-----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, HPySFd1JlZQlHgNPt81yczqRFiPu8kWrB7YPutIPy8g4ZrBuIUALjJ0E9P1SIUOK WFkjXGMqRoQysiqq6g/NAw== 0000950134-03-015141.txt : 20031113 0000950134-03-015141.hdr.sgml : 20031113 20031113093247 ACCESSION NUMBER: 0000950134-03-015141 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETROQUEST ENERGY INC CENTRAL INDEX KEY: 0000872248 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 721440714 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19020 FILM NUMBER: 03995924 BUSINESS ADDRESS: STREET 1: 400 E KALISTE SALOOM RD SUITE 6000 CITY: LAFAYETTE STATE: LA ZIP: 70508 BUSINESS PHONE: 3372327028 MAIL ADDRESS: STREET 1: 400 E KALISTE SALOOM RD SUITE 6000 CITY: LAFAYETTE STATE: LA ZIP: 70508 FORMER COMPANY: FORMER CONFORMED NAME: OPTIMA PETROLEUM CORP DATE OF NAME CHANGE: 19950726 10-Q 1 d10457e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2003 [ ] 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: 019020 -------------------- PETROQUEST ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 72-1440714 (State of Incorporation) (I.R.S. Employer Identification No.) 400 E. KALISTE SALOOM RD., SUITE 6000 LAFAYETTE, LOUISIANA 70508 (Address of principal executive offices) (Zip code) -------------------- Registrant's telephone number, including area code: (337) 232-7028 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 requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of November 12, 2003, there were 44,535,694 shares of the registrant's common stock, par value $.001 per share, outstanding. PETROQUEST ENERGY, INC. Table of Contents
Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002...................................... 1 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002....................... 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002................................. 3 Notes to Consolidated Financial Statements........................................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 13 Item 4. Controls and Procedures........................................................... 14 Part II. Other Information Item 1. Legal Proceedings................................................................. 15 Item 2. Changes in Securities and Use of Proceeds......................................... 15 Item 3. Defaults upon Senior Securities................................................... 15 Item 4. Submission of Matters to a Vote of Security Holders............................... 15 Item 5. Other Information................................................................. 15 Item 6. Exhibits and Reports on Form 8-K.................................................. 15
PETROQUEST ENERGY, INC. Consolidated Balance Sheets (Amounts in Thousands)
September 30, December 31, 2003 2002 ---- ---- (unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 831 $ 1,137 Oil and gas revenue receivable 4,839 6,500 Joint interest billing receivable 3,527 2,165 Other current assets 765 310 ------------ ------------ Total current assets 9,962 10,112 ------------ ------------ Oil and gas properties: Oil and gas properties, full cost method 246,785 214,543 Unevaluated oil and gas properties 11,029 15,653 Accumulated depreciation, depletion and amortization (127,047) (109,450) ------------ ------------ Oil and gas properties, net 130,767 120,746 ------------ ------------ Other assets, net of accumulated depreciation and amortization of $3,503 and $2,851, respectively 1,303 1,205 ------------ ------------ Total assets $ 142,032 $ 132,063 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 9,026 $ 18,337 Advances from co-owners 2,845 940 Current portion of long-term debt 6,500 6,600 ------------ ------------ Total current liabilities 18,371 25,877 ------------ ------------ Long-term debt 2,000 2,400 Asset retirement obligation 11,650 - Deferred income taxes 6,896 5,461 Other liabilities 555 555 Commitments and contingencies - - Stockholders' equity: Common stock, $.001 par value; authorized 75,000 shares; issued and outstanding 44,306 and 42,852 shares, respectively 44 43 Paid-in capital 108,229 106,173 Other comprehensive income (201) (1,197) Unearned deferred compensation (125) (337) Accumulated deficit (5,387) (6,912) ------------ ------------ Total stockholders' equity 102,560 97,770 ------------ ------------ Total liabilities and stockholders' equity $ 142,032 $ 132,063 ============ ============
See accompanying Notes to Consolidated Financial Statements. 1 PETROQUEST ENERGY, INC. Consolidated Statements of Operations (unaudited) (Amounts in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues: Oil and gas sales $ 9,800 $ 11,220 $ 35,014 $ 33,085 Interest and other income 57 30 108 68 ---------- ---------- ---------- ---------- 9,857 11,250 35,122 33,153 ---------- ---------- ---------- ---------- Expenses: Lease operating expenses 2,235 2,487 7,501 7,240 Production taxes 289 119 623 441 Depreciation, depletion and amortization 6,197 5,916 20,549 19,638 General and administrative 1,171 1,016 3,519 3,758 Accretion of asset retirement obligation 169 - 445 - Interest expense 30 25 283 252 Derivative expense (586) 226 1,163 530 ---------- ---------- ---------- ---------- 9,505 9,789 34,083 31,859 ---------- ---------- ---------- ---------- Income from operations 352 1,461 1,039 1,294 Income tax expense 123 511 364 453 ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle $ 229 $ 950 $ 675 $ 841 Cumulative effect of change in accounting principle - - 849 - ---------- ---------- ---------- ---------- Net income $ 229 $ 950 $ 1,524 $ 841 ========== ========== ========== ========== Earnings per common share: Basic Income before cumulative effect of change in accounting principle $ 0.01 $ 0.03 $ 0.02 $ 0.02 Cumulative effect of change in accounting principle - - 0.02 - ---------- ---------- ---------- ---------- Net income $ 0.01 $ 0.03 $ 0.04 $ 0.02 ========== ========== ========== ========== Diluted Income before cumulative effect of change in accounting principle $ 0.01 $ 0.02 $ 0.01 $ 0.02 Cumulative effect of change in accounting principle - - 0.02 - ---------- ---------- ---------- ---------- Net income $ 0.01 $ 0.02 $ 0.03 $ 0.02 ========== ========== ========== ========== Weighted average number of common shares: Basic 44,333 37,852 43,366 36,815 ========== ========== ========== ========== Diluted 44,729 39,820 44,167 38,575 ========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 2 PETROQUEST ENERGY, INC. Consolidated Statements of Cash Flows (unaudited) (Amounts in Thousands)
Nine Months Ended September 30, ------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 1,524 $ 841 Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax expense 364 453 Depreciation, depletion and amortization 20,549 19,638 Cumulative effect of change in accounting principle (849) - Accretion of asset retirement obligation 445 - Amortization of debt issuance costs 323 209 Compensation expense 294 259 Derivative mark to market 186 429 Changes in working capital accounts: Accounts receivable 1,661 1,370 Joint interest billing receivable (1,362) (2,213) Other assets (750) (673) Accounts payable and accrued liabilities (6,967) 4,695 Advances from co-owners 1,905 1,877 Plugging and abandonment escrow - 268 Other (455) (428) ---------- ---------- Net cash provided by operating activities 16,868 26,725 ---------- ---------- Cash flows from investing activities: Investment in oil and gas properties (18,727) (49,169) Sale of oil and gas properties, net - 17,321 ---------- ---------- Net cash used in investing activities (18,727) (31,848) ---------- ---------- Cash flows from investing activities: Exercise of options and warrants 2,059 178 Proceeds from borrowings 16,100 15,000 Repayment of debt (16,600) (32,329) Issuance of common stock, net of expenses (6) 21,827 ---------- ---------- Net cash provided by financing activities 1,553 4,676 ---------- ---------- Net decrease in cash and cash equivalents (306) (447) Cash balance and cash equivalents, beginning of period 1,137 1,063 ---------- ---------- Cash balance and cash equivalents, end of period $ 831 $ 616 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 251 $ 554 ========== ========== Income taxes $ - $ - ========== ==========
See accompanying Notes to Consolidated Financial Statements. 3 PETROQUEST ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION The consolidated financial information for the three- and nine-month periods ended September 30, 2003 and 2002, respectively, have been prepared by the Company and was not audited by its independent public accountants. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial position, results of operations, and cash flows of the Company at September 30, 2003 and for all reported periods. Results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year or any future periods. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Unless the context otherwise indicates, any references in this Quarterly Report on Form 10-Q to "PetroQuest" or the "Company" refer to PetroQuest Energy, Inc. (Delaware) and its wholly-owned consolidated subsidiaries, PetroQuest Energy, L.L.C. (a single member Louisiana limited liability company) and PetroQuest Oil & Gas, L.L.C. (a single member Louisiana limited liability company). Certain reclassifications of prior year amounts have been made to conform with the current year presentation. NOTE 2 EARNINGS PER SHARE Basic earnings or loss per common share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the relevant periods. Diluted earnings or loss per common share is determined on a weighted average basis using common shares issued and outstanding adjusted for the effect of stock options considered dilutive computed using the treasury stock method. Options to purchase 1,197,002 shares of common stock were outstanding during the three- and nine-month periods ended September 30, 2003, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares during the periods. These options' exercise prices were between $2.18-$7.65, respectively, and expire in 2010-2013. Options to purchase 572,751 and 273,667 shares of common stock were outstanding during the three- and nine-month periods ended September 30, 2002, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares during the periods. These options' exercise prices were between $4.95-$7.65 and between $5.56-$7.65, respectively, and expire in 2011-2012. NOTE 3 LONG-TERM DEBT The Company entered into a bank credit facility on May 14, 2003 with a group of two banks. The Company expensed $203,000 of deferred financing costs, which is included in interest expense, during the nine-month period ended September 30, 2003 relating to the previous credit facility. Pursuant to the new credit facility agreement, PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $75 million revolving credit facility with a group of two banks which permits the Borrower to borrow amounts from time to time based on its available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation as of April 1 and October 1 of each year of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. The Company or the lenders may also request additional borrowing base redeterminations. As of September 30, 2003, the borrowing base under this credit facility was $12 million and is subject to monthly reductions of $1 million commencing December 1, 2003. The Company is currently undergoing a borrowing base 4 redetermination. The banks will determine future monthly reductions in connection with each borrowing base redetermination. Outstanding balances on the revolving credit facility bear interest at either the bank's prime rate plus a margin (based on a sliding scale of 0.75% to 1.25% based on borrowing base usage but never less than the Federal Funds Effective Rate plus 0.5%) or the Eurodollar rate plus a margin (based on a sliding scale of 2.0% to 2.5% depending on borrowing base usage). The credit facility also allows the Company to use up to $5 million of the borrowing base for letters of credit for fees equal to the applicable margin rate for Eurodollar advances. At November 7, 2003, the Company had $9.5 million of borrowings and no letters of credit issued pursuant to the credit facility. The Company is subject to certain restrictive financial and non-financial covenants under the credit facility, including a minimum current ratio, a minimum tangible net worth, maximum debt to EBITDA ratio, maximum G&A expenses, and limiting authorization for expenditures on dry hole costs, all as defined in the credit facility. The credit facility also requires the Borrower to establish and maintain commodity hedges covering at least 50% of its proved developed producing reserves on a rolling twelve-month basis. As of September 30, 2003, the Company was in compliance with all of the covenants in the credit facility. The credit facility matures on May 14, 2006. The Company currently has two interest rate swaps covering $5 million of our floating rate debt. The swaps, which expire in November 2003 and 2004, have fixed interest rates of 4.56% and 4.25%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through derivative expense in the Company's income statement. At September 30, 2003, the Company recognized a liability of $306,000 related to these derivative instruments. NOTE 4 NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets included within the scope of SFAS 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction under the doctrine of promissory estoppel. The Company adopted SFAS 143 effective January 1, 2003. The net difference between the Company's previously recorded abandonment liability and the amounts estimated under SFAS 143, after taxes, totaled a gain of $849,000, which has been recognized as a cumulative effect of a change in accounting principle. The gain is due to the effect on the historical depletion as a result of the retirement obligation being recorded at fair value. On a pro forma basis, the impact for the nine months ended September 30, 2002 would have increased net income by $270,000. The Company has legal obligations to plug, abandon and dismantle existing wells and facilities that it has acquired and constructed during its existence. As of January 1, 2003, the Company recognized a $9,467,000 liability for its asset retirement obligations and recorded the related additional assets that will be depreciated using the units-of-production method. The following table describes all changes to the Company's asset retirement obligation liability: 5
Nine Months Ended September 30, 2003 ------------------ Asset retirement obligation at beginning of year $ - Liability recognized in transition 9,467,000 Liabilities incurred during 2003 74,000 Liabilities settled during 2003 (389,000) Accretion expense 445,000 Revisions in estimated cash flows 2,053,000 ------------ Asset retirement obligation at end of period $ 11,650,000 ============
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which requires companies to evaluate variable interest entities to determine whether to apply the consolidation provisions of FIN 46 to those entities. The consolidation provisions of FIN 46, if applicable, would apply to variable interest entities created after January 31, 2003 immediately, and to variable interest entities created before February 1, 2003 in the Company's interim period beginning October 1, 2003. The Company believes that it has no interests in these types of entities. NOTE 5 EQUITY Other Comprehensive Income and Derivative Instruments The following table presents a recap of the Company's comprehensive income for the three- and nine-month periods ended September 30, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income $ 229 $ 950 $1,524 $ 841 Change in fair value of derivative instrument, accounted for as hedges, net of taxes 534 (134) 996 (134) ------ ------ ------ ------ Comprehensive income $ 763 $ 816 $2,520 $ 707
The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards No. 133, as amended (SFAS 133). When the conditions specified in SFAS 133 are met, the Company may designate these derivatives as hedges. As of September 30, 2003, the Company had five derivative contracts with third parties designated as hedges, whereby a fixed price has been established for a certain period. For the three and nine months ended September 30, 2003, the effect of derivative financial instruments is net of deferred income tax liability of $287,000 and $536,000, respectively. For the three and nine months ended September 30, 2002, the effect of derivative financial instruments is net of deferred income tax benefit of $72,000. The cash settlements of these hedges are recorded in oil and gas revenues. Oil and gas sales include reductions related to gas hedges of $171,000 and zero and oil hedges of $412,000 and $61,000 for the three months ended September 30, 2003 and 2002, respectively. Oil and gas sales include reductions related to gas hedges of $2,440,000 and $729,000 and oil hedges of $1,423,000 and $61,000 for the nine months ended September 30, 2003 and 2002, respectively. As of September 30, 2003, the Company had open fixed price swap contracts with third parties, whereby a fixed price has been established for a certain period. These agreements in effect for the remainder of 2003 are for oil volume of 1,000 barrels per day at a weighted average price of $25.75, and gas volume of 7,000Mmbtu per day at a weighted average price of $4.02. Additionally, the Company entered into a costless collar contract for 2004 for 2,500Mmbtu per day with a floor price of $4.00 and ceiling price of $7.03. At September 30, 2003, the Company recognized a liability of $665,000 related to these derivative instruments, of which four have been designated as 6 cash flow hedges and one has been deemed ineffective and recorded through derivative expense on the income statement. These changes in fair value of the derivative are recorded on the income statement because of a decline in production in the specific field to which the derivative was designated. Public Offering During February and March 2002, the Company completed the offering of 5,193,600 shares of its common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, the Company realized proceeds of approximately $21.9 million. During October and November 2002, the Company completed the offering of 5,000,000 shares of its common stock. The shares were sold to the public for $4.25 per share. After underwriting discounts, the Company realized proceeds of approximately $20.4 million. NOTE 6 STOCK BASED COMPENSATION The Company accounts for its stock-based compensation plans under the principles prescribed by the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued to Employees." No stock option compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" pursuant to the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net income 229 950 1,524 841 Stock-based compensation: Add expense included in reported results, net of tax 90 56 191 168 Deduct fair value based method, net of tax (157) (226) (391) (678) ------- ------- --------- ------- Pro forma net income 162 780 1,324 331 Earnings per common share: Basic - as reported $ 0.01 $ 0.03 $ 0.04 $ 0.02 Basic - pro forma $ 0.00 $ 0.02 $ 0.03 $ 0.01 Diluted - as reported $ 0.01 $ 0.02 $ 0.03 $ 0.02 Diluted - pro forma $ 0.00 $ 0.02 $ 0.03 $ 0.01
7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PetroQuest Energy, Inc. is an independent oil and gas company engaged in the exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. The Company and its predecessors have been active in this area since 1986, which gives the Company extensive geophysical, technical and operational expertise in this area. The Company's business strategy is to increase production, cash flow and reserves through exploration, development and acquisition of properties located in the Gulf Coast Region. At September 30, 2003, the Company operated approximately 90% of all of its proved reserves. For the nine months ended September 30, 2003, approximately 50% of the Company's equivalent production was oil and 50% was natural gas. CRITICAL ACCOUNTING POLICIES Full Cost Method of Accounting We use the full cost method of accounting for our investments in oil and gas properties. Under this method, all acquisition, exploration and development costs, including certain related employee costs, incurred for the purpose of exploring for and developing and oil and natural gas are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire property. Exploration costs include the costs of drilling exploratory wells, including those in progress and geological and geophysical service costs in exploration activities. Development costs include the costs of drilling development wells and costs of completions, platforms, facilities and pipelines. Costs associated with production and general corporate activities are expensed in the period incurred. Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas. The costs associated with unevaluated properties are not initially included in the amortization base and relate to unevaluated leasehold acreage and delay rentals, seismic data and capitalized interest. These costs are either transferred to the amortization base with the costs of drilling the related well or are assessed quarterly for possible impairment or reduction in value. We compute the provision for depletion of oil and gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Unevaluated costs and related carrying costs are excluded from the amortization base until the properties associated with these costs are evaluated. In addition to costs associated with evaluated properties, the amortization base includes estimated future development costs and dismantlement, restoration and abandonment costs, net of estimated salvage values. Our depletion expense is affected by the estimates of future development costs, unevaluated costs and proved reserves, and changes in these estimates could have an impact on our future earnings. We capitalize certain internal costs that are directly identified with the acquisition, exploration and development activities. The capitalized internal costs include salaries, employee benefits, costs of consulting services and other related expenses and do not include costs related to production, general corporate overhead or similar activities. We also capitalize a portion of the interest costs incurred on our debt. Capitalized interest is calculated using the amount of our unevaluated property and our effective borrowing rate. Capitalized costs of oil and gas properties, net of accumulated DD&A and related deferred taxes, are limited to the estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent, plus the lower of cost or fair value of unproved properties, as adjusted for related income tax effects (the full cost ceiling). If capitalized costs exceed the full cost ceiling, the excess is charged to write-down of oil and gas properties in the quarter in which the excess occurs. Declines in prices or reserves could result in a future write-down of oil and gas properties. 8 Given the volatility of oil and gas prices, it is probable that our estimate of discounted future net cash flows from proved oil and gas reserves will change in the near term. If oil or gas prices decline, even for only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that write-downs of oil and gas properties could occur in the future. Future Abandonment Costs Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering systems, wells and related structures and restoration costs of land and seabed. We develop estimates of these costs for each of our properties based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment. The accounting for future abandonment costs changed on January 1, 2003, with the adoption of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." See New Accounting Standards in the Notes to Consolidated Financial Statements for a further discussion of this accounting standard. Reserve Estimates Our estimates of oil and gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future oil and gas prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to the extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of such oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variance may be material. Derivative Instruments The estimated fair values of our commodity derivative instruments are recorded in the consolidated balance sheet. At inception, all of our commodity derivative instruments represent hedges of the price of future oil and gas production. The changes in fair value of those derivative instruments that qualify for treatment due to being highly effective are recorded to Other Comprehensive Income until the hedged oil or natural gas quantities are produced. If a hedge becomes ineffective because the expected event does not occur, the fair value of the derivative is recorded on the income statement. Estimating the fair values of hedging derivatives requires complex calculations incorporating estimates of future prices, discount rates and price movements. Instead, we choose to obtain the fair value of our commodity derivatives from the counter parties to those contracts. Since the counter parties are market makers, they are able to provide us with a literal market value, or what they would be willing to settle such contracts for as of the given date. 9 RESULTS OF OPERATIONS The following table (unaudited) sets forth certain operating information with respect to our oil and gas operations for the periods noted:
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Production: Oil (Bbls) 166,385 237,167 584,249 688,801 Gas (Mcf) 1,031,679 1,461,924 3,483,927 5,763,714 Total Production (Mcfe) 2,029,989 2,884,923 6,989,421 9,896,520 Sales: Total oil sales $ 4,552,094 $ 6,339,813 $ 16,801,189 $ 16,732,483 Total gas sales 5,247,711 4,879,750 18,212,501 16,352,614 Average sales prices: Oil (per Bbl) $ 27.36 $ 26.73 $ 28.76 $ 24.29 Gas (per Mcf) 5.09 3.34 5.23 2.84 Per Mcfe 4.83 3.89 5.01 3.36
The above sales include reductions related to gas hedges of $171,000 and zero and oil hedges of $412,000 and $61,000 for the three months ended September 30, 2003 and 2002, respectively. The above sales include reductions related to gas hedges of $2,440,000 and $729,000 and oil hedges of $1,423,000 and $61,000 for the nine months ended September 30, 2003 and 2002, respectively. Net income totaled $229,000 and $950,000 for the quarters ended September 30, 2003 and 2002, respectively. Net income totaled $1,524,000 and $841,000 for the nine-month periods ended September 30, 2003 and 2002, respectively. The results are attributable to the following components: PRODUCTION. Oil production in 2003 decreased 30% and 15% from the third quarter and nine months ended September 30, 2002, respectively. Natural gas production in 2003 decreased 29% and 40% from the third quarter and nine months ended September 30, 2002, respectively. On a Mcfe basis, production for the quarter and nine months ended September 30, 2003 decreased 30% and 29% over the same periods in 2002, respectively. The decrease in current year production as compared to 2002 was due to well performance at our Bordeaux and Berry Lake wells, the consistent decline of our Gulf Coast production and the absence of the addition of a significant amount of new discoveries. PRICES. Average oil prices per Bbl for the quarter and nine months ended September 30, 2003 were $27.36 and $28.76, as compared to $26.73 and $24.29, respectively, for the same periods in 2002. Average gas prices per Mcf were $5.09 and $5.23 for the quarter and nine months ended September 30, 2003, as compared to $3.34 and $2.84, respectively, for the same periods in 2002. Stated on a Mcfe basis, unit prices received during the third quarter and nine months ended September 30, 2003 were 24% and 49% higher, respectively, than the prices received during the comparable 2002 periods. REVENUE. Oil and gas sales during the third quarter ended September 30, 2003 decreased to $9,800,000 as compared to sales of $11,220,000 for the same period in 2002. The decrease in production volumes resulted in a decrease in revenue. Oil and gas sales during the nine months ended September 30, 2003 increased to $35,014,000 as compared to sales of $33,085,000 for the same period in 2002. The increase in commodity prices partially offset by a decrease in production volumes, resulted in a decrease in revenue for the quarter. The increase in commodity prices resulted in the increase in revenue for the nine months ended September 30, 2003. EXPENSES. Lease operating expenses for the quarter and nine months ended September 30, 2003 decreased and increased to $2,235,000 and $7,501,000, respectively as compared to $2,487,000 and $7,240,000, respectively, for the same periods in 2002. On a Mcfe basis, lease operating expenses for the quarter and nine months ended September 30, 2003 increased to $1.10 and $1.07, respectively, as compared to $0.86 and $0.73 for the same periods 10 during 2002. The increase is primarily due to the decrease in production volumes without a comparable reduction of the fixed costs in our major fields. General and administrative expenses during the third quarter and nine months ended September 30, 2003 totaled $1,171,000 and $3,519,000, respectively, as compared to expenses of $1,016,000 and $3,758,000, respectively, during the 2002 periods. The Company capitalized $974,000 and $2,869,000, respectively, of general and administrative costs during the quarter and nine months ended September 30, 2003 as compared to $784,000 and $2,752,000, respectively in the comparable 2002 periods. We have recognized $139,000 and $294,000, respectively, of non-cash compensation expense during the quarter and nine months ended September 30, 2003. We recorded non-cash compensation expense of $86,000 and $258,000, respectively, during the quarter and nine months ended September 30, 2002. Depreciation, depletion and amortization ("DD&A") expense for the three- and nine-month periods ended September 30, 2003 increased 5%, respectively, from the 2002 periods. On a Mcfe basis, which reflects the changes in production, the DD&A rate for the third quarter of 2003 was $3.05 per Mcfe as compared to $2.05 per Mcfe for the same period in 2002. The DD&A rate for the nine months ended September 30, 2003 was $2.94 per Mcfe compared to $1.98 per Mcfe for the same period in 2002. The increase in 2003 as compared to 2002 is due primarily to the significant capital expended during the previous twelve months without a comparable increase in our reserve base. Interest expense, net of amounts capitalized on unevaluated prospects, increased $5,000 and $31,000 during the third quarter and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002. The increases are the result of fully expensing deferred financing costs from our previous credit facility during the current year. We capitalized $111,000 and $150,000 of interest during the three months ended September 30, 2003 and 2002, respectively, and $343,000 and $457,000 during the nine months ended September 30, 2003 and 2002, respectively. Derivative expense decreased and increased $812,000 and $633,000 during the third quarter and nine months ended September 30, 2003, respectively, as compared to the same periods in 2002. These fluctuations are primarily the result of one of our gas derivatives being marked-to-market value on the income statement. These changes in fair value of the derivative are recorded on the income statement because of a decline in production in the specific field to which the derivative was designated. Additionally, the monthly settlements related to this derivative have been recorded to derivative expense effective during June 2003. Income tax expense of $123,000 and $364,000 was recognized during the third quarter and nine months ended September 30, 2003, respectively, as compared to expense of $511,000 and $453,000 during the same periods of 2002. The changes are a result of fluctuations in the operating profit during the current year. We provide for income taxes at a statutory rate of 35%. LIQUIDITY AND CAPITAL RESOURCES We have financed our exploration and development activities to date principally through cash flow from operations, bank borrowings, private and public offerings of common stock and sales of properties. Source of Capital: Operations Net cash flow from operations during the nine months ended September 30, 2003 decreased from $26,725,000 in 2002 to $16,868,000 in 2003. This decrease resulted primarily from the decrease in production volumes during the current year. Additionally, we utilized discretionary cash flow to reduce our vendor payables and debt during the first nine months of 2003, which decreased our net cash flow from operations. The working capital deficit was reduced from $(15.8) million at December 31, 2002 to $(8.4) million at September 30, 2003. This decrease was caused primarily by our effort to utilize cash flow to first reduce our working capital deficit and second to drill prospects. Source of Capital: Debt We entered into a new bank credit facility on May 14, 2003 with a group of two banks. Pursuant to the new credit facility agreement, PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $75 million revolving credit facility with a group of two banks which permits us to borrow amounts from time to time based on 11 our available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation as of April 1 and October 1 of each year of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. We or the lenders may also request additional borrowing base redeterminations. As of September 30, 2003, the borrowing base under this credit facility was $12 million and is subject to monthly reductions of $1 million commencing December 1, 2003. We are currently undergoing a borrowing base redetermination. The banks will determine future monthly reductions in connection with each borrowing base redetermination. Outstanding balances on the revolving credit facility bear interest at either the bank's prime rate plus a margin (based on a sliding scale of 0.75% to 1.25% based on borrowing base usage but never less than the Federal Funds Effective Rate plus 0.5%) or the Eurodollar rate plus a margin (based on a sliding scale of 2.0% to 2.5% depending on borrowing base usage). The credit facility also allows us to use up to $5 million of the borrowing base for letters of credit for fees equal to the applicable margin rate for Eurodollar advances. At November 7, 2003, we had $9.5 million of borrowings and no letters of credit issued pursuant to the credit facility. We are subject to certain restrictive financial and non-financial covenants under the credit facility, including a minimum current ratio, a minimum tangible net worth, maximum debt to EBITDA ratio, maximum G&A expenses, and limiting authorization for expenditures on dry hole costs, all as defined in the credit facility. The credit facility also requires the Borrower to establish and maintain commodity hedges covering at least 50% of its proved developed producing reserves on a rolling twelve month basis. As of September 30, 2003, we were in compliance with all of the covenants in the facility. The credit facility matures on May 14, 2006. On November 6, 2003, we obtained a $20 million subordinated term credit facility from Macquarie Americas Corp. ("Macquarie"). The facility carries an interest rate of prime plus 5.5%, is secured by a second mortgage on substantially all of our oil and gas properties and matures November 30, 2006. The facility is available for advances at any time until December 31, 2004 subject to the restrictive covenants of the facility and Macquarie approval. At closing, Macquarie received warrants to purchase 1,250,000 shares of our common stock at an exercise price of $2.30 per share. When cumulative advances under the facility exceed $5 million, $10 million and $15 million, Macquarie will receive warrants to purchase an additional 250,000 shares, 500,000 shares and 250,000 shares of our common stock, respectively, at the same exercise price per share. The warrants are and will be exercisable at any time through the earlier of 36 months following the repayment in full of the facility or 30 days after daily volume weighted average price of our common stock as published by Nasdaq is equal to or greater than, for a period of 30 days, the exercise price multiplied by three. In addition, we granted Macquarie piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the warrants. We intend to use the proceeds borrowed under the Macquarie facility towards funding our development plan, which is subject to prior approval by Macquarie and includes completion and facility costs, the cost of drilling development wells, and for other general corporate purposes. The facility contains certain restrictive financial and non-financial covenants, including a minimum current ratio, a minimum interest coverage ratio, a minimum adjusted present value ratio and a maximum general and administrative expense ratio, all as defined in the facility. Natural gas and oil prices have a significant impact on our cash flows available for capital expenditures and our ability to borrow and raise additional capital. The amount we can borrow under our credit facility is subject to periodic re-determination based in part on changing expectations of future prices. Lower prices may also reduce the amount of natural gas and oil that we can economically produce. Additionally, the production declines of certain producing wells resulted in lower production in the nine months ended September 30, 2003. Lower prices and/or lower production may decrease revenues, cash flows and the borrowing base under the credit facility, thus reducing the amount of financial resources available to meet our capital requirements. Source of Capital: Issuance of Equity Securities We have an effective universal shelf registration statement relating to the potential public offer and sale by PetroQuest of any combination of debt securities, common stock, preferred stock, depositary shares, and warrants from time to time or when financing needs arise. The registration statement does not provide assurance that we will or could sell any such securities. 12 During October and November 2002, we completed the offering of 5,000,000 shares of our common stock. The shares were sold to the public for $4.25 per share. After underwriting discounts, we realized proceeds of approximately $20.4 million. During February and March 2002, we completed the offering of 5,193,600 shares of our common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, we realized proceeds of approximately $21.9 million. Source of Capital: Sales of Properties On March 1, 2002, we closed the sale of our interest in Valentine Field for $18.6 million. The transaction had an effective date of January 1, 2002. At December 31, 2001, our independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to our interest in this field. Consistent with the full cost method of accounting, we did not recognize any gain or loss as a result of this sale. The proceeds were treated as a reduction of the full cost pool. Use of Capital: Exploration and Development We have an exploration and development program budget for the year 2003 that will require significant capital. Our capital budget for capital for new projects in 2003 is approximately $30 million of which $18 million had been incurred by September 30, 2003. We have completed the drilling of our Murphy Castle, Knight, Trout, Pinot Grigio and Riesling prospects, and are currently drilling our Eagle, Amberjack and Dolcetto prospects. Our management believes that cash flows from operations will be sufficient to fund planned 2003 exploration and development activities. Although we have not determined our budget for capital for new projects in 2004, we are currently planning on spending approximately $35-40 million depending on drilling success and related completion and facility costs. In the future, our exploration and development activities could require additional financings, which may include sales of additional equity or debt securities, additional bank borrowings, sales of properties, or joint venture arrangements with industry partners. We cannot assure you that such additional financings will be available on acceptable terms, if at all. If we are unable to obtain additional financing, we could be forced to delay or even abandon some of our exploration and development opportunities or be forced to sell some of our assets on an untimely or unfavorable basis. