Document:

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                                                                     EXHIBIT 4.4

                               FOURTH AMENDMENT TO
                       AMENDED AND RESTATED CLASS B RIGHTS
                                   AGREEMENT

       THIS FOURTH AMENDMENT to the Amended and Restated Class B Rights
Agreement dated April 22, 1992, as amended (as so amended, the "Existing Class B
Agreement"), is dated as of August 22, 2001 and is between TECUMSEH PRODUCTS
COMPANY, a Michigan corporation (the "Company"), and STATE STREET BANK AND TRUST
COMPANY, N.A., as Class A Rights Agent (the "Agent").

       WHEREAS, Section 26 of the Existing Class B Agreement entitles the
Company at any time prior to the Distribution Date (as therein defined) to amend
any provisions of the Existing Class B Agreement and requires the Agent, if
directed by the Company, to execute any such amendment upon the delivery of a
certificate from an appropriate officer of the Company which states that it is
in compliance with Section 26 (a "compliance certificate"); and

       WHEREAS, the Board of Directors of the Company has authorized and
approved the amendments to the Existing Class B Agreement hereafter set forth in
this Fourth Amendment and has directed the execution hereof, and a compliance
certificate concerning this Fourth Amendment has been delivered to the Agent;

       NOW, THEREFORE, in consideration of the foregoing and pursuant to Section
26 of the Existing Class B Agreement, the parties hereby agree as follows:

       1. Amendment of Definition of "Acquiring Person." The definition of
"Acquiring Person" in Section 1 of the Existing Class B Agreement is hereby
amended to read in its entirety as follows:

              "Acquiring Person" shall mean any Person who or which shall be the
       Beneficial Owner of 10% or more of the shares of Class B Stock then
       outstanding, but shall not include:

                  (i) the Company;

                  (ii) any Subsidiary of the Company;

                  (iii) any employee benefit plan of the Company or of any
              Subsidiary of the Company or any trustee or fiduciary with respect
              to any such plan acting in such capacity;

                  (iv) any Grandfathered Person, unless such Grandfathered
              Person after April 22, 1992 becomes the Beneficial Owner of more
              than the Grandfathered Percentage of the Class B Stock then
              outstanding;

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                  (v) any Person who or which becomes the Beneficial Owner of
              10% (or, if applicable, the Grandfathered Percentage) or more of
              the shares of Class B Stock then outstanding as a result of a
              reduction in the number of shares of Class B Stock outstanding due
              to the repurchase of shares of Class B Stock by the Company unless
              and until such Person, after becoming aware that such Person has
              become the Beneficial Owner of 10% (or, if applicable, the
              Grandfathered Percentage) or more of the then outstanding shares
              of Class B Stock, acquires beneficial ownership of additional
              shares of Class B Stock representing 1% or more of the shares of
              Class B Stock then outstanding; or

                  (vi) any such Person who or which has reported or is permitted
              to report such ownership (but less than 20%) on Schedule 13G under
              the Exchange Act (or any comparable or successor report), or on
              Schedule 13D under the Exchange Act (or any comparable or
              successor report) which Schedule 13D does not state any intention
              to or reserve the right to control or influence the management or
              policies of the Company or engage in any of the actions specified
              in Item 4 of such Schedule (other than the disposition of the
              Class B Stock). Within ten Business Days after being requested by
              the Company, such Person shall certify to the Company that such
              Person acquired beneficial ownership of shares of Class B Stock
              representing 10% or more of the outstanding Class B Stock
              inadvertently or without knowledge of the terms of the Class B
              Rights. If such Person, having been requested to so certify as
              aforesaid, fails to do so within ten Business Days, then such
              Person shall become an Acquiring Person immediately after such ten
              Business Day period. If such Person, after so certifying, acquires
              beneficial ownership of additional shares of Class B Stock while
              the Beneficial Owner of 10% or more of the shares of Class B Stock
              then outstanding, then such Person shall become an Acquiring
              Person immediately following the date on which the Company's Board
              of Directors shall adopt a resolution to that effect.

       2. Amendment of Section 11(a)(ii)(B). Section 11(a)(2)(B) of the Existing
Class B Agreement is hereby amended to read in its entirety as follows:

           (B) any Acquiring Person shall become the Beneficial Owner of 15%
       (or, if such Person is a Grandfathered Person, the greater of the
       Grandfathered Percentage or 15%) or more of the shares of Class B Stock
       then outstanding, other than pursuant to any transaction set forth in
       Section 13(a) hereof; or

       3. Amendment of Section 11(d). The first sentence of Section 11(d) of the
Existing Class B Agreement is hereby amended to read as follows:

           (d) For the purpose of any computation hereunder, the "current market
       price" per share of Class B Stock on any date shall be deemed to be the

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       arithmetic mean of the average of the daily closing prices per share of
       the Class A Stock and the average of the daily closing prices per share
       of the Class B Stock for the ten consecutive Trading Days (as such term
       is hereinafter defined) immediately prior to such date; provided,
       however, if prior to the expiration of such requisite ten Trading Day
       period the issuer announces either (A) a dividend or distribution on such
       shares payable in such shares or securities convertible into such shares
       (other than the Class B Rights or rights issued under the Company's Class
       A Rights Agreement dated as of April 22, 1992, as amended from time to
       time), or (B) any subdivision, combination or reclassification of such
       shares, then, following the ex-dividend date for such dividend or the
       record date for such subdivision, as the case may be, the "current market
       price" shall be properly adjusted to take into account such event.

       4. Amendment of Summary of Rights. Exhibit B to the Existing Class B
Agreement (Summary of Rights to Purchase Class B Stock) is hereby amended to
read in its entirety as set forth in Annex A to this Fourth Amendment.

       5. Affirmation. Except as specifically amended herein, the Existing Class
B Agreement shall remain in full force and effect as existing prior to the date
hereof.

       IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment
to be duly executed, all as of the date first above written.

TECUMSEH PRODUCTS                            STATE STREET BANK AND TRUST
COMPANY                                      COMPANY, N.A.

By:      /s/ John H. Foss                    By:  /s/ Tyler Haynes
         ---------------------------              ----------------
         John H. Foss
Its:     Vice President, Treasurer and       Its: Managing Director
         Chief Financial Officer

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                                     ANNEX A

                                                                       EXHIBIT B

                   SUMMARY OF RIGHTS TO PURCHASE CLASS B STOCK

       Pursuant to a Class B Rights Agreement amended and restated in 1992,
Tecumseh Products Company (the "Company") distributed one Class B Right for each
share of Class B Stock issued by the Company. Each Class B Right entitles the
registered holder, subject to the terms of the Class B Rights Agreement, to
purchase from the Company one share of Class B Stock at a specified purchase
price.

       The Class B Rights are issued pursuant to an Amended and Restated Class B
Rights Agreement dated as of April 22, 1992, as amended, between the Company and
State Street Bank and Trust Company, N.A., as successor Class B Rights Agent.
This summary does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Class B Rights Agreement, including its
definition of certain terms. The Class B Rights Agreement is incorporated in
this summary by reference. Copies of the Class B Rights Agreement and all
amendments to that Agreement have been filed with the Securities and Exchange
Commission and are available free of charge from the Company.

       Each Class B Right entitles the registered holder, subject to the terms
of the Class B Rights Agreement, to purchase from the Company one share of Class
B Stock at a purchase price of $180.00 per share, subject to adjustment (the
"Purchase Price"). The Purchase Price is payable in cash or by certified or bank
check or money order payable to the order of the Company.

       The Class B Rights currently are attached to all certificates
representing shares of outstanding Class B Stock. Class B Rights will also be
attached to all certificates representing shares of Class B Stock issued in the
future until the Distribution Date. Initially, no separate Class B Rights
Certificates will be distributed. Until the Distribution Date, the Class B
Rights will be evidenced by the certificates representing Class B Stock and will
be transferred with and only with those certificates. The Class B Rights are not
exercisable until the Distribution Date and will expire at the close of business
on August 25, 2009, unless earlier redeemed by the Company as described below.

       The Class B Rights will separate from the Class B Stock on the
Distribution Date. The Distribution Date will occur upon the earlier of (i) ten
business days following a public announcement (the "Stock Acquisition Date")
that a person or group of persons (an "Acquiring Person") has acquired 10% (or,
if such person or group is a "Grandfathered Person," the "Grandfathered
Percentage") or more of

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the then outstanding shares of Class B Stock other than as a result of
repurchases of Class B Stock by the Company or certain inadvertent actions by
institutional or certain other shareholders, or (ii) ten business days (or a
later date determined by the Board of Directors) following the commencement,
without Board approval, of a tender or exchange offer that would result in a
person or group owning 10% or more of the then outstanding shares of Class B
Stock. Any person or group that owned 5% or more of the Class B Stock
outstanding on April 22, 1992 (a "Grandfathered Person") will not be an
Acquiring Person unless the percentage of outstanding shares of Class B Stock
owned by that Grandfathered Person subsequently exceeds twice the percentage
owned on April 22, 1992, plus an additional 1% (the "Grandfathered Percentage").
An announcement by the Company will only give rise to the Stock Acquisition Date
if the Company expressly states in the announcement that it will do so.

       After the Distribution Date, Class B Rights Certificates will be mailed
to holders of record of Class B Stock on the Distribution Date. From that point
on, the separate Class B Rights Certificates alone will represent the Class B
Rights.

       If (i) the Company survives a merger with an Acquiring Person and shares
of Class B Stock remain outstanding, or (ii) any Acquiring Person becomes the
owner of 15% (or, if such person is a Grandfathered Person, the greater of 15%
or the Grandfathered Percentage) or more of the outstanding shares of Class B
Stock (other than pursuant to a transaction described in the next paragraph), or
(iii) an Acquiring Person engages in one or more "self-dealing" transactions as
set forth in the Class B Rights Agreement, or (iv) the Company is a party to any
transaction which results in an Acquiring Person's ownership interest being
increased by more than 1% (other than a transaction described in the next
paragraph), then, in each such case, each Class B Right will thereafter
represent the right to receive, upon exercise, shares of Class B Stock (or, in
certain circumstances, shares of Class B Stock and cash, property, or other
securities of the Company) having a value (based on the current market price)
equal to two times the Purchase Price of the Class B Right. However, all Class B
Rights that are owned by any Acquiring Person will be null and void.

       If, at any time following the Stock Acquisition Date, (i) the Company
merges into any other person, (ii) any person merges into the Company and in
connection with the merger all or part of the Class B Stock is converted or
exchanged for cash or property, or securities of any other person, or (iii) 50%
or more of the Company's assets or earning power is sold or transferred, each
holder of a Class B Right (except Class B Rights which previously have been
voided as

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described above) will have the right to receive, upon exercise, common stock of
the Acquiring Person having a value (based on the current market price) equal to
two times the Purchase Price of the Class B Right.

       For purposes of the calculations described above, the current market
price of the Class B Stock will be considered to be the average of the daily
closing prices of the Class A Stock and the Class B Stock over a period of ten
consecutive trading days.

