Document:

<PAGE>   1
                                                                    EXHIBIT 10.7

                                 March 31, 2000

                           ACKNOWLEDGMENT AND CONSENT

         This Acknowledgment and Consent is being executed by Energy Capital
Investment Company PLC, an English investment company, EnCap Energy Capital Fund
III-B, L.P., a Texas limited partnership, BOCP Energy Partners, L.P., a Texas
limited partnership, EnCap Energy Capital Fund III, L.P., a Texas limited
partnership, Kayne Anderson Energy Fund, L.P., a Delaware limited partnership,
BancAmerica Capital Investors SBIC I, L.P., a Delaware limited partnership, Eos
Partners, L.P., a Delaware limited partnership, Eos Partners SBIC, L.P., a
Delaware limited partnership, Eos Partners SBIC II, L.P., a Delaware limited
partnership, SGC Capital Partners II LLC, a Delaware limited liability company
and Bankers Trust Company, a New York banking corporation (each an "Equity
Investor" and collectively, the "Equity Investors") and Bargo Energy Company, a
Texas corporation ("Bargo or the "Borrower"), in accordance with Section 6.01 of
that certain Credit Agreement dated as of March 31, 2000 (together with all
amendments and other modifications, if any, from time to time thereafter made
thereto, the "Credit Agreement") among Bargo, various financial institutions
party thereto ("Lenders"), and Chase Bank of Texas, National Association, as
administrative agent for the Lenders (the "Administrative Agent"), and the other
agents a party thereto. Capitalized terms not otherwise defined herein have the
meanings assigned to such terms in the Credit Agreement.

         1. Each Equity Investor hereby acknowledges and agrees, for itself,
that Bargo must obtain the written consent of the Lenders prior to taking any of
the actions not permitted by Section 9.04(a) of the Credit Agreement with
respect to Bargo's $50,000,000 Cumulative Redeemable Preferred Stock, Series B
(the "Series B Preferred") and Bargo's $45,000,000 Redeemable Preferred Stock,
Series C (the "Series C Preferred" and, together with the Series B Preferred,
the "Preferred Stock") and that the Lenders are not obligated to give such
consent; provided, however, that the Borrower may make or accrue dividends with
respect to the Preferred Stock in the form of additional shares of capital stock
of the Borrower or accruals thereof, so long as such additional shares of
capital stock of the Borrower do not entitle the holder thereof to receive
dividends payable in cash as a matter of right, or may declare dividends on the
Preferred Stock and accrue the amount of such dividends as an increase in the
stated value thereof.

         2. Each Equity Investor hereby acknowledges and agrees, for itself,
that without having first obtained the written consent of the Lenders, no
redemption of the Preferred Stock shall be requested, required or exercised so
long as any of the Aggregate Commitments are outstanding or any other
obligations under the Credit Agreement and the other Loan Documents remain
unpaid or unperformed (irrespective of whether any payment of any kind is then
due to the Lenders under the Credit Agreement); provided, however, that this
section 2 shall terminate on May 13, 2004.

<PAGE>   2

         3. Each Equity Investor hereby acknowledges and agrees, that (a) it has
received a copy of the Credit Agreement and understands the effect of Section
9.04(a) on Bargo's ability to pay cash dividends on the Preferred Stock, (b) it
is a condition precedent to the extension of credit under the Credit Agreement
that the Equity Investors execute and deliver this Acknowledgment and Consent,
and (c) this Acknowledgment and Consent is given for the benefit of the Lenders
and the Agents to induce them to rely upon it in extending credit to the
Borrower under the Credit Agreement.

         This Acknowledgment and Consent may be executed in any number of
counterparts, each of which, when executed, shall be deemed an original. This
Acknowledgment and Consent is effective as to each Equity Investor upon the
execution and delivery by such Equity Investor of its counterpart, irrespective
of whether or when the other Equity Investors execute and deliver the same.

         This Acknowledgment and Consent is binding upon and shall inure to the
benefit of each Equity Investor, Bargo, the Lenders, and their respective
successors and assigns. In the event that any Equity Investor (or any subsequent
transferee) transfers his or its interest in some or all of his or its Preferred
Stock, such Equity Investor shall deliver to the Administrative Agent, at the
time of such transfer, a counterpart of this Acknowledgment and Consent executed
by such transferee. This Acknowledgment and Consent shall be governed in
accordance with the laws of Texas.

                         [Signatures begin on next page]

<PAGE>   3

ENERGY CAPITAL INVESTMENT CO., PLC

By:
   ------------------------------------
   Gary R. Petersen
   Director

ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.L.C., General Partner

By:
   ------------------------------------
   D. Martin Phillips
   Managing Director

ENCAP ENERGY CAPITAL FUND III-B L.P.
By: EnCap Investments L.L.C., General Partner

By:
   ------------------------------------
   D. Martin Phillips
   Managing Director

ENCAP EQUITY 1994, L.P.
By: EnCap Investments L.L.C., General Partner

By:
   ------------------------------------
   D. Martin Phillips
   Managing Director

<PAGE>   4

BOCP PARTNERS, L.P.
By: EnCap Investments L.L.C., Manager

By:
   ------------------------------------
   D. Martin Phillips
   Managing Director

EOS PARTNERS, L.P.
By: Eos SBIC General, L.P., its general partner
    By: Eos SBIC, Inc., its general partner

By:
   ------------------------------------
   Brian D. Young
   General Partner

EOS PARTNERS SBIC, L.P.
By: Eos SBIC General, L.P., its general partner
    By: Eos SBIC, Inc., its general partner

By:
   ------------------------------------
   Brian D. Young
   President

EOS PARTNERS SBIC II, L.P.
By: Eos SBIC General II, L.P., its general partner
    By: Eos SBIC II, Inc., its general partner

By:
   ------------------------------------
   Brian D. Young
   President

<PAGE>   5

SGC PARTNERS II LLC

By:
   ------------------------------------
   V. Frank Pottow
   Managing Director

BANCAMERICA CAPITAL INVESTORS SBIC I, L.P.
By: BancAmerica Capital Management SBIC I, LLC, its general partner
    By: BancAmerica Capital Management I, L.P., its sole member
        By: BACM I GP, LLC, its general partner

By:
   ------------------------------------
   J. Travis Hain
   Managing Director

KAYNE ANDERSON ENERGY L.P.
By: Kayne Anderson Capital Advisors, L.P., its General Partner
    By: Kayne Anderson Investment Management, Inc., its General Partner

By:
   ------------------------------------
   Daniel M. Weingeist
   Managing Director

BANKERS TRUST COMPANY

By:
   ------------------------------------
   Name:
   Title: Managing Director<PAGE>   1
                                                                    EXHIBIT 10.8
================================================================================

                            INDEMNIFICATION AGREEMENT

                                  BY AND AMONG

                              BARGO ENERGY COMPANY

                                       AND

                      ENERGY CAPITAL INVESTMENT COMPANY PLC

                       ENCAP ENERGY CAPITAL FUND III, L.P.

                      ENCAP ENERGY CAPITAL FUND III-B, L.P.

                           BOCP ENERGY PARTNERS, L.P.

                               EOS PARTNERS, L.P.

                             EOS PARTNERS SBIC, L.P.

                           EOS PARTNERS SBIC II, L.P.

                               SGC PARTNERS II LLC

                   BANCAMERICA CAPITAL INVESTORS SBIC I, L.P.

                        KAYNE ANDERSON ENERGY FUND, L.P.

