Credit Agreement

Credit Agreement

by Abraxas Petroleum Corporation
October 15th, 1996
                                      
                            CREDIT AGREEMENT





                     ABRAXAS PETROLEUM CORPORATION,
                            as the Borrower,



                        the Banks named herein,

                                  and

                         BANKERS TRUST COMPANY,
                                as Agent









                     Dated as of September 30, 1996


                           TABLE OF CONTENTS


PRELIMINARY STATEMENT ................................................  1
 
ARTICLE I   DEFINITIONS, ETC..........................................  1
      Section 1.01.  Certain Defined Terms ...........................  1
      Section 1.02.  Accounting Terms ................................  1
      Section 1.03.  Computation of Time Periods .....................  1
      Section 1.04.  References, Etc. ................................  1

ARTICLE II  COMMITMENTS AND TERMS OF CREDIT ..........................  2
      Section 2.01.  Commitments .....................................  2
      Section 2.02.  Borrowing Procedures; Conversions ...............  3
      Section 2.03.  Warrants ........................................  5
      Section 2.04.  Borrowing Base ..................................  5
      Section 2.05.  The Notes .......................................  6
      Section 2.06.  Reduction of the Commitments ....................  6
      Section 2.07.  Mandatory Repayment of Loans ....................  6
      Section 2.08.  Interest Accrual, Payments ......................  7
      Section 2.09.  Optional Prepayments ............................  9
      Section 2.10.  Payments, Notice of Certain Repayments and
            Computations .............................................  9
      Section 2.11.  Fees ............................................ 10
      Section 2.12.  Setoff, Counterclaims and Taxes ................. 11
      Section 2.13.  Funding Losses .................................. 13
      Section 2.14.  Change of Law ................................... 13
      Section 2.15.  Increased Costs ................................. 14

ARTICLE III  CONDITIONS  OF  CREDIT .................................. 15
      Section 3.01.  Conditions Precedent to the Initial Borrowing.... 15
      Section 3.02.  Conditions Precedent to All Loans ............... 18

ARTICLE IV  REPRESENTATIONS  AND  WARRANTIES ......................... 18
      Section 4.01.  Corporate Existence ............................. 18
      Section 4.02.  Corporate Authority; Binding Obligations ........ 18
      Section 4.03.  No Conflict ..................................... 19
      Section 4.04.  No Consent ...................................... 19
      Section 4.05.  No Defaults or Violations of Law ................ 19
      Section 4.06.  Financial Position .............................. 19
      Section 4.07.  Litigation ...................................... 20
      Section 4.08.  Use of Proceeds ................................. 20
      Section 4.09.  Governmental Regulation ......................... 20
      Section 4.10.  Disclosure ...................................... 20
      Section 4.11.  ERISA ........................................... 20
      Section 4.12.  Payment of Taxes ................................ 21
      Section 4.13.  Title and Liens ................................. 21
      Section 4.14.  Gas Imbalances................................... 22
      Section 4.15.  Consummation of Acquisition...................... 22
      Section 4.16.  Environmental Matters............................ 22

ARTICLE V  AFFIRMATIVE COVENANTS...................................... 23
      Section 5.01.  Reporting Requirements........................... 23
      Section 5.02.  Taxes; Claims.................................... 26
      Section 5.03.  Compliance with Laws............................. 26
      Section 5.04.  Insurance ....................................... 26
      Section 5.05.  Corporate Existence.............................. 27
      Section 5.06.  Inspections ..................................... 27
      Section 5.07.  Maintenance of Properties........................ 27
      Section 5.08.  Accounting Systems............................... 27
      Section 5.09.  Use of Loans..................................... 28
      Section 5.10.  Reserve Reports.................................. 28
      Section 5.11.  Title............................................ 29
      Section 5.12.  Additional Collateral............................ 29
      Section 5.13.  Further Assurances in General.................... 29
      Section 5.14.  Enforcement of Acquisition Documents............. 30

ARTICLE VI  NEGATIVE COVENANTS........................................ 30
      Section 6.01.  Indebtedness Restriction......................... 30
      Section 6.02.  Lien Restriction................................. 30
      Section 6.03.  Derivatives...................................... 32
      Section 6.04.  Interest Coverage Ratio.......................... 32
      Section 6.05.  Current Ratio.................................... 32
      Section 6.06.  Tangible Net Worth............................... 32
      Section 6.07.  Sales of Assets.................................. 32
      Section 6.08.  Consolidation and Mergers........................ 32
      Section 6.09.  Restricted Disbursements......................... 33
      Section 6.10.  Lines of Business................................ 33
      Section 6.11.  Transactions with Affiliates..................... 33

ARTICLE VII  DEFAULT AND REMEDIES..................................... 33
      Section 7.01.  Events of Default................................ 33
      Section 7.02.  Setoff in Event of Default....................... 36
      Section 7.03.  No Waiver; Remedies.............................. 37
      Section 7.04.  Hydrocarbon Proceeds............................. 37

ARTICLE VIII  THE AGENT............................................... 37
      Section 8.01.  Authorization and Action......................... 37
      Section 8.02.  Reliance, Etc.................................... 38
      Section 8.03.  BTCo and Affiliates.............................. 38
      Section 8.04.  Bank Credit Decision............................. 39
      Section 8.05.  Indemnification.................................. 39
      Section 8.06.  Employees of the Agent........................... 40
      Section 8.07.  Successor Agent.................................. 40
      Section 8.08.  Notice of Default................................ 41
      Section 8.09.  Execution of Loan Documents...................... 41

ARTICLE IX  MISCELLANEOUS............................................. 41
      Section 9.01.  Amendments, Etc.................................. 41
      Section 9.02.  Participation Agreements and Assignments......... 42
      Section 9.03.  Notices.......................................... 45
      Section 9.04.  Costs and Expenses............................... 46
      Section 9.05.  Successors and Assigns........................... 46
      Section 9.06.  Independence of Covenants........................ 46
      Section 9.07.  Survival of Representations and Warranties ...... 46
      Section 9.08.  Separability..................................... 46
      Section 9.09.  Captions......................................... 47
      Section 9.10.  Counterparts..................................... 47
      Section 9.11.  Governing Law.................................... 47
      Section 9.12.  Submission to Jurisdiction....................... 47
      Section 9.13.  Limitation on Interest........................... 48
      Section 9.14.  Indemnification.................................. 48
      Section 9.15.  Confidentiality.................................. 49
      Section 9.16.  Final Agreement of the Parties................... 49


      EXHIBITS
      Exhibit 2.02(a)-1       Form of Borrowing Request (Revolving Borrowing)   
      Exhibit 2.02(a)-2       Form of Borrowing Request (Tranche A Borrowing and
                              Tranche B Borrowing)
      Exhibit 2.02(c)         Form of Conversion Notice
      Exhibit 2.03            Form of Warrant Agreement
      Exhibit 2.05(a)         Form of Revolving Note
      Exhibit 2.05(b)         Form of Tranche A Note
      Exhibit 2.05(c)         Form of Tranche B Note
      Exhibit 9.02            Form of Assignment and Acceptance Agreement




      SCHEDULES
      Schedule 4.01    List of Borrower's Subsidiaries
      Schedule 4.04    Consents
      Schedule 4.07    Litigation
      Schedule 4.13    Titles and Liens
      Schedule 4.14    Gas Imbalances


      Schedule 6.01    Indebtedness



HOU04:37909.7








 
                           CREDIT AGREEMENT

            THIS  CREDIT  AGREEMENT  dated  as of  September  30,  1996 is among
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Borrower"),  the banks
named on the signature pages hereto (together with their  respective  successors
and assigns in such capacity,  the "Banks"), and BANKERS TRUST COMPANY, as agent
for the Banks  (together with its  successors and assigns in such capacity,  the
"Agent"). Unless otherwise defined herein, all capitalized terms used herein and
defined in Article I are used herein as so defined.

                         PRELIMINARY STATEMENT

            The Borrower has requested  that the Banks provide the Borrower with
(a) a  $30,000,000  revolving  credit  facility,  (b) a  $35,000,000  term  loan
facility and (c) a $25,000,000 term loan facility, each of which will be used as
specified herein. The Banks have agreed to provide the Borrower with such credit
facilities upon the terms and conditions set forth in this Agreement.

            Accordingly,  in  consideration  of the  foregoing  and  the  mutual
covenants set forth herein, the parties agree as follows:


                               ARTICLE I
                           DEFINITIONS, ETC.

            Section 1.01. Certain Defined Terms.  Capitalized terms used in this
Agreement and not otherwise defined herein,  shall have the respective  meanings
set forth in Annex A hereto  (such  meanings  to be equally  applicable  to both
singular and plural forms of the terms defined).

            Section  1.02.   Accounting   Terms.   All   accounting   terms  not
specifically  defined  herein shall be construed in  accordance  with  generally
accepted accounting  principles consistent with those applied in the preparation
of the consolidated financial statements referred to in Section 4.06.

            Section 1.03.  Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later  specified date,
the word "from" means "from and  including"  and the words "to" and "until" each
means "to but excluding."

            Section 1.04.  References, Etc.  The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.  All references herein to Sections, Annexes, Exhibits and Schedules








shall,  unless the context  requires a different  construction,  be deemed to be
references  to the  Sections of this  Agreement  and the  Annexes,  Exhibits and
Schedules  attached hereto and made a part hereof.  In this Agreement,  unless a
clear contrary  intention  appears the word  "including"  (and with  correlative
meaning  "include")  means  including,  without  limiting the  generality of any
description  preceding  such  term.  No  provision  of this  Agreement  shall be
interpreted  or construed  against any Person solely  because that Person or its
legal representative drafted such provision.


                               ARTICLE II
                    COMMITMENTS AND TERMS OF CREDIT

            Section 2.01.  Commitments.  (a) Each Bank severally  agrees, on the
terms and conditions  hereinafter set forth, to make one or more revolving loans
(the  "Revolving  Loans") to the Borrower  from time to time on any Business Day
during the period from the  Effective  Date up to, but  excluding,  the Maturity
Date in an aggregate amount  outstanding for such Bank not to exceed at any time
an amount equal to such Bank's Revolving  Commitment.  Each Revolving Loan shall
be made as either a Base Rate  Loan or a  Eurodollar  Rate Loan and as part of a
single Revolving  Borrowing made on the same day by the Banks ratably  according
to their respective Commitment  Percentages.  Each Base Rate Revolving Borrowing
shall be in an  aggregate  amount  not less than  $2,000,000,  or, if less,  the
entire unfunded portion of the Total Revolving Commitment.  Each Eurodollar Rate
Revolving  Borrowing shall be in an aggregate amount not less than $2,000,000 or
an integral  multiple of  $1,000,000  in excess  thereof.  Within the limits set
forth  above and  subject to the terms and  conditions  of this  Agreement,  the
Borrower  may  borrow,  repay  pursuant  to Section  2.07 or prepay  pursuant to
Section 2.09 and reborrow under this Section 2.01(a)(i).

            Notwithstanding any other term or provision hereof no Revolving Loan
shall be made if after giving effect  thereto (A) the aggregate  amount of Loans
outstanding  would  exceed the  Borrowing  Base or (B) the  aggregate  amount of
outstanding Revolving Loans would exceed the Total Revolving Commitment.

            (b)  Each  Bank  severally  agrees,  on  the  terms  and  conditions
hereinafter  set  forth,  to make term  loans to the  Borrower  (the  "Tranche A
Loans")  on the  Effective  Date in an  aggregate  amount  equal to such  Bank's
Tranche A Commitment. If the Tranche A Loan made by a Bank on the Effective Date
is less than such Bank's Tranche A Commitment,  such Tranche A Commitment  shall
automatically  be reduced to the amount of such Tranche A Loan, as  contemplated
by the definition of Tranche A Commitment.  Each Tranche A Loan shall be made as
a Base Rate  Loan or a  Eurodollar  Rate Loan and as part of a single  Tranche A
Borrowing made on the Effective Date by the Banks ratably


HOU04:37909.7







according to their  respective  Commitment  Percentages.  Each  Eurodollar  Rate
Tranche A Borrowing shall be in an aggregate  amount not less than $2,000,000 or
an integral multiple of $1,000,000 in excess thereof. Any Tranche A Borrowing in
an aggregate amount less than $2,000,000 shall be a Base Rate Borrowing. Tranche
A Loans, once repaid, may not be reborrowed.

            (c)  Each  Bank  severally  agrees,  on  the  terms  and  conditions
hereinafter  set  forth,  to make a term loan to the  Borrower  (the  "Tranche B
Loans")  on the  Effective  Date in an  aggregate  amount  equal to such  Bank's
Tranche B Commitment. If the Tranche B Loan made by a Bank on the Effective Date
is less than such Bank's Tranche B Commitment,  such Tranche B Commitment  shall
automatically  be reduced to the amount of such Tranche B Loan, as  contemplated
by the definition of Tranche B Commitment. Each Tranche B Loan shall be made and
maintained as a Base Rate Loan and as part of a single  Tranche B Borrowing made
on the  Effective  Date by the  Banks  ratably  according  to  their  respective
Commitment Percentages. Tranche B Loans, once repaid, may not be reborrowed.

            (d) Loans of more than one Type may be outstanding at the same time,
but the  Borrower  shall not be entitled to request any  Borrowing or to Convert
Loans  comprising  any  Borrowing  into Loans of another  Type,  if after giving
effect to such Borrowing or Conversion,  as the case may be, any Bank would have
outstanding  (i) at any one time more than four (4) different Types of Revolving
Loans or more than four (4) different Types of Tranche A Loans or (ii) a Tranche
B Loan other than as a Base Rate Loan. Loans having different  Interest Periods,
regardless  of whether  they  commence on the same date or have the same type of
interest rate, shall be considered different Types of Loans; provided,  however,
that all Base Rate Loans are the same type of Loan so long as they  remain  Base
Rate Loans.

            Section  2.02.  Borrowing  Procedures;  Conversions.  (a)  (i)  Each
Revolving  Borrowing  shall be made upon the  written,  telecopied  or facsimile
transmitted  request  of the  Borrower,  given to the Agent not later than 11:00
a.m.  (New  York  time) on (A) the  third  Business  Day  prior to the  proposed
Borrowing Date in the case of a Eurodollar Rate Revolving Borrowing,  or (B) the
Business Day immediately  preceding the proposed Borrowing Date in the case of a
Base Rate Revolving Borrowing, and the Agent shall give each other member of the
Bank Group prompt notice of such request by telecopier, telex or cable.

            (ii) The Tranche A  Borrowings  to be funded on the  Effective  Date
      shall be made  upon  the  written,  telecopied  or  facsimile  transmitted
      request of the Borrower, given to the Agent not later than 11:00 a.m. (New
      York time) on (A) the third  Business Day prior to the  Effective  Date in
      the case of a  Eurodollar  Rate Tranche A Borrowing or (B) on the Business
      Day prior to the Effective Date in the case of a Base Rate Tranche A


HOU04:37909.7







      Borrowing,  and the Agent  shall give each other  member of the Bank Group
      prompt notice of such request by telecopier, telex or cable. The Tranche B
      Borrowing  to be  funded  on the  Effective  Date  shall be made  upon the
      written,  telecopied  or facsimile  transmitted  request of the  Borrower,
      given to the  Agent not  later  than  11:00  a.m.  (New York  time) on the
      Business Day prior to the  Effective  Date,  and the Agent shall give each
      other  member  of  the  Bank  Group  prompt  notice  of  such  request  by
      telecopier, telex or cable.

            (iii) Each request for a Borrowing (a "Borrowing  Request")  made by
      the Borrower shall be in  substantially  the form of Exhibit  2.02(a)-1 in
      the case of a Revolving Borrowing, or Exhibit 2.02(a)-2 in the case of the
      Tranche A Borrowing  and Tranche B Borrowing  to be made on the  Effective
      Date,  specifying  therein (A) the Borrowing Date for such Borrowing,  (B)
      the Type of Loans  comprising such Borrowing,  (C) the aggregate amount of
      such  Borrowing and (D) in the case of a Eurodollar  Rate  Borrowing,  the
      Interest Period for the Loans comprising such Borrowing.  Each Bank shall,
      before  12:00  Noon (New York  time) on the date of such  Borrowing,  make
      available for the account of its Applicable Lending Office to the Agent at
      its address  referred to in Section 9.03,  in same day funds,  such Bank's
      ratable portion of such Borrowing. After the Agent's receipt of such funds
      and upon  fulfillment  of the  applicable  conditions set forth in Article
      III,  the Agent  will make such funds  available  to the  Borrower  at the
      Agent's aforesaid address. Each Borrowing Request shall be irrevocable and
      binding on the Borrower.

            (b) Unless the Agent shall have received notice from a Bank prior to
the date of any  Borrowing  that such Bank will not make  available to the Agent
such Bank's ratable  portion of such  Borrowing,  the Agent may assume that such
Bank has made such portion  available to the Agent on the date of such Borrowing
in  accordance  with  subsection  (a) of this Section 2.02 and the Agent may, in
reliance  upon such  assumption,  make  available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such  ratable  portion  available  to the  Agent,  such  Bank  and the  Borrower
severally  agree to repay to the Agent  forthwith  on demand such  corresponding
amount, together with interest thereon for each day from the date such amount is
made available to the Borrower until the date such amount is repaid to the Agent
at (i) in the case of the Borrower,  the interest rate applicable at the time to
the Loans  comprising  such  Borrowing  and (ii) in the case of such  Bank,  the
Federal  Funds Rate.  If such Bank shall  repay to the Agent such  corresponding
amount,  such amount so repaid shall constitute such Bank's Loan as part of such
Borrowing  for purposes of this  Agreement,  and  Borrower  shall be relieved of
Borrower's  obligation  to repay such amount  under this  Section  2.02(b).  The
failure  of any Bank to make the Loan to be made by it as part of any  Borrowing
shall not relieve any other Bank of its obligation, if any,


HOU04:37909.7







hereunder  to make  its  Loan on the date of such  Borrowing  or any  subsequent
Borrowing  Date, but no Bank shall be  responsible  for the failure of any other
Bank  to  make  the  Loan to be  made  by  such  other  Bank on the  date of any
Borrowing.

            (c) The Borrower may, subject to the terms of this Agreement, on any
Business Day, upon written,  telecopied or facsimile  transmitted  notice to the
Agent, given not later than 11:00 a.m. (New York time) on (i) the third Business
Day prior to the proposed  Conversion  Date in the case of a Conversion of Loans
into Eurodollar  Rate Loans, or (ii) the Business Day immediately  preceding the
proposed  Conversion  Date in the case of a  Conversion  of Loans into Base Rate
Loans,  Convert Revolving Loans into Revolving Borrowings comprised of Revolving
Loans of another  Type or  Convert  Tranche A Loans  into  Tranche A  Borrowings
comprised  of  Tranche A Loans of another  Type,  and the Agent  shall  promptly
transmit  the  contents of such notice to each other member of the Bank Group by
telecopier,  telex or cable. Notwithstanding any other term or provision hereof,
after  giving  effect  to any  such  Conversion,  the  size  of  all  Borrowings
outstanding  hereunder,  and the number of different Types of Loans  outstanding
hereunder,  shall conform to the  requirements  of Section 2.01. In the event of
any  Conversion of  Eurodollar  Rate Loans on any day other than the last day of
the Interest  Period  applicable  thereto,  the  Borrower  shall be obligated to
reimburse the Banks in respect thereof  pursuant to Section 2.13. Each notice of
a  Conversion  (a  "Conversion  Notice")  given  by  the  Borrower  shall  be in
substantially  the form of Exhibit  2.02(c) hereto,  specifying  therein (A) the
Conversion Date for such Conversion, (B) the Loans to be Converted, (C) the Type
of  Loans to  which  such  Loans  are to be  Converted  and (D) in the case of a
Conversion into  Eurodollar  Rate Loans,  the Interest Period for such Converted
Loans. If the Borrower shall fail to give a timely  Conversion Notice conforming
to the  requirements of this Agreement with respect to any Eurodollar Rate Loans
prior  to the  expiration  of  the  Interest  Period  applicable  thereto,  such
Eurodollar  Rate Loans  shall,  automatically  on the last day of such  Interest
Period, be Converted,  in the case of Eurodollar Rate Revolving Loans, into Base
Rate Revolving Loans,  or, in the case of Eurodollar Rate Tranche A Loans,  into
Base Rate Tranche A Loans.