       The Purchase Price payable, and the number of shares of Class B Stock
issuable, upon exercise of the Class B Rights are subject to adjustment from
time to time to prevent dilution. Those circumstances are set forth in detail in
the Class B Rights Agreement. With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments amount to at least
1% of the Purchase Price. The Company is not required to issue fractional
shares. Instead, it may make a cash adjustment based on the market price of the
Class B Stock prior to the date of exercise.

       For ten business days following the Stock Acquisition Date, the Company's
Board of Directors may redeem all the Class B Rights at a price of one-fourth of
one cent ($.0025) per Class B Right, subject to adjustment (the "Redemption
Price"). The Redemption Price is payable, at the election of the Board, in cash
or shares of Class B Stock. Immediately upon action of the Board of Directors
ordering the redemption of the Class B Rights, the Class B Rights will terminate
and the holders of Class B Rights will only have a right to receive the
Redemption Price.

       Until a Class B Right is exercised, the holder of the Right will have no
rights as a shareholder of the Company with respect to that Right (but the
holder will have rights as a shareholder with respect to the Class B Stock that
the Class B Right is attached to). The distribution of the Class B Rights was
not taxable to shareholders or to the Company. However, Class B shareholders
may, depending on the circumstances, recognize taxable income if the Class B
Rights become exercisable.

       Any of the provisions of the Class B Rights Agreement may be amended at
any time prior to the Distribution Date. After the Distribution Date, the Class
B Rights Agreement may be amended to cure an ambiguity, defect, or
inconsistency, to make changes that do not adversely affect the interests of
holders of Class B Rights Certificates (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period. However, no amendment may

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<PAGE>   7

be made to lengthen the time period governing redemption when the Class B Rights
are not redeemable or to lengthen any other time period unless it is for the
purpose of protecting, enhancing, or clarifying the rights of and/or the
benefits to the holders of Class B Rights.

                                      -4-<PAGE>   1
                                                                   EXHIBIT 10.14

                                CREDIT AGREEMENT

                  THIS CREDIT AGREEMENT is made effective as of the 29th day of
June, 2001, by and between CONTANGO OIL & GAS COMPANY, a Delaware corporation
(the "Borrower"), and GUARANTY BANK, FSB, a federal savings bank (the "Lender").

                                   WITNESSETH:

                  In consideration of the mutual covenants and agreements herein
contained, the Borrower and the Lender hereby agree as follows:

                                    ARTICLE I
                         DEFINITIONS AND INTERPRETATION

                  I.1 Terms Defined Above. As used in this Credit Agreement, the
terms "Borrower" and "Lender" shall have the meaning assigned to them
hereinabove.

                  I.2 Additional Defined Terms. As used in this Credit
Agreement, each of the following terms shall have the meaning assigned thereto
in this Section, unless the context otherwise requires:

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

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

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

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

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                  "Applicable Rate" shall mean that interest rate as to that
         portion of the Loan Balance bearing interest at the Floating Rate and
         the LIBOR Base Rate as to each Euro-Dollar Amount.

                  "Assessment" shall mean any impositions and assessments
         imposed on Borrower with respect to any Euro-Dollar Amount for
         insurance or other fees, assessments and surcharges.

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

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

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

                  "Borrowing Base" shall mean, at any time, the amount
         determined by the Lender in accordance with Section 2.6 and then in
         effect.

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

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

                           (b) specify the amount requested or prepaid and the
                  date of the borrowing or prepayment (which shall be a Business
                  Day); and

                           (c) be delivered to the Lender no later than 11:00
                  a.m., Central Standard or Daylight Savings Time, as the case
                  may be, on the Business Day of the requested borrowing or
                  prepayment.

                  "Business Day" shall mean any banking day of the Lender as
         defined in Section 4.104(a)(3) of the Texas Business and Commerce Code.

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

                  "Collateral" shall mean (a) the Mortgaged Properties (b)
         Collateral as defined in the Security Agreement and (c) all other
         collateral of whatever nature purported to be subject to the lien of
         the Security Instruments.

                  "Commitment" shall mean the obligation of the Lender, subject
         to applicable provisions of this Agreement, to make Loans to or for the
         benefit of the Borrower pursuant to Section 2.1.

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<PAGE>   3

                  "Commitment Fee" shall mean each fee payable to the Lender by
         the Borrower pursuant to Section 2.9.

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

                  "Commitment Termination Date" shall mean three years following
         the Closing Date.

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

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

                  "Compliance Certificate" shall mean each certificate,
         substantially in the form attached hereto as Exhibit III, executed by a
         Responsible Officer of the Borrower and furnished to the Lender from
         time to time in accordance with Sections 5.2 and 5.3.

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

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

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

                  "Debt Service" shall mean an amount equal to the actual
         interest payments for the quarter, plus 12.5% of the outstanding
         balance of this facility at the end of the quarter.

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

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<PAGE>   4

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

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

                  "EBITDAX" shall mean, for any period, net income for such
         period plus interest expense, federal and state income taxes,
         depreciation, amortization, and other non-cash expenses and losses,
         exploration expenses (which otherwise would be capitalized under full
         cost accounting method) excluding any non-cash gains and less preferred
         cash dividends paid.

                  "Engineering Fee" shall mean each fee payable to the Lender by
         the Borrower pursuant to Section 2.10.

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

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

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

                  "Euro-Dollar Amount" shall mean each portion of the Loan
         Balance bearing interest at the applicable LIBOR Base Rate pursuant to
         a Euro-Dollar Rate Request. There shall be no more than four (4)
         portions of the Loan Balance bearing interest at an applicable LIBOR
         Base Rate outstanding at any time and each such portion shall be in an
         amount not less than $100,000.

                  "Euro-Dollar Business Day" shall mean any day on which
         commercial banks are open for domestic and international business
         (including dealings in U.S. Dollar deposits) in New York City and
         Dallas, Texas.

                  "Euro-Dollar Rate Request" shall mean Borrower's telephonic
         notice (to be promptly confirmed in a written notice which must be
         received by Lender before such Euro-Dollar Rate

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<PAGE>   5
         Request will be put into effect by Lender), to be received by Lender by
         twelve o'clock noon (Dallas, Texas time) three (3) Euro-Dollar Business
         Days prior to the Euro-Dollar Business Day specified in the Euro-Dollar
         Rate Request for the commencement of the Interest Period, of (a) its
         intention to have (1) all or any portion of the Loan Balance which is
         not then the subject of an Interest Period (other than an Interest
         Period which is terminating on such Euro-Dollar Business Day), and /or
         (2) all or any portion of any advance of Loan proceeds which is to be
         made on such Euro-Dollar Business Day, bear interest at the LIBOR Base
         Rate, and (b) the Interest Period desired by Borrower in respect of the
         amount specified. There shall be no more than four (4) such requests
         for an election outstanding at any time.

                  "Euro-Dollar Rate Request Amount" shall mean the amount, to be
         specified by Borrower in each Euro-Dollar Rate Request and stated in
         increments of $100,000, which Borrower desires to bear interest at the
         LIBOR Base Rate, provided, however, in no event shall any such amount
         be less than $100,000 in each instance.

                  "Euro-Dollar Reference Source" shall mean the display for
         Euro-Dollar rates provided on The Bloomberg (a data service), viewed by
         accessing Page One (1) of the global deposits segment of money-market
         rates (or such other page as may replace Page One [1] for the purposes
         of displaying Euro-Dollar rates); or, at the option of Lender the
         display for Euro-Dollar rates on such other service selected from time
         to time by Lender and determined by Lender to be comparable to The
         Bloomberg, which other service may include Reuters Monitor Money Rates
         Service.

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

                  "Facility Fee" shall mean the fee payable to the Lender by the
         Borrower pursuant to Section 2.11.

                  "Final Maturity Date" shall mean the date which is three years
         following the Closing Date or if such date is not a Business Day it
         shall be the next Business Day.

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

                  "Floating Rate" shall mean an interest rate per annum equal to
         the Base Rate from time to time in effect plus one-fourth percent
         (1/4%), but in no event exceeding the Highest Lawful Rate.

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

                  "Governmental Authority" shall mean any nation, country,
         commonwealth, territory, government, state, county, parish,
         municipality, or other political subdivision and any entity

                                      -5-
<PAGE>   6
         exercising executive, legislative, judicial, regulatory, or
         administrative functions of or pertaining to government.

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

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

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

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

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

                  "Interest Period" shall mean the period during which interest
         at the LIBOR Base Rate, determined as provided in this Agreement, shall
         be applicable to the applicable Euro-Dollar Rate Request Amount;
         provided, however, that each such period shall be either thirty (30),
         sixty (60) or ninety (90) days, which shall be measured from the date
         specified by Borrower in each Euro-Dollar Rate Request for the
         commencement of the computation of interest at the LIBOR Base Rate, to
         the numerically corresponding day in the calendar month in which such
         period terminates (or, if there be no numerical correspondent in such
         month, or if the date selected by Borrower for such commencement is the
         last Euro-Dollar Business Day of a calendar month, then the last
         Euro-Dollar Business Day of the calendar month in

                                      -6-
<PAGE>   7
         which such period terminates, or, if the numerically corresponding day
         is not a Euro-Dollar Business Day, then the next succeeding Euro-Dollar
         Business Day, unless such next succeeding Euro-Dollar Business Day
         enters a new calendar month, in which case such period shall end on the
         next preceding Euro-Dollar Business Day); and in no event shall any
         such period be elected which extends beyond the Final Maturity Date.

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

                  "LIBOR Base Rate" shall mean with respect to any Euro-Dollar
         Amount, the rate per annum (expressed as a percentage) determined by
         Lender to be equal to the sum of (a) the quotient of the LIBOR Rate for
         the applicable Euro-Dollar Amount and the applicable Interest Period,
         divided by (1 minus the applicable Reserve Requirement), rounded up to
         the nearest 1/100 of 1%, plus (b) the applicable Assessments, plus (c)
         two percent (2%).

                  "LIBOR Rate" shall mean the rate determined by Lender (rounded
         upward, if necessary, to the nearest 1/16 of 1%) equal to the offered
         rate (and not the bid rate) for deposits in U.S. Dollars of amounts
         comparable to the Euro-Dollar Rate Request Amount for the same period
         of time as the Interest Period selected by Borrower in the Euro-Dollar
         Rate Request, as set forth on the Euro-Dollar Reference Source at
         approximately 10:00 a.m. (Dallas, Texas time) on the first day of the
         applicable Interest Period.

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

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

                  "Loan" shall mean any loan made by the Lender to or for the
         benefit of the Borrower pursuant to this Agreement.

                  "Loan Balance" shall mean, at any time, the outstanding
         principal balance of the Note at such time.

                  "Loan Documents" shall mean this Agreement, the Note, the
         Security Instruments, and all other documents and instruments now or
         hereafter delivered pursuant to the terms of or in connection with this
         Agreement, the Note, or the Security Instruments, and all renewals

                                      -7-
<PAGE>   8
         and extensions of, amendments and supplements to, and restatements of,
         any or all of the foregoing from time to time in effect.

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

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

                  "Note" shall mean the promissory note of the Borrower, in the
         form attached hereto as Exhibit I, together with all renewals,
         extensions for any period, increases, and rearrangements thereof.

