-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2yfATWTrT3mahAt8uGxusvoESJVHOE22aSs6QWpwaK7ynt791sbD7THYjUU4o/w sBGczGPSnG9zNbLIrAlAcg== 0000899243-02-000874.txt : 20020415 0000899243-02-000874.hdr.sgml : 20020415 ACCESSION NUMBER: 0000899243-02-000874 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ULTRA PETROLEUM CORP CENTRAL INDEX KEY: 0001022646 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29370 FILM NUMBER: 02594125 BUSINESS ADDRESS: STREET 1: 16801 GREENSPOINT PARK DR STREET 2: SUITE 370 CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 2818760120 MAIL ADDRESS: STREET 1: 16801 GREENSPOINT PARK DR STREET 2: SUITE 370 CITY: HOUSTON STATE: TX ZIP: 77060 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE TRANSITION PERIOD FROM __________TO ___________. Commission File Number: 0-29370 ULTRA PETROLEUM CORP. (Exact Name of Registrant as specified in its charter) YUKON TERRITORY, CANADA N/A (Jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 16801 GREENSPOINT PARK DRIVE, SUITE 370 Houston, Texas 77060 (Address of principal executive offices) (Zip Code) 281-876-0120 (Registrant's telephone number, including area code) SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Shares American Stock Exchange without par value Toronto Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 1, 2002, the Registrant had 73,383,418 common shares outstanding, and the aggregate market value of the common shares held by non-affiliates was approximately $496,805,739.90 based upon the closing price of $6.77 per share for the common stock on March 1, 2002, as reported on the American Stock Exchange. Documents incorporated by reference: The definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2001, is incorporated by reference in Part III of this Form 10-K. 1 TABLE OF CONTENTS
Page ---- PART I Item 1. Business........................................................................ 3 Item 2. Property........................................................................ 13 Item 3. Legal Proceedings............................................................... 17 Item 4. Submission of matters to a vote of security holders............................. 17 PART II Item 5. Market for registrant's common equity and related stockholder matters............ 17 Item 6. Selected Financial Data.......................................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 19 Item 7A Quantitative and Qualitative Disclosures About Market Risk....................... 33 Item 8. Financial Statements and Supplementary Data...................................... 33 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures................................................................. 33 PART III Item 10. Directors and Executive Officers of Registrant................................... 33 Item 11. Executive Compensation........................................................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 34 Item 13. Certain Relationships and Related Transactions................................... 34 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.................................................................... 34 Signatures....................................................................... 36
2 PART I ITEM 1. DESCRIPTION OF BUSINESS. Ultra Petroleum Corp. ("Ultra" or the "Company") was incorporated on November 14, 1979, under the laws of the Province of British Columbia, Canada. The Company continued into the Yukon Territory, Canada under Section 190 of the Business Corporations Act (Yukon Territory) on March 1, 2000. Ultra is an independent oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. On January 16, 2001, the Company completed the acquisition through a Plan of Arrangement of all of the outstanding shares of Pendaries Petroleum Ltd., a Houston based independent oil and gas exploration company with its primary focus in the Bohai Bay, China. In exchange, the Company issued 14,994,958 shares of its common stock. The transaction was valued at approximately $40 million based on share price of Ultra and is recorded using the purchase method of accounting. In July 2001 Ultra implemented a restructuring of the Company's subsidiaries; Ultra Resources, Inc., Ultra Petroleum (USA) Inc., Pendaries Petroleum Ltd. and Sino-American Energy Corporation. This restructuring allowed the Company to maximize the tax benefits from the net operating losses (NOL) in the various entities and simplify the overall corporate structure and administration of the Company. To accomplish this goal, the Company formed on July 11, 2001 UP Energy Corporation, a Nevada corporation, so as to transfer all of the stock of Ultra Resources, Inc. and Sino-American Energy Corporation in exchange for UP Energy Corporation stock. On July 13, 2001 Pendaries Petroleum Ltd was dissolved in New Brunswick, Canada, its place of incorporation. Ultra Petroleum (USA) Inc. was merged into Ultra Resources, Inc. on July 16, 2001. Thus after the restructuring, UP Energy Corporation is the wholly-owned subsidiary of Ultra Petroleum Corp., the parent, and Ultra Resources, Inc. and Sino-American Energy Corporation are wholly owned subsidiaries of UP Energy Corporation and now form a consolidated group for federal income taxes. GREEN RIVER BASIN - WYOMING Ultra holds interests in approximately 265,395 gross (163,547 net) acres in Wyoming covering approximately 410 square miles. The Company's current domestic operations are principally focused on developing and expanding a tight gas sand project located in the Green River Basin in southwest Wyoming. The Green River Basin drilling program targets the upper Cretaceous Lance and Mesaverde sands. These together, form a thick sequence of tight, over- pressured, gas charged sands which were deposited some 65 million years ago in the developing basin which is bounded on the east by the Wind River Mountains and to the west by the Western Overthrust and LaBarge Platform. The thickest accumulations of these potential play sands underlie the Pinedale Anticline which trends northwest to southeast just west of the Wind River Mountains. The Lance and Mesaverde reservoirs are characterized as, Basin Center Tight Gas Sand reservoirs. As such there are several characteristics of these reservoirs that set them apart from normal hydrocarbon accumulations. These types of reservoirs are generally formed in the deep portions of sedimentary basins. The sands have porosity and permeability levels lower than normally associated with productive zones. Pressures within the reservoir are abnormal, in the case of this accumulation they are greater than normal due to the gas migrating into the reservoir rock from a rich hydrocarbon source bed at rates exceeding those at which the gas can escape. 3 The Lance and Mesaverde consist of a thick sequence of inter-bedded sand and shale which were deposited over the broad depositional basin by a major braided river system which drained across this area from the highlands in the Idaho area to the Cretaceous Seaway which was located in south central Wyoming at the time. Due to the nature of the depositional environment there exists an abundance of stacked sand bodies all of which are relatively small in size and extent but when taken together form a major accumulation of interconnected reservoir bodies that contribute to the high production potential from these zones. The Lance can be over 5000 feet thick with 1000 feet or more being potential reservoir. The underlying Mesaverde section can be up to an additional 1000 feet thick with 300 or more feet of pay sand. The Mesaverde sections differs from the overlying Lance in that, during deposition the area was more stable and closer to the coast thus the sands are somewhat better developed, coal beds are present in parts of the area and the reservoir pressures are somewhat higher than the Lance. Exploratory Wells. During the year-ended December 31, 2001, the Company drilled or caused to be drilled a total of 23 gross exploratory (9.09 net) wells. Of these, 22 gross (8.67 net) wells were considered productive and the one non-productive location was abandoned by the operator due to mechanical reasons. From January 1, 2002 through March 1, 2002, the Company drilled one gross (.425 net) well which is undergoing completion at this time and which appears to be productive. During the second half of 2001, the Company drilled four field extension wells on the flanks of the then identified productive fairway of the Pinedale Anticline based on 3-D seismic. All four (3.23 net) wells were commercially productive. Initial production rates for these wells ranged from 8.8 Mmcf to 12.5 Mmcf per day. Because of the rapid decline normally experienced in the first six months of a well's production life, the Company typically only places two production units on a well site, which can constrain initial production to 12-12.5 Mmcf per day. The success of these wells confirmed the Company's geologic interpretation in these areas of the Anticline and proved that the currently defined fairway can be expanded. Additionally during the second half of 2001, the Company participated in the drilling of 2 (0.74 net) wells that penetrated the Mesaverde, a productive horizon underlying the Lance formation, the primary productive interval in the Company's producing wells. These wells have been successfully completed in the Mesaverde and are currently producing from that horizon. One of these wells was drilled in northern and the other was drilled in the southern portion of the Pinedale Anticline. During the first quarter of 2002 another one gross (0.43 net) well in the southern portion of the Pinedale Anticline was drilled into the Mesaverde formation and appears to be productive in that horizon. However, the Company does not anticipate that the Mesaverde will be productive across the entire Pinedale Anticline. Development Wells. In addition to the 23 gross (9.10 net) exploratory wells, the Company drilled 8 gross (5.1 net) successful development wells in the Jonah Field area as well as one gross (.425 net) development well in the Warbonnet area of the Pinedale Anticline which was successful. During 2001, the Company acquired a new 100 square mile 3-D seismic survey on the west flank of the Pinedale Anticline. The Company has received the first of several data sets to be received from this survey. The Company expects to receive the remaining data sets by the end of the first quarter of 2002. The Company anticipates that the data sets will provide a clear picture of the structural and stratigraphic attributes of the acreage just to the west of the Anticline where it is thought that additional productive structures may be located. This survey, which overlaps the existing 3-D surveys owned by the Company, provides the Company with 330 total square miles of modern (1999-2001), high quality 3-D seismic data over most of the Company's Pinedale Anticline area acreage. The Company believes that this data and the proprietary processing and interpretation techniques utilized by the Company provide the clearest view of the objective formations and structures in this area. The Company believes that these techniques 4 have greatly contributed to the high success rate for both development and exploratory drilling that the Company has achieved over the last two years. Ultra plans to drill and or participate in up to 25 gross (11.4 net) wells in 2002. The Company plans to drill the majority of these wells in and around the current activity areas on the Pinedale Anticline. Additionally, the Company expects to drill at least one wildcat well to test one or more areas identified by the 3-D seismic outside the current fairway. The drilling plans are a combination of development, step-out and exploratory locations selected with the objective of expanding the proved acreage of the Anticline and extended areas while maintaining a good balance of production, risk management, reserves bookings and economic prudence in the current operating market. The Company had estimated net proved reserves as of December 31, 2001 of 444,727 Mmcfe, 36% of which were proved developed, with a PV-10 of approximately $182,460,000. The Company's net daily gas sales at December 31, 2001 were approximately 41.6 Mmcf per day from a total of 72 producing wells. Total sales of hydrocarbons were approximately 43.3 Mmcfe per day. The Company plans to continue to identify, develop and explore the gas-rich acreage in the Green River Basin. At year-end 2001, the Company had 133 commercial Lance locations classified as proved undeveloped on the Pinedale Anticline and another 174 classified as probable under its SEC pricing case. There can be no assurance that the Company will drill these locations or that those drilled will prove to be commercially productive. The Company plans to attempt to continue expanding the identified productive area through the drilling of step-out and exploration wells on its Green River Basin acreage as well as drilling to intercept deeper potentially productive horizons. The Company is utilizing its 3-D seismic to map these deeper potential productive intervals and to identify further extensions of the productive Lance fairway. BOHAI BAY - CHINA Bohai Bay History With the acquisition of Pendaries Petroleum Ltd. on January 16, 2001, the Company became active in oil and gas exploration and development in Bohai Bay, China. The acquisition brought to Ultra an 18.182% working interest in Block 04/36 (454,000 gross acres), a 15.0% working interest in Block 05/36 (311,000 gross acres) (jointly the "Blocks") and a 10.0% working interest in the (76,107 gross acres) Getuo block. A wholly-owned subsidiary of Kerr-McGee Corporation is the operator of all three blocks. At the time of the acquisition, three oil discoveries had been made on the Blocks. The CFD 2-1 and CFD 11-1 discoveries are located in the 04/36 block and the CFD 12-1 discovery is located in the 05/36 block. The discoveries were in various stages of appraisal and a 1,100 square kilometer 3-D seismic survey had recently been acquired covering the discoveries and a large number of high potential exploration targets on the two blocks. Petroleum Sharing Contracts Contracts covering offshore exploration blocks are Petroleum Sharing Contracts (PSCs) entered into by and between China National Offshore Oil Company ("CNOOC") and foreign oil and gas companies ("Contractor"). CNOOC has the exclusive rights to offshore hydrocarbon leases granted in law from the Chinese government and has the right to enter into PSCs with foreign oil and gas companies. These PSCs have a maximum term of 30 years and are divided into three periods: exploration, development and production. The Contractor pays 100% of the exploration costs required for exploration operations and has the right to act as operator until any 5 development has repaid all of the exploration and development costs. CNOOC has the right to acquire a 51% working interest in any commercial development and will pay their proportionate 51% share of all development costs. The Contractor receives up to a 71% share of the oil and gas produced until it has recovered the exploration costs. After recovery of exploration expenses, the Contractor's share of production is approximately 40-45%. Contractors have the right to take their share of production in kind and sell it on the international market. The Contract is divided into three (3) periods not to exceed 30 years in total. Extensions to any of the three periods of the contract can be negotiated with CNOOC. A brief description of the 3 periods of the contracts is presented below. The exploration period is a 7-year period consisting of an initial term of 3 years, followed by two terms of 2 years each. A relinquishment of 25% of the then contracted acreage is made at the beginning of the second and third terms. All acreage not under appraisal, development or production is relinquished at the end of the seven-year period. The development period for any oil or gas field discovered within the contract area during the exploration period begins upon approval of the Overall Development Plan (ODP) by the Chinese government. The contract does not impose a time limit on the development period of individual fields. The production period for any oil and gas field within the contract area is for 15 years following commencement of commercial production. The contract calls for negotiated extensions to the production period due to circumstances warranting longer field production. Status of Petroleum Sharing Contracts Block 04/36: The PSC covering this block became effective October 1, 1994. Negotiations with the Chinese government in 1997 resulted in the contractor not having to make the mandatory 25% acreage relinquishment at the beginning of the second exploration term. In September 1999 a 25% relinquishment was made to fulfill the required relinquishment schedule at the beginning of the third exploration term. Negotiations at this time resulted in the addition of 31,876 acres to the south side of the block to completely include certain prospects within the block boundary. These negotiations also included a one-year extension of the third exploration term to September 30, 2002. As the contract now stands, the exploration period will end at the end of September 2002. Barring an extension, at that time all acreage not under appraisal, development or production must be relinquished. Negotiations are ongoing to extend the exploration period. Block 05/36: The PSC covering this block became effective March 1, 1996. At the end of the first exploration term in February 1999, a 25% relinquishment was made. At the same time, a one-year extension to the second exploration term was negotiated, extending the total exploration period to 8 years. The second exploration term ended in February 2002 with another 25% acreage relinquishment submitted. The third (and final) exploration term will continue until the end of February 2004 when, barring an extension, all acreage not under appraisal, development or production must be relinquished. The relinquished areas of the Blocks were selected using geologic and geophysical modeling. The Company believes that the relinquishments were made to minimize the relinquishment of prospective acreage. Drilling Activity In 2001, utilizing the newly received 3-D seismic data, the Company participated in drilling 4 (0.61 net) exploratory and 12 (2.02 net) appraisal wells on the Blocks. The exploratory drilling 6 resulted in 2 new discoveries on the Blocks and the appraisal drilling brought the CFD 11-1 and CFD 11-2 fields to commercial status and partially appraised the CFD 12-1 and CFD 12-1S field discoveries. One of the exploratory wells was a dry hole and resulted in the relinquishment of the Getuo Block. Individual block activity is listed below: Block 04/36 (18.2% W.I.): The Company participated in drilling a total of 9 (1.64 net) wells in the 04/36 block in 2001. This included 2 (0.36 net) exploratory wells in the block. One exploratory well discovered the CFD 11-2 field and the other was a dry hole at the CFD 10-1 prospect resulting in a 50% success rate. Ultra drilled 7 (1.27 net) successful appraisal wells on the block in 2001. Five of these appraisal wells were drilled on the CFD 11-1 field thus completing the appraisal process on that field. Two of the appraisal wells were drilled on the CFD 11-2 field (discovered in June 2001) to bring commercial status to that accumulation. Block 05/36 (15.0% W.I.): During 2001, Ultra drilled 6 (0.90 net) wells in the 05/36 block. This included one (0.15 net) exploratory well that was the new field discovery CFD 12-1S-1 that tested in excess of 6,000 BOPD from multiple zones. This resulted in the 05/36 block having a 100% success rate for exploratory drilling. A total of 5 (0.75 net) successful appraisal wells were drilled on the CFD 12-1 (4 wells, 0.60 net) and CFD 12-1S (1 well, 0.15 net) discovery areas. Getuo block (10.0% W.I.): At the time of the Pendaries acquisition, the Getuo block was burdened by a drilling commitment of one well to be drilled by June of 2001. Due to the lack of prospectivity, the partners attempted unsuccessfully to fulfill this commitment through a cash payment to the Chinese. The commitment well was drilled to the required depth and abandoned. With the commitment fulfilled, the Getuo block was relinquished as planned. Thus during 2001, Ultra participated in drilling one (0.10 net) well in the Getuo block. Ultra had placed negative value in the amount of the net commitment on the block in the acquisition of Pendaries. The Company expects to submit a finalized development plan for the CFD 11-1 and CFD 11-2 fields to the Chinese government by mid-year 2002 with first production scheduled in 2004. The Company plans to drill additional exploration wells in 2002 on the two blocks and to continue appraisal activity on the CFD 12-1, CFD 12-1S and CFD 2-1 discovery areas. PENNSYLVANIA During the past year Ultra entered into a joint venture in Pennsylvania covering 10,801 gross (5,401 net) acres of undeveloped leasehold acreage and is continuing to acquire additional acreage. Texas The Company operates one (0.66 net) well and owns working interests in two (0.22 net) other wells in Pecos and Winkler Counties, Texas. The Company believes these interests are not material to the Company. The Company does not generate any revenues in Canada. MARKETING AND PRICING The Company derives its revenue principally from the sale of natural gas. As a result, the Company's revenues are determined, to a large degree, by prevailing natural gas prices. The Company sells the majority of its natural gas on the open market at prevailing market prices, or pursuant to market price contracts. The market price for natural gas is dictated by supply and demand, and the Company cannot predict or control the price it receives for its natural gas. Moreover, market prices for natural gas vary significantly by region. For example, natural gas in 7 the Rocky Mountain region, where the Company produces most of its natural gas, historically sells for less than natural gas in the Midwest and Northeast. Accordingly, the Company's income and cash flows will be greatly affected by changes in natural gas prices and by regional pricing differentials. The Company will experience reduced cash flows and may experience operating losses when natural gas prices are low. Under extreme circumstances, the Company's natural gas sales may not generate sufficient revenue to meet the Company's financial obligations and fund-planned capital expenditures. Moreover, significant price decreases could negatively affect the Company's reserves by reducing the quantities of reserves that are recoverable on an economic basis, necessitating write-downs to reflect the realizable value of the reserves in the low price environment. The ability to market oil and natural gas depends on numerous factors beyond the Company's control. These factors include: . the extent of domestic production and imports of oil and natural gas; . the proximity of natural gas production to natural gas pipelines; . the availability of pipeline capacity; . the demand for oil and natural gas by utilities and other end users; . the availability of alternative fuel sources; . the effects of inclement weather; . state and federal regulations of oil and natural gas marketing; and . federal regulation of natural gas sold or transported in interstate commerce. Because of these factors, the Company may be unable to market all of the oil and natural gas it produces, including oil and natural gas that may be produced from the Bohai Bay properties. In addition, it may be unable to obtain favorable prices of the oil and natural gas it produces. The Company is dependent on oil and gas leases in Wyoming and two petroleum contracts in China in order to explore for and produce oil and gas. The leases in Wyoming are primarily federal leases with 10-year lease terms until establishment of production. Production on the lease extends the lease terms until cessation of that production. The China petroleum contracts are for a maximum of 30 years and are divided into 3 periods; exploration period, development period and production period. The exploration period is for approximately 7 years and work is to be performed and expenditures are to be incurred to delineate the extent and amount of hydrocarbons, if any, for each block. The development period occurs when a field is discovered and commences on the date of approval of the Ministry of Energy. There is no limit on the time required to develop a field. The production period of any oil and gas field in a block is a period of 15 consecutive years commencing on the date of commencement of commercial production from the field. COMPETITION The Company competes with numerous other companies in virtually all facets of its business. The competitors in development, exploration, acquisitions and production include the major oil companies as well as numerous independents, including many that have significantly greater resources. ENVIRONMENTAL MATTERS In 1998, the U.S. Bureau of Land Management initiated a requirement for an Environmental Impact Statement ("EIS") for the Pinedale Anticline area in the Green River Basin. An EIS evaluates the effects that an industry's activities will have on the environment in which the 8 activity is proposed. This EIS encompasses approximately 200,000 gross acres under lease by the Company north of the Jonah Field which is where most of the Company's exploration and development is taking place. This environmental study included an analysis of the geological and reservoir characteristics of the area plus the necessary environmental studies related to wildlife, surface use, socio-economic and air quality issues. This has been an important step in giving the Company the ability to develop its natural gas resources in the region. On July 27, 2000, the BLM issued its Record of Decision ("ROD") with respect to the final EIS. The ROD/EIS allows for the drilling of 700 producing surface locations within the area covered by the EIS, but does not authorize the drilling of particular wells; rather Ultra must submit applications to the BLM's Pinedale field manager for permits to drill and for other required authorizations, such as rights-of-ways for pipelines, for each specific well or pipeline location. Development activities in the Pinedale Anticline area, as on all federal leaseholds, remain subject to regulatory agency approval. In making its determination on whether to approve specific drilling or development activities, the BLM applies the requirements outlined in the ROD/EIS. The ROD/EIS imposes limitations and restrictions on activities in the Pinedale Anticline area and proposes mitigation guidelines, standard practices for industry activities and best management practices for sensitive areas. The ROD/EIS also provides for annual reviews to compare actual environmental impacts to the environmental impacts projected in the EIS and provides for adjustments to mitigate such impacts, if necessary. The review team is comprised of operators, local residents and other affected persons. The BLM's field manager may also impose additional limitations and mitigation measures as is deemed reasonably necessary to mitigate the impacts of drilling and production operations in the area. To date, the Company has been required to expend significant resources in order to satisfy applicable environmental laws and regulations in the Pinedale Anticline area and other areas of operation under the jurisdiction of the BLM, and it is expected that the Company's costs of complying with these regulations will continue to be substantial. Compliance costs under the ROD/EIS and any revisions to the ROD/EIS could become material. In addition, any additional limitations and mitigation measures could increase production costs further, delay exploration, development and production activities and curtail exploration, development and production activities altogether. The Company co-owns leases on a significant area of state and privately owned lands in the vicinity of the Pinedale Anticline that do not fall under the jurisdiction of the BLM and are not subject to the EIS requirement. In August 1999, the BLM required an Environmental Assessment ("EA") for the potential increased drilling density in the Jonah Field area. An EA is a more limited environmental study than is conducted under an EIS. The EA was required to address the environmental impacts of developing the field on 40-acre well density rather than the 80-acre density that was approved in the initial EIS in 1998. The EA was completed in June of 2000. With the approval of this subsequent EA, the Company was permitted to infill drill on 40-acre well density the 2,160 gross acres owned in the field. Prior to this approval, the Company had drilled 21 gross (7.7 net) wells in the field. Since the approval of 40- acre spacing, the Company has drilled an additional 22 gross (14.0 net) wells. Eight gross (5.1 net) of these were drilled during 2001. All 43 of the wells drilled by the Company in Jonah Field have been productive. During 2001, the Company received the "Corporation of the Year" Award from the Wyoming Wildlife Federation primarily for its support of the Pinedale area wildlife studies. Also during 2001, the Company received the "Regional Administrator's Award for Environmental Achievement" from the U.S. Environmental Protection Agency for its work in protecting the air quality in Wyoming's Class I wilderness area through the participation in installation of advanced 9 burner technology at the coal burning Naughton power plant which is upwind of the Pinedale area. The technology installed reduced nitrogen dioxide emissions by 1,000-2,000 tons per year. REGULATION Oil and Gas Regulation The availability of a ready market for oil and gas production depends upon numerous factors beyond the Company's control. These factors include state and federal regulation of oil and gas production and transportation, as well as regulations governing environmental quality and pollution control, state limits on allowable rates of production by a well or proration unit, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. For example, a productive gas well may be "shut-in" because of an over-supply of gas or lack of an available gas pipeline in the areas in which the Company may conduct operations. State and Federal regulations are generally intended to prevent waste of oil and gas, protect rights to produce oil and gas between owners in a common reservoir, control the amount of oil and gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines and gas plants are also subject to the jurisdiction of various Federal, state and local agencies. The Company's sales of natural gas are affected by the availability, terms and costs of transportation. The rates, terms and conditions applicable to the interstate transportation of gas by pipelines are regulated by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Acts, as well as under Section 311 of the Natural Gas Policy Act. Since 1985, the FERC has implemented regulations intended to increase competition within the gas industry by making gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis. The Company's sales of oil are also affected by the availability, terms and costs of transportation. The rates, terms, and conditions applicable to the interstate transportation of oil by pipelines are regulated by the FERC under the Interstate Commerce Act. The FERC has implemented a simplified and generally applicable ratemaking methodology for interstate oil pipelines to fulfill the requirements of Title VIII of the Energy Policy Act of 1992 comprised of an indexing system to establish ceilings on interstate oil pipeline rates. The FERC has announced several important transportation-related policy statements and rule changes, including a statement of policy and final rule issued February 25, 2000 concerning alternatives to its traditional cost-of- service rate-making methodology to establish the rates interstate pipelines may charge for their services. The final rule revises the FERC's pricing policy and current regulatory framework to improve the efficiency of the market and further enhance competition in natural gas markets. In the event the Company conducts operations on federal, state or Indian oil and gas leases, such operations must comply with numerous regulatory restrictions, including various nondiscrimination statutes, royalty and related valuation requirements, and certain of such operations must be conducted pursuant to certain on-site security regulations and other appropriate permits issued by the Bureau of Land Management ("BLM") or Minerals Management Service ("MMS") or other appropriate federal or state agencies. The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or indirect ownership of any interest in federal onshore oil and gas leases by a foreign citizen of a country that denies "similar or like privileges" to citizens of the United States. Such restrictions on citizens of a "non- reciprocal" country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be canceled in a proceeding instituted by the United States Attorney General. Although the 10 regulations of the BLM (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect. The Company owns interests in numerous federal onshore oil and gas leases. It is possible that holders of the Company's equity interests may be citizens of foreign countries, which at some time in the future might be determined to be non-reciprocal under the Mineral Act. Environmental Regulation General. The Company's activities are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations governing the release of materials in the environment or otherwise relating to the protection of the environment will not have a material effect upon the Company's operations, capital expenditures, earnings or competitive position. Ultra's activities with respect to exploration, drilling and production from wells, natural gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing natural gas and other products, are subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency ("EPA"). Such regulation can increase the cost of planning, designing, installing and operating such facilities. In most instances, the regulatory requirements relate to water and air pollution control measures. Waste Disposal. Ultra currently owns or leases, and has in the past owned or leased, numerous properties that have been used for production of oil and gas for many years. Although the Company utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties that the Company currently owns or leases or properties that the Company has owned or leased. In addition, many of these properties have been operated by third parties over whom the Company had no control as to such entities' treatment of hydrocarbons or other wastes or the manner in which such substances may have been disposed of or released. State and federal laws applicable to oil and gas wastes and properties have become stricter. Under these new laws, the Company could be required to remediate property, including ground water, containing or impacted by previously disposed wastes (including wastes disposed of or released by prior owners or operators) or to perform remedial plugging operations to prevent future or mitigate existing contamination. The Company may generate wastes, including hazardous wastes that are subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA has limited the disposal options for certain wastes that are designated as hazardous under RCRA ("Hazardous Wastes") and is considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, certain wastes generated by the Company's oil and gas operations that are currently exempt from treatment as Hazardous Wastes may in the future be designated as Hazardous Wastes, and therefore be subject to more rigorous and costly operating and disposal requirements. Superfund. The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint and several liability for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances ("Hazardous Substances"). These classes of persons or potentially responsible parties ("PRP") include the current and certain past owners and operators of a facility where there is or has been a release or threat of release of a Hazardous Substance and persons who disposed of or arranged for the 11 disposal of the Hazardous Substances found at such a facility. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the PRP the costs of such action. In the course of its operations, the Company may have generated and may generate wastes that fall within CERCLA's definition of Hazardous Substances. The Company may also be an owner of facilities on which Hazardous Substances have been released by previous owners or operators. Ultra may be responsible under CERCLA for all or part of the costs to clean up facilities at which such substances have been released and for natural resource damages. The Company has not been named a PRP under CERCLA nor does the Company know of any prior owners or operators of its properties that are named as PRP's related to their ownership or operation of such property. Air Emissions. The Company's operations are subject to local, state and Federal regulations for the control of emissions of air pollution. Local air quality districts do much of the air quality regulation of sources in California. California requires new and modified sources of air pollutants to obtain permits prior to commencing construction. Major sources of air pollutants are subject to more stringent, federally imposed permitting requirements, including additional permits. Because of the severity of the ozone (smog) problems in portions of California, the state has the most severe restrictions on the emissions of volatile organic compounds (VOC) and nitrogen oxides (Nox) of any state. Producing wells, gas plants and electric generating facilities, all of which are owned by us generate VOC and Nox. Some of the Company's producing wells are in counties that are designated as nonattainment for ozone and are therefore potentially subject to restrictive emission limitations and permitting requirements. If the ozone problems in the state are not resolved by the deadlines imposed by the federal Clean Air Act (2005 - 2010), even more restrictive requirements may be imposed including financial penalties based upon the quantity of ozone producing emissions. California also operates a stringent program to control hazardous (toxic) air pollutants, which might require installation of additional controls. Administrative enforcement actions for failure to comply strictly with air pollution regulations or permits are generally resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could require the Company to forego construction, modification or operation of certain air emission sources, although the Company believes that in the latter cases the Company would have enough permitted or permittable capacity to continue its operations without a material adverse effect on any particular producing field. Clean Water Act. The Clean Water Act ("CWA") imposes restrictions and strict controls regarding the discharge of wastes, including produced waters and other oil and natural gas wastes, into waters of the United States, a term broadly defined. These controls have become more stringent over the years, and it is probable that additional restrictions will be imposed in the future. Permits must be obtained to discharge pollutants into federal waters. The CWA provides for civil, criminal and administrative penalties for unauthorized discharges of pollutants and of oil and hazardous substances. It imposes substantial potential liability for the costs of removal or remediation associated with discharges of oil or hazardous substances. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or its derivatives, or other hazardous substances, into state waters. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff, including discharges associated with construction activities. In the event of an unauthorized discharge of wastes, the Company may be liable for penalties and costs. The Company believes that it is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. 12 EMPLOYEES As of March 1, 2002, the Company had 20 full time employees, including officers. ITEM 2. DESCRIPTION OF PROPERTY. As of December 31, 2001, the Company owned developed oil and gas leases totaling 4,680 gross (2,169 net) acres of which 85% are located in the Green River Basin of Sublette County, Wyoming and the remaining 15% are located in Texas. The Company also owned production equipment associated with certain developed leases. The Company owned undeveloped oil and gas leases totaling 272,236 gross (167,160 net) acres of which 97% are located in the Green River Basin of Sublette County, Wyoming. Pennsylvania acreage totals 10,801 gross (5,401 net) which is 3% of the Company's total acreage. The Company's acreage in the Green River Basin is primarily covering the Pinedale Anticline and a large undeveloped block northwest of the Anticline. The Company also owns 2,160 gross (1,322 net) acres in the Jonah Field. Holding costs of leases not held by production were approximately $183,127 for the fiscal year ending December 31, 2001. OIL AND GAS RESERVES The table below sets forth the Company's quantities of proved reserves, for the year-ended December 31, 2001, 2000 and 1999 as estimated by independent petroleum engineers Netherland Sewell & Associates, Inc. All of the Company's oil and gas reserves are located in the United States. The table summarizes Ultra's proved reserves, the estimated future net revenues from these reserves and the standardized measure of discounted future net cash flows attributable thereto at December 31, 2001, 2000 and 1999.
December 31, ------------------------------------- 2001 2000 1999 ------- --------- ------ Proved Undeveloped Reserves Natural gas (MMcf)......................................... 273,433 75,249 34,751 Oil (MBbl)................................................. 2,187 602 278 Proved Developed reserves Natural gas (MMcf)......................................... 150,397 85,141 36,480 Oil (MBbl)................................................. 1,295 688 297 Total Proved Reserves (Mcfe)................................. 444,727 168,130 74,681 Estimated future net cash flows, before income tax........... 531,676 1,052,126 92,938 Standardized measure of discounted future net cash flows, before income tax............................. 182,460 493,243 41,275
Uncertainty of Estimates of Reserves and Future Revenues. The financial statements included in this report contain estimates of the Company's oil and gas reserves and the discounted future net revenues from those reserves, as prepared by independent petroleum engineers and/or the Company. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company. Those estimates are based on several assumptions that the United States Securities and Exchange Commission (the "SEC") requires oil and gas companies to use, for example, constant oil and gas prices. Such estimates are inherently imprecise indications of future net revenues. Actual future production, revenues, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves might vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves. In addition, the Company's reserves might be subject to revisions based upon future production, results of future exploration and development, prevailing oil and gas prices and other factors. Moreover, estimates of the economically 13 recoverable oil and gas reserves, classifications of such reserves, and estimates of future net cash flows, prepared by different engineers or by the same engineers at different times, may vary substantially. Information about reserves constitutes forward-looking information. Ability to Replace Reserves. The Company's future success depends upon its ability to find, develop and acquire oil and gas reserves that are economically recoverable. As a result, the Company must locate and develop or acquire new oil and gas reserves to replace those being depleted by production. The Company must do this even during periods of low oil and gas prices when it is difficult to raise the capital necessary to finance these activities. Without successful exploration or acquisition activities, the Company's reserves, production and revenues will decline rapidly. No assurances can be made that the Company will be able to find and develop or acquire additional reserves at an acceptable cost. OIL AND GAS ACREAGE As of December 31, 2001, the Company had total gross and net developed and undeveloped oil and gas leasehold acres as set forth below. The developed acreage is stated on the basis of spacing units designated by state regulatory authorities. The acreage and other additional information concerning the Company's oil and gas operations are presented in the following tables.
United States Acreage: Developed Acres Undeveloped Acres ------------------------ ------------------------- Gross Net Gross Net --------- ------------ ----------- ----------- Wyoming 3,960 1,787 261,435 161,760 Pennsylvania 0 0 10,801 5,401 Texas 720 382 0 0 ----- ----- ------- ------- All States 4,680 2,169 272,236 167,161 Bohai Bay Acreage: The table below sets out Ultra's Bohai acreage held as of March 1, 2002: Developed Acres Undeveloped Acres ------------------------ ------------------------- Gross Net Gross Net --------- ------------ ----------- ----------- Block 04/36 0 0 454,000 82,546 Block 05/36* 0 0 233,300 34,995 - - ------- ------- Total Bohai Acreage 0 0 687,300 117,541
____________ * A 25% relinquishment was made on February 28, 2002 as a requirement for entering the third exploration period. 14 Drilling Activities For each of the three fiscal years ended December 31, 2001, 2000 and 1999, the number of gross and net wells drilled by the Company was as follows: Wyoming - Green River Basin
2001 2000 1999 ----- ----- ----- Gross Net Gross Net Gross Net ---------- --------- ----------- ------- --------- --------- Development Wells Productive........................ 9.00 5.52 14.00 8.92 0.00 0.00 Dry............................... 0.00 0.00 0.00 0.00 0.00 0.00 ----- ---- ----- ---- ---- ---- Total............................. 9.00 5.52 14.00 8.92 0.00 0.00 Exploratory Wells Productive...................... 22.00 8.67 10.00 3.16 2.00 0.92 Dry............................... 1.00* 0.42 1.00* 0.09 4.00 2.13 ----- ---- ----- ---- ---- ---- Total............................. 23.00 9.09 11.00 3.25 6.00 3.05
____________ * The exploratory dry holes drilled in 2000 and 2001 (2 gross wells) were both abandoned at TD due to mechanical failure during drilling operations. China - Bohai Bay Block 04/36 (18.2% W.I.)
2001 2000 1999 ---- ---- ---- Gross Net Gross Net Gross Net --------- --------- --------- --------- --------- --------- Exploratory Wells Productive and Successful Appraisal*........ 8.00 1.45 2.00 0.36 1.00 0.18 Dry Holes...................... 1.00 0.18 1.00 0.18 0.00 0.00 ---- ---- ---- ---- ---- ---- Total Wells........................ 9.00 1.63 3.00 0.54 1.00 0.18
____________ * Successful Appraisal well is a well that drilled into a formation shown to be productive of oil or gas by an earlier well for the purpose of obtaining more information about the reservoir. Block 05/36 (15.0% W.I.)
2001 2000 1999 ---- ---- ---- Gross Net Gross Net Gross Net --------- --------- --------- --------- --------- --------- Exploratory Wells Productive and Successful Appraisal*........ 6.00 0.90 2.00 0.30 0.00 0.00 Dry Holes...................... 0.00 0.00 0.00 0.00 0.00 0.00 ---- ---- ---- ---- ---- ---- Total Wells........................ 6.00 0.90 2.00 0.30 0.00 0.00
__________ * Successful Appraisal well is a well that drilled into a formation shown to be productive of oil or gas by an earlier well for the purpose of obtaining more information about the reservoir. 15
Getuo Block (10.0% W.I.) 2001 2000 1999 ---- ---- ---- Gross Net Gross Net Gross Net --------- --------- --------- --------- --------- --------- Exploratory Wells Productive and Successful Appraisal*........ 0.00 0.00 0.00 0.00 0.00 0.00 Dry Holes...................... 1.00 0.10 0.00 0.00 0.00 0.00 ---- ---- ---- ---- ---- ---- Total Wells........................ 1.00 0.10 0.00 0.00 0.00 0.00
____________ * Successful Appraisal well is a well that drilled into a formation shown to be productive of oil or gas by an earlier well for the purpose of obtaining more information about the reservoir. PRODUCTIVE WELLS As of December 31, 2001, the Company's total gross and net wells were as follows: Productive Wells* Gross Wells Net Wells - ---------------- ----------- --------- Natural Gas and Condensate ......... 97 46.41 __________ *Productive wells are producing wells plus shut-in wells the Company deems capable of production. A gross well is a well in which a working interest is owned. The number of net wells represents the sum of fractional working interests the Company owns in gross wells. PRODUCTION VOLUMES, AVERAGE SALES PRICE AND AVERAGE PRODUCTION COSTS The following table sets forth certain information regarding the production volumes and average sales prices received for and average production costs associated with Ultra's sale of oil and natural gas for the periods indicated.
Year Ended December 31, ----------------------------------------------- 2001 2000 1999 ----------- ----------- ---------- (unaudited) PRODUCTION Natural gas (Mcf) 11,500,446 5,297,421 4,525,570 Oil (Bbl) 116,413 50,386 45,702 ----------------------------------------------- Total (Mcfe)* 12,198,924 5,599,737 4,799,782 REVENUES Gas sales $38,204,298 $19,399,001 $8,229,984 Oil sales 2,996,955 1,603,635 746,722 ----------------------------------------------- Total Revenues 41,201,253 21,002,636 8,976,706 LEASE OPERATING EXPENSES Production costs** 1,439,026 665,999 554,257 Severance/production taxes 4,425,345 2,253,793 863,540 Gathering 3,158,901 1,321,228 1,297,169 ----------------------------------------------- Total Lease Operating Expenses 9,023,271 4,241,020 2,714,966 REALIZED PRICES Natural gas (Mcf) $ 3.32 $ 3.66 $ 1.82 Oil (Bbl) $ 25.74 $ 31.83 $ 16.34 OPERATING COSTS PER MCFE Production costs $ 0.12 $ 0.12 $ 0.12 Severance/production taxes $ 0.36 $ 0.40 $ 0.18 Gathering $ 0.26 $ 0.24 $ 0.27 ----------------------------------------------- Total Operating Costs per Mcfe $ 0.74 $ 0.76 $ 0.57
16 __________ *Equivalent barrels have been calculated on the basis of six thousand cubic feet (6 Mcf) of natural gas equals one barrel of oil. **Average production costs includes lifting costs, remedial workover expenses and production taxes. ITEM 3. LEGAL PROCEEDINGS. The Company is currently involved in various routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, the Company believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on the Company's financial position, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The common shares of the Company are listed and posted for trading on the American Stock Exchange ("AMEX") since January 17, 2001 under the symbol "UPL" and the Toronto Stock Exchange ("TSE") since September 30, 1998 under the symbol "UP". The following table sets forth the high and low closing sales prices on the AMEX for 2001 and on the TSE from December 31, 1999 though December 31, 2001 as reported by such exchanges, respectively. TORONTO STOCK EXCHANGE (CDN$) 1999 High Low ---- ---- --- First Quarter $ 1.54 $1.06 Second Quarter $ 1.37 $0.96 Third Quarter $ 2.00 $1.07 Fourth Quarter $ 1.49 $0.93 2000 High Low ---- ---- --- First Quarter $ 1.10 $0.75 Second Quarter $ 2.80 $0.78 Third Quarter $ 3.90 $0.95 Fourth Quarter $ 4.70 $2.95 2001 High Low ---- ---- --- First Quarter $ 8.70 $3.76 Second Quarter $10.95 $7.01 Third Quarter $ 9.00 $5.65 Fourth Quarter $10.05 $6.30 17 AMERICAN STOCK EXCHANGE (US$) 2001 High Low ---- ---- --- First Quarter (beginning January 17, 2001) $ 5.50 $2.75 Second Quarter $ 7.34 $4.34 Third Quarter $ 5.92 $3.54 Fourth Quarter $ 6.41 $4.00 On March 26, 2002, the last reported sale price of the common stock on the AMEX was $7.65 per share. As of March 1, 2002 there were approximately 470 holders of record of the common stock. The Company has not declared or paid and does not anticipate declaring or paying any dividends on its common stock in the near future. The Company intends to retain its cash flow from operations for the future operation and development of its business. In addition, the Company's credit facility restricts payment of dividends on its common stock. Under current Canadian tax law and the United States-Canada Tax Convention (1980) (the "Convention"), any dividends paid to U.S. resident shareholders under the Convention are generally subject to a 15% Canadian withholding tax. The Convention provides an exemption from withholding tax on dividends paid or credited to certain tax-exempt organizations that are resident in the United States for purposes of the Convention. Persons who are subject to the United States federal income tax on dividends may be entitled, subject to certain limitations, to either a credit or deduction with respect to Canadian income taxes withheld with respect to dividends paid or credited on the Company's shares. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial information presented below for the years ended December 31, 2001, 2000, the six months ended December 31, 1999 and the years ended June 30, 1999, 1998 and 1997 is derived from the Consolidated Financial Statements of the Corporation. Effective with the period ended December 31, 1999 the Company began utilizing a December 31 year-end.
