Document:

<PAGE>

                                                                   EXHIBIT 10.28

                                    SECOND
                                   RESTATED
                               CREDIT AGREEMENT

                                     AMONG

                           3TEC ENERGY CORPORATION,
                          ENEX RESOURCES CORPORATION,
                     MIDDLE BAY PRODUCTION COMPANY, INC.,
                        AND MAGELLAN EXPLORATION, LLC,
                                 AS BORROWERS,

                                      AND

                             BANK ONE, TEXAS, N.A.
                       AND THE INSTITUTIONS NAMED HEREIN
                                  AS LENDERS,

                            BANK ONE, TEXAS, N.A.,
                            AS ADMINISTRATIVE AGENT

                                      AND

                               BANK OF MONTREAL
                             AS SYNDICATION AGENT

                                      AND

                        BANC ONE CAPITAL MARKETS, INC.
                                  AS ARRANGER

                                 May 31, 2000

                         $250,000,000 REVOLVING CREDIT
<PAGE>

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                        Page No.
<S>                                                                     <C>
1.   Definitions...........................................................   2

2.   Commitments of the Lender.............................................  13
     (a)    Terms of Commitment............................................  13
     (b)    Procedure for Borrowing........................................  14
     (c)    Letters of Credit..............................................  14
     (d)    Procedure for Obtaining Letters of Credit......................  15
     (e)    Voluntary Reduction of Commitment..............................  16
     (f)    Mandatory Commitment Reductions................................  16
     (g)    Several Obligations............................................  16
     (h)    Type and Number of Advances....................................  16
     (i)    Limited Liability of Enex, Production and Magellan.............  16

3.   Notes Evidencing Loans................................................  17
     (a)    Form of Notes..................................................  17
     (b)    Issuance of Additional Notes...................................  17
     (c)    Interest Rate..................................................  17
     (d)    Payment of Interest............................................  17
     (e)    Payment of Principal...........................................  17
     (f)    Payment to Lenders.............................................  18
     (g)    Sharing of Payments, Etc.......................................  18
     (h)    Non-Receipt of Funds by the Agent..............................  18

4.   Interest Rates........................................................  19
     (a)    Options........................................................  19
     (b)    Interest Rate Determination....................................  20
     (c)    Conversion Option..............................................  20
     (d)    Recoupment.....................................................  20

5.   Special Provisions Relating to Loans..................................  20
     (a)    Unavailability of Funds or Inadequacy of Pricing...............  20
     (b)    Change in Laws.................................................  21
     (c)    Increased Cost or Reduced Return...............................  21
     (d)    Discretion of Lender as to Manner of Funding...................  23
     (e)    Breakage Fees..................................................  23

6.   Collateral Security...................................................  24
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<S>                                                                        <C>
7.   Borrowing Base......................................................  24
     (a)    Initial Borrowing Base.......................................  24
     (b)    Subsequent Determinations of Borrowing Base..................  25

8.   Fees................................................................  26
     (a)    Unused Commitment Fee........................................  26
     (b)    The Letter of Credit Fee.....................................  26

9.   Prepayments.........................................................  27
     (a)    Voluntary Prepayments........................................  27
     (b)    Mandatory Prepayment For Borrowing Base Deficiency...........  27
     (c)    Special Mandatory Prepayment.................................  27

10.  Representations and Warranties......................................  28
     (a)    Creation and Existence.......................................  28
     (b)    Power and Authority..........................................  28
     (c)    Binding Obligations..........................................  28
     (d)    No Legal Bar or Resultant Lien...............................  28
     (e)    No Consent...................................................  28
     (f)    Financial Condition..........................................  28
     (g)    Liabilities..................................................  29
     (h)    Litigation...................................................  29
     (i)    Taxes; Governmental Charges..................................  29
     (j)    Titles, Etc..................................................  29
     (k)    Defaults.....................................................  29
     (l)    Casualties; Taking of Properties.............................  30
     (m)    Use of Proceeds; Margin Stock................................  30
     (n)    Location of Business and Offices.............................  30
     (o)    Compliance with the Law......................................  30
     (p)    No Material Misstatements....................................  31
     (q)    Not A Utility................................................  31
     (r)    ERISA........................................................  31
     (s)    Public Utility Holding Company Act...........................  31
     (t)    Subsidiaries.................................................  31
     (u)    Environmental Matters........................................  31
     (v)    Liens........................................................  32

11.  Conditions of Lending...............................................  32
</TABLE>

                                     -ii-
<PAGE>

<TABLE>
<S>                                                                        <C>
12.  Affirmative Covenants...............................................  34
     (a)    Financial Statements and Reports.............................  34
     (b)    Certificates of Compliance...................................  35
     (c)    Accountants' Certificate.....................................  36
     (d)    Taxes and Other Liens........................................  36
     (e)    Compliance with Laws.........................................  36
     (f)    Further Assurances...........................................  36
     (g)    Performance of Obligations...................................  37
     (h)    Insurance....................................................  37
     (i)    Accounts and Records.........................................  37
     (j)    Right of Inspection..........................................  38
     (k)    Notice of Certain Events.....................................  38
     (l)    ERISA Information and Compliance.............................  38
     (m)    Environmental Reports and Notices............................  38
     (n)    Compliance and Maintenance...................................  39
     (o)    Operation of Properties......................................  39
     (p)    Compliance with Leases and Other Instruments.................  40
     (q)    Certain Additional Assurances Regarding
            Maintenance and Operations of Properties.....................  40
     (r)    Sale of Certain Assets/Prepayment of Proceeds................  40
     (s)    Title Matters................................................  41
     (t)    Curative Matters.............................................  41
     (u)    Change of Principal Place of Business........................  41
     (v)    Cash Collateral Accounts.....................................  41
     (w)    Take Down of Exchangeable Preferred Stock....................  42
     (x)    Additional Collateral........................................  42

13.  Negative Covenants..................................................  42
     (a)    Negative Pledge..............................................  42
     (b)    Current Ratio................................................  43
     (c)    Minimum Interest Coverage Ratio..............................  43
     (d)    Consolidations and Mergers...................................  43
     (e)    Debts, Guaranties and Other Obligations......................  43
     (f)    Dividends....................................................  44
     (g)    Loans and Advances...........................................  45
     (h)    Sale or Discount of Receivables..............................  45
     (i)    Nature of Business...........................................  45
     (j)    Transactions with Affiliates.................................  45
     (k)    Hedging Transactions.........................................  45
     (l)    Investments..................................................  45
     (m)    Amendment to Articles of Incorporation or Bylaws.............  46
</TABLE>

                                     -iii-
<PAGE>

<TABLE>
<S>                                                                          <C>
     (n)  Proceeds of Production...........................................  46
     (o)  Issuance of  Preferred Stock.....................................  46
     (p)  Amendments to and Redemption of Preferred Stock or Other Equity..  46
     (q)  Payment or Pre-Payment of Other Indebtedness.....................  46
     (r)  Subordinated Indebtedness........................................  46

14.  Events of Default.....................................................  47

15.  The Agent and the Lenders.............................................  49
     (a)  Appointment and Authorization....................................  49
     (b)  Note Holders.....................................................  50
     (c)  Consultation with Counsel........................................  50
     (d)  Documents........................................................  50
     (e)  Resignation or Removal of Agent..................................  51
     (f)  Responsibility of Agent..........................................  51
     (g)  Independent Investigation........................................  53
     (h)  Indemnification..................................................  53
     (i)  Benefit of Section 15............................................  53
     (j)  Pro Rata Treatment...............................................  53
     (k)  Assumption as to Payments........................................  54
     (l)  Other Financings.................................................  54
     (m)  Interests of Lenders.............................................  54
     (n)  Investments......................................................  55

16.  Exercise of Rights....................................................  55

17.  Notices...............................................................  55

18.  Expenses..............................................................  55

19.  Indemnity.............................................................  56

20.  Governing Law.........................................................  57

21.  Invalid Provisions....................................................  57

22.  Maximum Interest Rate.................................................  57

23.  Amendments............................................................  58

24.  Multiple Counterparts.................................................  58
</TABLE>

                                     -iv-
<PAGE>

<TABLE>
<S>                                                                        <C>
25.  Conflict............................................................  58

26.  Survival............................................................  58

27.  Parties Bound.......................................................  58

28.  Assignments and Participations......................................  58

29.  Choice of Forum: Consent to Service of Process and Jurisdiction.....  60

30.  Waiver of Jury Trial................................................  61

31.  Other Agreements....................................................  61

32.  Financial Terms.....................................................  61
</TABLE>

                                      -v-
<PAGE>

Exhibits
--------

Exhibit "A"    -    Notice of Borrowing
Exhibit "B"    -    Note
Exhibit "C"    -    Certificate of Compliance
Exhibit "D"    -    Form of Assignment and Acceptance Agreement

Schedules
---------

Schedule 1     -    Liens
Schedule 2     -    Financial Condition
Schedule 3     -    Liabilities
Schedule 4     -    Litigation
Schedule 5     -    Subsidiaries
Schedule 6     -    Environmental Matters
Schedule 7     -    Title Matters
Schedule 8     -    Curative Matters

                                     -vi-
<PAGE>

                       SECOND RESTATED CREDIT AGREEMENT

     THIS SECOND RESTATED CREDIT AGREEMENT (hereinafter referred to as the
"Agreement") executed as of the 31st day of May, 2000, by and between 3TEC
ENERGY CORPORATION, a Delaware corporation ("3TEC") (successor in interest to
Middle Bay Oil Company, Inc.), ENEX RESOURCES CORPORATION, a Delaware
corporation ("Enex"), MIDDLE BAY PRODUCTION COMPANY, INC., a Kansas corporation
("Production") and MAGELLAN EXPLORATION, LLC, a Delaware limited liability
company ("Magellan") (3TEC, Enex, Production and Magellan are hereinafter
collectively referred to as "Borrowers", and individually as a "Borrower") and
BANK ONE, TEXAS, N.A., a national banking association ("Bank One"), and each of
the financial institutions which is a party hereto (as evidenced by the
signature pages to this Agreement) or which may from time to time become a party
hereto pursuant to the provisions of Section 28 hereof or any successor or
assignee thereof (hereinafter collectively referred to as "Lenders", and
individually, "Lender") and Bank One, as Administrative Agent (the "Agent") and
Bank of Montreal, as Syndication Agent.

                             W I T N E S S E T H:

     WHEREAS, as of March 27, 1998, Middle Bay Oil Company, Inc. ("Middle Bay")
entered into a Credit Agreement with Compass Bank, as Agent for itself and Bank
of Oklahoma, N.A., pursuant to which the Lenders made available to Middle Bay, a
credit facility of up to $100,000,000 (the "Credit Agreement"); and

     WHEREAS, as of November 23, 1999, Middle Bay, Enex, Production, the Agent
and the Lenders entered into a Restated Credit Agreement pursuant to which the
Lenders made available to Middle Bay, a credit facility of up to $250,000,000
(the "Restated Credit Agreement"); and

     WHEREAS, as of November 23, 1999 the Lenders have acquired all of the
interest of Compass Bank and Bank of Oklahoma in the Credit Agreement and the
liens securing the same; and

     WHEREAS, as of December 7, 1999, Middle Bay merged with and into 3TEC
Energy Corporation; and

     WHEREAS, effective February 3, 2000 Magellan was merged with and into 3TM
Acquisition L.L.C., a Delaware limited liability company which was a wholly-
owned subsidiary of 3TEC and became a wholly-owned subsidiary of 3TEC; and

     WHEREAS, the Borrowers have requested that the Lenders restate the Restated
Credit Agreement to make certain changes thereto and the Lenders have agreed to
restate the Restated Credit Agreement and make the changes requested by the
Borrowers.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereby agree to restate the Credit Agreement as
follows:
<PAGE>

     Definitions. When used herein the terms "Agent", "Agreement", "Bank One",
"Borrower", "Borrowers", "Enex", "Lender", "Lenders", "Magellan", "Production"
and "3TEC" shall have the meanings indicated above. When used herein the
following terms shall have the following meanings:

     Advance or Advances means a loan or loans hereunder.
     -------------------

     Affiliate means any Person which, directly or indirectly, controls, is
     ---------
controlled by or is under common control with the relevant Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as used with respect
to any Person, shall mean a member of the board of directors, a partner or an
officer of such Person, or any other Person with possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, through the ownership (of record, as trustee, or by
proxy) of voting shares, partnership interests or voting rights, through a
management contract or otherwise. Any Person owning or controlling directly or
indirectly ten percent or more of the voting shares, partnership interests or
voting rights, or other equity interest of another Person shall be deemed to be
an Affiliate of such Person.

     Alternate Base Rate shall mean, as of any date, a rate of interest per
     -------------------
annum equal to the higher of (i) the Prime Rate for such date, and (ii) the sum
of the Federal Funds Effective Rate for such date plus one-half of one percent
(.50%) per annum.

     Assignment and Acceptance means a document substantially in the form of
     -------------------------
Exhibit "D" hereto.

     Base Rate shall mean, as of any date, the sum of the Alternate Base Rate
     ---------
plus the Base Rate Margin.

     Base Rate Loans shall mean any loan during any period which bears interest
     ---------------
based upon the Alternate Base Rate or which would bear interest based upon the
Alternate Base Rate if the Maximum Rate ceiling was not in effect at that
particular time.

     Base Rate Margin shall be:
     ----------------

          (i)  one-half of one percent (.50%) per annum whenever the Borrowing
     Base Usage is equal to or greater than 90%; or

          (ii) three-eighths of one percent (.375%) per annum whenever the
     Borrowing Base Usage is equal to or greater than 75% but less than 90%; or

                                      -2-
<PAGE>

          (iii) one-quarter of one percent (.25%) per annum whenever the
     Borrowing Base Usage is equal to or greater than 50%, but less than 75%; or

          (iv)  zero percent (0%) per annum whenever the Borrowing Base Usage is
     less than 50%.

     Borrowing Base shall mean the value assigned by the Lenders from time to
     --------------
time to the Oil and Gas Properties pursuant to Section 7 hereof. Until the next
determination of the Borrowing Base pursuant to Section 7(b) hereof and subject
to Section 9(c) hereof, the Borrowing Base shall be $145,000,000.

     Borrowing Base Usage shall mean, as of any date, all amounts outstanding on
     --------------------
the Loan plus all outstanding Letters of Credit, divided by the Borrowing Base.

     Borrowing Date means the date elected by Borrowers pursuant to Section 2(b)
     --------------
hereof for an Advance on the Loan.

     Business Day shall mean (i) with respect to any borrowing, payment or note
     ------------
selection of LIBOR Loans, a day (other than Saturdays or Sundays) on which banks
are legally open for business in Dallas, Texas and New York, New York and on
which dealings in United States dollars are carried on in the London interbank
market, and (ii) for all other purposes a day (other than Saturdays and Sundays)
on which banks are legally open for business in Dallas, Texas.

     Cash Collateral Accounts is used herein as defined in Section 12(v).
     ------------------------

     Change of Control shall occur if any Person (or syndicate or group of
     -----------------
Persons which is deemed a Person for the purposes of Sections 13(d) or 14(d)(ii)
of the Securities Act of 1934, as amended) shall acquire, directly or indirectly
an amount of issued and outstanding voting stock of Borrowers (including the
acquisition of newly-issued stock) sufficient to change the control of Borrowers
by causing the election or change of a majority of the directors of Borrowers.

     Change of Management means a Change of Management shall occur if Floyd C.
     --------------------
Wilson ever ceases to act as Chairman and Chief Executive Officer of 3TEC and a
replacement for such officer, acceptable to Agent, is not appointed within sixty
(60) days thereafter.

     Commitment means (A) For all Lenders, the lesser of (i) $250,000,000 or
     ----------                                ------
(ii) the Borrowing Base, as reduced or increased from time to time pursuant to
Sections 2 and 7 hereof, and (B) as to any Lender, its obligation to make
Advances hereunder on the Loan and

                                      -3-
<PAGE>

purchase participations in Letters of Credit issued hereunder by the Agent in
amounts not exceeding, in the aggregate, an amount equal to such Lender's
Commitment Percentage times the total Commitment as of any date. The Commitment
of each Lender hereunder shall be adjusted from time to time to reflect
assignments made by such Lender pursuant to Section 28 hereof. Each reduction in
the Commitment shall result in a Pro Rata reduction in each Lender's Commitment.

     Commitment Percentage means for each Lender the percentage derived by
     ---------------------
dividing its Commitment at the time of the determination by the Commitments of
all Lenders at the time of determination. The Commitment Percentage of each
Lender hereunder shall be adjusted from time to time to reflect assignments made
by such Lender pursuant to Section 28 hereof.

     Consolidated Current Assets means the total of the consolidated current
     ---------------------------
assets determined in accordance with GAAP, plus, as of any date, the unused
availability on the Commitment.

     Consolidated Current Liabilities means the total of consolidated current
     --------------------------------
obligations as determined in accordance with GAAP, excluding therefrom, as of
any date, current maturities due on the Loans.

     Consolidated EBITDAX shall mean Consolidated Net Income (excluding gains
     --------------------
and losses from asset sales, extraordinary and non-recurring gains and losses)
plus the sum of (i) income tax expense (but excluding income tax expense
relating to the sales or other disposition of assets, including capital stock,
the gains and losses from which are excluded in the determination of
Consolidated Net Income), plus (ii) Consolidated Interest Expense, plus (iii)
depreciation, depletion and amortization expense, plus (iv) other non-cash
expenses, plus (v) dry hole costs and geological and geophysical expenses, all
as determined in accordance with GAAP.

     Consolidated Interest Expense shall mean the aggregate amount of interest
     -----------------------------
expense of Borrowers as determined on a consolidated basis in accordance with
GAAP.

     Consolidated Net Income shall mean Borrowers' consolidated net income after
     -----------------------
income taxes calculated in accordance with GAAP.

     Current Ratio means the ratio of Consolidated Current Assets for the period
     -------------
being measured to the Consolidated Current Liabilities for such period.

     CW Resources Acquisition means the acquisition by Borrowers of oil and gas
     ------------------------
properties from C.W. Resources, Inc., Westerman Royalty, Inc. and Carl A.
Westerman

                                      -4-
<PAGE>

     ("CWR et. al".) pursuant to an Agreement of Sale and Purchase between 3TEC,
and CWR et. al dated April 14, 2000.

     Default means all the events specified in Section 14 hereof, regardless of
     -------
whether there shall have occurred any passage of time or giving of notice, or
both, that would be necessary in order to constitute such event as an Event of
Default.

     Defaulting Lender is used herein as defined in Section 3(f) hereof.
     -----------------

     Effective Date means the date of this Agreement.
     --------------

     Eligible Assignee means any of (i) a Lender or any Affiliate of a Lender;
     -----------------
(ii) a commercial bank organized under the laws of the United States, or any
state thereof, and having a combined capital and surplus of at least
$100,000,000; (iii) a commercial bank organized under the laws of any other
country which is a member of the Organization for Economic Cooperation and
Development, or a political subdivision of any such country, and having a
combined capital and surplus of at least $100,000,000.00, provided that such
bank is acting through a branch or agency located in the United States; (iv) a
Person that is primarily engaged in the business of commercial lending and that
(A) is a subsidiary of a Lender, (B) a subsidiary of a Person of which a Lender
is a subsidiary, or (C) a Person of which a Lender is a subsidiary; (v) any
other entity (other than a natural person) which is an "accredited investor" (as
defined in Regulation D under the Securities Act) which extends credit or buys
loans as one of its businesses, including, but not limited to, insurance
companies, mutual funds, investments funds and lease financing companies; and
(vi) with respect to any Lender that is a fund that invests in loans, any other
fund that invests in loans and is managed by the same investment advisor of such
Lender or by an Affiliate of such investment advisor (and treating all such
funds so managed as a single Eligible Assignee); provided, however, that no
Affiliate of Borrowers shall be an Eligible Assignee.

     Engineered Value is used herein as defined in Section 6 hereof.
     ----------------

     Environmental Laws means the Comprehensive Environmental Response,
     ------------------
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, 42 U.S.C.A. (S)9601, et seq., the Resource
                                                      -- ---
Conservation and Recovery Act, as amended by the Hazardous Solid Waste Amendment
of 1984, 42 U.S.C.A. (S)6901, et seq., the Clean Water Act, 33 U.S.C.A. (S)1251,
                              -- ---
et seq., the Clean Air Act, 42 U.S.C.A. (S)1251, et seq., the Toxic Substances
-- ---                                           -- ---
Control Act, 15 U.S.C.A. (S)2601, et seq., The Oil Pollution Act of 1990, 33
U.S.G. (S)2701, et seq., and all other laws, statutes, codes, acts, ordinances,
                -- ---
orders, judgments, decrees, injunctions, rules, regulations, orders, permits and
restrictions of any federal, state, county, municipal and other governments,
departments, commissions, boards, agencies, courts, authorities, officials and
officers, domestic or foreign,

                                      -5-
<PAGE>

relating to oil pollution, air pollution, water pollution, noise control and/or
the handling, discharge, disposal or recovery of on-site or off-site asbestos,
radioactive materials, spilled or leaked petroleum products, distillates or
fractions and industrial solid waste or "hazardous substances" as defined by 42
U.S.C. (S) 9601, et seq., as amended, as each of the foregoing may be amended
                 -- ---
from time to time.

     Environmental Liability means any claim, demand, obligation, cause of
     -----------------------
action, order, violation, damage, injury, judgment, penalty or fine, cost of
enforcement, cost of remedial action or any other costs or expense whatsoever,
including reasonable attorneys' fees and disbursements, resulting from the
violation or alleged violation of any Environmental Law or the release of any
substance into the environment which is required to be remediated by a
regulatory agency or governmental authority or the imposition of any
Environmental Lien (as hereinafter defined) which could reasonably be expected
to individually or in the aggregate have a Material Adverse Effect.