                                       AND

                              BANKERS TRUST COMPANY

                              DATED MARCH 31, 2000

================================================================================
<PAGE>   2

                                TABLE OF CONTENTS
<TABLE>

<S>      <C>               <C>                                                                                   <C>
ARTICLE I.  DEFINITIONS...........................................................................................1
         Section 1.1       Certain Defined Terms..................................................................1

ARTICLE II.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................3
         Section 2.1       Corporate Organization.................................................................3
         Section 2.2       Qualification..........................................................................4
         Section 2.3       Authority Relative to This Agreement...................................................4
         Section 2.4       Noncontravention.......................................................................4
         Section 2.5       Articles and Bylaws....................................................................4
         Section 2.6       Capitalization of the Company..........................................................5
         Section 2.7       Governmental Approvals.................................................................5
         Section 2.8       Subsidiaries...........................................................................5
         Section 2.9       Units..................................................................................6
         Section 2.10      SEC Filings............................................................................6
         Section 2.11      Absence of Certain Changes.............................................................7
         Section 2.12      Tax Matters............................................................................7
         Section 2.13      Compliance With Laws...................................................................8
         Section 2.14      Legal Proceedings......................................................................8
         Section 2.15      Permits................................................................................9
         Section 2.16      Agreements.............................................................................9
         Section 2.17      ERISA.................................................................................10
         Section 2.18      Environmental Matters.................................................................11
         Section 2.19      Oil and Gas Properties................................................................12
         Section 2.20      Nature of Company Assets..............................................................13
         Section 2.21      Marketing of Production...............................................................13
         Section 2.22      Material Personal Property............................................................14
         Section 2.23      Intellectual Property.................................................................14
         Section 2.24      Brokerage Fees........................................................................14
         Section 2.25      Disclosure............................................................................14

ARTICLE III.  INDEMNIFICATION....................................................................................15
         Section 3.1       Indemnification by Company............................................................15
         Section 3.2       Procedure for Indemnification.........................................................15
         Section 3.3       Indemnification Despite Negligence....................................................16

ARTICLE IV.  EFFECT OF AGREEMENT.................................................................................16
</TABLE>

                                        i
<PAGE>   3

<TABLE>

<S>     <C>                <C>                                                                                  <C>
ARTICLE V.  MISCELLANEOUS........................................................................................16
         Section 5.1.      Choice of Law.........................................................................16
         Section 5.2.      Entire Agreement......................................................................16
         Section 5.3.      Binding Effect........................................................................16
         Section 5.4.      Assignment............................................................................16
         Section 5.5.      Notices...............................................................................16
         Section 5.6.      No Merger.............................................................................16
         Section 5.7.      Expenses..............................................................................16
         Section 5.8.      Third Party Beneficiaries.............................................................17
         Section 5.9.      Transmission by Facsimile.............................................................17
         Section 5.10.     Severability..........................................................................17
         Section 5.11.     Waiver................................................................................17
         Section 5.12.     Counterparts..........................................................................17
         Section 5.13.     Remedies..............................................................................17
         Section 5.14.     Construction..........................................................................17
</TABLE>

                                       ii
<PAGE>   4

                            INDEMNIFICATION AGREEMENT

         This INDEMNIFICATION AGREEMENT (this "Agreement") is dated as of March
__, 2000 by and among Energy Capital Investment Company PLC, an English
investment company ("Energy PLC"), EnCap Energy Capital Fund III-B, L.P., a
Texas limited partnership ("EnCap III-B"), BOCP Energy Partners, L.P., a Texas
limited partnership ("BOCP"), EnCap Energy Capital Fund III, L.P., a Texas
limited partnership ("EnCap III"), Kayne Anderson Energy Fund, L.P., a Delaware
limited partnership ("Kayne"), BancAmerica Capital Investors SBIC I, L.P., a
Delaware limited partnership ("BACI"), Eos Partners, L.P., a Delaware limited
partnership ("Eos Partners"), Eos Partners SBIC, L.P., a Delaware limited
partnership ("Eos SBIC"), Eos Partners SBIC II, L.P., a Delaware limited
partnership ("Eos SBIC II" and together with Eos Partners and Eos SBIC,
collectively referred to as "EOS"), SGC Partners II LLC, a Delaware limited
liability company ("SGCP") (each individually, an "Equity Investor," and
collectively, the "Equity Investors"), Bankers Trust Company, a New York banking
corporation ("BT"), and Bargo Energy Company, a Texas corporation ("Bargo" or
the "Company").

         WHEREAS, in order to induce the Equity Investors to enter into the
Subscription Agreement by and among the Company and the Equity Investors
pursuant to which the Equity Investors will subscribe to purchase Units (as
defined in the Subscription Agreement) the Company has agreed to make the
representations, warranties and indemnities set forth herein;

         WHEREAS, in order to induce BT to agree to convert the Tranche B Term
Loan into Units or Subordinated Notes as provided and under the circumstances
described in the Credit Agreement, dated March 30, 2000, the Company has agreed
to make the representations, warranties and indemnities set forth herein;

         NOW, THEREFORE, in consideration of the premises contained herein and
the mutual covenants contained in the Subscription Agreement, and intending to
be legally bound hereby, the Company and Equity Investors hereby agree as
follows:

                             ARTICLE I. DEFINITIONS

         Section 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, each of
the following terms has the meaning given it below:

                  AFFILIATE: means, with respect to any person, any other person
         that, directly or indirectly, through one or more intermediaries,
         controls, is controlled by, or is under common control with, such
         person. For the purposes of this definition, "control" when used with
         respect to any person means the possession, directly or indirectly, of
         the power to direct or cause the direction of the management and
         policies of such person, whether through the ownership of voting
         securities, by contract, or otherwise; and the terms "controlling" and
         "controlled" have meanings correlative to the foregoing.

<PAGE>   5

                  APPLICABLE LAW: means any statute, law, rule, or regulation or
         any judgment, order, writ, injunction, or decree of any Governmental
         Entity to which a specified person or property is subject.

                  CODE: means the Internal Revenue Code of 1986, as amended.

                  COMPANY: means Bargo Energy Company, a Texas corporation, and,
         unless the context otherwise requires, includes the Company's
         predecessor, Future Petroleum Corporation, a Utah corporation.

                  CREDIT AGREEMENT: means the Credit Agreement by and among the
         Company, Chase Bank of Texas, National Association, as Administrative
         Agent, Bankers Trust Company, as Syndication Agent, Bank One of Texas,
         N.A., as Documentation Agent, and the lenders parties thereto from time
         to time.

                  ENCUMBRANCES: means liens, charges, pledges, options,
         mortgages, deeds of trust, security interests, claims, restrictions
         (whether on voting, sale, transfer, disposition, or otherwise),
         easements, and other encumbrances of every type and description,
         whether imposed by law, agreement, understanding, or otherwise.

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

                  EXCHANGE ACT: means the Securities Exchange Act of 1934, as
         amended.

                  GAAP: means generally accepted accounting principles in the
         United States of America from time to time.

                  GOVERNMENTAL ENTITY: means any court or tribunal in any
         jurisdiction (domestic or foreign) or any federal, state, municipal, or
         other governmental body, agency, authority, department, commission,
         board, bureau, or instrumentality (domestic or foreign), as well as the
         New York Stock Exchange, The Nasdaq Stock Market, and any exchange upon
         which the Common Stock is listed from time to time.

                  MATERIAL ADVERSE EFFECT: means any change, development, or
         effect (individually or in the aggregate) which is, or is reasonably
         likely to be, materially adverse (i) to the business, assets, results
         of operations or condition (financial or otherwise) of a party, or (ii)
         to the ability of a party to perform on a timely basis any material
         obligation under this Agreement or any agreement, instrument, or
         document entered into or delivered in connection herewith.

                  PERMITS: means licenses, permits, franchises, consents,
         approvals, variances, exemptions, and other authorizations of or from
         Governmental Entities.