SIX MONTHS YEARS ENDED ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, --------------------- ----------------- ------------------------------ 2001 2000 1999 1999 1998 1997 ----- ------ ------- ------- -------- ------- Statement of Operations Data (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Natural gas sales $38,204 $19,399 $ 4,352 $ 6,352 $ 3,472 $ 405 Oil sales 2,997 1,604 434 670 174 21 Interest and other 393 171 18 287 121 14 --------------------------------------------------------------------------- Total revenues 41,594 21,174 4,804 7,309 3,767 440 =========================================================================== Expenses: Production expenses and taxes 9,023 4,241 1,329 2,571 953 78 Depreciation, depletion and amortization 6,687 3,163 1,186 1,794 1,377 77 General and administrative 4,231 3,078 1,668 5,861 3,406 1,381 Interest 1,687 802 344 577 406 - Ceiling test write-down - - - 3,417 2,081 - Loss on abandonment of oil and gas property - - - - 6,116 - Bad debt expense (recovery) - - (35) 2,019 - - Lawsuit settlement - - 1,876 - - - --------------------------------------------------------------------------- Total expenses 21,628 11,284 6,368 16,239 14,339 1,536 Income from continuing operations before income taxes 19,966 9,890 (1,564) (8,930) (10,572) (1,096) Income tax provision - deferred 2,087 - - - - - --------------------------------------------------------------------------- Net income $17,879 $ 9,890 $(1,564) $(8,930) $(10,572) $(1,096) =========================================================================== Basic income per common share $ 0.25 $ 0.17 $ (0.03) $ (0.16) $ (0.26) $ (0.04) Diluted income per common share $ 0.24 $ 0.17 $ (0.03) $ (0.16) $ (0.26) $ (0.04)
18
SIX MONTHS YEARS ENDED ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30, ------------------ ------------- ---------------------------- 2001 2000 1999 1999 1998 1997 ------ ----- ---- ---- ---- ---- (IN THOUSANDS) Statement of Cash Flows Data - ---------------------------- Net cash provided by (used in): Operating activities $ 35,610 $ 9,046 $ 674 $ 1,913 $ (7,915) $(1,046) Investing activities (61,335) (24,541) (1,624) (1,017) (30,032) (8,899) Financing activities 25,961 16,236 569 (6,010) 39,094 14,559 AS OF DECEMBER 31, AS OF JUNE 30, ----------------------------------- ------------------- 2001 2000 1999 1998 1997 ------- ------ ---- ------- -------- (IN THOUSANDS) Balance Sheet Data - ------------------ Cash and cash equivalents $ 1,379 $ 1,144 $ 402 $ 5,896 $ 4,690 Working capital (deficit) (9,227) 241 195 8,107 3,735 Oil and gas properties 155,221 59,729 33,773 37,392 16,304 Total assets 167,582 73,177 38,063 56,137 22,542 Total long term obligations 51,166 24,731 8,767 10,696 - Total stockholders' equity 95,320 35,694 25,632 35,372 21,237
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Statements that are not historical facts contained in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Such statements address activities, events or developments that the Company expects, believes, projects, intends or anticipates will or may occur, including such matters as: future availability of capital; development and exploration expenditures (including the amount and nature thereof); drilling of wells; timing and amount of future production of oil and gas; business strategies; operating costs and other expenses; cash flow and anticipated liquidity; prospect development and property acquisitions; and marketing of oil and gas. Factors that could cause actual results to differ materially ("Cautionary Disclosures") are described below in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Considerations." Cautionary Disclosures include, but are not limited to: general economic conditions; the market prices of oil and gas; the risks associated with exploration; the Company's ability to find, acquire, market, develop and produce new properties; operating hazards attendant to the oil and gas business; downhole drilling and completion risks that are generally not recoverable from third parties or insurance; the outcome of the Bureau of Land Management's EIS relating to the Company's core properties in the Green River Basin of southwest Wyoming; uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of exploration and development expenditures; potential mechanical failure or under performance of individually significant productive wells; the strength and financial resources of the Company's competitors; the Company's ability to find and retain skilled personnel; climatic conditions; labor relations; availability and cost of material and equipment; delays in anticipated start-up dates; environmental risks; the results of financing efforts; actions or inactions of third-party operators of the Company's properties; and regulatory developments. All statements attributable to the Company or persons acting on its behalf are expressly qualified in their entity by these Cautionary Disclosures. The Company disclaims any obligation to update or revise any forward-looking statement to reflect events or circumstances occurring hereafter or to reflect the occurrence of anticipated or unanticipated events. The following discussion of the financial condition and operating results of the Company should be read in conjunction with consolidated financial statements and related notes of the Company. Except as otherwise indicated all amounts are expressed in U.S. dollars. Since its entry into the oil and gas industry in 1993, the Company has continued to raise capital for its exploration and development programs, most of which are based in the United 19 States. Substantially all of the oil and gas activities are conducted jointly with others and, accordingly, the amounts reflect only the Company's proportionate interest in such activities. Inflation has not had a material impact on the Company's results of operations and is not expected to have a material impact on the Company's results of operations in the future. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Oil and gas revenues increased to $41.2 million for the year ended December 31, 2001 from $21.0 million for the same period in 2000. This 96% increase was attributable to an increase in the Company's production. During this period the Company's production increased to 11.5 Bcf of gas and 116.4 thousand barrels of condensate, up from 5.3 Bcf of gas and 50.0 thousand barrels of condensate for the same period in 2000. This 118% increase on an Mcfe basis was attributable to the Company's successful drilling activities during 2000 and 2001. During the year ended December 31, 2001 the average product prices were $3.32 per Mcf and $25.74 per barrel, compared to $3.66 per Mcf and $31.83 per barrel for the same period in 2000. Production costs increased 100% to $1.4 million in 2001 from $0.7 million in 2000 and on a unit of production basis were $.118 per Mcfe in 2001, as compared to $.119 per Mcfe in 2000. Production taxes in 2001 were $4.4 million, compared to $2.3 million in 2000, or $.363 per Mcfe in 2001, compared to $.402 per Mcfe in 2000. Production taxes are calculated based on a percentage of revenue from production. Therefore higher production and the subsequent increase in revenue contributed to the increases. Gathering fees for the period increased 146% to $3.2 million from $1.3 million in 2000, attributable to higher production volumes. Depletion, depreciation and amortization (DD&A) expenses increased to $6.7 million during the year ended December 31, 2001 from $3.2 million for the same period in 2000. On a unit basis, DD&A decreased to $0.548 per Mcfe in 2001, from $0.565 per Mcfe in 2000 primarily as a result of increases in the proved reserves used to calculate depletion of the full cost pool. General and administrative expenses increased to $4.2 million during the year ended December 31, 2001 from $3.1 million for the same period in 2000. The increase was primarily attributable to increases in personnel and overhead expenses arising from the acquisition and operations of the China properties and increases in activity on the Wyoming properties. Interest expense for the period increased to $1.7 million in 2001 from $0.8 million in 2000. This increase was attributable to the increase in borrowings under the senior credit facility. Interest and other income for the period increased to $0.4 million in 2001 from $0.2 million in 2000. This increase was attributable to increased utilization of company owned well service equipment and higher balances in interest bearing accounts certain 2001. Deferred income taxes for the period increased to $2.1 million in 2001 from $0 in 2000. This increase was primarily attributable to the increase in pre-tax net income relative to book net operating losses available to offset net income. The Company expects to book deferred taxes at the statutory rate in future periods. The Company was not liable for current payment of any material income taxes for the period ending December 31, 2001. On January 16, 2001, the Company acquired all of the outstanding capital stock of Pendaries Petroleum Ltd., a New Brunswick company, in exchange for 14,994,958 common shares of the Company. 20 RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 COMPARED TO UNAUDITED YEAR ENDED DECEMBER 31, 1999 Oil and gas revenues increased 133% to $21.0 million for the year ended December 31, 2000 from $9.0 million for the same period in 1999. This increase was attributable to an increase in both the Company's production and the increase in prices received for that production. During this period the Company's production increased to 5.3 Bcf of gas, and 50.0 thousand barrels of condensate, up from 4.5 Bcf of gas and 45.7 thousand barrels of condensate for the same period in 1999. During the year ended December 31, 2000 the average product prices were $3.66 per Mcf and $31.83 per barrel, compared to $1.82 per Mcf and $16.34 per barrel for the same period in 1999. During the year ended December 31, 2000 production expenses and taxes increased to $4.2 million from $2.7 million in 1999. Direct lease operating expenses increased to $0.7 million in 2000 from $0.6 million in 1999 and on a unit of production basis was $.12 per Mcfe in 2000, as compared to $.12 per Mcfe in 1999. Production taxes in 2000 were $2.3 million, compared to $0.9 million in 1999 or $.40 per Mcfe in 2000, compared to $.18 per Mcfe in 1999. Production taxes are calculated based on a percentage of revenue from production. Therefore higher production and higher prices contributed to the increases. Gathering fees for the period increased slightly in 2000 to $1.32 million from $1.29 million in 1999, attributable to higher production volumes. Depletion, depreciation and amortization expenses (DD&A) increased to $3.2 million during the year ended December 31, 2000 from $2.1 million for the same period in 1999. On a unit basis, DD&A increased to $.57 per Mcfe, from $.44 per Mcfe in 1999 primarily as a result of increases in the proved reserves' full cost pool. General and administrative expenses decreased to $3.1 million during the year ended December 31, 2000 from $3.6 million for the same period in 1999. The decrease was attributable to reductions in personnel and overhead expenses during 2000. Interest expense for the period increased to $0.8 million in 2000 from $0.7 million in 1999. This increase was attributable to the increase in borrowings under the senior credit facility. In November 1999, the Company settled litigation relating to the plugging and abandonment of the White Estate No. 1 well. The settlement and legal costs relating to this litigation totaled $1.9 million. No such settlement occurred during the year ended December 31, 2000. RESULTS OF OPERATIONS - SIX MONTH PERIOD ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTH PERIOD YEAR ENDED DECEMBER 31, 1998 Oil and gas revenues increased to $4.8 million for the six-month period ending December 31, 1999 from $3.1 million for the same period in 1998. The Company incurred a net loss of $1.5 million for the six-month period ending December 31, 1999 compared to a net loss of $6.7 million for the same period in 1998. The increase in gross revenues was attributable to an increase in both the Company's production and the increase in prices received for that production. During this period, the Company's cumulative production increased to 1.90 Bcf of gas, and 20.0 thousand barrels of condensate, up from 1.76 Bcf of gas, and 9.43 thousand barrels of condensate for the same period in 1998. During the six-month period ending December 31, 1999, the average product prices were $2.29 per Mcf and $21.69 per barrel, compared to $1.72 per Mcf and $11.77 per barrel for the same period in 1998. During the six-month period ending December 31, 1999 production expenses and taxes increased to $1.3 million from $1.2 million in 1998. Direct lease operating expenses decreased to 21 $0.3 million in 1999 from $0.4 million in 1998 and on a unit of production basis, to $0.136 per Mcfe in 1999, from $0.225 per Mcfe in 1998. This reduction was primarily attributable to the effects of restructuring operations and reductions in operating field staff. Production taxes for this period in 1999 were $0.5 million, compared to $0.25 million in 1998 or $0.238 per Mcfe in 1999, from $0.143 per Mcfe in 1998. Production taxes are calculated based on a percentage of revenue from production. Therefore, higher production and higher prices contributed to the increases. Depletion and depreciation expenses remained relatively constant for the six-month period ending December 31, 1999 to the same period in 1998. On a unit basis, such expenses decreased to $0.578 per Mcf, from $0.648 in 1998 primarily as a result of increases in proved reserves. General and administrative expenses decreased 58% to $1.7 million during the six-month period ending December 31, 1999 from $4.0 million for the same period in 1998. The decrease was attributable to the restructuring implemented during 1999. Net interest expense for the period increased to $0.3 million in 1999 from $0.1 million in 1998. This increase was attributable to both the increase in borrowings under the senior credit facility and reduction in cash balances earning interest. In November 1999, the Company settled litigation relating to the plugging and abandonment of the White Estate No. 1 well. The settlement and legal costs relating to this litigation totaled $1.9 million. RESULTS OF OPERATIONS - FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998 The Company incurred a net loss of $8.9 million for the year ended June 30, 1999 compared to a net loss of $10.6 million for the year ended June 30, 1998. Oil and gas revenues increased to $7.0 million in fiscal 1999 from $3.6 million in 1998. This was directly attributable to the Company's drilling and completion activities in the Green River Basin of Wyoming. The Company's annual production increased to 4.1 Bcf of gas and 41.9 thousand barrels of condensate during 1999, up from 1.8 Bcf of gas and 14.0 thousand barrels of condensate during 1998. During 1999 the average product prices received were $1.54 per Mcf and $15.95 per barrel, compared to an average of $1.81 per Mcf and $13.26 per barrel in 1998. Depletion and depreciation expense increased to $1.8 million in 1999 from $1.4 million in 1998. The increase in depletion and depreciation expense was attributable to increased production. The per Mcf equivalent oil and gas depletion and depreciation rate fell to $0.41 in 1999. The decline in the per Mcfe depletion and depreciation rate was attributable to the effects of the ceiling test writedown of $3.4 million incurred in December 1998, additions to reserves and reduced finding and development costs. The book value of oil and gas properties was $33.8 million at June 30, 1999, compared to $37.3 million at June 30, 1998. The causes of this decrease were the sale and write-downs of oil and gas properties and the costs of drilling of additional wells. Production taxes and gathering fees increased to $1.7 million in 1999 from $0.7 million in 1998. Both increases were directly attributable to increases in production in the Green River Basin of Wyoming. During 1999, the Company recognized a property impairment charge of $3.4 million, as a result of the capitalized cost of oil and gas properties exceeding a "ceiling" on such costs computed in accordance with GAAP. This impairment was caused by the lower commodity prices at December 31, 1998. The ceiling test impairment is a direct line item on the income statement. In June 1999, the Company sold a working interest in certain undeveloped leaseholds for $5 million in cash, which had been split between proven and unproven properties and $8.2 22 million in carried work commitments which reduced the carrying value of unproven properties. The $8.2 million in carried work commitments will not be reflected on the books until they are incurred which will be in December 1999. General and administrative expenses increased to $5.8 million in 1999 from $3.4 million in 1998. This increase in total general and administrative expenses was primarily attributable to increases in staffing and activity during the first and second quarters of fiscal 1999. During the third and fourth quarters, the Company implemented a restructuring plan to reduce general and administrative expenses. During fiscal 1999, the Company wrote-off $2.0 million of debt that had been on the books in excess of two years. These debts were owed primarily by junior joint venture partners for amounts expended by the Company in drilling farm-out prospects on these partners' behalf for which the Company was never reimbursed. The Company evaluated the ability of the joint venture partners to repay the debts and determined that repayment was unlikely. Included in unproven properties is $2.5 million of prepaid environmental costs, which relate to the Company's agreement to purchase specified nitrogen oxide emission offsets. These offsets are to be utilized by the Company in the future development of its oil and gas properties in the Mesa Area as the asset that will generate the offsets is under construction. Of the total payment, $2.0 million was in the form of a note that bears interest at 10% payable in installments of $0.75 million and $1.25 million on July 15, 1999 and 2000, respectively. The $0.2 million of interest on this note at June 30, 1999 has been capitalized as part of the prepaid environmental cost. LIQUIDITY AND CAPITAL RESOURCES In the twelve-month period ending December 31, 2001 the Company relied on its existing senior credit facility and cash provided by operations to finance its capital expenditures. The Company participated in the drilling of 32 gross (14.62 net) wells in Wyoming and 15 gross (2.53 net) wells in China blocks and one gross (0.1 net) commitment well on the Getuo block. For the twelve-month period ending December 31, 2001 net capital expenditures were $58.4 million. At December 31, 2001, the Company reported a cash position of $1.4 million compared to $1.1 million at December 31, 2000. Working capital at December 31, 2001 was $(9.3) million as compared to $0.2 million at December 31, 2000. As of December 31, 2001, the Company had incurred bank indebtedness of $43.0 million and other long term debt of $3.1 million which was comprised of accrued capital expenditures that the Company will finance by drawing on the available bank facility. The positive cash flow that the Company continues to produce, along with the availability under the senior credit facility, are projected to be sufficient to fund the Company's budgeted capital expenditures for 2001, which are projected to be $50.0 million. Of the $50.0 million budget, the Company plans to spend approximately $35.0 million in Wyoming and approximately $12.5 million in China in 2002. The remaining $2.5 million will go towards seismic, land and other miscellaneous costs in both areas. Of the $35.0 million for Wyoming the Company plans to drill or participate in an estimated 25 gross (11.4 net) wells in 2002, of which approximately $17.9 million is for exploration wells and the remaining $17.1 million will be for development wells. All of the $12.5 million for China will be for exploratory/appraisal wells. The Company currently has no budget for acquisitions of properties in 2002. As of March 1, 2002, the revolving senior credit facility provides for a $150.0 million revolving credit line with a borrowing base of $80.0 million. The credit facility matures on March 1, 2005. The notes bears interest at either the bank's prime rate plus a margin of one-half of one percent (0.50%) to one and one-quarter percent (1.25%) based on the percentage of available credit drawn or at LIBOR plus a margin of one and one-half percent (1.5%) to two and one-quarter percent (2.25%) based on the percentage of available credit drawn. An average annual commitment fee of 0.375% is charged quarterly for any unused portion of the credit line. The 23 borrowing base is subject to periodic (at least semi-annual) review and redetermination by the bank and may be decreased or increased depending on a number of factors including the Company's proved reserves and the bank's forecast of future oil and gas prices. Additionally, the Company is subject to quarterly reviews of compliance with the covenants under the bank facility including minimum coverage ratios relating to interest, working capital, G&A expenditures and advances to Sino-American Energy. In the event of a default under the covenants, the Company may not be able to access funds otherwise available under the facility. The notes are collateralized by a majority of the Company's proved domestic oil and gas properties and guaranteed by UP Energy and Ultra Petroleum Corp. At December 31, 2001 the Company had $43.0 million of outstanding borrowings under this credit facility, with a current average interest rate of 4.1%. The total amount outstanding at March 1, 2002 was $51.0 million. The Company was in compliance with all loan covenants at December 31, 2001 and 2000. During the year ended December 31, 2001, the Company generated cash from operating activities of $35.6 million as compared to $9.0 million for the year ended December 31, 2000 and $0.3 million for the year ended December 31, 1999. Cash flow from operations before changes in non-cash working capital was $27.5 million as compared to $13.0 million for the year ended December 31, 2000 and $0.3 million for the year ended December 31, 1999. The increase in cash from operating activities was attributable to the increase in earnings and DD&A and the increase in net changes to non-cash working capital items. During the year ended December 31, 2001 cash used in investing activities was to $61.3 million as compared to $24.5 million for the year ended December 31, 2000 and $4.3 million for the year ended December 31, 1999. The change is primarily attributable to increased drilling and completion activity. During the year ended December 31, 2001 cash provided by financing activities was $26.0 million as compared to $16.2 million for the year ended December 31, 2000 and $0.5 million for the year ended December 31, 1999. The change is primarily attributable to increased borrowing under the senior credit facility. The positive cash flow that the Company continues to produce and the availability under the senior credit facility are projected to be sufficient to fund the Company's budgeted capital expenditures for 2002. However, future cash flows and continued availability of financing are subject to a number of uncertainties beyond the Company's control such as production rates, the price of gas and oil, continued results of the Company's drilling program and the general condition of the capital markets for oil and gas companies. There can be no assurances that adequate funding will be available to execute the Company's planned future capital program. CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are described in the notes to the consolidated financial statements. It is increasingly important to understand that the application of generally accepted accounting principles involve certain assumptions, judgments and estimates that affect reported amounts of assets, liabilities, revenues and expenses. The application of principles can result in varying results from company to company. The most significant principles that impact the Company and its subsidiaries relate to oil and gas reserve estimates and deferred taxes. The financial statements included in this report contain estimates of the Company's oil and gas reserves and the discounted future net revenues from those reserves, as prepared by independent petroleum engineers and/or the Company. There are numerous uncertainties 24 inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company; and therefore, these estimates are subject to change. We use the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on differences between the financial statement carrying amounts and their respective income tax bases (temporary differences). Management regularly reviews its deferred taxes assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. During the year, the Company completed the acquisition of Pendaries Petroleum, Ltd., which gave rise to a deferred tax liability. Additionally, the Company fully utilized all of its available net operating carry-forwards attributable to continuing operations for financial statement purposes. The change in valuation allowance reflects management's assessment regarding the future realization of U.S. deferred tax assets and estimates of future earnings. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations ("SFAS No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective as of July 1, 2001 and SFAS No. 142 was effective January 1, 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption. The Canadian Institute of Chartered Accountants ("CICA") has adopted similar standards and accordingly, there will be no U.S. - Canadian GAAP differences arising from the addition of these standards. The Company has no goodwill or intangible assets. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company will also record a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently assessing the impact, if any, on the Company's consolidated financial statements for future periods. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 also broadens the definition of discontinued operations to include all distinguishable components of an entity that 25 will be eliminated from ongoing operations. The Company has adopted SFAS 144 as of January 1, 2002. Because the Company has elected the full-cost method of accounting for oil and gas exploration and development activities, the impairment provisions of SFAS 144 do not apply to the Company's oil and gas assets, which are subject to ceiling limitations. For the Company's non-oil and gas assets, the method of impairment assessment is unchanged from SFAS 121. The adoption of SFAS 144 had no impact on the Company's consolidated financial statements. CERTAIN CONSIDERATIONS Competition. The Company competes with numerous other companies in virtually all facets of its business. The competitors in development, exploration, acquisitions and production include the major oil companies as well as numerous independents, including many that have significantly greater resources. Therefore, competitors may be able to pay more for desirable leases and evaluate, bid for and purchase a greater number of properties or prospects than the financial or personal resources of the Company permit. The ability of the Company to increase reserves in the future will be dependent on its ability to select and acquire suitable prospects for future exploration and development. The availability of a market for oil and natural gas production depends upon numerous factors beyond the control of producers, including but not limited to the availability of other domestic or imported production, the locations and capacity of pipelines, and the effect of federal and state regulations on production. The Company's projects have been financed through debt and internally generated cash flow. There is competition for capital to finance oil and gas drilling. The ability of the Company to obtain such financing is uncertain and can be affected by numerous factors beyond its control. The inability of the Company to raise capital in the future could have an adverse effect on certain areas of the business. Government Regulations. The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may: . require that the Company acquire permits before commencing drilling; . restrict the substances that can be released into the environment in connection with drilling and production activities; . limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; and . require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells. Under these laws and regulations, the Company could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. The Company maintains limited insurance coverage for sudden and accidental environmental damages, but does not maintain insurance coverage for the full potential liability that could be caused by sudden and accidental environmental damages. Accordingly, the Company may be subject to liability or may be required to cease production from properties in the event of environmental damages. A significant percentage of the Company's operations are conducted on public lands. These operations are subject to a variety of on-site security regulations as well as other permits and authorizations issued by the U.S. Bureau of Land Management ("BLM"), the Wyoming Department of Environmental Quality and other agencies. A portion of the Company's acreage is affected by winter lease stipulations that prohibit exploration, drilling and completing activities generally from November 15 to May 15, but allow production activities all year round. To drill wells in Wyoming, the Company is required to file an Application for Permit to Drill with the Wyoming Oil 26 and Gas Commission. Drilling on acreage controlled by the federal government requires the filing of a similar application with the BLM. These permitting requirements may adversely affect the Company's ability to complete its drilling program at the cost and in the time period currently anticipated. On large-scale projects, lessees may be required to perform environmental impact statements to assess the environmental impact of potential development, which can delay project implementation and/or result in the imposition of the environmental restrictions that could have a material impact on cost or scope. Limited Financial Resources. The Company's ability to continue exploration and development of its properties and to replace reserves will be dependent upon its ability to continue to raise significant additional financing or obtain some other arrangements with industry partners in lieu of raising financing. Any arrangements that may be entered into could be expensive to the Company. There can be no assurance that the Company will be able to raise additional capital in light of factors such as the market demand for its securities, the state of financial markets for independent oil companies (including the markets for debt), oil and gas prices and general market conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" for a discussion of the Company's capital budget. The Company expects to continue using its bank credit facility to borrow funds to supplement its available cash. The amount the Company may borrow under the credit facility may not exceed a borrowing base determined by the lenders based on their projections of the Company's future production, future production costs and taxes, commodity prices and other factors. The Company cannot control the assumptions the lenders use to calculate the borrowing base. The lenders may, without the Company's consent, adjust the borrowing base at any time. If the Company's borrowings under the credit facility exceed the borrowing base, the lenders may require that the Company repay the excess. If this were to occur, the Company may have to sell assets or seek financing from other sources. The Company can make no assurances that it would be successful in selling assets or arranging substitute financing. For a description of the bank credit facility and its principal terms and conditions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Interruptions from Severe Weather. The Company's operations are conducted principally in the Rocky Mountain region. The weather in this area can be extreme and can cause interruption in the Company's exploration and production operations. Moreover, especially severe weather can result in damage to facilities entailing longer operational interruptions and significant capital investment. Likewise, the Company's Rocky Mountain operations are subject to disruption from winter storms and severe cold, which can limit operations involving fluids and impair access to the Company's facilities. A portion of the Company's acreage is affected by winter lease stipulations that restrict the period of time during which operations may be conducted on the leases. The Company's leases that are affected by the winter stipulations prohibit drilling and completing activities from late November to mid-May, but allow production activities all year round. The Company Invests Heavily in Exploration. The Company has historically invested a significant portion of its capital budget in drilling exploratory wells in search of unproved oil and gas reserves. The Company cannot be certain that the exploratory wells it drills will be productive or that it will recover all or any portion of its investments. In order to increase the chances for exploratory success, the Company often invests in seismic or other geoscience data to assist it in identifying potential drilling objectives. Additionally, the cost of drilling, completing and testing exploratory wells is often uncertain at the time of the Company's initial investment. Depending on complications encountered while drilling, the final cost of the well may significantly exceed that which the Company originally estimated. The Company capitalizes all direct costs of drilling an unsuccessful exploratory well in the period in which the well is determined not to be producible in 27 commercial quantities. Under the full-cost method of accounting these costs are then depleted using the units of production method based on the proven reserves determined by independent petroleum engineers. Operating Hazards and Uninsured Risks. The oil and gas business involves a variety of operating risks, including fire, explosion, pipe failure, casing collapse, abnormally pressured formations, and environmental hazards such as oil spills, gas leaks, and discharges of toxic gases. The occurrence of any of these events with respect to any property operated or owned (in whole or in part) by the Company could have a material adverse impact on the Company. The Company and the operators of its properties maintain insurance in accordance with customary industry practices and in amounts that management believes to be reasonable. However, insurance coverage is not always economically feasible and is not obtained to cover all types of operational risks. The occurrence of a significant event that is not fully insured could have a material adverse effect on the Company's financial condition. Drilling and Operating Risks. The Company's oil and gas operations are subject to all of the risks and hazards typically associated with drilling for, and production and transportation of, oil and gas. These risks include the necessity of spending large amounts of money for identification and acquisition of properties and for drilling and completion of wells. In the drilling of exploratory or development wells, failures and losses may occur before any deposits of oil or gas are found. The presence of unanticipated pressure or irregularities in formations, blow-outs or accidents may cause such activity to be unsuccessful, resulting in a loss of the Company's investment in such activity. If oil or gas is encountered, there can be no assurance that it can be produced in quantities sufficient to justify the cost of continuing such operations or that it can be marketed satisfactorily. Drilling Plans Subject to Change. This report includes descriptions of the Company's future drilling plans with respect to its prospects. A prospect is a property on which the Company's geoscientists have identified what they believe, based on available seismic and geological information, to be indications of hydrocarbons. The Company's prospects are in various stages of review. Whether or not the Company ultimately drills a prospect may depend on the following factors: receipt of additional seismic data or reprocessing of existing data; material changes in oil or gas prices; the costs and availability of drilling equipment; success or failure of wells drilled in similar formations or which would use the same production facilities; availability and cost of capital; changes in the estimates of costs to drill or complete wells; the Company's ability to attract other industry partners to acquire a portion of the working interest to reduce exposure to costs and drilling risks; decisions of the Company's joint working interest owners; and the results of the BLM's EIS. The Company will continue to gather data about its prospects, and it is possible that additional information may cause the Company to alter its drilling schedule or determine that a prospect should not be pursued at all. Financial Reporting Impact of Full Cost Method of Accounting. The Company follows the full cost method of accounting for its oil and gas properties. A separate cost center is maintained for expenditures applicable to each country in which the Company conducts exploration and/or production activities. Under such method, the net book value of properties on a country-by-country basis, less related deferred income taxes, may not exceed a calculated "ceiling." The ceiling is the estimated after tax future net revenues from proved oil and gas properties, discounted at 10% per year. In calculating discounted future net revenues, oil and gas prices in effect at the time of the calculation are held constant, except for changes which are fixed and determinable by existing contracts. The net book value is compared to the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense. Under SEC full cost accounting rules, any write-off recorded may not be reversed even if higher oil and gas prices increase the ceiling applicable to future periods. Future price 28 decreases could result in reductions in the carrying value of such assets and an equivalent charge to earnings. Restrictions on Production Due to Being Non-Operator in Bohai Bay. Because the Company is not the operator and holds a minority interest it cannot control the pace of exploration or development in the Bohai Bay properties or major decisions affecting drilling of wells or the plan for development and production, although contract provisions give the Company certain consent rights in some matters. Kerr-McGee's influence over these matters can affect the pace at which the Company spends money on this project. If Kerr-McGee were to lose interest in this project, then unless the Bohai Bay properties are sold to another party, the pace of development of the blocks could slow down or stop altogether and the blocks may never be developed. The Company currently does not believe it has sufficient funds to purchase Kerr-McGee's interests in these blocks if they were offered. On the other hand, if Kerr-McGee were to decide to accelerate development of this project, the Company could be required to provide cash to meet its share of costs at a faster pace than anticipated, which might exceed its ability to raise funds. If, because of this, the Company were unable to pay our share of costs, it could lose or be forced to sell the Bohai bay properties or be forced to not participate in the exploration or development of specific prospects or fields on the blocks, potentially diminishing the value of the Bohai Bay assets. Political, Economic or International Factors Affecting China. Ownership of property interests and production operations in areas outside the United States are subject to various risks inherent in foreign operations. These risks may include: . loss of revenue, property and equipment as a result of expropriation, nationalization, war or insurrections; . increases in taxes and governmental royalties; . renegotiation of contracts with governmental entities and quasi- governmental agencies; . change in laws and policies governing operations of foreign based companies; . labor problems; . other uncertainties arising out of foreign government sovereignty over our international operations; and . currency restrictions and exchange rate fluctuations; Tensions between China and its neighbors or various Western countries, especially the United States, changes in internal Chinese leadership, social or political disruptions within China, a downturn in the Chinese economy, or a change in Chinese laws or attitudes toward foreign investment could make China an unfavorable environment in which to invest. Although all the foreign interest owners in the Bohai Bay properties have the right to sell production in the world market, the regulation of the concession by China, and the possible participation by China National Offshore Oil Company as a large working interest owner, make Chinese internal and external affairs important to the investment in the Bohai Bay. If any of these negative events were to occur, it could lead to a decision that there is an intolerable level of risk in continuing with the investment, or the Company may be unable to attract equity investors or lenders, or satisfy any then-existing lenders. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. Operating Risk in China. Offshore operations, such as our Bohai Bay properties, are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and/or loss from typhoons or other adverse weather conditions. These conditions can 29 cause substantial damage to facilities and interrupt production. As a result, the Company could incur substantial liabilities that could result in financial losses or failure. CERTAIN DEFINITIONS TERMS USED TO DESCRIBE QUANTITIES OF OIL AND NATURAL GAS . Bbl -- One stock tank barrel, or 42 US gallons liquid volume, of crude oil or other liquid hydrocarbons. . Bcf -- One billion cubic feet of natural gas. . Bcfe -- One billion cubic feet of natural gas equivalent. . BOE -- One barrel of oil equivalent, converting gas to oil at the ratio of 6 Mcf of gas to 1 Bbl of oil. . MBbl -- One thousand Bbls. . Mcf -- One thousand cubic feet of natural gas. . Mcfe -- One thousand cubic feet of natural gas equivalent. . MMBbl -- One million Bbls of oil or other liquid hydrocarbons. . MMcf -- One million cubic feet of natural gas. . MBOE -- One thousand BOE. . MMBOE -- One million BOE. TERMS USED TO DESCRIBE THE COMPANY'S INTERESTS IN WELLS AND ACREAGE . Gross oil and gas wells or acres -- The Company's gross wells or gross acres represent the total number of wells or acres in which the Company owns a working interest. . Net oil and gas wells or acres -- Determined by multiplying "gross" oil and natural gas wells or acres by the working interest that the Company owns in such wells or acres represented by the underlying properties. TERMS USED TO ASSIGN A PRESENT VALUE TO THE COMPANY'S RESERVES . Standard measure of proved reserves -- The present value, discounted at 10%, of the pre-tax future net cash flows attributable to estimated net proved reserves. The Company calculates this amount by assuming that it will sell the oil and gas production attributable to the proved reserves estimated in its independent engineer's reserve report for the prices it received for the production on the date of the report, unless it had a contract to sell the production for a different price. The Company also assumes that the cost to produce the reserves will remain constant at the costs prevailing on the date of the report. The assumed costs are subtracted from the assumed revenues resulting in a stream of future net cash flows. Estimated future income taxes using rates in effect on the date of the report are deducted from the net cash flow stream. The after- tax cash flows are discounted at 10% to result in the standardized measure of the Company's proved reserves. 30 . Pre-tax discounted present value -- The discounted present value of proved reserves is identical to the standardized measure, except that estimated future income taxes are not deducted in calculating future net cash flows. The Company discloses the discounted present value without deducting estimated income taxes to provide what it believes is a better basis for comparison of its reserves to the producers who may have different tax rates. TERMS USED TO CLASSIFY OUR RESERVE QUANTITIES . Proved reserves -- The estimated quantities of crude oil, natural gas and natural gas liquids which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and natural gas reservoirs under existing economic and operating conditions. The SEC definition of proved oil and gas reserves, per Article 4-10(a)(2) of Regulation S-X, is as follows: Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (a) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (b) Reserves which can be produced economically through application of improved recovery, techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (c) Estimates of proved reserves do not include the following: (1) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (2) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (3) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (4) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. . Proved developed reserves -- Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. . Proved undeveloped reserves -- Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. 