     Environmental Lien means a Lien in favor of any court, governmental agency
     ------------------
or instrumentality or any other Person (i) for any Environmental Liability or
(ii) for damages arising from or cost incurred by such court or governmental
agency or instrumentality or other person in response to a release or threatened
release of asbestos or "hazardous substance" into the environment, the
imposition of which Lien could reasonably be expected to have a Material Adverse
Effect.

     ERISA means the Employee Retirement Income Security Act of 1974, as
     -----
amended.

     Exchangeable Preferred Stock means 800,000 shares of 3TEC preferred stock
     ----------------------------
which may be designated by 3TEC as Exchangeable Preferred Stock and will have a
stated value of $25.00 per share and will be subject to a take down at 3TEC's
request from EnCap Investments L.L.C. and its affiliates pursuant to the Private
Equity Shelf Agreement.

     Federal Funds Effective Rate shall mean, for any day, an interest rate per
     ----------------------------
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m. (Dallas,
Texas time) on such day on such transactions received by the Agent from three
(3) Federal funds brokers of recognized standing selected by the Agent in its
sole discretion.

     Financial Statements means balance sheets, income statements, statements of
     --------------------
cash flows and appropriate footnotes and schedules, prepared in accordance with
GAAP.

                                      -6-
<PAGE>

     GAAP means generally accepted accounting principles, consistently applied.
     ----

     Intercreditor Agreements means (i) the Intercreditor Agreement among 3TEC,
     ------------------------
the Agent and W/E Energy Company LLC ("W/E LLC") (formerly known as 3TEC Energy
Company L.L.C.), (ii) the Intercreditor Agreement among 3TEC, the Agent and
Shoemaker Family Partnership, LP, (iii) the Intercreditor Agreement among 3TEC,
the Agent and Shoeinvest II, LP, and (iv) Letter Amendment No. 1 to Middle Bay
Oil Company, Inc. Securities Purchase Agreement (dated October 19, 1999),
between 3TEC and The Prudential Insurance Company of America, each dated
November 23, 1999.

     Interest Payment Date shall mean the last day of each calendar quarter in
     ---------------------
the case of Base Rate Loans and, in the case of LIBOR Loans, the last day of the
applicable Interest Period.

     Interest Period shall mean with respect to any LIBOR Loan (i) initially,
     ---------------
the period commencing on the date such LIBOR Loan is made and ending one (1),
three (3), or six (6) months thereafter as selected by the Borrowers pursuant to
Section 4(a)(ii), and (ii) thereafter, each period commencing on the day
following the last day of the next preceding Interest Period applicable to such
LIBOR Loan and ending one (1), three (3) or six (6) months thereafter, as
selected by the Borrowers pursuant to Section 4(a)(ii); provided, however, that
(i) if any Interest Period would otherwise expire on a day which is not a
Business Day, such Interest Period shall expire on the next succeeding Business
Day unless the result of such extension would be to extend such Interest Period
into the next calendar month, in which case such Interest Period shall end on
the immediately preceding Business Day, (ii) if any Interest Period begins on
the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) such Interest Period shall end on the last Business Day of a calendar
month, and (iii) any Interest Period which would otherwise expire after the
Maturity Date shall end on such Maturity Date.

     Letters of Credit is used herein as defined in Section 2(c) hereof.
     -----------------

     LIBOR Base Rate shall mean, with respect to any LIBOR Loan for the relevant
     ---------------
Interest Period, the applicable British Bankers' Association Interest Settlement
Rate for deposits in U.S. dollars appearing on Reuter's Screen FRBD as of 11:00
a.m. (London time) two (2) Business Days prior to the first day of each Interest
Period, and having a maturity equal to such Interest Period; provided that, if
Reuter's Screen FRBD is not available to the Agent for any reason, the
applicable LIBOR Rate for the relevant Interest Period shall instead be the
applicable British Bankers' Association Interest Settlement Rate for deposits in
U.S. dollars as reported by any other generally recognized financial information
service as of

                                      -7-
<PAGE>

11:00 a.m. (London time) two (2) Business Days prior to the first day of such
Interest Period, and having a maturity equal to such Interest Period.

     LIBOR Loans means any loans during any period which bear interest at the
     -----------
LIBOR Rate, or which would bear interest at such rate if the Maximum Rate
ceiling was not in effect at a particular time.

     LIBOR Margin shall be:
     ------------

          (i)   two and one-eighths percent (2.125%) per annum whenever the
     Borrowing Base Usage is equal to or greater than 90%;

          (ii)  two percent (2%) per annum whenever the Borrowing Base Usage is
     equal to or greater than 75%, but less than 90%;

          (iii) one and three-quarters percent (1.75%) per annum whenever the
     Borrowing Base Usage is equal to or greater than 50%, but less than 75%; or

          (iv)  one and one-half percent (1.50%) per annum whenever the
     Borrowing Base Usage is less than 50%.

     LIBOR Rate means, with respect to a LIBOR Loan for the relevant Interest
     ----------
Period, the sum of (i) the quotient of (A) the LIBOR Base Rate applicable to
such Interest Period, divided by (B) one minus the Reserve Requirement
(expressed as a decimal) applicable to such Interest Period, plus the (ii) LIBOR
Margin. The LIBOR Rate shall be rounded to the next higher multiple of 1/16th of
one percent if the rate is not such a multiple.

     Lien means any mortgage, deed of trust, pledge, security interest,
     ----
assignment, encumbrance or lien (statutory or otherwise) of every kind and
character.

     Loan or Loans means an Advance or Advances made under the Commitment.
     -------------

     Loan Documents means this Agreement, the Notes, the Intercreditor
     --------------
Agreements, the Assignment, Acknowledgment, Agreement and Waiver, the Security
Instruments and all other documents executed in connection with the transaction
described in this Agreement.

     Majority Lenders means Lenders holding 66-2/3% or more of the Commitments
     ----------------
or if the Commitments have been terminated, Lenders holding 66-2/3% of the
outstanding Loans.

                                      -8-
<PAGE>

     Material Adverse Effect shall mean a material adverse effect on (i) the
     -----------------------
assets or properties, liabilities, financial condition, business, operations,
affairs or circumstances of the Borrowers, (ii) the ability of the Borrowers to
carry out their respective businesses as of the date of this Agreement or as
proposed at the date of this Agreement to be conducted, (iii) the ability of
Borrowers to perform fully and on a timely basis their obligations under any of
the Loan Documents, or (iv) the validity or enforceability of any of the Loan
Documents or the rights and remedies of the Agent or the Lenders thereunder.

     Maturity Date shall mean May 31, 2003.
     -------------

     Maximum Rate means at any particular time in question, the maximum non-
     ------------
usurious rate of interest which under applicable law may then be charged on the
Note. If such Maximum Rate changes after the date hereof, the Maximum Rate shall
be automatically increased or decreased, as the case may be, without notice to
Borrowers from time to time as the effective date of each change in such Maximum
Rate.

     Minimum Interest Coverage Ratio means the ratio of Consolidated EBITDAX for
     -------------------------------
the period being measured to the sum of Consolidated Interest Expense for the
period being measured plus preferred stock dividends paid in cash during the
period being measured.

     Notes means the Notes, substantially in the form of Exhibit "B" hereto
     -----
issued or to be issued hereunder to each Lender, respectively, to evidence the
indebtedness to such Lender arising by reason of the Advances on the Loan,
together with all modifications, renewals and extensions thereof or any part
thereof.

     Oil and Gas Properties means all oil, gas and mineral properties and
     ----------------------
interests, and related personal property, in which Borrowers grant to the
Lenders either a first and prior lien and security interest pursuant to Section
6 hereof or a negative pledge pursuant to Section 13(a) hereof.

     Operating Accounts is used herein as defined in Section 12(v).
     ------------------

     Other Financing is used herein as defined in Section 15(l) hereof.
     ---------------

     Payor is used herein as defined in Section 3(h)hereof.
     -----

     Permitted Liens shall mean (i) royalties, overriding royalties,
     ---------------
reversionary interests, production payments and similar burdens; (ii) sales
contracts or other arrangements for the sale of production of oil, gas or
associated liquid or gaseous hydrocarbons which would not (when considered
cumulatively with the matters discussed in clause (i) above) deprive Borrowers
of any material right in respect of any such Borrower's assets or properties
(except

                                      -9-
<PAGE>

for rights customarily granted with respect to such contracts and arrangements);
(iii) statutory Liens for taxes or other assessments that are not yet delinquent
(or that, if delinquent, are being contested in good faith by appropriate
proceedings, levy and execution thereon having been stayed and continue to be
stayed and for which such Borrower has set aside on its books adequate reserves
in accordance with GAAP); (iv) easements, rights of way, servitudes, permits,
surface leases and other rights in respect to surface operations, pipelines,
grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants
and other restrictions, and easements of streets, alleys, highways, pipelines,
telephone lines, power lines, railways and other easements and rights of way on,
over or in respect of Borrowers' assets or properties and that do not
individually or in the aggregate, cause a Material Adverse Effect; (v)
materialmen's, mechanic's, repairman's, employee's, warehousemen's, landlord's,
carrier's, pipeline's, contractor's, sub-contractor's, operator's, non-
operator's (arising under operating or joint operating agreements), and other
Liens (including any financing statements filed in respect thereof) incidental
to obligations incurred by Borrowers in connection with the construction,
maintenance, development, transportation, storage or operation of Borrowers'
assets or properties to the extent not delinquent (or which, if delinquent, are
being contested in good faith by appropriate proceedings and for which such
Borrower has set aside on its books adequate reserves in accordance with GAAP);
(vi) all contracts, agreements and instruments, and all defects and
irregularities and other matters affecting Borrowers' assets and properties
which were in existence at the time Borrowers' assets and properties were
originally acquired by Borrowers and all routine operational agreements entered
into in the ordinary course of business, which contracts, agreements,
instruments, defects, irregularities and other matters and routine operational
agreements are not such as to, individually or in the aggregate, interfere
materially with the operation, value or use of Borrowers' assets and properties,
considered in the aggregate; (vii) liens in connection with workmen's
compensation, unemployment insurance or other social security, old age pension
or public liability obligations; (viii) legal or equitable encumbrances deemed
to exist by reason of the existence of any litigation or other legal proceeding
or arising out of a judgment or award with respect to which an appeal is being
prosecuted in good faith and levy and execution thereon have been stayed and
continue to be stayed; (ix) rights reserved to or vested in any municipality,
governmental, statutory or other public authority to control or regulate
Borrowers' assets and properties in any manner, and all applicable laws, rules
and orders from any governmental authority; (x) landlord's liens; (xi) Liens
incurred pursuant to the Security Instruments; and (xii) Liens existing at the
date of this Agreement which are identified in Schedule "1" hereto.

     Person means an individual, a corporation, a partnership, an association, a
     ------
trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.

                                      -10-
<PAGE>

     Plan means any plan subject to Title IV of ERISA and maintained by
     ----
Borrowers, or any such plan to which any Borrower is required to contribute on
behalf of its employees.

     Pre-Approved Contracts as used herein shall mean any contracts or
     ----------------------
agreements entered into in connection with any Rate Management Transaction
designed (i) to hedge, forward sell or swap crude oil or natural gas or
otherwise sell up to 75% of the Borrowers' anticipated production from proved,
developed producing reserves of crude oil, and/or up to 75% of the Borrowers'
anticipated production from proved, developed producing reserves of natural gas,
during the period from the immediately preceding settlement date (or the
commencement of the term of such hedge transactions if there is no prior
settlement date) to such settlement date, (ii) with a maturity of not exceeding
the Maturity Date, and (iii) with counterparties to the hedging agreement (other
than a Lender or Affiliate of a Lender which are approved counterparties) which
are reasonably approved by Agent.

     Prime Rate means the rate per annum equal to the Prime Rate announced by
     ----------
the Agent from time to time, changing when and as said Prime Rate changes.

     Private Equity Shelf Agreement means that certain Private Equity Shelf
     ------------------------------
Agreement dated May 31, 2000, among 3TEC, EnCap Investments L.L.C. and certain
of its affiliates, pursuant to which the Exchangeable Preferred Stock may be
issued by 3TEC.

     Pro Rata or Pro Rata Part means for each Lender, (i) for all purposes where
     -------------------------
no Loan is outstanding, such Lender's Commitment Percentage and (ii) otherwise,
the proportion which the portion of the outstanding Loans owed to such Lender
bears to the aggregate outstanding Loans owed to all Lenders at the time in
question.

     Rate Management Transaction means any transaction (including an agreement
     ---------------------------
with respect thereto) now existing or hereafter entered into by any of the
Borrowers 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, forward 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 one 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 from time to time in effect and any successor thereto
and other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.

                                      -11-
<PAGE>

          Reimbursement Obligations means, at any time, the obligations of the
          -------------------------
     Borrowers in respect of all Letters of Credit then outstanding to reimburse
     amounts paid by any Lender in respect of any drawing or drawings under a
     Letter of Credit.

          Release Price is used herein as defined in Section 12(r) hereof.
          -------------

          Required Payment is used herein as defined in Section 3(h) hereof.
          ----------------

          Reserve Requirement means, with respect to any Interest Period, the
          -------------------
     maximum aggregate reserve requirement (including all basic, supplemental,
     marginal and other reserves) which is imposed under Regulation D or
     Eurocurrency liabilities.

          Security Instruments  is used collectively herein to mean this
          --------------------
     Agreement, all Deeds of Trust, Mortgages, Security Agreements, Assignments
     of Production and Financing Statements and other collateral documents
     covering the Oil and Gas Properties and related personal property,
     equipment, oil and gas inventory and proceeds of the foregoing, all such
     documents to be in form and substance satisfactory to Agent.

          Security Purchase Agreements mean (i) a Securities Purchase Agreement
          ----------------------------
     dated August 27, 1999 between Middle Bay and Shoemaker Family Partnership,
     LP, (ii) a Securities Purchase Agreement dated August 27, 1999 between
     Middle Bay and Shoeinvest II, LP, (iii) a Securities Purchase Agreement
     dated July 1, 1999 between Middle Bay and W/E LLC and (iv) a Securities
     Purchase Agreement dated October 19, 1999 between Middle Bay and The
     Prudential Insurance Company of America, as amended by that certain Letter
     Amendment No. 1 to Middle Bay Securities Purchase Agreement dated November
     23, 1999.

          Series B Preferred Stock means 266,667 shares of 3TEC preferred stock
          ------------------------
     which has been designated as Series B and has a stated value of $7.50 per
     share, all of which is issued and outstanding.

          Series C Preferred Stock means 2,300,000 shares of 3TEC preferred
          ------------------------
     stock which has been designated as Series C and has a stated value of $5.00
     per share, 2,167,156 shares of which are issued and outstanding.

          Series D Preferred Stock means 725,167 shares of 3TEC preferred stock
          ------------------------
     which has been designated as Series D and has a stated value of $24.00 per
     share, 621,930 of which are issued and outstanding as of March 31, 2000.

          Subordinated Lenders W/E LLC, Shoemaker Family Partnership, LP,
          --------------------
     Shoeinvest II, LP and The Prudential Insurance Company of America.

                                      -12-
<PAGE>

          Subordinated Notes means promissory notes issued by 3TEC pursuant to
          ------------------
     the Security Purchase Agreements.

          Subsidiary means any corporation or other entity of which securities
          ----------
     or other ownership interests having ordinary voting power to elect a
     majority of the board of directors or other persons performing similar
     functions are at the time directly or indirectly owned by Borrowers or
     another subsidiary.

          Total Outstandings means, as of any date, the sum of (i) the total
          ------------------
     principal balance outstanding on the Notes, plus (ii) the total face amount
     of all outstanding Letters of Credit, plus (iii) the total amount of all
     unpaid Reimbursement Obligations.

          Tranche means a set of LIBOR Loans made by the Lenders at the same
          -------
     time and for the same Interest Period.

          Unscheduled Redeterminations means a redetermination of the Borrowing
          ----------------------------
     Base made at any time other than on the dates set for the regular semi-
     annual redetermination of the Borrowing Base which are made (A) at the
     request of Borrowers (but only once between Borrowing Base
     redeterminations), (B) at the request of Majority Lenders.

          Unused Commitment Fee Rate shall be:
          --------------------------

               (i)   one-half of one percent (.50%) per annum whenever the
          Borrowing Base Usage is equal to or greater than 90%;

               (ii)  three-eighths of one percent (.375%) per annum whenever the
          Borrowing Base Usage is equal to or greater than 50% but less than
          90%; or

               (iii) one-fourth of one percent (.25%) per annum whenever the
          Borrowing Base Usage is less than 50%.

     2.   Commitments of the Lender.

          (a)  Terms of Commitment.  On the terms and conditions hereinafter set
               -------------------
     forth, each Lender agrees severally to make Advances to the Borrowers from
     time to time during the period beginning on the Effective Date and ending
     on the Maturity Date in such amounts as the Borrowers may request up to an
     amount not to exceed, in the aggregate principal amount outstanding at any
     time, the Commitment less Total Outstandings.  The obligation of the
     Borrowers hereunder shall be evidenced by this Agreement and the Notes
     issued in connection herewith, said Notes to be as described in Section 3
     hereof.  Notwithstanding any other provision of this Agreement, no Advance
     shall be required to be made hereunder if any

                                      -13-
<PAGE>

     Event of Default (as hereinafter defined) has occurred and is continuing or
     if any event or condition has occurred or failed to occur which with the
     passage of time or service of notice, or both, would constitute an Event of
     Default.  Each Advance under the Commitment shall be an aggregate amount of
     at least $1,000,000 or any whole multiples of $100,000 in excess thereof.
     Irrespective of the face amount of the Note or Notes, the Lenders shall
     never have the obligation to Advance any amount or amounts in excess of the
     Commitment or to increase the Commitment.

          (b)  Procedure for Borrowing.  Whenever the Borrowers desire an
               -----------------------
     Advance hereunder, they shall give Agent telegraphic, telex, facsimile or
     telephonic notice ("Notice of Borrowing") of such requested Advance, which
     in the case of telephonic notice, shall be promptly confirmed in writing.
     Each Notice of Borrowing shall be in the form of Exhibit "A" attached
     hereto and shall be received by Agent not later than 11:00 a.m. Dallas,
     Texas time, (i) one Business Day prior to the Borrowing Date in the case of
     the Base Rate Loan, or (ii) three Business Days prior to any proposed
     Borrowing Date in the case of LIBOR Loans.  Each Notice of Borrowing shall
     specify (i) the Borrowing Date (which, if at Base Rate Loan, shall be a
     Business Day and if a LIBOR Loan, a Business Day), (ii) the principal
     amount to be borrowed, (iii) the portion of the Advance constituting Base
     Rate Loans and/or LIBOR Loans, (iv) if any portion of the proposed Advance
     is to constitute LIBOR Loans, the initial Interest Period selected by
     Borrowers pursuant to Section 4 hereof to be applicable thereto, and (v)
     the date upon which such Advance is required.  Upon receipt of such Notice,
     Agent shall advise each Lender thereof; provided, that if the Lenders have
     received at least one (1) day's notice of such Advance prior to funding of
     a Base Rate Loan, or at least three (3) days' notice of each Advance prior
     to funding in the case of a LIBOR Loan, each Lender shall provide Agent at
     its office at 1717 Main Street, Dallas, Texas 75201, not later than 1:00
     p.m., Dallas, Texas time, on the Borrowing Date, in immediately available
     funds, its pro rata share of the requested Advance, but the aggregate of
     all such fundings by each Lender shall never exceed such Lender's
     Commitment.  Not later than 2:00 p.m., Dallas, Texas time, on the Borrowing
     Date, Agent shall make available to the Borrowers at the same office, in
     like funds, the aggregate amount of such requested Advance.  Neither Agent
     nor any Lender shall incur any liability to the Borrowers in acting upon
     any Notice referred to above which Agent or such Lender believes in good
     faith to have been given by a duly authorized officer or other person
     authorized to borrow on behalf of Borrowers or for otherwise acting in good
     faith under this Section 2(b).  Upon funding of Advances by Lenders in
     accordance with this Agreement, pursuant to any such Notice, the Borrowers
     shall have effected Advances hereunder.