                  PERSON: means any individual, corporation, partnership, joint
         venture, association, joint-stock company, trust, enterprise,
         unincorporated organization, or Governmental Entity.

                                       2
<PAGE>   6

                  PROCEEDINGS: means all proceedings, actions, claims, suits,
         investigations, and inquiries by or before any arbitrator or
         Governmental Entity.

                  REASONABLE BEST EFFORTS: means a party's reasonable best
         efforts in accordance with reasonable commercial practice and without
         the incurrence of unreasonable expense.

                  SECURITIES ACT: means the Securities Act of 1933, as amended.

                  SUBSIDIARY: means any corporation more than 50% of whose
         outstanding voting securities, or any general partnership, joint
         venture, or similar entity more than 50% of whose total equity
         interests, is owned, directly or indirectly, by the Company.

                  TAXES: means any income taxes or similar assessments or any
         sales, excise, occupation, use, ad valorem, property, production,
         severance, transportation, employment, payroll, franchise, or other tax
         imposed by any United States federal, state, or local (or any foreign
         or provincial) taxing authority, including any interest, penalties, or
         additions attributable thereto.

                  TAX RETURN: means any return or report, including any related
         or supporting information, with respect to Taxes.

                  TO THE BEST KNOWLEDGE: of a specified person (or similar
         references to a person's knowledge) means all information to be
         attributed to such person actually or constructively known to (a) such
         person in the case of an individual or (b) in the case of a corporation
         or other entity, an executive officer or employee who devoted
         substantive attention to matters of such nature during the ordinary
         course of his employment by such person. A person has "constructive
         knowledge" of those matters which the individual involved could
         reasonably be expected to have as a result of undertaking an
         investigation of such a scope and extent as a reasonably prudent man
         would undertake concerning the particular subject matter.

            ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company represents and warrants to Equity Investors and BT jointly
and severally, that:

         Section 2.1 CORPORATE ORGANIZATION. Bargo is a corporation duly
organized, validly existing, and in good standing under the laws of Texas and
has all requisite corporate power and corporate authority to own, lease, and
operate its properties and to carry on its business as now being conducted. No
actions or proceedings to dissolve Bargo are pending or, to the best knowledge
of Bargo, threatened.

         Section 2.2 QUALIFICATION. Bargo is duly qualified or licensed to do
business as a foreign corporation and is in good standing in each of the
jurisdictions in which it owns, leases, or operates property or in which such
qualification or licensing is required for the conduct of its business.

                                       3
<PAGE>   7

         Section 2.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Bargo has full
corporate power and corporate authority to execute, deliver, and perform this
Agreement and the Subscription Agreement, and to consummate the transactions
contemplated hereby and thereby. The execution, delivery, and performance by
Bargo of this Agreement and the Subscription Agreement, and the consummation by
it of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action of Bargo. This Agreement and the
Subscription Agreement has each been duly executed and delivered by Bargo and
constitutes valid and legally binding obligations of Bargo, enforceable against
Bargo in accordance with its terms, except that such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
and similar laws affecting creditors' rights generally and (ii) equitable
principles which may limit the availability of certain equitable remedies (such
as specific performance) in certain instances.

         Section 2.4 NONCONTRAVENTION. The execution, delivery, and performance
by Bargo of this Agreement and the Subscription Agreement and the consummation
by it of the transactions contemplated hereby and thereby do not and will not
(i) conflict with or result in a violation of any provision of the articles of
incorporation or bylaws or other governing instruments of Bargo, (ii) conflict
with or result in a violation of any provision of, or constitute (with or
without the giving of notice or the passage of time or both) a default under, or
give rise (with or without the giving of notice or the passage of time or both)
to any right of termination, cancellation, or acceleration under, or require any
consent, approval, authorization or waiver of, or notice to, any party to, any
bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other
instrument or obligation to which Bargo or any subsidiary is a party or by which
Bargo or any subsidiary or any of their respective properties may be bound or
any Permit held by Bargo or any subsidiary, (iii) result in the creation or
imposition of any Encumbrance upon the properties of Bargo or any subsidiary, or
(iv) violate any Applicable Law binding upon Bargo or any subsidiary, except, in
the case of clauses (ii), (iii) and (iv) above, for any such conflicts,
violations, defaults, terminations, cancellations, accelerations, or
Encumbrances which would not, individually or in the aggregate, have a Material
Adverse Effect on Bargo, and except, for the filing of Articles of Amendment to
Bargo's Articles of Incorporation as contemplated by Section 4.4 of the
Subscription Agreement and, for such consents, approvals, authorizations, and
waivers that have been obtained and are unconditional and in full force and
effect and such notices that have been duly given.

         Section 2.5 ARTICLES AND BYLAWS. The Company has made available to
Equity Investors and BT accurate and complete copies of (i) the articles of
incorporation and bylaws of each of the Company and the Subsidiaries as
currently in effect, (ii) the stock records of each of the Company and the
Subsidiaries, and (iii) the minutes of all meetings of the respective Boards of
Directors of the Company and the Subsidiaries, any committees of such Boards,
and the shareholders of the Company and the Subsidiaries (and all consents in
lieu of such meetings). Such records, minutes, and consents accurately reflect
the stock ownership of the Company and the Subsidiaries and all actions taken by
such Boards of Directors, committees, and shareholders. Neither the Company nor
any Subsidiary is in violation of any provision of its articles of incorporation
or bylaws, other than violations which, individually or in the aggregate, do not
and will not have a Material Adverse Effect on the Company.

                                       4
<PAGE>   8

         Section 2.6 CAPITALIZATION OF THE COMPANY. The authorized capital
stock of the Company consists of (i) 120,000,000 shares of Common Stock, of
which, as of the date hereof, 87,932,726 shares are outstanding and no shares
are held in the Company's treasury, and (ii) 5,000,000 shares of preferred
stock, par value $.01 per share, of which, as of the date hereof, 5,000,000
shares are outstanding and no such shares are held in the Company's treasury.
All outstanding shares of capital stock of the Company have been validly issued
and are fully paid and nonassessable, and no shares of capital stock of the
Company are subject to, nor have any been issued in violation of, preemptive or
similar rights. All issuances, sales, and repurchases by the Company of shares
of its capital stock have been effected in compliance with all Applicable Laws,
including without limitation applicable federal and state securities laws. The
Cumulative Preferred Stock, Series B ("Series B Preferred Stock") constitutes
all of the outstanding shares of preferred stock. As of the date hereof, an
aggregate of 25,798,339 shares of Common Stock of the Company are reserved for
issuance and are issuable upon the exercise of outstanding stock options granted
under the Company's stock option plans and outstanding warrants (subject to
certain anti-dilution provisions applicable thereto). Upon the amendment of the
Company's Articles of Incorporation, as contemplated by the Subscription
Agreement,37,685,454 shares of Common Stock and 45,000 shares of Preferred
Stock, Series C will be reserved for issuance pursuant to the Subscription
Agreement and the conversion of the Tranche B Term Notes as defined in the
Credit Agreement. Except as disclosed above in this Section, there are
outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company convertible into or exchangeable for
shares of capital stock or other voting securities of the Company, (iii) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue or sell, any shares of capital stock or other voting securities
of the Company or any securities of the Company convertible into or exchangeable
for such capital stock or voting securities, and (iv) no equity equivalents,
interests in the ownership or earnings, or other similar rights of or with
respect to the Company. Other than regarding the Series B Preferred Stock there
are no outstanding obligations of the Company or any Subsidiary to repurchase,
redeem, or otherwise acquire any of the foregoing shares, securities, options,
equity equivalents, interests, or rights.

