other than those listed identified in Schedule 4.01.

 

Section 4.02                Power.  The
execution, delivery, and performance by the Borrower of this Agreement, the
Notes, and the other Loan Documents to which it is a party and by the
Guarantors of the Guaranties and the other Loan Documents to which they are a
party and the consummation of the transactions contemplated hereby and thereby (a) are
within the Borrower’s 

 

35

 

and such Guarantors’
governing powers, (b) have been duly authorized by all necessary governing
action, (c) do not contravene (i) the Borrower’s or any Guarantor’s
certificate or articles of incorporation, bylaws, limited liability company
agreement, or other similar governance documents or (ii) any law or any
contractual restriction binding on or affecting the Borrower or any Guarantor,
and (d) will not result in or require the creation or imposition of any
Lien prohibited by this Agreement.  At
the time of each Advance, such Advance and the use of the proceeds of such
Advance, will be within the Borrower’s governing powers, will have been duly
authorized by all necessary corporate action, will not contravene (i) the
Borrower’s certificate of incorporation and bylaws or other organizational
documents or (ii) any law or any contractual restriction binding on or
affecting the Borrower and will not result in or require the creation or
imposition of any Lien prohibited by this Agreement.

 

Section 4.03                Authorization and Approvals. 
No consent, order, authorization, or approval or other action by, and no
notice to or filing with, any Governmental Authority or any other Person is
required for the due execution, delivery, and performance by the Borrower of
this Agreement, the Notes, or the other Loan Documents to which the Borrower is
a party or by each Guarantor of its Guaranty or the other Loan Documents to
which it is a party or the consummation of the transactions contemplated thereby.  At the time of each Borrowing, no
authorization or approval or other action by, and no notice to or filing with,
any Governmental Authority will be required for such Borrowing or the use of
the proceeds of such Borrowing.

 

Section 4.04                Enforceable Obligations.  This
Agreement, the Notes, and the other Loan Documents to which the Borrower is a
party have been duly executed and delivered by the Borrower and the Guaranties
and the other Loan Documents to which each Guarantor is a party have been duly
executed and delivered by the Guarantors. 
Each Loan Document is the legal, valid, and binding obligation of the
Borrower and each Guarantor which is a party to it enforceable against the
Borrower and each such Guarantor in accordance with its terms, except as such
enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium, or similar law affecting creditors’ rights
generally and by general principles of equity.

 

Section 4.05                Financial Statements.

 

(a)                                  The Borrower
has delivered to the Administrative Agent and the Lenders copies of the
Financial Statements and
the Interim Financial Statements, and the Financial
Statements and the
Interim Financial Statements are accurate and complete in all material
respects and present fairly the financial condition of Borrower and its
consolidated Subsidiaries for their respective period in accordance with
GAAP.  As of the date of the Financial
Statements, there were no material contingent obligations, liabilities for
taxes, unusual forward or long-term commitments, or unrealized or anticipated
losses of the Borrower or any Subsidiary, except as disclosed therein and
adequate reserves for such items have been made in accordance with GAAP.

 

(b)                                 Since the date
of the Financial Statements, no event or circumstance that could cause a
Material Adverse Change has occurred.

 

36

 

(c)                                  As of the date
hereof, the Borrower, the Guarantors and their respective Subsidiaries have no
Debt other than the Debt listed on Schedule 4.05.

 

Section 4.06                True and Complete Disclosure. 
All factual information (excluding estimates) heretofore or
contemporaneously furnished by or on behalf of the Borrower or any of the
Guarantors in writing to any Lender or the Administrative Agent for purposes of
or in connection with this Agreement, any other Loan Document or any
transaction contemplated hereby or thereby is, and all other such factual
information hereafter furnished by or on behalf of the Borrower and the
Guarantors in writing to the Administrative Agent or any of the Lenders was or
shall be, true and accurate in all material respects on the date as of which
such information was or is dated or certified and did not or does not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements contained therein not misleading at such
time.  All projections, estimates, and
pro forma financial information furnished by the Borrower were prepared on the
basis of assumptions, data, information, tests, or conditions believed to be
reasonable at the time such projections, estimates, and pro forma financial
information were furnished.

 

Section 4.07                Litigation; Compliance with Laws.

 

(a)                                  There is no pending or, to the best
knowledge of the Borrower, threatened action or proceeding affecting the
Borrower or any of the Guarantors before any court, Governmental Authority or
arbitrator which could reasonably be expected to cause a Material Adverse
Change other than as set forth in Schedule 4.07 or which purports to affect the
legality, validity, binding effect or enforceability of this Agreement, any
Note, or any other Loan Document. 
Additionally, there is no pending or, to the best of the knowledge of
the Borrower, threatened action or proceeding instituted against the Borrower
or any of the Guarantors which seeks to adjudicate the Borrower or any of the
Guarantors as bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition of
it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee or other similar official for
it or for any substantial part of its Property.

 

(b)                                 The Borrower and its Subsidiaries have
complied in all material respects with all material statutes, rules,
regulations, orders and restrictions of any Governmental Authority having
jurisdiction over the conduct of their respective businesses or the ownership
of their respective Property

 

Section 4.08                Use of Proceeds.  The proceeds
of the Advances will be used by the Borrower for the purposes described in Section 5.09.  The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U). 
No proceeds of any Advance will be used to purchase or carry any margin
stock in violation of Regulation T, U or X.

 

Section 4.09                Investment Company Act.  Neither the
Borrower nor any of the Guarantors is an “investment company” or a company “controlled”
by an “investment company” within the meaning of the Investment Company Act of
1940, as amended.

 

37

 

Section 4.10                Federal Power Act.  Neither the
Administrative Agent nor any of the Lenders, solely by virtue of the execution,
delivery and performance of, and the consummation of the transactions
contemplated by, the Loan Documents shall be or become subject to regulation (a) under
the Federal Power Act, as amended, (b) as a “public utility” or “public
service corporation” or the equivalent under the applicable law of any state,
or (c) under the applicable laws of any state relating to public utilities
or public service corporations.

 

Section 4.11                Taxes.

 

(a)                                  Reports and Payments. 
All Returns (as defined below in clause (c) of this Section)
required to be filed by or on behalf of the Borrower, the Guarantors, or any
member of the Controlled Group (hereafter collectively called the “Tax Group”)
have been duly filed on a timely basis or appropriate extensions have been
obtained and such Returns are and will be true, complete and correct, except
where the failure to so file would not be reasonably expected to cause a
Material Adverse Change; and all Taxes shown to be payable on the Returns or on
subsequent assessments with respect thereto will have been paid in full on a
timely basis, and no other Taxes will be payable by the Tax Group with respect
to items or periods covered by such Returns, except in each case to the extent
of (i) reserves reflected in the Financial Statements and the Interim
Financial Statements, or (ii) taxes that are being contested in good
faith.  The reserves for accrued Taxes
reflected in the financial statements delivered to the Lenders under this
Agreement are adequate in the aggregate for the payment of all unpaid Taxes,
whether or not disputed, for the period ended as of the date thereof and for
any period prior thereto, and for which the Tax Group may be liable in its own
right, as withholding agent or as a transferee of the assets of, or successor
to, any Person.

 

(b)                                 Taxes Definition.  “Taxes”
in this Section 4.11 shall mean all taxes, charges, fees, levies, or other
assessments imposed by any federal, state, local, or foreign taxing authority,
including without limitation, income, gross receipts, excise, real or personal
property, sales, occupation, use, service, leasing, environmental, value added,
transfer, payroll, and franchise taxes (and including any interest, penalties,
or additions to tax attributable to or imposed on with respect to any such
assessment).

 

(c)                                  Returns Definition.  “Returns”
in this Section 4.11 shall mean any federal, state, local, or foreign
report, estimate, declaration of estimated Tax, information statement or return
relating to, or required to be filed in connection with, any Taxes, including
any information return or report with respect to backup withholding or other
payments of third parties.

 

Section 4.12                Pension Plans.  All Plans are
in compliance in all material respects with all applicable provisions of
ERISA.  No Termination Event has occurred
with respect to any Plan, and each Plan has complied with and been administered
in all material respects in accordance with applicable provisions of ERISA and
the Code.  No “accumulated funding
deficiency” (as defined in Section 302 of ERISA) has occurred and there
has been no excise tax imposed under Section 4971 of the Code.  No Reportable Event under Section 4043
of ERISA and the regulations issued thereunder has occurred with respect to any
Multiemployer Plan, and each Multiemployer Plan has complied with and been
administered in all material respects with applicable provisions of ERISA and
the Code.  The present value of all
benefits vested under each Plan (based on the assumptions used to fund such
Plan) did not, as of the last annual 

 

38

 

valuation date applicable
thereto, exceed the value of the assets of such Plan allocable to such vested
benefits.  Neither the Borrower nor any
member of the Controlled Group has had a complete or partial withdrawal from
any Multiemployer Plan for which there is any withdrawal liability.  As of the most recent valuation date applicable
thereto, neither the Borrower nor any member of the Controlled Group would
become subject to any liability under ERISA if the Borrower or any member of
the Controlled Group has received notice that any Multiemployer Plan is
insolvent or in reorganization.  Based
upon GAAP existing as of the date of this Agreement and current factual
circumstances, the Borrower has no reason to believe that the annual cost
during the term of this Agreement to the Borrower or any member of the
Controlled Group for post-retirement benefits to be provided to the current and
former employees of the Borrower or any member of the Controlled Group under
Plans that are welfare benefit plans (as defined in Section 3(1) of
ERISA) could, in the aggregate, reasonably be expected to cause a Material
Adverse Change.

 

Section 4.13                Condition of Property; Casualties. 
Each of the Borrower and the Guarantors has good and marketable title to
all of its Oil and Gas Properties as is customary in the oil and gas industry
in all material respects, free and clear of all Liens except for Permitted
Liens.  Each Borrower and the Guarantors
has good and indefeasible title to all of its other Properties, free and clear
of all Liens except for Permitted Liens. 
The material Properties used or to be used in the continuing operations
of the Borrower and each of the Guarantors are in good repair, working order
and condition.  Since the date of the
Financial Statements, neither the business nor the material Properties of the
Borrower and each of the Guarantors, taken as a whole, has been materially and
adversely affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property or cancellation of contracts, Permits, or
concessions by a Governmental Authority, riot, activities of armed forces, or
acts of God or of any public enemy.

 

Section 4.14                No Burdensome Restrictions; No Defaults.

 

(a)                                  Other than those identified on Schedule
4.14(a), neither the Borrower nor any Guarantor is a party to any indenture,
loan, or credit agreement or any lease or other agreement or instrument or
subject to any charter or corporate restriction or provision of applicable law
or governmental regulation that could reasonably be expected to cause a
Material Adverse Change.  Neither the
Borrower nor any of its Subsidiaries is in default under or with respect to any
contract, agreement, lease, or other instrument to which the Borrower or any
Subsidiary is a party and which could reasonably be expected to cause a
Material Adverse Change or under any agreement in connection with any
Debt.  Neither the Borrower nor any of
its Subsidiaries has received any notice of default under any material contract,
agreement, lease, or other instrument to which the Borrower or such Subsidiary
is a party a copy of which has not been delivered to the Administrative Agent.

 

(b)                                 No Default has occurred and is
continuing.

 

Section 4.15                Environmental Condition.

 

(a)                                  Permits, Etc. 
The Borrower and the Guarantors (i) have obtained all Environmental
Permits necessary for the ownership and operation of their respective
Properties 

 

39

 

and the conduct of their
respective businesses; (ii) have at all times been and are in material
compliance with all terms and conditions of such Permits and with all other
material requirements of applicable Environmental Laws; (iii) have not
received notice of any material violation or alleged violation of any
Environmental Law or Permit; and (iv) are not subject to any actual or
contingent Environmental Claim, which could reasonably be expected to cause a
Material Adverse Change.

 

(b)                                 Certain Liabilities. 
To the Borrower’s actual knowledge, none of the present or previously owned
or operated Property of the Borrower or any Guarantor or of any of their former
Subsidiaries, wherever located, (i) has been placed on or proposed to be
placed on the National Priorities List, the Comprehensive Environmental
Response Compensation Liability Information System list, or their state or
local analogs, or have been otherwise investigated, designated, listed, or
identified as a potential site for removal, remediation, cleanup, closure,
restoration, reclamation, or other response activity under any Environmental
Laws; (ii) is subject to a Lien, arising under or in connection with any
Environmental Laws, that attaches to any revenues or to any Property owned or
operated by the Borrower or any of the Guarantors, wherever located, which
could reasonably be expected to cause a Material Adverse Change; or (iii) has
been the site of any Release of Hazardous Substances or Hazardous Wastes from
present or past operations which has caused at the site or at any third-party
site any condition that has resulted in or could reasonably be expected to
result in the need for Response that would cause a Material Adverse Change.

 

(c)                                  Certain Actions. 
Without limiting the foregoing, (i) all necessary notices have been
properly filed, and no further action is required under current Environmental
Law as to each Response or other restoration or remedial project undertaken by
the Borrower or the Guarantors or any of their former Subsidiaries on any of
their presently or formerly owned or operated Property and (ii) the present
and, to the Borrower’s best knowledge, future liability, if any, of the
Borrower and the Guarantors which could reasonably be expected to arise in
connection with requirements under Environmental Laws will not result in a
Material Adverse Change.

 

Section 4.16                Permits, Licenses, Etc.  The Borrower
and the Guarantors possess all authorizations, Permits, licenses, patents,
patent rights or licenses, trademarks, trademark rights, trade names rights and
copyrights which are material to the conduct of their business.  The Borrower and the Guarantors manage and
operate their business in all material respects in accordance with all
applicable Legal Requirements and good industry practices.

 

Section 4.17                Gas Contracts.  Neither the
Borrower nor any of the Guarantors, as of the date hereof, (a) is
obligated in any material respect by virtue of any prepayment made under any
contract containing a “take-or-pay” or “prepayment” provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Borrower’s and its Subsidiaries’ Oil and Gas Properties at some future date
without receiving full payment therefor at the time of delivery, or (b) except
as has been disclosed to the Administrative Agent, has produced gas, in any
material amount, subject to, and none of the Borrower’s and the Guarantors’ Oil
and Gas Properties is subject to, balancing rights of third parties or subject
to balancing duties under governmental requirements.

 

40

 

Section 4.18     Liens; Titles, Leases, Etc.  None of the Property of the Borrower or any
of the Guarantors is subject to any Lien other than Permitted Liens.  On the date of this Agreement, all
governmental actions and all other filings, recordings, registrations, third
party consents and other actions which are necessary to create and perfect the
Liens provided for in the Security Instruments will have been made, obtained
and taken in all relevant jurisdictions. 
All leases and agreements for the conduct of business of the Borrower
and the Guarantors are valid and subsisting, in full force and effect and there
exists no default or event of default or circumstance which with the giving of
notice or lapse of time or both would give rise to a default under any such
leases or agreements which could reasonably be expected to cause a Material
Adverse Change.  Neither the Borrower nor
any of the Guarantors is a party to any agreement or arrangement (other than
this Agreement and the Security Instruments), or subject to any order,
judgment, writ or decree, which either restricts or purports to restrict its
ability to grant Liens to secure the Obligations against their respective
assets or Properties.

 

Section 4.19     Solvency and Insurance.  Before and after giving effect to the making
of the initial Advances, each of the Borrower and its Subsidiaries is Solvent.  Additionally, each of the Borrower and its
Subsidiaries carry insurance required under Section 5.02 of this
Agreement.

 

Section 4.20     Hedging Agreements.  Schedule 4.20 sets forth, as of the date
hereof, a true and complete list of all Interest Hedge Agreements, Hydrocarbon
Hedge Agreements, and Hedge Contracts of the Borrower and its Subsidiaries, 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 relating thereto (including any margin required
or supplied), and the counterparty to each such agreement.

 

Section 4.21     Material Agreements.  Schedule 4.21 sets forth a complete and
correct list of all material agreements, leases, indentures, purchase
agreements, obligations in respect of letters of credit, guarantees, joint
venture agreements, and other instruments in effect or to be in effect as of
the date hereof (other than the agreements set forth in Schedule 4.20)
providing for, evidencing, securing or otherwise relating to any Debt of the
Borrower or any of the Guarantors, and all obligations of the Borrower or any
of the Guarantors to issuers of surety or appeal bonds issued for account of
the Borrower or any such Guarantor, and such list correctly sets forth the
names of the debtor or lessee and creditor or lessor with respect to the Debt
or lease obligations outstanding or to be outstanding and the Property subject
to any Lien securing such Debt or lease obligation.  Also set forth on Schedule 4.21 hereto is a
complete and correct list of all material agreements and other instruments of
the Borrower and the Guarantors relating to the purchase, transportation by
pipeline, gas processing, marketing, sale and supply of natural gas and other
Hydrocarbons.  The Borrower has
heretofore delivered to the Administrative Agent and the Lenders a complete and
correct copy of all such material credit agreements, indentures, purchase
agreements, contracts, letters of credit, guarantees, joint venture agreements,
or other instruments, including any modifications or supplements thereto, as in
effect on the date hereof.

 

41

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

So long as any Note or any
amount under any Loan Document shall remain unpaid, or any Lender shall have
any Commitment hereunder, the Borrower agrees, unless the Majority Lenders
shall otherwise consent in writing, to comply with the following covenants.

 

Section 5.01     Compliance with Laws, Etc.  The Borrower shall comply, and cause each of
its Subsidiaries to comply, in all material respects with all material Legal
Requirements.  Without limiting the
generality and coverage of the foregoing, the Borrower shall comply, and shall
cause each of its Subsidiaries to comply, in all material respects, with all
material Environmental Laws and all laws, regulations, or directives with
respect to equal employment opportunity and employee safety in all
jurisdictions in which the Borrower, or any of its Subsidiaries do business; provided,
however, that this Section 5.01 shall not prevent the Borrower or any of
its Subsidiaries from, in good faith and with reasonable diligence, contesting
the validity or application of any such laws or regulations by appropriate
legal proceedings.  Without limitation of
the foregoing, the Borrower shall, and shall cause each of its Subsidiaries to,
(a) maintain and possess all authorizations, Permits, licenses,
trademarks, trade names, rights and copyrights which are necessary to the
conduct of its business and (b) obtain, as soon as practicable, all
consents or approvals required from any states of the United States (or other Governmental
Authorities) necessary to grant the Administrative Agent an Acceptable Security
Interest in the Borrower’s and its Subsidiaries’ Oil and Gas Properties.

 

Section 5.02     Maintenance of Insurance.

 

(a)           The Borrower shall, and shall cause
each of its Subsidiaries to, procure and maintain or shall cause to be procured
and maintained continuously in effect policies of insurance in form and amounts
and issued by companies, associations or organizations reasonably satisfactory
to the Administrative Agent covering such casualties, risks, perils,
liabilities and other hazards reasonably required by the Administrative
Agent.  In addition, the Borrower shall,
and shall cause each of its Subsidiaries to, comply with all requirements
regarding insurance contained in the Security Instruments.

 

(b)           All certified copies of policies or
certificates thereof, and endorsements and renewals thereof shall be delivered
to and retained by the Administrative Agent. 
Unless the Senior Credit Agreement requires otherwise, all policies of
insurance shall either have attached thereto a Lender’s loss payable
endorsement for the benefit of the Administrative Agent, as loss payee in form
reasonably satisfactory to the Administrative Agent or shall name the
Administrative Agent as an additional insured, as applicable.  The Borrower shall furnish the Administrative
Agent with a certificate of insurance or a certified copy of all policies of
insurance required.  All policies or
certificates of insurance shall set forth the coverage, the limits of
liability, the name of the carrier, the policy number, and the period of
coverage.  Unless the Senior Credit
Agreement requires otherwise, all policies of insurance required under the
terms hereof shall contain an endorsement or agreement by the insurer that any
loss shall be payable in accordance with the terms of such policy
notwithstanding any act of negligence of the Borrower, or a Subsidiary or any
party holding under the Borrower or a Subsidiary which might otherwise result
in a forfeiture of the insurance and the further agreement of the insurer
waiving all rights of setoff, counterclaim or deductions against the Borrower
and its Subsidiaries.  Unless the Senior
Credit Agreement requires otherwise, all such policies shall contain a provision
that notwithstanding any contrary agreements between the Borrower, its
Subsidiaries, and the 

 

42

 

applicable insurance
company, such policies will not be canceled, allowed to lapse without renewal,
surrendered or amended (which provision shall include any reduction in the
scope or limits of coverage) without at least 30 days’ prior written notice to
the Administrative Agent.  In the event
that, notwithstanding the “lender’s loss payable endorsement” requirement of
this Section 5.02, the proceeds of any insurance policy described above
are paid to the Borrower or a Subsidiary, any Obligations are outstanding and
the Senior Debt has been indefeasibly paid in full, the Borrower shall deliver
such proceeds to the Administrative Agent immediately upon receipt.  Notwithstanding the foregoing, the Borrower
is not required to turn over to the Administrative Agent the casualty insurance
proceeds received by the Borrower and its Subsidiaries in connection with the
fires beginning on March 12, 2006 in the Texas Panhandle; provided that (i) the
aggregate amount of insurance proceeds the Borrower is permitted to retain
pursuant to the preceding provision shall not exceed $6,000,000, (ii) the
Borrower shall deposit all such insurance proceeds into a deposit account with
the Senior Administrative Agent in which the Senior Administrative Agent shall
have a first priority security interest, and (iii) the Borrower shall use
such proceeds to pay the attorneys’ fees, settlement amounts and other
litigation expenses incurred by the Borrower and its Subsidiaries in defending
or settling the Fire Litigation and for general corporate purposes.

 

Section 5.03     Preservation of Corporate Existence, Etc.  The Borrower shall preserve and maintain, and
cause each of its Subsidiaries to preserve and maintain, its corporate or
limited liability company, as applicable, existence, rights, franchises, and
privileges in the jurisdiction of its incorporation or organization, as
applicable, and qualify and remain qualified, and cause each such Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which qualification is necessary or desirable in view of its business and
operations or the ownership of its Properties, and, in each case, where failure
to qualify or preserve and maintain its rights and franchises could reasonably
be expected to cause a Material Adverse Change.

 

Section 5.04     Payment of Taxes, Etc.  The Borrower shall pay and discharge, and
cause each of its Subsidiaries to pay and discharge, before the same shall
become delinquent, (a) all taxes, assessments, and governmental charges or
levies imposed upon it or upon its income or profits or Property that are
material in amount, prior to the date on which penalties attach thereto and (b) all
lawful claims that are material in amount which, if unpaid, might by law become
a Lien upon its Property; provided, however, that neither the Borrower
nor any such Subsidiary shall be required to pay or discharge any such tax,
assessment, charge, levy, or claim which is being contested in good faith and
by appropriate proceedings, and with respect to which reserves in conformity
with GAAP have been provided.

 

Section 5.05     Visitation Rights.  At any reasonable time and from time to time,
upon reasonable notice, the Borrower shall, and shall cause its Subsidiaries
to, permit the Administrative Agent and any Lender or any of their respective
agents or representatives thereof, to (a) examine and make copies of and
abstracts from the records and books of account of, and visit and inspect at
their reasonable discretion the Properties of, the Borrower and any such
Subsidiary, and (b) discuss the affairs, finances and accounts of the
Borrower and any such Subsidiary with any of their respective officers or
directors.

 

Section 5.06     Reporting Requirements.  The Borrower shall furnish to the
Administrative Agent and each Lender:

 

43

 

(a)           Annual Financials.  As soon as available and in any event not
later than 90 days after the end of each fiscal year of the Borrower and
its consolidated Subsidiaries, commencing with fiscal year ending June 30,
2008, (i) to the extent not otherwise provided in the Form 10-K filed
by the Borrower with the SEC for such fiscal year end, a copy of the annual
audit report for such year for the Borrower and its consolidated Subsidiaries,
including therein the Borrower’s and its consolidated Subsidiaries’ balance
sheets as of the end
of such fiscal year and the Borrower’s and its consolidated Subsidiaries’
statements of income, cash flows, and retained earnings, in each case certified
by an independent certified public accountants of national standing reasonably
acceptable to the Administrative Agent and including any management letters
delivered by such accountants to the Borrower or any Subsidiary in connection
with such audit, (ii) any management letters delivered by such accountants
to the Borrower, (iii) the Form 10-K filed with the SEC for such
fiscal year end, (iv) a Compliance Certificate executed by a Responsible
Officer of the Borrower and (v) a copy of the unaudited annual
consolidating financial statements of each of its Subsidiaries, including
therein such Subsidiary’s balance sheet and statements of income, cash flows,
and retained earnings for such fiscal year;

 

(b)           Quarterly Financials.  As soon as available and in any event not
later than 45 days after the end of each of the first three fiscal quarters of
each fiscal year of the Borrower and its consolidated Subsidiaries, commencing
with the fiscal quarter ending March 31, 2008, (i) to the extent not
otherwise provided in the Form 10-Q for such fiscal quarter end, the
unaudited balance sheet and the statements of income, cash flows, and retained
earnings of each such Person for the period commencing at the end of the
previous year and ending with the end of such fiscal quarter, all in reasonable
detail and duly certified with respect to such consolidated statements (subject
to year-end audit adjustments) by a Responsible Officer of the Borrower as
having been prepared in accordance with GAAP, (ii) the Form 10-Q
filed with the SEC for such fiscal quarter end, and (iii) a Compliance
Certificate executed by the Responsible Officer of the Borrower;

 

(c)           Oil and Gas Reserve Reports.

 

(i)            As soon as available but in any
event on or before each September 30 of each year, an Independent
Engineering Report dated effective as of July 1 for such year;

 

(ii)           As soon as available but in any event
on or before March 31 of each year an Internal Engineering Report dated
effective as of the immediately preceding January 1;

 

(iii)          Such other information as may be
reasonably requested by the Administrative Agent or any Lender with respect to
the Oil and Gas Properties included or to be included in the Borrowing Base;

 

With the delivery of each Engineering Report, a
certificate from a Responsible Officer of the Borrower certifying that, to the
best of his knowledge and in all material respects: (A) the information
contained in the Engineering Report and any other information delivered in
connection therewith is true and correct, (B) the Borrower or its
Subsidiary, as applicable, owns good and marketable title to the Oil and Gas
Properties evaluated in such Engineering Report, as is customary in the oil and
gas industry, and such Oil and Gas Properties are subject to an Acceptable
Security Interest and free of all Liens except for Permitted Liens, (C) except
as set 

 

44

 

forth on an exhibit to the certificate, on a net basis
there are no gas imbalances, take or pay or other prepayments with respect to
its Oil and Gas Properties evaluated in such Engineering Report which would
require the Borrower or any of its Subsidiaries to deliver Hydrocarbons
produced from such Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor, (D) none of its 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 Majority Lenders, (E) attached to the
certificate is a list of its Oil and Gas Properties added to and deleted from
the immediately prior Engineering Report and a list showing any change in
working interest or net revenue interest in its Oil and Gas Properties
occurring and the reason for such change, (F) attached to the certificate
is a list of all Persons disbursing proceeds to the Borrower or to its
Subsidiary, as applicable, from its Oil and Gas Properties, (G) except as
set forth on a schedule attached to the certificate, all of the Oil and Gas
Properties evaluated by such Engineering Report are pledged as Collateral for
the Obligations, and (H) attached to the certificate is a quarterly cash
flow budget for the four quarters following the delivery of such certificate
setting forth the Borrower’s projections for production volumes, revenues, expenses,
taxes and budgeted capital expenditures during such period.

 

(d)           Production and Hedging
Reports.  As soon as available and in
any event within 45 days after the end of each quarter, commencing with the
quarter ending March 31, 2008, a report certified by a Responsible Officer
of the Borrower in form and substance satisfactory to the Administrative Agent
prepared by the Borrower (i) covering each of the Oil and Gas Properties
of the Borrower and its Subsidiaries (including the Barnett Shale Properties)
and detailing on a quarterly basis (A) the production, revenue, and price
information and associated operating expenses for each such quarter, (B) any
changes to any producing reservoir, production equipment, or producing well
during each such quarter, which changes could cause a Material Adverse Change,
and (C) any sales of the Borrower’s or any Subsidiaries’ Oil and Gas
Properties during each such quarter, (ii) setting forth a true and
complete list of all Hedge Contracts of the Borrower and its Subsidiaries and
detailing 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 relating thereto (including any margin
required or supplied), and the counterparty to each such agreement, and (iii) certifying
the Borrower’s compliance with Section 5.12 hereof;

 

(e)           Defaults.  As soon as possible and in any event within
five days after (i) the occurrence of any Default or (ii) the occurrence
of any default under any instrument or document evidencing Debt of the Borrower
or any Subsidiary, in each case known to any officer of the Borrower or any of
its Subsidiaries which is continuing on the date of such statement, a statement
of a Responsible Officer of the Borrower setting forth the details of such
Default or default, as applicable, and the actions which the Borrower or such
Subsidiary has taken and proposes to take with respect thereto;

 

(f)            Termination Events.  As soon as possible and in any event (i) within
30 days after the Borrower or any member of the Controlled Group knows or has
reason to know that any Termination Event described in clause (a) of the
definition of Termination Event with respect to any Plan has occurred, and (ii) within
10 days after the Borrower or any of its Affiliates knows or has reason to know
that any other Termination Event with respect to any Plan has occurred, a 

 

45

 

statement of a
Responsible Officer of the Borrower describing such Termination Event and the
action, if any, which the Borrower or such Affiliate proposes to take with
respect thereto;

 

(g)           Termination of Plans.  Promptly and in any event within two Business
Days after receipt thereof by the Borrower or any member of the Controlled
Group from the PBGC, copies of each notice received by the Borrower or any such
member of the Controlled Group of the PBGC’s intention to terminate any Plan or
to have a trustee appointed to administer any Plan;

 

(h)           Other ERISA Notices.  Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any member of the
Controlled Group from a Multiemployer Plan sponsor, a copy of each notice
received by the Borrower or any member of the Controlled Group concerning the
imposition or amount of withdrawal liability pursuant to Section 4202 of
ERISA;

 

(i)            Environmental Notices.  Promptly upon the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any form of request, notice, summons
or citation received from the Environmental Protection Agency, or any other
Governmental Authority, concerning (i) violations or alleged violations of
Environmental Laws, which seeks to impose liability therefor and could cause a
Material Adverse Change, (ii) any action or omission on the part of the
Borrower or any Subsidiary or any of their former Subsidiaries in connection
with Hazardous Waste or Hazardous Substances which could reasonably result in
the imposition of liability therefor that could cause a Material Adverse
Change, including without limitation any information request related to, or
notice of, potential responsibility under CERCLA, or (iii) concerning the
filing of a Lien upon, against or in connection with the Borrower or any
Subsidiary or their former Subsidiaries, or any of their leased or owned
Property, wherever located;

 

(j)            Other Governmental Notices.  Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any Subsidiary, a copy
of any notice, summons, citation, or proceeding seeking to modify in any
material respect, revoke, or suspend any material contract, license, permit or
agreement with any Governmental Authority;

 

(k)           Material Changes.  Prompt written notice of any condition or
event of which the Borrower has knowledge, which condition or event has
resulted or may reasonably be expected to result in (i) a Material Adverse
Change or (ii) a breach of or noncompliance with any material term,
condition, or covenant of any material contract to which the Borrower or any of
its Subsidiaries is a party or by which they or their Properties may be bound;

 

(l)            Disputes, Etc.  Prompt written notice of (i) any claims,
legal or arbitration proceedings, proceedings before any Governmental
Authority, or disputes pending, or to the knowledge of the Borrower threatened,
or affecting the Borrower, or any of its Subsidiaries which, if adversely
determined, could reasonably be expected to cause a Material Adverse Change, or
any material labor controversy of which the Borrower or any of its Subsidiaries
has knowledge resulting in or reasonably considered to be likely to result in a
strike against the Borrower or any of its Subsidiaries and (ii) any claim,
judgment, Lien or other encumbrance (other than a Permitted Lien) affecting any
Property of the Borrower or any Subsidiary if the 

 

46

 

value of the claim,
judgment, Lien, or other encumbrance affecting such Property shall exceed
$500,000.

 

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

 

(n)           Notices Under Other Loan
Agreements.  Promptly after the
furnishing thereof, copies of any statement, report or notice furnished to any
Person pursuant to the terms of any 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 5.06;

 

(o)           SEC Filings.  Promptly after the sending or filing thereof,
copies of all proxy material, reports and other information which the Borrower
or any of its Subsidiaries sends to or files with the SEC or sends to any shareholder of the Borrower or of any of
its Subsidiaries;

 

(p)           USA Patriot Act.  Promptly, following a request by any Lender,
all documentation and other information that such Lender reasonably requests in
order to comply with its ongoing obligations under applicable “know your
customer” and anti-money laundering rules and regulations, including the
USA Patriot Act; and

 

(q)           Other Information.  Such other information respecting the
business or Properties, or the condition or operations, financial or otherwise,
of the Borrower or any of its Subsidiaries, as any Lender through the
Administrative Agent may from time to time reasonably request.  The Administrative Agent agrees to provide
the Lenders with copies of any material notices and information delivered
solely to the Administrative Agent pursuant to the terms of this Agreement.

 

Section 5.07     Maintenance of Property.  The Borrower shall, and shall cause each of
its Subsidiaries to, maintain their owned, leased, or operated Property in good
condition and repair; and shall abstain, and cause each of its Subsidiaries to
abstain from, knowingly or willfully permitting the commission of waste or
other injury, destruction, or loss of natural resources, or the occurrence of
pollution, contamination, or any other condition in, on or about the owned or
operated Property involving the Environment that could reasonably be expected
to result in Response activities and that could reasonably be expected to cause
a Material Adverse Change.

 

Section 5.08     Agreement to Pledge.  The Borrower shall, and shall cause each
Subsidiary to, grant to the Administrative Agent an Acceptable Security
Interest in any Property of the Borrower or any Subsidiary now owned or
hereafter acquired promptly after receipt of a written request from the
Administrative Agent.

 

Section 5.09     Use of Proceeds.  The Borrower shall use the
proceeds of the Advances to pay to the Senior Lenders a portion of the Senior
Debt outstanding under the Senior Credit Agreement.

 

47

 

Section 5.10     Title Evidence and Opinions.  The Borrower shall from time to time upon the
reasonable request of the Administrative Agent, take such actions and execute
and deliver such documents and instruments as the Administrative Agent shall
require to ensure that the Administrative Agent shall, at all times, have
received satisfactory title evidence, which title evidence shall be in form and
substance acceptable to the Administrative Agent in its sole discretion and
shall include information regarding the before payout and after payout
ownership interests held by the Borrower and the Borrower’s Subsidiaries, for
all wells located on the Oil and Gas Properties, covering at least 80% of the
present value of the Proven Reserves of the Borrower and its Subsidiaries and
at least 80% of the present value of the proved developed producing reserves of
the Borrower and its Subsidiaries as determined by the Administrative Agent.

 

Section 5.11     Further Assurances; Cure of Title
Defects.  The Borrower shall, and
shall cause each Subsidiary to, cure promptly any defects in the creation and
issuance of the Notes and the execution and delivery of the Security
Instruments and this Agreement.  The
Borrower hereby authorizes the Administrative Agent to file any financing
statements without the signature of the Borrower to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under any of the Loan Documents.  The Borrower at its expense will, and will
cause each Subsidiary to, promptly execute and deliver to the Administrative
Agent upon request all such other documents, agreements and instruments to
comply with or accomplish the covenants and agreements of the Borrower or any
Subsidiary, as the case may be, in the Security Instruments and this Agreement,
or to further evidence and more fully describe the collateral intended as
security for the Notes, or to correct any omissions in the Security Instruments,
or to state more fully the security obligations set out herein or in any of the
Security Instruments, or to perfect, protect or preserve any Liens created
pursuant to any of the Security Instruments, or to make any recordings, to file
any notices or obtain any consents, all as may be necessary or appropriate in
connection therewith or to enable the Administrative Agent to exercise and
enforce its rights and remedies with respect to any Collateral.  Within 30 days after a request by the
Administrative Agent or the Lenders to cure any title defects or exceptions
which are not Permitted Liens raised by such information, the Borrower shall (i) cure
such title defects or exceptions which are not Permitted Liens or substitute
acceptable Oil and Gas Properties with no title defects or exceptions except
for Permitted Liens covering Collateral of an equivalent value and (ii) deliver
to the Administrative Agent satisfactory title evidence (including supplemental
or new title opinions meeting the foregoing requirements) in form and substance
acceptable to the Administrative Agent in its reasonable business judgment as
to the Borrower’s and its Subsidiaries’ ownership of such Oil and Gas
Properties and the Administrative Agent’s Liens and security interests therein
as are required to maintain compliance with Section 5.10.

 

Section 5.12     Hedging Arrangements.  The Borrower shall maintain (a) each
Hydrocarbon Hedge Agreement described in Schedule 5.12 until the stated
maturity of such Hydrocarbon Hedge Agreement and (b)  Hydrocarbon Hedge
Agreements covering no less than 50% and no more than 85% of the production
volumes attributable to “proved, developed and producing” Proven Reserves of
the Borrower’s and its Subsidiaries’ Oil and Gas Properties for a minimum
period of at least three years as of the end of December 31, 2006 and as
of the end of each six month period ending thereafter, and at a minimum price
floor as required by the Majority Lenders from time to time.

 

48

 

Section 5.13     Bank Accounts.  The Borrower shall, and shall cause each of
its Subsidiaries to, (a) maintain their principal operating accounts and
other deposit accounts with the Senior Administrative Agent or any Senior
Lender or any other bank that has executed an account control agreement
reasonably acceptable in form and substance to the Senior Administrative Agent,
or (b) within 30 days from the date hereof, provide an account control
agreement reasonably acceptable in form and substance to the Senior Administrative
Agent and executed by each depository bank that holds any operating accounts or
deposit accounts of the Borrower or any Guarantor and in existence on the date
hereof.

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

So long as any Note or any
amount under any Loan Document shall remain unpaid or any Lender shall have any
Commitment, the Borrower agrees, unless the Majority Lenders otherwise consent
in writing, to comply with the following covenants.

 

Section 6.01     Liens, Etc.  The Borrower shall not create, assume, incur,
or suffer to exist, or permit any of its Subsidiaries to create, assume, incur,
or suffer to exist, any Lien on or in respect of any of its Property whether
now owned or hereafter acquired, or assign any right to receive income, except
that the Borrower and its Subsidiaries may create, incur, assume, or suffer to
exist:

 

(a)           Liens created by the Security
Instruments;

 

(b)           purchase money Liens or purchase
money security interests upon or in any equipment acquired or held by the
Borrower or any of its Subsidiaries in the ordinary course of business prior to
or at the time of the Borrower’s or such Subsidiary’s acquisition of such
equipment; provided that, the Debt secured by such Liens (i) was
incurred solely for the purpose of financing the acquisition of such equipment,
and does not exceed the aggregate purchase price of such equipment, (ii) is
secured only by such equipment and not by any other assets of the Borrower and
its Subsidiaries, and (iii) is not increased in amount;

 

(c)           Liens for taxes, assessments, or
other governmental charges or levies not yet due or that (provided foreclosure,
sale, or other similar proceedings shall not have been initiated) are being
contested in good faith by appropriate proceedings, and such reserve as may be
required by GAAP shall have been made therefor;

 

(d)           Liens in favor of vendors, carriers,
warehousemen, repairmen, mechanics, workmen, materialmen, construction, or
similar Liens arising by operation of law in the ordinary course of business in
respect of obligations that are not yet due or that are being contested in good
faith by appropriate proceedings, provided such reserve as may be required by
GAAP shall have been made therefor;

 

(e)           Liens to operators and non-operators
under joint operating agreements arising in the ordinary course of the business
of the Borrower or the relevant Subsidiary to secure amounts owing, which
amounts are not yet due or are being contested in good faith by appropriate
proceedings, if such reserve as may be required by GAAP shall have been made
therefor;

 

49

 

(f)            royalties, overriding royalties, net
profits interests, production payments, reversionary interests, calls on
production, preferential purchase rights and other burdens on or deductions
from the proceeds of production, that do not secure Debt for borrowed money and
that are taken into account in computing the net revenue interests and working
interests of the Borrower or any of its Subsidiaries warranted in the Security
Instruments;

 

(g)           Liens arising in the ordinary course
of business out of pledges or deposits under workers’ compensation laws,
unemployment insurance, old age pensions or other social security or retirement
benefits, or similar legislation or to secure public or statutory obligations
of the Borrower;

 

(h)           operating agreements, unitization and
pooling agreements and orders, farmout agreements, gas balancing agreements and
other agreements, in each case that are customary in the oil, gas and mineral
production business and that are entered into in the ordinary course of
business that are taken into account in computing the net revenue interests and
working interests of the Borrower or any of its Subsidiaries warranted in the
Security Instruments, to the extent that any such Lien referred to in this
clause does not materially impair the use of the Property covered by such Lien
for the purposes for which such Property is held by the Borrower or any
Subsidiary or materially impair the value of such Property subject thereto;

 

(i)            easements, rights-of-way,
restrictions, and other similar encumbrances, and minor defects in the chain of
title that are customarily accepted in the oil and gas financing industry, none
of which interfere with the ordinary conduct of the business of Borrower or any
Subsidiary or materially detract from the value or use of the Property to which
they apply; and

 

(j)            Liens securing the Senior Debt.

 

Section 6.02     Debts, Guaranties, and Other Obligations.  The Borrower shall not, and shall not permit
any of its Subsidiaries to, create, assume, suffer to exist, or in any manner
become or be liable in respect of, any Debt except:

 

(a)           Debt of the Borrower and its
Subsidiaries under the Loan Documents;

 

(b)           Senior Debt;

 

(c)           Debt in the form of obligations for
the deferred purchase price of Property or services incurred in the ordinary
course of business which are not yet due and payable or are being contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP have been established;

 

(d)           Debt secured by the Liens permitted
under paragraph (b) of Section 6.01 in an aggregate amount not
to exceed $3,000,000 at any time;

 

(e)           Debt under Hydrocarbon Hedge
Agreements which are not prohibited by the terms of Section 6.14;

 

(f)            Debt consisting of sureties or bonds
provided to any Governmental Authority or other Person and assuring payment of
contingent liabilities of the Borrower in connection with 

 

50

 

the operation of the Oil
and Gas Properties, including with respect to plugging, facility removal and
abandonment of its Oil and Gas Properties;

 

(g)           Debt of the Borrower or any
Subsidiary owing to the Borrower or to any other Subsidiary; provided that such
Debt is subordinated to the Obligations on terms acceptable to the
Administrative Agent in its sole discretion; and

 

(h)           Debt that constitutes a renewal,
refinancing or extension of any Debt referred to clause (d) of this Section 6.02;
provided that (i) no Lien existing at the time of such renewal,
refinancing or extension shall be extended to cover any property not already
subject to such Lien, and (ii) the principal amount of any Debt renewed,
refinanced or extended shall not exceed the amount of such Debt outstanding immediately
prior to such renewal, refinancing or extension;

 

(i)            Debt Issuance by the Borrower; provided
that (i) such issuance, together with any Equity Issuance of convertible,
preferred stock in accordance with Section 6.22, shall not exceed
$60,000,000 in the aggregate; (ii) such Debt shall have (A) a
maturity date that is no earlier than February 28, 2011 or such later “Maturity
Date” in effect at the time such Debt is issued, (B) covenants and
restrictions that are no more restrictive than those set forth in this
Agreement and the other Loan Documents and which are, in any event,
satisfactory to the Administrative Agent, (C) no restriction on the
ability of the Borrower or any of its Subsidiaries to amend, modify or
otherwise supplement this Agreement or the other Loan Documents, (D) no
collateral or other security for such Debt, (E) no restriction on the
ability of the Borrower or any of its Subsidiaries to guarantee the Obligations
or pledge assets as collateral security for the Obligations, (F) a bullet
repayment and not provide for amortization (other than amortization resulting
from any mandatory prepayments required in respect of such Debt in connection
with the occurrence of an event of default under such Debt), (G) conversion
terms acceptable to the Administrative Agent, and (H) such other terms,
conditions and provisions that are satisfactory to the Administrative Agent; (iii) such
Debt shall be subordinated, in right of payment and otherwise, to the payment
of the Obligations and the rights and remedies available to the Administrative
Agent, the Lenders and the Swap Counterparties hereunder or under any other
Loan Document, in a manner, and pursuant to documentation, satisfactory to the
Administrative Agent in its sole discretion, including without limitation,
payment blockage provisions and standstill periods of no less than 180 days; (iv) the
Debt Issuance Proceeds shall be applied, first to satisfy the outstanding
Subordinated Debt in full and second to prepay the Obligations as calculated
under Section 2.05(f); and (v) such Debt Issuance shall not otherwise
cause the occurrence of a Default or Event of Default after giving effect to
the issuance of such Debt; and

 

(j)            Debt consisting of preferred Equity
Interests of the Borrower; provided that such Equity Interests are issued in
compliance with Section 6.22.

 

Section 6.03     Agreements Restricting Liens and
Distributions.  The Borrower shall
not, nor shall it permit any of its Subsidiaries to, create, incur, assume or
permit to exist any contract, agreement or understanding (other than this
Agreement, the Senior Loan Documents and the Security Instruments) which in any
way prohibits or restricts the granting, conveying, creation or imposition of
any Lien on any of its Property, whether now owned or hereafter acquired, to
secure the Obligations or restricts any Subsidiary from paying dividends to the
Borrower, or which requires the consent of or notice to other Persons in
connection therewith.

 

51

 

Section 6.04     Merger or Consolidation; Asset Sales.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to (a) merge or consolidate with or into any other
Person without the prior consent of all of the Lenders; provided that the
Borrower or any Subsidiary may merge or may be consolidated into the Borrower
or any Guarantor if the Borrower or such Guarantor is the surviving entity; or (b) sell,
lease, transfer, assign, farm-out, convey, or otherwise dispose of any of its
Property (including, without limitation, any working interest, overriding
royalty interest, production payments, net profits interest, royalty interest,
or mineral fee interest) other than: (i) the sale of Hydrocarbons in the
ordinary course of business, and (ii) the sale or transfer of equipment
that is (A) obsolete, worn out, depleted or uneconomic and disposed of in
the ordinary course of business, (B) no longer necessary for the business
of such Person or (C) contemporaneously replaced by equipment of at least
comparable value and use.

 

Section 6.05     Restricted Payments.  The Borrower shall not, nor
shall it permit any of its Subsidiaries to, make any Restricted Payments except
that if no Default has occurred both before and after giving effect to the
making of such Restricted Payment, (a) the Subsidiaries may make
Restricted Payments to the Borrower, (b) the Borrower may make Restricted
Payments to officers, directors, consultants and employees of the Borrower or
any Guarantor in any form other than cash or other assets of the Borrower, (c) the
Borrower may make Restricted Payments to officers, directors, consultants and
employees of the Borrower or any Guarantor in the form of cash in an aggregate
amount not to exceed $1,000,000 per fiscal year, (d) the Borrower may make
Restricted Payments in respect of preferred Equity Interests which were issued
in compliance with Section 6.22, and (e) the Borrower may make
Restricted Payments in respect of Debt Issuances which were issued in
compliance with Section 6.02(j) to the extent such payments would be
permitted under the subordination terms in effect in favor of the Obligations
and covering such Debt Issuances.

 

Section 6.06     Investments.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, make or permit to exist any loans, advances, or
capital contributions to, or make any investment in (including, without
limitation, the making of any Acquisition), or purchase or commit to purchase
any stock or other securities or evidences of indebtedness of or interests in
any Person or any Oil and Gas Properties or activities related to Oil and Gas
Properties, except:

 

(a)           Liquid Investments;

 

(b)           trade and customer accounts
receivable which are for goods furnished or services rendered in the ordinary
course of business and are payable in accordance with customary trade terms;

 

(c)           creation of any additional
Subsidiaries or acquisition of Oil and Gas Properties in compliance with Section 6.15;

 

(d)           the loans, advances, capital
contributions, investments, and commitments  made prior to
the date hereof and identified in the Interim Financial Statements; provided
that, the respective amounts of such loans, advances, capital contributions,
investments, and commitments shall not be increased (other than by
appreciation);

 

52

 

(e)           investments received in connection
with the bankruptcy or reorganization of, or settlement of delinquent accounts
and disputes with, customers and suppliers, in each case in the ordinary course
of business; provided that, the aggregate amount of such investment shall not
exceed $1,000,000 (other than by appreciation); and

 

(f)            investments consisting of any
deferred portion of the sales price received by the Borrower or any Subsidiary
in connection with any sale of assets permitted hereunder.

 

Section 6.07     Affiliate Transactions.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction or series of transactions (including, but not limited to,
the purchase, sale, lease or exchange of Property, the making of any
investment, the giving of any guaranty, the assumption of any obligation or the
rendering of any service) with any of their Affiliates unless such transaction
or series of transactions is on terms no less favorable to the Borrower or the
Subsidiary, as applicable, than those that could be obtained in a comparable
arm’s length transaction with a Person that is not such an Affiliate.

 

Section 6.08     Compliance with ERISA.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, directly or indirectly, (a) engage in, or
permit any Subsidiary or ERISA Affiliate to engage in, any transaction in
connection with which the Borrower, any Subsidiary or any ERISA Affiliate could
be subjected to either a civil penalty assessed pursuant to section 502(c), (i) or
(l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code; (b) terminate,
or permit any Subsidiary or 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 to the Borrower, any Subsidiary or any ERISA Affiliate to the PBGC; (c) fail
to make, or permit any Subsidiary or 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 Subsidiary or 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 Subsidiary or ERISA Affiliate to permit, the actuarial present
value of the benefit liabilities (as “actuarial present value of the benefit
liabilities” shall have the meaning specified in section 4041 of ERISA) under
any Plan maintained by the Borrower, any 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; (f) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
Multiemployer Plan; (g) acquire, or permit any Subsidiary or ERISA
Affiliate to acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to the Borrower, any Subsidiary or any
ERISA Affiliate 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 Subsidiary or ERISA Affiliate to incur, a liability to or on
account of a Plan under sections 515, 4062, 4063, 4064, 4201 or 4204 

 

53

 

of ERISA; (i) contribute
to or assume an obligation to contribute to, or permit any Subsidiary or 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 Subsidiary or ERISA Affiliate to amend, a Plan resulting in an
increase in current liability such that the Borrower, any Subsidiary or any
ERISA Affiliate is required to provide security to such Plan under section
401(a)(29) of the Code; or (k) permit to exist any occurrence of any
Reportable Event (as defined in Title IV of ERISA), or any other event or
condition, which presents a material (in the opinion of the Majority Lenders)
risk of such a termination by the PBGC of any Plan.

 

Section 6.09     Sale-and-Leaseback.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, sell or transfer to a Person any Property, whether
now owned or hereafter acquired, if at the time or thereafter the Borrower or a
Subsidiary shall lease as lessee such Property or any part thereof or other
Property which the Borrower or a Subsidiary intends to use for substantially
the same purpose as the Property sold or transferred.

 

Section 6.10     Change of Business.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, make any material change in the character of its
business as an independent oil and gas exploration and production company, nor
will the Borrower or any Subsidiary operate any business in any jurisdiction
other than the United States, including the Gulf of Mexico.

 

Section 6.11     Organizational Documents, Name Change.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, amend, supplement, modify or restate their articles
or certificate of incorporation, bylaws, limited liability company agreements,
or other equivalent organizational documents where such amendment, supplement,
modification or restatement could have an adverse effect on the Lenders as
determined by the Administrative Agent in its sole reasonable discretion, or amend its name or change its jurisdiction of
incorporation, organization or formation without prior written notice
to, and prior consent of, the Administrative Agent.

 

Section 6.12     Use of Proceeds.  The Borrower will not permit the proceeds of
any Advance to be used for any purpose other than those permitted by Section 5.09.  The Borrower will not engage in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U). 
Neither the Borrower nor any Person acting on behalf of the Borrower has
taken or shall take, nor permit any of the Borrower’s Subsidiaries to take any
action which might cause any of the Loan Documents to violate Regulation T, U
or X or any other regulation of the Board of Governors of the Federal Reserve
System 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, including without limitation, the use of the
proceeds of any Advance to purchase or carry any margin stock in violation of
Regulation T, U or X.

 

Section 6.13     Gas Imbalances, Take-or-Pay or Other
Prepayments.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to, allow gas imbalances,
take-or-pay or other prepayments with respect to the Oil and Gas Properties of
the Borrower or any Subsidiary which 

 

54

 

would require the
Borrower or any Subsidiary to deliver their respective Hydrocarbons produced on
a monthly basis from such Oil and Gas Properties at some future time without
then or thereafter receiving full payment therefor.

 

Section 6.14     Limitation on Speculative Hedging.  Other than the Hedge Contracts required to be
entered into and maintained pursuant to Section 5.12 hereof, the Borrower
shall not, nor shall it permit any of its Subsidiaries to, (a) purchase,
assume, or hold a speculative position in any commodities market or futures
market or enter into any Hydrocarbon Hedge Agreement, Interest Hedge Agreement
or similar hedge arrangement for speculative purposes, or (b) be party to
or otherwise enter into any Hedge Contract which (i) is entered into for
reasons other than as a part of its normal business operations as a risk management
strategy and/or hedge against changes resulting from market conditions related
to the Borrower’s operations, (ii) covers notional volumes in excess of
85% of the anticipated production volumes attributable to Proven Reserves of
the Borrower and its Subsidiaries during the period such hedge arrangement is
in effect, or (iii) is longer than three years in duration.

 

Section 6.15     Additional Subsidiaries; Additional Oil
and Gas Properties.  The Borrower
shall not, nor shall it permit any of its Subsidiaries to, create or acquire
any additional Subsidiaries or acquire any additional Oil and Gas Properties
without (a) such new Subsidiary executing and delivering to the
Administrative Agent, at its request, a Guaranty, a Pledge Agreement, a
Security Agreement and a Mortgage, and such other Security Instruments as the
Administrative Agent or the Majority Lenders may reasonably request, (b) the
delivery by the Borrower of any certificates, opinions of counsel, title
opinions or other documents as the Administrative Agent may reasonably request,
and (c) the Borrower or such Subsidiary acquiring such Oil and Gas
Properties executing and delivering to the Administrative Agent a new Mortgage
or a supplement to an existing Mortgage encumbering such Oil and Gas Properties;
provided that, in any event, no Subsidiary may be created or acquired and no
Oil and Gas Properties may be acquired if a Default has occurred before or
after giving effect to such creation or acquisition of the new Subsidiary or
the acquisition of the additional Oil and Gas Properties.