            Section 2.03. Warrants.  If the Loans and other Obligations have not
been paid in full, and the Commitments terminated,  by January 1, 1997, then, no
later than January 15, 1997,  the Borrower shall execute and deliver the Warrant
Agreement  to a  "Warrant  Agent"  approved  by the  Agent  and  issue the Banks
Warrants  sufficient to purchase five percent (5%) of the Borrower's  issued and
outstanding  common stock, on a fully diluted basis, as of January 1, 1997, with
each Bank receiving a number of Warrants  equal to its Commitment  Percentage of
the total number of Warrants so issued.  The Warrants  shall be issued  pursuant
to, and shall be governed by and subject to the terms of, the Warrant Agreement.


HOU04:37909.7








            Concurrently  with  delivery  of  the  Warrants  to the  Banks,  the
Borrower shall cause to be delivered to the Banks an opinion of counsel, in form
and substance  satisfactory to the Banks, covering such matters as the Banks may
request,  including  that (i) the Borrower is a corporation  duly  incorporated,
validly  existing  and in good  standing  under the laws of the State of Nevada,
(ii) the execution,  delivery and performance of the Warrant Agreement,  and the
issuance of the Warrants,  have been duly authorized by all necessary  corporate
action, (iii) the Warrants and the Warrant Agreement have been duly executed and
delivered  by  the  Borrower,  and  constitute  the  legal,  valid  and  binding
obligations  of the Borrower,  enforceable  against it in accordance  with their
respective terms,  (iv) the execution,  delivery and performance by the Borrower
of the Warrants and the Warrant  Agreement  will not violate any  Requirement of
Law or  breach  any  provision  contained  in the  articles  or  certificate  of
incorporation or bylaws of the Borrower or any material agreement, instrument or
document to which it is now a party or by which it or its  properties  is bound,
and (v) the shares of common  stock to be issued upon  exercise of the  Warrants
are validly authorized and, when the Warrants are exercised, such shares will be
validly issued, fully paid and nonassessable.

            Section 2.04.  Borrowing Base. (a) The Borrowing Base in effect from
time  to  time  shall  represent  the  maximum  amount  (subject  to  the  Total
Commitment) of Loans that the Banks will make to the Borrower. During the period
from and after the Effective  Date until the Borrowing Base is  redetermined  in
accordance  with  this  Section,  the  amount  of the  Borrowing  Base  shall be
$85,000,000.  The Borrowing Base shall be determined in accordance  with Section
2.04(b) by the Agent and approved by all of the Banks or the Majority  Banks, as
applicable.  The Borrowing Base is subject to redetermination in accordance with
Section  2.04(d).   Upon  any   redetermination  of  the  Borrowing  Base,  such
redetermination  shall remain in effect until the next  successive date that the
redetermined Borrowing Base becomes effective subject to the notice requirements
specified  in  Section  2.04(e)  for  both  the  scheduled  redetermination  and
unscheduled  redeterminations.  So long as any  part of the  Commitments  are in
effect and until all of the Loans  outstanding  hereunder are paid in full, this
Agreement shall be governed by the then effective Borrowing Base.
            (b) The Agent will after receipt of the most recent  Reserve  Report
delivered to the Banks under Section 5.10, and such other data and  supplemental
information as may from time to time be reasonably  requested by the Agent,  but
in no event later than May 1, 1997, redetermine the Borrowing Base based on such
Reserve Report.  The Agent and each Bank will  redetermine the Borrowing Base in
accordance  with their  respective  normal  and  customary  oil and gas  lending
criteria  as such exist at that  particular  time.  The Agent and each Bank,  in
their sole discretion, may make reasonable adjustments to the rates, volumes and
prices and other  assumptions  set forth in the  Reserve  Reports and such other
data and supplemental information. Each


HOU04:37909.7







redetermination  of the Borrowing  Base which would  increase the Borrowing Base
must be  approved  by all the  Banks,  and  each  other  redetermination  of the
Borrowing  Base must be approved  by the  Majority  Banks.  Failure of a Bank to
object to a redetermination  within 14 days after notice of such redetermination
is  given  to such  Bank by the  Agent  shall  be  deemed  an  approval  of such
redetermination by such Bank.

            (c) The Agent may  exclude  any Oil and Gas  Property  or portion of
production therefrom from the Borrowing Base, at any time, because the status of
title to such Oil or Gas  Property is not  reasonably  satisfactory  to Agent or
because  such Oil and Gas  Property is not subject to a first  priority  lien in
favor of the Agent as security for the Obligations.

            (d) So  long  as any of the  Commitments  are in  effect  and  until
payment in full of all Loans  hereunder,  effective  on May 1, 1997  ("Scheduled
Redetermination  Date"),  the Agent with the approval of all of the Banks or the
Majority  Banks,  as applicable,  shall  redetermine the amount of the Borrowing
Base in accordance with Section  2.04(b).  In addition,  the Agent, the Majority
Banks and the Borrower may initiate a  redetermination  of the Borrowing Base at
any  other  time  after  the  Scheduled  Redetermination  Date as they so elect;
provided that the Agent,  the Majority  Banks and the Borrower may each initiate
only one such  unscheduled  redetermination  during any consecutive  twelve (12)
month period (an "Unscheduled Redetermination Date"). Any redetermination of the
Borrowing  Base or an  Unscheduled  Redetermination  Date shall be in accordance
with Section 2.04(b).

            (e) The Agent shall promptly  notify in writing the Borrower and the
Banks of the new Borrowing  Base.  Such  redetermination  of the Borrowing  Base
shall not be in effect until notice is given to the Borrower.

            Section 2.05. The Notes.  (a) The Revolving  Loans made by each Bank
shall be  evidenced  by a  single  Revolving  Note  issued  to such  Bank by the
Borrower,  (i) dated the date of this  Agreement  (or such  other date as may be
specified  in  Section  9.02),  (ii)  payable  to the  order  of such  Bank in a
principal amount equal to such Bank's  Revolving  Commitment and (iii) otherwise
duly  completed.  Each  Revolving  Loan made by a Bank to the  Borrower  and all
payments  made on account of the  principal  amount  thereof shall be entered by
such Bank in its records or on the schedule (or a continuation thereof) attached
to the Revolving Note of such Bank, provided,  that prior to any transfer of any
such  Revolving  Note,  such Bank shall  endorse the amount and  maturity of any
outstanding Revolving Loans on the schedule (or a continuation thereof) attached
to such Revolving Note.
            (b) The  Tranche A Loans made by each Bank shall be  evidenced  by a
single Tranche A Note issued to such Bank by the Borrower, (i) dated the date of
this Agreement (or such other date as may be specified in


HOU04:37909.7







Section  9.02),  (ii)  payable to the order of such Bank in a  principal  amount
equal to such Bank's Tranche A Commitment and (iii) otherwise duly completed.

            (c) The  Tranche B Loans made by each Bank shall be  evidenced  by a
single Tranche B Note issued to such Bank by the Borrower, (i) dated the date of
this  Agreement (or such other date as may be specified in Section  9.02),  (ii)
payable to the order of such Bank in a  principal  amount  equal to such  Bank's
Tranche B Commitment and (iii) otherwise duly completed.

            Section 2.06.  Reduction of the Commitments.  (a) The Borrower shall
have the  right,  upon at least  three  Business  Days'  notice  to the Agent to
terminate  in  whole  or  reduce  ratably  in part the  unused  portions  of the
respective Revolving Commitments of the Banks; provided, that (i) the respective
Revolving  Commitments  of the Banks may not be so partially  reduced until such
time as the  Tranche A Loans and the  Tranche B Loans have been paid in full and
(ii) each partial  reduction in the Total Revolving  Commitment  shall be in the
aggregate  amount of $1,000,000 or an integral  multiple of $1,000,000 in excess
thereof.

            (b) Upon any  prepayment of the Revolving  Loans pursuant to Section
2.07(c)  or  Section  2.07(e),  the  Revolving  Commitment  of each  Bank  shall
automatically  be  reduced  by its  ratable  share  of such  prepayment.  On the
Maturity  Date the  Revolving  Commitment  of each Bank shall  automatically  be
reduced to zero.

            Section 2.07.  Mandatory  Repayment of Loans. (a) The Borrower shall
from  time to  time  repay  the  Revolving  Loans  comprising  part of the  same
Borrowing  in such  amounts  as  shall be  necessary  so that at all  times  the
Revolving  Loans  outstanding  shall not be in  excess  of the  Total  Revolving
Commitment.

            (b) The Borrower shall from time to time repay the Loans  comprising
part of the same Borrowing in whole or ratably in part in an amount equal to the
excess of (i) the Loans outstanding as of any  redetermination  of the Borrowing
Base pursuant to Section 2.04 over (ii) the Borrowing  Base as of such date. Any
repayment  required by this  Section  2.07(b)  shall be due and payable in three
equal monthly installments,  each in an amount equal to one third (1/3rd) of the
original amount of such excess, commencing on the last day of the calendar month
immediately  following such redetermination of the Borrowing Base and continuing
on the same day of each  subsequent  calendar  month,  and applied (x) first, to
repay the Tranche A Loans, (y) second, to repay the Tranche B Loans, and (z) the
remainder, to repay the Revolving Loans.

            (c) Immediately upon receipt of any Net Proceeds, the Borrower shall
repay the Loans comprising part of the same Borrowing in whole or ratably


HOU04:37909.7







in part in an amount equal to such Net Proceeds.  Any repayment required by this
Section 2.07(c) shall be applied (i) first,  to repay the Tranche A Loans,  (ii)
second,  to repay the  Tranche B Loans,  and (iii) the  remainder,  to repay the
Revolving Loans.
            (d) All  outstanding  Loans  shall be fully due and  payable  on the
Maturity Date, together with any unpaid interest accrued thereon.

            (e) All  outstanding  Loans shall be fully due and payable  upon the
occurrence  of a Change of Control,  together with any unpaid  interest  accrued
thereon.

            (f) Each  repayment of Loans  required by this Section 2.07 shall be
accompanied  by payment of accrued  interest to the date of such  payment on the
principal  amount paid.  In the event of any payment of a Eurodollar  Rate Loan,
the  Borrower  shall be  obligated  to  reimburse  the Banks in respect  thereof
pursuant to Section 2.13. All principal  payments  required by this Section 2.07
shall (i) in the case of Tranche A Loans,  first be applied to Base Rate Tranche
A Borrowings,  and second to Eurodollar  Rate Tranche A Borrowings,  and (ii) in
the case of Revolving Loans, first be applied to Base Rate Revolving Borrowings,
and second to Eurodollar Rate Revolving Borrowings.

            Section 2.08.  Interest Accrual, Payments.  (a) Accrual and
Payment.  Subject to the provisions of Section 9.13, the Borrower shall pay
interest on the unpaid  principal amount of each Loan made by each Bank from the
date of such Loan  until such  principal  amount  shall be paid in full,  on the
dates and at the rates per annum specified as follows:

            (i) Base Rate  Loans.  If such Loan is a Base Rate Loan,  a rate per
      annum equal at all times to the lesser of (A) the Highest  Lawful Rate and
      (B) the Base Rate in effect from time to time plus the  Applicable  Margin
      in effect  from time to time,  and unpaid  accrued  interest on such Loans
      shall be due and payable on each  Quarterly  Payment  Date and on the date
      such Base Rate Loan shall be paid in full; provided,  however, that if the
      Borrower has not been  notified by the Agent of the amount of such accrued
      interest  at least one  Business  Day  prior to such  date,  such  accrued
      interest  shall be due and payable one  Business Day after the Borrower is
      notified of such amount.

            (ii)  Eurodollar Rate Loans. If such Loan is a Eurodollar Rate Loan,
      a rate per annum equal at all times  during the  Interest  Period for such
      Loan to the lesser of (A) the  Highest  Lawful Rate and (B) the sum of the
      Eurodollar  Rate for such Interest  Period plus the  Applicable  Margin in
      effect as of the first day of such  Interest  Period,  and unpaid  accrued
      interest  on such Loans  shall be due and  payable on the last day of such
      Interest Period; provided, however, that if the Borrower has not been


HOU04:37909.7







      notified by the Agent of the amount of such accrued  interest at least one
      Business Day prior to such date,  such accrued  interest  shall be due and
      payable one Business Day after the Borrower is notified of such amount.

Any amount of principal or, to the extent permitted by applicable law,  interest
which is not paid when due  (whether  at stated  maturity,  by  acceleration  or
otherwise)  shall bear  interest from the date on which such amount is due until
such  amount  is paid in full,  at a rate per  annum  equal at all  times to the
lesser of (A) the Highest  Lawful Rate and (B) the Base Rate in effect from time
to time during the applicable  period plus the Applicable  Margin in effect from
time to time during such period  plus two  percent  (2%) (the  "Default  Rate"),
payable on demand.

            (b) Determination of Interest Rates. (i) The Agent shall give prompt
notice to the Borrower and each other member of the Bank Group of the applicable
interest  rate  determined  by the  Agent  hereunder  for each  Borrowing.  Each
determination by the Agent of an interest rate hereunder shall be conclusive and
binding for all purposes, absent manifest error.

            (ii) If the Majority  Banks shall,  at least one Business Day before
the date of any requested  Eurodollar Rate Borrowing,  notify the Agent that the
Eurodollar  Rate  applicable to such Borrowing  will not adequately  reflect the
cost to such Banks of making, funding or maintaining their respective Eurodollar
Rate Loans for such  Borrowing,  the right of the Borrower to select  Eurodollar
Rate Loans for such  Borrowing or any  subsequent  Borrowing  shall be suspended
until the Agent  shall  notify the  Borrower  and each other  member of the Bank
Group that the  circumstances  causing such suspension no longer exist, and each
Loan  comprising  such  Borrowing  shall  be made  as,  or  Converted  into,  as
applicable, a Base Rate Loan.

            (c) Applicable  Margin. As used in this Agreement and the other Loan
Documents,  "Applicable  Margin"  means,  as to  Loans  consisting  of a  single
Borrowing,  a rate  per  annum  determined  by  reference  to the  Type of Loans
comprising such Borrowing as follows:

            (i) in the case of Revolving Loans, such rate per annum shall be one
      percent  (1%) for  Base  Rate  Revolving  Loans,  and two and  one-quarter
      percent (2.25%) for Eurodollar Rate Revolving Loans;

                        (ii) in the case of Tranche A Loans, such rate per annum
      shall be one  percent  (1%) for Base  Rate  Tranche  A Loans,  and two and
      one-quarter (2.25%) for Eurodollar Rate Tranche A Loans; and

            (iii)  in the case of  Tranche  B  Loans,  (A) from the date  hereof
      through December 31, 1996, three percent (3%) , (B) from January 1,


HOU04:37909.7







      1997 through March 31, 1997, three and one-half percent (3.50%),  (C) from
      April 1, 1997 through June 30, 1997,  four percent (4%),  (D) from July 1,
      1997 through  September 30, 1997, four and one-half percent  (4.50%),  and
      (E) thereafter, five percent (5%).

            Section 2.09. Optional Prepayments.  (a) The Borrower may, from time
to time on any Business  Day, upon notice to the Agent stating the proposed date
and aggregate principal amount thereof, and if such notice is given the Borrower
shall,  prepay the outstanding  principal amount of the Base Rate Loans (without
premium or penalty) comprising part of the same Borrowing in whole or ratably in
part; provided,  that any partial prepayment of such Base Rate Loans shall be in
an aggregate  principal amount of not less than $500,000.  The Borrower may from
time to time upon at least three  Business Days' notice to the Agent stating the
proposed date and the aggregate principal amount thereof,  and if such notice is
given  the  Borrower  shall,  prepay  the  outstanding  principal  amount of the
Eurodollar Rate Loans  comprising part of the same Borrowing in whole or ratably
in part;  provided,  that any partial  prepayment of such  Eurodollar Rate Loans
shall be in an  aggregate  principal  amount  of not less  than  $500,000  or an
integral multiple of $100,000 in excess thereof.

            (b) Each  prepayment  of Loans made  pursuant to this  Section  2.09
shall be  accompanied  by a  payment  of  accrued  interest  to the date of such
prepayment on the principal amount prepaid.  In the event of any prepayment of a
Eurodollar  Rate Loan, the Borrower shall be obligated to reimburse the Banks in
respect thereof pursuant to Section 2.13.

     Section 2.10. Payments, Notice of Certain Repayments and Computations.  (a)
All  payments  of  principal,   interest,  commitment  fees  and  other  amounts
hereunder, under the Notes and the other Loan Documents shall be made in Dollars
to the Agent at its address specified in Section 9.03 for the account of each of
the Banks,  in immediately  available  funds not later than 11:00 a.m. (New York
time) on the date  when due.  Upon  receipt  of such  payments,  the Agent  will
promptly cause to be distributed like funds relating to the payment of principal
or interest or commitment fees ratably (other than amounts  payable  pursuant to
Section 2.12,  Section 2.13, Section 2.14 or Section 2.15) to the Banks, for the
account of their respective  Applicable Lending Offices, and like funds relating
to the  payment of any other  amount  payable to any Bank,  to such Bank for the
account  of its  Applicable  Lending  Office,  in  each  case to be  applied  in
accordance with the terms of this Agreement.

            (b) Unless the Agent shall have  received  notice from the  Borrower
prior  to the date on which  any  payment  is due to the  Banks  under  the Loan
Documents  that the Borrower  will not make such payment in full,  the Agent may
assume that the Borrower has made such payment in full to the Agent on


HOU04:37909.7







such date and the Agent  may,  in  reliance  upon such  assumption,  cause to be
distributed to each Bank on such due date an amount equal to the amount then due
such Bank. If and to the extent the Borrower shall not have made such payment in
full to the Agent each Bank shall  repay to the Agent  forthwith  on demand such
amount  distributed  to such Bank,  together with interest  thereon for each day
from the date such amount is  distributed  to such Bank until the date such Bank
repays such amount to the Agent at the Federal Funds Rate.

     (c) All  payments by the Borrower of the fees payable to the Agent shall be
made in Dollars directly to such Person at its address specified in Section 9.03
in immediately  available funds not later than 11:00 a.m. (New York time) on the
date when due.

     (d) All  computations  of interest  based on the Base Rate shall be made on
the basis of a year of 365 or 366 days, as the case may be, and all computations
of interest based on the  Eurodollar  Rate or the Federal Funds Rate, as well as
commitment fees, shall be made on the basis of a year of 360 days (unless use of
a 360 day year would  cause the  interest  contracted  for,  charged or received
hereunder  to exceed the Highest  Lawful Rate,  in which case such  computations
shall be made on the basis of a year of 365 or 366 days, as the case may be), in
each case for the actual number of days  (including  the first day but excluding
the last day) occurring in the period for which such interest or commitment fees
are payable.

     (e) Whenever any payment under the Loan Documents shall be stated to be due
on a day other  than a  Business  Day,  such  payment  shall be made on the next
succeeding  Business  Day,  and such  extension  of time  shall in such  case be
included in the  computation  of payment of interest or  commitment  fee, as the
case may be;  provided,  if such extension would cause payment of interest on or
principal of  Eurodollar  Rate Loans to be made in the next  following  calendar
month, such payment shall be made on the immediately preceding Business Day.

     (f) If any Bank shall obtain any payment (whether  voluntary,  involuntary,
through the  exercise of any right of setoff,  or  otherwise)  on account of the
Loans made by it (other than pursuant to Section 2.08(b),  Section 2.12, Section
2.13,  Section 2.14 or Section 2.15), in excess of its ratable share of payments
on account of the Loans  obtained  by all the Banks,  such Bank shall  forthwith
purchase  from the other  Banks  such  participations  in the Loans made by such
other Banks as shall be  necessary  to cause such  purchasing  Bank to share the
excess payment  ratably with each of them. The Borrower  agrees that any Bank so
purchasing a  participation  from another Bank pursuant to this Section  2.10(f)
may, to the fullest extent permitted by law and this Agreement, exercise all its
rights of payment (including the right of setoff) with respect to


HOU04:37909.7







such  participation  as fully as if such Bank were the  direct  creditor  of the
Borrower in the amount of such participation.