31 TERMS WHICH DESCRIBE THE COST TO ACQUIRE THE COMPANY'S RESERVES . Finding costs -- The Company's finding costs compare the amount the Company spent to acquire, explore and develop its oil and gas properties, explore for oil and gas and to drill and complete wells during a period, with the increases in reserves during the period. This amount is calculated by dividing the net change in the Company's evaluated oil and property costs during a period by the change in proved reserves plus production over the same period. The Company's finding costs as of December 31 of any year represent the average finding costs over the three-year period ending December 31 of that year. TERMS WHICH DESCRIBE THE PRODUCTIVE LIFE OF A PROPERTY OR GROUP OF PROPERTIES . Reserve life -- A measure of the productive life of an oil and gas property or a group of oil and gas properties, expressed in years. Reserve life for the years ended December 31, 2001, 2000 or 1999 equal the estimated net proved reserves attributable to a property or group of properties divided by production from the property or group of properties for the four fiscal quarters preceding the date as of which the proved reserves were estimated. TERMS USED TO DESCRIBE THE LEGAL OWNERSHIP OF THE COMPANY'S OIL AND GAS PROPERTIES . Royalty interest -- A real property interest entitling the owner to receive a specified portion of the gross proceeds of the sale of oil and natural gas production or, if the conveyance creating the interest provides, a specific portion of oil and natural gas produced, without any deduction for the costs to explore for, develop or produce the oil and natural gas. A royalty interest owner has no right to consent to or approve the operation and development of the property, while the owners of the working interests have the exclusive right to exploit the mineral on the land. . Working interest -- A real property interest entitling the owner to receive a specified percentage of the proceeds of the sale of oil and natural gas production or a percentage of the production, but requiring the owner of the working interest to bear the cost to explore for, develop and produce such oil and natural gas. A working interest owner who owns a portion of the working interest may participate either as operator or by voting his percentage interest to approve or disapprove the appointment of an operator and drilling and other major activities in connection with the development and operation of a property. TERMS USED TO DESCRIBE SEISMIC OPERATIONS . Seismic data -- Oil and gas companies use seismic data as their principal source of information to locate oil and gas deposits, both to aid in exploration for new deposits and to manage or enhance production from known reservoirs. To gather seismic data, an energy source is used to send sound waves into the subsurface strata. These waves are reflected back to the surface by underground formations, where they are detected by geophones which digitize and record the reflected waves. Computers are then used to process the raw data to develop an image of underground formations. . 2-D seismic data -- 2-D seismic survey data has been the standard acquisition technique used to image geologic formations over a broad area. 2-D seismic data is collected by a single line of energy sources which reflect seismic waves to a single line of geophones. When processed, 2-D seismic data produces an image of a single vertical plane of sub-surface data. 32 . 3-D seismic -- 3-D seismic data is collected using a grid of energy sources, which are generally spread over several miles. A 3-D survey produces a three dimensional image of the subsurface geology by collecting seismic data along parallel lines and creating a cube of information that can be divided into various planes, thus improving visualization. Consequently, 3-D seismic data is a more reliable indicator of potential oil and natural gas reservoirs in the area evaluated. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's major market risk exposure is in the pricing applicable to its gas production. Realized pricing is primarily driven by the prevailing price for crude oil and spot prices applicable to Ultra's US natural gas production. Historically, prices received for gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations ranged from a monthly low of $1.72 per Mcf to a monthly high of $7.61 per Mcf during 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report Consolidated Balance Sheets December 31, 2001 and 2000 Consolidated Statements of Operations and Deficit for the Years Ended December 31, 2001, 2000, the Six-Months Ended December 31, 1999 and Year Ended June 30, 1999 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000, the Six-Months Ended December 31, 1999 and Year Ended June 30, 1999 Consolidated Statements of Cash Flow for the Years Ended December 31, 2001, 2000, the Six-Months Ended December 31, 1999 and Year Ended June 30, 1999 Notes to Consolidated Financial Statements ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item will be included in our definitive proxy statement, which will be filed not later than 120 days after December 31, 2001 and is incorporated herein by reference. 33 ITEM 11. EXECUTIVE COMPENSATION. The information required by this item will be included in our definitive proxy statement, which will be filed not later than 120 days after December 31, 2001 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item will be included in our definitive proxy statement, which will be filed not later than 120 days after December 31, 2001 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item will be included in our definitive proxy statement, which will be filed not later than 120 days after December 31, 2001 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: See Index to Consolidated Financial Statements in Item 8. 2. Financial Statement Schedules: None 3. Exhibits. The following Exhibits are filed herewith pursuant to Rule 601 of the Regulation S-K or are incorporated by reference to previous filings. Exhibits designated with a "+" constitute a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. Exhibit Number Description - -------------- ----------- 3.1 Articles of Incorporation of Ultra Petroleum Corp. - (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001) 3.2 By-Laws of Ultra Petroleum Corp. - (incorporated by reference to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001) 4.1 Specimen common share certificate - (incorporated by reference to Exhibit 4.1 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001) 10.1 First Amended and Restated Credit Agreement dated March 1, 2002 among Bank One, NA, Union Bank of California, N.A., Guaranty Bank, FSB, Hibernia National Bank, Ultra Resources, Inc. and Banc One Capital Markets, Inc. 34 10.2 First Amendment to Credit Agreement dated July 19, 2001 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001) 10.3 Credit Agreement dated March 22, 2000 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001) 10.4 Ratification of and Amendment to Mortgage dated February 15, 2001 (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001) 10.5 Articles of Merger dated July 16, 2001 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001) 10.6 Plan of Merger and Reorganization dated July 16, 2001 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001) 21.1 Subsidiaries of the Company 23.1 Consent of Netherland Sewell & Associates, Inc. (b) Reports on Form 8-K None 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ULTRA PETROLEUM CORP. Date: March 29, 2002 By: /s/ Michael D. Watford ------------------------------------------ Name: Michael D. Watford Title: Director, Chairman of the Board, CEO and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Michael D. Watford Chairman, Chief Executive March 29, 2002 - ------------------------- Officer and President Michael D. Watford /s/ W. Charles Helton Director March 29, 2002 - ------------------------- W. Charles Helton /s/ James E. Nielson Director March 29, 2002 - ------------------------- James E. Nielson /s/ Robert E. Rigney Director March 29, 2002 - ------------------------- Robert E. Rigney /s/ James C. Roe Director March 29, 2002 - ------------------------- James C. Roe /s/ F. Fox Benton III Vice President, March 29, 2002 - ------------------------- Business Development F. Fox Benton III and Finance 36 MANAGEMENT'S REPORT The consolidated financial statements and all other information in the annual report are the responsibility of management. The consolidated financial statements and the financial information appearing in the annual report have been prepared in accordance with accounting principles generally accepted in Canada, except for the supplemental disclosures regarding oil and gas producing activities which have been prepared in accordance with disclosure standards generally accepted in the United States of America. Management has designed and maintains a system of internal accounting controls, policies and procedures in order to provide for the safeguarding of assets and preparation of relevant, reliable and timely financial information. External auditors, appointed by the shareholders, have examined the consolidated financial statements. The Board of Directors has reviewed the consolidated financial statements with management and the auditors, and has approved the statements. /s/ Michael D. Watford /s/ Kristen J. Miller - ------------------------------- -------------------------------- Michael D. Watford Kristen J. Miller Chief Executive Officer Financial Reporting Manager March 18, 2002 AUDITORS' REPORT To the Shareholders of Ultra Petroleum Corporation We have audited the consolidated balance sheets of Ultra Petroleum Corporation and subsidiaries as at December 31, 2001 and 2000, and the consolidated statements of operations and deficit, shareholders' equity and cash flows for the years ended December 31, 2001 and 2000, the six months ended December 31,1999 and the year ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000, the six months ended December 31,1999 and the year ended June 30, 1999, in accordance with accounting principles generally accepted in Canada. As required by the Company Act (British Columbia), we report that, in our opinion, these principles have been applied on a consistent basis. /s/ KPMG, LLP - --------------------------- KPMG, LLP Denver, Colorado March 18, 2002 ULTRA PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars) December 31, ------------------------------------------- 2001 2000 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 1,379,462 $ 1,143,591 Restricted cash 207,179 200,126 Accounts receivable, less allowance of $250,000 7,358,742 8,278,538 at December 31, 2000 and 1999 Prepaid drilling costs and other current assets 2,823,613 839,892 Note receivable (Note 8) - 2,530,976 ------------ ------------ 11,768,996 12,993,123 Oil and gas properties, using the full cost method of accounting (Note 3) 155,221,187 59,728,715 Capital assets (Note 4) 592,605 455,448 ------------ ------------ TOTAL ASSETS $167,582,788 $ 73,177,286 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 21,096,348 $ 12,752,483 Long-term debt (Note 5) 46,092,928 24,530,612 Deferred income taxes 4,974,008 Deferred revenue 100,000 200,000 Shareholders' equity: Share capital (Note 6) 92,585,148 50,838,663 Retained Earnings (Deficit) 2,734,356 (15,144,472) ------------ ------------ 95,319,504 35,694,191 ------------ ------------ Commitments and contingencies (Note 12) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $167,582,788 $ 73,177,286 ============ ============ See accompanying notes to consolidated financial statements. Approved on behalf of the Board: /s/ Michael D. Watford /s/ James E. Nielson - ------------------------------- ---------------------------------- Michael D. Watford, Director James E. Nielson, Director
ULTRA PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Six Months (Expressed in U.S. Dollars) Year Ended Ended Year Ended ---------------------------------------------- ------------- ------------- December 31, December 31, December 31, December 31, June 30 2001 2000 1999 1999 1999 ---------------------------------------------- ------------ ------------ (unaudited) REVENUES: Natural gas sales $ 38,204,298 $ 19,399,001 $ 8,229,984 $ 4,352,184 $ 6,352,315 Oil sales 2,996,955 1,603,635 746,722 433,627 670,023 ------------ ------------ ------------ ------------ ------------ 41,201,253 21,002,636 8,976,706 4,785,811 7,022,338 ------------ ------------ ------------ ------------ ------------ EXPENSES: Production expenses and taxes 9,023,271 4,241,020 2,714,966 1,329,034 2,571,081 Depletion and depreciation 6,687,433 3,162,568 2,105,663 1,186,395 1,794,307 Ceiling test write-down - - - - 3,416,786 Bad debt expense (recovery) - - 1,983,828 (35,588) 2,019,416 General and administrative 4,231,214 3,078,156 3,556,564 1,667,846 5,861,125 Interest 1,687,172 802,364 679,491 344,284 576,506 ------------ ------------ ------------ ------------ ------------ 21,629,090 11,284,108 11,040,512 4,491,971 16,239,221 OPERATING INCOME (LOSS) 19,572,163 9,718,528 (2,063,806) 293,840 (9,216,883) OTHER INCOME (EXPENSE): Interest 173,411 87,879 33,900 18,219 151,709 Other 220,016 83,519 135,008 - 135,008 Lawsuit settlement (Note 12) - - (1,875,610) (1,875,610) - ------------ ------------ ------------ ------------ ------------ 393,427 171,398 (1,706,702) (1,857,391) 286,717 ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) FOR THE PERIOD BEFORE 19,965,590 9,889,926 (3,770,508) (1,563,551) (8,930,166) INCOME TAXES Income tax provision - deferred 2,086,762 - - - - INCOME (LOSS) FOR THE PERIOD 17,878,828 9,889,926 (3,770,508) (1,563,551) (8,930,166) DEFICIT, beginning of period (15,144,472) (25,034,398) (21,263,890) (23,470,847) (14,540,681) ------------ ------------ ------------ ------------ ------------ DEFICIT, end of period $ 2,734,356 $ (5,254,546) $(28,804,906) $(26,597,949) $(23,470,847) ============ ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.25 $ 0.17 $ (0.07) $ (0.03) $ (0.16) ============ ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE - FULLY DILUTED $ 0.24 $ 0.17 $ (0.07) $ (0.03) $ (0.16) ============ ============ ============ ============ ============ Weighted average common shares outstanding - basic 72,371,839 56,821,748 56,446,086 56,670,808 55,804,459 ============ ============ ============ ============ ============ Weighted average common shares outstanding - fully diluted 75,931,529 58,438,783 56,446,086 56,670,808 55,804,459 ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. ULTRA PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Share Capital Authorized 10,000,000 preferred shares 100,000,000 common shares Year Ended Year Ended Year Ended December 31, 2001 December 31, 2000 December 31, 1999 ------------------------------------------------------------ ---------------------------- Issued Number Amount Number Amount Number Amount ------------------------------------------------------------ ---------------------------- Common Shares Balance, beginning of year 56,939,762 $ 50,838,663 56,751,125 $ 50,666,631 56,493,725 $ 50,485,327 Employee stock option plan 701,500 611,387 5,000 4,032 257,400 181,304 Employee stock plan 682,198 1,098,448 119,403 80,000 - - Acreage option purchase - - 64,234 88,000 - - Merger with Pendaries Petroleum Ltd. 40,036,650 - - - - - ---------- ------------ ---------- ------------ ---------- ------------ Balance, end of period 73,318,418 $ 92,585,148 56,939,762 $ 50,838,663 56,751,125 $ 50,666,631 ========== ============ ========== ============ ========== ============ Retained earnings (deficit) Balance, beginning of year (15,144,472) (25,034,398) (21,263,890) Earnings for period 17,878,828 9,889,926 (3,770,508) ------------ ------------ ------------ Balance, end of period 2,734,356 (15,144,472) (25,034,398) ============ ============ ============ Six Months Ended Year Ended December 31, 1999 June 30, 1999 ------------------------------------------------------------ Issued Number Amount Number Amount ------------------------------------------------------------ Common Shares Balance, beginning of year 56,493,725 $ 50,485,327 48,091,715 $ 32,312,036 Employee stock option plan 257,400 181,304 1,165,910 572,849 Conversion of special warrants - - 7,236,100 17,600,442 ---------- ------------ ---------- ------------ Balance, end of period 56,751,125 $ 50,666,631 56,493,725 $ 50,485,327 ========== ============ ========== ============ Retained earnings (deficit) Balance, beginning of year (23,470,847) (14,540,681) Earnings for period (1,563,551) (8,930,166) ------------ ------------ Balance, end of period (25,034,398) (23,470,847) ============ ============
ULTRA PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Year Ended Ended Year Ended -------------------------------------------- ----------------------------- December 31, December 31, December 31, December 31, June 30, 2001 2000 1999 1999 1999 ------------ ------------ ------------ ------------- ---------- (unaudited) CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES: Income (loss) for the year $ 17,878,828 $ 9,889,926 $(3,770,508) $(1,563,551) $ (8,930,166) Add (deduct): Items not involving cash: Depletion and depreciation 6,687,433 3,162,568 2,105,663 1,186,395 1,794,307 Deferred income taxes 2,086,762 Ceiling test write-down - - - - 3,416,786 Provision for bad debts - - 1,983,828 - 2,019,416 Stock compensation 848,448 - - - - Net changes in non-cash working capital: Restricted cash (7,053) 390,145 (413,802) 379,272 (856,062) Accounts receivable 919,796 (5,740,728) 2,748,840 26,782 6,640,176 Prepaid expenses and other current assets (1,983,721) (511,023) 2,348,214 49,896 (186,058) Note receivable (683,137) - - - 750,000 Accounts payable and accrued liabilities 9,962,508 1,955,546 (4,570,146) 645,533 (2,635,020) Deferred revenue (100,000) (100,000) (100,000) (50,000) (100,000) ------------------------------------------------------------------------------ 35,609,864 9,046,434 332,089 674,327 1,913,379 ------------------------------------------------------------------------------ INVESTING ACTIVITIES: Oil and gas property expenditures (61,330,153) (22,157,020) (9,318,200) (6,187,786) (21,996,324) Note receivable - (2,530,976) - - - Purchase of capital assets (317,592) (212,300) (22,392) (45,054) (58,319) Proceeds from sale of oil and gas properties 312,365 359,764 5,000,000 4,608,712 21,038,000 ------------------------------------------------------------------------------ (61,335,380) (24,540,532) (4,340,592) (1,624,128) (1,016,643) FINANCING ACTIVITIES: Long-term debt, net 25,350,000 16,063,966 116,646 387,485 (6,583,126) Issuance of shares 611,387 172,032 369,183 181,304 572,849 ------------------------------------------------------------------------------ 25,961,387 16,235,998 485,829 568,789 (6,010,277) ------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH DURING THE PERIOD 235,871 741,900 (3,522,674) (381,012) (5,113,541) CASH AND CASH EQUIVALENTS, beginning of period 1,143,591 401,691 3,924,365 782,702 5,896,243 ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, end of period $ 1,379,462 $ 1,143,591 $ 401,691 $ 401,691 $ 782,702 ============================================================================= SUPPLEMENTAL INFORMATION Cash paid for: Interest $ 1,687,172 $ 802,364 $ 679,491 $ 564,810 $ 454,742 Income taxes $ 10,000 $ 25,000 $ 3,000 $ 3,000 $ - Supplemental schedule of non-cash investing activities Acquisitions Fair value of assets acquired $ 43,950,263 $ - $ - $ - $ - Less: liabilities assumed (4,225,978) - - - - Cash acquired 312,365 - - - - ------------------------------------------------------------------------------ Fair value of stock issued $ 40,036,650 $ - $ - $ - $ - ==============================================================================
See accompanying notes to consolidated financial statements ULTRA PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. dollars unless otherwise noted) Years ended December 31, 2001 and 2000, six months ended December 31, 1999 and year ended June 30, 1999. DESCRIPTION OF THE BUSINESS Ultra Petroleum Corporation (the "Company") is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil and gas properties. The Company was incorporated under the laws of British Columbia, Canada. At March 1, 2000 the "Company" was continued under the laws of the Yukon Territory, Canada. The Company's principal business activities are in the Green River Basin of southwest Wyoming and Bohai Bay, China. 1. SIGNIFICANT ACCOUNTING POLICIES: Fiscal year change. The Company changed its fiscal year-end to a calendar year- end effective December 31, 1999. The six month transition period ended December 31, 1999 is presented herein. (a) Basis of presentation and principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Ultra Petroleum (U.S.A.) Inc., Ultra Resources, Inc, Pendaries Petroleum Ltd. and Sino-American Energy Corporation. All material inter-company transactions and balances have been eliminated upon consolidation. (b) Accounting principles: The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada. (c) Revenue recognition and deferred revenue: Revenues from oil and gas operations are recognized at the time the oil is sold or natural gas is delivered. The cash received upon dedicating certain production volumes to a gas pipeline is deferred and is being included in natural gas sales on a straight line basis over the term of the five year dedication. (d) Cash and cash equivalents: We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. (e) Restricted cash: Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute. Wyoming law requires that these funds be held in a federally insured bank in Wyoming. (f) Capital assets: Capital assets are recorded at cost and depreciated using the declining-balance method based on a seven-year useful life. (g) Oil and gas properties: The Company uses the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized to the Company's cost centers. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. Separate cost centers are maintained for each country in which the Company has operations. During 2000 and 1999, the Company's primary oil and gas operations were conducted in the United States. During 2001, the Company began drilling activities in Bohai Bay, China. The capitalized costs, together with the costs of production equipment, are depleted using the units-of-production method based on the proven reserves as determined by independent petroleum engineers. Oil and gas reserves and production are converted into equivalent units based upon relative energy content. Costs of acquiring and evaluating unproved properties are initially excluded from the costs subject to depletion. These unproved properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the costs subject to depletion. The total capitalized cost of oil and gas properties less accumulated depletion is limited to an amount equal to the estimated future net cash flows from proved reserves, discounted at 10%, using year-end prices, plus the cost (net of impairment) of unproved properties as adjusted for related tax effects (the "full cost ceiling test limitation"). Proceeds from the sale of oil and gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion. Substantially all of the Company's exploration, development and production activities are conducted jointly with others and, accordingly, these financial statements reflect only the Company's proportionate interest in such activities. (h) Income taxes: The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences. Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. (i) Foreign currency translation: The Company has adopted the United States dollar as its reporting currency, which is also its functional currency. The Company and its subsidiaries are considered to be integrated operations and accounts in Canadian dollars are translated using the temporal method. Under this method, monetary assets and liabilities are translated at the rates of exchange in effect at the balance sheet date; non-monetary assets at historical rates and revenue and expense items at the average rates for the period other than depletion and depreciation which are translated at the same rates of exchange as the related assets. The net effect of the foreign currency translation is included in current operations. (j) Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to common stock by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of stock options. The Company uses the treasury stock method to determine the dilutive effect. The following table provides a reconciliation of the components of basic and diluted net income per common share for the years ended December 31, 2001 and 2000, the six months ended December 31, 1999 and the year ended June 30, 1999:
For the six months ended For the year For the years ended December 31, December 31, ended June 30, 2001 2000 1999 1999 --------------------------------- ------------- -------------- Net income (loss) $17,878,828 $ 9,889,926 $(1,563,551) $(8,930,166) =========== =========== =========== =========== Weighted average common shares outstanding during the period 72,371,839 56,821,748 56,670,808 55,804,459 Effect of dilutive instruments 3,559,690 1,617,035 - - ----------- ----------- ----------- ----------- Weighted average common shares outstanding during the period including the effects of dilutive instruments 75,931,529 58,438,783 56,670,808 55,804,459 =========== =========== =========== =========== Basic earnings (loss) per share $ 0.25 $ 0.17 $ (0.03) $ (0.16) =========== =========== =========== =========== Diluted earnings (loss) per share $ 0.24 $ 0.17 $ (0.03) $ (0.16) =========== =========== =========== =========== Number of shares not included in dilutive earnings (loss) per share that would have been antidilutive because the exercise price was greater than the average market price of the common shares. 373,942 - 1,026,122 359,167 =========== =========== =========== ===========
(k) Use of estimates: Preparation of consolidated financial statements in accordance with generally accepted accounting principles in Canada requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (l) Reclassifications: Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year financial statement presentation. (m) Impact of recently issued accounting pronouncements: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations ("SFAS No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 was effective as of July 1, 2001 and SFAS No. 142 was effective January 1, 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption. The Canadian Institute of Chartered Accountants ("CICA") has adopted similar standards and accordingly, there will be no U.S. - Canadian GAAP differences arising from the addition of these standards. The Company has no goodwill or intangible assets. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company will also record a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently assessing the impact, if any, on the Company's consolidated financial statements for future periods. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from ongoing operations. The Company has adopted SFAS 144 as of January 1, 2002. Because the Company has elected the full-cost method of accounting for oil and gas exploration and development activities, the impairment provisions of SFAS 144 to not apply to the Company's oil and gas assets, which are subject to ceiling limitations. For the Company's non-oil and gas assets, the method of impairment assessment is unchanged from SFAS 121. The adoption of SFAS 144 had no impact on the Company's consolidated financial statements. 2. ACQUISITION OF PENDARIES PETROLEUM LTD.: Effective January 16, 2001, the Company completed the previously announced agreement to acquire 100% of the outstanding shares of Pendaries Petroleum Ltd. (Pendaries) and its wholly owned subsidiary Sino-American Energy Corporation in exchange for 14,994,958 shares of Ultra Petroleum Corp. common stock valued at $2.67. The value of the shares was based on the average price of the shares a few days prior to and a few days subsequent to the date the transaction was closed. The transaction was accounted for using the purchase method of accounting and was valued at $40 million. Accordingly, Pendaries' results of operations have been included in the consolidated financial statements of income from the effective date of acquisition. The consolidated balance sheet dated December 31, 2001, includes the assets and liabilities, as well as the adjustments required to record the acquisition in accordance with purchase accounting. The impact of the acquisition increased the undeveloped portion of the Company's full cost pool by $43 million and also carried to the balance sheet a net deferred tax liability of $962,081. This deferred tax liability was created as a result of a difference between the book and tax basis in Sino-American Energy Corporation's oil and gas properties. If the acquisition had occurred at the beginning of 2000, the Company would have reported no additional expense for operating expenses related to the China property as these properties still remain in the development phase. Since the properties are not producing, there would not have been any impact to revenues, net income or earnings per share. Additionally, no deferred tax liability would have been recorded as the net operating losses on a consolidated level would have equaled the variance between the book and tax basis. There would be no material change to the consolidated financial statements for the year ended December 31, 2001 since the acquisition occurred close to the beginning of the year. 3. OIL AND GAS PROPERTIES: DECEMBER 31, DECEMBER 31, 2001 2000 --------------------------- Developed Properties: Acquisition, equipment, exploration, development drilling and environmental costs $100,574,404 $54,362,982 Less accumulated depletion, depreciation and amortization (13,499,605) (7,047,605) ------------- ------------ 87,074,799 47,315,377 Unproved properties - China 55,894,246 - Unproved properties - Wyoming 12,252,142 12,413,338 ------------- ----------- $ 155,221,187 $59,728,715 ============= =========== 4. CAPITAL ASSETS:
December 31, December 31, December 31, December 31, 2001 2001 Accumulated 2001 Net 2000 Net Cost Depreciation Book Value Book Value -------------------------------------------------------------- Computer equipment $ 591,854 $337,648 $254,206 $241,223 Office equipment 228,880 122,051 106,829 67,325 Field equipment 183,775 118,934 64,841 50,420 Other 258,625 91,896 166,729 96,480 ---------- -------- -------- -------- $1,263,134 $670,529 $592,605 $455,448 ========== ======== ======== ========
5. LONG-TERM DEBT: December 31, December 31, 2001 2000 ----------- ----------- Bank indebtedness $43,000,000 $17,650,000 Short term obligations to be refinanced 3,092,928 6,880,612 ----------- ----------- $46,092,928 $24,530,612 =========== =========== Bank indebtedness: On March 22, 2000, the Company entered into a new senior revolving credit facility (New Facility) with Bank One, Texas N.A. Proceeds from the New Facility were used to pay off the outstanding balance of the Initial Facility at March 22, 2000 and to fund the Company's drilling programs. This facility provides for a maximum line of credit of $40 million with an initial borrowing base of $18 million. The borrowing base was increased on January 7, 2002 to $50 million. The outstanding balance on the line bears interest at the bank's Prime Rate or LIBOR plus two and one half percent and is secured by all of the Company's Wyoming oil and gas properties. The New Facility expires on March 1, 2003. On March 1, 2002, the Company closed a syndicated senior revolving credit facility with an initial borrowing base of $80 million. The syndicate of five banks includes: Bank One, NA, Union Bank of California, Hibernia National Bank, Guaranty Bank, and Compass Bank. The outstanding balance on the line bears interest at the bank's prime rate or LIBOR plus 1.75% and is secured by all of the Company's Wyoming oil and gas properties. The revolving credit facility contains various covenants and requires the Company to maintain various financial ratios as defined in the agreement. As of December 31, 2002, the Company was in compliance with the covenants and required ratios. Short term obligations to be refinanced: These costs relate to drilling obligations which will be funded on a long term basis through the use of the available borrowing base of bank indebtedness. 6. SHARE CAPITAL: (a) AUTHORIZED: 100,000,000 common shares with no par value (b) ISSUED: Number of Shares Amount ---------- ----------- Balance, June 30, 1998 48,091,715 $32,312,036 Shares issued during the year: For cash 1,165,910 572,849 For conversion of special warrants 7,236,100 17,600,442 ---------- ----------- Balance, June 30, 1999 56,493,725 50,485,327 Shares issued during the period: For cash 257,400 181,304 ---------- ----------- Balance, December 31, 1999 56,751,125 50,666,631 Shares issued during the period: For cash 5,000 4,032 For services rendered 183,637 168,000 ---------- ----------- Balance, December 31, 2000 56,939,762 50,838,663 Shares issued during the period: For cash 1,383,698 1,709,835 For Pendaries Acquisition 14,994,958 40,036,650 ---------- ----------- Balance, December 31, 2001 73,318,418 $92,585,148 ========== =========== (c) SHARE OPTIONS The following table summarizes the changes in stock options for the three-year period ending December 31, 2001: Weighted Average Number of Exercise Price Options (Cdn) ----------- --------------- Balance, June 30, 1998 3,463,220 $0.50 to $7.10 Granted 2,150,000 $1.46 to $3.85 Exercised (545,600) $0.50 to $1.05 Cancelled (1,445,360) $3.79 to $7.10 ----------- --------------- Balance, June 30, 1999 3,622,260 $1.50 to $6.96 Granted 1,595,000 $1.00 to $1.20 Exercised (257,400) $ 1.05 Cancelled (440,000) $ 1.05 ----------- --------------- Balance, December 31, 1999 4,519,860 $1.00 to $6.63 Granted 1,255,000 $0.81 to $4.15 Exercised (5,000) $ 1.20 Cancelled (1,244,860) $1.20 to $6.63 ----------- --------------- Balance, December 31, 2000 4,525,000 $0.81 to $4.15 Granted 1,630,000 $4.69 to $8.20 Exercised (701,500) $1.00 to $4.90 Cancelled (22,500) $1.79 to $8.20 ----------- --------------- Balance, December 31, 2001 5,431,000 $0.81 to $8.20 =========== =============== The share options outstanding at December 31, 2001 were held as follows: No compensation resulted from the granting of these options as all were granted at or above the market value of the common shares at the date of grant. The following table summarizes information about the stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable --------------------------------------- -------------------------------------- Weighted Weighted Range of Weighted Average Average Average Exercise Number Remaining Exercise Price Number Exercise Price Prices (Cdn) Outstanding Contractual Life (Cdn) Exercisable (Cdn) ----------- ----------- ----------------- -------------- ------------ --------------- $0.81-$1.79 3,743,500 7.7 Years $1.40 3,743,500 $1.40 $4.15-8.20 1,687,500 9.2 Years $6.20 1,023,750 $5.86
(d) SHARE PURCHASE WARRANTS: The following table summarizes the changes in the share purchase warrants for the three-year period ending December 31, 2001:
Number of Special Warrants Price Range (Cdn) ------------------------------------- Balance, June 30, 1998 1,455,000 $0.35 to $3.35 Issued upon conversion of Special Warrants 5,832,100 $4.02 to $5.20 Exercised (205,000) $0.48 to $0.56 Expired (1,250,000) $4.02 to $4.62 ------------- Balance, June 30, 1999 5,832,100 $4.02 to $5.20 Expired (4,428,100) $4.02 to $4.62 ------------- Balance, December 31, 1999 1,404,000 $4.02 to $5.20 ------------- Expired (1,404,000) $4.02 to $5.20 ------------- Balance, December 31, 2000 - =============
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) defines a fair value method of accounting for employee stock options and similar equity instruments. SFAS 123 allows for the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), provided that pro forma results of operations are disclosed for those options granted. The Company accounts for stock options granted to employees and directors of the Company under the intrinsic value method. Had the Company reported compensation costs as determined by the fair value method of accounting for option grants to employees and directors, net income (loss) and net income (loss) per common share would approximate the following pro forma amounts:
For the Years Ended December 31, -------------------------------------- 2001 2000 1999 ----------- ---------- ----------- (In thousands, except per share amounts) Net income: As reported $17,878,828 $9,889,926 $(3,770,508) Pro forma $14,924,923 $9,056,297 $(6,000,150) Net income per common share: Basic: As reported $ 0.25 $ 0.17 $ (0.03) Pro forma $ 0.21 $ 0.16 $ (0.11) Diluted: As reported $ 0.24 $ 0.17 $ (0.03) Pro forma $ 0.20 $ 0.16 $ (0.11)
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. The weighted-average fair value of each option granted is estimated on the date of grant using the Black Scholes option pricing model with the following assumptions: at December 31,1999, expected volatility of approximately 68%, at December 31, 2000, expected volatility of approximately 45%, at December 31, 2001, expected volatility of 30%. All options have expected lives of ten years. 7. RELATED PARTY TRANSACTIONS: The following amounts were paid to directors and officers of the Company or its affiliates:
Six months ended Year ended December 31, June 30, 1999 1999 ----------------------------- Office rent and administration services to a company controlled by a director $ 106,899 $404,806 ---------------- ------------- Management bonus to directors and officers $ - $190,743 ---------------- ------------- Wages/fees to directors and officers $ - $193,320 ---------------- ------------- Amounts due from related parties: Enterprise Exploration and Production Inc. (a) - 22,601 Transglobe Energy Corporation (b) 4,299 3,010 ---------------- ------------- Total $ 4,299 $ 44,206 ================ ============= Amounts due to related parties: Arrowhead Minerals Corporation $ - $ 12,200 Enterprise Exploration and Production Inc. - 39,869 ---------------- ------------- Total $ - $ 52,069 ================ =============
The above amounts due from and to related parties were incurred in the normal course of oil and gas operations. There were no related party transactions for the year ended December 31, 2001 and 2000. Related party relationships:(a) Enterprise Exploration and Production Inc. ("Enterprise") One of the Company's directors is the owner of Enterprise. The Company and Enterprise both own working interests in one of the Company's oil and gas properties. (b) Transglobe Energy Corporation ("Transglobe") One of the Company's previous directors is a director and Chairman of Transglobe. The Company and Transglobe both own working interests in a number of the same oil and gas properties. 8. NOTES RECEIVABLE: In conjunction with the arrangement pursuant to which Ultra would acquire all of the issued and outstanding shares of Pendaries Petroleum Ltd (Pendaries) (Note 2), Ultra provided a line of credit to Pendaries' subsidiary, Sino-American Energy Corporation (Sino-American). The line of credit bears interest at the prime rate of Bank One Texas, N.A (9.3% at December 31, 2000). The outstanding balance at December 31, 2000 was $2,530,976. As of January 16, 2001, the closing date of the Pendaries acquisition, the note was converted to an inter-company receivable. 9. INCOME TAXES: The recovery of (provision for) income taxes for the years ended December 31, 2000 and 2001 vary from the amounts that would be computed by applying the U.S. Federal income tax rate of 38.5% to pretax income as a result of the following:
December 31, 2000 December 31, 2001 ----------------- ----------------- Federal tax expense at statutory rate $ 3,598,345 $ 7,133,993 State income tax expense 43,132 468,024 Adjustment to estimated acquired net operating losses and partnership income 1,162,921 169,417 Percentage depletion (477,417) (523,929) Other 5,572 34,870 Decrease in valuation allowance (4,332,553) (5,195,612) ------------ ------------- Actual income tax expense $ - $ 2,086,763 ------------ -------------
The tax effects of temporary differences that give rise to significant portions of the future tax assets and liabilities are as follows:
December 31, 2000 December 31, 2001 ------------------ ----------------- Future tax assets: Property and equipment $ 6,690,227 $ 9,472,486 Net operating loss carry-forward 6,028,824 10,288,856 Other - 36,182 ----------- ------------- 12,719,051 19,797,524 Less valuation allowance (5,208,618) - ----------- ------------- Total future assets 7,510,433 19,797,524 Future tax liabilities - property and equipment (7,510,433) (24,771,533) ----------- ------------- Net future tax assets (liabilities) $ - $ (4,974,009) ----------- ------------- At December 31, 2001, the Company has available non-capital loss carry-forwards as follows: Losses for Financial Timing Losses for Statements Differences Tax Purposes Expiry Dates ------------------------------------------------------------------------------------- Canada (Cdn dollars) $9,082,955 $ 202,180 $ 8,880,775 2001-2008 ------------------------------------------------------------------------------------- United States (US dollars) $ - $25,967,537 $ 25,967,537 2008-2021 -------------------------------------------------------------------------------------
During 2001, the Company fully utilized available net operating loss carry- forwards attributable to continuing operations for financial statement purposes. The benefit of the Canadian loss carry-forwards could only be utilized if the Company were to generate taxable income in Canada. The Company currently has no operations in Canada; any potential benefit from these losses has been excluded from the calculation of deferred taxes. 10. EMPLOYEE BENEFITS: The Company sponsors a qualified tax-deferred savings plan in accordance with provisions of Section 401(k) of the Internal Revenue Code for its U.S. employees. Employees may defer up to 15% of their compensation, subject to certain limitations. The Company matches the employee contributions up to 5% of employee compensation along with a profit sharing contribution of 8% which began in February 2000. The plan operates on a calendar year basis and began in February 1998. The expense associated with the Company's contribution was $187,255 and $130,341 for the years ended 2001 and 2000, respectively, $27,060 for the six months ended December 31, 1999 and $58,978 for the year ended June 30, 1999. 11. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES: The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"), which differ in certain respects from generally accepted accounting principles in the United States ("US GAAP"). Had the Company followed US GAAP, the carrying value of the oil and gas properties would not be materially different than under Canadian GAAP. Under US GAAP, the Company is required to discount future net revenues at 10% for purposes of calculating any required ceiling test write-down. Under Canadian GAAP, future net revenues are not discounted, however, they are reduced for estimated future general and administrative expenses and interest. For the year ended, the six months ended December 31, 1999 and the years-ended June 1999 and 1998, the calculations of the ceiling test write downs that were recorded under Canadian GAAP approximated amounts determined under US GAAP. Total Shareholders' Equity under US GAAP would be $169,199 lower due to the manner in which escrowed shares were accounted for in fiscal 1995. 12. COMMITMENTS AND CONTINGENCIES: The Company is committed to payments, under an operating lease for office space, of $376,000 in 2002 and $380,000 in fiscal 2003 . Approximately 50% of these payments are offset by a sublease with the same term as the primary lease. During the six months ended December 31, 1999, the Company settled the litigation relating to the 1998 plugging and abandonment of the White Estate No. 1 well in Henderson County, Texas. The settlement and the legal fees associated with this litigation resulted in a charge of $1,875,610. The Company is currently involved in various other routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, management, after consultation with legal counsel, is of the opinion that the final resolution of all such currently pending or threatened litigation is not likely to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS: For certain of the Company's financial instruments including accounts receivable, note receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying value for notes payable approximates fair market value because the interest rates are similar to the current rates presently available to the Company for loans with similar terms and maturity. It is not practicable to estimate the fair values of amounts due to and from related parties due to the related party nature of the amounts and the absence of a ready market for such instruments. 14. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED): As discussed in Note 9, during the year the Company fully utilized all available net operating loss carry-forwards attributable to continuing operations for financial statement purposes. The quarterly numbers presented below reflect that fourth quarter adjustment spread proportionately throughout the year and as a result differ from those previously filed.