         Section 2.7 GOVERNMENTAL APPROVALS. No consent, approval, order, or
authorization of, or declaration, filing, or registration with, any Governmental
Entity is required to be obtained or made by the Company or any Subsidiary in
connection with the execution, delivery, or performance by the Company of this
Agreement or the Subscription Agreement or the consummation by it of the
transactions contemplated hereby or thereby.

         Section 2.8 SUBSIDIARIES.

         (a) The Company does not own, directly or indirectly, any capital stock
of, or other equity interest in, any corporation or have any direct or indirect
equity or ownership interest in any other person, other than the Subsidiaries.
Schedule 2.8 lists each Subsidiary, the jurisdiction of incorporation of each
Subsidiary, and the authorized and outstanding capital stock of each Subsidiary.
Each Subsidiary is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation. Each
Subsidiary is duly qualified or licensed

                                       5
<PAGE>   9

to do business as a foreign corporation and is in good standing in each of the
jurisdictions in which it owns, leases, or operates property or in which such
qualification or licensing is required for the conduct of its business. Each
Subsidiary has all requisite corporate power and corporate authority to own,
lease, and operate its properties and to carry on its business as now being
conducted. No actions or proceedings to dissolve any Subsidiary are pending, or
to the knowledge of the Company, threatened.

         (b) All the outstanding capital stock or other equity interests of each
Subsidiary are owned directly or indirectly by the Company, free and clear of
all Encumbrances. All outstanding shares of capital stock of each Subsidiary
have been validly issued and are fully paid and nonassessable. No shares of
capital stock or other equity interests of any Subsidiary are subject to, nor
have any been issued in violation of, preemptive or similar rights.

         (c) Except as set forth on Schedule 2.8, there are outstanding (i) no
shares of capital stock or other voting securities of any Subsidiary, (ii) no
securities of the Company or any Subsidiary convertible into or exchangeable for
shares of capital stock or other voting securities of any Subsidiary, (iii) no
options or other rights to acquire from the Company or any Subsidiary, and no
obligation of the Company or any Subsidiary to issue or sell, any shares of
capital stock or other voting securities of any Subsidiary or any securities
convertible into or exchangeable for such capital stock or voting securities,
and (iv) no equity equivalents, interests in the ownership or earnings, or other
similar rights of or with respect to any Subsidiary. Except as stated otherwise
herein, there are no outstanding obligations of the Company or any Subsidiary to
repurchase, redeem, or otherwise acquire any of the foregoing shares,
securities, options, equity equivalents, interests, or rights.

         Section 2.9 UNITS. The Units and/or Subordinated Notes to be issued by
the Company pursuant to the provisions of the Subscription Agreement and the
Credit Agreement have been duly authorized for such issuance. When issued and
delivered by the Company in accordance with the provisions of the Subscription
Agreement and Credit Agreement, the shares of Common Stock and Series C
Preferred Stock which comprise the Units and the Subordinated Notes will be
validly issued, fully paid, and nonassessable. The issuance of the Units
pursuant to this Agreement is not subject to any preemptive or similar rights.

         Section 2.10 SEC FILINGS. Since January 1, 1999, the Company has filed
on a timely basis, all periodic reports and proxy statements with the Securities
and Exchange Commission required to be filed under the Exchange Act. The
Company's Annual Report on Form-10KSB for the fiscal year ended December 31,
1999, Report on Form 8-K filed on February 28, 2000 and Information Statement on
Schedule 14C filed on March 13, 2000 (collectively, the "SEC Documents") are all
of the documents the Company was required to file with the Securities and
Exchange Commission since January 1, 2000. As of their respective dates, the SEC
Documents complied as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Securities and Exchange
Commission thereunder applicable to such SEC Documents. The SEC Documents do not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of circumstances then existing. The audited consolidated
financial statements and unaudited

                                       6
<PAGE>   10

consolidated interim financial statements, if any, of the Company included in
the SEC Documents comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Securities and Exchange Commission with respect thereto; present fairly in all
material respects, in conformity with GAAP applied on a consistent basis, the
consolidated financial position of the Company as of the dates thereof and its
consolidated results of operations and changes in financial position for the
periods then ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements and the fact that certain information and
notes have been condensed or omitted in accordance with the Exchange Act and the
rules promulgated thereunder); and are in all material respects in accordance
with the books of account and records of the Company and the Subsidiaries. There
are no material liabilities of the Company or any Subsidiary (contingent or
otherwise), other than as disclosed in the SEC Documents and the financial
statements included therein.

         Section 2.11 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the
SEC Documents or on Schedule 2.11, since January 1, 2000: (i) there has not been
any change, development, or effect, individually or in the aggregate, that has
had, or might reasonably be expected to have, a Material Adverse Effect on the
Company or a Subsidiary; (ii) the businesses of the Company and the Subsidiaries
have been conducted only in the ordinary course consistent with past practice;
(iii) neither the Company nor any Subsidiary has incurred any material
liability, engaged in any material transaction, or entered into any material
agreement outside the ordinary course of business consistent with past practice;
and (iv) neither the Company nor any Subsidiary has suffered any material loss,
damage, destruction, or other casualty to any of its assets (whether or not
covered by insurance).

         Section 2.12 TAX MATTERS. Except as disclosed on Schedule 2.12:

         (a) except in each case as could not be reasonably expected to have a
Material Adverse Effect, all Tax Returns have been or will be timely filed by
the Company and the Subsidiaries when due in accordance with all applicable
laws; all Taxes shown on such Tax Returns have been or will be timely paid when
due; such Tax Returns have been properly completed in compliance with all
applicable laws and regulations and completely and accurately reflect the facts
regarding the income, expenses, properties, business and operations required to
be shown thereon; such Tax Returns are not subject to penalties under Section
6662 of the Code (or any corresponding provision of state, local or foreign tax
law);

         (b) the Company and the Subsidiaries have paid all Taxes required to be
paid by them in all material respects (whether or not shown on a Tax Return) or
for which they could be liable (provided that it shall not be considered a
breach of this representation if it is ultimately determined that additional Tax
payments are due but such assessment is based on an adjustment to a return or
position, if such party has a reasonable basis for the position taken with
respect to such Taxes), whether to taxing authorities or to other persons under
Tax allocation agreements or otherwise, and the charges, accruals, and reserves
for Taxes due, or accrued but not yet due, relating to their income, properties,
transactions or operations as reflected on their books (including, without
limitation, the

                                       7
<PAGE>   11

balance sheet included in the Company's Form 10-KSB for the fiscal year ended
December 31, 1999) are adequate to cover such Taxes;

         (c) there are no agreements or consents currently in effect for the
extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of the Company or the Subsidiaries, nor has the Company or a
Subsidiary been requested to enter into any such agreement or consent; and

         (d) there are no liens for Taxes (other than for current Taxes not yet
due and payable) upon the assets of the Company or the Subsidiaries.

         Section 2.13 COMPLIANCE WITH LAWS. Except as disclosed on Schedule
2.13, the Company and the Subsidiaries have complied in all material respects
with all Applicable Laws (including without limitation Applicable Laws relating
to securities, properties, business products and services, manufacturing
processes, advertising and sales practices, employment practices, terms and
conditions of employment, wages and hours, safety, occupational safety, health,
environmental protection, product safety, and civil rights). Neither the Company
nor any Subsidiary has received any written notice, which has not been dismissed
or otherwise disposed of, that the Company or any Subsidiary has not so
complied. Neither the Company nor any Subsidiary is charged or, to the best
knowledge of the Company, threatened with, or, to the best knowledge of the
Company, under investigation with respect to, any violation of any Applicable
Law relating to any aspect of the business of the Company or any Subsidiary.