     Section 2.11. Fees. Subject to the provisions of Section 9.13, the Borrower
agrees to pay to each Bank a  commitment  fee equal to  one-half  of one percent
(.50%) per annum on the average  unused  portion of the Revolving  Commitment of
such Bank in effect from time to time for the period from the Execution Date to,
but excluding,  the Maturity Date (or if earlier, the termination in full of the
Revolving  Commitment).  Accrued  commitment  fees  shall be due and  payable in
arrears  on  each  Quarterly  Payment  Date  in each  year,  on the  date of any
reduction or  termination  of the  Revolving  Commitment of such Bank and on the
Maturity  Date  (or if  earlier,  the  termination  in  full  of  the  Revolving
Commitment); provided that if the Borrower has not been notified by Agent of the
amount of such fee at least one (1)  Business  Day prior to any such date,  such
fee shall be due and payable one (1) Business Day after the Borrower is notified
by Agent of such amount,  and shall be computed for the period  commencing  with
the day to which such fee was last paid (or, in the case of the first commitment
fee payment  date,  for the period  commencing  with and including the Execution
Date) to the date such fee is due and payable.

     Section  2.12.  Setoff,  Counterclaims  and  Taxes.  (a)  All  payments  of
principal, interest, expenses, reimbursements,  compensation, fees and any other
amount from time to time due under the Notes,  this  Agreement or any other Loan
Document shall be made by the Borrower  without setoff or counterclaim and shall
be made free and  clear of and  without  deduction  for any and all  present  or
future taxes,  levies,  imposts,  deductions,  charges or withholdings,  and all
liabilities with respect thereto,  excluding,  in the case of each member of the
Bank Group,  taxes imposed on its income,  and franchise taxes imposed on it, by
the  jurisdiction  under  the laws of which  such  member  of the Bank  Group is
organized or any  political  subdivision  thereof and, in the case of each Bank,
taxes  imposed  on its  income,  and  franchise  taxes  imposed  on  it,  by the
jurisdiction  of  such  Bank's  Applicable   Lending  Office  or  any  political
subdivision thereof (all such non-excluded taxes, levies,  imposts,  deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If the Borrower  shall be required by law to deduct any Taxes from or in respect
of any sum  payable  hereunder  or under any Loan  Document to any member of the
Bank Group,  (i) the sum payable  shall be increased as may be necessary so that
after  making  all  required  deductions  (including  deductions  applicable  to
additional  sums payable  under this Section 2.12) such member of the Bank Group
receives  an  amount  equal  to the  sum it  would  have  received  had no  such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant  taxation  authority
or other authority in accordance with applicable law.



HOU04:37909.7







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

(c) The  Borrower  will  indemnify  each  member of the Bank  Group for the full
amount of Taxes or Other  Taxes  (including,  without  limitation,  any Taxes or
Other Taxes imposed by any  jurisdiction  on amounts  payable under this Section
2.12) paid, by such member of the Bank Group  (whether paid on its own behalf or
on behalf of any other  member of the Bank Group) and any  liability  (including
penalties,  interest and expenses)  arising  therefrom or with respect  thereto.
This  indemnification  shall be made within 10 days from the date such member of
the Bank Group makes written demand therefor.

     (d) Within 30 days after the date of any  payment  of Taxes,  the  Borrower
will  furnish to the Agent,  at its  address  referred to in Section  9.03,  the
original or a certified  copy of a receipt  evidencing  payment  thereof.  If no
Taxes are payable in respect of any payment  hereunder or under the Notes or the
other Loan  Documents,  upon the reasonable  request of the Agent,  the Borrower
will  furnish  to the  Agent at its  address  referred  to in  Section  9.03,  a
certificate from each  appropriate  taxing  authority,  or an opinion of counsel
acceptable  to the Agent stating that such payment is exempt from or not subject
to Taxes.

     (e)  Without  prejudice  to the  survival  of any  other  agreement  of the
Borrower hereunder,  the agreements and obligations of the Borrower contained in
this  Section 2.12 shall  survive the payment in full of the Credit  Outstanding
and all other amounts owing under the other Loan  Documents.  The  provisions of
this Section 2.12 are in all respects subject to Section 9.13 hereof.

     (f) Each Bank  represents  and warrants to the Agent and the Borrower  that
such Bank is either  (i) a  corporation  organized  under the laws of the United
States or a state  thereof or (ii)  entitled to complete  exemption  from United
States  withholding  tax imposed on or with respect to any  payments,  including
fees, to be made to it pursuant to this  Agreement and the other Loan  Documents
(x) under an applicable provision of a tax convention to which the United States
is a party or (y) because it is acting through a branch, agency or office in the
United  States and any  payment to be received by it  hereunder  is  effectively
connected with a trade or business in the United  States.  Upon becoming a party
to this Agreement  (whether by assignment or as an original  signatory  hereto),
and in any  event,  from  time to time  upon  the  request  of the  Agent or the
Borrower,  each Bank which is not a corporation  organized under the laws of the
United  States or any state  thereof shall deliver to the Agent and the Borrower
such forms, certificates or other instruments as may be required by


HOU04:37909.7







     the Agent in order to  establish  that such Bank is  entitled  to  complete
exemption from United States withholding taxes imposed on or with respect to any
payments,  including  fees, to be made to such Bank under this Agreement and the
other Loan  Documents.  Each Bank also agrees to deliver to the Borrower and the
Agent and such  other  supplemental  forms as may at any time be  required  as a
result of the  passage of time or changes in  applicable  law or  regulation  in
order to confirm or maintain in effect its  entitlement  to exemption  from U.S.
withholding tax on any payments hereunder;  provided,  that the circumstances of
the Bank at the relevant time and applicable  laws permit it to do so. If a Bank
determines,  as a result of any change in either (1) applicable law,  regulation
or treaty, or in any official application thereof or (2) its circumstances, that
it is unable to submit any form or  certificate  that it is  obligated to submit
pursuant to this Section  2.12(f),  or that it is required to withdraw or cancel
any such form or certificate previously submitted,  it shall promptly notify the
Borrower and the Agent of such fact. If a Bank is organized  under the laws of a
jurisdiction  outside the United States, and the Borrower and the Agent have not
received  forms,   certificates  or  other   instruments   indicating  to  their
satisfaction that all payments to be made to such Bank hereunder are not subject
to United States  withholding  tax or the Agent  otherwise has reason to believe
that such Bank is subject to U.S.  withholding  tax, the Borrower shall withhold
taxes from such  payments  at the  applicable  statutory  rate.  Each Bank shall
indemnify  and hold the Borrower and the Agent  harmless  from any United States
taxes,  penalties,  interest and other  expenses,  costs and losses  incurred or
payable by them as a result of either (A) such Bank's failure to submit any form
or certificate  that it is required to provide  pursuant to this Section 2.12(f)
or (B)  reliance by the  Borrower  or the Agent on any such form or  certificate
which such Bank has provided to them pursuant to this Section 2.12(f).

     Section  2.13.  Funding  Losses.  The Borrower  shall  indemnify  each Bank
against any loss or reasonable expense (including,  but not limited to, any loss
or  reasonable  expense  sustained or incurred or to be sustained or incurred in
liquidating  or  reemploying  deposits from third parties  acquired to effect or
maintain  such Loan or any part  thereof as a  Eurodollar  Rate Loan) which such
Bank may sustain or incur as a consequence  of (a)any failure by the Borrower to
fulfill on the date of any Borrowing  hereunder the  applicable  conditions  set
forth in Article III, (b) any failure by the Borrower to borrow hereunder, or to
Convert  Loans  hereunder  after  a  Borrowing  Request  or  Conversion  Notice,
respectively,  has been given,  (c) any payment,  prepayment  or Conversion of a
Eurodollar  Rate Loan  required or  permitted  by any other  provisions  of this
Agreement,  including, without limitation, payments made due to the acceleration
of the maturity of the Notes  pursuant to Section 7.01,  or otherwise  made on a
date other than the last day of the applicable  Interest Period, (d) any default
in the payment or  prepayment  of the  principal  amount of any Loan or any part
thereof or  interest  accrued  thereon,  as and when due and payable (at the due
date thereof, by notice of prepayment or otherwise) or (e) the occurrence of an


HOU04:37909.7







     Event of Default.  Such loss or reasonable  expense shall include,  without
limitation, an amount equal to the excess, if any, as determined by each Bank of
(i) its  cost of  obtaining  the  funds  for the Loan  being  paid,  prepaid  or
Converted or not borrowed or Converted  (based on the Eurodollar Rate applicable
thereto) for the period from the date of such payment,  prepayment or Conversion
or failure to borrow or Convert to the last day of the Interest  Period for such
Loan (or, in the case of a failure to borrow or Convert, the Interest Period for
the Loan which  would have  commenced  on the date of such  failure to borrow or
Convert) over (ii) the amount of interest (as estimated by such Bank) that would
be realized by such Bank in reemploying the funds so paid,  prepaid or Converted
or not borrowed or Converted for such period or Interest Period, as the case may
be. A  certificate  of each Bank setting  forth any amount or amounts which such
Bank is entitled to receive  pursuant to this Section 2.13 shall be delivered to
the Borrower (with a copy to the Agent) and shall be conclusive, if made in good
faith,  absent  manifest  error.  The  Borrower  shall  pay to the Agent for the
account of each Bank the amount shown as due on any  certificate  within 10 days
after its receipt of the same.  Notwithstanding the foregoing, in no event shall
any  Bank be  permitted  to  receive  any  compensation  hereunder  constituting
interest in excess of the Highest Lawful Rate. Without prejudice to the survival
of any other  obligations  of the Borrower  hereunder,  the  obligations  of the
Borrower under this Section 2.13 shall survive the termination of this Agreement
and/or the payment or assignment of any of the Notes.

     Section 2.14. Change of Law. (a) If at any time any Bank determines in good
faith  (which  determination  shall  be  conclusive)  that  any  change  in  any
applicable  law,  rule or regulation or in the  interpretation,  application  or
administration  thereof  makes  it  unlawful,  or  any  central  bank  or  other
Governmental Authority asserts that it is unlawful, for such Bank or its foreign
branch or  branches  to fund or maintain  any  Eurodollar  Rate Loan (any of the
foregoing  determinations being a "Eurodollar  Event"),  then, such Bank, at its
option,  may: (i) declare that  Eurodollar  Rate Loans will no longer be made or
maintained  by  such  Bank,  whereupon  the  right  of the  Borrower  to  select
Eurodollar Rate Loans for any Borrowing shall be suspended until such Bank shall
notify the Agent that the circumstances  causing such Eurodollar Event no longer
exist;  (ii)  with  respect  to any  Eurodollar  Rate  Loans of such  Bank  then
outstanding,  require that all such  Eurodollar  Rate Loans be Converted to Base
Rate Loans, in which event all such Eurodollar Rate Loans shall automatically be
Converted  into Base Rate  Loans on the  effective  date of such  notice and all
payments or  prepayments  of principal that would have otherwise been applied to
repay such Converted Eurodollar Rate Loans shall instead be applied to repay the
Base Rate Loans resulting from such Conversion; and/or (iii) with respect to any
Eurodollar  Rate Loans  requested  of such Bank but not yet made as or Converted
into such, require that such Eurodollar Rate Loans be made as or Converted into,
as applicable, Base Rate Loans.



HOU04:37909.7







     (b) Upon the occurrence of any Eurodollar Event, and at any time thereafter
so long as such  Eurodollar  Event shall  continue,  such Bank may  exercise its
aforesaid option by giving written notice thereof to the Agent and the Borrower,
such notice to be effective upon receipt thereof by the Borrower. Any Conversion
of any  Eurodollar  Rate Loan which is required under this Section 2.14 shall be
made, together with accrued and unpaid interest and all other amounts payable to
such Bank under this Agreement  with respect to such Converted Loan  (including,
without  limitation,  amounts payable  pursuant to Section 2.13 hereof),  on the
date stated in the notice to the Borrower referred to above.

     Section 2.15.  Increased  Costs. (a) If, due to either (i) the introduction
of or any change in or in the  interpretation  of any law or  regulation or (ii)
the compliance with any guideline  issued or request made by any central bank or
other Governmental  Authority (whether or not having the force of law) after the
date hereof,  there shall be any increase in the cost to any Bank of agreeing to
make or making,  funding or maintaining Eurodollar Rate Loans, then the Borrower
shall from time to time,  subject to the  provisions of Section 9.13, pay to the
Agent for the account of such Bank additional  amounts  sufficient to compensate
such Bank for such increased cost upon demand by such Bank.

     (b) If any Bank shall  have  determined  in good faith that any law,  rule,
regulation or guideline adopted after the date hereof pursuant to or arising out
of the July 1988  report of the  Basle  Committee  on  Banking  Regulations  and
Supervisory Practices entitled "International Convergence of Capital Measurement
and  Capital  Standards"  or that the  adoption  after  the date  hereof  of any
applicable law, rule, regulation or guideline regarding capital adequacy, or any
change after the date hereof in any of the foregoing or in the interpretation or
administration  thereof  by any  central  bank or other  Governmental  Authority
charged with the interpretation or administration thereof, or compliance by such
Bank (or any  lending  office  of such  Bank)  with  any  request  or  directive
regarding  capital adequacy (whether or not having the force of law) of any such
Governmental  Authority or comparable agency, affects or would affect the amount
of capital required or expected to be maintained by such Bank or any corporation
controlling such Bank, then the Borrower shall from time to time, subject to the
provisions  of Section  9.13,  pay to such Bank upon demand  additional  amounts
sufficient  to  compensate  such Bank or such  corporation  in the light of such
circumstances,  to the extent that such Bank reasonably determines such increase
in capital to be allocable to the existence of such Bank's Commitment hereunder.

     (c) Each Bank will  notify the  Borrower of any event  occurring  after the
date of this Agreement which will entitle such Bank to compensation  pursuant to
this Section 2.15 as promptly as practicable  after such Bank obtains  knowledge
of the occurrence of such event. A certificate of such Bank setting


HOU04:37909.7







     forth in reasonable detail (i) such amount or amounts as shall be necessary
to compensate such Bank (or  participating  banks or other entities  pursuant to
Section  9.02) as  specified  above and (ii) the  calculation  of such amount or
amounts  shall be  delivered  to the  Borrower  and shall be  conclusive  absent
manifest  error.  The Borrower shall pay to such Bank the amount shown as due on
any such  certificate  within ten (10) days after its  receipt of the same.  The
failure of any Bank to demand  compensation for any increased costs or reduction
in amounts  received or  receivable  or reduction in return on capital shall not
constitute  a waiver  of the  right of such  Bank or any  other  Bank to  demand
compensation  for any  increased  costs or  reduction  in  amounts  received  or
receivable  or  reduction  in return on  capital  as such  rights  are set forth
herein.  The  protection  of this  Section  2.15 shall be available to the Banks
regardless of any possible  contention of invalidity or  inapplicability of law,
regulation or condition which shall have been imposed.


                              ARTICLE III
                          CONDITIONS OF CREDIT

     Section 3.01. Conditions Precedent to the Initial Borrowing. The obligation
of each Bank to make its initial Loan on the  occasion of the initial  Borrowing
hereunder  is  subject to the  conditions  precedent  that the Agent  shall have
received on or before the date of such initial  Borrowing all of the  following,
each in form and substance reasonably satisfactory to the Bank Group and in such
number of counterparts as may be reasonably requested by the Agent:

            (a)   The following Loan Documents duly executed by the
Persons indicated below:

            (i)   this Agreement executed by the Borrower and each member
      of the Bank Group,

            (ii)  the Notes executed by the Borrower,

            (iii)       the Mortgage executed by the Borrower, and

            (iv)  the Security Agreement executed by the Borrower.

            (b) Evidence that the Liens created by the Security  Documents  have
been duly  perfected and  constitute  valid first  priority  Liens,  which shall
include, without limiting the generality of the foregoing:

            (i)   the filing of such financing statements under the Uniform
      Commercial Code in such jurisdictions as the Agent may require, and



HOU04:37909.7







            (ii)  the filing of the Mortgage in such jurisdictions as the Agent
      may require.

     (c) A  certificate  of  the  secretary  or an  assistant  secretary  of the
Borrower  certifying,  inter alia,  (i) true and correct  copies of  resolutions
adopted by the Board of Directors of the Borrower (A) authorizing the execution,
delivery and performance by the Borrower of the Loan Documents to which it is or
will be a party and the Borrowings to be made thereunder and the consummation of
the transactions  contemplated thereby, (B) authorizing officers of the Borrower
to  negotiate  the  Loan  Documents  to which it is a party  and  which  will be
delivered at or prior to the date of the initial  Borrowing and (C)  authorizing
officers of the  Borrower to execute and deliver the Loan  Documents to which it
is or will be a party and any related documents,  including, without limitation,
any agreement or security document contemplated by this Agreement, (ii) true and
correct  copies of the articles of  incorporation  and bylaws (or other  similar
charter  documents)  of the  Borrower  and (iii)  the  incumbency  and  specimen
signatures of the officers of the Borrower  executing any documents on behalf of
it.

     (d)  Certificates of appropriate  public  officials as to the existence and
good standing of the Borrower in the States of Texas, Nevada and Wyoming.

     (e) An engineering report covering the Acquisition Properties and the other
Oil and Gas  Properties  of the Borrower  prepared by DeGolyer  and  MacNaughton
dated as of June 30, 1996 (the "Initial Reserve Report").

     (f)  Copies  of all  environmental  reports  in the  Borrower's  possession
covering  its  existing  Oil  and Gas  Properties  and an  environmental  report
prepared by Borrower with respect to the Acquisition Properties,  in form, scope
and substance satisfactory to the Agent.

     (g) A true and  correct  copy of the  Acquisition  Documents  and  evidence
satisfactory  to  the  Agent  that  the  Acquisition  has  been  consummated  in
accordance with the terms thereof and all Requirements of Law.

     (h) Fully  executed  and  acknowledged  releases  of all Liens  existing as
security for the First Union Debt, in form, scope and substance  satisfactory to
the Agent.

     (i) Title opinions covering at least 80% of the value of the Borrower's Oil
and Gas Properties  included in the Initial  Reserve  Report in form,  scope and
substance satisfactory to the Agent.

     (j) Copies of all authorizations, consents, approvals, licenses, filings or
registrations obtained from or made with any Governmental Authority or


HOU04:37909.7







any other Person in connection with the  Acquisition or the execution,  delivery
and  performance  of the Loan  Documents,  together  with a  certificate  from a
Responsible Officer of the Borrower to the effect that all such  authorizations,
consents,  approvals,  licenses,  filings or registrations have been obtained or
made, as applicable, and are in full force and effect.

     (k) A list of all insurance policies and programs in effect with respect to
the properties and businesses of the Borrower and its  Subsidiaries,  specifying
for each such policy or program the amount  thereof,  the risks insured  against
thereby,  the name of the  insurer and each  insured  party  thereunder  and the
policy or other identification number thereof,  together with a certificate from
a  Responsible  Officer of the Borrower to the effect that all such policies and
programs are in full force and effect.

     (l) A satisfactory review of Borrower, including a review of its marketing,
transportation and hedging arrangements for Hydrocarbons.

     (m)  A  certificate  signed  by  a  Responsible  Officer  of  the  Borrower
certifying  as to  the  satisfaction  of the  conditions  specified  in  Section
3.02(a).

     (n) The favorable,  signed  opinions of Cox & Smith  Incorporated,  special
counsel to the Borrower and its Subsidiaries  and Brown & Drew,  special Wyoming
counsel to the Agent and the Bank  Group,  each  addressed  to the Agent and the
Bank Group, in form and substance  reasonably  satisfactory to the Agent and its
counsel.

     (o) A written  confirmation  from the Process Agent of its  appointment and
acceptance as process agent for the Borrower as provided for in Section 9.12.