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in and incorporated by reference into this Form 10-Q are forward-looking statements. These forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the Company's estimate of the sufficiency of its existing capital sources, its ability to raise additional capital to fund cash requirements for future operations, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions and in projecting future rates of production, the timing of development expenditures and drilling of wells, and the operating hazards attendant to the oil and gas business. In particular, careful consideration should be given to cautionary statements made in the various reports the Company has filed with the Securities and Exchange Commission. The Company undertakes no duty to update or revise these forward-looking statements. When used in the Form 10-Q, the words, "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Management's Discussions and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company experiences market risks primarily in two areas: interest rates and commodity prices. The Company believes that its business operations are not exposed to significant market risks relating to foreign currency exchange risk. 13 The Company's revenues are derived from the sale of its crude oil and natural gas production. Based on projected annual sales volumes for the remaining three months of 2003, a 10% change in the prices the Company receives for its crude oil and natural gas production would have an approximate $1 million impact on the Company's revenues. In a typical hedge transaction, the Company will have the right to receive from the counterparts to the hedge, the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the fixed price, the Company is required to pay the counterparts this difference multiplied by the quantity hedged. The Company is required to pay the difference between the floating price and the fixed price (when the floating price exceeds the fixed price) regardless of whether the Company has sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require the Company to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging will also prevent the Company from receiving the full advantage of increases in oil or gas prices above the fixed amount specified in the hedge. As of September 30, 2003, the Company had open fixed price swap contracts with third parties, whereby a fixed price has been established for a certain period. These agreements in effect for the remainder of 2003 are for oil volume of 1,000 barrels per day at a weighted average price of $25.75, and gas volume of 7,000 Mmbtu per day at a weighted average price of $4.02. Additionally, the Company entered into a costless collar contract for 2004 for 2,500 Mmbtu per day with a floor price of $4.00 and ceiling price of $7.03. At September 30, 2003, the Company recognized a liability of $665,000 related to these derivative instruments, of which four have been designated as cash flow hedges and one has been deemed ineffective, under accounting regulations, and recorded through derivative expense on the income statement. We currently have two interest rate swaps covering $5 million of our floating rate debt. The swaps, which expire in November 2003 and 2004, have fixed interest rates of 4.56% and 4.25%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through derivative expense in our income statement. As of September 30, 2003, the fair value of the open interest rate swaps was a liability of $306,000. The Company also evaluated the potential effect that reasonably possible near term changes may have on the Company's credit facility. Debt outstanding under the facility is subject to a floating interest rate and represents 100% of the Company's total debt as of September 30, 2003. Based upon an analysis, utilizing the actual interest rate in effect and balances outstanding as of September 30, 2003 and assuming a 10% increase in interest rates and no changes in the amount of debt outstanding, the potential effect on interest expense for the remaining three months of 2003 is approximately $8,000. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission's rules and forms, of information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act. There have been no significant changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 14 PART II Item 1. LEGAL PROCEEDINGS NONE. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS NONE. Item 3. DEFAULTS UPON SENIOR SECURITIES NONE. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. Item 5. OTHER INFORMATION The Company announced the appointment of Michael L. Finch, age 48, as an independent member of the Company's Board of Directors. Mr. Finch served as Chief Financial Officer and a member of the Board of Directors of Stone Energy Corporation from 1993 until his retirement in 1999. He was affiliated with Stone in a variety of capacities for nineteen years. Prior to his service with Stone, he was employed by an international public accounting firm in New Orleans, Louisiana. Mr. Finch has been a private investor since 1999. He was licensed as a certified public accountant in 1978, and received a Bachelor of Science in Accounting from the University of South Alabama in 1976. The Company also announced the retirement of Alfred J. Thomas, II as President and the resignation of Mr. Thomas and Jay B. Langner from the Company's Board of Directors to devote more time to other commitments. Mr. Thomas' retirement and resignation was effective on September 5, 2003, and Mr. Langner's resignation was effective November 7, 2003. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 4.1, Warrant to Purchase Common Shares of PetroQuest Energy, Inc. Exhibit 10.1, Senior Second Lien Secured Credit Agreement dated November 6, 2003, between PetroQuest Energy, L.L.C., PetroQuest Energy, Inc., each of the Lenders from time to time party thereto; and Macquarie Americas Corp., as administrative agent for the Lenders. Exhibit 10.2, Unconditional Guaranty Agreement dated November 6, 2003, by PetroQuest Energy, Inc. to Macquarie Americas Corp., as administrative agent for the benefit of the Lenders under the Credit Agreement. Exhibit 10.3, Employment agreement dated July 28, 2003, between PetroQuest Energy, Inc. and Stephen H. Green Exhibit 10.4, First Amendment to Amended and Restated Credit Agreement dated as of November 6, 2003, by and among PetroQuest Energy, L.L.C., PetroQuest Energy, Inc.; Bank One, N.A., and Union Bank of California, N.A. Exhibit 31.1, Certification of Chief Executive Officer pursuant to Rule 13-a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. 15 Exhibit 31.2, Certification of Chief Financial Officer pursuant to Rule 13-a-14(a) / Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. Exhibit 32.1, Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Exhibit 32.2, Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: On July 30, 2003, the Company filed a current report on Form 8-K regarding its 2003 second quarter results. 16 SIGNATURE Pursuant to the requirements 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. PETROQUEST ENERGY, INC. Date: November 13, 2003 By: /s/ Michael O. Aldridge -------------------------------------- Michael O. Aldridge Senior Vice President, Chief Financial Officer and Treasurer (Authorized Officer and Principal Financial and Accounting Officer) 17 EX-4.1 3 d10457exv4w1.txt WARRANT TO PURCHASE COMMON SHARES EXHIBIT 4.1 NEITHER THIS CERTIFICATE NOR THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED OR QUALIFIED FOR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THIS CERTIFICATE NOR THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY SUCH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. THIS WARRANT (THIS "WARRANT") IS BEING ISSUED PURSUANT TO THE TERMS OF A $20,000,000 SECOND LIEN SECURED CREDIT AGREEMENT DATED AS OF THE DATE HEREOF (THE "CREDIT AGREEMENT"), BETWEEN PETROQUEST ENERGY, L.L.C., PETROQUEST ENERGY, INC., MACQUARIE AMERICAS CORP. AND THE LENDERS NAMED THEREIN. WARRANTS TO PURCHASE COMMON SHARES OF PETROQUEST ENERGY, INC. NO. 57 NOVEMBER 6, 2003 Expiring at 5:00 p.m. Houston, Texas time on the Expiration Date (defined below). THIS CERTIFIES that, for value received, MACQUARIE AMERICAS CORP. (together with its successors and assigns, the "Holder"), is entitled, subject to the terms and conditions set forth below, to subscribe for and purchase from the Company, up to two million two hundred fifty thousand (2,250,000) fully paid and non-assessable Common Shares, subject to adjustment in accordance with Section 2.7, at a purchase price per Common Share equal to $2.30 (the "Exercise Price"), subject, however, to the provisions and upon the terms and conditions hereinafter set forth. ARTICLE I DEFINITIONS 1.1 Definitions. As used herein, the following terms shall have the meanings set forth below: "Advances" shall have the meaning given to such term in the Credit Agreement. "Cashless Exercise" shall mean an exchange of this Warrant by Holder for that number of Common Shares determined by multiplying the number of Warrant Common Shares issuable hereunder by a fraction, the numerator of which shall be the difference between (x) the Current Market Price of the Warrant Common Shares on the date of exercise and (y) the Exercise Price for such Warrant Common Shares, and the denominator of which shall be the Current Market Price of the Warrant Common Shares on the date of exercise. "Change of Control" shall have the meaning given to such term in the Credit Agreement. "Commission" shall mean the U.S. Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act and/or the Exchange Act. "Common Shares" shall mean and include the Common Stock par value, $.001 per share, of the Company described as "Common Stock" in the Company's Certificate of Incorporation and shall also include: (i) in case of any reorganization, reclassification, consolidation, merger, distribution, securities exchange or sale, transfer or other disposition of assets, the securities provided for herein, and (ii) any other securities into which such shares may be converted. "Company" shall mean PetroQuest Energy, Inc., a Delaware corporation, and shall also include any successor thereto with respect to the obligations hereunder, by merger, consolidation or otherwise. "Convertible Securities" shall mean evidences of indebtedness, units, interests or other securities which are convertible into or exercisable or exchangeable for, with or without payment of additional consideration in cash or property into, Common Shares, either immediately or upon a specified date or the happening of a specified event. "Credit Agreement" shall have the meaning set forth in the legend hereto. "Current Market Price" shall mean the closing price of the Common Shares as published by Nasdaq for the trading day immediately prior to the Exercise Date or if the Common Shares are not traded on Nasdaq, such other exchange, or market where the Common Shares are principally traded. "Demand Notice" shall have the meaning set forth in Section 4.2(b). "Demand Registration" shall have the meaning set forth in Section 4.2(b). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Exercise Date" shall have the meaning set forth in Section 2.1. "Exercise Price" shall have the meaning set forth in the preamble hereto. "Expiration Date" shall mean the earlier of (a) thirty-six (36) months following repayment in full of the Obligations and (b) thirty (30) days following the occurrence of a VWAP Event. "Fully Diluted Basis" shall mean, with respect to the Common Shares at any time of determination, the number of Common Shares that would be issued and outstanding at such time, assuming that all outstanding options, rights or warrants to subscribe for Common Shares and all Convertible Securities and all options or rights to acquire Convertible Securities have been exercised, converted or exchanged, including this Warrant. 2 "GAAP" shall mean U.S. Generally Accepted Accounting Principles as in effect from time to time. "Holder" shall have the meaning set forth in the preamble hereto. "Obligations" shall have the meaning given to such term in the Credit Agreement. "Original Issue Date" shall mean the date of the original issuance of this Warrant. "Person" shall be construed as broadly as possible and shall include an individual or natural person, a partnership (including a limited liability partnership), a corporation, an association, a joint stock company, a limited liability company, a trust, a joint venture, an unincorporated organization and a Governmental Authority (as defined in the Credit Agreement). "Reclassification" shall have the meaning set forth in Section 2.7(a). "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "VWAP Event" means such time as the daily volume weighted average price of the Common Shares as published by Nasdaq is equal to or greater than, for a period of thirty (30) consecutive trading days, the product of (a) the Exercise Price multiplied by (b) 3. "Warrant" shall have the meaning set forth in the legend hereto. "Warrant Office" shall have the meaning set forth in Section 3.1. "Warrant Common Shares" shall mean the Common Shares into which this Warrant may be exercised. 1.2 Accounting Terms and Determinations. Except as otherwise may be expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Holder hereunder shall be prepared, in accordance with GAAP. All calculations made for the purposes of determining compliance with the terms of this Warrant shall (except as otherwise may be expressly provided herein) be made by application of GAAP. 1.3 Rules of Construction. The title of and the section and paragraph headings in this Warrant are for convenience of reference only and shall not govern or affect the interpretation of any of the terms or provisions of this Warrant. The use herein of the masculine, feminine or neuter forms shall also denote the other forms, as in each case the context may require. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Warrant has been chosen by the parties to 3 express their mutual intent, and no rule of strict construction shall be applied against any party. In the case of this Warrant, (a) the meanings of defined terms are equally applicable to the singular and plural forms of the defined terms; (b) Annex, Exhibit, Schedule and Section references are to this Warrant unless otherwise specified; (c) the term "including" is not limiting and means "including but not limited to"; (d) in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including"; (e) unless otherwise expressly provided in this Warrant, (i) references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of the Warrant, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation; (f) this Warrant may use several different limitations, tests or measurements to regulate the same or similar matters, all of which are cumulative and each shall be performed in accordance with its terms; and (g) this Warrant is the result of negotiations among and have been reviewed by counsel to the Company and the other parties thereto and are the products of all parties; accordingly, they shall not be construed against Holder merely because of Holder's involvement in their preparation. ARTICLE II EXERCISE OF WARRANTS 2.1 Method of Exercise. This Warrant may be exercised by the Holder hereof at any time, and from time to time, before 5:00 p.m., Houston, Texas time, on the Expiration Date. To exercise this Warrant, the Holder hereof shall deliver to the Company, at the Warrant Office designated herein, (i) a written notice in the form of the Subscription Notice attached as Exhibit A hereto, stating therein the election of such Holder to exercise this Warrant in the manner provided in the Subscription Notice; (ii) payment in full of the Exercise Price (A) in cash or by certified check or wire transfer for all Warrant Common Shares purchased hereunder, (B) through a Cashless Exercise (the Subscription Notice shall set forth the calculation upon which the Cashless Exercise is based) or (C) a combination of (A) and (B) above; and (iii) this Warrant. This Warrant shall be deemed to be exercised on the date of receipt by the Company of the Subscription Notice, accompanied by payment for the Warrant Common Shares and surrender of this Warrant, and such date is referred to herein as the "Exercise Date." If the Holder exercises this Warrant as set forth herein, then the Company shall, as promptly as practicable and in any event within ten business days after the Exercise Date, issue and deliver to such Holder a certificate or certificates for the full number of Warrant Common Shares. As permitted by applicable law, the person in whose name the certificates for Common Shares are to be issued shall be deemed to have become a holder of record of such Common Shares on the Exercise Date and shall be entitled to all of the benefits of such holder on the Exercise Date, including without limitation the right to receive dividends and other distributions for which the record date falls on or after the Exercise Date and to exercise voting rights. 2.2 Warrant Common Shares. Until such time as the total Advances pursuant to the Credit Agreement exceed $5,000,000, the maximum number of Common Shares that Holder is 4 entitled to purchase hereunder shall be one million two hundred fifty thousand (1,250,000). At such time as Advances exceed $5,000,000, Holder shall be entitled to purchase an additional two hundred fifty thousand (250,000) Common Shares on the terms and conditions set forth herein. At such time as Advances exceed $10,000,000, Holder shall be entitled to purchase an additional five hundred thousand (500,000) Common Shares on the terms and conditions set forth herein. At such time as Advances exceed $15,000,000, Holder shall be entitled to purchase an additional two hundred fifty thousand (250,000) Common Shares on the terms and conditions set forth herein. 2.3 Expenses and Taxes. The Company shall pay all expenses and taxes (including, without limitation, all documentary, stamp, transfer or other transactional taxes) other than income taxes attributable to the preparation, issuance or delivery of this Warrant and of the Common Shares issuable upon exercise of this Warrant. 2.4 Reservation of Common Shares. So long as this Warrant remains outstanding, the Company shall reserve, free from preemptive or similar rights, out of its authorized but unissued Common Shares, and solely for the purpose of effecting the exercise of this Warrant, a sufficient number of Common Shares to provide for the exercise of this Warrant. 2.5 Valid Issuance. All Common Shares issued upon exercise of this Warrant will, upon payment of the Exercise Price and issuance by the Company, be duly authorized, validly and legally issued, fully paid and nonassessable and free and clear of all taxes, liens, security interests, charges and other encumbrances or restrictions with respect to the issuance thereof and, without limiting the generality of the foregoing, the Company shall take all actions necessary to ensure such result and shall not take any action which will cause a contrary result. 2.6 Acknowledgment of Rights. At the time of the exercise of this Warrant in accordance with the terms hereof and upon the written request of the Holder hereof, the Company will acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; provided, however, that if the Holder hereof shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights. 2.7 Adjustment of Number of Shares. To prevent dilution of the rights granted under this Warrant, the number of Common Shares issuable upon exercise of this Warrant shall be subject to adjustment from time to time as provided herein. (a) Subdivision of Combination of Shares. If the Company at any time after the date hereof but prior to the date of exercise changes the number of Common Shares as a result of a stock dividend, stock split, reverse stock split or other combination, or a reclassification of securities in which the Company receives no consideration in connection with such transaction (any such transaction being referred to herein as a "Reclassification"), or a record date with respect to a Reclassification shall occur, this Warrant shall entitle the Holder to acquire such number and kind of securities as would have been issuable as a result 5 of such Reclassification with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such Reclassification. (b) Notices. Promptly following any adjustment pursuant to this Section 2.7, the Company will give written notice to the Holder of the new number and/or kind of securities underlying this Warrant. 2.8 No Fractional Common Shares. The Company shall not be required to issue fractional Common Shares on the exercise of this Warrant. The number of full Common Shares which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of whole Common Shares purchasable on exercise of this Warrant so presented. If any fraction of a Common Shares would, except for the provisions of this Section 2.8, be issuable on the exercise of this Warrant, the Company shall round up the total number of Common Shares purchasable hereunder to the next whole Common Share. ARTICLE III TRANSFER 3.1 Warrant Office. The Company shall maintain an office for certain purposes specified herein (the "Warrant Office"), which office shall be the Company's principal executive offices, and may subsequently be such other office of the Company or of any transfer agent of the Common Shares in the continental United States as to which written notice has previously been given to the Holder. The Company shall maintain, at the Warrant Office, a register for this Warrant in which the Company shall record (i) the name and address of the person in whose name this Warrant has been issued (as well as the name and address of each permitted assignee of the rights of the registered owner hereof) and (ii) the number of Warrant Common Shares issuable upon the exercise or exchange hereof. 3.2 Ownership of Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the Holder and owner hereof until provided with written notice to the contrary. This Warrant may be exercised by an assignee for the purchase of Warrant Common Shares without having a new Warrant issued upon evidence satisfactory to the Company that such assignee is the true owner of this Warrant. 3.3 Restrictions on Transfer of Warrant; Legends. The Warrant and the Warrant Common Shares are not transferable directly or indirectly, in whole or in part, except in the case of any transfer (a) which is in compliance with applicable federal and state securities laws, including the Securities Act, (b) for which the Company is provided with an opinion of counsel to the Holder, reasonably satisfactory to the Company, to the effect that such transfer is not in violation of any of said securities laws, and (c) which is to a transferee who acquires Warrants to purchase at least 200,000 Warrant Shares. Any transfers of the Warrant will be without charge to the Holder except that any securities transfer taxes due on transfer of the Warrant will be paid by Holder. Restrictive legends setting forth the above restrictions on transfer will be set forth on any Warrant Common Shares issued on exercise of the Warrant. 6 ARTICLE IV COVENANTS 4.1 Notices of Certain Actions. In case the Company proposes to (i) pay any dividend or make any distribution payable in Common Shares, evidences of indebtedness, cash or other property or assets to the holders of Common Shares, (ii) offer to the holders of Common Shares rights or warrants to subscribe for or purchase any Common Shares or any other rights or options, (iii) effect any reclassification of the Common Shares (other than a reclassification involving merely the subdivision or combination of outstanding Common Shares), or any capital reorganization or any consolidation or merger (other than a merger in which no distribution of securities or other property is to be made to holders of Common Shares), or any sale, transfer or other disposition of its property, assets and business as an entirety or substantially as an entirety, or the liquidation, dissolution or winding up of the Company, (iv) effect a transaction constituting a Change of Control, or (v) commence a voluntary (or becomes subject to an involuntary) dissolution, liquidation or winding up, then, in each such case, the Company shall mail (by first class mail, postage prepaid) to the Holder, notice of such proposed action, which shall specify the material terms thereof and the date on which the books of the Company shall close, or a record to be taken, for determining holders of Common Shares entitled to receive such dividends, distributions or issuances of such rights, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition or transaction constituting a Change of Control or such liquidation, dissolution, winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Common Shares of record shall be entitled to receive securities or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of Common Shares for purposes of receiving such payment or offer, and in the case of any action covered by clause (iii) through (v) above at least 30 days prior to the date upon which such action takes place and 30 days prior to any record date to determine holders of Common Shares entitled to receive such securities or other property. 4.2 Piggy-Back Registration Rights. If at any time the Company proposes to file a registration statement under the Securities Act, covering securities of the Company, whether for the Company's own account or for the account of selling security holders (other than a registration statement relating to an acquisition or merger or a registration statement on Form S-4 or S-8 or subsequent similar forms or pursuant to a registration under Section 4.2(b)), it shall advise the Holder by written notice at least twenty (20) days prior to the filing of such registration statement and will upon the request of the Holder given within 15 calendar days after the receipt of any such notice (which request shall include the number of such Warrant Common Shares intended to be disposed of by the Holder), use its commercially reasonable best efforts to effect the registration under the Securities Act of all such Warrant Common Shares that the Company has been requested to so register and to include in any such registration statement such information as may be required to permit a public offering of such Warrant Common Shares. The Company is not required to include such Warrant Common Shares in a registration statement relating to an offering of securities if the managing underwriter has advised the Company in good faith that the inclusion of such Warrant Common Shares should be limited due to market conditions, in which case the number of 7 Warrant Common Shares determined by such underwriter to be the maximum number capable of being included in such registration shall be allocated as follows: (a) first, to the Common Shares (if any) sought to be issued by the Company; and (b) second, to the Warrant Common Shares sought to be included by the Holder and any other securities holders on a pro rata basis based on the number of shares proposed to be sold by each of them. The Company shall keep any such registration statement current for a period of nine months from the effective date of such registration statement or until such earlier date as all of the registered Warrant Common Shares have been sold. In connection with such registration, the holders will execute and deliver such customary underwriting documents as are required by the managing underwriter as a condition to the inclusion of the Warrant Common Shares in the registration statement; provided, however, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to the Holder and thereupon the Company shall be relieved of its obligation to register any such securities. 4.3 Additional Provisions Concerning Registration. The following provisions of this Section 4.3 are applicable to any registration statement filed pursuant to Section 4.2 of this Warrant: (a) Costs and Expenses. The Company shall bear the entire cost and expense of any registration of securities initiated under Section 4.2 of this Warrant. Notwithstanding the foregoing, the Holder shall, however, bear the fees of its own counsel and accountants and any transfer taxes or underwriting discounts or commissions applicable to Warrant Common Shares sold by the Holder pursuant thereto. (b) Indemnification. The Company shall indemnify and hold harmless the Holder and each underwriter, within the meaning of the Securities Act, who may purchase from or sell for the Holder any Warrant Common Shares from and against any and all losses, claims, damages and liabilities (including reasonable fees and expenses of counsel, which counsel may, if the Holder requests, be separate from counsel for the Company) caused by any untrue statement or alleged untrue statement of material fact contained in the registration statement or any post-effective amendment thereto or any registration statement under the Securities Act or any prospectus included therein required to be filed or furnished by reason of Section 4.3 or any application or other filing under any state securities law caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading to which the Holder or any such underwriter or any of them may become subject under the Securities Act or other Federal or state statutory law or regulation, at common law or otherwise, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company by the Holder or underwriter expressly for use therein, which indemnification includes each person, if any, who controls any such underwriter within the meaning of the Securities Act. 8 (c) Blue Sky. The Company shall use its best efforts to qualify the Warrant Common Shares for sale in such states as it is otherwise qualifying its securities for sale, or in respect of a Demand Registration, in such states as are reasonably requested by the Holder. However, in no event is the Company required to submit to the jurisdiction of any state other than for the limited consent of service of process relating to the offering or subject itself to taxation in any such jurisdiction. The Company shall also provide the Holder with a reasonable number of prospectuses upon request. (d) Withdrawal. Neither the giving of any notice by the Holder nor the making of any request for prospectuses imposes any obligation upon the Holder to sell any Warrant Common Shares or exercise or exchange this Warrant but only if the Holder elects, in writing, prior to the effective date of the registration statement filed in connection with such registration, not to register such Warrant Common Shares, and if no such election shall be timely so filed, then the Holder shall sell such Warrant Common Shares in such registration on the same terms and conditions as apply to the Company and, if the Warrant with respect to such Warrant Common Shares requested to be so registered has not been exercised, shall exercise the Warrant prior to the effective date of such registration statement. 4.4 Continuation. THE COMPANY'S AGREEMENTS WITH RESPECT TO THIS WARRANT OR SUCH WARRANT COMMON SHARES IN SECTIONS 4.2 THROUGH 4.9 SHALL CONTINUE IN EFFECT FOR THE WARRANT COMMON SHARES REGARDLESS OF THE EXERCISE OR EXCHANGE AND SURRENDER OF THIS WARRANT. 4.5 Rule 144. The Company will continue to file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder and, during any period in which the Company is subject to Section 13 or 15(d) of the Exchange Act, will take such further action as any holder of this Warrant may reasonably request, all to the extent required from time to time to enable such holder to sell the securities underlying this Warrant without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of this Warrant, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 4.6 Listing Rights. The Company will, at its expense, list on Nasdaq, or such other exchange or market where its Common Shares are primarily traded, an official notice of issuance upon the exercise or exchange of this Warrant, and maintain such listing of, all Warrant Common Shares or other securities from time to time issuable upon the exercise or exchange of this Warrant. 4.7 Contribution. If the indemnification provided for in Section 4.3(b) from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or 9 expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.7 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 4.8 Market Stand-Off Agreement. The Holder agrees (the "Market Stand-Off Agreement") that it shall not, if required and reasonably requested by an underwriter of securities of the Company, sell or otherwise transfer or dispose of the Warrant Common Shares for up to 180 days following the effective date of a registration statement of the Company filed under the Securities Act. These provisions shall not apply to an employee benefit plan on Form S-1 or Form S-8 or similar forms or a Form S-4 or similar form. 4.9 No Inconsistent Agreements. THE COMPANY HAS NOT ENTERED INTO AND WILL NOT ENTER INTO ANY REGISTRATION RIGHTS AGREEMENT OR SIMILAR ARRANGEMENTS THE PERFORMANCE BY THE COMPANY OF THE TERMS OF WHICH WOULD IN ANY MANNER CONFLICT WITH, RESTRICT OR BE INCONSISTENT WITH THE PERFORMANCE BY THE COMPANY OF ITS OBLIGATIONS UNDER THIS AGREEMENT. ARTICLE V MISCELLANEOUS 5.1 Entire Agreement. This Warrant and the Credit Agreement contain the entire agreement between the Holder hereof and the Company with respect to the Warrant Common Shares purchasable upon exercise hereof and the related transactions and supersede all prior arrangements or understandings with respect thereto. 5.2 Governing Law. This Warrant shall be a contract made under and governed by the internal laws of the State of Delaware applicable to contracts made and to be performed entirely within such state, without regard to conflict of law principles. 5.3 Waiver and Amendment. Any term or provision of this Warrant may be waived at any time by the party which is entitled to the benefits thereof. Any term or provision of this Warrant may be amended or supplemented at any time by agreement of the Holder hereof and the Company. Any waiver of any term or condition, or any amendment or supplementation, of this Warrant shall be in writing. A waiver of any breach or failure to enforce any of the terms or 10 conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with every term or condition of this Warrant. 5.4 Severability. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. 5.5 Copy of Warrants. A copy of this Warrant shall be filed among the records of the Company. 5.6 Notice. Any notice or other document required or permitted to be given or delivered to the Holder hereof shall be in writing and delivered at, or sent by certified or registered mail or by facsimile to such Holder at, the last address shown on the books of the Company maintained at the Warrant Office for the registration of this Warrant or at any more recent address of which the Holder hereof shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company, other than such notice or documents required to be delivered to the Warrant Office, shall be delivered at, or sent by certified or registered mail or by facsimile to, the Warrant Office. 5.7 Limitation of Liability; Rights as a Stockholder. No provision hereof, in the absence of affirmative action by the Holder hereof to purchase Common Shares, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the purchase price of any Common Shares or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or consent to or to receive notice as a stockholder of the Company, in respect of any matters whatsoever. 5.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, mutilation or destruction of this Warrant, and in the case of any such loss, theft or destruction upon delivery of an appropriate affidavit in such form as shall be reasonably satisfactory to the Company and include reasonable indemnification of the Company, or in the event of such mutilation upon surrender and cancellation of this Warrant, the Company will make and deliver a new Warrant of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 5.8 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all taxes (other than securities transfer taxes or income taxes) and all other expenses and charges payable in connection with the preparation, execution and delivery of Warrants pursuant to this Section. 5.9 Accredited Investor Status. The Holder is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. The Holder has sufficient 11 knowledge and experience in business, financial and investment matters so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof. The Holder had access to such information regarding the Company and its affairs as is necessary to enable it to evaluate the merits and risks of an investment in restricted securities of the Company and has had a reasonable opportunity to ask questions and receive answers and documents concerning the Company and its current and proposed operations, financial condition, business, business plans and prospects. The Holder has not been offered the Warrants by any means of general solicitation or advertising. The Warrants being issued to and acquired by the Holder are being acquired by it for its account for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof. The Holder understands and acknowledges that none of the offer, issuance or sale of the Warrants has been registered under the Securities Act in reliance on an exemption from the registration requirements of the Securities Act. The Holder understands and acknowledges that the Warrants may be subject to additional restrictions on transfer under state and/or federal securities laws. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name. Dated: November 6, 2003. PETROQUEST ENERGY, INC. By: /s/ MICHAEL O. ALDRIDGE -------------------------- Michael O. Aldridge Treasurer THIS IS A SIGNATURE PAGE TO THE WARRANT EXHIBIT A SUBSCRIPTION NOTICE Date: ______________, 20_ PetroQuest Energy, Inc. 400 E. Kaliste Saloom Road, Suite 6000 Lafayette, LA 70508 Attention:_____________________ Ladies and Gentlemen: [ ] The undersigned (the "Purchaser") hereby elects to exercise this Warrant issued to it by PetroQuest Energy, Inc. (the "Company") and dated as of November 6, 2003 (the "Warrant") and to purchase thereunder __________ shares of Common Stock of the Company (the "Common Shares") at a purchase price of __________ Dollars ($___) per Common Share, or an aggregate purchase price of __________ ($__________) (the "Purchase Price"). [ ] The Purchaser hereby elects to convert the value of the Warrant pursuant to the provisions of Section 2.1 of the Warrant. In connection with the exercise of the Warrant, the Purchaser hereby represents, warrants, covenants and agrees as follows: 1. Accredited Investor. The Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as amended (together with the rules and regulations promulgated by the Securities and Exchange Commission thereunder, the "Securities Act"). 2. Investment Experience. The Purchaser has sufficient knowledge and experience in business, financial and investment matters so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof. 3. Company Information; No General Solicitation. The Purchaser had access to such information regarding the Company and its affairs as is necessary to enable it to evaluate the merits and risks of an investment in restricted securities of the Company and has had a reasonable opportunity to ask questions and receive answers and documents concerning the Company and its current and proposed operations, financial condition, business, business plans and prospects. The Purchaser has not been offered any of the Common Shares by any means of general solicitation or advertising. 4. Acquisition for Own Account. The Common Shares being issued to and acquired by the Purchaser are being acquired by it for its account for the purpose of investment and not with a view to, or for resale in connection with, any distribution thereof. The Purchaser understands that it must bear the economic risk of such investment indefinitely, and hold the Common Shares indefinitely, unless a subsequent disposition of the Common Shares is registered pursuant to the Securities Act, or an exemption from such registration is available, and that the Company has no present intention of registering the Common Shares. The Purchaser further understands that there is no assurance that any exemption from the Securities Act will be available or, if available, that such exemption will allow it to dispose of or otherwise transfer any or all of the Common Shares under the circumstances, in the amounts or at the times the Purchaser might propose. 5. Restricted Securities. (a) The Purchaser understands and acknowledges that none of the offer, issuance or sale of the Common Shares has been registered under the Securities Act in reliance on an exemption from the registration requirements of the Securities Act. (b) The Purchaser understands and acknowledges that the Common Shares may be subject to additional restrictions on transfer under state and/or federal securities laws. Pursuant to the terms of the Warrant, the undersigned has delivered the Purchase Price herewith in full in cash or by certified check or wire transfer or by delivery of the Warrant pursuant to the provisions thereof. Very truly yours, [HOLDER] By:___________________________ Name:______________________ Title:_____________________ EX-10.1 4 d10457exv10w1.txt SENIOR SECOND LIEN SECURED CREDIT AGREEMENT EXHIBIT 10.1 $20,000,000 SECOND LIEN SECURED CREDIT AGREEMENT BETWEEN PETROQUEST ENERGY, L.L.C., A LOUISIANA LIMITED LIABILITY COMPANY, AS BORROWER, PETROQUEST ENERGY, INC., A DELAWARE CORPORATION, AS GUARANTOR AND MACQUARIE AMERICAS CORP., A DELAWARE CORPORATION, IN ITS INDIVIDUAL CAPACITY AND AS ADMINISTRATIVE AGENT; AND THE LENDERS PARTY HERETO --------------------------------- DATED AS OF NOVEMBER 6, 2003 TABLE OF CONTENTS ARTICLE I. DEFINITIONS........................................................................................... 1 Section 1.1 Specific Defined Terms...................................................................... 1 Section 1.2 Other Capitalized Terms..................................................................... 19 Section 1.3 Exhibits and Schedules...................................................................... 19 Section 1.4 Amendment of Defined Instruments............................................................ 20 Section 1.5 References, Titles and Construction......................................................... 20 ARTICLE II. THE TERM LOAN........................................................................................ 20 Section 2.1 Term Loan................................................................................... 20 Section 2.2 Availability and Purpose of Term Loan Advance............................................... 21 Section 2.3 Advance Procedure........................................................................... 21 Section 2.4 Term Notes.................................................................................. 21 Section 2.5 Interest.................................................................................... 21 Section 2.6 Final Maturity of Obligations............................................................... 22 Section 2.7 Time and Place of Payments.................................................................. 22 Section 2.8 Optional Prepayment of the Term Loan........................................................ 23 Section 2.9 Mandatory Prepayment of the Term Loan....................................................... 23 Section 2.10 Taxes....................................................................................... 23 Section 2.11 Fees........................................................................................ 24 ARTICLE III. SECURITY............................................................................................ 24 Section 3.1 Grant of Security Interests................................................................. 24 Section 3.2 Pledged Interests........................................................................... 25 Section 3.3 Equipment................................................................................... 25 Section 3.4 Subordination Agreement..................................................................... 26 ARTICLE IV. REPRESENTATIONS AND WARRANTIES....................................................................... 26 Section 4.1 Formation and Existence..................................................................... 26 Section 4.2 Executive Offices........................................................................... 26 Section 4.3 Ownership; Subsidiaries..................................................................... 26 Section 4.4 Authorization; Non-Contravention............................................................ 27 Section 4.5 Solvency.................................................................................... 27 Section 4.6 Omissions and Misstatements................................................................. 27 Section 4.7 Joint Ventures.............................................................................. 28 Section 4.8 Commissions; Expenses....................................................................... 28 Section 4.9 Tax Matters................................................................................. 28 Section 4.10 Litigation; Governmental Proceedings........................................................ 28 Section 4.11 Ownership of Collateral; Interests.......................................................... 29 Section 4.12 Indebtedness................................................................................ 29 Section 4.13 Trademarks, Etc............................................................................. 29 Section 4.14 Leases...................................................................................... 29