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

                  "Oil and Gas Properties" shall mean fee, leasehold, or other
         interests in or under mineral estates or oil, gas, and other liquid or
         gaseous hydrocarbon leases with respect to Properties situated in the
         United States or offshore from any State of the United States,
         including, without limitation, overriding royalty and royalty
         interests, leasehold estate interests, net profits interests,
         production payment interests, and mineral fee interests, together with
         contracts executed in connection therewith and all tenements,
         hereditaments, appurtenances and Properties appertaining, belonging,
         affixed, or incidental thereto.

                  "Permitted Liens" shall mean (a) Liens for taxes, assessments,
         or other governmental charges or levies not yet due or which (if
         foreclosure, distraint, sale, or other similar proceedings shall not
         have been initiated) are being contested in good faith by appropriate
         proceedings, and such reserve as may be required by GAAP shall have
         been made therefor, (b) Liens in connection with workers' compensation,
         unemployment insurance or other social security (other than Liens
         created by Section 4068 of ERISA), old-age pension, or public liability
         obligations which are not yet due or which are being contested in good
         faith by appropriate proceedings, if such reserve as may be required by
         GAAP shall have been made therefor, (c) Liens in favor of vendors,
         carriers, warehousemen, repairmen, mechanics, workmen, materialmen,
         construction, or similar Liens arising by operation of law in the
         ordinary course of business in respect of obligations which are not yet
         due or which are being contested in good faith by appropriate
         proceedings, if such reserve as may be required by GAAP shall have been
         made therefor, (d) Liens in favor of operators and non-operators under
         joint operating agreements or similar contractual arrangements arising
         in the ordinary course of the business of the Borrower to secure
         amounts owing, which amounts are not yet due or are being contested in
         good faith by appropriate proceedings, if such reserve as may be
         required by GAAP shall have been made therefor, (e) Liens under
         production sales agreements, division orders, operating agreements, and
         other agreements customary in the oil

                                      -8-
<PAGE>   9
         and gas business for processing, producing, and selling hydrocarbons
         securing obligations not constituting Indebtedness and provided that
         such Liens do not secure obligations to deliver hydrocarbons at some
         future date without receiving full payment therefor within 90 days of
         delivery, (f) easements, rights of way, restrictions, and other similar
         encumbrances, and minor defects in the chain of title which are
         customarily accepted in the oil and gas financing industry, none of
         which interfere with the ordinary conduct of the business of the
         Borrower or materially detract from the value or use of the Property to
         which they apply, and (g) Liens in favor of the Lender and other Liens
         expressly permitted under the Security Instruments.

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

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

                  "Principal Office" shall mean the principal office of the
         Lender in Houston, Texas, presently located at 333 Clay Street, Suite
         4430, Houston, Texas 77002.

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

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

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

                  "Regulation" shall mean with respect to charging and
         collecting of interest at the LIBOR Base Rate, any United States
         federal, state or foreign laws, treaties, rules or regulations whether
         now in effect or hereinafter enacted or promulgated (including
         Regulation D) or any interpretations, directives or requests applying
         to a class of depository institutions including Lender under any United
         States federal, state or foreign laws or regulations (whether or not
         having the force of law) by any court or governmental or monetary
         authority charged with the interpretation or administration thereof,
         excluding any change the effect of which is determined by Lender to be
         reflected in a change in the LIBOR Base Rate.

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

                                      -9-
<PAGE>   10

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

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

                  "Reserve Report" shall mean each report delivered to the
         Lender pursuant to Section 5.4.

                  "Reserve Requirement" shall mean the average maximum rate a
         which reserves (including any marginal, supplemental or emergency
         reserves) are required to be maintained under Regulation D by member
         banks of the Federal Reserve System in New York City with deposits
         exceeding one billion U.S. Dollars against "Eurocurrency Liabilities",
         as such quoted term is used in Regulation D. Without limiting the
         effect of the foregoing, the Reserve Requirement shall reflect any
         other reserves required to be maintained by such member banks by reason
         of any regulatory change against (a) any category of liabilities which
         includes deposits by reference to which the LIBOR Rate is to be
         determined as provided in this Agreement, or (b) any category of
         extensions of credit or other assets which includes loans the interest
         rate on which is determined on the basis of rates referred to in the
         definition of "LIBOR Rate" set forth above.

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

                  "Security Instruments" shall mean the security instruments
         executed and delivered in satisfaction of the condition set forth in
         Section 3.3, and all other documents and instruments at any time
         executed as security for all or any portion of the Obligations, as such
         instruments may be amended, restated, or supplemented from time to
         time.

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

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

                  "Tangible Net Worth" shall mean (a) total assets, as would be
         reflected on a balance sheet of the Borrower prepared in accordance
         with GAAP, exclusive of Intellectual Property,

                                      -10-
<PAGE>   11
         experimental or organization expenses, franchises, licenses, permits,
         and other intangible assets, treasury stock, unamortized underwriters'
         debt discount and expenses, and goodwill minus (b) total liabilities,
         as would be reflected on a balance sheet of the Borrower prepared in
         accordance with GAAP.

                  "Total Funded Debt" shall mean for any period, the debt owed
         to the Lender.

                  "Total Liabilities" shall mean all liabilities which would, in
         accordance with GAAP, be included as liabilities on a balance sheet of
         the Borrower as of the date of calculation.

                  "Transferee" shall mean any Person to which the Lender has
         sold, assigned, transferred, or granted a participation in any of the
         Obligations, as authorized pursuant to Section 8.1, and any Person
         acquiring, by purchase, assignment, transfer, or participation, from
         any such purchaser, assignee, transferee, or participant, any part of
         such Obligations.

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

                  I.3 Undefined Financial Accounting Terms. Undefined financial
accounting terms used in this Agreement shall be defined according to GAAP at
the time in effect.

                  I.4 References. References in this Agreement to Exhibit,
Article, or Section numbers shall be to Exhibits, Articles, or Sections of this
Agreement, unless expressly stated to the contrary. References in this Agreement
to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof,"
"hereunder" and words of similar import shall be to this Agreement in its
entirety and not only to the particular Exhibit, Article, or Section in which
such reference appears.

                  I.5 Articles and Sections. This Agreement, for convenience
only, has been divided into Articles and Sections; and it is understood that the
rights and other legal relations of the parties hereto shall be determined from
this instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.

                  I.6 Number and Gender. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Definitions of terms defined in the singular or plural shall be equally
applicable to the plural or singular, as the case may be, unless otherwise
indicated. Words denoting sex shall be construed to include the masculine,
feminine and neuter, when such construction is appropriate; and specific
enumeration shall not exclude the general but shall be construed as cumulative.

                  I.7 Incorporation of Exhibits. The Exhibits attached to this
Agreement are incorporated herein and shall be considered a part of this
Agreement for all purposes.

                                   ARTICLE II
                                TERMS OF FACILITY

                  II.1 Reducing Revolving Line of Credit. (a) Upon the terms and
conditions (including, without limitation, the right of the Lender to decline to
make any Loan so long as any Default or Event of Default exists) and relying on
the representations and warranties contained in this Agreement, the Lender
agrees, during the Commitment Period, to make Loans, in immediately available
funds at the Principal Office, to or for the benefit of the Borrower, from time
to time on any Business Day designated by the Borrower following receipt by the
Lender of a Borrowing Request; provided, however, no Loan shall exceed the then
existing Available Commitment.

                                      -11-
<PAGE>   12

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

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

                  II.2 Use of Loan Proceeds. Proceeds of all Loans shall be used
solely to refinance existing bank debt and for funding development, exploration
and acquisition activities and other general corporate purposes.

                  II.3 Interest. (a) As herein provided, the Loan Balance under
this Agreement shall bear interest prior to maturity at the Floating Rate and/or
one or more applicable LIBOR Base Rates (as elected in the manner specified in
this Agreement), provided that in no event shall the Applicable Rate exceed the
Highest Lawful Rate. The foregoing notwithstanding, if at any time the
Applicable Rate exceeds the Highest Lawful Rate, the rate of interest payable
under the Note shall be limited to the Highest Lawful Rate, but any subsequent
reductions in the Floating Rate or the LIBOR Base Rate, as the case may be,
shall not reduce the Applicable Rate below the Highest Lawful Rate until the
total amount of interest accrued on the Note equals the total amount of interest
which would have accrued at the Applicable Rate if the Applicable Rate had at
all times been in effect. Interest prior to maturity on the Note shall be
calculated at a daily rate based on a year of 360 days, with the daily rate so
determined being applied for the actual number of days elapsed, provided that in
no event shall the amount or rate of interest payable hereunder exceed that
calculated under or constituting the Highest Lawful Rate. Interest on the
Floating Rate Loan Balance shall be payable monthly on the last day of each
month beginning the first day of August, 2001, and the remaining Loan Balance
and all accrued and unpaid interest shall be due and payable in full on the
Final Maturity Date and for LIBOR Rate Loans at the end of the applicable
Interest Period. Any Loan Balance owing hereunder may be paid in full or in part
prior to maturity without penalty or premium, except as otherwise provided in
Sections 2.3 (i) and 2.8 as to any Loan Balance bearing interest at the LIBOR
Base Rate.

                  (b) Borrower shall have the option, subject to the terms and
conditions hereinafter set forth, of paying interest on the Loan Balance or
portions thereof at the Base Rate or the LIBOR Base Rate as herein provided.
Except as to that portion or portions of the Loan Balance bearing interest at
the LIBOR Base Rate, the Loan Balance, from time to time outstanding, shall bear
interest at the Base Rate. If Borrower desires the application of the LIBOR Base
Rate, it shall submit a Euro-Dollar Rate Request to Lender. Such Euro-Dollar
Rate Request shall be irrevocable, subject to Borrower's right to convert the
rate of interest payable hereunder with respect to any Euro-Dollar Amount from
the LIBOR Base Rate to the Base Rate as hereinafter provided. In the event that
Borrower fails to submit a Euro-Dollar Rate Request with respect to an existing
Euro-Dollar Amount not later than 12 o'clock Noon (Dallas, Texas time), three
(3) Euro-Dollar Business Days prior to the Euro-Dollar Business Day specified in
the Euro-Dollar Rate Request for the commencement of the applicable Interest
Period, the Euro-Dollar Amount in question shall bear interest, commencing at
the end of such Interest Period, at the Floating Rate.

                  (c) Lender, at its option, may honor a Euro-Dollar Rate
Request which is submitted less than three (3) Euro-Dollar Business Days prior
to the Euro-Dollar Business Day specified in the Euro-Dollar

                                      -12-
<PAGE>   13
Rate Request for the commencement of the applicable Interest Period; provided,
however, Lender is not and shall not thereafter be bound to honor such a
request.

                  (d) Any language to the contrary hereinabove notwithstanding,
there may be no more than four (4) LIBOR Base Rate elections made by Borrower
outstanding at any one time during the terms of the Loan, whether or not any
portion of the Loan Balance is then bearing interest at the Floating Rate.