     (p) The  payment  to the Bank Group of the fees due to them as of such date
under the Loan  Documents,  and the  payment of all legal fees and  expenses  of
counsel  to the Agent,  including  those of  Andrews & Kurth  L.L.P.  and Cahill
Gordon & Reindel.

     (q) Such  other  documents,  certificates  and  opinions  as the  Agent may
reasonably request relating to this Agreement and the other Loan Documents.

     Section 3.02.  Conditions  Precedent to All Loans.  The  obligation of each
Bank to make any Loan, shall be subject to the further conditions precedent that
(a) on the Borrowing Date of such Loan the following  statements  shall be true,
and the  Borrower,  by virtue of its  delivery of a Borrowing  Request  shall be
deemed  to have  certified  to the  Bank  Group  as of such  date  that  (i) the
representations and warranties contained in Article IV are true and correct on

HOU04:37909.7







     and as of such  date,  before and after  giving  effect to such Loan and as
though  made on and as of such date,  (ii) no  Default  or Event of Default  has
occurred  and is  continuing,  or would result from such Loan and (iii) no event
has occurred since the Execution Date that could  reasonably be expected to have
a Material  Adverse  Effect on the Borrower or any of its  Subsidiaries  and (b)
that the Agent shall have received on or before such date such other  documents,
certificates,  information  and  opinions  as the Agent may  reasonably  request
relating  to this  Agreement  and the  other  Loan  Documents,  each in form and
substance reasonably satisfactory to the Agent.


                               ARTICLE IV
                     REPRESENTATIONS AND WARRANTIES

     In order to  induce  the Bank  Group to  enter  into  this  Agreement,  the
Borrower hereby represents and warrants to the Bank Group as follows:

     Section  4.01.   Corporate   Existence.   Each  of  the  Borrower  and  its
Subsidiaries  is a  corporation  duly  organized,  validly  existing and in good
standing under the laws of the  jurisdiction of its  incorporation,  and is duly
qualified or licensed to transact  business as a foreign  corporation  and is in
good standing  under the laws of each  jurisdiction  in which the conduct of its
operations  or  the  ownership  or  leasing  of  its  properties  requires  such
qualification  or  licensing,  except  where the failure to be so  qualified  or
licensed will not have a Material  Adverse Effect on such Person.  Schedule 4.01
is a complete list of the Borrower's Subsidiaries.

     Section  4.02.  Corporate  Authority;  Binding  Obligations.  Each  of  the
Borrower and its Subsidiaries has all requisite corporate power and authority to
conduct its business, to own, operate and encumber its Property, and to execute,
deliver and perform all of its obligations under the Loan Documents executed by,
or to be executed by, such Person.  The execution,  delivery and  performance of
each of the Loan Documents to which the Borrower or any of its Subsidiaries is a
party and the  consummation of the transactions  contemplated  thereby have been
duly authorized by all necessary corporate action. Each of the Loan Documents to
which the Borrower or any of its  Subsidiaries is a party has been duly executed
and delivered by such Person,  is in full force and effect and  constitutes  the
legal,  valid and binding obligation of such Person,  enforceable  against it in
accordance  with its  terms,  except as such  enforceability  may be  limited by
bankruptcy,  insolvency,  reorganization,   moratorium  or  other  similar  laws
affecting the enforcement of creditor's rights generally and general  principles
of equity. The Security Documents create valid Liens in the collateral described
therein, securing the secured obligations described therein.



HOU04:37909.7







     Section 4.03. No Conflict.  The execution,  delivery and performance by the
Borrower or any of its  Subsidiaries  of each Loan Document to which such Person
is a party and the consummation of each of the transactions contemplated thereby
do not and shall not, by the lapse of time,  the giving of notice or  otherwise:
(a)  constitute  a  violation  of any  Requirement  of Law  or a  breach  of any
provision contained in the articles or certificate of incorporation or bylaws of
such  Person,  or any  shareholder  agreement  pertaining  to  such  Person,  or
contained in any material agreement, instrument or document to which it is now a
party or by which it or its properties is bound,  except for such  violations or
breaches that will not have a Material Adverse Effect on any such Person; or (b)
result in or require the creation or imposition of any Lien  whatsoever upon any
of the  properties or assets of the Borrower or any of its  Subsidiaries  (other
than Excepted Liens and Liens in favor of the Agent arising pursuant to the Loan
Documents).

     Section 4.04. No Consent. No authorization,  consent, approval, license, or
exemption of or filing or registration  with, any Governmental  Authority or any
other Person, which has not been obtained,  was, is or will be necessary for the
valid  execution,  delivery  or  performance  by  the  Borrower  or  any  of its
Subsidiaries  of any of the  Loan  Documents  to  which  it is a  party  and the
consummation  of  each  of the  transactions  contemplated  thereby  (including,
without  limitation,  the  consummation of the Acquisition) or the Borrower's or
any of its Subsidiaries'  ownership, use or operation of any of their Properties
other than (a) those  listed on Schedule  4.04 and (b) those that the failure to
obtain, file or make will not have a Material Adverse Effect on any such Person.

     Section  4.05.  No  Defaults or  Violations  of Law. No Default or Event of
Default has occurred  and is  continuing.  No default (or event or  circumstance
occurred  which,  but for the passage of time or the giving of notice,  or both,
would  constitute a default) has occurred and is continuing  with respect to any
note,  indenture,  loan agreement,  mortgage,  lease, deed or other agreement to
which the Borrower or any of its Subsidiaries is a party or by which any of them
or their  Properties  is bound,  except for such  defaults  that will not have a
Material Adverse Effect on the Borrower or any of its Subsidiaries.  Neither the
Borrower  nor  any  of  its  Subsidiaries  is in  violation  of  any  applicable
Requirement  of Law  except  for such  violations  that will not have a Material
Adverse Effect on any such Person.

     Section 4.06.  Financial  Position.  (a) Prior to the Execution  Date,  the
Borrower has furnished to the Agent and the Bank Group audited financials of the
Borrower and its  Subsidiaries as of December 31, 1995 and unaudited  financials
of the Borrower as of June 30, 1996. The audited  financials  referred to in the
previous  sentence  have been  prepared in accordance  with  generally  accepted
accounting  principles  consistently applied throughout the periods involved and
present fairly the financial condition of the Borrower and its


HOU04:37909.7







     Subsidiaries  as of the dates  thereof and the results of their  operations
for the periods  then ended.  As of the  Execution  Date,  no event has occurred
since June 30, 1996 that could reasonably be expected to have a Material Adverse
Effect on the Borrower or any of its Subsidiaries.

     (b) Except as fully  reflected  in the  audited  financials  referred to in
paragraph  (a) of  this  Section  4.06,  as of the  date  hereof,  there  are no
liabilities  or obligations  of the Borrower or any of its  Subsidiaries  of any
nature  whatsoever  (whether  absolute,  accrued,  contingent  or otherwise  and
whether or not due) which,  either  individually  or in aggregate,  would have a
Material Adverse Effect on the Borrower or any of its Subsidiaries.

     Section 4.07. Litigation.  Except as set out in Schedule 4.07, there are no
actions,  suits or  proceedings  pending or, to the  knowledge  of the  Borrower
threatened against or affecting the Borrower or any of its Subsidiaries,  or the
Properties of any such Person, before or by any Governmental  Authority or other
Person,  which,  if  determined  adversely  to such Person could have a Material
Adverse Effect on any such Person.

     Section 4.08. Use of Proceeds.  (a) The Borrower's  uses of the proceeds of
the Loans are, and will  continue to be, legal and proper  corporate  uses (duly
authorized by Borrower's board of directors),  and such uses are consistent with
the terms of the Loan Documents,  including,  without limitation,  Section 5.09,
and all Requirements of Law.

     (b)  Neither the  Borrower  nor any of its  Subsidiaries  is engaged in the
business of extending  credit for the purpose of purchasing  or carrying  margin
stock (within the meaning of  Regulation  U), and no part of the proceeds of any
Loan will be used,  directly or indirectly,  (i) to purchase or carry any margin
stock or to extend  credit to others for the purpose of  purchasing  or carrying
any margin stock or (ii) for the purpose of  purchasing,  carrying or trading in
any securities under such circumstances as to involve the Borrower or any of its
Subsidiaries in a violation of Regulation X.

     Section 4.09. Governmental Regulation.  Neither the Borrower nor any of its
Subsidiaries  is subject to regulation  under the Public Utility Holding Company
Act, as amended,  the Investment  Company Act of 1940, as amended,  or any other
Requirement  of  Law  such  that  the  ability  of  any  such  Person  to  incur
indebtedness   is  limited  or  its  ability  to  consummate  the   transactions
contemplated  by this  Agreement,  the  other  Loan  Documents  or any  document
executed in connection therewith is impaired.

     Section 4.10.  Disclosure.  The schedules,  documents,  exhibits,  reports,
certificates  and other written  statements and  information  furnished by or on
behalf of the Borrower or any of its Subsidiaries to the Bank Group do not


HOU04:37909.7







     contain any Material misstatement of fact, or omit to state a Material fact
necessary in order to make the  statements  contained  therein,  in light of the
circumstances  under which they were made, not misleading.  Neither the Borrower
nor any of its  Subsidiaries  has  intentionally  withheld  any fact known to it
which has or is  reasonably  likely  to have a  Material  Adverse  Effect on the
Borrower or any of its Subsidiaries.

     Section  4.11.  ERISA.  (a) The  Borrower,  and each  ERISA  Affiliate  and
Subsidiary  have operated and  administered  each Pension Plan and Other Benefit
Plan in  compliance  with all  applicable  laws,  except for such  instances  of
noncompliance  as have not resulted in and could not  reasonably  be expected to
result  in a  Material  Adverse  Effect.  Neither  the  Borrower  nor any  ERISA
Affiliate or Subsidiary has incurred any liability  pursuant to Title I or IV of
ERISA or the  penalty or excise tax  provisions  of the  Internal  Revenue  Code
relating to employee  benefit  plans (as defined in Section 3 of ERISA),  and no
event,  transaction  or condition has occurred or exists or is  threatened  that
could  reasonably be expected to result in the  incurrence of any such liability
by the Borrower or any ERISA  Affiliate or  Subsidiary,  or in the imposition of
any Lien on any of the rights, properties or assets of the Borrower or any ERISA
Affiliate or Subsidiary, in either case pursuant to Title I or IV of ERISA or to
such penalty or excise tax  provisions  or to Section  401(a)(29)  or 412 of the
Internal  Revenue Code,  other than such  liabilities  or Liens as would not be,
individually or in the aggregate, Material.

     (b) The  present  value of the  aggregate  benefit  liabilities  under each
Pension  Plan  subject  to Title IV of ERISA,  determined  as of the end of such
Pension  Plan's  most  recently  ended  plan year on the basis of the  actuarial
assumptions  specified for funding  purposes in such Pension  Plan's most recent
actuarial  valuation  report,  did not exceed the aggregate current value of the
assets of such Pension Plan  allocable  to such  benefit  liabilities.  The term
"benefit liabilities" has the meaning specified in section 4001 of ERISA and the
terms "current value" and "present value" have the meaning  specified in Section
3 of ERISA.

     (c) The Borrower and its ERISA Affiliates and Subsidiaries do not currently
and have never had any liability or obligation  with respect to any  liabilities
(and are not subject to contingent withdrawal liabilities) under section 4201 or
4204 of any Multiemployer Plan.

     (d) The expected  post-retirement  benefit obligation (determined as of the
last day of the Borrower's  most recently  ended fiscal year in accordance  with
Financial  Accounting  Standards  Board  Statement  No. 106,  without  regard to
liabilities  attributable to continuation  coverage mandated by section 4980B of
the Internal  Revenue Code  ("COBRA")) of the Borrower and its ERISA  Affiliates
and Subsidiaries is not Material and, except as modified by


HOU04:37909.7







     COBRA,  such obligations can be unilaterally  terminated at any time by the
Borrower,  or  its  ERISA  Affiliates  and  Subsidiaries  without  any  Material
liability.

     Section 4.12. Payment of Taxes. The Borrower has filed, and has caused each
of its Subsidiaries to file, all federal,  state and local tax returns and other
reports that the Borrower and each such  Subsidiary  are required by law to file
and have  paid all  taxes and other  similar  charges  that are due and  payable
pursuant to such returns and  reports,  except to the extent any of the same may
be contested in good faith by  appropriate  proceedings  promptly  initiated and
diligently conducted,  and with respect to which adequate reserves have been set
aside  on the  books  of such  Person  in  accordance  with  generally  accepted
accounting principles.

     Section 4.13.  Title and Liens.  (a) Except as set out in Schedule 4.13 the
Borrower and its Subsidiaries  have good and defensible title to its Properties,
free and clear of all Liens except Liens  permitted by Section  6.02.  Except as
set forth in Schedule 4.13,  after giving full effect to the Excepted Liens, the
Borrower  owns  the net  interests  in  production  attributable  to Oil and Gas
Properties reflected in the Initial Reserve Report and the ownership of such Oil
and Gas Properties  shall not in any material  respect  obligate the Borrower to
bear the  costs  and  expenses  relating  to the  maintenance,  development  and
operations  of each  such Oil and Gas  Property  in an  amount  in excess of the
working  interest of each Oil and Gas Property set forth in the Initial  Reserve
Report.  Further,  upon delivery of each Reserve Report,  the statements made in
the  preceding  sentence  shall be true with respect to such  furnished  Reserve
Reports including the ownership of the Oil and Gas Properties set forth therein.
To the  best of the  Borrower's  knowledge,  all  information  contained  in the
Initial  Reserve  Report is true and correct in all material  respects as of the
date thereof.

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

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



HOU04:37909.7







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

            Section  4.14.  Gas  Imbalances.  As of the date of this  Agreement,
except as set forth in Schedule 4.14 or on the most recent certificate delivered
pursuant to Section 5.10(c), on a net basis there are no gas imbalances, take or
pay or other  prepayments  with respect to the Borrower's Oil and Gas Properties
which would require the Borrower to deliver  Hydrocarbons  produced from the Oil
and Gas Properties at some future time without then or thereafter receiving full
payment therefor exceeding a market value of $100,000 in the aggregate.

            Section  4.15.   Consummation  of  Acquisition.   The   transactions
described in the  Acquisition  Documents,  including,  without  limitation,  the
Acquisition,  have been  completed in accordance  with terms of the  Acquisition
Documents, and with all Requirements of Law.

            Section  4.16.  Environmental  Matters.  Except  as set forth in the
report  delivered to the Banks on the  Effective  Date pursuant to Section 3.01,
(a) (i) the Borrower  and each of its  Subsidiaries  possess all  environmental,
health and safety licenses, permits,  authorizations,  registrations,  approvals
and similar rights  necessary  under law or otherwise for such Person to conduct
its  operations as now being  conducted,  (ii) each of such  licenses,  permits,
authorizations,  registrations,  approvals  and  similar  rights  is  valid  and
subsisting,  in full force and effect and enforceable by such Person,  and (iii)
such Person is in compliance with all terms,  conditions or other  provisions of
such  permits,  authorizations,  registrations,  approvals  and similar  rights,
except to the extent that the failure to do so will not have a Material  Adverse
Effect on such  Person;  (b) except as disclosed  in the  environmental  reports
delivered  to the Bank Group on the  Effective  Date  pursuant to Section  3.01,
neither the Borrower nor any of its Subsidiaries has received any notices of any
violation of, noncompliance with, or remedial obligation under,  Requirements of
Environmental  Laws,  and there are no writs,  injunctions,  decrees,  orders or
judgments  outstanding,  or lawsuits,  claims,  proceedings,  investigations  or
inquiries pending or, to the knowledge of the Borrower, threatened,  relating to
the  ownership,  use,  condition,  maintenance,  or operation  of, or conduct of
business  related to, any Property owned,  leased or operated by the Borrower or
any  of  its   Subsidiaries,   other  than  those   violations,   instances   of
noncompliance,  obligations,  writs,  injunctions,  decrees, orders,  judgments,
lawsuits, claims, proceedings,  investigations or inquiries that will not have a
Material  Adverse  Effect  on  such  Person;  (c)  except  as  disclosed  in the
environmental reports delivered to the Agent pursuant to Section 3.01, there are
no material obligations,  undertakings or liabilities arising out of or relating
to  Environmental  Laws to which the  Borrower  or any of its  Subsidiaries  has
agreed to, assumed or retained, or by which the Borrower or


HOU04:37909.7







any of its Subsidiaries is adversely affected, by contract or otherwise; and (d)
except as disclosed in the  environmental  reports delivered to the Banks on the
Effective  Date  pursuant to Section  3.01,  neither the Borrower nor any of its
Subsidiaries  has  received a written  notice or claim to the  effect  that such
Person  is or may be  liable  to  any  Person  as the  result  of a  release  or
threatened release of a hazardous material or solid waste.


                               ARTICLE V
                         AFFIRMATIVE COVENANTS

            So long as any principal  amount of any Loan, any amount of interest
accrued under the Notes or any commitment or other fee, expense, compensation or
any  other  amount  payable  to any  member  of the Bank  Group  under  the Loan
Documents  shall  remain  unpaid  or  outstanding  or any  Bank  shall  have any
Commitment  hereunder,  unless the  Majority  Banks shall  otherwise  consent in
writing:

            Section 5.01. Reporting Requirements.  The Borrower shall deliver or
cause to be  delivered  to the Agent  (with  sufficient  copies for the Agent to
distribute the same to the other members of the Bank Group):

            (a) As soon as  available  and in any event within  forty-five  (45)
days after the end of each of the first three calendar quarters:

            (i)  copies  of the  unaudited  consolidated  balance  sheets of the
      Borrower and its Subsidiaries as of the end of such period,  and unaudited
      consolidated statements of income, retained earnings and cash flows of the
      Borrower and its  Subsidiaries  for that fiscal period and for the portion
      of the fiscal year ending with such period,  in each case setting forth in
      comparative   form  (on  a   consolidated   basis)  the  figures  for  the
      corresponding  period of the  preceding  fiscal  year,  all in  reasonable
      detail; and

            (ii) a  certificate  of a  Responsible  Officer of the  Borrower (1)
      stating that (A) such financial  statements fairly present in all material
      respects the consolidated  financial position and results of operations of
      the Borrower and its  Subsidiaries in accordance  with generally  accepted
      accounting   principles   consistently   applied,   subject  to   year-end
      adjustments  and the  absence  of  notes  and (B) no  Default  or Event of
      Default has occurred and is continuing  or, if any such event has occurred
      and is  continuing,  the action the Borrower is taking or proposes to take
      with respect  thereto,  and (2) setting forth  calculations  demonstrating
      compliance by the Borrower with Sections 6.04, 6.05 and 6.06.



HOU04:37909.7







            (b) As soon as available  and in any event  within  ninety (90) days
after the end of each  fiscal  year of the  Borrower  (i) copies of the  audited
consolidated   and   consolidating   balance  sheet  of  the  Borrower  and  its
Subsidiaries  as of the close of such fiscal year and audited  consolidated  and
consolidating statements of income and retained earnings and a statement of cash
flows of the Borrower and its  Subsidiaries  for such fiscal year,  in each case
setting forth in comparative form (on a consolidated  basis) the figures for the
preceding  fiscal year, all in reasonable  detail and  accompanied by an opinion
thereon (which shall not be qualified by reason of any limitation imposed by the
Borrower) of independent accountants of recognized national standing selected by
the Borrower and reasonably  satisfactory  to the Majority  Banks, to the effect
that such  consolidated  financial  statements  have been prepared in accordance
with generally accepted accounting  principles  consistently applied (except for
changes in which such  accountants  concur) and that such audit has been made in
accordance with generally  accepted auditing standards and (ii) a certificate of
a  Responsible   Officer  of  the  Borrower  (A)  setting   forth   calculations
demonstrating  compliance by the Borrower with Sections 6.04,  6.05 and 6.06 and
(B) stating that no Default or Event of Default has  occurred and is  continuing
or, if any such event has occurred and is continuing, the action the Borrower is
taking or proposes to take with respect thereto.
            (c)  Promptly  after the  sending or filing  thereof,  copies of all
reports  and  shareholder   information   which  the  Borrower  or  any  of  its
Subsidiaries  sends  to  any  holders  of its  respective  securities  in  their
capacities  as  holders  of such  securities  and  not in  their  capacities  as
directors,  officers  or  employees  of the  Borrower  or any of the  Borrower's
Subsidiaries, or to the SEC.