Revenues from Net Income Basic Continuing Before Income Income Tax Earnings Per Earnings Per Operations Expenses tax Provision Provision Net Income Share -------------------------------------------------------------------------------------- (in thousands, except for per share data) 2001 First Quarter $16,747 $ 5,717 $11,031 $1,146 $ 9,885 $0.14 $0.13 Second Quarter $10,048 $ 5,274 $ 4,774 $ 500 $ 4,274 $0.06 $0.05 Third Quarter $ 6,937 $ 5,091 $ 1,846 $ 199 $ 1,647 $0.02 $0.02 Fourth Quarter $ 7,469 $ 5,155 $ 2,315 $ 242 $ 2,073 $0.03 $0.03 ------- ------- ------- ------ ------- $41,201 $21,237 $19,966 $2,087 $17,879 ======= ======= ======= ====== ======= 2000 First Quarter $ 2,357 $ 1,987 $ 370 - $ 370 $0.01 $0.01 Second Quarter $ 2,652 $ 2,036 $ 616 - $ 616 $0.02 $0.02 Third Quarter $ 3,922 $ 2,122 $ 1,800 - $ 1,800 $0.03 $0.03 Fourth Quarter $12,072 $ 4,969 $ 7,103 - $ 7,103 $0.12 $0.12 ------- ------- ------- ------ ------- $21,003 $11,114 $ 9,889 - $ 9,889 ======= ======= ======= ====== =======
15. DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED): The following information about the Company's oil and gas producing activities is presented in accordance with Financial Accounting Standards Board Statement No. 69: Disclosure About Oil and Gas Producing Activities: A. OIL AND GAS RESERVES: The determination of oil and gas reserves is complex and highly interpretive. Assumptions used to estimate reserve information may significantly increase or decrease such reserves in future periods. The estimates of reserves are subject to continuing changes and, therefore, an accurate determination of reserves may not be possible for many years because of the time needed for development, drilling, testing, and studies of reservoirs. The following unaudited tables as of December 31, 2001, 2000 and 1999 are based upon estimates prepared by Netherland, Sewell & Associates, Inc. dated February 21, 2002, February 12, 2001 and February 4, 2000, respectively. The reserve reports as of July 1, 1999 have been prepared by Gilbert Lausten Jung Associates Ltd. These are estimated quantities of proved oil and gas reserves for the Company and the changes in total proved reserves as of December 31, 2001, 2000 and for the six months ended December 31, 1999 and as of June 30, 1999. All such reserves are located in the United States. B. ANALYSES OF CHANGES IN PROVEN RESERVES:
OIL (BBLS) GAS (MCF) ----------------------- Reserves, July 1, 1998 579,000 57,100,000 --------- ------------- Extensions, discoveries and additions 66,000 8,640,000 Production (42,000) (4,129,000) Revisions 125,000 8,400,000 Acquisition of reserves in place - - Sale of reserves in place (308,000) (28,575,000) --------- ------------- Reserves, July 1, 1999 420,000 41,436,000 --------- ------------- Extensions, discoveries and additions 266,000 33,228,000 Production (19,600) (1,907,600) Revisions (91,400) (1,525,400) Acquisition of reserves in place - - Sale of reserves in place - - --------- ------------- Reserves, July 1, 2000 575,000 71,231,000 --------- ------------- Extensions, discoveries and additions 741,800 91,369,000 Production (50,400) (5,297,400) Revisions 23,900 3,087,400 Acquisition of reserves in place - - Sale of reserves in place - - ---------- ------------- Reserves, January 1, 2001 1,290,300 160,390,000 ---------- ------------- Extensions, discoveries and additions 2,222,900 278,057,000 Production (118,800) (11,499,800) Revisions 88,400 (3,117,600) Acquisition of reserves in place - - Sale of reserves in place - - ----------- ------------ Reserves, January 1, 2002 3,482,800 423,829,600 ----------- ------------ Proved developed reserves: July 1, 1999 350,000 34,400,000 ========== ============ January 1, 2000 297,000 36,480,000 ========== ============ January 1, 2001 683,000 84,550,000 ========== ============ January 1, 2002 1,295,000 150,397,000 ========== ============
C. STANDARDIZED MEASURE: The standardized measure of discounted future net cash flows related to proven oil and gas reserves are as follows (000):
December 31, December 31, December 31, June 30, 2001 2000 1999 1999 ------------ ------------ ------------ --------- Future cash inflows $ 939,441 $1,301,456 $148,609 $ 81,797 Future production costs (257,960) (205,935) (34,708) (13,638) Future development costs (149,806) (43,395) (20,963) (3,677) Future income taxes (25,135) (293,630) - - ------------ ------------ ------------ --------- Future net cash flows 506,541 758,496 92,938 64,482 Discount at 10% (332,707) (402,909) (51,663) $(38,451) ------------ ------------ ------------ --------- Standardized measure of discounted future net cash flows $ 173,834 $ 355,587 $ 41,275 $ 26,031 ============ ============ ============ ========= Pre tax standardized measure SEC PV-10 $ 182,460 $ 493,243 $ 41,275 $ 26,031 ============ ============ ============ =========
The estimate of future income taxes is based on the future net cash flows from proved reserves adjusted for the tax basis of the oil and gas properties but without consideration of general and administrative and interest expenses. D. SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (000)
December 31, December 31, December 31, June 30, 2001 2000 1999 1999 ------------ ------------ ------------ --------- Standardized measure, beginning $ 355,587 $ 41,275 $26,031 $ 15,749 Net revisions (1,820) (371) (1,306) 8,511 Extensions, discoveries and other changes 177,819 140,348 24,771 6,641 Sales of reserves in place - - - (21,751) Changes in future development costs (31,066) (9,622) (7,677) (1,241) Sales of oil and gas, net of production costs (39,762) (18,083) (3,457) (4,451) Net change in prices and production costs (313,708) 191,885 (4,330) 8,201 Development costs incurred during the period that reduce future development costs - 1,385 - 15,787 Accretion of discount 35,559 4,127 2,603 1,575 Net change in income taxes (8,775) 4,643 4,640 (2,990) ------------ ------------ ------------ --------- Standardized measure, ending $ 173,834 $355,587 $41,275 $ 26,031 ============ ============ ============ =========
There are numerous uncertainties inherent in estimating quantities of proved reserves and projected future rates of production and timing of development expenditures, including many factors beyond the control of the Company. The reserve data and standardized measures set forth herein represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. Further, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions, including geologic success, prices, future production levels and costs that may not prove correct over time. Predictions of future production levels are subject to great uncertainty, and the meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Historically, oil and gas prices have fluctuated widely. E. COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES (000):
UNITED STATES - ------------- Year Ended Year Ended Six Months Ended Year Ended Years Ended December 31, December 31, December 31, June 30, 2001 2000 1999 1999 --------------------------------------------------------------- Acquisition costs - unproved properties $ 310 $ - $ 375 $ 598 Exploration 33,845 11,175 3,505 3,907 Development 11,950 18,115 2,308 17,491 ----------- ----------- ------------ ------------ Total $46,105 $29,290 $ 6,188 $21,996 =========== =========== ============ ============ CHINA - ----- Year Ended Year Ended Six Months Ended Year Ended Years Ended December 31, December 31, December 31, June 30, 2001 2000 1999 1999 --------------------------------------------------------------- Acquisition costs - unproved properties $11,944 $ - $ - $ - Exploration - - - - Development - - - - ----------- ----------- ------------ ------------ Total $11,944 $ - $ $ - =========== =========== ============ ============ F. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (US$000): Year Ended Year Ended Six Months Ended Year Ended Years Ended December 31, December 31, December 31, June 30, 2001 2000 1999 1999 --------------------------------------------------------------- Oil and gas revenue $41,201 $21,003 $ 4,786 $ 7,022 Production expenses and taxes (9,023) (4,241) (1,329) (2,571) Depletion and depreciation (6,687) (3,163) (1,186) (1,794) ----------- ----------- ------------ ------------ Total $25,491 $13,599 $ 2,271 $ 2,657 =========== =========== ============ ============
EX-10.1 3 dex101.txt FIRST AMENDED AND RESTATED CREDIT AGREEMENT First Amended and Restated Credit Agreement ------------------------------------------- REVOLVING LINE OF CREDIT OF UP TO $150,000,000.00 AMONG BANK ONE, NA As Administrative Agent, LC Issuer and a Bank, UNION BANK OF CALIFORNIA, N.A. As Syndication Agent and a Bank, GUARANTY BANK, FSB and HIBERNIA NATIONAL BANK Each As a Co-Agent and as a Bank, OTHER FINANCIAL INSTITUTIONS AND BANKS, As Banks, ULTRA RESOURCES, INC. As Borrower AND BANC ONE CAPITAL MARKETS, INC. As Lead Arranger and Sole Book Manager March 1, 2002 TABLE OF CONTENTS
Page ARTICLE I. DEFINITION........................................................................... 1 ARTICLE II. THE LOANS AND LETTERS OF CREDIT...................................................... 16 2.01 The Commitment............................................. 16 2.02 Notice and Manner of Borrowing............................. 17 2.03 Payment Procedure.......................................... 18 2.04 Payments of Interest under the Notes....................... 18 2.05 General Provisions Relating to Interest.................... 19 2.06 Borrowing Base Determination............................... 20 2.07 Mandatory Prepayment Due to a Loan Excess.................. 21 2.08 Other Mandatory Prepayments................................ 22 2.09 Prepayment and Conversion.................................. 22 2.10 Increased Cost of Loans.................................... 22 2.11 Change of Law.............................................. 24 2.12 Mitigation: Mandatory Assignment........................... 25 2.13 Pro Rata Treatment and Payments............................ 25 2.14 Sharing of Payments and Setoffs............................ 25 2.15 Advances to Satisfy Obligations of the Borrower............ 26 2.16 Assignment of Production................................... 26 2.17 Commitment Fee............................................. 26 2.18 Addition/Deletion of Borrowing Base Oil & Gas Properties... 26 2.19 Adjustment to Aggregate Commitment Amount.................. 27 2.20 Facility LCs............................................... 27 ARTICLE III. CONDITIONS........................................................................... 31 3.01 General Conditions to Closing and to all Disbursements..... 31 3.02 Deliveries at the Closing.................................. 32 3.03 Documents Required for Subsequent Disbursements Involving Additional Borrowing Base Oil and Gas Properties..... 34 ARTICLE IV. REPRESENTATIONS AND WARRANTIES....................................................... 34 4.01 Existence.................................................. 34 4.02 Due Authorization.......................................... 34
i 4.03 Valid and Binding Obligations.............................. 35 4.04 Scope and Accuracy of Financial Statements................. 35 4.05 Title to Borrowing Base Oil and Gas Properties............. 35 4.06 Oil and Gas Leases......................................... 35 4.07 Oil and Gas Contracts...................................... 36 4.08 Producing Wells............................................ 36 4.09 Purchasers of Production................................... 36 4.10 Authorizations and Consents................................ 36 4.11 Environmental Laws......................................... 36 4.12 Compliance with Laws, Rules, Regulations and Orders........ 37 4.13 Liabilities, Litigation and Restrictions................... 37 4.14 Existing Indebtedness...................................... 38 4.15 Material Commitments....................................... 38 4.16 Margin Stock............................................... 38 4.17 Proper Filing of Tax Returns and Payment of Taxes Due...... 38 4.18 ERISA...................................................... 38 4.19 Investment Company Act Compliance.......................... 39 4.20 Public Utility Holding Company Act Compliance.............. 39 4.21 Insurance.................................................. 39 4.22 Material Misstatements and Omissions....................... 39 ARTICLE V. AFFIRMATIVE COVENANTS............................................................... 39 5.01 Use of Funds............................................... 39 5.02 Maintenance and Access to Records.......................... 39 5.03 Quarterly Unaudited Financial Statements................... 40 5.04 Annual Audited Financial Statements........................ 40 5.05 Compliance Certificate..................................... 40 5.06 Statement of Material Adverse Change....................... 40 5.07 Title Defects.............................................. 40 5.08 Additional Information..................................... 40 5.09 Compliance with Laws and Payment of Assessments and Charges................................................ 41 5.10 Maintenance of Existence and Good Standing................. 41 5.11 Further Assurances......................................... 41 5.12 Initial Expenses of the Bank............................... 41 5.13 Subsequent Expenses of the Administrative Agent and the Arranger.................................... 41 5.14 Maintenance of Tangible Property........................... 42 5.15 Maintenance of Insurance................................... 42 5.16 Inspection of Tangible Assets/Right of Audit............... 42 5.17 Payment of Note and Performance of Obligations............. 42 5.18 Borrowing Base............................................. 42 5.19 Compliance with Environmental Laws......................... 43
ii 5.20 INDEMNIFICATION............................................. 43 5.21 Transactions with Affiliates................................ 45 5.22 Leases...................................................... 45 5.23 Operation of Borrowing Base Oil and Gas Properties.......... 45 5.24 Change of Purchasers of Production.......................... 45 5.25 Payment of Taxes, Etc....................................... 45 5.26 Notice of Litigation........................................ 46 5.27 Notice of Events of Default................................. 46 5.28 Notice of Change of Principal Offices....................... 46 5.29 Changes in Management....................................... 46 5.30 Employee Benefit Plans...................................... 46 5.31 Payment of Obligations...................................... 46 5.32 Annual Budget............................................... 46 ARTICLE VI. NEGATIVE COVENANTS................................................................... 47 6.01 Other Indebtedness.......................................... 47 6.02 Loans or Advances........................................... 47 6.03 Mortgages or Pledges of Assets.............................. 47 6.04 Sales of Assets............................................. 47 6.05 Dividends................................................... 47 6.06 Retire Stock................................................ 47 6.07 Payment of Accounts Payable................................. 47 6.08 Investments................................................. 47 6.09 Changes in Structure or Business............................ 48 6.10 Pooling or Unitization...................................... 48 6.11 Hedge Agreements............................................ 48 6.12 Capital Stock of Borrower................................... 48 6.13 Margin Stock................................................ 48 6.14 Minimum Tangible Net Worth.................................. 48 6.15 Current Ratio............................................... 49 6.16 EBITDA to Interest Ratio.................................... 49 ARTICLE VII. EVENTS OF DEFAULT.................................................................... 49 7.01 Enumeration of Events of Default............................ 49 7.02 Rights Upon Unmatured Event of Default...................... 52 7.03 Rights Upon Default......................................... 52 7.04 Remedies.................................................... 53 7.05 Right of Set-off............................................ 53
iii ARTICLE VIII. THE ADMINISTRATIVE AGENT............................................................ 53 8.01 Authorization and Action.................................... 53 8.02 Administrative Agent's Reliance, Etc........................ 53 8.03 The Administrative Agent and Affiliates..................... 54 8.04 Bank Credit Decision........................................ 54 8.05 Administrative Agent's Indemnity............................ 54 8.06 Successor Administrative Agent.............................. 55 8.07 Notice of Default........................................... 56 ARTICLE IX. MISCELLANEOUS....................................................................... 56 9.01 Security Interests in Deposits and Right of Offset or the Banker's Lien............................... 56 9.02 Survival of Representations, Warranties and Covenants....... 56 9.03 Notices and Other Communications............................ 56 9.04 Parties in Interest......................................... 57 9.05 Successors and Assigns; Participation; Purchasing Banks..... 57 9.06 Renewals and Extensions..................................... 60 9.07 No Waiver by the Administrative Agent, the Banks or the LC Issuer................................... 60 9.08 GOVERNING LAW............................................... 60 9.09 Incorporation of Exhibits and Schedules..................... 60 9.10 Survival Upon Unenforceability.............................. 60 9.11 Rights of Third Parties..................................... 60 9.12 Amendments or Modifications................................. 61 9.13 Agreement Construed as an Entirety.......................... 61 9.14 Number and Gender........................................... 62 9.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS................... 62 9.16 Controlling Provision Upon Conflict......................... 62 9.17 Time, Place and Method of Payments.......................... 62 9.18 Termination................................................. 62 9.19 Non-Application of Chapter 346 of Texas Finance Code........ 63 9.20 Counterpart Execution....................................... 63 9.21 Power of Attorney........................................... 63 9.22 Amended and Restated Agreement.............................. 63
iv EXHIBITS - -------- EXHIBIT A Borrowing Base Oil and Gas Properties EXHIBIT B Form of Revolving Note EXHIBIT C Compliance Certificate EXHIBIT D Security Instruments EXHIBIT E Request for Advance SCHEDULES - --------- Schedule 1.01(b) Commitment Amount and Aggregate Commitment Schedule 4.01 Information Regarding the Borrower and its Subsidiaries Schedule 4.07 Certain Oil and Gas Contracts Schedule 4.09 List of Purchasers of Production Schedule 4.11 Environment Impact Statement Schedule 4.14 Existing Indebtedness Schedule 4.15 Material Commitments Schedule 4.21 Insurance Certificates Schedule 9.05(d) Commitment Transfer Supplement v FIRST AMENDED AND RESTATED CREDIT AGREEMENT ------------------------------------------- THIS CREDIT AGREEMENT (this "Agreement"), executed March 1, 2002, is by and between ULTRA RESOURCES, INC., a Wyoming corporation ("Borrower"), the several banks and financial institutions from time to time parties to this Credit Agreement (the "Banks," such term to include all undersigned Banks and all other ----- financial institutions which subsequently become parties to this Agreement in accordance with Section 9.05 hereof), BANK ONE, NA, a national banking association ("Bank One") as a Bank, as the LC Issuer (hereinafter defined) and -------- as Administrative Agent for the Banks (in such latter capacity and together with its successors and permitted assigns in such capacity, the "Administrative -------------- Agent"). - ----- W I T N E S S E T H ------------------- WHEREAS, Borrower, Borrower's affiliate Ultra Petroleum (USA) Inc., and Bank One entered into that certain Credit Agreement dated March 22, 2000, as amended by that certain First Amendment to Credit Agreement dated July 19, 2001 by and between Borrower and Bank One as Lender, (the "Prior Credit Agreement"); WHEREAS, Borrower has requested that Bank One and the other Banks amend and restate the Prior Credit Agreement, and the Banks are willing to do so in accordance with the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Banks, the LC Issuer, the Administrative Agent and the Borrower agree as follows: ARTICLE I. DEFINITIONS ----------- As used in this Agreement, the following terms shall have the meanings indicated: "ABR" means a fluctuating rate of interest equal to the higher of (i) a --- rate per annum equal to the prime rate of interest announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes, and (ii) the sum of the Federal Funds Effective Rate most recently determined by the Administrative Agent plus one-half percent (1/2%) per annum. "ABR Loan" means any Loan from time to time for which interest thereon is -------- to be computed on the basis of the ABR plus the ABR Margin, as elected by Borrower pursuant to Section 2.04 hereof. "ABR Margin" means the applicable margin set forth in the Pricing Grid ---------- under the caption, "ABR Margin," determined based on the Utilization Percentage prevailing from time to time. "Administrative Agent" means Bank One, NA, as Administrative Agent for the -------------------- Banks hereunder and under the other Loan Documents, and each successor Administrative Agent. "Affiliate" means, as applied to any Person, any other Person, directly or --------- indirectly, controlling, controlled by, or under common control with, that Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by," and "under common control with"), as applied to any Person, means either: (a) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract, or otherwise, or (b) the legal or beneficial ownership of or voting rights with respect to twenty percent (20%) or more of the equity interest in such Person. "Aggregate Commitment Amount" means the lesser of: (a) the Borrowing Base --------------------------- in effect from time to time, or (b) the amount stated as the Aggregate Commitment Amount on Schedule 1.01(b) attached hereto, as the same may be amended from time to time as provided in this Agreement. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate ------------------------------------- of the Outstanding Credit Exposure of all the Banks. "Agreement" means this Credit Agreement, as the same may be amended or --------- supplemented from time to time. "Applicable Law" means that law in effect from time to time and applicable -------------- to the Notes which lawfully permits the charging and collection of the highest permissible lawful, non-usurious rate of interest on the Notes, including laws of the State of Texas and laws of the United States of America; Chapter 303 of the Texas Finance Code shall be included in the laws of the State of Texas in determining Applicable Law; and for the purpose of applying said Chapter 303 to the Notes, the interest ceiling applicable to the Notes under said Chapter 303 shall be the indicated weekly rate ceiling from time to time in effect. "Applicable Margin" means the applicable LIBOR Margin or ABR Margin ----------------- provided for in the Pricing Grid set forth below based upon the Utilization Percentage. "Arranger" means Banc One Capital Markets, Inc., in its capacity as lead -------- arranger and sole book manager. "Bank(s)" means any of the banks signatory to this Agreement, their ------- successors and, upon the effective date after registration with the Administrative Agent pursuant to Section 9.05 of a Commitment Transfer Supplement executed by a Purchasing Bank, such Purchasing Bank. "Borrower" has the meaning stated therefor in the preamble of this -------- Agreement. "Borrowing" means a group of Loans made by the Banks to Borrower on a --------- single date. 2 "Borrowing Base" means the maximum loan amount with respect to the -------------- Borrowing Base Oil and Gas Properties, as determined by the Administrative Agent and approved by the Required Banks from time to time in accordance with Section 2.06 of this Agreement. "Borrowing Base Oil and Gas Properties" means those Oil and Gas Properties ------------------------------------- of the Borrower that are subject to the liens created by the Security Instruments, together with the additional Borrowing Base Oil and Gas Properties that are described in Exhibit "A" attached hereto and made a part hereof, as such Exhibit "A" may be amended from time to time. "Breakage Costs" means all reasonable losses, expenses and liabilities -------------- (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by any Bank to fund its LIBOR Loans but excluding loss of anticipated profit with respect to any LIBOR Loans) which such Bank sustains: (i) if for any reason (other than a default by such Bank or the Administrative Agent) a borrowing of LIBOR Loans does not occur on a date specified therefor in a Request for Advance; (ii) if any repayment or conversion of any LIBOR Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any LIBOR Loans is not made on any date specified in a notice of prepayment given by Borrower; or (iv) as a consequence of any default by the Borrower to repay LIBOR Loans when required by the terms of this Agreement. "Business Day" means a day other than a Saturday, Sunday or legal holiday ------------ for commercial banks under the laws of the State of Texas, provided that with respect to transactions under this Agreement relating to LIBOR Loans, such day must also be a Eurodollar Business Day. "Change of Control" means any of the following events: (a) any "person" or ----------------- "group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) has become, directly or indirectly, the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all such shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), by way of merger, consolidation or otherwise, of a majority or more of the common stock of Borrower on a fully-diluted basis, after giving effect to the conversion and exercise of all outstanding warrants, options and other securities of the Borrower (whether or not such securities are then currently convertible or exercisable) or (b) during any period of two consecutive calendar years, individuals who at the beginning of such period constituted the board of directors of the Borrower cease for any reason to constitute a majority of the directors of the Borrower then in office unless (i) such new directors were elected by a majority of the directors of the Borrower who constituted the board of directors of the Borrower at the beginning of such period (or by directors so elected) or (ii) the reason for such directors failing to constitute a majority is a result of retirement by directors due to age, death or disability. "Closing" has the meaning provided in Section 3.01. ------- "Co-Agent" means Hibernia National Bank and Guaranty Bank, FSB, -------- respectively, and each successor to such agent position. 3 "Commitment" means, as to any Bank, the obligation of such Bank to make ---------- Loans to, and participate in Facility LCs issued upon the application of, the Borrower in an aggregate amount at any one time outstanding not to exceed the lesser of (i) such Bank's Commitment Amount and (ii) such Bank's Percentage Share of the Borrowing Base then in effect. "Commitment Amount" means at any time, for any Bank, the amount set forth ----------------- opposite such Bank's name on Schedule 1.01(b) under the heading "Commitment Amount," as such amount may be changed as provided in this Agreement. "Commitment Transfer Supplement" means a Commitment Transfer Supplement ------------------------------ executed by Administrative Agent and a Purchasing Bank substantially in the form of Schedule 9.05(d) and registered with the Administrative Agent pursuant to Section 9.05(d) hereof. "Compliance Certificate" means the certificate of the President or other ---------------------- Responsible Officer of the Borrower submitted to the Administrative Agent from time to time pursuant to this Agreement and attesting to the financial covenants and stating, to such officer's knowledge, whether or not an Event of Default or an Unmatured Event of Default has occurred and is continuing and, if such an event has occurred, the actions being taken by the Borrower, to remedy such situation and that GAAP has been used in the preparation of the Financial Statements, which certificate shall be in the form attached hereto as Exhibit "C." "Consolidated Financial Statements" means, as of any reporting period, the --------------------------------- consolidated and consolidating Financial Statements of Ultra Petroleum Corp. and its Subsidiaries, prepared in accordance with GAAP. "Consolidated Tangible Net Worth" means, as of any reporting period, ------------------------------- Stockholders' Equity, less the sum of: (A) Goodwill, including any amounts, however designated on the Consolidated Financial Statements, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of Ultra Petroleum Corp.; (B) Patents, trademarks, trade names, and copyrights; (C) Any amount at which shares of capital stock of the Borrower appear as an asset on the Borrower's balance sheet; (D) Loans and advances to stockholders, directors, officers, or employees, except for reasonable business travel expenses advanced to employees in the ordinary course of business; and (E) Any other amount in respect of an intangible that should be classified as an asset on the consolidated balance sheet of the Consolidated Financial Statements in accordance with GAAP. 4 "COPAS" means the Accounting Procedure Joint Operations Recommended by the ----- Council of Petroleum Accountants, with respect to onshore and offshore operations, respectively, including the most current versions thereof and any other recent versions thereof commonly in use. "Credit Extension" means the making of a Loan or the issuance of a Facility ---------------- LC hereunder. "Credit Extension Date" means the date on which a Loan is advanced or a --------------------- Facility LC is issued. "Current Assets" means at any time, all assets, that should in accordance -------------- with GAAP, be classified as current assets on a consolidated balance sheet of Borrower, plus the then current availability under the aggregate Commitments. ---- "Current Liabilities" means all liabilities which would, in accordance with ------------------- GAAP, be included as current liabilities plus short term liabilities (which have been reclassified as non-current) to be refinanced with the Aggregate Commitment Amount on a consolidated balance sheet of Ultra Petroleum Corp. as of the date of calculation less current maturities on the Obligations. "Current Ratio" means the ratio derived from dividing Current Assets by ------------- Current Liabilities. "Dollars" and "$" means dollars in lawful currency of the United States of ------- - America. "EBITDA" means, for any reporting period, net income on a consolidated ------ basis before deductions for interest expense, taxes, depreciation, depletion, amortization and other non-cash expenses, less non-cash income. "Environmental Laws" means (a) the following federal laws as they may be ------------------ cited, referenced and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Endangered Species Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Hazardous Materials Transportation Act, the Superfund Amendments and Reauthorization Act, the Toxic Substances Control Act, and the Oil Pollution Act of 1990; (b) any and all environmental statutes of any state in which property of the Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any rules or regulations promulgated under or adopted pursuant to the above federal and state laws; and (d) any other federal, state or local statute or any requirement, rule, regulation, code, ordinance or order adopted pursuant thereto, including, without limitation, those relating to the generation, transportation, treatment, storage, recycling, disposal, handling or release of Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and the regulations and published interpretations thereof. "ERISA Affiliate" means any trade or business (whether or not incorporated) --------------- which together with the Borrower would be treated as a single employer under Section 4001 of ERISA. 5 "Eurodollar Business Day" means a day on which dealings are carried on in ----------------------- the LIBOR Market. "Event of Default" means any of the events specified in Section 7.01 of ---------------- this Agreement. "Facility LC" is defined in Section 2.20(A). ----------- "Facility LC Application" is defined in Section 2.20(C). ----------------------- "Facility Termination Date" means March 1, 2005. ------------------------- "Federal Funds Effective Rate" means, for any day, the weighted average of ---------------------------- the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York for such day on the next succeeding Business Day or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Statements" means the statements of the financial condition of -------------------- the indicated Person, on a consolidated basis, as at the point in time and for the period indicated and consisting of at least a balance sheet, income statement and statement of cash flows, all expressed in terms of United States Dollars, and when the foregoing are audited, accompanied by the certification of such Person's independent certified public accountants and footnotes to any of the foregoing, all of which shall be prepared in accordance with GAAP applied on a basis consistent with that of the preceding year, except for any inconsistency that results from changes in GAAP from year to year. "Floating Rate" means a per annum interest rate determined by reference to ------------- the following schedule: . LIBOR + LIBOR Margin at Borrower's option pursuant to Section 2.04, or ABR + ABR Margin . After the occurrence and during the continuation of an Event of Default, the Floating Rate determined in accordance with the forgoing schedule shall, in each case, be increased by two percent (2%) per annum, not to exceed the Maximum Rate. "GAAP" means generally accepted accounting principles in Canada, applied on ---- a consistent basis, as defined in the Handbook of the Canadian Institute of Chartered Accountants, and which are applicable as of the date of Closing, except that solely for purposes of the definition of Financial Statements herein, changes in GAAP from time to time (if any) shall be applied and reflected in the Financial Statements. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. 6 "Guarantor(s)" means, individually and collectively, Ultra Petroleum Corp., ------------ a Yukon Territory of Canada corporation, and UP Energy Corporation, a Nevada corporation. "Guaranty" means the unlimited guaranty agreement of Borrower's Obligation -------- to Banks under this Agreement, in form and in substance satisfactory to the Administrative Agent, duly executed by each Guarantor. "Hazardous Substances" means flammables, explosives, radioactive materials, -------------------- hazardous wastes, asbestos or any material containing asbestos, polychlorinated biphenyls (PCBs), toxic substances or related materials, petroleum and petroleum products and associated oil or natural gas exploration, production and development wastes or any substances defined as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances" under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or any other Environmental Laws now or hereafter enacted or promulgated by any regulatory authority or governmental body, but only to the extent any such law is or becomes applicable to the Borrower or any of its property. "Hedge Agreement" means any swap agreement, cap, collar, floor, exchange --------------- transaction, forward agreement or exchange or protection agreement related to Hydrocarbons or interest rates, or any option with respect to such transaction, as more specifically provided in those certain master swap agreements on International Swaps and Derivatives Association forms and the schedules thereto and any confirmations thereunder entered into by Borrower with any other Person. "Hydrocarbons" means crude oil, condensate, natural gas, natural gas ------------ liquids and other hydrocarbons. "Increased Costs" has the meaning stated therefor in Section 2.10 (A)(3) of --------------- this Agreement. "Indebtedness" means, as to any Person, without duplication (a) all items ------------ of indebtedness or liability for borrowed money which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date as of which Indebtedness is to be determined, (b) indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance existing on or encumbering property owned by the Person whose Indebtedness is being determined, whether or not the indebtedness secured thereby shall have been assumed, (c) all indebtedness of others which such Person has directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted with recourse, agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, purchase of securities or capital contribution, through a commitment to pay for property or services regardless of the nondelivery of such property or the nonfurnishing of such services or otherwise), or in respect of which such Person has otherwise become directly or 7 indirectly liable, contingently or otherwise, whether now existing or hereafter arising, and (d) all leases (excluding Leases constituting Oil and Gas Properties) that, in accordance with GAAP, should not be reflected on the Borrower's balance sheet. "Interest Period" means as to any LIBOR Loan the period commencing on and --------------- including the date of such Loan (or on the effective date of the election pursuant to Section 2.04(B) by which such Loan became a LIBOR Loan) and ending on and including the day preceding the numerically corresponding day (or if there is no such numerically corresponding day, the last day) in the 1/st/, 2/nd/, 3/rd/ or 6/th/ calendar month after the date of such Loan, as selected by the Borrower in accordance with Section 2.04(B), and after such selected month, such period commencing on and including the day immediately following the last day of the then ending Interest Period for such Loan and ending on and including the day preceding the day numerically corresponding to the first day of such Interest Period (or if there is no such numerically corresponding day, the last day), in the 1/st/, 2/nd/, 3/rd/ or 6/th/ calendar month after the first day of such Interest Period, as so selected by the Borrower; provided, however, that if any Interest Period would otherwise end on a day immediately prior to a day that is not a Business Day it shall be extended so as to end on the day immediately prior to the next succeeding Business Day unless the same would fall in a different calendar month, in which case such Interest Period shall end on the day immediately preceding the first Business Day immediately preceding such next succeeding Business Day. "Investment" in any Person means any stock, bond, note or other evidence of ---------- Indebtedness or any other security (other than current trade and customer accounts) of, or loan to, such Person. "Laws" means all ordinances, statutes, rules, regulations, orders, ---- injunctions, writs, or decrees of any government or political subdivision or agency thereof, or any court or similar entity established by any thereof. "LC Fee" is defined in Section 2.20(D). ------ "LC Issuer" means Bank One (or any subsidiary or Affiliate of Bank One --------- designated by Bank One and reasonably acceptable to Borrower) in its capacity as issuer of Facility LCs hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) -------------- the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" is defined in Section 2.20(E). --------------- "Leases" means oil and gas leases and all oil, gas and mineral leases ------ constituting any part of the Borrowing Base Oil and Gas Properties. "LIBOR" means, with respect to each Interest Period, the rate of interest ----- per annum at which deposits of not less than $1,000,000.00 in United States dollars are offered in the LIBOR Market for a period of time equal or comparable to such Interest Period and in an amount equal to or comparable to the principal amount of the LIBOR Loan to which such Interest Period relates as 8 appearing on Reuters Screen FRBD as of 11:00 AM (London time) two (2) Business Days before the first day of the applicable Interest Period, as adjusted for maximum statutory reserves, provided, however, that if such rate is not available on Reuters Screen FRBD, then within five (5) Business Days of receipt of notification, the Administrative Agent and the Borrower shall enter into good faith negotiations for a period of fifteen (15) days (or such shorter period as is required to agree to the alternative basis) with a view to agreeing on an alternative basis for determining the rate of interest applicable to LIBOR Loans, and if no alternative basis is agreed within the fifteen (15) day period, the LIBOR Loan shall be deemed to have converted to an ABR Loan as of the end of the last Interest Period. "LIBOR Loan" means any Loan from time to time for which interest thereon is ---------- to be computed at a Floating Rate based on LIBOR plus the LIBOR Margin, as elected by Borrower pursuant to Section 2.04 hereof. "LIBOR Margin" means the applicable margin set forth in the Pricing Grid ------------ under the caption, "LIBOR Margin," determined based on the Utilization Percentage prevailing from time to time. "LIBOR Market" means the London interbank offered interest rate market ------------ created by major London clearing banks for deposits in United States dollars. "Limitation Period" means any period while any amount remains owing on the ----------------- Notes when interest on such amount, calculated at the applicable rate prescribed on the Notes, plus any fees payable hereunder and deemed to be interest under applicable Law, would exceed the Maximum Rate. "Loan" means, singly, any advance by the Banks to the Borrower pursuant to ---- this Agreement and "Loans" means, cumulatively, the aggregate sum of all money ----- advanced by the Banks to the Borrower pursuant to this Agreement. "Loan Documents" means this Agreement, the Notes, the Facility LC -------------- Applications, the Security Instruments, the Guaranties, any Hedge Agreements in which Administrative Agent or any Bank (or any of their respective Affiliates) is a counterparty to Borrower and all other promissory notes, security agreements, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Loan Excess" means, at any point in time, the amount, if any, by which the ----------- Aggregate Outstanding Credit Exposure exceeds the Aggregate Commitment Amount then in effect. "Marketable Title" means good and defensible title, as set forth, qualified ---------------- and/or limited on Exhibit "A," free and clear of all mortgages, liens and encumbrances, except for Permitted Encumbrances. "Material Adverse Change" means any change in the business, property, ----------------------- condition (financial or otherwise) or results of operations of the Borrower or either Guarantor which has a Material 9 Adverse Effect, including, but not limited to, Administrative Agent, any Bank, the LC Issuer or any Responsible Officer of Borrower acquiring knowledge of any facts or circumstances that differ from the facts and/or circumstances represented in Article IV of this Agreement or in any other Loan Document (including, but not limited to, any such facts and circumstances represented based on the knowledge of Borrower or its Responsible Officer), if such actual facts and circumstances, compared to the facts and circumstances so represented, would have a Material Adverse Effect. "Material Adverse Effect" means a material adverse effect on (i) the ----------------------- business, property, condition (financial or otherwise), results of operations of the Borrower or either Guarantor, or (ii) the ability of the Borrower or a Guarantor to perform its obligations under the Loan Documents to which it is a party. "Maximum Rate" means the maximum rate of non-usurious interest permitted ------------ from day to day by Applicable Law, including Chapter 303 of the Texas Finance Code (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "indicated weekly rate ceiling." "Modify" and "Modification" are defined in Section 2.20(A). ------ ------------ "Multi-employer Plan" means a plan described in Section 4001(a)(3) of ERISA ------------------- which covers employees of the Borrower or any ERISA Affiliate. "Net Income" means, for any period, the net income (or loss) of the ---------- Borrower on a consolidated basis after allowances for taxes for such period, determined in accordance with GAAP; provided that there shall be excluded from such net income (to the extent otherwise included therein) the net income of any Person in which the Borrower has an interest (which interest does not cause the net income of such other Person to be consolidated with the net income of the Borrower in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in such period by such other Person to the Borrower. "Note" and "Notes" means, individually, a promissory note issued by ---- ----- Borrower payable to the order of a Bank evidencing the Loans made by that Bank pursuant to Section 2.01 hereof and being substantially in the form of the note attached as Exhibit B hereto, together with any and all further renewals, --------- extensions for any period, increases or rearrangements thereof, and means collectively all of such Notes. "Obligations" means all obligations, indebtedness, and liabilities of the ----------- Borrower to the Banks and the LC Issuer, now existing or hereafter arising under this Agreement and the other Loan Documents, including, but not limited to, the Indebtedness evidenced by the Notes and the Reimbursement Obligations, and all interest accruing thereon and all reasonable attorneys' fees and other expenses in the administration, enforcement or collection thereof. "Oil and Gas Properties" means fee, leasehold or other interests in or ---------------------- under mineral estates or oil, gas and other liquid or gaseous hydrocarbon leases with respect to properties situated in the United States, including, without limitation, overriding royalty and royalty interests, leasehold estate 10 interests, net profits interests, production payment interests and mineral fee interests, together with contracts executed in connection therewith and all tenements, hereditaments, appurtenances and properties, real or personal, appertaining, belonging, affixed or incidental thereto. "Outstanding Credit Exposure" means, as to any Bank at any time, the sum of --------------------------- (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Percentage Share of the LC Obligations at such time. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Percentage Share" means, as to any Bank, a fraction (expressed as a ---------------- percentage), the numerator of which shall be such Bank's Commitment Amount, and the denominator of which shall be the Aggregate Commitment Amount stated on Schedule 1.01(b) attached hereto. "Permitted Asset Sales" means (a) sales, leases, assignments, transfers or --------------------- disposals of, in one or any series of related transactions, (i) all or any portion of Borrower's assets, whether now owned or hereafter acquired, including transfers to Affiliates, which, in the aggregate, do not exceed $5,000,000.00 during any period beginning on the date of Administrative Agent's written notice to Borrower pursuant to Section 2.06 of a Borrowing Base redetermination (except that the first such period shall begin at Closing) and ending on the date of the next such written notice from Administrative Agent to Borrower or (ii) surplus, worn out or obsolete equipment of nominal value to Borrower, and (b) sales of Hydrocarbons in the ordinary course of business. "Permitted Encumbrances" means: ---------------------- (A) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business that are not yet due and payable; (B) Liens of mechanics, materialmen, warehousemen, carriers, landlords or other like liens, securing obligations incurred in the ordinary course of business that are not yet due and payable; (C) Pledges or deposits in connection with or to secure workmen's compensation, unemployment insurance, pensions or other employee benefits; (D) Encumbrances consisting of covenants, zoning restrictions, rights, easements, liens, governmental environmental permitting and operation restrictions, operating restrictions under leases consistent with other leases in the same geographical area, operating constraints under the Environmental Impact Statement described on Schedule 4.12, the exercise by governmental bodies or third parties of eminent domain or condemnation rights, or any other restrictions on the use of real property, none of which materially impairs the use of such property by the Borrower in the operation of its business, and 11 none of which is violated in any material respect by existing or proposed operations; (E) Liens of operators and/or co-working interest owners under joint operating agreements or similar contractual arrangements with respect to the Borrower's proportionate share of the expense of exploration, development and operation of oil, gas and mineral leasehold or fee interests owned jointly with others, to the extent that same relate to sums not yet overdue, or if they relate to sums that are overdue, then to the extent that the same are being contested in good faith by appropriate proceedings and execution of the associated lien has been stayed, either pursuant to agreement of the lien claimant or by a valid order of a court having jurisdiction; (F) Liens securing surety or other bonds required in the normal course of business and Liens on cash deposits securing Permitted Hedge Agreements, not to exceed $2,000,000.00 in the aggregate at any time in effect; (G) The following, if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been stayed and continue to be stayed and they do not, in the aggregate, materially detract from the value of the property of the Borrower, or materially impair the use thereof in the operation of its business: (1) Claims or liens for taxes, assessments, or charges due and payable and subject to interest or penalty; (2) Claims, liens, and encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; (3) Claims or liens of mechanics, materialmen, warehousemen, carriers, or other like liens; and (4) Adverse judgments on appeal; (H) Liens securing payment and performance of the Obligations; (I) Liens securing purchase money obligations included in the definition of Permitted Indebtedness if such liens encumber only the property for which such purchase money obligation was incurred; and (J) Inchoate liens in respect of royalty owners. 12 "Permitted Hedge Agreement" means any Hedge Agreement which Borrower enters ------------------------- into with or through a counterparty that has a credit rating of at least "A-" by Standard and Poors or "A\\3\\" by Moody's Investment Service, together with the confirmations which Borrower may hereafter enter into with or through such counterparty covering, in the aggregate, among all such Hedge Agreements, not more than seventy-five percent (75%) of the Proved Reserves that are (i) attributable to Borrower's interest in the Borrowing Base Oil and Gas Properties and (ii) projected to be produced during the term(s) of such Hedge Agreement(s). "Permitted Indebtedness" means: ---------------------- (A) The Loans and Facility LCs; (B) Unsecured current accounts payable incurred in the ordinary course of business which are (i) not more than sixty (60) days overdue, or (ii) being contested in good faith by appropriate proceedings, or (iii) the subject of usual and customary review and evaluation; (C) Extensions of credit from suppliers or contractors who are not Affiliates of Borrower for the performance of labor or services or the provision of supplies or materials under applicable contracts or agreements in connection with Borrower's oil and gas exploration and development activities, which are not overdue or are being contested in good faith by appropriate proceedings; (D) Letters of credit or performance bonds required to be obtained by the Borrower in the normal course of its business to assure the proper plugging and abandonment of oil or gas drilling or production locations or bonds required by any governmental agency or instrumentality in the normal course of the Borrower's business; (E) Borrower's (i) purchase money obligations; (ii) capital lease obligations; and (iii) other obligations supporting Borrower's acquisition or use of any capital asset that had not been acquired and was not in use by Borrower as of the date of the Closing; of up to Five Million Dollars ($5,000,000) in the aggregate outstanding at any time, so long as no such obligation under clauses (i) through (iii) exceeds the fair market value of the respective asset(s) thereby acquired or used; (F) Income taxes payable that are not overdue; (G) Accrued abandonment liabilities; (H) Indebtedness arising out of Permitted Hedge Agreements; and (I) Other Indebtedness incurred by the Borrower not to exceed, in the aggregate at any time outstanding, Two Million Dollars ($2,000,000.00). 