         Section 2.14 LEGAL PROCEEDINGS. There are no Proceedings pending or,
to the best knowledge of the Company, threatened against or involving the
Company or any Subsidiary (or any of their respective directors or officers in
connection with the business or affairs of the Company or any Subsidiary) or any
properties or rights of the Company or any Subsidiary, except (i) as disclosed
on Schedule 2.14, (ii) for any Proceedings that pertain to routine claims by
persons other than Governmental Entities that are fully covered by insurance
(subject to applicable insurance deductibles), (iii) for minor product or
service warranty claims arising in the usual and ordinary course of business
which in the aggregate may be satisfied at nominal cost to the Company, and (iv)
for Proceedings which, individually or in the aggregate, if prosecuted to
judgment, would not have a Material Adverse Effect on the Company. Except as
disclosed on Schedule 2.14, any and all potential liability of the Company and
the Subsidiaries under such Proceedings is adequately covered (except for
standard deductible amounts) by the existing insurance maintained by the Company
and the Subsidiaries. Neither the Company nor any Subsidiary is subject to any
judgment, order, writ, injunction, or decree of any Governmental Entity which
has had or is reasonably likely to have a Material Adverse Effect on the
Company. There are no Proceedings pending or, to the best knowledge of the
Company, threatened seeking to restrain, prohibit, or obtain damages or other
relief in connection with this Agreement or the transactions contemplated
hereby.

         Section 2.15 PERMITS. The Company and the Subsidiaries hold all
Permits necessary or required for the conduct of the business of the Company and
the Subsidiaries as currently conducted, except where the failure to hold such
Permits could not reasonably be expected to have a Material Adverse Effect. Each
of such Permits is in full force and effect, the Company or such Subsidiary

                                       8
<PAGE>   12

is in compliance with all its obligations with respect thereto, and, to the best
knowledge of the Company, no event has occurred which permits, or with or
without the giving of notice or the passage of time or both would permit, the
revocation or termination of any thereof. Except as disclosed on Schedule 2.15,
no notice has been issued by any Governmental Entity and no Proceeding is
pending or, to the best knowledge of the Company, threatened with respect to any
alleged failure by the Company or a Subsidiary to have any Permit the absence of
which would have a Material Adverse Effect on the Company.

         Section 2.16 AGREEMENTS.

         (a) Set forth on Schedule 2.16 is a list of all the following
agreements, arrangements, and understandings (written or oral, formal or
informal) (collectively, for purposes of this Section, "agreements") to which
the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any of their respective properties is otherwise bound:

                  (i) collective bargaining agreements and similar agreements
         with employees as a group;

                  (ii) employee benefit agreements, trusts, plans, funds, or
         other arrangements of any nature;

                  (iii) agreements with any current or former shareholder,
         director, officer, employee, consultant, or advisor or any affiliate of
         any such person;

                  (iv) agreements between or among the Company and any of the
         Subsidiaries;

                  (v) indentures, mortgages, security agreements, notes, loan or
         credit agreements, or other agreements relating to the borrowing of
         money by the Company or any Subsidiary or to the direct or indirect
         guarantee or assumption by the Company or any Subsidiary of any
         obligation of others, including any agreement (other than trade
         payables incurred in the ordinary course of business) that has the
         economic effect although not the legal form of any of the foregoing;

                  (vi) agreements relating to the acquisition or disposition of
         assets, other than those entered into in the ordinary course of
         business consistent with past practice;

                  (vii) agreements relating to the acquisition or disposition of
         any interest in any business enterprise;

                  (viii) agreements containing any covenant limiting the freedom
         of the Company or any Subsidiary to engage in any line of business or
         compete with any other person in any geographic area or during any
         period of time;

                  (ix) joint venture agreements;

                                       9
<PAGE>   13

                  (x) contracts and other agreements under which the Company or
         any Subsidiary agrees to indemnify any party; and

                  (xi) other agreements, whether or not made in the ordinary
         course of business, that are material to the business, assets, results
         of operations, condition (financial or otherwise), or prospects of the
         Company and the Subsidiaries considered as a whole.

         (b) The Company has made available to Equity Investors and BT accurate
and complete copies of the agreements listed on Schedule 2.16. Each of such
agreements is a valid and binding agreement of the Company and the Subsidiaries
(to the extent each is a party thereto) and (to the best knowledge of the
Company) the other party or parties thereto, enforceable against the Company and
the Subsidiaries (to the extent each is a party thereto) and (to the best
knowledge of the Company) such other party or parties in accordance with its
terms. Neither the Company nor any Subsidiary is in breach of or in default
under, nor has any event occurred which (with or without the giving of notice or
the passage of time or both) would constitute a default by the Company or any
Subsidiary under, any of such agreements, and neither the Company nor any
Subsidiary has received any notice from, or given any notice to, any other party
indicating that the Company or any Subsidiary is in breach of or in default
under any of such agreements, except in each case which could not be reasonably
expected to have a Material Adverse Effect. To the best knowledge of the
Company, no other party to any of such agreements is in breach of or in default
under such agreements, nor has any assertion been made by the Company or any
Subsidiary of any such breach or default.

         (c) Neither the Company nor any Subsidiary has received notice of any
plan or intention of any other party to any material agreement to exercise any
right of offset with respect to, or any right to cancel or terminate, any
material agreement. Neither the Company nor any Subsidiary currently
contemplates, or has reason to believe any other person currently contemplates,
any amendment or change to any agreement, which amendment or change could have a
Material Adverse Effect on the Company.

         Section 2.17 ERISA. Other than a group health plan and a 401(k) plan,
there is no "employee benefit plan", as defined in Section 3(3) of ERISA, (i)
which is subject to any provision of ERISA, (ii) which is, or is required to be,
maintained, administered, or contributed to by the Company or any affiliate of
the Company, and (iii) which covers any employee or former employee of the
Company or any affiliate of the Company or under which the Company or any
affiliate of the Company has any liability. For purposes of this Section only,
an "affiliate" of any person means any other person which, together with such
person, would be treated as a single employer under Section 414 of the Code.

                                       10
<PAGE>   14

         Section 2.18 ENVIRONMENTAL MATTERS.

         (a) Except as disclosed on Schedule 2.18:

                  (i) the properties, operations, and activities of the Company
         and the Subsidiaries comply with all Applicable Environmental Laws (as
         defined below), except for noncompliance that could not reasonably be
         expected to have a Material Adverse Effect;

                  (ii) the Company and the Subsidiaries and the properties,
         operations, and activities of the Company and the Subsidiaries are not
         subject to any existing, pending, or, to the best knowledge of the
         Company, threatened Proceeding under, or to any remedial obligations
         under, any Applicable Environmental Laws that could reasonably be
         expected to have a Material Adverse Effect;

                  (iii) all Permits, if any, required to be obtained by the
         Company or any Subsidiary under any Applicable Environmental Laws in
         connection with any aspect of the business of the Company or the
         Subsidiaries, including without limitation those relating to the
         treatment, storage, disposal, or release of a hazardous material (as
         defined below), have been duly obtained and are in full force and
         effect, and the Company and the Subsidiaries are in compliance with the
         material terms and conditions of all such Permits;

                  (iv) the Company and the Subsidiaries have satisfied and are
         currently in compliance with all financial responsibility requirements
         applicable to their respective operations and imposed by any
         Governmental Entity under any Applicable Environmental Laws, and the
         Company and the Subsidiaries have not received any notice of
         noncompliance with any such financial responsibility requirements;

                  (v) to the best knowledge of the Company, there are no
         physical or environmental conditions existing on any property owned or
         leased by the Company or any Subsidiary or resulting from the Company's
         or any Subsidiary's operations or activities, past or present, at any
         location, that would give rise to any on-site or off-site remedial
         obligations under any Applicable Environmental Laws, other than normal
         and ordinary remedial work associated with plugging and abandoning of
         oil and gas facilities;