 

Section 6.16     Account Payables.  The Borrower shall not, nor shall it permit
any of its Subsidiaries to, allow (a) any of its trade payables or other
accounts payable to be outstanding for more than 90 days (except in cases where
any such trade payable is being disputed in good faith and adequate reserves
under GAAP have been established) and (b) the weighted average maturity of
all such trade payables to exceed 120 days.

 

Section 6.17     Current Ratio.  The Borrower shall not permit the ratio of,
as of the end of each fiscal quarter of the Borrower, beginning with the fiscal
quarter ending March 31, 2008, (a) its current assets to (b) its
current liabilities, to be less 1.00 to 1.00. 
For purposes of this calculation (i) “current assets” shall
include, as of the date of calculation, the aggregate Unused Commitment Amounts
(as defined under the Senior Credit Agreement) but shall exclude (A) any
cash deposited with or at the request of a counterparty to any Hedge Contract or
any other similar hedge arrangement and (B) any assets representing a
valuation account arising from the application of SFAS 133 and 143, and (ii) “current liabilities” shall
exclude, as of the date of calculation, the current portion of long-term Debt existing
under this Agreement and the current portion of long-term Debt existing under
the Senior Credit Agreement, and any liabilities representing a valuation
account arising from the application of SFAS 133 and 143.

 

55

 

Section 6.18                Leverage Ratio.  The Borrower (a) shall
not permit the Leverage Ratio at the end of each fiscal quarter ending prior to
June 30, 2008 to be greater than 5.50 to 1.00; and (b) shall not
permit the Leverage Ratio at the end of each fiscal quarter ending on or after June 30,
2008 to be greater than 5.00 to 1.00; provided that, solely for purposes of
calculating Leverage Ratio under this clause, “consolidated Debt” shall not
include Debt outstanding under preferred Equity Interests issued in compliance
with Section 6.22.

 

Section 6.19                Interest Coverage Ratio.  The Borrower
shall not permit the ratio of, as of the end of each fiscal quarter ending on
or after March 31, 2008, (a) the consolidated EBITDA of the Borrower
calculated for the four fiscal quarters then ended, to (b) the
consolidated Interest Expense of the Borrower for the four fiscal quarters then
ended, to be less than 1.50 to 1.00.

 

Section 6.20                Senior Debt.  Except as otherwise permitted by the terms of
the Subordination and Intercreditor Agreement none of the Borrower or any of
its Subsidiaries shall amend, supplement or otherwise modify the terms of the Senior
Debt unless otherwise consented to by the Majority Lender, including but not
limited to, any increases in the Borrowing Base above $100,000,000.

 

Section 6.21                Non-Guarantor Subsidiary. 
Notwithstanding anything to the contrary contained herein, including any
provision of this Article VI, the Borrower shall not, nor shall it permit
any of its Subsidiaries to, (a) create, assume, incur or suffer to exist
any Lien on or in respect of any of its Property for the benefit of Tri-Flow, (b) sell,
assign, pledge, or otherwise transfer any of its Properties to Tri-Flow, or (c) make
or permit to exist any loans, advances, or capital contributions to, or make
any investment in, or purchase or commit to purchase any stock or other
securities or evidences of indebtedness of or interests in, Tri-Flow or in any
Properties of Tri-Flow other than the loans, advances, capital contributions,
investments, and commitments made prior to the date hereof in Tri-Flow; provided
that, the respective amounts of such loans, advances, capital contributions,
investments, and commitments shall not be increased (other than by
appreciation).

 

Section 6.22                Equity Issuance.  The Borrower
shall not, nor shall it permit any of its Subsidiaries to, issue any preferred,
convertible equity securities or other Equity Interests unless (a) the
maturity thereof shall not be earlier than February 28, 2011, (b) the
other terms thereof, including any conversion terms, are satisfactory to the
Administrative Agent, (c) the Equity Issuance Proceeds thereof are
applied, first to satisfy the outstanding Subordinated Debt in full and second
to prepay the Obligations as calculated under Section 2.05(g), and (d) such
issuance of preferred or convertible Equity Interests, together with any Debt
Issuance permitted under Section 6.02(j), does not exceed $60,000,000 in
the aggregate.

 

Section 6.23                Minimum Asset Coverage Ratio.

 

(a)                                  The Borrower shall not permit at any time
the ratio of (i) the Total Present Value as of such date to (ii) the
consolidated Debt of the Borrower as of the applicable determination date to be
less than 1.50 to 1.0.

 

(b)                                 Upon any change to Total Present Value
pursuant to a Scheduled Redetermination or an Interim Redetermination (as such
terms are defined below), the Borrower will promptly, 

 

56

 

but in any event within
fifteen (15) days after any such redetermination, deliver to the Administrative
Agent a certificate of a Responsible Officer of the Borrower setting forth the
consolidated Debt of the Borrower and the Total Present Value and demonstrating
compliance with Section 6.23(a).

 

(c)                                  The Total Present Value shall be
calculated semi-annually in accordance with this Section 6.23 on or about April 15th
and October 15th of each year, commencing April 15, 2008 (each such
semi-annual calculation, a “Scheduled Redetermination”).  In addition, the Total Present Value shall be
calculated between Scheduled Redeterminations at the time of any interim or
additional redetermination of the Borrowing Base under the Senior Credit
Agreement (each such interim or additional calculation, an “Interim
Redetermination”) in accordance with this Section 6.23.  Promptly after receiving each Engineering
Report or other applicable information relating to the Proven Reserves of the
Borrower and its Subsidiaries delivered in connection with a Scheduled
Redetermination or Interim Redetermination, and using the calculations of PDP
NPV, PDNP NPV and PUD NPV contained therein (as well as any recalculations
thereof made by Administrative Agent as provided for in the definitions of PDP
NPV, PDNP NPV and PUD NPV) the Administrative Agent shall notify the Borrower
and each Lender of the resulting Total Present Value.  Such Total Present Value shall thereupon be
used for the purposes of Section 6.23(a) until a new Total Present
Value is calculated or estimated pursuant to this Section 6.23.  Each determination of Total Present Value
shall be made as of the date of the applicable Engineering Report or other
applicable information delivered in connection with a Scheduled Redetermination
or Interim Redetermination.

 

(d)                                 In the event that the Borrower does not
furnish to the Administrative Agent and the Lenders the Independent Engineering
Report, Internal Engineering Report or other information specified in Sections
5.06(c)(i), 5.06(c)(ii), or 5.06(c)(iii), as applicable, by the date specified
in such clauses, the Administrative Agent may, based on the information
available to it, estimate in good faith the Total Present Value from time to
time thereafter until the Administrative Agent and the Lenders receive the
relevant Independent Engineering Report, Internal Engineering Report, or other
information, as applicable.  Such
estimated Total Present Value shall thereupon be used for the purposes of Section 6.23(a) until
a new Total Present Value is calculated or estimated pursuant to this
Agreement.

 

ARTICLE VII

EVENTS OF DEFAULT; REMEDIES

 

Section 7.01                Events of Default.  The
occurrence of any of the following events shall constitute an “Event of Default”
under any Loan Document:

 

(a)                                  Payment.  The Borrower
shall (i) fail to pay when due any principal or interest payable hereunder
or under the Notes or (ii) fail to pay, within 3 Business Days of when
due, any other amounts (including fees, reimbursements, and indemnifications)
payable hereunder, under the Notes, or under any other Loan Document;

 

(b)                                 Representation and Warranties. 
Any representation or warranty made or deemed to be made (i) by the
Borrower, any Guarantor or any of their respective Subsidiaries (or any of 

 

57

 

their respective
officers) in this Agreement or in any other Loan Document, or (ii) by the
Borrower, any Guarantor or any of their respective Subsidiaries (or any of
their respective officers) in connection with this Agreement or any other Loan
Document, shall prove to have been incorrect in any material respect when made
or deemed to be made;

 

(c)                                  Covenant Breaches. 
The Borrower, any Guarantor or any of their respective Subsidiaries
shall fail to (i) perform or observe any covenant contained in Section 5.02(a),
Section 5.03, Section 5.06(e), Section 5.09, Section 5.12,
or Article VI of this Agreement or (ii) fail to perform or observe
any other term or covenant set forth in this Agreement or in any other Loan
Document which is not covered by clause (i) above or any other
provision of this Section 7.01 if such failure shall remain unremedied for
30 days after the occurrence of such breach or failure;

 

(d)                                 Cross-Defaults.  (i) The
Borrower, any Guarantor or any of their respective Subsidiaries shall fail to
pay any principal of or premium or interest on its Debt which is outstanding in
a principal amount of at least $1,000,000 individually or when aggregated with
all such Debt of the Borrower, any Guarantor or any of their respective
Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the
same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; (ii) any other event shall occur or
condition shall exist under any agreement or instrument relating to Debt
(including, without limitation, the Senior Credit Agreement) which is
outstanding in a principal amount of at least $1,000,000 individually or when
aggregated with all such Debt of the Borrower, such Subsidiary, or such
Guarantor so in default, and shall continue after the applicable grace period,
if any, specified in such agreement or instrument, if the effect of such event
or condition is to accelerate, or to permit the acceleration of, the maturity
of such Debt; or (iii) any such Debt shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; provided that, for
purposes of this subsection 7.01(d), the “principal amount” of the obligations
in respect of any Hedging Contracts at any time shall be the maximum aggregate
amount (giving effect to any netting agreements) that would be required to be
paid if such Hedging Contracts were terminated at such time

 

(e)                                  Insolvency.  The Borrower,
any Guarantor or any of their respective Subsidiaries shall generally not pay
its debts as such debts become due, or shall admit in writing its inability to
pay its debts generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against the Borrower,
any of its Subsidiaries, or any Guarantor seeking to adjudicate it as bankrupt
or insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for it or for any substantial part of its
Property and, in the case of any such proceeding instituted against the
Borrower, any such Subsidiary or any such Guarantor either such proceeding
shall remain undismissed for a period of 60 days or any of the actions sought
in such proceeding shall occur; or the Borrower, any of its Subsidiaries, or
any Guarantor shall take any corporate action to authorize any of the actions
set forth above in this paragraph (e);

 

58

 

(f)                                    Judgments.  Any judgment
or order for the payment of money in excess of $1,000,000 shall be rendered
against the Borrower, any Guarantor or any of their respective Subsidiaries and
either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order or (ii) there shall be any period of
30 consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect;

 

(g)                                 Termination Events. 
Any Termination Event with respect to a Plan shall have occurred, and,
30 days after notice thereof shall have been given to the Borrower by the
Administrative Agent, (i) such Termination Event shall not have been
corrected and (ii) the then present value of such Plan’s vested benefits
exceeds the then current value of assets accumulated in such Plan by more than
the amount of $1,000,000 (or in the case of a Termination Event involving the
withdrawal of a “substantial employer” (as defined in Section 4001(a)(2) of
ERISA), the withdrawing employer’s proportionate share of such excess shall
exceed such amount);

 

(h)                                 Plan Withdrawals. 
The Borrower or any member of the Controlled Group as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from such
Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have
notified such withdrawing employer that such employer has incurred a withdrawal
liability in an annual amount exceeding $1,000,000.

 

(i)                                     Change in Control. 
The Borrower shall have discontinued its usual business or a Change in
Control shall have occurred;

 

(j)                                     Reserved.

 

(k)                                  Loan Documents. 
Any material provision of any Loan Document shall for any reason cease
to be valid and binding on the Borrower or a Guarantor or any of their
respective Subsidiaries or any such Person shall so state in writing;

 

(l)                                     Security Instruments.  (i) The
Administrative Agent shall fail to have an Acceptable Security Interest in any
material portion of the Collateral as determined in the sole discretion of the
Administrative Agent, (ii) the Administrative Agent shall fail to have an
Acceptable Security Interest in any immaterial portion of the Collateral as
determined in the sole discretion of the Administrative Agent and such failure
continues for more than 30 days after the Administrative Agent shall have given
notice thereof, and a request to cure such failure, to the Borrower, or (iii) any
Security Instrument shall at any time and for any reason cease to create the
Lien on the Property purported to be subject to such agreement in accordance
with the terms of such agreement, or cease to be in full force and effect, or
shall be contested by the Borrower, any Guarantor or any of their respective
Subsidiaries;

 

(m)                               Potential Failure of Title. 
The title of the Borrower, any Guarantor or any of their respective
Subsidiaries to any of the Oil and Gas Properties subject to the Mortgages, or
any material part thereof, shall become the subject matter of litigation before
any Governmental Authority or arbitrator which could reasonably be expected to
result in a Material Adverse 

 

59

 

Change with respect to
the Borrower’s, such Guarantor’s or such Subsidiary’s title to such Oil and Gas
Properties;

 

(n)                                 Material Adverse Change. 
An event resulting in a Material Adverse Change shall have occurred;

 

(o)                                 Casualty.  Loss, theft,
substantial damage or destruction of a material portion of the Collateral the
subject of any Security Instrument and not fully covered by insurance (except
for deductibles and allowing for the depreciated value of such Collateral)
shall have occurred;

 

Section 7.02                Optional Acceleration of Maturity. 
If any Event of Default (other than an Event of Default pursuant to
paragraph (e) of Section 7.01) shall have occurred and be
continuing, then, and in any such event,

 

(a)                                  the Administrative Agent (i) shall
at the request, or may with the consent, of the Majority Lenders, by notice to
the Borrower, declare the obligation, if any, of each Lender to make extensions
of credit hereunder to be terminated, whereupon the same shall forthwith
terminate, and (ii) shall at the request, or may with the consent, of the
Majority Lenders, by notice to the Borrower, declare all principal, interest,
fees, reimbursements, indemnifications, and all other amounts payable under
this Agreement, the Notes, and the other Loan Documents to be forthwith due and
payable, whereupon all such amounts shall become and be forthwith due and
payable in full, without notice of intent to demand, demand, presentment for
payment, notice of nonpayment, protest, notice of protest, grace, notice of
dishonor, notice of intent to accelerate, notice of acceleration, and all other
notices, all of which are hereby expressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders (but subject to
the Subordination and Intercreditor Agreement) proceed to enforce its rights
and remedies under the Security Instruments, the Guaranties, and any other Loan
Documents for the ratable benefit of the Secured Parties by appropriate
proceedings.

 

Section 7.03                Automatic Acceleration of Maturity. 
If any Event of Default pursuant to paragraph (e) of Section 7.01
shall occur,

 

(a)                                  (i) the obligation, if any, of each
Lender to make extensions of credit hereunder shall terminate, and (ii) all
principal, interest, fees, reimbursements, indemnifications, and all other
amounts payable under this Agreement, the Notes, and the other Loan Documents
shall become and be forthwith due and payable in full, without notice of intent
to demand, demand, presentment for payment, notice of nonpayment, protest,
notice of protest, grace, notice of dishonor, notice of intent to accelerate,
notice of acceleration, and all other notices, all of which are hereby
expressly waived by the Borrower; and

 

(b)                                 the Administrative Agent shall at the
request of, or may with the consent of, the Majority Lenders (but subject to
the Subordination and Intercreditor Agreement) proceed to enforce its rights
and remedies under the Security Instruments, the Guaranties, and any other Loan
Document for the ratable benefit of the Secured Parties by appropriate
proceedings.

 

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Section 7.04                Right of Set-off.  Upon the
occurrence and during the continuance of any Event of Default, the
Administrative Agent and each Lender 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 indebtedness at any time owing by the Administrative Agent
or such Lender to or for the credit or the account of the Borrower against any
and all of the obligations of the Borrower now or hereafter existing under this
Agreement, the Notes held by the Administrative Agent or such Lender, and the
other Loan Documents, irrespective of whether or not the Administrative Agent
or such Lender shall have made any demand under this Agreement, such Notes, or
such other Loan Documents, and although such obligations may be unmatured.  The Administrative Agent and each Lender
agrees to promptly notify the Borrower after any such set-off and application
made by the Administrative Agent or such Lender, provided that the failure to
give such notice shall not affect the validity of such set-off and
application.  The rights of the
Administrative Agent and each Lender under this Section 7.04 are in
addition to any other rights and remedies (including, without limitation, other
rights of set-off) that the Administrative Agent or such Lender may have.

 

Section 7.05                Non-exclusivity of Remedies. 
No remedy conferred upon the Administrative Agent and the Lenders is
intended to be exclusive of any other remedy, and each remedy shall be
cumulative of all other remedies existing by contract, at law, in equity, by
statute or otherwise.

 

Section 7.06                Application of Proceeds.

 

(a)                                  Prior to the Payment in Full of Senior
Debt (as defined in the Subordination and Intercreditor Agreement) and other
than as otherwise permitted by the Subordination and Intercreditor Agreement,
any monies or Property actually received by the Administrative Agent pursuant
to this Agreement or any other Loan Document as a result of the exercise of any
rights or remedies under any Security Instrument or any other agreement with
the Borrower, any Guarantor or any of their respective Subsidiaries which
secures any of the Obligations, shall in any event be held in trust by the
Administrative Agent for the benefit of Senior Agent and Senior Secured Parties
(as defined in the Subordination and Intercreditor Agreement) and promptly paid
or delivered to Senior Agent in the form received; and

 

(b)                                 after the Payment in Full of Senior Debt
and the termination of the Subordination and Intercreditor Agreement, any
monies or Property actually received by the Administrative Agent pursuant to
this Agreement or any other Loan Document as a result of the exercise of any
rights or remedies under any Security Instrument or any other agreement with
the Borrower, any Guarantor or any of their respective Subsidiaries which
secures any of the Obligations, shall be applied in the following order:

 

(i)                                     First, to the payment of all amounts,
including costs and expenses incurred in connection with the collection of such
proceeds and the payment of any part of the Obligations, due to the
Administrative Agent under any of the expense reimbursement or indemnity
provisions of this Agreement or any other Loan Document, any Security
Instrument or other collateral documents, and any applicable law;

 

61

 

(ii)                                  Second, ratably, according to the then
unpaid amounts thereof, without preference or priority of any kind among them,
to the payment of the Obligations then due and payable; and

 

(iii)                               Third, the remainder, if any, to the
Borrower, its Subsidiaries, their respective successors or assigns, or such
other Person as may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct.

 

(c)                                  All rights of the Administrative Agent
and the Lenders in this Article VII shall be subject to the terms and
conditions of the Subordination and Intercreditor Agreement.  In the event of a conflict between the terms
of this Article VII and the Subordination and Intercreditor Agreement, the
Subordination and Intercreditor Agreement shall control.

 

ARTICLE VIII

THE ADMINISTRATIVE AGENT

 

Section 8.01                Authorization and Action. 
Each Lender hereby appoints and authorizes the Administrative Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Administrative Agent by the terms hereof and
of the other Loan Documents, together with such powers as are reasonably
incidental thereto.  As to any matters
not expressly provided for by this Agreement or any other Loan Document (including,
without limitation, enforcement or collection of the Notes), the Administrative
Agent shall not be required to exercise any discretion or take any action, but
shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Majority Lenders, and such instructions shall be binding upon all Lenders and
all holders of Notes; provided, however, that the Administrative Agent
shall not be required to take any action which exposes the Administrative Agent
to personal liability or which is contrary to this Agreement, any other Loan
Document, or applicable law.

 

Section 8.02                Administrative Agent’s Reliance, Etc. 
Neither the Administrative Agent nor any of its directors, officers,
agents, or employees shall be liable for any action taken or omitted to be
taken (INCLUDING THE ADMINISTRATIVE AGENT’S OWN
NEGLIGENCE) by it or them under or in connection with this Agreement
or the other Loan Documents, except for its or their own gross negligence or
willful misconduct.  Without limitation
of the generality of the foregoing, the Administrative Agent:  (a) may treat the payee of any Note as
the holder thereof until the Administrative Agent receives written notice of
the assignment or transfer thereof signed by such payee and in form
satisfactory to the Administrative Agent; (b) may consult with legal
counsel (including counsel for the Borrower), independent public accountants,
and other experts selected by it and shall not be liable for any action taken
or omitted to be taken in good faith by it in accordance with the advice of
such counsel, accountants, or experts; (c) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties, or representations made in or in connection with this
Agreement or the other Loan Documents; (d) shall not have any duty to
ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of this Agreement or any other Loan Document on
the part of the Borrower or its Subsidiaries or to inspect the Property
(including the books and records) of the Borrower or its 

 

62

 

Subsidiaries; (e) shall
not be responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency, or value of this Agreement or any
other Loan Document; and (f) shall incur no liability under or in respect
of this Agreement or any other Loan Document by acting upon any notice,
consent, certificate, or other instrument or writing (which may be by
telecopier or telex) believed by it to be genuine and signed or sent by the
proper party or parties.

 

Section 8.03                The Administrative Agent and Its Affiliates. 
With respect to its Commitment, the Advances made by it and the Notes
issued to it, the Administrative Agent shall have the same rights and powers
under this Agreement as any other Lender and may exercise the same as though it
were not the Administrative Agent.  The
term “Lender” or “Lenders” shall, unless otherwise expressly indicated, include
the Administrative Agent in its individual capacity.  The Administrative Agent and its Affiliates
may accept deposits from, lend money to, act as trustee under indentures of,
and generally engage in any kind of business with, the Borrower or any of its
Subsidiaries, and any Person who may do business with or own securities of the
Borrower or any such Subsidiary, all as if the Administrative Agent were not an
agent hereunder and without any duty to account therefor to the Lenders.

 

Section 8.04                Lender Credit Decision.  Each Lender
acknowledges that it has, independently and without reliance upon the
Administrative Agent or any other Lender and based on the Financial Statements
and the Interim Financial Statements and such other documents and information
as it has deemed appropriate, made its own credit analysis and decision to
enter into this Agreement.  Each Lender
also acknowledges that it shall, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.

 

Section 8.05                Indemnification.  THE LENDERS SEVERALLY AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT AND
EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND
AGENTS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR
RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES, OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE
IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY
WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED
BY THE ADMINISTRATIVE AGENT UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
(INCLUDING THE ADMINISTRATIVE AGENT’S OWN NEGLIGENCE), AND INCLUDING, WITHOUT
LIMITATION, ENVIRONMENTAL LIABILITIES, PROVIDED THAT NO LENDER SHALL BE LIABLE
FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE
ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  WITHOUT LIMITATION OF THE FOREGOING, EACH
LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR
ITS RATABLE SHARE OF ANY 

 

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OUT-OF-POCKET EXPENSES (INCLUDING
COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE
PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR
ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF,
OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT, TO THE EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT
REIMBURSED FOR SUCH BY THE BORROWER.

 

Section 8.06                Successor Administrative Agent. 
The Administrative Agent may resign at any time by giving written notice
thereof to the Lenders and the Borrower and may be removed at any time with or
without cause by the Majority Lenders upon receipt of written notice from the
Majority Lenders to such effect.  Upon
receipt of notice of any such resignation or removal, the Majority Lenders
shall have the right to appoint a successor Administrative Agent with, if any
Event of Default has not occurred and is not continuing, the consent of the
Borrower, which consent shall not be unreasonably withheld.  If no successor Administrative Agent shall
have been so appointed by the Majority Lenders with the consent of the
Borrower, and shall have accepted such appointment, within 30 days after the
retiring Administrative Agent’s giving of notice of resignation or the Majority
Lenders’ removal of the retiring Administrative Agent then the retiring
Administrative Agent may, on behalf of the Lenders and the Borrower, appoint a
successor Administrative Agent, which shall be, in the case of a successor
agent, a commercial bank organized under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of at
least $500,000,000.00.  Upon the
acceptance of any appointment as Administrative Agent by a successor
Administrative Agent, such successor Administrative Agent shall thereupon
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 under this Agreement
and the other Loan Documents.  After any
retiring Administrative Agent’s resignation or removal hereunder as
Administrative Agent, the provisions of this Article VIII shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.

 

ARTICLE IX

MISCELLANEOUS

 

Section 9.01                Amendments, Etc.  No amendment
or waiver of any provision of this Agreement, the Notes, or any other Loan
Document, nor consent to any departure by the Borrower or any Subsidiary
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Majority Lenders and the Borrower, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no amendment, waiver,
or consent shall, unless in writing and signed by all the Lenders, do any of
the following:  (a) waive any of the
conditions specified in Section 3.01, (b) increase the Commitments of
the Lenders other than as provide in Section 2.16, (c) reduce the
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or under any other Loan Document, (d) postpone any date fixed for
any payment of principal of, or interest on, the Notes or any fees or other
amounts payable hereunder or extend 

 

64

 

the Maturity Date (other
than as provided in Section 2.15), (e) change the percentage of
Lenders which shall be required for the Lenders or any of them to take any
action hereunder or under any other Loan Document, (f) amend Section 2.11
or this Section 9.01, (g) amend the definition of “Majority Lenders,”
(h) release any Guarantor from its obligations under any Guaranty, (i) permit
the Borrower or any Subsidiary to enter into any merger or consolidation with
or into any other Person or amend Section 6.04(a), (j) release any
Collateral securing the Obligations, except for releases of Collateral sold as
permitted by this Agreement or (k) amend or waive any provision of, nor
consent to any departure by any party thereto from, the Collateral Trust and
Intercreditor Agreement; and provided, further, that no amendment,
waiver or consent shall, unless in writing and signed by the Administrative
Agent in addition to the Lenders required above to take such action, affect the
rights or duties of the Administrative Agent under this Agreement or any other
Loan Document.

 

Section 9.02                Notices, Etc.  All notices
and other communications shall be in writing (including, without limitation,
telecopy or telex) and mailed by certified mail, return receipt requested,
telecopied, telexed, hand delivered, or delivered by a nationally recognized
overnight courier, at the address for the appropriate party specified in
Schedule II or at such other address as shall be designated by such party in a
written notice to the other parties.  All
such notices and communications shall, when so mailed, telecopied, telexed, or
hand delivered or delivered by a nationally recognized overnight courier, be
effective when received if mailed, when telecopy transmission is completed,
when confirmed by telex answer-back, or when delivered by such messenger or
courier, respectively, except that notices and communications to the
Administrative Agent pursuant to Article II or VIII shall not be effective
until received by the Administrative Agent.

 

Section 9.03                No Waiver; Remedies.  No failure on
the part of any Lender, or the Administrative Agent, to exercise, and no delay
in exercising, any right hereunder or under any Note shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right preclude
any other or further exercise thereof or the exercise of any other right.  The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.

 

Section 9.04                Costs and Expenses.  The Borrower
agrees to pay on demand (a) all reasonable out-of-pocket costs and
expenses of the Administrative Agent in connection with the preparation,
execution, delivery, administration, modification, and amendment of this
Agreement, the Notes, the Guaranties, and the other Loan Documents including
the reasonable fees and out-of-pocket expenses of counsel for the Administrative
Agent with respect to advising the Administrative Agent as to its rights and
responsibilities under this Agreement and (b) all out-of-pocket costs and
expenses, if any, of the Administrative Agent and each Lender (including,
without limitation, reasonable counsel fees and expenses of the Administrative
Agent and each Lender) in connection with the enforcement (whether through
negotiations, legal proceedings, or otherwise) of this Agreement, the Notes,
the Guaranties, and the other Loan Documents.

 

Section 9.05                Binding Effect.  This
Agreement shall become effective when it shall have been executed by the
Borrower and the Administrative Agent, and when the Administrative Agent shall
have, as to each Lender, either received a counterpart hereof executed by such
Lender or been notified by such Lender that such Lender has executed it and
thereafter shall be 

 

65

 

binding upon and inure to
the benefit of the Borrower, the Administrative Agent and each Lender and their
respective successors and assigns, except that the Borrower shall not have the
right to assign its rights or delegate its duties under this Agreement or any
interest in this Agreement without the prior written consent of each Lender.

 

Section 9.06                Lender Assignments and Participations.

 

(a)                                  Assignments. 
Any Lender may assign to one or more Eligible Assignees all or any
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitments, if any, the Advances owing to
it, and the Notes held by it); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of
such Lender’s rights and obligations assigned under this Agreement and shall be
an equal percentage with respect to both its obligations owing in respect of
the Commitments, if any, and the related Advances, (ii) the amount of the
Commitments and Advances of such Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall be, if to an entity other than a Lender, not
less than $5,000,000 and shall be an integral multiple of $1,000,000 in excess
thereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) the
parties to each such assignment shall execute and deliver to the Administrative
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with the Notes subject to such assignment, and (v) each
Eligible Assignee (other than the Eligible Assignee of the Administrative Agent
or an Affiliate of a Lender) shall pay to the Administrative Agent a $3,500
administrative fee.  Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder
shall be a party hereto for all purposes and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (B) such
Lender thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of such Lender’s rights and obligations under this Agreement, such Lender shall
cease to be a party hereto).

 

(b)                                 Term of Assignments. 
By executing and delivering an Assignment and Acceptance, the Lender
thereunder and the assignee thereunder confirm to and agree with each other and
the other parties hereto as follows:  (i) other
than as provided in such Assignment and Acceptance, such Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Lender makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Borrower or its Subsidiaries or the performance or observance by the
Borrower or its Subsidiaries of any of their obligations under this Agreement
or any other instrument or document furnished pursuant hereto; (iii) such
assignee confirms that it has received a copy of this Agreement, together with
copies of the Financial Statements and Interim Financial Statements referred to
in Section 4.05 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such 

 

66

 

Assignment and
Acceptance; (iv) such assignee will, independently and without reliance
upon the Administrative Agent, such Lender 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
this Agreement; (v) such assignee appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Administrative Agent
by the terms hereof, together with such powers as are reasonably incidental
thereto; and (vi) such assignee agrees that it will perform in accordance
with their terms all of the obligations which by the terms of this Agreement
are required to be performed by it as a Lender.

 

(c)                                  The Register. 
The Administrative Agent shall maintain at its address referred to in Section 9.02
a copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Lenders and the
Commitments of, and principal amount of the Advances owing to, each Lender from
time to time (the “Register”).  The
entries in the Register shall be conclusive and binding for all purposes,
absent manifest error, and the Borrower, the Administrative Agent and the
Lenders may treat each Person whose name is recorded in the Register as a
Lender hereunder for all purposes of this Agreement.  The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time
to time upon reasonable prior notice.

 

(d)                                 Procedures.  Upon its
receipt of an Assignment and Acceptance executed by a Lender and an Eligible
Assignee, together with the Notes subject to such assignment, the
Administrative Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of the attached Exhibit A, (i) accept
such Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt notice thereof to the
Borrower.  Within five Business Days
after its receipt of such notice, the Borrower shall execute and deliver to the
Administrative Agent in exchange for the surrendered Notes (A) a new Note
to the order of such Eligible Assignee in an amount equal to the Advances
purchased by it pursuant to such Assignment and Acceptance and (B) if such
Lender has retained any portion of the Advances owing to it, a new Note to the
order of such Lender in an amount equal to the portion retained by it
hereunder.  Such new Notes shall be dated
the effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of the attached Exhibit E.

 

(e)                                  Participations. 
Each Lender may sell participations to one or more banks or other
entities in or to all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of the Advances
owing to it); provided, however, that (i) such Lender’s obligations
under this Agreement shall remain unchanged, (ii) such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Lender shall remain the holder of any such Notes
for all purposes of this Agreement, (iv) the Borrower, the Administrative
Agent 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, and (v) such Lender shall not require the participant’s consent
to any matter under this Agreement, except for change in the principal amount
of the Notes, reductions in fees or interest, releasing all or substantially
all of any Collateral, permitting the Borrower or any Subsidiary to enter into
any merger or consolidation with or into any other,  postponement of any date fixed for any
payment of principal of, or interest on, the Notes or any fees or other amounts

 

67

 

payable hereunder, or
extensions of the Maturity Date (other than as provided in Section 2.15).  The Borrower hereby agrees that participants
shall have the same rights under Sections 2.12, 2.13, 2.14(c), and 9.07 as
a Lender to the extent of their respective participations.

 

Section 9.07                Indemnification; Waiver.

 

(a)                                  Indemnification.  THE BORROWER
SHALL, AND DOES HEREBY INDEMNIFY, THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT
THEREOF), EACH LENDER AND EACH OFFICER, DIRECTOR, EMPLOYEE, AGENT,
ATTORNEY-IN-FACT AND AFFILIATE  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 ANY INDEMNITEE OR ASSERTED
AGAINST ANY INDEMNITEE BY ANY THIRD PARTY OR BY THE BORROWER OR ANY SUBSIDIARY
OF THE BORROWER ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE
EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY
AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE
PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE
CASE OF THE ADMINISTRATIVE AGENT (AND ANY SUB-AGENT, OFFICER, DIRECTOR,
EMPLOYEE, AGENT, ATTORNEY-IN-FACT AND AFFILIATE THEREOF) THE ADMINISTRATION OF
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, (II) ANY ADVANCE OR THE USE
OR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) 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, OR ANY ENVIRONMENTAL
LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS SUBSIDIARIES, OR (IV) ANY
ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING
TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY,
WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY GUARANTOR, AND
REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, IN ALL CASES, WHETHER OR NOT CAUSED BY OR
ARISING, IN WHOLE OR IN PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE
NEGLIGENCE OF THE INDEMNITEE;  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.

 

(b)                                 Waiver
of Damages.  To
the fullest 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 

 

68

 

Agreement, any other Loan
Document or any agreement or instrument contemplated hereby, the transactions
contemplated hereby or thereby, any Advance or the use of the proceeds
thereof.  No Indemnitee referred to in
subsection (b) above shall be liable for any damages arising from the use
by unintended recipients of any information or other materials distributed by
it through telecommunications, electronic or other information transmission
systems in connection with this Agreement or the other Loan Documents or the
transactions contemplated hereby or thereby.

 

Section 9.08                Execution in Counterparts. 
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement. 
Delivery of an executed counterpart signature page of this
Agreement by facsimile is as effective as executing and delivering this
Agreement in the presence of the other parties to this Agreement.

 

Section 9.09                Survival of Representations, Etc. 
All representations and warranties contained in this Agreement or made
in writing by or on behalf of the Borrower in connection herewith shall survive
the execution and delivery of this Agreement and the Loan Documents, the making
of the Advances and any investigation made by or on behalf of the Lenders, none
of which investigations shall diminish any Lender’s right to rely on such
representations and warranties.  All
obligations of the Borrower provided for in Sections 2.12, 2.09(c), 2.13,
2.14(c), 9.04, and 9.07 and all of the obligations of the Lenders in Section 8.05
shall survive any termination of this Agreement and repayment in full of the
Obligations.

 

Section 9.10                Severability.  In case one
or more provisions of this Agreement or the other Loan Documents shall be
invalid, illegal or unenforceable in any respect under any applicable law, the
validity, legality, and enforceability of the remaining provisions contained
herein or therein shall not be affected or impaired thereby.

 

Section 9.11                Business Loans.  The Borrower
warrants and represents that the Loans evidenced by the Notes are and shall be
for business, commercial, investment, or other similar purposes and not
primarily for personal, family, household, or agricultural use, as such terms
are used in Chapter One (“Chapter One”) of the Texas Credit Code.  At all such times, if any, as Chapter One
shall establish a Maximum Rate, the Maximum Rate shall be the “indicated rate
ceiling” (as such term is defined in Chapter One) from time to time in effect.

 

Section 9.12                Governing Law; Submission to Jurisdiction. 
This Agreement, the Notes and the other Loan Documents shall be governed
by, and construed and enforced in accordance with, the laws of the State of
Texas.  Without limiting the intent of
the parties set forth above, (a) Chapter 346 of the Texas Finance Code, as
amended (relating to revolving loans and revolving tri-party accounts (formerly
Tex.  Rev. Civ.  Stat. 
Ann.  Art.  5069, Ch. 
15)), shall not apply to this Agreement, the Notes, or the transactions
contemplated hereby and (b) to the extent that any Lender may be subject
to Texas law limiting the amount of interest payable for its account, such
Lender shall utilize the indicated (weekly) rate ceiling from time to time in
effect.  The Borrower hereby irrevocably
submits to the jurisdiction of any Texas state or federal court sitting in
Dallas, Texas in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, and the Borrower hereby irrevocably
agrees that all claims in respect of such action 

 

69

 

or proceeding may be
heard and determined in such court.  The
Borrower hereby unconditionally and irrevocably waives, to the fullest extent
it may effectively do so, any right it may have to the defense of an
inconvenient forum to the maintenance of such action or proceeding.  The Borrower hereby agrees that service of
copies of the summons and complaint and any other process which may be served
in any such action or proceeding may be made by mailing or delivering a copy of
such process to such Borrower at its address set forth in this Agreement.  The Borrower agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law.  Nothing in this Section shall
affect the rights of any Lender to serve legal process in any other manner
permitted by the law or affect the right of any Lender to bring any action or
proceeding against the Borrower or its Property in the courts of any other
jurisdiction.

 

Section 9.13                Subordination and Intercreditor Agreement. 
The Administrative Agent is hereby authorized on behalf of the Lenders
for the Lenders to enter into the Subordination and Intercreditor
Agreement.  A copy of such Subordination
and Intercreditor Agreement will be made available to each Lender on the
Effective Date and thereafter upon request. 
Each Lender agrees to the terms of such Subordination and Intercreditor
Agreement and agrees that the terms thereof shall be binding on such Lender and
its successors and assigns, as if it were a party thereto.

 

Section 9.14                USA Patriot Act.  Each Lender
that is subject to the Patriot Act and the Administrative Agent (for itself and
not on behalf of any Lender) hereby notifies the Borrower that pursuant to the
requirements of the Patriot 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
or the Administrative Agent, as applicable, to identify the Borrower in
accordance with the Patriot Act.

 

Section 9.15                WAIVER OF JURY TRIAL. 
THE BORROWER, THE LENDERS AND THE ADMINISTRATIVE AGENT HEREBY
ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED BY AND HAVE CONSULTED WITH COUNSEL
OF THEIR CHOICE, AND HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY
WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY
OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

Section 9.16                ORAL AGREEMENTS. 
THIS WRITTEN AGREEMENT AND THE LOAN DOCUMENTS, AS DEFINED IN THIS
AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.  Signature page follows.]

 

70

 

EXECUTED
as of the date first above written.

 

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC. a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Morris B. Smith

  
	
   

  	
   

  	
  Morris
  B. Smith,

  
	
   

  	
   

  	
  Senior
  Vice President and

  
	
   

  	
   

  	
  Chief
  Financial Officer

  

 

 

Signature page to Subordinated Credit Agreement

(Cano Petroleum)

 

 

	
   

  	
  ADMINISTRATIVE
  AGENT/LENDERS:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL
  EQUITIES, INC.,

  
	
   

  	
  as
  Administrative Agent and Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Henry Park

  
	
   

  	
   

  	
  Henry
  Park

  
	
   

  	
   

  	
  Senior
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Tom Thompson

  
	
   

  	
   

  	
  Tom
  Thompson

  
	
   

  	
   

  	
  Senior
  Vice President

  

 

 

Signature page to Subordinated Credit Agreement

(Cano Petroleum)

 

 

SCHEDULE I

 

PRICING GRID

 

Applicable Margins

 

The
Applicable Margin shall be determined in accordance with the following Table
based on the Borrower’s Leverage Ratio as reflected in the Compliance
Certificate delivered in connection with the Financial Statements most recently
delivered pursuant to Section 5.06. 
Adjustments, if any, to such Applicable Margin shall be effective on the
date the Administrative Agent receives the applicable Financial Statements and
corresponding Compliance Certificate as required by the terms of this
Agreement.  If the Borrower fails to
deliver the Financial Statements and corresponding Compliance Certificate to
the Administrative Agent at the time required pursuant to Section 5.06,
then effective as of the date such Financial Statements and Compliance
Certificate were required to the delivered pursuant to Section 5.06, the
Applicable Margin shall be determined at Level II and shall remain at such
level until the date such Financial Statements and corresponding Compliance
Certificate are so delivered by the Borrower.  
Notwithstanding the foregoing, the Borrower shall be deemed to be at
Level I described below until delivery of its unaudited Financial Statements
and corresponding Compliance Certificate for the fiscal quarter ending March 31,
2008.  Notwithstanding anything to the
contrary contained herein, the determination of the Applicable Margin for any
period shall be subject to the provisions of Section 2.09(c).

 

	
  Applicable

  Margin

  	
   

  	
  Leverage Ratio

  	
   

  	
  Eurodollar

  Advances

  	
   

  	
  Reference Rate 

  Advances

  	
   

  
	
  Level I

  	
   

  	
  Is less than or equal to
  4.00 to 1.00

  	
   

  	
  5.75

  	
  %

  	
  4.75

  	
  %

  
	
  Level II

  	
   

  	
  Is greater than 4.00 to
  1.00

  	
   

  	
  6.00

  	
  %

  	
  5.00

  	
  %

  

 

 

SCHEDULE II

NOTICE INFORMATION AND COMMITMENTS

 

Each
of the commitments to lend set forth herein is governed by the terms of the
Credit Agreement which provides for, among other things, borrowing base
limitations which may restrict the Borrower’s ability to request (and the
Lenders’ obligation to provide) Credit Extensions to a maximum amount which is
less than the commitments set forth in this Schedule II.

 

Administrative Agent:

 

UnionBanCal
Equities, Inc.

445
South Figueroa Street, 13th Floor

Los
Angeles, California 90071

Attention:  Maggie Elower

Phone:  213-236-7881

Fax:  213-236-7619

 

Borrower:

 

Cano
Petroleum, Inc.

801
Cherry Street, Suite 3200

Forth
Worth, Texas 76102

Attention:
Morris B. Smith, CFO

Facsimile:
(817) 334-0222

 

	
  Lenders:

  	
   

  	
  Commitments

  	
   

  
	
  UnionBanCal Equities, Inc.

  	
   

  	
  $

  	
  15,000,000.00

  	
   

  
	
  Total:

  	
   

  	
  $

  	
  15,000,000.00

  	
   

  

 

 

SCHEDULE 4.01

 

SUBSIDIARIES OF BORROWER

 

Ladder Companies, Inc.

 

Sole
Jurisdiction of Formation / Filing:             Delaware

Type
of Organization:   Corporation

 

Square One Energy, Inc.

 

Sole
Jurisdiction of Formation / Filing:             Texas

Type
of Organization:   Corporation

 

W.O. Energy of Nevada, Inc.

 

Sole
Jurisdiction of Formation / Filing:             Nevada

Type
of Organization:   Corporation

 

WO Energy, Inc.

 

Sole
Jurisdiction of Formation / Filing:             Texas

Type
of Organization:   Corporation

 

W.O. Operating Company, Ltd.

 

Sole
Jurisdiction of Formation / Filing:             Texas

Type
of Organization:   Limited Partnership

 

W.O. Production Company, Ltd.

 

Sole
Jurisdiction of Formation / Filing:             Texas

Type
of Organization:   Limited Partnership

 

Tri-Flow, Inc.

 

Sole
Jurisdiction of Formation / Filing:             Oklahoma

 

Type
of Organization:   Corporation

 

Pantwist,
LLC

 

Sole
Jurisdiction of Formation / Filing:             Texas

 

Type
of Organization:   Limited Liability Company

 

1

 

Cano
Petro of New Mexico

 

Sole
Jurisdiction of Formation / Filing:             Texas

 

Type
of Organization:   Corporation

 

2

 

SCHEDULE 4.05

 

Cano
Petroleum, Inc.

 

Senior Debt as presented
below, as of 3/12/08.

 

	
  Value

  Date

  	
   

  	
  Maturity

  Date

  	
   

  	
  Eurodollar

  Rate Loan 

  Amount

  	
   

  	
  Rate

  	
   

  	
  Days

  	
   

  
	
  2/22/08

  	
   

  	
  3/25/08

  	
   

  	
  $

  	
  18,000,000

  	
   

  	
  5.37

  	
  %

  	
  32

  	
   

  
	
  2/29/08

  	
   

  	
  3/31/08

  	
   

  	
  $

  	
  22,000,000

  	
   

  	
  5.37

  	
  %

  	
  31

  	
   

  
	
  2/14/08

  	
   

  	
  3/14/08

  	
   

  	
  $

  	
  9,500,000

  	
   *

  	
  5.38

  	
  %

  	
  31

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  $

  	
  49,500,000

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

* Provided notice to convert
to a Reference Rate Loan on 3/14/08

 

The balances due for the Series D convertible
preferred stock, as of 3/12/08, are as follows:

 

	
  GLG North American Opportunity Fund

  	
   

  	
  $

  	
  107,670

  	
   

  
	
  GLG North American Opportunity Fund

  	
   

  	
  1,137,640

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  GLG North American Opportunity Fund

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  291,520

  	
   

  
	
  D.E. Shaw Laminar Portfolios, L.L.C.

  	
   

  	
  11,202,161

  	
   

  
	
  Dynamis Energy Fund, LTD

  	
   

  	
  182,835

  	
   

  
	
  Dynamis Energy Fund, LP

  	
   

  	
  832,915

  	
   

  
	
  GLG North American Opportunity Fund

  	
   

  	
  5,256,506

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Investcorp Interlachen Multi-Strategy Master Fund Limited

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1,404,049

  	
   

  
	
  Kellogg Capital Group LLC

  	
   

  	
  2,044,705

  	
   

  
	
  William Herbert Hunt Trust Estate

  	
   

  	
  3,219,012

  	
   

  
	
  Radcliffe SPC, Ltd. for and on behalf of the Class A

  	
   

  	
   

  	
   

  
	
  Convertible Crossover Segregated Portfolio

  	
   

  	
  2,044,705

  	
   

  
	
  Touradji DeepRock Master Fund, Ltd.

  	
   

  	
  1,015,750

  	
   

  
	
  Trapeze Capital Corp.

  	
   

  	
  3,557,157

  	
   

  
	
  O’Connor PIPEs Corporate Strategies Master Limited

  	
   

  	
  1,273,751

  	
   

  
	
  Spindrift Partners, L.P.

  	
   

  	
  6,535,434

  	
   

  
	
  Spindrift Investors (Bermuda) L.P.

  	
   

  	
  7,949,559

  	
   

  
	
  Total Convertible Preferred Stock

  	
   

  	
  $

  	
  48,055,367

  	
   

  

 

Ladder Companies, Inc.
(d/b/a Ladder Energy Company)

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

Square One Energy, Inc.

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

1

 

W.O. Energy of Nevada, Inc.

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

WO Energy, Inc.

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

W.O. Operating Company, Ltd.

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

W.O. Production Company, Ltd.

 

Senior Debt – refer to
detail under Cano Petroleum, Inc.

 

2

 

Schedule 4.07

 

Litigation

 

Burnett:

 

On
March 23, 2006, the following lawsuit was filed in the 100th Judicial
District Court in Carson County, Texas; Cause No. 9840, The Tom L. and
Anne Burnett Trust, by Anne Burnett Windfohr, Windi Phillips, Ben Fortson, Jr.,
George Beggs, III and Ed Hudson, Jr. as Co-Trustees; Anne Burnett
Windfohr; and Burnett Ranches, Ltd. v. Cano Petroleum, Inc., W.O.
Energy of Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.  The plaintiffs claim that the electrical
wiring and equipment of Cano or certain of its subsidiaries relating to oil and
gas operations started a wildfire that began on March 12, 2006 in Carson
County.  The owner of the remainder of
the mineral estate, Texas Christian University, has intervened in the suit
joining the plaintiffs’ request to terminate certain oil and natural gas
leases.

 

The
plaintiffs in the above action (i) allege negligence and (ii) seek
damages, including, but not limited to, damages for damage to their land and
livestock, certain expenses related to fighting the fire and certain remedial
expenses totaling approximately $1.7 million to $1.8 million.  In addition, the plaintiffs seek (i) termination
of certain oil and natural gas leases, (ii) reimbursement for their
attorney’s fees (in the amount of at least $549,000) and (iii) exemplary
damages.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or a general partnership or de facto partnership.

 

On
June 21, 2007, the Judge of the 100th Judicial District Court
issued a Final Judgment (a) granting motions for summary judgment in favor
of Cano and certain of its subsidiaries on plaintiffs’ claims for (i) breach
of contract/termination of an oil and gas lease; and (ii) negligence; and (b) granting
the plaintiffs’ no-evidence motion for summary judgment on contributory
negligence, assumption of risk, repudiation and estoppel affirmative defenses
asserted by Cano and certain of its subsidiaries.  The Final Judgment has been appealed.

 

Adcock:

 

On
April 28, 2006, the following lawsuit was filed in the 31st
Judicial District Court of Roberts County, Texas, Cause No. 1922, Robert
and Glenda Adcock, et al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W. O. Operating Company, Ltd, and WO Energy, Inc. (“Adcock”).  There are 47 plaintiffs and three groups of
intervenors that claim that the electrical wiring and equipment of Cano or
certain of its subsidiaries relating to oil and gas operations started a
wildfire that began on March 12, 2006 in Carson County.

 

The
plaintiffs and intervenors (i) allege negligence, res ipsa loquitor,
trespass and nuisance and (ii) seek damages, including, but not limited
to, damages to their land, buildings and livestock and certain remedial
expenses totaling $11,297,684.  In
addition, the plaintiffs and intervenors seek (i) reimbursement for their
attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and its
subsidiaries are jointly and severally liable as a single business enterprise
and/or a general partnership or de facto partnership.  On August 28, 2007, one of the
intervenors, Travelers Lloyds Insurance Company, filed a Notice of Nonsuit
requesting the court to sign an 

 

1

 

order
dismissing its claims, which seek approximately $367,627 of total damages,
without prejudice.   The Court granted
the Nonsuit on September 12, 2007.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and
transferred the Adcock case to the Honorable Paul Davis, retired judge of the
200th District Court of Travis County, Texas.  No further action will be taken in the 31st
District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 31st District Court for trial.

 

Hutchison:

 

On
April 10, 2006, the following lawsuit was filed in the 31st Judicial
District Court of Roberts County, Texas, Cause No. 1920, Joseph Craig
Hutchison and Judy Hutchison v. Cano Petroleum, Inc., W.O. Energy of
Nevada, Inc., W. O. Operating Company, Ltd, and WO Energy, Inc.
(“Hutchison”).  The plaintiffs
claim that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County. 
The plaintiffs (i) allege negligence and trespass and (ii) seek
damages including, but not limited to, damages to their land and certain
remedial expenses.  In addition, the
plaintiffs seek exemplary damages.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict
Litigation granted the Company’s motion to transfer and transferred
this case to the Honorable Paul Davis, retired judge of the 200th District
Court of Travis County, Texas.  No further action will be taken in the
31st District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 31st District Court for trial.

 

On
October 3, 2007, Firstbank Southwest, as Trustee for the John and Eddalee
Haggard Trust, intervened in the consolidated case in the 200th District Court
of Travis County, Texas as part of the Hutchinson case.  The intervenor
claims that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County. 
The intervenor (i) alleges negligence and (ii) seeks damages,
including, but not limited to, damages to its land and certain remedial
expenses.  In addition, the intervenor
seeks exemplary damages.

 

Chisum:

 

On
May 1, 2006, the following lawsuit was filed in the 31st Judicial District
Court of Roberts County, Texas, Cause No. 1923, Chisum Family
Partnership, Ltd. v. Cano, W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc. (“Chisum”).  The plaintiff claims that the electrical
wiring and equipment of Cano or certain of its subsidiaries relating to oil and
gas operations started a wildfire that began on March 12, 2006 in Carson
County.  The plaintiff (i) alleges
negligence and trespass and (ii) seeks damages, including, but not limited
to, damages to its land and certain remedial expenses.  In addition, the plaintiff seeks exemplary
damages.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict
Litigation granted the Company’s motion to transfer and transferred
this case to the Honorable Paul Davis, retired judge of the 200th District
Court of Travis County, Texas.  No further action will be taken in the 

 

2

 

31st District
Court until the 200th District Court resolves all pretrial matters and remands
this case to the 31st District Court for trial.

 

Martinez:

 

On
July 3, 2006, the following lawsuit was filed in the 31st Judicial
District Court of Roberts County, Texas, Cause No. 1928, Rebecca Lee
Martinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W. O. Operating Company, Ltd., and WO Energy, Inc. (“Martinez”).  The plaintiffs claim that the electrical wiring
and equipment of Cano or certain of its subsidiaries relating to oil and gas
operations started a wildfire that began on March 12, 2006 in Carson
County, Texas.  The plaintiffs (i) allege
negligence and (ii) seek undisclosed damages for the wrongful death of two
relatives, Gerardo Villarreal and Medardo Garcia, who they claim died as a
result of the fire.  An additional heir
of one of Medardo Garcia has intervened in this case alleging similar claims.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and
transferred the Martinez case to the Honorable Paul Davis, retired judge of the
200th District Court of Travis County, Texas.  No further action will be taken in the 31st
District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 31st District Court for trial.

 

The
plaintiffs and intervenor nonsuited this case on December 19, 2007 and
refiled in the 348th Judicial District Court of Tarrant County,
Texas as part of the Valenzuela case described below.

 

Villarreal:

 

On
August 9, 2006, the following lawsuit was filed in the 233rd Judicial
District Court of Gray County, Texas, Yolanda Villarreal, Individually and on
behalf of the Estate of Gerardo Villarreal v. Cano Petroleum, Inc., W.O.
Energy of Nevada, Inc., W. O. Operating Company, Ltd., and WO Energy, Inc.
(“Villarreal”).  The plaintiffs
claim that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County, Texas. The plaintiffs (i) allege
negligence and (ii) seek undisclosed damages, including exemplary damages,
for the wrongful death of Gerardo Villarreal who they claim died as a result of
the fire.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable under vicarious
liability theories.  Relatives of Roberto
Chavira have intervened in the case alleging similar claims regarding the death
of Roberto Chavira.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and
transferred the Martinez case to the Honorable Paul Davis, retired judge of the
200th District Court of Travis County, Texas.  No further action will be taken in the 233rd
District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 233rd District Court for trial.