          (c)  Letters of Credit.  On the terms and conditions hereinafter set
               -----------------
     forth, the Agent shall from time to time during the period beginning on the
     Effective Date and ending on the Maturity Date upon request of Borrowers
     issue standby Letters of Credit for the account of Borrowers (the "Letters
     of Credit") in such face amounts as Borrowers may request, but not

                                      -14-
<PAGE>

     to exceed in the aggregate face amount at any time outstanding the sum of
     Five Million Dollars ($5,000,000).  The face amount of all Letters of
     Credit issued and outstanding hereunder shall be considered as Advances on
     the Commitment for Borrowing Base purposes and all payments made by the
     Agent on such Letters of Credit shall be considered as Advances under the
     Notes.  Each Letter of Credit issued for the account of Borrowers hereunder
     shall (i) be in favor of such beneficiaries as specifically requested by
     Borrowers, (ii) have an expiration date not exceeding the earlier of (a)
     one year or (b) the Maturity Date, and (iii) contain such other terms and
     provisions as may be required by issuing Lender.  Each Lender (other than
     Agent) agrees that, upon issuance of any Letter of Credit hereunder, it
     shall automatically acquire a participation in the Agent's liability under
     such Letter of Credit in an amount equal to such Lender's Commitment
     Percentage of such liability, and each Lender (other than Agent) thereby
     shall absolutely, unconditionally and irrevocably assume, as primary
     obligor and not as surety, and shall be unconditionally obligated to Agent
     to pay and discharge when due, its Commitment Percentage of Agent's
     liability under such Letter of Credit.  The Borrowers hereby
     unconditionally agree to pay and reimburse the Agent for the amount of each
     demand for payment under any Letter of Credit that is in substantial
     compliance with the provisions of any such Letter of Credit at or prior to
     the date on which payment is to be made by the Agent to the beneficiary
     thereunder, without presentment, demand, protest or other formalities of
     any kind.  Upon receipt from any beneficiary of any Letter of Credit of any
     demand for payment under such Letter of Credit, the Agent shall promptly
     notify the Borrowers of the demand and the date upon which such payment is
     to be made by the Agent to such beneficiary in respect of such demand.
     Forthwith upon receipt of such notice from the Agent, Borrowers shall
     advise the Agent whether or not they intend to borrow hereunder to finance
     their obligations to reimburse the Agent, and if so, submit a Notice of
     Borrowing as provided in Section 2(b) hereof.  If Borrowers fail to so
     advise Agent and thereafter fail to reimburse Agent, the Agent shall notify
     each Lender of the demand and the failure of the Borrowers to reimburse the
     Agent, and each Lender shall reimburse the Agent for its Commitment
     Percentage of each such draw paid by the Agent and unreimbursed by the
     Borrowers.  All such amounts paid by Agent and/or reimbursed by the Lenders
     shall be treated as an Advance or Advances under the Commitment, which
     Advances shall be immediately due and payable and shall bear interest at
     the Maximum Rate.

          (d)  Procedure for Obtaining Letters of Credit.  The amount and date
               -----------------------------------------
     of issuance, renewal, extension or reissuance of a Letter of Credit
     pursuant to the Lenders' commitments above in Section 2(c) shall be
     designated by Borrowers' written request delivered to Agent at least three
     (3) Business Days prior to the date of such issuance, renewal, extension or
     reissuance.  Concurrently with or promptly following the delivery of the
     request for a Letter of Credit, Borrowers shall execute and deliver to the
     Agent an application and agreement with respect to the Letters of Credit,
     said application and agreement to be in the form used by the Agent.  The
     Agent shall not be obligated to issue, renew, extend or reissue such
     Letters of Credit if (A) the amount thereon when added to the face amount
     of the outstanding

                                      -15-
<PAGE>

     Letters of Credit plus any Reimbursement Obligations exceeds Five Million
     Dollars ($5,000,000) or (B) the amount thereof when added to the Total
     Outstandings would exceed the Commitment.  Borrowers agree to pay the Agent
     for the benefit of the Lenders commissions for issuing the Letters of
     Credit (calculated separately for each Letter of Credit) in an amount equal
     to the greater of (i) the LIBOR Margin then in effect times the maximum
     face amount of the Letter of Credit or (ii) $500.00.  Borrowers further
     agree to pay Agent an additional fronting fee equal to one-eighth of one
     percent (0.125%) per annum on the maximum face amount of each Letter of
     Credit.  Such commissions shall be payable prior to the issuance of each
     Letter of Credit and thereafter on each anniversary date of such issuance
     while such Letter of Credit is outstanding.

          (e)  Voluntary Reduction of Commitment.  Subject to the provisions of
               ---------------------------------
     Section 5(e) hereof, the Borrowers may at any time, or from time to time,
     upon not less than three (3) Business Days' prior written notice to Agent,
     reduce or terminate the Commitment; provided, however, that (i) each
     reduction in the Commitment must be in the amount of $1,000,000 or more, in
     increments of $1,000,000 and (ii) each reduction must be accompanied by a
     prepayment of the Notes in the amount by which the outstanding principal
     balance of the Notes exceeds the Commitment as reduced pursuant to this
     Section 2.

          (f)  Mandatory Commitment Reductions.  The Borrowing Base shall be
               -------------------------------
     reduced by the amount of the Special Mandatory Prepayment required pursuant
     to Section 9(c) hereof. In addition, the Borrowing Base shall be reduced
     from time to time by the amount of any prepayment required by Section 12(r)
     hereof upon the sale of assets. If, as a result of any such reduction in
     the Borrowing Base, the Total Outstandings ever exceed the Borrowing Base
     then in effect, the Borrowers shall make the mandatory prepayment of
     principal required pursuant to Section 9(b) hereof.

          (g)  Several Obligations.  The obligations of the Lenders under the
               -------------------
     Commitments are several and not joint.  The failure of any Lender to make
     an Advance required to be made by it shall not relieve any other Lender of
     its obligation to make its Advance, and no Lender shall be responsible for
     the failure of any other Lender to make the Advance to be made by such
     other Lender.  No Lender shall be required to lend hereunder any amount in
     excess of its legal lending limit.

          (h)  Type and Number of Advances.  Any Advance of the Commitment may
               ---------------------------
     be a Base Rate Loan or a LIBOR Loan, or a combination thereof, as selected
     by the Borrowers pursuant to Section 4 hereof.  The total number of
     Tranches which may be outstanding at any time shall never exceed four (4).

          (i)  Limited Liability of Enex, Production and Magellan. While the
               --------------------------------------------------
     obligations of the Borrowers under the Agreement and the Notes shall be
     joint and several obligations

                                      -16-
<PAGE>

     of 3TEC, Enex, Production and Magellan, the liability of Enex, Production
     and Magellan thereunder shall be limited to the maximum amount of liability
     that can be incurred without rendering the obligations of Enex, Production
     and Magellan under the Loan Documents voidable under applicable law
     relating to fraudulent conveyance or fraudulent transfer, and not for any
     greater amount.

     3.   Notes Evidencing Loans.  The loans described above in Section 2 shall
be evidenced by promissory notes of Borrowers as follows:

          (a)  Form of Notes.  The Loan shall be evidenced by a Note or Notes in
               -------------
     the aggregate face amount of $250,000,000, and shall be in the form of
     Exhibit "B" hereto with appropriate insertions (each a "Note").
     Notwithstanding the face amount of the Notes, the actual principal amount
     due from the Borrowers to Lenders on account of the Notes, as of any date
     of computation, shall be the sum of Advances then and theretofore made on
     account thereof, less all principal payments actually received by Lenders
     in collected funds with respect thereto.  Although the Notes may be dated
     as of the Effective Date, interest in respect thereof shall be payable only
     for the period during which the loans evidenced thereby are outstanding
     and, although the stated amount of the Notes may be higher, the Notes shall
     be enforceable, with respect to Borrowers' obligation to pay the principal
     amount thereof, only to the extent of the unpaid principal amount of the
     Loans.  Irrespective of the face amount of the Notes, no Lender shall ever
     be obligated to advance on the Commitment any amount in excess of its
     Commitment then in effect.

          (b)  Issuance of Additional Notes.  At the Effective Date there shall
               ----------------------------
     be outstanding Notes in the aggregate face amount of $250,000,000 payable
     to the order of Lenders.  From time to time new Notes may issued to other
     Lenders as such Lenders become parties to this Agreement.  Upon request
     from Agent, the Borrowers shall execute and deliver to Agent any such new
     or additional Notes.  From time to time as new Notes are issued the Agent
     shall require that each Lender exchange its Note(s) for newly issued
     Note(s) to better reflect the extent of each Lender's Commitments
     hereunder.

          (c)  Interest Rates.  The unpaid principal balance of the Notes shall
               --------------
     bear interest from time to time as set forth in Section 4 hereof.

          (d)  Payment of Interest.  Interest on the Notes shall be payable on
               -------------------
     each Interest Payment Date.

          (e)  Payment of Principal.   Principal of the Note or Notes shall be
               --------------------
     due and payable to the Agent for the ratable benefit of the Lenders on the
     Maturity Date unless earlier due in whole or in part as a result of an
     acceleration of the amount due or pursuant to the mandatory prepayment
     provisions of Sections 2(f), 9(b) and 9(c) hereof.

                                      -17-
<PAGE>

          (f)  Payment to Lenders.  Each Lender's Pro Rata Part of payment or
               ------------------
     prepayment of the Loans shall be directed by wire transfer to such Lender
     by the Agent at the address provided to the Agent for such Lender for
     payments no later than 2:00 p.m., Dallas, Texas, time on the Business Day
     such payments or prepayments are deemed hereunder to have been received by
     Agent; provided, however, in the event that any Lender shall have failed to
     make an Advance as contemplated under Section 2 hereof (a "Defaulting
     Lender") and the Agent or another Lender or Lenders shall have made such
     Advance, payment received by Agent for the account of such Defaulting
     Lender or Lenders shall not be distributed to such Defaulting Lender or
     Lenders until such Advance or Advances shall have been repaid in full to
     the Lender or Lenders who funded such Advance or Advances.  Any payment or
     prepayment received by Agent at any time after 12:00 noon, Dallas, Texas,
     time on a Business Day shall be deemed to have been received on the next
     Business Day.  Interest shall cease to accrue on any principal as of the
     end of the day preceding the Business Day on which any such payment or
     prepayment is deemed hereunder to have been received by Agent.  If Agent
     fails to transfer any principal amount to any Lender as provided above,
     then Agent shall promptly direct such principal amount by wire transfer to
     such Lender.

          (g)  Sharing of Payments, Etc.  If any Lender shall obtain any payment
               -------------------------
     (whether voluntary, involuntary, or otherwise) on account of the Loans,
     (including, without limitation, any set-off) which is in excess of its Pro
     Rata Part of payments on either of the Loans, as the case may be, obtained
     by all Lenders, such Lender shall purchase from the other Lenders such
     participation as shall be necessary to cause such purchasing Lender to
     share the excess payment pro rata with each of them; provided that, if all
     or any portion of such excess payment is thereafter recovered from such
     purchasing Lender, the purchase shall be rescinded and the purchase price
     restored to the extent of the recovery.  The Borrowers agree that any
     Lender so purchasing a participation from another Lender pursuant to this
     Section may, to the fullest extent permitted by law, exercise all of its
     rights of payment (including the right of offset) with respect to such
     participation as fully as if such Lender were the direct creditor of the
     Borrowers in the amount of such participation.

          (h)  Non-Receipt of Funds by the Agent. Unless the Agent shall have
               ---------------------------------
     been notified by a Lender or the Borrowers (the "Payor") prior to the date
     on which such Lender is to make payment to the Agent of the proceeds of a
     Loan to be made by it hereunder or the Borrowers are to make a payment to
     the Agent for the account of one or more of the Lenders, as the case may be
     (such payment being herein called the "Required Payment"), which notice
     shall be effective upon receipt, that the Payor does not intend to make the
     Required Payment to the Agent, the Agent may assume that the Required
     Payment has been made and may, in reliance upon such assumption (but shall
     not be required to), make the amount thereof available to the intended
     recipient on such date and, if the Payor has not in fact made the Required
     Payment to the Agent, the recipient of such payment shall, on demand, pay
     to the Agent the amount made available to it together with interest thereon
     in respect of the period

                                      -18-
<PAGE>

     commencing on the date such amount was made available by the Agent until
     the date the Agent recovers such amount at the rate applicable to such
     portion of the applicable Loan.

     4.   Interest Rates.

          (a)  Options.
               -------

               (i)  Base Rate Loans. On all Base Rate Loans the Borrowers agree
                    ---------------
          to pay interest on the Notes calculated on the basis of the actual
          days elapsed in a year consisting of 365, or if appropriate, 366 days
          with respect to the unpaid principal amount of each Base Rate Loan
          from the date the proceeds thereof are made available to Borrowers
          until maturity (whether by acceleration or otherwise), at a varying
          rate per annum equal to the lesser of (i) the Maximum Rate (defined
          herein), or (ii) the Base Rate. Subject to the provisions of this
          Agreement as to prepayment, the principal of the Notes representing
          Base Rate Loans shall be payable as specified in Section 3(e) hereof
          and the interest in respect of each Base Rate Loan shall be payable on
          each Interest Payment Date. Past due principal and, to the extent
          permitted by law, past due interest in respect to each Base Rate Loan,
          shall bear interest, payable on demand, at a rate per annum equal to
          the Maximum Rate.

               (ii) LIBOR Loans.  On all LIBOR Loans the Borrowers agree to pay
                    -----------
          interest calculated on the basis of a year consisting of 360 days with
          respect to the unpaid principal amount of each LIBOR Loan from the
          date the proceeds thereof are made available to Borrowers until
          maturity (whether by acceleration or otherwise), at a varying rate per
          annum equal to the lesser of (i) the Maximum Rate, or (ii) the LIBOR
          Rate. Subject to the provisions of this Agreement with respect to
          prepayment, the principal of the Notes shall be payable as specified
          in Section 3(e) hereof and the interest with respect to each LIBOR
          Loan shall be payable on each Interest Payment Date. Past due
          principal and, to the extent permitted by law, past due interest shall
          bear interest, payable on demand, at a rate per annum equal to the
          Maximum Rate. Upon three (3) Business Days' written notice prior to
          the making by the Lenders of any LIBOR Loan (in the case of the
          initial Interest Period therefor) or the expiration date of each
          succeeding Interest Period (in the case of subsequent Interest Periods
          therefor), Borrowers shall have the option, subject to compliance by
          Borrowers with all of the provisions of this Agreement, as long as no
          Event of Default exists, to specify whether the Interest Period
          commencing on any such date shall be a one (1), three (3) or six (6)
          month period. If Agent shall not have received timely notice of a
          designation of such Interest Period as herein provided, Borrowers
          shall be

                                      -19-
<PAGE>

          deemed to have elected to convert all maturing LIBOR Loans to Base
          Rate Loans.

          (b)  Interest Rate Determination.  The Agent shall determine each
               ---------------------------
     interest rate applicable to the Loans hereunder.  The Agent shall give
     prompt notice to the Borrowers and the Lenders of each rate of interest so
     determined and its determination thereof shall be conclusive absent error.

          (c)  Conversion Option.  Borrowers may elect from time to time (i) to
               -----------------
     convert all or any part of their LIBOR Loans to Base Rate Loans by giving
     Agent irrevocable notice of such election in writing prior to 10:00 a.m.
     (Dallas, Texas time) on the conversion date and such conversion shall be
     made on the requested conversion date, provided that any such conversion of
     LIBOR Loan shall only be made on the last day of the Interest Period with
     respect thereof, (ii) to convert all or any part of their Base Rate Loans
     to LIBOR Loans by giving the Agent irrevocable written notice of such
     election three (3) Business Days prior to the proposed conversion and such
     conversion shall be made on the requested conversion date or, if such
     requested conversion date is not a Business Day, on the next succeeding
     Business Day.  Any such conversion shall not be deemed to be a prepayment
     of any of the loans for purposes of this Agreement on the Notes.

          (d)  Recoupment.  If at any time the applicable rate of interest
               ----------
     selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the
     Maximum Rate, thereby causing the interest on the Notes to be limited to
     the Maximum Rate, then any subsequent reduction in the interest rate so
     selected or subsequently selected shall not reduce the rate of interest on
     the Notes below the Maximum Rate until the total amount of interest accrued
     on the Note equals the amount of interest which would have accrued on the
     Notes if the rate or rates selected pursuant to Sections 4(a)(i) or (ii),
     as the case may be, had at all times been in effect.

     5.   Special Provisions Relating to Loans.

          (a)  Unavailability of Funds or Inadequacy of Pricing.  In the event
               ------------------------------------------------
     that, in connection with any proposed LIBOR Loan, the Agent reasonably
     determines, which determination shall, absent manifest error, be final,
     conclusive and binding upon all parties, due to changes in circumstances
     since the date hereof, adequate and fair means do not exist for determining
     the LIBOR Rate or such rate will not accurately reflect the costs to the
     Lenders of funding LIBOR Loan for such Interest Period, the Agent shall
     give notice of such determination to the Borrowers and the Lenders,
     whereupon, until the Agent notifies the Borrowers and the Lenders that the
     circumstances giving rise to such suspension no longer exist, the
     obligations of the Lenders to make, continue or convert Loan into LIBOR
     Loan shall be suspended, and all loans to Borrowers shall be Base Rate Loan
     during the period of suspension.

                                      -20-
<PAGE>

          (b)  Change in Laws. If at any time any new law or any change in
               --------------
     existing laws or in the interpretation of any new or existing laws shall
     make it unlawful for any Lender to make or continue to maintain or fund
     LIBOR Loan hereunder, then such Lender shall promptly notify Borrowers in
     writing and such Lender's obligation to make, continue or convert Loan into
     LIBOR Loan under this Agreement shall be suspended until it is no longer
     unlawful for such Lender to make or maintain LIBOR Loan. Upon receipt of
     such notice, Borrowers shall either repay the outstanding LIBOR Loan owed
     to the Lenders, without penalty, on the last day of the current Interest
     Periods (or, if any Lender may not lawfully continue to maintain and fund
     such LIBOR Loan, immediately), or Borrowers may convert such LIBOR Loan at
     such appropriate time to Base Rate Loan.

          (c)  Increased Cost or Reduced Return.
               --------------------------------

               (i)  If, after the date hereof, the adoption of any applicable
          law, rule, or regulation, or any change in any applicable law, rule,
          or regulation, or any change in the interpretation or administration
          thereof by any governmental authority, central bank, or comparable
          agency charged with the interpretation or administration thereof, or
          compliance by any Lender with any request or directive (whether or not
          having the force of law) of any such governmental authority, central
          bank, or comparable agency:

                    (A)  shall subject such Lender to any tax, duty, or other
               charge with respect to any LIBOR Loan, its Notes, or its
               obligation to make LIBOR Loan, or change the basis of taxation of
               any amounts payable to such Lender under this Agreement or its
               Notes in respect of any LIBOR Loan (other than franchise taxes
               and taxes imposed on the overall net income of such Lender);

                    (B)  shall impose, modify, or deem applicable any reserve,
               special deposit, assessment, or similar requirement (other than
               reserve requirements, if any, taken into account in the
               determination of the LIBOR Rate) relating to any extensions of
               credit or other assets of, or any deposits with or other
               liabilities or commitments of, such Lender, including the
               Commitment of such Lender hereunder; or

                    (C)  shall impose on such Lender or on the London interbank
               market any other condition affecting this Agreement or its Notes
               or any of such extensions of credit or liabilities or
               commitments;

          and the result of any of the foregoing is to increase the cost to such
          Lender of making, converting into, continuing, or maintaining any
          LIBOR Loan or to reduce any sum received or receivable by such Lender
          under this Agreement or its Notes

                                      -21-
<PAGE>

          with respect to any LIBOR Loan, then  Borrowers shall pay to such
          Lender on demand such amount or amounts as will reasonably compensate
          such Lender for such increased cost or reduction.  If any Lender
          requests compensation by Borrowers under this Section 5(c), Borrowers
          may, by notice to such Lender (with a copy to Agent), suspend the
          obligation of such Lender to make or continue LIBOR Loan, or to
          convert all or part of the Base Rate Loan owing to such Lender to
          LIBOR Loan, until the event or condition giving rise to such request
          ceases to be in effect (in which case the provisions of Section 5(c)
          shall be applicable); provided that such suspension shall not affect
                                --------
          the right of such Lender to receive the compensation so requested.

               (ii)  If, after the date hereof, any Lender shall have determined
          that the adoption of any applicable law, rule, or regulation regarding
          capital adequacy or any change therein or in the interpretation or
          administration thereof by any governmental authority, central bank, or
          comparable agency charged with the interpretation or administration
          thereof, or any request or directive regarding capital adequacy
          (whether or not having the force of law) of any such governmental
          authority, central bank, or comparable agency, has or would have the
          effect of reducing the rate of return on the capital of such Lender or
          any corporation controlling such Lender as a consequence of such
          Lender's obligations hereunder to a level below that which such Lender
          or such corporation could have achieved but for such adoption, change,
          request, or directive (taking into consideration its policies with
          respect to capital adequacy), then from time to time upon demand
          Borrowers shall pay to such Lender such additional amount or amounts
          as will reasonably compensate such Lender for such reduction.

               (iii) Each Lender shall promptly notify Borrowers and Agent of
          any event of which it has knowledge, occurring after the date hereof,
          which will entitle such Lender to compensation pursuant to this
          Section 5(c) and will designate a separate lending office, if
          applicable, if such designation will avoid the need for, or reduce the
          amount of, such compensation and will not, in the judgment of such
          Lender, be otherwise disadvantageous to it. Any Lender claiming
          compensation under this Section 5(c) shall furnish to Borrowers and
          Agent a statement setting forth the additional amount or amounts to be
          paid to it hereunder which shall be conclusive in the absence of
          manifest error. In determining such amount, such Lender may use any
          reasonable averaging and attribution methods.

               (iv)  Any Lender giving notice to the Borrowers through the
          Agent, pursuant to Sections 3(k) or 5(c) shall give to the Borrowers a
          statement signed by an officer of such Lender setting forth in
          reasonable detail the basis for, and the calculation of such
          additional cost, reduced payments or capital requirements, as the

                                      -22-
<PAGE>

          case may be, and the additional amounts required to compensate such
          Lender therefor.

               (v)  Within five (5) Business Days after receipt by the Borrowers
          of any notice referred to in Sections 3(k) or 5(c), the Borrowers
          shall pay to the Agent for the account of the Lender issuing such
          notice such additional amounts as are required to compensate such
          Lender for the increased cost, reduce payments or increase capital
          requirements identified therein, as the case may be.

          (d)  Discretion of Lender as to Manner of Funding.  Notwithstanding
               --------------------------------------------
     any provisions of this Agreement to the contrary, each Lender shall be
     entitled to fund and maintain its funding of all or any part of its Loan in
     any manner it sees fit, it being understood, however, that for the purposes
     of this Agreement all determinations hereunder shall be made as if each
     Lender had actually funded and maintained each LIBOR Loan through the
     purchase of deposits having a maturity corresponding to the last day of the
     Interest Period applicable to such LIBOR Loan and bearing an interest rate
     to the applicable interest rate for such LIBOR Period.