                  (vi) to the best knowledge of the Company, since the effective
         date of the relative requirements of Applicable Environmental Laws, all
         hazardous materials generated by the Company or any Subsidiary or used
         in connection with their respective properties, operations, or
         activities have been transported only by carriers authorized under
         Applicable Environmental Laws to transport such materials, and have
         been disposed of only at treatment, storage, and disposal facilities
         authorized under Applicable Environmental Laws to treat, store, or
         dispose of such materials, and, to the best knowledge of the Company,
         such carriers and facilities, at the time of such transportation or
         disposal, were operating in compliance with such authorizations and
         were not the subject of any existing, pending, or threatened Proceeding
         in connection with any Applicable Environmental Laws;

                  (vii) since the effective date of the relative requirements of
         Applicable Environmental Laws, there has been no exposure of any person
         or property to hazardous materials, nor has there been any release of
         hazardous materials into the environment in

                                       11
<PAGE>   15

         violation of any Applicable Environmental Laws, by the Company or any
         Subsidiary or in connection with their respective properties,
         operations, or activities that could reasonably be expected to give
         rise to any claim for damages or compensation that could reasonably be
         expected to have a Material Adverse Effect; and

                  (viii) the Company and the Subsidiaries shall make available
         to Equity Investors all internal and external environmental audits and
         studies and all correspondence on substantial environmental matters in
         the possession of the Company and the Subsidiaries relating to any of
         the current or former properties, operations, or activities of the
         Company and the Subsidiaries, provided that the Company and the
         Subsidiaries shall not be required to make available any such audits,
         studies, or correspondence that may be subject to the attorney-client
         privilege or similar privilege.

         (b) For purposes of this Agreement, "Applicable Environmental Laws"
means any and all Applicable Laws pertaining to health, safety, or the
environment in effect (currently or hereafter) in any and all jurisdictions in
which the Company or the Subsidiaries have conducted operations or activities or
owned or leased property, including, without limitation, the Clean Air Act, as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Rivers and Harbors Act of 1899, as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances
Control Act, as amended, the Superfund Amendments and Reauthorization Act of
1986, as amended, the Hazardous Materials Transportation Act, as amended, the
Texas Water Code, the Texas Solid Waste Disposal Act, and other environmental
conservation or protection laws. For purposes of this Agreement, the term
"hazardous material" means any substance which is listed or defined as a
hazardous substance, hazardous constituent, or solid waste pursuant to any
Applicable Environmental Laws.

         (c) The representations and warranties contained in this Section would
continue to be true and correct following disclosure to the applicable
Governmental Entities of all relevant facts, conditions, and circumstances known
to the Company, if any, pertaining to the properties, operations, and activities
of the Company and the Subsidiaries.

         Section 2.19 OIL AND GAS PROPERTIES.

         (a) Each of the Company and the Subsidiaries has good and marketable
title to all of its material oil and gas properties and assets, free and clear
of all liens other than as disclosed in Schedule 2.19; provided, that no
representation or warranty is made with respect to any oil, gas or mineral
property or interest to which no proved oil or gas reserves are properly
attributed. All proceeds from the sale of each the Company's and the
Subsidiaries' share of the hydrocarbons being produced from its oil and gas
properties are currently being paid in full to such party by the purchasers
thereof on a timely basis and none of such proceeds are currently being held in
suspense by such purchaser or any other party.

                                       12
<PAGE>   16

         (b) The Company has delivered to Equity Investors and BT a copy of the
reserve report (the "Reserve Report") dated as of January 1, 2000, prepared by
T.J. Smith and Company, Inc., independent reserve engineers (the "Reserve
Engineers"), relating to the oil and gas reserves of the Company and the
Subsidiaries. The factual information underlying the estimates of the reserves
of the Company and the Subsidiaries, which was supplied by the Company to the
Reserve Engineers for the purpose of preparing the Reserve Report, including,
without limitation, production, volumes, sales prices for production,
contractual pricing provisions under oil or gas sales or marketing contracts
under hedging arrangements, costs of operations and development, and working
interest and net revenue information relating to the Company's and the
Subsidiaries' ownership interests in properties, was true and correct in all
material respects on the date of such Reserve Report; the estimates of future
capital expenditures and other future exploration and development costs supplied
to the Reserve Engineers were prepared in good faith and with a reasonable
basis; the information provided to the Reserve Engineers for purposes of
preparing the Reserve Report was prepared in accordance with customary industry
practices; the Reserve Engineers were, as of the date of the Reserve Report
prepared by it, and are, as of the date hereof, independent petroleum engineers
with respect to the Company and the Subsidiaries; other than normal production
of the reserves and intervening oil and gas price fluctuations, the Company is
not as of the date hereof, aware of any facts or circumstances that would result
in a materially adverse change in the reserves in the aggregate, or the
aggregate present value of future net cash flows therefrom, as described in the
Reserve Report; estimates of such reserves and the present value of the future
net cash flows therefrom in the Reserve Report comply in all material respects
to the applicable requirements of Regulation S-X and Industry Guide 2 under the
Securities Act.

         Section 2.20 NATURE OF COMPANY ASSETS. The assets of the Company and
of the Subsidiaries consist solely of (i) reserves of oil, rights to reserves of
oil and associated exploration and production assets with a fair market value
not exceeding $500 million and (ii) other assets with a fair market value not
exceeding $15 million. For purposes of this Section 2.20, the term "associated
exploration and production assets" shall have the meaning ascribed thereto in
Section 802.3 of the Rules promulgated pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976.

         Section 2.21 MARKETING OF PRODUCTION. Except for contracts listed on
Schedule 2.21 (with respect to all of which contracts the Company represents
that it or its affiliates are receiving a price for all production sold
thereunder which is computed in accordance with the terms of the relevant
contract and are not having deliveries curtailed substantially below the subject
property's delivery capacity), there exist no material agreements for the sale
of production from the leasehold and other interests in oil, gas and other
mineral properties owned, or otherwise held in the name of, the Company or its
affiliates (collectively, the "Oil and Gas Properties") (including without
limitation, calls on, or other rights to purchase, production, whether or not
the same are currently being exercised) other than (i) agreements or
arrangements pertaining to the sale of production at a price equal to or greater
than a price that is the market price from time to time existing in the areas
where the Oil and Gas Properties subject to such agreement or arrangement are
located, and (ii) agreements or arrangements that are cancelable on 90 days
notice or less without penalty or detriment.

                                       13
<PAGE>   17

         Section 2.22 MATERIAL PERSONAL PROPERTY. All pipelines, wells, gas
processing plants, platforms and other material improvements, fixtures and
equipment owned in whole or in part by the Company or any of its affiliates that
are necessary to conduct normal operations are being maintained in a state
adequate to conduct normal operations, and with respect to such of the foregoing
which are operated by the Company or any of its affiliates, in a manner
consistent with the Company's or its affiliates' past practices.

         Section 2.23 INTELLECTUAL PROPERTY. The Company and its affiliates
either own or have valid licenses or other rights to use all patents,
copyrights, trademarks, software, databases, geological data, geophysical data,
engineering data, maps, interpretations and other technical information used in
their businesses as presently conducted, subject to the limitations contained in
the agreements governing the use of the same, which limitations are customary
for companies engaged in the business of the exploration and production of oil,
gas, condensate and other hydrocarbons, with such exceptions as would not result
in a Material Adverse Effect on the Company. There are no limitations contained
in the agreements of the type described in the immediately preceding sentence
which, upon consummation of the transactions contemplated by this Agreement,
will alter or impair any such rights, breach any such agreement with any third
party vendor, or require payments of additional sums thereunder, except any such
limitations that would not have a Material Adverse Effect on the Company. The
Company and its affiliates are in compliance in all material respects with such
licenses and agreements and there are no pending or, to the best knowledge of
the Company, threatened Proceedings challenging or questioning the validity or
effectiveness of any license or agreement relating to such property or the right
of the Company or any affiliate to use, copy, modify or distribute the same.