i Section 4.15 Investments................................................................................. 29 Section 4.16 Environmental Matters....................................................................... 30 Section 4.17 Operating Permits and Licenses.............................................................. 31 Section 4.18 Maintenance of Properties................................................................... 31 Section 4.19 Defaults.................................................................................... 32 Section 4.20 Contingent Liabilities...................................................................... 32 Section 4.21 Restrictions on Equipment................................................................... 32 Section 4.22 Financial Statements; No Material Adverse Effect............................................ 32 Section 4.23 Taxpayer Identification..................................................................... 33 Section 4.24 Holding Company............................................................................. 33 Section 4.25 Investment Company.......................................................................... 33 Section 4.26 Other Agreements............................................................................ 33 Section 4.27 Basic Documents............................................................................. 34 Section 4.28 Farmout Agreements, Etc..................................................................... 34 Section 4.29 Operating Agreements........................................................................ 34 Section 4.30 No Unusual Agreements....................................................................... 35 Section 4.31 Suspense of Proceeds........................................................................ 35 Section 4.32 ERISA Plans................................................................................. 35 Section 4.33 Use of Proceeds............................................................................. 36 Section 4.34 Insurance................................................................................... 36 Section 4.35 No Material Adverse Effect.................................................................. 36 Section 4.36 Tax Shelter Regulations..................................................................... 36 Section 4.37 Restriction on Liens........................................................................ 37 Section 4.38 Hedging Agreements.......................................................................... 37 Section 4.39 Marketing of Production..................................................................... 37 ARTICLE V. FINANCIAL STATEMENTS AND INFORMATION; CERTAIN NOTICES TO LENDERS...................................... 37 Section 5.1 Monthly Operating Statement................................................................. 37 Section 5.2 Daily Field Reports......................................................................... 37 Section 5.3 Weekly Sales Reports........................................................................ 38 Section 5.4 AFEs........................................................................................ 38 Section 5.5 Test Results; Core Analyses; Surveys and Logs............................................... 38 Section 5.6 Annual Reports.............................................................................. 38 Section 5.7 Quarterly Reports........................................................................... 38 Section 5.8 Certificate of Financial Officer; Compliance................................................ 38 Section 5.9 Default Notices............................................................................. 39 Section 5.10 Reserve Reports............................................................................. 40 Section 5.11 Other Information........................................................................... 42 Section 5.12 Annual Operating Budget..................................................................... 42 Section 5.13 Charter Documents........................................................................... 42 Section 5.14 Other Information........................................................................... 42 Section 5.15 Information to Shareholders................................................................. 42 Section 5.16 Certificate of Chief Financial Officer; Hedging Agreements.................................. 43
ii Section 5.17 Certificate of Insurer; Insurance Coverage.................................................. 43 Section 5.18 Reportable Transactions..................................................................... 43 Section 5.19 Borrower Financial Statements............................................................... 43 ARTICLE VI. AFFIRMATIVE COVENANTS................................................................................ 43 Section 6.1 Preservation of Existence................................................................... 43 Section 6.2 Compliance with Law......................................................................... 43 Section 6.3 Environmental Matters....................................................................... 45 Section 6.4 Records..................................................................................... 46 Section 6.5 Litigation.................................................................................. 46 Section 6.6 Damage to Collateral........................................................................ 46 Section 6.7 Solvency.................................................................................... 46 Section 6.8 Insurance................................................................................... 46 Section 6.9 Delivery of Instruments..................................................................... 47 Section 6.10 Consultants................................................................................. 47 Section 6.11 Creditors................................................................................... 47 Section 6.12 Inspection.................................................................................. 47 Section 6.13 Environmental Opinion....................................................................... 48 Section 6.14 Operators................................................................................... 48 Section 6.15 Purchasers of Hydrocarbons.................................................................. 48 Section 6.16 Access to Officers, Employees and Agents.................................................... 49 Section 6.17 Hedging Hydrocarbon Production.............................................................. 49 Section 6.18 Use of Proceeds............................................................................. 50 Section 6.19 Bonds....................................................................................... 50 Section 6.20 Minimum Payments............................................................................ 50 Section 6.21 Post-Closing Title Opinions................................................................. 50 Section 6.22 Continuing Enterprise....................................................................... 50 Section 6.23 Venue for Debtor Relief Proceedings......................................................... 50 Section 6.24 Access to Seismic and Geophysical Data...................................................... 50 Section 6.25 Liens on Collateral......................................................................... 51 Section 6.26 Certain Financial Covenants................................................................. 51 Section 6.27 Additional Guarantors....................................................................... 51 Section 6.28 Collateral Records.......................................................................... 51 ARTICLE VII. NEGATIVE COVENANTS.................................................................................. 52 Section 7.1 Debt........................................................................................ 52 Section 7.2 Accounts.................................................................................... 53 Section 7.3 Guaranties.................................................................................. 53 Section 7.4 Ownership and Business Operations........................................................... 53 Section 7.5 Liens and Encumbrances...................................................................... 55 Section 7.6 Investments................................................................................. 56 Section 7.7 Subsidiaries and Divestitures............................................................... 56 Section 7.8 Compliance with Laws........................................................................ 56 Section 7.9 Dividends and Distributions................................................................. 56
iii Section 7.10 Modifications............................................................................... 57 Section 7.11 Debt Threshold.............................................................................. 57 Section 7.12 Senior Credit Facility...................................................................... 57 Section 7.13 Quarterly Production Levels and Net Operating Cash Flow..................................... 57 Section 7.14 General and Administrative Expenses......................................................... 57 Section 7.15 Other....................................................................................... 57 Section 7.16 Proceeds of Term Loan....................................................................... 58 Section 7.17 Limitation on Leases........................................................................ 58 Section 7.18 Nature of Business.......................................................................... 58 Section 7.19 POG......................................................................................... 59 ARTICLE VIII. FURTHER RIGHTS OF LENDERS.......................................................................... 59 Section 8.1 Delivery of Additional Documents............................................................ 59 Section 8.2 Payments by Lenders......................................................................... 59 Section 8.3 Payment of Taxes, Etc....................................................................... 60 Section 8.4 Possession.................................................................................. 60 Section 8.5 Indemnification............................................................................. 60 ARTICLE IX. CLOSING; CONDITIONS PRECEDENT TO CLOSING............................................................. 62 Section 9.1 Closing..................................................................................... 62 Section 9.2 Conditions Precedent........................................................................ 62 Section 9.3 Conditions Precedent to Funding of Term Loan................................................ 66 ARTICLE X. EVENTS OF DEFAULT..................................................................................... 67 Section 10.1 Events of Default........................................................................... 67 ARTICLE XI. REMEDIES OF LENDERS.................................................................................. 70 Section 11.1 Remedies.................................................................................... 70 Section 11.2 Collateral.................................................................................. 70 Section 11.3 Costs and Expenses.......................................................................... 71 Section 11.4 Set-Off Rights.............................................................................. 71 Section 11.5 Rights Under Operating Agreements........................................................... 71 ARTICLE XII. ADMINISTRATIVE AGENT................................................................................ 71 Section 12.1 Appointment and Authorization of Administrative Agent....................................... 71 Section 12.2 Delegation of Duties........................................................................ 72 Section 12.3 Liability of Administrative Agent........................................................... 72 Section 12.4 Reliance by Administrative Agent............................................................ 72 Section 12.5 Notice of Default........................................................................... 73 Section 12.6 Credit Decision; Disclosure of Information by Administrative Agent.......................... 73 Section 12.7 Indemnification of Administrative Agent..................................................... 74 Section 12.8 Administrative Agent in its Individual Capacity............................................. 74 Section 12.9 Successor Administrative Agent.............................................................. 75 Section 12.10 Administrative Agent May File Proofs of Claim............................................... 75 Section 12.11 Collateral and Guaranty Agreements Matters.................................................. 76
iv Section 12.12 Advance Procedure........................................................................... 77 Section 12.13 Payments.................................................................................... 78 Section 12.14 Application of Payments..................................................................... 78 Section 12.15 Liens....................................................................................... 79 Section 12.16 Payment Priority............................................................................ 79 Section 12.17 Sharing of Payments by Lenders.............................................................. 79 Section 12.18 Relationship of Lenders..................................................................... 80 ARTICLE XIII. MISCELLANEOUS...................................................................................... 80 Section 13.1 Remedies Cumulative......................................................................... 80 Section 13.2 Assignment.................................................................................. 80 Section 13.3 Notices..................................................................................... 80 Section 13.4 Waivers; Amendments......................................................................... 82 Section 13.5 Confidentiality............................................................................. 83 Section 13.6 Final Agreement............................................................................. 84 Section 13.7 WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC................................................. 84 Section 13.8 GOVERNING LAW............................................................................... 84 Section 13.9 No Third-Party Beneficiaries................................................................ 84 Section 13.10 Fees, Costs and Expenses; Indemnification................................................... 85 Section 13.11 Power of Attorney; Etc...................................................................... 86 Section 13.12 Severability................................................................................ 86 Section 13.13 Captions; Headings.......................................................................... 87 Section 13.14 Construction................................................................................ 87 Section 13.15 Additional Documents........................................................................ 87 Section 13.16 Counterpart Execution....................................................................... 87 Section 13.17 Compliance with Law......................................................................... 87 Section 13.18 EXCULPATION PROVISIONS...................................................................... 88 Section 13.19 No Other Agreements; No Parol Evidence...................................................... 88
Exhibit A Form of Advance Request Exhibit B Form of Term Note Exhibit C Form of Guaranty Agreement Exhibit D Form of Pledge Agreement Exhibit E Form of Production Report Exhibit F Cash Flow Report Exhibit G Form of Subordination Agreement Exhibit H Forms of Opinion of Counsel Exhibit I Form of Reserve Report Certification Annex I Lenders and Percentage Shares; Wiring Instructions Annex II Closing Date Transaction Documents Schedule 4.2 Executive Offices of Guarantor Schedule 4.3(a) Ownership of Borrower v Schedule 4.3(b) Subsidiaries of Borrower Schedule 4.10 Litigation Schedule 4.12 Indebtedness Schedule 4.14 Leases Schedule 4.15(d) Imbalances Schedule 4.16 Environmental Matters Schedule 4.23 Taxpayer Identification Schedule 4.26 Calls on Production Schedule 4.34(c) Insurance Coverages Schedule 4.38 Hedging Agreements Schedule 4.39 Marketing Contracts Schedule 5.12 Initial Annual Operating Budget Schedule 6.17 Minimum Average Price for PDP Reserves Subject to the Swap Agreement Schedule 7.1(v) Hedging Obligations Schedule 7.1(viii) Other Debt Schedule 7.1(x) Bonds and Surety Obligations Schedule 7.1(xv) Contingent Obligations Schedule 7.5 Liens and Encumbrances Schedule 7.13 Minimum Quarterly Production Levels and Net Operating Cash Flow Schedule 9.2(g) Subordinated Creditors Schedule 9.2(n) Unpaid Bills vi $20,000,000 SENIOR SECOND LIEN SECURED CREDIT AGREEMENT This $20,000,000 Senior Second Lien Secured Credit Agreement (this "Agreement") is dated November 6, 2003, between PetroQuest Energy, L.L.C., a Louisiana limited liability company, having its principal executive office and place of business at 400 E. Kaliste Saloom Road, Suite 6000, Lafayette, LA 70508 ("Borrower"); PetroQuest Energy, Inc., a Delaware corporation having its principal executive office and place of business at 400 E. Kaliste Saloom Road, Suite 6000, Lafayette, LA 70508 ("Guarantor"); each of the Lenders from time to time party hereto; and Macquarie Americas Corp., a Delaware corporation, (in its individual capacity, "MAC"), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent"). BACKGROUND: 1. Borrower desires to obtain a credit facility from Lenders for the purpose of further developing the Properties (defined below). Lenders desire to make available to Borrower a senior second lien secured term loan on a non-revolving basis for those purposes under the terms and conditions of this Agreement. 2. In connection with Lenders making available to Borrower the financial accommodations described in this Agreement and subject to the other terms of this Agreement and the Loan Documents (defined below), Borrower will grant to the Administrative Agent, for the benefit of Lenders, a second-priority mortgage lien and a second-priority perfected security interest in all of the real and personal property of Borrower and certain other collateral. 3. To further induce Lenders to make the term loan, Borrower will cause PQUE (defined below) to deliver the Warrants (defined below) to Lenders or their designees. AGREEMENTS: In consideration of the terms, covenants, provisions and conditions set forth in this Agreement, Borrower, Administrative Agent and Lenders agree as follows: ARTICLE I. Definitions Section 1.1 Specific Defined Terms. As used herein, the following terms shall have the following meanings and, as the context requires, the singular shall include the plural: "Administrative Agent" means MAC or any successor serving as the Administrative Agent pursuant to this Agreement. 1 "Administrative Agent-Related Persons" means the Administrative Agent, together with its Affiliates, and their respective officers, directors, employees, agents and attorneys in fact of such Persons. "Advance" means an advance of funds by Lenders at the Contract Rate pursuant to Article II of this Agreement. "Advance Request" means a request for an Advance under the Term Loan in substantially the form of Exhibit A hereto. "AFE" means an authorization for expenditure representing an estimate of work to be performed. "Affiliate" means as to any Person, (a) any other Person who directly or indirectly controls, is under common control with, or is controlled by such Person, (b) any director or officer of such Person or of any Person referred to in clause (a) above, or (c) if any Person in clause (a) above is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event (i) any Person who owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person, (ii) any subsidiary of any Borrower shall be deemed to be an Affiliate of Borrower. "Agreement" has the meaning assigned to that term in the introductory paragraph hereof and includes any amendment, modification, supplement or restatement. "Annual Operating Budget" has the meaning assigned to that term in Section 5.12. "Availability Termination Date" means December 31, 2004. "Basic Documents" means the Leases, Operating Agreements, Hydrocarbon purchase, sales, exchange, processing, gathering, treatment, compression and transportation agreements; farmout or farm-in agreements; unitization agreements; joint venture, exploration, limited or general partnership, dry hole, bottom hole, acreage contribution, purchase and acquisition agreements; area of mutual interest agreements; salt water disposal agreements, servicing contracts; easement and/or pooling agreements; surface leases, permits, licenses, rights-of-way, servitudes or other interests appertaining to the Properties and all other executory contracts and agreements relating to the Properties. 2 "BOE" means barrel of Crude Oil equivalent. When determining the BOE, Natural Gas volumes shall be converted to Crude Oil volumes on a basis of 6:1 (6 MCF of Natural Gas = 1 barrel of Crude Oil). "Borrower" has the meaning assigned to that term in the introductory paragraph of this Agreement. "Btu" means the amount of energy required to raise the temperature of one pound (avoirdupois) of pure water one degree Fahrenheit from 59 degrees Fahrenheit to 60 degrees Fahrenheit. "Business Day" means any day other than a Saturday, Sunday or other day in which banking institutions in the city of New York are authorized or obligated by law or executive order to close. "Capital Leases" means, in respect of any Person, all leases which shall have been, or should have been, in accordance with GAAP, recorded as capital leases on the balance sheet of the Person liable (whether contingent or otherwise) for the payment of rent thereunder. "Cash Flow Report" means monthly consolidated financial statements of PQUE and its subsidiaries for the applicable period including (a) the consolidated balance sheet of PQUE prepared in accordance with GAAP (excluding footnotes unless requested by Lenders) and (b) the consolidated statement of income (or operations) of Borrower prepared in accordance with GAAP (excluding footnotes unless requested by Lenders); provided, however, that Lenders shall have the right to require Borrower to prepare a Cash Flow Report specifically for the Borrower and its subsidiaries. An example of the monthly Cash Flow Report is attached to this Agreement as Exhibit F. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Borrower or Guarantor to any person (as that term is used in Section 13(d)(3) of the Exchange Act) other than to a Subsidiary of Borrower or Guarantor, respectively; (ii) Borrower or Guarantor consolidates with or merges into another Person or any Person consolidates with or merges into Borrower or Guarantor, in any such event pursuant to a transaction in which the then outstanding Voting Stock of Borrower or Guarantor, as applicable, is changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the then outstanding Voting Stock of Borrower or Guarantor, as applicable, is changed into or exchanged for Voting Stock of the surviving or resulting Person that is Qualified Capital Stock and (b) the holders of the Voting Stock of Borrower or Guarantor, as applicable, immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving or resulting Person immediately after such transaction; (iii) the adoption of a plan relating to the liquidation 3 or dissolution of Borrower or Guarantor not involving a merger or consolidation or a sale or other disposition of assets described in clause (i) above; (iv) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person (as that term is used in Section 13(d)(3) of the Exchange Act) becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of Borrower's or Guarantor's then outstanding Voting Stock, provided that the sale of Voting Stock of Borrower or Guarantor to a Person or Persons acting as underwriters in connection with a firm commitment underwriting shall not constitute a Change of Control; or (v) the first day on which a majority of the members of the Board of Directors of Guarantor or the Board of Directors of Borrower are not Continuing Directors. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring Voting Stock of Borrower or Guarantor shall be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Charter Documents" means, as applicable for any Person that is not an individual, the articles or certificate of incorporation or formation, certificate of limited partnership, regulations, bylaws, partnership or limited partnership agreement, and all similar documents related to the formation and governance of that Person, together with all amendments to any of them. "Closing" means the date of execution by Borrower and other applicable parties and the delivery to Lenders of this Agreement, the Term Notes (as hereinafter defined), the Security Agreements, the Mortgage, the Hedging Agreement or Swap Agreement, as applicable, the Intercreditor Agreement, the other Security Documents and all other documents contemplated by this Agreement and necessary to satisfy the conditions described in Section 9.2. "Closing Date" has the meaning assigned to that term in Section 9.1. "Code" means the Internal Revenue Code of 1986. "Collateral" means all Property and all Personal Property now owned or later acquired by the Borrower. "Commitment Fee" has the meaning assigned to such term in Section 2.10(a). "Consolidated" or "consolidated" means, when used with reference to any accounting terms, the amount described by such accounting term, determined on a consolidated basis in accordance with GAAP, after elimination of intercompany items. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of Guarantor or of the Board of Directors of Borrower who (i) was a member of such Board on the day after the date of this Agreement or (ii) was nominated or elected to such Board with the approval of a majority of the Continuing Directors identified in clause (i) above who were members of such Board at the time of such nomination or election. 4 "Contract Rate" means the Prime Rate in effect from time to time plus five and one-half percent (5.5%) per annum; provided, however, that the Contract Rate will in no event exceed the Highest Lawful Rate. "COPAS" means the Joint Operations Accounting Procedures recommended by the Council of Petroleum Accountants then in effect with respect to oil and gas operations as applied to properties located in the same geographical area with each Property. "Credit Facility Expenses" means the interest expenses, fees and other expenses of Borrower pursuant to this Agreement and the other Loan Documents. "Crude Oil" means all crude oil and condensate. "Current Assets" means on any date of determination, the consolidated current assets that would, in accordance with GAAP, be classified as of that date as current assets, plus the amounts available for borrowings under the Senior Credit Facility and for Advances under this Agreement as of such date, less any non-cash amount required to be included in Current Assets as the result of the application of FASB Statement 133 or FASB Statement 143. For purposes of this definition of "Current Assets," the phrase "amounts available for borrowings" means, with respect to this Agreement, fifteen million dollars ($15,000,000) less the total Advances made to Borrower by Lenders as of the date of determination. "Current Liabilities" means, on any date of determination, the consolidated obligations that would, in accordance with GAAP, be classified as of that date as current liabilities, excluding current maturities of long-term debt and non-cash obligations under FASB Statement 133 or FASB Statement 143. "Current Ratio" means the ratio of Current Assets for the date or period being measured to Current Liabilities for such date or period. "Debt" means, for any Person, the sum of the following (without duplication): (a) all obligations of such Person for borrowed money or evidenced by bonds, bankers' acceptances, debentures, notes or other similar instruments; (b) all obligations of such Person (whether contingent or otherwise) in respect of letters of credit, surety or other bonds and similar instruments; (c) all accounts payable and all accrued expenses, liabilities or other obligations of such Person to pay the deferred purchase price of property or services; (d) all obligations under Capital Leases; (e) all obligations under Synthetic Leases; (f) all Debt (as defined in the other clauses of this definition) of others secured by a Lien on any property of such Person, whether or not such Debt is assumed by such Person; (g) all Debt (as defined in the other clauses of this definition) of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the Debt (howsoever such assurance shall be made) to the extent of the lesser of the amount of such Debt and the maximum stated amount of such guarantee or assurance against loss; (h) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt or Property of others; (i) obligations to deliver commodities, goods or services, including, without limitation, 5 Hydrocarbons, in consideration of one or more advance payments, other than gas balancing arrangements in the ordinary course of business; (j) obligations to pay for goods or services whether or not such goods or services are actually received or utilized by such Person; (k) any Debt of a partnership for which such Person is liable either by agreement, by operation of law or by a governmental requirement but only to the extent of such liability; (l) Disqualified Capital Stock; and (m) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment. The Debt of any Person shall include all obligations of such Person of the character described above to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is not included as a liability of such Person under GAAP. "Debtor Relief Laws" means all applicable liquidation, conservatorship, bankruptcy, insolvency, rearrangement, moratorium, reorganization, or similar debtor relief laws affecting the rights of creditors generally from time to time in effect. "Default" means the occurrence of any event which, with the lapse of time or the giving of notice or both, will become an Event of Default hereunder. "Default Rate" has the meaning assigned to that term in Section 2.5(a) hereof. "Defaulting Lender" means any Lender that (a) has failed to fund any portion of the Term Loan it is required to fund under this Agreement within one (1) Business Day of the date such funding is required, (b) has otherwise failed to pay over to Administrative Agent or any other Lender any other amount required to be paid by it under this Agreement or any other Loan Document within one (1) Business Day of the date when due, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding under any Debtor Relief Law. "Defensible Title" means with respect to each Property, title that (i) entitles Borrower to receive (free and clear of all royalties not appearing of record, all overriding royalties and all net profits interests or other burdens on or measured by production of Hydrocarbons and associated gases) not less than the Net Revenue Interest of Borrower set forth in the Reserve Reports in all Hydrocarbons produced, saved and marketed from the Property for the productive life of the Property, free and clear of any security interest, lien, encumbrance, mortgage, claim, security agreement or other charge, other than the Permitted Encumbrances and any liens, mortgages and security interests and property interests which are in favor of Lenders and its Affiliates or are permitted hereunder; (ii) obligates Borrower to bear costs and expenses relating to the maintenance, development and operation of such Property in an amount not greater than the Working Interest of Borrower set forth in the Reserve Reports for the productive life of such Property; and (iii) with respect to any royalty, overriding royalty or other real property interests owned or acquired by Borrower and not included in the Net Revenue Interest or Working Interest described in clauses (i) or (ii) above, net profits interests and/or production interests and any rights Borrower acquires to receive revenues from production, good and indefeasible title to such interests, free and clear of any security interest, lien, encumbrance, mortgage, claim, security agreement or other charge, other than the Permitted Encumbrances and any liens, 6 mortgages and security interests and property interests which are in favor of Lenders and its affiliates or are permitted hereunder. "Developed Reserve Adjusted Present Value" means an amount, based on the most recent Reserve Report, equal to the sum of (i) the PDP Present Value plus (ii) the PDNP Present Value. "Developed Reserve Adjusted Present Value Ratio" means the ratio of Developed Reserve Adjusted Present Value to Outstanding Debt. "Disqualified Capital Stock" means with respect to any Person any Equity Interest of such Person or its Subsidiaries that, by its terms or by the terms of any security into which it is convertible or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased by such Person or its Subsidiaries, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due, on or prior to the Maturity Date. "EBITDA" means, without duplication and with respect to any Person for any period, the sum of (i) net income, in accordance with GAAP for such period plus (a) to the extent deducted in determining net income for such period, interest expense, income taxes, depreciation and amortization, accretion of discount associated with SFAS No. 143, and non-cash portion of derivative effects in accordance with SFAS No. 133, plus (b) any other non-cash expenses acceptable to Lenders in their sole discretion, minus (ii) all non-cash income and non-cash gains added to net income for such period. "Engineers" means Ryder Scott & Company or such other independent petroleum engineering firms as shall be acceptable to Lenders. "Environmental and Safety Regulations" means all applicable federal, state or local laws, ordinances, codes, rules, orders and regulations with respect to any environmental, pollution, toxic or hazardous waste or health and safety law, including, without limitation, those promulgated by the United States Environmental Protection Agency, the Federal Energy Regulatory Commission, the Department of Energy, the Occupational Safety and Health Administration, the Department of the Interior, or any other federal or state regulatory agency, or any of their predecessor or successor agencies. "Environmental Laws" shall mean any and all Governmental Requirements and any Environmental and Safety Regulations pertaining to health or the environment in effect in any and all jurisdictions in which Borrower or any Subsidiary is conducting or at any time has conducted business, or where any Property of the Borrower is located, including without limitation, the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the 7 Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA, the terms "hazardous substance" and "release" (or "threatened release") have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, that (a) in the event either OPA, CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and (b) to the extent the laws of the state in which any Property of the Borrower is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. "Equipment" has the meaning assigned to that term in the UCC and includes all surface or subsurface machinery, goods, equipment, fixtures, inventory, facilities, supplies or other personal or moveable property of whatsoever kind or nature (excluding property rented by Borrower or taken to the premises for temporary uses) now owned or hereafter acquired by Borrower now or hereafter located on or under any of the lands attributable to the Properties which are used for the production, gathering, treatment, processing, storage or transportation of Hydrocarbons whether or not attributable to the Properties (together with all accessions, additions and attachments to any thereof), including, without limitation, all Wells, casing, tubing, tubular goods, rods, pumping units and engines, Christmas trees, platforms, derricks, separators, compressors, gun barrels, flow lines, water injection lines, tanks, gas systems (for gathering, treating and compression), pipelines (including gathering lines, laterals and trunklines), chemicals, solutions, water systems (for treating, disposal and injection), power plants, poles, lines, transformers, starters and controllers, machine shops, tools, storage yards and equipment stored therein, telegraph, telephone and other communication systems, loading docks, loading racks, shipping facilities, platforms, well equipment, wellhead valves, meters, motors, pumps, tankage, regulators, furniture, fixtures, automotive equipment, forklifts, storage and handling equipment, together with all additions and accessions thereto, all replacements and all accessories and parts therefor, all manuals, blueprints, documentation and processes, warranties and records in connection therewith including, without limitation, any and all seismic data, geological data, geophysical data and interpretation of any of the foregoing, all rights against suppliers, warrantors, manufacturers, sellers or others in connection therewith, and together with all substitutes for any of the foregoing. "Equity Interests" means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such Equity Interest. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with Borrower within the meaning of Section 414(b) or (c) of the Code (and 8 Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Plan; (b) a withdrawal by Borrower or any ERISA Affiliate from a Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate. "Event of Default" has the meaning assigned to that term in Section 10.