                  (e) Borrower shall pay to Lender, promptly upon demand, such
amounts as are necessary to compensate Lender for Additional Costs resulting
from any Regulation which (i) subjects Lender to any tax, duty or other charge
with respect to the Loan or the Note, or changes the basis of taxation of any
amounts payable to Lender under the Loan or the Note (other than taxes imposed
on the overall net income of Lender or of its applicable lending office by the
jurisdiction in which Lender's principal office or such applicable lending
office is located), (ii) imposes, modifies or deems applicable any reserve,
special deposit or similar requirements relating to any extensions of credit or
other assets, or any deposits with or other liabilities of Lender, or (iii)
imposes on Lender or on the interbank Euro-dollar market any other condition
affecting the Loan or the Note, or any of such extensions of credit or
liabilities. Lender will notify Borrower of any event which would entitle Lender
to compensation pursuant to this paragraph as promptly as practicable after
Lender obtains knowledge thereof and determines to request such compensation.
For purposes of this paragraph, the term "Lender" shall mean and include Lender,
and at Lender's option, any present and/or future participants in the Loan.

                  (f) Without limiting the effect of the immediately preceding
paragraph, in the event that, by reason of any Regulation, (i) Lender incurs
Additional Costs based on or measured by the amount of (1) a category of
deposits or other liabilities of Lender which includes deposits by reference to
which the LIBOR Rate is determined as provided in the Note, and/or (2) a
category of extensions of credit or other assets of Lender which includes loans
the interest on which is determined on the basis of rates referred to in the
definition of "LIBOR Rate" as set forth above, (ii) Lender becomes subject to
restrictions on the amount of such a category of liabilities or assets which it
may hold, or (iii) if it shall be unlawful or impractical for Lender to make or
maintain the Loan (or any portion thereof) at the LIBOR Base Rate, the Lender's
obligation to make or maintain the Loan (or portions thereof) at the LIBOR Base
Rate (and Borrower's right to request the same) shall be suspended and Lender
shall give notice thereof to Borrower and, upon the giving of such notice,
interest payable hereunder at the LIBOR Base Rate shall be converted to the
Floating Rate, unless Lender may lawfully continue to maintain the Loan (or any
portion thereof) then bearing interest at the LIBOR Base Rate to the end of the
current Interest Period(s), at which time the interest rate shall convert to the
Floating Rate. If subsequently Lender determines that such Regulation has ceased
to be in effect, Lender will so advise Borrower and Borrower may convert the
rate of interest payable hereunder with respect to those portions of the Loan
Balance bearing interest at the Floating Rate to the LIBOR Base Rate by
submitting a Euro-Dollar Rate Request in respect thereof and otherwise complying
with the provisions of the Note with respect thereto. For purposes of this
paragraph, the term "Lender" shall mean and include Lender, and at Lender's
option, any present and/or future participants in the Loan.

                  (g) Determinations by Lender of the existence or effect of any
Regulation on its costs of making or maintaining the Loan, or portions thereof,
at the LIBOR Base Rate, or on amounts receivable by it in respect thereof, and
of the additional amounts required to compensate Lender in respect of Additional
Costs, shall be conclusive, provided that such determinations are made on a
reasonable basis (absent manifest error). For purposes of this paragraph, the
term "Lender" shall mean and include Lender, and at Lender's option, any present
and/or future participants in the Loan.

                  (h) Anything herein to the contrary notwithstanding, if, at
the time of or prior to the determination of the LIBOR Base Rate in respect of
any Euro-Dollar Rate Request Amount as herein provided, Lender determines (which
determination shall be conclusive, provided that such determination is made on a
reasonable basis absent manifest error) that (i) by reason of circumstances
affecting the interbank Euro-dollar

                                      -13-
<PAGE>   14
market generally, adequate and fair means do not or will not exist for
determining the LIBOR Base Rate applicable to an Interest Period, or (ii) the
LIBOR Rate, as determined by Lender, will not accurately reflect the cost to
Lender of making or maintaining the Loan (or any portion thereof) at the LIBOR
Base Rate, then Lender shall give Borrower prompt notice thereof, and the
Euro-Dollar Rate Request Amount in question shall bear interest, or continue to
bear interest, as the case may be, at the Floating Rate. If at any time
subsequent to the giving of such notice Lender determines that because of a
change in circumstances the LIBOR Base Rate is again available to Borrower
hereunder, Lender shall so advise Borrower and Borrower may convert the rate of
interest payable hereunder from the Floating Rate to the LIBOR Base Rate by
submitting a Euro-Dollar Rate Request to Lender and otherwise complying with the
provisions of the Note with respect thereto. For purposes of this paragraph, the
term "Lender" shall mean and include Lender, and at Lender's option, any present
and/or future participants in the Loan.

                  (i) Borrower shall pay to Lender, immediately upon request and
notwithstanding contrary provisions contained in the Loan Documents, such
amounts as shall, in the conclusive judgment of Lender reasonably exercised,
compensate Lender for any loss, cost or expense incurred by it as a result of
(i) any payment or prepayment, under any circumstances whatsoever, of any
portion of the Loan Balance bearing interest at the LIBOR Base Rate on a date
other than the last day of an applicable Interest Period, (ii) the conversion,
for any reason whatsoever, of the rate of interest payable hereunder from the
LIBOR Base Rate to the Floating Rate with respect to any portion of the Loan
Balance then bearing interest at the LIBOR Base Rate on a date other than the
last day of an applicable Interest Period, (iii) the failure of all or a portion
of an advance which was to have borne interest at the LIBOR Base Rate pursuant
to a Euro-Dollar Rate Request to be made under this Agreement, or (iv) the
failure of Borrower to borrow in accordance with a Euro-Dollar Rate Request
submitted by it to Lender, which amounts shall include, without limitation, any
actual loss by the Lender from the above. For purposes of this paragraph, the
term "Lender" shall mean and include Lender, and at Lender's option, any present
and/or future participants in the Loan.

                  (j) Borrower shall have the right, from time to time, to
convert the rate of interest payable hereunder with respect to any portion of
the Loan Balance not then subject to a Euro-Dollar Rate Request, to the Floating
Rate, subject to the terms of this Agreement and provided that, in the case of a
conversion from the LIBOR Base Rate to the Floating Rate, the entire amount of
the Euro-Dollar Amount in question is the subject of the conversion.

                  (k) Any portion of the Loan Balance to which the LIBOR Base
Rate is not or cannot, pursuant to the terms hereof, be applicable shall bear
interest at the Floating Rate.

                  II.4 Outstanding Amounts. The outstanding principal balance of
the Note reflected by the notations by the Lender on its records shall be deemed
rebuttably presumptive evidence of the principal amount owing on the Note. The
liability for payment of principal and interest evidenced by the Note shall be
limited to principal amounts actually advanced and outstanding pursuant to this
Agreement and interest on such amounts calculated in accordance with this
Agreement.

                  II.5 Time, Place, and Method of Payments. All payments
required pursuant to this Agreement or the Note shall be made in lawful money of
the United States of America and in immediately available funds, shall be deemed
received by the Lender on the next Business Day following receipt if such
receipt is after 2:00 p.m., Central Standard or Daylight Savings Time, as the
case may be, on any Business Day, and shall be made at the Principal Office.
Except as provided to the contrary herein, if the due date of any payment
hereunder or under the Note would otherwise fall on a day which is not a
Business Day, such date shall be extended to the next succeeding Business Day,
and interest shall be payable for any principal so extended for the period of
such extension.

                  II.6 Borrowing Base Determinations. (a) The Borrowing Base as
of the Closing Date is acknowledged by the Borrower and the Lender to be
$10,000,000. Commencing on August 1, 2001, and

                                      -14-
<PAGE>   15
continuing thereafter on the first day of each calendar month through the next
Borrowing Base review on December 1, 2001, the amount of the Borrowing Base
shall be reduced by $500,000.

                  (b) The Borrowing Base shall be redetermined semi-annually on
the basis of information supplied by the Borrower in compliance with the
provisions of this Agreement, including, without limitation, Reserve Reports,
and all other information available to the Lender. In addition, the Lender
shall, in the normal course of business following a request of the Borrower,
redetermine the Borrowing Base; provided, however, the Lender shall not be
obligated to respond to more than two such requests during any calendar year,
and in no event shall the Lender be required to redetermine the Borrowing Base
more than once in any three-month period, including, without limitation, each
scheduled semi-annual redetermination provided for above. Notwithstanding the
foregoing, the Lender may at its discretion redetermine the Borrowing Base and
the amount by which the Borrowing Base shall be reduced each calendar month as
set forth in Section 2.6 (a) at any time and from time to time.

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

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

                  II.7 Mandatory Prepayments. If at any time the Loan Balance
exceeds the Borrowing Base then in effect, the Borrower shall, within 30 days of
notice from the Lender of such occurrence, (a) prepay, or make arrangements
acceptable to the Lender for the prepayment of, the amount of such excess for
application on the Loan Balance, (b) provide collateral, of character and value
satisfactory to the Lender in its sole discretion, to secure the Obligations by
the execution and delivery to the Lender of security instruments in form and
substance satisfactory to the Lender, or (c) effect any combination of the
alternatives described in clauses (a) and (b) of this Section 2.7 and acceptable
to the Lender in its sole discretion.

                  II.8 Voluntary Prepayments of Loans. Subject to applicable
provisions of this Agreement, the Borrower shall have the right at any time or
from time to time to prepay Loans and to convert Loans of one type or with one
Interest Period into Loans of another type or with a different Interest Period;
provided, however, that (a) the Borrower shall give the Lender notice of each
such prepayment or conversion of all or any portion of a LIBO Rate Loan no less
than two Business Days prior to prepayment or conversion, (b) any LIBO Rate Loan
may be prepaid or converted only on the last day of an Interest Period for such
Loan, (c) the Borrower shall pay all accrued and unpaid interest on the amounts
prepaid or converted, and (d) no such prepayment or conversion shall serve to
postpone the repayment when due of any Obligation.

                  II.9 Commitment Fee. In addition to interest on the Note as
provided herein and all other fees payable hereunder and to compensate the
Lender for maintaining funds available, the Borrower shall pay to the Lender, in
immediately available funds, on the first day of October, 2001, and on the first
day of each third calendar month thereafter during the Commitment Period, a fee
in the amount of 0.375% per annum, calculated on the basis of a year of 360 and
actual days elapsed (including the first day but excluding the last day), on the
average daily amount of the Available Commitment during the preceding quarterly
period.

                                      -15-
<PAGE>   16

                  II.10 Engineering Fee. In addition to interest on the Note as
provided herein and all other fees payable hereunder and to compensate the
Lender for the costs of evaluating the Mortgaged Properties and reviewing the
Reserve Reports, the Borrower shall pay to the Lender, in immediately available
funds, on the date of each Borrowing Base review, an engineering fee in the
amount of $5,000.

                  II.11 Facility Fee. In addition to interest on the Note as
provided herein and all other fees payable hereunder and to compensate the
Lender for the costs of the extension of credit hereunder, the Borrower shall
pay to the Lender on the Closing Date, in immediately available funds, a
facility fee in the amount of $75,000 and 0.75% of any future increase in the
Borrowing Base.

                  II.12 Loans to Satisfy Obligations of Borrower. The Lender
may, but shall not be obligated to, make Loans for the benefit of the Borrower
and apply proceeds thereof to the satisfaction of any condition, warranty,
representation, or covenant of the Borrower contained in this Agreement or any
other Loan Document. Any such Loan shall be evidenced by the Note and shall be
made at the Floating Rate.