         Section 2.24 BROKERAGE FEES. Neither the Company nor any of its
affiliates has retained any financial advisor, broker, agent, or finder or paid
or agreed to pay any financial advisor, broker, agent, or finder on account of
this Agreement or any transaction contemplated in the Subscription Agreement.
The Company shall indemnify and hold harmless Equity Investors from and against
any and all losses, claims, damages, and liabilities (including legal and other
expenses reasonably incurred in connection with investigating or defending any
claims or actions) with respect to any finder's fee, brokerage commission, or
similar payment in connection with any transaction contemplated hereby asserted
by any person on the basis of any act or statement made or alleged to have been
made by the Company or any of its Affiliates.

         Section 2.25 DISCLOSURE. No representation or warranty made by the
Company in this Agreement or in the Subscription Agreement, and no statement of
the Company contained in any document, certificate, or other writing furnished
or to be furnished by the Company pursuant hereto or in connection herewith,
contains or will contain, at the time of delivery, any untrue statement of a
material fact or omits or will omit, at the time of delivery, to state any
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they are made, not misleading. The
Company knows of no matter (other than matters of a general economic character,
including commodity prices, not relating solely to the Company or any Subsidiary
in any specific manner) which has not been disclosed to Equity Investors
pursuant to this Agreement or in the Subscription Agreement which has or is
reasonably likely to have a Material Adverse Effect on the Company. The Company
has delivered or made available to Equity Investors and BT accurate

                                       14
<PAGE>   18

and complete copies of all agreements, documents, and other writings referred to
or listed in this Article II or any Schedule hereto.

                          ARTICLE III. INDEMNIFICATION

         Section 3.1 INDEMNIFICATION BY COMPANY. Subject to the terms and
conditions of this Article III, the Company shall indemnify, defend, and hold
harmless Equity Investors and BT from and against any and all claims, actions,
causes of action, demands, assessments, losses, damages, liabilities, judgments,
settlements, penalties, costs, and expenses (including reasonable attorneys'
fees and expenses), of any nature whatsoever (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred by Equity Investors or BT,
directly or indirectly, by reason of or resulting from any breach by the Company
of any of its representations, warranties, covenants, or agreements contained in
this Agreement or in any certificate, instrument, or document delivered pursuant
hereto.

         Section 3.2 PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by
an indemnified party under Section 3.2 of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party under such Section, give written notice to
the indemnifying party of the commencement thereof, but the failure so to notify
the indemnifying party shall not relieve it of any liability that it may have to
any indemnified party except to the extent the indemnifying party demonstrates
that the defense of such action is prejudiced thereby. In case any such action
shall be brought against an indemnified party and it shall give written notice
to the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it may wish, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. If the indemnifying party elects to assume the defense of
such action, the indemnified party shall have the right to employ separate
counsel at its own expense and to participate in the defense thereof. If the
indemnifying party elects not to assume (or fails to assume) the defense of such
action, the indemnified party shall be entitled to assume the defense of such
action with counsel of its own choice, at the expense of the indemnifying party.
If the action is asserted against both the indemnifying party and the
indemnified party and there is a conflict of interests which renders it
inappropriate for the same counsel to represent both the indemnifying party and
the indemnified party, the indemnifying party shall be responsible for paying
for separate counsel for the indemnified party; provided, however, that if there
is more than one indemnified party, the indemnifying party shall not be
responsible for paying for more than one separate firm of attorneys to represent
the indemnified parties, regardless of the number of indemnified parties. If the
indemnifying party elects to assume the defense of such action, (a) no
compromise or settlement thereof may be effected by the indemnifying party
without the indemnified party's written consent (which shall not be unreasonably
withheld) unless the sole relief provided is monetary damages that are paid in
full by the indemnifying party and (b) the indemnifying party shall have no
liability with respect to any compromise or settlement thereof effected without
its written consent (which shall not be unreasonably withheld).

         Section 3.3 INDEMNIFICATION DESPITE NEGLIGENCE. IT IS THE EXPRESS
INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED PURSUANT TO
THIS ARTICLE III SHALL BE INDEMNIFIED AND HELD HARMLESS FROM AND AGAINST ALL
DAMAGES AS TO WHICH INDEMNITY IS PROVIDED FOR UNDER THIS ARTICLE III
NOTWITHSTANDING THAT ANY SUCH DAMAGES ARISE OUT OF OR

                                       15
<PAGE>   19

RESULT FROM THE ORDINARY, STRICT, SOLE, OR CONTRIBUTORY NEGLIGENCE OF SUCH
PERSON AND REGARDLESS OF WHETHER ANY OTHER PERSON (INCLUDING THE OTHER PARTIES
TO THIS AGREEMENT) IS OR IS NOT ALSO NEGLIGENT.

                         ARTICLE IV. EFFECT OF AGREEMENT

         This Agreement shall not affect the obligation of the Equity Investors
to purchase securities from the Company as contemplated by or otherwise perform
under the Subscription Agreement or the conversion of BT's Tranche B Term Notes
under and pursuant to the terms of the Credit Agreement.

                            ARTICLE V. MISCELLANEOUS

         Section 5.1. CHOICE OF LAW. This Agreement shall be governed by and
construed in accordance with the laws of Texas, notwithstanding principles of
conflicts of laws.

         Section 5.2. ENTIRE AGREEMENT. This Agreement, including all schedules
attached hereto, constitutes the entire agreement among the Parties hereto with
respect to the subject matter hereof, and may be amended only by a writing
executed by all parties hereto.

         Section 5.3. BINDING EFFECT. This Agreement and the representations and
warranties contained herein shall be binding upon the heirs, executors, legal
representatives, administrators, successors and permitted assigns of the
parties.

         Section 5.4. ASSIGNMENT. Except as provided in this Section, this
Agreement may not be assigned by any party hereto without the prior written
consent of all other parties. This Agreement may be assigned by the Equity
Investors or BT to their respective Affiliates.

         Section 5.5. NOTICES. All notices, requests and approval required by
this Agreement shall be given as provided in the Subscription Agreement in the
case of an Equity Investor or the Company and in the Credit Agreement, in the
case of BT.

         Section 5.6. NO MERGER. The parties agree and acknowledge that none of
the warranties and representations contained in this Agreement shall merge upon
the execution and delivery of this Agreement by the parties and that all such
warranties and representations shall continue in full force and effect after the
date hereof.

         Section 5.7. EXPENSES. The Company agrees to pay the Equity Investors'
reasonable out-of-pocket expenses (including fees and expenses of legal counsel,
including in-house counsel, accountants and other professional advisors)
incurred in connection with the negotiation and settlement of this Agreement.

                                       16
<PAGE>   20

         Section 5.8. THIRD PARTY BENEFICIARIES. Except as expressly permitted
in this Agreement, the parties do not intend, nor shall any clause in this
Agreement be interpreted to create, for any third party an obligation to or
benefit from any of the parties.

         Section 5.9. TRANSMISSION BY FACSIMILE. The parties agree that this
Agreement may be transmitted by facsimile or such similar device and that the
reproduction of signatures by facsimile or such similar device shall be treated
as binding as if originals and each party undertakes in writing to provide each,
and every other, party with a copy of this Agreement bearing original
signatures.