 

3

 

SPS:

 

On
March 14, 2007, the following lawsuit was filed in 100th Judicial District
Court in Carson County, Texas; Cause No. 9994, Southwestern Public Service
Company d/b/a Xcel Energy v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc.,
W. O. Operating Company, Ltd, and WO Energy, Inc. (“SPS”). The
plaintiff claims that the electrical wiring and equipment of Cano or certain of
its subsidiaries relating to oil and gas operations started a wildfire that
began on March 12, 2006 in Carson County. 
The plaintiff (i) alleges negligence and breach of contract and (ii) seeks
$1,876,000 in damages for loss and damage to transmission and distribution
equipment, utility poles, lines and other equipment.  In addition, the plaintiff seeks
reimbursement for its attorney’s fees.

 

On
May 15, 2007, William L. Arrington, William M. Arrington and Mark and Le’Ann
Mitchell intervened in the lawsuit.  The
intervenors (i) allege negligence, res ipsa loquitor, nuisance, and
trespass and (ii) seek damages, including, but not limited to, damages to
their land, buildings and livestock and certain remedial expenses totaling approximately
$201,280.  In addition, the intervenors
seek (i) reimbursement for their attorney’s fees and (ii) exemplary
damages.  The intervenors also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or as a partnership or de facto partnership.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and
transferred the SPS case to the Honorable Paul Davis, retired judge of the 200th
District Court of Travis County, Texas. 
No further action will be taken in the 100th District Court
until the 200th District Court resolves all pretrial matters and
remands this case to the 100th District Court for trial.

 

On
January 10, 2008, Philip L. Fletcher intervened in the consolidated case
in the 200th District Court of Travis County, Texas as part of the SPS
case.  The intervenor (i) alleges negligence, trespass and nuisance
and (ii) seeks damages, including, but not limited to, damages to his
livestock.  In addition, the intervenor
seeks (i) reimbursement for his attorney’s fees and (ii) exemplary
damages.  The intervenor also claims that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or as a partnership or de facto partnership.

 

On
January 15, 2008, the Jones and McMordie Ranch Partnership intervened in
the consolidated case in the 200th District Court of Travis County, Texas as
part of the SPS case.  The intervenor (i) alleges negligence,
trespass and nuisance and (ii) seeks damages, including, but not limited
to, damages to its land.  In addition,
the intervenor seeks exemplary damages. 
The intervenor also claims that Cano and its subsidiaries are jointly
and severally liable as a single business enterprise and/or as a partnership or
de facto partnership.

 

Burgess:

 

On
May 2, 2007, the following lawsuit was filed in the 84th
Judicial District Court of Hutchinson County, Texas, Cause No. 37,619,
Gary and Genia Burgess, et al. v. Cano Petroleum, Inc., W.O. Energy of
Nevada, Inc., W.O. Operating, Ltd. and WO Energy, Inc. (“Burgess”).  Eleven plaintiffs claim that electrical
wiring and equipment relating to oil and gas operations of the Company or
certain of its subsidiaries started a wildfire that began on March 12,
2006 in Carson 

 

4

 

County,
Texas.  The plaintiffs (i) allege
negligence, res ipsa loquitor,
nuisance, and trespass and (ii) seek damages, including, but not limited
to, damages to their land, buildings and livestock and certain remedial
expenses totaling approximately $1,152,480. 
In addition, the plaintiffs seek (i) reimbursement for their
attorney’s fees and (ii) exemplary damages.  The plaintiffs also claim that Cano and its
subsidiaries are jointly and severally liable as a single business enterprise
and/or as a partnership or de facto partnership.

 

On
September 25, 2007, the Texas Judicial Panel on Multidistrict Litigation
granted Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O.
Operating Company, Ltd, and WO Energy, Inc.’s motion to transfer and
transferred the Burgess case to the Honorable Paul Davis, retired judge of the
200th District Court of Travis County, Texas.  No further action will be taken in the 84th
District Court until the 200th District Court resolves all pretrial
matters and remands this case to the 84th District Court for trial.

 

MDL
Case:

 

On September 25, 2007,
the Texas Judicial Panel on Multidistrict Litigation granted Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating
Company, Ltd, and WO Energy, Inc.’s Motion to Transfer Related Cases
to Pretrial Court pursuant to Texas Rule of Judicial Administration
13.  The Panel transferred to a single
pretrial court for consideration of pretrial matters of all pending cases (Adcock,
Chisum, Hutchison, Villarreal, Martinez, Southwestern
Public Service Company d/b/a Xcel Energy, Burgess, identified above)
that assert claims against the Company and its subsidiaries related to
wildfires beginning on March 12, 2006.  The Panel transferred all
pending cases to the Honorable Paul Davis, retired judge of the
200th District Court of Travis County, Texas.  On October 19,
2007, the Court entered a Case Management Order settling deadlines for
completion of discovery in January and February of 2008 and a hearing
date for summary judgment motions on April 14, 2008.

 

On December 19, 2007,
the plaintiffs and intervenor in the Martinez case nonsuited their claims in
the MDL Case.

 

Valenzuela:

 

On December 18, 2007,
the following lawsuit was filed in the 348th Judicial District Court
of Tarrant County, Texas, Cause No. 348-227907-07, Norma Valenzuela, et
al. v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. (“Valenzuela”).  Six plaintiffs, including the two plaintiffs
and intervenor from the nonsuited Martinez case, claim that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County. 
The plaintiffs (i) allege negligence and (ii) seek undisclosed
damages for the wrongful death of four relatives, Manuel Dominguez, Roberto
Chavira, Gerardo Villarreal and Medardo Garcia, who they claim died as a result
of the fire.  In addition, plaintiffs
seek (i) reimbursement for their attorney’s fees and (ii) exemplary
damages.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or as a partnership or de facto partnership.  Cano and its subsidiaries filed a Motion to
Dismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Along transferring
the case to the MDL Case in the 200th Judicial District Court of
Travis County, Texas.

 

5

 

Abraham
Equine:

 

On February 11, 2008,
the following lawsuit was filed in the 48th Judicial District Court
of Tarrant County, Texas, Cause No. 048-228763-08, Abraham Equine, Inc.
v. Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. (“Abraham Equine”).  The plaintiff claims that the electrical wiring and equipment of Cano or certain of its
subsidiaries relating to oil and gas operations started a wildfire that began
on March 12, 2006 in Carson County. 
The plaintiff (i) alleges negligence, trespass and nuisance and (ii) seeks
damages, including, but not limited to, damages to its land, livestock and lost
profits.  In addition, the plaintiff
seeks (i) reimbursement for its attorney’s fees and (ii) exemplary
damages.  The plaintiff also claims that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or a general partnership or de facto partnership.  Cano and its subsidiaries filed a Motion to
Dismiss or, in the Alternative, to Transfer Venue and a Notice of Tag Along
transferring the case to the MDL Case in the 200th Judicial District
Court of Travis County, Texas.

 

Pfeffer:

 

On March 10, 2008, the
following lawsuit was filed in the 352nd Judicial District Court of
Tarrant County, Texas, Cause No. 352-229256-08, Gary Pfeffer v. Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. (“Pfeffer”).  Cano and its subsidiaries have not yet been
served with the lawsuit.  The plaintiff claims that the electrical wiring and equipment of
Cano or certain of its subsidiaries relating to oil and gas operations started
a wildfire that began on March 12, 2006 in Carson County.  The plaintiff (i) alleges negligence,
trespass and nuisance, (ii) seeks undisclosed damages for the wrongful
death of his father, Bill W. Pfeffer, who he claims died as a result of the
fire and (iii) seeks undisclosed damages, including, but not limited to,
damages to his parents’ home and property. 
In addition, the plaintiff seeks exemplary damages.  The plaintiff also claims that Cano and its
subsidiaries are jointly and severally liable as a general partnership or de
facto partnership.  Cano and its
subsidiaries will file a Motion to Transfer Venue and a Notice of Tag Along
transferring the case to the MDL Case in the 200th Judicial District
Court of Travis County, Texas.

 

Ayers:

 

On March 11, 2008, the
following lawsuit was filed in the 141st Judicial District Court of
Tarrant County, Texas, Cause No. 141-229281-08, Pamela Ayers, et al. v.
Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. 
Cano and its subsidiaries have not yet been served with the
lawsuit.  The plaintiffs claim that the electrical wiring and equipment of
Cano or certain of its subsidiaries relating to oil and gas operations started
a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence and
(ii) seek undisclosed damages for the wrongful death of their mother,
Kathy Ryan, who they claim died as a result of the fire.  In addition, the plaintiffs seek exemplary
damages.  The plaintiffs also claim that
Cano and its subsidiaries are jointly and severally liable as a single business
enterprise and/or general partnership or de facto partnership.  Cano and its subsidiaries 

 

6

 

will file a Motion to
Transfer Venue and a Notice of Tag Along transferring the case to the MDL Case
in the 200th Judicial District Court of Travis County, Texas.

 

Travelers:

 

On March 12, 2008, the
following lawsuit was filed in the 17th Judicial District Court of
Tarrant County, Texas, Cause No. 017-229316-08, The Travelers Lloyds
Insurance Company and Travelers Lloyds of Texas Insurance Company v. Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. 
Cano and its subsidiaries have not yet been served with the
lawsuit.  The plaintiffs claim that the electrical wiring and equipment of
Cano or certain of its subsidiaries relating to oil and gas operations started
a wildfire that began on March 12, 2006 in Carson County.  The plaintiffs (i) allege negligence, res ipsa loquitor, and trespass and (ii) claim
they are subrogated to the rights of their insureds for damages to their
buildings and building contents totaling $447,764.60.  The plaintiffs also claim that Cano and its
subsidiaries are jointly and severally liable as a single business enterprise
and/or general partnership or de facto partnership.  Cano and its subsidiaries will file a Motion
to Transfer Venue and a Notice of Tag Along transferring the case to the MDL
Case in the 200th Judicial District Court of Travis County, Texas.

 

Tolling
Agreement:

 

On January 29, 2008,
Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O.
Operating, Ltd. and WO Energy, Inc. entered into a confidential
tolling agreement with two claimants, which preserved their ability to bring
claims against Cano and its subsidiaries arising out of, or related to,
wildfires that allegedly began on March 12, 2006 in Carson County.

 

7

 

SCHEDULE 4.14(a)

 

AGREEMENTS WHICH COULD CREATE A MATERIAL ADVERSE
CHANGE

 

Credit
Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Party hereto
from time to time, as Lenders, and Union Bank of California, N.A., as
Administrative Agent and as issuing Lender, dated November 29, 2005,
including its Amendments (1-9) and all associated agreements.

 

Securities
Purchase Agreement dated August 25, 2006 by and among Cano Petroleum, Inc.
and the Buyers listed therein.

 

Certificate
of Designations, Preferences and Rights of Series D Convertible Preferred
Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware
Secretary of State.

 

 

SCHEDULE 4.20

 

CANO PETROLEUM, INC.

SCHEDULE OF HEDGING AGREEMENTS

 

COSTLESS COLLARS

 

	
   

  	
   

  	
  Floor

  	
   

  	
  Ceiling

  	
   

  	
  Barrels

  	
   

  	
  Floor

  	
   

  	
  Ceiling

  	
   

  	
  MCF

  	
   

  	
   

  	
   

  
	
  Time Period

  	
   

  	
  Oil Price

  	
   

  	
  Oil Price

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  Gas Price

  	
   

  	
  Gas Price

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  Counterparty

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  117.50

  	
   

  	
  11,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.40

  	
   

  	
  56,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  110.90

  	
   

  	
  11,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  10.60

  	
   

  	
  50,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  108.20

  	
   

  	
  10,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  9.85

  	
   

  	
  47,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  107.30

  	
   

  	
  10,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.60

  	
   

  	
  44,000

  	
   

  	
  UBOC

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  110.60

  	
   

  	
  8,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.90

  	
   

  	
  37,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  104.40

  	
   

  	
  7,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.15

  	
   

  	
  34,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  101.50

  	
   

  	
  7,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  9.40

  	
   

  	
  31,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  100.50

  	
   

  	
  6,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  11.05

  	
   

  	
  29,000

  	
   

  	
  UBOC

  	
   

  

 

PUTS PURCHASED BY CANO

 

	
  Trade

  	
   

  	
  Effective

  	
   

  	
  Termination

  	
   

  	
  Notional

  	
   

  	
  Strike Price

  	
   

  	
   

  	
   

  
	
  Date

  	
   

  	
  Date

  	
   

  	
  Date

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  (PUT)

  	
   

  	
  Counterparty

  	
   

  
	
  Crude Oil

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12/1/2007

  	
   

  	
  1/1/2008

  	
   

  	
  12/31/2008

  	
   

  	
  14,500

  	
   

  	
  $

  	
  55.00

  	
   

  	
  UBOC

  	
   

  
	
  5/2/2006

  	
   

  	
  1/1/2008

  	
   

  	
  12/31/2008

  	
   

  	
  2,000

  	
   

  	
  $

  	
  60.00

  	
   

  	
  UBOC

  	
   

  
	
  5/2/2006

  	
   

  	
  1/1/2009

  	
   

  	
  4/30/2009

  	
   

  	
  1,800

  	
   

  	
  $

  	
  60.00

  	
   

  	
  UBOC

  	
   

  
	
  12/22/2006

  	
   

  	
  1/1/2009

  	
   

  	
  12/31/2009

  	
   

  	
  12,000

  	
   

  	
  $

  	
  55.00

  	
   

  	
  UBOC

  	
   

  
	
  6/22/2007

  	
   

  	
  1/1/2010

  	
   

  	
  6/30/2010

  	
   

  	
  11,000

  	
   

  	
  $

  	
  55.00

  	
   

  	
  UBOC

  	
   

  
	
  6/22/2007

  	
   

  	
  7/1/2010

  	
   

  	
  12/31/2010

  	
   

  	
  12,000

  	
   

  	
  $

  	
  55.00

  	
   

  	
  F.C.
  Stone

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Natural Gas

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12/1/2007

  	
   

  	
  1/1/2008

  	
   

  	
  12/31/2008

  	
   

  	
  46,500

  	
   

  	
  $

  	
  7.50

  	
   

  	
  UBOC

  	
   

  
	
  5/4/2006

  	
   

  	
  1/1/2008

  	
   

  	
  12/31/2008

  	
   

  	
  18,000

  	
   

  	
  $

  	
  7.60

  	
   

  	
  UBOC

  	
   

  
	
  5/2/2006

  	
   

  	
  1/1/2009

  	
   

  	
  4/30/2009

  	
   

  	
  17,000

  	
   

  	
  $

  	
  7.60

  	
   

  	
  UBOC

  	
   

  
	
  12/22/2006

  	
   

  	
  1/1/2009

  	
   

  	
  12/31/2009

  	
   

  	
  50,000

  	
   

  	
  $

  	
  7.60

  	
   

  	
  UBOC

  	
   

  
	
  6/22/2007

  	
   

  	
  1/1/2010

  	
   

  	
  6/30/2010

  	
   

  	
  50,000

  	
   

  	
  $

  	
  7.00

  	
   

  	
  UBOC

  	
   

  
	
  12/18/2007

  	
   

  	
  7/1/2010

  	
   

  	
  12/31/2010

  	
   

  	
  63,000

  	
   

  	
  $

  	
  7.50

  	
   

  	
  F.C.
  Stone

  	
   

  

 

CEILINGS PURCHASED BY CANO

Crude Oil

 

	
  Trade

  	
   

  	
  Effective

  	
   

  	
  Termination

  	
   

  	
  Notional

  	
   

  	
  Strike Price

  	
   

  	
   

  	
   

  
	
  Date

  	
   

  	
  Date

  	
   

  	
  Date

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  (Ceiling)

  	
   

  	
  Counterparty

  	
   

  
	
  9/27/2007

  	
   

  	
  1/1/2008

  	
   

  	
  6/30/2008

  	
   

  	
  14,000

  	
   

  	
  $

  	
  86.00

  	
   

  	
  UBOC

  	
   

  
													

 

 

SCHEDULE 4.21

 

MATERIAL AGREEMENTS

 

	
  Description

  
	
   

  
	
  Certificate of Designations, Preferences and Rights
  of Series D Convertible Preferred Stock of Cano Petroleum, Inc.
  filed August 31, 2006 with the Delaware Secretary of State.

  
	
   

  
	
  Crude
  Oil Purchase Contract between Cano Petro of New Mexico Inc and Plains
  Marketing L.P. dated January 21, 2008, Contract No. 7405-1001.

  
	
   

  
	
  Crude
  Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock
  Transportation dated June 25, 2007.

  
	
   

  
	
  Crude
  Oil Purchase Agreement between Cano Petro of New Mexico, Inc and Blackrock
  Transportation dated February 28, 2008.

  
	
   

  
	
  Gas
  Services and/or Purchase Agreement between Myriad Resources Corporation and
  Dynegy Midstream Services, L. P. dated July 20, 1999.

  
	
   

  
	
  Gas
  Purchase Contract between Duke Energy (formerly Phillips 66) and Sohio
  Petroleum Company dated February 1, 1974.

  
	
   

  
	
  Amendatory
  Agreement between Duke Energy (formerly Phillips 66) and Sohio Petroleum
  Company dated August 19, 1986.

  
	
   

  
	
  Gas
  Purchase Contract between Myriad Resources Corporation and GPM Gas Corporation
  (successor to Phillips 66 Natural Gas Company) dated November 27, 1992.

  
	
   

  
	
  Amendatory
  Agreement for Gas Purchase Contract between Myriad Resources Corporation and
  GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated
  November June 18, 1993.

  
	
   

  
	
  Amendatory
  Agreement for Gas Purchase Contract between Myriad Resources Corporation and
  GPM Gas Corporation (successor to Phillips 66 Natural Gas Company) dated
  January 4, 1994.

  
	
   

  
	
  Gas
  Purchase Contract between Myriad Resources Corporation and GPM Gas
  Corporation dated June 23, 1994. 

  
	
   

  
	
  Gas
  Purchase Contract between Myriad Resources and GMPM Gas Corporation dated
  March 10, 1999.

  
	
   

  
	
  Gas
  Purchase Agreement between ONEOK Texas Field Services, L. P and PAMTEX,
  Contract No,. 431625 dated October 1, 2004.

  
	
   

  
	
  Gas
  Purchase Agreement between Scissortail Energy, Inc. and Ladder Energy
  Co. dated September 4, 2004.

  
	
   

  
	
  Amendment
  to Gas Purchase Contract between GPM Gas Corporation and Rio
  Petroleum, Inc. dated June 1, 1999.

  
	
   

  
	
  Crude
  Oil Purchase Agreement between Sunoco Partners Marketing &
  Terminals, LP and Ladder Energy Company dated February 1, 2000.

  
	
   

  
	
  Amendment
  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
  Terminals, LP and Ladder Energy Company dated December 1, 2004.

  
	
   

  
	
  Amendment
  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
  Terminals, LP and Ladder Energy Company dated June 2, 2005.

  

 

1

 

	
  Amendment
  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
  Terminals, LP and Ladder Energy Company dated September 2, 2005.

  
	
   

  
	
  Amendment
  to Crude Oil Purchase Agreement between Sunoco Partners Marketing &
  Terminals, LP and Ladder Energy Company dated September 26, 2006.

  
	
   

  
	
  Gas
  Purchase and Sales Contract between Arrow Oil & Gas Inc and
  STP, Inc. dated August 15, 2002.

  
	
   

  
	
  Gas
  Purchase Contract between Union Texas Products Corporation and Gemini Oil
  Company dated June 1, 1985.

  
	
   

  
	
  Gas
  Sales & Purchase Agreement between Alliant Energy Desdemona and
  Square One Energy dated June 20, 2006.

  
	
   

  
	
  Gas
  Sales & Purchase Agreement Amendment between Alliant Energy
  Desdemona and Square One Energy dated January 1, 2007.

  
	
   

  
	
  Gas
  Sales & Purchase Agreement Amendment between Alliant Energy
  Desdemona and Square One Energy dated March 20, 2007.

  
	
   

  
	
  Gas
  Sales & Purchase Agreement Amendment between Alliant Energy
  Desdemona and Square One Energy dated November 1, 2007.

  
	
   

  
	
  Gas
  Purchase Contract between Enbridge G & P (North Texas) L. P. and
  Square One Energy, Inc. contract number 5409 dated March 1, 2007.

  
	
   

  
	
  Crude
  Oil Purchase Contract between Plains Marketing, LP (PMLP) and Square One
  Energy contract number 7062-1001 dated March 1, 2007.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
  Terminals L.P. and Square One Energy Reference Number 521329 dated
  June 1, 2003.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
  Terminals L.P. and Square One Energy Reference Number 521329 dated
  March 1, 2004.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
  Terminals L.P. and Square One Energy Reference Number 521329 dated
  November 1, 2004.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
  Terminals L.P. and Square One Energy Reference Number 521329 dated
  September 1, 2006.

  
	
   

  
	
  Crude
  Oil Purchase Agreement between Sunoco Partners Marketing & Terminals
  L.P. and Square One Energy Reference Number 521329 dated November 1,
  2006.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Sunoco Partners Marketing &
  Terminals L.P. and Square One Energy Reference Number 521329 dated
  November 1, 2006.

  
	
   

  
	
  Crude Oil Purchase
  Agreement Amendment between Sunoco Partners Marketing & Terminals
  L.P. and Square One Energy Reference Number 521329 dated April 7, 2004.

  
	
   

  
	
  Gas
  Purchase Contract between Duke Energy Field Services and W. O. Operating
  dated November 1, 2003.

  
	
   

  
	
  Gas
  Purchase Contract Amendment between Duke Energy Field Services and W. O.
  Operating dated September 1, 2005.

  
	
   

  
	
  Gas
  Purchase Contract between Duke Energy Field Services and W. O. Operating
  dated August 1, 2005.

  
	
   

  
	
  Crude
  Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W.
  O. Operating Company Contract number 01-0838 dated May 1, 2001

  

 

2

 

	
  Crude
  Oil Purchase Contract between Diamond Shamrock Refining Company, L. P. and W.
  O. Operating Company Contract number 01-0838 dated August 1, 2007 and
  Exhibit A.

  
	
   

  
	
  Gas
  Purchase Agreement between Eagle Rock Field Services, L.P. and W. O.
  Operating Company Ltd and Pantwist, LLC dated April 1, 2007.

  
	
   

  
	
  Gas
  Purchase Contract between Hugoton Energy Corporation and GPM Gas Corporation
  dated August 3, 1995.

  
	
   

  
	
  Gas
  Purchase Contract between W. O. Operating Company and GPM Corporation dated
  March 15, 1994.

  
	
   

  
	
  Gas
  Purchase Agreement between ONEOK Texas Field Services, L. P. and W. O.
  Operating Company, LTD dated January 1, 2005.

  
	
   

  
	
  Gas
  Purchase Contract between Phillips Petroleum Company and Skelly Oil Company
  dated September 1, 1975.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment 14 between Valero Marketing and Supply
  Company and W. O. Operating Company dated December 1, 2007.

  
	
   

  
	
  Crude
  Oil Purchase Agreement Amendment between Blackrock Transportation and Cano
  Petro Of New Mexico, Inc. dated February 1, 2008.

  
	
   

  
	
  Gas Services and/or
  Purchase Agreement between Versado Gas Processors, L.L.C. acting through
  Dynegy Midstream Services, Limited Partnership, its operator and UHC New
  Mexico Corporation, Owner dated June 1, 2000.

  
	
   

  
	
  Amendment to Gas
  Services and/or Purchase Agreement between Cano Petroleum, Inc, Owner and
  Versado Gas Processors, L.L.C. acting through Targa Midstream Services
  Limited Partnership, its operator

  
	
   

  
	
  Pipeline Lease
  Agreement dated effective June 19, 2007, between Meyer Land and Cattle
  Co., Inc., Meyer Farms, Inc. and W.O. Operating Company, Ltd.

  
	
   

  
	
  Unit Agreement –
  Cockrell Ranch Unit – Hutchinson County, Texas, dated January 8, 2007
  executed by W.O. Operating Company, Ltd.

  
	
   

  
	
  Unit Operating
  Agreement – Cano Unit dated May 1, 1989.

  
	
   

  
	
  Unit Agreement for the
  Development and Operation for the Cato Unit – Chaves County, New Mexico dated
  May 1, 1989.

  
	
   

  
	
  Credit
  Agreement among Cano Petroleum, Inc. as Borrower, The Lenders Party
  hereto from time to time, as Lenders, and Union Bank of California, N.A., as
  Administrative Agent and as issuing Lender, dated November 29, 2005,
  including its Amendments (1-9) and all associated agreements.

  

 

3

 

SCHEDULE 5.12

 

Required Hedging Contracts

 

COSTLESS COLLARS

 

	
   

  	
   

  	
  Floor

  	
   

  	
  Ceiling

  	
   

  	
  Barrels

  	
   

  	
  Floor

  	
   

  	
  Ceiling

  	
   

  	
  MCF

  	
   

  	
   

  	
   

  
	
  Time Period

  	
   

  	
  Oil Price

  	
   

  	
  Oil Price

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  Gas Price

  	
   

  	
  Gas Price

  	
   

  	
  Quantity/ Mo.

  	
   

  	
  Counterparty

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  117.50

  	
   

  	
  11,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.40

  	
   

  	
  56,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  110.90

  	
   

  	
  11,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  10.60

  	
   

  	
  50,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  108.20

  	
   

  	
  10,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  9.85

  	
   

  	
  47,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  80.00

  	
   

  	
  $

  	
  107.30

  	
   

  	
  10,000

  	
   

  	
  $

  	
  7.75

  	
   

  	
  $

  	
  11.60

  	
   

  	
  44,000

  	
   

  	
  UBOC

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4/1/08 - 12/31/08

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  110.60

  	
   

  	
  8,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.90

  	
   

  	
  37,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/09 - 12/31/09

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  104.40

  	
   

  	
  7,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  10.15

  	
   

  	
  34,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/10 - 12/31/10

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  101.50

  	
   

  	
  7,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  9.40

  	
   

  	
  31,000

  	
   

  	
  UBOC

  	
   

  
	
  1/1/11 - 3/31/11

  	
   

  	
  $

  	
  85.00

  	
   

  	
  $

  	
  100.50

  	
   

  	
  6,000

  	
   

  	
  $

  	
  8.00

  	
   

  	
  $

  	
  11.05

  	
   

  	
  29,000

  	
   

  	
  UBOC

  	
   

  

 

 

EXHIBIT A

 

FORM OF ASSIGNMENT AND
ACCEPTANCE

 

This
Assignment and Acceptance (the “Assignment and Acceptance”) is dated as
of the Effective Date set forth below and is entered into by and between
[the][each](1) Assignor identified in item 1 below ([the][each, an] “Assignor”)
and [the][each](2) Assignee identified in item 2 below ([the][each, an] “Assignee”).  [It is understood and agreed that the rights
and obligations of [the Assignors][the Assignees](3) hereunder are several
and not joint.](4)  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][each] 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 Acceptance as if set forth herein in full.

 

For
an agreed consideration, [the][each] Assignor hereby irrevocably sells and
assigns to [the Assignee][the respective Assignees], and [the][each] Assignee
hereby irrevocably purchases and assumes from [the Assignor][the respective
Assignors], 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][the
respective Assignors’] rights and obligations in [its capacity as a
Lender][their respective capacities as Lenders] 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][the respective Assignors]
under the respective facilities identified below (including without limitation
any letters of credit, guarantees, and swingline loans 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)][the respective Assignors (in their
respective capacities as Lenders)] 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,
but not limited to, 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 by [the][any] Assignor to [the][any] Assignee
pursuant to clauses (i) and (ii) above being referred to herein
collectively as [the][an] “Assigned Interest”).  Each such sale and assignment is without
recourse to [the][any] Assignor and, except as expressly provided in this
Assignment and Acceptance, without representation or warranty by [the][any]
Assignor.

 

(1) For bracketed language here and elsewhere in this form
relating to the Assignor(s), if the assignment is from a single Assignor,
choose the first bracketed language.  If
the assignment is from multiple Assignors, choose the second bracketed
language.

 

(2) For bracketed language here and elsewhere in this form
relating to the Assignee(s), if the assignment is to a single Assignee, choose
the first bracketed language.  If the
assignment is to multiple Assignees, choose the second bracketed language.

 

(3) Select as appropriate.

 

(4) Include bracketed language if there are either multiple
Assignors or multiple Assignees.

 

1

 

	
  1.

  	
   

  	
  Assignor[s]:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Assignee[s]:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [for
  each Assignee, indicate [Affiliate][Approved Fund] of [identify
  Lender]

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Borrower:

  	
   

  	
  CANO
  PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Administrative
  Agent:

  	
   

  	
  UNIONBANCAL
  EQUITIES, INC., as the administrative agent under the Credit Agreement

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Credit
  Agreement:

  	
   

  	
  The
  Subordinated Credit Agreement dated as of
  March     , 2008 among Borrower, the Lenders party
  thereto from time to time, and UnionBanCal Equities, Inc. as
  Administrative Agent.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  Assigned
  Interest[s]:

  	
   

  	
   

  

 

	
  Assignor[s]

  	
   

  	
  Assignee[s]

  	
   

  	
  Facility

  Assigned

  	
   

  	
  Aggregate Amount

  of Commitment

  /Advance for all

  Lenders

  	
   

  	
  Amount of

  Commitment / 

  Advances

  Assigned(5)

  	
   

  	
  Percentage Assigned

  of Commitment /

  Advances(6)

  	
   

  	
  CUSIP

  Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
   

  	
  %

  	
   

  	
   

  

 

7.             Trade Date:                                          (7)

 

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

 

(5) Amount to be adjusted by the counterparties to take into
account any payments or prepayments made between the Trade Date and the Effective
Date.

 

(6) Set forth, to at least 9 decimals, as a percentage of the
Commitment / Advances of all Lenders thereunder.

 

 

(7) To be completed if the Assignor(s) and the Assignee(s) intend
that the minimum assignment amount is to be determined as of the Trade Date.

 

2

 

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

 

	
   

  	
  ASSIGNOR[S](8)

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [NAME OF ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  ASSIGNEE[S]

  
	
   

  	
  [NAME
  OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME
  OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
									

 

[Consented
to and]  (9) Accepted:

 

	
  UNIONBANCAL
  EQUITIES, INC., as

  	
   

  
	
      Administrative
  Agent

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					

 

 

(8) Add additional
signature blocks as needed.

 

(9) To
be added only if the consent of the Administrative Agent is required by the
terms of the Credit Agreement.

 

3

 

[Consented
to:]  (10)

 

	
  CANO
  PETROLEUM, INC., a Delaware corporation

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					

 

(10) To be added only if the consent of the Borrower is required
by the terms of the Credit Agreement.

 

4

 

Annex 1

To Exhibit A – Assignment and Acceptance

 

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ACCEPTANCE

 

1.  Representations and Warranties.

 

1.1
Assignor[s].  [The][Each] Assignor
(a) represents and warrants that (i) it is the legal and beneficial
owner of [the][the relevant] Assigned Interest, (ii) [the][such] 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 Acceptance 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[s].  [The][Each] 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
Acceptance and to consummate the transactions contemplated hereby and to become
a Lender under the Credit Agreement, (ii) it meets all the requirements to
be an Eligible Assignee under Section 9.06 of the Credit Agreement
(subject to such consents, if any, as may be required under Section 9.06
of the Credit Agreement), (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][the relevant] Assigned Interest, shall have the
obligations of a Lender thereunder, (iv) it is sophisticated with respect
to decisions to acquire assets of the type represented by the Assigned Interest
and either it, or the person exercising discretion in making its decision to
acquire the Assigned Interest, is experienced in acquiring assets of such type,
(v) it has received a copy of the Credit Agreement, and has received or
has been accorded the opportunity to receive copies of the most recent
financial statements delivered pursuant to Section 3.01(c) thereof,
as applicable, and such other documents and information as it deems appropriate
to make its own credit analysis and decision to enter into this Assignment and
Acceptance and to purchase [the][such] Assigned Interest, (vi) 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 Assignment and
Acceptance and to purchase [the][such] Assigned Interest, and (vii) if it
is a Person that is organized under the laws of a jurisdiction other than that
in which the Borrower is resident for tax purposes, attached to the Assignment
and Acceptance is any documentation required to be delivered by it pursuant to
the terms of the Credit Agreement, duly completed and executed by [the][such]
Assignee; and (b) agrees that (i) it will, independently and without
reliance on the Administrative Agent, [the][any] 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 

 

1

 

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][each] Assigned
Interest (including payments of principal, interest, fees and other amounts) to
[the][the relevant] Assignee whether such amounts have accrued prior to, on or
after the Effective Date.  The
Assignor[s] and the Assignee[s] shall make all appropriate adjustments in
payments by the Administrative Agent for periods prior to the Effective Date or
with respect to the making of this assignment directly between themselves.

 

3.  General Provisions.  This Assignment and Acceptance shall be
binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.  This
Assignment and Acceptance 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 Acceptance by telecopy shall be effective as delivery of a
manually executed counterpart of this Assignment and Acceptance.  This Assignment and Acceptance shall be
governed by, and construed in accordance with, the law of the State of Texas.

 

2

 

EXHIBIT B

 

FORM OF COMPLIANCE
CERTIFICATE

FOR THE PERIOD FROM
              ,
200     TO
                ,
200

 

This certificate dated as of
                      
      ,
           is prepared
pursuant to the Subordinated Credit Agreement dated as of March     ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Credit
Agreement”) among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
the lenders party thereto (the “Lenders”), and UNIONBANCAL EQUITIES, INC. as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”).  Unless otherwise defined in
this certificate, capitalized terms that are defined in the Credit Agreement
shall have the meanings assigned to them by the Credit Agreement.

 

The undersigned hereby
certifies that:

 

(a)                                  all of the
representations and warranties made by the Borrower in the Credit Agreement and
the other Loan Documents are true and correct in all material respects as if
made on this date, except to the extent that any such representation or
warranty expressly relates solely to an earlier date, in which case it shall
have been true and correct in all material respects as of such earlier date;

 

[(b)                             that no Default
or Event of Default has occurred and is continuing; and]

 

[(b)                             the following
Default[s] or Event[s] of Default exist as of the date hereof or have occurred
since the date of the Borrower’s previous certification to the Administrative
Agent, if any, and the actions set forth below have been or are being taken to
remedy such circumstances:

 

                                                                        ;
and]

 

(c) that as of the last
day of the previous quarter the following statements, amounts, and calculations
were true and correct:

 

I.                                         Current Ratio—Section 6.17.

 

	
  (a)           consolidated current assets(11)

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (b)           consolidated current liabilities(12)

  	
  $

  	
   

  	
   

  

 

(11)
“current assets” shall include the aggregate Unused Commitment Amounts (as
defined in the Senior Credit Agreement), but shall exclude (A) any cash
deposited with or at the request of a counterparty to any Hedge Contract or any
other similar hedge arrangement and (B) any assets representing a
valuation account arising from the application of SFAS 133 and 143.

 

(12)
“current liabilities” shall exclude, as of the date of calculation, the current
portion of long-term Debt existing under the Senior Credit Agreement, the
current portion of long-term Debt existing under the Credit Agreement and any
liabilities representing a valuation account arising from the application of
SFAS 133 and 143.

 

1

 

	
  Current Ratio = (a) to (b) =

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Minimum Current Ratio not less than:

  	
   

  	
  1.00 to 1.00

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES            NO

  	
  NO

  	
   

  

 

II.                                     Leverage Ratio—Section 6.18.

 

	
  (a)           consolidated Debt(13)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (b)           consolidated
  EBITDA(14) =

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (i) + [(ii) + (iii) + (iv)](15) –
  (v) =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (i)            Consolidated Net
  Income

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (ii)           consolidated Interest
  Expense

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (iii)          taxes

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (iv)          depreciation,
  amortization, depletion & other non-cash items(16)

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (v)           all
  non-cash items of income included in determining Consolidated Net Income(17)

  	
  $

  	
   

  

 

	
  Leverage Ratio = (a) to (b) =

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Maximum Leverage Ratio:

  	
   

  	
  [5.50 to 1.00] [5.00 to 1.00](18)

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES            NO

  	
   

  	
   

  

 

(13)
“consolidated Debt” shall not include Debt outstanding under preferred Equity
Interests issued in compliance with Section 6.22 of the Credit Agreement.

 

(14)
EBITDA shall be measured for the four fiscal quarter period then ended.

 

(15)  Items (ii) – (iv) shall be included
to the extent deducted in determining Consolidated Net Income.

 

(16)
Other non-cash items should include any provisions for the reduction in the
carrying value of assets recorded in accordance with GAAP and including
non-cash charges resulting from the requirements of SFAS 133 or 143.

 

(17)
Non-cash items of income should include any items resulting from the
requirements of SFAS 133 or 143.

 

(18)  Use
(i) 5.50 to 1.00 for each fiscal quarter ending prior to June 30,
2008 and (ii) 5.00 to 1.00 for each fiscal quarter ending on or after
June 30, 2008.

 

2

 

III.                                 Interest Coverage Ratio—Section 6.19.

 

	
  (a)           consolidated EBITDA = See II(b) above =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (b)           consolidated Interest Expense =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  Interest
  Coverage Ratio = (a) to (b) =

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Minimum
  Interest Coverage Ratio =

  	
   

  	
  1.50
  to 1.00

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES        NO

  

 

IV.                                Minimum Asset Coverage Ratio - Section 6.22.

 

	
  (a)           PDP NPV =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (b)           PDNP NPV =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (c)           PUD NPV =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (d)           = (a) divided by
  sum of (a) plus (b) plus (c)

  	
  %

  	
   

  
	
   

  	
   

  	
   

  
	
  (e)           = (a) divided by
  .60

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (f)            = (a) plus
  (b) plus (c)

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (g)           Total Present Value = either (f), or if (d) is less
  than 60%, then Total Present Value equals (e)=

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  (h)           consolidated Debt = see II(a) above =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  Minimum
  Reserve Ratio = (g) to (h)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Minimum
  Interest Coverage Ratio:

  	
   

  	
  1.50
  to 1.00

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
   

  	
  YES        NO

  

 

IN WITNESS THEREOF, I have
hereto signed my name to this Compliance Certificate as of
                                  ,
20        .

 

 

3

 

	
   

  	
  CANO PETROLEUM, INC., a Delaware 

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

4

 

EXHIBIT C

 

FORM OF GUARANTY
AGREEMENT

 

This Subordinated Guaranty
Agreement dated as of March         ,
2008 (this “Guaranty”) is executed by each of the undersigned
(individually a “Guarantor” and collectively, the “Guarantors”),
in favor of UnionBanCal Equities, Inc., as Administrative Agent for the
ratable benefit of itself, the Lenders (as defined below) (together with the
Administrative Agent and the Lenders, individually a “Beneficiary”, and
collectively, the “Beneficiaries”).

 

INTRODUCTION

 

                A.            This
Guaranty is given in connection with that certain Subordinated Credit Agreement
dated as of March         , 2008
(as it has been or may be amended, supplemented, restated or otherwise modified
from time to time, the “Credit Agreement”), among Cano Petroleum, Inc.,
a Delaware corporation (the “Borrower”), the lenders party thereto from
time to time (individually a “Lender” and collectively, the “Lenders”),
and UnionBanCal Equities, Inc. as administrative agent (“Administrative
Agent”) for such Lenders.

 

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

 

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

 

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

 

ARTICLE I.                   DEFINITIONS.  ALL CAPITALIZED TERMS NOT OTHERWISE DEFINED
IN THIS GUARANTY THAT ARE DEFINED IN THE CREDIT AGREEMENT SHALL HAVE THE
MEANINGS ASSIGNED TO SUCH TERMS BY THE CREDIT AGREEMENT.

 

ARTICLE II.                 GUARANTY.

 

Section 2.01.          Each Guarantor hereby absolutely,
unconditionally and irrevocably guarantees the punctual payment and
performance, when due, whether at stated maturity, by acceleration or
otherwise, of all Obligations, whether absolute or contingent and whether for
principal, interest (including, without limitation, interest that but for the
existence of a bankruptcy, reorganization or similar proceeding would accrue),
fees, amounts required to be provided as collateral, indemnities, expenses or
otherwise (collectively, the “Guaranteed Obligations”). Without limiting
the generality of the foregoing, each Guarantor’s liability shall extend to all
amounts that constitute part of the Guaranteed Obligations and would be owed by
the Borrower to the Administrative Agent or any Lender under the Loan Documents
and by the 

 

1

 

Borrower or any of its
Subsidiaries but for the fact that they are unenforceable or not allowable due
to insolvency or the existence of a bankruptcy, reorganization or similar
proceeding involving the Borrower or such other Subsidiary.

 

Section 2.02.          It is the intention of the Guarantors
and each Beneficiary that the amount of the Guaranteed Obligations guaranteed
by each Guarantor shall be in, but not in excess of, the maximum amount
permitted by fraudulent conveyance, fraudulent transfer or similar Legal
Requirements applicable to such Guarantor. Accordingly, notwithstanding
anything to the contrary contained in this Guaranty or in any other agreement
or instrument executed in connection with the payment of any of the Guaranteed
Obligations, the amount of the Guaranteed Obligations guaranteed by a Guarantor
under this Guaranty shall be limited to an aggregate amount equal to the
largest amount that would not render such Guarantor’s obligations hereunder
subject to avoidance under Section 548 of the United States Bankruptcy
Code or any comparable provision of any other applicable law.

 

ARTICLE III.                GUARANTY
ABSOLUTE.  EACH GUARANTOR GUARANTEES
THAT THE GUARANTEED OBLIGATIONS WILL BE PAID STRICTLY IN ACCORDANCE WITH THE
TERMS OF THE LOAN DOCUMENTS, REGARDLESS OF ANY LAW, REGULATION OR ORDER NOW OR
HEREAFTER IN EFFECT IN ANY JURISDICTION AFFECTING ANY OF SUCH TERMS OR THE
RIGHTS OF THE ADMINISTRATIVE AGENT OR ANY LENDER WITH RESPECT THERETO BUT
SUBJECT TO SECTION 2(B) ABOVE. 
THE OBLIGATIONS OF EACH GUARANTOR UNDER THIS GUARANTY ARE INDEPENDENT OF
THE GUARANTEED OBLIGATIONS OR ANY OTHER OBLIGATIONS OF ANY OTHER PERSON UNDER
THE LOAN DOCUMENTS, AND A SEPARATE ACTION OR ACTIONS MAY BE BROUGHT AND
PROSECUTED AGAINST ANY GUARANTOR TO ENFORCE THIS GUARANTY, IRRESPECTIVE OF
WHETHER ANY ACTION IS BROUGHT AGAINST THE BORROWER, ANY OTHER GUARANTOR OR ANY
OTHER PERSON OR WHETHER THE BORROWER, ANY OTHER GUARANTOR OR ANY OTHER PERSON
IS JOINED IN ANY SUCH ACTION OR ACTIONS. THE LIABILITY OF EACH GUARANTOR UNDER
THIS GUARANTY SHALL BE IRREVOCABLE, ABSOLUTE AND UNCONDITIONAL IRRESPECTIVE OF,
AND EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ANY DEFENSES IT MAY NOW OR
HEREAFTER HAVE IN ANY WAY RELATING TO, ANY OR ALL OF THE FOLLOWING:

 

Section 3.01.          any lack of validity or enforceability
of any Loan Document or any agreement or instrument relating thereto or any
part of the Guaranteed Obligations being irrecoverable;

 

Section 3.02.          any change in the time, manner or
place of payment of, or in any other term of, all or any of the Guaranteed
Obligations or any other obligations of any Person under the Loan Documents, or
any other amendment or waiver of or any consent to departure from any Loan
Document, including, without limitation, any increase in the Guaranteed Obligations
resulting from the extension of additional credit to the Borrower or otherwise;

 

2

 

Section 3.03.          any taking, exchange, release or
non-perfection of any collateral, or any taking, release or amendment or waiver
of or consent to departure from any other guaranty, for all or any of the
Guaranteed Obligations;

 

Section 3.04.          any manner of application of
collateral, or proceeds thereof, to all or any of the Guaranteed Obligations,
or any manner of sale or other disposition of any collateral for all or any of
the Guaranteed Obligations or any other obligations of any other Person under
the Loan Documents or any other assets of the Borrower or any of its
Subsidiaries;

 

Section 3.05.          any change, restructuring or termination
of the corporate structure or existence of the Borrower or any of its
Subsidiaries;

 

Section 3.06.          any failure of any Beneficiary to
disclose to the Borrower or any Guarantor any information relating to the
business, condition (financial or otherwise), operations, properties or
prospects of any Person now or in the future known to any Beneficiary (and each
Guarantor hereby irrevocably waives any duty on the part of any Beneficiary to
disclose such information);

 

Section 3.07.          any signature of any officer of the
Borrower or any other Person being mechanically reproduced in facsimile or
otherwise; or

 

Section 3.08.          any other circumstance or any
existence of or reliance on any representation by any Beneficiary that might
otherwise constitute a defense available to, or a discharge of, the Borrower,
any Guarantor or any other guarantor, surety or other Person.

 

ARTICLE
IV.                CONTINUATION AND
REINSTATEMENT, ETC.  EACH GUARANTOR
AGREES THAT, TO THE EXTENT THAT PAYMENTS OF ANY OF THE GUARANTEED OBLIGATIONS
ARE MADE, OR ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES ANY PROCEEDS OF
COLLATERAL, AND SUCH PAYMENTS OR PROCEEDS OR ANY PART THEREOF ARE
SUBSEQUENTLY INVALIDATED, DECLARED TO BE FRAUDULENT OR PREFERENTIAL, SET ASIDE,
OR OTHERWISE REQUIRED TO BE REPAID, THEN TO THE EXTENT OF SUCH REPAYMENT THE
GUARANTEED OBLIGATIONS SHALL BE REINSTATED AND CONTINUED IN FULL FORCE AND
EFFECT AS OF THE DATE SUCH INITIAL PAYMENT OR COLLECTION OF PROCEEDS
OCCURRED.  EACH GUARANTOR SHALL DEFEND AND INDEMNIFY EACH BENEFICIARY FROM AND
AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE UNDER THIS SECTION 4
(INCLUDING REASONABLE ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH
ACTION OR SUIT INCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE
ARISING AS A RESULT OF THE INDEMNIFIED BENEFICIARY’S OWN NEGLIGENCE BUT
EXCLUDING SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND
IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO
HAVE RESULTED FROM SUCH INDEMNIFIED BENEFICIARY’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

3

 

ARTICLE V.                 WAIVERS AND ACKNOWLEDGMENTS.

 

Section 5.01.          Each Guarantor hereby waives
promptness, diligence, presentment, notice of acceptance and any other notice
with respect to any of the Guaranteed Obligations and this Guaranty and any
requirement that any Beneficiary protect, secure, perfect or insure any Lien or
any Property or exhaust any right or take any action against the Borrower or
any other Person or any collateral.

 

Section 5.02.          Each Guarantor hereby irrevocably
waives any right to revoke this Guaranty, and acknowledges that this Guaranty
is continuing in nature and applies to all Guaranteed Obligations, whether
existing now or in the future.

 

Section 5.03.          Each Guarantor acknowledges that it
will receive substantial direct and indirect benefits from the financing
arrangements involving the Borrower and its Subsidiaries contemplated by the
Loan Documents and that the waivers set forth in this Guaranty are knowingly
made in contemplation of such benefits.

 

ARTICLE VI.                SUBROGATION.
NO GUARANTOR WILL EXERCISE ANY RIGHTS THAT IT MAY NOW HAVE OR HEREAFTER
ACQUIRE AGAINST THE BORROWER OR ANY OTHER PERSON TO THE EXTENT THAT SUCH RIGHTS
ARISE FROM THE EXISTENCE, PAYMENT, PERFORMANCE OR ENFORCEMENT OF SUCH
GUARANTOR’S OBLIGATIONS UNDER THIS GUARANTY OR ANY OTHER LOAN DOCUMENT,
INCLUDING, WITHOUT LIMITATION, ANY RIGHT OF SUBROGATION, REIMBURSEMENT,
EXONERATION, CONTRIBUTION OR INDEMNIFICATION AND ANY RIGHT TO PARTICIPATE IN
ANY CLAIM OR REMEDY OF ANY BENEFICIARY AGAINST THE BORROWER OR ANY OTHER
PERSON, WHETHER OR NOT SUCH CLAIM, REMEDY OR RIGHT ARISES IN EQUITY OR UNDER
CONTRACT, STATUTE OR COMMON LAW, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO
TAKE OR RECEIVE FROM THE BORROWER OR ANY OTHER PERSON, DIRECTLY OR INDIRECTLY,
IN CASH OR OTHER PROPERTY OR BY SET-OFF OR IN ANY OTHER MANNER, PAYMENT OR
SECURITY ON ACCOUNT OF SUCH CLAIM, REMEDY OR RIGHT, UNLESS AND UNTIL ALL OF THE
GUARANTEED OBLIGATIONS AND ANY AND ALL OTHER AMOUNTS PAYABLE BY THE GUARANTORS
UNDER THIS GUARANTY SHALL HAVE BEEN PAID IN FULL IN CASH, ALL COMMITMENTS SHALL
HAVE EXPIRED OR TERMINATED, AND THE CREDIT AGREEMENT HAS BEEN TERMINATED IN
WRITING.  IF ANY AMOUNT SHALL BE PAID TO
A GUARANTOR IN VIOLATION OF THE PRECEDING SENTENCE AT ANY TIME PRIOR TO (A) THE
PAYMENT IN FULL IN CASH OF THE GUARANTEED OBLIGATIONS AND ANY AND ALL OTHER
AMOUNTS PAYABLE BY THE GUARANTORS UNDER THIS GUARANTY, AND (B) THE
TERMINATION OF THE COMMITMENTS, SUCH AMOUNT SHALL BE HELD IN TRUST FOR THE
BENEFIT OF THE BENEFICIARIES AND SHALL FORTHWITH BE PAID TO THE ADMINISTRATIVE
AGENT TO BE CREDITED AND APPLIED TO THE GUARANTEED OBLIGATIONS AND ANY AND ALL
OTHER AMOUNTS PAYABLE BY THE GUARANTORS UNDER THIS GUARANTY, WHETHER MATURED OR

 

4

 

UNMATURED,
IN ACCORDANCE WITH THE TERMS OF THE LOAN DOCUMENTS.

 

ARTICLE VII.              REPRESENTATIONS
AND WARRANTIES.  EACH GUARANTOR
HEREBY REPRESENTS AND WARRANTS AS FOLLOWS:

 

Section 7.01.          There are no conditions precedent to
the effectiveness of this Guaranty.  Such
Guarantor benefits from executing this Guaranty.

 

Section 7.02.          Such Guarantor has, independently and
without reliance upon the Administrative Agent or any Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Guaranty, and such Guarantor has
established adequate means of obtaining from the Borrower and each other
relevant Person on a continuing basis information pertaining to, and is now and
on a continuing basis will be completely familiar with, the business, condition
(financial and otherwise), operations, properties and prospects of the Borrower
and each other relevant Person.

 

Section 7.03.          The obligations of such Guarantor
under this Guaranty are the valid, binding and legally enforceable obligations
of such Guarantor, and the execution and delivery of this Guaranty by such
Guarantor has been duly and validly authorized in all respects by such Guarantor,
and the Person who is executing and delivering this Guaranty on behalf of such
Guarantor has full power, authority and legal right to so do, and to observe
and perform all of the terms and conditions of this Guaranty on such Guarantor’s
part to be observed or performed.

 

ARTICLE VIII.             RIGHT
OF SET-OFF.  UPON THE OCCURRENCE AND
DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT, ANY BENEFICIARY IS HEREBY
AUTHORIZED AT ANY TIME, TO THE FULLEST EXTENT PERMITTED BY LAW, TO SET OFF AND
APPLY ANY DEPOSITS (GENERAL OR SPECIAL, TIME OR DEMAND, PROVISIONAL OR FINAL)
AND OTHER INDEBTEDNESS OWING BY SUCH BENEFICIARY TO THE ACCOUNT OF EACH
GUARANTOR AGAINST ANY AND ALL OF THE OBLIGATIONS OF THE GUARANTORS UNDER THIS
GUARANTY, IRRESPECTIVE OF WHETHER OR NOT SUCH BENEFICIARY SHALL HAVE MADE ANY
DEMAND UNDER THIS GUARANTY AND ALTHOUGH SUCH OBLIGATIONS MAY BE CONTINGENT
AND UNMATURED.  SUCH BENEFICIARY SHALL
PROMPTLY NOTIFY THE AFFECTED GUARANTOR AFTER ANY SUCH SET-OFF AND APPLICATION
IS MADE, PROVIDED THAT THE FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT THE
VALIDITY OF SUCH SET-OFF AND APPLICATION. 
THE RIGHTS OF THE BENEFICIARIES UNDER THIS SECTION 8 ARE IN
ADDITION TO OTHER RIGHTS AND REMEDIES (INCLUDING, WITHOUT LIMITATION, OTHER
RIGHTS OF SET-OFF) WHICH ANY BENEFICIARY MAY HAVE.

 

ARTICLE IX.                AMENDMENTS,
ETC.  NO AMENDMENT OR WAIVER OF ANY
PROVISION OF THIS GUARANTY AND NO CONSENT TO ANY DEPARTURE BY ANY GUARANTOR
THEREFROM SHALL IN ANY EVENT BE EFFECTIVE UNLESS THE SAME SHALL BE IN WRITING
AND SIGNED BY THE AFFECTED 

 

5

 

GUARANTOR,
THE ADMINISTRATIVE AGENT AND THE REQUIRED LENDERS, AND THEN SUCH WAIVER OR
CONSENT SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFIC
PURPOSE FOR WHICH GIVEN; PROVIDED THAT NO AMENDMENT, WAIVER OR CONSENT
SHALL, UNLESS IN WRITING AND SIGNED BY ALL OF THE LENDERS, (A) OTHER THAN
TO THE EXTENT EXPRESSLY PROVIDED IN SUCH AMENDMENT, WAIVER OR CONSENT, LIMIT
THE LIABILITY OF ANY GUARANTOR HEREUNDER (IT BEING UNDERSTOOD THAT WAIVERS AND
AMENDMENTS PERMITTED TO BE MADE UNDER THE CREDIT AGREEMENT BY THE REQUIRED
LENDERS WITH RESPECT TO ANY OF THE UNDERLYING OBLIGATIONS GUARANTEED HEREUNDER
SHALL NOT BE DEEMED TO LIMIT THE LIABILITY OF ANY GUARANTOR WITHIN THE MEANING
OF THIS CLAUSE (A)), (B) POSTPONE ANY DATE FIXED FOR PAYMENT HEREUNDER IN
RESPECT OF ANY OF THE GUARANTEED OBLIGATIONS THAT IS PRINCIPAL OF, OR INTEREST
ON, THE NOTES OR ANY FEES, OR (C) CHANGE THE PERCENTAGE OF THE COMMITMENTS
OR OF THE AGGREGATE UNPAID PRINCIPAL AMOUNT OF THE NOTES REQUIRED TO TAKE ANY
ACTION HEREUNDER.