                  II.13 Security Interest in Accounts; Right of Offset. As
security for the payment and performance of the Obligations, the Borrower hereby
transfers, assigns, and pledges to the Lender and grants to the Lender a
security interest in all funds of the Borrower now or hereafter or from time to
time on deposit with the Lender, with such interest of the Lender to be
retransferred, reassigned, and/or released by the Lender, as the case may be, at
the expense of the Borrower upon payment in full and complete performance by the
Borrower of all Obligations. All remedies as secured party or assignee of such
funds shall be exercisable by the Lender upon the occurrence of any Event of
Default, regardless of whether the exercise of any such remedy would result in
any penalty or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity thereof.
Furthermore, the Borrower hereby grants to the Lender the right, exercisable at
such time as any Obligation shall mature, whether by acceleration of maturity or
otherwise, of offset or banker's lien against all funds of the Borrower now or
hereafter or from time to time on deposit with the Lender, regardless of whether
the exercise of any such remedy would result in any penalty or loss of interest
or profit with respect to any withdrawal of funds deposited in a time deposit
account prior to the maturity thereof.

                  II.14 General Provisions Relating to Interest. (a) It is the
intention of the parties hereto to comply strictly with the usury laws of the
State of Texas and the United States of America. In this connection, there shall
never be collected, charged, or received on the sums advanced hereunder interest
in excess of that which would accrue at the Highest Lawful Rate. For purposes of
Chapter 303 of the Texas Finance Code (Vernon's 1999), the Borrower agrees that
the Highest Lawful Rate shall be the "weekly ceiling" as defined in such
Chapter, provided that the Lender may also rely, to the extent permitted by
applicable laws of the State of Texas or the United States of America, on
alternative maximum rates of interest under other laws of the State of Texas or
the United States of America applicable to the Lender, if greater.

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

                  (c) If, under any circumstances, the aggregate amounts paid on
the Note or under this Agreement or any other Loan Document include amounts
which by law are deemed interest and which would exceed the amount permitted if
the Highest Lawful Rate were in effect, the Borrower stipulates that such

                                      -16-
<PAGE>   17

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

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

                  II.15 Letters in Lieu of Transfer Orders. The Lender agrees
that none of the letters in lieu of transfer or division orders provided by the
Borrower pursuant to Section 3.3 or Section 5.7 will be sent to the addressees
thereof prior to the occurrence of an Event of Default, at which time the Lender
may, at its option and in addition to the exercise of any of its other rights
and remedies, send any or all of such letters.

                  II.16 Power of Attorney. The Borrower hereby designates the
Lender as its agent and attorney-in-fact, to act in its name, place, and stead
for the purpose of completing and, upon the occurrence of an Event of Default,
delivering any and all of the letters in lieu of transfer orders and Mortgage,
Deed of Trust, Security Agreement, Assignment of Production and Financing
Statement delivered by the Borrower to the Lender pursuant to Section 3.3 or
Section 5.7, including, without limitation, completing any blanks contained in
such letters and attaching exhibits thereto describing the relevant Collateral.
The Borrower hereby ratifies and confirms all that the Lender shall lawfully do
or cause to be done by virtue of this power of attorney and the rights granted
with respect to such power of attorney. This power of attorney is coupled with
the interests of the Lender in the Collateral, shall commence and be in full
force and effect as of the Closing Date and shall remain in full force and
effect and shall be irrevocable so long as any Obligation remains outstanding or
unpaid or any Commitment exists. The powers conferred on the Lender by this
appointment are solely to protect the interests of the Lender under the Loan
Documents and shall not impose any duty upon the Lender to exercise any such
powers. The Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and shall not be responsible
to the Borrower or any other Person for any act or failure to act with respect
to such powers, except for gross negligence or willful misconduct.

                                   ARTICLE III
                                   CONDITIONS

                  The obligations of the Lender to enter into this Agreement and
to make Loans are subject to the satisfaction of the following conditions
precedent:

                  III.1 Receipt of Loan Documents and Other Items. The Lender
shall have no obligation under this Agreement unless and until all matters
incident to the consummation of the transactions contemplated herein, including,
without limitation, the review by the Lender or its counsel of the title of the
Borrower to its Oil and Gas Properties, shall be satisfactory to the Lender, and
the Lender shall have received, reviewed, and approved the following documents
and other items, appropriately executed when necessary and, where applicable,
acknowledged by one or more authorized officers of the Borrower, all in form and
substance satisfactory to the Lender and dated, where applicable, of even date
herewith or a date prior thereto and acceptable to the Lender:

                                      -17-
<PAGE>   18

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

                  (b) the Note;

                  (c) copies of the Certificate of Incorporation and all
         amendments thereto and the bylaws and all amendments thereto of the
         Borrower, accompanied by a certificate issued by the secretary or an
         assistant secretary of the Borrower to the effect that each such copy
         is correct and complete;

                  (d) certificates of incumbency and signatures of all officers
         of the Borrower who are authorized to execute Loan Documents on behalf
         of the Borrower, each such certificate being executed by the secretary
         or an assistant secretary of the Borrower;

                  (e) copies of corporate resolutions approving the Loan
         Documents and authorizing the transactions contemplated herein and
         therein, duly adopted by the board of directors of the Borrower,
         accompanied by certificates of the secretary or an assistant secretary
         of the Borrower, to the effect that such copies are true and correct
         copies of resolutions duly adopted at a meeting or by unanimous consent
         of the board of directors of the Borrower, and that such resolutions
         constitute all the resolutions adopted with respect to such
         transactions, have not been amended, modified, or revoked in any
         respect, and are in full force and effect as of the date of such
         certificate;

                  (f) unaudited Financial Statements of the Borrower as of March
         31, 2001;

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

                  (h) list of all investments in any entity reflecting the
         manner and amount invested in each entity;

                  (i) engineering reports covering the Oil and Gas Properties;

                  (j) the opinion of Morgan, Lewis and Bockius, L.L.P., counsel
         to the Borrower, in substantially the form attached hereto as Exhibit
         IV, with such changes thereto as may be approved by the Lender;

                  (k) certificates evidencing the insurance coverage required
         pursuant to Section 5.17; and

                  (l) Power of Attorney executed by the Borrower making the
         Lender attorney-in-fact for the matters stated therein; with an exhibit
         containing the legal description of the Guilita and South Coyote
         leases.

                  (m) such other agreements, documents, instruments, opinions,
         certificates, waivers, consents, and evidence as the Lender may
         reasonably request.

                  III.2 Each Loan. In addition to the conditions precedent
stated elsewhere herein, the Lender shall not be obligated to make any Loan
unless:

                                      -18-
<PAGE>   19

                  (a) the Borrower shall have delivered to the Lender a
         Borrowing Request at least the requisite time prior to the requested
         date for the relevant Loan and each statement or certification made in
         such Borrowing Request shall be true and correct in all material
         respects on the requested date for such Loan;

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

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

                  (d) the Lender shall have received, reviewed, and approved
         such additional documents and items as may be requested by the Lender
         with respect to such Loan;

                  (e) no event shall have occurred which, in the reasonable
         opinion of the Lender, could have a Material Adverse Effect;

                  (f) each of the representations and warranties contained in
         this Agreement shall be true and correct in all material respects and
         shall be deemed to be repeated by the Borrower as if made on the
         requested date for such Loan;

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

                  (h) the Lender shall have received the payment of all
         Engineering Fees, Facility Fees, and other fees payable to the Lender
         hereunder and reimbursement from the Borrower, or special legal counsel
         for the Lender shall have received payment from the Borrower, for all
         reasonable fees and expenses of counsel to the Lender for which the
         Borrower is responsible pursuant to applicable provisions of this
         Agreement and for which invoices have been presented as of or prior to
         the date of the relevant Loan; and

                  (i) all matters incident to the consummation of the
         transactions hereby contemplated shall be satisfactory to the Lender.

                  III.3 Mortgage of Oil and Gas Properties. In the event there
is an Event of Default, the following documents will be required.

                  (a) Deed of Trust, Security Agreement, Assignment of
         Production, and Financing Statement from the Borrower covering all Oil
         and Gas Properties of the Borrower a form of which is attached as
         Exhibit VI(and Borrower will promptly furnish legal descriptions of the
         Mortgaged Properties) and all improvements, personal property, and
         fixtures related thereto;

                  (b) Financing Statements from the Borrower, as debtors,
         constituent to the instrument described in clause (a) above;

                  (c) undated letters, in form and substance satisfactory to the
         Lender, from the Borrower to each purchaser of production and disburser
         of the proceeds of production from or attributable to the Mortgaged
         Properties, together with additional letters with the

                                      -19-
<PAGE>   20
         addressees left blank, authorizing and directing the addressees to make
         future payments attributable to production from the Mortgaged
         Properties directly to the Lender;

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

                  (e) pledge of interest in REX Offshore Corporation;

                  (f) all operating, lease, sublease, royalty, sales, exchange,
         processing, farmout, bidding, pooling, unitization, communitization,
         and other agreements relating to the Mortgaged Properties requested by
         the Lender;

                  (g) results of searches of the UCC Records of the Secretary of
         State of the State of Texas from a source acceptable to the Lender and
         reflecting no Liens against any of the Collateral as to which
         perfection of a Lien is accomplished by the filing of a financing
         statement other than in favor of the Lender;

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

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

                  (j) the Borrower shall pay to special legal counsel for the
         Lender estimated fees charged by filing officers and other public
         officials incurred or to be incurred in connection with the filing and
         recordation of any Security Instruments, for which invoices have been
         presented as of or prior to the date of the requested Loan;

                                   ARTICLE IV
                         REPRESENTATIONS AND WARRANTIES

                  To induce the Lender to enter into this Agreement and to make
the Loans, the Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note) that:

                  IV.1 Due Authorization. The execution and delivery by the
Borrower of this Agreement and the borrowings hereunder, the execution and
delivery by the Borrower of the Note, the repayment of the Note and interest and
fees provided for in the Note and this Agreement, the execution and delivery of
the Security Instruments by the Borrower and the performance of all obligations
of the Borrower under the Loan Documents are within the power of the Borrower,
have been duly authorized by all necessary corporate action by the Borrower, and
do not and will not (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) contravene or conflict
with any indenture, instrument, or other agreement to which the Borrower is a
party or by which any Property of the Borrower may be presently bound or
encumbered, or (d) result in or require the creation or imposition of any Lien
in, upon or of any Property of the Borrower under any such indenture,
instrument, or other agreement, other than the Loan Documents.

                  IV.2 Corporate Existence. The Borrower is a corporation duly
organized, legally existing, and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and is in good
standing in all jurisdictions wherein the ownership of Property or the operation
of its business

                                      -20-
<PAGE>   21
necessitates same, other than those jurisdictions wherein the failure to so
qualify will not have a Material Adverse Effect.

                  IV.3 Valid and Binding Obligations. All Loan Documents, when
duly executed and delivered by the Borrower, will be the legal, valid, and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.

                  IV.4 Security Instruments. Subject to Section 3.3, the
provisions of each Security Instrument are effective to create in favor of the
Lender, a legal, valid, and enforceable Lien in all right, title, and interest
of the Borrower in the Collateral described therein, which Liens, assuming the
accomplishment of recording and filing in accordance with applicable laws prior
to the intervention of rights of other Persons, shall constitute fully perfected
first-priority Liens on all right, title, and interest of the Borrower in the
Collateral described therein.