         Section 5.10. SEVERABILITY. If any provision of this Agreement is
determined to be invalid or unenforceable by an arbitrator or a court of
competent jurisdiction, that provision shall be deemed to be severed from this
Agreement only to the extent of the facts in dispute, and where permitted by
such determination, and the remaining provisions of this Agreement shall not be
affected and shall remain valid and enforceable, provided that in the event that
any portion of this Agreement is determined to be or becomes invalid or
unenforceable (the "offending portion"), the parties shall negotiate, in good
faith, reasonable changes to this Agreement that are consistent with industry
practice and as shall reasonably preserve the parties' intentions, benefits and
obligations that were the subject of such offending portion.

         Section 5.11. WAIVER. Each party may only waive any right it may have
pursuant to this Agreement in writing and subject to the notice provisions
hereof. Any waiver of a right, including any right under this Agreement, by any
party shall not constitute a waiver of any other right by such party. Failure or
delay by any party to enforce any term or condition of this Agreement shall not
constitute a wavier of such term or condition.

         Section 5.12. COUNTERPARTS. This Agreement may be executed in one or
more counterparts all of which taken together will constitute one and the same
instrument.

         Section 5.13. REMEDIES. Except as otherwise provided in this Agreement,
all remedies provided for in this Agreement shall be cumulative and in addition
to and not in lieu of any other remedies available to any party at law, in
equity or otherwise.

         Section 5.14. CONSTRUCTION. Each of the parties hereto acknowledges
that it has had the benefit of legal counsel of its own choice and has been
afforded an opportunity to review this Agreement with its legal counsel and that
this Agreement shall be construed as if jointly drafted by the Parties hereto.

                                       17
<PAGE>   21

                           INDEMNIFICATION AGREEMENT

         IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date above first written.

                            ENERGY CAPITAL INVESTMENT COMPANY PLC

                            By:
                               -----------------------------------------------
                                   Gary R. Petersen
                                   Director

                            ENCAP ENERGY CAPITAL FUND III, L.P.
                            By:    EnCap Investments L.L.C., General Partner

                                   By:
                                      --------------------------------------
                                        D. Martin Phillips
                                        Managing Director

                            ENCAP ENERGY CAPITAL FUND III-B, L.P.
                            By:    EnCap Investments L.L.C., General Partner

                                   By:
                                      --------------------------------------
                                        D. Martin Phillips
                                        Managing Director

                            BOCP ENERGY PARTNERS, L.P.
                            By:    EnCap Investments L.L.C., Manager

                                   By:
                                      --------------------------------------
                                        D. Martin Phillips
                                        Managing Director

                            Idemnification Agreement

                                       18
<PAGE>   22

                            EOS PARTNERS, L.P.

                            By:
                               -----------------------------------------------
                                Brian Young
                                General Partner

                            EOS PARTNERS SBIC, L.P.
                            By: Eos SBIC General, L.P., its general partner
                                By: Eos SBIC, Inc., its general partner

                            By:
                               -----------------------------------------------
                                Brian Young
                                President

                            EOS PARTNERS SBIC II, L.P.
                            By: Eos SBIC General II, L.P., its general partner
                                By: Eos SBIC II, Inc., its general partner

                            By:
                               -----------------------------------------------
                                Brian Young
                                President

                            SGC PARTNERS II LLC

                            By:
                               -----------------------------------------------
                                V. Frank Pottow
                                Managing Director

                           Indemnification Agreement
<PAGE>   23

                                       BANCAMERICA CAPITAL INVESTORS SBIC I,
                                       L.P.
                                       By: BancAmerica Capital Management SBIC
                                           I, LLC, its general partner
                                           By: BancAmerica Capital Management I,
                                               L.P., its sole member
                                               By: BACM I GP, LLC, its general
                                                   partner

                                               By:
                                                  ------------------------------
                                                   J. Travis Hain
                                                   Managing Director

                                       KAYNE ANDERSON ENERGY FUND, L.P.
                                       By: Kayne Anderson Capital Advisors,
                                           L.P., its General Partner
                                           By: Kayne Anderson Investment
                                               Management, Inc., its General
                                               Partner

                                               By:
                                                  ------------------------------
                                                   Daniel M. Weingeist
                                                   Managing Director

                                       BARGO ENERGY COMPANY

                                       By:
                                          --------------------------------------
                                           Jonathan M. Clarkson
                                           President

                           Indemnification Agreement

<PAGE>   24

                                   BANKERS TRUST COMPANY

                                   By:
                                      -----------------------------------------
                                   Name:
                                        ---------------------------------------
                                   Title:
                                         --------------------------------------

                           Indemnification Agreement
<PAGE>   25

                                  SCHEDULE 2.8
                                  SUBSIDIARIES

<TABLE>
<CAPTION>

           Subsidiary               Jurisdiction    Type of Entity     Authorized      Outstanding           %
                                                                         Shares           Shares           Owner
--------------------------------------------------------------------------------------------------------------------
<S>                                <C>              <C>              <C>             <C>              <C>
Bargo Petroleum Corporation           Texas          Corporation        10,000           1,000             100%
--------------------------------------------------------------------------------------------------------------------

Future CAL-TEX Corporation            Texas          Corporation     1,000,000           1,000             100%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                           Indemnification Agreement

<PAGE>   26

                                  SCHEDULE 2.11
                                MATERIAL CHANGES

None.

                           Indemnification Agreement
<PAGE>   27

                                  SCHEDULE 2.12
                                   TAX MATTERS

None.

                           Indemnification Agreement
<PAGE>   28

                                  SCHEDULE 2.13
                              COMPLIANCE WITH LAWS

         Certain filings with the Securities and Exchange Commission have been
filed late.

                           Indemnification Agreement
<PAGE>   29

                                  SCHEDULE 2.14
                                LEGAL PROCEEDINGS

None.

                           Indemnification Agreement
<PAGE>   30

                                  SCHEDULE 2.15
                         GOVERNMENTAL PERMIT PROCEEDINGS

None.

                           Indemnification Agreement
<PAGE>   31

                                  SCHEDULE 2.16
                                   AGREEMENTS

In addition to the agreements those previously disclosed in the Company's
filings with the Securities and Exchange Commission the Company has entered into
the following material agreements:

         o        Approximately 50% of CURRENT oil production is hedged as
                  follows:

                  -        22,800 barrels beginning October 1999 declining each
                           month to 18,750 barrels in September 2000 at a floor
                           of $18.00 and a cap of $20.75.

                  -        27,400 barrels beginning October 1999 declining each
                           month to 23,250 barrels in September 2000 at a floor
                           of $18.00 and a cap of $23.08.

         o        For the 12 month period October 2000 - September 2001 a
                  straight swap is in place for approximately 25% of CURRENT
                  monthly oil production at $17.55 per barrel. (18,525 barrels
                  beginning 10/00 declining to 16,200 barrels in 9/01)

         o        For the 12 month period October 2000 - September 2001 a
                  straight swap is in place for approximately 25% of CURRENT
                  monthly oil production at $18.05 per barrel. ( 22,825 barrels
                  beginning 10/00 declining to 18,100 barrels in 9/01)

         o        Floors are in place for April 2000-December 2000 at a price of
                  $22.00 per bbl for 75% of the PROJECTED TEXACO acquisition
                  volume (1,791,672 bbls)

         o        Floors are in place for January 2001-December 2001 at a price
                  of $21.00 per bbl for 75% of the PROJECTED TEXACO acquisition
                  volume (2,197,728 bbls)

         o        Change of Control Agreement dated September 1, 1999 between
                  the Company and Tim J. Goff.

         o        Change of Control Agreement dated September 1, 1999 between
                  the Company and Jonathan M. Clarkson.

                           Indemnification Agreement

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