            (d) As soon as reasonably  possible and in any event within ten (10)
days  after  the  Borrower  or any  of its  Subsidiaries  becomes  aware  of the
occurrence  of a Default or Event of Default,  a  certificate  of a  Responsible
Officer  of the  Borrower  setting  forth  details  of such  Default or Event of
Default  and the  action  which has been  taken or is to be taken  with  respect
thereto.

            (e) As soon as reasonably  possible and in any event within ten (10)
days  after the  Borrower  or any of its  Subsidiaries  becomes  aware  thereof,
written notice from a Responsible Officer of the Borrower of (i) the institution
of or overt threat of, any action, suit, proceeding,  governmental investigation
or  arbitration  by any  Governmental  Authority  or  other  Person  against  or
affecting  the  Borrower or any of its  Subsidiaries  that could have a Material
Adverse  Effect on any such  Person  and that has not  previously  disclosed  in
writing to the Bank Group  pursuant to this  Section  5.01 or (ii) any  material
development  in any action,  suit,  proceeding,  governmental  investigation  or
arbitration already disclosed to the Bank Group pursuant to this Section 5.01 or
Section 3.01.

            (f) As soon as reasonably  possible and in any event within ten (10)
days after the Borrower or any of its Subsidiaries becomes aware thereof,


HOU04:37909.7







written  notice from a Responsible  Officer of the Borrower of (i) any violation
of,  noncompliance  with,  or  remedial   obligations  under,   Requirements  of
Environmental  Laws,  (ii) any  release  or  threatened  release  affecting  any
property  owned,  leased or operated by the Borrower or any of its  Subsidiaries
that  could  have  a  Material  Adverse  Effect  on the  Borrower  or any of its
Subsidiaries,  (iii) the amendment or  revocation of any permit,  authorization,
registration,  approval  or similar  right  that  could have a Material  Adverse
Effect  on  the  Borrower  or  any  of  its  Subsidiaries  or  (iv)  changes  to
Requirements of Environmental  Laws that could have a Material Adverse Effect on
the Borrower or any of its Subsidiaries.

            (g) Promptly, and in any event within five days after becoming aware
of any of the  following,  a written notice setting forth the nature thereof and
the action,  if any,  that the  Borrower  or an ERISA  Affiliate  or  Subsidiary
proposes to take with respect thereto: (i) with respect to any Pension Plan, any
Reportable  Event, for which notice thereof has not been waived pursuant to such
regulations  as in effect on the date hereof;  or (ii) the taking by the PBGC of
steps  to  institute,  or the  threatening  by the PBGC of the  institution  of,
proceedings  under  section  4042  of  ERISA  for  the  termination  of,  or the
appointment of a trustee to administer,  any Pension Plan, or the receipt by the
Borrower or any ERISA  Affiliate or Subsidiary of a notice from a  Multiemployer
Plan  that  such  action  has  been  taken  by the  PBGC  with  respect  to such
Multiemployer  Plan;  or (iii) any event,  transaction  or condition  that could
result in the incurrence of any liability by the Borrower or any ERISA Affiliate
or  Subsidiary  pursuant  to Title I or IV of ERISA or the penalty or excise tax
provisions of the Internal  Revenue Code relating to employee  benefit plans, or
in the imposition of any Lien on any of the rights,  properties or assets of the
Borrower or any ERISA Affiliate or Subsidiary pursuant to Title I or IV of ERISA
or such penalty or excise tax  provisions;  or (iv) the  inability or failure of
the Borrower or any ERISA  Affiliate or Subsidiary to make timely any payment or
contribution to or with respect to any Pension Plan, Multiemployer Plan or Other
Benefit Plan, if such failure, either separately or together with all other such
failures  could  reasonably  be expected to be  Material;  or (v) any event with
respect to any Pension  Plan,  Multiemployer  Plan and/or  Other  Benefit  Plan,
individually  or in the  aggregate,  that could  reasonably  be expected to be a
Material liability.

            (h) As soon as available  and in any event  simultaneously  with the
delivery of the  financial  statements  delivered  pursuant to Section  5.01(b),
copies  of  the  budget  of the  Borrower  and  its  Subsidiaries  containing  a
consolidated and consolidating balance sheet, and detailed statements of income,
cash flow and projected capital expenditures for the then current fiscal year.

            (i) As soon as possible  and in any event within ten (10) days after
the Borrower becomes aware thereof, any claim by or against the Borrower


HOU04:37909.7







under the Acquisition Documents, including claims for breach of warranty and
claims for indemnity.

            (j) As soon as  possible  and in any event  within  ninety (90) days
after the end of each calendar year commencing  March 31, 1997, an environmental
report  prepared by Pilko & Associates  or any other  independent  environmental
firm  qualified to prepare  such reports and approved by the Agent  covering the
real property owned by the Borrower and its  Subsidiaries  in form and substance
satisfactory to the Agent.

            (k) Such other  information as any member of the Bank Group may from
time to time reasonably request respecting the business, properties,  operations
or  condition,   financial  or  otherwise,   of  the  Borrower  or  any  of  its
Subsidiaries.

            Section 5.02.  Taxes;  Claims.  The Borrower will pay and discharge,
and  will  cause  each of its  Subsidiaries  to pay and  discharge,  all  taxes,
assessments and governmental  charges or levies imposed upon such Person or upon
its income or profits, or upon any properties belonging to such Person, prior to
the date on which  penalties  attach  thereto,  and all lawful claims which,  if
unpaid,  might become a Lien upon any properties of such Person,  other than any
such tax,  assessment,  charge,  levy or claim which is being  contested in good
faith by appropriate  proceedings  promptly initiated and diligently  conducted,
and with respect to which  adequate  reserves are set aside on the books of such
Person in accordance with generally accepted accounting principles.

            Section 5.03.  Compliance  with Laws. The Borrower will comply,  and
will cause each of its Subsidiaries to comply, with all applicable  Requirements
of Law imposed by, any Governmental  Authority,  non-compliance with which might
have a Material  Adverse  Effect on any such Person.  Without  limitation of the
foregoing,  the Borrower  shall,  and shall cause each of its  Subsidiaries  to,
comply with all  Requirements  of  Environmental  Laws,  operate  properties and
conduct its  business  in  accordance  with good  environmental  practices,  and
handle,  treat,  store and  dispose of  hazardous  materials  or solid  waste in
accordance with such practices,  except where the failure to do so will not have
a Material Adverse Effect on any such Person.

            Section 5.04. Insurance.  The Borrower will maintain, and will cause
each of its  Subsidiaries  to maintain,  with  financially  sound and  reputable
insurance  companies or associations,  or self-insure against such risks, and in
such amounts (and with  co-insurance  and  deductibles),  as are usually insured
against by Persons of similar  size and  established  reputation  engaged in the
same or similar businesses and similarly  situated,  including insurance against
fire, casualty, business interruption, injury to Persons or property and other


HOU04:37909.7







normal hazards normally insured against, but, in any event, such insurance shall
not be  substantially  dissimilar from that described in the insurance  schedule
delivered on the Effective  Date  pursuant to Section  3.01. In addition,  on or
before  January 31 of each year  commencing  January 31, 1997, the Borrower will
deliver to the Agent a report  prepared by Borrower's  insurance  broker listing
all  insurance  policies  and  programs  then  in  effect  with  respect  to the
properties  and  businesses  of the  Borrower  and  each  of  its  Subsidiaries,
specifying  for each such policy and program,  (a) the amount  thereof,  (b) the
risks  insured  against  thereby,  (c) the name of the insurer and each  insured
party  thereunder  and (d) the policy or other  identification  number  thereof.
Other than with respect to worker's compensation policies, each policy listed on
the  schedule  delivered  pursuant to Section  3.02 and each  additional  policy
maintained in compliance with this Agreement shall be endorsed showing the Agent
as an  additional  insured,  or a loss payee,  as  applicable.  All  policies of
insurance required by the terms of this Agreement or any Security Document shall
provide that at least 30 days' prior written notice be given to the Agent of any
termination, cancellation, reduction or other modification of such insurance.

            Section 5.05.  Corporate  Existence.  The Borrower will preserve and
maintain,  and will cause each of its Subsidiaries to preserve and maintain, its
existence,  rights,  franchises  and  privileges  in  the  jurisdiction  of  its
incorporation,  and  qualify  and  remain  qualified,  and  cause  each  of  its
Subsidiaries to qualify and remain qualified,  as a foreign  corporation in each
jurisdiction  in which  such  qualification  is  material  to the  business  and
operations of such Person or the ownership or leasing of the  properties of such
Person  except  to the  extent  that a  Subsidiary  merges  or  consolidates  in
compliance  with Section  6.08 or ceases to be a Subsidiary  of Borrower if such
cessation is permitted under this Agreement.

            Section 5.06. Inspections. From time to time during regular business
hours upon  reasonable  prior notice,  the Borrower will permit,  and will cause
each of its Subsidiaries to permit,  any agents or representatives of any member
of the Bank Group to examine and make copies of and  abstracts  from the records
and books of  account  of,  and visit the  properties  of the  Borrower  and its
Subsidiaries  and to discuss  the  affairs,  finances  and  accounts of any such
Person with any of its independent  public  accountants,  officers or directors,
all at the expense of the Borrower.

            Section 5.07. Maintenance of Properties.  The Borrower will maintain
and  preserve,  and will cause each  Subsidiary  of the Borrower to maintain and
preserve,  all of its personal  property and fixtures (or replacement  therefor)
necessary  for the proper  conduct of its  business  in good  working  order and
condition  as  would a  reasonably  prudent  operator,  ordinary  wear  and tear
excepted.  The  Borrower  shall  cause,  or in the event the Borrower is not the
operator of its Oil and Gas Properties, use reasonable best efforts consistent


HOU04:37909.7







with its rights under applicable  operating agreements to cause, its Oil and Gas
Properties to be maintained,  developed, protected against drainage and operated
in a good and workmanlike  manner as would a reasonably  prudent operator and in
material compliance with all operating  agreements,  other applicable agreements
and all applicable Requirements of Law.

            Section 5.08.  Accounting Systems.  The Borrower will keep, and will
cause each of its Subsidiaries to keep, adequate records and books of account in
which  complete  entries  will be made in  accordance  with  generally  accepted
accounting  principles  consistently  applied (subject to year end adjustments),
reflecting  all  financial  transactions  of such  Person.  The  Borrower  shall
maintain  or cause to be  maintained  a system  of  accounting  established  and
administered in accordance with sound business  practices to permit  preparation
of  financial  statements  in  conformity  with  generally  accepted  accounting
principles,  and each of the  financial  statements  described  herein  shall be
prepared from such system and records.

            Section  5.09.  Use of Loans.  Except as specified in the  following
sentence,  the Borrower will use the proceeds of all Revolving  Loans  hereunder
for general corporate purposes  (including working capital purposes)  consistent
with the terms of this  Agreement and all  Requirements  of Law. The proceeds of
the Loans  funded on the  Effective  Date will be used to (a) fund the  purchase
price payable by the Borrower under the  Acquisition  Documents,  and (b) pay in
full the First Union Debt.

            Section 5.10.  Reserve Reports.  (a) By March 15 and September 15 of
each year commencing March 15, 1997, the Borrower shall furnish to the Agent and
the Banks a Reserve Report dated as of the immediately  preceding December 31 or
June 30, as the case may be. Each Reserve  Report shall be prepared by certified
independent  petroleum  engineers  acceptable  to the Agent.  Each such  Reserve
Report shall be in form and  substance  satisfactory  to the Agent and shall set
forth, as of the immediately  preceding  December 31 or June 30, as the case may
be:  (i)  the  Proved  Reserves  attributable  to the  Borrower's  Oil  and  Gas
Properties  together with a projection of the rate of production  and future net
income, taxes,  operating expenses and capital expenditures with respect thereto
as of such dates, based upon pricing and escalation  assumptions consistent with
SEC reporting  requirements  at the time and (ii) such other  information as the
Agent may reasonably request.

            (b) In the event of an unscheduled  redetermination of the Borrowing
Base,  the Borrower  shall  furnish to the Agent and the Banks a Reserve  Report
prepared by or under the  supervision  of the chief engineer of the Borrower who
shall certify,  to the best of his knowledge and in all material respects,  such
Reserve Report to be true and accurate and to have been


HOU04:37909.7







prepared in accordance  with the procedures  used in the  immediately  preceding
Reserve Report delivered to the Banks under Section 5.10(a) with an "as of date"
as requested by the Majority Banks. For any unscheduled  redetermination  of the
Borrowing Base initiated by the Majority Banks,  the Borrower shall provide such
Reserve  Report  as soon as  possible,  but in any  event no later  than 30 days
following the Borrower's  receipt of notice of such unscheduled  redetermination
from the Agent.

            (c) With the delivery of each  Reserve  Report,  the Borrower  shall
provide to the Bank Group, a certificate  from the Responsible  Officer that, to
the best of his  knowledge  and in all material  respects,  (i) the  information
contained in the Reserve Report and any other information delivered therewith is
true and correct,  (ii) the Borrower owns good and  defensible  title to its Oil
and Gas Properties evaluated in such Reserve Report free of all Liens except for
Excepted Liens and that the Borrower has created or allowed to be created no new
Liens on its Oil and Gas Properties  except for Excepted Liens,  (iii) except as
set forth on an  exhibit  to the  certificate,  on a net basis  there are no gas
imbalances,  take or pay or other  prepayments  with  respect to its Oil and Gas
Properties  evaluated in such Reserve Report which would require the Borrower to
delivery  Hydrocarbons  produced from such Oil and Gas Properties at some future
time without then or  thereafter  receiving  full payment  therefor  exceeding a
market  value  of  $100,000  in the  aggregate,  (iv)  none  of its  Oil and Gas
Properties  have been sold (other  than  Hydrocarbons  produced  and sold in the
ordinary  course  of  business)  since  the  date  of the  last  Borrowing  Base
determination  except  as set  forth on an  exhibit  to the  certificate,  which
certificate  shall  list  all of its Oil and Gas  Properties  sold  (other  than
Hydrocarbons  produced and sold in the ordinary  course of business) and in such
detail as reasonably required by the Agent, (v) attached to the certificate is a
list of its Oil and Gas  Properties  added to and deleted  from the  immediately
prior Reserve  Report and an updated list of all Persons (with their  addresses)
disbursing proceeds to the Borrower from its Oil and Gas Properties, (vi) except
as set forth on a schedule  attached to the certificate,  all of the Oil and Gas
Properties  evaluated by such Reserve Report are Mortgaged  Property,  and (vii)
any  change in  working  interest  or net  revenue  interest  in its Oil and Gas
Properties  occurring  since the last  Reserve  Report  and the  reason for such
change.

            (d) As soon as  available  and in any event within 30 days after the
end of each month  commencing  with October 31, 1996, the Borrower shall provide
the Bank Group  production  reports  certified by an officer of the Borrower for
its Oil and Gas Properties,  which reports shall include quantities or volume of
production  which have accrued to the  Borrower's  accounts in such period,  and
such other information with respect thereto as the Agent may reasonably request.



HOU04:37909.7







            Section 5.11. Title.  Promptly and in any event within 30 days after
written request therefor by the Agent, the Borrower will provide the Agent with
title  opinions  reasonably  satisfactory  to  the  Agent  with  respect  to the
Borrower's Oil and Gas Properties  which are included in the most recent Reserve
Report  delivered to the Bank Group and for which title  opinions  have not been
previously delivered so that the Agent will have acceptable title opinions on at
least eighty percent (80%) of the value of the Borrower's Oil and Gas Properties
included in such Reserve Report.

            Section  5.12.  Additional  Collateral.   Should  the  Borrower  own
additional Oil and Gas Properties  that are not subject to a first priority Lien
under the Security  Documents or acquire any additional Oil and Gas  Properties,
the  Borrower  will grant to the Agent as security for the  Obligations  a first
priority  Lien (subject only to Excepted  Liens) on the  Borrower's  interest in
such Oil and Gas  Properties  which Lien will be created and perfected by and in
accordance with the provisions of mortgages, deeds of trust, security agreements
and financing statements, or other Security Documents, all in form and substance
satisfactory to the Agent in its sole discretion and in sufficient executed (and
acknowledged   where  necessary  or  appropriate)   counterparts  for  recording
purposes.

            Section 5.13. Further Assurances in General. The Borrower shall, and
shall  cause  each  of its  Subsidiaries  to,  protect  and  perfect  the  Liens
contemplated by the Security  Documents.  The Borrower at its expense shall, and
shall cause each of its  Subsidiaries  to, promptly execute and deliver all such
other and further  documents,  agreements and  instruments in compliance with or
accomplishment  of the  covenants  and  agreements of the Borrower or any of its
Subsidiaries  in  the  Loan  Documents,   including,   without  limitation,  the
accomplishment of any condition precedent that may have been waived by the Banks
prior to the initial Borrowing or any subsequent Borrowings.

            Section 5.14.  Enforcement  of Acquisition  Documents.  The Borrower
will enforce in all material  respects all of the terms,  covenants,  warranties
and representations in favor of the Borrower under the Acquisition Documents.


                               ARTICLE VI
                           NEGATIVE COVENANTS

            So long as any principal  amount of any Loan, any amount of interest
accrued  under the Notes or any  commitment,  facility  or other  fee,  expense,
compensation  or any other amount  payable to any member of the Bank Group under
the Loan Documents shall remain unpaid or outstanding or any Bank shall have any
Commitment  hereunder,  unless the  Majority  Banks shall  otherwise  consent in
writing:


HOU04:37909.7








            Section 6.01. Indebtedness  Restriction.  The Borrower will not, and
will not permit any of its Subsidiaries to, create,  incur,  assume or suffer to
exist, any Indebtedness other than:

            (a)   Indebtedness of the Borrower and its Subsidiaries under the
Loan Documents,

            (b)   Indebtedness of the Borrower in respect of any Derivatives
permitted by Section 6.03,

            (c) purchase  money  Indebtedness  for  equipment  or similar  items
purchased  or leased in the  ordinary  course of  business  not to exceed in the
aggregate $2,000,000 outstanding at any time,

            (d)  Indebtedness  owing to Christiania Bank og Kreditkasse that the
Borrower is obligated to make contributions to Portilla-1996, L.P. to allow such
partnership  to pay  under  Section  6.03  of that  certain  Purchase  and  Sale
Agreement,  dated  September 18, 1996,  among the Borrower and Acco, LLC, et al.
and under  paragraph  4 of the August 22,  1996  letter  agreement  between  the
Borrower and Christiania Bank og Kreditkasse;  provided, that if the Borrower is
required to contribute any amount in excess of $2,000,000 in the aggregate under
such  purchase  and sale  agreement  and  letter  agreement,  such  event  shall
constitute an Event of Default under this Agreement;

            (e)   Indebtedness set out on Schedule 6.01; and

            (f)  Indebtedness of Borrower and its  Subsidiaries in the aggregate
amount not to exceed $500,000 in addition to all other Indebtedness permitted by
this Section 6.01.