          (e)  Breakage Fees.   Without duplication under any other provision
               -------------
     hereof, if any Lender incurs any loss, cost or expense including, without
     limitation, any loss of profit and loss, cost, expense or premium
     reasonably incurred by reason of the liquidation or re-employment of
     deposits or other funds acquired by such Lender to fund or maintain any
     LIBOR Loan or the relending or reinvesting of such deposits or amounts paid
     or prepaid to the Lenders as a result of any of the following events other
     than any such occurrence as a result in the change of circumstances
     described in Sections 5(a) and (b):

               (i) any payment, prepayment or conversion of a LIBOR Loan on a
          date other than the last day of its Interest Period (whether by
          acceleration, prepayment or otherwise);

               (ii) any failure to make a principal payment of a LIBOR Loan on
          the due date thereof; or

               (iii)  any failure by the Borrowers to borrow, continue, prepay
          or convert to a LIBOR Loan on the dates specified in a notice given
          pursuant to Section 2(b) or 4(c) hereof;

     then the Borrowers shall pay to such Lender such amount as will reimburse
     such Lender for such loss, cost or expense.  If any Lender makes such a
     claim for compensation, it shall furnish to Borrowers and Agent a statement
     setting forth the amount of such loss, cost or expense in reasonable detail
     (including an explanation of the basis for and the computation

                                      -23-
<PAGE>

     of such loss, cost or expense) and the amounts shown on such statement
     shall be conclusive and binding absent manifest error.

     6.   Collateral Security.  To secure the performance by Borrowers of their
obligations hereunder, and under the Notes and Security Instruments, whether now
or hereafter incurred, matured or unmatured, direct or contingent, joint or
several, or joint and several, including extensions, modifications, renewals and
increases thereof, and substitutions therefore, Borrowers  have heretofore
granted and shall herewith grant and assign to Agent for the ratable benefit of
the Lenders a first and prior Lien on certain of their Oil and Gas Properties,
certain related equipment, oil and gas inventory and proceeds of the foregoing.
The Oil and Gas Properties heretofore and herewith mortgaged to the Agent shall
represent not less than 80% of the Engineered Value (as hereinafter defined) of
Borrowers' Oil and Gas Properties as of the Effective Date.  Obligations arising
from agreements arising from Rate Management Transactions between Borrowers and
one or more of the Lenders or an Affiliate of any of the Lenders providing for
the hedging, forward sale or swap of crude oil or natural gas or interest rate
protection shall be secured by the Collateral (as hereinafter defined) on a pari
passu basis with the indebtedness and obligations of the Borrowers under the
Loan Documents.  All Oil and Gas Properties and other collateral in which
Borrowers herewith grant or hereafter grant to Agent for the ratable benefit of
the Lenders a first and prior Lien (to the satisfaction of the Agent) in
accordance with this Section 6 or the Oil and Gas Properties and other
collateral in which the Agent has acquired an interest for the ratable benefit
of the Lenders from Compass Bank, as such properties and interests are from time
to time constituted, are hereinafter collectively called the "Collateral".

     The granting and assigning of such security interests and Liens by
Borrowers shall be pursuant to Security Instruments in form and substance
reasonably satisfactory to the Agent.  Concurrently with the delivery of each of
the Security Instruments or within a reasonable time thereafter, Borrowers shall
have furnished to the Agent mortgage and title opinions and other title
information satisfactory to Agent with respect to the title and Lien status of
Borrowers' interests in not less than 90% of the Engineered Value of the Oil and
Gas Properties covered by the Security Instruments as Agent shall have
designated.  "Engineered Value" for this purpose shall mean future net revenues
discounted at the discount rate being used by the Agent as of the date of any
such determination utilizing the pricing parameters used in the engineering
report furnished to the Agent for the ratable benefit of the Lenders, pursuant
to Sections 7 and 12 hereof.  Borrowers will cause to be executed and delivered
to the Agent, in the future, additional Security Instruments if the Agent
reasonably deems such are necessary to insure perfection or maintenance of
Lenders' security interests and Liens in the Oil and Gas Properties or any part
thereof.

     7.   Borrowing Base.

          (a)  Initial Borrowing Base. At the Effective Date, the Borrowing Base
               ----------------------
     shall be $145,000,000.

                                      -24-
<PAGE>

          (b)  Subsequent Determinations of Borrowing Base.  Subsequent
               -------------------------------------------
     determinations of the Borrowing Base shall be made by the Lenders at least
     semi-annually on May 1 and November 1 of each year beginning November 1,
     2000 or as Unscheduled Redeterminations.  The Borrowers shall furnish to
     the Lenders as soon as possible but in any event no later than April 1 of
     each year, beginning April 1, 2001, with an Engineering Report in form and
     substance satisfactory to the Agent prepared by an independent petroleum
     engineering firm or firms acceptable to Agent covering the Oil and Gas
     Properties utilizing economic and pricing parameters used by Agent as
     established from time to time, together with such other information
     concerning the value of the Oil and Gas Properties as the Agent shall deem
     necessary to determine the value of the Oil and Gas Properties.  By October
     1 of each year, beginning October 1, 2000, or within thirty (30) days after
     either (i) receipt of notice from Agent that the Lenders require an
     Unscheduled Redetermination, or (ii) the Borrowers give notice to Agent of
     their desire to have an Unscheduled Redetermination performed, the
     Borrowers shall furnish to the Lenders an engineering report in form and
     substance satisfactory to Agent prepared by Borrowers' in-house engineering
     staff valuing the Oil and Gas Properties utilizing economic and pricing
     parameters used by the Agent as established from time to time, together
     with such other information, reports and data concerning the value of the
     Oil and Gas Properties as Agent shall deem reasonably necessary to
     determine the value of such Oil and Gas Properties.  Agent shall by written
     notice to the Borrowers no later than May 1 and November 1 of each year, or
     within a reasonable time thereafter (herein called the "Determination
     Date"), notify the Borrowers of the designation by the Lenders of the new
     Borrowing Base for the period beginning on such Determination Date and
     continuing until, but not including, the next Determination Date.  If an
     Unscheduled Redetermination is made by the Lenders, the Agent shall notify
     the Borrowers within a reasonable time after receipt of all requested
     information of the new Borrowing Base, and such new Borrowing Base shall
     continue until the next Determination Date.  If the Borrowers do not
     furnish all such information, reports and data by any date specified in
     this Section 7(b), unless such failure is of no fault of the Borrowers, the
     Lenders may nonetheless designate the Borrowing Base at any amounts which
     the Lenders in their reasonable discretion determine and may redesignate
     the Borrowing Base from time to time thereafter until the Lenders receive
     all such information, reports and data, whereupon the Lenders shall
     designate a new Borrowing Base as described above.  Each Lender shall
     determine the amount of the Borrowing Base based upon the loan collateral
     value which such Lender in its reasonable discretion (using such
     methodology, assumptions and discounts rates as such Lender customarily
     uses in assigning collateral value to oil and gas properties, oil and gas
     gathering systems, gas processing and plant operations) assigns to such Oil
     and Gas Properties of the Borrowers at the time in question and based upon
     such other credit factors consistently applied (including, without
     limitation, the assets, liabilities, cash flow, business, properties,
     prospects, management and ownership of the Borrowers and their affiliates)
     as such Lender customarily considers in evaluating similar oil and gas
     credits, but such Lender in its discretion shall not be required to give
     any additional positive value to any Oil and Gas

                                      -25-
<PAGE>

     Property over the current economic and pricing parameters used by such
     Lender for such Determination Date which additional value is derived
     directly from a hedging, forward sale or swap agreement covering such Oil
     and Gas Property as of the date of such determination.  All determinations
     or Unscheduled Redeterminations of the Borrowing Base require the approval
     of Majority Lenders; provided, however, that notwithstanding anything to
     the contrary herein, the amount of the Borrowing Base may not be increased,
     without the approval of all Lenders.  If the Lenders cannot otherwise agree
     on the Borrowing Base, the Agent shall notify each of the Lenders of such
     fact or facts and each Lender will submit within five (5) days thereafter
     its proposed Borrowing Base.  The redetermined Borrowing Base shall be then
     determined based upon the weighted arithmetic average of the proposed
     amounts submitted by each Lender, said proposals to be weighted according
     to each Lender's Commitment.  If at any time any of the Oil and Gas
     Properties are sold, the Borrowing Base then in effect shall automatically
     be reduced by a sum equal to the amount of prepayment, if any, required to
     be made pursuant to Section 12(r) hereof.  The Borrowing Base shall be
     additionally reduced from time to time pursuant to the provisions of
     Sections 2(e) and 2(f) hereof.  It is expressly understood that the Lenders
     have no obligation to designate the Borrowing Base at any particular
     amounts, except in the exercise of their discretion, whether in relation to
     the Commitment or otherwise.  Provided, however, that the Lenders shall not
     have the obligation to designate a Borrowing Base in an amount in excess of
     the Commitment.

     8.   Fees.

          (a)  Unused Commitment Fee.  The Borrowers shall pay to Agent for the
               ---------------------
     ratable benefit of the Lenders an unused commitment fee (the "Unused
     Commitment Fee") equivalent to the Unused Commitment Fee Rate times the
     daily average of the unadvanced amount of the Commitment.  Such Unused
     Commitment Fee shall be calculated on the basis of a year consisting of 360
     days.  The Unused Commitment Fee shall be payable in arrears on the last
     Business Day of each calendar quarter beginning June 30, 2000 with the
     final fee payment due on the Maturity Date for any period then ending for
     which the Unused Commitment Fee shall not have been theretofore paid.  In
     the event the Commitment terminates on any date prior to the end of any
     such monthly period, the Borrowers shall pay to the Agent for the ratable
     benefit of the Lenders, on the date of such termination, the total Unused
     Commitment Fee due for the period in which such termination occurs.

          (b)  The Letter of Credit Fee.  Borrowers shall pay to the Agent the
               ------------------------
     Letter of Credit fees required above in Section 2(d).

                                      -26-
<PAGE>

     9.   Prepayments.

          (a)  Voluntary Prepayments.  Subject to the provisions of Section 5(e)
               ---------------------
     hereof, the Borrowers may at any time and from time to time, without
     penalty or premium, prepay the Notes, in whole or in part.  Each such
     prepayment shall be made on at least three (3) Business Days' notice to
     Agent in the case of LIBOR Loan Tranches and without notice in the case of
     Base Rate Loans and shall be in a minimum amount of (i) $500,000 or any
     whole multiple of $100,000 in excess thereof (or the unpaid balance of the
     Notes, whichever is less), for Base Rate Loans, plus accrued interest
     thereon and (ii) $1,000,000 or any whole multiple of $100,000 in excess
     thereof (or the unpaid balance on the Notes, whichever is less) for LIBOR
     Loans, plus accrued interest thereon to the date of prepayment.

          (b)  Mandatory Prepayment For Borrowing Base Deficiency.  In the event
               --------------------------------------------------
     the Total Outstandings ever exceed the Borrowing Base as determined by
     Lenders pursuant to Section 7(b) hereof, the Borrowers shall, within thirty
     (30) days after written notification from the Agent, either (A) by
     instruments reasonably satisfactory in form and substance to the Lender,
     provide the Agent with collateral with value and quality in amounts
     satisfactory to all of the Lenders in their discretion in order to increase
     the Borrowing Base by an amount at least equal to such excess, or (B)
     prepay, without premium or penalty, the principal amount of the Notes in an
     amount at least equal to such excess plus accrued interest thereon to the
     date of prepayment, or (C) prepay, without premium or penalty, the
     principal amount of such excess in five (5) equal monthly installments to
     be applied to principal plus accrued interest thereon with the first such
     monthly payment being due upon the 30th day after receipt of  notice of
     such deficiency.  If the Total Outstandings ever exceed the Commitment as a
     result of any required reduction in the Commitment, then in such event,
     Borrowers shall, upon written notice, immediately prepay the principal
     amount of the Notes in an amount at least equal to such excess plus accrued
     interest to the date of prepayment.

          (c)  Special Mandatory Prepayment.   In addition to any mandatory
               ----------------------------
     prepayment required pursuant to Section 9(b) above, on or before December
     31, 2000, Borrowers shall make a mandatory prepayment (the "Special
     Mandatory Prepayment") in an amount sufficient to reduce the Total
     Outstandings to the greater of $125,000,000 or (ii) the amount of Borrowing
     Base as redetermined on November 1, 2000.  Provided, however, that if the
     Borrowing Base as of November 1, 2000 is less than $125,000,000, the
     provisions of Section 9(b) above shall apply.  Such Special Mandatory
     Prepayment may be made by the Borrowers in one or more prepayments but the
     full amount must be paid by December 31, 2000.  Any proceeds received by
     the Borrowers from the sale of any equity securities must be applied upon
     receipt by the Borrowers to the Special Mandatory Prepayment.

                                      -27-
<PAGE>

     10.  Representations and Warranties.  In order to induce the Lenders to
enter into this Agreement, the Borrowers represent and warrant to the Lenders
(which representations and warranties will survive the delivery of the Notes)
that:

          (a)  Creation and Existence.  Each Borrower is a corporation or
               ----------------------
     limited liability company duly organized, validly existing and in good
     standing under the laws of the jurisdiction in which it was formed and is
     duly qualified in all jurisdictions wherein failure to qualify may result
     in a Material Adverse Effect.  Each Borrower has all power and authority to
     own its properties and assets and to transact the business in which it is
     engaged.

          (b)  Power and Authority.  Each Borrower is duly authorized and
               -------------------
     empowered to create and issue the Notes; and is duly authorized and
     empowered to execute, deliver and perform the Loan Documents, including
     this Agreement; and all corporate and limited liability company action on
     each Borrower's part requisite for the due creation and issuance of the
     Notes and for the due execution, delivery and performance of the Loan
     Documents, including this Agreement, has been duly and effectively taken.

          (c)  Binding Obligations.  This Agreement does, and the Notes and
               -------------------
     other Loan Documents upon their creation, issuance, execution and delivery
     will, constitute valid and binding obligations of each Borrower,
     enforceable in accordance with its respective terms (except that
     enforcement may be subject to any applicable bankruptcy, insolvency, or
     similar debtor relief laws now or hereafter in effect and relating to or
     affecting the enforcement of creditors' rights generally).

          (d)  No Legal Bar or Resultant Lien.  The Notes and the Loan
               ------------------------------
     Documents, including this Agreement, do not and will not, to the best of
     each Borrower's knowledge violate any provisions of any contract,
     agreement, law, regulation, order, injunction, judgment, decree or writ to
     which any Borrower is subject, or result in the creation or imposition of
     any lien or other encumbrance upon any assets or properties of any
     Borrower, other than those contemplated by this Agreement.

          (e)  No Consent.  The execution, delivery and performance by each
               ----------
     Borrower of the Notes and the Loan Documents, including this Agreement,
     does not require the consent or approval of any other person or entity,
     including without limitation any regulatory authority or governmental body
     of the United States or any state thereof or any political subdivision of
     the United States or any state thereof except for consents required for
     federal, state and, in some instances, private leases, right of ways and
     other conveyances or encumbrances of oil and gas leases.

          (f)  Financial Condition.  The unaudited consolidated Financial
               -------------------
     Statements of 3TEC dated December 31, 1999, which have been delivered to
     Lenders are complete and

                                      -28-
<PAGE>

     correct in all material respects, and fully and accurately reflect in all
     material respects the financial condition and results of the operations of
     the Borrowers on a consolidated basis as of the date or dates and for the
     period or periods stated subject to normal year-end adjustments and
     provided that such Financial Statements do not contain footnotes.  No
     change has since occurred in the condition, financial or otherwise, of any
     Borrower which is reasonably expected to have a Material Adverse Effect,
     except as disclosed to the Lenders in Schedule "2" attached hereto.

          (g)  Liabilities.  No Borrower has any material liability, direct or
               -----------
     contingent, except as disclosed to the Lenders in the Financial Statements
     and on Schedule "3" attached hereto.  No unusual or unduly burdensome
     restrictions, restraint, or hazard exists by contract, law or governmental
     regulation or otherwise relative to the business, assets or properties of
     any Borrower which is reasonably expected to have a Material Adverse
     Effect.

          (h)  Litigation.  Except as described in the Financial Statements, or
               ----------
     as otherwise disclosed to the Lenders in Schedule "4" attached hereto,
     there is no litigation, legal or administrative proceeding, investigation
     or other action of any nature pending or, to the knowledge of the officers
     of any of the Borrowers threatened against or affecting any of the
     Borrowers which involves the possibility of any judgment or liability not
     fully covered by insurance, and which is reasonably expected to have a
     Material Adverse Effect.

          (i)  Taxes; Governmental Charges.  Each Borrower has filed all tax
               ---------------------------
     returns and reports required to be filed and has paid all taxes,
     assessments, fees and other governmental charges levied upon it or its
     assets, properties or income which are due and payable, including interest
     and penalties, the failure of which to pay could reasonably be expected to
     have a Material Adverse Effect, except such as are being contested in good
     faith by appropriate proceedings and for which adequate reserves for the
     payment thereof as required by GAAP has been provided and levy and
     execution thereon have been stayed and continue to be stayed.

          (j)  Titles, Etc.  Each Borrower has good and defensible title to all
               ------------
     of its assets, including without limitation, the Oil and Gas Properties,
     free and clear of all liens or other encumbrances except Permitted Liens.

          (k)  Defaults.  No Borrower is in default and no event or circumstance
               --------
     has occurred which, but for the passage of time or the giving of notice, or
     both, would constitute a default under any loan or credit agreement,
     indenture, mortgage, deed of trust, security agreement or other agreement
     or instrument to which any Borrower is a party in any respect that would be
     reasonably expected to have a Material Adverse Effect.  No Event of Default
     hereunder has occurred and is continuing.

                                      -29-
<PAGE>

          (l)  Casualties; Taking of Properties.  Since the dates of the latest
               --------------------------------
     Financial Statements of the Borrowers delivered to Lenders, neither the
     business nor the assets or properties of any Borrower has been affected (to
     the extent it is reasonably likely to cause a Material Adverse Effect), 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
     domestic or foreign government or any agency thereof, riot, activities of
     armed forces or acts of God or of any public enemy.

          (m)  Use of Proceeds; Margin Stock.  The proceeds of the Commitment
               -----------------------------
     may be used by the Borrowers for the purposes of (i) refinance existing
     indebtedness, (ii) acquisition and development of oil and gas properties,
     (iii) Letters of Credit, (iv) working capital and (v) general corporate
     purposes including redemption of the Series C Stock made in compliance with
     the requirements of Section 13(f) hereof.  None of the Borrowers are
     engaged principally or as one of their important activities in the business
     of extending credit for the purpose of purchasing or carrying any "margin
     stock " as defined in Regulation U of the Board of Governors of the Federal
     Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or
     retiring any indebtedness which was originally incurred to purchase or
     carry a margin stock or for any other purpose which might constitute this
     transaction a "purpose credit" within the meaning of said Regulation U.

          No Borrower nor any person or entity acting on behalf of the Borrowers
     has taken or will take any action which might cause the loans hereunder or
     any of the Loan Documents, including this Agreement, to violate Regulation
     U or any other regulation of the Board of Governors of the Federal Reserve
     System or to violate the Securities Exchange Act of 1934 or any rule or
     regulation thereunder, in each case as now in effect or as the same may
     hereafter be in effect.

          (n)  Location of Business and Offices.  The principal place of
               --------------------------------
     business and chief executive offices of the each Borrower is located at the
     address stated in Section 17 hereof.

          (o)  Compliance with the Law.  To the best of each Borrower's
               -----------------------
     knowledge, no Borrower:

               (i)  is in violation of any law, judgment, decree, order,
          ordinance, or governmental rule or regulation to which Borrower, or
          any of its assets or properties are subject; or

               (ii) has failed to obtain any license, permit, franchise or other
          governmental authorization necessary to the ownership of any of its
          assets or properties or the conduct of its business;

                                      -30-
<PAGE>

     which violation or failure is reasonably expected to have a Material
     Adverse Effect.

          (p)  No Material Misstatements.  No information, exhibit or report
               -------------------------
     furnished by any Borrower to the Lenders in connection with the negotiation
     of this Agreement or in the preparation of the offering memo contained any
     material misstatement of fact or omitted to state a material fact or any
     fact necessary to make the statement contained therein not materially
     misleading.

          (q)  Not A Utility.  No Borrower is an entity engaged in the State of
               -------------
     Texas in the (i) generation, transmission, or distribution and sale of
     electric power; (ii) transportation, distribution and sale through a local
     distribution system of natural or other gas for domestic, commercial,
     industrial, or other use; (iii) provision of telephone or telegraph service
     to others; (iv) production, transmission, or distribution and sale of steam
     or water; (v) operation of a railroad; or (vii) provision of sewer service
     to others.

          (r)  ERISA.  Each Borrower is in compliance in all material respects
               -----
     with the applicable provisions of ERISA, and no "reportable event", as such
     term is defined in Section 403 of ERISA, has occurred with respect to any
     Plan of any Borrower.

          (s)  Public Utility Holding Company Act.  No Borrower is a "holding
               ----------------------------------
     company", or "subsidiary company" of a "holding company", or an "affiliate"
     of a "holding company" or of a"subsidiary company" of a "holding company",
     or a "public utility" within the meaning of the Public Utility Holding
     Company Act of 1935, as amended.

          (t)  Subsidiaries.  Each of the Borrower's Subsidiaries are listed on
               ------------
     Schedule "5" hereto.