 

ARTICLE X.                 NOTICES,
ETC.  ALL NOTICES AND OTHER
COMMUNICATIONS PROVIDED FOR HEREUNDER SHALL BE SENT IN THE MANNER PROVIDED FOR
IN SECTION 9.02 OF THE CREDIT AGREEMENT AND IF TO A GUARANTOR, AT ITS
ADDRESS SPECIFIED ON THE SIGNATURE PAGE HERETO AND IF TO THE ADMINISTRATIVE
AGENT OR ANY LENDER, AT ITS ADDRESS SPECIFIED IN OR PURSUANT TO THE CREDIT
AGREEMENT.  ALL SUCH NOTICES AND
COMMUNICATIONS SHALL BE EFFECTIVE WHEN DELIVERED, EXCEPT THAT NOTICES AND COMMUNICATIONS
TO THE ADMINISTRATIVE AGENT SHALL NOT BE EFFECTIVE UNTIL RECEIVED BY THE
ADMINISTRATIVE AGENT.

 

ARTICLE XI.                NO
WAIVER: REMEDIES.  NO FAILURE ON THE PART OF
ANY BENEFICIARY TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT HEREUNDER
SHALL OPERATE AS A WAIVER THEREOF; NOR SHALL ANY SINGLE OR PARTIAL EXERCISE OF
ANY RIGHT HEREUNDER PRECLUDE ANY OTHER OR FURTHER EXERCISE THEREOF OR THE
EXERCISE OF ANY OTHER RIGHT. THE REMEDIES HEREIN PROVIDED ARE CUMULATIVE AND
NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY LAW.

 

ARTICLE XII.              CONTINUING
GUARANTY: ASSIGNMENTS UNDER THE CREDIT AGREEMENT.  THIS GUARANTY IS A CONTINUING GUARANTY AND
SHALL (A) REMAIN IN FULL FORCE AND EFFECT UNTIL THE PAYMENT IN FULL OF ALL
GUARANTEED OBLIGATIONS AND ALL OTHER AMOUNTS PAYABLE UNDER THE LOAN DOCUMENTS
AND THE TERMINATION OF ALL THE COMMITMENTS, (B) BE BINDING UPON EACH
GUARANTOR AND ITS SUCCESSORS AND ASSIGNS, AND (C) INURE TO THE BENEFIT OF
AND BE ENFORCEABLE BY THE ADMINISTRATIVE AGENT AND EACH LENDER, AND, IN THE
CASE OF TRANSFERS AND ASSIGNMENTS MADE IN ACCORDANCE WITH THE CREDIT AGREEMENT,
TRANSFEREES AND ASSIGNS.  WITHOUT
LIMITING 

 

6

 

THE
GENERALITY OF THE FOREGOING CLAUSE (C), SUBJECT TO SECTION 9.06 OF THE
CREDIT AGREEMENT, ANY LENDER MAY ASSIGN OR OTHERWISE TRANSFER ALL OR ANY
PORTION OF ITS RIGHTS AND OBLIGATIONS UNDER THE CREDIT AGREEMENT (INCLUDING,
WITHOUT LIMITATION, ALL OR ANY PORTION OF ITS COMMITMENT, THE ADVANCES OWING TO
IT AND THE NOTE OR NOTES HELD BY IT) TO ANY OTHER PERSON, AND SUCH OTHER PERSON
SHALL THEREUPON BECOME VESTED WITH ALL THE BENEFITS IN RESPECT THEREOF GRANTED
TO SUCH LENDER HEREIN OR OTHERWISE, SUBJECT, HOWEVER, IN ALL RESPECTS TO THE
PROVISIONS OF THE CREDIT AGREEMENT.  EACH
GUARANTOR ACKNOWLEDGES THAT UPON ANY PERSON BECOMING A LENDER, THE
ADMINISTRATIVE AGENT IN ACCORDANCE WITH THE CREDIT AGREEMENT, SUCH PERSON SHALL
BE ENTITLED TO THE BENEFITS HEREOF.

 

ARTICLE XIII.             GOVERNING
LAW.  THIS GUARANTY SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TEXAS.  EACH GUARANTOR HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY TEXAS STATE OR FEDERAL COURT SITTING IN
DALLAS, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
GUARANTY AND THE OTHER LOAN DOCUMENTS, AND EACH GUARANTOR HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE
HEARD AND DETERMINED IN SUCH COURT.  EACH
GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY
DO SO, ANY RIGHT IT MAY HAVE TO THE DEFENSE OF AN INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. 
EACH GUARANTOR HEREBY AGREES THAT SERVICE OF COPIES OF THE SUMMONS AND
COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR
PROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO
SUCH GUARANTOR AT ITS ADDRESS SET FORTH IN THE CREDIT AGREEMENT OR SET FORTH ON
THE SIGNATURE PAGE OF THIS GUARANTY. 
EACH GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS
BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS SECTION SHALL AFFECT THE
RIGHTS OF ANY BENEFICIARY TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED
BY THE LAW OR AFFECT THE RIGHT OF ANY BENEFICIARY TO BRING ANY ACTION OR
PROCEEDING AGAINST ANY GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION.

 

ARTICLE
XIV.             INDEMNIFICATION.  EACH GUARANTOR SHALL INDEMNIFY EACH OF THE Beneficiaries, AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND DISCHARGE,
RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LIABILITIES,
OBLIGATIONS, LOSSES, CLAIMS, EXPENSES, OR DAMAGES OF ANY KIND OR NATURE
WHATSOEVER TO WHICH ANY OF THEM MAY BECOME SUBJECT 

 

7

 

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

 

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

 

ARTICLE XVI.             ADDITIONAL
GUARANTORS.  PURSUANT TO SECTION 6.15
OF THE CREDIT AGREEMENT, EACH SUBSIDIARY OF THE BORROWER THAT WAS NOT IN
EXISTENCE ON THE DATE OF THE CREDIT AGREEMENT IS REQUIRED TO ENTER INTO THIS
GUARANTY AS A GUARANTOR UPON BECOMING A SUBSIDIARY.  AFTER THE DATE HEREOF, UPON EXECUTION AND
DELIVERY AFTER THE DATE HEREOF BY THE ADMINISTRATIVE AGENT AND SUCH SUBSIDIARY
OF AN INSTRUMENT IN THE FORM OF ANNEX 1, SUCH SUBSIDIARY SHALL BECOME
A GUARANTOR HEREUNDER WITH THE SAME FORCE AND EFFECT AS IF ORIGINALLY NAMED AS
A GUARANTOR HEREIN.  THE EXECUTION AND
DELIVERY OF ANY 

 

8

 

INSTRUMENT
ADDING AN ADDITIONAL GUARANTOR AS A PARTY TO THIS GUARANTY SHALL NOT REQUIRE
THE CONSENT OF ANY OTHER GUARANTOR HEREUNDER. 
THE RIGHTS AND OBLIGATIONS OF EACH GUARANTOR HEREUNDER SHALL REMAIN IN
FULL FORCE AND EFFECT NOTWITHSTANDING THE ADDITION OF ANY NEW GUARANTOR AS A
PARTY TO THIS GUARANTY.

 

ARTICLE XVII.             SUBORDINATION
AND INTERCREDITOR AGREEMENT. 
REFERENCE IS MADE TO THE SUBORDINATION AND INTERCREDITOR AGREEMENT DATED
OF EVEN DATE HEREWITH (AS AMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED
FROM TIME TO TIME, THE “SUBORDINATION AND  INTERCREDITOR AGREEMENT”), AMONG UNION BANK
OF CALIFORNIA, N.A., AS SENIOR AGENT, AND UNIONBANCAL EQUITIES, INC., AS SUBORDINATED AGENT, AND CERTAIN
OTHER PERSONS, PARTY OR THAT MAY BECOME PARTY THERETO FROM TIME TO
TIME.  NOTWITHSTANDING ANYTHING HEREIN TO
THE CONTRARY, THIS GUARANTY, THE OBLIGATIONS OF THE GUARANTORS HEREUNDER AND
THE RIGHTS AND REMEDIES OF THE BENEFICIARIES HEREUNDER ARE SUBJECT TO THE
PROVISIONS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT.  IN THE EVENT OF ANY CONFLICT BETWEEN THE
TERMS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT AND THIS GUARANTY, THE
TERMS OF THE SUBORDINATION AND INTERCREDITOR AGREEMENT SHALL GOVERN AND
CONTROL.

 

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

 

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

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS
AMONG THE PARTIES.

 

[Remainder of this page intentionally left
blank.]

 

9

 

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

 

	
   

  	
  GUARANTOR:

  
	
   

  	
   

  
	
   

  	
  [SUBSIDIARY
  OF BORROWER]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address  of  Guarantor:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  

  
	
   

  	
  [SUBSIDIARY
  OF BORROWER]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
  

  
	
   

  	
  Address  of  Guarantor:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC., as 

  
	
   

  	
  Administrative
  Agent

  
	
   

  	
  

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

10

 

Annex
1 to the

Subordinated
Guaranty Agreement

 

SUPPLEMENT
NO.          dated as of
                            (the
“Supplement”),
to the Subordinated Guaranty Agreement dated as of March       ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Guaranty Agreement”),
among each of the subsidiaries party thereto (each such subsidiary
individually, a “Guarantor” and collectively, the “Guarantors”) of CANO PETROLEUM,
INC., a Delaware corporation (the “Borrower”) in favor of
UNIONBANCAL EQUITIES, INC., as Administrative Agent (the “Administrative Agent”) for the
benefit of the Beneficiaries (as defined in the Guaranty Agreement).

 

A.            Reference is made to the
Subordinated Credit Agreement dated as of March       ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”),
among the Borrower, the lenders from time to time party thereto (the “Lenders”),
and the Administrative Agent.

 

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

 

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

 

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

 

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

 

SECTION 2.           The New Guarantor represents and
warrants to the Administrative Agent and the other Beneficiaries that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

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

 

 

	
   

  	
  [Name of New Guarantor]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address  of  Guarantor:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
					

 

3

 

	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES,
  INC., as 

  
	
   

  	
  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

4

 

 

EXHIBIT D

 

FORM OF MORTGAGE

 

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, 

SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT

 

THIS
INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY AND FUTURE ADVANCE PROVISIONS.

 

THIS
INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN MINERALS OR THE LIKE (INCLUDING
OIL AND GAS) BEFORE EXTRACTION AND THE SECURITY INTEREST CREATED BY THIS
INSTRUMENT ATTACHES TO SUCH MINERALS AS EXTRACTED AND TO THE ACCOUNTS RESULTING
FROM THE SALE THEREOF AT THE WELLHEAD. 
THIS INSTRUMENT COVERS THE INTEREST OF MORTGAGOR IN FIXTURES.  THIS FINANCING STATEMENT IS TO BE FILED FOR
RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS.  PRODUCTS OF THE COLLATERAL ARE ALSO COVERED.

 

NOTICE TO MORTGAGOR:

 

A POWER OF SALE HAS BEEN GRANTED IN THIS
MORTGAGE.  A POWER OF SALE MAY ALLOW
THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT
IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.

 

FROM

 

CANO PETROLEUM, INC.

(Mortgagor, Debtor and Grantor)

 

TO

 

UNIONBANCAL EQUITIES, INC., as Administrative Agent

(Mortgagee, Secured Party and Grantee)

 

            ,
2008

 

For
purposes of filing this Mortgage as a financing statement, the mailing address
of Mortgagor is 801 Cherry Street, Suite 3200, Fort Worth, Texas
76102.  Mortgagor is a corporation
organized under the laws of the State of Delaware and the Mortgagor’s
organizational number is 

 

1

 

                        
the mailing address of Mortgagee is 445 South Figueroa Street, 13th Floor, Los
Angeles, California 90071.

 

***********************************

 

This
instrument, prepared by Sommer Louie, Bracewell & Giuliani LLP, 711
Louisiana, South Tower Pennzoil Place, Suite 2300, Houston, Texas 77002,
(713) 221-1363, contains after-acquired property provisions and covers future
advances and proceeds to the fullest extent allowed by applicable law.

 

ATTENTION
RECORDING OFFICER: This instrument is a
mortgage of both real and personal property insofar as the same covers or
relates to the Oil and Gas Properties and is, among other things, a Security
Agreement and Financing Statement under the Uniform Commercial Code in effect
in Oklahoma.  This instrument creates a
lien on rights in or relating to lands of Mortgagor which are described in Exhibit A
hereto or in documents described in such Exhibit A.

 

RECORDED
DOCUMENT SHOULD BE RETURNED TO:

 

BRACEWELL & GIULIANI LLP

711 Louisiana, South Tower Pennzoil Place, Suite 2300

Houston, Texas 77002

Attn: Cynthia Hasty

 

2

 

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, 

SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT

 

WHEREAS,
this instrument (the “Mortgage”) is made as of
                      ,
2008 (the “Effective Date”) and executed and delivered by CANO
PETROLEUM, INC., a Delaware corporation (“Mortgagor”), to and in favor
of UnionBanCal Equities, Inc. (the “Mortgagee”) in its capacity as
the Administrative Agent under the Credit Agreement (as hereinafter defined)
and on behalf of the Credit Parties (as hereinafter defined).  The addresses of Mortgagor and the Mortgagee
appear in Section 7.12 of this Mortgage.

 

WHEREAS,
this Mortgage is executed in connection with, and pursuant to the terms of that
certain Subordinated Credit Agreement dated as of March       ,
2008 (as the same may be renewed, extended, amended, supplemented and/or
restated from time-to-time, the “Credit Agreement”), among Mortgagor,
the lenders party thereto from time to time (the “Lenders”) and the
Mortgagee (the Mortgagee and the Lenders collectively referred to herein as the
“Credit Parties”).

 

WHEREAS,
it is a condition precent to the extension of credit to Mortgagor under the
Credit Agreement that the Mortgagor and the Mortgagee on behalf of the Credit
Parties execute and deliver this Mortgage.

 

NOW,
THEREFORE, in consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Mortgagor (a) wishes to make this Mortgage in favor of Mortgagee to
secure the Obligations (as defined herein), and (b) hereby agrees as
follows:

 

ARTICLE I

Definitions

 

1.1                                 “Collateral” means the Realty Collateral, Personalty
Collateral and Fixture Collateral.

 

1.2                                 “Contracts” means all contracts, agreements, operating
agreements, farm-out or farm-in agreements, sharing agreements, mineral
purchase agreements, contracts for the purchase, exchange, transportation,
processing or sale of Hydrocarbons, rights-of-way, easements, surface leases,
equipment leases, permits, franchises, licenses, pooling or unitization
agreements, and unit or pooling designations and orders now or hereafter
affecting any of the Oil and Gas Properties, Operating Equipment, Fixture
Operating Equipment, or Hydrocarbons now or hereafter covered hereby, or which
are useful or appropriate in drilling for, producing, treating, handling,
storing, transporting or marketing oil, gas or other minerals produced from any
of the Oil and Gas Properties, and all as such contracts and agreements as they
may be amended, restated, modified, substituted or supplemented from
time-to-time.

 

1.3                                 “Event of Default” shall have the meaning set forth in Article V
hereof.

 

1

 

1.4                                 “Fixture Collateral” means all of Mortgagor’s interest now
owned or hereafter acquired in and to all Fixture Operating Equipment and all
proceeds, products, renewals, increases, profits, substitutions, replacements,
additions, amendments and accessions thereof, thereto or therefor.

 

1.5                                 “Fixture Operating Equipment” means any of the items
described in the first sentence of the definition of “Operating Equipment”
below which as a result of being incorporated into realty or structures or
improvements located therein or thereon, with the intent that they remain there
permanently, constitute fixtures under the laws of the state in which such
equipment is located.

 

1.6                                 “Governmental Authority” shall have the meaning assigned to
such term in the Credit Agreement.

 

1.7                                 “Hydrocarbons” means oil, gas, coal seam gas, casinghead gas,
drip gasoline, natural gasoline, condensate, distillate, and all other liquid
and gaseous hydrocarbons produced or to be produced in conjunction therewith
from a well bore and all products, by-products, and other substances derived
therefrom or the processing thereof, and all other minerals and substances
produced in conjunction with such substances, including sulfur, geothermal
steam, water, carbon dioxide, helium, and any and all minerals, ores, or
substances of value and the products and proceeds therefrom.

 

1.8                                 “Legal Requirement” shall have the meaning assigned to such
term in the Credit Agreement.

 

1.9                                 “Notes” means the “Notes” as that term is defined in the
Credit Agreement.

 

1.10                           “Obligations” means

 

(a)                                  The “Obligations”,
as that term is defined in the Credit Agreement, including all indebtedness
evidenced by the Notes;

 

(b)                                 All other
indebtedness, obligations, and liabilities of Mortgagor or any of its
Subsidiaries arising under the Credit Agreement, the Security Documents, this
Mortgage, or any of the other Loan Documents;

 

(c)                                  All other
indebtedness, obligations and liabilities of any kind of Mortgagor owing to any
of the Credit Parties now existing or hereafter arising under or pursuant to
any Loan Document, whether fixed or contingent, joint or several, direct or
indirect, primary or secondary, and regardless of how created or evidenced;

 

(d)                                 All sums
advanced or costs or expenses incurred by Mortgagee or any of the other Credit
Parties, which are made or incurred pursuant to, or allowed by, the terms of
this Mortgage plus interest thereon from the date of the advance or incurrence
until reimbursement of Mortgagee or such Credit Party charged at the
Reimbursement Rate;

 

2

 

(e)                                  All future
advances or other value, of whatever class or for whatever purpose, at any time
hereafter made or given by Mortgagee or any of the other Credit Parties to
Mortgagor under or pursuant to the Credit Agreement or any other Loan Document,
whether or not the advances or value are given pursuant to a commitment,
whether or not the advances or value are presently contemplated by the parties
hereto, and whether or not Mortgagor is indebted to Mortgagee or any Credit
Party at the time of such events; and

 

(f)                                    All renewals,
extensions, modifications, amendments, rearrangements and substitutions of all
or any part of the above whether or not Mortgagor executes any agreement or
instrument.

 

1.11                           “Oil and Gas Property” or “Oil and Gas
Properties” means (a) the oil and gas and/or oil, gas and
mineral leases and leasehold interests, fee mineral interests, term mineral
interests, participation interests, back-in or carried working interests,
rights of first refusal, options, subleases, farmouts, royalties, overriding
royalties, net profits interests, production payments and similar interests or
estates described in Exhibit A attached hereto and made a part hereof for
all purposes including the net revenue interests warranted in Exhibit A
and any reversionary or carried interests relating to any of the foregoing, (b) all
production units, and drilling and spacing units (and the Properties covered
thereby) which may affect all or any portion of such interests including those
units which may be described or referred to on Exhibit A and any units
created by agreement or designation or under orders, regulations, rules or
other official acts of any Federal, state or other governmental body or agency
having jurisdiction, (c) the surface leases described in Exhibit A, (d) any
and all non-consent interests owned or held by, or otherwise benefiting,
Mortgagor and arising out of, or pursuant to, any of the Contracts, (e) any
other interest in, to or relating to (i) all or any part of the land
described in Exhibit A, the land relating to the leases set forth in Exhibit A
or in the documents described in Exhibit A, or (ii) any of the
estates, property rights or other interests referred to above, (f) any
instrument executed in amendment, correction, modification, confirmation,
renewal or extension of the same, (g) any and all rights, titles and
interests of Mortgagor (which are similar in nature to any of the rights,
titles and interests described in (a) through (f) above) which are located
on or under or which concern any Property or Properties located in counties
referenced in Exhibit A hereto or counties in which a counterpart of this
Mortgage is filed of record in the real property records of such county, and (h) all
tenements, hereditaments and appurtenances now existing or hereafter obtained
in connection with any of the aforesaid, including any rights arising under
unitization agreements, orders or other arrangements, communitization
agreements, orders or other arrangements or pooling orders, agreements or other
arrangements, including without limitation pooling orders of the Oklahoma
Corporation Commission.

 

1.12                           “Operating Equipment” means all surface or subsurface
machinery, equipment, facilities, supplies or other Property of whatsoever kind
or nature now or hereafter located on any of the Property affected by the Oil
and Gas Properties which are useful for the production, treatment, storage or
transportation of Hydrocarbons, including all oil wells, gas wells, water
wells, injection wells, casing, tubing, rods, pumping units and engines,
christmas trees, derricks, separators, gun barrels, flow lines, pipelines,
tanks, gas systems (for gathering, treating and compression), water systems
(for treating, disposal and injection), supplies, derricks, wells,

 

3

 

power
plants, poles, cables, wires, meters, processing plants, compressors,
dehydration units, lines, transformers, starters and controllers, machine
shops, tools, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone and other communication systems, roads, loading racks,
shipping facilities and all additions, substitutes and replacements for, and
accessories and attachments to, any of the foregoing.  Operating Equipment shall not include any
items incorporated into realty or structures or improvements located therein or
thereon in such a manner that they no longer remain personalty under the laws
of the state in which such equipment is located.

 

1.13                           “Permitted Liens” means the Liens permitted under the Credit
Agreement.

 

1.14                           “Permitted Prior Liens”
shall have the meaning assigned to such term in the Credit Agreement.

 

1.15                           “Personalty Collateral” means all of Mortgagor’s interest now
owned or hereafter acquired in and to (a) all Operating Equipment, (b) all
Hydrocarbons severed and extracted from or attributable to the Oil and Gas
Properties, including oil in tanks and all other “as-extracted” collateral from
or attributable to the Oil and Gas Properties, (c) all accounts (including
accounts resulting from the sale of Hydrocarbons at the wellhead), contract
rights and general intangibles, including all accounts, contract rights and
general intangibles now or hereafter arising regardless of whether any of the
foregoing is in connection with the sale or other disposition of any
Hydrocarbons or otherwise, including all liens securing the same, (d) all
accounts, contract rights and general intangibles now or hereafter arising
regardless of whether any of the foregoing is in connection with or resulting
from any of the Contracts, including all liens security the same, (e) all
proceeds and products of the Realty Collateral and any other contracts or
agreements, (f) all information concerning the Oil and Gas Properties and
all wells located thereon, including abstracts of title, title opinions,
geological and geophysical information and logs, lease files, well files, and
other books and records (including computerized records and data), (g) any
deposit or time accounts with Mortgagee or any Lender, (h) any options or
rights of first refusal to acquire any Realty Collateral, and (i) all
proceeds, products, renewals, increases, profits, substitutions, replacements,
additions, amendments and accessions of, to or for any of the foregoing.

 

1.16                           “Property” means any property of any kind, whether real,
personal, or mixed and whether tangible or intangible.

 

1.17                           “Realty Collateral” means all of Mortgagor’s interest now
owned or hereafter acquired in and to the Oil and Gas Properties, including any
access rights, water and water rights, and all unsevered and unextracted
Hydrocarbons (even though Mortgagor’s interest therein may be incorrectly
described in, or a description of a part or all of such interest may be omitted
from, Exhibit A).

 

1.18                           “Reimbursement
Rate” means a per annum rate equal to the lesser of (a) the Maximum Rate
(as defined in the Credit Agreement) and (b) the Adjusted Reference Rate
(as defined in the Credit Agreement) in effect from time to time plus the
Applicable Margin for Reference Rate Advances (as such terms are defined in the
Credit Agreement) in effect during an Event of Default.

 

4

 

1.19                           All other
capitalized terms defined in the Credit Agreement which are used in this
Mortgage and which are not otherwise defined herein shall have the meanings
assigned to such terms in the Credit Agreement. 
All meanings to defined terms, unless otherwise indicated, are to be
equally applicable to both the singular and plural forms of the terms
defined.  Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and
Exhibits to this Mortgage, unless otherwise specified.  All references to instruments, documents,
contracts, and agreements are references to such instruments, documents,
contracts, and agreements as the same may be amended, supplemented, and
otherwise modified from time to time, unless otherwise specified.  The words “hereof”, “herein” and “hereunder”
and words of similar import when used in this Mortgage shall refer to this
Mortgage as a whole and not to any particular provision of this Mortgage.  As used herein, the term “including” means “including
, without limitation,”.

 

ARTICLE II

Creation of Security

 

2.1                                 Conveyance
and Grant of Lien.  In
consideration of the advances or extensions by the Credit Parties to Mortgagor
of the funds or credit constituting the Obligations, and in further
consideration of the mutual covenants contained herein, Mortgagor, by this
Mortgage does hereby GRANT, MORTGAGE, WARRANT, CONVEY, SELL, TRANSFER, AND
ASSIGN with a general warranty of title, for the uses, purposes and conditions
hereinafter set forth all of its right, title and interest in and to the Realty
Collateral, the Personalty Collateral and the Fixture Collateral unto
Mortgagee, its successors and assigns, with power of sale, to secure the
payment and performance of the Obligations for the benefit of Mortgagee and the
ratable benefit of the Credit Parties.

 

MORTGAGOR
FURTHER GRANTS TO MORTGAGEE, ITS SUCCESSORS AND ASSIGNS, THE RIGHT AND POWER TO
FORECLOSE THIS MORTGAGE UNDER THE OKLAHOMA POWER OF SALE MORTGAGE FORECLOSURE
ACT, 46. O.S. § 40 ET SEQ.

 

TO HAVE AND TO HOLD the
Realty Collateral, the Personalty Collateral and Fixture Collateral unto the
Mortgagee and its successors and assigns forever for the benefit of the Credit
Parties, together with all and singular the rights, hereditaments and
appurtenances thereto in anywise appertaining or belonging, to secure payment
of the Obligations and the performance of the covenants of Mortgagor contained
in this Mortgage.  Mortgagor does hereby
bind itself, its successors and permitted assigns, to warrant and forever
defend all and singular the Realty Collateral, the Personalty Collateral and
the Fixture Collateral unto the Mortgagee and its successors and assigns,
against every Person whomsoever lawfully claiming or to claim the same, or any
part thereof.

 

Subject, however, to the
condition that none of the Mortgagee or the Credit Parties shall be liable in
any respect for the performance of any covenant or obligation of the Mortgagor
in respect of the Collateral.  Any
reference in Exhibit A to the name of a well shall not be construed to
limit the Collateral to the well bore of such well or in the pro rata
units.  It is Mortgagor’s

 

5

 

intention
that this instrument cover Mortgagor’s entire interest in the lands, leases,
units and other interests set forth in Exhibit A.

 

2.2                                 Security
Interest.  For the
same consideration and to further secure the Obligations, Mortgagor hereby
grants to Mortgagee for its benefit and the ratable benefit of the other Credit
Parties a security interest in and to the Collateral.

 

2.3                                 Assignment
of Liens and Security Interests.  For the same consideration and to further
secure the Obligations, Mortgagor hereby assigns and conveys to Mortgagee for
its benefit and the benefit of the other Credit Parties any security interests
held by Mortgagor arising under, and any liens granted to the Mortgagor
pursuant to, Title 12A of the Oklahoma Statutes (as amended from time to time).

 

ARTICLE III

Proceeds from Production

 

3.1                                 Assignment
of Production.

 

(a)                                  In order to
further secure the Obligations, Mortgagor has assigned, transferred, conveyed
and delivered and does hereby assign, transfer, convey and deliver unto
Mortgagee, subject to Permitted Prior Liens, effective as of the Effective Date
at 7:00 a.m. Dallas, Texas time, all Hydrocarbons produced from, and which
are attributable to, Mortgagor’s interest, now owned or hereafter acquired, in
and to the Oil and Gas Properties, or are allocated thereto pursuant to pooling
or unitization orders, agreements or designations, and all proceeds therefrom.

 

(b)                                 Subject to the
provisions of subsection (f) below, all parties producing, purchasing,
taking, possessing, processing or receiving any production from the Oil and Gas
Properties, or having in their possession any such production, or the proceeds
therefrom, for which they or others are accountable to Mortgagee by virtue of
the provisions of this Section 3.1, are authorized and directed by
Mortgagor to treat and regard Mortgagee as the assignee and transferee of
Mortgagor and entitled in its place and stead to receive such Hydrocarbons and
the proceeds therefrom.

 

(c)                                  Mortgagor
directs and instructs each of such parties to pay to Mortgagee, for its benefit
and the ratable benefit of the other Credit Parties, all of the proceeds of
such Hydrocarbons until such time as such party has been furnished evidence
that all of the Obligations have been paid and that the Lien evidenced hereby
has been released; provided, however, that until Mortgagee shall have exercised
the rights as herein to instruct such parties to deliver such Hydrocarbons and
all proceeds therefrom directly to Mortgagee, such parties shall be entitled to
deliver such Hydrocarbons and all proceeds therefrom to Mortgagor for Mortgagor’s
use and enjoyment, and Mortgagor shall be entitled to execute division orders,
transfer orders and other instruments as may be required to direct all proceeds
to Mortgagor without the necessity of joinder by Mortgagee in such division
orders, transfer orders or other instruments. Mortgagor agrees to perform all
such acts, and to execute all such further assignments, transfers and division
orders, and other instruments as may be reasonably required

 

6

 

or
desired by Mortgagee or any party in order to have said revenues and proceeds
so paid to Mortgagee.  None of such
parties shall have any responsibility for the application of any such proceeds
received by Mortgagee.  Subject to the
provisions of subsection (f) below, Mortgagor authorizes Mortgagee to
receive and collect all proceeds of such Hydrocarbons.

 

(d)                                 Subject to the
provisions of subsection (f) below, Mortgagor will execute and deliver to
Mortgagee any instruments Mortgagee may from time to time reasonably request
for the purpose of effectuating this assignment and the payment to Mortgagee of
the proceeds assigned.

 

(e)                                  Neither the
foregoing assignment nor the exercise by Mortgagee of any of its rights herein
shall be deemed to make Mortgagee a “mortgagee-in-possession” or otherwise
responsible or liable in any manner with respect to the Oil and Gas Properties
or the use, occupancy, enjoyment or operation of all or any portion thereof,
unless and until Mortgagee, in person or by agent, assumes actual possession
thereof, nor shall appointment of a receiver for the Oil and Gas Properties by
any court at the request of Mortgagee or by agreement with Mortgagor or the
entering into possession of the Oil and Gas Properties or any part thereof by
such receiver be deemed to make Mortgagee a “mortgagee-in-possession” or
otherwise responsible or liable in any manner with respect to the Oil and Gas
Properties or the use, occupancy, enjoyment or operation of all or any portion
thereof.

 

(f)                                    Notwithstanding
anything to the contrary contained herein, so long as no Default or an Event of
Default shall have occurred and is continuing, Mortgagor shall have the right
to collect all revenues and proceeds attributable to the Hydrocarbons that
accrue to the Oil and Gas Properties or the products obtained or processed
therefrom, as well as any Liens and security interests securing any sales of
said Hydrocarbons and to retain, use and enjoy same.

 

(g)                                 Mortgagee may
endorse and cash any and all checks and drafts payable to the order of
Mortgagor or Mortgagee for the account of Mortgagor, received from or in
connection with the proceeds of the Hydrocarbons affected hereby, and the same
may be applied as provided herein. 
Mortgagee may execute any transfer or division orders in the name of
Mortgagor or otherwise, with warranties and indemnities binding on Mortgagor;
provided that Mortgagee shall not be held liable to Mortgagor for, nor be
required to verify the accuracy of, Mortgagor’s interests as represented
therein.

 

(h)                                 Mortgagee shall
have the right at Mortgagee’s election and in the name of Mortgagor, or
otherwise, to prosecute and defend any and all actions or legal proceedings
deemed advisable by Mortgagee in order to collect such proceeds and to protect
the interests of Mortgagee or Mortgagor, with all costs, expenses and attorneys
fees incurred in connection therewith being paid by Mortgagor.  In addition, should any purchaser taking
production from the Oil and Gas Properties fail to pay promptly to Mortgagee in
accordance with this Article, Mortgagee shall have the right to demand a change
of connection and to designate another purchaser with whom a new connection may
be made without any liability on the part of Mortgagee in making such election,
so long as ordinary care is used in the making thereof, and upon failure of
Mortgagor to consent to such change of connection, the entire amount of all the

 

7

 

Obligations
may, at the option of Mortgagee, be immediately declared to be due and payable
and subject to foreclosure hereunder.

 

(i)                                     Without in any
way limiting the effectiveness of the foregoing provisions, if Mortgagor
receives any proceeds which under this Section 3.1 are payable to
Mortgagee, Mortgagor shall hold the same in trust and remit such proceeds, or
cause them to be remitted, immediately, to Mortgagee.

 

3.2                                 Application
of Proceeds.  All
payments received by Mortgagee pursuant to this Article III attributable
to the interest of Mortgagor in and to the Hydrocarbons shall be applied in the
order set forth in Section 7.06 of the Credit Agreement.

 

3.3                                 Mortgagor’s
Payment Duties.  Except as
provided in Section 7.16 hereof, nothing contained herein will limit
Mortgagor’s absolute duty to make payment of the Obligations regardless of
whether the proceeds assigned by this Article III are sufficient to pay
the same, and the receipt by Mortgagee of proceeds from Hydrocarbons under this
Mortgage will be in addition to all other security now or hereafter existing to
secure payment of the Obligations.

 

3.4                                 Liability
of Mortgagee.  Mortgagee
is hereby absolved from all liability for failure to enforce collection of any
of such proceeds, and from all other responsibility in connection therewith
except the responsibility to account to Mortgagor for proceeds actually
received by Mortgagee.

 

3.5                                 Actions
to Effect Assignment. 
Subject to the provisions of Section 3.1(f), Mortgagor covenants to
cause all operators, pipeline companies, production purchasers and other
remitters of said proceeds to pay promptly to Mortgagee the proceeds from such
Hydrocarbons in accordance with the terms of this Mortgage, and to execute,
acknowledge and deliver to said remitters such division orders, transfer
orders, certificates and other documents as may be necessary, requested or
proper to effect the intent of this assignment; and Mortgagee shall not be
required at any time, as a condition to its right to obtain the proceeds of
such Hydrocarbons, to warrant its title thereto or to make any guaranty
whatsoever.  In addition, Mortgagor
covenants to provide to Mortgagee the name and address of every such remitter
of proceeds from such Hydrocarbons, together with a copy of the applicable
division orders, transfer orders, sales contracts and governing
instruments.  All expenses incurred by
the Mortgagee in the collection of said proceeds shall be repaid promptly by
Mortgagor; and prior to such repayment, such expenses shall be a part of the
Obligations secured hereby.  If under any
existing Contracts for the sale of Hydrocarbons, other than division orders or
transfer orders, any proceeds of Hydrocarbons are required to be paid by the
remitter direct to Mortgagor so that under such existing agreements payment
cannot be made of such proceeds to Mortgagee in the absence of foreclosure,
Mortgagor’s interest in all proceeds of Hydrocarbons under such existing Contracts
shall, when received by Mortgagor, constitute trust funds in Mortgagor’s hands
and shall be immediately paid over to Mortgagee.

 

3.6                                 Power
of Attorney.  Without
limitation upon any of the foregoing, Mortgagor hereby designates and appoints
Mortgagee as true and lawful agent and attorney-in-fact (with

 

8

 

full
power of substitution, either generally or for such periods or purposes as
Mortgagee may from time to time prescribe), with full power and authority, for
and on behalf of and in the name of Mortgagor, to execute, acknowledge and
deliver all such division orders, transfer orders, certificates and other
documents of every nature, with such provisions as may from time to time, in
the opinion of Mortgagee, be necessary or proper to effect the intent and
purpose of the assignment contained in this Article III; and Mortgagor
shall be bound thereby as fully and effectively as if Mortgagor had personally
executed, acknowledged and delivered any of the foregoing orders, certificates
or documents.  The powers and authorities
herein conferred on Mortgagee may be exercised by Mortgagee through any person
who, at the time of exercise, is the president, a senior vice president or a
vice president of Mortgagee.  The power of attorney conferred by this Section 3.6
is granted for valuable consideration and coupled with an interest and is
irrevocable until all of the Obligations have been fully and finally paid and
discharged in full, all Commitments have been terminated or expired and the
Credit Agreement has been terminated in writing.   All persons dealing
with Mortgagee, or any substitute, shall be fully protected in treating the
powers and authorities conferred by this Section 3.6 as continuing in full
force and effect until advised by Mortgagee that the Obligations are fully and
finally paid and the Liens granted hereunder have been released.

 

3.7                               INDEMNIFICATION.  MORTGAGOR AGREES TO INDEMNIFY MORTGAGEE AND
THE OTHER CREDIT PARTIES, AND EACH OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, AND AGENTS (COLLECTIVELY, THE “INDEMNIFIED PARTIES”) FROM,
AND DISCHARGE, RELEASE AND HOLD EACH OF THEM HARMLESS AGAINST ALL LOSSES,
DAMAGES, CLAIMS, ACTIONS, LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS FEES OR
OTHER CHARGES OF WHATSOEVER KIND OR NATURE (HEREAFTER REFERRED TO AS “CLAIMS”)
MADE AGAINST, IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM IN ANY AS
A CONSEQUENCE OF THE ASSERTION EITHER BEFORE OR AFTER THE PAYMENT IN FULL OF
THE OBLIGATIONS THAT ANY OF THE INDEMNIFIED PARTIES RECEIVED HYDROCARBONS OR
PROCEEDS PURSUANT TO THIS MORTGAGE OR PURSUANT TO ANY RIGHT TO COLLECT PROCEEDS
DIRECTLY FROM ACCOUNT DEBTORS WHICH ARE CLAIMED BY THIRD PERSONS.  THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT
TO EMPLOY ATTORNEYS AND TO DEFEND AGAINST ANY SUCH CLAIMS AND UNLESS FURNISHED
WITH REASONABLE INDEMNITY, THE INDEMNIFIED PARTIES WILL HAVE THE RIGHT TO PAY
OR COMPROMISE AND ADJUST ALL SUCH CLAIMS. 
MORTGAGOR WILL INDEMNIFY AND PAY TO THE INDEMNIFIED PARTIES ALL SUCH
AMOUNTS AS MAY BE PAID IN RESPECT THEREOF, OR AS MAY BE SUCCESSFULLY
ADJUDICATED AGAINST ANY OF THE INDEMNIFIED PARTIES.  THE INDEMNITY UNDER THIS SECTION SHALL
APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED’S
OWN NEGLIGENCE BUT SHALL NOT APPLY TO CLAIMS ARISING OR INCURRED BY REASON OF
THE PERSON BEING INDEMNIFIED’S OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.  THE LIABILITIES OF
MORTGAGOR AS SET FORTH IN THIS SECTION 3.7 SHALL SURVIVE THE TERMINATION
OF THIS MORTGAGE.

 

ARTICLE IV

Mortgagor’s Warranties and Covenants

 

4.1                                 Payment
of Obligations.  Mortgagor
covenants that Mortgagor shall timely pay and perform the Obligations secured
by this Mortgage.

 

9

 

4.2                                 Representations
and Warranties.  Mortgagor
represents and warrants as follows:

 

(a)                                  Incorporation
of Representations and Warranties from the Credit Agreement.  The representations and warranties applicable
to the Mortgagor and to its Properties contained in Article IV of the
Credit Agreement are hereby confirmed and restated, each such representation
and warranty, together with all related definitions and ancillary provisions,
being hereby incorporated into this Mortgage by reference as though
specifically set forth in this Section.

 

(b)                                 Title to
Collateral.  Mortgagor
has good and marketable title to the Collateral as is customary in the oil and
gas industry in all material respects and free from all Liens, security
interests or other encumbrances except as permitted by the provisions of Section 4.4(i) below.  The descriptions set forth in Exhibit A
of the quantum and nature of the interests of Mortgagor in and to the Oil and
Gas Properties include the entire interests of Mortgagor in the Oil and Gas
Properties and are complete and accurate in all material respects.  There are no “back-in” or “reversionary”
interests held by third parties which could reduce the interests of Mortgagor
in the Oil and Gas Properties except as set forth on Exhibit A.  No operating or other agreement to which
Mortgagor is a party or by which Mortgagor is bound affecting any part of the
Collateral requires Mortgagor to bear any of the costs relating to the
Collateral greater than the leasehold interest of Mortgagor in such portion of
the Collateral, except in the event Mortgagor is obligated under an operating
agreement to assume a portion of a defaulting party’s share of costs.

 

(c)                                  Status
of Leases, Term Mineral Interests and Contracts.  All of the leases and term mineral interests
in the Oil and Gas Properties are valid, subsisting and in full force and
effect, and Mortgagor has no knowledge that a default exists under any of the
terms or provisions, express or implied, of any of such leases or interests or
under any agreement to which the same are subject.  All of the Contracts and obligations of
Mortgagor that relate to the Oil and Gas Properties are in full force and
effect and constitute legal, valid and binding obligations of Mortgagor.  Neither Mortgagor nor, to the knowledge of
Mortgagor, any other party to any leases or term mineral interests in the Oil
and Gas Properties or any Contract (A) is in breach of or default, or with
the lapse of time or the giving of notice, or both, would be in breach or
default, with respect to any obligations thereunder, whether express or
implied, or (B) has given or threatened to give notice of any default
under or inquiry into any possible default under, or action to alter,
terminate, rescind or procure a judicial reformation of, any lease in the Oil
and Gas Properties or any Contract.

 

(d)                                 Production
Burdens, Taxes, Expenses and Revenues.  All rentals, royalties, overriding royalties,
shut-in royalties and other payments due under or with respect to the Oil and
Gas Properties have been properly and timely paid, except for payments held in
suspense in the ordinary course of business or remitted to state agencies
responsible for handling unclaimed property. 
All taxes have been properly and timely paid except to the extent such
taxes are being contested in good faith and for which reserves in accordance
with GAAP have been made as reflected in the Financial Statements.  All expenses payable under the terms of the

 

10

 

Contracts
have been properly and timely paid except for such expenses being contested in
good faith by appropriate proceedings, and for which reserves shall have been
made therefore and except for such expenses as are being currently paid prior
to delinquency in the ordinary course of business.  Except for Mortgagor’s interests in certain
Oil and Gas Properties, which Mortgagor represents do not constitute a material
portion (with 2% being deemed material) of the value of the Collateral and all
other Properties of Mortgagor securing the Obligations, all of the proceeds
from the sale of Hydrocarbons produced from the Realty Collateral are being
properly and timely paid to Mortgagor by the purchasers or other remitters of
production proceeds without suspense. 
Mortgagor’s ownership of the Hydrocarbons and the undivided interests therein
as specified on attached Exhibit A will, after giving full effect to all
Liens permitted hereby and after giving full effect to the agreements or
instruments set forth on Exhibit A and any other instruments or agreements
affecting Mortgagor’s ownership of the Hydrocarbons, afford Mortgagor not less
than those net interests (expressed as a fraction, percentage or decimal) in
the production from or which is allocated to such Hydrocarbons specified as net
revenue interest on attached Exhibit A and will cause Mortgagor to bear
not more than that portion (expressed as a fraction, percentage or decimal),
specified as working interest on attached Exhibit A, of the costs of
drilling, developing and operating the wells identified on Exhibit A.

 

(e)                                  Pricing.  The prices being received for the production
of Hydrocarbons do not violate any Contract or any law or regulation.  Where applicable, all of the wells located on
the Oil and Gas Properties and production of Hydrocarbons therefrom have been
properly classified under appropriate governmental regulations.

 

(f)                                    Gas
Regulatory Matters.  Mortgagor
has filed with the appropriate state and federal agencies all necessary rate
and collection filings and all necessary applications for well determinations
under the Natural Gas Act of 1938, as amended, the Natural Gas Policy Act of
1978, as amended, and the rules and regulations of the Federal Energy
Regulatory Commission (the “FERC”) thereunder, and each such application
has been approved by or is pending before the appropriate state or federal
agency.

 

(g)                                 Production
Balances.  Except as
set forth below or permitted by the Credit Agreement, none of the purchasers
under any production sales contracts are entitled to “make-up” or otherwise
receive deliveries of Hydrocarbons at any time after the date hereof without
paying at such time the full contract price therefor.  Except as set forth below, no person is
entitled to receive any portion of the interest of Mortgagor in any Hydrocarbons
or to receive cash or other payments to “balance” any disproportionate
allocation of Hydrocarbons under any operating agreement, gas balancing and
storage agreement, gas processing or dehydration agreement, or other similar
agreements.  Mortgagor believes that certain
third parties may be entitled to receive “make-up” deliveries of Hydrocarbons
or cash or other payments to “balance” a disproportionate allocation of
Hydrocarbons produced from certain Oil and Gas Properties; provided, however,
Mortgagor represents and warrants that such deliveries or payments are not
material (with 2% being deemed material) in aggregate amount when compared to
the value of the Collateral and all other Properties of Mortgagor securing the
Obligations.

 

(h)                                 Drilling
Obligations.  There are
no obligations under any Oil and Gas Property or Contract which require the
drilling of additional wells or operations to earn or to

 

11

 

continue
to hold any of the Oil and Gas Properties in force and effect, except for oil
and gas leases that are still within their primary term (each of which will
require drilling operations to perpetuate it beyond its primary term) and the
standard provision in certain oil and gas leases that requires either
production or operations to perpetuate each respective lease after the
expiration of its primary term.

 

(i)                                     Compliance
With Laws.  All wells
on or attributable to the Oil and Gas Properties have been drilled, completed
and operated, and all production therefrom has been accounted for and paid to
the persons entitled thereto, in compliance in all material respects with all
applicable federal, state and local laws and applicable rules and
regulations of the federal, state and local regulatory authorities having
jurisdiction thereof.

 

(j)                                     Regulatory
Filings and Compliance.  All
necessary regulatory filings have been properly made, and all regulatory
(including Environmental) processes have been complied with, in connection with
the drilling, completion and operation of the wells on or attributable to the
Oil and Gas Properties, and the issuance of all rights of way and other surface
uses necessary for the exploration, development and transportation to and from
such wells, and all other operations related thereto.

 

(k)                                  Allowables.  All production and sales of Hydrocarbons
produced or sold from the Oil and Gas Properties have been made in accordance
with any applicable allowables (plus permitted tolerances) imposed by any
Governmental Authorities.

 

(l)                                     Refund
Obligations.  Mortgagor
has not collected any proceeds from the sale of Hydrocarbons produced from the
Oil and Gas Properties which are subject to any refund obligation.

 

(m)                               The address of
Mortgagor’s place of business, residence, chief executive office and office
where Mortgagor keeps its records concerning accounts, contract rights and
general intangibles is as set forth in Section 7.12, and there has been no
change in the location of Mortgagor’s place of business, residence, chief
executive office and office where it keeps such records and no change of
Mortgagor’s name during the four months immediately preceding the Effective
Date.  Mortgagor hereby represents and
warrants that its organizational number is
                        ,
the state of its formation is Delaware and the correct spelling of Mortgagor’s
name is as set forth in its signature block below.

 

4.3                                 Further
Assurances.

 

(a)                                  Mortgagor
covenants that Mortgagor shall execute and deliver such other and further
instruments, and shall do such other and further acts as in the opinion of Mortgagee
may be necessary or desirable to carry out more effectively the purposes of
this Mortgage, including without limiting the generality of the foregoing, (i) prompt
correction of any defect in the execution or acknowledgment of this Mortgage,
any written instrument comprising part or all of the Obligations, or any other
document used in connection herewith; (ii) prompt correction of any defect
which may hereafter be discovered in the title to the Collateral; (iii) prompt
execution and delivery of all division or transfer orders or other instruments
which in Mortgagee’s opinion

 

12

 

are
required to transfer to Mortgagee, for its benefit and the ratable benefit of
the other Credit Parties, the assigned proceeds from the sale of Hydrocarbons
from the Oil and Gas Properties; and (iv) prompt payment when due and
owing of all taxes, assessments and governmental charges imposed on this
Mortgage, upon the interest of Mortgagee or upon the income and profits from any
of the above.

 

(b)                                 Mortgagor
covenants that Mortgagor shall maintain and preserve the Lien and security
interest herein created as an Acceptable Security Interest until all of the
Obligations have been fully and finally paid and discharged in full, all Commitments
have been terminated or expired and the Credit Agreement has been terminated in
writing.

 

(c)                                  Mortgagor shall
immediately notify Mortgagee of any discontinuance of or change in the address
of Mortgagor’s place of business, residence, chief executive office or office
where it keeps records concerning accounts, contract rights and general
intangibles.

 

4.4                                 Operation
of Oil and Gas Properties.  Until all of the Obligations have been fully
and finally paid and discharged in full, all Commitments have been terminated
or expired, and the Credit Agreement has been terminated in writing, Mortgagor
shall (at Mortgagor’s own expense):

 

(a)                                  not enter into
any operating agreement, contract or agreement which materially adversely
affects the Collateral;

 

(b)                                 do all things
necessary and within the reasonable control of Mortgagor to keep, or cause to
be kept, in full force and effect the Oil and Gas Properties and Mortgagor’s
interests therein;

 

(c)                                  neither
abandon, forfeit, surrender, release, sell, assign, sublease, farmout or
convey, nor agree to sell, assign, sublease, farmout or convey, nor mortgage or
grant security interests in, nor otherwise dispose of or encumber any of the
Collateral or any interest therein, except as permitted by the Credit Agreement;

 

(d)                                 operate the Oil
and Gas Properties or, to the extent that the right of operation is vested in
others, will exercise its best efforts to cause the operator to operate the Oil
and Gas Properties, in each case in such a manner as to cause the Collateral to
be maintained, developed and protected against drainage and continuously
operated for the production and marketing of Hydrocarbons in a good and
workmanlike manner as a prudent operator would in accordance with (i) generally
accepted practices, (ii) applicable oil and gas leases and Contracts, and (iii) all
applicable Federal, state and local laws, rules and regulations;

 

(e)                                  promptly pay or
cause to be paid when due and owing (i) all rentals and royalties payable
in respect of the Collateral; (ii) all expenses incurred in or arising
from the operation or development of the Collateral; (iii) all taxes,
assessments and governmental charges imposed upon the Collateral, upon the
income and profits from any of the Collateral, or upon Mortgagee because of its
interest therein; and (iv) all local, state and federal taxes, payments
and contributions for which Mortgagor may be liable except to the extent
disputed as permitted under

 

13

 

the
Credit Agreement; and indemnify Mortgagee from all liability in connection with
any of the foregoing;

 

(f)                                    promptly take
all action necessary to enforce or secure the observance or performance of any
term, covenant, agreement or condition to be observed or performed by third
parties under any Contract, or any part thereof, or to exercise any of its
rights, remedies, powers and privileges under any Contract, all in accordance
with the respective terms thereof;

 

(g)                                 other than as
otherwise permitted under the terms of the Credit Agreement, cause the
Operating Equipment and the Fixture Operating Equipment to be kept in good and
effective operating condition, ordinary wear and tear excepted, and cause to be
made all repairs, renewals, replacements, additions and improvements thereof or
thereto, necessary or appropriate in connection with the production of
Hydrocarbons from the Oil and Gas Properties;

 

(h)                                 permit and do
all things necessary or proper to enable the Mortgagee (through any of their
respective agents and employees) to enter upon the Oil and Gas Properties for
the purpose of investigating and inspecting the condition and operations of the
Collateral in accordance with the terms of the Credit Agreement;

 

(i)                                     cause the
Collateral to be kept free and clear of Liens, charges, security interests and
encumbrances of every character other than (i) the Liens and security
interests created and assigned by this Mortgage and (ii) the Permitted
Liens;

 

(j)                                     carry and
maintain the insurance required by the Credit Agreement;

 

(k)                                  furnish to Mortgagee,
upon request, copies of any Contracts; and

 

(l)                                     promptly
perform all covenants express or implied in any Contract.

 

4.5                                 Recording.  Mortgagor shall promptly (at Mortgagor’s own
expense) record, register, deposit and file this Mortgage and every other
instrument in addition or supplement hereto, including applicable financing
statements, in such offices and places within the state where the Collateral is
located and in the state where the Mortgagor is registered as a limited
liability company and at such times and as often as may be necessary to
preserve, protect and renew the Lien and security interest herein created as an
Acceptable Security Interest on real or personal property as the case may be,
and otherwise shall do and perform all matters or things necessary or expedient
to be done or observed by reason of any Legal Requirement for the purpose of
effectively creating, perfecting, maintaining and preserving the Lien and
security interest created hereby in and on the Collateral.

 

4.6                                 Records,
Statements and Reports. Mortgagor shall keep
proper books of record and account in which complete and correct entries shall
be made of Mortgagor’s transactions in accordance with the method of accounting
required in the Credit Agreement and shall furnish or cause to be furnished to
Mortgagee the reports required to be delivered pursuant to the terms of the
Credit Agreement.

 

14

 

4.7                                 Insurance.  To the extent that insurance is carried by a
third-party operator on behalf of Mortgagor, upon request by Mortgagee,
Mortgagor shall obtain and provide Mortgagee with copies of certificates of
insurance showing Mortgagor as a named insured. 
Mortgagor hereby assigns to Mortgagee for its benefit and the benefit of
the other Credit Parties any and all monies that may become payable under any
such policies of insurance by reason of damage, loss or destruction of any of
the Collateral and Mortgagee may receive such monies and apply all or any part
of the sums so collected, at its election, toward payment of the Obligations,
whether or not such Obligations are then due and payable, in such manner as
Mortgagee may elect. Any insurance proceeds received by Mortgagor shall be held
in trust for the benefit of Mortgagee, shall be segregated from other funds of
Mortgagor and shall be forthwith paid over to Mortgagee.

 

ARTICLE V

Default

 

5.1                                 Events
of Default.  An Event of
Default under the terms of the Credit Agreement shall constitute an “Event of
Default” under this Mortgage.