13 "Person" means an individual, company, corporation, partnership, joint ------ venture, limited liability company, trust, association, unincorporated organization or a government or any agency or political subdivision thereof. "Plan" means, at any time, any employee benefit plan which is covered by ---- ERISA and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pricing Grid" means the following table: ------------ ===================================================================== Utilization Percentage LIBOR Margin ABR Margin Commitment Fee ===================================================================== ** 90% 225 b.p. 125 b.p. 50.0 b.p. --------------------------------------------------------------------- ** 75% * 90% 200 b.p. 100 b.p. 37.5 b.p. --------------------------------------------------------------------- ** 50% * 75% 175 b.p. 75 b.p. 37.5 b.p. --------------------------------------------------------------------- * 50% 150 b.p. 50 b.p. 37.5 b.p. ===================================================================== * Denotes less than ** Denotes more than or equal to "Prior Credit Agreement" has the meaning stated therefor in the first ---------------------- recital of this Agreement. "Prior Note" means the Note held by Bank One as of the Closing, which ---------- was issued by Borrower to Bank One pursuant to the Prior Credit Agreement, together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof. "Production Revenue" means revenues of the Borrower from the sale of its ------------------ oil and gas production minus any applicable oil and gas production taxes and ----- royalties. "Prohibited Transaction" means any transaction set forth in Section 406 of ---------------------- ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time to time. "Purchasing Bank" shall have the meaning assigned to that term in Section --------------- 9.05 hereof. "Proved Reserves" means the estimated quantities of crude oil, condensate, --------------- natural gas liquids and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable by primary producing mechanisms in future years from known reservoirs underlying lands or interests therein constituting Oil and Gas Properties, under existing economic and operating conditions. Reserves which can be produced economically through application of improved recovery techniques (i.e., fluid injection) will be included in Proved Reserves when successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the pilot project or installed program was based. In general, the economic productivity of the estimated proved reserves is supported by actual production or a conclusive formation test; however, in certain instances proved reserves are assigned to reservoirs on the basis of a combination of electrical and other type logs and core analyses which 14 indicate these reservoirs are analogous to similar reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. "PW9" means the present worth of future net income, discounted to --- present value at the simple interest rate of nine percent (9%) per year. "Reimbursement Obligations" means, at any time, the aggregate of all ------------------------- obligations of the Borrower then outstanding under Section 2.20 to reimburse the LC Issuer for amounts paid by the LC Issuer in respect of any one or more drawings under Facility LCs. "Reportable Event" means any of the events set forth in Section 4043 ---------------- of ERISA. "Request for Advance" means the written or verbal (confirmed in ------------------- writing within one (1) Business Day) request by the Borrower to the Administrative Agent for an advance by the Banks pursuant to this Agreement, which Request for Advance shall be in substantially the form attached hereto as Exhibit "E", signed by an authorized officer of the Borrower and which shall include a statement of the amount requested to be advanced, the date of the requested advance and such other information as the Administrative Agent in its reasonable discretion deems necessary. "Required Banks" means, at any time, Banks holding at least sixty-six -------------- and two-thirds percent (66 2/3%) of the Aggregate Commitment Amount or, if the Aggregate Commitment Amount has been terminated, Banks having at least sixty-six and two-thirds percent (66 2/3%) of the Aggregate Outstanding Credit Exposure. "Required Number" means: in the case of notices hereunder (i) relative --------------- to borrowings, prepayments, elections of LIBOR Loans, selections of Interest Periods for, or other transactions in respect of, LIBOR Loans: by 10:00 a.m., Central Standard Time on the third Business Day prior to the proposed activity; or (ii) relative to all transactions in respect of ABR Loans: the same Business Day by 1:00 p.m., Central Standard Time; it being understood, however, that in the case of notices involving transactions in respect of more than one type of Loan (such as a change in type of Loan in accordance with Section 2.04(B)), "Required Number" means that number of days, as indicated above in respect of --------------- the Loans involved, which would constitute the longest applicable period of time. "Reserve Report" means a report prepared by a company engineer or an -------------- independent petroleum engineer or firm of engineers satisfactory to the Administrative Agent in the reasonable exercise of its discretion regarding the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties, using the criteria and parameters required by and acceptable to the Securities and Exchange Commission, and incorporating the present cost of appropriate plugging and abandonment obligations to be incurred in the future, taking into account any plugging and abandonment fund required to be accrued or established by Borrower out of cash flow from the Borrowing Base Oil and Gas Properties covered by such report with respect to such future obligations. "Responsible Officer" means, as to any Person, its president, chief ------------------- executive officer and any senior vice president, provided that if any such officer's position does not exist within a Person or 15 if two or more of such positions are held by the same individual, then such term shall mean each of the three most senior duly elected and acting officers of such Person. "Security Instruments" means the security instruments described on -------------------- Exhibit "D," in form and substance satisfactory to the Administrative Agent, to be executed by Borrower pursuant to Section 3.01, and the Security Instruments as defined in the Prior Credit Agreement, each of which shall continue to secure Borrower's Obligations, and any and all other instruments or documents hereafter executed in connection with or as security for the payment of the Notes and performance of the Obligations. "Stockholders' Equity" means, at any time, the sum of the following -------------------- accounts set forth on the Consolidated Financial Statements, prepared in accordance with GAAP: (A) the par or stated value of all outstanding capital stock (common and preferred); (B) capital surplus including paid in capital; and (C) retained earnings. "Subsidiary" means, as to any Person, any corporation in which such ---------- Person, directly or indirectly through its Subsidiaries, owns more than fifty percent (50%) of the stock of any class or classes having by the terms thereof the ordinary voting power to elect a majority of the directors of such corporation, and any partnership, association, joint venture, or other entity in which such Person, directly or indirectly through its Subsidiaries, has more than a fifty percent (50%) equity interest at the time. "Syndication Agent" means Union Bank of California, and each successor ----------------- to such agent position. "Transfer Order Letters" means the letters in lieu of division or ---------------------- transfer orders, in form acceptable to the Administrative Agent. "Unmatured Event of Default" means any event or occurrence which -------------------------- solely with: (a) the lapse of any applicable grace period as stated or expressly referred to in Article VII hereof, or (b) the giving of notice required by this Agreement, or (c) both, will ripen into an Event of Default. "Utilization Percentage" means the percentage of the Aggregate ---------------------- Commitment Amount represented by the aggregate principal amount of all Credit Extensions outstanding from time to time. Undefined Terms. Undefined financial accounting terms used in this --------------- Agreement shall be defined according to GAAP. ARTICLE II. THE LOANS AND LETTERS OF CREDIT ------------------------------- 2.01 The Commitment. From and including the date of this Agreement -------------- and prior to the Facility Termination Date, each Bank severally agrees, on the terms and conditions set forth in this 16 Agreement, to (i) make Loans to the Borrower and (ii) participate in Facility LCs issued upon the request of the Borrower, provided that, after giving effect to the making of each Loan and the issuance of each Facility LC, such Bank's Outstanding Credit Exposure shall not exceed its Commitment. The Loans advanced by each Bank to the Borrower shall be evidenced by the Banks' respective Notes from the Borrower. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow up to the Aggregate Commitment Amount at any time prior to the Facility Termination Date. All Commitments to extend credit hereunder shall expire on the Facility Termination Date. The LC Issuer will issue Facility LCs hereunder on the terms and conditions set forth in Section 2.20. 2.02 Notice and Manner of Borrowing. ------------------------------ (a) The amount and date of each Credit Extension shall be designated in a Request for Advance executed by Borrower, to be received by the Administrative Agent at least the Required Number of, but not more than ten (10), Business Days prior to the date of such Credit Extension, which date shall be a Business Day. The Administrative Agent shall promptly advise the Banks and, if applicable, the LC Issuer, of any Request for Advance given pursuant to this Section 2.02, of each Bank's Percentage Share of any requested Borrowing and, if applicable, the amount requested for any Facility LC by telephone, confirmed promptly in writing, or telecopier. Upon satisfaction of the applicable conditions set forth in Article III, each Borrowing shall be made at the office of the Administrative Agent, and shall be funded prior to 3:00 o'clock p.m., Houston, Texas time, on the day so requested in immediately available funds in the amount so requested. (b) Each Bank shall make each Loan to be made by it hereunder on the date of the proposed Borrowing by wire transfer of immediately available funds to the Administrative Agent in Houston, Texas, not later than 2:00 p.m., Houston, Texas time, and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to Borrower shall direct to the Administrative Agent from time to time or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Banks as soon as practicable. Unless the Administrative Agent shall have received notice from a Bank prior to the date of any proposed Borrowing that such Bank will not make available to the Administrative Agent such Bank's Percentage Share of such Borrowing, the Administrative Agent may assume that such Bank has made its Percentage Share available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (b) and the Administrative Agent may, in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If, and to the extent that, such Bank shall not have made its Percentage Share available to the Administrative Agent, such Bank and Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of 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 Effective Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Bank's Loan as part of such Borrowing for purposes of this Agreement. 17 2.03 Payment Procedure. All payments and prepayments made by ----------------- Borrower under this Agreement shall be made to the Administrative Agent at its office specified in Section 9.03 for the account of the Banks in immediately available funds before 11:00 a. m., Houston, Texas time, on the date that such payment is required to be made. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to such payments or prepayments ratably to the Banks (and if the payment relates to amounts owed to a particular Bank only, in like funds to such Bank), in each case, to be applied in accordance with the terms of this Agreement. Borrower hereby authorizes the Administrative Agent, if and to the extent payment or prepayment (including prepayments required pursuant to Section 2.11 hereof) is not made when due hereunder or under the Notes or any other Loan Document, to charge from time to time against Borrower's account with the Administrative Agent any amount so due. Any payment received and accepted by the Administrative Agent (or any branch or Affiliate thereof) after such time shall be considered for all purposes (including the calculation of interest, to the extent permitted by law) as having been made on the next following Business Day. 2.04 Payments of Interest under the Notes. Subject to the terms ------------------------------------ and provisions of this Agreement, interest on the Loan, calculated at the Floating Rate, shall be due and payable as follows: (A) Interest on ABR Loans shall be calculated on the basis of a 365/366-day year, as applicable, and on LIBOR Loans on the basis of a 360-day year, in each case counting the actual number of days elapsed. Interest on the outstanding principal balance of the Loans shall accrue for each day at either a Floating Rate based on ABR plus the ABR Margin for such day for ABR Loans, or a Floating Rate based on LIBOR for the Interest Period which includes such day plus the LIBOR Margin for such day for LIBOR Loans, all as elected and specified (including specification as to length of Interest Period, as permitted by the definition of that term, with respect to any election of a Floating Rate based on LIBOR) by the Borrower in accordance with Section 2.04(B); provided that: (1) In the absence of an election by the Borrower of a Floating Rate based on LIBOR plus the LIBOR Margin, or, having made such election, but upon the Required Number of days prior to the end of the then current Interest Period the Borrower fails or is not entitled under the terms of this Agreement to elect to continue a Floating Rate based on LIBOR plus the LIBOR Margin and specify the applicable Interest Period therefor, then upon the expiration of such then current Interest Period, interest on the Loans shall accrue for each day at a Floating Rate based on ABR plus the ABR Margin for such day, until the Borrower, pursuant to Section 2.04(B), elects a different Floating Rate and specifies the Interest Period for the Loans. (2) Interest accruing on any LIBOR Loan during any Interest Period shall be payable on the first Business Day of the next Interest Period except that: (a) with respect to LIBOR Loans for which Borrower has selected an Interest Period of six (6) months, interest will be payable on the first Business Day following the ninetieth (90/th/) day after the commencement of such Interest Period and on the first Business Day of the next Interest Period, (b) interest will be payable on the Facility 18 Termination Date on any LIBOR Loan with an Interest Period ending on the Facility Termination Date; and provided that (c) all -------- accrued interest on any LIBOR Loan converted or prepaid pursuant to Section 2.11 shall be paid immediately upon such prepayment or conversion. (B) By at least the Required Number of days prior to the advance of any Loan hereunder, the Borrower shall select the initial Floating Rate to be charged on such Loan, and from time to time thereafter the Borrower may elect, on at least the Required Number of days irrevocable prior written (or verbal, promptly confirmed by written) notice to the Administrative Agent, an initial Floating Rate for any additional Loan, or to change the Floating Rate on any Loan to any other Floating Rate (including, when applicable, the selection of the Interest Period); provided that; (i) the Borrower shall not select an Interest Period that -------- extends beyond the Facility Termination Date; (ii) except as otherwise provided in Section 2.11 no such change from a Floating Rate based on LIBOR plus the LIBOR Margin to another Floating Rate shall become effective on a day other than the day, which must be a Business Day, next following the last day of the Interest Period last effective for such LIBOR Loan; (iii) any elections made by the Borrower pursuant to this Section 2.04(B) shall be in the amount of $1,000,000, plus any additional increment of $1,000,000, or such lesser amount as constitutes the balance of all Loans then outstanding hereunder; (iv) notwithstanding anything herein to the contrary, the Borrower may not make any election under this Section 2.04(B) that would result in Loans outstanding based on more than six (6) different LIBORs without the consent of the Required Banks to do so; and (v) the first day of each Interest Period as to a LIBOR Loan shall be a Business Day. (C) Interest on ABR Loans shall be paid monthly in arrears on the first Business Day of each calendar month (for the immediately preceding month) commencing with the month following any month during which interest begins to accrue at a Floating Rate based on ABR plus the ABR Margin, as elected by Borrower pursuant to Section 2.04(B), and on the date the principal of such Loans shall be due (on the stated Facility Termination Date, on acceleration, or otherwise). 2.05 General Provisions Relating to Interest. It is the intention of --------------------------------------- the parties hereto to comply strictly with the usury Laws of the State of Texas and the United States of America and, in this connection, there shall never be collected, charged or received on any sums advanced hereunder interest in excess of the Maximum Rate. For purposes of Chapter 303 of the Texas Finance Code, as amended, the Borrower agrees that the maximum rate to be charged shall be the "indicated (weekly) rate ceiling" as defined in said Chapter, provided that the Bank may also rely to the extent permitted by applicable Laws of the State of Texas or the United States of America, on alternative maximum rates of interest under other applicable Laws of the State of Texas or the United States of America applicable to the Loans, if greater. Notwithstanding anything herein or in the Notes to the contrary, during any Limitation Period, the interest rate to be charged on amounts evidenced by the Notes shall be the Maximum Rate and the obligation of the Borrower for any fees payable hereunder and deemed to be interest under applicable Law shall be suspended. During any period or periods of time following a Limitation Period, to the extent permitted by applicable Laws of the State of Texas or the United States of America, the interest rate to be charged hereunder shall remain at the 19 Maximum Rate until such time as there has been paid to each Bank (a) the amount of interest in excess of the Maximum Rate that such Bank would have received during the Limitation Period had the interest rate remained at the relevant rates specified in the Note, and (b) all interest and fees otherwise due to such Bank but for the effect of such Limitation Period. If under any circumstances the aggregate amounts paid on the Notes or under this Agreement include amounts which by Law are deemed interest and which would exceed the amount permitted if the Maximum Rate were in effect, the Borrower stipulates that such payment and collection will have been and will be deemed to have been, to the extent permitted by applicable Laws of the State of Texas or the United States of America, the result of mathematical error on the part of both the Borrower and the Banks, and each Bank shall promptly refund the amount of such excess (to the extent only of such interest payments above the Maximum Rate which could lawfully have been collected and retained) upon discovery of such error by such Bank or notice thereof from the Borrower. 2.06 Borrowing Base Determination. The Borrowing Base in effect as ---------------------------- of the Closing is Eighty Million Dollars ($80,000,000.00) based upon the Netherland Sewell Report dated effective January 1, 2002, relative to the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties described on Exhibit "A," which has been provided to Administrative Agent prior to Closing. The Borrowing Base shall be re-determined from time to time pursuant to the following provisions of this Section. On or before each October 1 and April 1, commencing October 1, 2002, until the Facility Termination Date, the Borrower shall furnish to the Administrative Agent a Reserve Report, which shall set forth, as of each preceding July 1 or January 1, as applicable, the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties. Each October Reserve Report may be prepared by the Borrower's own engineers and shall be certified by the President or other Responsible Officer of the Borrower. Each April Reserve Report shall be a complete report prepared by independent reservoir engineers acceptable to Administrative Agent relating to the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties. Upon receipt of each such Reserve Report, the Administrative Agent shall, within forty-five (45) days following the delivery of such Reserve Report, make a determination of the Borrowing Base which shall become effective upon approval by the Required Banks and subsequent written notification from the Administrative Agent to the Borrower, and which, subject to the other provisions of this Agreement, shall be the Borrowing Base until the effective date of the next redetermination of the Borrowing Base as set forth in this Section 2.06. The Administrative Agent may, subject to approval of the Required Banks, and must, upon the request of the Required Banks, redetermine the Borrowing Base at any time, and from time to time, which redetermination shall become effective upon approval by the Required Banks and subsequent written notification from the Administrative Agent to the Borrower and which, subject to the other provisions of this Agreement, shall be the basis on which the Borrowing Base shall thereafter be calculated until the effective date of the next redetermination of the Borrowing Base, as set forth in this Section. The Administrative Agent shall have the right to initiate one unscheduled redetermination of the Borrowing Base between any two consecutive scheduled redeterminations thereof by 20 requesting in writing, not more than once between any two consecutive scheduled deliveries of Reserve Reports, that the Borrower provide an unscheduled Reserve Report regarding the Proved Reserves attributable to the Borrowing Base Oil and Gas Properties with an effective date not more than ninety (90) days prior to Borrower's delivery of such Reserve Report to Administrative Agent, and such Reserve Report shall be delivered to Administrative Agent within ninety (90) days after Borrower's receipt of such written request. The Borrower shall have the right to request, by written notice to Administrative Agent, one unscheduled redetermination of the Borrowing Base between any two consecutive scheduled redeterminations thereof, subject to contemporaneously providing to Administrative Agent a Reserve Report with an effective date not more than ninety (90) days prior to the date of such notice. If at any time the Required Banks cannot otherwise agree on a redetermination of the Borrowing Base, then the Borrowing Base, shall be set on the basis of the Administrative Agent's calculation of the "weighted arithmetic average" (as hereinafter calculated) of the Borrowing Base, as determined by each individual Bank and communicated to Administrative Agent in writing. However, the amount of the Borrowing Base shall never be increased at any time without the unanimous consent of the Banks, notwithstanding anything else herein to the contrary. For purposes of this paragraph, the "weighted arithmetic average" of the Borrowing Base shall be determined by first multiplying the Borrowing Base proposed in writing to Administrative Agent by each Bank by such Bank's Percentage Share, and then adding the results of each such calculation, with the resultant sum being the Borrowing Base. The Borrowing Base shall represent the Required Banks' approval of the Administrative Agent's determination, in accordance with their customary lending practices, of the maximum loan amount with respect to the Borrowing Base Oil and Gas Properties and the Borrower acknowledges, for purposes of this Agreement, such determination by the Administrative Agent as being the maximum loan amount with respect to the Borrowing Base Oil and Gas Properties. In making any redetermination of the Borrowing Base, the Administrative Agent and the Banks shall apply the parameters and other credit factors consistently applied then generally being utilized by the Administrative Agent and each such Bank, respectively, for Borrowing Base redeterminations for other similarly situated borrowers. The Borrower, Required Banks and the Administrative Agent acknowledge that (a) due to the uncertainties of the oil and gas extraction process, the Borrowing Base Oil and Gas Properties are not subject to evaluation with a high degree of accuracy and are subject to potential rapid deterioration in value, and (b) for this reason and the difficulties and expenses involved in liquidating and collecting against the Borrowing Base Oil and Gas Properties, the Administrative Agent's determination of the maximum loan amount with respect to the Borrowing Base Oil and Gas Properties contains an equity cushion, which equity cushion is acknowledged by the Borrower as essential for the adequate protection of the Banks. 2.07 Mandatory Prepayment Due to a Loan Excess. Within sixty (60) ----------------------------------------- days after receipt of written notice from Administrative Agent that a Loan Excess exists, including, but not limited to, any notice establishing a redetermined Borrowing Base that is less than the Aggregate Outstanding Credit Exposure, Borrower shall either (i) prepay the principal of the Notes in an aggregate amount at least equal to such Loan Excess or (ii) add to the Borrowing Base Oil and Gas Properties additional Oil and Gas Properties of the Borrower sufficient in value, as determined pursuant to 21 Section 2.06, to increase the Borrowing Base to equal the unpaid principal amount of the Aggregate Outstanding Credit Exposure. 2.08 Other Mandatory Prepayments. --------------------------- (A) On each date on which the Borrower sells any of its Borrowing Base Oil and Gas Properties, other than Permitted Asset Sales, the Borrowing Base will be automatically reduced to the loan value (determined in accordance with the procedures for determining the Borrowing Base) of the remaining Borrowing Base Oil and Gas Properties, and the Borrower shall be required to make the prepayment, if any, required pursuant to Section 2.07. (B) Except to the extent otherwise provided in Section 2.08(A), if on any date the Outstanding Credit Exposure exceeds the amount of the then effective Aggregate Commitment, the Borrower shall be required to immediately prepay the Loans by the amount of such excess. 2.09 Prepayment and Conversion. Upon the Required Number of days ------------------------- written notice to the Administrative Agent, the Borrower may, without the payment of penalty or premium, prepay the principal of the Loans or voluntarily convert the applicable Floating Rate of any Loan prior to the termination of the applicable Interest Period in whole or in part, from time to time. Any partial payment or conversion of ABR Loans shall be made in the sum of not less than $1,000,000, and any partial payment or conversion of LIBOR Loans shall be made in the sum of not less than $1,000,000 or any $1,000,000 increment in addition thereto. With respect to any such prepayment or conversion of any LIBOR Loan the Borrower agrees to pay to the Banks upon the request of the Administrative Agent such amount or amounts as will compensate the Banks for Breakage Costs, excluding, however, any such Breakage Costs resulting from a payment or prepayment made more than sixty (60) days prior to the Administrative Agent's request for payment of Breakage Costs. The payment of any such Breakage Costs to the Banks shall be made within thirty (30) days of a request therefor from Administrative Agent. If LIBOR cannot be determined on the date of such prepayment, the Administrative Agent shall calculate LIBOR by interpolating LIBOR in effect immediately prior to the prepayment and LIBOR in effect immediately after the prepayment. 2.10 Increased Cost of Loans. ----------------------- (A) Notwithstanding any other provisions herein, if as a result of any regulatory change after the date hereof (1) the basis of taxation of payments to any Bank of the principal of, or interest on, any LIBOR Loan or any other amounts due under this Agreement in respect of any such LIBOR Loan (except for taxes imposed on the overall net income or receipts of such Bank, and franchise or other taxes imposed generally on such Bank), by the jurisdiction (or any political subdivision therein) in which the Bank has its principal office (if such other taxes do not specifically affect the cost to the Bank of making the Loans) is changed; 22 (2) any reserve, special deposit, or similar requirement (including without limitation any reserve requirement under regulations of the Board of Governors of the Federal Reserve System) against assets of, deposits with, or for the account of, or credit extended by such Bank, is imposed, increased, modified, or deemed applicable; or (3) any other condition affecting this Agreement or any LIBOR Loan is imposed on such Bank or (in the case of LIBOR Loans) the LIBOR Market; and the result of any of the foregoing is to increase the actual direct cost to such Bank of making or maintaining any such LIBOR Loan (and such increase shall not have been compensated by a corresponding increase in the interest rate applicable to the respective Loans) by an amount deemed by such Bank to be material (such increases in cost and reductions in amounts receivable being herein called "Increased Costs"), then the Borrower shall pay such Bank, within thirty (30) days after its written demand, such additional amount or amounts as will compensate such Bank for those Increased Costs. No Bank will demand to be compensated by Borrower for such Increased Costs unless such Bank generally makes such demands to its other LIBOR Loan customers who are similarly situated. A certificate of such Bank setting forth the basis for the determination of such amount necessary to compensate such Bank as aforesaid (including a representation by such Bank that it is generally making demands as required by the preceding sentence), accompanied by documentation showing reasonable support for such increased costs or reduced sums received by such Bank, shall be delivered to the Borrower and shall be conclusive, save for manifest error, as to such determination and such amount. The affected Bank shall notify the Borrower, as promptly as practicable after such Bank obtains knowledge of any Increased Costs or other sums payable pursuant to this Section 2.10 and determines to request compensation therefor, or any event occurring after the Closing which will entitle such Bank to compensation pursuant to this Section; provided that, notwithstanding anything herein to the contrary, the Borrower shall not be obligated for the payment of any Increased Costs or other sums payable pursuant to this Section 2.10 to the extent such Increased Costs or other sums accrued more than 90 days prior to the date upon which the Borrower was given such notice. If the Borrower is required to indemnify or pay additional amounts pursuant to this Section 2.10, then the Bank will take such action as in the reasonable judgment of the Bank (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise commercially unreasonable. The Bank shall use its reasonable efforts to obtain in a timely fashion any refund, deduction or credit of any taxes paid or reimbursed by the Borrower pursuant to this Section 2.10. If the Bank receives a benefit in the nature of a refund, deduction or credit (including a refund in the form of a deduction from or credit against taxes that are otherwise payable by the Bank) of any taxes with respect to which the Borrower has made a payment under Section 2.10, the Bank agrees to reimburse the Borrower to the extent of the benefit of such refund, deduction or credit promptly after the Bank reasonably determines that such refund deduction or credit has become final; provided, however, -------- ------- that nothing contained in this paragraph shall require the Bank to make available its tax 23 returns (or any other information relating to its taxes which it deems to be confidential) or to attempt to obtain any such refund, deduction or credit, which attempt would be inconsistent with any reporting position otherwise taken by the Bank on its tax returns. (B) Notwithstanding the foregoing provisions of this Section 2.10, in the event that by reason of any regulatory change any Bank either (i) incurs Increased Costs based on, or measured by, the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank that includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank that includes LIBOR Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Bank so elects by written notice to the Borrower, the obligation of such Bank to make or convert Loans of any other type into LIBOR Loans hereunder shall be suspended until the earlier of the date such regulatory change ceases to be in effect or the date the Borrower and such Bank agree upon an alternative method of determining the interest rate payable by the Borrower on LIBOR Loans, and all LIBOR Loans of such Bank then outstanding shall be converted into an ABR Loan (if not otherwise prohibited under the terms of this Agreement) at such Bank's option. 2.11 Change of Law. Notwithstanding any other provision herein, in the ------------- event that any change in any applicable law or in the interpretation or administration thereof shall make it unlawful for the Banks to (i) honor any commitment it may have hereunder to make any LIBOR Loan, then such commitment shall terminate, or (ii) maintain any LIBOR Loan, then all LIBOR Loans of the Banks then outstanding shall be repaid and converted to ABR Loans (unless the Banks' obligations to fund Loans hereunder has been suspended by any other provisions of this Agreement) at the Borrower's option in accordance with the election procedures set forth in Section 2.04(B); provided, however, that prior -------- to the effective date of such election, interest shall be calculated at the ABR. Any remaining commitment of the Banks hereunder to make LIBOR Loans (but not other Loans) shall be suspended so long as they are prohibited by any applicable law. Upon the occurrence of any such change, the Administrative Agent shall promptly notify the Borrower thereof, and shall furnish to the Borrower in writing evidence thereof certified by the Administrative Agent. Any repayment or conversion of any LIBOR Loan which is required under this Section 2.11 or under 2.04(B) shall be effected by payment thereof, together with accrued interest thereon, on demand, and concurrently there shall occur the borrowing of the corresponding ABR Loan as provided herein. If any repayment to the Banks of any LIBOR Loan (including conversions thereof) is made under this Section 2.11 on a day other than a day otherwise scheduled for a payment of principal of or interest on such Loan, the Borrower shall pay to the Banks upon its request of the Administrative Agent such amount or amounts as will compensate the Banks for Breakage Costs, excluding, however, any such Breakage Costs resulting from a prepayment or conversion made more than sixty (60) days prior to the Administrative Agent's request for payment of Breakage Costs. The payment 24 of any such Breakage Costs to the Banks shall be made within thirty (30) days of a request therefor from Administrative Agent. 2.12 Mitigation: Mandatory Assignment. Each Bank shall use -------------------------------- reasonable efforts to avoid or mitigate any Increased Cost or suspension of the availability of an interest rate under Sections 2.09 through 2.10 above, to the greatest extent practicable (including transferring the Loans to another lending office or Affiliate of a Bank) unless, in the opinion of such Bank, such efforts would be likely to have an adverse effect upon it. In the event a Bank makes a request to the Borrower for additional payments in accordance with Sections 2.09 or 2.10, then, provided that no Event of Default has occurred and is continuing -------- at such time, the Borrower may, at its own expense and in its sole discretion, require such Bank to transfer and assign in whole (but not in part), without recourse, all of its interests, rights and obligations under this Agreement to an assignee which shall assume such assigned obligations (which assignee may be another Bank, if a Bank accepts such assignment); provided that (a) such -------- assignment shall not conflict with any law, rule or regulation or order of any court or other governmental authority and (b) the Borrower or such assignee shall have paid to the Administrative Agent for the account of the assigning Bank in immediately available funds the principal of and interest accrued to the date of such payment on the portion of the Loans hereunder held by such assigning Bank and all other amounts owed to such assigning Bank hereunder, including amounts owed pursuant to Sections 2.09 and 2.10 hereof. 2.13 Pro Rata Treatment and Payments. Each Borrowing by Borrower ------------------------------- from the Banks hereunder, each payment by Borrower on account of any fee hereunder and any reduction of the Commitments of the Banks shall be made pro rata according to the respective Percentage Shares of the Banks. Each payment (including each prepayment) by Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Banks. The Administrative Agent shall distribute such payments to the Banks promptly upon receipt in like funds as received. 2.14 Sharing of Payments and Setoffs. Each Bank agrees that if it ------------------------------- shall, through the exercise of a right of banker's lien, setoff or counterclaim Borrower (pursuant to Section 9.01 or otherwise), including, but not limited to, a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Bank under any applicable bankruptcy, insolvency or other similar law or otherwise, or by similar means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans (other than pursuant to Section 2.10) as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Bank, it shall simultaneously purchase from such other Banks at face value a participation in the Loans of such other Banks, so that the aggregate unpaid principal amount of Loans and participations in Loans held by each Bank shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker's lien, setoff, counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker's lien, setoff, counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.14 and the payment giving rise thereto shall thereafter be recovered, such purchase or 25 purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. 2.15 Advances to Satisfy Obligations of the Borrower. The ----------------------------------------------- Administrative Agent or any Bank may, but shall not be obligated to, make advances hereunder for the benefit of the Banks and apply same to the satisfaction of any condition, warranty, representation or covenant of the Borrower contained in this Agreement, and the funds so advanced and applied shall be part of the Loan proceeds advanced under this Agreement and evidenced by the Notes. 2.16 Assignment of Production. Certain of the Security Instruments ------------------------ covering the Borrowing Base Oil and Gas Properties contain an assignment unto and in favor of Administrative Agent for the benefit of the Banks of all oil, gas and other minerals produced and to be produced from or attributable to the Borrowing Base Oil and Gas Properties together with all of the revenues and proceeds attributable to such production, and such Security Instruments further provide that all such revenues and proceeds which may be so collected by Administrative Agent for the benefit of the Banks pursuant to the assignment shall be applied to the payment of the Notes and the satisfaction of all other Indebtedness to be secured by such Security Instruments. The Borrower hereby appoints the Administrative Agent as its Administrative Agent and attorney-in- fact until this Agreement has been terminated in accordance with Section 9.18 hereof for purposes of completing the Transfer Order Letters delivered to the Administrative Agent pursuant to Section 3.02(B) hereof, which power is coupled with an interest and is not revocable. 2.17 Commitment Fee. As consideration for the commitment of the -------------- Banks to make Credit Extensions to the Borrower through the Facility Termination Date pursuant to this Agreement, the Borrower agrees to pay to the Administrative Agent for the account of the Banks within five (5) Business Days of receipt of the Administrative Agent's statement as to quarterly periods ending March 31, June 30, September 30 and December 31 of each year (except the first period shall be for a period of time from the Closing to March 31, 2002) during the period commencing on the date of this Agreement to and including the Facility Termination Date and at the Facility Termination Date, a commitment fee equal to the percentage per annum specified in the Pricing Grid based on the Utilization Percentage (computed on the basis of a year of 360 days) multiplied by an amount equal to the daily average excess, if any, of the Aggregate Commitment Amount over the Outstanding Credit Exposure, throughout the period from the Closing Date or previous calculation date provided above, whichever is later, to the relevant calculation date or the Facility Termination Date, as the case may be. 2.18 Addition/Deletion of Borrowing Base Oil and Gas Properties. -------------------------------------------------------- The Borrower may, from time to time upon written notice to the Administrative Agent, propose to add Oil and Gas Properties of the Borrower to the Borrowing Base Oil and Gas Properties. Any such proposal to add Oil and Gas Properties of the Borrower to the Borrowing Base Oil and Gas Properties shall be accompanied by a Reserve Report applicable to such properties that conforms to the requirements of Section 2.06, and evidence sufficient to establish that the Borrower has Marketable Title to such Oil and Gas Properties, and any such addition shall become effective at such time as: (a) the Administrative Agent, with the approval of the Banks, has made a determination of the amount by which the Borrowing Base would be increased as the result of such addition and (b) the conditions 26 set forth in Article III hereof, to the extent they are applicable to such additional Oil and Gas Properties of the Borrower, have been satisfied. In determining the increase in the Borrowing Base pursuant to this Section, the Administrative Agent and the Banks shall apply the parameters and other credit factors set forth in Section 2.06, above. 2.19 Adjustment to Aggregate Commitment Amount. At any time that ----------------------------------------- Borrower proposes to increase the Borrowing Base by adding additional Oil and Gas Properties to the Borrowing Base Oil and Gas Properties pursuant to Section 2.18, Borrower may also request that Banks increase the amount of the Aggregate Commitment Amount stated on Schedule 1.01(b). At any time that Borrower makes such a request it shall promptly provide Administrative Agent with such financial information as Administrative Agent may request to assist the Administrative Agent in evaluating such request. Following the receipt of such information from Borrower, within forty-five (45) days of such request the Administrative Agent shall, with the unanimous approval of the Banks and in the normal course of its business, make a redetermination of the Aggregate Commitment Amount, which shall become effective upon written notification from the Administrative Agent to Borrower of the new Aggregate Commitment Amount based on the parameters and other credit factors set forth in Section 2.06, above. The Borrower may upon written notice to Administrative Agent, not sooner than one hundred eighty (180) days subsequent to the last such action by Borrower, amend the definition of the Aggregate Commitment Amount by reducing the amount set forth in such definition. Upon such reduction, the Banks shall not be obligated to make Credit Extensions in excess of such reduced Aggregate Commitment Amount. 2.20 Facility LCs. ------------ (A) Issuance. The LC Issuer hereby agrees, on the terms and -------- conditions set forth in this Agreement, to issue standby letters of credit (each, a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action a "Modification"), from time to time from and including the date of this Agreement and prior to the Facility Termination Date upon the request of the Borrower; provided that immediately after each such Facility LC is issued or Modified, (i) the aggregate amount of the outstanding LC Obligations shall not exceed $5,000,000.00 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment Amount. Facility LC's issued pursuant to the Prior Credit Agreement and outstanding as of the Closing of this Agreement shall also constitute Facility LCs hereunder. No Facility LC shall have an expiry date later than the earlier of (x) the fifth Business Day prior to the Facility Termination Date and (y) one year after its issuance. (B) Participations. Upon the issuance or Modification by -------------- the LC Issuer of a Facility LC in accordance with this Section 2.20, the LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from the LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Percentage Share. 27 (C) Notice. Subject to Section 2.20(A), the Borrower shall give ------ the LC Issuer notice prior to 10:00 a.m. (Houston, Texas time) at least two Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, the LC Issuer shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank, of the contents thereof and of the amount of such Bank's participation in such proposed Facility LC. The issuance or Modification by the LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article III (the satisfaction of which the LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to the LC Issuer and that the Borrower shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as the LC Issuer shall have reasonably requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. (D) LC Fees. The Borrower shall pay to the Administrative Agent, ------- for the account of the Banks ratably in accordance with their respective Percentage Shares, with respect to each Facility LC, a letter of credit fee at a rate equal to the then otherwise applicable LIBOR Margin per annum on the average daily undrawn stated amount under such Facility LC, such fee to be payable in arrears on or before the first Business Day of each calendar month (each such fee described in this sentence an "LC Fee"). The Borrower shall also pay to the LC Issuer for its own account (x) at the time of issuance of each Facility LC, a fronting fee calculated at the rate of fifteen (15) basis points per annum, and (y) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with the LC Issuer's standard schedule for such charges as in effect from time to time; except that upon the occurrence and during the continuation of a default under the Agreement, the fee on any outstanding Facility LC shall increase by two percent (2%). (E) Administration; Reimbursement by Banks. Upon receipt from -------------------------------------- the beneficiary of any Facility LC of any demand for payment under such Facility LC, the LC Issuer shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid by the LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of the LC Issuer to the Borrower and each Bank shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by the LC Issuer, each Bank shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse the LC Issuer on demand for (i) such Bank's Percentage Share of the amount 28 of each payment made by the LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.20(F) below, plus (ii) interest on the foregoing amount to be reimbursed by such Bank, for each day from the date of the LC Issuer's demand for such reimbursement (or, if such demand is made after 11:00 a.m. (Houston, Texas time) on such date, from the next succeeding Business Day) to the date on which such Bank pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three Business Days and, thereafter, at a rate of interest equal to the Floating Rate based on ABR. (F) Reimbursement by Borrower. The Borrower shall be irrevocably and ------------------------- unconditionally obligated to reimburse the LC Issuer on the applicable LC Payment Date for any amounts paid by the LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Bank shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Bank to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) the LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by the LC Issuer and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate applicable to ABR Loans for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Bank ratably in accordance with its Percentage Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by the LC Issuer, but only to the extent such Bank has made payment to the LC Issuer in respect of such Facility LC pursuant to Section 2.20(E). Subject to the terms and conditions of this Agreement (including without limitation the submission of a Request for Advance in compliance with Section 2.02 and the satisfaction of the applicable conditions precedent set forth in Article III), the Borrower may request a Loan hereunder for the purpose of satisfying any Reimbursement Obligation. (G) Obligations Absolute. The Borrower's obligations under this -------------------- Section 2.20 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the LC Issuer, any Bank or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuer and the Banks that the LC Issuer and the Banks shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer shall not be liable for any error, omission, interruption or delay 29 in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Borrower agrees that any action taken or omitted by the LC Issuer or any Bank under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put the LC Issuer or any Bank under any liability to the Borrower. Nothing in this Section 2.20(G) is intended to limit the right of the Borrower to make a claim against the LC Issuer for damages as contemplated by the proviso to the first sentence of Section 2.20(F). (H) Actions of LC Issuer. The LC Issuer shall be entitled to -------------------- rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Banks as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Section 2.20, the LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and any future holders of a participation in any Facility LC. (I) Indemnification. The Borrower hereby agrees to indemnify and --------------- hold harmless each Bank, the LC Issuer and the Administrative Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which such Bank, the LC Issuer or the Administrative Agent may incur (or which may be claimed against such Bank, the LC Issuer or the Administrative Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the LC Issuer may incur by reason of or in connection with (i) the failure of any other Bank to fulfill or comply with its obligations to the LC Issuer hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Bank) or (ii) by reason of or on account of the LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to the LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Borrower shall not be required to indemnify any Bank, the LC Issuer or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the LC Issuer in determining whether a request 30 presented under any Facility LC complied with the terms of such Facility LC or (y) the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.20(I) is intended to limit the obligations of the Borrower under any other provision of this Agreement. (J) Banks' Indemnification. Each Bank shall, ratably in ---------------------- accordance with its Percentage Share, indemnify the LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.20 or any action taken or omitted by such indemnitees hereunder. (K) Rights as a Bank. In its capacity as a Bank, the LC Issuer ---------------- shall have the same rights and obligations as any other Bank. ARTICLE III. CONDITIONS ---------- The obligation of the Banks to make the Credit Extensions is subject to the following conditions precedent: 3.01 General Conditions to Closing and to all Disbursements. At the ------------------------------------------------------ time of the execution and delivery of this Agreement by all parties who are designated as signatories on the signature pages of this Agreement (the "Closing") and at each subsequent Credit Extension: (A) No Event of Default or Unmatured Event of Default shall have occurred and be continuing, unless, with respect to any such Unmatured Event of Default, Borrower provides evidence satisfactory to the Banks that such Unmatured Event of Default shall, contemporaneously with or promptly after such Credit Extension, be cured with funds advanced pursuant to the Credit Extension; (B) The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects as though such representations and warranties had been made on such date, except such as are expressly limited to a prior date, which shall have been true and correct in all material respects as of such prior date; (C) The Administrative Agent and the Banks shall have been, and shall continue to be, satisfied, in their good faith discretion, that the Borrower holds Marketable Title to the Borrowing Base Oil and Gas Properties, and that such ownership includes record title to an undivided net revenue interest in the production from each such Borrowing Base Oil and Gas 31 Property that is not less than, as well as an undivided working interest in each Borrowing Base Oil and Gas Property that is not greater than (unless there is a corresponding increase in the net revenue interest attributed to such party therein), the net revenue interest therein and the working interest therein, respectively, attributed to the Borrower on Exhibit "A," subject to the limitations and qualifications on such exhibit (or attributed to Borrower in any Security Instrument applicable to any Oil and Gas Property that is added to the Borrowing Base Oil and Gas Properties in connection with any subsequent funding after the Closing); provided, however, that for purposes of Closing, Administrative Agent and Banks intend to have confirmed, to their reasonable satisfaction, the status of Borrower's title to Borrowing Base Oil and Gas Properties comprising approximately ninety percent (90%) of the PW9 (based on the most recent Borrowing Base evaluation by the Administrative Agent) of the Proved Reserves that are attributable to those Borrowing Base Oil and Gas Properties that, as of Closing, are made subject to Security Instruments in favor of Administrative Agent; such determination by Administrative Agent and the Banks, however, shall not relieve Borrower from the ongoing obligation to comply with all of its representations, warranties and covenants herein and in the Security Instruments regarding Borrower's title to all Borrowing Base Oil and Gas Properties. (D) No Material Adverse Change shall have occurred since the date of the latest audited Consolidated Financial Statements provided to the Administrative Agent; (E) All of the Security Instruments previously delivered with respect to the Borrowing Base Oil and Gas Properties shall have remained in full force and effect, except to the extent released pursuant to the terms of this Agreement; and (F) All legal matters incidental thereto shall be reasonably satisfactory to each Bank's designated legal counsel. 