                  IV.5 Title to Assets. The Borrower has good and marketable
title to all of its Properties, free and clear of all Liens except Permitted
Liens.

                  IV.6 Scope and Accuracy of Financial Statements. The Financial
Statements of the Borrower as of March 31, 2001, present fairly the financial
position and results of operations and cash flows of the Borrower in accordance
with GAAP as at the relevant point in time or for the period indicated, as
applicable. No event or circumstance has occurred since March 31, 2001, which
could reasonably be expected to have a Material Adverse Effect.

                  IV.7 No Material Misstatements. No information, exhibit,
statement, or report furnished to the Lender by or at the direction of the
Borrower in connection with this Agreement contains any material misstatement of
fact or omits to state a material fact or any fact necessary to make the
statements contained therein not misleading as of the date made or deemed made.

                  IV.8 Liabilities, Litigation, and Restrictions. Other than as
listed under the heading "Liabilities" on Exhibit V, VI attached hereto, the
Borrower has no liabilities, direct, or contingent, which may materially and
adversely affect its business or operations or subject to the Security
Instruments being delivered pursuant to Section 3.3, its ownership of the
Collateral. Except as set forth under the heading "Litigation" on Exhibit V, VI
hereto, no litigation or other action of any nature affecting the Borrower is
pending before any Governmental Authority or, to the best knowledge of the
Borrower, threatened against or affecting the Borrower which might reasonably be
expected to result in any impairment of its ownership of any Oil and Gas
Property or have a Material Adverse Effect. To the best knowledge of the
Borrower, after due inquiry, no unusual or unduly burdensome restriction,
restraint or hazard exists by contract, Requirement of Law, or otherwise
relative to the business or operations of the Borrower or, subject to the
Security Instruments being delivered pursuant to Section 3.3, the ownership and
operation of the Collateral other than such as relate generally to Persons
engaged in business activities similar to those conducted by the Borrower.

                  IV.9 Authorizations; Consents. Except as expressly
contemplated by this Agreement, no authorization, consent, approval, exemption,
franchise, permit, or license of, or filing with, any Governmental Authority or
any other Person is required to authorize or is otherwise required in connection
with the valid execution and delivery by the Borrower of the Loan Documents or
any instrument contemplated hereby, the repayment by the Borrower of the Note
and interest and fees provided in the Note and this Agreement, or the
performance by the Borrower of the Obligations.

                  IV.10 Compliance with Laws. The Borrower and its Property,
including, without limitation, the Oil and Gas Property, are in compliance with
all applicable Requirements of Law, including, without limitation, Environmental
Laws, the Natural Gas Policy Act of 1978, as amended, and ERISA, except to the

                                      -21-
<PAGE>   22
extent non-compliance with any such Requirements of Law could not reasonably be
expected to have a Material Adverse Effect.

                  IV.11 ERISA. Except as set forth on Exhibit V, the Borrower
does not maintain nor has it maintained any Plan. The Borrower does not
currently contribute to or have any obligation to contribute to or otherwise
have any liability with respect to any Plan.

                  IV.12 Environmental Laws. To the best knowledge and belief of
the Borrower, except as would not have a Material Adverse Effect, or as
described on Exhibit V, VI under the heading "Environmental Matters:"

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

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

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

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

                  IV.13 Compliance with Federal Reserve Regulations. No
transaction contemplated by the Loan Documents is in violation of any
regulations promulgated by the Board of Governors of the Federal Reserve System,
including, without limitation, Regulations T, U, or X.

                  IV.14 Investment Company Act Compliance. The Borrower is not,
nor is the Borrower directly or indirectly controlled by or acting on behalf of
any Person which is, an "investment company" or an "affiliated person" of an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.

                  IV.15 Public Utility Holding Company Act Compliance. The
Borrower is not a "holding company," or an "affiliate" of a "holding company" or
of a "subsidiary company" of a "holding company," within the meaning of the
Public Utility Holding Company Act of 1935, as amended.

                  IV.16 Proper Filing of Tax Returns; Payment of Taxes Due. The
Borrower has duly and properly filed its United States income tax return and all
other tax returns which are required to be filed and has paid all taxes due
except such as are being contested in good faith and as to which adequate
provisions and disclosures have been made. The respective charges and reserves
on the books of the Borrower with respect to taxes and other governmental
charges are adequate.

                  IV.17 Refunds. Except as described on Exhibit V, VI under the
heading "Refunds," no orders of, proceedings pending before, or other
requirements of, the Federal Energy Regulatory Commission, the Texas Railroad
Commission, or any Governmental Authority exist which could result in the
Borrower being required to refund any material portion of the proceeds received
or to be received from the sale of hydrocarbons constituting part of the
Mortgaged Property.

                  IV.18 Gas Contracts. Except as described on Exhibit V, VI
under the heading "Gas Contracts," the Borrower (a) is not obligated in any
material respect by virtue of any prepayment made under

                                      -22-
<PAGE>   23
any contract containing a "take-or-pay" or "prepayment" provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Mortgaged Property at some future date without receiving full payment
therefor within 90 days of delivery, and (b) has not produced gas, in any
material amount, subject to, and neither the Borrower nor any of the Mortgaged
Properties is subject to, balancing rights of third parties or subject to
balancing duties under governmental requirements, except as to such matters for
which the Borrower has established monetary reserves adequate in amount to
satisfy such obligations and has segregated such reserves from other accounts.

                  IV.19 Intellectual Property. The Borrower owns or is licensed
to use all Intellectual Property necessary to conduct all business material to
its condition (financial or otherwise), business, or operations as such business
is currently conducted. No claim has been asserted or is pending by any Person
with the respect to the use of any such Intellectual Property or challenging or
questioning the validity or effectiveness of any such Intellectual Property; and
the Borrower knows of no valid basis for any such claim. The use of such
Intellectual Property by the Borrower does not infringe on the rights of any
Person, except for such claims and infringements as do not, in the aggregate,
give rise to any material liability on the part of the Borrower.

                  IV.20 Casualties or Taking of Property. Except as disclosed on
Exhibit V, VI under the heading "Casualties," since March 31, 2001, neither the
business nor any Property of the Borrower has been materially adversely affected
as a result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or taking of
Property, or cancellation of contracts, permits, or concessions by any
Governmental Authority, riot, activities of armed forces, or acts of God.

                  IV.21 Locations of Borrower. The principal place of business
and chief executive office of the Borrower is located at the address of the
Borrower set forth in Section 8.3 or at such other location as the Borrower may
have, by proper written notice hereunder, advised the Lender, provided that such
other location is within a state in which appropriate financing statements from
the Borrower in favor of the Lender have been filed.

                  IV.22 Subsidiaries. The Borrower has no Subsidiaries except
those described on Exhibit V, VI under the heading "Subsidiaries".

                                    ARTICLE V
                              AFFIRMATIVE COVENANTS

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

                  V.1 Maintenance and Access to Records. Keep adequate records,
in accordance with GAAP, of all its transactions so that at any time, and from
time to time, its true and complete financial condition may be readily
determined, and promptly following the reasonable request of the Lender, make
such records available for inspection by the Lender and, at the expense of the
Borrower, allow the Lender to make and take away copies thereof.

                  V.2 Quarterly Financial Statements; Compliance Certificates.
Deliver to the Lender, (a) on or before the 45th day after the close of each of
the first three quarterly periods of each fiscal year of the Borrower, a copy of
the unaudited Financial Statements of the Borrower as at the close of such
quarterly period and from the beginning of such fiscal year to the end of such
period, such Financial Statements to be certified by a Responsible Officer of
the Borrower as having been prepared in accordance with GAAP consistently
applied and as a fair presentation of the condition of the Borrower, subject to
changes resulting from normal year-end audit adjustments, and (b) on or before
the 45th day after the close of each fiscal quarter, with the exception of the
last fiscal quarter, a Compliance Certificate.

                                      -23-
<PAGE>   24

                  V.3 Annual Financial Statements. Deliver to the Lender, on or
before the 90th day after the close of each fiscal year of the Borrower, a copy
of the annual audited Financial Statements of the Borrower and a Compliance
Certificate.

                  V.4 Oil and Gas Reserve Reports. (a) Deliver to the Lender no
later than August 15 of each year during the term of this Agreement, engineering
reports in form and substance satisfactory to the Lender, certified by any
nationally- or regionally-recognized independent consulting petroleum engineers
acceptable to the Lender as fairly and accurately setting forth (i) the proven
and producing, shut-in, behind-pipe, and undeveloped oil and gas reserves
(separately classified as such) attributable to the Oil and Gas Properties as of
June 30 of the year for which such reserve reports are furnished, (ii) the
aggregate present value of the future net income with respect to such Oil and
Gas Properties, discounted at a stated per annum discount rate of proven and
producing reserves, (iii) projections of the annual rate of production, gross
income, and net income with respect to such proven and producing reserves, (iv)
information with respect to the "take-or-pay," "prepayment," and gas-balancing
liabilities of the Borrower and (v) legal descriptions of Oil and Gas Properties
to be included in each Borrower Base review.

                  (b) Deliver to the Lender no later than February 15 of each
year during the term of this Agreement, engineering reports in form and
substance satisfactory to the Lender prepared by or under the supervision of the
chief petroleum engineer of the Borrower evaluating the Oil and Gas Property as
of December 31 of the previous year for which such reserve reports are furnished
and updating the information provided in the reports pursuant to Section 5.4(a).

                  (c) Each of the reports provided pursuant to this Section 5.4
shall be submitted to the Lender together with additional data concerning
pricing, quantities of production from the Oil and Gas Properties, volumes of
production sold, purchasers of production, gross revenues, expenses, and such
other information and engineering and geological data with respect thereto as
the Lender may reasonably request.

                  V.5 Title Opinions; Title Defects. In the event mortgages are
required pursuant to Section 3.3, promptly upon the request of the Lender,
furnish to the Lender title opinions, in form and substance and by counsel
satisfactory to the Lender, or other confirmation of title acceptable to the
Lender, covering Oil and Gas Properties constituting not less than 81% of the
value, determined by the Lender in its sole discretion, of the Mortgaged
Properties; and promptly, but in any event within 60 days after notice by the
Lender of any defect, material in the opinion of the Lender in value, in the
title of the Borrower to any of its Oil and Gas Properties, clear such title
defects, and, in the event any such title defects are not cured in a timely
manner, pay all related costs and fees incurred by the Lender to do so.