            Section 6.02. Lien Restriction.  The Borrower will not, and will not
permit  any of its  Subsidiaries  to,  create,  incur,  assume  or  suffer to be
created,  assumed or  incurred or to exist,  any Lien upon any of such  Person's
property  or assets,  whether  now owned or  hereafter  acquired  other than the
following Liens ("Excepted Liens"):

            (a)   Liens created pursuant to this Agreement or any other Loan
Document,

            (b)  royalties,   overriding  royalties,   reversionary   interests,
production  payments and similar  burdens with respect to the  Borrower's or its
Subsidiaries Oil and Gas Properties to the extent such burdens do not reduce the
Borrower's net interests in production in its Oil and Gas  Properties  below the
interests reflected in each Reserve Report or the interests warranted under this


HOU04:37909.7







Agreement  or the  Mortgage  and do not operate to deprive  the  Borrower or its
Subsidiaries  of any  material  rights in respect  of its  assets or  properties
(except for rights customarily granted with respect to such interests);

            (c) statutory liens,  including liens for taxes or other assessments
that are not yet delinquent (or that, if delinquent, are being contested in good
faith by appropriate  proceedings and for which the Borrower or its Subsidiaries
have set aside on their books  adequate  reserves in accordance  with  generally
accepted accounting principles consistently applied);

            (d) 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 the Borrower's or its Subsidiaries' assets or properties;

            (e)   materialmen's,    mechanic's,    repairman's,    contractor's,
sub-contractor's,  operator's  and other Liens  incidental to the  construction,
maintenance,  development  or operation of the  Borrower's or its  Subsidiaries'
assets or properties to the extent not delinquent (or which, if delinquent,  are
being  contested  in good  faith by  appropriate  proceedings  and for which the
Borrower or its Subsidiaries  have set aside on their books adequate reserves in
accordance with generally accepted accounting principles  consistently applied);
and

            (f) all contracts,  agreements and instruments,  and all defects and
irregularities  and other matters  affecting the Borrower's or its Subsidiaries'
assets  and  properties  which  were in  existence  at the time such  assets and
properties were originally  acquired by such Person 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 do not reduce the  Borrower's net interest in production
in its Oil and Gas  Properties  below the  interests  reflected  in each Reserve
Report or the interests  warranted  under this  Agreement or the Mortgage and do
not interfere  materially with the operation,  value or use of the Borrower's or
its Subsidiaries' assets and properties;

            (g) landlord's lien securing obligations that are not yet delinquent
(or that,  if  delinquent,  are being  contested  in good  faith by  appropriate
proceedings  and for which the  Borrower or its  Subsidiaries  have set aside on
their books adequate reserves in accordance with generally  accepted  accounting
principles consistently applied);



HOU04:37909.7







            (h) Liens in connection  with workmen's  compensation,  unemployment
insurance  or  other  social  security,  old age  pension  or  public  liability
obligations  that are not yet  delinquent  (or that,  if  delinquent,  are being
contested in good faith by appropriate proceedings and for which the Borrower or
its Subsidiaries  have set aside on their books adequate  reserves in accordance
with generally accepted accounting principles consistently applied);

            (i) Liens  securing  purchase  money  Indebtedness  permitted  under
Section  6.01(c) but only to the extent such Liens cover the  equipment or other
similar items purchased or leased;

            (j)   Undertaking by Grey Wolf Exploration Ltd. to The Alberta
Stock  Exchange  dated January 4, 1996,  concerning the common shares of Cascade
Oil & Gas Ltd.; and

            (k) Lien in favor of Compass  Bank-San Antonio covering certain real
property in Comal County, Texas described in that certain Real Estate Lien Note,
dated  December 28, 1995,  issued by the Borrower,  in the  principal  amount of
$238,500, to the extent the Lien secures such Real Estate Lien Note.

            Section  6.03.  Derivatives.  The Borrower  shall not, and shall not
permit any of its  Subsidiaries  to, enter into any  Derivatives  other than (a)
Derivatives presently existing with First Union National Bank of North Carolina,
which are being assumed by the Agent, (b) commodity price Derivatives related to
bona fide hedging  activities so long as (i) the aggregate  notional  amounts of
such Derivatives during any calculation period do not exceed fifty percent (50%)
of the Borrower's  projected  actual  production of  Hydrocarbons  (based on the
projected  production  of Proved  Producing  Reserves  reflected  in the Reserve
Report  delivered  pursuant  hereto  immediately  prior to the execution of such
Derivative) for such period,  and (ii) such commodity price  Derivative has been
entered into with the Agent or such other Person agreed to by the Majority Banks
and (c) interest  rate and foreign  exchange  Derivatives  entered into with the
Agent or otherwise approved by the Majority Banks.

            Section 6.04.  Interest Coverage Ratio. The Borrower will not permit
the ratio of (a) EBITDA to (b) Interest Expense,  measured as of the last day of
any calendar  quarter for the twelve  month  period then ended,  to be less than
1.75 to 1.00.

            Section 6.05 Current  Ratio.  The Borrower will not permit the ratio
of (i) its consolidated  current assets,  including  amounts available under the
Revolving  Commitments  based on the Revolving  Loans  outstanding  and the most
recent  determination  of the Borrowing Base, to (ii) its  consolidated  current
liabilities,  excluding the aggregate amount of Loans outstanding, at the end of
any fiscal quarter to be less than 1.00 to 1.00.


HOU04:37909.7








            Section 6.06.  Tangible Net Worth.  The Borrower will not permit its
Consolidated Tangible Net Worth to be less than $30,000,000 at any time.

            Section 6.07.  Sales of Assets.  The Borrower will not, and will not
permit any of its Subsidiaries to, sell, transfer,  assign,  farm-out,  lease or
otherwise  transfer or dispose of any assets other than (a) sales of Hydrocarbon
production in the ordinary  course of business and sales of obsolete or worn-out
equipment in the ordinary  course of business,  (b) sales or transfers of assets
by any of the Borrower's  wholly-owned  Subsidiaries to the Borrower or any such
other wholly-owned  Subsidiary,  (c) sale of the Gaelic Resources Stock, and (d)
any other sale of assets sold at fair market value, so long as the aggregate Net
Proceeds  for all such sales made under this  subclause  (d) during any calendar
year does not exceed $500,000 and the Net Proceeds of all such sales are applied
as a mandatory prepayment of the Loans in accordance with Section 2.07.

            Section 6.08.  Consolidation and Mergers. The Borrower will not, and
will not permit any of its Subsidiaries to, directly or indirectly,  consolidate
with or merge into any Person or permit any Person to consolidate  with or merge
into  it,  except  that  any  Subsidiary  of the  Borrower  may  merge  into  or
consolidate  with any other Subsidiary of the Borrower and any Subsidiary of the
Borrower may merge into or consolidate with the Borrower,  provided in each case
that,  immediately  after giving effect and pro forma effect  thereto,  no event
shall occur and be continuing which constitutes  either a Default or an Event of
Default,  and if the  Borrower is a party to such  merger,  the  Borrower is the
surviving entity.

            Section 6.09. Restricted  Disbursements.  The Borrower will not, and
will not permit any of its  Subsidiaries  to approve,  make,  incur or commit to
incur any Restricted Disbursements other than:

            (a)  advances  or  extensions  of credit on terms  customary  in the
industry involved in the form of accounts receivable incurred,  and investments,
loans, and advances made in settlement of such accounts  receivable,  all in the
ordinary course of business;
            (b)   Permitted Investments;

            (c) Capital  Expenditures  to develop Proved Reserves as detailed in
the  most  recent  Reserve  Report  delivered  by  the  Borrower,  plus  Capital
Expenditures in an amount not to exceed  $2,000,000  during any six-month period
commencing on any October 1 or April 1, as the case may be;

            (d) preferred  stock  dividends not to exceed  $365,928 per annum so
long as no Event of Default has occurred and is continuing or would be caused by
payment of such preferred stock dividend; and


HOU04:37909.7








            (e) dividends paid by any Subsidiary of the Borrower to the Borrower
or any of its Subsidiaries and any minority shareholders of such Subsidiary,  so
long as such  dividend  is paid at a uniform  rate to all  shareholders  of such
Subsidiary  and no Event of Default  would  exist  after  giving  effect to such
payment.

            Section 6.10. Lines of Business. The Borrower will not, and will not
permit any of its Subsidiaries to, directly or indirectly engage in any business
other than the acquisition,  disposition, exploration, ownership development and
operation of Oil and Gas  Properties  and the  gathering,  marketing,  treating,
processing, storage and transporting of production from Oil and Gas Properties.

            Section 6.11. Transactions with Affiliates. Neither the Borrower nor
any of its Subsidiaries, will enter into any transaction with an Affiliate other
than (a)  transactions  entered into in the ordinary course of business and upon
terms no less  favorable  than those that the  Borrower  or its  Subsidiary,  as
applicable, could obtain in an arms length transaction with a Person that is not
an  Affiliate  and  (b)  transactions  between  the  Borrower  and  any  of  its
Subsidiaries,  or between such  Subsidiaries,  that do not and will not,  either
directly or indirectly, cause an Event of Default.


                              ARTICLE VII
                          DEFAULT AND REMEDIES

            Section  7.01.  Events of Default.  If any of the  following  events
("Events of Default") shall occur and be continuing:

            (a)   the Borrower shall fail to pay when due any installment of
principal of the Notes; or

            (b) the  Borrower  shall fail to pay any interest on any Loan or any
arrangement fee, commitment fee,  administration  fee, funding fee,  commission,
expense, compensation, reimbursement or other amount when due; or

            (c)   the Borrower shall fail to perform any term, covenant or
agreement contained in Article VI, or Section 5.01(e) of this Agreement; or

            (d) the  Borrower  shall  fail to  perform  any  term,  covenant  or
agreement   contained  in  this  Agreement   (other  than  those  referenced  in
subsections  (a), (b) and (c) of this Section  7.01) and such failure  shall not
have been remedied  within ten (10) days after notice  thereof from the Agent to
the Borrower; or


HOU04:37909.7








            (e) the  Borrower  shall  fail to  perform  any  term,  covenant  or
agreement  contained  in any Loan  Document  (other  than  those  referenced  in
subsections  (a),  (b), (c) and (d) of this Section 7.01) and such failure shall
not have been  remedied  within  thirty (30) days after notice  thereof from the
Agent to the Borrower; or

            (f) any  representation or warranty made by the Borrower,  or any of
its officers, in any Loan Document or in any certificate,  agreement, instrument
or statement  contemplated by or delivered  pursuant to, or in connection  with,
any Loan  Document  shall prove to have been  incorrect in any material  respect
when made; or

            (g) the  Borrower or any of its  Subsidiaries  shall (i) fail to pay
Indebtedness  having a principal  amount in excess of $250,000 in the  aggregate
(other than the amounts  referred to in subsections  (a) and (b) of this Section
7.01) owing by such Person, or any interest or premium thereon, when due (or, if
permitted by the terms of the relevant  document,  within any  applicable  grace
period),  whether such Indebtedness shall become due by scheduled  maturity,  by
required prepayment,  by acceleration,  by demand or otherwise;  or (ii) fail to
perform any term,  covenant or condition  on its part to be performed  under any
agreement  or   instrument   evidencing,   securing  or  relating  to  any  such
Indebtedness,  when  required to be performed,  and such failure shall  continue
after the  applicable  grace  period,  if any,  specified  in such  agreement or
instrument,  if the effect of such  failure is to  accelerate,  or to permit the
holder or holders of such  Indebtedness  to  accelerate,  the  maturity  of such
Indebtedness; or

            (h) any Loan  Document  shall  (other  than with the  consent of the
Majority  Banks),  at any time  after its  execution  and  delivery  and for any
reason,  cease  to  be  in  full  force  and  effect  or to  provide  the  Liens
contemplated  thereby, or shall be declared to be null and void, or the validity
or  enforceability  thereof  or of  the  Liens  contemplated  thereby  shall  be
contested  by any Person  party to the Loan  Documents  or any such Person shall
deny that it has any or further liability or obligation under any Loan Document;
or

            (i) the  Borrower or any of its  Subsidiaries  shall be  adjudicated
insolvent, or shall generally not pay, or admit in writing its inability to pay,
its  debts as they  mature,  or make a general  assignment  for the  benefit  of
creditors,  or any proceeding  shall be instituted by any such Person seeking to
adjudicate  it  insolvent,  seeking  liquidation,  winding-up,   reorganization,
arrangement,  adjustment,  protection,  relief or composition of it or its debts
under any law relating to bankruptcy,  insolvency or reorganization or relief of
debtors,  or seeking  the entry of an order for relief or the  appointment  of a
receiver,  trustee, or other similar official for it or for any substantial part
of its property, or the


HOU04:37909.7







     Borrower or any of its Subsidiaries shall take any action in furtherance of
any of the actions set forth above in this Section 7.01(i); or

            (j) any  proceeding  of the type  referred to in Section  7.01(i) is
filed,  or any such  proceeding is commenced  against the Borrower or any of its
Subsidiaries  or any such  Person by any act  indicates  its  approval  thereof,
consent thereto or acquiescence therein, or an order for relief is entered in an
involuntary  case under the bankruptcy  law of the United  States,  or an order,
judgment  or  decree is  entered  appointing  a  trustee,  receiver,  custodian,
liquidator or similar  official or adjudicating  any such Person  insolvent,  or
approving  the  petition in any such  proceedings,  and such order,  judgment or
decree remains in effect for sixty (60) days; or

            (k) a final  judgment or order for the payment of money in excess of
$500,000 (net of acknowledged, uncontested insurance coverage) shall be rendered
against the Borrower or any of its  Subsidiaries  which has not been discharged,
vacated  or  reversed  and either (i)  enforcement  proceedings  shall have been
commenced  by any  creditor  upon  such  judgment  or  order  or  (ii) a stay of
enforcement  of such  judgment  or  order  by  reason  of a  pending  appeal  or
otherwise,  shall not be in effect  for any  period of thirty  (30)  consecutive
days; or

            (l) if (i) any  Pension  Plan  shall  fail to  satisfy  the  minimum
funding  standards  of ERISA or the  Internal  Revenue Code for any plan year or
part thereof or a waiver of such  standards  or  extension  of any  amortization
period is sought or granted under section 412 of the Internal Revenue Code, (ii)
a notice  of  intent  to  terminate  any  Pension  Plan  shall  have  been or is
reasonably  expected to be filed with the PBGC or the PBGC shall have instituted
proceedings  under  Section  4042 of ERISA to  terminate or appoint a trustee to
administer  any Pension Plan or the PBGC shall have notified the Borrower or any
ERISA  Affiliate or  Subsidiary  that a Pension Plan may become a subject to any
such proceedings,  (iii) the aggregate "amount of unfunded benefit  liabilities"
(within the meaning of Section  4001(a)(18)  of ERISA) under all Pension  Plans,
determined in accordance with Title IV of ERISA, shall exceed $100,000, (iv) the
Borrower  or any  ERISA  Affiliate  or  Subsidiary  shall  have  incurred  or is
reasonably  expected to incur any liability  pursuant to Title I or IV of ERISA,
the penalty or excise tax  provisions  of the Internal  Revenue Code relating to
employee  benefit plans and/or other liability with respect to one or more Other
Benefit Plans,  (v) the Borrower or any ERISA Affiliate or Subsidiary  withdraws
from any  Multiemployer  Plan,  (vi) the  Borrower  or any  ERISA  Affiliate  or
Subsidiary fails to make any contribution  due, or payment to, any Pension Plan,
Multiemployer Plan and/or Other Benefit Plan, or (vii) the Borrower or any ERISA
Affiliate or Subsidiary  establishes or amends any employee welfare benefit plan
that provides  post-employment  welfare benefits in a manner that would increase
the liability of the Borrower or any ERISA  Affiliate or Subsidiary  thereunder,
and any such event or events  described  in clauses  (i)  through  (vii)  above,
either


HOU04:37909.7







individually or together with any other such event or events,  could  reasonably
be expected to have a Material Adverse Effect; or

            (m)   any event which has a Material Adverse Effect shall occur.

then,  (i) upon the  occurrence  of any Event of  Default  described  in Section
7.01(i) or Section 7.01(j),  (A) the Commitments shall  automatically  terminate
and (B) the entire unpaid  principal  amount of all Loans,  all interest accrued
and unpaid  thereon,  and all other amounts  payable by the Borrower  under this
Agreement,  the  Notes,  the other Loan  Documents  and any other  agreement  or
security document contemplated by or delivered in connection with this Agreement
shall automatically become immediately due and payable,  without presentment for
payment, demand, protest, notice of intent to accelerate, notice of acceleration
or further notice of any kind, all of which are hereby  expressly  waived by the
Borrower,  and (ii) upon the occurrence of any Event of Default,  the Agent may,
and upon the  direction of the Majority  Banks shall,  by notice to the Borrower
(A) declare the Commitments to be terminated, whereupon the same shall forthwith
terminate and (B) declare the entire unpaid  principal  amount of all Loans, all
interest  accrued  and  unpaid  thereon,  and all other  amounts  payable by the
Borrower under this Agreement, the Notes, the other Loan Documents and any other
agreement or security  document  contemplated by or delivered in connection with
this  Agreement,  to be forthwith  due and payable,  whereupon  all such amounts
shall become and be forthwith due and payable,  without presentment for payment,
demand,  protest,  notice of intent to  accelerate,  notice of  acceleration  or
further  notice of any kind,  all of which are  hereby  expressly  waived by the
Borrower.

            Section 7.02.  Setoff in Event of Default.  Upon the  occurrence and
during the continuance of any Event of Default, each member of the Bank Group is
hereby  authorized,  at any time and from  time to time,  without  notice to the
Borrower  (any such notice being  expressly  waived by the  Borrower) and to the
fullest  extent  permitted  by  applicable  law, to setoff and apply any and all
deposits  at any time  held and  other  indebtedness  at any time  owing by such
member of the Bank Group (or any branch,  subsidiary or affiliate of such member
of the Bank Group) to or for the credit or the account of the  Borrower  against
any and all of the  obligations  of the  Borrower  or any other  Person,  now or
hereafter existing under this Agreement,  the Notes or the other Loan Documents,
irrespective of whether or not such member of the Bank Group shall have made any
demand for satisfaction of such obligations and although such obligations may be
unmatured.  Any member of the Bank Group  exercising such right agrees to notify
the Borrower promptly after any such setoff and application made by such Person;
provided,  that the failure to give such notice shall not affect the validity of
such setoff and  application.  The rights of the Bank Group  under this  Section
7.02 are in addition to other rights and remedies (including,


HOU04:37909.7







without  limitation,  other  rights of  setoff)  which  the Bank  Group may have
hereunder or under any applicable law.

            Section  7.03.  No Waiver;  Remedies.  No failure on the part of any
member of the Bank  Group to  exercise,  or any delay in  exercising,  any right
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise of any right hereunder  preclude any other or further  exercise thereof
or the exercise of any other right. The remedies  provided in this Agreement are
cumulative  and not exclusive of any remedies  provided in any of the other Loan
Documents or by law.

     Section 7.04.  Hydrocarbon Proceeds.  Notwithstanding that, by the terms of
the  various  Security  Documents,  Borrower  is  and  will  be  absolutely  and
unconditionally  assigning to the Agent for the ratable benefit of the Banks all
Hydrocarbons and all proceeds therefrom accruing to the interest of the Borrower
in the  Mortgaged  Property,  so long as no Event of Default  has  occurred  the
Borrower  shall  have the right  (revocable  at any time by the  Agent  upon the
occurrence of an Event of Default) to receive from the  purchasers of production
all such Hydrocarbon proceeds,  subject, however, to the Liens created under the
Security  Documents,  which Liens are hereby  affirmed  and  ratified.  Upon the
occurrence  of an Event of  Default,  the  Agent may  exercise  all  rights  and
remedies  granted  under the Security  Documents,  including the right to obtain
possession  of all such  Hydrocarbon  proceeds  then held by the  Borrower or to
receive  directly from the purchasers of production  all other such  Hydrocarbon
proceeds. In no case shall any failure, whether purposed or inadvertent,  by the
Agent to collect directly any such Hydrocarbon  proceeds constitute in any way a
waiver,  remission or release of any of its rights under the Security Documents,
nor shall  any  release  of any such  Hydrocarbon  proceeds  by the Agent to the
Borrower constitute a waiver, remission or release of any other such Hydrocarbon
proceeds  or of  any  rights  of  the  Agent  to  collect  other  such  proceeds
thereafter.