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. "Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day, provided that if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day. "G&A Expenses" means the Consolidated general and administrative expenses of Borrower, including capitalized general and administrative expenses, calculated in accordance with GAAP (excluding all non-cash charges). "GAAP" means generally accepted accounting principles recognized as such by the Financial Accounting Standards Board (or generally recognized successor) consistently applied and maintained throughout the period indicated and consistent with applicable laws, except for changes mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing. Whenever any accounting term is used herein which is not otherwise defined, it shall be interpreted in accordance with GAAP. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or 9 pertaining to government over the Borrower, any Affiliate, any of their properties, the Administrative Agent or any Lender. "Governmental Requirement" means any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other directive or requirement, whether now or hereinafter in effect, including, without limitation, Environmental Laws, energy regulations and occupational, safety and health standards or controls, of any Governmental Authority. "Guarantor" means PQUE, in its capacity as a guarantor under the Guaranty Agreement and each other Person that may become a Subsidiary of Borrower. POG shall not be a Guarantor. "Guaranty Agreement" means the Guaranty Agreement executed by each Guarantor as of the Closing Date in the form attached as Exhibit C. "Hazardous Materials" means and include (i) all elements or compounds that are contained in the list of hazardous substances adopted by the United States Environmental Protection Agency and the list of toxic pollutants designated by Congress or the Environmental Protection Agency or under any Hazardous Substance Laws (as hereinafter defined), and (ii) any "hazardous waste," "hazardous substance," "toxic substance," "regulated substance," "pollutant" or "contaminant" as defined under any Hazardous Substance Laws. "Hazardous Substance Laws" means CERCLA, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. 2601 et seq., the Hazardous Liquid Pipeline Safety Act of 1979, as amended, 40 U.S.C. 2001 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. 136 et seq., the Federal Clean Air Act, 42 U.S.C. 7401 et seq., the Texas Natural Resources Code, Ch. 117 (Vernon Supp. 1992), the Texas Water Quality Act, Texas Water Code Ann. 26.01 - 26.407 (Vernon 1992), the Texas Clean Air Act, Tex. Health & Safety Code Ann. 382.001 et seq. (Vernon 1992), Subchapter I of the Texas Water Code (Underground and Aboveground Storage Tanks), as amended, Tex. Water Code Ann. 26.341 et seq. (Vernon 1992), the Texas Solid Waste Disposal Act, Tex. Health & Safety Code Ann. 361.001 et seq. (Vernon 1992), any so-called federal, state or local "superfund" or "superlien" statute, and any other federal, state or local law, rule, regulation or ordinance related to the remediation, clean-up or reporting of environmental pollution or contamination or imposing liability (including strict liability) or standards of conduct concerning any Hazardous Materials. "Hedging Agreement" means any (a) interest rate or currency swap, rate cap, rate collar, forward agreement and other exchange or rate protection agreements or any option with respect to any such transaction and (b) any swap agreement, cap, collar, floor, exchange transaction, forward agreement or the exchange or protection agreement related to Crude Oil, Natural Gas or other Hydrocarbons or any option with respect to such transaction and includes any Swap Agreement. 10 "Highest Lawful Rate" means, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Term Notes or on other Obligations under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws allow as of the date hereof. "Hydrocarbons" means all Crude Oil, Natural Gas, distillate and sulphur, natural gas liquids and all products recovered in the processing of natural gas liquids, including, without limitation, natural gasoline, iso-butane, normal butane, propane and ethane (including such methane allowable in commercial ethane), produced from or attributable to the Properties. "Interest Coverage Ratio" means the ratio of Borrower's EBITDA for the most recent four (4) fiscal quarters then ended to its cumulative interest expense for the same four (4) fiscal quarters. "Intercreditor Agreement" means that certain Intercreditor Agreement dated as of November 6, 2003, between Borrower, Lenders and Senior Lender. "Investment" means, for any Person: (a) the acquisition (whether for cash, property, services or securities or otherwise) of Equity Interests of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding ninety (90) days representing the purchase price of inventory or supplies sold by such Person in the ordinary course of business) or (c) the entering into of any guarantee of, or other contingent obligation (including the deposit of any Equity Interests to be sold) with respect to, Debt or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person. "IRS" means the United States Internal Revenue Service. "Lease" or "Leases" means, whether one or more, (i) those certain oil and gas leases set forth in the description of the Property attached to each Mortgage, and any other interests in the Leases or any other lease of real property, whether now owned or hereafter acquired by Borrower, and any extension, renewals, corrections, modifications, elections or amendments (such as those relating to unitization) of any such Lease or Leases, or (ii) other oil, gas and/or mineral leases or other interests pertaining to the Properties, whether now owned or hereafter acquired, which may now and hereafter be made subject to the lien of any of the Security Documents and any extension, renewals, corrections, modifications, elections or amendments (such as those relating to unitization) of any such lease or leases. 11 "Lenders" means the Persons listed on Annex I, any Person that shall have become a party hereto pursuant to Section 13.2 (assignment), other than any such Person that ceases to be a party hereto pursuant to Section 13.2 (assignment). "Lender Participation Documents" means (i) any participation and intercreditor agreement evidencing any transaction (each a "Lender Participation Transaction") under which the initial Lenders identified in this Agreement assigns to any other Person an interest in the Term Note and the rights of Lenders under this Agreement and the other Loan Documents, (ii) any Term Note issued by Borrower to any other Person pursuant to any Lender Participation Transaction and (iii) all other documents, agreements, instruments and writings at any time delivered in connection with a Lender Participation Transaction. "Liabilities and Costs" has the meaning assigned to such term in Section 13.10(b). "Lien" means any interest in property (real or personal) securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to (a) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes or (b) production payments and the like payable out of oil and gas properties and the Properties. The term "Lien" shall include easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations. For the purposes of this Agreement, the Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing. "Loan Documents" means this Agreement, the Term Notes, the Security Documents, the Guaranty Agreements, the Lender Participation Documents, the Intercreditor Agreement and all other agreements, certificates, documents, instruments and writings at any time delivered in connection herewith or therewith (exclusive of term sheets, commitment letters, correspondence and similar documents used in the negotiation hereof, except to the extent the same contain information about Borrower or its Affiliates, properties, business or prospect), but does not include documents for the Senior Credit Facility. "Loan Termination Date" means the earliest of (i) the Maturity Date, (ii) the date on which Borrower has paid and discharged in full all Obligations (as hereinafter defined) to Lenders, and (iii) the date on which Lenders have notified Borrower of the acceleration of payment of all Obligations hereunder because of the occurrence of an Event of Default. "MAC" has the meaning assigned to that term in the introductory paragraph of this Agreement. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, assets, condition (financial or otherwise), circumstances or prospects of Borrower or 12 Guarantor, (b) the ability of the Borrower or Guarantor to carry out its business as conducted as of the date of this Agreement, (c) the ability of Borrower or Guarantor to perform any of its obligations under any Loan Document, (d) the validity or enforceability of any Loan Document, (e) the rights and remedies of or benefits available to the Administrative Agent or any Lender under any Loan Document or (f) the Collateral or the Liens granted pursuant to the Security Documents. "Maturity Date" means November 30, 2006. "Maximum Commitment" has the meaning assigned such term in Section 2.1. "MMBtu" means 1,000,000 Btus. "MMCF" and "MCF" means one million cubic feet and one thousand cubic feet, respectively. "Monthly Operating Statement" means the Production Report and the Cash Flow Report delivered to Lender in accordance with Section 5.1. "Mortgage" means a mortgage, deed of trust, assignment of production, security agreement and financing statement and act of mortgage and security agreement securing future advances executed by Borrower and granting a lien to or for the benefit of Lenders in the Properties otherwise in form and substance satisfactory to Lenders, as the same may be modified, amended or supplemented. "Natural Gas" means all natural gas, and any natural gas liquids and all products recovered in the processing of natural gas (other than condensate) including, without limitation, natural gasoline, casinghead gas, iso-butane, normal butane, propane and ethane (including such methane allowable in commercial ethane) produced from or attributable to the Properties. "Net Operating Cash Flow" means Borrower's gross revenue from sales of Production Volumes and all other revenue (including, if applicable, gains from commodity hedging) less the following (1) lease operating expenses; (2) production taxes; (3) other state and federal taxes paid in cash; (4) G&A Expenses; (5) if applicable, losses from commodity hedging; and (6) other cash expenses approved in writing by Lenders in their sole and absolute discretion. "Net Revenue Interest" means, with respect to any Property, the decimal or percentage share of production from or allocable to such Property, after deduction of all overriding royalties and other burdens (including lessor royalties), that an owner of a Working Interest is entitled to receive. "Obligations" means and include all loans and advances (including the Term Loan), debts, liabilities, obligations, covenants, duties and amounts owing or to be owing by Borrower or any Affiliate of Borrower to the Administrative Agent, any Lender or any Affiliate of a Lender, of any kind or nature, present or future, whether or not evidenced by any note, guaranty 13 or other instrument, arising directly or indirectly, under this Agreement, the Term Note, the Security Documents, the Swap Agreement, or under any Loan Documents, and all renewals, extensions and/or rearrangements of any of the foregoing. The term includes, but is not limited to, all interest, reasonable charges, expenses, consultants' and attorneys' fees and any other sum chargeable to Borrower under this Agreement, the Term Note, the Security Documents, or any of the Loan Documents. "Obligations" shall not include any debts, liabilities, obligations, covenants or duties owing by Borrower under the Warrants. "Operator" means any Person designated as operator pursuant to an Operating Agreement. "Operating Agreement" means all operating agreements relating to the Properties. "Other Taxes" shall have the meaning assigned to such term in Section 2.10(b). "Outstanding Debt" means the aggregate outstanding loan balances under the Senior Credit Facility and this Agreement (including letters of credit outstanding under the Senior Credit Facility) plus, if applicable, negative working capital, calculated in accordance with GAAP, but excluding non-cash gains, charges or losses required under SFAS 133 or SFAS 143. "Percentage Share" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment as such percentage is set forth on Annex I, as modified from time to time to reflect assignments permitted by Section 13.2. "Permitted Encumbrances" means (i) minor irregularities in title which do not (a) materially interfere with the occupation, use and enjoyment by Borrower or Guarantor of any of the Properties in the normal course of business as presently conducted, or (b) materially impair the value thereof for such Properties, (ii) all interests in the Properties securing obligations owed to, or claimed by, any Person other than Lenders, whether such interest is based on the common law, statute or contract, and whether such interest includes liens or security interests arising by virtue of mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or lease, consignment or bailment for security purposes, so long as each said interest has been expressly consented to by Lenders, in writing, (iii) Liens of landlords, vendors, carriers, warehousemen, taxing authorities, mechanics, laborers and materialmen arising by law, and of operators arising by contract, in the ordinary course of business for sums not yet due or being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserve as shall be required by generally accepted accounting principles shall have been made therefor; (iv) the Senior Liens; and (v) the specific exceptions and encumbrances affecting each of the Properties as described in the Mortgage and the title opinions delivered to Lenders prior to the Closing Date INSOFAR ONLY as said exceptions and encumbrances are valid and subsisting and are enforceable against the particular Lease which is made subject to said exceptions and encumbrances. "Person" means an individual, corporation, partnership, limited liability company, joint venture, trust or unincorporated organization, joint stock company or other similar organization, 14 government or any political subdivision thereof, a court, or any other legal entity, whether acting in an individual, fiduciary or other capacity. "Personal Property" means all personal property of Borrower and its Subsidiaries of every kind including all goods (including Equipment), documents, accounts, chattel paper (whether tangible or electronic), money, deposit accounts, letters of credit and letter-of-credit rights (without regard to whether the letter of credit is evidenced by a writing), documents, Equity Interests (certificated or uncertificated), other securities and all other investment property, supporting obligations, any other contract rights (including all rights in transportation agreements, processing agreements, delivery agreements and seismic agreements related to the Properties) or rights to the payment of money, insurance claims and proceeds, all general intangibles (including all payment intangibles and rights to seismic and other geophysical data) and all permits, licenses, books and records related to the Properties or the business of Borrower and its Subsidiaries, whether now owned or later acquired by Borrower or its Subsidiaries. "Plan" means any "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) established by Borrower or, with respect to any such plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA Affiliate. "Pledge Agreement" means the pledge agreement executed by the Member, in favor of the Administrative Agent, for the benefit of each of the Lenders, substantially in the form of Exhibit D. "Pledged Interests" has the meaning assigned such term in Section 3.2. "PQUE" means PetroQuest Energy, Inc., a Delaware corporation. "Prime Rate" means, at any time, the prime rate published in The Wall Street Journal's "Money Rates" or similar table; provided that, if multiple prime rates are quoted in such table, then the highest such prime rate will be the Prime Rate and, in the event that the prime rate is no longer published by The Wall Street Journal's "Money Rates" or similar table, then Lender may designate an alternative published index based upon comparable information as a substitute Prime Rate and upon the selection of such a substitute Prime Rate, the applicable interest rate will thereafter vary in relation to the substitute index. "Production Report" means a Property history report substantially in the form of Exhibit E which details Crude Oil, Natural Gas and other Hydrocarbon production volumes, revenues and lease operating expenses attributable to the Properties for the immediately preceding month; and a reconciliation of Borrower's implementation of all projects to drill or recomplete any Well, as set out in the then effective Annual Operating Budget, all in form and substance acceptable to Lenders. "Production Volumes" means the sum of Borrower's net produced and sold; (1) barrels of crude oil; (2) barrels of liquefied natural gas; and (3) thousand cubic feet ("Mcf") of natural gas divided by six. 15 "POG" means PetroQuest Oil & Gas, L.L.C., a Louisiana limited liability company. "Property" or "Properties" means, collectively, all real property of Borrower and its Subsidiaries, including but not limited to Hydrocarbon Leases, Royalty Interests, overriding royalty interests, production payments or similar interests in real property. "Pro Rata Share" means, when determined for each Lender, a fraction (stated as a percentage), the numerator of which is the outstanding principal amount of such Lender's Term Note, and the denominator of which is the outstanding principal amount of all Term Notes. "Proved Developed Non-Producing Present Value" or "PDNP Present Value" means the present value discounted at ten percent (10%) of future net revenues attributable to all PDNP Reserves from the Properties calculated based on a Reserve Report prepared in accordance with Section 5.10. "Proved Developed Producing Present Value" or "PDP Present Value" means the present value discounted at ten percent (10%) of future net revenues attributable to all PDP Reserves from the Properties calculated based on a Reserve Report prepared in accordance with Section 5.10. "Proved Reserves" has the meaning given that term in the definitions promulgated by the Society of Petroleum Evaluation Engineers and the World Petroleum Congress as in effect at the time in question; "Proved Developed Producing Reserves" or "PDP Reserves" means Proved Reserves which are categorized as both "Developed" and "Producing" in such definitions; "Proved Developed Non-Producing Reserves" or "PDNP Reserves" means Proved Reserves which are categorized as both "Developed" and "Non-Producing" in such definitions; and "Proved Undeveloped Reserves" or "PUD Reserves" means Proved Reserves which are categorized as "Undeveloped" in such definitions. "Proved Undeveloped Present Value" or "PUD Present Value" means the present value discounted at ten percent (10%) of future net revenues attributable to all PUD Reserves from the Properties calculated based on a Reserve Report prepared in accordance with Section 5.10. "Qualified Capital Stock" means any capital stock that is not Disqualified Capital Stock. "Related Costs" means the fees and expenses of counsel for Lenders and other consultants for Lenders and Lenders' other out-of-pocket expenses incurred in connection with the due diligence, negotiation and preparation of documents relating to the Term Loan and execution, delivery and filing and/or recording of the Loan Documents together with any amendments, supplements or modifications thereto. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors (including attorneys, accountants and experts) of such Person and such Person's Affiliates. 16 "Release" means Hazardous Materials that are pumped, spilled, leaked, disposed of, emptied, discharged or otherwise released into the environment in violation of applicable laws. "Repayment Date" means, prior to the repayment in full and satisfaction of all Obligations, the fifth day of each month, commencing December 5, 2003. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period has been waived. "Required Lenders" means, when determined, at least two (2) Lenders holding at least sixty-six and two-thirds percent (66-2/3%) of the Maximum Commitment; provided that, the holdings of any Defaulting Lender shall be excluded in the determination of Required Lenders; provided further that, if there is only one Lender, it will constitute the Required Lenders for purposes of this definition; and provided further that, if there are multiple Lenders but only one Lender is not a Defaulting Lender, the single non-defaulting Lender will constitute the Required Lenders for purposes of this definition. "Reserve Report" has the meaning assigned to that term in Section 5.10 hereof. "Royalty Interest" means the volume of production from or allocable to any particular Property which the owners of royalty rights, including but not limited to lessor and overriding royalty rights, and other rights to receive production, other than by virtue of ownership of Working Interests, in any particular Property are entitled to take in kind or for which they are entitled to be paid. "Security Agreements" means, collectively, any security agreement executed by Borrower, as debtor, in favor of Lenders, as secured party, as the same may be modified, amended, supplemented or restated pursuant to the terms of this Agreement. "Security Documents" means this Agreement, the Mortgages, the Security Agreements, Pledge Agreement, the Subordination Agreement(s), the Guaranty Agreements, financing statements and any other agreement or writing evidencing any assignment, lien, encumbrance or security interest executed in favor of or for the benefit of any Lender or any of its Affiliates in or on the Collateral and any other documents relevant thereto; provided, however, that "Security Documents" shall not include the Warrants. "Senior Credit Facility" means that certain $75,000,000 revolving credit facility established pursuant to that certain Credit Agreement dated May 14, 2003, as amended November __, 2003, between Borrower, Guarantor, Bank One, NA, as Agent, and the Persons that may become lenders thereunder from time to time as the same is amended, modified or restated, and all documents or instruments executed in connection therewith. "Senior Liens means (a) Liens securing the Debt of Borrower pursuant to the Senior Credit Facility and (b) Liens in favor of any Hedging Agreement counterparty or Swap Agreement counterparty that Lenders have expressly agreed to be subordinate to. 17 "Senior Lender" means the lender or lenders pursuant to the Senior Credit Facility. "Solvent" means that, as of the date on which a Person's solvency is to be measured: (a) the fair saleable value of its assets is in excess of the total amount of its liabilities (including income tax liabilities) as they become absolute and matured; and (b) it is able to meet its debts as they mature. "Subordination Agreement" means a subordination agreement or agreements substantially in the form of Exhibit G. All Affiliates of Borrower and any other Person designated by Lenders shall subordinate any Debt due or to become due from Borrower to the Obligations, and shall subordinate or release (as deemed appropriate by Lenders) any lien in favor of such Person to the security interests of Lenders. "Subsidiary" means any Person, corporation or other entity of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of directors, members or general partners is owned, directly or indirectly, by such Person and/or one or more of its subsidiaries. "Swap Agreement" means any ISDA Master Agreement and the Schedule thereto executed between Borrower and MAC, or any other Lender or Affiliate of a Lender, together with any confirmation of trade thereunder. "Synthetic Leases" means, in respect of any Person, all leases which shall have been, or should have been, in accordance with GAAP, treated as operating leases on the financial statements of the Person liable (whether contingently or otherwise) for the payment of rent thereunder and which were properly treated as indebtedness for borrowed money for purposes of U.S. federal income taxes, if the lessee in respect thereof is obligated to either purchase for an amount in excess of, or pay upon early termination an amount in excess of, 80% of the residual value of the property subject to such operating lease upon expiration or early termination of such lease. "Tax Adjusted Gross Margin" means Borrower's total revenue from any source minus an amount equal to the sum of Borrower's total lease operating expenses, production taxes, state and federal taxes paid in cash and hedge settlements. "Taxes" has the meaning assigned to that term in Section 2.10(a). "Taxing Authorities" means any and all federal, state or local governmental or quasi-governmental agencies that have the power to impose taxes upon any Borrower or any Subsidiary or any of the Collateral. "Term Loan" means the Advance by Lenders to Borrower pursuant to Section 2.1 in an amount not exceeding the Maximum Commitment and subject to all of the terms and conditions of this Agreement and the other Loan Documents. 18 "Term Note" means, collectively, one or more promissory notes substantially in the form of Exhibit B executed by Borrower and delivered to Lenders (including any successors to and assignees of the initial Lenders identified in this Agreement) pursuant to Section 2.4, together with all renewals, extensions and rearrangements. "Total Adjusted Present Value" means an amount, based on the most recent Reserve Report, equal to the sum of (i) the PDP Present Value plus (ii) the PDNP Present Value plus (iii) the PUD Present Value; provided, however, if the sum of PDNP Present Value plus the PUD Present Value exceeds sixty percent (60%) of the amount that would otherwise be the Total Adjusted Present Value, the Total Adjusted Present Value will be an amount equal the PDP Present Value multiplied by 2.25; and provided further that, in calculating the Total Adjusted Present Value, Lenders will make appropriate adjustments for material purchases, sale and discoveries of Hydrocarbon reserves and related operating cost adjustments since the effective date of the last Reserve Report. "Total Adjusted Present Value Ratio" means the ratio of Total Adjusted Present Value to Outstanding Debt. "UCC" means the Uniform Commercial Code presently in effect in the State of Texas or other applicable jurisdiction. "Voting Stock" means other Equity Interests of a person having generally the right to vote in the elections of such Person's directors, managers or trustees or other persons performing comparable functions to a corporation's board of directors. "Warrants" means those certain warrants granted by Borrower to Lenders in consideration for Lenders' commitment to make the Term Loan to Borrower pursuant to a warrant agreement in form and substance satisfactory to the Lenders. "Well" means any existing oil or gas well, salt water disposal well, injection well, water supply well or any other well located on or related to the Properties or any well which may hereafter be drilled and/or completed on the Properties, or any facility or equipment in addition to or replacement of any well. "Working Interest" means the property interest which entitles the owner thereof to explore and develop certain land for oil and gas production purposes, whether under an oil and gas lease or unit, a compulsory pooling order or otherwise. Section 1.2 Other Capitalized Terms Capitalized terms not otherwise defined in Section 1.1 shall have the meanings given them elsewhere in this Agreement. Section 1.3 Exhibits and Schedules. All exhibits, schedules and annexes attached to this Agreement are part of this Agreement for all purposes. 19 Section 1.4 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein, the terms defined in this Agreement which refer to a particular agreement, instrument or document also refer to and include all renewals, extensions, modifications, amendments and restatements of such agreement, instrument or document. Nothing contained in this Section 1.4 will be construed to authorize any renewal, extension, modification, amendment or restatement. Section 1.5 References, Titles and Construction. All references in this Agreement to exhibits, schedules, articles, sections, subsections and other subdivisions refer to the exhibits, schedules, articles, sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivisions are for convenience only, do not constitute any part of those subdivisions and will be disregarded in construing the language contained in those subdivisions. The words "this Agreement," "this instrument," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this section" and "this subsection" and similar phrases refer only to the sections or subsections of this Agreement in which those phrases occur. The word "or" is not exclusive; the word "including" (in its various forms) means "including without limitation." Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any reference herein to any law shall be construed as referring to such law and any rule or regulation promulgated thereunder, all as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, (b) any reference herein to any Person shall be construed to include such Person's successors and assigns (subject to the restrictions contained herein), (c) with respect to the determination of any time period, the word "from" means "from and including" and the word "to" means "to and including". No provision of this Agreement or any other Loan Document shall be interpreted or construed against any Person solely because such Person or its legal representative drafted such provision. Any reference to an approval or consent by Lenders or Administrative Agent shall be construed to require a written approval or consent. ARTICLE II. The Term Loan Section 2.1 Term Loan. Each Lender severally agrees, subject to the terms and conditions of this Agreement and prior to the Availability Termination Date, to make a secured multiple Advance term loan (the "Term Loan") in accordance with its Percentage Share on a non-revolving basis to the Borrower not to exceed TWENTY MILLION DOLLARS ($20,000,000) (the "Maximum Commitment") on the date and for the purposes set forth in Section 2.2. Borrower acknowledges that Lenders do not intend to advance Borrower any amount which would at any point in time exceed the Maximum Commitment; provided, however, if the obligations of Borrower under the Term Loan exceed the Maximum Commitment, all obligations will nevertheless constitute Obligations under this Agreement and 20 be entitled to the benefit of all of Lenders' security interests in, and mortgage liens on, the Collateral. All amounts on the Term Loan will be fully due and payable on the Maturity Date. Section 2.2 Availability and Purpose of Term Loan Advance. Up to fifteen million dollars ($15,000,000) of the Term Loan (the "Tranche A Loan") shall be used by Borrower exclusively for development of the Properties in accordance with a development plan approved in writing by Lender in its sole and absolute discretion and for other general corporate purposes as set forth in the Annual Operating Budget approved in writing by Lender in its sole and absolute discretion. Up to five million dollars ($5,000,000) of the Term Loan (the "Tranche B Loan") shall be used for projects approved in writing by Lender in its sole and absolute discretion. No Advance shall be permitted under either Tranche of the Term Loan after the Availability Termination Date. Section 2.3 Advance Procedure. In connection with any Advance under the Term Loan, Borrower will submit to the Administrative Agent a single written Advance Request not later than 12:00 noon Houston, Texas time, at least three (3) Business Days prior to the date on which the Advance is to be made; provided, however, that Lenders shall not have any obligation to make any Advances unless and until all of the conditions set forth in Sections 9.2, 9.3 and this Article II have been satisfied. Section 2.4 Term Notes. Borrower's obligation to repay the Term Loan will be evidenced by Term Notes in favor of each Lender. The Advances made by each Lender shall be evidenced by a single Term Note, dated, in the case of (i) any Lender party hereto as of the date of this Agreement, or (ii) any Lender that becomes a party hereto pursuant to an assignment, as of the effective date of the assignment, payable to the order of such Lender in a principal amount equal to its commitment as in effect on such date, and otherwise duly completed. In the event that any Lender's commitment increases or decreases for any reason, the Borrower shall deliver or cause to be delivered on the effective date of such increase or decrease, a new Note payable to the order of such Lender in a principal amount equal to its commitment after giving effect to such increase or decrease, and otherwise duly completed. The date, amount, interest rate of each Advance made by each Lender, and all payments made on account of the principal thereof, shall be recorded by such Lender on its books for its Note, and, prior to any transfer, may be endorsed by such Lender on a schedule attached to such Note or any continuation thereof or on any separate record maintained by such Lender. Failure to make any such notation or to attach a schedule shall not affect any Lender's or Borrower's rights or obligations in respect of such Advances or affect the validity of such transfer by any Lender of its Note. Section 2.5 Interest. (a) The Advances comprising the Term Loan shall bear interest at the Contract Rate on the outstanding borrowed and unpaid principal amount of the Term Loan for the period commencing on the date of the initial Advance until all Obligations are paid in full in accordance with this Agreement. Upon the occurrence and during the continuation of an Event of Default, the rate of interest applicable to the Notes will be equal to the lesser of (i) the Highest Lawful Rate and (ii) four percent (4.0%) over the interest rate otherwise applicable (the "Default 21 Rate"). In addition, if any principal of or interest on any Advance or any fee or other amount payable by Borrower or any Guarantor hereunder or under any other Loan Document is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to the Default Rate. (b) All interest will be computed on the basis of a year comprised of 360 days. Interest will be due and payable in accordance with this Section 2.5 in immediately available funds monthly in arrears on the Repayment Date and in full on the Loan Termination Date. (c) Borrower shall pay to Lenders all outstanding interest calculated at the rate specified in this Agreement on all monetary Obligations (including Obligations which are for fees or to reimburse or indemnify Lenders) on each Repayment Date. (d) The applicable interest rate under this Agreement shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error, and be binding upon the parties hereto. (e) Application of Funds. Payments made hereunder will be applied first to unpaid fees and expenses due and owing to Lender pursuant to the Loan Documents, second to accrued interest on the Term Loan and third to principal on the Term Loan. All interest on the outstanding principal balance of the Term Loan from the Closing Date through October 31, 2003, will be due and payable on November 15, 2003. On each subsequent Repayment Date, interest will be due and payable on the outstanding principal balance of the Term Loan for the immediately preceding calendar month. Section 2.6 Final Maturity of Obligations. Borrower shall, on or before the Maturity Date, pay to Administrative Agent for the ratable benefit of the Lenders all of the monetary Obligations (other than Obligations that may continue past the Maturity Date under the terms of the Swap Agreement) and perform or otherwise satisfy all other Obligations that are outstanding on that date. Section 2.7 Time and Place of Payments. All payments (whether of principal, interest, legal expenses, fees, costs, indemnities or otherwise) to be made by Borrower to the Administrative Agent for the benefit of the Lenders will be made by wire transfer in immediately available funds not later than 10:00 a.m., Houston, Texas, time, on the date of payment, to Administrative Agent at: Account: Bank of New York New York, NY 10004 ABA: 021000018 22 Favour: Macquarie Bank Limited Sydney A/C No.: 8900055375 Chips UID: 236386 Further Credit: Macquarie Americas Corp. REFERENCE: PetroQuest Energy, L.L.C. or to any other account Lenders may designate in writing to Borrower from time to time. If any payment to be made under this Agreement falls due on a day that is not a Business Day, the payment will be payable on the next succeeding Business Day. Section 2.8 Optional Prepayment of the Term Loan. Borrower will have the right to prepay the Term Loan, in whole or in part, at any time without penalty or premium. Section 2.9 Mandatory Prepayment of the Term Loan. (a) Prepayment Upon Sale. All proceeds from the sale of any assets of Borrower (excluding the sale of Hydrocarbons in the ordinary course of business) shall be applied to the Senior Credit Facility and the Term Loan as mutually agreed by the Lenders and the Senior Lender. The preceding sentence will not be deemed to be a consent by Lenders to any sale. (b) Application of Mandatory Prepayments. All amounts paid by Borrower to Lenders under this Section 2.9 will be immediately applied as a prepayment of the principal balance of the Term Loan. Section 2.10 Taxes. (a) Taxes Not Deducted from Payments to Lenders. All payments made by the Borrower under this Agreement will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all similar liabilities (collectively, "Taxes"), excluding, in the case of Lenders, taxes imposed on its income, and franchise or similar taxes imposed on it, by any jurisdiction (or political subdivision thereof) of which Lenders is a citizen or resident, in which Lenders is organized, or in which Lenders is presently doing business to the extent taxes are imposed solely as a result of its doing business in that jurisdiction. If Borrower is required by law to deduct any Taxes from any sum payable to Lenders, (i) the sum payable will be increased by an amount so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.10) Lenders will receive an amount equal to the sum it would have received had no deductions been made, (ii) Borrower will deduct from the sum payable to Lenders an amount sufficient to pay the Taxes and pay the balance to Lenders, and (iii) Borrower will promptly pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. 