 

5.2                                 Acceleration
Upon Default.  Upon the
occurrence and during the continuance of any Event of Default, Mortgagee may
(or shall at the request of the Majority Lenders), declare the entire unpaid
principal of, and the interest accrued on, and all other amounts owed in
connection with, the Obligations to be forthwith due and payable, whereupon the
same shall become immediately due and payable without any protest, presentment,
demand, notice of intent to accelerate, notice of acceleration or further
notice of any kind, all of which are hereby expressly waived by Mortgagor.  Whether or not Mortgagee or the Majority
Lenders elect to accelerate as herein provided, Mortgagee may simultaneously,
or thereafter, without any further notice to Mortgagor, exercise any other
right or remedy provided in this Mortgage or otherwise existing under the
Credit Agreement or any other Loan Documents or any other agreement, document,
or instrument evidencing obligations owing from the Mortgagor to any of the
Credit Parties.

 

ARTICLE VI

Mortgagee’s Rights

 

6.1                                 Rights
to Realty Collateral Upon Default.

 

(a)                                  Operation
of Property by Mortgagee.  Upon
the occurrence and during the continuance of an Event of Default, and in
addition to all other rights of Mortgagee, Mortgagee shall have the following
rights and powers (but no obligation):

 

(i) 
To enter upon and take possession of any of the Realty Collateral and exclude
Mortgagor therefrom;

 

(ii) 
To hold, use, administer, manage and operate the Realty Collateral to the
extent that Mortgagor could do so, and without any liability to Mortgagor in
connection with such operations; and

 

15

 

(iii) To
the extent that Mortgagor could do so, to collect, receive and receipt for all
Hydrocarbons produced and sold from the Realty Collateral, to make repairs, to
purchase machinery and equipment, to conduct workover operations, to drill
additional wells, and to exercise every power, right and privilege of Mortgagor
with respect to the Realty Collateral.

 

Mortgagee
may designate any person, firm, corporation or other entity to act on its
behalf in exercising the foregoing rights and powers.  When and if the expenses of such operation
and development (including costs of unsuccessful workover operations or
additional wells) have been paid and all of the Obligations have been fully and
finally paid and discharged in full, all of the Commitments have terminated or
expired, and the Credit Agreement has been terminated in writing, the Realty
Collateral shall be returned to Mortgagor (providing there has been no
foreclosure sale).

 

(b)                                 Judicial
Proceedings.  Upon the
occurrence and during the continuance of an Event of Default, the Mortgagee, in
lieu of or in addition to exercising the power of sale hereafter given, may
proceed by a suit or suits, in equity or at law (i) for the specific
performance of any covenant or agreement herein contained or in aid of the
execution of any power herein granted, (ii) for the appointment of a
receiver whether there is then pending any foreclosure hereunder or the sale of
the Realty Collateral, or (iii) for the enforcement of any other
appropriate legal or equitable remedy. 
Furthermore, if an action is filed to foreclose this Mortgage, or if
Mortgagee seeks to foreclose this Mortgage by power of sale under the Oklahoma
Power of Sale Mortgage Foreclosure Act, Mortgagee shall be entitled to the
immediate appointment of a receiver pursuant to 12 O.S. §1551(2)(c) without
the necessity of further proof.

 

(c)                                  Intentionally
omitted.

 

(d)                                 Certain
Aspects of Sale.  Mortgagee
will have the right to become the purchaser at any foreclosure sale and to
credit the then outstanding balance of the Obligations against the amount
payable by Mortgagee as purchaser at such sale. 
Statements of fact or other recitals contained in any conveyance to any
purchaser or purchasers at any sale made hereunder will conclusively establish
the occurrence of an Event of Default, any acceleration of the maturity of the
Obligations, the advertisement and conduct of such sale in the manner provided
herein and the truth and accuracy of all other matters stated therein.  Mortgagor does hereby ratify and confirm all
legal acts that the Mortgagee may do in carrying out the Mortgagee’s duties and
obligations under this Mortgage, and Mortgagor hereby irrevocably appoints
Mortgagee to be the attorney-in-fact of Mortgagor and in the name and on behalf
of Mortgagor to execute and deliver any deeds, transfers, conveyances,
assignments, assurances and notices which Mortgagor ought to execute and
deliver and do and perform any and all such acts and things which Mortgagor
ought to do and perform under the covenants herein contained and generally to
use the name of Mortgagor in the exercise of all or any of the powers hereby
conferred on Mortgagee.  Upon any sale,
whether under the power of sale hereby given or by virtue of judicial
proceedings, it shall not be necessary for Mortgagee or any public officer acting
under execution or by order of court, to have physically present or
constructively in his possession any of the

 

16

 

Collateral,
and Mortgagor hereby agrees to deliver to the purchaser or purchasers at such
sale on the date of sale the Collateral purchased by such purchasers at such
sale and if it should be impossible or impracticable to make actual delivery of
such Collateral, then the title and right of possession to such Collateral
shall pass to the purchaser or purchasers at such sale as completely as if the
same had been actually present and delivered.

 

(e)                                  Effect
of Sale.  Any sale or sales of the
Realty Collateral will operate to divest all right, title, interest, claim and
demand whatsoever, either at law or in equity, of Mortgagor in and to the
premises and the Realty Collateral sold, and will be a perpetual bar, both at
law and in equity, against Mortgagor, Mortgagor’s successors or assigns, and
against any and all persons claiming or who shall thereafter claim all or any
of the Realty Collateral sold by, through or under Mortgagor, or Mortgagor’s
successors or assigns.  Nevertheless, if
requested by the Mortgagee so to do, Mortgagor shall join in the execution and
delivery of all proper conveyances, assignments and transfers of the Property
so sold.  The purchaser or purchasers at
the foreclosure sale will receive as incident to his, her, its or their own
ownership, immediate possession of the Realty Collateral purchased and
Mortgagor agrees that if Mortgagor retains possession of the Realty Collateral
or any part thereof subsequent to such sale, Mortgagor will be considered a
tenant at sufferance of the purchaser or purchasers and will be subject to
eviction and removal by any lawful means, with or without judicial
intervention, and all damages by reason thereof are hereby expressly waived by
Mortgagor.

 

(f)                                    Provisions
with Respect to the Power of Sale.  Notwithstanding any other provisions in this
Mortgage, if Mortgagee sells the Collateral under the power of sale granted by
this Mortgage, the following provisions shall apply:

 

(i)                                     The notices
described in Title 46 Okla. Stat. Sec. 40 and following, as amended (the “Act”),
shall be given as and when required therein;

 

(ii)                                  All notices
which are required to be given Mortgagor under the Act may be given to
Mortgagor at the address which is set forth in the first paragraph of this
Mortgage, or if such address has been changed pursuant to this Mortgage, to
that changed address;

 

(iii)                               Mortgagee may
purchase part or all of the Collateral at any such sale;

 

(iv)                              Mortgagor
stipulates the total amounts owing under this Mortgage will have benefited
Mortgagor substantially and are not unconscionable in amount, and therefore the
total amount of the Obligations, less the fair market value of the Collateral
sold under such Act, and any prior indebtedness, shall be available as a
deficiency judgment against Mortgagor;

 

(v)                                 The purchaser
under such sale may seek and obtain a writ of assistance by application to the District
Court in the county in Oklahoma in which any part of the Realty Collateral is
located, or the United States District Court having venue for actions arising
in such county;

 

17

 

(vi)                              Mortgagee may,
at its option, proceed with foreclosure under judicial proceedings instead of
exercising the rights of this Power of Sale;

 

(vii)                           All other
procedures and requirements of such Act shall be followed;

 

(viii)                        After the
completion of the sale as contemplated by such Act, the purchaser shall have
all of Mortgagor’s right, title and interest in and to the Collateral, free and
clear of all rights of Mortgagor, and free and clear of all rights of any
person with a priority which is subordinate to the lien of this Mortgage,
except any right which may be reserved under such Act;

 

(ix)                                Any recitation
in any notice, publication thereof, recordation thereof, or deed, of the
existence of an event of default, giving, publication, service and recordation
of notice, occurrence of the sale at the time and place set forth in such
notice or any postponement authorized and effective under such Act,
circumstances of sale and bidding, and compliance with the terms of such Act,
shall be presumed to be statements of fact and no person shall be required to
investigate the truthfulness or accuracy of any such recitation; and

 

(x)                                   The proceeds of
any such sale shall be applied first to the costs, attorney fees, and expenses
of sale, next to the Obligations; except that if such application of proceeds
conflicts with the requirements of such Act, the proceeds shall be applied as
provided under such Act only to the extent of any such conflict.

 

(g)                                 Application
of Proceeds.  The
proceeds of any sale of the Realty Collateral or any part thereof, whether
under the power of sale herein granted and conferred or by virtue of judicial
proceedings, shall either be, at the option of Mortgagee, applied at the time
of receipt, or held by Mortgagee in the Collateral Account as additional
Collateral, and in either case, applied in the order set forth in Section 7.06
of the Credit Agreement.

 

(h)                                 Appraisement
and Marshalling.  Mortgagor
agrees, to the full extent that Mortgagor may lawfully so agree, that Mortgagor
will not at any time insist upon or plead or in any manner whatever claim the
benefit of any appraisement, valuation, stay, extension or redemption law, now
or hereafter in force, in order to prevent or hinder the enforcement or
foreclosure of this Mortgage, the absolute sale of the Collateral, including
the Realty Collateral, or the possession thereof by any purchaser at any sale
made pursuant to this Mortgage or pursuant to the decree of any court of
competent jurisdiction.  Mortgagee hereby
waives or does not waive appraisement, such election to be made at or before
entry of judgment in any action to foreclose this Mortgage, and Mortgagor, for
Mortgagor and all who may claim through or under Mortgagor, hereby waives, to
the extent that Mortgagor may lawfully do so under any applicable law, any and
all rights to have the Collateral, including the Realty Collateral, marshaled
upon any foreclosure of the Lien hereof or sold in inverse order of
alienation.  Mortgagor agrees that, in
the event of a judicial foreclosure or a sale under the power of sale provisions
of this Mortgage, the Collateral, including the Realty Collateral, may be sold
in part, in parcels or as an entirety as directed by Mortgagee.

 

18

 

6.2                                 Rights
to Personalty Collateral Upon Default.  Upon the occurrence of an Event of Default,
or at any time thereafter, Mortgagee may proceed against the Personalty
Collateral in accordance with the rights and remedies granted herein with
respect to the Realty Collateral, or will have all rights and remedies granted
by the Uniform Commercial Code as in effect in Oklahoma and this Mortgage.  Mortgagee shall have the right to take
possession of the Personalty Collateral, and for this purpose Mortgagee may
enter upon any premises on which any or all of the Personalty Collateral is
situated and, to the extent that Mortgagor could do so, take possession of and
operate the Personalty Collateral or remove it therefrom.  Mortgagee may require Mortgagor to assemble
the Personalty Collateral and make it available to Mortgagee at a place to be
designated by Mortgagee which is reasonably convenient to both parties.  Unless the Personalty Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, Mortgagee will send Mortgagor reasonable notice of
the time and place of any public sale or of the time after which any private
sale or other disposition of the Personalty Collateral is to be made.  This requirement of sending reasonable notice
will be met if such notice is mailed, postage prepaid, to Mortgagor at the
address designated in Section 7.12 hereof (or such other address as has
been designated as provided herein) at least ten days before the time of the
sale or disposition.  In addition to the
expenses of retaking, holding, preparing for sale, selling and the like,
Mortgagee will be entitled to recover attorney’s fees and legal expenses as
provided for in this Mortgage and in the writings evidencing the Obligations
before applying the balance of the proceeds from the sale or other disposition
toward satisfaction of the Obligations. 
Mortgagor will remain liable for any deficiency remaining after the sale
or other disposition.

 

6.3                                 Rights
to Fixture Collateral Upon Default.  Upon the occurrence of an Event of Default,
or at any time thereafter, Mortgagee may elect to treat the Fixture Collateral
as either Realty Collateral or as Personalty Collateral (but not both) and
proceed to exercise such rights as apply to the type of Collateral selected.

 

6.4                                 Account
Debtors.  Mortgagee
may, in its discretion, after the occurrence and during the continuance of an
Event of Default, notify any account debtor to make payments directly to
Mortgagee and contact account debtors directly to verify information furnished
by Mortgagor.  Mortgagee shall not have
any obligation to preserve any rights against prior parties.

 

6.5                                 Costs
and Expenses.  All sums
advanced or costs or expenses incurred by Mortgagee (either by it directly or
on its behalf by any receiver appointed hereunder) in protecting and enforcing
its rights hereunder shall constitute a demand obligation owing by Mortgagor to
Mortgagee as part of the Obligations. 
Mortgagor hereby agrees to repay such sums on demand plus interest
thereon from the date of the advance or incurrence until reimbursement of
Mortgagee at the Reimbursement Rate.

 

6.6                                 Set-Off.  Upon the occurrence and during the
continuance of any Event of Default, Mortgagee shall have the right to set-off
any funds of Mortgagor in the possession of Mortgagee against any amounts then
due by Mortgagor to Mortgagee pursuant to this Mortgage.

 

19

 

ARTICLE VII

Miscellaneous

 

7.1                                 Advances
by Mortgagee.  Each and
every covenant of Mortgagor herein contained shall be performed and kept by
Mortgagor solely at Mortgagor’s expense. 
If Mortgagor fails to perform or keep any of the covenants of whatsoever
kind or nature contained in this Mortgage, Mortgagee (either by it directly or
on its behalf by any receiver appointed hereunder) may, but will not be
obligated to, make advances to perform the same on Mortgagor’s behalf, and
Mortgagor hereby agrees to repay such sums and any attorneys’ fees incurred in
connection therewith on demand plus interest thereon from the date of the
advance until reimbursement of Mortgagee at the Reimbursement Rate.  In addition, Mortgagor hereby agrees to repay
on demand any costs, expenses and attorney’s fees incurred by Mortgagee which
are to be obligations of Mortgagor pursuant to, or allowed by, the terms of
this Mortgage, including such costs, expenses and attorney’s fees incurred
pursuant to Section 3.1(h), Section 6.5 or Section 7.2 hereof,
plus interest thereon from the date of the advance by Mortgagee until
reimbursement of Mortgagee at the Reimbursement Rate.  Such amounts will be in addition to any sum
of money which may, pursuant to the terms and conditions of the written
instruments comprising part of the Obligations, be due and owing.  No such advance will be deemed to relieve
Mortgagor from any default hereunder.

 

7.2                                 Defense
of Claims.  Mortgagor
shall promptly notify Mortgagee in writing of the commencement of any legal
proceedings affecting Mortgagor’s title to the Collateral or Mortgagee’s Lien
or security interest in the Collateral, or any part thereof, and shall take
such action, employing attorneys agreeable to Mortgagee, as may be necessary to
preserve Mortgagor’s and Mortgagee’s rights affected thereby.  If Mortgagor fails or refuses to adequately
or vigorously, in the sole judgment of Mortgagee, defend Mortgagor’s or
Mortgagee’s rights to the Collateral, the Mortgagee may take such action on
behalf of and in the name of Mortgagor and at Mortgagor’s expense.  Moreover, Mortgagee may take such independent
action in connection therewith as it may in its discretion deem proper,
including the right to employ independent counsel and to intervene in any suit
affecting the Collateral.  All costs,
expenses and attorneys’ fees incurred by Mortgagee pursuant to this Section 7.2
or in connection with the defense by Mortgagee of any claims, demands or
litigation relating to Mortgagor, the Collateral or the transactions
contemplated in this Mortgage shall be paid by Mortgagor on demand plus
interest thereon from the date of such demand by Mortgagee until reimbursement
of Mortgagee at the Reimbursement Rate.

 

7.3                                 Termination.  If all of the Obligations have been fully and
finally paid and discharged in full, all Commitments have been terminated or
expired, and the Credit Agreement has been terminated in writing, then all of
the Collateral (to the extent not sold, assigned or otherwise transferred as
permitted herein or under applicable law) will revert to Mortgagor and the
entire estate, right, title and interest of the Mortgagee will thereupon cease;
and Mortgagee in such case shall, upon the request of Mortgagor and the payment
by Mortgagor of all attorneys’ fees and other expenses, deliver to Mortgagor
proper instruments acknowledging satisfaction of this Mortgage.

 

20

 

7.4                                 Renewals,
Amendments and Other Security.  Without notice or consent of Mortgagor,
renewals and extensions of the written instruments constituting part or all of
the Obligations may be given at any time and amendments may be made to
agreements relating to any part of such written instruments or the
Collateral.  Mortgagee may take or hold
other security for the Obligations without notice to or consent of Mortgagor.  The acceptance of this Mortgage by Mortgagee
shall not waive or impair any other security Mortgagee may have or hereafter
acquire to secure the payment of the Obligations nor shall the taking of any
such additional security waive or impair the Lien and security interests herein
granted.  The Mortgagee may resort first
to such other security or any part thereof, or first to the security herein
given or any part thereof, or from time to time to either or both, even to the
partial or complete abandonment of either security, and such action will not be
a waiver of any rights conferred by this Mortgage.  This Mortgage may not be amended, waived or
modified except in a written instrument executed by both Mortgagor and
Mortgagee.

 

7.5                                 Security
Agreement, Financing Statement and Fixture Filing.  This Mortgage will be deemed to be and may be
enforced from time to time as an assignment, chattel mortgage, contract, deed
of trust, financing statement, real estate mortgage, or security agreement, and
from time to time as any one or more thereof if appropriate under applicable
state law.  As a financing statement,
this Mortgage is intended to cover all Personalty Collateral including
Mortgagor’s interest in all Hydrocarbons as and after they are extracted and
all accounts arising from the sale thereof at the wellhead.  THIS MORTGAGE SHALL BE
EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING WITH RESPECT TO
FIXTURE COLLATERAL INCLUDED WITHIN THE COLLATERAL.   This Mortgage shall be filed in the real
estate records or other appropriate records of the county or counties in the
state in which any part of the Realty Collateral and Fixture Collateral is
located as well as the Uniform Commercial Code records of the Secretary of
State or other appropriate office of the state in which any Collateral or
Mortgagor is located.  At Mortgagee’s request
Mortgagor shall deliver financing statements covering the Personalty
Collateral, including all Hydrocarbons sold at the wellhead, and Fixture
Collateral, which financing statements may be filed in the Uniform Commercial
Code records of the Secretary of State or other appropriate office of the state
in which any of the Collateral or Mortgagor is located or in the county where
any of the Collateral is located. 
Furthermore, Mortgagor hereby irrevocably authorizes Mortgagee and any
affiliate, employee or agent thereof, at any time and from time to time, to
file in any Uniform Commercial Code jurisdiction any financing statement or
document and amendments thereto, without the signature of Mortgagor where
permitted by law, in order to perfect or maintain the perfection of any
security interest granted under this Mortgage. 
A photographic or other reproduction of this Mortgage shall be
sufficient as a financing statement.

 

7.6                                 Unenforceable
or Inapplicable Provisions.  If any term, covenant, condition or provision
hereof is invalid, illegal or unenforceable in any respect, the other
provisions hereof will remain in full force and effect and will be liberally
construed in favor of the Mortgagee in order to carry out the provisions
hereof.

 

7.7                                 Rights
Cumulative.  Each and
every right, power and remedy herein given to the Mortgagee will be cumulative
and not exclusive, and each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and

 

21

 

as
often and in such order as may be deemed expedient by the Mortgagee, as the
case may be, and the exercise, or the beginning of the exercise, of any such
right, power or remedy will not be deemed a waiver of the right to exercise, at
the same time or thereafter, any other right, power or remedy.  No delay or omission by Mortgagee in the
exercise of any right, power or remedy will impair any such right, power or
remedy or operate as a waiver thereof or of any other right, power or remedy
then or thereafter existing.

 

7.8                                 Waiver
by Mortgagee.  Any and all
covenants in this Mortgage may from time to time by instrument in writing by
Mortgagee, be waived to such extent and in such manner as the Mortgagee may
desire, but no such waiver will ever affect or impair the Mortgagee’s rights
hereunder, except to the extent specifically stated in such written instrument.

 

7.9                                 Terms.  The term “Mortgagor” as used in this Mortgage
will be construed as singular or plural to correspond with the number of
persons executing this Mortgage as Mortgagor. 
If more than one person executes this Mortgage as Mortgagor, his, her,
its, or their duties and liabilities under this Mortgage will be joint and
several.  The terms “Mortgagee” and “Mortgagor”
as used in this Mortgage include the heirs, executors or administrators,
successors, representatives, receiver, trustees and assigns of those
parties.  Unless the context otherwise
requires, terms used in this Mortgage which are defined in the Uniform
Commercial Code of Oklahoma are used with the meanings therein defined.

 

7.10                           Counterparts.  This Mortgage may be executed in any number
of counterparts, each of which will for all purposes be deemed to be an
original, and all of which are identical except that, to facilitate
recordation, in any particular counties counterpart portions of Exhibit A
hereto which describe Properties situated in counties other than the counties
in which such counterpart is to be recorded may have been omitted.

 

7.11                           Governing
Law.  This Mortgage shall be
governed by and construed in accordance with the laws of the State of Oklahoma.

 

7.12                           Notice.  All notices required or permitted to be given
by Mortgagor or Mortgagee shall be made in the manner set forth in the Credit Agreement
and shall be addressed as follows:

 

	
  Mortgagor:

  	
  c/o Cano Petroleum, Inc.

  
	
   

  	
  309
  West 7th Street, Suite 1600

  
	
   

  	
  Fort
  Worth, Texas 76102

  
	
   

  	
  Attention:
  Morris B. Smith, CFO

  
	
   

  	
  Facsimile:
  (817) 334-0222

  
	
   

  	
   

  
	
  Mortgagee:

  	
  UnionBanCal
  Equities, Inc.

  
	
   

  	
  445
  South Figueroa Street, 13th Floor

  
	
   

  	
  Los
  Angeles, California 90071

  
	
   

  	
  Attention:   Maggie
  Elower

  
	
   

  	
  Facsimile:   213-236-7619

  

 

22

 

7.13                           Condemnation.  All awards and payments heretofore and
hereafter made for the taking of or injury to the Collateral or any portion
thereof whether such taking or injury be done under the power of eminent domain
or otherwise, are hereby assigned, and shall be paid to Mortgagee.  Mortgagee is hereby authorized to collect and
receive the proceeds of such awards and payments and to give proper receipts
and acquittances therefor.  Mortgagor
hereby agrees to make, execute and deliver, upon request, any and all
assignments and other instruments sufficient for the purpose of confirming this
assignment of the awards and payments to Mortgagee free and clear of any
encumbrances of any kind or nature whatsoever. 
Any such award or payment may, at the option of Mortgagee, be retained
and applied by Mortgagee after payment of attorneys’ fees, costs and expenses
incurred in connection with the collection of such award or payment toward
payment of all or a portion of the Obligations, whether or not the Obligations
are then due and payable, or be paid over wholly or in part to Mortgagor for
the purpose of altering, restoring or rebuilding any part of the Collateral
which may have been altered, damaged or destroyed as a result of any such
taking, or other injury to the Collateral.

 

7.14                           Successors
and Assigns.

 

(a)                                  This Mortgage
is binding upon Mortgagor, Mortgagor’s successors and assigns, and shall inure
to the benefit of each Credit Party and each of its successors and assigns, and
the provisions hereof shall likewise be covenants running with the land.

 

(b)                                 This Mortgage
shall be transferable and negotiable, with the same force and effect and to the
same extent as the Obligations may be transferable, it being understood that,
upon the transfer or assignment by the Credit Parties (or any of them) of any
of the Obligations, the legal transfer or assignment by the Credit Parties (or
any of them) of any of the Obligations, the legal holder of such Obligations
shall have all of the rights granted to the Mortgagee for the benefit of the
Credit Parties under this Mortgage.  The
Mortgagor specifically agrees that upon any transfer of all or any portion of
the Obligations, this Mortgage shall secure with retroactive rank the existing
Obligations of the Mortgagor to the transferee and any and all Obligations to
such transferee thereafter arising.

 

(c)                                  The Mortgagor
hereby recognizes and agrees that the Credit Parties (or any of them) may, from
time to time, one or more times, transfer all or any portion of the Obligations
to one or more third parties.  Such
transfers may include, but are not limited to, sales of participation interests
in such Obligations in favor of one or more third parties.  Upon any transfer of all or any portion of
the Obligations, the Mortgagee may transfer and deliver any and/or all of the
Collateral to the transferee of such Obligations and such Collateral shall
secure any and all of the Obligations in favor of such a transferee then
existing and thereafter arising, and after any such transfer has taken place,
the Mortgagee shall be fully discharged from any and all future liability and
responsibility to the Mortgagor with respect to such Collateral, and transferee
thereafter shall be vested with all the powers, rights and duties with respect
such Collateral.

 

7.15                           Article and
Section Headings.  The
article and section headings in this Mortgage are inserted for convenience of
reference and shall not be considered a part of this Mortgage or used in its
interpretation.

 

23

 

7.16                           Usury
Not Intended.  It is the
intent of Mortgagor and Mortgagee in the execution and performance of this
Mortgage, the Credit Agreement and the other Loan Documents to contract in
strict compliance with applicable usury laws governing the Obligations
including such applicable usury laws of the State of Texas and the United States
of America as are from time-to-time in effect. 
In furtherance thereof, Mortgagee and Mortgagor stipulate and agree that
none of the terms and provisions contained in this Mortgage, the Credit
Agreement or the other Loan Documents shall ever be construed to create a
contract to pay, as consideration for the use, forbearance or detention of
money, interest at a rate in excess of the maximum non-usurious rate permitted
by applicable law and that for purposes hereof “interest” shall include the
aggregate of all charges which constitute interest under such laws that are
contracted for, charged or received under this Mortgage, the Credit Agreement
and the other Loan Documents; and in the event that, notwithstanding the
foregoing, under any circumstances the aggregate amounts taken, reserved,
charged, received or paid on the Obligations, include amounts which by
applicable law are deemed interest which would exceed the maximum non-usurious
rate permitted by applicable law, then such excess shall be deemed to be a
mistake and Mortgagee shall credit the same on the principal of the Obligations
(or if the Obligations shall have been paid in full, refund said excess to
Mortgagor).  In the event that the
maturity of the Obligations is accelerated by reason of any election of
Mortgagee resulting from any Event of Default, or in the event of any required
or permitted prepayment, then such consideration that constitutes interest may
never include more than the maximum non-usurious rate permitted by applicable
law and excess interest, if any, provided for in this Mortgage, the Credit
Agreement or other Loan Documents shall be canceled automatically as of the
date of such acceleration and prepayment and, if theretofore paid, shall be
credited on the Obligations or, if the Obligations shall have been paid in
full, refunded to Mortgagor.  In
determining whether or not the interest paid or payable under any specific
contingencies exceeds the maximum non-usurious rate permitted by applicable
law, Mortgagor and Mortgagee shall to the maximum extent permitted under
applicable law amortize, prorate, allocate and spread in equal part during the
period of the full stated term of the Obligations, all amounts considered to be
interest under applicable law of any kind contracted for, charged, received or
reserved in connection with the Obligation.

 

7.17                           Credit
Agreement.  To the
fullest extent possible, the terms and provisions of the Credit Agreement shall
be read together with the terms and provisions of this Mortgage so that the
terms and provisions of this Mortgage do not conflict with the terms and
provisions of the Credit Agreement; provided, however, notwithstanding the
foregoing, in the event that any of the terms or provisions of this Mortgage
conflict with any terms or provisions of the Credit Agreement, the terms or
provisions of the Credit Agreement shall govern and control for all purposes;
provided that the inclusion in this Mortgage of terms and provisions,
supplemental rights or remedies in favor of the Secured Party not addressed in
the Credit Agreement shall not be deemed to be a conflict with the Credit
Agreement and all such additional terms, provisions, supplemental rights or
remedies contained herein shall be given full force and effect.

 

7.18                           Due
Authorization.  Mortgagor
hereby represents, warrants and covenants to Mortgagee that the obligations of
Mortgagor under this Mortgage are the valid, binding and legally enforceable
obligations of Mortgagor, that the execution, ensealing and delivery of this
Mortgage by Mortgagor has been duly and validly authorized in all respects by
Mortgagor, and

 

24

 

that
the persons who are executing and delivering this Mortgage on behalf of
Mortgagor have full power, authority and legal right to so do, and to observe
and perform all of the terms and conditions of this Mortgage on Mortgagor’s
part to be observed or performed.

 

7.19                           No
Offsets, Etc.  Mortgagor
hereby represents, warrants and covenants to Mortgagee that there are no
offsets, counterclaims or defenses at law or in equity against this Mortgage or
the indebtedness secured hereby.

 

7.20                           Bankruptcy
Limitation.  Notwithstanding
anything contained herein to the contrary, it is the intention of the
Mortgagor, the Mortgagee and the other Credit Parties that the amount of the
Obligation secured by the Mortgagor’s interests in any of its Property shall be
in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to the Mortgagor.  Accordingly, notwithstanding anything to the
contrary contained in this Mortgage in any other agreement or instrument
executed in connection with the payment of any of the Obligations, the amount
of the Obligations secured by the Mortgagor’s interests in any of its Property
pursuant to this Mortgage shall be limited to an aggregate amount equal to the
largest amount that would not render the Mortgagor’s obligations hereunder or
the Liens and security interest granted to the Mortgagee hereunder subject to
avoidance under Section 548 of the United States Bankruptcy Code or any
comparable provision of any other applicable law.

 

7.21                        Subordination
and Intercreditor Agreement.  Reference
is made to the Subordination and Intercreditor Agreement, dated as of
                        ,
2008 (as amended, restated, supplemented or otherwise modified from time to
time, the “Subordination and Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal Equities, Inc., as
Subordinated Agent, and certain other persons, party or that may become party
thereto from time to time. 
Notwithstanding anything herein to the contrary, this Mortgage, the
Liens granted to the Mortgagee pursuant to this Mortgage and the exercise of
any right or remedy by the Mortgagee or any of the Lenders hereunder are
subject to the provisions of the Subordination and Intercreditor
Agreement.  In the event of any conflict
between the terms of the Subordination and Intercreditor Agreement and this
Mortgage, the terms of the Subordination and Intercreditor Agreement shall
govern and control.

 

THIS WRITTEN AGREEMENT AND
THE OTHER LOAN DOCUMENTS, AS DEFINED IN THIS MORTGAGE, REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

 

[Remainder of this page intentionally left blank.]

 

25

 

NOTICE TO MORTGAGOR:

 

A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE.  A POWER OF SALE MAY ALLOW THE MORTGAGEE
TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A
FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS MORTGAGE.

 

EXECUTED
AND DELIVERED effective as of the date first written above.

 

	
   

  	
  MORTGAGOR:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MORTGAGEE:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
  as Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Henry Park

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Tom Thompson

  
	
   

  	
   

  	
  Senior Vice President

  

 

26

 

	
  THE
  STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY
  OF DALLAS

  	
  §

  	
   

  

 

This
instrument was acknowledged before me on this
           day of March,
2008, by S. Jeffrey Johnson as President of Cano Petroleum, Inc., on
behalf of said limited liability company.

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary
  Public in and for

  
	
   

  	
  the
  State of Texas

  
	
   

  	
   

  
	
   

  
	
  STATE
  OF CALIFORNIA

  	
  )

  
	
   

  	
  )

  
	
  COUNTY
  OF

  	
  )

  
				

 

On
March     , 2008, before me, Henry Park, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he executed the same in his authorized capacity, and that by his signature
on the instrument the person, or the entity upon behalf of which the person
acted, executed the instrument.

 

WITNESS
my hand and official seal.

 

 

	
  Signature 

  	
   

  	
    (Seal)

  

 

 

	
  STATE
  OF CALIFORNIA

  	
  )

  
	
   

  	
  )

  
	
  COUNTY
  OF

  	
  )

  

 

On
March     , 2008, before me, Tom Thompson, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he executed the same in his authorized capacity, and that by his signature
on the instrument the person, or the entity upon behalf of which the person
acted, executed the instrument.

 

WITNESS
my hand and official seal.

 

 

	
  Signature 

  	
   

  	
    (Seal)

  

 

27

 

EXHIBIT A

TO

SUBORDINATED MORTGAGE, LINE OF CREDIT MORTGAGE, ASSIGNMENT, 

SECURITY AGREEMENT, FIXTURE FILING, AND FINANCING STATEMENT

 

The
designation “Working Interest” or “WI” or “GWI” when used in this Exhibit means
an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest.  The designation “Net Revenue Interest” or “NRI”
or “NRIO” or “NRIG” means that portion of the production attributable to the
owner of a working interest after deduction for all royalty burdens, overriding
royalty burdens or other burdens on production, except severance, production,
and other similar taxes.  The designation
“Overriding Royalty Interest” “ORRI” means an interest in production which is
free of any obligation for the expense of exploration, development, and
production, bearing only its pro rata share of severance, production, and other
similar taxes and, in instances where the document creating the overriding
royalty interest so provides, costs associated with compression, dehydration,
other treating or processing, or transportation of production of oil, gas, or
other minerals relating to the marketing of such production.  The designation “Royalty Interest” or “RI”
means an interest in production which results from an ownership in the mineral
fee estate or royalty estate in the relevant land and which is free of any
obligation for the expense of exploration, development, and production, bearing
only its pro rata share of severance, 
production, and other similar taxes and, in instances where the document
creating the royalty interest so provides, costs associated with compression,
dehydration, other treating or processing or transportation of production of
oil, gas, or other minerals relating to the marketing of such production.  Each amount set forth as “Working Interest”
or “WI” or “GWI” or “Net Revenue Interest” or “NRI” or “NRIO” or “NRIG” is the
Mortgagor’s interest after giving full effect to, among other things, all Liens
permitted by the Credit Agreement and after giving full effect to the
agreements or instruments set forth in this Exhibit A and any other
instruments or agreements affecting Mortgagor’s ownership of the Hydrocarbons.

 

Any
reference in this Exhibit A to wells or units is for warranty of interest,
administrative convenience, and identification and shall not limit or restrict
the right, title, interest, or Properties covered by this Mortgage.  All right, title, and interest of Mortgagor
in the Properties described herein and in Exhibit A are and shall be
subject to this Mortgage, regardless of the presence of any units or wells not
described herein.

 

The
reference to book or volume and page herein and in Exhibit A refer to
the recording location of each respective Realty Collateral described herein
and in Exhibit A in the county where the land covered by the Realty
Collateral is located.

 

1

 

EXHIBIT E

 

FORM OF NOTE

 

THE OBLIGATIONS OF THE
BORROWER UNDER THIS NOTE ARE SUBORDINATED TO THE PAYMENT OF CERTAIN SENIOR DEBT
AS SET FORTH IN THE SUBORDINATION AND INTERCREDITOR AGREEMENT REFERRED TO
BELOW.

 

NOTE

 

$                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            , 2008

 

For value received, the
undersigned Cano Petroleum, Inc., a Delaware corporation (“Borrower”),
hereby promises to pay to the order of
                                              
(“Bank”), the principal amount of
                                                                                      
Dollars
($                            )
or, if less, the aggregate outstanding principal amount of the Advances (as
defined in the Credit Agreement referred to below) made by the Bank to the
Borrower, together with interest on the unpaid principal amount of the Advances
from the date of such Advances until such principal amount is paid in full, at
such interest rates, and at such times, as are specified in the Credit
Agreement.

 

This Note is one of the
Notes referred to in, and is entitled to the benefits of, and is subject to the
terms of, the Subordinated Credit Agreement dated as of March     ,
2008 (as the same may be amended, restated, or modified from time to time, the “Credit
Agreement”), among the Borrower, the lenders party thereto (the “Lenders”),
and UnionBanCal Equities, Inc., as administrative agent for the Lenders
(the “Administrative Agent”). 
Capitalized terms used in this Note that are defined in the Credit
Agreement and not otherwise defined in this Note have the meanings assigned to
such terms in the Credit Agreement.  The
Credit Agreement, among other things, (a) provides for the making of the
Advances by the Bank to the Borrower in an aggregate amount not to exceed at
any time outstanding the Dollar amount first above mentioned, the indebtedness
of the Borrower resulting from each such Advance being evidenced by this Note
and (b) contains provisions for acceleration of the maturity of this Note
upon the happening of certain events stated in the Credit Agreement and for
optional and mandatory prepayments of principal prior to the maturity of this
Note upon the terms and conditions specified in the Credit Agreement.

 

Both principal and interest
are payable in lawful money of the United States of America to the
Administrative Agent at the place and in the manner specified in the Credit
Agreement.  The Bank shall record
payments of principal made under this Note, but no failure of the Bank to make
such recordings shall affect the Borrower’s repayment obligations under this
Note.

 

1

 

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

 

Except as specifically
provided in the Credit Agreement, the Borrower hereby waives presentment,
demand, protest, notice of intent to accelerate, notice of acceleration, and
any other notice of any kind.  No failure
to exercise, and no delay in exercising, any rights hereunder on the part of
the holder of this Note shall operate as a waiver of such rights.

 

This Note is also subject to
the terms and provisions of the Subordination and Intercreditor Agreement dated
as of March         , 2008 (as the
same may be modified from time to time, the “Subordination and Intercreditor
Agreement”), among the Borrower, the Administrative Agent, the Guarantors,
the Lenders, the Senior Agent and the Senior Lenders.  The Subordination and Intercreditor
Agreement, among other things, contains subordination provisions that
subordinate the rights of the Bank to obtain payment of and exercise remedies
with respect to this Note.

 

This Note shall be governed
by, and construed and enforced in accordance with, the laws of the state of
Texas (except that Chapter 346 of the Texas Finance Code Chapter, which
regulates certain revolving credit loan accounts shall not apply to this Note).

 

THIS NOTE AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT AGREEMENTS OF
THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

 

 

	
   

  	
  CANO PETROLEUM, INC., a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
							

 

2

 

EXHIBIT F

 

FORM OF NOTICE OF
BORROWING

 

[Date]

 

UnionBanCal
Equities, Inc., as Administrative Agent

445
South Figueroa Street, 15th Floor

Los
Angeles, California 90071

 

Attention:  [LOAN PROCESSOR]

 

Ladies and Gentlemen:

 

The undersigned, Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), refers to
the Subordinated Credit Agreement dated as of March       ,
2008 (as the same has been and may be amended, restated or modified from
time-to-time, the “Credit Agreement,” the defined terms of which are
used in this Notice of Borrowing unless otherwise defined in this Notice of
Borrowing) among the Borrower, the lenders party thereto (the “Lenders”),
and UnionBanCal Equities, Inc., as administrative agent for the Lenders
(the “Administrative Agent”), and hereby gives you irrevocable notice
pursuant to Section 2.03(a) of the Credit Agreement that the
undersigned hereby requests a Borrowing, and in connection with that request
sets forth below the information relating to such Borrowing (the “Proposed
Borrowing”) as required by Section 2.03(a) of the Credit
Agreement:

 

(a)                                  The Business Day of the Proposed
Borrowing is
                          ,
          .

 

(b)                                 The Proposed Borrowing will be composed
of [Reference Rate Advances] [Eurodollar Rate Advances].

 

(c)                                  The aggregate amount of the Proposed
Borrowing is
$                        .

 

(d)                                 [The Interest Period for each Eurodollar
Rate Advance made as part of the Proposed Borrowing is
[           month[s]].]

 

The Borrower hereby
certifies that the following statements are true on the date hereof, and will
be true on the date of the Proposed Borrowing:

 

(1)                                  the representations and warranties
contained in Article IV of the Credit Agreement and the representations
and warranties contained in the Security Instruments, the Guaranties, and each
of the other Loan Documents are true and correct in all material respects on
and as of the date of the Proposed Borrowing, before and after giving effect to
the Proposed Borrowing and to the application of the proceeds from the Proposed
Borrowing, as though made on and as of such date, except to the extent that any
such representation or warranty expressly 

 

1

 

relates solely to an earlier date, in which case it
shall have been true and correct in all material respects as of such earlier
date; and

 

(2)                                  no Default has occurred and is continuing
or would result from the Proposed Borrowing or from the application of the
proceeds therefrom.

 

	
   

  	
  Very
  truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware 

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

2

 

EXHIBIT G

 

FORM OF NOTICE OF
CONVERSION OR CONTINUATION

 

[Date]

 

UnionBanCal
Equities, Inc., as Administrative Agent

445 South Figueroa Street, 15th Floor

Los Angeles, California 90071

Attention:
[LOAN PROCESSOR]

 

Ladies and Gentlemen:

 

The undersigned, Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), refers to
the Subordinated Credit Agreement dated as of March       ,
2008 (as the same may be amended, restated or modified from time-to-time, the “Credit
Agreement,” the defined terms of which are used in this Notice of
Conversion or Continuation unless otherwise defined in this Notice of
Conversion or Continuation) among the Borrower, the lenders party thereto (the “Lenders”),
and UnionBanCal Equities, Inc., as administrative agent for the Lenders
(the “Administrative Agent”), and hereby gives you irrevocable notice
pursuant to Section 2.03(b) of the Credit Agreement that the
undersigned hereby requests a Conversion or continuation of an outstanding
Borrowing, and in connection with that request sets forth below the information
relating to such Conversion or continuation (the “Proposed Borrowing”)
as required by Section 2.03(b) of the Credit Agreement:

 

(a)                                  The Business Day of the Proposed
Borrowing is
                              ,
20    .

 

(b)                                 The Proposed Borrowing consists of [a
Conversion to [Reference Rate Advances] [Eurodollar Rate Advances]] [a
continuation of Eurodollar Rate Advances].

 

(c)                                  The aggregate amount of the Borrowing to
be [Converted] [continued] is
$             and
consists of [Reference Rate Advances] [Eurodollar Rate Advances].

 

(d)                                 [The Interest Period for each Eurodollar
Rate Advance made as part of the Proposed Borrowing is
[         month[s]].]

 

The Borrower hereby
certifies that the following statements are true on the date hereof, and will
be true on the date of the Proposed Borrowing:

 

(a)                                  the representations and warranties
contained in Article IV of the Credit Agreement and the representations
and warranties contained in the Security Instruments, the Guaranties, and each
of the other Loan Documents are true and correct in all material respects on
and as of the date of the Proposed Borrowing, before and after giving effect to
the Proposed Borrowing and to the application of the proceeds from the Proposed
Borrowing, as though made on and as of such date, except to the extent that any
such representation or warranty expressly 

 

1

 

relates solely to an earlier date, in which case it
shall have been true and correct in all material respects as of such earlier
date; and

 

(b)                                 no Default has occurred and is continuing
or would result from the Proposed Borrowing or from the application of the
proceeds therefrom.

 

	
   

  	
  Very
  truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

2

 

EXHIBIT H

 

FORM OF
PLEDGE AGREEMENT

 

THIS
SUBORDINATED PLEDGE AGREEMENT dated as of March       ,
2008 (this “Pledge Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower
signatory hereto (together with the Borrower, the “Pledgors” and
individually, each a “Pledgor”) and UnionBanCal Equities, Inc. as
Administrative Agent (in such capacity the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined), for its benefit and the benefit
of the Lenders (as hereinafter defined).

 

RECITALS

 

A.            The Borrower, the lenders party
thereto from time to time (the “Lenders”; together with the
Administrative Agent, the “‘Secured Parties”), and the Administrative
Agent have entered into that certain Subordinated Credit Agreement dated of
even date herewith (as it may be amended, restated, supplemented or otherwise
modified from time to time, the “Credit Agreement”).

 

B.            It is a condition precedent to the
extension of credit to the Borrower under the Credit Agreement that the Pledgors
and the Administrative Agent, on behalf of the Lenders, execute and deliver
this Pledge Agreement.

 

C.            Each Pledgor (other than the
Borrower) is a subsidiary of the Borrower, and therefore shall derive direct
and indirect benefits from the transactions contemplated by the Credit
Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged and confessed, each Pledgor hereby agrees with the Administrative
Agent for the benefit of the Secured Parties as follows:

 

ARTICLE I.             DEFINITIONS.  ALL CAPITALIZED TERMS NOT OTHERWISE DEFINED
IN THIS PLEDGE AGREEMENT THAT ARE DEFINED IN THE CREDIT AGREEMENT SHALL HAVE
THE MEANINGS ASSIGNED TO SUCH TERMS BY THE CREDIT AGREEMENT.  ANY TERMS USED IN THIS PLEDGE AGREEMENT THAT
ARE DEFINED IN THE UNIFORM COMMERCIAL CODE IN EFFECT IN THE STATE OF TEXAS
FROM TIME TO TIME (THE “UCC”) AND NOT OTHERWISE DEFINED HEREIN OR IN THE CREDIT
AGREEMENT, SHALL HAVE THE MEANINGS ASSIGNED TO THOSE TERMS BY THE UCC.  ALL
MEANINGS TO DEFINED TERMS, UNLESS OTHERWISE INDICATED, ARE TO BE EQUALLY
APPLICABLE TO BOTH THE SINGULAR AND PLURAL FORMS OF THE TERMS 

 

1

 

DEFINED.  ARTICLE,
SECTION, SCHEDULE, AND EXHIBIT REFERENCES ARE TO ARTICLES AND SECTIONS OF AND
SCHEDULES AND EXHIBITS TO THIS PLEDGE AGREEMENT, UNLESS OTHERWISE
SPECIFIED.  ALL REFERENCES TO
INSTRUMENTS, DOCUMENTS, CONTRACTS, AND AGREEMENTS ARE REFERENCES TO SUCH
INSTRUMENTS, DOCUMENTS, CONTRACTS, AND AGREEMENTS AS THE SAME MAY BE
AMENDED, SUPPLEMENTED, AND OTHERWISE MODIFIED FROM TIME TO TIME, UNLESS
OTHERWISE SPECIFIED.  THE WORDS “HEREOF”,
“HEREIN” AND “HEREUNDER” AND WORDS OF SIMILAR IMPORT WHEN USED IN THIS PLEDGE
AGREEMENT SHALL REFER TO THIS PLEDGE AGREEMENT AS A WHOLE AND NOT TO ANY
PARTICULAR PROVISION OF THIS PLEDGE AGREEMENT. 
AS USED HEREIN, THE TERM “INCLUDING” MEANS “INCLUDING, WITHOUT
LIMITATION,”. PARAGRAPH HEADINGS HAVE BEEN INSERTED IN THIS PLEDGE AGREEMENT AS
A MATTER OF CONVENIENCE FOR REFERENCE ONLY AND IT IS AGREED THAT SUCH PARAGRAPH
HEADINGS ARE NOT A PART OF THIS PLEDGE AGREEMENT AND SHALL NOT BE USED IN
THE INTERPRETATION OF ANY PROVISION OF THIS PLEDGE AGREEMENT.

 

ARTICLE II.            PLEDGE.

 

Section 2.01.    Grant of Pledge.

 

(a)      Each
Pledgor hereby pledges to the Administrative Agent, and grants to the
Administrative Agent, for the benefit of the Secured Parties, a continuing
security interest in, the Pledged Collateral, as defined in Section 2.02
below.  This Pledge Agreement shall
secure (i) all Obligations (as defined in the Credit Agreement) now or
hereafter existing (ii) all other amounts now or hereafter owed by the
Borrower, any Pledgor, or any of their respective Subsidiaries under this
Pledge Agreement or the other Loan Documents to the Administrative Agent or any
other Lender, and (iii) any increases, extensions, modifications,
substitutions, amendments, restatements and renewals of any of the foregoing
obligations, whether for principal, interest, fees, expenses, indemnification
or otherwise.   All such obligations shall be referred to in
this Pledge Agreement as the “Secured Obligations”.

 

(b)      Notwithstanding
anything contained herein to the contrary, it is the intention of each Pledgor,
the Administrative Agent and the Lenders that the amount of the Secured
Obligation secured by each Pledgor’s interests in any of its property or assets
(whether real or personal, or mixed, tangible or intangible) (“Property”)
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Pledgor.  Accordingly, notwithstanding anything to the
contrary contained in this Pledge Agreement or in any other agreement or
instrument executed in connection with the payment of any of the Secured
Obligations, the amount of the Secured Obligations secured by each Pledgor’s
interests in any of its Property pursuant to 

 

2

 

this Pledge Agreement shall be limited to an aggregate amount equal to
the largest amount that would not render such Pledgor’s obligations hereunder
or the liens and security interest granted to the Administrative Agent
hereunder subject to avoidance under Section 548 of the United States
Bankruptcy Code or any comparable provision of any other applicable law.

 

Section 2.02.    Pledged Collateral.  “Pledged Collateral” shall mean all of
each Pledgor’s right, title, and interest in the following, whether now owned
or hereafter acquired:

 

(a)      (i) all
of the membership interests listed in the attached Schedule 2.02(a) issued
to such Pledgor and all such additional membership interests of any issuer of
such interests hereafter acquired by such Pledgor (the “Membership Interests”),
(ii) the certificates representing the Membership Interests, if any, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Membership Interests, 
including, without limitation, (A) any proceeds from a sale by or
on behalf of such Pledgor of any of the Membership Interests, and (B) any
distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Membership
Interests, whether regular, special or made in connection with the partial or
total liquidation of the issuer and whether attributable to profits, the return
of any contribution or investment or otherwise attributable to the Membership
Interests or the ownership thereof 
(collectively, the “Membership Interests Distributions”);

 

(b)      (i) all
of the general and limited partnership interests listed in the attached
Schedule 2.02(b) issued to such Pledgor and all such additional limited or
general partnership interests of any issuer of such interests hereafter
acquired by such Pledgor (the “Partnership Interests”), and (ii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Partnership Interests, 
including, without limitation, (A) any proceeds from a sale by or
on behalf of such Pledgor of any of the Partnership Interests, and (B) any
distributions, dividends, cash, instruments and other property from
time-to-time received or otherwise distributed in respect of the Partnership
Interests, whether regular, special or made in connection with the partial or
total liquidation of the issuer and whether attributable to profits, the return
of any contribution or investment or otherwise attributable to the Partnership
Interests or the ownership thereof 
(collectively, the “Partnership Interests Distributions”);

 

(c)      (i) all
of the shares of stock listed in the attached Schedule 2.02(c) issued to
such Pledgor and all such additional shares of stock of any issuer of such
shares of stock hereafter issued to such Pledgor (the “Pledged Shares”),
(ii) the certificates representing the Pledged Shares, and (iii) all
rights to money or Property which such Pledgor now has or hereafter acquires in
respect of the Pledged Shares, including, without limitation, (A) any
proceeds from a sale by or on behalf of such Pledgor of any of the Pledged
Shares, and (B) any distributions, dividends, cash, instruments and other
property from time-to-time received or otherwise distributed in respect of the
Pledged 

 

3

 

Shares, whether regular, special or made in connection with the partial
or total liquidation of the issuer and whether attributable to profits, the
return of any contribution or investment or otherwise attributable to the
Pledged Shares or the ownership thereof (collectively, the “Pledged Shares
Distributions”; together with the Membership Interests Distributions and
the Partnership Interest Distributions, the “Distributions”); and

 

(d)      all
proceeds from the Pledged Collateral described in paragraphs (a), (b) and (c) of
this Section 2.02.

 

Section 2.03.    Delivery of Pledged Collateral.  All certificates or instruments, if any,
representing the Pledged Collateral shall be delivered to the Administrative
Agent and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank,
all in form and substance reasonably satisfactory to the Administrative Agent.  After the occurrence and during the
continuance of an Event of Default, the Administrative Agent shall have the
right, upon prior written notice to the applicable Pledgor, to transfer to or
to register in the name of the Administrative Agent or any of its nominees any
of the Pledged Collateral, subject to the rights specified in Section 2.04.  In addition, after the occurrence and during
the continuance of an Event of Default, the Administrative Agent shall have the
right at any time to exchange the certificates or instruments representing the
Pledged Collateral for certificates or instruments of smaller or larger
denominations.

 

Section 2.04.    Rights Retained by Pledgor.  Notwithstanding the pledge in Section 2.01,

 

(a)      so long
as no Event of Default shall have occurred and remain uncured or unwaived and
except as otherwise provided in the Credit Agreement, (i) each Pledgor
shall be entitled to receive and retain any dividends and other Distributions
paid on or in respect of the Pledged Collateral and the proceeds of any sale of
the Pledged Collateral; and (ii) each Pledgor shall be entitled to
exercise any voting and other consensual rights pertaining to its Pledged
Collateral for any purpose not inconsistent with the terms of this Pledge
Agreement or the Credit Agreement; provided, however, that no
Pledgor shall exercise nor shall it refrain from exercising any such right if
such action or inaction, as applicable, would have a materially adverse effect
on the value of the Pledged Collateral; and

 

(b)      if an
Event of Default shall have occurred and remain uncured or unwaived,

 

(i)          until
such time thereafter as the Administrative Agent gives written notice of its
election to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall be entitled to exercise any voting and other
consensual rights pertaining to its Pledged Collateral for any purpose not
inconsistent with the terms of this Pledge Agreement or the Credit Agreement; provided,
however, that no Pledgor shall exercise nor shall it refrain from 

 

4

 

exercising any
such right if such action or inaction, as applicable, would have a materially
adverse effect on the value of the Pledged Collateral; and

 

(ii)         at
and after such time as the Administrative Agent gives written notice of its
election to exercise such voting and other consensual rights pursuant to Section 5.02
hereof, each Pledgor shall execute and deliver (or cause to be executed and
delivered) to the Administrative Agent all proxies and other instruments as the
Administrative Agent may reasonably request to enable the Administrative Agent
to (A) exercise the voting and other rights which such Pledgor is entitled
to exercise pursuant to paragraph (a) or paragraph (b)(i) of
this Section 2.04, and (B) receive any Distributions and proceeds of
sale of the Pledged Collateral which such Pledgor is authorized to receive and
retain pursuant to paragraph (a)(i) of this Section 2.04.

 

ARTICLE III.        PLEDGOR’S
REPRESENTATIONS AND WARRANTIES.  EACH
PLEDGOR REPRESENTS AND WARRANTS TO THE ADMINISTRATIVE AGENT AND THE LENDERS AS
FOLLOWS:

 

(a)      The
Pledged Collateral applicable to such Pledgor listed on the attached
Schedules 2.02(a), 2.02(b) and 2.02(c) have been duly authorized
and validly issued to such Pledgor and are fully paid and nonassessable.

 

(b)      Such
Pledgor is the legal and beneficial owner of the Pledged Collateral free and
clear of any Lien or option, except for (i) the security interest created
by this Pledge Agreement and (ii) other Liens permitted under the Credit
Agreement ( the “Permitted Liens”).