3.02 Deliveries at the Closing. The Borrower shall have duly ------------------------- delivered or caused to be delivered to the Administrative Agent, prior to or contemporaneously with the Closing, the following: (A) The Notes payable to each respective Bank, along with each of the Security Instruments covering any Borrowing Base Oil and Gas Properties not already covered by valid and continuing Security Instruments in favor of Administrative Agent; provided, however, that Administrative Agent and the Banks intend to proceed with Closing (subject to all other conditions in this Article III) if Borrowing Base Oil and Gas Properties comprising approximately ninety percent (90%) of the Proved Reserves attributable to all of the Borrowing Base Oil and Gas Properties are made subject to Security Instruments in favor of Administrative Agent, but Borrower is not thereby relieved from its obligation to execute and deliver, upon request from Administrative Agent at any time, additional Security Instruments covering any and all Borrowing Base Oil and Gas Properties not previously covered by valid and continuing Security Instruments, with the exception of the Borrowing Base Oil and Gas Properties comprising any field (considered by the Administrative Agent 32 to be a "field" in its most recent Borrowing Base evaluation pursuant to Section 2.06) that has a PW9 of $10,000 or less. (B) Transfer Order Letters applicable to the production of oil and gas from any Borrowing Base Oil and Gas Properties for which Transfer Order letters have not previously been delivered to the Administrative Agent; (C) The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against the Borrower in the Offices of the Secretary of State of the State of Wyoming and each State in which any of the Borrowing Base Oil and Gas Properties are located or deemed to be located, such search to be as of a date no more than ten (10) days prior to the date of Closing. (D) A certified (as of the date of the Closing) copy of resolutions of Borrower's Board of Directors authorizing the execution, delivery, and performance of this Agreement, the Notes, and each other Loan Document to be delivered by Borrower pursuant hereto; (E) A certificate (dated the date of the Closing) of Borrower's corporate secretary as to the incumbency and signatures of the officers of the Borrower signing this Agreement, the Notes, and each other Loan Document to be delivered by Borrower pursuant hereto; (F) A copy, certified as of the most recent date practicable by the Secretary of State of the state in which Borrower is incorporated, of the Borrower's certificate of incorporation, together with a certificate (dated the date of the Closing) of the Borrower's corporate secretary to the effect that such certificate of incorporation has not been amended since the date of the aforesaid certification; (G) Certificates, as of the most recent dates practicable, of the Secretary of State of each state in which the Borrower is qualified as a foreign corporation, and the department of revenue or taxation of each of the foregoing states, as to the good standing of the Borrower; (H) A Compliance Certificate, dated the date of the Closing; (I) Payment of the Administrative Agent's attorneys' fees upon receipt of a reasonably detailed invoice pursuant to Section 5.12 hereof; (J) A legal opinion or opinions of outside counsel to the Borrower and each Guarantor, addressed to Administrative Agent, the Banks, the Arranger and the LC Issuer, in form and substance reasonably satisfactory to the Administrative Agent, covering, among other matters reasonably requested by Administrative Agent or its counsel, the matters addressed in Sections 4.01, 4.02, 4.03, 4.19 and 4.20 hereof as to Borrower, and Section 4.(d) of each Guaranty as to each respective Guarantor; and (K) Duly executed counterparts to the Guaranty of each respective Guarantor. 33 3.03 Documents Required for Subsequent Disbursements Involving --------------------------------------------------------- Additional Borrowing Base Oil and Gas Properties. As of the time of funding any - ------------------------------------------------ additional advances to Borrower that have been approved by the Banks pursuant to Section 2.01 and are made in conjunction with the addition of Oil and Gas Properties owned by the Borrower to the Borrowing Base Oil and Gas Properties, the Borrower shall have duly delivered to the Administrative Agent: (i) the Security Instruments that are necessary or appropriate, in the reasonable opinion of the Administrative Agent, relating to such additional Oil and Properties, provided that Borrower understands and agrees that Administrative Agent will require Borrowing Base Oil and Gas Properties that include any well from which Proved Reserves may be produced and each prospective drilling unit comprised of Proved Reserves that are undeveloped to have attributable thereto at least 80 contiguous acres of land covered by a Lease that is made subject to the Security Instruments, and (ii) Transfer Order Letters applicable to the production of oil and gas from the such additional Borrowing Base Oil and Gas Properties. 3.04 Subject to the satisfaction of the conditions stated in Sections 3.01 and 3.02 above, Bank One will execute and deliver an assignment of notes and liens whereby it assigns the Prior Note and the liens under the security documents executed pursuant to the Prior Credit Agreement from Bank One (in its capacity as the sole lender under the Prior Credit Agreement) to Bank One, as Administrative Agent for the benefit of the Banks and the LC Issuer, under the terms of this Agreement. ARTICLE IV. REPRESENTATIONS AND WARRANTIES ------------------------------ To induce the Administrative Agent and the Banks to enter into this Agreement and to make the Credit Extensions hereunder, each Borrower represents and warrants to the Administrative Agent and the Banks that: 4.01 Existence. The Borrower is a corporation, duly organized, legally --------- existing, and in good standing under the Laws of the State of Wyoming, the Borrower has the lawful power to own its properties and to engage in the businesses that it conducts, and is duly qualified and in good standing as a foreign corporation in the jurisdictions wherein the nature of the business transacted by it or property owned by it makes such qualification necessary, other than those jurisdictions where the failure to so qualify will not have a Material Adverse Effect; the states in which the Borrower is qualified to do business are set forth in Schedule 4.01; the addresses of all places of business of the Borrower are as set forth in Schedule 4.01; the Borrower has not changed its name, been the surviving company in a merger, acquired any business, or changed its principal executive office within five (5) years and one (1) month prior to the date hereof, except as disclosed on Schedule 4.01. 4.02 Due Authorization. The execution and delivery by the Borrower of ----------------- this Agreement and the borrowings hereunder; the execution and delivery by the Borrower of the Notes, the Security Instruments, and the other Loan Documents to which it is a party; and the repayment by the 34 Borrower of the Indebtedness evidenced by the Notes and interest and fees provided in the Notes and this Agreement are (a) within the corporate power of the Borrower; (b) have been duly authorized by all necessary corporate action, and (c) do not and will not (i) require the consent of any regulatory authority or governmental body, (ii) contravene or conflict with any provision of Law or of the articles of incorporation or bylaws of the Borrower, (iii) contravene or conflict with any indenture, instrument or other agreement to which the Borrower is a party or by which its property may be presently bound or encumbered, or (iv) result in or require the creation or imposition of any mortgage, lien, pledge, security interest, charge or other encumbrance in, upon or of any of the properties or assets of the Borrower under any such indenture, instrument or other agreement, other than under any of the Security Instruments. 4.03 Valid and Binding Obligations. This Agreement, the Notes, and the ----------------------------- Security Instruments , and the other Loan Documents to which Borrower is a party, when duly executed and delivered, will be legal, valid and binding obligations of and enforceable against the Borrower, in accordance with their respective terms (subject to any applicable bankruptcy, insolvency or other Laws of general application affecting creditors' rights, general equitable principles, whether considered in a proceeding in equity or at law, and judicial decisions interpreting any of the foregoing). 4.04 Scope and Accuracy of Financial Statements. All Financial ------------------------------------------ Statements submitted and to be submitted to the Administrative Agent hereunder are and will be complete and correct in all material respects, are and will be prepared in accordance with GAAP consistently applied, and do and will fairly reflect the consolidated financial condition and the results of the operations of Ultra Petroleum Corp. and its Subsidiaries in all material respects as of the dates and for the period stated therein (subject only to normal year-end audit adjustments with respect to such unaudited interim statements of Ultra Petroleum Corp.), and no Material Adverse Change has occurred since the effective date of the latest audited Consolidated Financial Statements delivered to Administrative Agent. 4.05 Title to Borrowing Base Oil and Gas Properties. The Borrower has ---------------------------------------------- Marketable Title to the working and net revenue interests in the Borrowing Base Oil and Gas Properties as set forth on Exhibit "A". Except as set forth in the instruments and agreements, if any, more particularly described in Exhibit "A" hereto, all such shares of production which the Borrower is entitled to receive, and shares of expenses which the Borrower is obligated to bear, are not subject to change, except for changes attributable to future elections by the Borrower not to participate in operations proposed pursuant to customary forms of applicable joint operating agreements, and except for changes attributable to changes in participating areas under any federal units wherein participating areas may be formed, enlarged or contracted in accordance with the rules and regulations of the applicable governmental authority. 4.06 Oil and Gas Leases. The Leases which constitute any part of the ------------------ Borrowing Base Oil and Gas Properties are in full force and effect as to those portions thereof that comprise the Borrowing Base Oil and Gas Properties. 35 4.07 Oil and Gas Contracts. Except: (a) as set forth on Schedule --------------------- 4.07 attached hereto, and (b) as may subsequently occur and be disclosed by Borrower in the next Compliance Certificate delivered by Borrower after such occurrence pursuant to Section 5.05 hereof, the Borrower is not obligated, by virtue of any prepayment under any contract providing for the sale by the Borrower of Hydrocarbons which contains a "take-or-pay" clause or under any similar prepayment agreement or arrangement, including, without limitation, "gas balancing agreements", to deliver a material amount of Hydrocarbons produced from the Borrowing Base Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor (i.e., in the case of oil, not in ---- excess of sixty (60) days, and in the case of gas, not in excess of ninety (90) days). Except: (a) as set forth on Schedule 4.07 attached hereto, and (b) as may subsequently occur and be disclosed by Borrower in the next Compliance Certificate delivered by Borrower after such occurrence pursuant to Section 5.05 hereof, the Borrowing Base Oil and Gas Properties are not subject to any contractual, or other arrangement for the sale of crude oil which cannot be canceled on ninety (90) days' (or less) notice, unless the price provided for therein is equal to or greater than the prevailing market price in the vicinity. The Borrowing Base Oil and Gas Properties are not subject to any regulatory refund obligation and no facts exist which might cause the same to be imposed. 4.08 Producing Wells. All producing wells that constitute part --------------- of the Borrowing Base Oil and Gas Properties: (a) have been, during all times that any such wells were operated by Borrower or its Affiliates, and (b) to the knowledge of the Borrower, have been at all other times; drilled, operated and produced in conformity with all applicable Laws, rules, regulations and orders of all regulatory authorities having jurisdiction, are subject to no penalties on account of past production, and are bottomed under and are producing from, and the well bores are wholly within, the Borrowing Base Oil and Gas Properties, or on Oil and Gas Properties which have been pooled, unitized or communitized with the Borrowing Base Oil and Gas Properties, except to the extent that any noncompliance with the representations set forth in this Section would not have a Material Adverse Effect. 4.09 Purchasers of Production. The names and business addresses ------------------------ of the Persons who: (a) have purchased any of the Borrower's interests in oil and gas produced from the Borrowing Base Oil and Gas Properties during the six calendar months preceding the Closing, and (b) are considered by Borrower to be potential future purchasers of Borrower's interest in oil and gas produced from the Borrowing Base Oil and Gas Properties, are identified on Schedule 4.09 attached hereto. 4.10 Authorizations and Consents. No authorization, consent, --------------------------- approval, exemption, franchise, permit or license of, or filing with, any governmental or public authority or any third party is required to authorize, or is otherwise required in connection with the valid execution and delivery by the Borrower of this Agreement, the Notes, and the Security Instruments, or any other instrument contemplated hereby, the repayment by the Borrower of advances against the Notes and interest and fees provided in the Notes and this Agreement, or the performance by the Borrower of its obligations under any of the foregoing. 4.11 Environmental Laws. Except to the extent that the failure to ------------------ do so would not have and would not be expected to have a Material Adverse Effect, the Borrower (a) is and has in the past been in compliance with all Environmental Laws and all permits, requests and notifications relating 36 to health, safety or the environment applicable to the Borrower or any of its properties, assets, operations and businesses; (b) has obtained and adhered to and currently possesses all necessary permits and other approvals, including interim status under the Federal Resource Conservation and Recovery Act, necessary to store, dispose of and otherwise handle Hazardous Substances and to operate its properties, assets and businesses; (c) has reported, to the extent required by all federal, state and local statutes, Laws, ordinances, regulations, rules, permits, judgments, orders and decrees, all past and present sites owned and/or operated by the Borrower where any Hazardous Substance has been released, treated, stored or disposed of and (d) has not used, stored, or Released any Hazardous Substance in excess of amounts allowed by Environmental Law. To the best knowledge and belief of Borrower, there is (x) no location on any property currently or previously owned or operated by the Borrower where Hazardous Substances are known to have entered or are likely to enter into the soil or groundwater on such property, other than releases of oil or natural gas in the ordinary course of business none of which releases (i) either individually, or in the aggregate, has had or may be expected to have a Material Adverse Effect or (ii) has violated or may be expected to violate any Environmental Laws, except for any such violation that has not had and would not be expected to have a Material Adverse Effect, and (y) no on-site or off-site location to which the Borrower has released or transported Hazardous Substances or arranged for the transportation or disposal of Hazardous Substances, which is or is likely to be the subject of any federal, state, local or foreign enforcement action or any investigation which could lead to any material claims against any such entity for any clean-up cost, remedial work, damage to natural resources, common law or legal liability, including, but not limited to, claims under Comprehensive Environmental Response, Compensation, and Liability Act. All Environmental Impact Statements, orders or decrees specifically applicable to Borrower or any of its Oil and Gas Properties with respect to operations to be conducted on any of such Oil and Gas Properties are described on Schedule 4.11 attached hereto. For the purposes of this Section, references to "the Borrower" shall include all predecessors, successors-in-interest of the Borrower; provided, that with respect to the Borrower's properties or assets, the - -------- foregoing representations as to predecessors and successors-in-interest are limited to the knowledge of the Borrower. 4.12 Compliance with Laws, Rules, Regulations and Orders. Except --------------------------------------------------- to the extent that the failure to comply would not materially interfere with the conduct of the business of the Borrower, the Borrower has complied with all applicable Laws with respect to: (1) the conduct of its business; and (2) the use, maintenance, and operation of the Borrowing Base Oil and Gas Properties and personal properties owned or leased by it in the conduct of its business; except as expressly set forth on Exhibit "A" hereto, the Borrower possesses all licenses, approvals, registrations, permits and other authorizations necessary to enable it to carry on its business in all material respects as now conducted, and all such licenses, approvals, registrations, permits and other authorizations are in full force and effect; and the Borrower has no reason to believe that the Borrower will be unable to obtain the renewal of any such licenses, approvals, registrations, permits and other authorizations. 4.13 Liabilities, Litigation and Restrictions. Except as ---------------------------------------- disclosed in the Financial Statements, the Borrower does not have any liabilities, direct or contingent, which would have a Material Adverse Effect. There is no litigation or other action of any nature pending before any court, governmental instrumentality, regulatory authority or arbitral body or, to the knowledge of the Borrower threatened against or affecting the Borrower which might reasonably be expected to 37 result in any material, adverse change in the Borrower, or its business or assets. To the best of the Borrower's knowledge, no unduly burdensome restriction, restraint or hazard exists by contract or Law that would have a Material Adverse Effect. 4.14 Existing Indebtedness. All Indebtedness of the Borrower --------------------- consisting of liability to repay borrowed money or to pay money to become due on capital leases is described in the most recent Financial Statements of Borrower delivered to Administrative Agent prior to the Closing and from time to time thereafter; and Borrower is not in default with respect to any of its existing Indebtedness. 4.15 Material Commitments. Except as described in Schedule 4.15 -------------------- hereto and in filings made by Borrower with the Securities Exchange Commission, (a) the Borrower does not have any material leases (other than oil and gas leases), contracts or commitments of any kind (including, without limitation, employment agreements; collective bargaining agreements; powers of attorney; distribution arrangements; patent license agreements; contracts for future purchase or delivery of goods or rendering of services; bonuses, pension and retirement plans; or accrued vacation pay, insurance and welfare agreements); (b) to the best of the Borrower's knowledge, all parties to all such material leases, contracts, and other commitments to which the Borrower is a party have complied with the provisions of such leases, contracts, and other commitments; and (c) to the best of the Borrower's knowledge, no party is in default under any thereof and no event has occurred that but for the giving of notice or the passage of time, or both, would constitute a default, except for defaults and events that have not had and would not be expected to have a Material Adverse Effect. 4.16 Margin Stock. The Borrower is not engaged principally, or ------------ as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Neither the Borrower nor any Person acting on its behalf has taken any action that might cause the transactions contemplated by this Agreement or the Notes to violate Regulations T, U, or X or to violate the Securities Exchange Act of 1934, as amended. 4.17 Proper Filing of Tax Returns and Payment of Taxes Due. ----------------------------------------------------- Except as otherwise permitted herein, the Borrower has filed all federal, state, and local tax returns and other reports required by any applicable Laws to have been filed prior to the date hereof, has paid or caused to be paid all taxes, assessments, and other governmental charges that are due and payable prior to the date hereof, and has made adequate provision for the payment of such taxes, assessments, or other charges accruing but not yet payable, except where the failure to do so would not have a Material Adverse Effect; the Borrower has no knowledge of any material deficiency or additional assessment in connection with any taxes, assessments, or charges not provided for on its books. 4.18 ERISA. The Borrower is in compliance in all material ----- respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any plan; no notice of intent to terminate a plan has been filed, nor has any plan been terminated; no circumstances exist which constitute grounds under Section 4042 of 38 ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administrate a plan, nor has the PBGC instituted any such proceedings; neither the Borrower nor any ERISA Affiliate has completely or partially withdrawn under Sections 4201 or 4204 of ERISA from a Multi-Employer Plan; the Borrower and each ERISA Affiliate has met its minimum funding requirements under ERISA with respect to all of its plans and the present value of all vested benefits under each plan exceeds the fair market value of all plan assets allocable to such benefits, as determined on the most recent valuation date of the plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of the Borrower or any ERISA Affiliate to the PBGC or the plan under Title IV of ERISA; and neither the Borrower nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA. 4.19 Investment Company Act Compliance. The Borrower is not --------------------------------- directly or indirectly controlled by, or acting on behalf of, any, Person which is an "Investment Company," within the meaning of the Investment Company Act of 1940, as amended. 4.20 Public Utility Holding Company Act Compliance. The Borrower --------------------------------------------- is not a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.21 Insurance. The Borrower Maintains insurance with respect to --------- the properties and business of the Borrower providing coverage for such liabilities, casualties, risks and contingencies and in such amounts as is customary in the industry. The insurance coverage reflected on the Certificate of Insurance attached hereto as Schedule 4.21 is in full force and effect, and all premiums due thereon have been paid. 4.22 Material Misstatements and Omissions. No representation or ------------------------------------ warranty by or with respect to the Borrower contained herein or in any certificate or other document furnished by the Borrower pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made. ARTICLE V. AFFIRMATIVE COVENANTS --------------------- Borrower covenants so long as any Indebtedness of the Borrower to any Bank remains unpaid under this Agreement, or any Obligations of the Borrower to any Bank or the LC Issuer remain unsatisfied, or any Bank remains obligated to make advances hereunder, to: 5.01 Use of Funds. Use funds advanced hereunder for the purposes ------------ of (A) extending, rearranging and renewing existing debt, (B) making acquisitions of Oil and Gas Properties, and (C) funding Borrower's other lawful corporate purposes. 5.02 Maintenance and Access to Records. Keep adequate records in --------------------------------- accordance with good accounting practices, of all of the transactions of the Borrower so that at any time, and from time to 39 time, such records present fairly the financial condition of the Borrower which may be readily determined and, at the Administrative Agent's reasonable request, make all financial records and records relating to the Borrowing Base Oil and Gas Properties available for the Administrative Agent's inspection and permit the Administrative Agent to make and take away copies thereof. 5.03 Quarterly Unaudited Financial Statements. Deliver to the ---------------------------------------- Administrative Agent, on or before the sixtieth (60th) day after the end of each calendar quarter, unaudited Consolidated Financial Statements, as at the end of such period and from the beginning of such fiscal year to the end of the respective period, as applicable, which Consolidated Financial Statements shall be certified by the president or chief financial officer of Ultra Petroleum Corp. as being true and correct, subject to changes resulting from year-end audit adjustments. 5.04 Annual Audited Financial Statements. Deliver to the ----------------------------------- Administrative Agent, on or before the one hundred twentieth (120th) day after the close of each fiscal year of Ultra Petroleum Corp. a copy of annual audited Consolidated Financial Statements, together with the report and opinion thereon of KPMG or such other firm of independent certified public accountants acceptable to the Administrative Agent at its reasonable discretion. 5.05 Compliance Certificate. At Closing, at the time of delivery ---------------------- of the certified but unaudited Consolidated Financial Statements pursuant to Section 5.03 above, and at the time of the delivery of the annual audited Consolidated Financial Statements pursuant to Section 5.04 above, deliver to the Administrative Agent a Compliance Certificate. 5.06 Statement of Material Adverse Change. Deliver to the ------------------------------------ Administrative Agent, promptly upon any Responsible Officer of the Borrower having knowledge of any Material Adverse Change (or any event or circumstance that would result in any such Material Adverse Change) in the condition, financial or otherwise, of Borrower or of any Guarantor, a statement of a Responsible Officer of the Borrower, setting forth the change in condition or event or circumstance likely to result in any such change and the steps being taken by the Borrower and/or Guarantor with respect to such change in condition or event or circumstance. 5.07 Title Defects. Cure any title defects of the Borrowing Base ------------- Oil and Gas Properties material in value, in the reasonable opinion of the Administrative Agent, within sixty (60) days after receipt of written notice thereof from Administrative Agent and, in the event any title defects are not cured in a timely manner, pay all related costs and fees reasonably incurred ny the Administrative Agent for the account of the Banks to do so; provided, however, the Borrower may remove any of its Oil and Gas Properties from the Borrowing Base Oil and Gas Properties so long as the Indebtedness evidenced by the Notes is less than or equal to the Borrowing Base (determined by the Banks in accordance with Section 2.06 exclusive of such Oil and Gas Properties) 5.08 Additional Information. Furnish to the Administrative Agent ---------------------- copies of all information, if any, filed with the Securities Exchange Commission by the Borrower or either Guarantor and all information routinely provided by the Borrower or either Guarantor to its shareholders, generally. Furnish to the Administrative Agent, promptly upon the Administrative Agent's reasonable request, such additional financial or other information in Borrower's or either Guarantor's possession or to 40 which Borrower or either Guarantor has access, without incurring material costs, concerning the assets, liabilities, operations, and transactions of the Borrower, including, without limitation, information concerning title to any of the Borrowing Base Oil and Gas Properties. 5.09 Compliance with Laws and Payment of Assessments and Charges. ----------------------------------------------------------- Materially comply with all applicable statutes and government regulations, including, without limitation, ERISA, and pay all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien other than a Permitted Encumbrance against its property, except any of the foregoing being contested in good faith and as to which accruals satisfactory to the Administrative Agent, in its reasonable discretion, have been provided. 5.10 Maintenance of Existence and Good Standing. Maintain the ------------------------------------------ Borrower's corporate existence and good standing in the jurisdiction of its organization, and maintain the Borrower's qualification and good standing in all other jurisdictions wherein the property now owned or hereafter acquired or business now or hereafter conducted by Borrower necessitates same, other than those jurisdictions wherein the failure to so qualify will not have a Material Adverse Effect on the Borrower. 5.11 Further Assurances. Promptly cure any defects in the ------------------ execution and delivery of this Agreement, the Notes, the Security Instruments, or any other Loan Document referred to herein or executed in connection with the Notes, and upon the reasonable request of the Administrative Agent promptly execute and deliver to the Administrative Agent all such other and further instruments as may be reasonably required by the Administrative Agent from time to time in compliance with the covenants and agreements made in this Agreement. Without limiting the generality of the foregoing, upon the reasonable request of the Administrative Agent, Borrower shall promptly execute and deliver to the Administrative Agent amendments of the Security Instruments existing under the Prior Credit Agreement to provide that references in any of such Security Instruments to the Prior Credit Agreement shall include references to this Agreement, as amended from time to time, and references in any such Security Instrument to the Prior Note shall be amended to include references to the Notes delivered pursuant to this Agreement, and any further notes issued in substitution therefor or in renewal, extension, increase or rearrangement thereof. 5.12 Initial Expenses of the Bank. Pay prior to or at Closing all ---------------------------- documented reasonable fees and expenses of Porter & Hedges, L.L.P., the special legal counsel for the Administrative Agent incurred directly and solely in connection with the preparation of this Agreement, the Notes, the Guaranty, the Security Instruments, and any other Loan Document referred to herein or executed directly and solely in connection with the Notes, the satisfaction of the conditions precedent set forth in Article III of this Agreement and the consummation of the transactions contemplated in this Agreement. 5.13 Subsequent Expenses of the Administrative Agent and the ------------------------------------------------------- Arranger. Upon request, promptly reimburse the Administrative Agent and the - -------- Arranger and any Bank for all documented amounts reasonably expended, advanced or incurred by the Administrative Agent, the Arranger or any such Bank to collect the Notes or to enforce the rights of the Administrative Agent, the Arranger or such Banks under this Agreement, the Notes, the Guaranty, the Security Instruments, or any other 41 Loan Document referred to herein or executed in connection with the Notes, which amounts shall be deemed compensatory in nature and liquidated as to amount upon notice to the Borrower by the Administrative Agent and which amounts will include, but not be limited to, (a) all court costs, (b) reasonable attorneys' fees, (c) fees of auditors and accountants, (d) investigation expenses, (e) internal fees of the Administrative Agent's in-house legal counsel, (f) fees and expenses incurred in connection with the Administrative Agent's and any such Bank's participation as a member of the creditors committee in a case commenced under Title 11 of the United States Code or other similar Law of the United States, the State of Texas or any other jurisdiction, (g) fees and expenses incurred in connection with lifting the automatic stay prescribed in (S)(S)362 Title 11 of the United States Code, and (h) fees and expenses incurred in connection with any action pursuant to (S)(S)1129 Title 11 of the United States Code, reasonably incurred by the Administrative Agent and/or any such Bank in connection with the collection of any sums due under this Agreement, together with interest at the Floating Rate per annum, calculated on a basis of a year of three hundred sixty (360) days on each such amount from the date of notification to the Borrower that the same was expended, advanced or incurred by the Administrative Agent and/or any such Bank until, but not including, the date it is repaid to the Administrative Agent or such Bank, with the obligations under this Section 5.13, surviving the non-assumption of this Agreement in a case commenced under Title 11 of the United States Code or other similar Law of the United States, the State of Texas or any other jurisdiction and being binding upon the Borrower or a trustee, receiver or liquidator of any such party appointed in any such case. 5.14 Maintenance of Tangible Property. Maintain all of its -------------------------------- tangible property relating to the Borrowing Base Oil and Gas Properties in good repair and condition and make all necessary replacements thereof and operate such property in a good and workmanlike manner in accordance with standard industry practices, unless the failure to do so would not have a Material Adverse Effect on the Borrower or the value of any Borrowing Base Oil and Gas Property. 5.15 Maintenance of Insurance. Continue to maintain, or cause to ------------------------ be maintained, insurance with respect to the properties and business of the Borrower against such liabilities, casualties, risks and contingencies and in such amounts as is customary in the industry and furnish to the Administrative Agent annually after the execution of this Agreement certificates evidencing such insurance. 5.16 Inspection of Tangible Assets/Right of Audit. Permit any -------------------------------------------- authorized representative of the Administrative Agent or any Bank to visit and inspect (at the risk of the Administrative Agent, such Bank and/or such representative) any tangible asset of the Borrower, and/or to audit the books and records of the Borrower during normal business hours, at the expense of the Administrative Agent or such Bank and during normal business hours following reasonable advance notice. 5.17 Payment of Note and Performance of Obligations. Pay the ---------------------------------------------- Notes according to the reading, tenor and effect thereof, as modified hereby, and do and perform every act and discharge all of the Obligations provided to be performed and discharged hereunder. 5.18 Borrowing Base. Maintain a Borrowing Base in compliance with -------------- Section 2.07 such that the amount of the Outstanding Credit Exposure will not, at any time other than during applicable 42 grace periods expressly set forth elsewhere in this Agreement, exceed the Aggregate Commitment Amount. 5.19 Compliance with Environmental Laws. To the extent necessary ---------------------------------- to avoid a Material Adverse Effect, comply with any and all requirements of Law, including, without limitation, Environmental Laws, (a) applicable to any natural or environmental resource or media located on, above, within, in the vicinity of, related to or affected by any Borrowing Base Oil and Gas Properties or any other property of the Borrower, or (b) applicable to the performance or conduct of its operations, including, without limitation, all permits, licenses, registrations, approvals and authorizations, and, in this regard, comply with, and require all employees, crew members, agents, contractors and subcontractors (pursuant to appropriate contractual provisions) and future lessees (pursuant to appropriate lease provisions) of the Borrower while such Persons are acting within the scope of their relationship with the Borrower, to so comply with, all applicable requirements of Law, including, without limitation, applicable Environmental Laws, and other applicable requirements with respect to the property of the Borrower, and the operation thereof necessary or appropriate to enable the Borrower to fulfill its obligations under all applicable requirements of Law, including, without limitation, Environmental Laws, applicable to the use, generation, handling, storage, treatment, transport and disposal of any Hazardous Substances now or hereafter located or present on or under any such property. 5.20 INDEMNIFICATION. INDEMNIFY AND HOLD THE ADMINISTRATIVE --------------- AGENT, THE BANKS AND THE LC ISSUER AND THEIR RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE ADMINISTRATIVE AGENT, THE BANKS AND THE LC ISSUER (EACH AN "INDEMNIFIED PERSON") UNDER ANY SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY 43 OR NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY LOAN DOCUMENT, ANY ALLEGATION BY ANY BENEFICIARY OF A LETTER OF CREDIT OF A WRONGFUL DISHONOR BY THE ADMINISTRATIVE AGENT, THE BANKS OR THE LC ISSUER OF A CLAIM OR DRAFT PRESENTED THEREUNDER, OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, WHETHER SOLE OR CONCURRENT, ON THE PART OF THE ADMINISTRATIVE AGENT, THE BANKS OR THE LC ISSUER OR ANY OF THEIR RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE ADMINISTRATIVE AGENT, THE BANKS OR THE LC ISSUER UNDER ANY SECURITY INSTRUMENT; PROVIDED THAT THE BORROWER SHALL HAVE NO OBLIGATION HEREUNDER TO ANY INDEMNIFIED PERSON WITH RESPECT TO ANY OF THE FOREGOING IN THIS SECTION TO THE EXTENT SAME ARISE FROM THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF ANY INDEMNIFIED PERSON WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS CREDIT AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN SATISFIED WHOLLY IN CASH FROM THE BORROWER AND NOT BY WAY OF REALIZATION AGAINST ANY COLLATERAL OR THE CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT SUCH INDEMNITY SHALL -------- NOT EXTEND TO ANY ACT OR OMISSION BY THE ADMINISTRATIVE AGENT, THE BANKS OR THE LC ISSUER AND THEIR RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE ADMINISTRATIVE AGENT, THE BANKS OR THE LC ISSUER UNDER ANY SECURITY INSTRUMENT WITH RESPECT TO ANY PROPERTY THROUGH THE EXERCISE OF ADMINISTRATIVE AGENT'S, ANY BANK'S OR THE LC ISSUER'S REMEDIES HEREUNDER OR UNDER ANY OF THE SECURITY DOCUMENTS SUBSEQUENT TO THE ADMINISTRATIVE AGENT, ANY BANK OR THE LC ISSUER BECOMING THE OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH CLAIM, LOSS, DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION, OR REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE THERETO BY THE ADMINISTRATIVE AGENT, ANY BANK OR THE LC ISSUER OR OTHER PERSON. 44 5.21 Transactions with Affiliates. Conduct all transactions with ---------------------------- any Affiliate of the Borrower on an arm's-length basis (provided that such transactions are otherwise permitted by the terms of this Agreement). 5.22 Leases. Keep and continue all Leases comprising the ------ Borrowing Base Oil and Gas Properties and related contracts and agreements relating thereto in full force and effect in accordance with the terms thereof and not permit the same to lapse or otherwise become impaired for failure to comply with the obligations thereof, whether express or implied; provided, -------- however, that this provision shall not prevent the Borrower from abandoning and - ------- releasing any such Leases upon their termination as the result of cessation of production in paying quantities that did not result from the Borrower's failure to maintain such production as a reasonably prudent operator. 5.23 Operation of Borrowing Base Oil and Gas Properties. Operate -------------------------------------------------- or, to the extent that the right of operation is vested in others, exercise all reasonable efforts to require the operator to operate the Borrowing Base Oil and Gas Properties and all wells drilled thereon and that may hereafter be drilled thereon, continuously and in a prudent and workmanlike manner and in accordance with all Laws of the State in which the Borrowing Base Oil and Gas Properties are situated and the United States of America, as well as all rules, regulations, and Laws of any governmental agency having jurisdiction to regulate the manner in which the operation of the Borrowing Base Oil and Gas Properties shall be carried on, and comply with all terms and conditions of the Leases it now holds, and any assignment or contract obligating the Borrower in any way with respect to the Borrowing Base Oil and Gas Properties, except for any such non-compliance that would not have a Material Adverse Effect; but nothing herein shall be construed to empower the Borrower to bind the Administrative Agent or any Bank to any contract obligation, or render the Administrative Agent or any Bank in any way responsible or liable for bills or obligations incurred by the Borrower. 5.24 Change of Purchasers of Production. On or before each ---------------------------------- anniversary of the Closing, and at any other time that the Administrative Agent may so request in writing, the Borrower shall notify the Administrative Agent in writing of the identity and address of each Person who: (a) has purchased any of the Borrower's interests in oil and gas produced from the Borrowing Base Oil and Gas Properties during the six calendar months preceding such anniversary of the Closing, and (b) are considered by Borrower to be potential future purchasers of Borrower's interest in oil and gas produced from the Borrowing Base Oil and Gas Properties and, if requested by the Administrative Agent, shall provide the Administrative Agent with Transfer Order Letters executed by the Borrower and addressed to such purchasers of production. 6.25 Payment of Taxes, Etc. Pay or cause to be paid when due, all --------------------- taxes, assessments, and charges or levies imposed upon it, or on its property, or which it is required to withhold and pay, except where contested in good faith by appropriate proceedings with adequate reserves therefor having been set aside on its books, provided, however, that the Borrower shall pay or cause to be paid all such taxes, assessments, charges, or levies forthwith whenever foreclosure on any lien that may have attached (or security therefor) appears imminent. 45 5.26 Notice of Litigation. Give immediate notice to the -------------------- Administrative Agent of any litigation or proceeding in which it or any Guarantor is a party if an adverse decision therein would require it or any Guarantor to: (a) pay more than, and/or (b) deliver, forfeit or otherwise lose ownership of assets the value of which exceeds, and/or (c) take any action or refrain from taking any action the result of which causes it or any Guarantor to incur losses or damages in excess of, $1,000,000 in the combined aggregate (whether or not any such payment, loss or damages is considered to be covered by insurance). 5.27 Notice of Events of Default. Notify the Administrative --------------------------- Agent immediately if it becomes aware of the occurrence of any Event of Default or of any fact, condition, or event that only with the giving of notice or passage of time or both, would become an Event of Default or if it becomes aware of any Material Adverse Change (including, without limitation, proceedings in bankruptcy, insolvency, reorganization, or the appointment of a receiver or trustee). 5.28 Notice of Change of Principal Offices. Notify the ------------------------------------- Administrative Agent thirty (30) days in advance of any change in the location of the principal offices of Borrower or any Guarantor. 5.29 Changes in Management. Notify the Administrative Agent of --------------------- any change in the senior management of Borrower or any Guarantor existing as of the date hereof. 5.30 Employee Benefit Plans. Fund its Plan(s) in accordance with ---------------------- no less than the minimum funding standards of 29 U.S.C.A. (S)(S) 1082 (Section 302 of ERISA); furnish the Administrative Agent, promptly after the filing or receiving of the same, with copies of any reports or other statements filed with, or notices or other communications received from, the United States Department of Labor, the PBGC, or the Internal Revenue Service with respect to any such Plan; promptly advise the Administrative Agent of the occurrence of any Reportable Event or Prohibited Transaction with respect to any such Plan and the action the Borrower proposes to take with respect thereto; and promptly advise the Administrative Agent when the Borrower knows or has reason to believe that the PBGC or the Borrower has instituted or will institute proceedings under Title IV of ERISA to terminate any such Plan and the action the Borrower proposes to take with respect thereto. 5.31 Payment of Obligations. Promptly pay (or renew and extend) ---------------------- all of its Indebtedness as it becomes due unless such Indebtedness is contested in good faith by appropriate proceedings. 5.32 Annual Budget. On or before April 1/st/ of each year, ------------- beginning on or before April 1, 2003, Borrower shall prepare and provide to the Administrative Agent a comprehensive budget for the calendar year beginning as of the immediately preceding January 1, which shall include, but shall not necessarily be limited to, all projected capital expenditures, lease operating expenditures, revenues from the sale or other disposition of Hydrocarbons, Hedge Agreement receipts and payments, and all other reasonably foreseeable material budgetary information. 46 ARTICLE VI. NEGATIVE COVENANTS ------------------ Without the prior written consent of the Administrative Agent and the Required Banks and so long as any part of the principal or interest on the Notes shall remain unpaid or any Bank remains obligated to make advances hereunder, Borrower covenants that it will not: 6.01 Other Indebtedness. Incur, create, assume or suffer to exist ------------------ any Indebtedness, whether by way of loan or the issuance or sale of securities except Permitted Indebtedness. 6.02 Loans or Advances. Make or agree to make or allow to remain ----------------- outstanding any loans or advances to any Person, except: (a) advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business, (b) loans or advances permitted by Section 6.18, and (c) provided no Event of Default or Unmatured Event of Default has occurred and is continuing: (i) other loans or advances not exceeding $1,000,000, in the aggregate, at any time outstanding, and (ii) loans or advances to Guarantor as and to the extent necessary to enable Guarantor to retire or redeem any capital stock of Guarantor, to the extent required pursuant to the terms of any employee incentive compensation plan of Guarantor that was in effect at Closing and disclosed to Administrative Agent in writing at or prior to Closing. 6.03 Mortgages or Pledges of Assets. Create, incur, assume or ------------------------------ permit to exist, any mortgage, pledge, security interest, lien or encumbrance on any of its properties or assets (now owned or hereafter acquired), except for Permitted Encumbrances. 6.04 Sales of Assets. Except for Permitted Asset Sales, sell, --------------- lease, assign, transfer or otherwise dispose of, in one or any series of related transactions, all or any portion of its Oil and Gas Properties or other material assets, whether now owned or hereafter acquired, including transfers to Affiliates, nor enter into any arrangement, directly or indirectly, with any Person to sell and rent or lease back as lessee such property or any part thereof which is intended to be used for substantially the same purpose or purposes as the property sold or transferred. 6.05 Dividends. Declare or pay any distribution on any capital --------- stock of Borrower. 6.06 Retire Stock. Retire or redeem any capital stock of ------------ Borrower. 6.07 Payment of Accounts Payable. Allow any account payable to --------------------------- remain unpaid more than sixty (60) days after due date, except such as are (i) being contested in good faith and as to which adequate provision or accrual has been made, or (ii) the subject of usual and customary review and evaluation. 6.08 Investments. Make Investments in or purchase or otherwise ----------- acquire all or substantially all of the assets of any Person, or any shares of stock of, or similar interest in, any other Person, if the result of such action would impair the ability of the Borrower to perform any of its Obligations pursuant to this Agreement, including, without limitation, the obligation to repay the Indebtedness 47 evidenced by the Notes, except that the Borrower may invest in instruments that are investment grade, short-term commercial paper. 