23 (b) Other Taxes. In addition, and to the fullest extent permitted by applicable law, Borrower agrees to pay any present or future stamp, documentary, mortgage registration or similar taxes or any other excise or property taxes, charges or similar levies (collectively, the "Other Taxes") that arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, or any Security Documents. (c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, AND PROVIDED THAT THERE IS NO DEFAULT OF THE LENDERS REPRESENTATIONS CONTAINED IN THIS AGREEMENT, BORROWER WILL INDEMNIFY LENDERS FOR THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE UNDER THIS SECTION 2.10 AND PAID BY LENDERS) PAID BY LENDERS (ON BEHALF OF BORROWER), AND ANY LIABILITY (INCLUDING PENALTIES, INTEREST AND REASONABLE EXPENSES) ARISING FROM OR WITH RESPECT TO THOSE AMOUNTS, WHETHER OR NOT THE TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. ANY PAYMENT PURSUANT TO THE INDEMNIFICATION DESCRIBED IN THIS SECTION 2.10(c) WILL BE MADE BY BORROWER WITHIN THIRTY (30) DAYS AFTER THE DATE LENDERS MAKES WRITTEN DEMAND FOR THOSE PAYMENTS. SUCH LENDERS' DEMAND WILL STATE WITH SPECIFICITY THE BASIS FOR THE TAX, IDENTIFY THE TAXING AUTHORITY ASSERTING THE TAX AND CERTIFY THAT LENDERS HAS PAID THE TAX. Section 2.11 Fees. (a) Commitment Fee. At Closing, Borrower shall pay to the Administrative Agent for the benefit of the Lenders a non-refundable commitment fee (the "Commitment Fee") equal to one hundred thousand dollars ($100,000). The Commitment Fee is for the commitments of the Lenders hereunder and is fully earned on the date paid. (b) Advance Fee. In connection with each Advance, Borrower will pay to Lender a non-refundable fee (the "Advance Fee") equal to one-half percent (0.5%) of the Advance. (c) Allocation of Fees. The allocation of the Commitment Fee among the Lenders shall be made as agreed by the Lenders pursuant to a separate agreement or agreements among the Lenders. ARTICLE III. Security Section 3.1 Grant of Security Interests. (a) Mortgage and Security Interest. As security for all of its Obligations, Borrower and Guarantors, pursuant to the Security Documents shall contemporaneously 24 herewith grant, assign, transfer and convey to the Administrative Agent for the benefit of the Lenders a mortgage lien on and perfected security interest in the Collateral subject only to the Permitted Encumbrances. Additionally, each Subsidiary of Borrower shall unconditionally guarantee the Obligations. (b) Further Assurances. Borrower will, upon request, execute and deliver to or for the benefit of Lenders any and all documents necessary or desirable, in the reasonable opinion of Lenders, to create, perfect, maintain and preserve the priority of Lenders' security interests in and mortgage liens on the Collateral. Borrower will, at its own expense, cause searches of the Uniform Commercial Code filing records or similar public records to be conducted at the reasonable request of Lenders from time to time in order to evidence, perfect, maintain or continue perfection, or confirm the rights and remedies, of Lenders in and to the Collateral granted by Borrower and its Subsidiaries, perfect those security interests in after-acquired property, continue the perfection of all security interests granted by Borrower and its Subsidiaries and file financing statements against Borrower relating to the security interests securing any Obligations. Borrower irrevocably authorizes Lenders to prepare and file at any time and from time to time in any filing office initial financings statements and amendments to them necessary or convenient to the perfection or continuation of the security interests granted by Borrower. (c) Release of Financing Statements. Upon the indefeasible payment in cash and performance in full of all Obligations under this Agreement, the Administrative Agent will deliver or will cause to be delivered to Borrower and each Subsidiary, at Borrower's expense, releases of all financing statements and all other Security Documents with an acknowledgment that the same have been terminated, and Borrower and each Subsidiary shall deliver to Lenders a general release of all of Lenders' liabilities and obligations under this Agreement and the other Loan Documents. The obligations of the Borrower under the Warrants will survive the termination of this Agreement and the full or partial release of the security interests. Section 3.2 Pledged Interests. Borrower will cause the Pledge Agreements to be entered into on or before the Closing Date of the Term Loan so as to grant to Administrative Agent for the benefit of the Lenders, as additional security for the Obligations, a second-priority security interest in all of the membership interests in Borrower (the "Pledged Interests"). Section 3.3 Equipment. (a) Preservation of Equipment. All Equipment currently owned or hereafter acquired by or on behalf of Borrower or its Subsidiaries will be kept at the applicable Property except as permitted by this Agreement or any Mortgage or except with the prior written consent of Lenders; provided, however, Borrower, each Subsidiary or any Operator may dispose of Equipment in accordance with the terms of the applicable Operating Agreements and may dispose of obsolete, broken or worn Equipment, without Lenders' consent. Borrower and each Subsidiary shall use reasonable commercial efforts to cause each Operator at all times to (i) keep correct and accurate records itemizing and describing the location, kind, type, age, condition and cost of and accumulated depreciation on all Equipment and (ii) make those records available 25 during the Operators' usual business hours on demand to any of the officers, employees or agents of Borrower and Lenders. (b) Sale or Disposal of Equipment. Where Borrower or its Subsidiaries is permitted to dispose of any Equipment, it shall do so, or shall cause each Operator to do so, at arm's-length, in good faith and by obtaining the maximum amount of recovery practicable and without impairing the operating integrity of the remaining Equipment. Section 3.4 Subordination Agreement. All Affiliates of Borrower and any other Person designated by Lenders shall execute a Subordination Agreement in favor of Lenders subordinating to the Obligations any existing or future Debt owed by Borrower to any of those Affiliates or other Persons. ARTICLE IV. Representations and Warranties In order to induce Lenders to make the Term Loan, Borrower makes the following representations and warranties to Lenders as of the Closing Date, each and all of which will survive the execution and delivery of this Agreement and continue until all Obligations have been satisfied: Section 4.1 Formation and Existence. Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Louisiana. Guarantor is a Delaware corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. Borrower and Guarantor are each qualified to do business in every jurisdiction where the nature of their business or the ownership of their property requires them to be so qualified and where failure to so qualify could reasonably be expected to have a Material Adverse Effect. Section 4.2 Executive Offices. The name of the Borrower as listed in the public records of its jurisdiction of organization is PetroQuest Energy, L.L.C.; and the organizational identification number of the Borrower in its jurisdiction of organization is 34487931K (or, in each case, as set forth in a notice delivered to the Administrative Agent pursuant to Section 13.3). The Borrower's principal place of business and chief executive offices are located at the address specified in Section 13.3 (or as set forth in a notice delivered pursuant to Section 13.3). The jurisdiction of organization, name as listed in the public records of its jurisdiction of organization, organizational identification number in its jurisdiction of organization, and the location of its principal place of business and chief executive office of each Subsidiary is stated on Schedule 4.2 (or as set forth in a notice delivered pursuant to Section 13.3). Section 4.3 Ownership; Subsidiaries. Borrower is owned as set forth on Part (a) of Schedule 4.3. Except for the owners set forth on Part (a) of Schedule 4.3, no other Person owns any Equity Interest in the Borrower or is the holder of any right that could result in the transfer or issuance of any Equity Interest in the Borrower. Borrower has no Subsidiaries except as set forth 26 on Part (b) of Schedule 4.3, and no Equity Interests in any other Person other than those set forth in Part (b) of Schedule 4.3. Section 4.4 Authorization; Non-Contravention. The execution, delivery and performance of Borrower's or any Subsidiaries' obligations under this Agreement, the Term Note, the Security Documents, the Swap Agreement, the Intercreditor Agreement and all and any other Loan Documents and the creation of all liens, mortgages and security interests provided for in those agreements: (a) are within the company power and authority of Borrower and each Subsidiary; (b) have been duly authorized by all necessary corporate action of Borrower and each Subsidiary; (c) are not in contravention of (i) any agreement or indenture to which Borrower or any Subsidiary is a party or by which it or its property is bound, (ii) the Charter Documents of Borrower or any Subsidiary, or (iii) any provision of law applicable to Borrower or any Subsidiary; (d) do not require the consent or approval of any governmental body, agency, authority or any other Person which has not been obtained and a correct and complete copy of each of those approvals has been furnished to Lenders; and (e) are legal, valid and binding obligations of Borrower and each Subsidiary, enforceable against Borrower and each Subsidiary in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by general equitable principles. Section 4.5 Solvency. Borrower is Solvent and will continue to be Solvent after giving effect to the transactions contemplated by this Agreement. Section 4.6 Omissions and Misstatements. The Borrower has disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which it or the Guarantor is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the other reports, financial statements, certificates or other information furnished by or on behalf of the Borrower or any Affiliate to the Administrative Agent or any Lender or any of their Affiliates in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or under any other Loan Document (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared 27 in good faith based upon assumptions believed to be reasonable at the time. There is no fact peculiar to the Borrower or any Affiliate which could reasonably be expected to have a Material Adverse Effect or in the future is reasonably likely to have a Material Adverse Effect and which has not been set forth in this Agreement or the Loan Documents or the other documents, certificates and statements furnished to the Administrative Agent or the Lenders by or on behalf of the Borrower or any Affiliate prior to, or on, the date hereof in connection with the transactions contemplated hereby. There are no statements or conclusions in any Reserve Report which are based upon or include misleading information or fail to take into account material information regarding the matters reported therein. Section 4.7 Joint Ventures. Other than joint ownership of Hydrocarbon properties through the use of joint operating agreements standard in the oil and gas industry, Borrower is not engaged in any joint venture or partnership with any other Person. Section 4.8 Commissions; Expenses. No broker's or finder's fees or commissions have been paid or will be payable by Borrower or any of its Affiliates to any Person in connection with the transactions contemplated by this Agreement. Borrower will indemnify Lenders and its Affiliates and their respective officers, directors, employees and agents from and against, and hold each of those parties harmless on demand from, all liabilities, costs, damages and expenses, including attorneys' fees and disbursements relating to any third parties concerning finder's, brokerage, financing or similar fees arising in connection with the transactions contemplated under this Agreement. Section 4.9 Tax Matters. Borrower and each Subsidiary has filed all tax returns (federal, state and local) required to be filed and have either paid all taxes due (including interest and penalties) or provided adequate reserves for those taxes. No assessments have been made against Borrower by any Taxing Authority nor has any penalty or deficiency been assessed by any Taxing Authority. To the best of Borrower's knowledge, no federal or other income tax return of Borrower is presently being examined by the Internal Revenue Service or any state or local governmental authority nor are the results of any prior examination by the Internal Revenue Service or any state or local governmental authority being contested by Borrower. No Tax lien has been filed and, to the knowledge of the Borrower, no claim is being asserted with respect to any such Tax or other such governmental charge. Section 4.10 Litigation; Governmental Proceedings. Except as set forth on Schedule 4.10, no claim, action, suit or other proceeding is pending or, to the best of Borrower's knowledge, has been threatened against Borrower or any Subsidiary, including, without limitation, those related to the transactions contemplated by this Agreement, at law, in equity or otherwise, before or involving any court, board, commission, agency or instrumentality of the federal or any state or local government or any agency or subdivision of any of those governments, or before any arbitrator or panel of arbitrators, and Borrower has not accepted liability for any action or proceeding. There is no proceeding pending before any federal, state or local governmental agency and no investigation has been commenced before any government agency the effect of which, if adversely decided, could reasonably be expected to have a Material Adverse Effect. 28 Section 4.11 Ownership of Collateral; Interests. The Collateral is owned by Borrower and its Subsidiaries, free and clear of any security interest, lien, encumbrance, mortgages, security agreement or other charge other than the Senior Liens and Permitted Encumbrances. Borrower and its Subsidiaries has Defensible Title to the Properties, including each Lease related to the Properties, free and clear of any lien, claim, or encumbrance except for the Senior Liens and Permitted Encumbrances and those arising under this Agreement or the Security Documents. Except for Permitted Encumbrances and the liens and security interests contemplated by this Agreement and the Security Documents, there are no unrecorded documents or agreements which may result in the impairment or loss of Borrower's or its Subsidiaries' ability to mortgage the Properties or of Lenders' ability to enforce the Mortgage and convey the Properties. Subject to the Permitted Encumbrances, Borrower and its Subsidiaries has all beneficial right, title and interest in and to the Net Revenue Interest in all production from or allocable to Borrower's or its Subsidiaries' interest in the Properties (including each Lease) and has the exclusive right to sell or mortgage the Properties subject to any right in the owners of Royalty Interests to take their royalty interest in kind. With respect to each of the Properties, Borrower's or its Subsidiaries' Working Interest is not more than and its Net Revenue Interest is not less than those set forth in the Reserve Reports. All leases and agreements referenced in the title opinions delivered in connection with the Closing are valid and subsisting, in full force and effect and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any Lease or Leases comprising the Properties, which would affect in any material respect the conduct of the business of the Borrower. All of the Properties of the Borrower which are reasonably necessary for the operation of its business are in good working condition and are maintained in accordance with prudent business standards. Section 4.12 Indebtedness. Except for Debt evidenced by the Senior Credit Facility and as otherwise set forth in Schedule 4.12 of the Agreement, upon the execution of this Agreement, Borrower will have no Debt outstanding other than the Obligations. The information presented in Schedule 4.12 is current as of August 31, 2003, and there has been no material change in that information since that date. Section 4.13 Trademarks, Etc. Borrower and its Subsidiaries possess or will possess all trademarks, trade names, trade styles, copyrights and patents necessary to conduct its business as it is presently conducted or as Borrower or any Subsidiary intends to conduct it in the future without any infringement or conflict with the rights of any other Person with respect to trademarks, trade names, trade styles, copyrights or patents. Section 4.14 Leases. Except as disclosed on Schedule 4.14, neither Borrower nor any Subsidiary is the lessor or lessee under any leases (including real property leases, equipment leases, capital leases, etc.), other than Leases included in the Properties. Section 4.15 Investments. Borrower and each Subsidiary: (a) has not committed to make any Investment; 29 (b) is not a party to any indenture, agreement, contract, instrument or lease or subject to any charter, by-law or other restriction or any injunction, order, restriction or decree, which could have a Material Adverse Effect; (c) is not a party to any "take or pay" contract or settlement or any other contract or agreement which (i) allows its gas purchaser to take gas previously paid for out of future gas production or (ii) provides for a cash rebate to the gas purchaser if reimbursement of take-or-pay monies is not made through gas production; (d) except as provided on Schedule 4.15(d) has not produced Natural Gas from the Properties in excess of the percentage to which its ownership interest in the applicable Property would entitle it, pursuant to balancing rights of third parties or pursuant to balancing duties under governmental requirements; or (e) has no material contingent or long term liability or commitment which could have a Material Adverse Effect. Section 4.16 Environmental Matters. Except as disclosed on Schedule 4.16: (a) Neither any Property of the Borrower or any of its Affiliates nor the operations conducted thereon violate any order or requirement of any court or Governmental Authority or any Environmental Laws; (b) Without limitation of clause (a) above, no Property of the Borrower or any of its Affiliates nor the operations currently conducted thereon or, to the best knowledge of the Borrower, by any prior owner or operator of such Property or operation, are in violation of or subject to any existing, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or Governmental Authority or to any remedial obligations under Environmental Laws; (c) All notices, permits, licenses or similar authorizations, if any, required to be obtained or filed in connection with the operation or use of any and all Property of the Borrower and each of its Affiliates, including without limitation past or present treatment, storage, disposal or release of a hazardous substance or solid waste into the environment, have been duly obtained or filed, and the Borrower and each such Affiliate are in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations; (d) All hazardous substances, solid waste, and oil and gas exploration and production wastes, if any, generated at any and all Property of the Borrower or any of its Affiliates have, to the best of Borrower's knowledge, in the past been transported, treated and disposed of in accordance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and, to the best knowledge of the Borrower, all such transport carriers and treatment and disposal facilities have been and are operating in compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment, and are 30 not the subject of any existing, pending or threatened action, investigation or inquiry by any Governmental Authority in connection with any Environmental Laws; (e) The Borrower has taken all steps reasonably necessary to determine and has determined that no hazardous substances, solid waste, or oil and gas exploration and production wastes, have been disposed of or otherwise released and there has been no threatened release of any hazardous substances on or to any Property of the Borrower or any of its Affiliates except in compliance with Environmental Laws and so as not to pose an imminent and substantial endangerment to public health or welfare or the environment; (f) To the extent applicable, all Property of the Borrower and each of its Affiliates currently satisfies all design, operation, and equipment requirements imposed by the OPA (as defined in the definition of Environmental Laws), and the Borrower does not have any reason to believe that such Property, to the extent subject to OPA, will not be able to maintain compliance with the OPA requirements during the term of this Agreement; and (g) Neither the Borrower nor any of its Affiliates has any known contingent liability in connection with any release or threatened release of any oil, hazardous substance or solid waste into the environment. Section 4.17 Operating Permits and Licenses. Borrower and its Subsidiaries have fulfilled all requirements for obtaining and have obtained and maintained all licenses, permits, operating authorities and other authorizations necessary for the conduct of the business of the Borrower and its Subsidiaries or for Borrower or its Subsidiaries to operate or maintain each of the Properties which it operates, and Borrower is and will be fully qualified to own and hold such Properties and to exercise rights under all leases, contracts or other documents governing the operation or maintenance of the Properties. All of the Personal Property and Properties of the Borrower or its Subsidiaries which are reasonably necessary for the operation of its business are in good working condition and are maintained in accordance with prudent business standards. There are no pending fees, assessments or penalties relating to the permits, licenses and operating authorities. The continuation, validity and effectiveness of each license, permit and other authorization are not and will in no way be adversely affected by the transactions contemplated by this Agreement or the Security Documents. Neither Borrower nor any Subsidiary is in breach of, or in default under the terms of, and has not engaged in any activity which would cause revocation or suspension of, any such licenses, permits or authorizations and no action or proceeding looking to or contemplating the revocation or suspension of any of them is pending or, to the best of Borrower's knowledge, threatened against Borrower. Neither Borrower nor any Subsidiary is in violation in any material respect of any law, ordinance, administrative or governmental rule or regulation or court decree relating to any of the Properties or otherwise applicable to Borrower, any Subsidiary or any Operator. No suspension of production on the Properties is in effect which could reasonably be expected to have a Material Adverse Effect. Section 4.18 Maintenance of Properties. Except for such acts or failures to act as could not be reasonably expected to have a Material Adverse Effect, the Properties (and Properties 31 unitized therewith) have been maintained, operated and developed in a good and workmanlike manner and in conformity with all government requirements and in conformity with the provisions of all leases, subleases or other contracts comprising a part of the Properties and other contracts and agreements forming a part of the Properties. Specifically in connection with the foregoing, except for those as could not be reasonably expected to have a Material Adverse Effect, (a) no Property is subject to having allowable production reduced below the full and regular allowable (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) and (b) none of the wells comprising a part of the Properties (or Properties unitized therewith) is deviated from the vertical more than the maximum permitted by government requirements, and such wells are, in fact, bottomed under and are producing from, and the well bores are wholly within, the Properties (or in the case of wells located on Properties unitized therewith, such unitized Properties). All pipelines, wells, gas processing plants, platforms and other material improvements, fixtures and equipment owned in whole or in part by the Borrower or its Subsidiaries that are necessary to conduct normal operations are being maintained in a state adequate to conduct normal operations, and with respect to such of the foregoing which are operated by the Borrower or its Subsidiaries, in a manner consistent with past practices. Section 4.19 Defaults. Neither Borrower nor any Subsidiary and, to Borrower's knowledge, any Operator are in violation of, or in default under, any material agreement affecting any lease or any other contract or agreement to which either Borrower, any Subsidiary or any Operator is a party or is bound or its property is bound. All Wells are, in all material respects, operated in compliance with all applicable rules, regulations, permits, judgments, orders and decrees of any court or the federal and state regulatory authorities having jurisdiction over Borrower, any Subsidiary or any Operator or any of the Wells. Section 4.20 Contingent Liabilities. Neither Borrower nor any Subsidiary has assumed, guaranteed, endorsed or otherwise become directly, indirectly or contingently liable in connection with any liability of any other Person, except for the endorsement of checks and other negotiable instruments for collection in the ordinary course of business, or as may be required under the Operating Agreements or the Security Documents or other documents executed in connection with the Security Documents. Section 4.21 Restrictions on Equipment. Except for the Senior Liens, the Intercreditor Agreement and Permitted Encumbrances, there is no restriction or other limitation on Lenders' right to obtain or exercise its security interests in the Equipment, including the right to foreclose on and sell the Equipment or to exercise all other rights and remedies of a secured party under the laws of each jurisdiction applicable to the Collateral but subject to Debtor Relief Laws, laws related to the rights of co-owners of property and laws related to the enforcement of security interests on personal property. Section 4.22 Financial Statements; No Material Adverse Effect. (a) The consolidated audited financial statements of Guarantor for the period ending December 31, 2002 (i) were prepared in accordance with GAAP consistently applied 32 throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of Guarantor and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of Guarantor and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness. (b) The unaudited consolidated balance sheet of Guarantor and its Subsidiaries dated as of June 30, 2003, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal quarter ended on that date (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of Guarantor and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby , subject in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments. (c) Since the date of the audited financial statements described in Section 4.22(a), there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect. Section 4.23 Taxpayer Identification. The federal taxpayer identification number of Borrower and each Subsidiary of Borrower is set forth on Schedule 4.23. Section 4.24 Holding Company. Borrower is not a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.25 Investment Company. Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.26 Other Agreements. There is no agreement in force and effect (including, without limitation, letters of intent), whether written or oral, between Borrower or any of its Affiliates and any other Person regarding the acquisition or financing of any of the Properties or the purchase and sale of production from or allocable to the Properties other than pursuant to Hydrocarbon purchase and sale agreements satisfactory to Lenders. Except as set forth on Schedule 4.26, no Person has any call upon, option to purchase or similar rights under any agreement with respect to Borrower's Working Interest or Net Revenue Interest in the Properties or to the production from the Properties other than pursuant to a Hydrocarbon purchase and sale agreement satisfactory to Lenders and Persons who have waived such rights in writing with respect to the Properties. 33 Section 4.27 Basic Documents. With respect to the Basic Documents: (a) all are in full force and effect in accordance with their terms and constitute valid and binding obligations; (b) no other party to any Basic Document (or any successor in interest to that party) is in breach or default with respect to any of its obligations under the Basic Documents which could reasonably be expected to have a Material Adverse Effect on Borrower or the Properties; (c) no party to any Basic Document has given or has threatened to give notice of any action to terminate, cancel, rescind or procure a judicial reformation of any Basic Document or any of their provisions; and (d) the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in a breach of, a default under, or other violation of the provisions of any Basic Document. Section 4.28 Farmout Agreements, Etc. With respect to the Properties and the unit agreements, pooling agreements, communization agreements and other Basic Documents creating the interests constituting the Properties, and except as set forth in the title opinions provided by Borrower to Lenders upon which Lenders are expressly entitled to rely: (a) there are no outstanding farmout agreements, obligations to drill additional wells or agreements to engage in other development operations, except for obligations arising under offset well provisions, obligations arising under provisions of any Operating Agreement which allow the parties to elect whether or not they will participate in development activities; (b) there are no limitations as to the depths covered or substances to which such interests purport to apply; and (c) there are no royalty provisions (other than those allowing a lessor the right to take in kind) requiring the payment of royalties on any basis other than as specified in those leases, contracts and other agreements. Section 4.29 Operating Agreements. With respect to the Operating Agreements relating to Borrower's or any Subsidiaries' Working Interest and Net Revenue Interest in the Properties: (a) there are no outstanding calls for payments under any AFE or payments which are due or which Borrower or, to the best of Borrower's knowledge, any predecessor of Borrower or any Subsidiary has committed to make which have not been or are not being paid within the terms required; and (b) there are no operations under any of the Operating Agreements with respect to which Borrower or any Subsidiary has become a non-consenting party nor are there 34 any non-consenting penalties binding or that will become binding upon Borrower or any Subsidiary that are not reflected in the Net Revenue Interest or Working Interest as set forth on the Reserve Report. Section 4.30 No Unusual Agreements. All agreements applicable to Borrower's or its Subsidiaries' Working Interest and Net Revenue Interest in the Properties are of the type generally found in the oil and gas industry and the gathering and transmission industry, as applicable, and do not (individually or in the aggregate) contain any unusual provisions which may operate in a material and adverse manner with respect to Borrower's or any Subsidiaries' Working Interest or Net Revenue Interest in the Properties. Section 4.31 Suspense of Proceeds. Except as disclosed by Borrower to Lenders in writing prior to the execution of this Agreement, as of the Closing Date, all proceeds from the sale of Hydrocarbons from Borrower's or any Subsidiaries' Working Interest or Net Revenue Interest in the Properties are being received by Borrower and each Subsidiary in a timely manner and are not being held in suspense for any reason. Section 4.32 ERISA Plans. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. Borrower and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Plan has any Unfunded Pension Liability; (iii) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. 35 Section 4.33 Use of Proceeds. Borrower will use all amounts Advanced under the Term Loan solely for the purposes described in this Agreement. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying margin stock (within the meaning of Regulation T, U or X of the Board of Governors of the Federal Reserve System (the "Board")). No part of the proceeds of any Advance will be used for any purpose which violates the provisions of Regulations T, U or X of the Board. Section 4.34 Insurance. Borrower shall: (a) continuously keep all of its Personal Property together with all improvements on its Real Property insured for replacement value of like kind and quality with insurance companies licensed or approved to do business in the jurisdictions in which the Properties are located with a Best's rating of A or better or as otherwise satisfactory to Lender against loss or damage by fire or other risk usually insured against by other prudent owners in similar businesses similarly situated under extended coverage endorsement and against theft, burglary, and pilferage together with other insurance covering any other hazards as Lender may from time to time reasonably request; (b) deliver certificates of insurance to Lender and, whether or not so delivered such policies and all proceeds thereof shall be security for all Obligations. All such insurance shall contain endorsements in form satisfactory to Lender showing Lender as a loss payee and additional party assured as its interest may appear. Subject to the terms of the Intercreditor Agreement, all insurance proceeds received by Lender shall be retained by Lender at its option, for application to the payment of such portion of the Obligations or as Lender may determine in its reasonable discretion or shall be applied to repair any such insurable loss or damage; and (c) promptly notify Lender of any event or occurrence causing a material loss or decline in value of Collateral insured or the existence of an event justifying a material claim under any insurance and the estimated amount thereof. In furtherance, but not in limitation of the requirements of the preceding sentence, Borrower shall continuously keep and maintain in full force and effect during the term of this Agreement, at Borrower's sole cost and expense, original insurance policies for which the payment of premiums are current containing waivers of subrogation by the respective insurers and non-contributory standard mortgagee clauses or their equivalent or a satisfactory mortgagee loss payable endorsement in favor of Lender providing the coverages set forth in Schedule 4.34(c) attached hereto. Section 4.35 No Material Adverse Effect. Since September 5, 2003, no Material Adverse Effect has occurred. Section 4.36 Tax Shelter Regulations. Borrower does not intend to treat the Term Loan and related transactions as being a "reportable transaction" (within the meaning of Treasury Regulation Section 1.6011-4). In the event Borrower determines to take any action inconsistent with such intention, it will promptly notify Administrative Agent thereof. If Borrower so notifies Administrative Agent, Borrower acknowledges that one or more of the Lenders may treat the 36 Term Loan as part of a transaction that is subject to Treasury Regulation Section 301.6112-1, and such Lender or Lenders, as applicable, will maintain the lists and other records required by such Treasury Regulation. Section 4.37 Restriction on Liens. Except for the Senior Credit Facility, the Intercreditor Agreement and the Loan Documents, and except for agreements which consent has previously or contemporaneously been obtained, neither Borrower nor any Subsidiary is a party to any agreement or arrangement, or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to the Administrative Agent and the Lenders on or in respect of its Properties to secure the Obligations and the Loan Documents. Section 4.38 Hedging Agreements. Schedule 4.38, as of the date hereof, and after the date hereof, each report required to be delivered by the Borrower pursuant to Section 5.16, sets forth, a true and complete list of all Hedging Agreements of the Borrower, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied) and the counterparty to each such agreement. Section 4.39 Marketing of Production. Except for contracts listed and in effect on the date hereof on Schedule 4.39, and thereafter either disclosed in writing to the Administrative Agent (with respect to all of which contracts the Borrower represents that it and its Subsidiaries are receiving a price for all production sold thereunder which is computed substantially in accordance with the terms of the relevant contract and are not having deliveries curtailed substantially below the subject Property's delivery capacity), no material agreements exist which are not cancelable on 60 days notice or less without penalty or detriment for the sale of production from the Borrower's or any Subsidiaries' Hydrocarbons (including, without limitation, calls on or other rights to purchase, production, whether or not the same are currently being exercised) that (a) pertain to the sale of production at a fixed price and (b) have a maturity or expiry date of longer than six (6) months from the date hereof. ARTICLE V. Financial Statements and Information; Certain Notices to Lenders So long as there are any Obligations owed to Lenders under this Agreement or to MAC or its Affiliates or under a Swap Agreement, Borrower shall deliver to Lenders the following items: Section 5.1 Monthly Operating Statement. Commencing on November 30, 2003, within thirty (30) days after the end of each calendar month, a Monthly Operating Statement detailing financial and operating performance for the immediately preceding month. Section 5.2 Daily Field Reports. Borrower shall provide Lender by facsimile or e-mail a daily report in the form and substance satisfactory to Lender detailing all field drilling and other notable activity from the preceding day with respect to the Properties. 37 Section 5.3 Weekly Sales Reports. Borrower shall provide Lender each week during the term of this Agreement by facsimile or e-mail, a report in the form and substance satisfactory to Lender setting forth the quantities of Crude Oil and Natural Gas sold from or allocable to each of the Properties for the prior week. Section 5.4 AFEs. Borrower shall provide Lender a true and complete copy of each AFE in excess of $200,000 prior to commencing the activity contemplated by the AFE. Borrower shall promptly submit to Lender a supplemental AFE or similar information for any anticipated expenditures in excess of 110% of those authorized on an approved AFE or other approved expenditure pursuant to the Annual Operating Budget. Section 5.5 Test Results; Core Analyses; Surveys and Logs. Upon the request of Lender, Borrower shall promptly provide Lender with true and complete copies of all test results, fluid analyses, pressure surveys and core analyses related to the Properties. As soon as such data are available, Borrower shall promptly provide Lender with true and correct copies of all electrical surveys, radioactivity logs, temperature surveys, deviation or directional surveys, caliper logs and all other logs and surveys obtained during the drilling of any Well. In addition, promptly upon the completion of any Well, Borrower will provide Lender with a composite of all electrical-type logs to the extent reasonable and customary. Section 5.6 Annual Reports. Within ninety (90) days after the close of each fiscal year, a copy of the annual consolidated financial statements (including all notes) of Guarantor, consisting of a balance sheet, income or operations statement, statement of stockholder's equity, and statement of cash flows, all audited by independent certified public accountants retained by Borrower and acceptable to Lenders and accompanied by the accountants' certification that, in the normal course of their audit, they have not become aware of any circumstances constituting Default under this Agreement. The first audited financial statement will be delivered on or before March 31, 2004. Section 5.7 Quarterly Reports. Within forty-five (45) days after the end of each quarter, a consolidated balance sheet, income or operations statement and statement of cash flows of Guarantor (including all notes thereto) for the quarter and year-to-date, prepared by Borrower and accompanied by a certification of Borrower's President or Chief Financial Officer, dated the date of the delivery of the financial statements to Lenders, and further certifying that no Default exists under this Agreement. Section 5.8 Certificate of Financial Officer; Compliance. Concurrently with any delivery of financial statements under Section 5.7, a certificate of the president or chief financial officer of the Borrower in form and substance satisfactory to the Administrative Agent (a) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (b) setting forth reasonably detailed calculations demonstrating compliance with Section 6.26 and (c) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 5.7 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate. 38 Section 5.9 Default Notices. Promptly after becoming aware of the existence of any Default under this Agreement or any of the Loan Documents or a default by Borrower under the Senior Credit Facility, or after becoming aware of any developments or other information which could reasonably be expected to have a Material Adverse Effect, including, without limitation, the following: (a) any dispute (including franchise or income tax liability disputes) that may arise between Borrower and any governmental regulatory body or law enforcement authority; (b) the commencement of any litigation or proceeding involving amounts in dispute in excess of five hundred thousand dollars ($500,000) affecting Borrower or any of the Properties; (c) any labor dispute or controversy resulting in or threatening to result in a general strike or work stoppage against Borrower; (d) any proposal by any public authority to acquire any of the assets or business of Borrower; (e) any proposed or actual change in the Borrower or the Guarantor's corporate name or in any trade name used to identify such Person in the conduct of its business or in the ownership of its Properties, (i) in the location of the Borrower or the Guarantor's chief executive office or principal place of business, (ii) in the Borrower or the Guarantor's identity or corporate structure or in the jurisdiction in which such Person is incorporated or formed, (iii) in the Borrower or the Guarantor's jurisdiction of organization or such Person's organizational identification number in such jurisdiction of organization, and (iv) in the Borrower or the Guarantor's federal taxpayer identification number; (f) the loss of, suspension, termination or material adverse change to any of the permits, licenses, operating authorities and other authorizations referred to in Section 4.17 and Section 4.18; (g) any material loss or damage to any of the Collateral, or Borrower's business or operations; or (h) the failure to make any payment when due with respect to any Debt or the failure to comply with the terms of any material agreement (including, without limitation, any Hedging Agreement or Swap Agreement) to which Borrower is a party; (i) any proposed sale, transfer, assignment or other disposition of any Properties permitted hereunder, prior written notice of such disposition, the price thereof and the anticipated date of closing; (j) the occurrence of any loss, casualty or other insured damage to, or any nationalization, taking under power of eminent domain or by condemnation or similar 39 proceeding of, any Property of the Borrower having a fair market value in excess of five hundred thousand dollars ($500,000); (k) any other development that results in, or could reasonably be expected to result in a Material Adverse Effect; in each case Borrower shall provide Lenders with telephonic facsimile or e-mail notice specifying and describing the nature of the Default, development or information, and the anticipated effect. Any notice delivered by telephone or e-mail will be confirmed in writing (or, with respect to e-mail notices, physically delivered to Lenders) within five (5) days. Section 5.10 Reserve Reports. (a) Timing of Reports. Beginning January 1, 2004 and continuing semi-annually throughout the term of this Agreement, Borrower shall, at its sole expense, cause to be prepared by the Engineers and delivered to Lenders an engineering reserve report (the "Reserve Report") relating to the Properties. The Reserve Reports will set forth, without limitation, the projected recoverable reserves attributable to the Properties, the Working Interests and Net Revenue Interests of Borrower. Borrower shall deliver each Reserve Report to Lenders within sixty (60) days of its effective date. The initial Reserve Report effective date shall be January 1, 2004. So long as no Default has occurred and continues, the "mid-year" Reserve Report may be prepared by Borrower's internal engineers; however, such Reserve Report must be acceptable to Lender in its reasonable discretion. (b) Preparation of Reports. The Reserve Report will be prepared in accordance with the following assumptions: (i) reserves shall be adjusted for cumulative production since the effective date of the most recent Reserve Report; (ii) (A) for all Natural Gas to be sold by Borrower other than Natural Gas described in Section 5.10(b)(ii)(B) below, the purchase price for each calendar year will be the average of the monthly prices provided to Borrower by Administrative Agent for that year for Natural Gas as reflected in the New York Mercantile Exchange as of the settlement of the last trading day for the contract month coincident with the effective date of the Reserve Report (as adjusted for appropriate quality, transportation and location differentials approved by Lenders), using price escalators or de-escalators existing in the market as determined by Lenders at the time the Reserve Report is being prepared, for the remaining life of the Properties; 40 (B) for all Natural Gas to be sold by Borrower on a fixed price basis pursuant to any bona fide contract or with respect to which the price has been hedged pursuant to any New York Mercantile Exchange contract or bona fide price swap agreement or arrangement, the purchase price will be the fixed price (as adjusted for appropriate quality, transportation and location differentials approved by Lenders) for the volumes indicated in the contract, agreement or arrangement; (C) for Crude Oil to be sold by Borrower other than Crude Oil described in Section 5.10(b)(ii)(D) below, the purchase price for each calendar year shall be the average of the monthly prices provided to Borrower by Administrative Agent for that year for Crude Oil as reflected in the New York Mercantile Exchange as of the settlement on the last trading day for the contract month coincident with the effective date of the Reserve Report (as adjusted for appropriate quality, transportation and location differentials approved by Lenders), using price escalators or de-escalators existing in the market as determined by Lenders at the time the Reserve Report is being prepared, for the remaining life of the Properties; (D) for Crude Oil to be sold by Borrower on a fixed price basis pursuant to any bona fide contract or for which the price has been hedged pursuant to any New York Mercantile Exchange contract or bona fide price swap agreement or arrangement, the purchase price will be the fixed price (as adjusted for appropriate quality, transportation and location differentials approved by Lenders) for the volumes indicated in the contract, agreement or arrangement. (c) reserves will be adjusted to reflect revisions to volume estimates of reserves since the effective date of the last Reserve Report; (d) projected operating expenses and capital expenditures will be adjusted to reflect (i) actual expense levels incurred since the effective date of the last Reserve Report and (ii) projected increases or decreases in anticipated operating expenses and capital expenditure levels; (e) each Reserve Report will separately report on PDP Reserves, PDNP Reserves and PUD Reserves and will utilize any other assumptions that Lenders may request from time to time; and (f) each Reserve Report shall be accompanied by a certificate of the Senior Vice President - Operations or other responsible officer of Borrower as required pursuant to Section 5.8, and such certificate will be substantially in the form of Exhibit I. 41 Borrower or Lenders, at the sole option of any of them so long as there are any Obligations owing to Lenders under this Agreement, may cause additional Reserve Reports meeting the requirements of the preceding paragraph to be prepared by the Engineers to be delivered to the other party. Except for the two (2) Reserve Reports each year required in the first paragraph of this Section 5.10 which will be paid for by Borrower, the costs and expenses of any additional reports will be borne by the party requesting the report. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing, then Lenders may request an additional Reserve Report to be prepared on an annual basis at the sole expense of Borrower. Section 5.11 Other Information. Borrower shall provide the Administrative Agent and the Lenders copies of any financial statement, report or notice furnished to or by any Person pursuant to the terms of any preferred stock designation, indenture, loan or credit or other similar agreement (including, without limitation, the Senior Credit Facility), other than this Agreement and not otherwise required to be furnished to the Lenders pursuant to any other provision of this Agreement. Borrower shall provide any other information concerning the financial condition of Borrower and Guarantor or any property of Borrower as Lenders may reasonably request from time to time. Section 5.12 Annual Operating Budget. Borrower shall provide to Lenders before Closing, and annually thereafter forty-five (45) days prior to the beginning of each calendar year (commencing with the 2005 calendar year annual operating budget), an annual operating budget for Borrower (as amended, supplemented, substituted or otherwise modified with the prior written consent of Lenders, the "Annual Operating Budget"). The Annual Operating Budget delivered to Lenders, and approved by Lenders in writing prior to Closing (and annually thereafter), shall cover the eighteen month period commencing July 1, 2003 and ending on December 31, 2004. The Annual Operating Budget shall include, and detail by project, all capital expenditures for the drilling or recompletion of any Wells which require the preparation of any AFE in accordance with the relevant Operating Agreement. The initial Annual Operating Budget, attached to this Agreement as Schedule 5.12, is approved by Lenders. Section 5.13 Charter Documents. Borrower shall provide Lenders copies of (a) all Borrower's Charter Documents including amendments or modifications, and (b) all Subsidiary Charter Documents including amendments and modifications. Section 5.14 Other Information. Borrower shall promptly provide all other information or reports related to Borrower, the Properties, the Personal Property or the Guarantor Properties as Lenders may reasonably request. Section 5.15 Information to Shareholders. Simultaneous with the distribution thereof to the Guarantor's Equity Interest holders, Borrower shall furnish to the Administrative Agent and the Lenders copies of all periodic and other reports, proxy statements and other materials distributed by Guarantor to its Equity Interest holders generally, including all filings with the Securities and Exchange Commission by Guarantor. 42 Section 5.16 Certificate of Chief Financial Officer; Hedging Agreements. Concurrently with the delivery of each Reserve Report hereunder, a certificate of the chief financial officer or other responsible officer of Borrower, in form and substance satisfactory to the Administrative Agent, setting forth as of the effective date of the Reserve Report, a true and complete list of all Hedging Agreements of the Borrower, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value therefor, credit support agreements not previously disclosed to the Lenders in writing, any margin required or supplied under any credit support document, and the counterparty to each such agreement. Section 5.17 Certificate of Insurer; Insurance Coverage. Concurrently with the delivery of annual financial statements hereunder (to the extent not previously provided to the Administrative Agent), a certificate of insurance coverage from each insurer with respect to the insurance required by Section 6.8 in form and substance satisfactory to the Administrative Agent, and, if requested by the Administrative Agent or any Lender, all copies of the applicable policies. In addition, Borrower will promptly deliver to Administrative Agent copies of all notices or other correspondence from any insurer in connection with any change to the coverages then in existence. Section 5.18 Reportable Transactions. Promptly after Borrower has notified Lenders of any intention by Borrower to treat the Term Loan and related transactions as being a "reportable transaction" (within the meaning of Treasury Regulation Section 1.6011-4), Borrower shall deliver to Lenders a duly completed copy of IRS Form 8886 or any successor form. Section 5.19 Borrower Financial Statements. To the extent any of the financial statements to be delivered to the Lenders under this Agreement present the financial condition of Guarantor or Guarantor and its subsidiaries, Lenders reserve the right to require Borrower to deliver to Lender similar financial statements presenting the financial condition of Borrower or Borrower and its subsidiaries. ARTICLE VI. Affirmative Covenants Borrower covenants and agrees that, so long as there are any Obligations owing to Lenders under this Agreement or under the Swap Agreement, or Lenders have any commitment to make Advances under this Agreement, and unless Lenders have previously consented in writing to Borrower's non-compliance, Borrower will comply with the following covenants: Section 6.1 Preservation of Existence. Borrower shall preserve and maintain its and its Subsidiaries' existence as corporations and all related rights, privileges and franchises. Section 6.2 Compliance with Law. Borrower and Borrower's Subsidiaries shall: (a) comply, and use all commercially reasonable efforts to cause any Operator to comply, with all federal, state or local laws and regulations regarding the collection, payment 43 and deposit of employees' income, unemployment and Social Security taxes and use all commercially reasonable efforts to cause each Operator to properly and timely make all royalty or overriding royalty payments and payments to all other interest owners in the Properties which it operates; (b) duly observe and conform in all material respects with all laws, rules and regulations made by any governmental authority, and all valid requirements of any regulatory body which may acquire jurisdiction, which apply or relate to ownership and operation of any or all of the Properties, including, without limitation, compliance with all obligations under the Environmental and Safety Regulations; (c) operate or cause each Property to be operated (whether or not such Property constitutes a "facility" as defined by CERCLA) so that no cleanup or other obligation arises in respect of CERCLA or other applicable federal law or under any state, local or municipal law, statute (including, without limitation, Hazardous Substance Laws), ordinance, rule or regulation designed to protect the environment or relating to the disposition, generation or transportation of hazardous waste, which would constitute a lien or charge on any property of Borrower prior in right to that of Lenders. If any claim of prior lien or charge is made or any similar obligation arises, Borrower will, at its own expense, (a) immediately cure or cause a third party to immediately cure the same and (b) indemnify and hold harmless Lenders and its officers, directors, agents and employees from any related liability, responsibility or obligation in connection with any cleanup or other liability as successor, secured party or otherwise (regardless of whether or not Lenders may be deemed to be an "owner or operator" under CERCLA) for any reason including, without limitation, the enforcement of Lenders' rights as a secured party under this Agreement, the Security Documents or by operation of law; (d) comply with, and use all commercially reasonable efforts to cause material compliance by all of its Operators, agents and invitees with, all Environmental and Safety Regulations with respect to Hazardous Materials, and keep all of the Properties free and clear of any liens imposed by those regulations. If Borrower receives any notice from any Person with regard to the Release of Hazardous Materials on or from any of the Properties, Borrower shall promptly (and, in any event, prior to the expiration of any period in which to respond to such notice under any applicable Environmental and Safety Regulation) send a copy of the notice to Lenders; (e) cause any Operator to do or cause to be done all things reasonably necessary to preserve and keep in good repair, working order and efficiency all of its Properties including, without limitation, all equipment, machinery and facilities, and from time to time will make all the reasonably necessary repairs, renewals and replacements so that at all times the state and condition of its Properties will be fully preserved and maintained, except to the extent a portion of such Properties is no longer capable of producing in paying quantities; (f) comply with ERISA and all applicable rules and regulations; and 44 (g) promptly (i) pay and discharge, or make reasonable and customary efforts to cause to be paid and discharged, all delay rentals, royalties, expenses, severance taxes and other taxes and indebtedness accruing under the leases or other agreements affecting or pertaining to its Properties, (ii) perform or make reasonable and customary efforts to cause to be performed, in accordance with industry standards, the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in its Properties, (iii) will and will cause each Affiliate to do all other things necessary to keep unimpaired, except for Liens described in Section 7.5, its rights with respect to its Properties and prevent any forfeiture thereof or a default thereunder, except to the extent a portion of such Properties is no longer capable of producing in paying quantities. Section 6.3 Environmental Matters. (a) The Borrower shall at its expense: (i) comply, and shall cause the Properties and operations to comply, with all applicable Environmental Laws, the breach of which could be reasonably expected to have a Material Adverse Effect; (ii) not dispose of or otherwise release, any oil, oil and gas waste, hazardous substance, or solid waste on, under, about or from any of the Properties or any other property to the extent caused by the Borrower's or any Subsidiaries' operations except in compliance with applicable Environmental Laws, the disposal or release of which could reasonably be expected to have a Material Adverse Effect; (iii) timely obtain or file all notices, permits, licenses, exemptions, approvals, registrations or other authorizations, if any, required under applicable Environmental Laws to be obtained or filed in connection with the operation or use of the Borrower's Properties, which failure to obtain or file could reasonably be expected to have a Material Adverse Effect; (iv) promptly commence and diligently prosecute to completion any assessment, evaluation, investigation, monitoring, containment, cleanup, removal, repair, restoration, remediation or other remedial obligations (collectively, the "Remedial Work") in the event any Remedial Work is required or reasonably necessary under applicable Environmental Laws because of or in connection with the actual or suspected past, present or future disposal or other release of any oil, oil and gas waste, hazardous substance or solid waste on, under, about or from any of the Borrower's Properties, which failure to commence and diligently prosecute to completion could reasonably be expected to have a Material Adverse Effect; and (v) establish and implement such procedures as may be necessary to continuously determine and assure that the Borrower's obligations under this Section 6.3(a) are timely and fully satisfied, which failure to establish and implement could reasonably be expected to have a Material Adverse Effect. (b) The Borrower will promptly, but in no event later than five days of the occurrence of a triggering event, notify the Administrative Agent and the Lenders in writing of any threatened action, investigation or inquiry by any Governmental Authority or any threatened demand or lawsuit by any landowner or other third party against the Borrower, any Subsidiary or the Properties of which the Borrower has knowledge in connection with any Environmental Laws (excluding routine testing and corrective action) if the Borrower reasonably anticipates that such action will result in liability (whether individually or in the aggregate) in excess of five hundred thousand dollars ($500,000), not fully covered by insurance, subject to normal deductibles. 45 (c) The Borrower will provide environmental audits and tests in accordance with American Society of Testing Materials standards upon request by the Administrative Agent and the Lenders and no more than once per year in the absence of any Event of Default (or as otherwise required to be obtained by the Administrative Agent or the Lenders by any Governmental Authority), in connection with any future acquisitions of any other Properties. Section 6.4 Records. Borrower shall keep adequate records and books of account with respect to the business activities of Borrower and its Subsidiaries and the Properties in which proper entries are made in accordance with GAAP reflecting all financial transactions of Borrower and its Subsidiaries. The Borrower shall keep separate books and records than its Affiliates and shall conduct its business separately from the business of POG. Section 6.5 Litigation. Borrower shall give Lenders prompt written notice of any suit at law or in equity or any investigation or proceeding before or by any administrative or governmental agency known to Borrower that could: (a) limit, prohibit or restrict the manner in which Borrower or any Subsidiary presently conducts its business or (b) declare any substance contained in any product used, sold or distributed by Borrower or any Subsidiary to be a Hazardous Material in violation of Hazardous Substance Laws. Section 6.6 Damage to Collateral. Borrower shall give Lenders prompt written notice of (a) damage to any of the Collateral causing a loss in excess of five hundred thousand dollars ($500,000); and (b) the occurrence of any condition or event which has caused or may cause loss or depreciation in excess of five hundred thousand dollars ($500,000) with respect to any of the Collateral excluding market fluctuation for the price paid for Hydrocarbons. Section 6.7 Solvency. Borrower shall conduct all operations in a manner as is necessary to remain Solvent. Section 6.8 Insurance. Borrower shall maintain with financially sound and reputable insurance companies not Affiliates of Borrower, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts (after giving effect to any self-insurance compatible with the following standards) as are customarily carried under similar circumstances by such other Persons and providing for not less than 30 days' prior notice to Administrative Agent of termination, lapse or cancellation of such insurance. 46 Section 6.9 Delivery of Instruments. Borrower shall deliver to Lenders upon its request copies of all contracts, statements, invoices, notices, receipts and vouchers under which Borrower has incurred or is to incur costs, and deliver to Lenders all other data or documents in connection with Borrower's operations as Lenders may from time to time reasonably request. Section 6.10 Consultants. Borrower shall accord to Lenders the right, with prior written notice to Borrower (except upon the occurrence and during the continuation of an Event of Default, in which case no prior written notice is required), from time to time, to select and retain consultants, including engineers and public accountants, to advise Lenders as to technical and financial matters pertaining to Borrower's operations relating to the Properties and Borrower's financial records. Except as otherwise provided in this Agreement, the reasonable fees and costs charged by Lenders' consultants will be paid by Borrower. Borrower shall allow Lenders' consultants access during normal business hours to the Properties and all other facilities owned, operated or used by Borrower in connection with the Properties or the conduct of Borrower's business and to Borrower's records (financial or otherwise) relating to the operation of the Properties. The access granted to Lenders and its consultants under this Section 6.10 will not unreasonably disrupt the business of Borrower or the operation of the Properties. Section 6.11 Creditors. Borrower shall promptly, upon Lenders' request, provide Lenders with a statement showing the identity of Borrower's and its Subsidiaries' creditors, the amount due to each, and the date each payment is due. Borrower shall notify Lenders immediately if Borrower or any Subsidiary fails to make any payment (other than a contested payment) in accordance with required terms to lessors, suppliers, vendors, owners of Royalty Interests, third-party Working Interest owners, tax authorities or others relating to the Properties, including, without limitation, owners or holders of overriding royalty interests, net profit interests, production payments, or any other liens or burdens on or relating to the Properties, where non-payment would create any lien rights against any item of Collateral or otherwise interfere with or jeopardize performance by Borrower under this Agreement. Upon receipt of a notice of non-payment from Borrower, Lenders may, but need not, make in its reasonable discretion, any payments or agree to pay any persons as are required to enable Borrower to complete performance under this Agreement or to protect the interests of Lenders in production from or allocable to Borrower's Net Revenue Interest in the Properties or other Collateral, and those payments will be immediately reimbursed to Lenders by Borrower on demand. Borrower's obligation to reimburse Lenders for any payments will be secured by the security interests and the liens granted under the Security Documents. Section 6.12 Inspection. Borrower shall, so long as any Obligation remains owing to Lenders or any Collateral remains located at any of the Properties or other facilities owned or leased by Borrower, accord Lenders or its agents full and unrestricted access (at Lenders' risk) upon the giving of reasonable notice under the circumstances (subject to reasonable safety restrictions and in accordance with prudent operator standards) during normal business hours to the Properties and such other facilities to permit Lenders or its agents to, among other things, witness drilling, workovers and other field activities and inspect or take delivery of production. Borrower shall give Lenders or its agents due notice of drilling, workovers and other field activities to permit Lenders to exercise its rights under this Section 6.12. The access granted to 47 Lenders under this Section 6.12 will not unreasonably disrupt the business of Borrower or the operation of the Properties. Section 6.13 Environmental Opinion. Borrower shall, upon Lenders' reasonable request, obtain opinions from counsel or other consultants reasonably satisfactory to Lenders that Borrower has all permits, licenses and other approvals required by the EPA and other applicable Governmental Authorities, and the current and planned operations of the Properties are in compliance with all applicable laws and requirements. Section 6.14 Operators. Borrower shall, in the event of a failure by any Operator to perform any obligations under the respective Operating Agreement or upon the occurrence of a Default under this Agreement which is not cured within the applicable cure period: (a) immediately, upon the request of Lenders, vote or cause the applicable Subsidiary to vote to remove an Operator or commence any proceedings necessary under the applicable Operating Agreement to remove an Operator or assign to Lenders its right to vote to remove the Operator with respect to the Properties; provided, however, that Borrower and the Lenders agree and acknowledge that the removal of an Operator under this Section 6.14 is subject to the consent of the Senior Lender pursuant to Section 6.33 of the Senior Credit Facility, (b) seek indemnification or damages from the Operator and its successors or assigns for any loss or liability incurred by Borrower or any Subsidiary, (c) deliver or use all commercially reasonable efforts to cause each Operator to deliver to any successor Operator all books, agreements, contracts, papers, records (including but not limited to royalty payment records, computerized tapes and other royalty payment information), division orders, farm-in and farmout agreements, and all other records, contracts, agreements, papers or documents, written, printed or computerized, which may be pertinent in any way to the operations to be conducted by the successor Operator or which may have been conducted by the former Operator, (d) cooperate, and use all commercially reasonable efforts to cause each Operator to fully cooperate with the successor Operator to ensure that the Leases are not terminated or the value of the Properties diminished by virtue of the resignation or removal, and (e) take all other actions and use all commercially reasonable efforts to cause each Operator to take all other actions necessary to ensure an orderly transition of all operations to the successor Operator. Borrower shall promptly reimburse Lenders for any payments made pursuant to this Section 6.14. The rights and remedies of Lenders under this Section 6.14 are in addition to any other rights or remedies available under Article XI or elsewhere in this Agreement. Section 6.15 Purchasers of Hydrocarbons. Borrower shall, in the event that any Purchaser of Hydrocarbons is, in Lenders' reasonable judgment, not creditworthy, upon the request of Lenders, (i) cause the Purchaser to provide one or more letters of credit, in form and 48 substance and from a bank satisfactory to Lenders in connection with its purchase of Hydrocarbons from the Properties, (ii) sell Hydrocarbons only to Purchasers who are creditworthy in Lenders' reasonable judgment or who prepay, or (iii) exercise its right to take the Hydrocarbons in kind and sell to Purchasers of Hydrocarbons who are creditworthy in Lenders' reasonable judgment. Section 6.16 Access to Officers, Employees and Agents. Borrower shall allow Lenders reasonable access to appropriate officers, employees and agents of Borrower and its Subsidiaries to discuss the affairs, finances and accounts of Borrower and its Subsidiaries at all reasonable times and as often as Lenders may reasonably request. Section 6.17 Hedging Hydrocarbon Production. (a) Hedges at Closing. At or prior to Closing, Borrower shall enter into an energy price hedging or swap pursuant to a Hedging Agreement with Senior Lender or other Person acceptable to MAC or a Swap Agreement (in either case, in form and substance satisfactory to Lenders in their sole and absolute discretion) such that up to seventy percent (70%) of the volume of PDP Reserves scheduled to be produced for the period commencing on the Closing Date through and including the Maturity Date (based upon the most recent Reserve Report) are dedicated to the Hedging Agreement or other price risk management program approved by Lenders. (b) Additional Hedges. Beginning six (6) months after Closing and continuing each six (6) months thereafter (upon receipt of an updated Reserve Report) or more frequently if Borrower and the Lenders so agree, Lenders may require Borrower to enter into one or more additional Hydrocarbon Hedging Agreement such that up to sixty-five percent (65%) of the incremental PDP Reserves identified in the most current Reserve Report are dedicated to the Hedging Agreement or other price risk management program approved by Lenders in their sole and absolute discretion. (c) Miscellaneous. The minimum average price for all PDP Reserves subject to the Swap Agreement at Closing shall, for the periods from the Closing Date through the Maturity Date, be as described on Schedule 6.17. Lenders may require that Borrower's hedging program be extended beyond the Maturity Date if any of the Obligations remain outstanding as of that date, and if so required, Borrower shall enter into such additional energy price hedging arrangements necessary to comply with Lender's request. (d) MAC As Counterparty. At least forty percent (40%) of the total future hedged Hydrocarbon volumes will be hedged under a Swap Agreement with MAC with a maximum credit margin of twelve and one-half cents ($0.125) per mmbtu of natural gas and forty cents ($0.40) per barrel of crude oil on a swap equivalent basis or as otherwise agreed by Borrower and MAC. Notwithstanding the previous sentence, however, nothing in this Section 6.17(d) will be construed to require Borrower to enter into any hedging transaction with MAC on terms and conditions that are not reasonably competitive with the terms and conditions on which comparable counterparties are both willing and able to enter into like hedge 49 transactions at the time of such transaction (the "Competing Hedge Terms"). Borrower shall notify MAC in writing prior to entering into any hedge transaction with MAC that Borrower reasonably believes is subject to terms or conditions that are not reasonably competitive with Competing Hedge Terms. Promptly following MAC's receipt of a written notice from Borrower pursuant to the immediately preceding sentence, MAC and Borrower will confer and, if necessary, attempt to identify a mutually acceptable amendment to this Section 6.17(d). (e) Unless otherwise approved by Lenders, the sole counterparty to any Hedging Agreement with Borrower shall be MAC or its Affiliates or BankOne, N.A. or its Affiliates. Section 6.18 Use of Proceeds. Borrower shall use all amounts Advanced under the Term Loan only as described in this Agreement and as approved in writing by the Lenders in connection with each Advance. Section 6.19 Bonds. Borrower shall, and shall cause each Subsidiary to, maintain in full force and effect all federal and state qualifications, bonds and approvals necessary to own and operate the Properties, and deliver to Lenders certificates evidencing any bonds and copies of any bonds in place (including renewals). Section 6.20 Minimum Payments. Borrower shall pay to Lenders all outstanding interest calculated at the rate specified in this Agreement on all Obligations (including Obligations which are for fees or to reimburse or indemnify Lenders) on each Repayment Date. Section 6.21 Post-Closing Title Opinions. Within sixty (60) days following Closing, Borrower will deliver to Lenders post-closing title opinions (or other title information acceptable to Lenders) in form and substance acceptable to Lenders covering not less than 81% of the Proved Reserves Properties showing a Mortgage Lien in favor of the Administrative Agent for the ratable benefit of the Lenders subject only to Permitted Encumbrances. Additionally, as requested by Lenders, Borrower will provide Lenders with new, updated or supplemental title opinions (or other title information acceptable to Lenders) on Proved Reserves Properties that are added as Collateral. Section 6.22 Continuing Enterprise. Borrower shall, and shall cause each Subsidiary to, continue to conduct its operations on such a scale and in such a manner as is necessary to (a) perform its obligations under this Agreement and the Basic Documents, and (b) preserve its rights to the Properties and its rights under the Basic Documents. Section 6.23 Venue for Debtor Relief Proceedings. If Borrower voluntarily commences any proceeding under any Debtor Relief Law, Borrower shall initiate and maintain the proceeding in a court within the Southern District of Texas. Section 6.24 Access to Seismic and Geophysical Data. Borrower and Guarantor shall provide Lenders and their respective engineering consultants with access to all engineering, seismic, geological and geophysical data, studies and evaluations which Borrower or Guarantor 50 possess or to which Borrower or Guarantor has access which relate to the Properties. Lenders will, upon reasonable notice to Borrower or Guarantor as applicable, have access to these records during regular business hours; provided, however, to the extent the information to be made available to Lenders under this Section 6.24 is subject to a confidentiality agreement, Borrower or Guarantor, as applicable, may require Lenders to execute and deliver to it a mutually acceptable confidentiality agreement prior to being allowed access to the confidential information. Section 6.25 Liens on Collateral. The Borrower will at all times cause at least 90% of the PDP Properties to be subject to a perfected Mortgage Lien in favor of or for the benefit of the Lenders pursuant to the Security Documents subject only to the Senior Liens and Permitted Encumbrances. Section 6.26 Certain Financial Covenants. Borrower shall, at all times while the Obligations are outstanding: (a) maintain an Interest Coverage Ratio of 2.50 to 1.00; (b) maintain a Current Ratio of 1.30 to 1.00 until December 31, 2004 and 1:00 to 1:00 thereafter; (c) maintain a Total Adjusted Present Value Ratio of 2.00 to 1.00; (d) maintain a Developed Reserve Adjusted Present Value Ratio of 2.00 to 1.00; and (e) maintain all financial covenants set out in the Senior Credit Facility. Section 6.27 Additional Guarantors. Notify Administrative Agent at the time that any Person becomes a Subsidiary, and promptly thereafter (and in any event within 30 days), cause such Person to (a) become a Guarantor by executing and delivering to Administrative Agent for the benefit of Lenders a counterpart of the Guaranty Agreements or such other document as Administrative Agent shall deem appropriate for such purpose, and (b) deliver to Administrative Agent documents of the types referred to in clauses (iii) and (iv) of Section 9.2(h) and favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to in clause (a)), all in form, content and scope reasonably satisfactory to Administrative Agent. Section 6.28 Collateral Records. Borrower agrees to execute and deliver promptly, and to cause each Subsidiary to execute and deliver promptly, to Administrative Agent, from time to time, solely for Administrative Agent's convenience in maintaining a record of the Collateral, such written statements and schedules as Administrative Agent may reasonably require designating, identifying or describing the Collateral. The failure by Borrower or any other Person, however, to promptly give Administrative Agent such statements or schedules shall not 51 affect, diminish, modify or otherwise limit the Liens on the Collateral granted pursuant to the Collateral Documents. ARTICLE VII. Negative Covenants So long as there are any Obligations owing to Lenders under this Agreement or a Swap Agreement, and unless Lenders has previously consented in writing to Borrower's non-compliance, Borrower will comply with the following covenants: Section 7.1 Debt. Borrower shall not, and shall not permit any Subsidiary to, create, incur, assume or suffer to exist any Debt, except: (i) Obligations to Lenders; (ii) obligations outstanding under the Senior Credit Facility; (iii) Capitalized leases which do not exceed five hundred thousand dollars ($500,000) in the aggregate; (iv) obligations secured by Permitted Encumbrances; (v) obligations in connection with a Hedging Agreement required by this Agreement or otherwise approved by Lenders and described on Schedule 7.1(v); (vi) accounts payable and accrued expenses, liabilities or other obligations to pay the deferred purchase price of property or services, from time to time incurred in the ordinary course of business which are not greater than ninety (90) days past the date of invoice or delinquent or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (vii) endorsements of negotiable instruments for collection in the ordinary course of business; (viii) Debt existing on the date hereof and described in Schedule 7.1(viii); (ix) obligations among Guarantor, Borrower or any of their Subsidiaries; (x) obligations described on Schedule 7.1(x) associated with bonds or surety obligations required by any governmental or regulatory authority or prior owner in connection with owning or operating its Hydrocarbon properties in the ordinary course of business; 52 (xi) obligations not to exceed at any one time $500,000 related to purchase money financing; (xii) obligations relating to net production imbalances not to exceed at any one time $1,000,000; (xiii) obligations relating to overriding royalties and other interests carved out of production incurred in the ordinary course of oil and gas exploration and development projects; (xiv) obligations associated with the financing of premiums for business insurance of Guarantor, Borrower and their Subsidiaries; (xv) contingent obligations of Guarantor described on Schedule 7.1(xv) in connection with guarantees of the obligations of Borrower and its Subsidiaries in connection with owning and operating Hydrocarbon properties in the ordinary course of business; and (xvi) non-recourse obligations not to exceed $25,000,000. Section 7.2 Accounts. Borrower shall not sell, discount or factor its accounts, instruments, intangibles, leases or chattel paper. Section 7.3 Guaranties. Borrower shall not assume, guaranty or endorse or otherwise become directly or contingently liable for any liability of any other Person except as provided in the Senior Credit Facility and except for the indemnification obligations contained in this Agreement and the Security Documents. The preceding sentence will not prohibit the endorsement of negotiable instruments for deposit or collection or the incurrence of obligations under the Operating Agreements and similar transactions in the ordinary course of business. For purposes of this Section 7.3, the term "guaranty" includes any agreement, whether contingent or otherwise, to purchase, repurchase or otherwise acquire any obligation or liability of any other Person, or to purchase, sell or lease, as lessee or lessor, property or services, in any case primarily for the purpose of enabling another Person to make payment of any debt or liability, or to make any payment (whether as a capital contribution, purchase of an equity interest or otherwise) to assure a minimum equity, asset base, working capital or other balance sheet or financial condition, in connection with a debt or liability of another Person, or to supply funds to or in any manner invest in another Person in connection with that Person's debts or liabilities. Section 7.4 Ownership and Business Operations. Borrower shall not: (a) (i) acquire or agree to acquire all or any material portion of the stock, securities or assets of any other Person, (ii) suffer any Change of Control or (iii) merge into or consolidate with any other Person; provided, however, that Guarantor, Borrower or any Subsidiary may acquire by purchase, merger or otherwise, additional Hydrocarbon properties or the capital stock or interests of any Person whose business is the ownership and operation of Hydrocarbon properties to the extent such transaction does not result in a Change of Control; 53 (b) enter into any business which is, in Lenders' reasonable judgment, significantly different from its present business; (c) sell, transfer, assign or grant any Person an option to acquire any of its assets (as that term is defined in accordance with GAAP) or take any similar action except: (i) the sales of Hydrocarbons in the ordinary course of business. (ii) transfers of interests in Hydrocarbon properties in the ordinary course of the joint development of Hydrocarbon properties with others, including without limitation transfers to other parties to joint development agreements, participation agreements, farmout agreements, farmin agreements, exploration agreements, operating agreements and unit agreements; (iii) the sale or transfer of equipment that is no longer necessary for their business or is replaced by equipment of at least comparable value and use; and (iv) during consecutive twelve month period, sales or other dispositions of Hydrocarbon properties in the ordinary course that will not exceed $1,000,000 in the aggregate, and that will not materially impair or diminish the value of the Collateral or the Borrower's financial condition; upon the written request of Borrower setting forth in reasonable detail the transfer, sale or conveyance of assets in a transaction permitted by this Section 7.4(c), Administrative Agent will execute and deliver to Borrower such documentation as is reasonably necessary in the opinion of Administrative Agent and its counsel to release the Lien of Lenders on the assets transferred, sold or conveyed; (d) cancel any claim or Debt during the term of the Term Loan, except for consideration and in the ordinary course of its business; (e) prepay any Debt other than Obligations owing to Lenders hereunder and obligations owing under the Senior Credit Facility; (f) cause or suffer to exist a default under any lease, mortgage, deed of trust or lien on real estate owned or leased by Borrower; (g) except as permitted in Section 7.1(ix), make any loan or advance or extend any credit during the term of the Term Loan (except in the ordinary course of business) to any Person, whether or not an Affiliate of Borrower; (h) transfer its executive offices, or change its company name or reorganize as an entity other than a corporation or in a jurisdiction other than the jurisdiction under which it is organized on the date of this Agreement; (i) change its fiscal year; 54 (j) allow (i) the abandonment of any Well capable of commercial production, or the release or abandonment of all or any part of Borrower's Working Interest or Net Revenue Interest in any of the Properties capable of commercial production, or release or abandon all or any portion of the Properties except in accordance with prudent operator standards; (ii) Borrower's Net Revenue Interest in the Properties to be developed, maintained or operated in a manner less favorable than prudent operator standards; and (iii) any material alterations in the Basic Documents; (k) except in the ordinary course of business and as permitted under this Agreement, enter into any new agreement or contract with any Person relating to or affecting any of the Properties that could be material in the context of any particular Lease; (l) make or commit to make any expenditure in connection with any project or activity not included in the then current Annual Operating Budget which has been approved in writing by Lenders; or (m) except as otherwise approved in writing by Lenders in their sole and absolute discretion, make or commit to make any expenditures in excess of the aggregate expenditures included in the then current Annual Operating Budget which has been approved in writing by Lenders. For the avoidance of doubt, the Annual Operating Budget sets forth 115% of the aggregate expenditures contemplated to be made by Borrower during the Annual Operating Budget period. Section 7.5 Liens and Encumbrances. Except as set forth on Schedule 7.5, Borrower shall not: (a) suffer to exist any Lien or consent to the filing of any financing statement on any of its property (including Borrower's and each Subsidiaries' Working Interest or Net Revenue Interest in the Properties) other than: (i) the Liens created by and granted to Lenders under this Agreement and the Security Documents; (ii) the Senior Liens and the other liens and encumbrances permitted under Section 6.15 of the Senior Credit Facility; (iii) the Permitted Encumbrances; and (iv) Liens securing capital leases permitted by Section 7.1(iii); (b) dedicate, sell, encumber or dispose of, or suffer to exist any agreement for the sale, disposition or encumbrance of, Borrower's or any Subsidiaries' Working Interest and/or Net Revenue Interest in the Properties or of any oil and gas production attributable to Borrower's Working Interest or Net Revenue Interest in the Properties except in the ordinary course of business or as otherwise permitted in this Agreement; 55 (c) in connection with the sale or other disposition of all or any portion of the Properties, reserve any recorded or unrecorded executory rights in Borrower's Working Interest or Net Revenue Interest in the Properties except as consented to in writing by Lenders; or (d) allow any of its or its Subsidiaries' accounts payable to remain unpaid after the expiration of ninety (90) days from the invoice date except for those that are being contested in good faith and for which adequate reserves have been established and maintained in accordance with GAAP. Section 7.6 Investments. Borrower shall not and shall not permit any Subsidiary to make, or suffer to exist, any Investment except Investments in certificates of deposit or other obligations issued by a bank or trust company having capital, surplus and undivided profits of at least one hundred million dollars ($100,000,000), or obligations of the United States government or any agency thereof or as otherwise permitted under Section 6.14 of the Senior Credit Facility or under this Agreement. Section 7.7 Subsidiaries and Divestitures. Neither Borrower nor any Subsidiary shall create any direct or indirect subsidiary or divest itself of any material assets by (i) transferring them to any future subsidiary or (ii) by entering into a partnership, joint venture, or similar arrangement. Neither Borrower nor any Subsidiary shall make any material change in its capital structure or enter into any management contract permitting a third party to exercise management rights with respect to Borrower's business other than pursuant to an Operating Agreement. Section 7.8 Compliance with Laws. Borrower shall not and shall not permit any Subsidiary to (a) violate any Environmental and Safety Regulation in any material respect; or (b) use or permit the use of any of the Properties to generate, treat, store, handle, transport or dispose of Hazardous Materials except in strict compliance with all applicable Environmental and Safety Regulations. Upon the occurrence of any Release of Hazardous Materials, Borrower shall promptly commence and perform, or cause to be promptly commenced and performed, without cost to Lenders, all investigations, studies, sampling and testing, and all remedial, removal and other actions necessary to clean up and remove all Hazardous Materials Released to the full extent necessary to comply with the requirements of all applicable Environmental and Safety Regulations. Section 7.9 Dividends and Distributions. Neither Guarantor nor Borrower will, nor will they permit any Subsidiary to, declare or pay any dividends or make any distributions on its capital stock or membership interests (other than dividends payable in its own capital stock or membership interests, as applicable) or redeem, repurchase or otherwise acquire or retire any of its capital stock or membership interests at any time outstanding, except that: (a) Borrower or any Subsidiary of Borrower may declare and pay dividends or make distributions to its members or shareholders; or (b) Guarantor may repurchase, repay, defease, redeem or otherwise acquire or retire any capital stock with the contemporaneous issuance of the capital stock of the Guarantor. 