 

(c)      No
authorization, authentication, approval, or other action by, and no notice to
or filing with, any Governmental Authority or regulatory body is required
either (a) for the pledge by such Pledgor of the Pledged Collateral
pursuant to this Pledge Agreement or for the execution, delivery, or
performance of this Pledge Agreement by such Pledgor or (b) for the
exercise by the Administrative Agent or any Secured Party of the voting or
other rights provided for in this Pledge Agreement or the remedies in respect
of the Pledged Collateral pursuant to this Pledge Agreement (except as may be
required in connection with such disposition by laws affecting the offering and
sale of securities generally).

 

(d)      Such
Pledgor has the full right, power and authority to deliver, pledge, assign and
transfer the Pledged Collateral to the Administrative Agent.

 

(e)      The
Membership Interests listed on the attached Schedule 2.02(a) constitute
the percentage of the issued and outstanding membership interests of the
respective issuer thereof set forth on Schedule 2.02(a) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.

 

5

 

(f)       The
Partnership Interests listed on the attached Schedule 2.02(b) constitute
the percentage of the issued and outstanding general and limited partnership
interests of the respective issuer thereof set forth on Schedule 2.02(b) and
all of the Equity Interest in such issuer in which the Pledgor has any
ownership interest.

 

(g)      The
Pledged Shares list on the attached Schedule 2.02(c) constitute the
percentage of the issued and outstanding shares of capital stock of the
respective issuer thereof set forth on Schedule 2.02(c) and all of the
Equity Interest in such issuer in which the Pledgor has any ownership interest.

 

(h)      Schedule
3 sets forth its sole jurisdiction of formation, type of organization, federal
tax identification number, the organizational number, and all names used by it
during the last five years prior to the date of this Pledge Agreement.

 

ARTICLE IV.        PLEDGOR’S
COVENANTS.  DURING THE TERM OF THIS
PLEDGE AGREEMENT AND UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN FULLY AND
FINALLY PAID AND DISCHARGED IN FULL, THE COMMITMENTS UNDER THE CREDIT AGREEMENT
HAVE BEEN TERMINATED OR EXPIRED, AND THE CREDIT AGREEMENT HAS BEEN TERMINATED
IN WRITING, EACH PLEDGOR COVENANTS AND AGREES WITH THE ADMINISTRATIVE AGENT
THAT:

 

Section 4.01.    Protect Collateral; Further Assurances.  Each Pledgor will warrant and defend the
rights and title herein granted unto the Administrative Agent in and to the
Pledged Collateral (and all right, title, and interest represented by the
Pledged Collateral) against the claims and demands of all Persons
whomsoever.  Each Pledgor agrees that, at
the expense of such Pledgor, such Pledgor will promptly execute and deliver all
further instruments and documents, and take all further action, that may be
reasonably necessary and that the Administrative Agent or any Secured Party may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Administrative Agent
or any Secured Party to exercise and enforce its rights and remedies hereunder
with respect to any Pledged Collateral. 
Each Pledgor hereby authorizes the Administrative Agent to file any
financing statements, amendments or continuations without the signature of such
Pledgor to the extent permitted by applicable law in order to perfect or
maintain the perfection of any security interest granted under this Pledge
Agreement.

 

Section 4.02.    Transfer, Other Liens, and Additional
Shares.  Each Pledgor agrees that it
will not (a) except as otherwise permitted by the Credit Agreement, sell
or otherwise dispose of, or grant any option with respect to, any of the
Pledged Collateral or (b) create or permit to exist any Lien upon or with
respect to any of the Pledged Collateral, except for Permitted Liens.  Each Pledgor agrees that it will (i) cause
each issuer of the Pledged Collateral that is a Subsidiary of such Pledgor not
to issue any other Equity Interests in addition to or in substitution for the
Pledged Collateral issued by such issuer, except to such Pledgor or any other
Pledgor and (ii) pledge hereunder, immediately upon its acquisition
(directly or indirectly) thereof, any 

 

6

 

additional Equity
Interests of an issuer acquired by such Pledgor.  No Pledgor shall approve any amendment or
modification of any of the Pledged Collateral without the Administrative Agent’s
prior written consent.

 

Section 4.03.    Jurisdiction of Formation; Name Change.  Each Pledgor shall give the Administrative
Agent at least 30 days’ prior written notice before it (i) in the case of
a Pledgor that is not a “registered organization” (as defined in Section 9-102
of the UCC) changes the location of its principal place of business and chief
executive office, or (ii) uses a trade name other than its current name
used on the date hereof.  Other than as
permitted by Section 6.11 of the respective Credit Agreement, no Pledgor
shall amend, supplement, modify or restate its articles or certificate of
incorporation, bylaws, limited liability company agreements, or other
equivalent organizational documents, nor amend its name or change its
jurisdiction of incorporation, organization or formation.

 

ARTICLE V.            REMEDIES
UPON DEFAULT.  IF ANY EVENT OF
DEFAULT SHALL HAVE OCCURRED AND BE CONTINUING:

 

Section 5.01.    UCC Remedies.  To the extent permitted by law, the
Administrative Agent may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for in this Pledge Agreement or
otherwise available to it, all the rights and remedies of a Administrative
Agent under the UCC (whether or not the UCC applies to the affected Pledged
Collateral).

 

Section 5.02.    Dividends and Other Rights.

 

(a)      All
rights of the Pledgors to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 2.04(a) may
be exercised by the Administrative Agent if the Administrative Agent so elects
and gives written notice of such election to the affected Pledgor and all
rights of the Pledgors to receive any Distributions on or in respect of the
Pledged Collateral and the proceeds of sale of the Pledged Collateral which it
would otherwise be authorized to receive and retain pursuant to Section 2.04(b) shall
cease.

 

(b)      All
Distributions on or in respect of the Pledged Collateral and the proceeds of
sale of the Pledged Collateral which are received by any Pledgor shall be
received in trust for the benefit of the Administrative Agent, shall be
segregated from other funds of such Pledgor, and shall be promptly paid over to
the Administrative Agent as Pledged Collateral in the same form as so received
(with any necessary indorsement).

 

Section 5.03.    Sale of Pledged Collateral. The
Administrative Agent may sell all or part of the Pledged Collateral at public or
private sale, at any of the Administrative Agent’s offices or elsewhere, for
cash, on credit, or for future delivery, and upon such other terms as the
Administrative Agent may deem commercially reasonable in accordance with
applicable laws.  Each Pledgor agrees
that to the extent permitted by law such sales may be made without notice.

 

7

 

If notice is required by
law, each Pledgor hereby deems 10 days’ advance notice of the time and place of
any public sale or the time after which any private sale is to be made
reasonable notification, recognizing that if the Pledged Collateral threatens
to decline speedily in value or is of a type customarily sold on a recognized
market shorter notice may be reasonable. 
The Administrative Agent shall not be obligated to make any sale of the
Pledged Collateral regardless of notice of sale having been given.  The Administrative Agent may adjourn any
public or private sale from time-to-time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. 
Each Pledgor shall fully cooperate with Administrative Agent in selling
or realizing upon all or any part of the Pledged Collateral.  In addition, each Pledgor shall fully comply
with the securities laws of the United States, the State of Texas, and other
states and take such actions as may be necessary to permit Administrative Agent
to sell or otherwise dispose of any securities representing the Pledged
Collateral in compliance with such laws.

 

Section 5.04.    Exempt Sale.  If, in the opinion of the Administrative
Agent, there is any question that a public or semipublic sale or distribution
of any Pledged Collateral will violate any state or federal securities law, the
Administrative Agent in its reasonable discretion (a) may offer and sell
securities privately to purchasers who will agree to take them for investment
purposes and not with a view to distribution and who will agree to imposition
of restrictive legends on the certificates representing the security, or (b) may
sell such securities in an intrastate offering under Section 3(a)(11) of
the Securities Act of 1933, as amended, and no sale so made in good faith by
the Administrative Agent shall be deemed to be not “commercially reasonable”
solely because so made.  Each Pledgor
shall cooperate fully with the Administrative Agent in selling or realizing
upon all or any part of the Pledged Collateral.

 

Section 5.05.    Application of Collateral. The
proceeds of any sale, or other realization (other than that received from a
sale or other realization permitted by the Credit Agreement) upon all or any
part of the Pledged Collateral pledged by the Pledgors shall be applied by the
Administrative Agent as set forth in Section 7.06 of the Credit Agreement.

 

Section 5.06.    Cumulative Remedies.  Each right, power and remedy herein
specifically granted to the Administrative Agent or otherwise available to it
shall be cumulative, and shall be in addition to every other right, power and
remedy herein specifically given or now or hereafter existing at law, in
equity, or otherwise, and each such right, power and remedy, whether
specifically granted herein or otherwise existing, may be exercised at any time
and from time-to-time as often and in such order as may be deemed expedient by
the Administrative Agent in its sole discretion.  No failure on the part of the Administrative
Agent to exercise, and no delay in exercising, and no course of dealing with
respect to, any such right, power or remedy, shall operate as a waiver thereof,
nor shall any single or partial exercise of any such rights, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right.

 

8

 

ARTICLE
VI.          ADMINISTRATIVE AGENT AS
ATTORNEY-IN-FACT FOR PLEDGOR.

 

Section 6.01.          Administrative Agent Appointed
Attorney-in-Fact.  Each Pledgor hereby irrevocably appoints the
Administrative Agent as such Pledgor’s attorney-in-fact, with full authority after
the occurrence and during the continuance of an Event of Default to act for
such Pledgor and in the name of such Pledgor, and, in the Administrative Agent’s
discretion, to take any action and to execute any instrument which the
Administrative Agent may deem reasonably necessary or advisable to accomplish
the purposes of this Pledge Agreement, including, without limitation, to
receive, indorse, and collect all instruments made payable to such Pledgor
representing any dividend, or the proceeds of the sale of the Pledged
Collateral, or other distribution in respect of the Pledged Collateral and to
give full discharge for the same.  Each Pledgor hereby acknowledges, consents and agrees
that the power of attorney granted pursuant to this Section is irrevocable
and coupled with an interest.

 

Section 6.02.          Administrative Agent May Perform.
The Administrative Agent may from time-to-time, at its option but at the
Pledgors’ expense, perform any act which any Pledgor agrees hereunder to
perform and which such Pledgor shall fail to perform after being requested in
writing so to perform (it being understood that no such request need be given
after the occurrence and during the continuance of any Event of Default and
after notice thereof by the Administrative Agent to the affected Pledgor) and
the Administrative Agent may from time-to-time take any other action which the
Administrative Agent reasonably deems necessary for the maintenance,
preservation or protection of any of the Pledged Collateral or of its security
interest therein.  The Administrative
Agent shall provide notice to the affected Pledgor of any action taken
hereunder; provided however, the failure to provide such notice shall not be
construed as a waiver of any rights of the Administrative Agent provided under
this Pledge Agreement or under applicable law.

 

Section 6.03.          Administrative Agent Has No Duty.  The powers conferred on the Administrative
Agent hereunder are solely to protect its interest in the Pledged Collateral
and shall not impose any duty on it to exercise any such powers.  Except for reasonable care of any Pledged
Collateral in its possession and the accounting for moneys actually received by
it hereunder, the Administrative Agent shall have no duty as to any Pledged
Collateral or responsibility for taking any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Pledged Collateral.

 

Section 6.04.          Reasonable Care.  The Administrative Agent shall be deemed to
have exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
property, it being understood that the Administrative Agent shall have no
responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders, or other matters relative
to any Pledged Collateral, whether or not the Administrative Agent has or is
deemed to have knowledge of such matters, or 

 

9

 

(b) taking any
necessary steps to preserve rights against any parties with respect to any
Pledged Collateral.

 

ARTICLE VII.         MISCELLANEOUS.

 

Section 7.01.         Expenses.  The Pledgors will upon demand pay to the
Administrative Agent for its benefit and the benefit of the other Secured
Parties the amount of any reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of its counsel and of any experts, which the
Administrative Agent and the other Lenders may incur in connection with (a) the
custody, preservation, use, or operation of, or the sale, collection, or other
realization of, any of the Pledged Collateral, (b) the exercise or
enforcement of any of the rights of the Administrative Agent or any Lender or
any other Lenders hereunder, and (c) the failure by any Pledgor to perform
or observe any of the provisions hereof.

 

Section 7.02.         Amendments,
Etc.  No amendment or waiver of any
provision of this Pledge Agreement nor consent to any departure by any Pledgor
herefrom shall be effective unless made in writing and executed by the affected
Pledgor and the Administrative Agent, and such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

 

Section 7.03.         Addresses
for Notices.  All notices and other
communications provided for hereunder shall be in the manner and to the
addresses set forth in the Credit Agreement.

 

Section 7.04.         Continuing
Security Interest; Transfer of Interest.

 

(a)           This
Pledge Agreement shall create a continuing security interest in the Pledged
Collateral and, unless expressly released by the Administrative Agent, shall (i) remain
in full force and effect until the indefeasible payment in full in cash of, and
termination of, the Secured Obligations and the termination of the Commitments
under the Credit Agreement, (ii) be binding upon the Pledgors, the
Administrative Agent, the Lenders and their successors, and assigns, and (iii) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, and the Lenders
and their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Secured Party assigns or otherwise transfers any
interest held by it under either the Credit Agreement or other Loan Document to
any other Person pursuant to the terms of the Credit Agreement or such other
Loan Document, that other Person shall thereupon become vested with all the
benefits held by such Secured Party under this Pledge Agreement.

 

(b)           Upon
the indefeasible payment in full and termination of the Secured Obligations,
the termination of all Commitments under the Credit Agreement, and the
termination of the Credit Agreement in writing, the security interest granted
hereby shall terminate and all rights to the Pledged Collateral shall revert to
the applicable Pledgor to 

 

10

 

the extent such Pledged Collateral shall not have been sold or
otherwise applied pursuant to the terms hereof. 
Upon any such termination, the Administrative Agent will, at the
Pledgors’ expense, deliver all Pledged Collateral to the applicable Pledgor,
execute and deliver to the applicable Pledgor such documents as such Pledgor
shall reasonably request and take any other actions reasonably requested to
evidence or effect such termination.

 

Section 7.05.         Waivers.  Each Pledgor hereby waives:

 

(a)           promptness,
diligence, notice of acceptance, and any other notice with respect to any of
the Secured Obligations and this Pledge Agreement;

 

(b)           any
requirement that the Administrative Agent or any Secured Party protect, secure,
perfect, or insure any Lien or any Property subject thereto or exhaust any
right or take any action against any Pledgor, any Guarantor, or any other
Person or any collateral; and

 

(c)           any
duty on the part of the Administrative Agent to disclose to any Pledgor any
matter, fact, or thing relating to the business, operation, or condition of any
Pledgor, any Guarantor, or any other Person and their respective assets now
known or hereafter known by such Person.

 

Section 7.06.         Severability.  Wherever possible each provision of this
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Pledge Agreement shall
be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Pledge
Agreement.

 

Section 7.07.         Choice
of Law.  This Pledge Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Pledged Collateral are governed by the laws of a jurisdiction other
than the State of Texas.

 

Section 7.08.         Counterparts.  The parties may execute this Pledge Agreement
in counterparts, each of which constitutes an original, and all of which,
collectively, constitute only one agreement. 
Delivery of an executed counterpart signature page by facsimile is
as effective as executing and delivering this Pledge Agreement in the presence
of the other parties to this Pledge Agreement. 
In proving this Pledge Agreement, a party must produce or account only
for the executed counterpart of the party to be charged.

 

Section 7.09.         Headings.  Paragraph headings have been inserted in this
Pledge Agreement as a matter of convenience for reference only and it is agreed
that such paragraph 

 

11

 

headings are not a part
of this Pledge Agreement and shall not be used in the interpretation of any
provision of this Pledge Agreement.

 

Section 7.10.         Reinstatement.  If, at any time after payment in full of all
Secured Obligations and termination of the Administrative Agent’s security
interest, any payments on the Secured Obligations previously made must be
disgorged by any Secured Party for any reason whatsoever, including, without
limitation, the insolvency, bankruptcy or reorganization of any Pledgor or any
other Person, this Pledge Agreement and the Administrative Agent’s security
interests herein shall be reinstated as to all disgorged payments as though
such payments had not been made, and each Pledgor shall sign and deliver to the
Administrative Agent all documents, and shall do such other acts and things, as
may be necessary to reinstate and perfect the Administrative Agent’s security
interest.  EACH PLEDGOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH
OTHER SECURED PARTY FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST OR EXPENSE
UNDER THIS SECTION 7.10 (INCLUDING REASONABLE ATTORNEYS’ FEES AND
EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED SECURED PARTY’S  OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM, DAMAGE, LOSS,
LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT
BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED
SECURED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

 

Section 7.11.         Conflicts.  In the event of any explicit or implicit
conflict between any provisions of this Pledge Agreement and any provision of
the Credit Agreement, the terms of the Credit Agreement shall be controlling.

 

Section 7.12.         Additional
Pledgors.  Pursuant to Section 6.15 of the Credit
Agreement, certain Subsidiaries of the Borrower that were not in existence on
the date of the Credit Agreement are required to enter into this Pledge
Agreement as Pledgors.  Upon execution
and delivery after the date hereof by the Administrative Agent and such
Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall
become a Pledgor hereunder with the same force and effect as if originally
named as a Pledgor herein.  The execution
and delivery of any instrument adding an additional Pledgor as a party to this
Pledge Agreement shall not require the consent of any other Pledgor
hereunder.  The rights and obligations of
each Pledgor hereunder shall remain in full force and effect notwithstanding
the addition of any new Pledgor as a party to this Pledge Agreement.

 

Section 7.13.         Subordination and Intercreditor Agreement.  Reference is made to the Subordination and
Intercreditor Agreement, dated as of
                        ,
2008 (as amended, restated, supplemented or otherwise modified from time to
time, the “Subordination and Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal
Equities, Inc.,  as
Subordinated Agent, and certain other 

 

12

 

persons, party or that may become
party thereto from time to time.  Notwithstanding
anything herein to the contrary, this Pledge Agreement, the Liens granted
to the Administrative Agent pursuant to this Pledge Agreement and the exercise
of any right or remedy by the Administrative Agent or any of the Lenders
hereunder are subject to the provisions of the Subordination and Intercreditor
Agreement.  In the event of any conflict
between the terms of the Subordination and Intercreditor Agreement and this
Pledge Agreement, the terms of the Subordination and Intercreditor Agreement
shall govern and control.

 

Section 7.14.         Entire Agreement.  THIS PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

13

 

The parties hereto have
caused this Pledge Agreement to be duly executed as of the date first above
written.

 

	
   

  	
  PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware 

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

14

 

SCHEDULE 2.02(a)

 

Attached to and forming a
part of that certain Pledge Agreement dated [DATE] by [PLEDGOR] as Pledgor, to
the Administrative Agent.

 

	
  Issuer

  	
   

  	
  Type of Membership 

  Interest

  	
   

  	
  % of Membership Interest 

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(b)

 

Attached to and forming a part of that certain Pledge
Agreement dated [DATE] by [PLEDGOR], as Pledgor, to the Administrative Agent.

 

	
  Issue

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest 

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(c)

 

Attached to and forming a
part of that certain Pledge Agreement [DATE] by [PLEDGOR] as Pledgor, to the
Administrative Agent.

 

	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of 

  Shares

  	
   

  	
  % of Shares 

  Owned

  	
   

  	
  Certificate No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 3

 

	
  Pledgor:

  	
   

  	
   

  
	
   

  	
   

  
	
  Sole
  Jurisdiction of Formation / Filing:

  	
   

  	
   

  
	
   

  	
   

  
	
  Type
  of Organization:

  	
   

  	
   

  
	
   

  	
   

  
	
  Organizational
  Number:

  	
   

  	
   

  
	
   

  	
   

  
	
  Federal
  Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  
	
  Prior
  Names:

  	
   

  	
   

  

 

15

 

Annex
1 to the

Subordinated
Pledge Agreement

 

SUPPLEMENT NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Pledge Agreement dated as of March       ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Pledge
Agreement”) by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each other party signatory hereto (together with the Borrower, the “Pledgors”
and individually, each a “Pledgor”) and UnionBanCal Equities, Inc.
as Administrative Agent (in such capacity, the “Administrative Agent”) under
the Credit Agreement (as hereinafter defined) for the benefit of the Lenders
(as hereinafter defined).

 

RECITALS

 

A.            Reference is made to that certain
Subordinated Credit Agreement dated as of March       ,
2008 (as it may be amended, restated or otherwise modified from time to time,
the “Credit Agreement”, among the Borrower, the lenders party thereto
from time to time (the “Lenders”), and the Administrative Agent; and

 

B.            The Pledgors have entered into the Pledge Agreement in
order to induce the Lenders to make the Advances under the Credit
Agreement.  Pursuant to Section 6.15
of the respective Credit Agreement, each Subsidiary of the Borrower that was
not in existence on the date of the respective Master Debt Agreement is
required to enter into the Pledge Agreement as a Pledgor upon becoming a
Subsidiary.  Section 7.12 of the
Pledge Agreement provides that additional Subsidiaries of the Borrower may
become Pledgors under the Pledge Agreement by execution and delivery of an
instrument in the form of this Supplement. 
The undersigned Subsidiary of the Borrower (the “New Pledgor”) is
executing this Supplement in accordance with the requirements of the Senior
Credit Agreement to become a Pledgor under the Pledge Agreement.

 

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

 

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

 

(a)           In accordance with Section 7.12
of the Pledge Agreement, the New Pledgor by its signature below becomes a
Pledgor under the Pledge Agreement with the same force and effect as if
originally named therein as a Pledgor and the New Pledgor hereby agrees (a) to
all the terms and provisions of the Pledge Agreement applicable to it as a
Pledgor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Pledgor thereunder are true and
correct on and as of the date hereof in all material respects.  In furtherance of the foregoing, the New
Pledgor, as security for the payment and performance in full of the Secured
Obligations, does hereby create and grant to the Administrative Agent, its
successors and assigns, for the benefit of the Secured Parties, their
successors and assigns, a continuing security interest in and lien on all of
the New Pledgor’s right, title and interest in and 

 

1

 

to the Pledged Collateral
of the New Pledgor.  Each reference to a “Pledgor”
in the Pledge Agreement shall be deemed to include the New Pledgor.  The Pledge Agreement is hereby incorporated
herein by reference.

 

(b)           The New Pledgor represents and
warrants to the Administrative Agent and the other Secured Parties that this
Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).

 

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

 

(d)           The New Pledgor hereby represents and
warrants that (a) set forth on Schedules 2.02(a), 2.02(b), and 2.02(c) attached
hereto are true and correct schedules of all its Membership Interests,
Partnership Interests and Pledged Shares, as each term is defined in the Pledge
Agreement, and (b) set forth on Schedule 3 attached hereto are its sole
jurisdiction of formation, type of organization, its federal tax identification
number and the organizational number, and all names used by it during the last
five years prior to the date of this Supplement.

 

(e)           Except as expressly supplemented
hereby, the Pledge Agreement shall remain in full force and effect.

 

(f)            THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS.

 

(g)           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Pledge Agreement shall not in
any way be affected or impaired.  The
parties hereto shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable 

 

2

 

provisions with valid provisions the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

 

(h)           All communications and notices
hereunder shall be in writing and given as provided in the Pledge
Agreement.  All communications and notices
hereunder to the New Pledgor shall be given to it at the address set forth
under its signature hereto.

 

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

 

THIS
SUPPLEMENT, THE PLEDGE AGREEMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
HERETO.

 

[SIGNATURES PAGES FOLLOW]

 

3

 

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

 

	
   

  	
  NEW PLEDGOR:

  
	
   

  	
   

  
	
   

  	
  [

  	
  ]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

4

 

Schedules

Supplement
No.       

to
the Pledge Agreement

 

Pledged Collateral of the New Pledgor

 

SCHEDULE 2.02(a)

 

	
  Issuer

  	
   

  	
  Type of Membership 

  Interest

  	
   

  	
  % of Membership Interest 

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(b)

 

	
  Issue

  	
   

  	
  Type of Partnership Interest

  	
   

  	
  % of Partnership Interest 

  Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 2.02(c)

 

	
  Issuer

  	
   

  	
  Type of Shares

  	
   

  	
  Number of 

  Shares

  	
   

  	
  % of Shares 

  Owned

  	
   

  	
  Certificate No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

SCHEDULE 3

 

	
  New
  Pledgor:

  	
   

  	
   

  
	
   

  	
   

  
	
  Sole
  Jurisdiction of Formation / Filing:

  	
   

  	
   

  
	
   

  	
   

  
	
  Type
  of Organization:

  	
   

  	
   

  
	
   

  	
   

  
	
  Organizational
  Number:

  	
   

  	
   

  
	
   

  	
   

  
	
  Federal
  Tax Identification Number:

  	
   

  	
   

  
	
   

  	
   

  
	
  Prior
  Names:

  	
   

  	
   

  

 

5

 

EXHIBIT I

 

FORM OF SECURITY AGREEMENT

 

THIS
SUBORDINATED SECURITY AGREEMENT dated as of March       ,
2008 (this “Security Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower party
hereto from time to time (together with the Borrower, the “Grantors” and
individually, each a “Grantor”) and UnionBanCal Equities, Inc. as
administrative agent (in such capacity the “Administrative  Agent”)
for the ratable benefit of itself and the Lenders (as defined below) (together
with the Lenders, individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

RECITALS

 

A.            Reference is made to that certain
Subordinated Credit Agreement dated as of March     ,
2008 among the Borrower, the lenders party thereto from time to time (the “Lenders”)
and the Administrative Agent (as the same may be amended, restated, supplemented
or otherwise modified from time to time, the “Subordinated Credit Agreement”).

 

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

 

C.            It is a condition precedent to the
extension of credit to the Borrower under the Credit Agreement that the
Grantors and the Administrative Agent, on behalf of the Lenders, execute and
deliver this Security Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged and confessed, each Grantor hereby agrees with the Administrative
Agent for its benefit and the benefit of the Secured Parties as follows:

 

Section 1.          Definitions; Interpretation.  (a) All capitalized terms not otherwise
defined in this Security Agreement that are defined in the Credit Agreement
shall have the meanings assigned to such terms by the Credit Agreement.  Any terms used in this Security Agreement
that are defined in the UCC (as defined below) and not otherwise defined herein
or in the Credit Agreement, shall have the meanings assigned to those terms by
the UCC.  The following terms shall have
the meanings specified below:

 

“Accounts”
means an “account” as defined in the UCC, including, without limitation, all of
any Grantor’s rights to payment for goods sold or leased, services performed,
or otherwise, whether now in existence or arising from time to time hereafter,
including, 

 

1

 

without
limitation, rights arising under any of the Contracts or evidenced by an
account, note, contract, security agreement, Chattel Paper (including, without
limitation, tangible Chattel Paper and electronic Chattel Paper), or other
evidence of indebtedness or security, together with all of the right, title and
interest of any Grantor in and to (i) all security pledged, assigned,
hypothecated or granted to or held by any Grantor to secure the foregoing, (ii) all
of any Grantor’s right, title and interest in and to any goods or services, the
sale of which gave rise thereto, (iii) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (iv) all powers of
attorney granted to any Grantor for the execution of any evidence of
indebtedness or security or other writing in connection therewith, (v) all
books, correspondence, credit files, records, ledger cards, invoices, and other
papers relating thereto, including without limitation all similar information
stored on a magnetic medium or other similar storage device and other papers
and documents in the possession or under the control of any Grantor or any
computer bureau from time to time acting for any Grantor, (vi) all
evidences of the filing of financing statements and other statements granted to
any Grantor and the registration of other instruments in connection therewith
and amendments thereto, notices to other creditors or secured parties, and
certificates from filing or other registration officers, (vii) all credit
information, reports and memoranda relating thereto, and (viii) all other
writings related in any way to the foregoing.

 

“Cash Collateral”
means all amounts from time to time held in any checking, savings, deposit or
other account of such Grantor, including, if applicable, the Cash Collateral
Account, all monies, proceeds or sums due or to become due therefrom or thereon
and all documents (including, but not limited to passbooks, certificates and
receipts) evidencing all funds and investments held in such accounts.

 

“Chattel Paper”
has the meaning set forth in the UCC.

 

“Collateral”
has the meaning set forth in Section 2 of this Security Agreement.

 

“Contracts”
means all contracts to which any Grantor now is, or hereafter will be bound, or
to which such Grantor is or hereafter will be a party, beneficiary or assignee,
all Insurance Contracts, and all exhibits, schedules and other attachments to
such contracts, as the same may be amended, supplemented or otherwise modified
or replaced from time to time.

 

“Contract
Documents” means all Instruments, Chattel Paper, letters of credit, bonds,
guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.

 

“Contract
Rights” means (i) all (A) of any Grantor’s rights to payment
under any Contract or Contract Document and (B) payments due and to become
due to any Grantor under any Contract or Contract Document, in each case
whether as contractual obligations, 

 

2

 

damages or
otherwise; (ii) all of any Grantor’s claims, rights, powers, or privileges
and remedies under any Contract or Contract Document; and (iii) all of any
Grantor’s rights under any Contract or Contract Document to make
determinations, to exercise any election (including, but not limited to,
election of remedies) or option or to give or receive any notice, consent,
waiver or approval together with full power and authority with respect to any
Contract or Contract Document to demand, receive, enforce or collect any of the
foregoing rights or any property which is the subject of any Contract or
Contract Document, to enforce or execute any checks, or other instruments or
orders, to file any claims and to take any action which, in the opinion of any
Secured Party, may be necessary or advisable in connection with any of the foregoing.

 

“Document”
means a bill of lading, dock warrant, dock receipt, warehouse receipt or order
for the delivery of goods, and also any other document which in the regular
course of business or financing is treated as adequately evidencing that the
person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.

 

“Equipment”
means any equipment now or hereafter owned or leased by any Grantor, or in
which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the equipment),
and similar items which relate to the above, and any and all additions,
substitutions and replacements of any of the foregoing, wherever located
together with all improvements thereon and all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.

 

“Fixtures”
means any fixtures now or hereafter owned or leased by any Grantor, or in which
any Grantor holds or acquires any other right, title or interest, constituting “fixtures”
under the UCC, including without limitation any and all additions,
substitutions and replacements of any of the foregoing, wherever located
together with all improvements thereon and all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.

 

“General
Intangibles” means all general intangibles now or hereafter owned by any
Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business 

 

3

 

identifiers,
prints, labels, trade styles and service marks (whether or not registered),
trade dress, including logos and/or designs, copyrights, patents, patent
applications, goodwill of any Grantor’s business symbolized by any of the
foregoing, trade secrets, license rights, license agreements, permits,
franchises, and any rights to tax refunds to which any Grantor is now or
hereafter may be entitled.

 

“Hedge Contract”
has the meaning set forth in the Senior Credit Agreement.

 

“Instrument”
means an “instrument” as defined in the UCC, including, without limitation, any
Negotiable Instrument, or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the ordinary course of business transferred by delivery with
any necessary endorsement or assignment (other than Instruments constituting
Chattel Paper).

 

“Insurance
Contracts” means all contracts and policies of insurance and re-insurance
maintained or required to be maintained by or on behalf of any Grantor under
the Loan Documents.

 

“Inventory”
means all of the inventory of any Grantor, or in which any Grantor holds or
acquires any right, title or interest, of every type or description, now owned
or hereafter acquired and wherever located, whether raw, in process or finished,
and all materials usable in processing the same and all documents of title
covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary
course of its business, all present and future substitutions therefor, parts
and accessories thereof and all additions thereto, all Proceeds thereof and
products of such inventory in any form whatsoever, and any other item
constituting “inventory” under the UCC.

 

“Investment
Property” means “investment property” as defined in the UCC, including,
without limitation, all securities (whether certificated or uncertificated),
security entitlements, securities accounts, commodity contracts, and commodity
accounts.

 

“Negotiable
Instrument” means a “negotiable instrument” as defined in the UCC.

 

“Proceeds”
means all proceeds (as defined in the UCC) of any or all of the Collateral,
including without limitation (i) any and all proceeds of, all claims for,
and all rights of any Grantor to receive the return of any premiums for, any
insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting
under color of any Governmental Authority), (iii) all proceeds received or
receivable when any or all of the Collateral is sold, exchanged or otherwise
disposed, whether 

 

4

 

voluntarily,
involuntarily, in foreclosure or otherwise, (iv) all claims of any Grantor
for damages arising out of, or for breach of or default under, any Collateral, (v) all
rights of any Grantor to terminate, amend, supplement, modify or waive
performance under any Contracts, to perform thereunder and to compel
performance and otherwise exercise all remedies thereunder, and (vi) any
and all other amounts from time to time paid or payable under or in connection
with any of the Collateral.

 

“Secured
Obligations” means all Obligations no or hereafter owed by the Borrower,
any Guarantor, or any of their respective Subsidiaries to the Secured Parties,
including any extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise.

 

“Security
Agreement” means this Subordinated Security Agreement, as the same may be
modified, supplemented or amended from time to time in accordance with its
terms.

 

“UCC” shall
mean the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of Texas; provided, however, in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of the security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of Texas,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
attachment, perfection or priority and for purposes of definitions related to
such provisions.

 

(b)           All meanings to defined terms, unless
otherwise indicated, are to be equally applicable to both the singular and
plural forms of the terms defined. 
Article, Section, Schedule, and Exhibit references are to Articles
and Sections of and Schedules and Exhibits to this Security Agreement, unless
otherwise specified.  All references to
instruments, documents, contracts, and agreements are references to such
instruments, documents, contracts, and agreements as the same may be amended,
supplemented, and otherwise modified from time to time, unless otherwise
specified.  The words “hereof”, “herein”
and “hereunder” and words of similar import when used in this Security
Agreement shall refer to this Security Agreement as a whole and not to any
particular provision of this Security Agreement.  As used herein, the term “including” means “including,
without limitation,”. Paragraph headings have been inserted in this Security
Agreement as a matter of convenience for reference only and it is agreed that
such paragraph headings are not a part of this Security Agreement and shall not
be used in the interpretation of any provision of this Security Agreement.

 

Section 2.          Assignment, Pledge and Grant of
Security Interest.

 

(a)           As collateral security for the prompt
and complete payment and performance when due of all Secured Obligations, each
Grantor hereby assigns, pledges, and grants to the Administrative Agent for the
benefit of the Secured Parties a lien on and continuing security interest in
all of such Grantor’s right, title and interest in, to and under, all items
described in this 

 

5

 

Section 2, whether now owned or hereafter
acquired by such Grantor and wherever located and whether now or hereafter
existing or arising (collectively, the “Collateral”):

 

(i)                             all
Contracts, all Contract Rights, Contract Documents and Accounts associated with
such Contracts and each and every document granting security to such Grantor
under any such Contract;

 

(ii)                          all
Accounts;

 

(iii)                       all
Inventory;

 

(iv)                      all
Equipment;

 

(v)                         all
General Intangibles;

 

(vi)                      all
Investment Property;

 

(vii)                   all
Fixtures;

 

(viii)                all Cash
Collateral;

 

(ix)                        any
Legal Requirements now or hereafter held by such Grantor (except that any Legal
Requirement which would by its terms or under applicable law become void,
voidable, terminable or revocable by being subjected to the Lien of this
Security Agreement or in which a Lien is not permitted to be granted under
applicable law, is hereby excluded from such Lien to the extent necessary so as
to avoid such voidness, voidability, terminability or revocability);

 

(x)                           any
right to receive a payment under any Hedge Contract in connection with a
termination thereof;

 

(xi)                        (A) all
policies of insurance and Insurance Contracts, now or hereafter held by or on
behalf of such Grantor, including casualty and liability, business
interruption, and any title insurance, (B) all Proceeds of insurance, and (C) all
rights, now or hereafter held by such Grantor to any warranties of any
manufacturer or contractor of any other Person;

 

(xii)                     any and
all liens and security interests (together with the documents evidencing such
security interests) granted to such Grantor by an obligor to secure such obligor’s
obligations owing under any Instrument, Chattel Paper, or Contract which is
pledged hereunder or with respect to which a security interest in such Grantor’s
rights in such Instrument, Chattel Paper, or Contract is granted hereunder;

 

6

 

(xiii)                 any and
all guaranties given by any Person for the benefit of such Grantor which
guarantees the obligations of an obligor under any Instrument, Chattel Paper or
Contract, which are pledged hereunder;

 

(xiv)                without
limiting the generality of the foregoing, all other personal property, goods,
Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands and
assets of such Grantor whether now existing or hereafter acquired from time to
time; and

 

(xv)                   any and
all additions, accessions and improvements to, all substitutions and
replacements for and all products and Proceeds of or derived from all of the
items described above in this Section 2.

 

(b)           Notwithstanding anything contained
herein to the contrary, it is the intention of each Grantor, the Administrative
Agent, and the other Secured Parties that the amount of the Secured Obligation
secured by each Grantor’s interests in any of its Property shall be in, but not
in excess of, the maximum amount permitted by fraudulent conveyance, fraudulent
transfer and other similar law, rule or regulation of any Governmental
Authority applicable to such Grantor. Accordingly, notwithstanding anything to
the contrary contained in this Security Agreement in any other agreement or
instrument executed in connection with the payment of any of the Secured
Obligations, the amount of the Secured Obligations secured by each Grantor’s
interests in any of its Property pursuant to this Security Agreement shall be
limited to an aggregate amount equal to the largest amount that would not
render such Grantor’s obligations hereunder or the liens and security interest
granted to the Administrative Agent hereunder subject to avoidance under Section 548
of the United States Bankruptcy Code or any comparable provision of any other
applicable law.

 

Section 3.          Representations and Warranties.  Each Grantor hereby represents and warrants
the following to the Administrative Agent and the other Secured Parties:

 

(i)            Records.  Such Grantor’s sole jurisdiction of formation
and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the
Accounts, General Intangibles, or any other Collateral applicable to such
Grantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by a
promissory note or other instrument.

 

(ii)           Other Liens.  Such Grantor is, and will be the record,
legal, and beneficial owner of all of the Collateral pledged by such Grantor
free and clear of any Lien, except for the Permitted Liens.  No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is, or
will be, on file in any recording office, except such as may be filed in
connection with this Security Agreement or in connection with other Permitted
Liens or for which satisfactory releases have been received by the
Administrative Agent.

 

7

 

(iii)          Lien Priority
and Perfection.

 

Subject only to Permitted
Liens, this Security Agreement creates valid and continuing security interests
in the Collateral, securing the payment and performance of all the Secured
Obligations.  Upon the filing of
financing statements with the jurisdiction listed in Schedule 1, the
security interests granted to the Administrative Agent hereunder will
constitute valid first-priority perfected security interests in all Collateral
with respect to which a security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens.

 

No consent of any other
Person and no authorization, approval, or other action by, and no notice to or
filing with any Governmental Authority is required (A) for the grant by
such Grantor of the pledge, assignment, and security interest granted hereby or
for the execution, delivery, or performance of this Security Agreement by such
Grantor, (B) for the validity, perfection, or maintenance of the pledge,
assignment, lien, and security interest created hereby (including the first-priority
(subject to Permitted Liens) nature thereof), except for security interests
that cannot be perfected by filing under the UCC, or (C) for the exercise
by the Administrative Agent of the rights provided for in this Security
Agreement or the remedies in respect of the Collateral pursuant to this
Security Agreement, except (1) those consents to assignment of licenses,
permits, approvals, and other rights that are as a matter of law not
assignable, (2) those consents, approvals, authorizations, actions, notices
or filings which have been duly obtained or made and, in the case of the
maintenance of perfection, the filing of continuation statements under the UCC,
and (3) those filings and actions described in Section 3(c)(i).

 

(iv)          Tax Identification Number and
Organizational Number.  The federal
tax identification number of such Grantor and the organizational number of such
Grantor are as set forth in Schedule 1.

 

(v)           Tradenames; Prior Names.  Except as set forth on Schedule 1,
such Grantor has not conducted business under any name other than its current
name during the last five years prior to the date of this Security Agreement.

 

(vi)          Exclusive Control.  Such Grantor has exclusive possession and
control of its respective Equipment and Inventory.

 

Section 4.          Covenants.

 

(i)            Further Assurances.

 

Each Grantor agrees that
from time to time, at its expense, such Grantor shall promptly execute and
deliver all instruments and documents, and take all action, that may be
reasonably necessary or desirable, or that the Administrative Agent may
reasonably request, in order to perfect and protect any pledge, assignment, or
security interest granted or intended to be granted hereby or to enable the
Administrative Agent to exercise and enforce its rights and 

 

8

 

remedies hereunder with respect to any
Collateral.  Without limiting the
generality of the foregoing, each Grantor (A) at the request of the
Administrative Agent, shall execute such instruments, endorsements or notices,
as may be reasonably necessary or desirable or as the Administrative Agent may
reasonably request, in order to perfect and preserve the assignments and
security interests granted or purported to be granted hereby, (B) shall,
at the reasonable request of the Administrative Agent, mark conspicuously each
material document included in the Collateral, each Chattel Paper included in
the Accounts, and each of its records pertaining to the Collateral with a
legend, in form and substance satisfactory to the Administrative Agent,
including that such document, Chattel Paper, or record is subject to the
pledge, assignment, and security interest granted hereby, (C) shall, if
any Collateral shall be evidenced by a promissory note or other instrument or
chattel paper, deliver and pledge to the Administrative Agent hereunder such
note or instrument or chattel paper duly endorsed and accompanied by duly
executed instruments of transfer or assignment, all in form and substance
satisfactory to the Administrative Agent, and (D) authorizes the
Administrative Agent to file any financing statements, amendments or
continuations without the signature of such Grantor to the extent permitted by
applicable law in order to perfect or maintain the perfection of any security
interest granted under this Security Agreement (including, without limitation,
financing statements using an “all assets” or “all personal property”
collateral description).

 

Each Grantor shall pay
all filing, registration and recording fees and all refiling, re-registration
and re-recording fees, and all other reasonable expenses incident to the
execution and acknowledgment of this Security Agreement, any assurance, and all
federal, state, county and municipal stamp taxes and other taxes, duties,
imports, assessments and charges arising out of or in connection with the
execution and delivery of this Security Agreement, any agreement supplemental
hereto, any financing statements, and any instruments of further assurance.

 

Each Grantor shall
promptly provide to the Administrative Agent all information and evidence the
Administrative Agent may reasonably request concerning the Collateral to enable
the Administrative Agent to enforce the provisions of this Security Agreement.

 

(ii)           Change of Name;
State of Formation.  Each Grantor
shall give the Administrative Agent at least 30 days’ prior written notice
before it (i) in the case of any Grantor that is not a “registered
organization” (as such term is defined in Section 9-102 of the UCC),
changes the location of its principal place of business and chief executive
office, (ii) changes the location of its jurisdiction of formation or
organization, (iii) changes the location of the Equipment, Inventory, or
original copies of any Chattel Paper evidencing Accounts, or (iv) uses a trade
name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the Credit Agreement, no Grantor shall amend, supplement, modify or restate
its articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent organizational documents, nor amend its name or
change its jurisdiction of incorporation, organization or formation.

 

(iii)          Right of
Inspection.  Each Grantor shall hold
and preserve, at its own cost and expense satisfactory and complete records of
the Collateral, including, but not limited to, 

 

9

 

Instruments, Chattel Paper, Contracts, and records
with respect to the Accounts, and will permit representatives of the Administrative
Agent, upon reasonable advance notice, at any time during normal business hours
to inspect and copy them.  Upon the
occurrence and during the continuation of any Event of Default, at the
Administrative Agent’s request, each Grantor shall promptly deliver copies of
any and all such records to the Administrative Agent.

 

(iv)          Liability Under Contracts and
Accounts.  Notwithstanding anything
in this Security Agreement to the contrary, (i) the execution of this
Security Agreement shall not release any Grantor from its obligations and
duties under any of the Contract Documents, or any other contract or instrument
which are part of the Collateral and Accounts included in the Collateral, (ii) the
exercise by the Administrative Agent of any of its rights hereunder shall not
release any Grantor from any of its duties or obligations under any Contract
Documents, or any other Contract or Instrument which are part of the Collateral
and Accounts included in the Collateral, and (iii) the Administrative
Agent shall not have any obligation or liability under any Contract Documents,
or any other contract or instrument which are part of the Collateral and
Accounts included in the Collateral by reason of the execution and delivery of
this Security Agreement, nor shall the Administrative Agent be obligated to
perform any of the obligations or duties of any Grantor thereunder or to take
any action to collect or enforce any claim for payment assigned hereunder.

 

(v)           Transfer of Certain Collateral;
Release of Certain Security Interest. 
Each Grantor agrees that it shall not sell, assign, or otherwise dispose
of any Collateral, except as otherwise permitted under the Credit
Agreement.  The Administrative Agent
shall promptly, at the Grantors’ expense, execute and deliver all further
instruments and documents, and take all further action that a Grantor may
reasonably request in order to release its security interest in any Collateral
which is disposed of in accordance with the terms of the Credit Agreement.

 

(vi)          Accounts.  Each Grantor agrees that it will use
commercially reasonable efforts to ensure that each Account (i) is and
will be, in all material respects, the genuine, legal, valid, and binding
obligations of the account debtor in respect thereof, representing an unsatisfied
obligation of such account debtor, (ii) is and will be, in all material
respects, enforceable in accordance with its terms, (iii) is not and will
not be subject to any setoffs, defenses, taxes, counterclaims, except in the
ordinary course of business, (iv) is and will be, in all material
respects, in compliance with all applicable laws, whether federal, state, local
or foreign, and (v) which if evidenced by Chattel Paper, will not require
the consent of the account debtor in respect thereof in connection with its
assignment hereunder.

 

(vii)         Negotiable Instrument.  If any Grantor shall at any time hold or
acquire any Negotiable Instruments, including promissory notes, such Grantor
shall forthwith endorse, assign and deliver the same to the Administrative
Agent, accompanied by such instruments of transfer or assignment duly executed
in blank as the Administrative Agent may from time to time reasonably request.

 

10

 

(viii)        Other Covenants of Grantor.  Each Grantor agrees that (i) any action
or proceeding to enforce this Security Agreement may be taken by the
Administrative Agent either in such Grantor’s name or in the Administrative
Agent’s name, as the Administrative Agent may deem necessary, and (ii) such
Grantor will, until the indefeasible payment in full in cash of the Secured
Obligations and the termination or expiration of the Commitments, warrant and
defend its title to the Collateral and the interest of the Administrative Agent
in the Collateral against any claim or demand of any Persons (other than
Permitted Liens) which could reasonably be expected to materially adversely
affect such Grantor’s title to, or the Administrative Agent’s right or interest
in, such Collateral.

 

Section 5.          Termination of Security Interest.  Upon the indefeasible payment in full in cash
of the Secured Obligations, the termination or expiration of all Commitments
and the termination of the Credit Agreement in writing, the security interest
granted hereby shall terminate and all rights to the Collateral shall revert to
the applicable Grantor to the extent such Collateral shall not have been sold
or otherwise applied pursuant to the terms hereof.  Upon any such termination, the Administrative
Agent will, at the Grantors’ expense, execute and deliver to the applicable
Grantor such documents (including, without limitation, UCC-3 termination
statements) as such Grantor shall reasonably request to evidence such
termination.

 

Section 6.          Reinstatement. If, at any time
after payment in full of all Secured Obligations and termination of the
Administrative Agent’s security interest, any payments on the Secured
Obligations previously made must be disgorged by the Administrative Agent for
any reason whatsoever, including, without limitation, the insolvency,
bankruptcy or reorganization of any Grantor or any other Person, this Security
Agreement and the Administrative Agent’s security interests herein shall be
reinstated as to all disgorged payments as though such payments had not been
made, and each Grantor shall sign and deliver to the Administrative Agent all
documents, and shall do such other acts and things, as may be necessary to
reinstate and perfect the Administrative Agent’s security interest.  EACH
GRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER
ADMINISTRATIVE AGENT FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST
OR EXPENSE UNDER THIS SECTION 6 (INCLUDING REASONABLE ATTORNEYS’ FEES AND
EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF THE
INDEMNIFIED ADMINISTRATIVE AGENT’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL,
NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED
FROM SUCH INDEMNIFIED ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

Section 7.          Remedies upon Event of Default.

 

(a)           If any Event of Default has occurred
and is continuing, the Administrative Agent may (and shall at the written
request of the Majority Lender), (i) proceed to protect and enforce 

 

11

 

the rights vested in it by this Security Agreement or
otherwise available to it, including but not limited to, the right to cause all
revenues and other moneys pledged hereby as Collateral to be paid directly to
it, and to enforce its rights hereunder to such payments and all other rights
hereunder by such appropriate judicial proceedings as it shall deem most
effective to protect and enforce any of such rights, either at law or in equity
or otherwise, whether for specific enforcement of any covenant or agreement
contained in any of the Contract Documents, or in aid of the exercise of any
power therein or herein granted, or for any foreclosure hereunder and sale
under a judgment or decree in any judicial proceeding, or to enforce any other
legal or equitable right vested in it by this Security Agreement or by law; (ii) cause
any action at law or suit in equity or other proceeding to be instituted and
prosecuted and enforce any rights hereunder or included in the Collateral,
subject to the provisions and requirements thereof; (iii) sell or
otherwise dispose of any or all of the Collateral or cause the Collateral to be
sold or otherwise disposed of in one or more sales or transactions, at such
prices and in such manner as may be commercially reasonable, and for cash or on
credit or for future delivery, without assumption of any credit risk, at public
or private sale, without demand of performance or notice of intention to sell
or of time or place of sale (except such notice as is required by applicable
statute and cannot be waived), it being agreed that the Administrative Agent
may be a purchaser on behalf of the Secured Parties or on its own behalf at any
such sale and that the Administrative Agent, any other Secured Party, or any
other Person who may be a bona fide purchaser for value and without notice of
any claims of any or all of the Collateral so sold shall thereafter hold the
same absolutely free from any claim or right of whatsoever kind, including any
equity of redemption of any Grantor, any such demand, notice or right and
equity being hereby expressly waived and released to the extent permitted by
law; (iv) incur reasonable expenses, including reasonable attorneys’ fees,
reasonable consultants’ fees, and other costs appropriate to the exercise of
any right or power under this Security Agreement; (v) perform any
obligation of any Grantor hereunder and make payments, purchase, contest or
compromise any encumbrance, charge or lien, and pay taxes and expenses,
without, however, any obligation to do so; (vi) in connection with any
acceleration and foreclosure, take possession of the Collateral and render it
usable and repair and renovate the same, without, however, any obligation to do
so, and enter upon any location where the Collateral may be located for that
purpose, control, manage, operate, rent and lease the Collateral, collect all
rents and income from the Collateral and apply the same to reimburse the
Secured Parties for any cost or expenses incurred hereunder or under any of the
Loan Documents and to the payment or performance of any Grantor’s obligations
hereunder or under any of the Loan Documents, and apply the balance to the
other Secured Obligations and any remaining excess balance to whomsoever is
legally entitled thereto; (vii) secure the appointment of a receiver for
the Collateral or any part thereof; (viii) require any Grantor to, and
each Grantor hereby agrees that it will at its expense and upon request of the
Administrative Agent forthwith, assemble all or part of the Collateral as
directed by the Administrative Agent and make it available to the
Administrative Agent at a place to be designated by the Administrative Agent
which is reasonably convenient to both parties; (ix) exercise any other or
additional rights or remedies granted to a Administrative Agent under the UCC;
or (x) occupy any premises owned or leased by any Grantor where the Collateral
or any part thereof is assembled for a reasonable period in order to effectuate
its rights and remedies hereunder or 

 

12

 

under law, without obligation to any Grantor in
respect of such occupation.  If, pursuant
to applicable law, prior notice of sale of the Collateral under this Section is
required to be given to any Grantor, each Grantor hereby acknowledges that the
minimum time required by such applicable law, or if no minimum time is
specified, 10 days, shall be deemed a reasonable notice period.   The Administrative Agent shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given.  The Administrative Agent may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.

 

(b)           All reasonable costs
and expenses (including reasonable attorneys’ fees and expenses) incurred by
the Administrative Agent in connection with any suit or proceeding in
connection with the performance by the Administrative Agent of any of the
agreements contained in any of the Contract Documents, or in connection with
any exercise of its rights or remedies hereunder, pursuant to the terms of this
Security Agreement, shall constitute additional indebtedness secured by this
Security Agreement and shall be paid on demand by the Grantors to the
Administrative Agent on behalf of the Secured Parties.

 

Section 8.          Remedies Cumulative; Delay Not
Waiver.

 

(a)           No right, power or remedy herein
conferred upon or reserved to the Administrative Agent is intended to be
exclusive of any other right, power or remedy and every such right, power and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right, power and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. 
The assertion or employment of any right or remedy hereunder or
otherwise shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.  Resort to
any or all security now or hereafter held by the Administrative Agent may be
taken concurrently or successively and in one or several consolidated or
independent judicial actions or lawfully taken nonjudicial proceedings, or
both.

 

(b)           No delay or omission
of the Administrative Agent to exercise any right or power accruing upon the
occurrence and during the continuance of any Event of Default as aforesaid
shall impair any such right or power or shall be construed to be a waiver of
any such Event of Default or an acquiescence therein; and every power and
remedy given by this Security Agreement may be exercised from time to time, and
as often as shall be deemed expedient, by the Administrative Agent.

 

Section 9.          Contract Rights.  After the occurrence and
during the continuance of an Event of Default, the Administrative Agent may exercise any of the
Contract Rights and remedies of any Grantor under or in connection with the
Instruments, Chattel Paper, or Contracts which represent Accounts, the General
Intangibles, or which otherwise relate to the Collateral, including, without
limitation, any rights of any Grantor to demand or otherwise require payment of
any amount under, or performance of any provisions of, the Instruments, Chattel
Paper, or Contracts which represent Accounts, or the General Intangibles.

 

13

 

Section 10.        Accounts.