HOU04:37909.7







                              ARTICLE VIII
                               THE AGENT

            Section 8.01.  Authorization  and Action.  Each Bank hereby appoints
and  authorizes  the Agent to take such  action in such  capacity on such Bank's
behalf and to  exercise  such  powers  under this  Agreement  and the other Loan
Documents  as are  delegated  to the  Agent by the  terms  hereof  and  thereof,
together  with  such  powers as are  reasonably  incidental  thereto.  As to any
matters  not  expressly  provided  for by  this  Agreement  (including,  without
limitation, enforcement or collection of the Notes or of amounts owing under the
other  Loan  Documents),  the  Agent  shall  not be  required  to  exercise  any
discretion  or take any action,  but shall be required to act or to refrain from
acting (and shall be fully  protected  in so acting or  refraining  from acting)
upon the  instructions of the Majority  Banks,  and such  instructions  shall be
binding upon all Banks and any other holders of Notes;  provided,  however, that
the Agent shall not be required to take any action which  exposes it to personal
liability  or which is contrary to the Loan  Documents  or  applicable  law. The
Agent is hereby expressly  authorized on behalf of the other members of the Bank
Group,  without hereby limiting any implied authority,  (a) to receive on behalf
of each of the other  members of the Bank Group any payment of  principal  of or
interest  on the  Loans  outstanding  hereunder  and all other  amounts  accrued
hereunder paid to such Persons,  and promptly to distribute to each other member
of the Bank Group its proper  share of all  payments  so  received;  (b) to give
notice within a reasonable time on behalf of each other member of the Bank Group
to the Borrower of any Default or Event of Default  specified in this  Agreement
of which the Agent has actual  knowledge  as  provided in Section  8.09;  (c) to
distribute  to the  other  members  of the Bank  Group  copies  of all  notices,
agreements  and other  material as provided for in this Agreement as received by
such Person; and (d) to distribute to the Borrower any and all requests, demands
and  approvals  received by such Person from any other member of the Bank Group.
Nothing herein contained shall be construed to constitute the Agent as a trustee
for any holder of the Notes or of a participation  therein, nor to impose on the
Agent any duties or obligations  other than those expressly  provided for in the
Loan Documents.
            Section 8.02.  Reliance,  Etc. None of the Agent, its Affiliates and
their  directors,  officers,  agents or employees shall be liable for any action
taken or  omitted  to be taken by it or them  under or in  connection  with this
Agreement,  except for its or their own gross negligence or willful  misconduct.
Without limitation of the generality of the foregoing,  the Agent: (a) may treat
the payee of any Note as the holder thereof until the Agent receives and accepts
an Assignment and Acceptance entered into by the Bank which is the payee of such
Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section
9.02; (b) may consult with legal counsel  (including  counsel for the Borrower),
independent public accountants and other experts selected by it and shall not be
liable  for any  action  taken or  omitted  to be  taken in good  faith by it in
accordance with the advice of such counsel, accountants or experts; (c) makes


HOU04:37909.7







no warranty or  representation  to any Bank and shall not be  responsible to any
Bank for any statements, warranties or representations (whether written or oral)
made in or in connection  with this Agreement or the other Loan  Documents;  (d)
shall not have any duty to  ascertain  or to  inquire as to the  performance  or
observance of any of the terms, covenants or conditions of this Agreement or the
other  Loan  Documents  on the part of the  Borrower  or any other  Person or to
inspect the  property  (including  the books and records) of the Borrower or any
other Person;  (e) shall not be  responsible  to any Bank for the due execution,
legality,  validity,  enforceability,  genuineness,  sufficiency or value of any
Loan Document,  any collateral  provided for therein, or any other instrument or
document furnished  pursuant thereto;  and (f) shall incur no liability under or
in respect of this Agreement by acting upon any notice, consent,  certificate or
other  instrument or writing  (which may be by  telecopier,  telegram,  cable or
telex)  believed by it to be genuine  and signed or sent by the proper  party or
parties.  None of the  Agent,  its  Affiliates  and their  directors,  officers,
employees or agents shall have any  responsibility to the Borrower on account of
the  failure  or  delay  in  performance  or  breach  by any  Bank of any of its
obligations  hereunder  or to any Bank on account of the  failure of or delay in
performance  or  breach  by  any  other  Bank  or  the  Borrower  of  any of its
obligations  hereunder or in connection herewith;  provided,  however,  that the
foregoing shall not relieve BTCo of its obligations as a Bank hereunder.

            Section 8.03. BTCo and Affiliates. Without limiting the right of any
other Bank to engage in any  business  transactions  with the Borrower or any of
its  Affiliates,  with respect to its  Commitment,  the Loans made by it and the
Notes issued to it.  Bankers Trust Company  ("BTCo")  shall have the same rights
and powers  under this  Agreement as any other Bank and may exercise the same as
though it were not the  Agent;  and the term  "Bank" or  "Banks"  shall,  unless
otherwise expressly indicated, include BTCo in its individual capacity. BTCo, or
any of its  Affiliates,  may be engaged in, or may  hereafter  engage in, one or
more loan, letter of credit,  leasing,  derivative or other financing activities
not the subject of the Loan  Documents  (collectively,  the "Other  Financings")
with the Borrower or any of its Affiliates,  or may act as trustee on behalf of,
or depositary for, or otherwise engage in other business  transactions  with the
Borrower or any of its Affiliates (all Other  Financings and other such business
transactions being collectively,  the "Other Activities") with no responsibility
to account  therefor to the Banks.  Without  limiting the rights and remedies of
the Banks specifically set forth in the Loan Documents, no other Bank shall have
any interest in (a) any Other Activities, (b) any present or future guarantee by
or for the  account of the  Borrower  not  contemplated  or included in the Loan
Documents,  (c) any present or future offset exercised by BTCo in respect of any
such Other Activities,  (d) any present or future property taken as security for
any such Other Activities or (e) any property now or hereafter in the possession
or control of BTCo which may be or become  security for the  obligations  of the
Borrower  under  the Loan  Documents  by reason of the  general  description  of
indebtedness secured, or of


HOU04:37909.7







property, contained in any other agreements, documents or instruments related to
such  Other  Activities;  provided,  that  if any  payment  in  respect  of such
guarantees  or such  property  or the  proceeds  thereof  shall  be  applied  to
reduction of the  obligations  evidenced  hereunder and by the Notes,  then each
Bank shall be entitled to share in such  application  according  to its pro rata
portion of such obligations.

            Section 8.04.  Bank Credit Decision. Each Bank acknowledges that
it has, independently and without reliance upon any other member of the Bank
Group and based on the financial statements referred to in Section 4.06 and such
other  documents  and  information  as it has deemed  appropriate,  made its own
credit  analysis  and  decision  to enter  into this  Agreement.  Each Bank also
acknowledges  that it will,  independently  and without  reliance upon any other
member of the Bank Group and based on such documents and information as it shall
deem  appropriate  at the time,  continue  to make its own credit  decisions  in
taking or not taking action under this Agreement.

            Section 8.05. Indemnification.  The Banks agree to indemnify each of
the Agent, its Affiliates or any of their respective directors, officers, agents
or employees (to the extent not reimbursed by the Borrower),  ratably  according
to its  Commitment  Percentages,  from  and  against  any and  all  liabilities,
obligations,  losses,  damages,  penalties,  actions,  judgments,  suits, costs,
expenses or disbursements of any kind or nature  whatsoever which may be imposed
on,  incurred by, or asserted  against any such Person in any way relating to or
arising out of this Agreement or the other Loan Documents or any action taken or
omitted by any such Person  under this  Agreement  or the other Loan  Documents,
provided,  that no Bank  shall be liable for any  portion  of such  liabilities,
obligations,  losses,  damages,  penalties,  actions,  judgments,  suits, costs,
expenses or  disbursements  resulting  from such  Person's  gross  negligence or
willful  misconduct.  IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE
AGENT,  AND ITS AFFILIATES AND THEIR  DIRECTORS,  OFFICERS,  AGENTS OR EMPLOYERS
SHALL  BE  INDEMNIFIED  AND  HELD  HARMLESS  AGAINST  ANY AND  ALL  LIABILITIES,
OBLIGATIONS,  LOSSES,  DAMAGES,  PENALTIES,  ACTIONS,  JUDGMENTS,  SUITS, COSTS,
EXPENSES  OR  DISBURSEMENTS  OF ANY KIND  ARISING OUT OF OR  RESULTING  FROM THE
ORDINARY  NEGLIGENCE  (WHETHER SOLE OR CONTRIBUTORY)  OF SUCH PERSON.  The Agent
shall not be required  to do any act  hereunder  or under any other  document or
instrument  delivered  hereunder  or in  connection  herewith or take any action
toward the  execution or  enforcement  of the  agencies  hereby  created,  or to
prosecute or defend any suit in respect of this  Agreement or the Loan Documents
or any  collateral  security,  unless  indemnified  to its  satisfaction  by the
holders  of the  Notes  against  loss,  cost,  liability,  and  expense.  If any
indemnity  furnished  to the Agent for any  purpose  is, in the  opinion of such
Person  insufficient  or becomes  impaired,  such Person may call for additional
indemnity and not commence or

HOU04:37909.7







cease to do the acts  indemnified  against  until such  additional  indemnity is
furnished.  Without  limitation of the foregoing,  each Bank agrees to reimburse
the Agent  promptly  upon  demand  for its  ratable  share of any  out-of-pocket
expenses (including counsel fees) incurred by such Person in connection with the
preparation,  execution, delivery,  administration,  modification,  amendment or
enforcement (whether through  negotiations,  legal proceedings or otherwise) of,
or legal advice in respect of rights or  responsibilities  under, this Agreement
and the other Loan Documents, to the extent that the Agent is not reimbursed for
such expenses by the Borrower.

            Section 8.06.  Employees of the Agent.  The Agent may execute any of
its duties under this  Agreement,  the other Loan Documents and any  instrument,
agreement or document  executed,  issued or delivered pursuant hereto or thereto
or in connection  herewith or  therewith,  by or through  employees,  agents and
attorneys-in-fact,  and shall not be answerable for the default or misconduct of
any such  employee,  agent or  attorney-in-fact  selected by it with  reasonable
care.  The Agent may, and upon the written  instruction  of the  Majority  Banks
shall,  enforce  on behalf of the Banks any  claims  which the Agent  and/or the
Banks may have against any such  employee,  agent or  attorney-in-fact,  and any
recovery therefrom shall be applied for the pro rata benefit of the Banks.

            Section 8.07.  Successor  Agent. The Agent may resign at any time by
giving  written  notice  thereof to the other  members of the Bank Group and the
Borrower  and may be removed at any time with or without  cause by the  Majority
Banks.  Upon any such resignation or removal,  the Majority Banks shall have the
right to appoint a successor  Agent.  If no  successor  Agent shall have been so
appointed by the  Majority  Banks,  and shall have  accepted  such  appointment,
within  thirty  (30)  days  after  the  retiring  Agent's  giving  of  notice of
resignation  or the  Majority  Banks'  removal of the retiring  Agent,  then the
retiring  Agent may, on behalf of the Banks,  appoint a successor  Agent,  which
shall be a  commercial  bank  organized  under the laws of the United  States of
America or of any State thereof and having a combined  capital and surplus of at
least $500,000,000. 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, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement, subject to the requirement that such retiring Agent will execute
such  documents  and take such actions as may be necessary or desirable to cause
the successor  Agent to be vested with all such rights,  powers,  privileges and
duties.  After any retiring Agent's  resignation or removal  hereunder as Agent,
the provisions of this Article VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.  All
reasonable costs and expenses incurred by the Bank Group in connection with


HOU04:37909.7







any  amendments  or other  documentation  required by this Section 8.07 shall be
paid by the Borrower pursuant to Section 9.04 hereof.

            Section 8.08.  Notice of Default.  The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder  unless it shall  have  received  notice  from a Bank or the  Borrower
referring  to this  Agreement,  describing  such Default or Event of Default and
stating  that such  notice is a  "notice  of  default"  or  "notice  of event of
default," as applicable.  If the Agent receives such a notice from the Borrower,
the Agent shall give notice  thereof to the other members of the Bank Group and,
if such notice is received from a Bank,  the Agent shall give notice  thereof to
the other  members  of the Bank  Group  and the  Borrower.  The  Agent  shall be
entitled to take  action or refrain  from  taking  action  with  respect to such
Default or Event of Default as provided in this Article VIII.

            Section 8.09.  Execution of Loan Documents.  Each member of the Bank
Group  hereby  authorizes  and  directs  the Agent to execute and deliver on its
behalf each Loan  Document to be executed by the Agent  pursuant to the terms of
this Agreement.




HOU04:37909.7







                               ARTICLE IX
                             MISCELLANEOUS

            Section  9.01.  Amendments,  Etc.  No  amendment  or  waiver  of any
provision of this Agreement,  any Note or any other Loan Document, or consent to
any  departure  by any  Person  herefrom  or  therefrom,  shall in any  event be
effective unless the same shall be in writing and signed by the Borrower and the
Majority  Banks,  and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given;  provided,  that
no amendment,  waiver or consent shall,  unless in writing and signed by all the
Banks,  do any of the following:  (a) waive any of the  conditions  specified in
Article III, (b) increase the  Commitments  of the Banks or subject the Banks to
any  additional  obligations,  (c) reduce the  principal of, or interest on, the
Notes or any fees or other  amounts  payable  hereunder,  (d)  postpone any date
fixed for any payment of principal  of, or interest on, the Notes or any fees or
other amounts  payable  hereunder,  (e) release the Borrower or any other Person
from its payment  obligations  to the Bank  Group,  regardless  of whether  such
obligations are those of a primary obligor, a guarantor or surety, or otherwise,
(f) authorize  the Agent to release  Liens against a substantial  portion of any
collateral  covered by the Security  Documents,  (g) take action which expressly
requires the signing of all the Banks  pursuant to the terms of this  Agreement,
(h) reduce the Commitment  Percentages or the aggregate  unpaid principal amount
of the Notes, or the number of Banks, as the case may be, required for the Agent
or the Banks or any of them to take any action  under this  Agreement  or reduce
the  percentage  of Majority  Banks or (i) amend this  Section  9.01;  provided,
further,  that no  amendment,  waiver or consent  shall,  unless in writing  and
signed by the Agent in addition to the Banks required above to take such action,
affect the rights or duties of the Agent under this  Agreement or any other Loan
Document.  Notwithstanding the foregoing,  the Agent may (without the consent of
the Banks)  release the Lien created under the Security  Documents on any assets
of the  Borrower  or any of its  Subsidiaries  if the  sale  of such  assets  is
permitted under Section 6.07.

            Section 9.02.  Participation  Agreements and  Assignments.  (a) Each
Bank may assign to one or more Eligible Assignees all or a portion of its rights
and obligations under this Agreement  (including,  without limitation,  all or a
portion  of its  Commitment  and  the  Loans  owing  to it and  the  other  Loan
Documents);  provided, that (i) each such assignment shall be of a constant, and
not a varying,  percentage of all rights and  obligations  of the assignor under
this  Agreement and the other Loan  Documents,  and no assignment  shall be made
unless it covers a pro rata share of all rights and obligations of such assignor
under  this  Agreement  and the other  Loan  Documents,  (ii) the  amount of the
Commitment of the assigning Bank being assigned pursuant to each such assignment
(determined as of the date of the Assignment and Acceptance with respect to such
assignment) shall, unless otherwise agreed to by the Agent or


HOU04:37909.7







unless such  assignment  is to a member of the Bank  Group,  in no event be less
than $5,000,000, (iii) each such assignment to an Eligible Assignee who is not a
member of the Bank Group must be  approved  by the Agent and (iv) the parties to
each such assignment  shall execute and deliver to the Agent, for its acceptance
and recording in the Register  (defined  below),  an Assignment and  Acceptance,
together with any Note subject to such  assignment and a recordation  fee in the
amount of $3,500 for processing such assignment. Upon such execution,  delivery,
acceptance  and  recording,  from and after the effective date specified in each
Assignment and Acceptance,  (x) the assignee  thereunder shall be a party hereto
and, to the extent that rights and  obligations  under the Loan  Documents  have
been assigned to it pursuant to such Assignment and Acceptance,  have the rights
and  obligations  of a Bank under the Loan  Documents,  (y) the  assigning  Bank
thereunder  shall,  to the extent  that  rights and  obligations  under the Loan
Documents have been assigned by it pursuant to such  Assignment and  Acceptance,
relinquish  its rights and be released from further  obligations  under the Loan
Documents (and, in the case of an Assignment and Acceptance  covering all or the
remaining  portion of an  assigning  Bank's  rights and  obligations  under this
Agreement, such Bank shall cease to be a party hereto) and (z) be deemed to have
made,  as  of  such   effective   date,  to  the  Agent  and  the  Borrower  the
representations and warranties set forth in Section 2.12(f) hereof.

            (b) By executing and  delivering an Assignment and  Acceptance,  the
assigning Bank thereunder and the assignee  thereunder confirm to and agree with
each other and the other parties  hereto as follows:  (i) other than as provided
in such Assignment and Acceptance,  such assigning Bank makes no  representation
or  warranty  and  assumes no  responsibility  with  respect to any  statements,
warranties or  representations  made in or in connection with the Loan Documents
or the execution, legality, validity, enforceability,  genuineness,  sufficiency
or value  of this  Agreement  or any  other  instrument  or  document  furnished
pursuant hereto;  (ii) such assigning Bank makes no  representation  or warranty
and assumes no  responsibility  with respect to the  financial  condition of the
Borrower or any other Person or the performance or observance by the Borrower or
any other  Person of any of its  obligations  under this  Agreement or any other
instrument or document furnished  pursuant hereto;  (iii) such assignee confirms
that it has  received a copy of this  Agreement  and the other  Loan  Documents,
together with copies of the financial statements referred to in Section 4.06 and
such other  documents and  information as it has deemed  appropriate to make its
own credit  analysis and decision to enter into such  Assignment and Acceptance;
(iv) such assignee will,  independently  and without reliance upon any member of
the Bank Group  (including  such assigning Bank) and based on such documents and
information as it shall deem  appropriate at the time,  continue to make its own
credit  decisions in taking or not taking action under this Agreement;  (v) such
assignee confirms that it is an Eligible  Assignee;  (vi) such assignee appoints
and authorizes the Agent, to take such action on its


HOU04:37909.7







behalf and to  exercise  such  powers  under this  Agreement  and the other Loan
Documents as are  delegated to such Person by the terms  thereof,  together with
such powers as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all of the obligations which
by the terms of this  Agreement and the other Loan  Documents are required to be
performed by it as a Bank.

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

            (d) Upon its receipt of an Assignment and Acceptance  executed by an
assigning  Bank and an assignee  representing  that it is an Eligible  Assignee,
together with any Notes subject to such  assignment and the  administrative  fee
payable to the Agent for such  assignment,  the Agent shall,  if such Assignment
and Acceptance has been  completed and is in  substantially  the form of Exhibit
9.02  hereto,  (i)  accept  such  Assignment  and  Acceptance,  (ii)  record the
information  contained  therein in the  Register  and (iii) give  prompt  notice
thereof to the Borrower. Within five (5) Business Days after its receipt of such
notice,  the  Borrower,  at its own  expense,  shall  execute and deliver to the
Agent,  in exchange for the  surrendered  Notes,  new Notes to the order of such
Eligible Assignee in an amount corresponding to the Revolving Commitment assumed
by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the
assigning Bank has retained a Revolving Commitment  hereunder,  new Notes to the
order  of the  assigning  Bank  in an  amount  corresponding  to the  Commitment
retained  by it  hereunder.  Such new Notes shall be in an  aggregate  principal
amount equal to the aggregate  principal amount of such surrendered Notes, shall
be  dated  the  effective  date of such  Assignment  and  Acceptance  and  shall
otherwise be in substantially the form prescribed by Section 2.04 hereto.