56 Section 7.10 Modifications. Borrower shall not alter, amend or cause the alteration or amendment of any of the Loan Documents or the Senior Credit Facility or any Hedging Agreement without the prior written consent of Lenders. Section 7.11 Debt Threshold. Permit the combined amount of Outstanding Debt pursuant to the Senior Credit Facility and this Agreement plus the combined committed but undrawn amounts under the Senior Credit Facility and this Agreement (but excluding that undrawn amount which represents twenty percent (20%) of the Senior Credit Facility "borrowing base" which must remain undrawn at all times by Borrower) to exceed, in the aggregate, twenty-five million dollars ($25,000,000.00); provided, however, for the purpose of computing the limitation under this Section 7.11, "committed but undrawn amounts" under this Agreement will be included in the calculation only to the extent Borrower is permitted to draw such amounts and Lenders are permitted to advance such amounts under the terms of the Senior Credit Facility and the Intercreditor Agreement. Section 7.12 Senior Credit Facility. Permit the amount of indebtedness outstanding under the Senior Credit Facility (including outstanding letters of credit) to exceed 80% of the Senior Credit Facility borrowing base. Section 7.13 Quarterly Production Levels and Net Operating Cash Flow. Beginning with the calendar quarter commencing July 1, 2003, Borrower shall not allow (a) Production Volumes pertaining to Borrower's Net Revenue Interest in the Properties and (b) Net Operating Cash Flow to fall below the quarterly amounts set forth on Schedule 7.13. Section 7.14 General and Administrative Expenses. Permit Borrower's and Guarantor's consolidated G&A Expenses to exceed: (a) four million five hundred thousand dollars ($4,500,000) in the aggregate for the last six calendar months of 2003; or (b) for each calendar quarter beginning January 1, 2004, the lesser of (i) two million five hundred thousand ($2,500,000) or (ii) thirty-one percent (31%) of the Tax Adjusted Gross Margin; provided, however, if Borrower's and Guarantor's consolidated G&A Expenses for any quarter exceed 31% of the Tax Adjusted Gross Margin, the maximum allowable consolidated G&A Expenses for Borrower and Guarantor during the immediately succeeding quarter will be 18% of the Tax Adjusted Gross margin; and provided further that a breach of clause (ii) of this Section 7.14(b) can only form the basis of an Event of Default if Borrower's and Guarantor's consolidated G&A Expenses exceed (x) 31% of the Tax Adjusted Gross Margin during any quarter and (y) 18% of the Tax Adjusted Gross Margin during the immediately succeeding quarter; and provided further that, notwithstanding anything in this Section 7.14(b) to the contrary, the consolidated G&A Expenses of Borrower and Guarantor shall not exceed 35% of the Tax Adjusted Gross Margin. Section 7.15 Other. Borrower shall not: 57 (a) fail to observe all of the provisions of Articles IV, V, and VI of this Agreement after the Closing, to the extent not already subsumed in this Article VII; (b) declare an Early Termination Date (as that term may be defined in the Swap Agreement) or any similar action pursuant to any Hedging Agreement without the prior written consent of Lenders; (c) enter into any Hedging Agreement not approved by Lenders; (d) enter into any transaction with any Affiliates (i) except in the ordinary course of business as it is currently being conducted or (ii) without the prior written consent of Lenders, and, in either case, Borrower shall conduct those transactions on an arm's-length basis; (e) except as otherwise authorized under this Agreement or otherwise approved in writing by Lenders in their sole and absolute discretion, enter into any financial transaction that is not usual or customary in the oil and gas industry; (f) engage in speculative or margin hedging transactions. Section 7.16 Proceeds of Term Loan. Borrower will not permit the proceeds of the Term Loan to be used for any purpose other than those permitted by Section 2.2. Neither the Borrower nor any Person acting on behalf of the Borrower has taken or will take any action which might cause any of the Loan Documents to violate Regulations T, U or X or any other regulation of the Board of Governors of the United States Federal Reserve System (the "Board") or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. If requested by the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 or such other form referred to in Regulation U, Regulation T or Regulation X of the Board, as the case may be. Section 7.17 Limitation on Leases. Borrower will not create, incur, assume or suffer to exist any obligation for the payment of rent or hire of property of any kind whatsoever (real or personal but excluding Capital Leases and leases of Hydrocarbon properties), under leases or lease agreements which would cause the aggregate amount of all payments made by the Borrower pursuant to all such leases or lease agreements, including, without limitation, any residual payments at the end of any lease, to exceed one million five hundred thousand dollars ($1,500,000) in any period of twelve consecutive calendar months during the life of such leases. Section 7.18 Nature of Business. Borrower will not allow any material change to be made in the character of the business of its Subsidiaries or its business as an independent oil and gas exploration and production company. Borrower will not and will not permit any Subsidiary to acquire or make any other expenditure (whether such expenditure is capital, operating or otherwise) in or related to, any oil and gas properties not located within the geographical boundaries of the United States including its outer continental shelf. 58 Section 7.19 POG. Borrower and PQUE will not permit POG to acquire any assets other than Working Interests and Royalty Interests in oil and gas properties, the beneficial interests of which are owned by persons other than Borrower or Guarantor. PQUE will not allow any other person to become a member of POG. PQUE will not nor will it permit the Borrower or any other subsidiary to transfer assets of any Guarantor or the Borrower to, or assume or discharge the liabilities of, POG, and shall enter into any further agreements as deemed necessary by Lender in its sole and absolute discretion to segregate the assets and liabilities of POG from those of Borrower and all Guarantors. ARTICLE VIII. Further Rights of Lenders Section 8.1 Delivery of Additional Documents. Until the Obligations are repaid in full, Borrower, at its own expense, shall do all things and shall deliver all instruments requested by Lenders to protect or perfect any security interest, mortgage or lien granted or created under this Agreement or any of the Security Documents. Lenders may examine, inspect and copy or make extracts from all books and records of Borrower at any time during regular business hours upon prior notice to Borrower. Borrower authorizes Lenders to execute alone any other instruments that Lenders may require to perfect, protect or establish any lien or security interest under this Agreement or any of the Security Documents and further authorizes Lenders to sign Borrower's name on any of those instruments. Upon the occurrence of an Event of Default, Borrower authorizes Lenders to appoint any Person or Persons as Lenders may designate as its agent and attorney-in-fact to endorse the name of Borrower on any checks, notes, drafts or other forms of payment or security that may come into the possession of either Lenders or any Affiliate of Lenders, to sign Borrower's name on invoices or bills of lading, drafts against customers, notices of assignment, verifications and schedules and, generally, to do all things necessary to carry out this Agreement and the Security Documents. The powers granted in this Section 8.1 are coupled with an interest and are, therefore, irrevocable. Neither Lenders nor any agent or attorney-in-fact will be liable to any Person for any act or omission, error in judgment or mistake of law that is not malicious or grossly negligent. Upon payment and performance of all Obligations of Borrower to Lenders, this power of attorney will become null and void. Section 8.2 Payments by Lenders. If Borrower fails to purchase or maintain insurance in accordance with this Agreement, or to pay any tax, assessment, government charge or levy in accordance with this Agreement, or in the event that any prohibited lien, encumbrance or security interest is not discharged in accordance with this Agreement, or in the event that Borrower fails to perform or comply with any other covenant, promise or Obligation under any Loan Document, Lenders may, but will not be required to, perform, pay, satisfy, discharge or bond the same for the account of Borrower, and all amounts paid by Lenders, including reasonable attorneys' fees and disbursements, will be deemed to be additional Obligations owing by Borrower to Lenders under this Agreement; provided, however, that Lenders will not make any payments on behalf of Borrower without providing Borrower prior written notice of at least three (3) Business Days. 59 Section 8.3 Payment of Taxes, Etc. Borrower and each Subsidiary shall pay all costs to be paid on taxes, assessments, governmental charges or private encumbrances levied, assessed, imposed or payable upon or with respect to any of the Collateral. Section 8.4 Possession. Upon the occurrence and during the continuation of an Event of Default, Lenders may (i) enter Borrower's or any Subsidiaries' premises at any time, and (ii) until it completes the enforcement of its rights in the Equipment or other Collateral subject to its security interest or lien under the Security Documents and the sale or other disposition of any property subject to those documents, take possession of those premises without charge, rent or payment, or place custodians in control any of the premises, remain on and use the premises and any of Borrower's or any Subsidiaries' Equipment and other Collateral for the purpose of completing any work in progress, preparing any Collateral for disposition or collecting any Collateral. Section 8.5 Indemnification. (a) BORROWER WILL, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, INDEMNIFY LENDERS AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AUTHORIZED AGENTS (COLLECTIVELY, THE "INDEMNIFIED PARTIES") AND HOLD EACH OF THEM HARMLESS FROM AND AGAINST ANY AND ALL INJURIES, CLAIMS, DAMAGES, JUDGMENTS, LIABILITIES, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, FEES AND DISBURSEMENTS OF COUNSEL), CHARGES AND ENCUMBRANCES WHICH MAY BE INCURRED BY OR ASSERTED AGAINST ANY OF THE INDEMNIFIED PARTIES IN CONNECTION WITH OR ARISING OUT OF ANY ASSERTION, DECLARATION OR DEFENSE OF LENDERS' RIGHTS OR SECURITY INTERESTS UNDER THE PROVISIONS OF THIS AGREEMENT, ANY SECURITY DOCUMENT OR ANY OTHER LOAN DOCUMENT OR IN CONNECTION WITH: (i) THE ACQUISITION OR OPERATION OF THE COLLATERAL; (ii) THE REALIZATION, REPOSSESSION, SAFEGUARDING, INSURING OR OTHER PROTECTION OF THE COLLATERAL WHILE AN EVENT OF DEFAULT IS CONTINUING; (iii) THE COLLECTING, PERFECTING OR PROTECTING OF LENDER'S LIENS AND SECURITY INTERESTS UNDER THIS AGREEMENT AND THE OTHER SECURITY DOCUMENTS; AND (iv) ANY INVESTIGATION, LITIGATION, OR PROCEEDING RELATED TO ANY PRESENT OR FUTURE ACQUISITION OR PROPOSED ACQUISITION BY BORROWER. BORROWER WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL RIGHTS IT MIGHT HAVE IN CONNECTION WITH ANY SUIT OR ACTION AGAINST LENDER TO CLAIM SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES TO IT, ITS BUSINESS OR ITS 60 PROSPECTS. BORROWER HAS CONSULTED WITH ITS COUNSEL WITH RESPECT TO THE PROVISIONS OF THIS SECTION 8.5 AND UNDERSTANDS THAT IT IS TO BE INTERPRETED BROADLY AGAINST BORROWER. (b) THE BORROWER SHALL INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN "INDEMNITEE") AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE, INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (i) THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR BY ANY OTHER LOAN DOCUMENT, (ii) THE FAILURE OF THE BORROWER OR ANY OTHER PERSON TO COMPLY WITH THE TERMS OF ANY LOAN DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (iii) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OR COVENANT OF THE BORROWER OR ANY GUARANTOR SET FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (iv) ANY LOAN OR ADVANCE OR THE USE OF THE PROCEEDS THEREFROM, (v) THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS AFFILIATES BY THE BORROWER AND ITS AFFILIATES, (vi) ANY ASSERTION THAT THE LENDERS WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE LOAN DOCUMENTS OR ANY INSTRUMENTS OR OTHER DOCUMENTS DELIVERED IN CONNECTION THEREWITH, (vii) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY AFFILIATE OR ANY OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE PRESENCE, GENERATION, STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT, DISPOSAL, ARRANGEMENT OF DISPOSAL OR TREATMENT OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES, (viii) THE BREACH OR NON-COMPLIANCE BY THE BORROWER OR ANY AFFILIATE WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY AFFILIATE, (ix) THE PAST OWNERSHIP BY THE BORROWER OR ANY AFFILIATE OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (x) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT, DISPOSAL, GENERATION, THREATENED RELEASE, TRANSPORT, ARRANGEMENT FOR TRANSPORT OR ARRANGEMENT FOR DISPOSAL OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS SUBSTANCES ON OR AT ANY OF THE 61 PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY AFFILIATE OR ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OF ITS AFFILIATES, (xi) ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OF ITS AFFILIATES, OR (xii) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, OR (xiii) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO, AND SUCH INDEMNITY SHALL EXTEND TO EACH INDEMNITEE NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNITEES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNITEES; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE. (c) To the extent permitted by applicable law, Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, any transaction contemplated hereby or thereby, any Advance or the use of the proceeds thereof. (d) All amounts due under this Section 8.5 shall be payable not later than ten (10) days after written demand therefor. ARTICLE IX. Closing; Conditions Precedent to Closing Section 9.1 Closing. Subject to the conditions stated in this Agreement, Closing will occur at a mutually agreeable time on or before November 7, 2003. The date the Loan Documents are executed will be the "Closing Date." Closing will occur at the offices of Porter & Hedges, L.L.P., 700 Louisiana, Suite 3500, Houston, Texas, at 10:00 a.m. on the Closing Date, or at any other place and time as Borrower and Lenders may agree in writing. Section 9.2 Conditions Precedent. At Closing, and as conditions to the commitments of the Lenders to make the Term Loan: 62 (a) Borrower shall execute and deliver to the Administrative Agent and the Lenders, respectively, each of the Loan Documents to which Borrower is a party required by Lenders to be delivered on the Closing Date; (b) Borrower will deliver to Lenders an opinion or opinions of counsel to Borrower, each of which will be in form and substance satisfactory to Lenders and their counsel substantially in the form of Exhibit H related to the Term Loan (whether in one or more separate opinions) and each opinion will provide that Lenders' Lenders or Lenders' assignees will be entitled to rely upon it; Borrower will also deliver to Lenders each other document identified on Annex II, duly executed by the applicable parties and in form and substance satisfactory to Lenders; (c) Lenders have obtained a report prepared by a consultant acceptable to Lenders confirming (i) Borrower's and Operator's compliance, in all material respects, with all applicable Laws and regulatory requirements and (ii) that Borrower or Operator have all necessary material permits and licenses; (d) An environmental consultant satisfactory to Lenders will investigate Borrower's compliance with all Environmental Laws, the results of which shall be satisfactory to Lenders in their sole discretion; (e) Borrower will deliver to Lenders title opinions or other evidence of title relating to the Properties showing Defensible Title to the Properties vested in Borrower subject only to the Permitted Encumbrances and otherwise satisfactory in form and substance to Lenders, together with a letter from the issuer or issuers of such opinions, if the opinions are not addressed to the Lenders, to the effect that Lenders are authorized to rely on the title opinions; (f) Borrower will deliver to Lenders copies of the Basic Documents and all other documents and instruments as Lenders may reasonably request, all of which will be satisfactory, in form and substance, to Lenders; (g) Each Person designated by Lenders on Schedule 9.2(g) will execute and deliver to Lenders a Subordination Agreement satisfactory in form and substance to Lenders; (h) Borrower will deliver to Lenders: (i) A copy of resolutions, in form and substance satisfactory to Lenders, authorizing (1) the execution, delivery and performance by Borrower of this Agreement, the Term Note, the Swap Agreement, the Intercreditor Agreement and the other Loan Documents to which it is or will be a party, (2) the borrowings contemplated by this Agreement, and (3) the granting of the liens, pledges and security interests contemplated by the Mortgage and the other Security Documents, certified as true and correct by the Secretary of Borrower as of the Closing Date and certifying that the resolutions have not been amended, modified, revoked or rescinded as of the Closing Date; 63 (ii) A certificate of the Secretary or Assistant Secretary of Borrower dated the Closing Date, certifying the incumbency and specimen signature of each of the officers of Borrower executing this Agreement, and the Term Note, the Security Documents, the Intercreditor Agreement, and any other Loan Documents to which Borrower is a party and any certificate or other documents to be delivered in connection with any of the Loan Documents, together with evidence of the incumbency of the certifying Secretary or Assistant Secretary; (iii) (1) A copy of the Certificate of Formation of Borrower, certified as of a date not more than 10 Business Days prior to the Closing Date by the Secretary of State of the State of Louisiana, (2) a certificate as of a date not more than 10 Business Days prior to the Closing Date from the Secretary of State for the State of Louisiana as to the existence of Borrower as a Louisiana limited liability company, (3) a certificate as of a date not more than 10 Business Days prior to the Closing Date from the Department of Revenue for the State of Louisiana as to the good standing of Borrower as a limited liability company, (4) a certificate from the Secretary of State of Texas not more than 10 Business Days prior to the Closing Date that Borrower is a limited liability company duly qualified as a foreign company to do business in the State of Texas, and (5) a certificate dated the Closing Date from the Secretary or Assistant Secretary of Borrower to the effect that the documents delivered pursuant to (1)-(4) are true and correct copies and, with regard to item (1) as on file with the Secretary of State for the State of Louisiana, no action has been taken to amend, modify or repeal that document and it remains in full force and effect in that same form on the Closing Date; and (iv) The items specified in (i)-(iii) above with respect to any Subsidiary of Borrower; (i) Guarantor will deliver to Lenders: (i) A copy of resolutions, in form and substance satisfactory to Lenders, authorizing (1) the execution, delivery and performance by Guarantor of this Agreement, the Pledge Agreement, the Guaranty and the other Loan Documents to which it is or will be a party, (2) Guarantor's guarantee of the Obligations, and borrowings contemplated by this Agreement, (3) the granting of the liens, pledges and security interests contemplated by the Pledge Agreement, certified as true and correct by the Secretary of Guarantor as of the Closing Date and certifying that the resolutions have not been amended, modified, revoked or rescinded as of the Closing Date; (ii) A certificate of the Secretary or Assistant Secretary of Guarantor dated the Closing Date, certifying the incumbency and specimen signature of each of the officers of Borrower executing this Agreement, and Pledge Agreement, the Guaranty and any other Loan Documents to which Borrower is a party and any certificate or other documents to be delivered in connection with any of the Loan Documents, together with evidence of the incumbency of the certifying Secretary or Assistant Secretary; (j) (iii) (1) A copy of the Certificate of Incorporation of Guarantor, certified as of a date not more than 10 Business Days prior to the Closing Date by the Secretary 64 of State of the State of Delaware, (2) a certificate as of a date not more than 10 Business Days prior to the Closing Date from the Secretary of State for the State of Delaware as to the existence and good standing of Guarantor as a Delaware corporation, (3) a certificate from the Secretary of State of Texas not more than 10 Business Days prior to the Closing Date that Guarantor is a corporation duly qualified as a foreign corporation to do business in the State of Texas, and (4) a certificate dated the Closing Date from the Secretary or Assistant Secretary of Guarantor to the effect that the documents delivered pursuant to (1) - (3) are true and correct copies and, with regard to item (1) as on file with the Secretary of State for the State of Delaware, no action has been taken to amend, modify or repeal that document and it remains in full force and effect in that same form on the Closing Date; (k) Borrower will deliver to Lenders a certificate of insurance evidencing the coverages required under this Agreement and the Administrative Agent and the Lenders have been named as additional insureds in respect of such liability insurance policies and the Administrative Agent has been named as loss payee with respect to property loss insurance; (l) Lenders will have reviewed and found acceptable Borrower's accounting and business systems (including "back-office" and administrative functions); (m) Borrower will have identified to Lenders independent public accountants Borrower will retain, which independent public accountants shall be satisfactory to Borrower and Lenders; (n) Borrower will execute and deliver to MAC or its designated Affiliate the Swap Agreement; (o) No Material Adverse Effect has occurred; (p) Except for the obligations listed (or, with the consent of Lenders, summarized) on Schedule 9.2(n), there are no unpaid bills for improvements or services to the Properties that could give rise to mechanic's or materialmen's liens or any other similar encumbrance arising by operation of applicable law; (q) Lenders are satisfied with the management of Borrower and all other due diligence conducted by Lenders relating to Borrower and its Subsidiaries; (r) The representations in each of the Loan Documents of Borrower and each other Person are true, complete and correct in all material respects; (s) Lenders are satisfied, in their sole discretion, with the results of its due diligence examination of Borrower, and the Properties, including, Borrower's proposed development of the Properties, satisfactory information regarding existing Hydrocarbon sales, and all aspects of Borrower's existing and contemplated Hydrocarbon marketing activities; 65 (t) No suit or other proceeding is pending or threatened before any court or governmental agency seeking to restrain, enjoin or prohibit or declare illegal, or seeking damages from Borrower in connection with the transactions contemplated in this Agreement (or the operations contemplated as part of those transactions) or alleging the breach of any material contract; (u) Borrower has reimbursed Lenders for all Related Costs for which invoices have been presented; (v) each of the Operating Agreements affecting the Properties will be satisfactory in form and substance to Lenders in their sole and absolute discretion; (w) each of the documents executed and delivered by Borrower or Guarantor in connection with the Senior Credit Facility will be satisfactory in form and substance to Lenders in their sole and absolute discretion; (x) the Senior Lender will have executed and delivered to Lenders an Intercreditor Agreement satisfactory in form and substance to Lenders in their sole and absolute discretion; (y) Borrower shall have prepared and submitted to Lenders an eighteen (18) month Annual Operating Budget for the further development of the Properties, and the budget is satisfactory in form and substance to Lenders in their sole and absolute discretion; (z) Borrower will have executed and delivered to Lenders the Warrant Agreement; (aa) Lenders will be satisfied in their sole and absolute discretion with Borrower's Hydrocarbon hedging program; (bb) the capital structures of Borrower and Guarantor will be satisfactory to Lenders in their sole and absolute discretion, and Lenders have received such financial statements of Guarantor, as requested, which shall be in form and substance satisfactory to the Lenders in their sole discretion, including, without limitation, a pro forma balance sheet to be delivered by Borrower to Lenders not less than three (3) Business Days prior to the Closing Date which represents Guarantor's financial condition immediately prior to and following the closing and funding of the Term Loan; (cc) the Commitment Fee will have been paid to Administrative Agent for the ratable benefit of the Lenders; and Section 9.3 Conditions Precedent to Funding of Term Loan. The funding of the Term Loan shall be subject to the following conditions: (a) Satisfaction of the conditions precedent set forth in Section 9.2; 66 (b) No Material Adverse change has occurred and is continuing; (c) The Senior Credit Facility with a borrowing base of at least eleven million seven hundred fifty thousand dollars ($11,750,000) shall have closed prior to or contemporaneously with the funding of the Term Loan; (d) all representations and warranties of Borrower and Guarantor set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects as of the date of the Advance except to the extent such representations and warranties are expressly limited to an earlier date, in which case the representations and warranties shall be true and correct as of such specified earlier date; (e) Borrower shall have delivered an Advance Request to the Administrative Agent in accordance with Section 2.2. Such Advance Request must be accompanied by copies of all approved AFEs included in the Annual Operating Budget as well as other supporting documentation satisfactory to Lenders evidencing the amount to be Advanced. Each AFE previously approved by Lenders in writing or other project description from the Annual Operating Budget delivered to Lender in conjunction with an Advance Request will detail all amounts Advanced to date by Lenders under that AFE or project description and the amount requested under the Advance Request. Notwithstanding anything to the contrary herein, Lenders shall not Advance any amount with respect to any specific activity included in the Annual Operating Budget that exceeds the amount included for such Well or project in the Annual Operating Budget inclusive of any amount included in the "Cost-Overrun" line-item of that Annual Operating Budget. (f) the hedging requirements required by Section 6.17 are in full force and effect; and (g) no Event of Default has occurred or is continuing and no circumstance exists which but for the lapse of time or notice from the Lenders or both would become an Event of Default. ARTICLE X. Events of Default Section 10.1 Events of Default. The occurrence and continuance of any of the following at any time during the term of this Agreement will be an "Event of Default": (a) Borrower fails to make any payment under this Agreement, the Term Note or any Security Document within two (2) Business Days after the date due; or (b) Borrower or any Affiliate of Borrower or any other obligor fails to comply with any material term, condition, or covenant of this Agreement (other than a payment obligation pursuant to Section 10.1(a)), the Term Note, the Intercreditor Agreement, any Security 67 Document, the Subordination Agreement or any other Loan Document, whether or not related to any payment Obligation; or (c) Borrower (i) executes an assignment for the benefit of its creditors, (ii) becomes or is adjudicated bankrupt or insolvent, (iii) admits in writing its inability to pay its debts generally as they become due, (iv) applies for or consents to the appointment of a conservator, receiver, trustee, or liquidator of Borrower or of all or any substantial part of its assets, (v) files a voluntary petition seeking reorganization or an arrangement with creditors, or to take advantage of or seek any other relief under any Debtor Relief Laws, (vi) files an answer admitting the material allegations of or consenting to, or defaults in, a petition filed against it in any proceeding under any Debtor Relief Laws, or (vii) institutes or voluntarily becomes a party to any other judicial proceedings intended to effect a discharge of its debts, in whole or in part, or seeking to postpone the maturity or the collection of any of its debts or to suspend any of the rights of Lenders or any of its Affiliates under any of the Loan Documents; or (d) (i) an order, judgment, or decree is entered by any court of competent jurisdiction approving a petition seeking reorganization of Borrower or appointing a conservator, receiver, trustee, or liquidator of Borrower, or of all or any substantial part of its assets, and the order, judgment, or decree is not permanently stayed or reversed within sixty (60) days after its entry, or (ii) a petition is filed against Borrower seeking reorganization, an arrangement with creditors, or any other relief under any Debtor Relief Laws, and the petition is not discharged within ninety (90) days after its filing; or (e) if any statement or representation contained in this Agreement, any Security Document, any other Loan Document, any financial statement or any certificate delivered by Borrower to Lenders shall prove to have been materially incorrect when made or deemed made; or (f) if any federal tax lien or any other liens totaling two hundred fifty thousand dollars ($250,000) or more are filed of record against Borrower, Operator or the Properties and not bonded or discharged within thirty (30) days after Borrower receives actual or constructive notice of its filing; or (g) if a judgment (i) for more than two hundred fifty thousand dollars ($250,000) or (ii) for any amount if the execution and enforcement of such judgment could adversely affect Borrower's or Operator's ability to operate the Properties is entered against Borrower or Operator and not stayed, vacated, bonded, paid, or discharged within thirty (30) days of its entry, except a judgment where the claim is fully covered by insurance and the insurance company has accepted liability for the claim or for which Borrower has adequate reserves under GAAP; or (h) upon the occurrence of any material violation by Borrower or Operator of the Properties of any applicable Law, including, without limitation, any Environmental and Safety Regulation; or 68 (i) unless Borrower provides written notice to Lenders (prior to the date on which such Debt becomes due) detailing to the satisfaction of Lenders the basis upon which Borrower intends to dispute the obligation, Borrower fails to pay any Debt in excess of two hundred fifty thousand dollars ($250,000) (other than Debt under this Agreement) or any related interest or premium, when due (whether at scheduled maturity or by acceleration, demand or otherwise) and the failure continues after the applicable grace period, if any, specified in the agreement or instrument relating to the Debt, or any other event occurs and continues after the applicable grace period, if any, specified in the applicable agreement or instrument, if the effect of the default or event is to accelerate or to permit the acceleration of the maturity of the Debt or permit the Debt to be declared to be due and payable prior to the stated maturity; or (j) the occurrence of a "default" or an "Event of Default" under the Guaranty Agreements, or any of the other Security Documents that continues beyond any applicable grace period; or (k) (i) this Agreement, the Term Note, any Security Document, the Intercreditor Agreement or any other Loan Document ceases to be in full force and effect (except in accordance with its terms) or is declared null and void or the validity or enforceability is contested or challenged by Borrower, any Affiliate of Borrower or any of their respective members or shareholders; (ii) Borrower denies that it has any further liability or obligation under this Agreement, the Term Note or any of the Security Documents; or (iii) any of the liens and security interests granted to Lenders under the Security Documents cease to be valid or perfected or cease to have the priority required hereby or under the Security Documents; or (l) Borrower, Guarantor or any of their respective Subsidiaries fails to comply in all material respects with all federal, state or local Laws pertaining in any way to Borrower, the Properties, the Equipment, or the Hydrocarbons; or (m) Borrower's or any Subsidiaries' Working Interest or Net Revenue Interest in the Properties is materially decreased from those set forth in the Reserve Reports without the prior written consent of Lenders; or (n) Borrower fails to perform any material obligation under the Swap Agreement or any Hedging Agreement and the failure continues beyond any applicable grace period; or (o) Borrower modifies or amends any of its Charter Documents in any material manner without Lenders' prior written consent or permits the Charter Documents of any Subsidiary to be modified or amended in any material manner; or (p) an "Event of Default" or "Early Termination Date" is designated under the Swap Agreement or any Hedging Agreement, if caused by action or inaction of Borrower; or (q) a Change in Control occurs without Lenders' prior written consent; 69 (r) an event occurs or fails to occur that could, in the reasonable opinion of Lender, have a Material Adverse Effect; (s) a default or event of default occurs under the Senior Credit Facility; or (t) Borrower or any Subsidiary fails to observe or perform any material covenant, condition or agreement contained in Articles VI or VII; provided, however, that the events described in any of subsections 10.1(e), (h) and (i) will constitute an Event of Default only if the event described is not remedied by Borrower within twenty (20) days after the earlier of (i) any officer of Borrower becoming aware of the occurrence of the event or (ii) Borrower's receipt of a notice from Lenders or the Administrative Agent on behalf of the Lenders of the occurrence of the event. ARTICLE XI. Remedies of Lenders Section 11.1 Remedies. Upon the occurrence of any Event of Default other than under Sections 10.1(c) or 10.1(d), Lenders shall, by notice to Borrower, take either or both of the following actions, at the same or different times, following two (2) Business Days' prior written notice: (i) terminate the commitments and thereupon the commitments shall terminate immediately and (ii) declare the Term Notes and the Term Loan due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Term Loan so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower and the Guarantor accrued hereunder and under the Term Notes and the other Loan Documents, shall become due and payable immediately, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are hereby waived by the Borrower and the Guarantor. Upon the occurrence of an Event of Default described in Section 10.1(c) or Section 10.1(d), the commitments shall automatically terminate and the Term Notes and the principal of the Term Loan then outstanding, together with accrued interest thereon and all fees and the other obligations of the Borrower and the Guarantor accrued hereunder and under the Term Notes and the other Loan Documents, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower and the Guarantor. Upon a termination of commitments following an Event of Default, Lenders will have, in addition to all of its other rights arising under any of the Loan Documents or by operation of law or otherwise (which rights shall be cumulative), all of the rights and remedies of a secured party under the Uniform Commercial Code and will have the right to enter upon any premises where the Collateral is kept and peacefully retake possession. Section 11.2 Collateral. Lenders will have no obligation to preserve rights to any Collateral against prior parties or to proceed first against any Collateral or to marshal any Collateral of any kind for the benefit of any other creditor of Borrower or any other Person. Borrower grants to Lenders a license or other right to use, without charge, Borrower's labels, 70 patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature related to the Collateral and necessary or convenient in correction with Lenders completing production of, advertising for sale and selling any Collateral, and Borrower's rights under all licenses and any franchise, sales or distribution agreements will inure to Lenders' benefit. Section 11.3 Costs and Expenses. Borrower shall pay all costs and expenses of amending, administering, implementing, perfecting, collecting, defending, declaring and enforcing Lenders' rights, security interests in the Collateral under this Agreement or any Security Document or other instrument or agreement delivered in connection with any of the Loan Documents, including searches and filings at all times, and Lenders' attorneys' fees (regardless of whether any litigation is commenced or default is declared and regardless of tribunal or jurisdiction). Section 11.4 Set-Off Rights. Upon the occurrence and during the continuation of an Event of Default, Lenders or the Administrative Agent on behalf of the Lenders will have the right, at any time and from time to time, to set-off and apply against the Obligations, in any manner Lenders may determine, any and all deposits (general or special, time or demand, provisional or final) or other amounts at any time credited by or owing from Lenders or any depositary to Borrower whether or not the Obligations are then due; provided, however, that this sentence will not apply to any amounts owing to third-party Working Interest and Royalty Interest previously identified in writing to Lenders. Lenders will provide notice to Borrower not later than three (3) days following the application of any funds under this Section 11.4. As further security for the Obligations, Borrower grants to Lenders a security interest in and lien on all money, instruments, and other property of Borrower now or at any time held by Lenders, including property held in safekeeping. In addition to Lenders' right of set-off and as further security for the Obligations, Borrower grants to Lenders a security interest in and lien on all deposits (general or special, time or demand, provisional or final) and other accounts of Borrower now or at any time on deposit with or held by Lenders or any depositary together with all other amounts at any time credited by or owing from Lenders or any depositary to Borrower. The rights and remedies of Lenders under this Section 11.4 are in addition to other rights and remedies (including other rights of set-off) that Lenders may have. Section 11.5 Rights Under Operating Agreements. Upon the occurrence and during the continuation of an Event of Default, Lenders will have the right to exercise Borrower's rights under the Operating Agreements, including the right to remove and replace the Operator, with or without cause. ARTICLE XII. Administrative Agent Section 12.1 Appointment and Authorization of Administrative Agent. Each Lender hereby irrevocably appoints, designates and authorizes the Administrative Agent to act as its agent under the Agreement and Loan Documents and to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and 71 perform such duties as are expressly delegated to it by the terms of this Agreement, or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere herein or in any Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set out herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement, or any other Loan Document or otherwise exist against the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term "Administrative Agent" herein and in the Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an Administrative relationship between independent contracting parties. Section 12.