 

(a)           After the occurrence
and during the continuance of an Event of Default, the Administrative Agent
may, or may direct any Grantor to, take any action the Administrative Agent
deems necessary or advisable to enforce collection of the Accounts, including,
without limitation, notifying the account debtors or obligors under any
Accounts of the assignment of such Accounts to the Administrative Agent and
directing such account debtors or obligors to make payment of all amounts due
or to become due directly to the Administrative Agent.  Upon such notification and direction, and at
the expense of the Grantors, the Administrative Agent may enforce collection of
any such Accounts, and adjust, settle, or compromise the amount or payment
thereof in the same manner and to the same extent as any Grantor might have
done.

 

(b)           After receipt by any
Grantor of the notice referred to in Section 10(a) above that an
Event of Default has occurred and is continuing, all amounts and Proceeds
(including instruments) received by such Grantor in respect of the Accounts
shall be received in trust for the benefit of the Administrative Agent
hereunder, shall be segregated from other funds of such Grantor, and shall
promptly be paid over to the Administrative Agent in the same form as so
received (with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, or
compromise the amount or payment of any Account, nor release wholly or partly
any account debtor or obligor thereof, nor allow any credit or discount thereon
other than in the ordinary course of business and consistent with past
practices.

 

Section 11.        Application of Collateral.  The proceeds of any sale, or other
realization (other than that received from a sale or other realization
permitted by the Senior Credit Agreement) upon all or any part of the
Collateral pledged by any Grantor shall be applied by the Administrative Agent
as set forth in Section 7.06 of the Credit Agreement.

 

Section 12.        Administrative Agent as Attorney-in-Fact
for Grantor.  Each Grantor hereby
constitutes and irrevocably appoints the Administrative Agent, acting for and
on behalf of itself and the Secured Parties and each successor or assign of the
Administrative Agent and the Secured Parties, the true and lawful
attorney-in-fact of such Grantor, with full power and authority in the place
and stead of such Grantor and in the name of such Grantor, the Administrative
Agent or otherwise to, following the occurrence and during the continuation of
an Event of Default, take any action and execute any instrument at the written
direction of the Secured Parties and enforce all rights, interests and remedies
of such Grantor with respect to the Collateral, including the right:

 

(i)            to ask, require, demand, receive and
give acquittance for any and all moneys and claims for moneys due and to become
due under or arising out of the any of the other Collateral, including without
limitation, any Insurance Contracts;

 

(ii)           to elect remedies thereunder and to
endorse any checks or other instruments or orders in connection therewith;

 

14

 

(iii)          to file any claims or take any action
or institute any proceedings in connection therewith which the Administrative
Agent may deem to be necessary or advisable;

 

(iv)          to pay, settle or compromise all bills
and claims which may be or become liens or security interests against any or
all of the Collateral, or any part thereof, unless a bond or other security
satisfactory to the Administrative Agent has been provided; and

 

(v)           upon foreclosure, to do any and every
act which any Grantor may do on its behalf with respect to the Collateral or
any part thereof and to exercise any or all of such Grantor’s rights and
remedies under any or all of the Collateral; provided, however,
that the Administrative Agent shall not exercise any such rights except upon
the occurrence and continuation of an Event of Default.  This power of attorney is
a power coupled with an interest and shall be irrevocable.

 

Section 13.        Administrative Agent May Perform.  The Administrative Agent may from
time-to-time perform any act which any Grantor has agreed hereunder to perform
and which such Grantor shall fail to perform after being requested in writing
so to perform (it being understood that no such request need be given after the
occurrence and during the continuance of any Event of Default and after notice
thereof by the Administrative Agent to any Grantor) and the Administrative
Agent may from time-to-time take any other action which the Administrative
Agent deems necessary for the maintenance, preservation or protection of any of
the Collateral or of its security interest therein, and the reasonable expenses
of the Administrative Agent incurred in connection therewith shall be part of
the Secured Obligations and shall be secured hereby.

 

Section 14.        Administrative Agent Has No Duty.  The powers conferred on the Administrative
Agent hereunder are solely to protect its interest in the Collateral and shall
not impose any duty on it to exercise any such powers.  Except for reasonable care of any Collateral
in its possession and the accounting for moneys actually received by it
hereunder, the Administrative Agent shall have no duty as to any Collateral or
responsibility for taking any necessary steps to preserve rights against prior
parties or any other rights pertaining to any Collateral.

 

Section 15.        Reasonable Care.  The Administrative Agent shall be deemed to
have exercised reasonable care in the custody and preservation of the
Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
Property.

 

Section 16.        Payments Held in Trust.  During the continuance of an Event of
Default, all payments received by any Grantor under or in connection with any
Collateral shall be received in trust for the benefit of the Administrative
Agent, and shall be segregated from other funds of such Grantor and shall be
forthwith paid over to the Administrative Agent in the same form as received
(with any necessary endorsement).

 

15

 

Section 17.        Miscellaneous.

 

(a)           Expenses.  Each Grantor will upon demand pay to the
Administrative Agent for its benefit and the benefit of the Secured Parties the
amount of any reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of its counsel and of any experts, which the Administrative
Agent may incur in connection with (i) the custody, preservation, use, or
operation of, or the sale, collection, or other realization of, any of the
Collateral, (ii) the exercise or enforcement of any of the rights of the
Administrative Agent hereunder, and (iii) the failure by any Grantor to
perform or observe any of the provisions hereof.

 

(b)           Amendments; Etc.  No amendment or waiver of any provision of
this Security Agreement nor consent to any departure by any Grantor herefrom
shall be effective unless the same shall be in writing and executed by the
affected Grantor and the Administrative Agent, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.

 

(c)           Addresses for Notices.  All notices and other communications provided
for hereunder shall be made in the manner and to the addresses set forth in the
Credit Agreement.

 

(d)           Continuing Security Interest;
Transfer of Interest.  This Security
Agreement shall create a continuing security interest in the Collateral and,
unless expressly released by the Administrative Agent, shall (a)  remain
in full force and effect until the indefeasible payment in full in cash of the
Secured Obligations, the termination or expiration of all Commitments, and the
termination of the Credit Agreement in writing, (b) be binding upon each
Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, the Lenders and
their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Lender assigns or otherwise transfers any interest
held by it under the Credit Agreement or other Loan Document to any other
Person pursuant to the terms of the Credit Agreement or such other Loan
Document, that other Person shall thereupon become vested with all the benefits
held by such Lender under this Security Agreement.

 

(e)           Severability.  Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Security Agreement.

 

(f)            Choice of Law.  This Security Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas,
except to the extent that the validity or perfection of the security interests
hereunder, or remedies hereunder, in respect of any particular Collateral are
governed by the laws of a jurisdiction other than the state of Texas.

 

16

 

(g)           Counterparts.  The parties may execute this Security
Agreement in counterparts, each of which constitutes an original, and all of
which, collectively, constitute only one agreement.  Delivery of an executed counterpart signature
page by facsimile is as effective as executing and delivering this
Security Agreement in the presence of the other parties to this Security
Agreement.  In proving this Security
Agreement, a party must produce or account only for the executed counterpart of
the party to be charged.

 

(h)           Headings.  Paragraph headings have been inserted in this
Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.

 

(i)            Conflicts.   In the event of any explicit or implicit
conflict between any provision of this Security Agreement and any provision of
the Credit Agreement, the terms of the Senior Credit Agreement shall be
controlling.

 

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

 

(k)           Subordination and
Intercreditor Agreement. 
Reference is made to the Subordination and Intercreditor Agreement,
dated as of
                        ,
2008 (as amended, restated, supplemented or otherwise modified from time to
time, the “Subordination and Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal
Equities, Inc.,  as
Subordinated Agent, and certain other persons, party or that may become party
thereto from time to time.  Notwithstanding
anything herein to the contrary, this Security Agreement, the Liens granted
to the Administrative Agent pursuant to this Security Agreement and the
exercise of any right or remedy by the Administrative Agent or any of the
Lenders hereunder are subject to the provisions of the Subordination and
Intercreditor Agreement.  In the event of
any conflict between the terms of the Subordination and Intercreditor Agreement
and this Security Agreement, the terms of the Subordination and Intercreditor
Agreement shall govern and control.

 

(l)            Entire Agreement.  THIS SECURITY AGREEMENT
AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, 

 

17

 

CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

18

 

The parties hereto have
caused this Security Agreement to be duly executed as of the date first above
written.

 

	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware 

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [GUARANTORS]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADMINISTRATIVE AGENT:

  
	
   

  	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

19

 

SCHEDULE 1

to Security Agreement

 

	
  Grantor:

  	
   

  	
  Cano
  Petroleum, Inc.

  
	
   

  	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for

  	
   

  	
   

  
	
  Collateral are kept:

  	
   

  	
  [ADDRESS]

  
	
   

  	
   

  	
  [CITY,
  STATE ZIP]

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  Ladder
  Companies, Inc.

  
	
   

  	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
   

  	
  Delaware

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  corporation

  
	
   

  	
   

  	
   

  
	
  Address where records for

  	
   

  	
   

  
	
  Collateral are kept:

  	
   

  	
  [ADDRESS]

  
	
   

  	
   

  	
  [CITY,
  STATE ZIP]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Grantor:

  	
   

  	
  Square
  One Energy, Inc.

  
	
   

  	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
   

  	
  Texas

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  corporation

  

 

1

 

	
  Address where records for

  	
   

  	
   

  
	
  Collateral are kept:

  	
   

  	
  [ADDRESS]

  
	
   

  	
   

  	
  [CITY,
  STATE ZIP]

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  

 

2

 

Annex
1 to the

Security
Agreement

 

SUPPLEMENT NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Security Agreement dated as of March     ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and UnionBanCal Equities, Inc., as
administrative agent (the “Administrative Agent”) for the ratable
benefit of itself, the Lenders (as defined below) (together with the Lenders,
individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

A.            Reference is made to that certain
Subordinated Credit Agreement dated as of March       ,
2008 by and among the Borrower, the lenders party thereto from time to time
(individually, a “Lender”, and collectively, the “Lenders”), and
the Administrative Agent (as it may be amended, restated or otherwise modified
from time to time, the “Credit Agreement”).

 

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

 

C.            The Grantors have entered into the
Security Agreement in order to induce the Lenders to make Advances.  Pursuant to Section 6.15 of the Credit
Agreement, each Subsidiary of the Borrower that was not in existence on the
date of the Credit Agreement is required to enter into the Security Agreement
as a Grantor upon becoming a Subsidiary. 
Section 17(j) of the Security Agreement provides that
additional Subsidiaries of the Borrower may become Grantors under the Security
Agreement by execution and delivery of an instrument in the form of this
Supplement.  The undersigned Subsidiary
of the Borrower (the “New Grantor”) is executing this Supplement in
accordance with the requirements of the Credit Agreement to become a Grantor
under the Security Agreement.

 

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

 

(a)           In accordance with Section 17(j) of
the Security Agreement, the New Grantor by its signature below becomes a
Grantor under the Security Agreement with the same force and effect as if originally
named therein as a Grantor and the New Grantor hereby agrees (a) to all
the terms and provisions of the Security Agreement applicable to it as a
Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof in all material respects.  In furtherance of the foregoing, the New
Grantor, as security for the payment and performance in full of the Secured
Obligations (as defined in the Security Agreement), does hereby create and
grant to the Administrative Agent, its successors and assigns, for the benefit
of the Secured Parties, their successors and assigns, a continuing security
interest in and lien on all of the New Grantor’s right, title and interest in
and to the Collateral (as defined in the Security Agreement) 

 

1

 

of the New Grantor. 
Each reference to a “Grantor” in the Security Agreement shall be deemed
to include the New Grantor.  The Security
Agreement is hereby incorporated herein by reference.

 

(b)           The New Grantor represents and
warrants to the Administrative Agent that this Supplement has been duly
authorized, executed and delivered by it and constitutes its legal, valid and
binding obligation, enforceable against it in accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors’ rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).

 

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

 

(d)           The New Grantor hereby represents and
warrants that set forth on Schedule 1 attached hereto are (a) its
sole jurisdiction of formation and type of organization, (b) the location
of all records concerning its Accounts, General Intangibles, or any other
Collateral, (c) its federal tax identification number and the
organizational number, and (d) all names used by it during the last five
years prior to the date of this Supplement.

 

(e)           Except as expressly supplemented
hereby, the Security Agreement shall remain in full force and effect.

 

(f)            THIS SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS.

 

(g)           In case any one or more of the
provisions contained in this Supplement should be held invalid, illegal or
unenforceable in any respect, neither party hereto shall be required to comply
with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired.  The
parties hereto shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.

 

2

 

(h)           All communications and notices
hereunder shall be in writing and given as provided in the Security
Agreement.  All communications and
notices hereunder to the New Grantor shall be given to it at the address set
forth under its signature hereto.

 

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

 

THIS SUPPLEMENT, THE SECURITY
AGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

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

 

	
   

  	
  [Name of New Grantor],

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ADMINISTRATIVE AGENT]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

3

 

Schedule
1

Supplement
No.      

to
the Security Agreement

 

	
   

  	
   

  	
   

  
	
  New Grantor:

  	
   

  	
  [GRANTOR]

  
	
   

  	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
   

  	
  [STATE]

  
	
   

  	
   

  	
   

  
	
  Type of Organization:

  	
   

  	
  [ENTITY
  TYPE]

  
	
   

  	
   

  	
   

  
	
  Address where records for

  	
   

  	
   

  
	
  Collateral are kept:

  	
   

  	
  [ADDRESS]

  
	
   

  	
   

  	
  [CITY,
  STATE   ZIP]

  
	
   

  	
   

  	
   

  
	
  Organizational Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Prior Names:

  	
   

  	
   

  	
   

  

 

1

 

EXHIBIT J

 

FORM OF TRANSFER
LETTERS

 

                                  ,
20     

 

                                       

                                       

                                       

Re:                               Agreement dated
                              ,
by and between                                    ,
as Seller, and                                                       ,
as Buyer (the “Contract”).

 

Ladies and Gentlemen:

 

Cano Petroleum, Inc., a
Delaware corporation (“Mortgagor”), has executed a mortgage or deed of
trust dated effective as of
              
    , 2008 (“Mortgage”) for the benefit of
UnionBanCal Equities, Inc., as Administrative Agent for the ratable
benefit of itself and the Lenders (as defined in the Mortgage), which Mortgage
has been recorded in the Real Property Records of the Counties listed on the
attached Exhibit A.  A copy
of the Mortgage is enclosed.  The
properties covered by the Mortgage include all of the oil, gas and other
hydrocarbons and/or other minerals attributable to the above-referenced
Contract to which we understand you are currently a party and includes the well
or wells listed on the attached Exhibit A with respect to which you
are remitting proceeds of production to the Mortgagor.  Your division order or lease numbers for such
well or wells are set forth on the attached Exhibit A.

 

Pursuant to Article III
of the Mortgage, the Administrative Agent is entitled to receive all of
Mortgagor’s interest in all Hydrocarbons (as defined in the Mortgage), which
are covered by the above-referenced Contract, all products obtained or
processed therefrom, and the revenues and proceeds attributable thereto.  The assignment of the Hydrocarbons, products
and proceeds was effective as of 7:00 A.M., (Dallas, Texas Time), on
                            ,
2008 (“Effective Date”).  The
Lenders and the Administrative Agent, however, as provided in Article III,
have permitted Mortgagor to collect the Hydrocarbons and the revenues and
proceeds attributable thereto until the Administrative Agent or the Mortgagor
shall have instructed the seller or purchaser of production to deliver such
Hydrocarbons and all proceeds therefrom directly to the Administrative Agent.  The purpose of this letter is to notify you
that, commencing immediately upon the receipt hereof, and in accordance with
the terms and conditions of the Mortgage, you are to deliver all proceeds
attributable to the sale of such Hydrocarbons pursuant to the above-referenced
Contract directly to the Administrative Agent at its office at 445 South
Figueroa Street, 13th Floor, Los Angeles, California 90071, Telephone
(      )                ,
Facsimile:
(        )                  ,
Attention:                      ,
or to such other address of which we may subsequently notify you in
writing.  If you require the execution of
transfer or division orders, please forward the transfer or division orders to
the Administrative Agent at its address at indicated above, Attention:                            .

 

1

 

Should you have any
questions in connection with any of the foregoing, please do not hesitate to
contact us.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES,
  INC., as

  
	
   

  	
  Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC., a Delaware 

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
							

 

2

 

EXHIBIT K

 

FORM OF BORROWER’S COUNSEL OPINION

 

March 17,
2008

 

UnionBanCal
Equities, Inc.

  Administrative
Agent and a Lender, and all the

  other
Lenders party to the Subordinated Credit Agreement

  described
below

445
South Figueroa Street

13th
Floor

Los
Angeles, California 90071

 

Ladies
and Gentlemen:

 

We
have acted as Texas counsel to Cano Petroleum, Inc., a Delaware
corporation (“Borrower”),
Ladder Companies, Inc., a Delaware corporation (“Ladder”), Square One
Energy, Inc., a Texas corporation (“Square One”), W.O. Energy of Nevada, Inc.,
a Nevada corporation (“WOEN”),
WO Energy, Inc., a Texas corporation (“WOE”), W.O. Operating Company, Ltd., a
Texas limited partnership (“Operating”), W.O. Production Company, Ltd., a Texas
limited partnership (“Production”),
Cano Petro of New Mexico, Inc., a Texas corporation (“CPNM”)
and Pantwist, LLC, a Texas limited liability company (“Pantwist”,
and together with Ladder, Square One, WOEN, WOE, Operating, Production and
CPNM, the “Guarantors”;
Borrower and the Guarantors are each a “Loan Party” and collectively, the “Loan Parties”;
Borrower and Ladder are collectively, the “Delaware Loan Parties”; and Square One, WOE,
Operating, Production, CPNM and Pantwist are collectively, the “Texas Loan Parties”)
in connection with that certain Subordinated Credit Agreement (herein so
called) dated as of even date herewith, executed by Borrower, UnionBanCal
Equities, Inc., as Administrative Agent (in such capacity, the “Administrative Agent”), and
each financial institution party thereto as a Lender (collectively, the “Lenders”).  Capitalized terms used herein shall, unless
otherwise provided herein, have the respective meanings set forth in the
Subordinated Credit Agreement.

 

For
the purpose of rendering the opinions set forth herein, we have been furnished
with and have reviewed the following documents each dated of even date with the
Subordinated Credit Agreement unless otherwise indicated (collectively, the “Transaction Documents”):

 

(a)           the Subordinated Credit Agreement;

 

(b)           the Note, executed by Borrower and
payable to the order of the Administrative Agent in the original principal
amount of $25,000,000;

 

1

 

(c)           the Security Agreement, executed by
the Loan Parties, in favor of the Administrative Agent;

 

(d)           the Guaranty, executed by the
Guarantors, in favor of the Administrative Agent, for the benefit of the
Beneficiaries (as defined therein);

 

(e)           the Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of Production
dated March 17, 2008, executed by Square One, WOEN, WOE, Operating and
Production as Mortgagors made to Henry Park as the Trustee
for the benefit of the Administrative Agent as the Mortgagee (the “SOWWOP  Texas Mortgage”);

 

(f)            the Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of Production
dated March 17, 2008, executed by Pantwist as Mortgagor made to Henry Park, as the Trustee for
the benefit of the Administrative Agent as the Mortgagee (the “Pantwist Texas Mortgage”, and together with
the SOWWOP Texas Mortgage, the “Texas Mortgages”)

 

(g)           the Mortgage, Line of Credit
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated March 17, 2008, executed by Borrower and Ladder as
Mortgagors in favor of the Administrative Agent as the Mortgagee (the “Oklahoma Mortgage”);

 

(h)           the Mortgage, Line of Credit
Mortgage, Assignment, Security Agreement, Fixture Filing and Financing
Statement dated March 17, 2008, executed by CPNM as Mortgagor in favor of
the Administrative Agent as the Mortgagee (the “New Mexico Mortgage”);

 

(i)            the Pledge Agreement, executed by
Borrower, WOEN, and WOE in favor of the Administrative Agent (the “Pledge Agreement”);

 

(j)            the Subordination and Intercreditor
Agreement;

 

(k)           the UCC-1 Financing Statement
reflecting Borrower as debtor and the Administrative Agent as secured party, to
be filed in the Office of the Secretary of State of Delaware (the “Borrower Financing Statement”);

 

(l)            the UCC-1 Financing Statement
reflecting Ladder as debtor and the Administrative Agent as secured party, to
be filed in the Office of the Secretary of State of Delaware (the “Ladder Financing Statement”,
and together with the Borrower Financing Statement, the “Delaware Financing Statements”);

 

(m)          the UCC-1 Financing Statement
reflecting Square One as debtor and the Administrative Agent as secured party,
to be filed in the Office of the Secretary of State of Texas (the “Square One Financing Statement”);

 

2

 

(n)           the UCC-1 Financing Statement
reflecting WOE as debtor and the Administrative Agent as secured party, to be
filed in the Office of the Secretary of State of Texas (the “WOE Financing Statement”);

 

(o)           the UCC-1 Financing Statement
reflecting Operating as debtor and the Administrative Agent as secured party,
to be filed in the Office of the Secretary of State of Texas (the “Operating Financing Statement”);

 

(p)           the UCC-1 Financing Statement
reflecting Production as debtor and the Administrative Agent as secured party,
to be filed in the Office of the Secretary of State of Texas (the “Production Financing Statement”);

 

(q)           the UCC-1 Financing Statement
reflecting CPNM as debtor and the Administrative Agent as secured party, to be
filed in the Office of the Secretary of State of Texas (the “CPNM Financing Statement”);
and

 

(r)            the UCC-1 Financing Statement
reflecting Pantwist as debtor and the Administrative Agent as secured party, to
be filed in the Office of the Secretary of State of Texas (the “Pantwist Financing Statement”,
and together with the Square One Financing Statement, the WOE Financing
Statement, the Operating Financing Statement, the Production Financing
Statement and the CPNM Financing Statement, 
the “Texas
Financing Statements”; the Delaware Financing Statements and the
Texas Financing Statements are collectively, the “Financing Statements”).

 

(s)           the UCC-1 Financing Statement
reflecting Borrower as debtor and the Administrative Agent as secured party, to
be filed in County Filing Offices, as defined below (the “Borrower County Financing Statement”);

 

(t)            the UCC-1 Financing Statement
reflecting Ladder as debtor and the Administrative Agent as secured party, to
be filed in the County Filing Offices (the “Ladder County Financing Statement”);

 

(u)           the UCC-1 Financing Statement
reflecting Square One as debtor and the Administrative Agent as secured party,
to be filed in the County Filing Offices (the “Square One County Financing Statement”);

 

(v)           the UCC-1 Financing Statement
reflecting WOE as debtor and the Administrative Agent as secured party, to be
filed in the County Filing Offices (the “WOE County Financing Statement”);

 

3

 

(w)          the UCC-1 Financing Statement
reflecting Operating as debtor and the Administrative Agent as secured party,
to be filed in the County Filing Offices (the “Operating County Financing Statement”);

 

(x)           the UCC-1 Financing
Statement reflecting Production as debtor and the Administrative Agent as secured
party, to be filed in the County Filing Offices (the “Production County Financing
Statement”); and

 

(y)           the UCC-1 Financing Statement
reflecting Pantwist as debtor and the Administrative Agent as secured party, to
be filed in the County Filing Offices (the “Pantwist County Financing Statement”,
and together with the Square One County Financing Statement, the WOE County
Financing Statement, the Operating County Financing Statement, the Production
County Financing Statement, the Borrower County Financing Statement, and the
Ladder County Financing Statement, collectively, the “County
Financing
Statements”).

 

As
used herein, the term “Collateral”
shall mean the non-fixture equipment, accounts, inventory, and general
intangibles and other personal property that is “Collateral” (as defined in the Security Agreement); provided that the Collateral shall exclude
all real property, real estate, leases, and fixtures that are not personal
property.  As used herein, the term “Real Property Collateral”
shall mean the real property, real estate, leases, and fixtures described in
the Texas Mortgages.  As used herein, the
term “Pledged Collateral”
shall mean the “Pledged Collateral” as defined in the Pledge Agreement.

 

In
addition to the Transaction Documents, other documents we have reviewed in
rendering this opinion, and upon which we have relied, include the following:

 

(a)           the Certificate of Incorporation of
Borrower, certified by the Secretary of State of the State of Delaware on March 6,
2008;

 

(b)           an Officer’s Certificate of Borrower
(the “Borrower’s Officer’s
Certificate”) dated as of March 17, 2008, certifying (i) the
Certificate of Incorporation of Borrower, (ii) the Bylaws of Borrower, (iii) Resolutions
adopted by the Board of Directors of Borrower authorizing the execution,
delivery, and performance of the Transaction Documents executed by Borrower,
and (iv) the incumbency of officers of Borrower;

 

(c)           a certificate from the Secretary of
State of the State of Delaware indicating that Borrower is in existence and good
standing as of March 3, 2008 (the “Borrower’s Existence and Good Standing Certificate”);

 

(d)           the Certificate of Incorporation of
Ladder, certified by the Secretary of State of the State of Delaware on March 6,
2008;

 

4

 

(e)           an Officer’s Certificate of Ladder (“Ladder’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Certificate of
Incorporation of Ladder, (ii) the Bylaws of Ladder, (iii) Resolutions
adopted by the Board of Directors of Ladder authorizing the execution,
delivery, and performance of the Transaction Documents executed by Ladder, and (iv) the
incumbency of officers of Ladder;

 

(f)            a certificate from the Secretary of
State of the State of Delaware indicating that Ladder is in existence and good
standing as of March 5, 2008 (“Ladder’s Existence and Good Standing Certificate”);

 

(g)           the Articles of Incorporation of
Square One, certified by the Secretary of State of the State of Texas on March 6,
2008;

 

(h)           an Officer’s Certificate of Square
One (“Square One’s
Officer’s Certificate”) dated as of March 17, 2008
certifying (i) the Articles of Incorporation of Square One, (ii) the
Bylaws of Square One, (iii) Resolutions adopted by the Board of Directors
of Square One authorizing the execution, delivery, and performance of the
Transaction Documents executed by Square One, and (iv) the incumbency of
officers of Square One;

 

(i)            a certificate from the Secretary of
State of the State of Texas indicating that Square One is in existence as of March 3,
2008 (“Square One’s
Existence Certificate”);

 

(j)            a certificate, dated March 12,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by Square One of all franchise and similar taxes (“Square One’s Good Standing
Certificate”);

 

(k)           the Articles of Incorporation of
WOEN, certified by the Secretary of State of the State of Nevada on March 6,
2008;

 

(l)            an Officer’s Certificate of WOEN (“WOEN’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Articles of
Incorporation of WOEN, (ii) the Bylaws of WOEN, (iii) Resolutions
adopted by the Board of Directors of WOEN authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOEN, and (iv) the
incumbency of officers of WOEN;

 

(m)          a certificate from the Secretary of
State of the State of Nevada indicating that WOEN is in existence and good
standing as of March 3, 2008 (“WOEN’s Existence and Good Standing Certificate”);

 

(n)           the Articles of Incorporation of WOE,
certified by the Secretary of State of the State of Texas on March 6,
2008;

 

5

 

(o)           an Officer’s Certificate of WOE (“WOE’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Articles of
Incorporation of WOE, (ii) the Bylaws of WOE, (iii) Resolutions
adopted by the Board of Directors of WOE authorizing the execution, delivery,
and performance of the Transaction Documents executed by WOE, and (iv) the
incumbency of officers of WOE;

 

(p)           a certificate from the Secretary of
State of the State of Texas indicating that WOE is in existence as of March 3,
2008 (“WOE’s Existence
Certificate”);

 

(q)           a certificate, dated March 12,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by WOE of all franchise and similar taxes (“WOE’s Good Standing Certificate”);

 

(r)            the Certificate of Limited
Partnership of Operating, certified by the Secretary of State of the State of
Texas on March 6, 2008 and amended on March 14, 2008 as certified by
the Secretary of State of the State of Texas on March 17, 2008;

 

(s)           an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Operating (“Operating’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Certificate of Limited
Partnership of Operating, (ii) the Agreement of Limited Partnership of
Operating, (iii) Resolutions adopted by Board of Directors of WOE, acting
in its capacity as the sole General Partner of Operating, authorizing the
execution, delivery, and performance of the Transaction Documents executed by
the officers of WOE acting in its capacity as the sole General Partner of
Operating, and (iv) the incumbency of officers of WOE;

 

(t)            a certificate from the Secretary of
State of the State of Texas indicating that Operating is in existence as of March 3,
2008 (“Operating’s
Existence Certificate”);

 

(u)           the Certificate of Limited
Partnership of Production, certified by the Secretary of State of the State of
Texas on March 6, 2008 and amended on March 14, 2008 as certified by
the Secretary of State of the State of Texas on March 17, 2008;

 

(v)           an Officer’s Certificate of WOE,
acting in its capacity as the sole General Partner of Production (“Production’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Certificate of Limited
Partnership of Production, (ii) the Agreement of Limited Partnership of
Production, (iii) Resolutions adopted by Board of Directors of WOE, acting
in its capacity as the sole General Partner of Production, authorizing the
execution, delivery, and performance of the Transaction Documents executed by
the officers of WOE, acting in its capacity as the sole General Partner of
Production, and (iv) the incumbency of officers of WOE;

 

(w)          a certificate from the Secretary of
State of the State of Texas indicating that Production is in existence as of March 3,
2008 (“Production’s
Existence Certificate”);

 

6

 

(x)            the Articles of Incorporation of
CPNM, certified by the Secretary of State of the State of Texas on March 6,
2008;

 

(y)           an Officer’s Certificate of CPNM (“CPNM’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Articles of
Incorporation of CPNM, (ii) the Bylaws of CPNM, (iii) Resolutions
adopted by the Board of Directors of CPNM authorizing the execution, delivery,
and performance of the Transaction Documents executed by CPNM, and (iv) the
incumbency of officers of CPNM;

 

(z)            a certificate from the Secretary of
State of the State of Texas indicating that CPNM is in existence as of March 3,
2008 (“CPNM’s Existence
Certificate”);

 

(aa)         a certificate, dated March 12,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by CPNM of all franchise and similar taxes (“CPNM’s Good Standing Certificate”);

 

(bb)         the Certificate of Formation of
Pantwist, certified by the Secretary of State of the State of Texas on March 6,
2008;

 

(cc)         an Officer’s Certificate of Pantwist (“Pantwist’s Officer’s Certificate”)
dated as of March 17, 2008 certifying (i) the Certificate of
Formation of Pantwist, (ii) the Company Agreement of Pantwist, (iii) Resolutions
adopted by the Sole Manager of Pantwist authorizing the execution, delivery, and
performance of the Transaction Documents executed by Pantwist, and (iv) the
incumbency of officers of Pantwist;

 

(dd)         a certificate from the Secretary of
State of the State of Texas indicating that Pantwist is in existence as of March 3,
2008 (“Pantwist’s
Existence Certificate”);

 

(ee)         a certificate, dated March 12,
2008, from the Comptroller of Public Accounts of the State of Texas, attesting
to the current payment by Pantwist of all franchise and similar taxes (“Pantwist’s Good Standing Certificate”);
and

 

(ff)           a certificate from the officer of the
Borrower, Ladder, Square One, WOEN, WOE, CPNM and Pantwist and WOE as general
partner of Operating and Production dated as of March 17, 2008, certifying
as to certain factual matters, including the Material Agreements.

 

7

 

Scope of Examination and General

Assumptions and Qualifications

 

We have been furnished with and examined
originals or copies, certified or otherwise identified to our satisfaction, of
all such records of the Loan Parties, agreements and other instruments,
certificates of officers and representatives of the Loan Parties, certificates
of public officials, and other documents as we have deemed necessary or
desirable as a basis for the opinions hereinafter expressed.  As to questions of fact material to such
opinions, we have, without independent verification of their accuracy, relied
to the extent we deem reasonably appropriate upon the representations and warranties
of the Loan Parties made in the Transaction Documents and upon their respective
Officer’s Certificates.

 

In
making such examinations, we have assumed, with your consent (a) the
genuineness of all signatures (other than the signatures of officers of the
Loan Parties), (b) the authenticity of all documents submitted to us as
originals, (c) the conformity to original documents of all documents
submitted to us as certified or photostatic copies, (d) the authenticity
of the originals of the documents referred to in the immediately preceding clause (c), (e) the
prompt and proper recordation of any Transaction Documents in which recordation
is anticipated, (f) that each party to the Transaction Documents (other
than the Delaware Loan Parties and the Texas Loan Parties) has full power,
authority, and legal right to enter into and perform all agreements to which it
is a party and has duly authorized, executed, and delivered each such
Transaction Document, (g) that the Transaction Documents (other than the
Oklahoma and New Mexico Mortgages) constitute the valid, binding, and
enforceable agreement of all the parties thereto (other than the Loan Parties),
and (h) the correctness and accuracy of all the facts set forth in all
certificates and reports identified in this opinion.

 

We
have been advised by officers of the Loan Parties (and with your consent have
relied on that advice) that the agreements described on Exhibit A
attached hereto (the “Material
Agreements”) are the only agreements and there are no orders,
writs, judgments, or decrees that are material to Borrower or applicable Loan
Party and which, if violated by the execution, delivery, or performance of the
Transaction Documents, could reasonably be expected to have a material adverse
effect on the validity, performance, or enforceability of any Transaction
Document or the ability of any Loan Party to fulfill its material obligations
under the Transaction Documents.  We
advise you that we have not reviewed, and have not devoted substantive
attention to, any other agreements (other than those described on Exhibit A) for
the purposes of rendering the opinion set forth in Paragraph 15
below.  We have made no examination of,
and express no opinion with respect to, any financial, accounting, or similar
covenant or provision contained in the Material Agreements to the extent that
any such covenant or provision would require a determination as to any
financial or accounting matters.  In
addition, we express no opinion as to any breach of any confidentiality
provision contained in any Material Agreement caused by any Transaction
Document or Borrower’s or applicable Loan Party’s actions pursuant thereto or
in contemplation thereof.  We note that
some of the Material Agreements are not governed by Texas law.  Therefore,
we have assumed that a court would enforce the Material Agreements as 

 

8

 

written,
and we have limited our opinion to matters readily ascertainable from the face
of the Material Agreements.  We also note
that some of the Material Agreements are not assignable by Borrower or
applicable Loan Party (the “Non-Assignable Material Agreements”).  As a result, to the extent that the
Collateral includes Borrower’s or applicable Loan Party’s rights under the
Material Agreements, we have relied upon Section 9.408(a) of
the UCC (defined below).  We note that
any assignment of Non-Assignable Material Agreements is subject to the
limitations set forth in Section 9.408(d) of
the UCC.

 

Our
opinions set forth below are limited solely to matters governed by the laws of
the State of Texas, the federal laws of the United States of America, and the
General Corporation Law of the State of Delaware (collectively, “Applicable Law”) and we express no
opinion as to questions concerning the laws of any other jurisdiction.  The opinions expressed herein are limited to
the Uniform Commercial Code as
adopted in the State of Texas (the “Texas UCC”) and the State of Delaware (the “Delaware UCC”) in
effect on the date hereof (the Texas UCC and the Delaware UCC are collectively,
the “UCC”).

 

Specific
Limitations and Qualifications on

Opinions
Regarding Enforceability

 

With
respect to our opinion set forth in Paragraph 14 under the heading “Opinions”
below, we advise you that:

 

1.             The enforceability of the
Transaction Documents is subject to (a) the effects of (i) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium,
rearrangement, liquidation, conservatorship, or similar laws of general
application now or hereafter in effect relating to or affecting the rights of
creditors generally, (ii) general equity principles, and (iii) statutory
provisions of the Federal Bankruptcy Code and the Uniform
Fraudulent Transfer Act as adopted by the State of Texas (and
related court decisions) pertaining to the voidability of preferential or
fraudulent transfers, conveyances, and obligations, (b) the application of
a standard of “good faith” such
as that imposed by Section 1.304
of the Texas UCC, and (c) the rights of the United
States under the Federal Tax Lien Act of
1966, as amended; provided, however, that any
limitations referred to under clauses (a)(ii) and (a)(iii) of
this paragraph imposed by such laws on the enforceability of any Transaction
Document will not render any Transaction Document invalid as a whole or prevent
you from the ultimate realization of the practical benefits of such Transaction
Document, except for the economic consequences of any judicial, administrative,
or other procedural delay which may result from such laws.

 

2.             The opinion that the Transaction
Documents are enforceable is also subject to the qualification that certain of
the remedial, waiver, and other provisions of the Transaction Documents may not
be enforceable; but such unenforceability will not, in our judgment, render the
Transaction Documents invalid as a whole or substantially interfere with the
realization of the principal legal benefits and/or security intended to be
provided by the Transaction Documents, except to the extent of any procedural
delay which may result therefrom.

 

9

 

3.             We express no opinion as to: (a) the
enforceability of provisions of the Transaction Documents to the extent that
such provisions: (i) purport to waive or affect any rights to notices
required by law and that are not subject to waiver under Section 9.602
of the Texas UCC; (ii) purport to waive trial by jury; (iii) state
that any Lender’s failure or delay in exercising rights, powers, privileges or
remedies under the Transaction Documents shall not operate as a waiver thereof;
(iv) purport to indemnify any Lender for such Lender’s violations of
federal or state securities laws or environmental laws, or any obligation to
the extent such obligation arises from or is a result of such Lender’s own
fraud, negligence, or willful misconduct or to the extent that such
indemnification is inconsistent with public policy; (v) purport to
establish or satisfy certain factual standards or conditions (e.g.,
standards of “commercial reasonableness” or “reasonable care” under Article 9
of the Texas UCC) in a manner not permitted by Sections 9.602
and 9.603 of the Texas UCC; (vi) purport
to sever unenforceable provisions from the Transaction Documents, to the extent
that the enforcement of remaining provisions would frustrate the fundamental
intent of the parties to such documents; (vii) restrict access to legal or
equitable remedies; (viii) purport to waive any claim of any Loan Party
against any Lender arising out of, or in any way related to, the Transaction
Documents; (ix) purport to provide remedies inconsistent with applicable
law; or (x) providing that decisions by a party are conclusive or may be
made in its sole discretion; (b) whether a court would grant specific
performance or any other equitable remedy with respect to enforcement of any
provision contained in the Transaction Documents; (c) the enforceability
of any provision in the Transaction Documents that purports to appoint an agent
for service of process or establish or otherwise affect jurisdiction, venue,
evidentiary standards, or limitation periods, or procedural rights in any suit
or other proceeding; (d) the enforceability of any provision in the
Transaction Documents that purports to waive, subordinate, or otherwise
restrict or deny access to rights, benefits, claims, causes of action, or
remedies that cannot be waived, subordinated, or otherwise restricted or
denied; (e) the enforceability of any provision in the Transaction
Documents that allows any Lender to accelerate the maturity date of the
obligations evidenced by the Transaction Documents, to institute foreclosure
proceedings, or to exercise any similar right, without notice to the person or
entity signatory thereto or bound thereby; or (f) the enforceability of
any provision contained in the Transaction Documents relating to the
appointment of a receiver, to the extent that appointment of a receiver is
governed by applicable statutory requirements, and to the extent that such
provision may not be in compliance with such requirements.

 

4.             We express no opinion on any Lender’s
ability to foreclose on, become the owner of, or validly transfer or assume,
all of the rights and duties of any Loan Party (other than the right to receive
payments thereunder and the right to receive an assignment of accounts receivable
arising thereunder) as a party to the Non-Assignable Material Agreements, under
which such Loan Party’s rights, obligations, or duties are not freely
assignable or transferable.

 

5.             We express no opinion regarding the
enforceability of any documents or agreements referenced in the Transaction
Documents (other than the Transaction Documents).

 

10

 

6.             We express no opinion regarding any
Lender’s ability to exercise any rights or remedies against any collateral that
is personal property pursuant to the Transaction Documents other than in
accordance with the Texas UCC or the Delaware UCC.

 

7.             We express no opinion regarding (a) the
enforceability of provisions of the Texas Mortgages that grant the right to
become a mortgagee in possession of the Real Property Collateral prior to a
foreclosure of the lien of the Transaction Documents or provide for the
collection of (or the perfection or effectiveness of your lien in) rents and
profits prior to actual or constructive possession of the Real Property
Collateral, (b) the enforceability of any waiver of any right to an
appraisal of the Real Property Collateral, to the extent one is provided
pursuant to Texas Property Code Annotated
Sections 51.003-51.005, which rights are not waivable under Texas
law, or (c) compliance with, or the effect of land use, zoning, building,
sanitation, environmental, or ecological laws or regulations affecting the Real
Property Collateral.

 

Specific Limitations and Qualifications on

Opinions Regarding Texas Usury Laws

 

The opinions expressed in Paragraphs 14 and 16 under the heading “Opinions”
below are also subject to the following:

 

1.             We
have assumed that (a) no fees, charges, or other compensation will be paid
to Lenders, or for their benefit, except as specified in the Transaction
Documents, and (b) no interest will accrue on the unfunded portion of the
indebtedness evidenced by the Transaction Documents.

 

2.             We have assumed that Lenders will
comply with and give effect to all of the provisions of the Transaction
Documents with respect to the computation of the interest rate and the charging
and collection of interest thereunder, including without limitation, the “Savings Clause”
(herein so called) (i.e., a
clause to the effect that Borrower shall never be required to pay, and Lenders
shall never be entitled to collect or receive, interest on the loans evidenced
by the Subordinated Credit Agreement at a rate in excess of the maximum rate
permitted by applicable law).  We advise
Lenders that, if Borrower repays, or Lenders accelerate or otherwise demand
payment of, the loans made under the Subordinated Credit Agreement prior to the
scheduled maturity date thereof, then Lenders will have to return any excessive
interest received as the result of such prepayment in order to give effect to
the Savings Clause.

 

3.             We express no opinion as to whether
the fees denominated in the Subordinated Credit Agreement as “commitment fees” or other fees and
expenses (other than those explicitly designated as interest) payable to
Lenders under the Transaction Documents are interest or in certain cases,
whether any fees should be deducted from the principal of the loan evidenced by
the Transaction Documents in determining interest chargeable under such loan.  We assume that Lenders will comply with
applicable law in the treatment of such items under such loan.

 

11

 

4.             Section 2.09(d) of
the Subordinated Credit Agreement limits the reduction in the contract rate of
interest in certain circumstances in order to recoup the contracted rate of
interest for the prior period where the contracted rate was capped at a lower
rate by the maximum lawful rate.  While
there is a Texas statute and established precedent for the spreading of
interest forward over the anticipated life of a loan, we are aware of no cases
permitting “backward”
spreading.  Notwithstanding the lack of
case law, however, backward spreading, we believe, is consistent with the
principles underlying forward spreading and should be permissible under Texas
law.

 

Specific Limitations and Qualifications on

Opinions Regarding Laws and Consents

 

With
respect to our opinions in Paragraphs
16 and 17
under the heading “Opinions” below with respect to no violation of any
applicable law and as to the lack of any required consents, approvals, or
authorizations of governmental authorities, our opinions are expressed only
with respect to statutes or regulations that a lawyer in Texas or Delaware, as
applicable, exercising customary professional diligence would reasonably
recognize as being applicable to the Loan Parties or the transactions
contemplated by the Transaction Documents. 
In addition, we express no opinion as to the following: (a) federal
securities laws and regulations administered by the Securities and Exchange
Commission, State of Texas “Blue Sky” laws and regulations, and laws and
regulations relating to commodity (and other) futures and indices and other
similar instruments; or (b) the statutes and ordinances, the
administrative decisions, and the rules and regulations of counties,
towns, municipalities, and special political subdivisions (whether created or
enabled through legislative action at the federal, state, or regional level),
and any judicial decisions to the extent they deal with any of the foregoing.

 

Specific Limitations and Qualifications on

Opinions Regarding Perfection of Liens

and Security Interests in the Collateral

 

With respect to the opinions
expressed below regarding the perfection of the Administrative Agent’s liens
and security interests in the Collateral, we advise you that:

 

1.             We express no opinion regarding (a) the
accuracy or completeness of any property descriptions contained in the
Transaction Documents; however such descriptions are in sufficient form,
assuming accuracy and completeness, (b) title to the Collateral, (c) the
creation or perfection of the Administrative Agent’s liens and security
interests in the Collateral insofar as the laws of a jurisdiction other than the State of Texas (with
respect to creation) or the States of Texas and Delaware (with respect to
perfection) govern the creation or perfection of such liens and security
interests, or (d) the creation or perfection of the Administrative Agent’s
liens and security interests in Collateral that is not described in the
Transaction Documents.

 

12

 

2.             We have assumed, with your
permission, the following facts: (a) the Loan Parties, as applicable, have
good and sufficient title to the Collateral; (b) the Loan Parties, as
applicable, have “rights in the collateral”
as that term is used in Section 9.203
of the Texas UCC; (c) value has been given within the meaning of Section 9.203 of the Texas UCC; (d) the
Delaware Loan Parties are each solely incorporated, formed, or organized, as
the case may be, under the laws of the State of Delaware, the Texas Loan
Parties are each solely incorporated, formed, or organized, as the case may be,
under the laws of the State of Texas and WOEN is solely incorporated under the
laws of the State of Nevada; and (e) the Administrative Agent’s address is
correctly set forth on the Financing Statements and the County Financing
Statements.

 

3.             The opinions given in Paragraphs 18, 19, and 20 under the
heading “Opinions” below as to the creation and perfection of security
interests do not cover real property and other property transactions excluded
from the coverage of the Texas UCC pursuant to
Section 9.109 of the Texas UCC.

 

4.             We advise you that (a) in the
case of Collateral consisting of motor vehicles for which certificates of title
have been issued and for which the exclusive manner of perfecting a security
interest is by noting the Administrative Agent’s security interests on the
certificate of title in accordance with the Texas
Certificate of Title Act or other comparable law of other states,
the Administrative Agent’s security interest therein cannot be perfected by the
filing of the Financing Statements, but will be perfected only if the
Administrative Agent’s security interests are so noted, (b) the
continuation of any security interests and perfection of any security interests
in Collateral consisting of proceeds is limited to the extent set forth in the
UCC, (c) continuation statements complying with the UCC must be filed not
more than six (6) months prior to the expiration of a five (5) year
period dating from the date of filing of the Financing Statements (or otherwise
within the time permitted by the UCC) and subsequent continuation statements
must be filed within six (6) months prior to the end of each subsequent
five (5) year period and amendments or supplements to the Financing
Statements and/or additional financing statements may be required to be filed
in the event of a change of name, identity, or corporate structure of any of
the Delaware Loan Parties or any of the Texas Loan Parties, or if any of the
Delaware Loan Parties or any of the Texas Loan Parties changes the jurisdiction
of its incorporation, organization, or formation, as the case may be, (d) in
the case of property which becomes Collateral after the date hereof, Section 552 of the Federal Bankruptcy Code limits the extent
to which property acquired by a debtor after the commencement of a case under
the Federal Bankruptcy Code may
be subject to a security interest arising from a security agreement entered
into by the debtor before the commencement of the case, (e) although the
filing of a financing statement will perfect a security interest in chattel
paper, negotiable documents, instruments, and investment property, (i) such
a perfected security interest in chattel paper, negotiable documents, and
instruments is subject to rights of prior or subsequent holders who obtain
possession of such Collateral, and (ii) such a perfected security interest
in investment property is subject to rights of prior or subsequent holders who
obtain “control” (as such term is
defined in the UCC) of such Collateral, unless
the secured party obtains “control”
of such Collateral in accordance with the UCC, and (f) as against third
parties having or acquiring an interest in or a lien on the real 

 

13

 

property
to which any fixtures are attached, the rights and duties of the law of the
state relating to real property and fixtures may apply.

 

5.             We express no opinion as to the
perfection of liens and security interests in the Collateral constituting
general intangibles consisting of copyrights, patents, trademarks, and
tradenames to the extent security interests in such property may be perfected
only by the filing of the appropriate documents in the United States Copyright
Office and the United States Patent and Trademark Office.

 

6.             We have assumed that none of the
Collateral consists or will consist of consumer goods, farm products, crops, or
timber, or accounts resulting from the sale of timber.

 

7.             We also note that a security interest
in after-acquired property may attach and become enforceable and may become
perfected only when the debtor has obtained rights in such Collateral.

 

8.             We express no opinion regarding the
priority of any liens and security interests created by the Transaction
Documents, except as explicitly set forth in Paragraph
20 under the heading “Opinions” below.  We express no opinion as to the priority of
any security interest in the Pledged Collateral or portions thereof that are or
become subject to liens for taxes, assessments, levies, fees and other
governmental and similar charges, and other claims of any type of any
governmental authority, in each case that may be afforded priority over the
security interests of Lender by Applicable Law.

 

9.             We have made no review of the
Collateral, the books and records relating to the Collateral, or any compliance
by any of the Loan Parties with applicable rules and regulations governing
the ownership, use, leasing, maintenance, or charter of the Collateral, and
therefore we give no opinion concerning same.

 

10.           We have assumed, with your
permission, that (a) that no party executing the Security Agreement is a
broker or securities intermediary, as such terms are defined in the UCC, and (b) any
original certificates evidencing the Pledged Collateral have been delivered to,
and possession thereof will be held by, the Administrative Agent in the State
of Texas.

 

11.           We note that in order to enforce
Lenders’ remedies and rights of foreclosure by sale, after default, of the
Pledged Collateral, Lenders will be required to comply with applicable federal
and state securities laws.

 

14

 

Opinions

 

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

 

1.             Borrower
is, based solely upon, and as of the date of, the Borrower’s Existence and Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Delaware.

 

2.             Ladder is, based solely upon, and
as of the date of, Ladder’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Delaware.

 

3.             Square One is, based solely upon,
and as of the date of, Square One’s Existence Certificate and Square One’s Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Texas.

 

4.             WOEN is, based solely upon, and as
of the date of, WOEN’s Existence and Good Standing Certificate, validly
existing and in good standing under the laws of the State of Nevada.

 

5.             WOE is, based solely upon, and as
of the date of, WOE’s Existence Certificate and WOE’s Good Standing
Certificate, validly existing and in good standing under the laws of the State
of Texas.

 

6.             Operating is, based solely upon,
and as of the date of, Operating’s Existence Certificate, validly existing
under the laws of the State of Texas.

 

7.             Production is, based solely upon,
and as of the date of, Production’s Existence Certificate, validly existing
under the laws of the State of Texas.

 

8.             CPNM is, based solely upon, and as
of the date of, CPNM’s Existence Certificate and CPNM’s Good Standing
Certificate, validly existing and in good standing under the laws of the State
of Texas.

 

9.             Pantwist is, based solely upon, and
as of the date of, Pantwist’s Existence Certificate and Pantwist’s Good
Standing Certificate, validly existing and in good standing under the laws of
the State of Texas.

 

10.           Borrower and Ladder each have the
corporate power and authority under the General
Corporation Law of the State of Delaware and their respective
Certificates of Incorporation and Bylaws to execute, deliver, and perform their
obligations under the Transaction Documents. 
The Transaction Documents to which Borrower and/or Ladder is a party
have been duly authorized by all necessary corporate action on the part of
Borrower and/or 

 

15

 

Ladder,
as appropriate, and have been duly executed and delivered by Borrower and/or
Ladder, as appropriate.

 

11.           Square One, WOE and CPNM each have
the corporate power and authority under the Texas
Business Corporation Act or
the Texas Business Organizations Code and their respective Articles of Incorporation and Bylaws to execute,
deliver, and perform their obligations under the Transaction Documents.  The Transaction Documents to which Square
One, WOE and/or CPNM is a party have been duly authorized by all necessary
corporate action on the part of Square One, WOE and/or CPNM, as appropriate,
and have been duly executed and delivered by Square One, WOE and/or CPNM, as
appropriate.

 

12.           Pantwist has the limited liability
company power and authority under the Texas Limited Liability Company Law,
Title 3 of the Texas Business Organization Code, as the same may be amended
from time to time, and its Certificate of Formation and Company Agreement to
execute, deliver, and perform its obligations under the Transaction
Documents.  The Transaction Documents to
which Pantwist is a party have been duly authorized by all necessary limited liability
company action on the part of Pantwist and have been duly executed and
delivered by Pantwist.

 

13.           Operating and Production each have
the partnership power and authority under the Texas
Revised Limited Partnership Act and their respective Certificates of
Limited Partnership and Limited Partnership Agreements to execute, deliver, and
perform their obligations under the Transaction Documents.  The Transaction Documents to which Operating
and/or Production is a party have been duly authorized by all necessary
partnership action on the part of Operating and/or Production and their general
partners, as appropriate, and have been duly executed and delivered by
Operating and/or Production (or their general partners on their behalf), as
appropriate.

 

14.           The Transaction Documents (other than
the Oklahoma and New Mexico Mortgages) to which any Loan Party is a party are
enforceable against such Loan Party in accordance with their respective terms.

 

15.           The execution and delivery by each
Loan Party of, and performance of its agreements in, the Transaction Documents
do not (a) violate the Certificate of Incorporation, Articles of
Incorporation, Bylaws, Certificate of Limited Partnership or Limited
Partnership Agreement, each as applicable, of any Loan Party, or (b) breach
or result in a default under any obligation of any Loan Party under, or require
a consent under, or result in the creation of any Lien (except for the Liens
created pursuant to the Transaction Documents) upon any of the properties,
revenues, or other assets of any Loan Party pursuant to, any Material
Agreement.

 

16.           The execution and delivery of the
Transaction Documents, the consummation of the transactions contemplated
thereby, and compliance by the Loan Parties with the provisions thereof will not
violate any Applicable Law.

 

16

 

17.           No consent, approval, waiver,
license, or authorization or any other action by or filing with any
governmental authority is required under Applicable Law in connection with the
execution and delivery by the Loan Parties of the Transaction Documents, except
for those already obtained or completed.

 

18.           The Security Agreement creates in
favor of the Administrative Agent, for the benefit of the Secured Parties (as
defined therein), a valid security interest in all of the Loan Parties’ right,
title, and interest in and to that portion of the Collateral in which a
security interest may be created under the Texas UCC.  Under the Texas UCC and the Delaware UCC,
upon the acceptance of filing of the Financing Statements in the Office of the
Secretary of State of Texas or the Office of the Secretary of State of
Delaware, as appropriate, the Administrative Agent shall have a perfected
security interest, for the benefit of the Secured Parties (as defined in the
Security Agreement) in the Collateral in which a security interest may be
perfected by filing of financing statements under the Texas UCC or Delaware
UCC, as appropriate.