          (u)  Environmental Matters.  Except as disclosed on Schedule "6", no
               ---------------------
     Borrower (i) has received notice or otherwise learned of any Environmental
     Liability which would be reasonably likely to individually or in the
     aggregate have a Material Adverse Effect arising in connection with (A) any
     non-compliance with or violation of the requirements of any Environmental
     Law or (B) the release or threatened release of any toxic or hazardous
     waste into the environment, (ii) has received notice of any threatened or
     actual liability in connection with the release or notice of any threatened
     release of any toxic or hazardous waste into the environment which would be
     reasonably likely to individually or in the aggregate have a Material
     Adverse Effect or (iii) has received notice or otherwise learned of any
     federal or state investigation evaluating whether any remedial action is
     needed to respond to a release or threatened release of any toxic or
     hazardous waste into the environment for which any Borrower is or may be
     liable which may reasonably be expected to result in a Material Adverse
     Effect.

                                      -31-
<PAGE>

          (v)  Liens.Except (i) as disclosed on Schedule "1" hereto and (ii)
               -----
     for Permitted Liens, the assets and properties of the each Borrower are
     free and clear of all liens and encumbrances.

     11.  Conditions of Lending.

          (a)  The effectiveness of this Agreement, and the obligation to make
     the initial Advance or issue any initial Letter of Credit under the
     Commitment shall be subject to satisfaction of the following conditions
     precedent:

               (i)   Execution and Delivery.  Each Borrower shall have executed
                     ----------------------
          and delivered the Agreement, the Notes and other required Loan
          Documents, all in form and substance satisfactory to the Agent;

               (ii)  Legal Opinion.  The Agent shall have received from
                     -------------
          Borrowers' legal counsel a favorable legal opinion in form and
          substance satisfactory to it (i) as to the matters set forth in
          Subsections 10(a), (b), (c), (d), (e) and (h) hereof, (ii) the
          enforceability of the Private Shelf Equity Agreement and (iii) as to
          such other matters as Agent or its counsel may reasonably request;
          provided that the opinion as to 10(e) and 10(h) may be limited to
          knowledge;

               (iii) Corporate Resolutions.  The Agent shall have received
                     ---------------------
          appropriate certified corporate resolutions of each Borrower;

               (iv)  Good Standing.  The Agent shall have received evidence of
                     -------------
          existence and good standing for each Borrower;

               (v)   Incumbency.  The Agent shall have received a signed
                     ----------
          certificate of each Borrower, certifying the names of the officers of
          each Borrower authorized to sign loan documents on behalf of each
          Borrower, together with the true signatures of each such officer.  The
          Agent may conclusively rely on such certificate until the Agent
          receives a further certificate of any Borrower canceling or amending
          the prior certificate and submitting signatures of the officers named
          in such further certificate;

               (vi)  Articles of Incorporation and Bylaws.  The Agent shall have
                     ------------------------------------
          received copies of the Articles of Incorporation of each Borrower and
          all amendments thereto, certified by the Secretary of State of the
          State of its incorporation, and a copy of the bylaws of each Borrower
          and all amendments thereto, certified by each Borrower as being true,
          correct and complete;

                                      -32-
<PAGE>

               (vii)  Closing of CW Resources Acquisition.  The Agent shall have
                      -----------------------------------
          received satisfactory evidence that the CW Resources Acquisition will
          close concurrently with the initial funding hereunder;

               (viii) Execution of Private Equity Shelf Agreements.  The Agent
                      --------------------------------------------
          shall have received satisfactory evidence of the execution and
          enforceability of the Private Equity Shelf Agreements, said agreements
          to be in form and substance satisfactory to Agent and shall provide,
          among other things, that EnCap Investments L.L.C. and/or its
          affiliates executing such agreements shall be obligated, upon not less
          than ten (10) days prior notice, to acquire the Exchangeable Preferred
          Stock for cash;

               (ix)   Authorizations and Approvals.  [Intentionally Deleted].
                      ----------------------------
               (x)    Representation and Warranties.  The representations and
                      -----------------------------
          warranties of Borrowers under this Agreement are true and correct in
          all material respects as of such date, as if then made (except to the
          extent that such representations and warranties related solely to an
          earlier date);

               (xi)   No Event of Default.  No Event of Default shall have
                      -------------------
          occurred and be continuing nor shall any event have occurred or failed
          to occur which, with the passage of time or service of notice, or
          both, would constitute an Event of Default;

               (xii)  Other Documents.  Agent shall have received such other
                      ---------------
          instruments and documents incidental and appropriate to the
          transaction provided for herein as Agent or its counsel may reasonably
          request, and all such documents shall be in form and substance
          reasonably satisfactory to the Agent; and

               (xiii) Legal Matters Satisfactory.  All legal matters incident to
                      --------------------------
          the consummation of the transactions contemplated hereby shall be
          reasonably satisfactory to special counsel for Agent retained at the
          expense of the Borrowers.

          (b)  The obligation of the Lenders to make any Advance or issue any
     Letter of Credit under the Commitment (including the initial Advance) shall
     be subject to the following additional conditions precedent that, at the
     date of making each such Advance and after giving effect thereto:

               (i)    Representation and Warranties.  The representations and
                      -----------------------------
          warranties of Borrowers under this Agreement are true and correct in
          all material respects as of such date, as if then made (except to the
          extent that such representations and warranties related solely to an
          earlier date);

                                      -33-
<PAGE>

               (ii)   No Event of Default.  No Event of Default shall have
                      -------------------
          occurred and be continuing nor shall any event have occurred or failed
          to occur which, with the passage of time or service of notice, or
          both, would constitute an Event of Default;

               (iii)  Other Documents.  Agent shall have received such other
                      ---------------
          instruments and documents incidental and appropriate to the
          transaction provided for herein as Agent or its counsel may reasonably
          request, and all such documents shall be in form and substance
          reasonably satisfactory to the Agent; and

               (iv)   Legal Matters Satisfactory.  All legal matters incident to
                      --------------------------
          the consummation of the transactions contemplated hereby shall be
          reasonably satisfactory to special counsel for Agent retained at the
          expense of Borrowers.

     12. Affirmative Covenants.  A deviation from the provisions of this
Section 12 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by Majority Lenders prior to the date of
deviation.  The Borrowers will at all times comply with the covenants contained
in this Section 12 from the date hereof and for so long as the Commitments are
in existence or any amount is owed to the Agent or the Lenders under this
Agreement or the other Loan Documents.

          (a)  Financial Statements and Reports.  Each Borrower shall promptly
               --------------------------------
     furnish to the Agent from time to time upon request such information
     regarding the business and affairs and financial condition of each
     Borrower, as the Agent may reasonably request, and will furnish to the
     Agent:

               (i)    Annual Audited Financial Statements. As soon as available,
                      -----------------------------------
          and in any event within ninety (90) days after the close of each
          fiscal year beginning with the fiscal year ended December 31, 2000,
          the annual audited consolidated Financial Statements of Borrowers,
          prepared in accordance with GAAP accompanied by an unqualified opinion
          rendered by an independent accounting firm reasonably acceptable to
          the Agent;

               (ii)   Annual Unaudited Financial Statements.  Contemporaneously
                      -------------------------------------
          with the delivery of the annual audited Financial Statements required
          above in Section 12(a)(i), the annual unaudited consolidating
          Financial Statements of Borrowers prepared in accordance with GAAP;

               (iii)  Quarterly Financial Statements.  As soon as available, and
                      ------------------------------
          in any event within forty-five (45) days after the end of each fiscal
          quarter of each year  beginning with the fiscal quarter ended March
          31, 2000, the quarterly unaudited,

                                      -34-
<PAGE>

          consolidated and consolidating Financial Statements of the Borrowers
          prepared in accordance with GAAP;

               (iv)  Report on Properties. As soon as available and in any event
                     --------------------
          on or before April 1 and October 1 of each calendar year, and at such
          other times as any Lender, in accordance with Section 7 hereof, may
          request, the engineering reports required to be furnished to the Agent
          under such Section 7 on the Oil and Gas Properties;

               (v)   SEC Reports.  As soon as available, and in any event within
                     -----------
          five (5) days of filing, copies of all filings by each Borrower with
          the Securities and Exchange Commission;

               (vi)  Hedging Reports.  As soon as available, and in any event
                     ---------------
          within thirty (30) days after the end of each fiscal quarter, a report
          of all existing Rate Management Transactions , said report to be in
          form and substance satisfactory to Agent;

               (vii) Additional Information.  Promptly upon request of the Agent
                     ----------------------
          from time to time any additional financial information or other
          information that the Agent may reasonably request.

     All such reports, information, balance sheets and Financial Statements
     referred to in Subsection 12(a) above shall be in such detail as the Agent
     may reasonably request and shall be prepared in a manner consistent with
     the Financial Statements.

          (b)  Certificates of Compliance.  Concurrently with the furnishing of
               --------------------------
     the annual audited Financial Statements pursuant to Subsection 12(a)(i)
     hereof and the quarterly unaudited Financial Statements pursuant to
     Subsection 12(a)(ii) hereof for the months coinciding with the end of each
     calendar quarter, each Borrower will furnish or cause to be furnished to
     the Agent a certificate in the form of Exhibit "C" attached hereto, signed
     by the President or Chief Financial Officer of each Borrower, (i) stating
     that each Borrower has fulfilled in all material respects its obligations
     under the Notes and the Loan Documents, including this Agreement, and that
     all representations and warranties made herein and therein continue (except
     to the extent they relate solely to an earlier date) to be true and correct
     in all material respects (or specifying the nature of any change), or if a
     Default has occurred, specifying the Default and the nature and status
     thereof; (ii) to the extent requested from time to time by the Agent,
     specifically affirming compliance of each Borrower in all material respects
     with any of its representations (except to the extent they relate solely to
     an earlier date) or obligations under said instruments; (iii) setting forth
     the computation, in reasonable detail as of the end of each period covered
     by such certificate, of compliance with

                                      -35-
<PAGE>

     Sections 13(b) and (c); and (iv) containing or accompanied by such
     financial or other details, information and material as the Agent may
     reasonably request to evidence such compliance.

          (c)  Accountants' Certificate.  Concurrently with the furnishing of
               ------------------------
     the annual audited Financial Statement pursuant to Section 12(a)(i) hereof,
     Borrowers will furnish a statement from the firm of independent public
     accountants which prepared such Financial Statement to the effect that
     nothing has come to their attention to cause them to believe that there
     existed on the date of such statements any Event of Default and
     specifically calculating Borrowers' compliance with Sections 13(b) and (c)
     of this Agreement.

          (d)  Taxes and Other Liens.  Each Borrower will pay and discharge
               ---------------------
     promptly all taxes, assessments and governmental charges or levies imposed
     upon each Borrower, or upon the income or any assets or property of any
     Borrower, as well as all claims of any kind (including claims for labor,
     materials, supplies and rent) which, if unpaid, might become a Lien or
     other encumbrance upon any or all of the assets or property of any Borrower
     and which could reasonably be expected to result in a Material Adverse
     Effect; provided, however, that such Borrower shall not be required to pay
     any such tax, assessment, charge, levy or claim if the amount,
     applicability or validity thereof shall currently be contested in good
     faith by appropriate proceedings diligently conducted, levy and execution
     thereon have been stayed and continue to be stayed and if such Borrower
     shall have set up adequate reserves therefor, if required, under GAAP.

          (e)  Compliance with Laws.  Each Borrower will observe and comply, in
               --------------------
     all material respects, with all applicable laws, statutes, codes, acts,
     ordinances, orders, judgments, decrees, injunctions, rules, regulations,
     orders and restrictions relating to environmental standards or controls or
     to energy regulations of all federal, state, county, municipal and other
     governments, departments, commissions, boards, agencies, courts,
     authorities, officials and officers, domestic or foreign.

          (f)  Further Assurances.  Borrowers will cure promptly any defects in
               ------------------
     the creation and issuance of the Notes and the execution and delivery of
     the Notes and the Loan Documents, including this Agreement.  Borrowers at
     their sole expense will promptly execute and deliver to Agent upon its
     reasonable request all such other and further documents, agreements and
     instruments in compliance with or accomplishment of the covenants and
     agreements in this Agreement, or to correct any omissions in the Notes or
     more fully to state the obligations set out herein.

          (g)  Performance of Obligations.  Borrowers will pay the Notes and
               --------------------------
     other obligations incurred by them hereunder according to the reading,
     tenor and effect thereof and hereof; and Borrowers will do and perform
     every act and discharge all of the obligations

                                      -36-
<PAGE>

     provided to be performed and discharged by the Borrowers under the Loan
     Documents, including this Agreement, at the time or times and in the manner
     specified.

          (h)  Insurance.  The Borrowers now maintain and will continue to
               ---------
     maintain insurance with financially sound and reputable insurers with
     respect to their respective assets against such liabilities, fires,
     casualties, risks and contingencies and in such types and amounts as is
     customary in the case of persons engaged in the same or similar businesses
     and similarly situated.  Upon request of the Agent, the Borrowers will
     furnish or cause to be furnished to the Agent from time to time a summary
     of the respective insurance coverage of Borrowers in form and substance
     satisfactory to the Agent, and, if requested, will furnish the Agent copies
     of the applicable policies.  Upon demand by Agent any insurance policies
     covering any such property shall be endorsed (i) to provide that such
     policies may not be canceled, reduced or affected in any manner for any
     reason without fifteen (15) days prior notice to Agent, (ii) to provide for
     insurance against fire, casualty and other hazards normally insured
     against, in the amount of the full value (less a reasonable deductible not
     to exceed amounts customary in the industry for similarly situated business
     and properties) of the property insured, and (iii) to provide for such
     other matters as the Agent may reasonably require.  The Borrowers shall at
     all times maintain adequate insurance with respect to all of their assets,
     including but not limited to, the Oil and Gas Properties or any collateral
     against their liability for injury to persons or property, which insurance
     shall be by financially sound and reputable insurers and shall without
     limitation provide the following coverages:  comprehensive general
     liability (including coverage for damage to underground resources and
     equipment, damage caused by blowouts or cratering, damage caused by
     explosion, damage to underground minerals or resources caused by saline
     substances, broad form property damage coverage, broad form coverage for
     contractually assumed liabilities and broad form coverage for acts of
     independent contractors), worker's compensation and automobile liability.
     The Borrowers shall at all times maintain cost of control of well insurance
     with respect to the Oil and Gas Properties which shall insure the Borrowers
     against seepage and pollution expense; redrilling expense; and cost of
     control of well; fires, blowouts, etc., if deemed economical in the
     reasonable discretion of the Borrowers.  Additionally, the Borrowers shall
     at all times maintain adequate insurance with respect to all of their other
     assets and wells in accordance with prudent business practices.

          (i)  Accounts and Records.  Each Borrower will keep books, records and
               --------------------
     accounts in which full, true and correct entries will be made of all
     dealings or transactions in relation to its business and activities,
     prepared in a manner consistent with prior years, subject to changes
     suggested by such Borrower's auditors.

          (j)  Right of Inspection.  Each Borrower will permit any officer,
               -------------------
     employee or agent of the Lenders to examine such Borrower's books, records
     and accounts, and take copies and extracts therefrom, all at such
     reasonable times during normal business hours and

                                      -37-
<PAGE>

     as often as the Lenders may reasonably request.  The Lenders will use best
     efforts to keep all Confidential Information (as herein defined)
     confidential and will not disclose or reveal the Confidential Information
     or any part thereof other than (i) as required by law, and (ii) to the
     Lenders', and the Lenders' subsidiaries', Affiliates, officers, employees,
     legal counsel and regulatory authorities or advisors to whom it is
     necessary to reveal such information for the purpose of effectuating the
     agreements and undertakings specified herein or as otherwise required in
     connection with the enforcement of the Lenders' and the Agent's rights and
     remedies under the Notes, this Agreement and the other Loan Documents.  As
     used herein, "Confidential Information" means information about the
     Borrowers furnished by the Borrowers to the Lenders, but does not include
     information (i) which was publicly known, or otherwise known to the
     Lenders, at the time of the disclosure, (ii) which subsequently becomes
     publicly known through no act or omission by the Lenders, or (iii) which
     otherwise becomes known to the Lenders, other than through disclosure by
     the Borrowers.

          (k)  Notice of Certain Events. The Borrowers shall promptly notify the
               ------------------------
     Agent if Borrowers learn of the occurrence of (i) any event which
     constitutes an Event of  Default together with a detailed statement by
     Borrowers of the steps being taken to cure such Event of Default; (ii) any
     legal, judicial or regulatory proceedings affecting Borrowers or any of the
     assets or properties of Borrowers which, if adversely determined, could
     reasonably be expected to have a Material Adverse Effect; (iii) any dispute
     between Borrowers and any governmental or regulatory body or any other
     Person or entity which, if adversely determined, might reasonably be
     expected to cause a Material Adverse Effect; (iv) any other matter which in
     Borrowers' reasonable opinion could have a Material Adverse Effect.

          (l)  ERISA Information and Compliance.  The Borrowers will promptly
               --------------------------------
     furnish to the Agent immediately upon becoming aware of the occurrence of
     any "reportable event", as such term is defined in Section 4043 of ERISA,
     or of any "prohibited transaction", as such term is defined in Section 4975
     of the Internal Revenue Code of 1954, as amended, in connection with any
     Plan or any trust created thereunder, a written notice signed by the chief
     financial officer of Borrowers specifying the nature thereof, what action
     Borrowers are taking or proposes to take with respect thereto, and, when
     known, any action taken by the Internal Revenue Service with respect
     thereto.

          (m)  Environmental Reports and Notices.  The Borrowers will deliver to
               ---------------------------------
     the Agent (i) promptly upon its becoming available, one copy of each report
     sent by any Borrower to any court, governmental agency or instrumentality
     pursuant to any Environmental Law, (ii) notice, in writing, promptly upon
     any Borrower's receipt of notice or otherwise learning of any claim,
     demand, action, event, condition, report or investigation indicating any
     potential or actual liability arising in connection with (x) the non-
     compliance with or violation of the requirements of any Environmental Law
     which reasonably could be expected to have a Material Adverse Effect; (y)
     the release or threatened release of any toxic or

                                      -38-
<PAGE>

     hazardous waste into the environment which reasonably could be expected to
     have a Material Adverse Effect or which release any Borrower would have a
     duty to report to any court or government agency or instrumentality, or
     (iii) the existence of any Environmental Lien on any properties or assets
     of any Borrower, and Borrowers shall immediately deliver a copy of any such
     notice to Agent.

          (n)  Compliance and Maintenance. The Borrowers will (i) observe and
               --------------------------
     comply in all material respects with all Environmental Laws; (ii) except as
     provided in Subsections 12(o) and 12(p) below, maintain the Oil and Gas
     Properties and other assets and properties in good and workable condition
     at all times and make all repairs, replacements, additions, betterments and
     improvements to the Oil and Gas Properties and other assets and properties
     as are needed and proper so that the business carried on in connection
     therewith may be conducted properly and efficiently at all times in the
     opinion of the Borrowers exercised in good faith; (iii) take or cause to be
     taken whatever actions are necessary or desirable to prevent an event or
     condition of default by Borrowers under the provisions of any gas purchase
     or sales contract or any other contract, agreement or lease comprising a
     part of the Oil and Gas Properties or other collateral security hereunder
     which default could reasonably be expected to result in a Material Adverse
     Effect; and (iv) furnish Agent upon request evidence satisfactory to Agent
     that there are no Liens, claims or encumbrances on the Oil and Gas
     Properties, except laborers', vendors', repairmen's, mechanics', worker's,
     or materialmen's liens arising by operation of law or incident to the
     construction or improvement of property if the obligations secured thereby
     are not yet due or are being contested in good faith by appropriate legal
     proceedings or Permitted Liens.

          (o)  Operation of Properties. Except as provided in Subsection 12(p)
               -----------------------
     and (q) below, the Borrowers will operate, or use reasonable efforts to
     cause to be operated, all Oil and Gas Properties in a careful and efficient
     manner in accordance with the practice of the industry and in compliance in
     all material respects with all applicable laws, rules, and regulations, and
     in compliance in all material respects with all applicable proration and
     conservation laws of the jurisdiction in which the properties are situated,
     and all applicable laws, rules, and regulations, of every other agency and
     authority from time to time constituted to regulate the development and
     operation of the properties and the production and sale of hydrocarbons and
     other minerals therefrom; provided, however, that the Borrowers shall have
     the right to contest in good faith by appropriate proceedings, the
     applicability or lawfulness of any such law, rule or regulation and pending
     such contest may defer compliance therewith, as long as such deferment
     shall not subject the properties or any part thereof to foreclosure or
     loss.

          (p)  Compliance with Leases and Other Instruments. The Borrowers will
               --------------------------------------------
     pay or cause to be paid and discharge all rentals, delay rentals,
     royalties, production payment, and indebtedness required to be paid by
     Borrowers (or required to keep unimpaired in all material

                                      -39-
<PAGE>

     respects the rights of Borrowers in Oil and Gas Properties) accruing under,
     and perform or cause to be performed in all material respects each and
     every act, matter, or thing required of Borrowers by each and all of the
     assignments, deeds, leases, subleases, contracts, and agreements in any way
     relating to Borrowers or any of the Oil and Gas Properties and do all other
     things necessary of Borrowers to keep unimpaired in all material respects
     the rights of Borrowers thereunder and to prevent the forfeiture thereof or
     default thereunder; provided, however, that nothing in this Agreement shall
     be deemed to require Borrowers to perpetuate or renew any oil and gas lease
     or other lease by payment of rental or delay rental or by commencement or
     continuation of operations nor to prevent Borrowers from abandoning or
     releasing any oil and gas lease or other lease or well thereon when, in any
     of such events, in the opinion of Borrowers exercised in good faith, it is
     not in the best interest of the Borrowers to perpetuate the same.