            (e) Each Bank may sell  participations to one or more banks or other
entities  in or to all or a portion  of its rights  and  obligations  under this
Agreement (including, without limitation, all or a portion of its Commitment and
the Loans owing to it);  provided,  that (i) such Bank's  obligations under this
Agreement  (including,  without  limitation,  its  Commitment  to  the  Borrower
hereunder) and the other Loan Documents shall remain unchanged, (ii) such


HOU04:37909.7







Bank  shall  remain  solely  responsible  to the other  parties  hereto  for the
performance of such obligations,  and the participating  banks or other entities
shall not be considered a "Bank" for purposes of the Loan  Documents,  (iii) the
participating  banks or other entities shall be entitled to the cost  protection
provisions  contained in Sections  2.11 through 2.14 to the same extent that the
Bank  from  which  such   participating   bank  or  other  entity  acquired  its
participation  would  be  entitled  to  the  benefit  of  such  cost  protection
provisions,  so long as Borrower is not  obligated  to pay any amount under such
Sections  in excess of the  amount  that  would have been due to such Bank under
such  Sections  if no  participations  had been made by such Bank,  and (iv) the
Borrower and the other  members of the Bank Group shall  continue to deal solely
and  directly  with  such  Bank  in  connection  with  such  Bank's  rights  and
obligations  under this  Agreement and the other Loan  Documents,  and such Bank
shall retain the sole right to enforce the obligations of the Borrower  relating
to the  Loans  and to  approve  any  amendment,  modification  or  waiver of any
provision of this Agreement  (other than  amendments,  modifications  or waivers
with  respect to the  amounts  of any fees  payable  hereunder  or the amount of
principal of or the rate at which  interest is payable on the Loans or the dates
fixed for payments of principal or interest on the Loans).
            (f) Any Bank may at any time  pledge or assign all or any portion of
its rights  under this  Agreement  and the other Loan  Documents  to any Federal
Reserve Bank  without  notice to or consent of the  Borrower.  No such pledge or
assignment shall release the assigning Bank from its obligations hereunder.

            (g) The Agent and each Bank may furnish any  information  concerning
the Borrower or its  Subsidiaries  in the  possession  of the Agent or such Bank
from time to time to  Affiliates  of the Agent or such Bank  (including  without
limitation,  in the case of Bankers Trust Company, BT Securities Corporation and
its employees,  to the extent  necessary for the purposes  contemplated  by this
Agreement,   including,  without  limitation,  the  syndication  of  the  credit
facilities  contemplated hereby) and, in the case of each Bank, to assignees and
participants  (including  prospective  assignees and participants) of such Bank.
Each Bank will take  reasonable  steps to  protect  the  confidentiality  of any
information concerning the Borrower or its Subsidiaries provided to a respective
participant  or  assignee  and known by such Bank to be  confidential,  and,  if
requested by the Borrower, such Bank will identify the prospective assignees and
participants that have received such information.

            Section 9.03.  Notices.  All  correspondence,  statements,  notices,
requests  and  demands  (collectively  "Communications")  shall  be  in  writing
(including  telegraphic  Communications)  and mailed,  telegraphed,  telecopied,
facsimile transmitted or delivered as follows:



HOU04:37909.7







      if to the Borrower --

            Abraxas Petroleum Corporation
            500 North Loop 1604 East, Suite 100
            San Antonio, Texas 78232
            Attention: Robert L.G. Watson
            Telecopier: (210) 490-8816


      if to the Agent--

            Bankers Trust Company
            130 Liberty Street, 14th Floor
            New York, New York 10006
            Attention:  James T. Cullen
            Telecopier: (212) 250-6029 or (212) 250-7351

      with a copy to --

            BT Southwest, Inc.
            909 Fannin Street, Suite 3000
            Houston, Texas 77010
            Attention: Roberta Bohn
            Telecopier: (713) 759-6708

if to any Bank, at its Domestic  Lending  Office,  or as to each such party,  at
such other address as such party shall designate in a written  Communication  to
each of the other parties hereto. All such Communications shall be effective, in
the case of written or telegraphed  Communications,  when deposited in the mails
or  delivered  to the  telegraph  company,  respectively,  and, in the case of a
Communication  by  telecopy  or  facsimile  transmission,   when  telecopied  or
transmitted  against  receipt  of a  confirmation,  in each  case  addressed  as
aforesaid,  except that  Communications to any member of the Bank Group pursuant
to Article II and Article  VIII shall not be  effective  until  received by such
Persons.

            Section  9.04.  Costs  and  Expenses.  The  Borrower  agrees  to pay
promptly (a) all reasonable  costs and expenses  (including fees and expenses of
legal  counsel)  of the  Agent  incurred  in  connection  with the  preparation,
execution,  delivery, filing, administration and recording of the Loan Documents
and any other agreements or security  documents  delivered in connection with or
pursuant to any of the Loan Documents and the syndication of this Agreement both
before and after the date hereof,  and (b) all reasonable  costs and expenses of
any member of the Bank Group incurred in connection  with the enforcement of the
Loan Documents and any other agreements or security documents executed


HOU04:37909.7







in connection with or pursuant to any of the Loan Documents,  including, but not
limited to, the reasonable  fees and  out-of-pocket  expenses of counsel for any
member of the Bank Group, and local counsel who may be retained by such counsel,
with respect thereto, and the costs and expenses in connection with the custody,
preservation,  use or operation of, or the sale of, or collection from, or other
realization upon the sale of, or collection from, or other  realization upon any
collateral  covered by any of the other documents executed in connection with or
pursuant to any of the Loan Documents.  The agreements of Borrower  contained in
this Section  9.04 shall  survive the  termination  of the  Commitments  and the
payment  of all other  amounts  owing  hereunder  or under any of the other Loan
Documents.

            Section  9.05.  Successors  and  Assigns.  This  Agreement  shall be
binding upon and inure to the benefit of the Borrower,  the Agent, the Banks and
its successors and assigns,  except that the Borrower may not assign or transfer
its rights hereunder without the prior written consent of the Banks.

            Section 9.06. Independence of Covenants.  All covenants contained in
the Loan  Documents  shall be given  independent  effect so that if a particular
action or condition is not  permitted  by any of such  covenants,  the fact that
such action or condition  would be permitted by an exception to, or otherwise be
within the limitations of, another  covenant shall not avoid the occurrence of a
Default or an Event of Default if such action is taken or condition exists.

            Section  9.07.  Survival  of  Representations  and  Warranties.  All
representations  and  warranties  contained in this Agreement and the other Loan
Documents  or  made  in  writing  by the  Borrower  in  connection  herewith  or
therewith, shall survive the execution and delivery of this Agreement, the Notes
and the other Loan Documents,  and the repayment of the Loans. Any investigation
by any member of the Bank Group shall not diminish in any respect whatsoever its
right to rely on such representations and warranties.

            Section 9.08. Separability.  Should any clause, sentence, paragraph,
subsection,  Section or Article of this  Agreement be judicially  declared to be
invalid,  unenforceable  or void,  such  decision  will not have the  effect  of
invalidating or voiding the remainder of this Agreement,  and the parties hereto
agree  that  the  part or  parts  of  this  Agreement  so  held  to be  invalid,
unenforceable  or void  will be deemed to have  been  stricken  herefrom  by the
parties hereto,  and the remainder will have the same force and effectiveness as
if such stricken part or parts had never been included herein.

            Section 9.09.  Captions.  The captions in this  Agreement  have been
inserted  for  convenience  only and shall be given no  substantive  meaning  or
significance   whatsoever  in  construing  the  terms  and  provisions  of  this
Agreement.


HOU04:37909.7








            Section 9.10.  Counterparts.  This  Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so  executed  shall be deemed to be an  original,  and all of
which taken together shall constitute one and the same agreement.

            Section 9.11.  Governing Law. THIS AGREEMENT (INCLUDING THE VALIDITY
AND  ENFORCEABILITY  HEREOF)  SHALL BE GOVERNED BY, AND  CONSTRUED IN ACCORDANCE
WITH,  THE LAWS OF THE STATE OF NEW YORK.  Chapter 15,  Subtitle 3, Title 79, of
the Revised Civil  Statutes of Texas,  1925,  as amended  (relating to revolving
loan and revolving triparty accounts),  shall not apply to this Agreement or the
Notes or the transactions contemplated hereby.

            Section 9.12.  Submission to  Jurisdiction.  (a) The Borrower hereby
irrevocably  submits  to the  non-exclusive  jurisdiction  of any New York state
court  located in the Borough of  Manhattan,  City and State of New York, or any
federal  court  located in the Southern  District of New York over any action or
proceeding arising out of or relating to this Agreement or any of the other Loan
Documents,  and each of the  Borrower  irrevocably  agrees  that all  claims  in
respect of such action or  proceeding  may be heard and  determined  in such New
York state or federal court; provided,  nothing in this Section 9.12 is intended
to waive the right of any member of the Bank Group to remove any such  action or
proceeding commenced in any such New York state court to an appropriate New York
federal court to the extent the basis for such removal  exists under  applicable
law. The Borrower  hereby  irrevocably  appoints CT  Corporation  (the  "Process
Agent"), with an office on the date hereof at 1633 Broadway,  New York, New York
10019,  as its agent to  receive on behalf of it and its  properties  service of
copies of the summons and complaint and any other process which may be served in
any such action or proceeding.  Such service may be made by mailing by certified
mail a copy of such process to the Borrower in care of the Process  Agent at the
Process  Agent's  above  address,  with a copy to  such  Person  at its  address
specified  herein and each of the Borrower  hereby  irrevocably  authorizes  and
directs  the  Process  Agent  to  accept  such  service  on  its  behalf.  As an
alternative method of service, each of the Borrower also irrevocably consents to
the  service of any and all  process  in any such  action or  proceeding  by the
mailing  by  certified  mail of  copies  of such  process  to it at its  address
specified  herein.  The Borrower agrees that a final judgment in any such action
or proceeding shall be conclusive and may be enforced in other  jurisdictions by
suit on the judgment or in any other manner provided by law.

            (b)  Nothing  in this  Section  9.12  shall  affect the right of any
member of the Bank Group to serve legal process in any other manner permitted by
law or affect the right of any member of the Bank Group to bring any action or


HOU04:37909.7







proceeding against any of the Borrower, or such Person's properties, in the
courts of any other jurisdiction.

            Section 9.13.  Limitation on Interest.  Each provision in this
Agreement and each other Loan Document is expressly limited so that in no
event  whatsoever  shall the amount paid, or otherwise agreed to be paid, by the
Borrower for the use,  forbearance  or detention of the money to be loaned under
this Agreement or any other Loan Document or otherwise  (including any sums paid
as required by any covenant or obligation  contained herein or in any other Loan
Document which is for the use,  forbearance or detention of such money),  exceed
that amount of money which would cause the effective  rate of interest to exceed
the Highest  Lawful  Rate,  and all amounts owed under this  Agreement  and each
other Loan Document  shall be held to be subject to reduction to the effect that
such amounts so paid or agreed to be paid which are for the use,  forbearance or
detention of money under this  Agreement or such Loan Document shall in no event
exceed that amount of money which would cause the effective  rate of interest to
exceed the Highest  Lawful  Rate.  To the extent  that the  Highest  Lawful Rate
applicable to a Bank is at any time  determined by Texas law, such rate shall be
the  "indicated  rate  ceiling"  described in Section  (a)(1) of Article 1.04 of
Chapter 1, Subtitle 1, Title 79, of the Revised Civil  Statutes of Texas,  1925,
as amended;  provided,  to the extent permitted by such Article,  the Banks from
time to time by notice  from the Agent to  Borrower  may  revise  the  aforesaid
election of such interest rate ceiling as such ceiling affects the  then-current
or future balances of the Loans outstanding under the Notes. Notwithstanding any
provision in this  Agreement or any other Loan Document to the contrary,  if the
maturity of the Notes or the  obligations in respect of the other Loan Documents
are  accelerated  for any reason,  or in the event of  prepayment  of all or any
portion of the Notes or the  obligations  in respect of the other Loan Documents
by the  Borrower or in any other  event,  earned  interest on the Loans and such
other  obligations of the Borrower may never exceed the maximum amount permitted
by applicable law, and any unearned  interest  otherwise payable under the Notes
or the  obligations  in respect of the other Loan Documents that is in excess of
the maximum amount permitted by applicable law shall be cancelled  automatically
as of the date of such  acceleration  or  prepayment or other such event and, if
theretofore  paid,  shall be credited on the  principal  of the Notes or, if the
principal  of the  Notes  has been  paid in  full,  held as  collateral  for any
contingent  or  unmatured  obligation  of the  Borrower,  or,  if  there  are no
contingent or unmatured  obligations of the Borrower then outstanding,  refunded
to the  Borrower.  In  determining  whether or not the interest paid or payable,
under any specific  contingency,  exceeds the Highest  Lawful Rate, the Borrower
and the  Banks  shall,  to the  maximum  extent  permitted  by  applicable  law,
amortize,  prorate, allocate and spread, in equal parts during the period of the
actual term of this Agreement, all interest at any time contracted for, charged,
received or reserved in connection with this Agreement.



HOU04:37909.7







            Section 9.14.  Indemnification.  The Borrower agrees to indemnify,
defend and hold the Agent and each member of the Bank Group, their Affiliates
and their officers,  employees,  agents, directors,  shareholders and Affiliates
(collectively,  "Indemnified  Persons")  harmless  from and  against any and all
loss,  liability,  damage,  judgment,  claim,  deficiency or reasonable  expense
(including interest,  penalties,  reasonable attorneys' fees and amounts paid in
settlement)  incurred by or asserted against any Indemnified  Person arising out
of, in any way connected  with, or as a result of (i) the execution and delivery
of this Agreement and the other documents  contemplated  hereby, the performance
by the parties  hereto and thereto of its  obligations  hereunder and thereunder
(including  but not limited to the making of the  Commitments  of each Bank) and
consummation  of the  transactions  contemplated  hereby and  thereby,  (ii) the
actual or proposed use of the proceeds of the Loans,  (iii) any violation by the
Borrower or any of its Subsidiaries of any Requirement of Law, including but not
limited to  Environmental  Laws, (iv) ownership by the Bank Group of any real or
personal property  following  foreclosure under the Security  Documents,  to the
extent such losses,  liabilities,  damages,  judgments,  claims, deficiencies or
expenses  arise out of or result from the  presence,  disposal or release of any
hazardous  materials  or solid  waste in, on or under such  property  during the
period  owned,  leased or operated by the  Borrower or any of its  Subsidiaries,
including, without limitation, losses, liabilities,  damages, judgments, claims,
deficiencies or expenses which are imposed under Environmental Laws upon Persons
by virtue of their  ownership,  (v) any member of the Bank Group being deemed an
operator of any such real or  personal  property  in  circumstances  in which no
member of the Bank Group is generally operating or generally  exercising control
over such property, to the extent such losses, liabilities,  damages, judgments,
claims,  deficiencies  or  expenses  arise out of or result  from any  hazardous
materials  or solid  waste  located  in, on or under such  property  or (vi) any
claim, litigation, investigation or proceeding relating to any of the foregoing,
whether or not any  Indemnified  Person is a party  thereto;  provided that such
indemnity shall not apply to any such losses,  claims,  damages,  liabilities or
related  expenses that are  determined by a court of competent  jurisdiction  by
final and  nonappealable  judgment to have resulted from the gross negligence or
willful misconduct of such Indemnified Person. WITHOUT LIMITING ANY PROVISION OF
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS,  IT IS THE EXPRESS  INTENTION
OF THE  BORROWER  THAT EACH  INDEMNIFIED  PERSON SHALL BE  INDEMNIFIED  AND HELD
HARMLESS  AGAINST  ANY  AND  ALL  LOSSES,  LIABILITIES,   CLAIMS,  DEFICIENCIES,
JUDGMENTS OR REASONABLE  EXPENSES  ARISING OUT OF OR RESULTING FROM THE ORDINARY
NEGLIGENCE  (WHETHER  SOLE OR  CONTRIBUTORY)  OF SUCH  INDEMNIFIED  PERSON.  THE
OBLIGATIONS   OF  THE  BORROWER  UNDER  THIS  SECTION  9.14  SHALL  SURVIVE  THE
TERMINATION OF THIS AGREEMENT.



HOU04:37909.7







            Section 9.15.  Confidentiality.  In the event that the Borrower
provides to the Agent or the Banks written confidential information belonging to
the Borrower,  if the Borrower shall  denominate such  information in writing as
"confidential",   the  Agent  and  the  Banks  shall  thereafter  maintain  such
information in confidence in accordance with the standards of care and diligence
that  each  utilizes  in  maintaining  its own  confidential  information.  This
obligation  of confidence  shall not apply to such  portions of the  information
which (i) are in the public  domain,  (ii)  hereafter  become part of the public
domain without the Agent or the Banks breaching  their  obligation of confidence
to the Borrower,  (iii) are previously known by the Agent or the Banks from some
source other than the Borrower,  (iv) are hereafter  obtained by or available to
the Agent or the Banks from a third party who owes no  obligation  of confidence
to the  Borrower  with  respect to such  information  or through any other means
other than through  disclosure  by the  Borrower,  (vi) are  disclosed  with the
Borrower's consent,  (vii) must be disclosed either pursuant to any Requirements
of Law or to Persons  regulating  the  activities of the Agent or the Banks,  or
(viii) as may be  required  by law or  regulation  or order of any  Governmental
Authority in any judicial, arbitration or governmental proceeding.  Further, the
Agent or a Bank may  disclose  any  such  information  to any  other  Bank,  any
independent petroleum engineers or consultants, any independent certified public
accountants,  any legal counsel  employed by such Person in connection with this
Agreement  or  any  Security  Document,   including  without   limitation,   the
enforcement or exercise of all rights and remedies  thereunder,  or any assignee
or participant  (including prospective assignees and participants) in the Loans;
provided,  however,  that the Agent or Bank  imposes  on the Person to whom such
information is disclosed the same obligation to maintain the  confidentiality of
such  information as is imposed upon it hereunder.  Notwithstanding  anything to
the contrary  provided  herein,  this obligation of confidence shall cease three
(3) years from the date the  information  was  furnished,  unless  the  Borrower
requests in writing at least  thirty (30) days prior to the  expiration  of such
three year period,  to maintain the  confidentiality  of such information for an
additional  three year period.  The Borrower  waives any and all other rights it
may have to  confidentiality  as  against  the Agent and the  Banks  arising  by
contract,  agreement,  statute or law except as expressly stated in this Section
9.15.

            Section 9.16. Final Agreement of the Parties. THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS  REPRESENT 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 ORAL AGREEMENTS BETWEEN THE PARTIES.

HOU04:37909.7









HOU04:37909.7








            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by its officers thereunto duly authorized as of the date first above
written.

                                       ABRAXAS PETROLEUM
                                       CORPORATION


                                       By:_____________________________
                                           Chris E. Williford
                                           Executive Vice President


                                           BANKERS TRUST COMPANY,
as
                                           Agent


                                           By:__________________________
                                               Mary Zadroga
                                               Vice President


HOU04:37909.7









                                           Bank:

Revolving Commitment: $25,000,000.00           BANKERS TRUST COMPANY
Tranche A Commitment: $29,166,666.67
Tranche B Commitment: $20,833,333.33
                                           By:_________________________
                                               Mary Zadroga
                                               Vice President

                                           Address:

                                           130 Liberty Street, 14th Floor
                                           New York, New York 10006

                                           Telecopy No.: (212) 250-6029
                                          
                                           Domestic Lending Office

                                           Bankers Trust Company
                                           130 Liberty Street, 14th Floor
                                           New York, New York 10006

                                           Eurodollar Lending Office

                                           Bankers Trust Company
                                           130 Liberty Street, 14th Floor
                                           New York, New York 10006

HOU04:37909.7









                                           Bank:

Revolving Commitment: $5,000,000.00        INTERNATIONALE
NEDERLANDEN
Tranche A Commitment: $5,833,333.33        (U.S.) CAPITAL
CORPORATION
Tranche B Commitment: $4,166,666.67

                                           By:__________________________
                                                   Christopher R. Wagner
                                                      Vice President

                                           Address:

                                           135 East 57th Street
                                           8th Floor
                                           New York, New York 10022

                                           Telecopy No.: (212) 832-3616
                                           Domestic Lending Office

                                           135 East 57th Street
                                           8th Floor
                                           New York, New York 10022

                                           Telecopy No.: (212) 832-3616

                                           Eurodollar Lending Office

                                           135 East 57th Street
                                           8th Floor
                                           New York, New York 10022

                                           Telecopy No.: (212) 832-3616

HOU04:37909.7