6.09 Changes in Structure or Business. Consolidate or merge with -------------------------------- or purchase (for cash or securities) all or substantially all of the assets or capital stock of any corporation, firm, association or enterprise, or allow any such entity to be merged into the Borrower, or change the basic business operations of the Borrower, unless all of the following conditions are satisfied: (a) Borrower has provided Administrative Agent complete and detailed information relating to such merger or purchase at least fifteen (15) days in advance thereof, (b) Borrower is the survivor of such merger or the acquiror in any such purchase, and (c) such merger or purchase will not otherwise constitute or result in an Event of Default or Unmatured Event of Default under any other provisions of this Agreement. 6.10 Pooling or Unitization. Voluntarily pool or unitize all or ---------------------- any part of the Borrowing Base Oil and Gas Properties where the pooling or unitization would result in the diminution of the Borrower's net revenue interest in production from the pooled or unitized lands, without the Required Banks' prior consent, which will not be unreasonably withheld. Any unitization, pooling or communitization or other action or instrument in violation of this Section 6.10 shall be of no force or effect against any Bank. 6.11 Hedge Agreements. Except for Permitted Hedge Agreements, ---------------- enter into or become obligated under any contract for sale for future delivery of Hydrocarbons other than normal production contracts entered into in the Borrower's normal course of business (whether or not the subject Hydrocarbons are to be delivered), forward contract, Hedging Agreement, futures contract or any other similar agreement, without the prior written consent of the Required Banks, acting in their reasonable discretion. 6.12 Capital Stock of Borrower. Without the prior written consent ------------------------- of the Required Banks, acting in their reasonable discretion, (a) issue, redeem, purchase, retire or otherwise acquire for value any of its capital stock or grant, issue, purchase, retire or otherwise acquire for value any warrant, right, or option pertaining thereto or other security convertible into any of the foregoing, or (b) permit any transfer, sale, redemption, retirement, or other change in the ownership of the outstanding capital stock of the Borrower; except for the issuance or transfer of the Borrower's capital stock which does not result in a Change of Control or otherwise constitute or result in an Event of Default under any other provisions of this Agreement. 6.13 Margin Stock. Directly or indirectly apply any part of the ------------ proceeds of the Loans to the purchasing or carrying of any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or any regulations, interpretations or rulings thereunder. 6.14 Minimum Tangible Net Worth. Permit Consolidated Tangible Net -------------------------- Worth to be less than $80,000,000.00, plus 75% of Ultra Petroleum Corp.'s ---- positive consolidated Net Income, if any, accrued during each calendar quarter subsequent to September 30, 2001, calculated cumulatively as of the end of each fiscal quarter of Ultra Petroleum Corp. beginning with the quarter ending 48 December 31, 2001, with no reduction for negative Net Income during any such quarter, plus 100% of any increase in Stockholders' Equity resulting from the sale or issuance of stock in Ultra Petroleum Corp or any of its Subsidiaries subsequent to September 30, 2001. 6.15 Current Ratio. (a) Permit as of the end of any fiscal ------------- quarter the Current Ratio to be less than 1.00 to 1.00, calculated based on the Consolidated Financial Statements, and (b) permit as of the end of any fiscal quarter Borrower's Current Ratio to be less than 1.00 to 1.00, calculated based solely on the consolidating financial statements relative to Borrower, which constitute a part of the Consolidated Financial Statements. 6.16 EBITDA to Interest Ratio. (a) Permit, as of the end of any ------------------------ fiscal quarter, the ratio of EBITDA to total interest expense on all Indebtedness, calculated based on the Consolidated Financial Statements, to be less than 4.5 to 1.0, calculated on a rolling four-quarter basis, and (b) permit, as of the end of any fiscal quarter, the ratio of Borrower's EBITDA to Borrower's total interest expense on all of Borrower's Indebtedness, calculated based solely on the consolidating financial statements relative to Borrower, which constitute a part of the Consolidated Financial Statements, to be less that 4.5 to 1.0, calculated on a rolling four-quarter basis.. 6.17 General and Administrative Expenses. Permit, for any fiscal ----------------------------------- quarter, general and administrative expenses to be greater than 25% of gross Production Revenue, calculated based on the Consolidated Financial Statements. 6.18 Intercompany Transfers. Permit the Borrower or any of its ---------------------- Affiliates to invest in, loan to or transfer to Sino-American Energy Corporation an amount greater than Seventeen Million Five Hundred Thousand Dollars ($17,500,000) during the calendar year ending December 31, 2002 without the prior written approval of the Required Banks; and thereafter permit the Borrower or any of its Affiliates to invest in or transfer to Sino-American Energy Corporation an amount greater than Twenty-Five Million Dollars ($25,000,000) during each subsequent calendar year without the prior written approval of the Required Banks; provided that in no event shall any such transfers to Sino- American Energy Corporation be permitted if either: (i) an Event of Default has occurred and is continuing pursuant to any of Sections 7.01(a), (d), (e), (f), (g), (h), (i) or (j) hereof; (ii) Administrative Agent has given Borrower written notice that a Loan Excess has occurred and is continuing; (iii) the Current Ratio calculated pursuant to Section 6.15 (a) or (b) is, or as the result of the making of such investment, loan or transfer would become, less than 0.85 to 1.00; (iv) the EBITDA to Interest Ratio calculated pursuant to Section 6.16 (a) or (b) is, or as the result of the making of such investment, loan or transfer would become, less than 3.0 to 1.0; or (v) Administrative Agent has accelerated the maturity of Borrower's Obligations as provided in Section 7.03. ARTICLE VII. EVENTS OF DEFAULT ----------------- 7.01 Enumeration of Events of Default. Any of the following -------------------------------- events shall be considered an Event of Default as that term is used herein: 49 (a) Default shall be made by the Borrower in the payment of any installment of principal or interest (including, without limitation, any mandatory prepayments payable pursuant to either Section 2.07 or 2.08 of this Agreement) on the Notes, any LC Fee or any other monetary obligation (other than Reimbursement Obligations) payable hereunder when due, including without limitation, any other fee due to Administrative Agent, LC Issuer or any Bank hereunder within five (5) days after such payment was due, or in the payment of any Reimbursement Obligation within one Business Day after the same becomes due; (b) Default shall be made by the Borrower or any Guarantor in the due observance or performance of any affirmative covenant required in this Agreement, the Notes, the Guaranty, the Facility LC Applications or the Security Instruments or any other Loan Documents and such default continues for more than thirty (30) days after the earlier of: (i) any Responsible Officer of Borrower or any Guarantor having knowledge thereof, or (ii) Borrower or Guarantor receiving written notice thereof from the Administrative Agent; (c) Default shall be made by the Borrower or any Guarantor in the due observance or performance of any negative covenant required in this Agreement, the Notes, the Guaranty, the Facility LC Applications or the Security Instruments or any other Loan Documents; (d) Any representation or warranty made herein by the Borrower or made in the Guaranty by either Guarantor proves to have been untrue in any respect material to the Borrower or such Guarantor, respectively, or any representation, statement (including Financial Statements), certificate or data furnished or made by the Borrower or any Guarantor to the Administrative Agent in connection herewith proves to have been untrue in any respect material to the Borrower or the Guarantor, respectively, as of the date the facts therein set forth were stated or certified; (e) (x) Default shall be made by the Borrower or either Guarantor (as principal or other surety) in payment or performance of any bond, debenture, note or other evidence of Indebtedness for borrowed money, or under any credit agreement, loan agreement, indenture, promissory note or similar agreement or instrument executed in connection with any of the forgoing, relating to any Indebtedness in an aggregate amount of One Million Dollars ($1,000,000.00) or more, and such default shall remain unremedied for in excess of the period of grace, if any, with respect thereto, entitling the payee thereof to accelerate the maturity of such Indebtedness; or (y) Default shall be made by Sino- American Energy Corporation (as principal or other surety) in payment or performance of any bond, debenture, note or other evidence of Indebtedness for borrowed money, or under any credit agreement, loan agreement, 50 indenture, promissory note or similar agreement or instrument executed in connection with any of the forgoing, relating to any Indebtedness in an aggregate amount of One Million Dollars ($1,000,000.00) or more, and such default shall remain unremedied for in excess of the period of grace, if any, with respect thereto, entitling the payee thereof to accelerate the maturity of such Indebtedness, and the payee of such Indebtedness has, or alleges in written notice to Borrower or either Guarantor that it has, recourse against Borrower or either Guarantor for the collection of such Indebtedness; (f) The Borrower or either Guarantor (i) discontinues its usual business or applies for or consents to the appointment of a receiver, trustee or liquidator of it or all or a substantial part of its assets, or (ii) files a voluntary petition commencing a case under Title 11 of the United States Code, seeking liquidation, reorganization or rearrangement or taking advantage of any bankruptcy, insolvency, debtor's relief or other similar Law of the United States the State of Texas or any other jurisdiction, or (iii) makes a general assignment for the benefit of creditors, or (iv) is unable, or admits in writing its inability to pay its debts generally as they become due, or (v) files an answer admitting the material allegations of a petition filed against it in any case commenced under Title 11 of the United States Code or any reorganization, insolvency, conservatorship or similar proceeding under any bankruptcy, insolvency, debtor's relief or other similar Law of the United States, the State of Texas or any other jurisdiction; (g) An order, judgment or decree shall be entered against the Borrower or either Guarantor by any court of competent jurisdiction or by any other duly authorized authority, on the petition of a creditor or otherwise, granting relief under Title 11 of the United States Code or under any bankruptcy, insolvency, debtor's relief or other similar Law of the United States, the State of Wyoming, the State of Nevada, the Yukon Territory of Canada, or any other jurisdiction, approving a petition seeking reorganization or an arrangement of its debts or appointing a receiver, trustee, conservator, custodian or liquidator of it or all or any substantial part of its assets, and the failure to have such order, judgment or decree dismissed within thirty (30) days of its entry; (h) the Borrower or either Guarantor has concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them; or has made or suffered a transfer of any of its property which would be characterized as a fraudulent conveyance under bankruptcy or similar Laws; or has made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or has suffered or permitted, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings or distraint which is not vacated within thirty (30) days from the date thereof; 51 (i) the Liens under the Security Instruments are not, or they cease to be, perfected first priority Liens subject to only Permitted Encumbrances, or any of the Loan Documents or the rights or remedies of the Administrative Agent, the Banks or the LC Issuer are not, or they cease to be, valid and enforceable; or (j) a Material Adverse Change has occurred and the same remains unremedied for in excess of 30 days after the earlier of: (i) any Responsible Officer of Borrower or any Guarantor having knowledge thereof, or (ii) Borrower receiving written notice thereof from the Administrative Agent. 7.02 Rights Upon Unmatured Event of Default. At any time that there exists -------------------------------------- an Unmatured Event of Default, any obligation of the Banks and the LC Issuer to make Credit Extensions shall be suspended: (a) unless, with respect to any such Unmatured Event of Default, Borrower provides evidence satisfactory to the Banks that such Unmatured Event of Default shall, contemporaneously with or promptly after such Credit Extension, be cured with funds advanced pursuant to the Credit Extension, or (b) unless and until the Administrative Agent, with the approval of the Required Banks and the LC Issuer, shall reinstate the same in writing, the Unmatured Event of Default shall have been waived by the Administrative Agent, with approval of the Required Banks and the LC Issuer, or the relevant Unmatured Event of Default shall have been remedied prior to ripening into an Event of Default. 7.03 Rights Upon Default. Upon the happening of an Event of Default ------------------- specified in Subsections 7.01 (f) or (g), the obligations of the Banks and the LC Issuer to make Credit Extensions hereunder shall automatically terminate and all Obligations then outstanding hereunder and the interest accrued thereon shall automatically become immediately due and payable without any election or action on the part of the Administrative Agent, any Bank or the LC Issuer. Upon the happening and during the continuation of any other Event of Default, the Administrative Agent may, or upon the request of the Required Banks subject to Section 9.12, the Administrative Agent shall terminate or suspend the obligations of the Banks and the LC Issuer to make Credit Extensions hereunder, or declare the Obligations to be immediately due and payable, or both, and upon such declaration with respect to the Obligations they shall become immediately due and payable. In either case, the entire principal and interest shall thereupon become immediately due and payable, without notice (including, without limitation, notice of intent to accelerate maturity or notice of acceleration of maturity) and without presentment, demand, protest, notice of protest or other notice of default or dishonor of any kind, except as provided to the contrary elsewhere herein, all of which are hereby expressly waived by the Borrower. If, within thirty (30) days after acceleration of the maturity of the Obligations or termination of the obligations of the Banks and LC Issuer to make Credit Extensions hereunder as the result of any Event of Default (other than any Event of Default specified in subsections 7.01(f) or (g)) and before any judgement or decree for the payment of the Obligations due shall have been obtained or entered, the Required Banks (in their sole discretion) shall direct with respect to the Obligations relating to the Loans or the LC Issuer (in its sole discretion) shall direct with respect to Obligations 52 relating to Facility LCs, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 7.04 Remedies. After any acceleration, as provided for in Section 7.03, -------- the Administrative Agent, the Banks and the LC Issuer shall have, in addition to the rights and remedies given them by this Agreement and the Security Instruments, all those allowed by all applicable Laws. 7.05 Right of Set-off. Upon the occurrence of any Event of Default, each ---------------- Bank may, and is hereby authorized by the Borrower, at any time and from time to time, to the fullest extent permitted by applicable Laws, without advance notice to the Borrower (any such notice being expressly waived by the Borrower), set- off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and any other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrower against any or all of the Obligations of the Borrower now or hereafter existing, whether or not such Obligations have matured and irrespective of whether such Bank may have exercised any other rights that they have or may have with respect to such Obligations, including, without limitation, any acceleration rights. Each Bank agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 7.05 are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which the Banks may have. ARTICLE VIII. THE ADMINISTRATIVE AGENT ------------------------ 8.01 Authorization and Action. Each Bank hereby irrevocably appoints and ------------------------ authorizes the Administrative Agent to act on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are specifically delegated to or required of the Administrative 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 or the other Loan Documents (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and, as between the Administrative Agent and the Banks, shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Administrative Agent shall not be -------- required to take any action which exposes such Administrative Agent to personal liability or which is contrary to this Agreement, the other Loan Documents or applicable law. The Administrative Agent is authorized to release Collateral from the Security Instruments in connection with any sale, lease, assignment, transfer or other disposition thereof permitted by Section 6.04. 8.02 Administrative Agent's Reliance, Etc. Neither the Administrative ------------------------------------ Agent nor any of its directors, officers, agents or employees shall be liable to any Bank for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Loan Documents (i) with the consent or at the request of the Required Banks or (ii) in the absence of its or their own gross negligence or willful misconduct (it being the express intention of the parties that the 53 Administrative Agent and its directors, officers, agents and employees shall have no liability for actions and omissions under this Section 8.02 resulting from their sole ordinary or contributory negligence). Without limitation of the generality of the foregoing, the Administrative Agent: (i) may treat the payee of each Note as the holder thereof until the Administrative Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Administrative Agent; (ii) may consult with legal counsel (including counsel for 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; (iii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents; (iv) except as otherwise expressly provided herein, 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 or to inspect the property (including the books and records) of Borrower; (v) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; and (vi) shall incur no liability under or in respect of this Agreement or the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopier, cable or telex) reasonably believed by it to be genuine and signed or sent by the proper party or parties; and (vii) the provisions of this Section 8.02 shall survive the termination of this Agreement and/or the payment or assignment of any of the Indebtedness under this Agreement. 8.03 The Administrative Agent and Affiliates. With respect to its --------------------------------------- Commitment, the Credit Extensions made by it and the Note issued to it as a Bank, the Administrative Agent shall have the same rights and powers under this Agreement or the other Loan Documents as any other Bank and may exercise the same as though it were not the Administrative Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity. The Administrative Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with Borrower and any Person who may do business with or own securities of Borrower, all as if the Administrative Agent were not the Administrative Agent and without any duty to account therefor to the Banks. 8.04 Bank Credit Decision. Each Bank acknowledges and agrees that it has, -------------------- independently and without reliance upon the Administrative Agent or any other Bank and based on the Financial Statements referred to in Sections 5.03 and 5.04 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 and agrees that it will, independently and without reliance upon the Administrative Agent or any other 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 and the other Loan Documents. 8.05 Administrative Agent's Indemnity. The Administrative Agent shall -------------------------------- not be required to take any action hereunder or to prosecute or defend any suit in respect of this Agreement or the other Loan Documents unless indemnified to the Administrative Agent's satisfaction by the Banks 54 against loss, cost, liability and expense. If any indemnity furnished to the Administrative Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. In addition, the Banks agree to indemnify the Administrative Agent (to the extent not reimbursed by Borrower), ratably according to the respective principal amounts of the Notes then held by each of them (or if no Notes are at the time outstanding, ratably according to either (i) the respective amounts of their Commitments, or (ii) if no Commitments are outstanding, the respective amounts of the Commitments immediately prior to the time the Commitments ceased to be outstanding), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Administrative Agent under this Agreement or the other Loan Documents (including, without limitation, any action taken or omitted under Article II of this Agreement); 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 the Administrative Agent's gross negligence or willful misconduct. Each Bank agrees, however, that it expressly intends, under this Section 8.05, to indemnify the Administrative Agent ratably as aforesaid for all such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements arising out of or resulting from the Administrative Agent's ordinary or contributory negligence. Without limitation of the foregoing, each Bank agrees to reimburse the Administrative Agent promptly upon demand for its ratable share of any out-of- pocket expenses (including reasonable counsel fees) incurred by the Administrative Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibilities under, this Agreement and the other Loan Documents to the extent that the Administrative Agent is not reimbursed for such expenses by Borrower. The provisions of this Section 8.05 shall survive the termination of this Agreement and/or the payment or assignment of any of the Indebtedness under this Agreement. 8.06 Successor Administrative Agent. The Administrative Agent may ------------------------------ resign at any time by giving thirty (30) days advance written notice thereof to the Banks and Borrower and may be removed as Administrative Agent under this Agreement and the other Loan Documents at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks with the concurrence of Borrower shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 calendar days after the retiring Administrative Agent's giving of notice of resignation or the Required Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks and with the concurrence of Borrower, appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent hereunder and under the other Loan Documents by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents. After any retiring Administrative Agent's resignation or removal as Administrative Agent hereunder and under the other Loan Documents, the 55 provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. 8.07 Notice of Default. The Administrative Agent shall not be deemed to ----------------- have knowledge or notice of the occurrence of any Event of Default hereunder unless the Administrative Agent shall have received notice from a Bank or Borrower referring to this Agreement, describing such Event of Default and stating that such notice is a "notice of default." If the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Banks; provided, however, if such notice is received from a Bank, the -------- ------- Administrative Agent also shall give notice thereof to Borrower. The Administrative Agent shall be entitled to take action or refrain from taking action with respect to such Event of Default as provided in Section 8.01 and Section 8.02. ARTICLE IX. MISCELLANEOUS ------------- 9.01 Security Interests in Deposits and Right of Offset or the Banker's ------------------------------------------------------------------ Lien. The Borrower hereby transfers, assigns, pledges and grants to each Bank a - ---- security interest (as security for the payment and/or performance of the Obligations of the Borrower, with such interest of each Bank to be retransferred, reassigned and/or released by such Bank at the expense of the Borrower upon payment in full and/or complete performance by the Borrower of all such Obligations) and the right, exercisable at such time as any obligation hereunder shall mature, whether by acceleration of maturity or otherwise, of offset or banker's lien against all funds or other property of the Borrower now or hereafter or from time to time on deposit with or in the possession of such Bank, including, without limitation, all certificates of deposit and other depository accounts. 9.02 Survival of Representations, Warranties and Covenants. All ----------------------------------------------------- representations and warranties of the Borrower and all covenants and agreements herein made shall survive the execution and delivery of the Notes and this Agreement and shall remain in force and effect so long as any debt is outstanding under the Notes, or any renewal or extension of this Agreement or the Notes, or the Banks remain obligated to make advances hereunder. 9.03 Notices and Other Communications. Notices, requests and -------------------------------- communications hereunder shall be in writing and shall be sufficient in all respects if delivered to the relevant address indicated below (including delivery by registered or certified United States mail, facsimile, telex, telegram or hand): (A) If to the Borrower: ULTRA RESOURCES, INC. 16801 Greenspoint Park, Suite 370 Houston, Texas 77060 Attention: Mr. Fox Benton Telecopy: (281) 876-2831 56 If to a Guarantor: ULTRA PETROLEUM CORPORATION, and UP ENERGY CORPORATION 16801 Greenspoint Park, Suite 370 Houston, Texas 77060 Attention: Mr. Fox Benton Telecopy: (281) 876-2831 with a copy to: ULTRA RESOURCES, INC. 1200 Summit Avenue, Suite 700 Fort Worth, Texas 76102 Attention: Ms. Charlotte Kauffman Telecopy: (817) 335-2434 (B) If to the Administrative Agent or the Banks: BANK ONE, NA 910 Travis, 6th Floor Houston, Texas 77002 Attention: Stephen M. Shatto Any party may, by proper written notice hereunder to the other, change the individuals or addresses to which such notices to it shall thereafter be sent. 9.04 Parties in Interest. All covenants and agreements herein contained ------------------- by or on behalf of the Borrower shall be binding upon the Borrower and its successors and assigns and inure to the benefit of the Administrative Agent and the Banks and their respective successors and assigns. 9.05 Successors and Assigns; Participation; Purchasing Banks. ------------------------------------------------------- (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party; and all covenants, promises and agreements by or on behalf of Borrower, the Administrative Agent or the Banks that are contained in this Agreement shall bind and inure to the benefit of their respective successors and permitted assigns. Borrower may not assign or transfer any of its rights or obligations hereunder without the written consent of all the Banks. (b) Each Bank may, without the consent of Borrower, sell participations to one or more banks or other financial institutions in all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment, the Loans owing to it, and the Notes held by it); provided, -------- however, that (i) the selling Bank's obligations under this Agreement and ------- the other Loan Documents shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) Borrower, the 57 Administrative Agent, and the other Banks shall continue to deal solely and directly with the selling Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents, (iv) the selling Bank shall remain the holder of its Note(s) for all purposes of this Agreement, and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce to the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any regularly scheduled payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. (c) With the prior written consent of Borrower and the Administrative Agent, each Bank may assign to one or more banks or other entities (a "Purchasing Bank"), all or a portion of its interests, rights and obligations under this Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the same portion of the Loans at the time owing to it and the Notes held by it); provided, -------- however, that (i) each such assignment shall be of a constant, and not a ------- varying, percentage of all the assigning Bank's rights and obligations under this Agreement and the other Loan Documents, (ii) after giving effect to such assignment, the Purchasing Bank's Commitment must be at least $5,000,000 (either solely as the result of such assignment or as the result of multiple assignments from two or more assigning Banks), (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent a Commitment Transfer Supplement together with any Notes subject to such Commitment Transfer Supplement, (iv) the assigning Bank shall pay to Administrative Agent an assignment fee of $3,500, (v) an assigning Bank shall not assign a portion of such Bank's Commitment in an amount less than an amount equal to the lesser of such Bank's Commitment ---- hereunder and $5,000,000 and (vi) if the assigning Bank has retained any Commitment hereunder, such assigning Bank's Commitment shall be at least $5,000,000 after giving effect to such assignment. Upon such execution and delivery, from and after the effective date specified in each Commitment Transfer Supplement, which effective date shall be at least five Business Days after the execution thereof (x) the Purchasing Bank thereunder shall be a party hereto and, to the extent herein provided in such, have the rights and obligations of a Bank hereunder and (y) the assignor Bank thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of a Commitment Transfer Supplement covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement and the other Loan Documents, such Bank shall cease to be a party hereto). Such Commitment Transfer Supplement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank and the resulting adjustment of Percentage Shares arising from the purchase by such Purchasing Bank of all or a portion of the rights and obligations of such assigning Bank under this Agreement, the Notes and the other Loan Documents. 58 (d) The Administrative Agent shall maintain at its office a copy of each Commitment Transfer Supplement delivered to it and a register for the recordation of the names and addresses of the Banks and the Commitment Amount 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, in the absence of manifest error, and Borrower, the Administrative Agent, and the Banks 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 Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a Commitment Transfer Supplement executed by an assigning Bank and a Purchasing Bank together with any Notes subject to such Commitment Transfer Supplement and the written consent to such Commitment Transfer Supplement, the Administrative Agent shall (i) accept such Commitment Transfer Supplement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Banks and Borrower. Within five (5) Business Days after receipt of such notice, Borrower shall, at its own expense, execute and deliver to the Administrative Agent, in exchange for the surrendered Notes, replacement Notes dated as of the effective date of such surrendered Notes and otherwise substantially in the form of the Notes replaced thereby payable to the order of such Purchasing Bank in an amount equal to the Commitment assumed by it pursuant to such Commitment Transfer Supplement and, if the assigning Bank has retained any Commitment hereunder, replacement Notes dated as of the effective date of the surrendered Notes and otherwise substantially in the form of the Notes replaced thereby payable to the order of the assigning Bank in an amount equal to the Commitment of such assigning Bank retained by it hereunder. Such replacement Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes. Contemporaneously with the delivery of the replacement Notes, the canceled Notes shall be returned to Borrower marked "Replaced." (f) Each Bank agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and to other Banks and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to such Bank, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which such Bank is a party, (vi) to such Bank's direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) permitted by this Section. Notwithstanding any other provision herein, any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.05, disclose to the assignee or participant or proposed assignee or participant, any information relating to Borrower furnished to such Bank by or on behalf of Borrower; provided, that prior to any such disclosure, each -------- such assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to Borrower received from such Bank to the same extent as required by this Section. 59 (g) Assignment to Federal Reserve Bank. Notwithstanding any other ---------------------------------- language in this Agreement, any Bank may at any time assign all or any portion of its rights under this Agreement and the Notes to a Federal Reserve Bank as collateral in accordance with Regulation A and the applicable operating circular of such Federal Reserve Bank. 9.06 Renewals and Extensions. All provisions of this Agreement relating ----------------------- to the Notes shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension, amendment, modification or rearrangement of any part of the Indebtedness originally represented by the Notes. 9.07 No Waiver by the Administrative Agent, the Banks or the LC Issuer. ----------------------------------------------------------------- No course of dealing on the part of the Administrative Agent, the Banks or the LC Issuer, their officers or employees, nor any failure or delay by the Administrative Agent, any Bank or the LC Issuer with respect to exercising any of its rights, powers or privileges under this Agreement, the Notes, the Facility LC Applications, the Security Instruments, or any other instrument referred to herein or executed in connection with the Notes shall operate as a waiver thereof. The rights and remedies of the Administrative Agent, the Banks and the LC Issuer under this Agreement, the Notes, the Facility LC Applications, the Security Instruments, or any other instrument referred to herein or executed in connection with the Notes shall be cumulative and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. No Credit Extensions hereunder shall constitute a waiver of any of the covenants or warranties of the Borrower contained herein or of any of the conditions to the Banks' or the LC Issuer's obligation to make further Credit Extensions hereunder. In the event that the Borrower is unable to satisfy any such covenant, warranty or condition, no such Credit Extension shall have the effect of precluding the Banks or the LC Issuer from thereafter declaring such inability to be an Event of Default as hereinabove provided. 9.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE DEEMED TO BE ------------- CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 9.09 Incorporation of Exhibits and Schedules. The Exhibits and Schedules --------------------------------------- attached to this Agreement are incorporated herein for all purposes and shall be considered a part of this Agreement. 9.10 Survival Upon Unenforceability. In the event any one or more of the ------------------------------ provisions contained in this Agreement, the Notes, the Security Instruments, or in any other instrument referred to herein or executed in connection with the Notes shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or of any other instrument referred to herein or executed in connection herewith. 9.11 Rights of Third Parties. All provisions herein are imposed solely ----------------------- and exclusively for the benefit of the Administrative Agent, the Banks, the LC Issuer and Borrower and no other Person shall have standing to require satisfaction of such provisions in accordance with their terms or be 60 entitled to assume that any Bank will refuse to make advances in the absence of strict compliance with any or all thereof. Any or all of such provisions may be freely waived in whole or in part by the Administrative Agent, the Banks and the LC Issuer at any time if in their discretion they deem it advisable to do so. 9.12 Amendments or Modifications. Subject to the provisions of this --------------------------- Section, the Required Banks (or the Administrative Agent with the consent in writing of the Required Banks) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Banks or the Borrower hereunder or waiving any Event of Default hereunder; provided, however, that: (a) no such supplemental agreement shall, without the consent of all of the Banks: (i) Extend the final maturity of any Loan, postpone any regularly scheduled payment of principal of any Loan, forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon; (ii) Reduce the percentage specified in the definition of Required Banks; (iii) Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under Sections 2.07 or 2.08, or increase the Aggregate Commitment Amount or the Commitment of any Bank hereunder, or permit the Borrower to assign its rights under this Agreement; (iv) Amend the requirement that the Borrowing Base may be increased only with the consent of all Banks; (v) Release any Guarantor of any Loan or, except as provided in the Security Instruments, release all or substantially all of the Borrowing Base Oil and Gas Properties; or (vi) Amend this Section 9.12; and (b) no amendment of any provision of this Agreement relating to the Administrative Agent shall be effective without the written consent of the Administrative Agent. 9.13 Agreement Construed as an Entirety. This Agreement, for convenience ---------------------------------- only, has been divided into Articles and Sections and it is understood that the rights, powers, privileges, duties and other legal relations of the parties hereto shall be determined from this Agreement as an entirety and without regard to the aforesaid division into Articles and Sections and without regard to headings prefixed to said Articles or Sections. 61 9.14 Number and Gender. Whenever the context requires, reference herein ----------------- made to the single number shall be understood to include the plural and likewise the plural shall be understood to include the singular. Words denoting sex shall be construed to include the masculine, feminine, and neuter, when such construction is appropriate, and specific enumeration shall not exclude the general, but shall be construed as cumulative. 9.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS AGREEMENT, TOGETHER ----------------------------------------- WITH THE NOTES, THE FACILITY LC APPLICATIONS, THE SECURITY INSTRUMENTS, AND ANY OTHER WRITTEN INSTRUMENTS EXECUTED PURSUANT TO THIS AGREEMENT REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF, UNLESS SUCH PRIOR AGREEMENT IS EXPRESSLY CONTINUED IN EFFECT UNDER THE TERMS HEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 9.16 Controlling Provision Upon Conflict. In the event of a conflict ----------------------------------- between the provisions of this Agreement and those of the Notes, the Facility LC Applications, the Security Instruments or any other instrument referred to herein or executed in connection with the Notes, the provisions of this Agreement shall control; provided if any of the Facility LC Applications or Security Instruments contain any representations, warranties, or covenants of the Borrower that are in addition to or are more restrictive on the Borrower than those set forth in this Agreement, such additional or more restrictive representations, warranties, and covenants shall control. 9.17 Time, Place and Method of Payments. All payments required pursuant ---------------------------------- to this Agreement or the Notes shall be made in immediately available funds; shall be deemed received by the Administrative Agent on the next Business Day following receipt if such receipt is after 4:00 p.m., on any Business Day, and shall be made at the principal banking quarters of the Administrative Agent in Houston, Texas. 9.18 Termination. This Agreement and the Aggregate Commitment Amount may ----------- be canceled by the Borrower without premium or penalty prior to the Facility Termination Date upon at least ten (10) days' prior written notice, provided, -------- that the Obligations that are then due and payable are paid and performed in full to the satisfaction of the Administrative Agent and the Banks; provided, -------- however that any such cancellation hereunder shall not terminate any - ------- obligations, representations or warranties of the Borrower to the Administrative Agent and/or the Banks hereunder and under other Loan Documents that survive beyond the Facility Termination Date. Upon the earlier to occur of the (i) the Facility Termination Date, and (ii) cancellation of this Agreement and the Aggregate Commitment Amount prior thereto in accordance with this Section 9.18 and upon payment and performance in full of the Obligations that are due and payable to the satisfaction of the Banks, the Administrative Agent agrees, at the Borrower's request and sole cost and expense, to execute and deliver any such lien release documents and other documentation 62 reasonably requested by the Borrower to release or terminate the Administrative Agent's liens and security interests hereunder and under the other Loan Documents. 9.19 Non-Application of Chapter 346 of Texas Finance Code. The provisions ---------------------------------------------------- of Chapter 346 of the Texas Finance Code are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Security Instruments or to the transactions contemplated hereby. 9.20 Counterpart Execution. This Agreement may be executed as one --------------------- instrument signed by all parties or in separate counterparts hereof, each of which counterparts shall be considered an original and all of which shall be deemed to be one instrument, and any signed counterpart shall be deemed delivered by the party signing it if sent to any other party hereto by electronic facsimile transmission. 9.21 Power of Attorney. To the fullest extent permitted by Law and until ----------------- this Agreement is terminated in accordance with Section 9.18 hereof, Borrower hereby appoints Administrative Agent as its attorney-in-fact (without requiring the Administrative Agent to act as such) to execute any Security Instrument in the name of the Borrower, and to perform all other acts that the Administrative Agent deems appropriate to perfect and continue its liens, security interests, and other rights in, and to protect and preserve, the Borrowing Base Oil and Gas Properties and other collateral covered by or described in (or, as evidenced by this Agreement, intended to have been covered by) any of the Security Instruments, but only to the extent required of Borrower under the terms of this Agreement. 9.22 Amended and Restated Agreement. This Agreement amends, extends, ------------------------------ rearranges and restates the Prior Credit Agreement. All Security Instruments (as defined and executed pursuant to the Prior Credit Agreement) shall also constitute Security Instruments as defined in this Agreement, and they shall continue to secure all Obligations of Borrower to the Administrative Agent, the Banks and the LC Issuer hereunder. [Signature pages 64 and 65 follow] 63 IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. BORROWER ULTRA RESOURCES, INC. By: /s/ Michael D. Watford ---------------------------------------- Michael D. Watford President and Chief Executive Officer ADMINISTRATIVE AGENT, LC ISSUER AND BANK: BANK ONE, NA By: /s/ Stephen Shatto --------------------------------------- Stephen Shatto Vice President SYNDICATION AGENT AND BANK: UNION BANK OF CALIFORNIA, N.A. By: /s/ Randy Osterberg --------------------------------------- Randy Osterberg Senior Vice President By: /s/ Ali Ahmed --------------------------------------- Ali Ahmed Vice President 64 CO-AGENT AND BANK: HIBERNIA NATIONAL BANK By: /s/ Spencer Gagnet ---------------------------------------- Spencer Gagnet Senior Vice President CO-AGENT AND BANK: GUARANTY BANK, FSB By: /s/ Richard E. Menchaca ---------------------------------------- Richard E. Menchaca Vice President BANK: COMPASS BANK By: /s/ Murray Brasseux ---------------------------------------- Murray Brasseux Executive Vice President 65 EXHIBIT "A" BORROWING BASE OIL AND GAS PROPERTIES ---------------------- This Exhibit A (together with the Borrowing Base Oil and Gas Properties, as defined in this Agreement) sets forth the description of the Borrowing Base Oil & Gas Properties covered by the Agreement to which this Exhibit is attached. All of the terms defined in the Agreement are used in this Exhibit with the same meanings given therein. This Exhibit and the Agreement cover and include the following: (a) All of Borrower's right, title and interest in and to the oil, gas and mineral leases described herein (collectively the ALeases") and lands described in and subject to such Leases (collectively the ALands"), regardless of any surface acreage and/or depth limitations set forth in this Exhibit, and all of Borrower's right, title and interest in and to any of the oil, gas and minerals in, on or under the Lands described on this Exhibit, including, without limitation, all contractual rights, fee interests, leasehold interests, overriding royalty interests, non- participating royalty interests, mineral interests, production payments, net profits interests, or any other interest measured by or payable out of production of oil, gas or other minerals from the Leases and/or Lands described herein; and (b) All of the foregoing interests of the Borrower as such interests may be enlarged by the discharge of any payments out of production or by the removal of any charges or encumbrances together with the Borrower's interests in, to and under or derived from all renewals and extensions of any oil, gas and mineral leases described herein, it being specifically intended hereby that any new oil and gas lease (i) in which an interest is acquired by the Borrower after the termination or expiration of any oil and gas lease, the interests of the Borrower in, to and under or derived from which are subject to the lien and security interest hereof, and (ii) that covers all or any part of the property described in and covered by such terminated or expired Leases, shall, to the extent, and only to the extent such new oil and gas lease may cover such property, be considered a renewal or extension of such terminated or expired lease; and (c) All right, title and interest of Borrower in, to and under or derived from any operating, farmout, and bidding agreements, assignments and subleases, whether or not described in this Exhibit, to the extent, and only to the extent, that such agreements, assignments and subleases (i) cover or include any of the Borrower's present right, title and interest in and to the leases and/or lands described in this Exhibit, or (ii) cover or include any other undivided interests now or hereafter held by the Borrower in, to and under the described leases and/or lands, including, without limitation, any future operating, farmout and bidding agreements, assignments, subleases and pooling, unitization and communitization agreements and the units created thereby (including, without limitation all units formed under orders, regulations, rules or other official acts of any governmental body 1 or agency having jurisdiction) to the extent and only to the extent that such agreements, assignments, subleases, or units cover or include the described leases and/or lands; and (d) All right, title, and interest of the Borrower in, to and under or derived from all presently existing and future advance payment agreements, oil, casinghead gas and gas sales, exchange, and processing contracts and agreements including, without limitation, those contracts and agreements that are described on this Exhibit to the extent, and only to the extent, those contracts and agreements cover or include the described Leases and/or Lands herein; and (e) All right, title and interest of the Borrower in, to and under or derived from all existing and future permits, licenses, easements and similar rights and privileges that relate to or are appurtenant to any of the described Leases and/or Lands. Notwithstanding the intention of this Agreement to cover all of the right, title and interest of Borrower in and to the described leases and/or lands, except as expressly set forth herein Borrower hereby specifically warrants and represents that the interests covered by this Exhibit are not greater than the working interest nor less than the net revenue interest, overriding royalty interest, net profit interest, production payment interest or other interest payable out of or measured by production set forth in connection with each oil and gas well described in this Exhibit. In the event the Borrower owns any other or greater interest, such additional interest shall also be covered by and included in this Agreement. The designation "Working Interest" or "W.I." means an interest owned in an oil, gas, and mineral lease (including operating rights and/or record title interest in oil and gas leases issued pursuant to the Outer Continental Shelf Lands Act) that determines the cost bearing percentage of the owner of such interest. The designation "Net Revenue Interest" or "NRI" means net revenue interest, or that portion of the production attributable to the owner of a working interest after deduction for all royalty burdens, overriding royalty burdens, or other burdens on production, except severance, production, windfall profits and other similar taxes. The designation "Overriding Royalty Interest" or "ORRI" means an interest in production which is free of any obligation for the expense of exploration, development and production, bearing only its pro rata share of severance, production, windfall profits and other similar taxes. 2 EXHIBIT "A" SUBLETTE COUNTY, WYOMING
INSOFAR AND ONLY LEASE INSOFAR AS LEASE PROPERTY NAME WI NRI LEASE LESSEE DATE COVERS Stud Horse Butte 13-14 18.84% 14.51% BLM WYW-127194 LIBERTY PETROLEUM 7/1/92 29N-108-14-S/2SW Stud Horse Butte 1-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-N/2NE Stud Horse Butte 7-21 14.34% 11.48% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SWNE Stud Horse Butte 8-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SENE Stud Horse Butte 9-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-NESE Stud Horse Butte 1O-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-NWSE Stud Horse Butte 11-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-N/2SW Stud Horse Butte 13-21 14.84% 11.87% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SWSW Stud Horse Butte 14-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SESW Stud Horse Butte 15-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SWSE Stud Horse Butte 16-21 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-SESE Stud Horse Butte 1-23 22.55% 18.04% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NENE Stud Horse Butte 2-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NWNE Stud Horse Butte 3-23 25.10% 20.08% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NENW Stud Horse Butte 4-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NWNW Stud Horse Butte 5-23 23.81% 19.05% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SWNW Stud Horse Butte 6-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SENW Stud Horse Butte 7-23 25.32% 20.25% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SWNE Stud Horse Butte 8-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SENE Stud Horse Butte 9-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NESE Stud Horse Butte 10-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NWSE Stud Horse Butte 11-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NESW Stud Horse Butte 12-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-NWSW Stud Horse Butte 13-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SWSW Stud Horse Butte 14-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SESW Stud Horse Butte 15-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SWSE Stud Horse Butte 16-23 63.75% 51.OO% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-23-SESE Stud Horse Butte 1-24 16.59% 13.27% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NENE