          (q)  Certain Additional Assurances Regarding Maintenance and
               -------------------------------------------------------
     Operations of Properties. With respect to those Oil and Gas Properties
     ------------------------
     which are being operated by operators other than the Borrowers, the
     Borrowers shall not be obligated to perform any undertakings contemplated
     by the covenants and agreement contained in Subsections 12(o) or 12(p)
     hereof which are performable only by such operators and are beyond the
     control of the Borrowers; however, the Borrowers agree to promptly take all
     reasonable actions available under any operating agreements or otherwise to
     bring about the performance of any such material undertakings required to
     be performed thereunder.

          (r)  Sale of Certain Assets/Prepayment of Proceeds. The Borrowers will
               ---------------------------------------------
     immediately pay over to the Agent for the ratable benefit of the Lenders as
     a prepayment of principal on the Notes and a reduction of the Commitments,
     an amount equal to 100% of the Release Price from the proceeds of the sale
     of the Oil and Gas Properties (other than sales permitted by Sections
     13(a)(ii)(A) and (B) hereof), which sale has been approved in advance by
     the Majority Lenders. The term "Release Price" as used herein shall mean a
     price determined by the Majority Lenders in their discretion based upon the
     loan collateral value of the Oil and Gas Properties being sold by Borrowers
     which such Lenders in their discretion (using such methodology, assumptions
     and discounts rates as such Lenders customarily use in assigning collateral
     value to oil and gas properties, oil and gas gathering systems, gas
     processing and plant operations) assign to such Oil and Gas Properties at
     the time in question. Any such prepayment of principal on the Notes
     required by this Section 12(r), shall not be in lieu of, but shall be in
     addition to any mandatory prepayment of principal required to be paid
     pursuant to Sections 9(b) and 9(c) hereof.

          (s)  Title Matters. Within ninety (90) days after the Effective Date
               -------------
     with respect to the Oil and Gas Properties listed on Schedule "7" hereto,
     Borrowers shall furnish Agent with title opinions and/or title information
     reasonably satisfactory to Agent showing good and defensible title of
     Borrowers to such Oil and Gas Properties subject only to the Permitted

                                      -40-
<PAGE>

     Liens. As to any Oil and Gas Properties hereafter mortgaged to Agent,
     Borrowers will promptly (but in no event more than thirty (30) days
     following such mortgaging), furnish, if requested, Agent with title
     opinions and/or title information reasonably satisfactory to Agent showing
     good and defensible title of Borrowers to such Oil and Gas Properties
     subject only to Permitted Liens.

          (t)  Curative Matters. Within sixty (60) days after the Effective Date
               ----------------
     with respect to matters listed on Schedule "8" and, thereafter, within
     sixty (60) days after receipt by Borrowers from Agent or its counsel of
     written notice of title defects the Agent reasonably requires to be cured,
     Borrowers shall either (i) provide such curative information, in form and
     substance satisfactory to Agent, or (ii) substitute Oil and Gas Properties
     of value and quality satisfactory to the Agent for all of Oil and Gas
     Properties for which such title curative was requested but upon which
     Borrowers elected not to provide such title curative information, and,
     within sixty (60) days of such substitution, provide title opinions or
     title information satisfactory to the Agent covering the Oil and Gas
     Properties so substituted. If the Borrowers fail to satisfy (i) or (ii)
     above within the time specified, the loan collateral value assigned by the
     Lenders to the Oil and Gas Properties for which such curative information
     was requested shall be deducted from the Borrowing Base resulting in a
     reduction thereof.

          (u)  Change of Principal Place of Business. Borrowers shall give Agent
               -------------------------------------
     at least thirty (30) days prior written notice of their intention to move
     their principal place of business from the address set forth in Section 17
     hereof.

          (v)  Cash Collateral Accounts. Each Borrower shall establish and
               ------------------------
     maintain with Agent one or more operating accounts (the "Operating
     Accounts"), the maintenance of each of which shall be subject to such rules
     and regulations as Agent from time to time specify. Such Operating Accounts
     shall be the sole operating accounts of the Borrowers. Such accounts shall
     be maintained with the Agent until all amounts due hereunder and under the
     Notes have been paid in full. To the extent not already so instructed,
     Borrowers shall within sixty (60) days of the Effective Date instruct and
     cause all monetary proceeds of production from the Oil and Gas Properties
     to be remitted to their respective Operating Accounts. Such proceeds of
     production shall not be redirected without the prior written consent of the
     Agent until such time as all indebtedness due Lenders by Borrowers has been
     paid in full and the Commitments have been terminated. Each Borrower hereby
     grants a security interest to Lenders in and to their respective Operating
     Accounts (collectively, the "Cash Collateral Accounts") and all checks,
     drafts and other items ever received by any Lender for deposit therein. If
     any Event of Default shall occur and be continuing, Agent shall have the
     immediate right, without prior notice or demand, to take and apply against
     the Borrowers' obligations hereunder any and all funds legally and
     beneficially owned by the Borrowers then or thereafter on deposit in the
     Cash Collateral Accounts for the ratable benefit of the Lenders.

                                      -41-
<PAGE>

          (w)  Take Down of Exchangeable Preferred Stock. Borrowers agree that
               -----------------------------------------
     (i) upon the occurrence of an Event of Default (other than an Event of
     Default occurring as a result of a breach of the affirmative covenants
     contained in Section 12 of this Agreement), and (ii) receipt of written
     notice from Agent that Majority Banks have determined that a take down is
     required and (iii) prior to the time that the Special Mandatory Prepayment
     has been made, they will, within ten (10) Business Days, cause the take
     down of the Exchangeable Preferred Stock by EnCap Investments L.L.C. and/or
     its affiliates as described in the Private Equity Shelf Agreement to occur.
     The proceeds received by the Borrowers from the take down of the
     Exchangeable Preferred Stock shall be applied upon receipt to payment of
     the Special Mandatory Prepayment.

          (x)  Additional Collateral. The Borrowers agree to regularly monitor
               ---------------------
     engineering data covering all producing oil and gas properties and
     interests owned or acquired by Borrowers on or after the date hereof and to
     mortgage or cause to be mortgaged such of the same to Agent for the ratable
     benefit of the Lenders in substantially the form of the Security
     Instruments, as applicable, to the extent that the Lenders shall at all
     times during the existence of the Commitment be secured by perfected Liens
     and security interests covering not less than eighty percent (80%) of the
     Engineered Value of all producing oil and gas properties of Borrowers. In
     addition, the Borrowers agree that in connection with the mortgaging of
     such additional oil and gas properties, they shall within a reasonable time
     thereafter, deliver to the Agent such mortgage and title opinions and other
     title information with respect to the title and Lien status of such oil and
     gas properties as may be necessary to maintain at all times a level of such
     title opinions and title information of not less than ninety percent (90%)
     of the Engineered Value of all Oil and Gas Properties mortgaged to the
     Agent for the ratable benefit of the Lenders.

     13.  Negative Covenants. A deviation from the provisions of this Section 13
shall not constitute an Event of Default under this Agreement if such deviation
is consented to in writing by Majority Lenders prior to the date of deviation.
The Borrowers will at all times comply with the covenants contained in this
Section 13 from the date hereof and for so long as the Commitment is in
existence or any amount is owed to the Agent or the Lenders under this Agreement
or the other Loan Documents.

          (a)  Negative Pledge. Borrowers shall not without the prior written
               ---------------
     consent of the Lenders:

               (i)   create, incur, assume or permit to exist any Lien, security
          interest or other encumbrance on any of their assets or properties
          except Permitted Liens; or

               (ii)  sell, lease, transfer or otherwise dispose of, in any
          fiscal year, any of their assets except for (A) sales, leases,
          transfers or other dispositions made in the

                                      -42-
<PAGE>

          ordinary course of Borrowers' oil and gas businesses, (B) sales,
          leases or transfers or other dispositions made by Borrowers between
          Borrowing Base Determination Dates which do not exceed $10,000,000 of
          net proceeds in the aggregate between such Determination Dates, and
          (C) other sales, leases, transfer or other dispositions made with the
          consent of Majority Lenders which are made pursuant to, and in full
          compliance with, Section 12(r) hereof;

          (b)  Current Ratio. Borrowers shall not allow their ratio Current
               -------------
     Ratio to be less than 1.0 to 1.0 as of the end of any fiscal quarter.

          (c)  Minimum Interest Coverage Ratio. The Borrowers will not allow
               -------------------------------
     their Minimum Interest Coverage Ratio to be less than (i) 2.5 to 1.0 for
     the two quarter period ending March 31, 2000, (ii) 2.5 to 1.0 for the three
     quarter period ending June 30, 2000, (iii) 2.5 to 1.0 for the four quarter
     period ending September 30, 2000 and each four quarter period thereafter.

          (d)  Consolidations and Mergers. No Borrower will consolidate or merge
               --------------------------
     with or into any other Person, except that any Borrower may merge with
     another Person if such Borrower is the surviving entity in such merger and
     if, after giving effect thereto, no Default or Event of Default shall have
     occurred and be continuing except that Enex, Production and/or Magellan may
     merge into 3TEC.

          (e)  Debts, Guaranties and Other Obligations.  Without the consent of
               ---------------------------------------
     Majority Lenders, no Borrower will incur, create, assume or in any manner
     become or be liable in respect of any indebtedness, nor will any Borrower
     guarantee or otherwise in any manner become or be liable in respect of any
     indebtedness, liabilities or other obligations of any other person or
     entity, whether by agreement to purchase the indebtedness of any other
     person or entity or agreement for the furnishing of funds to any other
     person or entity through the purchase or lease of goods, supplies or
     services (or by way of stock purchase, capital contribution, advance or
     loan) for the purpose of paying or discharging the indebtedness of any
     other person or entity, or otherwise, except that the foregoing
     restrictions shall not apply to:

               (i)  the Notes and any renewal or increase thereof, or other
          indebtedness of the Borrowers heretofore disclosed to Lenders in the
          Borrower's Financial Statements or on Schedule "3" hereto; or

               (ii) taxes, assessments or other government charges which are not
          yet due or are being contested in good faith by appropriate action
          promptly initiated and diligently conducted, if such reserve as shall
          be required by GAAP shall have been

                                      -43-
<PAGE>

          made therefor and levy and execution thereon have been stayed and
          continue to be stayed; or

               (iii) indebtedness (other than in connection with a loan or
          lending transaction) incurred in the ordinary course of business,
          including, but not limited to indebtedness for drilling, completing,
          leasing and reworking oil and gas wells; or

               (iv)  indebtedness evidenced by the Subordinated Notes; or

               (v)   any renewals or extensions of (but not increases in) any of
          the foregoing.

          (f)  Dividends.  No Borrower will declare or pay any cash dividend,
               ---------
     purchase, redeem or otherwise acquire for value any of its stock now or
     hereafter outstanding, return any capital to its stockholders, or make any
     distribution of its assets to its stockholders as such, except the
     foregoing shall not apply to:

               (i)   dividends on the Series C Preferred Stock and interest on
          the Subordinated Note;

               (ii)  redemption of the Series C Preferred Stock after the
          payment in full of the Special Mandatory Prepayment, but only if at
          least $10,000,000 availability exists under the Commitment after such
          redemption; or

               (iii) cash dividends on the Exchangeable Preferred Stock after
          the end of the third year after issuance thereof by Borrowers pursuant
          to the Private Equity Shelf Agreement; or

               (iv) redemption of the Exchangeable Preferred Stock in accordance
          with the provisions of the Private Equity Shelf Agreement.

     Provided, however, that no dividends may be paid on the Series C Preferred
     Stock or the Exchangeable Preferred Stock nor may any interest be paid on
     the Subordinated Notes nor may the Series C Preferred Stock or the
     Exchangeable Preferred Stock be redeemed if, immediately before or after
     giving effect thereto, a Default or Event of Default exists.

          (g)  Loans and Advances.  Borrowers shall not make or permit to remain
               ------------------
     outstanding any loans or advances to or in any person or entity, except
     that the foregoing restriction shall not apply to:

                                      -44-
<PAGE>

               (i)   loans or advances to any person, the material details of
          which have been set forth in the Financial Statements of the Borrowers
          heretofore furnished to Lenders; or

               (ii)  advances made in the ordinary course of Borrowers' oil and
          gas business; or

               (iii) loans or advances to Affiliates and non-related third
          parties not exceeding $100,000 in the aggregate during the existence
          of the Commitment.

          (h)  Sale or Discount of Receivables.  Borrowers will not discount or
               -------------------------------
     sell with recourse, or sell for less than the greater of the face or market
     value thereof, any of their notes receivable or accounts receivable.

          (i)  Nature of Business.  Borrowers will not permit any material
                ------------------
     change to be made in the character of their respective businesses as
     carried on at the date hereof.

          (j)  Transactions with Affiliates.  Borrowers will not enter into any
               ----------------------------
     transaction with any Affiliate, except (i) transactions upon terms that are
     no less favorable to them than would be obtained in a transaction
     negotiated at arm's length with an unrelated third party; and (ii) the
     transaction described in the Private Equity Shelf Agreement.

          (k)  Hedging Transactions. Borrowers will not enter into any Rate
               --------------------
     Management Transactions, except the foregoing prohibitions shall not apply
     to (x) transactions consented to in writing by the Majority Lenders which
     are on terms acceptable to the Majority Lenders, or (y) Pre-Approved
     Contracts.

          (l)  Investments.  Borrowers shall not make any investments in any
               -----------
     person or entity, except such restriction shall not apply to:

               (i)  investments and direct obligations of the United States of
          America or any agency thereof; or

               (ii) investments in certificates of deposit issued by the Lenders
          or certificates of deposit with maturities of less than one year,
          issued by other commercial banks in the United States having capital
          and surplus in excess of $500,000,000 and which have a senior
          unsecured debt rating of A+ by Standard & Poors or A1 by Moody's; or

                                      -45-
<PAGE>

               (iii)  investments in insured money market funds, LIBOR
          investment accounts and other similar accounts at Agent or such
          investment with maturities of less than ninety (90) days at other
          commercial banks having capital and surplus in excess of $500,000,000
          and which have a senior unsecured debt rating of A+ by Standard &
          Poors or A1 by Moody's.

          (m)  Amendment to Articles of Incorporation or Bylaws.  Borrowers will
               ------------------------------------------------
     not  permit any material amendment to, or any alteration of, their Articles
     of Incorporation or Bylaws.

          (n)  Proceeds of Production.  Borrowers shall not redirect the payment
               ----------------------
     of the proceeds of production from the Oil and Gas Properties to anyone or
     any place other than to the Operating Accounts at the Agent.

          (o)  Issuance of  Preferred Stock.  Borrowers shall not issue any
               ----------------------------
     additional preferred stock after the Effective Date without the consent of
     Majority Lenders, except as permitted for the exchange of securities for
     the Exchangeable Preferred Stock or as payment in kind to the holders of
     Series D Preferred Stock or Series E Preferred Stock.

          (p)  Amendments to and Redemption of Preferred Stock or Other Equity.
               ---------------------------------------------------------------
     Borrowers shall not  (i) amend any outstanding equity issue after the
     Effective Date without the consent of Majority Lenders, or (ii) redeem any
     preferred stock (other than the Series C Preferred Stock and the
     Exchangeable Preferred Stock which may be redeemed pursuant to Section
     13(f)) without the consent of Majority Lenders.

          (q)  Payment or Pre-Payment of Other Indebtedness.  Except as
               --------------------------------------------
     otherwise provided for in this Agreement, Borrowers shall not make any
     unscheduled payments on or redeem any of their indebtedness (other than
     indebtedness owed the Lenders hereunder) unless such payment, pre-payment
     or redemption is approved by Majority Lenders.

          (r)  Subordinated Indebtedness.  Borrowers shall not fail in any
               -------------------------
     respect to comply with all of the provisions of the Intercreditor
     Agreements or the subordination provisions of the Security Purchase
     Agreements and shall not make any payments on the Subordinated Notes in
     violation of the provisions thereof.  3TEC shall not amend in any respect
     the provisions of the Subordinated Notes or the Security Purchase
     Agreements, except as permitted by the provisions of the Intercreditor
     Agreements or any of the Security Purchase Agreements.

     14.  Events of Default.  Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:

                                      -46-
<PAGE>

          (a)  The Borrowers shall fail to pay when due or declared due the
     principal of any note or any Reimbursement Obligation when due; or

          (b)  Borrowers shall fail to pay any accrued interest due and owing on
     any Note or any fees or any other amount payable hereunder when due and
     such failure shall continue for a period of three (3) business days
     following the due date;

          (c)  Any representation or warranty made by Borrowers under this
     Agreement, or in any certificate or statement furnished or made to the
     Lenders pursuant hereto, or in connection herewith, or in connection with
     any document furnished hereunder, shall prove to be untrue in any material
     respect as of the date on which such representation or warranty is made (or
     deemed made), or any representation, statement (including financial
     statements), certificate, report or other data furnished or to be furnished
     or made by Borrowers under any Loan Document, including this Agreement,
     proves to have been untrue in any material respect, as of the date as of
     which the facts therein set forth were stated or certified; or

          (d)  Default shall be made in the due observance or performance of any
     of the covenants or agreements of the Borrowers contained in the Loan
     Documents, including this Agreement (excluding covenants contained in
     Section 13 of the Agreement for which there is a twenty (20) day cure
     period), and such default shall continue for more than thirty (30) days
     after written notice is received by Borrowers; or

          (e)  Default shall be made in the due observance or performance of the
     covenants of the Borrowers contained in Section 13 of this Agreement and
     such default shall continue for more than twenty (20) days after written
     notice is received by Borrowers; or

          (f)  Default shall be made in respect of any obligation for borrowed
     money, other than the Notes, for which Borrowers are liable (directly, by
     assumption, as guarantor or otherwise), or any obligations secured by any
     mortgage, pledge or other security interest, lien, charge or encumbrance
     with respect thereto, on any asset or property of any Borrower or in
     respect of any agreement relating to any such obligations unless such
     Borrower is not liable for same (i.e., unless remedies or recourse for
     failure to pay such obligations is limited to foreclosure of the collateral
     security therefor), and if such default shall continue beyond the
     applicable grace period, if any; or

          (g)  Borrowers shall commence a voluntary case or other proceeding
     seeking liquidation, reorganization or other relief with respect to any of
     them or their debts under any bankruptcy, insolvency or other similar law
     now or hereafter in effect or seeking an appointment of a trustee,
     receiver, liquidator, custodian or other similar official of any of them or
     any substantial part of their property, or shall consent to any such relief
     or to the appointment of or taking possession by any such official in an
     involuntary case or other

                                      -47-
<PAGE>

     proceeding commenced against them, or shall make a general assignment for
     the benefit of creditors, or shall fail generally to pay their debts as
     they become due, or shall take any corporate action authorizing the
     foregoing; or

          (h)  An involuntary case or other proceeding, shall be commenced
     against Borrowers seeking liquidation, reorganization or other relief with
     respect to them or their debts under any bankruptcy, insolvency or similar
     law now or hereafter in effect or seeking the appointment of a trustee,
     receiver, liquidator, custodian or other similar official of it or any
     substantial part of their property, and such involuntary case or other
     proceeding shall remain undismissed and unstayed for a period of sixty (60)
     days; or an order for relief shall be entered against Borrowers under the
     federal bankruptcy laws as now or hereinafter in effect; or

          (i)  A final judgment or order for the payment of money in excess of
     $2,000,000 (or judgments or orders aggregating in excess of $2,000,000)
     shall be rendered against Borrowers and such judgments or orders shall
     continue unsatisfied and unstayed for a period of thirty (30) days; or

          (j)  In the event the Total Outstandings shall at any time exceed the
     Borrowing Base established for the Notes, and the Borrowers shall fail to
     comply with the provisions of Section 9(b) hereof; or

          (k)  A Change of Control shall occur; or

          (l)  A Change of Management shall occur; or

          (m)  The Special Mandatory Prepayment is not paid in full on or before
     December 31, 2000.

     Upon occurrence of any Event of Default specified in Subsections 14(g) and
(h) hereof, the entire principal amount due under the Notes and all interest
then accrued thereon, and any other liabilities of the Borrowers hereunder,
shall become immediately due and payable all without notice and without
presentment, demand, protest, notice of protest or dishonor or any other notice
of default of any kind, all of which are hereby expressly waived by the
Borrowers.  In any other Event of Default, the Agent, upon request of Majority
Lenders, shall by written notice to the Borrowers declare the principal of, and
all interest then accrued on, the Notes and any other liabilities hereunder to
be forthwith due and payable, whereupon the same shall forthwith become due and
payable without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other notice of any kind, all of which the Borrowers
hereby expressly waive, anything contained herein or in the Note to the contrary
notwithstanding.  Nothing contained in this Section 14 shall be

                                      -48-
<PAGE>

construed to limit or amend in any way the Events of Default enumerated in the
Note, or any other document executed in connection with the transaction
contemplated herein.

     Upon the occurrence and during the continuance of any Event of Default, the
Lenders are hereby authorized at any time and from time to time, without notice
to the Borrowers (any such notice being expressly waived by the Borrowers), to
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by any of the Lenders to or for the credit or the account of the Borrowers
against any and all of the indebtedness of the Borrowers under the Notes and the
Loan Documents, including this Agreement, irrespective of whether or not the
Lenders shall have made any demand under the Loan Documents, including this
Agreement or the Notes and although such indebtedness may be unmatured.  Any
amount set-off by any of the Lenders shall be applied against the indebtedness
owed the Lenders by the Borrowers pursuant to this Agreement and the Notes.  The
Lenders agree promptly to notify the Borrowers after any such setoff and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application.  The rights of the Lender under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Lenders may have.