                  V.6 Notices of Certain Events. Deliver to the Lender,
immediately upon having knowledge of the occurrence of any of the following
events or circumstances, a written statement with respect thereto, signed by a
Responsible Officer of the Borrower and setting forth the relevant event or
circumstance and the steps being taken by the Borrower with respect to such
event or circumstance:

                  (a) any Default or Event of Default;

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

                  (c) any litigation or proceeding involving the Borrower as a
         defendant or in which any Property of the Borrower is subject to a
         claim and in which the amount involved is

                                      -24-
<PAGE>   25
         $500,000 or more and which is not covered by insurance or in which
         injunctive or similar relief is sought;

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

                  (e) any actual, proposed, or threatened testing or other
         investigation by any Governmental Authority or other Person concerning
         the environmental condition of, or relating to, any Property of the
         Borrower or adjacent to any Property of the Borrower following any
         allegation of a violation of any Requirement of Law;

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

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

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

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

                  V.7 Letters in Lieu of Transfer Orders; Division Orders. In
the event mortgages are required pursuant to Section 3.3 promptly upon request
by the Lender at any time and from time to time, and without limitation on the
rights of the Lender pursuant to Sections 2.15 and 2.16, execute such letters in
lieu of transfer orders, in addition to the letters signed by the Borrower and
delivered to the Lender in satisfaction of the condition set forth in Section
3.3(c) and/or division and/or transfer orders as are necessary or appropriate to
transfer and deliver to the Lender proceeds from or attributable to any
Mortgaged Property.

                  V.8 Additional Information. Furnish to the Lender, promptly
upon the request of the Lender, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of the Borrower
as the Lender may from time to time reasonably request; and notify the Lender
not less than ten Business Days prior to the occurrence of any condition or
event that may change the proper location for the filing of any financing
statement or other public notice or recording for the purpose of perfecting a
Lien in any Collateral, including, without limitation, any change in its name or
the location of its principal place of business or chief executive office; and
upon the request of the Lender, execute such additional Security Instruments as
may be necessary or appropriate in connection therewith.

                  V.9 Compliance with Laws. Except to the extent the failure to
comply or cause compliance would not have a Material Adverse Effect, comply with
all applicable Requirements of Law, including, without limitation, (a) the
Natural Gas Policy Act of 1978, as amended, (b) ERISA, (c) Environmental Laws,
and (d) all permits, licenses, registrations, approvals, and authorizations (i)
related to any natural or environmental resource or media located on, above,
within, in the vicinity of, related to or affected by any Property of the
Borrower, (ii) required for the performance of the operations of the Borrower,
or (iii) applicable to the use, generation, handling, storage, treatment,
transport, or disposal of any Hazardous Substances; and cause all employees,
crew members, agents, contractors, subcontractors, and future lessees (pursuant
to appropriate lease provisions) of the Borrower, while such Persons are acting
within the scope of

                                      -25-
<PAGE>   26
their relationship with the Borrower, to comply with all such Requirements of
Law as may be necessary or appropriate to enable the Borrower to so comply.

                  V.10 Payment of Assessments and Charges. Pay all taxes,
assessments, governmental charges, rent, and other Indebtedness which, if
unpaid, might become a Lien against the Property of the Borrower, except any of
the foregoing being contested in good faith and as to which adequate reserve in
accordance with GAAP has been established or unless failure to pay would not
have a Material Adverse Effect.

                  V.11 Maintenance of Corporate Existence and Good Standing.
Maintain its corporate existence or qualification and good standing in its
jurisdictions of incorporation and in all jurisdictions wherein the Property now
owned or hereafter acquired or business now or hereafter conducted necessitates
same, unless the failure to do so would not have a Material Adverse Effect.

                  V.12 Payment of Notes; Performance of Obligations. Pay the
Note according to the reading, tenor, and effect thereof, as modified hereby,
and do and perform in all material respects every act and discharge all of its
other Obligations.

                  V.13 Further Assurances. Promptly cure any defects in the
execution and delivery of any of the Loan Documents and all agreements
contemplated thereby, and execute, acknowledge, and deliver such other
assurances and instruments as shall, in the reasonable opinion of the Lender, be
necessary to fulfill the terms of the Loan Documents.

                  V.14 Subsequent Fees and Expenses of Lender. Upon request by
the Lender, promptly reimburse the Lender (to the fullest extent permitted by
law) for all amounts reasonably expended, advanced, or incurred by or on behalf
of the Lender to satisfy any obligation of the Borrower under any of the Loan
Documents; to collect the Obligations; to ratify, amend, restate, or prepare
additional Loan Documents, as the case may be; for the filing and recordation of
Security Instruments; to enforce the rights of the Lender under any of the Loan
Documents; and to protect the Properties or business of the Borrower, including,
without limitation, the Collateral, which amounts shall be deemed compensatory
in nature and liquidated as to amount upon notice to the Borrower by the Lender
and which amounts shall include, but not be limited to (a) all court costs, (b)
reasonable attorneys' fees, (c) reasonable fees and expenses of auditors and
accountants incurred to protect the interests of the Lender, (d) fees and
expenses incurred in connection with the participation by the Lender as a member
of the creditors' committee in a case commenced under any Insolvency Proceeding,
(e) fees and expenses incurred in connection with lifting the automatic stay
prescribed in Section 362 Title 11 of the United States Code, and (f) fees and
expenses incurred in connection with any action pursuant to Section 1129 Title
11 of the United States Code all reasonably incurred by the Lender in connection
with the collection of any sums due under the Loan Documents, together with
interest at the per annum interest rate equal to the Floating Rate, calculated
on a basis of a calendar year of 365 or 366 days, as the case may be, counting
the actual number of days elapsed, on each such amount from the date of
notification that the same was expended, advanced, or incurred by the Lender
until the date it is repaid to the Lender, with the obligations under this
Section surviving the non-assumption of this Agreement in a case commenced under
any Insolvency Proceeding and being binding upon the Borrower and/or a trustee,
receiver, custodian, or liquidator of the Borrower appointed in any such case.

                  V.15 Operation of Oil and Gas Properties. Develop, maintain,
and operate its Oil and Gas Properties in a prudent and workmanlike manner in
accordance with industry standards.

                  V.16 Maintenance and Inspection of Properties. Maintain all of
its tangible Properties in good repair and condition, ordinary wear and tear
excepted; make all necessary replacements thereof and operate such Properties in
a good and workmanlike manner; and permit any authorized representative of the
Lender to visit and inspect, at the expense of the Borrower, any tangible
Property of the Borrower.

                                      -26-
<PAGE>   27

                  V.17 Maintenance of Insurance. Maintain insurance with respect
to its Properties and businesses against such liabilities, casualties, risks,
and contingencies as is customary in the relevant industry and sufficient to
prevent a Material Adverse Effect, all such insurance to be in amounts and from
insurers acceptable to the Lender, maintained by Borrower, naming the Lender as
loss payee, and, upon any renewal of any such insurance and at other times upon
request by the Lender, furnish to the Lender evidence, satisfactory to the
Lender, within 30 days of the Closing Date of the maintenance of such insurance.

                  V.18 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND
AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY
INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES,
LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS
AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF
ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH
(INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND EXPENSES), ARISING DIRECTLY
OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS
SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR
DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY
PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND
WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER PERSON AT ANY TIME
OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING,
TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER
SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE
BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING IN
CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING
WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF
WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY
LOAN DOCUMENT OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT
LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE LENDER OR ANY OF ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY
INSTRUMENT; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT, UNLESS ALL SUCH OBLIGATIONS
HAVE BEEN SATISFIED WHOLLY IN CASH FROM THE BORROWER AND NOT BY WAY OF
REALIZATION AGAINST ANY COLLATERAL OR THE CONVEYANCE OF ANY PROPERTY IN LIEU
THEREOF, PROVIDED THAT SUCH INDEMNITY SHALL NOT EXTEND TO ANY ACT OR OMISSION BY
THE LENDER WITH RESPECT TO ANY PROPERTY SUBSEQUENT TO THE LENDER BECOMING THE
OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH CLAIM, LOSS,
DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION,
OR REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE THERETO BY THE
LENDER.

                  V.19 Transactions with Affiliates. Enter into any transactions
(including the sale, lease, or exchange of Property or the rendering of service)
with its Affiliates, only upon fair and reasonable terms

                                      -27-
<PAGE>   28
no less favorable than could be obtained in an arm's length transaction with a
Person which was not an Affiliate.

                  V.20 Pledge of Collateral. In the event there is a Default or
Event of Default, the Borrower agrees to furnish the Security Instruments
described in Section 3.3.

                                   ARTICLE VI
                               NEGATIVE COVENANTS

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

                  VI.1 Indebtedness. Create, incur, assume, or suffer to exist
any Indebtedness, whether by way of loan or otherwise; provided, however, the
foregoing restriction shall not apply to (a) the Obligations, (b) unsecured
accounts payable incurred in the ordinary course of business, which are not
unpaid in excess of 60 days beyond invoice date or are being contested in good
faith and as to which such reserve as is required by GAAP has been made, (c)
crude oil, natural gas, or other hydrocarbon floor, collar, cap, price
protection, or swap agreements, in form and substance and with a Person
acceptable to the Lender, provided that (i) each commitment issued under such
agreement must also be approved by the Lender, (ii) such agreements shall not be
entered into with respect to Oil and Gas Properties constituting more than 70%
of the present value of estimated future net revenues, computed using a discount
factor of 9%, of all proved developed producing Oil and Gas Properties, and
(iii) that the floor prices in such agreements are not less than the prices used
by the Lender in its most recent Borrowing Base determination, or (d) Rate
Management Transactions, in form and substance and with a Person acceptable to
the Lender.

                  VI.2 Contingent Obligations. Create, incur, assume, or suffer
to exist any Contingent Obligation; provided, however, the foregoing restriction
shall not apply to (a) performance guarantees and performance surety or other
bonds not to exceed $500,000 in the aggregate provided in the ordinary course of
business, or (b) trade credit incurred or operating leases entered into in the
ordinary course of business.

                  VI.3 Liens. Create, incur, assume, or suffer to exist any Lien
on any of its Oil and Gas Properties or any other Property, whether now owned or
hereafter acquired; provided, however, the foregoing restrictions shall not
apply to Permitted Liens.

                  VI.4 Sales of Assets. Without the prior written consent of the
Lender, sell, transfer, or otherwise dispose of, in one or any series of
transactions assets, whether now owned or hereafter acquired except in the
ordinary course of business, provided, however, that such sales of assets shall
not be more than 5% of the Borrowing Base per annum.

                  VI.5 Leasebacks. Enter into any agreement to sell or transfer
any Property and thereafter rent or lease as lessee such Property or other
Property intended for the same use or purpose as the Property sold or
transferred.

                  VI.6 Loans or Advances. Make or agree to make or allow to
remain outstanding any loans or advances to any Person; provided, however, the
foregoing restrictions shall not apply to (a) advances or extensions of credit
in the form of accounts receivable incurred in the ordinary course of business
and upon terms common in the industry for such accounts receivable, or (b)
advances to employees of the Borrower for the payment of expenses in the
ordinary course of business, or (c) unless approved by the Lender in writing,
loans or advances to subsidiaries of the Borrower.