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INSOFAR AND ONLY LEASE INSOFAR AS LEASE PROPERTY NAME WI NRI LEASE LESSEE DATE COVERS Stud Horse Butte 2-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NWNE Stud Horse Butte 3-24 20.88% 16.71% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NENW Stud Horse Butte 4-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NWNW Stud Horse Butte 5-24 15.03% 12.03% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SWNW Stud Horse Butte 6-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SENW Stud Horse Butte 7-24 23.09% 18.47% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SWNE Stud Horse Butte 8-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SENE Stud Horse Butte 9-24 19.67% 15.73% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NESE Stud Horse Butte 10-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-l08-24-NWSE Stud Horse Butte 11-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NESW Stud Horse Butte 12-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-NWSW Stud Horse Butte 13-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SWSW Stud Horse Butte 14-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SESW Stud Horse Butte 15-24 21.52% 17.21% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SWSE Stud Horse Butte 16-24 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-24-SESE Stud Horse Butte Acreage 63.75% 51.00% BLM WYW-118155 ONAGER ENTERPRISES 12/1/89 29N-108-21-NW Sherlock Federal 15-8 85.00% 66.30% BLM WYW-130234 H P MCLISH 9/1/93 33N-109W-8-S/2SE Gannett 13-16 50.00% 40.00% ST WY 94-00293 CENEX INC 6/2/94 33N-109W-16-S/2SW Pinedale 8-20 31.87% 26.37% BLM WYW-08593 GWEN KIEF 10/1/51 33N-109W-20-N/2SW Stewart Point 3-28 9.67% 7.56% BLM WYW-08592 GWEN KEIF 10/1/51 33N-109W-28-N/2NW Stewart Point 16-29 31.87% 24.92% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-29-SESE Stewart Point 6-32 50.00% 38.85% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 33N-109W-32-S/2NW Stewart Point 11-33 31.69% 24.76% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-33-E/2SW Mesa 1-7 0.00% 0.43% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-7-N/2NE Mesa 3-7 0.00% 0.32% BLM WYW-15315 MARY ALICE GUENZEL 6/1/52 32N-109W-7-NENW Mesa 7-7 0.00% 0.25% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-7-S/2NE Mesa 13-5 6.06% 4.61% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-5-SWSW Mesa 15-6 6.11% 4.65% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-6-S/2SE Mesa 5-8 7.36% 5.60% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-W/2NW Mesa 7-8 27.34% 21.50% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-S/2NE Mesa 15-8 42.50% 33.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-S/2SE Mesa 3-20 42.50% 31.06% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-N/2NW Mesa 11-20 27.03% 19.21% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-N/2SW
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INSOFAR AND ONLY LEASE INSOFAR AS LEASE PROPERTY NAME WI NRI LEASE LESSEE DATE COVERS Mesa 10-21D 19.38% 19.52% BLM WYW-135124 MERIDIAN OIL INC 2/1/95 32N-109W-21-NWSE Mesa 9-21D 19.38% 19.52% BLM WYW-135124 MERIDIAN OIL INC 2/1/95 32N-109W-21-NESE Mesa l6-21D 19.38% 19.52% BLM WYW-135124 MERIDIAN OIL INC 2/1/95 32N-109W-21-SESE New Fork 11-24-Non Consent 0.00% 0.00% BLM WYW-06269 DONALD B ANDERSON 6/1/51 31N-109W-24-NESW Mesa 3-22d 42.50% 33.71% BLM WYW-015317 R L MANNING 6/1/52 32N-109W-22-N/2NW Pinedale 4A 63.75% 53.29% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-S/2NW Cottonwood 32-33 100.00% 80.58% BLM WYW-114059 SHAMA KAFAR LIMITED 1/1/89 32N-111W-33-S/2NE Lizard Head 11-8 75.00% 60.00% BLM WYW-118158 ONAGER ENTERPRISES 12/1/89 31N-108W-8-N/2SW Riverside 2-2 85.00% 66.69% BLM WYW-06270 DONALD B. ANDERSON 6/1/51 31N-l09W-2-N/2NE Riverside 1-4 68.00% 56.10% BLM WYW-143046 HIGH PLAINS ASSOC. 10/1/97 31N-109W-4-N/2NE New Fork 7-3 15.94% 12.84% BLM WYW-06270 DONALD B. ANDERSON 6/1/51 31N-109W-3-S/2NE Pinedale 13-l9 0.00% 1.28% BLM WYW-144993 FLOYD H SCHROEDER 6/1/51 31N-108W-19-S/2SW Lizard Head 13-28 60.00% 48.00% BLM WYW-118159 ONAGER ENTERPRISES 12/1/89 31N-108W-28-S/2SW Pinedale 13-2a 0.00% 1.28% BLM WYW-06270 DONALD B ANDERSON 6/1/51 31N-109W-2-S/2SW Lovatt Draw 15-8 100.00% 80.00% BLM WYW-118166 ONAGER ENTERPRISES 12/1/89 31N-109W-8-S/2SE Pinedale 1-14 0.00% 1.28% BLM WYW-06269 DONALD B ANDERSON 6/1/51 31N-109W-14-N/2NE New Fork 13-10 0.00% 1.28% BLM WYW-15314 EDWIN L GUENZEL 6/1/52 30N-108W-10-S/2SW Warbonnet 5-23 42.50% 31.21% BLM WYW-15314 EDWIN L GUENZEL 6/1/52 30N-108W-23-S/2NW Warbonnet 9-23 37.50% 30.00% BLM WYW-118157 ONAGER ENTERPRISES 12/1/89 30N-108W-23-NESE Warbonnet 15-23 37.50% 30.00% BLM WYW-118157 ONAGER ENTERPRISES 12/1/89 30N-108W-23-SWSE Warbonnet 1-26d 42.50% 32.93% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-26-NENE Warbonnet 2-26d 42.50% 32.70% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-26-NWNE Warbonnet 8-26 42.50% 32.57% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-109W-26-S/2NE Warbonnet 4-26 42.50% 33.03% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-26-N/2NW Warbonnet 6-23 42.50% 31.06% BLM WYW-15314 EDWIN L GUENZEL 6/1/52 30N-108W-23-SENW Warbonnet 7-4 85.00% 65.84% BLM WYW-015316 FRED M MANNING JR 6/1/52 30N-108W-4-S/2NE Mesa 2-28d 42.50% 34.57% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-28-NWNE Mesa 9-7 9.39% 7.48% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-7-N/2SE Boulder 5-19 85.00% 66.69% BLM WYW-144993 FLOYD H SCHROEDER 6/1/51 31N-l08W-19-S/2NW Stewart Point 9-29 31.36% 24.49% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-29-NESE Stewart Point 9-33 31.1O% 24.28% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-33-E/2SE Mesa 7-28 42.50% 34.58% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-28-SWNE
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INSOFAR AND ONLY LEASE INSOFAR AS LEASE PROPERTY NAME WI NRI LEASE LESSEE DATE COVERS Mesa 8-28 42.50% 34.58% BLM WYW-06286 DONALD B ANDERSON 6/l/51 32N-109W-28-SENE Stewart Point 1-20 31.88% 25.50% BLM WYW-015315 MARY ALICE GUENZEL 6/l/52 33N-109W-20-N/2NE Stewart Point 3-20 31.88% 25.50% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 33N-109W-20-N/2NW Stewart Point 7-20 31.88% 25.50% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 33N-109W-20-S/2NE Stewart Point 9-20 31.88% 25.50% BLM WYW-015315 MARY ALICE GUENZEL 6/l/52 33N-109W-20-N/2SE Stewart Point 13-21 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-21-S/2SW Stewart Point 5-28 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-28-S/2NW Stewart Point 7-29 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-29-S/2NE Stewart Point 15-29 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-29-SWSE Stewart Point 13-28 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-28-SWSW Stewart Point 12-28 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-28-NWSW Stewart Point 10-29 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-29-NWSE Stewart Point 2-32 33.75% 27.00% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-32-N/2NE Stewart Point 13-33 31.88% 25.50% BLM WYW-08592 GWEN KIEF 10/1/51 33N-109W-33-W/2SW Mesa 9-6 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-6-N/2SE Mesa 11-6 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-6-N/2SW Mesa 11-7 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-7-E/2SW Mesa 15-7 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-7-S/2SE Mesa 13-8 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-S/2SW Mesa 3-8 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-E/2NW Mesa 9-8 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-8-N/2SE Mesa 11-8 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-1OSW-8-NESW Mesa 1-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-N/2NE Mesa 13-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-S/2SW Mesa 11-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-N/2SW Mesa 5-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-S/2NW Mesa 7-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-SWNE Mesa 15-17 27.63% 22.10% BLM WYW-08589 JEAN HARMON 10/1/51 32N-109W-17-S/2SE Mesa 5-20 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-S/2NW Mesa 7-20 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-S/2NE Mesa 15-20 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-S/2SE Mesa 5-21 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-21-S/2NW
4
INSOFAR AND ONLY LEASE INSOFAR AS LEASE PROPERTY NAME WI NRI LEASE LESSEE DATE COVERS Mesa 1-20 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-N/2NE Mesa 9-20 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-20-N/2SE Mesa 15-21 19.38% 15.50% BLM WYW-135124 MERIDIAN OIL INC 2/1/95 32N-109W-21-SWSE Mesa 14-21 27.63% 22.10% BLM WYW-015315 MARY ALICE GUENZEL 6/1/52 32N-109W-21-S/2SW Mesa 1-28 42.50% 34.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-28-NENE Mesa 9-28 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-28-NESE Mesa 12-27 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-27-N/2SW Mesa 10-28 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-28-NWSE Mesa 2-34 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-N/2NE Mesa 4-34 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-N/2NW Mesa 10-34 63.87% 51.00% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-N/2SE Mesa 12-34 15.94% 12.75% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-N/2SW Riverside 6-2 63.87% 51.00% BLM WYW-06770 DONALD B ANDERSON 6/1/51 31N-109W-2-S/2NW Riverside 11-2 15.94% 12.75% BLM WYW-06770 DONALD B ANDERSON 6/1/51 31N-109W-2-N/2SW Riverside 9-3 63.87% 51.00% BLM WYW-06770 DONALD B ANDERSON 6/1/51 31N-109W-3-N/2SE Riverside 1-10 63.87% 51.00% BLM WYW-143657 ULTRA RESOURCES INC 12/1/97 31N-109W-10-N/2NE Riverside 3-11 63.87% 51.00% BLM WYW-143656 ULTRA RESOURCES INC 12/1/97 31N-109W-11-N/2NW Riverside 1-3 15.94% 12.75% BLM WYW-06770 DONALD B ANDERSON 6/1/51 31N-109W-3-N/2NE Riverside 3-3 63.87% 51.00% BLM WYW-06770 DONALD B ANDERSON 6/1/51 31N-109W-3-N/2NW Mesa 13-34 15.94% 12.75% BLM WYW-06286 DONALD B ANDERSON 6/1/51 32N-109W-34-S/2SW Warbonnet 1-22 85.00% 68.00% BLM WYW-15314 EDWIN L GUENZEL 6/1/52 30N-108W-22-N/2NE Warbonnet 4-23 42.50% 34.00% BLM WYW-15314 EDWIN L GUENZEL 6/1/52 30N-108W-23-N/2NW Warbonnet 10-23 37.50% 30.00% BLM WYW-118157 ONAGER ENTERPRISES 12/1/89 30N-108W-23-NWSE Warbonnet 11-23 37.50% 30.00% BLM WYW-118157 ONAGER ENTERPRISES 12/1/89 30N-108W-23-N/2SW Warbonnet 4-25 42.50% 34.00% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-25-NWNW Warbonnet 6-25 85.00% 68.00% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-25-SENW Warbonnet 5-25 85.00% 68.00% BLM WYW-016158 PHIL D HELMIG 7/1/52 30N-108W-25-SWNW Warbonnet 16-23 37.50% 30.00% BLM WYW-118157 ONAGER ENTERPRISES 12/1/89 30N-108W-23-SESE
5 EXHIBIT "B" REVOLVING NOTE -------------- $________________ Houston, Texas March 1, 2002 On the dates hereinafter prescribed, for value received, ULTRA RESOURCES, INC., a Wyoming corporation, (herein called "Borrower"), having an address at 16801 Greenspoint Park, Suite 370, Houston, Texas 77060, promises to pay to the order of ___________ (herein called "Bank"), at its principal offices at __________________________________, (i) the principal amount of U.S. ___________________________________ DOLLARS ($_______________) or the principal amount advanced pursuant to the terms of the Credit Agreement (defined herein) as of the date of maturity hereof, whether by acceleration or otherwise, whichever may be the lesser, and (ii) interest on the principal balance from time to time advanced and remaining unpaid from the date of the advance until maturity at a rate of interest equal to lesser of (a) the "Floating Rate" (as defined and calculated in the Credit Agreement), or (b) the Maximum Rate (as defined and calculated in the Credit Agreement). Any increase or decrease in interest rate resulting from a change in the Maximum Rate shall be effective immediately when such change becomes effective, without notice to the Borrower, unless Applicable Law (as defined in the Credit Agreement) requires that such increase or decrease not be effective until a later time, in which event such increase or decrease shall be effective at the earliest time permitted under the provisions of such law. Notwithstanding the foregoing, if during any period the Floating Rate exceeds the Maximum Rate, the rate of interest in effect on this Note shall be limited to the Maximum Rate during each such period, but at all times thereafter the rate of interest in effect on this Note shall be the Maximum Rate or, if there is no Maximum Rate, the Agreed Maximum Rate (as defined below), until the total amount of interest accrued on this Note equals the total amount of interest which would have accrued hereon if the Floating Rate had at all times been in effect. This Note is a revolving credit note and it is contemplated that by reason of prepayments hereon there may be times when no indebtedness is owing hereunder; but notwithstanding such occurrence, this Note shall remain valid and in full force and effect as to each principal advance made hereunder subsequent to each such occurrence. Each principal advance and each payment hereof made pursuant to this Note shall be reflected by the Bank's records and the aggregate unpaid amounts reflected by such records shall constitute rebuttably presumptive evidence of the principal and unpaid, accrued interest remaining outstanding on this Note. "Agreed Maximum Rate" means a per annum rate of seven and three-fourths percent (7.75%) plus the Floating Rate from time to time in effect, which Agreed Maximum Rate shall apply only during any period while there is no Maximum Rate applicable to this Note. _________________________ Borrower's Initials 1 Other capitalized terms used herein, that are not defined herein, shall have the meanings prescribed therefor in the Credit Agreement. The Borrower and the Bank hereby agree that Chapter 346 of the Texas Finance Code, shall not apply to this Note or the loan transaction evidenced by, and referenced in, the Credit Agreement (hereinafter defined) in any manner, including without limitation, to any account or arrangement evidenced or created by, or provided for in, this Note. The principal sum of this Note, after giving credit for unadvanced principal, if any, remaining at final maturity, shall be due and payable on or before March 1, 2005; interest to accrue upon the principal sum from time to time owing and unpaid hereunder shall be due and payable as provided in the Credit Agreement; provided, however, the final installment of interest hereunder shall be due and payable not later than the maturity of the principal sum hereof, howsoever such maturity may be brought about. In no event shall the aggregate of the interest on this Note, plus any other amounts paid in connection with the loan evidenced by this Note which would under Applicable Law be deemed "interest," ever exceed the maximum amount of interest which, under Applicable Law, could be lawfully charged on this Note. The Bank and the Borrower specifically intend and agree to limit contractually the interest payable on this Note to not more than an amount determined at the Maximum Rate. Therefore, none of the terms of this Note or any other instruments pertaining to or securing this Note shall ever be construed to create a contract to pay interest at a rate in excess of the Maximum Rate, and neither the Borrower nor any other party liable herefor shall ever be liable for interest in excess of that determined at the Maximum Rate, and the provisions of this paragraph shall control over all provisions of this Note or of any other instruments pertaining to or securing this Note. If any amount of interest taken or received by the Bank shall be in excess of the maximum amount of interest which, under Applicable Law, could lawfully have been collected on this Note, then the excess shall be deemed to have been the result of a mathematical error by the parties hereto and shall be refunded promptly to the Borrower. All amounts paid or agreed to be paid in connection with the indebtedness evidenced by this Note which would under Applicable Law be deemed Ainterest" shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full term of this Note. This Note is secured by all security agreements, collateral assignments, mortgages and lien instruments executed by the Borrower (or by any other party) in favor of Bank One, NA, as Administrative Agent for the Bank, including those executed simultaneously herewith, those executed heretofore and those hereafter executed, and including specifically and without limitation the Security Instruments described and defined in that certain Credit Agreement dated as of March 22, 2000 by and between Borrower, Ultra Petroleum (USA) Inc., and Bank One, Texas, National Association, as amended by that certain First Amendment to Credit Agreement dated as of July 19, 2001 by and between Borrower and Bank One, NA, and as amended and restated by that certain First Amended and Restated Credit Agreement dated March 1, 2002 by and among Borrower, Bank One, _________________________ Borrower's Initials 2 NA, as the Administrative Agent, as a Bank and as LC Issuer, and the several other banks and financial institutions who are from time to time party thereto as Banks (the "Credit Agreement"). This Note is the Revolving Note issued pursuant to the Credit Agreement. Reference is hereby made to the Credit Agreement for a statement of the rights and obligations of the holder of this Note and the duties and obligations of the Borrower in relation thereto; but neither this reference to the Credit Agreement nor any provisions thereof shall affect or impair the absolute and unconditional obligation of the Borrower to pay any outstanding and unpaid principal of and interest on this Note when due, in accordance with the terms of the Credit Agreement. Each advance and each payment made pursuant to this Note shall be reflected by notations made by the Bank on its records and the aggregate unpaid amounts reflected by the notations on the records of the Bank shall be deemed rebuttably presumptive evidence of the principal amount owing under this Note. In the event of default in the payment when due of any of the principal of or any interest on this Note, or in the event of default under the terms of the Credit Agreement or any of the Security Instruments, or if any event occurs or condition exists which authorizes the acceleration of the maturity of this Note under any agreement made by the Borrower, the Bank (or other holder of this Note) may, at its option, without presentment or demand or any notice to the Borrower or any other person liable herefor, declare the unpaid principal balance of and accrued interest on this Note to be immediately due and payable. If this Note is collected by suit or through the Probate or Bankruptcy Court, or any judicial proceeding, or if this Note is not paid at maturity, however such maturity may be brought about, and is placed in the hands of an attorney for collection, then the Borrower agrees to pay reasonable and documented attorneys' fees, not to exceed 10% of the full amount of principal and interest owing hereon at the time this Note is placed in the hands of an attorney. The Borrower and all sureties, endorsers and guarantors of this Note waive demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate maturity, notice of acceleration of maturity, and all other notices, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, and agree to any substitution, exchange or release of any such security or the release of any party primarily or secondarily liable hereon and further agrees that it will not be necessary for the Bank, in order to enforce payment of this Note by them, to first institute suit or exhaust its remedies against any Borrower or others liable herefor, or to enforce its rights against any security herefor, and consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect hereto, without notice thereof to any of them. The Bank may transfer this Note, and the rights and privileges of the Bank under this Note shall inure to the benefit of the Bank's representatives, successors or assigns. This Note amends, extends, rearranges and restates that certain Reducing Revolving Note executed effective as of July 19, 2001, in the original principal amount of $100,000,000.00 executed _________________________ Borrower's Initials 3 by ULTRA RESOURCES, INC. and payable to the order of Bank One, NA, which itself amended, extended, rearranged and restated that certain Reducing Revolving Note dated March 22, 2000, in the face amount of $40,000,000.00 executed by ULTRA PETROLEUM (USA) INC. and ULTRA RESOURCES, INC., payable to the order of Bank One, Texas, National Association, (the "Prior Notes"). All liens and security interests that exist to secure the indebtedness evidenced by that Prior Notes shall continue in force and effect to secure the indebtedness evidenced by this Note. Executed as of the date and year first set forth above. ULTRA RESOURCES, INC. Attest: ______________________________ By:__________________________ Charlotte H. Kauffman Michael D. Watford Secretary President and CEO 4 EXHIBIT "C" Compliance Certificate ---------------------- I, the President of ULTRA RESOURCES, INC. (the "Company"), pursuant to Section 5.05 of the First Amended and Restated Credit Agreement dated as of March 1, 2002, by and among the Company, BANK ONE, NA, as Administrative Agent, a Bank and the LC Issuer, and the other Banks that become party thereto (the "Agreement") do hereby certify, as of the date hereof, that to my knowledge: (a) No Event of Default (as defined in the Agreement) or Unmatured Event Of Default (as defined in the Agreement) has occurred and is continuing except for the following events (include actions taken to cure such situations): ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ____________________________________________________________________; (b) No Material Adverse Change has occurred since the effective date of the latest audited consolidated Financial Statements of the Company delivered to the Administrative Agent; (c) Except as otherwise stated in the Schedule, if any, attached hereto, each of the representations and warranties of the Company contained in Article IV of the Agreement is true and correct in all respects [include on the attached Schedule, if any, any qualifications to the representations in Section 4.07 of the Agreement that have occurred since the date of the last Compliance Certificate]; and (d) The Company's consolidated financial condition for the quarter ending __________ is as follows: 1
Actual Date or Time Required Ratio or Ratio or Financial Covenant Period Amount Amount ======================== ============== ====================================== =========== (a) Consolidated Tangible Term of Loan not * $80,000,000.00 plus 75% of ---- _______ Net Worth Ultra Petroleum Corp.'s (as defined in the Agreement) positive consolidated Net Income, if any, accrued during each calendar quarter subsequent to 9/30/01, calculated cumulatively as of the end of each fiscal quarter of Ultra Petroleum Corp. beginning with the quarter ending 12/31/01, with no reduction for negative Net Income during any such quarter, plus 100% of any increase in Stockholder=s Equity resulting from the sale or issuance of stock in Ultra Petroleum Corp. or any of its Subsidiaries subsequent to 12/31/01. (b) Current Ratio for any Term of Loan not * 1.00 to 1.00, calculated based ________ fiscal quarter on both: (a) the Consolidated Financial Statements (as defined in the Agreement), and (b) the consolidating financial statements applicable to Borrower, which form a part of the Consolidated Financial Statements. (c) Ratio of EBITDA to Term of Loan not * 4.50 to 1.00, calculated on a ________ interest expense on all rolling four (4) quarter basis and Indebtedness as of the based on both: (a) the Consolidated end of each fiscal Financial Statements, and (b) the quarter consolidating financial statements applicable to Borrower, which form a part of the Consolidated Financial Statements. (d) General & Term of Loan not ** 25% of gross Production _______ Administrative Expenses Revenue, calculated based on the Consolidated Financial Statements
* Less than ** More than 2
Actual Date or Time Required Ratio or Ratio or Financial Covenant Period Amount Amount ======================== ============== ====================================== =========== (e) Intercompany Transfers During not ** $17,500,00.00, without the _______ to Sino-American Energy calendar year prior written approval of the Corporation 2002 Required Banks (f) Intercompany Transfers During each not ** $25,000,000.00, without the _______ to Sino-American Energy calendar year prior written approval of the Corporation beginning Required Banks with calendar year 2003
This certificate is executed this _____ day of_________,_____. ULTRA RESOURCES, INC. By:________________________________ ________________________________ President and CEO * Less than ** More than 3 EXHIBIT "D" SECURITY INSTRUMENTS -------------------- The Security Instruments securing the Borrower's Obligations and Indebtedness to the Banks shall include the following, each in form and substance satisfactory to the Administrative Agent, on behalf of the Banks: 1. ACT(s) OF MORTGAGE, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF PRODUCTION covering the Borrowing Base Oil and Gas Properties situated in the State of Wyoming, the personal property and equipment therein and thereon, the production of oil, gas, and other minerals therefrom, and all of the products and proceeds thereof, such Mortgages to be duly executed by Borrower with respect to all of the Borrowing Base Oil and Gas Properties. 2. SECURITY AGREEMENT granting the Administrative Agent, on behalf of the Banks, a first priority security interest in all of the Borrower's as-extracted oil and gas, accounts, equipment, machinery, fixtures, inventory, chattel paper, documents, instruments and general intangibles relating to or arising out of the Oil and Borrowing Base Oil and Gas Properties and the business of the Borrower, whether now owned or hereafter acquired, and all products and proceeds thereof. 3. FINANCING STATEMENTS in connection with the Security Instruments described in the preceding paragraphs, in form and number satisfactory to the Administrative Agent, on behalf of the Banks, as the Administrative Agent may specify from time to time (including additional or supplemental financing statements, amendments thereto, and continuation statements thereof). 4. PRIOR SECURITY INSTRUMENTS. All Security Instruments (as defined in the Prior Credit Agreement) shall continue to secure Borrower's Obligations arising under this Agreement. 5. OTHER SECURITY INSTRUMENTS. Such other instruments as are necessary or appropriate from time to time, in the good faith opinion of the Administrative Agent, to perfect to the satisfaction of the Administrative Agent the Banks' liens, security interests, and other rights in the Borrowing Base Oil and Gas Properties and in any and all other collateral covered by or described in (or, as evidenced by the Agreement, intended to have been covered by) any of the other Security Instruments described above. 1 EXHIBIT "E" REQUEST FOR ADVANCE ------------------- I, the undersigned officer of ULTRA RESOURCES, INC. (the "Company"), pursuant to Section 2.01 of the First Amended and Restated Credit Agreement dated as of March 1, 2002, as amended from time to time (the "Agreement"), by and between BANK ONE, NA ("Administrative Agent"), the banks and other financial institutions from time to time parties to the Agreement (the "Banks"), the LC Issuer, and the Company, do hereby make the requests indicated below on this ____ day of _________, 200__: [_] 1. Loans: (a) Amount of new Loan: $____________ (b) Requested funding date: _________, 200_ (c) $____________ of such Loan is to be an ABR Loan; $____________ of such Loan is to be a LIBOR Loan. Requested Interest Period for LIBOR Loan: ________ months. [_] 2. Continuation or conversion of LIBOR Loan maturing on ______, 200_: (a) Amount to be continued as a LIBOR Loan is $ ___________, with an Interest Period of __ months; (b) Amount to be converted to an ABR Loan is $ ________. [_] 3. Conversion of Prime Rate Loan: (a) Requested conversion date: ________ , 200__. (b) Amount to be converted to a LIBOR Loan is $ __________ , with an Interest Period of __ months. 4. The undersigned certifies that the funds advanced from the Banks to the Company pursuant to paragraphs 1 through 3 hereof, as applicable, shall be used by the Company solely for the purposes permitted by the Agreement. 1 5. The undersigned certifies that to my knowledge after reasonable inquiry into the applicable facts, as of the date hereof, the Company is in compliance with all of the representations, warranties, terms, conditions and covenants contained in the Agreement and no Event of Default or Unmatured Event of Default has occurred and is continuing under the Agreement. 6. The undersigned certifies that to my knowledge after reasonable inquiry into the applicable facts, as of the date hereof, no Material Adverse Change has occurred since the effective date of the latest audited Financial Statements of the Company delivered to the Administrative Agent; This certificate is executed this ____ day of ___________, 200__. ULTRA RESOURCES, INC. By: __________________________________ Name:_________________________________ Title:________________________________ 2 Schedule 1.01(b) ---------------- Commitment Amounts and Aggregate Commitment Amount -------------------------------------------------- Percentage Commitment Bank Share Amount ---- ----- ------ Bank One, NA 26.250% $39,375,000.00 Union Bank of California, N.A. 23.750% $35,625,000.00 Hibernia National Bank 21.250% $31,875,000.00 Guaranty Bank, FSB 21.250% $31,875,000.00 Compass Bank 7.500% $11,250,000.00 ----------------- Aggregate Commitment Amount: $150,000,000.00 --------------------------- 1 SCHEDULE 4.01 INFORMATION REGARDING THE BORROWER AND ITS SUBSIDIARIES . States qualified to do business in: Wyoming, Texas and Colorado . Addresses of places of business: 16801 Greenspoint Park Drive 304 Inverness Way South Suite 370 Suite 295 Houston, Texas 77060 Englewood, Colorado 80112 1200 Summit Avenue Suite 700 Fort Worth, Texas 76102 . Name change, merger, acquired business: January 16, 2001 Ultra Petroleum Corp. merged with Pendaries Petroleum Ltd. through an amalgamation with Ultra Petroleum Corp. the surviving entity. July 16, 2001 Ultra Petroleum Corp. and its subsidiaries Ultra Resources, Inc., Ultra Petroleum (USA) Inc., Pendaries Petroleum Ltd. and Sino- American Energy Corporation effectuated a reorganization in which Ultra Petroleum Corp., as the parent now owns 100% of UP Energy Corporation, a Nevada corporation which owns 100% of Ultra Resources, Inc. and 100% of Sino-American Energy Corporation. Thus Ultra Petroleum (USA) Inc. merged into Ultra Resources, Inc. and Pendaries Petroleum Ltd. was dissolved. SCHEDULE 4.07 OIL AND GAS CONTRACTS None SCHEDULE 4.09 PURCHASE OF PRODUCTION Duke Energy Field Services Gregory C. Scoggin -- Manager, Business Development - Wyoming 370 17/th/ Street Suite 900 Denver, CO 80202 303/605-1685 Phone 303/605-1671 Fax Questar Energy Trading John Ruskauff -- Senior Marketing Representative 180 East 100 South P.O. Box 45601 Salt Lake City, UT 84145-0601 801/324-2612 Phone 801/599-6447 Cell Sempra Energy Trading Damon Suter, Vice President 1516 Brookhollow Drive Santa Ana, CA 92705 714/241-1500 Phone 714/430-9210 Fax 714/264-4371 Cell Headquarters: 58 Commerce Road Stamford, CT 06902 203/355-5062 Phone 203/355-5010 Fax Western Gas Resources, Inc. Mark Malinowski, Sr. Marketing Representative Rocky Mountain Region 12200 N. Pecos Street Denver, CO 80234 303/452-5603 Phone 303/450-8356 Direct 303/457-9748 Fax SCHEDULE 4.11 ENVIRONMENT IMPACT STATEMENT The Environmental Impact Statement for Pinedale Anticline Oil and Gas Exploration and Development Project, Sublette County, Wyoming prepared by the Bureau of Land Management was previously delivered to Bank One, NA on March 22, 2000 by Ultra Resources, Inc. in regards to closing on the original Credit Agreement dated March 22, 2000. SCHEDULE 4.14 EXISTING INDEBTNESS Bank One Texas N. A. - $50MM SCHEDULE 4.15 MATERIAL COMMITMENTS None SCHEDULE 4.21 INSURANCE CERTIFICATE See Attached
Client#: 41509 ULTRA - ------------------------------------------------------------------------------------------------------------------------------------ ACORD(TM) CERTIFICATE OF LIABILITY INSURANCE DATE (MM/DD/YY) 02/28/01 - ------------------------------------------------------------------------------------------------------------------------------------ PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND Higginbotham & Assoc., Inc. CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS P.O. Box 908 CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE Fort Worth, TX 76101 AFFORDED BY THE POLICIES BELOW. 817 336-2377 --------------------------------------------------------------- INSURERS AFFORDING COVERAGE - ------------------------------------------------------------------------------------------------------------------------------------ INSURED INSURER A: St. Paul Surplus Lines Ins Co. --------------------------------------------------------------- Ultra Resources, Inc. INSURER B: St. Paul Fire & Marine Ins Co. --------------------------------------------------------------- 304 Inverness Way South, Suite 295 INSURER C: Englewood, CO 80112 --------------------------------------------------------------- INSURER D: --------------------------------------------------------------- INSURER E: - ------------------------------------------------------------------------------------------------------------------------------------ COVERAGES - ------------------------------------------------------------------------------------------------------------------------------------ THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. AGGREGATE LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS. - ------------------------------------------------------------------------------------------------------------------------------------ POLICY EFFECTIVE POLICY EXPIRATION TYPE OF INSURANCE POLICY NUMBER DATE (MM/DD/YY) DATE (MM/DD/YY) LIMITS - ------------------------------------------------------------------------------------------------------------------------------------ A GENERAL LIABILITY MU05531493 06/26/01 06/26/02 EACH OCCURRENCE $ 1,000,000 [X] COMMERCIAL GENERAL LIABILITY ----------------------------------------- [_] CLAIMS MADE [X] OCCUR FIRE DAMAGE (Any one fire) $ 100,000 _______________________ ----------------------------------------- MED EXP (Any one person) $ 5,000 _______________________ ----------------------------------------- PERSONAL & ADV INJURY $ 1,000,000 ----------------------------------------- GENERAL AGGREGATE $ 2,000,000 ----------------------------------------- PRODUCTS-COMP/OP AGG $ 1,000,000 GEN'L AGGREGATE LIMIT APPLIES PER: ----------------------------------------- [_] POLICY [_] PROJECT [_] LOC - ------------------------------------------------------------------------------------------------------------------------------------ A AUTOMOBILE LIABILITY MU05531493 06/26/01 06/26/02 [_] ANY AUTO COMBINED SINGLE LIMIT [_] ALL OWNED AUTOS (Ea accident) $ 1,000,000 [_] SCHEDULED AUTOS ----------------------------------------- [X] HIRED AUTOS BODILY INJURY [X] NON-OWNED AUTOS (Per person) $ _______________________ ----------------------------------------- BODILY INJURY (Per accident) $ ----------------------------------------- PROPERTY DAMAGE (Per accident) $ - ------------------------------------------------------------------------------------------------------------------------------------ GARAGE LIABILITY AUTO ONLY-EA ACCIDENT $ [_] ANY AUTO ----------------------------------------- EA ACC $ ------------------------- OTHER THAN AUTO ONLY: AGG $ - ------------------------------------------------------------------------------------------------------------------------------------ A EXCESS LIABILITY MU05571008 06/26/01 06/26/02 EACH OCCURRENCE $10,000,000 [X] OCCUR [_] CLAIMS MADE ----------------------------------------- [_] DEDUCTIBLE AGGREGATE $10,000,000 [X] RETENTION $10000 ----------------------------------------- $ ----------------------------------------- $ ----------------------------------------- $ - ------------------------------------------------------------------------------------------------------------------------------------ WORKERS COMPENSATION AND WC STATU- OTH- EMPLOYERS' LIABILITY TORY LIMITS ER ----------------------------------------- E.L. EACH ACCIDENT $ ----------------------------------------- E.L. DISEASE-EA EMPLOYEE $ ----------------------------------------- E.L. DISEASE-POLICY LIMIT $ - ------------------------------------------------------------------------------------------------------------------------------------ A OTHER Control of MU05504887 06/26/01 06/26/02 $10,000,000 Drilling Well $ 5,000,000 Producing - ------------------------------------------------------------------------------------------------------------------------------------ DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/EXCLUSIONS ADDED BY ENDORSEMENT/SPECIAL PROVISIONS Blanket Waiver of Subrogation and Blanket Additional Insured, as regards GL and Umbrella, if required by written contract. GL & Umbrella policies include XCU coverages. - ------------------------------------------------------------------------------------------------------------------------------------ CERTIFICATE HOLDER ADDITIONAL INSURED; INSURER LETTER CANCELLATION - ------------------------------------------------------------------------------------------------------------------------------------ SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE Bank One, NA EXPIRATION DATE THEREOF, THE ISSUING INSURER WILL ENDEAVOR TO MAIL as Administrative Agent 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT, Attn: Steven Shatto BUT FAILURE TO DO SO SHALL IMPOSE NO OBLIGATION OR LIABILITY OF ANY 910 Travis, 6th Floor KIND UPON THE INSURER, ITS AGENTS OR REPRESENTATIVES. Houston, Texas 77002 -------------------------------------------------------------------- AUTHORIZED REPRESENTATIVE /s/ James R. Rid - ------------------------------------------------------------------------------------------------------------------------------------ ACORD 25-S (7/97) 1 of 2 #S75138/M65525 LOC (C) ACORD CORPORATION 1988
COMMITMENT TRANSFER SUPPLEMENT ------------------------------ THIS COMMITMENT TRANSFER SUPPLEMENT (this "Commitment Transfer Supplement") dated as of the date set forth in Item 1 of Schedule I hereto, is ---------- among the Transferor Bank set forth in Item 2 of Schedule I hereto (the ---------- "Transferor Bank"), each Purchasing Bank set forth in Item 3 of Schedule 1 (each --------------- ---------- a "Purchasing Bank"), and BANK ONE, N.A., as Administrative Agent for the Banks --------------- under, and as defined in, the Credit Agreement described below (in such capacity, the "Administrative Agent"). -------------------- RECITALS WHEREAS, this Commitment Transfer Supplement is being executed and delivered in accordance with Section 9.05(c) of the First Amended and Restated --------------- Credit Agreement dated as of March 1, 2002, by and among ULTRA RESOURCES, INC., a Wyoming corporation ("Borrower"), the Transferor Bank and the other Banks -------- party thereto and the Administrative Agent (as from time to time amended, supplemented or otherwise modified in accordance with the terms thereof, the "Credit Agreement"; terms defined therein being used herein as therein defined); ---------------- WHEREAS, each Purchasing Bank (if it is not already a Bank party to the Credit Agreement) wishes to become a Bank party to the Credit Agreement; and WHEREAS, the Transferor Bank is selling and assigning to each Purchasing Bank, rights, obligations and commitments under the Credit Agreement; NOW, THEREFORE, the parties hereto agree as follows: GENERAL TERMS Section 1. Upon receipt by the Administrative Agent of five counterparts of this Commitment Transfer Supplement, to each of which is attached a fully completed Schedule I and Schedule II, and each of which has ---------- ----------- been executed by the Transferor Bank, each Purchasing Bank (and any other person required by the Credit Agreement to execute this Commitment Transfer Supplement), the Administrative Agent will transmit to the Borrower, the Transferor Bank and each Purchasing Bank a Transfer Effective Notice, substantially in the form of Schedule III to this Commitment Transfer Supplement ------------ (a "Transfer Effective Notice"). Such Transfer Effective Notice shall set forth, ------------------------- inter alia, the date on which the transfer effected by this Commitment Transfer - ----- ---- Supplement shall become effective (the "Transfer Effective Date"), which date ----------------------- shall be at least five (5) Business Days following the date of such Transfer Effective Notice. From and after the Transfer Effective Date each Purchasing Bank shall be a Bank party to the Credit Agreement for all purposes thereof. Section 2. At or before 12:00 Noon, local time of the Transferor Bank, on the Transfer Effective Date, each Purchasing Bank shall pay to the Transferor Bank, in immediately available funds, an amount equal to the purchase price, as agreed between the Transferor Bank and such Purchasing Bank (the "Purchase -------- Price"), of the portion being purchased by such Purchasing Bank (such Purchasing - ----- Bank's "Purchased Percentage") of the outstanding Credit Extensions and other -------------------- amounts owing to the Transferor Bank under the Credit Agreement and the Notes. Effective upon receipt by the Transferor Bank of the Purchase Price from a Purchasing Bank, the Transferor Bank hereby irrevocably sells, assigns and transfers to such Purchasing Bank, without recourse, representation or warranty, and each Purchasing Bank hereby irrevocably purchases, takes and assumes from the Transferor Bank, such Purchasing Bank's Purchased Percentage of the Commitment of the Transferor Bank and the presently outstanding Credit Extensions and other amounts owing to the Transferor Bank under the Credit Agreement and the Notes together with all instruments, documents and collateral security pertaining thereto. Section 3. The Transferor Bank has made arrangements with each Purchasing Bank with respect to (a) the portion, if any, to be paid, and the date or dates for payment, by the Transferor Bank to such Purchasing Bank of any fees heretofore received by the Transferor Bank pursuant to the Credit Agreement prior to the Transfer Effective Date, and (b) the portion, if any, to be paid, and the date or dates for payment, by such Purchasing Bank to the Transferor Bank of fees or interest received by such Purchasing Bank pursuant to the Credit Agreement from and after the Transfer Effective Date. Section 4. (a) All principal payments that would otherwise be payable from and after the Transfer Effective Date to or for the account of the Transferor Bank pursuant to the Credit Agreement and the Notes shall, instead, be payable to or for the account of the Transferor Bank and the Purchasing Banks, as the case may be, in accordance with their respective interests as reflected in this Commitment Transfer Supplement. (b) All interest, fees and other amounts that would otherwise accrue for the account of the Transferor Bank from and after the Transfer Effective Date pursuant to the Credit Agreement and the Notes shall, instead, accrue for the account of, and be payable to, the Transferor Bank and the Purchasing Banks, as the case may be, in accordance with their respective interests as reflected in this Commitment Transfer Supplement. (c) In the event that any amount of interest, fees or other amounts accruing prior to the Transfer Effective Date was included in the Purchase Price paid by any Purchasing Bank, the Transferor Bank and each Purchasing Bank will make appropriate arrangements for payment by the Transferor Bank to such Purchasing Bank of such amount upon receipt thereof from the Borrower. Section 5. On or prior to the Transfer Effective Date, the Transferor Bank will deliver to the Administrative Agent its Note. Within five (5) Business Days after Borrower's receipt of notice from Administrative Agent of Administrative Agent's receipt of this Commitment Transfer Supplement, the Borrower will deliver to the Administrative Agent, in exchange for the surrendered Note from the Transferor Bank, a new Note for each Purchasing Bank and the Transferor Bank, to -2- the extent the Transferor Bank has retained any of its Commitment, in each case in principal amounts reflecting, in accordance with the Credit Agreement, their respective Commitment Amounts (as adjusted pursuant to this Commitment Transfer Supplement). As provided in Section 9.05(e) of the Credit Agreement, each such --------------- new Note shall be dated the date of the original Note delivered pursuant to the Credit Agreement (the "Effective Date"). Promptly after the Transfer Effective -------------- Date, the Administrative Agent will send to each of the Transferor Bank and the Purchasing Banks its new Note and will send to the Borrower the superseded Note of the Transferor Bank, marked "Canceled" or "Replaced" as appropriate. Section 6. Concurrently with the execution and delivery hereof, the Transferor Bank will provide to each Purchasing Bank (if it is not already a Bank party to the Credit Agreement) conformed copies of all documents in the Transferor Bank's possession that were delivered to the Administrative Agent on the Effective Date in satisfaction of the conditions precedent set forth in the Credit Agreement. Section 7. Each of the parties to this Commitment Transfer Supplement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Commitment Transfer Supplement. Section 8. By executing and delivering this Commitment Transfer Supplement, the Transferor Bank and each Purchasing Bank confirm to and agree with each other and the Administrative Agent and the Banks as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claim, the Transferor 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 Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, the Notes, any other Loan Document or any other instrument or document furnished pursuant thereto; (ii) the Transferor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement, the Notes, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) each Purchasing Bank confirms that it has received a copy of the Credit Agreement, together with copies of the Financial Statements referred to in Section 3.1(D), the Financial Statements delivered pursuant to Sections 5.03 -------------- ------------- and 5.04, if any, and such other documents and information as it has deemed - -------- appropriate to make its own credit analysis and decision to enter into this Commitment Transfer Supplement; (iv) each Purchasing Bank will, independently and without reliance upon the Administrative Agent, the Transferor Bank or any other 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 the Credit Agreement; (v) each Purchasing Bank appoints and authorizes the Administrative Agent to take such action as Administrative Agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto, all in accordance with Article ------- VIII of the Credit Agreement; and (vi) each Purchasing Bank agrees that - ---- -3- it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. Section 9. Each party hereto represents and warrants to and agrees with the Administrative Agent that it is aware of and will comply with the provision of Section 2.16 of the Credit Agreement. ------------ Section 10. Schedule II hereto sets forth the revised Commitment ----------- Amounts and Percentage Shares of the Transferor Bank and each Purchasing Bank as well as administrative information with respect to each Purchasing Bank. SECTION 11. THIS COMMITMENT TRANSFER SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. IN WITNESS WHEREOF, the parties hereto have caused this Commitment Transfer Supplement to be executed by their respective duly authorized officers on Schedule I hereto as of the date set forth in Item I of Schedule I hereto. ---------- -4- Schedule I to Commitment Transfer Supplement COMPLETION OF INFORMATION AND SIGNATURES FOR COMMITMENT TRANSFER SUPPLEMENT ------------------- Re: First Amended and Restated Credit Agreement dated as of March 1, 2002 among Ultra Resources, Inc., the Banks, and Bank One, N.A., as Administrative Agent for the Banks thereunder. Item 1 (Date of Commitment Transfer Supplement): [Insert date of Commitment Transfer Supplement] Item 2 (Transferor Bank): [Insert name of Transferor Bank] Item 3 (Purchasing Bank[s]): [Insert name[s] of Purchasing Bank[s]] Item 4 (Signatures of Parties to Commitment Transfer Supplement): _________________, as Transferor Bank By:___________________________________ Title:________________________________ _________________, as Purchasing Bank By:___________________________________ Title:________________________________ __________________, as Purchasing Bank By:___________________________________ Title:________________________________ CONSENTED TO AND ACKNOWLEDGED: ULTRA RESOURCES, INC. By:___________________________________ Title:________________________________ BANK ONE, NA, as Administrative Agent By:___________________________________ Title:________________________________ [Consents Required only when Purchasing Bank is not already a Bank or Affiliate thereof] ACCEPTED FOR RECORDATION IN REGISTER: BANK ONE, NA, as Administrative Agent By:___________________________________ Title:________________________________ -2- Schedule II to Commitment Transfer Supplement LIST OF LENDING OFFICES, ADDRESSES FOR NOTICES AND COMMITMENT AMOUNTS ---------------------------------- [Name of Transferor Bank] Revised Commitment Amount: $_____________ ------------------------- Revised Commitment Percentage: ______________ ----------------------------- [Name of Purchasing Bank] New Commitment Amount: $_____________ --------------------- New Commitment Percentage: ______________ ------------------------- Address for Notices: - ------------------- [address] Attention:______________ Telex:__________________ Answer back:____________ Telephone:______________ Telecopier:_____________ Lending Office: - -------------- ________________________ ________________________ ________________________ [Form of Transfer Effective Notice] Schedule III to Commitment Transfer Supplement To: [Insert Name of Borrower, Transferor Bank and each Purchasing Bank] The undersigned, as Administrative Agent under the First Amended and Restated Credit Agreement dated as of March 1, 2002, among Ultra Resources, Inc. ("Borrower"), the Banks and other financial institutions from time to time parties thereto and Bank One, N.A., as Administrative Agent, acknowledges receipt of five executed counterparts of a completed Commitment Transfer Supplement, as described in Schedule I hereto. [Note: attach copy of Schedule I from Commitment Transfer Supplement.] Terms defined in such Commitment Transfer Supplement are used herein as therein defined. 1. Pursuant to such Commitment Transfer Supplement, you are advised that the Transfer Effective Date will be [Insert fifth Business Day following date of Transfer Effective Notice]. 2. Pursuant to such Commitment Transfer Supplement, the Transferor Bank is required to deliver its Note to the Administrative Agent on or before the Transfer Effective Date. 3. Pursuant to such Commitment Transfer Supplement, the Borrower is required to deliver to the Administrative Agent on or before the fifth (5/th/) Business Day from its receipt of this notice, in return for the Note surrendered to the Administrative Agent by the Transferor Bank, the following Notes [Describe each Note for Transferor Bank and Purchasing Bank as to principal amount and payee], dated [March 1, 2002]. 4. Pursuant to such Commitment Transfer Supplement each Purchasing Bank is required to pay its Purchase Price to the Transferor Bank at or before 12:00 Noon on the Transfer Effective Date in immediately available funds. Very truly yours, BANK ONE, NA, as Administrative Agent By:________________________________________ Title:_____________________________________ EX-21.1 4 dex211.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 SUBSIDIARY OF ULTRA PETROLEUM CORP. - UP Energy Corporation, a Nevada corporation SUBSIDIARIES OF UP ENERGY CORPORATION - Ultra Resources, Inc., a Wyoming corporation - Sino-American Energy Corporation, a Nevada corporation EX-23.1 5 dex231.txt CONSENT OF NETHERLAND SEWELL & ASSOCIATES, INC. EXHIBIT 23.1 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS We hereby consent to the incorporation by reference to our reserve reports for the years ended December 31, 2001, 2000, and 1999. each of which is included in the Annual Report on Form 10-K of Ultra Petroleum Corporation for the year ended December 31, 2001. NETHERLAND, SEWELL & ASSOCIATES, INC. By:/S/ Frederic D. Sewell ---------------------------- Frederic D. Sewell Chairman and Chief Executive Officer Dallas, Texas March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----