     15.  The Agent and the Lenders.

          (a)  Appointment and Authorization. Each Lender hereby appoints Agent
               -----------------------------
     as its nominee and agent, in its name and on its behalf: (i) to act as
     nominee for and on behalf of such Lender in and under all Loan Documents;
     (ii) to arrange the means whereby the funds of Lenders are to be made
     available to the Borrowers under the Loan Documents; (iii) to take such
     action as may be requested by any Lender under the Loan Documents (when
     such Lender is entitled to make such request under the Loan Documents);
     (iv) to receive all documents and items to be furnished to Lenders under
     the Loan Documents; (v) to be the secured party, mortgagee, beneficiary,
     and similar party in respect of, and to receive, as the case may be, any
     collateral for the benefit of Lenders; (vi) to promptly distribute to each
     Lender all material information, requests, documents and items received
     from the Borrowers under the Loan Documents; (vii) to promptly distribute
     to each Lender such Lender's Pro Rata Part of each payment or prepayment
     (whether voluntary, as proceeds of insurance thereon, or otherwise) in
     accordance with the terms of the Loan Documents and (viii) to deliver to
     the appropriate Persons requests, demands, approvals and consents received
     from Lenders. Each Lender hereby authorizes Agent to take all actions and
     to exercise such powers under the Loan Documents as are specifically
     delegated to Agent by the terms hereof or thereof, together with all other
     powers reasonably incidental thereto. With respect to its commitments
     hereunder and the Notes issued to it, Agent and any successor Agent shall
     have the same rights under the Loan Documents as any other Lender and may
     exercise the same as though it were not the Agent; and the term "Lender" or
     "Lenders" shall, unless otherwise expressly indicated, include Agent and
     any successor Agent in its capacity as a Lender.

                                      -49-
<PAGE>

     Agent and any successor Agent and its Affiliates may accept deposits from,
     lend money to, act as trustee under indentures of and generally engage in
     any kind of business with the Borrowers, and any person which may do
     business with the Borrowers, all as if Agent and any successor Agent was
     not Agent hereunder and without any duty to account therefor to the
     Lenders; provided that, if any payments in respect of any property (or the
     proceeds thereof) now or hereafter in the possession or control of Agent
     which may be or become security for the obligations of the Borrowers
     arising under the Loan Documents by reason of the general description of
     indebtedness secured or of property contained in any other agreements,
     documents or instruments related to any such other business shall be
     applied to reduction of the obligations of the Borrowers arising under the
     Loan Documents, then each Lender shall be entitled to share in such
     application according to its pro rata part thereof.  Each Lender, upon
     request of any other Lender, shall disclose to all other Lenders all
     indebtedness and liabilities, direct and contingent, of the Borrowers to
     such Lender as of the time of such request.

          (b)  Note Holders.  From time to time as other Lenders become a party
               ------------
     to this Agreement, Agent shall obtain execution by the Borrowers of
     additional Notes in amounts representing the Commitment of each such new
     Lender, up to an aggregate face amount of all Notes not exceeding
     $250,000,000.  The obligation of such Lender shall be governed by the
     provisions of this Agreement, including but not limited to, the obligations
     specified in Section 2 hereof.  From time to time, Agent may require that
     the Lenders exchange their Notes for newly issued Notes to better reflect
     the Commitments of the Lenders.  Agent may treat the payee of any Note as
     the holder thereof until written notice of transfer has been filed with it,
     signed by such payee and in form satisfactory to Agent.

          (c)  Consultation with Counsel.  Lenders agree that Agent may consult
               -------------------------
     with legal counsel selected by Agent and shall not be liable for any action
     taken or suffered in good faith by it in accordance with the advice of such
     counsel.  Lenders acknowledge that Gardere & Wynne, L.L.P. is counsel for
     Bank One, both as Agent and as a Lender, and that such firm does not
     represent any of the other Lenders in connection with this transaction.

          (d)  Documents.  Agent shall not be under a duty to examine or pass
               ---------
     upon the validity, effectiveness, enforceability, genuineness or value of
     any of the Loan Documents or any other instrument or document furnished
     pursuant thereto or in connection therewith, and Agent shall be entitled to
     assume that the same are valid, effective, enforceable and genuine and what
     they purport to be.

          (e)  Resignation or Removal of Agent.  Subject to the appointment and
               -------------------------------
     acceptance of a successor Agent as provided below, Agent may resign at any
     time by giving written notice thereof to Lenders and the Borrowers, and
     Agent may be removed at any time with

                                      -50-
<PAGE>

     or without cause by all Lenders. If no successor Agent has been so
     appointed by all Lenders (and approved by the Borrowers) and has accepted
     such appointment within 30 days after the retiring Agent's giving of notice
     of resignation or removal of the retiring Agent, then the retiring Agent
     may, on behalf of Lenders, appoint a successor Agent. Any successor Agent
     must be approved by Borrowers, which approval will not be unreasonably
     withheld. Upon the acceptance of any appointment as Agent hereunder by a
     successor Agent, such successor Agent shall thereupon succeed to and become
     vested with all the rights and duties of the retiring Agent, and the
     retiring Agent, as the case may be, shall be discharged from its duties and
     obligations hereunder. After any retiring Agent's resignation or removal
     hereunder as Agent, the provisions of this Section 15 shall continue in
     effect for its benefit in respect to any actions taken or omitted to be
     taken by it while it was acting as Agent. To be eligible to be an Agent
     hereunder the party serving, or to serve, in such capacity must own a Pro
     Rata Part of the Commitments equal to the level of Commitment required to
     be held by any Lender pursuant to Section 28 hereof.

          (f)  Responsibility of Agent.  It is expressly understood and agreed
               -----------------------
     that the obligations of Agent under the Loan Documents are only those
     expressly set forth in the Loan Documents as to each and that Agent, shall
     be entitled to assume that no Default or Event of Default has occurred and
     is continuing, unless Agent has actual knowledge of such fact or has
     received notice from a Lender or the Borrowers that such Lender or the
     Borrowers considers that a Default or an Event of Default has occurred and
     is continuing and specifying the nature thereof.  Neither Agent nor any of
     its directors, officers, attorneys or employees shall be liable for any
     action taken or omitted to be taken by them under or in connection with the
     Loan Documents, except for its or their own gross negligence or willful
     misconduct.  Agent shall not incur liability under or in respect of any of
     the Loan Documents by acting upon any notice, consent, certificate,
     warranty or other paper or instrument believed by it to be genuine or
     authentic or to be signed by the proper party or parties, or with respect
     to anything which it may do or refrain from doing in the reasonable
     exercise of its judgment, or which may seem to it to be necessary or
     desirable.

          Agent shall not be responsible to Lenders for any of the Borrowers'
     recitals, statements, representations or warranties contained in any of the
     Loan Documents, or in any certificate or other document referred to or
     provided for in, or received by any Lender under, the Loan Documents, or
     for the value, validity, effectiveness, genuineness, enforceability or
     sufficiency of or any of the Loan Documents or for any failure by the
     Borrowers to perform any of its obligations hereunder or thereunder.  Agent
     may employ agents and attorneys-in-fact and shall not be answerable, except
     as to money or securities received by it or its authorized agents, for the
     negligence or misconduct of any such agents or attorneys-in-fact selected
     by it with reasonable care.

                                      -51-
<PAGE>

          The relationship between Agent and each Lender is only that of agent
     and principal and has no fiduciary aspects. Nothing in the Loan Documents
     or elsewhere shall be construed to impose on Agent any duties or
     responsibilities other than those for which express provision is therein
     made. In performing its duties and functions hereunder, Agent does not
     assume and shall not be deemed to have assumed, and hereby expressly
     disclaims, any obligation or responsibility toward or any relationship of
     agency or trust with or for the Borrowers or any of their beneficiaries or
     other creditors. As to any matters not expressly provided for by the Loan
     Documents, Agent shall not be required to exercise any discretion or take
     any action, but shall be required to act or to refrain from acting (and
     shall be fully protected in so acting or refraining from acting) upon the
     instructions of all Lenders and such instructions shall be binding upon all
     Lenders and all holders of the Notes; provided, however, that Agent shall
     not be required to take any action which is contrary to the Loan Documents
     or applicable law.

          Agent shall have the right to exercise or refrain from exercising,
     without notice or liability to the Lenders, any and all rights afforded to
     Agent by the Loan Documents or which Agent may have as a matter of law;
     provided, however, Agent shall not (i) except as provided herein and in
     Section 7(b) hereof, without the consent of Majority Lenders designate the
     amount of the Borrowing Base or (ii) take any other action with regard to
     amending the Loan Documents, waiving any default under the Loan Documents
     or taking any other action with respect to the Loan Documents. Provided
     further, however, that no amendment, waiver, or other action shall be
     effected pursuant to the preceding clause (ii) without the consent of all
     Lenders which: (i) would increase the Borrowing Base, (ii) would reduce any
     fees hereunder, or the principal of, or the interest on, any Lender's Note
     or Notes, (iii) would postpone any date fixed for any payment of any fees
     hereunder, or any principal or interest of any Lender's Note or Notes, (iv)
     would materially increase any Lender's obligations hereunder or would
     materially alter Agent's obligations to any Lender hereunder, (v) would
     release Borrowers from their obligation to pay any Lender's Note or Notes,
     (vi) release any of the Collateral except as permitted by Sections 12(r)
     and 13(a)(ii) hereof, (vii) would change the definition of Majority
     Lenders, (viii) would amend, modify or change any provision of this
     Agreement requiring the consent of all the Lenders, (ix) would waive any of
     the conditions precedent to the Effective Date or the making of any Loan or
     issuance of any Letter of Credit or (x) would extend the Maturity Date or
     (xi) would amend this sentence or the previous sentence. Agent shall not
     have liability to Lenders for failure or delay in exercising any right or
     power possessed by Agent pursuant to the Loan Documents or otherwise unless
     such failure or delay is caused by the gross negligence of the Agent, in
     which case only the Agent responsible for such gross negligence shall have
     liability therefor to the Lenders.

          (g)  Independent Investigation.  Each Lender severally represents and
               -------------------------
     warrants to Agent that it has made its own independent investigation and
     assessment of the financial condition and affairs of the Borrowers in
     connection with the making and continuation of its

                                      -52-
<PAGE>

     participation hereunder and has not relied exclusively on any information
     provided to such Lender by Agent in connection herewith, and each Lender
     represents, warrants and undertakes to Agent that it shall continue to make
     its own independent appraisal of the credit worthiness of the Borrowers
     while the Notes are outstanding or its commitments hereunder are in force.
     Agent shall not be required to keep itself informed as to the performance
     or observance by the Borrowers of this Agreement or any other document
     referred to or provided for herein or to inspect the properties or books of
     the Borrowers. Other than as provided in this Agreement, Agent shall not
     have any duty, responsibility or liability to provide any Lender with any
     credit or other information concerning the affairs, financial condition or
     business of the Borrowers which may come into the possession of Agent.

          (h)  Indemnification. Lenders agree to indemnify Agent, ratably
               ---------------
     according to their respective Commitments on a Pro Rata basis, from and
     against any and all liabilities, obligations, losses, damages, penalties,
     actions, judgments, suits, costs, expenses or disbursements of any proper
     and reasonable kind or nature whatsoever which may be imposed on, incurred
     by or asserted against Agent in any way relating to or arising out of the
     Loan Documents or any action taken or omitted by Agent under the Loan
     Documents, provided that no Lender shall be liable for any portion of such
     liabilities, obligations, losses, damages, penalties, actions, judgments,
     suits, costs, expenses or disbursements resulting from Agent's gross
     negligence or willful misconduct.  Each Lender shall be entitled to be
     reimbursed by the Agent for any amount such Lender paid to Agent under this
     Section 15(h) to the extent the Agent has been reimbursed for such payments
     by the Borrowers or any other Person.  The parties intend for the
     provisions of this Section to apply to and protect the Agent from the
     consequences of any liability including strict liability imposed or
     threatened to be imposed on Agent as well as from the consequences of its
     own negligence, whether or not that negligence is the sole, contributing or
     concurring cause of any such liability.

          (i)  Benefit of Section 15.  The agreements contained in this Section
               ---------------------
     15 are solely for the benefit of Agent and the Lenders and are not for the
     benefit of, or to be relied upon by, the Borrowers, any affiliate of the
     Borrowers or any other person.

          (j)  Pro Rata Treatment.  Subject to the provisions of this Agreement,
               ------------------
     each payment (including each prepayment) by the Borrowers and collection by
     Lenders (including offsets) on account of the principal of and interest on
     the Notes and fees provided for in this Agreement, payable by the Borrowers
     shall be made Pro Rata; provided, however, in the event that any Defaulting
     Lender shall have failed to make an Advance as contemplated under Section 3
     hereof and Agent or another Lender or Lenders shall have made such Advance,
     payment received by Agent for the account of such Defaulting Lender or
     Lenders shall not be distributed to such Defaulting Lender or Lenders until
     such Advance or

                                      -53-
<PAGE>

     Advances shall have been repaid in full to the Lender or Lenders who funded
     such Advance or Advances.

          (k)  Assumption as to Payments.  Except as specifically provided
               -------------------------
     herein, unless Agent shall have received notice from the Borrowers prior to
     the date on which any payment is due to Lenders hereunder that the
     Borrowers will not make such payment in full, Agent may, but shall not be
     required to, assume that the Borrowers have made such payment in full to
     Agent on such date and Agent may, in reliance upon such assumption, cause
     to be distributed to each Lender on such due date an amount equal to the
     amount then due such Lender.  If and to the extent the Borrowers shall not
     have so made such payment in full to Agent, each Lender shall repay to
     Agent forthwith on demand such amount distributed to such Lender together
     with interest thereon, for each day from the date such amount is
     distributed to such Lender until the date such Lender repays such amount to
     Agent, at the interest rate applicable to such portion of the Loan.

          (l)  Other Financings.  Without limiting the rights to which any
               ----------------
     Lender otherwise is or may become entitled, such Lender shall have no
     interest, by virtue of this Agreement or the Loan Documents, in (a) any
     present or future loans from, letters of credit issued by, or leasing or
     other financial transactions by, any other Lender to, on behalf of, or with
     the Borrowers (collectively referred to herein as "Other Financings") other
     than the obligations hereunder; (b) any present or future guarantees by or
     for the account of the Borrowers which are not contemplated by the Loan
     Documents; (c) any present or future property taken as security for any
     such Other Financings; or (d) any property now or hereafter in the
     possession or control of any other Lender which may be or become security
     for the obligations of the Borrowers arising under any loan document by
     reason of the general description of indebtedness secured or property
     contained in any other agreements, documents or instruments relating to any
     such Other Financings.

          (m)  Interests of Lenders.  Nothing in this Agreement shall be
               --------------------
     construed to create a partnership or joint venture between Lenders for any
     purpose.  Agent, Lenders and the Borrowers recognize that the respective
     obligations of Lenders under the Commitments shall be several and not joint
     and that neither Agent nor any of Lenders shall be responsible or liable to
     perform any of the obligations of the other under this Agreement.  Each
     Lender is deemed to be the owner of an undivided interest in and to all
     rights, titles, benefits and interests belonging and accruing to Agent
     under the Security Instruments, including, without limitation, liens and
     security interests in any collateral, fees and payments of principal and
     interest by the Borrowers under the Commitments on a Pro Rata basis.  Each
     Lender shall perform all duties and obligations of Lenders under this
     Agreement in the same proportion as its ownership interest in the Loans
     outstanding at the date of determination thereof.

                                      -54-
<PAGE>

          (n)  Investments.  Whenever Agent in good faith determines that it is
               -----------
     uncertain about how to distribute to Lenders any funds which it has
     received, or whenever Agent in good faith determines that there is any
     dispute among the Lenders about how such funds should be distributed, Agent
     may choose to defer distribution of the funds which are the subject of such
     uncertainty or dispute. If Agent in good faith believes that the
     uncertainty or dispute will not be promptly resolved, or if Agent is
     otherwise required to invest funds pending distribution to the Lenders,
     Agent may invest such funds pending distribution (at the risk of the
     Borrowers). All interest on any such investment shall be distributed upon
     the distribution of such investment and in the same proportions and to the
     same Persons as such investment. All monies received by Agent for
     distribution to the Lenders (other than to the Person who is Agent in its
     separate capacity as a Lender) shall be held by the Agent pending such
     distribution solely as Agent for such Lenders, and Agent shall have no
     equitable title to any portion thereof.

     16.  Exercise of Rights.  No failure to exercise, and no delay in
exercising, on the part of the Agent or the Lenders, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right. The rights of the Agent and the Lenders hereunder shall be in addition to
all other rights provided by law. No modification or waiver of any provision of
the Loan Documents, including this Agreement, or the Note nor consent to
departure therefrom, shall be effective unless in writing, and no such consent
or waiver shall extend beyond the particular case and purpose involved. No
notice or demand given in any case shall constitute a waiver of the right to
take other action in the same, similar or other circumstances without such
notice or demand.

     17.  Notices.  Any notices or other communications required or permitted to
be given by this Agreement or any other documents and instruments referred to
herein must be given in writing (which may be by facsimile transmission) and
must be personally delivered or mailed by prepaid certified or registered mail
to the party to whom such notice or communication is directed at the address of
such party as follows: (a) BORROWERS: c/o 3TEC ENERGY CORPORATION, Two Shell
Plaza, 777 Walker, Suite 2400, Houston, Texas 77002, Attn: Floyd C. Wilson,
Chief Executive Officer, Facsimile (713) 821-7200; (b) AGENT: BANK ONE, TEXAS,
N.A., 1717 Main Street, Dallas, Texas 75201, Facsimile No. (214) 290-2332,
Attention: Mynan C. Feldman, First Vice President. Any such notice or other
communication shall be deemed to have been given (whether actually received or
not) on the day it is personally delivered or delivered by facsimile as
aforesaid or, if mailed, on the third day after it is mailed as aforesaid. Any
party may change its address for purposes of this Agreement by giving notice of
such change to the other party pursuant to this Section 17. Any notice required
to be given to the Lenders shall be given to the Agent and distributed to all
Lenders by the Agent .

     18.  Expenses.  The Borrowers shall pay (i) all reasonable and necessary
out-of-pocket expenses of the Lenders, including reasonable fees and
disbursements of special counsel for the

                                      -55-
<PAGE>

Agent, in connection with the preparation of this Agreement, any waiver or
consent hereunder or any amendment hereof or any default or Event of Default or
alleged default or Event of Default hereunder, (ii) all reasonable and necessary
out-of-pocket expenses of the Agent, including reasonable fees and disbursements
of special counsel for the Agent in connection with the preparation of any
participation agreement for a participant or participants requested by the
Borrowers or any amendment thereof and (iii) if a default or an Event of Default
occurs, all reasonable and necessary out-of-pocket expenses incurred by the
Lenders, including fees and disbursements of counsel, in connection with such
default and Event of Default and collection and other enforcement proceedings
resulting therefrom. The Borrowers hereby acknowledge that Gardere & Wynne,
L.L.P. is special counsel to Bank One, as Agent and as a Lender, under this
Agreement and that it is not counsel to, nor does it represent the Borrowers in
connection with the transactions described in this Agreement. The Borrowers are
relying on separate counsel in the transaction described herein. The Borrowers
shall indemnify the Lenders against any transfer taxes, document taxes,
assessments or charges made by any governmental authority by reason of the
execution, delivery and filing of the Loan Documents. The obligations of this
Section 18 shall survive any termination of this Agreement, the expiration of
the Loans and the payment of all indebtedness of the Borrowers to the Lenders
hereunder and under the Notes.

     19.  Indemnity.  The Borrowers agree to indemnify and hold harmless the
Lenders and their respective officers, employees, agents, attorneys and
representatives (singularly, an "Indemnified Party", and collectively, the
"Indemnified Parties") from and against any loss, cost, liability, damage or
expense (including the reasonable fees and out-of-pocket expenses of counsel to
the Lenders, including all local counsel hired by such counsel) ("Claim")
incurred by the Lenders in investigating or preparing for, defending against, or
providing evidence, producing documents or taking any other action in respect of
any commenced or threatened litigation, administrative proceeding or
investigation under any federal securities law, federal or state environmental
law, or any other statute of any jurisdiction, or any regulation, or at common
law or otherwise, which is alleged to arise out of or is based upon any acts,
practices or omissions or alleged acts, practices or omissions of the Borrowers
or their agents or arises in connection with the duties, obligations or
performance of the Indemnified Parties in negotiating, preparing, executing,
accepting, keeping, completing, countersigning, issuing, selling, delivering,
releasing, assigning, handling, certifying, processing or receiving or taking
any other action with respect to the Loan Documents and all documents, items and
materials contemplated thereby even if any of the foregoing arises out of an
Indemnified Party's ordinary negligence. The indemnity set forth herein shall be
in addition to any other obligations or liabilities of the Borrowers to the
Lenders hereunder or at common law or otherwise, and shall survive any
termination of this Agreement, the expiration of the Loans and the payment of
all indebtedness of the Borrowers to the Lenders hereunder and under the Notes,
provided that the Borrowers shall have no obligation under this Section to the
Lender with respect to any of the foregoing arising out of the gross negligence
or willful misconduct of the Lender. If any Claim is asserted against any
Indemnified Party, the Indemnified Party shall endeavor to notify the Borrowers
of such Claim (but failure to do so shall not affect the indemnification herein
made

                                      -56-
<PAGE>

except to the extent of the actual harm caused by such failure). The Indemnified
Party shall have the right to employ, at the Borrowers' expense, counsel of the
Indemnified Parties' choosing and to control the defense of the Claim. The
Borrowers may at their own expense also participate in the defense of any Claim.
Each Indemnified Party may employ separate counsel in connection with any Claim
to the extent such Indemnified Party believes it reasonably prudent to protect
such Indemnified Party. The parties intend for the provisions of this Section to
apply to and protect each Indemnified Party from the consequences of any
liability including strict liability imposed or threatened to be imposed on
Agent as well as from the consequences of its own negligence, whether or not
that negligence is the sole, contributing, or concurring cause of any Claim.