                  VI.7 Investments. Acquire Investments in, or purchase or
otherwise acquire all or substantially all of the assets of, any Person;
provided, however, the foregoing restriction shall not apply to the

                                      -28-
<PAGE>   29
purchase or acquisition of (a) Oil and Gas Properties, (b) Investments in the
form of (i) debt securities issued or directly and fully guaranteed or insured
by the United States Government or any agency or instrumentality thereof, with
maturities of no more than one year, (ii) commercial paper of a domestic issuer
rated at the date of acquisition at least P-2 by Moody's Investor Service, Inc.
or A-2 by Standard & Poor's Corporation and with maturities of no more than one
year from the date of acquisition, or (iii) repurchase agreements covering debt
securities or commercial paper of the type permitted in this Section 6.7,
certificates of deposit, demand deposits, eurodollar time deposits, overnight
bank deposits and bankers' acceptances, with maturities of no more than one year
from the date of acquisition, issued by or acquired from or through the Lender
or any bank or trust company organized under the laws of the United States or
any state thereof and having capital surplus and undivided profits aggregating
at least $100,000,000, (c) other short-term Investments similar in nature and
degree of risk to those described in clause (b) of this Section 6.7, or (d)
money-market funds.

                  VI.8 Dividends and Distributions. Declare, pay, or make,
whether in cash or Property of the Borrower, any dividend or distribution on, or
purchase, redeem, or otherwise acquire for value, any share of any class of its
capital stock; provided, however, the foregoing restriction shall not apply to
dividends paid in capital stock of the Borrower and cash dividends paid on its
preferred stock in an amount not to exceed $600,000 per annum.

                  VI.9 Issuance of Stock; Changes in Corporate Structure. Enter
into any transaction of consolidation, merger, or amalgamation; liquidate, wind
up, or dissolve (or suffer any liquidation or dissolution).

                  VI.10 Lines of Business. Expand, on its own or through any
Subsidiary, into any line of business other than those in which the Borrower is
engaged as of the date hereof.

                  VI.11 Plan Obligations. Except as disclosed on Exhibit V,
assume or otherwise become subject to an obligation to contribute to or maintain
any Plan or acquire any Person which has at any time had an obligation to
contribute to or maintain any Plan.

                  VI.12 Current Ratio. Permit, as of the close of any fiscal
quarter, the ratio of Current Assets to Current Liabilities to be less than 1.75
to 1.00.

                  VI.13 Debt Coverage Ratio. Permit, as of the close of any
fiscal quarter, the ratio of (a) quarterly EBITDAX to (b) Debt Service to be
less than 2.50 to 1.0.

                  VI.14 Funded Debt Ratio. Permit, as of the close of any fiscal
quarter, the ratio of (a) Total Funded Debt to (b) annualized quarterly EBITDAX
to be more than 1.00 to 1.00.

                  VI.15 Total Liabilities to Tangible Net Worth Ratio. Permit,
as of the close of any fiscal quarter, the ratio of (a) Total Liabilities to (b)
Tangible Net Worth to be more than 0.50 to 1.00.

                  VI.16 General and Administrative Expenses. Permit, as of the
close of any fiscal year, general and administrative expenses to exceed
$3,300,000.

                                   ARTICLE VII
                                EVENTS OF DEFAULT

                  VII.1 Enumeration of Events of Default. Any of the following
events shall constitute an Event of Default:

                  (a default shall be made in the payment when due of any
         installment of principal or interest under this Agreement or the Note
         or in the payment when due of any fee or other sum

                                      -29-
<PAGE>   30

         payable under any Loan Document and such default as to interest or fees
         only shall have continued for three Business Days;

                  (b default shall be made by the Borrower in the due observance
         or performance of any of its obligations under the Loan Documents,
         other than the payment Defaults described in (a) above, and such
         default shall continue for 30 days after the earlier of notice thereof
         to the Borrower by the Lender or knowledge thereof by the Borrower;

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

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

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

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

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

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

                  (i a final and non-appealable order, judgment, or decree
         shall be entered against the Borrower for money damages and/or
         Indebtedness due in an amount in excess of $750,000, and such order,
         judgment, or decree shall not be dismissed or stayed within 60 days;

                  (j any charges are filed or any other action or proceeding is
         instituted by any Governmental Authority against the Borrower under the
         Racketeering Influence and Corrupt Organizations Statute (18 U.S.C.
         Section 1961 et seq.), the result of which could be the forfeiture or
         transfer of any material Property of the Borrower subject to a Lien in
         favor of the Lender

                                      -30-
<PAGE>   31
         without (i) satisfaction or provision for satisfaction of such Lien, or
         (ii) such forfeiture or transfer of such Property being expressly made
         subject to such Lien;

                  (k the Borrower shall have (i) concealed, removed, or
         diverted, or permitted to be concealed, removed, or diverted, any part
         of its Property, with intent to hinder, delay, or defraud its creditors
         or any of them, (ii) made or suffered a transfer of any of its Property
         which may be fraudulent under any bankruptcy, fraudulent conveyance, or
         similar law, (iii) made any transfer of its Property to or for the
         benefit of a creditor at a time when other creditors similarly situated
         have not been paid, or (iv) shall have suffered or permitted, while
         insolvent, any creditor to obtain a Lien upon any of its Property
         through legal proceedings or distraint which is not vacated within 60
         days from the date thereof;

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

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

                  VII.2 Remedies. (a Upon the occurrence of an Event of Default
specified in Sections 7.1(f) or 7.1(g), immediately and without notice, (i) all
Obligations shall automatically become immediately due and payable, without
presentment, demand, protest, notice of protest, default, or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity, or other
notice of any kind, except as may be provided to the contrary elsewhere herein,
all of which are hereby expressly waived by the Borrower; (ii) the Commitment
shall immediately cease and terminate unless and until reinstated by the Lender
in writing; and (iii) the Lender is hereby authorized at any time and from time
to time, without notice to the Borrower (any such notice being expressly waived
by the Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) held by the Lender and any and all other
indebtedness at any time owing by the Lender to or for the credit or account of
the Borrower against any and all of the Obligations although such Obligations
may be unmatured.

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

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

                                  ARTICLE VIII
                                  MISCELLANEOUS

                  VIII.1 Transfers; Participations. The Lender may, at any time,
sell, transfer, assign, or grant participations in the Obligations or any
portion thereof; and the Lender may forward to each Transferee and

                                      -31-
<PAGE>   32
prospective Transferee all documents and information relating to such
Obligations, whether furnished by the Borrower or otherwise obtained, as the
Lender determines necessary or desirable.

                  VIII.2 Survival of Representations, Warranties, and Covenants.
All representations and warranties of the Borrower and all covenants and
agreements herein made shall survive the execution and delivery of the Note and
the Security Instruments and shall remain in force and effect so long as any
Obligation is outstanding or any Commitment exists.

                  VIII.3 Notices and Other Communications. Except as to verbal
notices expressly authorized herein, which verbal notices shall be confirmed in
writing, all notices, requests, and communications hereunder shall be in writing
(including by telecopy). Unless otherwise expressly provided herein, any such
notice, request, demand, or other communication shall be deemed to have been
duly given or made when delivered by hand, or, in the case of delivery by mail,
when deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when receipt thereof is
acknowledged orally or by written confirmation report, addressed as follows:

                  (a  if to the Lender, to:

                           Guaranty Bank, FSB
                           333 Clay Street, Suite 4430
                           Houston, Texas  77002

                           Attention: A.R. Gralla, Jr.
                           Telecopy:  (713) 759-1780

                  (b  if to the Borrower, to:

                           Contango Oil & Gas Company
                           3700 Buffalo Speedway, Suite 960
                           Houston, Texas  77098
                           Attention: William H. Gibbons
                           Telecopy: (713) 960-1065

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

                  VIII.4 Parties in Interest. Subject to applicable restrictions
contained herein, all covenants and agreements herein contained by or on behalf
of the Borrower or the Lender shall be binding upon and inure to the benefit of
the Borrower or the Lender, as the case may be, and their respective legal
representatives, successors, and assigns.

                  VIII.5 Rights of Third Parties. All provisions herein are
imposed solely and exclusively for the benefit of the Lender and the Borrower.
No other Person shall have any right, benefit, priority, or interest hereunder
or as a result hereof or have standing to require satisfaction of provisions
hereof in accordance with their terms, and any or all of such provisions may be
freely waived in whole or in part by the Lender at any time if in its sole
discretion it deems it advisable to do so.

                  VIII.6 Renewals; Extensions. All provisions of this Agreement
relating to the Note shall apply with equal force and effect to each promissory
note hereafter executed which in whole or in part represents a renewal or
extension of any part of the Indebtedness of the Borrower under this Agreement,
the Note, or any other Loan Document.

                                      -32-
<PAGE>   33

                  VIII.7 No Waiver; Rights Cumulative. No course of dealing on
the part of the Lender, its officers or employees, nor any failure or delay by
the Lender with respect to exercising any of its rights under any Loan Document
shall operate as a waiver thereof. The rights of the Lender under the Loan
Documents shall be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right. The making of any Loan
shall not constitute a waiver of any of the covenants, warranties, or conditions
of the Borrower contained herein. In the event the Borrower is unable to satisfy
any such covenant, warranty, or condition, the making of any Loan shall not have
the effect of precluding the Lender from thereafter declaring such inability to
be an Event of Default as hereinabove provided.

                  VIII.8 Survival Upon Unenforceability. In the event any one or
more of the provisions contained in any of the Loan Documents or in any other
instrument referred to herein or executed in connection with the Obligations
shall, for any reason, be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision of any Loan Document or of any other instrument referred to
herein or executed in connection with such Obligations.

                  VIII.9 Amendments; Waivers. Neither this Agreement nor any
provision hereof may be amended, waived, discharged, or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the amendment, waiver, discharge, or termination is sought.

                  VIII.10 Controlling Agreement. In the event of a conflict
between the provisions of this Agreement and those of any other Loan Document,
the provisions of this Agreement shall control.

                  VIII.11 Disposition of Collateral. Notwithstanding any term or
provision, express or implied, in any of the Security Instruments, the
realization, liquidation, foreclosure, or any other disposition on or of any or
all of the Collateral shall be in the order and manner and determined in the
sole discretion of the Lender; provided, however, that in no event shall the
Lender violate applicable law or exercise rights and remedies other than those
provided in such Security Instruments or otherwise existing at law or in equity.

                  VIII.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE
TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.

                  VIII.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS
WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF,
RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED,
AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN
HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER HEREBY SUBMITS TO THE JURISDICTION
OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS,
AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION
OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH
THIS SECTION.

                  VIII.14 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER AND THE
LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND
UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT,
PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF
ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE
LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR

                                      -33-
<PAGE>   34

PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH
RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT FOR
THE LENDER ENTERING INTO THIS AGREEMENT.

                  VIII.15 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF
AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER
WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF, INCLUDING, WITHOUT LIMITATION,
THE CORRESPONDENCE DATED NOVEMBER 9, 2000, FROM THE LENDER TO THE BORROWER.
FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH
PARTIES.

                  VIII.16 Counterparts. For the convenience of the parties, this
Agreement may be executed in multiple counterparts, each of which for all
purposes shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same Agreement.

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

                                     BORROWER:

                                     CONTANGO OIL & GAS COMPANY

                                     By:  /s/  WILLIAM H. GIBBONS
                                          --------------------------
                                          William H. Gibbons
                                          Vice President and Treasurer

                                     LENDER:

                                     GUARANTY BANK, FSB

                                     By:  /s/  RICHARD E. MENCHACA
                                          --------------------------
                                          Richard E. Menchaca
                                          Vice President

                                      -34-

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