 

19.           The Pledge Agreement creates
in favor of the Administrative Agent for the benefit of the Secured Parties (as
defined therein) a valid security interest in all right, title, and interest of
each Loan Party a party thereto in the Pledged Collateral enforceable against
each such Loan Party, securing the Secured Obligations (as defined in the
Pledge Agreement).

 

20.           Upon the filing of the Delaware
Financing Statements in the Office of the Secretary of State of Delaware and
the Texas Financing Statements in the Office of the Secretary of State of
Texas, the Administrative Agent shall have a perfected security interest in the
Pledged Collateral.

 

21.           The form of the Texas Mortgages and
the form of the description of the Mortgaged Property (as such term is defined
therein and so used herein) situated in the State of Texas are in satisfactory
form for filing and recording in the offices described in Paragraph 22 below.

 

22.           Upon filing and recording of
the Texas Mortgages with the real property records of the Texas counties, as
applicable, the Texas Mortgages will create a valid and binding perfected
mortgage lien in favor of the Administrative Agent on the Real Property
Collateral.  The proper recordings of the
Texas Mortgages in the real property records of the respective Texas counties
identified therein (the “County Filing Offices”)
are the only filings, recordings, and registrations necessary to publish notice
and preserve the liens of the Texas Mortgages in the Real Property
Collateral.  Each Texas Mortgage creates
a valid security interest in favor of the Administrative Agent to the extent
provided therein in all right, title and interest of each Loan Party party
thereto in that portion of the “Collateral” (as defined therein) (other than
the Real Property Collateral) which constitutes personal property.  Upon the proper filing in the real property
records of the County Filing Offices of the County Financing Statements, the
Administrative Agent will have a perfected security interest within the meaning
of Chapter 9 of 

 

17

 

the
Texas UCC in that portion of the Collateral (as defined in the Texas Mortgages)
that is personal property and constitutes fixtures located on the Real Property
Collateral or as-extracted collateral from such Real Property Collateral in
which a security interest may be perfected by filing a financing statement
subject, however, with respect to proceeds, to Section 9.315 of the Texas
UCC.

 

23.           No state or local mortgage
registration tax, stamp tax, or other similar fee, tax, or governmental charge
(other than filing and recording fees to be paid upon filing) is required to be
paid to the State of Texas or any subdivision thereof in connection with the
execution, delivery, filing, or recording of any of the Texas Mortgages or the
consummation of the transactions contemplated therein.  Except for the payment of recording or filing
fees and taxes associated with filings made with respect to the Financing
Statements and the Texas Mortgages, no other taxes or governmental fees or
charges are required under Applicable Law in connection with (a) the
creation, perfection, or the recording of the Liens purported to be created by
the Transaction Documents, (b) the execution and delivery of any of the
Transaction Documents, or (c) the obtaining of credit under the
Subordinated Credit Agreement.

 

24.           The Advances to be made on the date
hereof and the application of the proceeds thereof as provided for in the
Subordinated Credit Agreement do not violate Regulation U or X of the Board of
Governors of the Federal Reserve System.

 

25.           No Loan Party is an “investment
company” or a company “controlled by” an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.

 

This
opinion (a) has been furnished to you at your request, and we consider it
to be a confidential communication that may not be furnished, reproduced,
distributed or disclosed to anyone (other than your permitted successors and
assigns under the Subordinated Credit Agreement) without our prior written
consent, (b) is rendered solely for your information and assistance in
connection with the above transaction, and may not be relied upon by any other
person (other than your permitted successors and assigns under the Subordinated
Credit Agreement) or for any other purpose without our prior written consent, (c) is
rendered as of the date hereof, and we undertake no, and hereby disclaim any
kind of obligation to advise you of any changes for any new developments that
might affect any matters or opinions set forth herein, and (d) is limited
to the matters stated herein and no opinions may be inferred or implied beyond
the matters expressly stated herein.

 

Sincerely,

 

HAYNES AND BOONE, LLP

 

18

 

EXHIBIT A

 

MATERIAL AGREEMENTS

 

Securities Purchase
Agreement dated August 25, 2006 by and among Cano Petroleum, Inc. and
the Buyers listed therein.

 

Registration Rights
Agreement dated August 25, 2006 by and among Cano Petroleum, Inc. and
the Buyers listed therein.

 

Certificate
of Designations, Preferences and Rights of Series D Convertible Preferred
Stock of Cano Petroleum, Inc. filed August 31, 2006 with the Delaware
Secretary of State.

 

Cano Petroleum, Inc.
2005 Long-Term Incentive Plan dated December 7, 2005, incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K filed
on December 9, 2005.

 

Amendment No. 1 to
the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan effective December 28,
2006.

 

Employment Agreement
between Cano Petroleum, Inc. and S. Jeffrey Johnson dated effective January 1,
2006.

 

Employment Agreement of
Morris B. Smith effective June 1, 2006.

 

First Amendment to
Employment Agreement of Morris B. Smith dated June 29, 2007.

 

Employment Agreement of
Michael J. Ricketts effective July 1, 2006.

 

First Amendment to
Employment Agreement of Michael J. Ricketts effective June 29,  2007.

 

Employment Agreement of
Patrick McKinney effective June 1, 2006.

 

First Amendment to
Employment Agreement of Patrick McKinney dated November 9, 2006.

 

Second Amendment to
Employment Agreement of Patrick McKinney dated June 29, 2007.

 

Securities Purchase
Agreement dated November 2, 2007 between Cano Petroleum, Inc. and the
investors listed therein.

 

Registration Rights
Agreement dated November 2, 2007 between Cano Petroleum, Inc. and the
investors listed therein.

 

Credit Agreement among Cano Petroleum, Inc. as Borrower, The
Lenders Party hereto from time to time, as Lenders, and Union Bank of
California, N.A., as Administrative Agent and as issuing Lender, dated November 29,
2005, including its Amendments (1-9) and all associated agreements.

 

19EXHIBIT 10.7

 

Execution Version

 

SUBORDINATED SECURITY AGREEMENT

 

THIS SUBORDINATED SECURITY AGREEMENT dated as of March 17, 2008
(this “Security Agreement”) is by and among CANO PETROLEUM, INC., a
Delaware corporation (“Borrower”), each subsidiary of the Borrower party
hereto from time to time (together with the Borrower, the “Grantors” and
individually, each a “Grantor”) and UnionBanCal Equities, Inc. as
administrative agent (in such capacity the “Administrative  Agent”)
for the ratable benefit of itself and the Lenders (as defined below) (together
with the Lenders, individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

RECITALS

 

A.                                   Reference
is made to that certain Subordinated Credit Agreement dated as of March 17,
2008 among the Borrower, the lenders party thereto from time to time (the “Lenders”)
and the Administrative Agent (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the “Subordinated
Credit Agreement”).

 

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

 

C.                                     It
is a condition precedent to the extension of credit to the Borrower under the
Credit Agreement that the Grantors and the Administrative Agent, on behalf of
the Lenders, execute and deliver this Security Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the
foregoing and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and confessed, each Grantor hereby
agrees with the Administrative Agent for its benefit and the benefit of the
Secured Parties as follows:

 

Section 1.                          Definitions;
Interpretation.  (a) All
capitalized terms not otherwise defined in this Security Agreement that are
defined in the Credit Agreement shall have the meanings assigned to such terms
by the Credit Agreement.  Any terms used
in this Security Agreement that are defined in the UCC (as defined below) and
not otherwise defined herein or in the Credit Agreement, shall have the
meanings assigned to those terms by the UCC. 
The following terms shall have the meanings specified below:

 

“Accounts”
means an “account” as defined in the UCC, including, without limitation, all of
any Grantor’s rights to payment for goods sold or leased, services performed,
or otherwise, whether now in existence or arising from time to time hereafter,
including, without limitation, rights arising under any of the Contracts or
evidenced by an account, note, contract, security agreement, Chattel Paper
(including, without limitation, tangible Chattel Paper and electronic Chattel
Paper), or other evidence of indebtedness or security, together with all of the
right, title and interest of any Grantor in and to (i) all security
pledged, assigned, hypothecated or granted to or held by any Grantor to secure
the 

 

1

 

foregoing, (ii) all
of any Grantor’s right, title and interest in and to any goods or services, the
sale of which gave rise thereto, (iii) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (iv) all powers of
attorney granted to any Grantor for the execution of any evidence of
indebtedness or security or other writing in connection therewith, (v) all
books, correspondence, credit files, records, ledger cards, invoices, and other
papers relating thereto, including without limitation all similar information
stored on a magnetic medium or other similar storage device and other papers
and documents in the possession or under the control of any Grantor or any
computer bureau from time to time acting for any Grantor, (vi) all
evidences of the filing of financing statements and other statements granted to
any Grantor and the registration of other instruments in connection therewith
and amendments thereto, notices to other creditors or secured parties, and
certificates from filing or other registration officers, (vii) all credit
information, reports and memoranda relating thereto, and (viii) all other
writings related in any way to the foregoing.

 

“Cash
Collateral” means all amounts from time to time held in any checking,
savings, deposit or other account of such Grantor, including, if applicable,
the Cash Collateral Account, all monies, proceeds or sums due or to become due
therefrom or thereon and all documents (including, but not limited to
passbooks, certificates and receipts) evidencing all funds and investments held
in such accounts.

 

“Chattel Paper”
has the meaning set forth in the UCC.

 

“Collateral”
has the meaning set forth in Section 2 of this Security Agreement.

 

“Contracts”
means all contracts to which any Grantor now is, or hereafter will be bound, or
to which such Grantor is or hereafter will be a party, beneficiary or assignee,
all Insurance Contracts, and all exhibits, schedules and other attachments to
such contracts, as the same may be amended, supplemented or otherwise modified
or replaced from time to time.

 

“Contract
Documents” means all Instruments, Chattel Paper, letters of credit, bonds,
guarantees or similar documents evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, the Contract Rights.

 

“Contract
Rights” means (i) all (A) of any Grantor’s rights to payment
under any Contract or Contract Document and (B) payments due and to become
due to any Grantor under any Contract or Contract Document, in each case
whether as contractual obligations, damages or otherwise; (ii) all of any
Grantor’s claims, rights, powers, or privileges and remedies under any Contract
or Contract Document; and (iii) all of any Grantor’s rights under any
Contract or Contract Document to make determinations, to exercise any election
(including, but not limited to, election of remedies) or option or to give or
receive any notice, consent, waiver or approval together with full power and
authority with respect to any Contract or Contract Document to demand, receive,
enforce or collect any of the foregoing rights or any property which is the
subject of any Contract or Contract Document, to enforce or execute any checks,
or other instruments or orders, to 

 

2

 

file any claims
and to take any action which, in the opinion of any Secured Party, may be
necessary or advisable in connection with any of the foregoing.

 

“Document”
means a bill of lading, dock warrant, dock receipt, warehouse receipt or order
for the delivery of goods, and also any other document which in the regular
course of business or financing is treated as adequately evidencing that the
person in possession of it is entitled to receive, hold and dispose of the
document and the goods it covers.

 

“Equipment”
means any equipment now or hereafter owned or leased by any Grantor, or in
which any Grantor holds or acquires any other right, title or interest,
constituting “equipment” under the UCC, including, without limitation, all
surface or subsurface machinery, equipment, facilities, supplies, or other
tangible personal property, including tubing, rods, pumps, pumping units and
engines, pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone, and other communication systems, loading docks, loading
racks, and shipping facilities, and any manuals, instructions, blueprints,
computer software (including software that is imbedded in and part of the
equipment), and similar items which relate to the above, and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located together with all improvements thereon and all attachments, components,
parts, equipment and accessories installed thereon or affixed thereto.

 

“Fixtures”
means any fixtures now or hereafter owned or leased by any Grantor, or in which
any Grantor holds or acquires any other right, title or interest, constituting “fixtures”
under the UCC, including without limitation any and all additions,
substitutions and replacements of any of the foregoing, wherever located together
with all improvements thereon and all attachments, components, parts, equipment
and accessories installed thereon or affixed thereto.

 

“General
Intangibles” means all general intangibles now or hereafter owned by any
Grantor, or in which any Grantor holds or acquires any other right, title or
interest, constituting “general intangibles” or “payment intangibles” under the
UCC, including, but not limited to, all trademarks, trademark applications,
trademark registrations, tradenames, fictitious business names, business names,
company names, business identifiers, prints, labels, trade styles and service
marks (whether or not registered), trade dress, including logos and/or designs,
copyrights, patents, patent applications, goodwill of any Grantor’s business symbolized
by any of the foregoing, trade secrets, license rights, license agreements,
permits, franchises, and any rights to tax refunds to which any Grantor is now
or hereafter may be entitled.

 

“Hedge Contract”
has the meaning set forth in the Senior Credit Agreement.

 

“Instrument”
means an “instrument” as defined in the UCC, including, without limitation, any
Negotiable Instrument, or any other writing which evidences a right to the
payment of money and is not itself a security agreement or lease and is of a
type which is in the 

 

3

 

ordinary course of
business transferred by delivery with any necessary endorsement or assignment
(other than Instruments constituting Chattel Paper).

 

“Insurance
Contracts” means all contracts and policies of insurance and re-insurance
maintained or required to be maintained by or on behalf of any Grantor under
the Loan Documents.

 

“Inventory”
means all of the inventory of any Grantor, or in which any Grantor holds or
acquires any right, title or interest, of every type or description, now owned
or hereafter acquired and wherever located, whether raw, in process or
finished, and all materials usable in processing the same and all documents of
title covering any inventory, including, without limitation, work in process,
materials used or consumed in any Grantor’s business, now owned or hereafter
acquired or manufactured by any Grantor and held for sale in the ordinary
course of its business, all present and future substitutions therefor, parts
and accessories thereof and all additions thereto, all Proceeds thereof and
products of such inventory in any form whatsoever, and any other item
constituting “inventory” under the UCC.

 

“Investment
Property” means “investment property” as defined in the UCC, including,
without limitation, all securities (whether certificated or uncertificated),
security entitlements, securities accounts, commodity contracts, and commodity
accounts.

 

“Negotiable
Instrument” means a “negotiable instrument” as defined in the UCC.

 

“Proceeds”
means all proceeds (as defined in the UCC) of any or all of the Collateral,
including without limitation (i) any and all proceeds of, all claims for,
and all rights of any Grantor to receive the return of any premiums for, any
insurance, indemnity, warranty or guaranty payable from time to time with
respect to any of the Collateral, (ii) any and all payments (in any form
whatsoever) made or due and payable from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any Governmental Authority (or any Person acting
under color of any Governmental Authority), (iii) all proceeds received or
receivable when any or all of the Collateral is sold, exchanged or otherwise
disposed, whether voluntarily, involuntarily, in foreclosure or otherwise, (iv) all
claims of any Grantor for damages arising out of, or for breach of or default
under, any Collateral, (v) all rights of any Grantor to terminate, amend,
supplement, modify or waive performance under any Contracts, to perform
thereunder and to compel performance and otherwise exercise all remedies
thereunder, and (vi) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral.

 

“Secured
Obligations” means all Obligations now or hereafter owed by the Borrower,
any Guarantor, or any of their respective Subsidiaries to the Secured Parties,
including any extensions, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses, indemnification, or
otherwise.

 

“Security
Agreement” means this Subordinated Security Agreement, as the same may be
modified, supplemented or amended from time to time in accordance with its terms.

 

4

 

“UCC” shall
mean the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of Texas; provided, however, in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of the security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of Texas,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such
other jurisdiction for purposes of the provisions hereof relating to such
attachment, perfection or priority and for purposes of definitions related to
such provisions.

 

(b)                                 All
meanings to defined terms, unless otherwise indicated, are to be equally
applicable to both the singular and plural forms of the terms defined.  Article, Section, Schedule, and Exhibit references
are to Articles and Sections of and Schedules and Exhibits to this Security
Agreement, unless otherwise specified. 
All references to instruments, documents, contracts, and agreements are
references to such instruments, documents, contracts, and agreements as the
same may be amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.  The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Security
Agreement shall refer to this Security Agreement as a whole and not to any
particular provision of this Security Agreement.  As used herein, the term “including” means “including,
without limitation,”. Paragraph headings have been inserted in this Security
Agreement as a matter of convenience for reference only and it is agreed that
such paragraph headings are not a part of this Security Agreement and shall not
be used in the interpretation of any provision of this Security Agreement.

 

Section 2.                                            Assignment,
Pledge and Grant of Security Interest.

 

(a)                                  As
collateral security for the prompt and complete payment and performance when
due of all Secured Obligations, each Grantor hereby assigns, pledges, and
grants to the Administrative Agent for the benefit of the Secured Parties a
lien on and continuing security interest in all of such Grantor’s right, title
and interest in, to and under, all items described in this Section 2,
whether now owned or hereafter acquired by such Grantor and wherever located
and whether now or hereafter existing or arising (collectively, the “Collateral”):

 

	
  (i)

  	
   

  	
  all
  Contracts, all Contract Rights, Contract Documents and Accounts associated
  with such Contracts and each and every document granting security to such
  Grantor under any such Contract;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  all
  Accounts;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  all
  Inventory;

  
	
   

  	
   

  	
   

  
	
  (iv)

  	
   

  	
  all
  Equipment;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  all
  General Intangibles;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  all
  Investment Property;

  
	
   

  	
   

  	
   

  
	
  (vii)

  	
   

  	
  all
  Fixtures;

  

 

5

 

	
  (viii)

  	
   

  	
  all
  Cash Collateral;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  any
  Legal Requirements now or hereafter held by such Grantor (except that any
  Legal Requirement which would by its terms or under applicable law become
  void, voidable, terminable or revocable by being subjected to the Lien of
  this Security Agreement or in which a Lien is not permitted to be granted
  under applicable law, is hereby excluded from such Lien to the extent
  necessary so as to avoid such voidness, voidability, terminability or
  revocability);

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  any
  right to receive a payment under any Hedge Contract in connection with a
  termination thereof;

  
	
   

  	
   

  	
   

  
	
  (xi)

  	
   

  	
  (A) all
  policies of insurance and Insurance Contracts, now or hereafter held by or on
  behalf of such Grantor, including casualty and liability, business
  interruption, and any title insurance, (B) all Proceeds of insurance,
  and (C) all rights, now or hereafter held by such Grantor to any
  warranties of any manufacturer or contractor of any other Person;

  
	
   

  	
   

  	
   

  
	
  (xii)

  	
   

  	
  any
  and all liens and security interests (together with the documents evidencing
  such security interests) granted to such Grantor by an obligor to secure such
  obligor’s obligations owing under any Instrument, Chattel Paper, or Contract
  which is pledged hereunder or with respect to which a security interest in
  such Grantor’s rights in such Instrument, Chattel Paper, or Contract is
  granted hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiii)

  	
   

  	
  any
  and all guaranties given by any Person for the benefit of such Grantor which
  guarantees the obligations of an obligor under any Instrument, Chattel Paper
  or Contract, which are pledged hereunder;

  
	
   

  	
   

  	
   

  
	
  (xiv)

  	
   

  	
  without
  limiting the generality of the foregoing, all other personal property, goods,
  Instruments, Chattel Paper, Documents, Fixtures, credits, claims, demands and
  assets of such Grantor whether now existing or hereafter acquired from time
  to time; and

  
	
   

  	
   

  	
   

  
	
  (xv)

  	
   

  	
  any
  and all additions, accessions and improvements to, all substitutions and
  replacements for and all products and Proceeds of or derived from all of the
  items described above in this Section 2.

  

 

(b)                                Notwithstanding
anything contained herein to the contrary, it is the intention of each Grantor,
the Administrative Agent, and the other Secured Parties that the amount of the
Secured Obligation secured by each Grantor’s interests in any of its Property
shall be in, but not in excess of, the maximum amount permitted by fraudulent
conveyance, fraudulent transfer and other similar law, rule or regulation
of any Governmental Authority applicable to such Grantor. Accordingly,
notwithstanding anything to the contrary contained in this Security Agreement
in any other agreement or instrument executed in connection with the payment of
any of the Secured Obligations, the amount of the Secured Obligations secured
by each Grantor’s interests in any of its Property pursuant to this Security
Agreement shall be limited to an aggregate 

 

6

 

amount equal to the largest
amount that would not render such Grantor’s obligations hereunder or the liens
and security interest granted to the Administrative Agent hereunder subject to
avoidance under Section 548 of the United States Bankruptcy Code or any
comparable provision of any other applicable law.

 

Section 3.                       Representations
and Warranties.  Each Grantor hereby
represents and warrants the following to the Administrative Agent and the other
Secured Parties:

 

(a)                                  Records.  Such Grantor’s sole jurisdiction of formation
and type of organization are as set forth in Schedule 1 attached
hereto.  All records concerning the
Accounts, General Intangibles, or any other Collateral applicable to such
Grantor are located at the address for such Grantor on such Schedule 1.  None of the Accounts is evidenced by a
promissory note or other instrument.

 

(b)                                 Other
Liens.  Such Grantor is, and will be
the record, legal, and beneficial owner of all of the Collateral pledged by
such Grantor free and clear of any Lien, except for the Permitted Liens.  No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is, or
will be, on file in any recording office, except such as may be filed in
connection with this Security Agreement or in connection with other Permitted
Liens or for which satisfactory releases have been received by the
Administrative Agent.

 

(c)                                  Lien
Priority and Perfection.

 

(i)                                     Subject
only to Permitted Liens, this Security Agreement creates valid and continuing
security interests in the Collateral, securing the payment and performance of
all the Secured Obligations.  Upon the
filing of financing statements with the jurisdiction listed in Schedule 1,
the security interests granted to the Administrative Agent hereunder will
constitute valid first-priority perfected security interests in all Collateral
with respect to which a security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens.

 

(ii)                                  No
consent of any other Person and no authorization, approval, or other action by,
and no notice to or filing with any Governmental Authority is required (A) for
the grant by such Grantor of the pledge, assignment, and security interest
granted hereby or for the execution, delivery, or performance of this Security
Agreement by such Grantor, (B) for the validity, perfection, or
maintenance of the pledge, assignment, lien, and security interest created
hereby (including the first-priority (subject to Permitted Liens) nature
thereof), except for security interests that cannot be perfected by filing
under the UCC, or (C) for the exercise by the Administrative Agent of the
rights provided for in this Security Agreement or the remedies in respect of
the Collateral pursuant to this Security Agreement, except (1) those
consents to assignment of licenses, permits, approvals, and other rights that
are as a matter of law not assignable, (2) those consents, approvals,
authorizations, actions, notices or filings which have been duly obtained or
made and, in the case of the maintenance of perfection, the filing of
continuation statements under the UCC, and (3) those filings and actions
described in Section 3(c)(i). 

 

7

 

(d)                                 Tax
Identification Number and Organizational Number.  The federal tax identification number of such
Grantor and the organizational number of such Grantor are as set forth in Schedule
1.

 

(e)                                  Tradenames;
Prior Names.  Except as set forth on Schedule
1, such Grantor has not conducted business under any name other than its current
name during the last five years prior to the date of this Security Agreement.

 

(f)                                    Exclusive
Control.  Such Grantor has exclusive
possession and control of its respective Equipment and Inventory.

 

Section 4.                                Covenants.

 

(a)                                  Further
Assurances.

 

(i)                          Each
Grantor agrees that from time to time, at its expense, such Grantor shall
promptly execute and deliver all instruments and documents, and take all
action, that may be reasonably necessary or desirable, or that the
Administrative Agent may reasonably request, in order to perfect and protect
any pledge, assignment, or security interest granted or intended to be granted
hereby or to enable the Administrative Agent to exercise and enforce its rights
and remedies hereunder with respect to any Collateral.  Without limiting the generality of the
foregoing, each Grantor (A) at the request of the Administrative Agent,
shall execute such instruments, endorsements or notices, as may be reasonably
necessary or desirable or as the Administrative Agent may reasonably request,
in order to perfect and preserve the assignments and security interests granted
or purported to be granted hereby, (B) shall, at the reasonable request of
the Administrative Agent, mark conspicuously each material document included in
the Collateral, each Chattel Paper included in the Accounts, and each of its
records pertaining to the Collateral with a legend, in form and substance
satisfactory to the Administrative Agent, including that such document, Chattel
Paper, or record is subject to the pledge, assignment, and security interest
granted hereby, (C) shall, if any Collateral shall be evidenced by a
promissory note or other instrument or chattel paper, deliver and pledge to the
Administrative Agent hereunder such note or instrument or chattel paper duly
endorsed and accompanied by duly executed instruments of transfer or
assignment, all in form and substance satisfactory to the Administrative Agent,
and (D) authorizes the Administrative Agent to file any financing
statements, amendments or continuations without the signature of such Grantor
to the extent permitted by applicable law in order to perfect or maintain the
perfection of any security interest granted under this Security Agreement
(including, without limitation, financing statements using an “all assets” or “all
personal property” collateral description).

 

(ii)                       Each
Grantor shall pay all filing, registration and recording fees and all refiling,
re-registration and re-recording fees, and all other reasonable expenses
incident to the execution and acknowledgment of this Security Agreement, any
assurance, and all federal, state, county and municipal stamp taxes and other
taxes, duties, imports, assessments and charges arising out of or in connection
with the execution and delivery of this Security Agreement, any agreement
supplemental hereto, any financing statements, and any instruments of further
assurance.

 

8

 

(iii)                               Each Grantor shall
promptly provide to the Administrative Agent all information and evidence the
Administrative Agent may reasonably request concerning the Collateral to enable
the Administrative Agent to enforce the provisions of this Security Agreement.

 

(b)                                 Change
of Name; State of Formation.  Each
Grantor shall give the Administrative Agent at least 30 days’ prior written
notice before it (i) in the case of any Grantor that is not a “registered
organization” (as such term is defined in Section 9-102 of the UCC),
changes the location of its principal place of business and chief executive
office, (ii) changes the location of its jurisdiction of formation or
organization, (iii) changes the location of the Equipment, Inventory, or
original copies of any Chattel Paper evidencing Accounts, or (iv) uses a
trade name other than its current name used on the date hereof.  Other than as permitted by Section 6.11
of the Credit Agreement, no Grantor shall amend, supplement, modify or restate
its articles or certificate of incorporation, bylaws, limited liability company
agreements, or other equivalent organizational documents, nor amend its name or
change its jurisdiction of incorporation, organization or formation.

 

(c)                                  Right
of Inspection.  Each Grantor shall
hold and preserve, at its own cost and expense satisfactory and complete
records of the Collateral, including, but not limited to, Instruments, Chattel
Paper, Contracts, and records with respect to the Accounts, and will permit
representatives of the Administrative Agent, upon reasonable advance notice, at
any time during normal business hours to inspect and copy them.  Upon the occurrence and during the
continuation of any Event of Default, at the Administrative Agent’s request,
each Grantor shall promptly deliver copies of any and all such records to the
Administrative Agent.

 

(d)                                 Liability
Under Contracts and Accounts. 
Notwithstanding anything in this Security Agreement to the contrary, (i) the
execution of this Security Agreement shall not release any Grantor from its
obligations and duties under any of the Contract Documents, or any other
contract or instrument which are part of the Collateral and Accounts included
in the Collateral, (ii) the exercise by the Administrative Agent of any of
its rights hereunder shall not release any Grantor from any of its duties or
obligations under any Contract Documents, or any other Contract or Instrument
which are part of the Collateral and Accounts included in the Collateral, and (iii) the
Administrative Agent shall not have any obligation or liability under any
Contract Documents, or any other contract or instrument which are part of the
Collateral and Accounts included in the Collateral by reason of the execution
and delivery of this Security Agreement, nor shall the Administrative Agent be
obligated to perform any of the obligations or duties of any Grantor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.

 

(e)                                  Transfer
of Certain Collateral; Release of Certain Security Interest.  Each Grantor agrees that it shall not sell,
assign, or otherwise dispose of any Collateral, except as otherwise permitted
under the Credit Agreement.  The
Administrative Agent shall promptly, at the Grantors’ expense, execute and
deliver all further instruments and documents, and take all further action that
a Grantor may reasonably request in order to release its security interest in
any Collateral which is disposed of in accordance with the terms of the Credit
Agreement.

 

9

 

(f)                                    Accounts.  Each Grantor agrees that it will use commercially
reasonable efforts to ensure that each Account (i) is and will be, in all
material respects, the genuine, legal, valid, and binding obligations of the
account debtor in respect thereof, representing an unsatisfied obligation of
such account debtor, (ii) is and will be, in all material respects,
enforceable in accordance with its terms, (iii) is not and will not be
subject to any setoffs, defenses, taxes, counterclaims, except in the ordinary
course of business, (iv) is and will be, in all material respects, in
compliance with all applicable laws, whether federal, state, local or foreign,
and (v) which if evidenced by Chattel Paper, will not require the consent
of the account debtor in respect thereof in connection with its assignment
hereunder.

 

(g)                                 Negotiable
Instrument.  If any Grantor shall at
any time hold or acquire any Negotiable Instruments, including promissory
notes, such Grantor shall forthwith endorse, assign and deliver the same to the
Administrative Agent, accompanied by such instruments of transfer or assignment
duly executed in blank as the Administrative Agent may from time to time
reasonably request.

 

(h)                                 Other
Covenants of Grantor.  Each Grantor
agrees that (i) any action or proceeding to enforce this Security
Agreement may be taken by the Administrative Agent either in such Grantor’s
name or in the Administrative Agent’s name, as the Administrative Agent may
deem necessary, and (ii) such Grantor will, until the indefeasible payment
in full in cash of the Secured Obligations and the termination or expiration of
the Commitments, warrant and defend its title to the Collateral and the
interest of the Administrative Agent in the Collateral against any claim or
demand of any Persons (other than Permitted Liens) which could reasonably be expected
to materially adversely affect such Grantor’s title to, or the Administrative
Agent’s right or interest in, such Collateral.

 

Section 5.                            Termination
of Security Interest.  Upon the
indefeasible payment in full in cash of the Secured Obligations, the
termination or expiration of all Commitments and the termination of the Credit
Agreement in writing, the security interest granted hereby shall terminate and
all rights to the Collateral shall revert to the applicable Grantor to the
extent such Collateral shall not have been sold or otherwise applied pursuant
to the terms hereof.  Upon any such
termination, the Administrative Agent will, at the Grantors’ expense, execute
and deliver to the applicable Grantor such documents (including, without
limitation, UCC-3 termination statements) as such Grantor shall reasonably
request to evidence such termination.

 

Section 6.                            Reinstatement.
If, at any time after payment in full of all Secured Obligations and
termination of the Administrative Agent’s security interest, any payments on
the Secured Obligations previously made must be disgorged by the Administrative
Agent for any reason whatsoever, including, without limitation, the insolvency,
bankruptcy or reorganization of any Grantor or any other Person, this Security
Agreement and the Administrative Agent’s security interests herein shall be
reinstated as to all disgorged payments as though such payments had not been
made, and each Grantor shall sign and deliver to the Administrative Agent all
documents, and shall do such other acts and things, as may be necessary to
reinstate and perfect the Administrative Agent’s security interest.  EACH
GRANTOR SHALL DEFEND AND INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH OTHER
ADMINISTRATIVE AGENT FROM AND AGAINST ANY CLAIM, DAMAGE, LOSS, LIABILITY, COST
OR EXPENSE UNDER THIS SECTION 6 (INCLUDING

 

10

 

REASONABLE
ATTORNEYS’ FEES AND EXPENSES) IN THE DEFENSE OF ANY SUCH ACTION OR SUIT INCLUDING
SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE ARISING AS A RESULT OF
THE INDEMNIFIED ADMINISTRATIVE AGENT’S OWN NEGLIGENCE BUT EXCLUDING SUCH CLAIM,
DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE THAT IS FOUND IN A FINAL,
NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED
FROM SUCH INDEMNIFIED ADMINISTRATIVE AGENT’S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.

 

Section 7.                            Remedies
upon Event of Default.

 

(a)                                  If
any Event of Default has occurred and is continuing, the Administrative Agent
may (and shall at the written request of the Majority Lender), (i) proceed
to protect and enforce the rights vested in it by this Security Agreement or
otherwise available to it, including but not limited to, the right to cause all
revenues and other moneys pledged hereby as Collateral to be paid directly to
it, and to enforce its rights hereunder to such payments and all other rights
hereunder by such appropriate judicial proceedings as it shall deem most
effective to protect and enforce any of such rights, either at law or in equity
or otherwise, whether for specific enforcement of any covenant or agreement
contained in any of the Contract Documents, or in aid of the exercise of any
power therein or herein granted, or for any foreclosure hereunder and sale
under a judgment or decree in any judicial proceeding, or to enforce any other
legal or equitable right vested in it by this Security Agreement or by law; (ii) cause
any action at law or suit in equity or other proceeding to be instituted and
prosecuted and enforce any rights hereunder or included in the Collateral,
subject to the provisions and requirements thereof; (iii) sell or
otherwise dispose of any or all of the Collateral or cause the Collateral to be
sold or otherwise disposed of in one or more sales or transactions, at such
prices and in such manner as may be commercially reasonable, and for cash or on
credit or for future delivery, without assumption of any credit risk, at public
or private sale, without demand of performance or notice of intention to sell
or of time or place of sale (except such notice as is required by applicable
statute and cannot be waived), it being agreed that the Administrative Agent
may be a purchaser on behalf of the Secured Parties or on its own behalf at any
such sale and that the Administrative Agent, any other Secured Party, or any
other Person who may be a bona fide purchaser for value and without notice of
any claims of any or all of the Collateral so sold shall thereafter hold the
same absolutely free from any claim or right of whatsoever kind, including any
equity of redemption of any Grantor, any such demand, notice or right and
equity being hereby expressly waived and released to the extent permitted by
law; (iv) incur reasonable expenses, including reasonable attorneys’ fees,
reasonable consultants’ fees, and other costs appropriate to the exercise of
any right or power under this Security Agreement; (v) perform any
obligation of any Grantor hereunder and make payments, purchase, contest or
compromise any encumbrance, charge or lien, and pay taxes and expenses,
without, however, any obligation to do so; (vi) in connection with any
acceleration and foreclosure, take possession of the Collateral and render it
usable and repair and renovate the same, without, however, any obligation to do
so, and enter upon any location where the Collateral may be located for that
purpose, control, manage, operate, rent and lease the Collateral, collect all
rents and income from the Collateral and apply the same to reimburse the
Secured Parties for any cost or expenses incurred hereunder or under any of the
Loan Documents and to the payment or performance of any Grantor’s obligations
hereunder or under any of the Loan Documents, and apply the balance to the
other Secured Obligations and

 

11

 

any remaining excess balance to whomsoever is legally
entitled thereto; (vii) secure the appointment of a receiver for the
Collateral or any part thereof; (viii) require any Grantor to, and each
Grantor hereby agrees that it will at its expense and upon request of the
Administrative Agent forthwith, assemble all or part of the Collateral as
directed by the Administrative Agent and make it available to the
Administrative Agent at a place to be designated by the Administrative Agent
which is reasonably convenient to both parties; (ix) exercise any other or
additional rights or remedies granted to a Administrative Agent under the UCC;
or (x) occupy any premises owned or leased by any Grantor where the
Collateral or any part thereof is assembled for a reasonable period in order to
effectuate its rights and remedies hereunder or under law, without obligation
to any Grantor in respect of such occupation. 
If, pursuant to applicable law, prior notice of sale of the Collateral
under this Section is required to be given to any Grantor, each Grantor
hereby acknowledges that the minimum time required by such applicable law, or
if no minimum time is specified, 10 days, shall be deemed a reasonable notice
period.   The Administrative Agent shall
not be obligated to make any sale of Collateral regardless of notice of sale
having been given.  The Administrative
Agent may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned.

 

(b)                                 All reasonable costs
and expenses (including reasonable attorneys’ fees and expenses) incurred by
the Administrative Agent in connection with any suit or proceeding in
connection with the performance by the Administrative Agent of any of the
agreements contained in any of the Contract Documents, or in connection with
any exercise of its rights or remedies hereunder, pursuant to the terms of this
Security Agreement, shall constitute additional indebtedness secured by this
Security Agreement and shall be paid on demand by the Grantors to the
Administrative Agent on behalf of the Secured Parties.

 

Section 8.                            Remedies
Cumulative; Delay Not Waiver.

 

(a)                                  No
right, power or remedy herein conferred upon or reserved to the Administrative
Agent is intended to be exclusive of any other right, power or remedy and every
such right, power and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right, power and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or
remedy hereunder or otherwise shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.  Resort to any or all security now or
hereafter held by the Administrative Agent may be taken concurrently or
successively and in one or several consolidated or independent judicial actions
or lawfully taken nonjudicial proceedings, or both.

 

(b)                                 No delay or omission
of the Administrative Agent to exercise any right or power accruing upon the
occurrence and during the continuance of any Event of Default as aforesaid
shall impair any such right or power or shall be construed to be a waiver of
any such Event of Default or an acquiescence therein; and every power and
remedy given by this Security Agreement may be exercised from time to time, and
as often as shall be deemed expedient, by the Administrative Agent.

 

12

 

Section 9.                            Contract
Rights.  After the occurrence and during the continuance of an Event of Default,
the Administrative Agent may exercise any of the Contract Rights and
remedies of any Grantor under or in connection with the Instruments, Chattel Paper,
or Contracts which represent Accounts, the General Intangibles, or which
otherwise relate to the Collateral, including, without limitation, any rights
of any Grantor to demand or otherwise require payment of any amount under, or
performance of any provisions of, the Instruments, Chattel Paper, or Contracts
which represent Accounts, or the General Intangibles.

 

Section 10.                      Accounts.

 

(a)                                  After the occurrence
and during the continuance of an Event of Default, the Administrative Agent
may, or may direct any Grantor to, take any action the Administrative Agent
deems necessary or advisable to enforce collection of the Accounts, including,
without limitation, notifying the account debtors or obligors under any
Accounts of the assignment of such Accounts to the Administrative Agent and
directing such account debtors or obligors to make payment of all amounts due
or to become due directly to the Administrative Agent.  Upon such notification and direction, and at
the expense of the Grantors, the Administrative Agent may enforce collection of
any such Accounts, and adjust, settle, or compromise the amount or payment
thereof in the same manner and to the same extent as any Grantor might have
done.

 

(b)                                 After receipt by any
Grantor of the notice referred to in Section 10(a) above that an
Event of Default has occurred and is continuing, all amounts and Proceeds
(including instruments) received by such Grantor in respect of the Accounts
shall be received in trust for the benefit of the Administrative Agent
hereunder, shall be segregated from other funds of such Grantor, and shall
promptly be paid over to the Administrative Agent in the same form as so
received (with any necessary indorsement) to be held as Collateral.  No Grantor shall adjust, settle, or
compromise the amount or payment of any Account, nor release wholly or partly
any account debtor or obligor thereof, nor allow any credit or discount thereon
other than in the ordinary course of business and consistent with past
practices.

 

Section 11.                      Application
of Collateral.  The proceeds of any
sale, or other realization (other than that received from a sale or other
realization permitted by the Senior Credit Agreement) upon all or any part of
the Collateral pledged by any Grantor shall be applied by the Administrative
Agent as set forth in Section 7.06 of the Credit Agreement.

 

Section 12.                      Administrative
Agent as Attorney-in-Fact for Grantor. 
Each Grantor hereby constitutes and irrevocably appoints the
Administrative Agent, acting for and on behalf of itself and the Secured
Parties and each successor or assign of the Administrative Agent and the
Secured Parties, the true and lawful attorney-in-fact of such Grantor, with
full power and authority in the place and stead of such Grantor and in the name
of such Grantor, the Administrative Agent or otherwise to, following the
occurrence and during the continuation of an Event of Default, take any action
and execute any instrument at the written direction of the Secured Parties and
enforce all rights, interests and remedies of such Grantor with respect to the
Collateral, including the right:

 

13

 

(a)                                  to
ask, require, demand, receive and give acquittance for any and all moneys and
claims for moneys due and to become due under or arising out of the any of the
other Collateral, including without limitation, any Insurance Contracts;

 

(b)                                 to
elect remedies thereunder and to endorse any checks or other instruments or
orders in connection therewith;

 

(c)                                  to
file any claims or take any action or institute any proceedings in connection
therewith which the Administrative Agent may deem to be necessary or advisable;

 

(d)                                 to
pay, settle or compromise all bills and claims which may be or become liens or
security interests against any or all of the Collateral, or any part thereof,
unless a bond or other security satisfactory to the Administrative Agent has
been provided; and

 

(e)                                 upon
foreclosure, to do any and every act which any Grantor may do on its behalf
with respect to the Collateral or any part thereof and to exercise any or all
of such Grantor’s rights and remedies under any or all of the Collateral;

 

provided, however,
that the Administrative Agent shall not exercise any such rights except upon
the occurrence and continuation of an Event of Default.  This power of attorney is
a power coupled with an interest and shall be irrevocable.

 

Section 13.                      Administrative
Agent May Perform.  The
Administrative Agent may from time-to-time perform any act which any Grantor
has agreed hereunder to perform and which such Grantor shall fail to perform
after being requested in writing so to perform (it being understood that no
such request need be given after the occurrence and during the continuance of
any Event of Default and after notice thereof by the Administrative Agent to
any Grantor) and the Administrative Agent may from time-to-time take any other
action which the Administrative Agent deems necessary for the maintenance,
preservation or protection of any of the Collateral or of its security interest
therein, and the reasonable expenses of the Administrative Agent incurred in
connection therewith shall be part of the Secured Obligations and shall be
secured hereby.

 

Section 14.                      Administrative
Agent Has No Duty.  The powers
conferred on the Administrative Agent hereunder are solely to protect its
interest in the Collateral and shall not impose any duty on it to exercise any
such powers.  Except for reasonable care
of any Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Administrative Agent shall have no duty as to any
Collateral or responsibility for taking any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral.

 

Section 15.                      Reasonable
Care.  The Administrative Agent shall
be deemed to have exercised reasonable care in the custody and preservation of
the Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which the Administrative Agent accords its own
Property.

 

Section 16.                      Payments
Held in Trust.  During the
continuance of an Event of Default, all payments received by any Grantor under
or in connection with any Collateral shall be

 

14

 

received in trust for the
benefit of the Administrative Agent, and shall be segregated from other funds
of such Grantor and shall be forthwith paid over to the Administrative Agent in
the same form as received (with any necessary endorsement).

 

Section 17.                      Miscellaneous.

 

(a)                                  Expenses.  Each Grantor will upon demand pay to the
Administrative Agent for its benefit and the benefit of the Secured Parties the
amount of any reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of its counsel and of any experts, which the Administrative
Agent may incur in connection with (i) the custody, preservation, use, or
operation of, or the sale, collection, or other realization of, any of the
Collateral, (ii) the exercise or enforcement of any of the rights of the
Administrative Agent hereunder, and (iii) the failure by any Grantor to
perform or observe any of the provisions hereof.

 

(b)                                 Amendments;
Etc.  No amendment or waiver of any
provision of this Security Agreement nor consent to any departure by any
Grantor herefrom shall be effective unless the same shall be in writing and
executed by the affected Grantor and the Administrative Agent, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.

 

(c)                                  Addresses
for Notices.  All notices and other
communications provided for hereunder shall be made in the manner and to the
addresses set forth in the Credit Agreement.

 

(d)                                 Continuing
Security Interest; Transfer of Interest. 
This Security Agreement shall create a continuing security interest in
the Collateral and, unless expressly released by the Administrative Agent,
shall (a)  remain in full force and effect until the indefeasible payment
in full in cash of the Secured Obligations, the termination or expiration of
all Commitments, and the termination of the Credit Agreement in writing, (b) be
binding upon each Grantor and its successors, tranferees and assigns, and (c) inure,
together with the rights and remedies of the Administrative Agent hereunder, to
the benefit of and be binding upon, the Administrative Agent, the Lenders and
their respective successors, transferees, and assigns.  Without limiting the generality of the
foregoing clause, when any Lender assigns or otherwise transfers any interest
held by it under the Credit Agreement or other Loan Document to any other
Person pursuant to the terms of the Credit Agreement or such other Loan
Document, that other Person shall thereupon become vested with all the benefits
held by such Lender under this Security Agreement.

 

(e)                                  Severability.  Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Security Agreement.

 

(f)                                    Choice
of Law.  This Security Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of Texas, except to the extent that the validity or perfection of the
security interests hereunder, or remedies hereunder, in respect of any
particular Collateral are governed by the laws of a jurisdiction other than the
state of Texas.

 

15

 

(g)                                 Counterparts.  The parties may execute this Security
Agreement in counterparts, each of which constitutes an original, and all of
which, collectively, constitute only one agreement.  Delivery of an executed counterpart signature
page by facsimile is as effective as executing and delivering this
Security Agreement in the presence of the other parties to this Security
Agreement.  In proving this Security
Agreement, a party must produce or account only for the executed counterpart of
the party to be charged.

 

(h)                                 Headings.  Paragraph headings have been inserted in this
Security Agreement as a matter of convenience for reference only and it is
agreed that such paragraph headings are not a part of this Security Agreement
and shall not be used in the interpretation of any provision of this Security
Agreement.

 

(i)                                     Conflicts.   In the event of any explicit or
implicit conflict between any provision of this Security Agreement and any
provision of the Credit Agreement, the terms of the Senior Credit Agreement
shall be controlling.

 

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

 

(k)                                  Subordination and Intercreditor Agreement.  Reference is made to the Subordination and
Intercreditor Agreement, dated as of March 17, 2008 (as amended, restated,
supplemented or otherwise modified from time to time, the “Subordination and
Intercreditor Agreement”),
among Union Bank of California, N.A., as Senior Agent, and UnionBanCal
Equities, Inc.,  as Subordinated
Agent, and certain other persons, party or that may become party thereto from
time to time.  Notwithstanding
anything herein to the contrary, this Security Agreement, the Liens granted
to the Administrative Agent pursuant to this Security Agreement and the
exercise of any right or remedy by the Administrative Agent or any of the
Lenders hereunder are subject to the provisions of the Subordination and
Intercreditor Agreement.  In the event of
any conflict between the terms of the Subordination and Intercreditor Agreement
and this Security Agreement, the terms of the Subordination and Intercreditor
Agreement shall govern and control.

 

(l)                                     Entire
Agreement.  THIS
SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES.

 

16

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.

 

[SIGNATURE PAGES FOLLOW]

 

17

 

The parties
hereto have caused this Security Agreement to be duly executed as of the date
first above written.

 

	
   

  	
  GRANTORS:

  
	
   

  	
   

  
	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Senior Vice President and Chief Financial 

  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  LADDER
  COMPANIES, INC.

  
	
   

  	
  SQUARE
  ONE ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  CANO
  PETRO OF NEW MEXICO, INC.

  
	
   

  	
  PANTWIST,
  LLC

  
	
   

  	
   

  
	
   

  	
  Each by: 

  	
  /s/ Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O.
  OPERATING COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  W.O.
  PRODUCTION COMPANY, LTD.

  
	
   

  	
  By: WO Energy, Inc., its general
  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Morris B. Smith

  
	
   

  	
   

  	
  Morris B. Smith

  
	
   

  	
   

  	
  Vice President

  
				

 

Signature Page to
Subordinated Security Agreement

 

 

	
   

  	
  ADMINISTRATIVE
  AGENT:

  
	
   

  	
   

  
	
   

  	
  UNIONBANCAL EQUITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/
  Henry Park

  	
   

  
	
   

  	
   

  	
  Henry Park

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tom Thompson

  	
   

  
	
   

  	
   

  	
  Tom Thompson

  
	
   

  	
   

  	
  Senior Vice President

  

 

Signature Page to
Subordinated Security Agreement

 

 

SCHEDULE 1

to Security Agreement

 

GRANTOR INFORMATION

 

	
  Grantor:

  	
  Cano Petroleum, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  3664494

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  77-0635673

  
	
   

  	
   

  
	
  Prior Names:

  	
  Huron Ventures, Inc.

  
	
   

  	
   

  
	
  Grantor:

  	
  Ladder Companies, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Delaware

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  2097505

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  73-1282131

  
	
   

  	
   

  
	
  Prior Names:

  	
  d/b/a Ladder Energy Company

  
	
   

  	
   

  
	
  Grantor:

  	
  Square One Energy, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for

  	
   

  

 

 

	
  Collateral are kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  800262012

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  81-0639886

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  WO Energy, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  113518200

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2303966

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  W.O. Energy of Nevada, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Nevada

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for

  	
   

  
	
  Collateral are kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  C20757-1996-001

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  88-0369151

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
  Grantor:

  	
  W.O. Operating Company, Ltd.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  

 

 

	
  Type of Organization:

  	
  Limited Partnership

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  9373210

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2675224

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  W.O. Production Company, Ltd.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Limited Partnership

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  9295410

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  75-2675222

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  
	
   

  	
   

  
	
  Grantor:

  	
  Cano Petro of New Mexico, Inc.

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Corporation

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  TX 800782069

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  20-8564572

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  

 

 

	
  Grantor:

  	
  Pantwist, LLC

  
	
   

  	
   

  
	
  Sole Jurisdiction of Formation / Filing:

  	
  Texas

  
	
   

  	
   

  
	
  Type of Organization:

  	
  Limited Liability Company

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  801 Cherry Street, Suite 3200

  
	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  
	
  Organizational Number:

  	
  TX 800646872

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
  20-4766962

  
	
   

  	
   

  
	
  Prior Names:

  	
  None.

  

 

 

Annex 1 to the

Security Agreement

 

SUPPLEMENT
NO. 
[            ]  dated as of
[               ]
(the “Supplement”), to the Security Agreement dated as of March     ,
2008 (as amended, supplemented or otherwise modified from time to time, the “Security
Agreement”), by and among CANO PETROLEUM, INC., a Delaware corporation (“Borrower”),
each subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and UnionBanCal Equities, Inc., as
administrative agent (the “Administrative Agent”) for the ratable
benefit of itself, the Lenders (as defined below) (together with the Lenders,
individually a “Secured Party”, and collectively, the “Secured
Parties”).

 

A.                                   Reference
is made to that certain Subordinated Credit Agreement dated as of March       ,
2008 by and among the Borrower, the lenders party thereto from time to time
(individually, a “Lender”, and collectively, the “Lenders”), and
the Administrative Agent (as it may be amended, restated or otherwise modified
from time to time, the “Credit Agreement”).

 

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

 

C.                                     The
Grantors have entered into the Security Agreement in order to induce the
Lenders to make Advances.  Pursuant to Section 6.15
of the Credit Agreement, each Subsidiary of the Borrower that was not in
existence on the date of the Credit Agreement is required to enter into the
Security Agreement as a Grantor upon becoming a Subsidiary.  Section 17(j) of the Security
Agreement provides that additional Subsidiaries of the Borrower may become
Grantors under the Security Agreement by execution and delivery of an instrument
in the form of this Supplement.  The
undersigned Subsidiary of the Borrower (the “New Grantor”) is executing
this Supplement in accordance with the requirements of the Credit Agreement to
become a Grantor under the Security Agreement.

 

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

 

SECTION 1.                In accordance with
Section 17(j) of the Security Agreement, the New Grantor by its
signature below becomes a Grantor under the Security Agreement with the same
force and effect as if originally named therein as a Grantor and the New
Grantor hereby agrees (a) to all the terms and provisions of the Security
Agreement applicable to it as a Grantor thereunder and (b) represents and
warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof in all material
respects.  In furtherance of the
foregoing, the New Grantor, as security for the payment and performance in full
of the Secured Obligations (as defined in the Security Agreement), does hereby
create and grant to the Administrative Agent, its successors and assigns, for
the benefit of the Secured Parties, their successors and assigns, a continuing
security interest in and lien on all of the New Grantor’s right, title and
interest in and to the Collateral (as defined in the Security Agreement) of the
New Grantor.  Each reference to a “Grantor”
in the Security Agreement shall be deemed to include the New Grantor.  The Security Agreement is hereby incorporated
herein by reference.

 

1

 

SECTION 2.                The New Grantor
represents and warrants to the Administrative Agent that this Supplement has
been duly authorized, executed and delivered by it and constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its
terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium
or similar laws affecting creditors’ rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).

 

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

 

SECTION 4.                The New Grantor
hereby represents and warrants that set forth on Schedule 1 attached
hereto are (a) its sole jurisdiction of formation and type of
organization, (b) the location of all records concerning its Accounts,
General Intangibles, or any other Collateral, (c) its federal tax
identification number and the organizational number, and (d) all names
used by it during the last five years prior to the date of this Supplement.

 

SECTION 5.                Except as
expressly supplemented hereby, the Security Agreement shall remain in full
force and effect.

 

SECTION 6.                THIS SUPPLEMENT
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS.

 

SECTION 7.                In case any one or
more of the provisions contained in this Supplement should be held invalid,
illegal or unenforceable in any respect, neither party hereto shall be required
to comply with such provision for so long as such provision is held to be
invalid, illegal or unenforceable, but the validity, legality and
enforceability of the remaining provisions contained herein and in the Security
Agreement shall not in any way be affected or impaired.  The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 8.                All communications
and notices hereunder shall be in writing and given as provided in the Security
Agreement.  All communications and
notices hereunder to the New Grantor shall be given to it at the address set
forth under its signature hereto.

 

SECTION 9.                The New Grantor
agrees to reimburse the Administrative Agent for its reasonable out-of-pocket
expenses in connection with this Supplement, including the reasonable fees,
other charges and disbursements of counsel for the Administrative Agent.

 

2

 

THIS SUPPLEMENT, THE SECURITY
AGREEMENT AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT AMONG THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

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

 

	
   

  	
  [Name of New
  Grantor],

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [ADMINISTRATIVE AGENT]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
								

 

3

 

Schedule 1

Supplement No.         

to the Security Agreement

 

	
  New Grantor:

  	
  [GRANTOR]

  
	
   

  	
   

  
	
  Jurisdiction of Formation / Filing:

  	
  [STATE]

  
	
   

  	
   

  
	
  Type of Organization:

  	
  [ENTITY TYPE]

  
	
   

  	
   

  
	
  Address where records for Collateral are
  kept:

  	
  [ADDRESS]

  
	
   

  	
  [CITY, STATE ZIP]

  
	
   

  	
   

  
	
  Organizational Number:

  	
   

  
	
   

  	
   

  
	
  Federal Tax Identification Number:

  	
   

  
	
   

  	
   

  
	
  Prior Names:

  	
   

  

 

4

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