     20.  Governing Law.  THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE SUBSTANTIVE
LAWS OF TEXAS SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF THIS AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS
REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.

     21.  Invalid Provisions.  If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provisions shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.

     22.  Maximum Interest Rate.  Regardless of any provisions contained in this
Agreement or in any other documents and instruments referred to herein, the
Lenders shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Notes any amount in excess of the Maximum
Rate, and in the event any Lender ever receives, collects or applies as interest
any such excess, or if an acceleration of the maturities of any Notes or if any
prepayment by the Borrowers results in the Borrowers having paid any interest in
excess of the Maximum Rate, such amount which would be excessive interest shall
be applied to the reduction of the unpaid principal balance of the Notes for
which such excess was received, collected or applied, and, if the principal
balance of such Note is paid in full, any remaining excess shall forthwith be
paid to the Borrowers. All sums paid or agreed to be paid to the Lenders for the
use, forbearance or detention of the indebtedness evidenced by the Notes and/or
this Agreement shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of such indebtedness
until payment in full so that the rate or amount of interest on account of such
indebtedness does not exceed the Maximum Rate. In determining whether or not the
interest paid or payable under any specific contingency exceeds the Maximum Rate
of interest permitted by law, the Borrowers and the Lenders shall, to the
maximum extent permitted under applicable law, (i) characterize any non-
principal payment as an expense, fee or premium, rather than as interest; and

                                      -57-
<PAGE>

(ii) exclude voluntary prepayments and the effect thereof; and (iii) compare the
total amount of interest contracted for, charged or received with the total
amount of interest which could be contracted for, charged or received throughout
the entire contemplated term of the Note at the Maximum Rate.

     23.  Amendments.  Subject to the provisions of Section 15(b) hereof, this
Agreement may be amended only by an instrument in writing executed by an
authorized officer of the party against whom such amendment is sought to be
enforced.

     24.  Multiple Counterparts.  This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto.

     25.  Conflict.  In the event any term or provision hereof is inconsistent
with or conflicts with any provision of the Loan Documents, the terms or
provisions contained in this Agreement shall be controlling.

     26.  Survival.  All covenants, agreements, undertakings, representations
and warranties made in the Loan Documents, including this Agreement, the Notes
or other documents and instruments referred to herein shall survive all closings
hereunder and shall not be affected by any investigation made by any party.

     27.  Parties Bound.  This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates, provided, however, that the Borrowers may
not, without the prior written consent of all of the Lenders, assign any rights,
powers, duties or obligations hereunder.

     28.  Assignments and Participations.

          (a)  Each Lender shall have the right to sell, assign or transfer all
     or any part of its Note or Notes, its Commitment and its rights and
     obligations hereunder to one or more Affiliates, Lenders, financial
     institutions, pension plans, insurance companies, investment funds, or
     similar Persons who are Eligible Assignees or to a Federal Reserve Bank;
     provided, that in connection with each sale, assignment or transfer (other
     --------
     than to an Affiliate, a Bank or a Federal Reserve Bank), shall require the
     consent of Agent and the Borrowers, which consents will not be unreasonably
     withheld; provided, however, that if an Event of Default has occurred and
     is continuing, the consent of the Borrowers shall not be required.  Any
     such assignee, transferee or recipient shall have, to the extent of such
     sale, assignment, or transfer, the same rights, benefits and obligations as
     it would if it were such Lender and a holder of such Note, Commitment and
     rights and obligations, including, without limitation, the right

                                      -58-
<PAGE>

     to vote on decisions requiring consent or approval of all Lenders or
     Majority Lenders and the obligation to fund its Commitment; provided, that
     (1) each such sale, assignment, or transfer (other than to an Affiliate, a
     Bank or a Federal Reserve Bank) shall be in an aggregate principal amount
     not less than $5,000,000, (2) each remaining Lender shall at all times
     maintain Commitment then outstanding in an aggregate principal amount at
     least equal to $5,000,000; (3) each such sale, assignment or transfer shall
     be of a Pro Rata portion of such Lender's Commitment, (4) no Lender may
     offer to sell its Note or Notes, Commitment, rights and obligations or
     interests therein in violation of any securities laws; and (5) no such
     assignments (other than to a Federal Reserve Bank) shall become effective
     until the assigning Lender and its assignee delivers to Agent and Borrowers
     an Assignment and Acceptance and the Note or Notes subject to such
     assignment and other documents evidencing any such assignment. An
     assignment fee in the amount of $3,500 for each such assignment (other than
     to an Affiliate, a Bank or the Federal Reserve Bank) will be payable to
     Agent by assignor or assignee. Within five (5) Business Days after its
     receipt of copies of the Assignment and Acceptance and the other documents
     relating thereto and the Note or Notes, the Borrowers shall execute and
     deliver to Agent (for delivery to the relevant assignee) a new Note or
     Notes evidencing such assignee's assigned Commitment and if the assignor
     Lender has retained a portion of its Commitment, a replacement Note in the
     principal amount of the Commitment retained by the assignor (except as
     provided in the last sentence of this paragraph (a) such Note or Notes to
     be in exchange for, but not in payment of, the Note or Notes held by such
     Lender). On and after the effective date of an assignment hereunder, the
     assignee shall for all purposes be a Lender, party to this Agreement and
     any other Loan Document executed by the Lenders and shall have all the
     rights and obligations of a Lender under the Loan Documents, to the same
     extent as if it were an original party thereto, and no further consent or
     action by Borrowers, Lenders or the Agent shall be required to release the
     transferor Lender with respect to its Commitment assigned to such assignee
     and the transferor Lender shall henceforth be so released.

          (b)  Each Lender shall have the right to grant participations in all
     or any part of such Lender's Notes and Commitment hereunder to one or more
     pension plans, investment funds, insurance companies, financial
     institutions or other Persons, provided, that:

               (i)    each Lender granting a participation shall retain the
          right to vote hereunder, and no participant shall be entitled to vote
          hereunder on decisions requiring consent or approval of Lender or
          Majority Lenders (except as set forth in (iii) below);

               (ii)   in the event any Lender grants a participation hereunder,
          such Lender's obligations under the Loan Documents shall remain
          unchanged, such Lender shall remain solely responsible to the other
          parties hereto for the performance of such obligations, such Lender
          shall remain the holder of any

                                      -59-
<PAGE>

          such Note or Notes for all purposes under the Loan Documents, and
          Agent, each Lender and Borrowers shall be entitled to deal with the
          Lender granting a participation in the same manner as if no
          participation had been granted; and

               (iii)  no participant shall ever have any right by reason of its
          participation to exercise any of the rights of Lenders hereunder,
          except that any Lender may agree with any participant that such Lender
          will not, without the consent of such participant (which consent may
          not be unreasonably withheld) consent to any amendment or waiver
          requiring approval of all Lenders.

          (c)  It is understood and agreed that any Lender may provide to
     assignees and participants and prospective assignees and participants
     financial information and reports and data concerning Borrowers' properties
     and operations which was provided to such Lender pursuant to this
     Agreement.

          (d)  Upon the reasonable request of either Agent or Borrowers, each
     Lender will identify those to whom it has assigned or participated any part
     of its Notes and Commitment, and provide the amounts so assigned or
     participated.

     29.  Choice of Forum: Consent to Service of Process and Jurisdiction.  THE
OBLIGATIONS OF BORROWERS UNDER THE LOAN DOCUMENTS ARE PERFORMABLE IN DALLAS
COUNTY, TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWERS WITH RESPECT
TO THE LOAN DOCUMENTS OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF,
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF DALLAS, OR IN THE
UNITED STATES COURTS LOCATED IN DALLAS COUNTY, TEXAS AND THE BORROWERS HEREBY
SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. THE BORROWERS HEREBY IRREVOCABLY CONSENT TO
SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN SAID COURT BY THE
MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
THE BORROWERS, AS APPLICABLE, AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION
17. THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY OBJECTION WHICH THEY MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO ANY LOAN DOCUMENT BROUGHT IN THE COURTS LOCATED IN THE
STATE OF TEXAS, COUNTY OF DALLAS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.

                                      -60-
<PAGE>

     30.  Waiver of Jury Trial.  THE BORROWERS HEREBY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.

     31.  Other Agreements.  THIS WRITTEN CREDIT AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     32.  Financial Terms.  All accounting terms used in this Agreement which
are not specifically defined herein shall be construed in accordance with GAAP.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -61-
<PAGE>

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

                              BORROWERS:
                              ---------

                              3TEC ENERGY CORPORATION
                              a Delaware corporation

                              By:____________________________________________
                                    R.A. Walker, President and
                                    Chief Financial Officer

                              ENEX RESOURCES CORPORATION
                              a Delaware corporation

                              By:____________________________________________
                                    Floyd C. Wilson, President

                              MIDDLE BAY PRODUCTION COMPANY, INC.
                              a Kansas corporation

                              By:____________________________________________
                                    Floyd C. Wilson, President

                              MAGELLAN EXPLORATION,  LLC
                              a Delaware limited liability company

                              By:____________________________________________
                                    Floyd C. Wilson, President

                                      -62-
<PAGE>

                              LENDERS:
                              -------

                              BANK ONE, TEXAS, N.A.,
                              a national banking association

                              By:____________________________________________
                                    Mynan C. Feldman, First Vice President

                              THE BANK OF NOVA SCOTIA

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                              UNION BANK OF CALIFORNIA, N.A.

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                              BANK OF MONTREAL

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                              WELLS FARGO BANK TEXAS, NATIONAL
                              ASSOCIATION

                              By:____________________________________________
                                    Brian K. Otis, Vice President

                                      -63-
<PAGE>

                              CIBC, INC.

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                              ADMINISTRATIVE AGENT:
                              --------------------

                              BANK ONE, TEXAS, N.A.,
                              a national banking association

                              By:____________________________________________
                                    Mynan C. Feldman, First Vice President

                              SYNDICATION AGENT:
                              -----------------

                              BANK OF MONTREAL

                              By:____________________________________________
                              Name:__________________________________________
                              Title:_________________________________________

                                      -64-<PAGE>

                                                                   EXHIBIT 10.29

                  FIRST AMENDMENT TO SHAREHOLDERS' AGREEMENT

     This First Amendment to Shareholders' Agreement (the "Amendment") is made
and entered into this 30th day of May, 2000, by and among 3TEC Energy
Corporation, a Delaware corporation, successor in interest to Middle Bay Oil
Company, Inc. (the "Company") and W/E Energy Company L.L.C., formerly known as
3TEC Energy Company L.L.C. and successor in interest to the 3TEC Energy
Corporation referenced in the Agreement (as defined below) ("W/E"), ECIC
Corporation ("ECIC"), EnCap Energy Capital Fund III, L.P. ("Fund III"), EnCap
Energy Acquisition III-B, Inc. ("Acquisition III-B"), BOCP Energy Partners, L.P.
("BOCP") (W/E, ECIC, Fund III, Acquisition III-B and BOCP are sometimes
hereinafter referred to collectively as the "W/E Shareholders") and Kaiser-
Francis Oil Company ("Kaiser-Francis"), C.J. Lett, III ("Lett"), Weskids, L.P.
("Weskids") and Alvin V. Shoemaker ("Shoemaker") (Kaiser-Frances, Lett, Weskids
and Shoemaker are sometimes hereinafter referred to collectively as the "Major
Shareholders").

                                   RECITALS

     WHEREAS, on August 27, 1999, the Company, W/E and the Major Shareholders
executed that certain Shareholders Agreement (the "Agreement");

     WHEREAS, the W/E Shareholders and the Major Shareholders are hereinafter
referred to collectively as the "Shareholders";

     WHEREAS, the Company and the Shareholders wish to amend the Agreement;

     NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

     1.   Terms Defined in the Agreement.  Unless otherwise defined in this
          -------------------------------
Amendment, each term defined in the Agreement shall have the meaning assigned to
it in the Agreement.

     2.   Additional Parties to the Agreement; Certain Defined Terms.
          ----------------------------------------------------------

          (a)  EnCap Energy Capital Fund III, L.P., EnCap Energy Acquisition
               III-B, Inc., ECIC Corporation and BOCP Energy Partners, L.P.
               shall be added as parties to the Agreement.

          (b)  The Agreement shall be amended: (i) to add a new defined term
               "W/E Shareholders" which, for purposes of the Agreement, shall
               mean "W/E Energy Company L.L.C., EnCap Energy Capital Fund III,
               L.P., EnCap Energy Acquisition III-B, Inc., ECIC Corporation and
               BOCP Energy Partners, L.P.," and (ii) to redefine "Shareholders"
               to mean "W/E Shareholders and the Major Shareholders."

     3.   Paragraph 1.  Paragraph 1 of the Agreement is hereby deleted in its
          ------------
          entirety and replaced with the following:
<PAGE>

     "Nomination and Election of Directors. Each of the Shareholders agrees, so
     -------------------------------------
     long as it owns such shares, to vote (including the taking of any action by
     written consent, as necessary or appropriate) and cause its affiliates to
     vote all shares of Common Stock (and any and all shares of any other voting
     class of capital stock of the Company presently or at any future time owned
     by the Shareholders or their affiliates) which it is entitled to vote (or
     control the voting directly or indirectly) to ensure that the following
     shall occur:

     (a)  The Company shall at all times be managed by or under the direction of
          the Board of Directors of the Company (the "Board"), which shall
          consist of seven (7) members, at least two of whom shall qualify as an
          "independent director" as defined in Section 4200(14) of the NASDAQ
          Marketplace Rules.

          The Shareholders shall use their best efforts (including voting the
          shares owned by them and their Affiliates, in calling special meetings
          of the Shareholders and executing and delivering written consents), to
          elect such seven (7) members of the Board, consisting of the
          following:

          (i)    Three (3) members designated by W/E Energy Company L.L.C.
                 ("W/E");

          (ii)   Two (2) members designated by the Major Shareholders; and

          (iii)  Two (2) members designated by a majority of the Board, at least
                 one of which so elected shall be an "independent director" as
                 defined in the Section 4200(14) of the NASDAQ Marketplace
                 Rules, which independent director shall be acceptable to W/E.

The party designating a director may remove such director, with or without
cause, and designate his or her successor. If the director designated by a party
resigns, dies, becomes incapacitated or is otherwise unable to serve, the party
designating such director may designate his or her successor. All Shareholders
shall vote all shares held by them in favor of the election or removal of such
persons so designated. Action taken by either W/E or the Major Shareholders in
designating or removing directors shall be in writing executed by either W/E or
the Major Shareholders, as the case may be, and promptly delivered to the other
Shareholders and the Company."

     4.   Paragraph 4.  Paragraph 4 of the Agreement is hereby deleted in
          ------------
its entirety and replaced with the following:

     "Termination of W/E's Right to Elect Directors.  W/E's right to designate
      ----------------------------------------------
the directors as provided in paragraph 1(b)(i) above shall terminate as follows:

     (a)  if W/E's Shareholders' percentage of beneficial ownership of Common
          Stock is below 15%, W/E shall be entitled to designate only two (2)
          members to the Board;

     (b)  if W/E's Shareholders' percentage of beneficial ownership of Common
          Stock is below 7%, W/E shall be entitled to designate only one (1)
          member to the Board; and

                                       2
<PAGE>

     (c)  if W/E's Shareholders' percentage of beneficial ownership of Common
          Stock is below 5%, W/E's right to designate a member to the Board
          shall terminate.

For purposes of this Agreement, "beneficial ownership" of Common Stock or to
"beneficially own" Common Stock shall be determined in accordance with Rule 13d-
3(d)(1) under the Securities Exchange Act of 1934, as amended.

      5.  Paragraph 5.  Paragraph 5 of the Agreement is hereby deleted in its
          ------------
entirety and replaced with the following:

      "Termination of Major Shareholders' Right to Elect Directors.  The Major
       ------------------------------------------------------------
Shareholders' right to designate the directors as provided in paragraph 1(b)(ii)
above shall terminate as follows:

     (a)  if the Major Shareholders' percentage of beneficial ownership of
          Common Stock is below 7 1/2%, the Major Shareholders shall be entitled
          to designate only one (1) member to the Board;

     (b)  if the Major Shareholders' percentage of beneficial ownership of
          Common Stock is below 5%, the Major Shareholders' right to designate a
          member to the Board shall terminate."

     6.   Paragraph 8.  Paragraph 8 of the Agreement is hereby deleted in its
          -----------
entirety and replaced with the following:

          "8.  Termination of Agreement.  This Agreement shall continue until,
               ------------------------
          and shall terminate immediately upon (a) execution of a written
          agreement of termination by the Shareholders and the Company, (b) the
          adjudication of the Company as a bankrupt or insolvent by a court of
          competent jurisdiction or (c) each of (i) the W/E Shareholders, in the
          aggregate, and (ii) the Major Shareholders beneficially own less than
          5% of the Common Stock."

     7.   Paragraph 19. Paragraph 19 of the Agreement is hereby deleted in its
          -------------
entirety and replaced with the following:

          "19. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
          -------------
          WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE."

     8.   New Paragraph 21.  The following shall be added as paragraph 21
          -----------------
          of the Agreement:

          "21. Ownership of less than 3.5%.  Notwithstanding any other
               --------------------------
provision herein to the contrary, in the event (i) the Company completes its
offering of common stock as contemplated in its Form S-2 Registration Statement
filed with the Securities and Exchange Commission, and (ii) if any Shareholder's
percentage of beneficial ownership of Common Stock falls below three and one-
half percent (3.5%), then such Shareholder's rights and obligations under this
Agreement shall terminate upon the Company's receipt of written notice executed
by a duly authorized representative of such Shareholder that its percentage of
beneficial ownership of Common Stock has fallen below such threshold. Upon the
Company's receipt of such duly executed notice, the Company shall promptly
                                       3
<PAGE>

take all action necessary to notify the Company's transfer agent that the
restrictive legend as required in paragraph 7 of the Agreement on such
Shareholder's Common Stock certificate(s) should be removed and shall be of no
further force or effect."

     9.   Successors.  This Amendment shall be binding upon and shall operate
          ----------
for the benefit of the Company, its shareholders, and their respective
successors, assigns, executors, administrators and heirs, and it shall be
binding upon the Shareholders and any entity to whom any shares of Common Stock
is transferred by the Shareholders in accord with or in violation of the
provisions of this Agreement, and the executor or administrator of such entity.

     10.  Shareholders' Agreement in Effect.  Except as modified herein, the
          ---------------------------------
terms and provisions of the Agreement remain in full force and effect.

     11.  Counterparts.  This Amendment may be signed in any number of
          ------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed on the day and year first above written.

COMPANY:

3TEC ENERGY CORPORATION

By:________________________________
Name:  Stephen W. Herod
Title: Executive Vice President

Address for Notice:
3TEC Energy Corporation
Two Shell Plaza, 777 Walker Street
Houston, TX 77002
Fax: (713) 821-7200

W/E ENERGY COMPANY L.L.C.

By: ________________________________
Name: Floyd C. Wilson
Title: Managing Director

Address for Notice:
W/E Energy Company L.L.C.
Two Shell Plaza, 777 Walker Street
Houston, TX 77002
Fax: (713) 821-7200

                                       4
<PAGE>

ECIC CORPORATION

By ____________________________
   ____________________________
   Vice President

Address for Notice:
c/o EnCap Investments L.L.C.
Attn: David B. Dunton
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas  75219

ENCAP ENERGY CAPITAL FUND III, L.P.

By:  EnCap Investments L.L.C.,
     General Partner

     By: __________________________
         __________________________
           Managing Director

Address for Notice:
c/o EnCap Investments L.L.C.
Attn: David B. Dunton
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas  75219

ENCAP ENERGY ACQUISITION III-B, INC.

By ___________________________
   ___________________________
   Vice President

Address for Notice:
c/o EnCap Investments L.L.C.
Attn: David B. Dunton
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas  75219

BOCP ENERGY PARTNERS, L.P.

By: EnCap Investments L.L.C., Manager

By: __________________________
    __________________________
    Managing Director

                                       5
<PAGE>

Address for Notice:
c/o EnCap Investments L.L.C.
Attn: David B. Dunton
3811 Turtle Creek Blvd., Suite 1080
Dallas, Texas  75219

KAISER-FRANCIS OIL COMPANY

By:__________________________________
Name:________________________________
Title:_______________________________

Address for Notice:
Kaiser-Francis Oil Company
6733 South Yale
Tulsa, OK  74136
Fax: (918) 491-4694

________________________________
C.J. LETT, III

Address for Notice:
C.J. Lett, III
9320 East Central
Wichita, Kansas 67206
Fax: (316) 636-1803

________________________________________
ALVIN V. SHOEMAKER

Address for Notice:
Alvin V. Shoemaker
8800 First Avenue
Stone Harbor, NJ 08247
Fax: (609) 368-0147

WESKIDS, L.P.

By: Weskids, Inc.
    Its General Partner

    By:___________________________________
    Name:_________________________________
    Title:________________________________

                                       6
<PAGE>

Address for Notice:
Weskids, L.P.
310 South Street
Morristown, NJ 07960
Fax: (973) 682-2684

                                       7

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