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement, or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct on the part of the Administrative Agent. Section 12.3 Liability of Administrative Agent. No Administrative Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement, or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set out herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by Borrower or any officer thereof, contained in the Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement, or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Administrative Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or any other Loan Document, or to inspect the properties, books or records of Borrower or any Affiliate thereof. Section 12.4 Reliance by Administrative Agent. (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, electronic mail message, statement or other document or conversation 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 (including counsel to Borrower), independent 72 accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under any Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, or any other Loan Document in accordance with a request or consent of the Required Lenders (or such greater number of Lenders as may be expressly required hereby in any instance) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. (b) For purposes of determining compliance with the conditions specified in Article IX, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the Closing Date or Advance date, as applicable, specifying its objection thereto. Section 12.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or the Borrower referring to the Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Default or Event of Default as may be directed by the Required Lenders in accordance with Article XI of the Agreement; provided that unless and until the Administrative Agent has received any such direction, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders. Section 12.6 Credit Decision; Disclosure of Information by Administrative Agent. Each Lender acknowledges that no Administrative Agent-Related Person has made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent to and acceptance of any assignment or review of the affairs of Borrower, Guarantor, or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any Administrative Agent-Related Person to any Lender as to any matter, including whether Administrative Agent-Related Persons have disclosed material information in their possession. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower, Guarantor and their respective Subsidiaries, and all applicable bank or other regulatory Laws relating to the transactions contemplated hereby, and made its own decision to 73 enter into this Agreement and to extend credit to the Borrower under the Agreement. Each Lender also represents that it will, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and Guarantor. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent herein, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any of Borrower, Guarantor or any of their respective Affiliates which may come into the possession of any Administrative Agent-Related Person. Section 12.7 Indemnification of Administrative Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand each Administrative Agent-Related Person (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), pro rata, and hold harmless each Administrative Agent-Related Person from and against any and all Liabilities and Costs incurred by it; provided that no Lender shall be liable for the payment to any Administrative Agent-Related Person of any portion of such Liabilities and Costs to the extent determined in a final, nonappealable judgment by a court of competent jurisdiction to have resulted from such Administrative Agent-Related Person's own gross negligence or willful misconduct; provided further that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section 12.7. Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorneys' fees and expenses) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section 12.7 shall survive termination of the Maximum Commitments, the payment of all other Obligations and the resignation of the Administrative Agent. Section 12.8 Administrative Agent in its Individual Capacity. MAC and its Affiliates may make loans to, acquire equity interests in and generally engage in any kind of financial advisory, underwriting or other business with each of the Borrower or Guarantor and their respective Affiliates as though MAC were not the Administrative Agent hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, MAC or its Affiliates may receive information regarding Borrower, or its Affiliates (including information that may be subject to confidentiality obligations in favor of Borrower or such Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide 74 such information to them. With respect to its Advances, MAC shall have the same rights and powers under this Agreement as any other Lender and may exercise such rights and powers as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" include MAC in its individual capacity. Section 12.9 Successor Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this Section 12.9, the Administrative Agent may resign as Administrative Agent upon thirty (30) days notice to the Lenders and the Administrative Agent may be removed at any time with or without cause by the Required Lenders. If the Administrative Agent resigns or is removed under this Agreement, the Required Lenders shall appoint from among the Lenders a successor Administrative Agent for the Lenders, which successor Administrative Agent shall be consented to by the Borrower at all times other than during the existence of an Event of Default (which consent of the Borrower shall not be unreasonably withheld or delayed). If no successor Administrative Agent is appointed prior to the effective date of the resignation or retirement of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Borrower, a successor Administrative Agent from among the Lenders. Upon the acceptance of its appointment as successor Administrative Agent hereunder, the Person acting as such successor Administrative Agent shall succeed to all the rights, powers and duties of the retiring or removed Administrative Agent and the term "Administrative Agent" shall mean such successor Administrative Agent and the retiring or removed Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article XII 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. If no successor Administrative Agent has accepted appointment as Administrative Agent by the date which is thirty (30) days following a retiring Administrative Agent's notice of resignation, the retiring or removed Administrative Agent's resignation or removal shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided for above. Section 12.10 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to Borrower or Guarantor, the Administrative Agent (irrespective of whether the principal of Term Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Term Loan, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective Administrative Agents and counsel and all other amounts due the 75 Lenders and the Administrative Agent under Sections 2.11 and 13.10 allowed in such judicial proceeding; and (b) to collect and receive any monies or other property payable or deliverable in respect of any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its Administrative Agents and counsel, and any other amounts due the Administrative Agent under Sections 2.11 and 13.10. Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding. Section 12.11 Collateral and Guaranty Agreements Matters. (a) Collateral Matters. (i) Each Lender authorizes and directs Administrative Agent to enter into the Security Documents for the ratable benefit of Lenders. Each Lender agrees that (A) any action taken by Administrative Agent in respect of any Collateral in accordance with the provisions of this Agreement or the Security Documents (and with the consent of, or at the request of, Required Lenders), and (B) the exercise by Administrative Agent (with the consent of, or at the request of, Required Lenders) of powers in respect of the Collateral set out in any Security Documents, together with other reasonably incidental powers, shall be authorized by and binding upon all Lenders. (ii) In the event any lien under any Security Document is, on its face, granted to a Lender rather than to Administrative Agent (for the ratable benefit of all Lenders), the Administrative Agent, Lenders, and Borrower confirm that it is their intent that all such liens shall be granted (or deemed granted) to Administrative Agent for the ratable benefit of all Lenders. All such Security Documents are hereby amended to the extent necessary to reflect that the liens granted under those Security Documents are granted to Administrative Agent (for the ratable benefit of all Lenders), and Borrower hereby grants all liens under all Security Documents to Administrative Agent, for the ratable benefit of Lenders. (iii) Administrative Agent is authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time to time while no Default or Event of Default exists, to take any action with respect to any Collateral or 76 Security Documents that may be necessary to perfect and maintain the perfection of the liens upon the Collateral granted by the Security Documents. (iv) Administrative Agent has no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by the party pledging the Collateral or is cared for, protected or insured or has been encumbered or that the liens granted to Administrative Agent for the benefit of Lenders under the Security Documents have been properly or sufficiently or lawfully created, perfected, protected or enforced, or are entitled to any particular priority. (v) Administrative Agent shall exercise the same care and prudent judgment with respect to the Collateral and the Security Documents as it normally and customarily exercises in respect of similar collateral and security documents. (b) Release Collateral. Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any lien or encumbrance on any property granted to or held by the Administrative Agent under any Loan Document or Security Document (i) upon termination of the Maximum Commitments and payment in full of all Obligations (other than contingent indemnification obligations), (ii) that is sold or to be sold as part of or in connection with any sale permitted under the Agreement or under any other Loan Document, or (iii) if approved, authorized or ratified in writing by the Required Lenders. (c) Subordinate Liens. Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to subordinate any lien or encumbrance on any property granted to or held by the Administrative Agent under any Loan Document or Security Document to the holder of any lien or encumbrance on such property that constitutes a purchase money lien or a capital lease. (d) Confirm Authority. Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent's authority to release or subordinate its interest in particular types or items of property. Section 12.12 Advance Procedure. (a) Subject to compliance with Section 2.3 and Article IX, Borrower may request the Advance of the Term Loan by submitting an Advance Request to Administrative Agent, and Administrative Agent shall promptly notify each Lender of the Advance Request and its contents. An Advance Request is irrevocable and binding on Borrower. Each Advance Request must be received by Administrative Agent no later than 12:00 p.m. Houston, Texas, Time on the third Business Day preceding the proposed Advance date. (b) By 11:00 a.m. Eastern Time on the Advance date, each Lender shall remit its Commitment Percentage of each requested Advance by wire transfer to Administrative Agent pursuant to Administrative Agent's wire transfer instructions on Annex I (or as otherwise directed by Administrative Agent) in funds that are available for immediate use by 77 Administrative Agent. Subject to receipt of such funds, Administrative Agent shall make such funds available to Borrower as directed in the Advance Request (unless it has actual knowledge that any applicable condition precedent has not been satisfied by Borrower). (c) Absent contrary written notice from a Lender, Administrative Agent may assume that each Lender has made its Commitment Percentage of the requested Advance available to Administrative Agent on the applicable Advance date, and Administrative Agent may, in reliance upon such assumption (but is not required to), make available to Borrower a corresponding amount. If a Lender fails to make its Percentage Share of any requested Advance available to Administrative Agent on the applicable Advance date, Administrative Agent may (to the extent such amount was actually advanced to Borrower) recover the applicable amount on demand from that Lender, together with interest at the Federal Funds Rate for the period commencing on the date the amount was made available to Borrower by Administrative Agent and ending on (but excluding) the date Administrative Agent recovers the amount from that Lender. Section 12.13 Payments. Borrower shall make each payment on the Obligation as provided in the Agreement, provided that all such payments shall be paid to Administrative Agent and shall be without offset, counterclaim or deduction. Any payment of the Obligation from Borrower, Guarantor, or any of their respective Affiliates which is received by any Lender (including under Section 11.4), shall be promptly forwarded to Administrative Agent. Payments received after the designated time will be deemed received on the next Business Day. Administrative Agent shall pay each Lender any payment to which that Lender is entitled on the same day Administrative Agent receives the funds from Borrower if Administrative Agent receives payment before 12 noon Eastern Time. If Administrative Agent receives the funds at 12 noon or later, Eastern Time, Administrative Agent shall pay such amount to Lender on the following Business Day. If and to the extent that Administrative Agent does not make a payment to Lenders when due, the unpaid amounts shall accrue interest at the Federal Funds Rate from the due date until (but not including) the date paid. Section 12.14 Application of Payments. (a) If no Default or Event of Default then exists, all scheduled payments shall be applied in accordance with Section 2.5(e) of this Agreement. (b) If no Default or Event of Default then exists, all prepayments shall be applied first to unpaid fees, expenses, and Related Costs, second to accrued and unpaid interest on the Term Loan with the balance being allocated among the Term Notes in accordance with each Lender's Pro Rata Share, and then applied to the outstanding principal balance of each Term Note. If the amount of a prepayment is not sufficient to pay in full any component of the Term Loan, then the amount of such payment shall be applied to the scheduled principal payments of such loan in the inverse order of their maturity. (c) All proceeds realized from the liquidation or other disposition of Collateral or otherwise received after maturity of the Notes, whether by acceleration or 78 otherwise, shall be applied: first, to reimbursement of expenses and indemnities provided for in this Agreement and the Security Documents; second, to accrued interest on the Notes; third, to fees; fourth, pro rata to principal outstanding on the Notes and Obligations in respect of the Swap Agreement; fifth, to any other Obligations; and any excess shall be paid to the Borrower or as otherwise required by any Governmental Requirement. Section 12.15 Liens. The liens granted by Borrower under the Loan Documents are granted to the Administrative Agent for the ratable benefit of the Lenders. It is the intent of the Lenders that they share an equal priority lien in all of the Collateral, regardless of any previous recordations or filings, the name of the grantee or secured party in the applicable Security Document, and regardless of the timing of any additional recordations or filings, and that the enforcement of all of their respective rights and remedies under the Loan Documents is subject to the terms and provisions of this Agreement. SUBJECT TO THE TERMS OF THE INTERCREDITOR AGREEMENT, ALL LIENS OF ANY LENDER IN ANY OF THE COLLATERAL SHALL BE PARI PASSU WITH ALL LIENS OF THE OTHER LENDERS IN SUCH COLLATERAL AND ALL SUCH LIENS SHALL HAVE EQUAL PRIORITY. Section 12.16 Payment Priority. The right of each Lender to receive any payments or prepayments under or in respect of the Agreement, any Loan Document, or any Collateral shall be pari passu with the payment rights of all other Lenders acting in their capacity as a Lender pursuant to this Agreement, provided that payments of principal and interest will be allocated to each Lender in accordance with its Pro Rata Share of such payment or prepayment. Section 12.17 Sharing of Payments by Lenders. If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Advances or fees resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Advances or fees and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Advances or fees of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Advances; provided that (a) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (b) the provisions of this Section 12.17 shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Advances to any assignee or participant, other than to the Borrower or any Affiliate thereof (as to which the provisions of this Section 12.17 shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. 79 Section 12.18 Relationship of Lenders. This Agreement, and the documents delivered in connection herewith, does not create a partnership or joint venture among Administrative Agent and Lenders or among the Lenders. ARTICLE XIII. Miscellaneous Section 13.1 Remedies Cumulative. Lenders' rights and remedies under this Agreement are cumulative and non-exclusive of any other rights or remedies it may have under any other agreement or instrument, or by operation of law or otherwise. Section 13.2 Assignment. This Agreement is entered into for the benefit of Borrower and Lenders and their respective successors and assigns. It will be binding upon and inure to the benefit of those parties and their respective successors and assigns. The rights and obligations of Borrower under this Agreement, the Term Note, the other Security Documents, the Swap Agreement or any other Loan Document to which Borrower is a party may not be assigned without Lenders' prior written consent. Lenders may assign, transfer or otherwise dispose of any of its rights or obligations under this Agreement or any of the other Loan Documents with the consent of Borrower, which consent will not be unreasonably withheld. Lenders may assign interests or participation in this Agreement and the other Loan Documents with the prior written consent of Borrower, which consent shall not be unreasonably withheld; provided, that if any Event of Default has occurred and is continuing or any circumstance exists which could, with notice to Borrower or the lapse of time or both result in an Event of Default, Borrower's consent to such an assignment by Lenders shall not be required. To the extent Lenders assigns to any other Person an interest in the Term Note pursuant to one or more Lender Participation Transactions, Borrower shall execute and deliver to Lenders any Lender Participation Documents reasonably necessary in connection with such transaction, including the issuance by Borrower of one or more Term Notes. Additionally, Lenders will be entitled to grant and assign a security interest in its right, title and interest in and to the Term Note, the Security Documents and all other Loan Documents to its Lenders or Lenders as security for indebtedness of the Lenders. Section 13.3 Notices. Any notice, demand or document which any party is required or may desire to give to any other will be in writing and, except as otherwise provided in this Agreement, given by messenger, overnight delivery, facsimile or other electronic transmission, or United States certified mail, postage prepaid, return receipt requested, addressed to the recipient at the location shown below, or at any other address as either party may furnish to the other by notice given in accordance with this provision. 80 If to Administrative Agent, to: Macquarie Americas Corp., Administrative Agent Two Allen Center, Suite 1140 1200 Smith Houston, Texas 77002 Attention: Michael Sextro Telephone: (713) 986-3607 Facsimile: (713) 986-3610 E-Mail: michael.sextro@macquarie.com with a copy to: Macquarie Americas Corp., Administrative Agent Two Allen Center, Suite 1140 1200 Smith Houston, Texas 77002 Attention: Alma Torres Telephone: (713) 986-3600 Facsimile: (713) 986-3610 E-Mail: alma.torres@macquarie.com If to Borrower, to: PetroQuest Energy, L.L.C. 400 E. Kaliste Saloom Rd., Suite 6000 Lafayette, Louisiana 70508 Attention: Michael O. Aldridge Telephone: (337) 232-7028 Facsimile: (337) 232-0044 E-Mail: maldridge@petroquest.com With copy to: PetroQuest Energy, L.L.C. 400 E. Kaliste Saloom Rd., Suite 6000 Lafayette, Louisiana 70508 Attention: Daniel G. Fournerat Telephone: (337) 232-7028 Facsimile: (337) 232-0044 E-Mail: dfournerat@petroquest.com If to a Lender, to such Lender at its address, facsimile number or other destination provided to the other parties by such Lender from time to time. 81 If to any other obligor party, the notice will be sent to the address set forth in the Security Document or other Loan Document to which the recipient is a party. Any notice delivered or made by messenger, telecopy, electronic mail or United States mail will be deemed to be given on the date of actual delivery as shown by messenger receipt, the sender's facsimile machine confirmation or other verifiable electronic receipt, or the registry or certification receipt. Notwithstanding the previous sentence, if either party receives from the other any message via electronic mail that purports to be a notice under this Agreement but that contains information that is syntactically incorrect, garbled or otherwise unintelligible, the recipient will promptly notify the sender and the message containing the unintelligible information will not be deemed to be given until it is successfully delivered (including redelivery by electronic mail) pursuant to this Section 13.3. If Lenders receives oral notice of any event from an authorized officer of Borrower, Lenders will not be required to delay the exercise of any rights arising from the occurrence of that event until it receives written confirmation of the oral notice. In the event that a discrepancy exists between the notice received by Lenders orally and the written confirmation, or in the absence of a written confirmation, the oral notice, as understood by Lenders will be deemed the controlling and proper notice. Section 13.4 Waivers; Amendments. (a) No failure on the part of the Administrative Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege, or any abandonment or discontinuance of steps to enforce such right, power or privilege, under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Administrative Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by Section 13.4(b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of an Advance shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof or of any other Loan Document may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Advance or reduce the rate of interest thereon, or reduce any fees payable hereunder, or reduce any other Obligations hereunder or under any other Loan Document, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Advance, or any interest thereon, or 82 any fees payable hereunder, or any other Obligations hereunder or under any other Loan Document, or reduce the amount of, waive or excuse any such payment, or postpone or extend the Termination Date without the written consent of each Lender affected thereby, (iv) change the Agreement in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change the definition of the term "Subsidiary," without the written consent of each Lender, (vi) release any Guarantor (except as set forth in the Guaranty Agreements), release any of the collateral (except as expressly provided in Section 12.11(b), or change Section 6.26, without the written consent of each Lender, or (vii) change any of the provisions of this Section 13.4(b) or the definitions of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or under any other Loan Documents or make any determination or grant any consent hereunder or any other Loan Documents, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder or under any other Loan Document without the prior written consent of the Administrative Agent. Section 13.5 Confidentiality. Except as may be required (a) by applicable rules of NASDAQ or the United States Securities and Exchange Commission, (b) by applicable law, (c) in response to or in connection with arbitration proceedings or legal process or in any legal proceeding to enforce or interpret the Security Documents or any other document or instrument executed in connection with the Security Documents, and (d) in any filings necessary or appropriate to create, maintain and perfect liens and security interests contemplated by this Agreement, neither party will release this Agreement or any other document, agreement or instrument relating to or executed in conjunction with this Agreement, or disclose the substantive terms of any of them except to its attorneys, accountants or engineers on a need-to-know basis, without the prior written consent of the other party. Notwithstanding the previous sentence, Lenders may disclose the substantive terms of or furnish its Lenders and potential Lenders and investment bankers and their respective attorneys, accountants or engineers with copies of this Agreement or any Security Document or any other document agreement or instrument relating to or executed or delivered to Lenders in conjunction with this Agreement without the consent of Borrower. Except as required by applicable rules of NASDAQ or the United States Securities Exchange Commission, neither party or any of their respective Affiliates will issue any press release or make any other public announcement relating to this Agreement without the prior written consent of the other party; provided, however, Lenders and Borrower may each publish a "tombstone" announcement regarding this Agreement. Notwithstanding anything herein to the contrary, the information protected by this Section 13.5 will not include, and Lenders may disclose to any and all Persons, without limitation of any kind, any information with respect to the "tax treatment" and "tax structure" (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to Lenders relating to such tax treatment and tax structure; that, with respect to any document or similar item that in either case contains information concerning the tax treatment or tax structure of the transaction as well as other information, this sentence shall only apply to such portions of the document or similar item that relate. 83 Section 13.6 Final Agreement. This Agreement and the other agreements to which this Agreement refers, together with all exhibits, schedules and annexes attached to any of them, constitute the final, entire agreement among the parties and supersede any prior oral or written and all contemporaneous oral proposals, commitments, promises, agreements and understandings between the parties with respect to the subject matter of this Agreement and the other Loan Documents, all of which are merged into and replaced by the Loan Documents. Section 13.7 WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. EACH OF BORROWER AND LENDERS KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THIS AGREEMENT, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED OR ASSOCIATED WITH ANY OF THEM, BEFORE OR AFTER MATURITY; (B) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES", AS DEFINED BELOW; (C) CERTIFIES THAT NEITHER IT NOR ANY OF ITS REPRESENTATIVES, AGENTS OR COUNSELORS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT THE CERTIFYING PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED THEM BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. AS USED IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY PARTY HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY. Section 13.8 GOVERNING LAW. THIS AGREEMENT, THE TERM NOTE, THE INTERCREDITOR AGREEMENT, THE GUARANTY, THE SWAP AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS (OTHER THAN THE SECURITY DOCUMENTS TO THE EXTENT THEY MAY BE MANDATORILY GOVERNED BY LAWS OF ANOTHER JURISDICTION) ARE TO BE PERFORMED IN THE STATE OF TEXAS. EXCEPT TO THE EXTENT THAT THE LAWS OF ANOTHER JURISDICTION ARE MANDATORILY APPLICABLE, THIS AGREEMENT, THE TERM NOTE AND ALL OF THE OTHER LOAN DOCUMENTS (EXCEPT FOR THE SWAP AGREEMENT WHICH WILL BE GOVERNED BY, INTERPRETED AND CONSTRUED UNDER AND ENFORCED PURSUANT TO THE LAWS OF THE STATE OF NEW YORK) TOGETHER WITH ALL TRANSACTIONS PROVIDED FOR IN THEM WILL BE GOVERNED BY, INTERPRETED AND CONSTRUED UNDER AND ENFORCED PURSUANT TO THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CONFLICTS OF LAWS PROVISIONS. Section 13.9 No Third-Party Beneficiaries. Subject to Section 13.2, the benefits of this Agreement will not inure to any third party. Notwithstanding anything contained in this 84 Agreement or the other Loan Documents, or any conduct or course of conduct by the parties, before or after signing this Agreement or the Loan Documents, this Agreement will not be construed as creating any rights, claims or causes of action against Lenders, or any of its officers, directors, agents or employees by any Person other than Borrower. Section 13.10 Fees, Costs and Expenses; Indemnification. (a) Fees, Costs and Expenses. Whether or not the transactions contemplated by this Agreement are consummated, Borrower will promptly (and in any event, within thirty (30) days after any invoice or other statement or notice) pay all Related Costs. Additionally, Borrower will promptly pay (within thirty (30) days after receipt of invoice or other statement or notice) (i) all transfer, stamp, mortgage, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the other Loan Documents or any other document referred to herein or therein, (ii) all reasonable costs and expenses incurred by or on behalf of Lenders (including attorneys' fees, consultants' fees and engineering fees, travel costs and miscellaneous expenses) in connection with (A) the negotiation, preparation, execution and delivery of any and all consents, waivers and amendments to any of the Loan Documents, (B) the filing, recording, refiling and re-recording of any Loan Documents and any other documents or instruments or further assurances required to be filed or recorded or refiled or re-recorded by the terms of any Loan Document, (C) the borrowings hereunder and other action reasonably required in the course of administration hereof, and (D) monitoring or confirming (or preparation or negotiation of any documents related to) Borrower's compliance with any covenants or conditions contained in this Agreement or in any other Loan Document, and (iii) all reasonable costs and expenses incurred by or on behalf of Lenders (including attorneys' fees, consultants' fees and accounting fees) in connection with the defense or enforcement of any of the Loan Documents (including this section) or the defense of Lenders' exercise of its rights thereunder. In addition, until all Obligations are paid in full, Borrower shall also pay or reimburse Lenders for all reasonable out-of-pocket costs and expenses of Lenders or its agents or employees in connection with the continuing administration of the Term Loan and the related due diligence of Lenders, including travel and miscellaneous expenses and fees and expenses of Lenders' outside counsel, reserve engineers and consultants engaged in connection with the Loan Documents. (b) Indemnification. BORROWER AGREES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW TO DEFEND, RELEASE AND INDEMNIFY THE ADMINISTRATIVE AGENT AND LENDERS, UPON DEMAND, FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES, PENALTIES, FINES, ACTIONS, JUDGMENTS, SUITS, SETTLEMENTS, COSTS, EXPENSES OR DISBURSEMENTS (INCLUDING REASONABLE FEES OF ATTORNEYS, ACCOUNTANTS, EXPERTS AND ADVISORS) OF ANY KIND OR NATURE WHATSOEVER (IN THIS SECTION, COLLECTIVELY CALLED "LIABILITIES AND COSTS") WHICH TO ANY EXTENT (IN WHOLE OR IN PART) MAY BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST LENDERS ARISING OUT OF, RESULTING FROM OR IN ANY OTHER WAY ASSOCIATED WITH ANY OF THE COLLATERAL, THE LOAN DOCUMENTS 85 AND THE TRANSACTIONS AND EVENTS (INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF) AT ANY TIME ASSOCIATED THEREWITH OR CONTEMPLATED THEREIN (INCLUDING ANY VIOLATION OR NONCOMPLIANCE WITH ANY ENVIRONMENTAL LAWS BY ANY RESTRICTED PERSON OR ANY LIABILITIES OR DUTIES OF ANY RESTRICTED PERSON OR LENDERS WITH RESPECT TO HAZARDOUS MATERIALS FOUND IN OR RELEASED INTO THE ENVIRONMENT). THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY LENDERS, PROVIDED ONLY THAT LENDERS SHALL NOT BE ENTITLED UNDER THIS SECTION TO RECEIVE INDEMNIFICATION FOR THAT PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH IS PROXIMATELY CAUSED BY ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT. IF ANY PERSON (INCLUDING BORROWER OR ANY OF ITS AFFILIATES) EVER ALLEGES SUCH GROSS NEGLIGENCE OR WILLFUL MISCONDUCT BY LENDERS, THE INDEMNIFICATION PROVIDED FOR IN THIS SECTION SHALL NONETHELESS BE PAID UPON DEMAND, SUBJECT TO LATER ADJUSTMENT OR REIMBURSEMENT, UNTIL SUCH TIME AS A COURT OF COMPETENT JURISDICTION ENTERS A FINAL JUDGMENT AS TO THE EXTENT AND EFFECT OF THE ALLEGED GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. AS USED IN THIS SECTION THE TERM "LENDERS" SHALL REFER NOT ONLY TO THE PERSONS DESIGNATED AS SUCH IN SECTION 1.1 BUT ALSO TO EACH DIRECTOR, OFFICER, AGENT, ATTORNEY, EMPLOYEE, REPRESENTATIVE AND AFFILIATE OF SUCH PERSONS. Section 13.11 Power of Attorney; Etc. Borrower grants to Agent a power of attorney for the purpose of executing on behalf of Borrower documents related to the enforcement of the Lenders' rights under the Security Documents, including but not limited to the execution of any instrument to be filed with or approved by the MMS in the event of a foreclosure on any of the Property. The power of attorney granted to Agent by Borrower under this Section 13.11 is a right coupled with an interest and will be irrevocable for as long as any of the Obligations remain outstanding provided, however that Agent and the Lenders agree not to exercise the power of attorney described in this Section 13.11 prior to the occurrence of an Event of Default. In addition, on or before the 30th day following Closing, Borrower will provide to Agent documentary evidence satisfactory to Agent that at least one authorized representative of Agent has been added to Borrower's signature register on file with the MMS. Section 13.12 Severability. Any section, clause, subsection, sentence, paragraph, provision or term this Agreement held invalid, illegal, or ineffective by a court of competent jurisdiction will not impair, invalidate or nullify the remainder of this Agreement. 86 Section 13.13 Captions; Headings. The headings, captions and arrangements contained in this Agreement have been inserted for convenience only and will not be deemed in any manner to modify, explain, enlarge or restrict any provision in this Agreement. Section 13.14 Construction. Borrower and Lenders acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement, the Term Note and each of the other Loan Documents with its legal counsel and that this Agreement and the other Security Documents will be construed as if jointly drafted by Borrower and Lenders. Section 13.15 Additional Documents. From time to time after the date of this Agreement, each of the parties hereto agrees to execute and deliver or cause to be executed and delivered, all reasonable documents and instruments, and take any other reasonable and lawful action as the other party may deem necessary or desirable to perfect or evidence perfection of its security interest, to enforce its rights under this Agreement or to otherwise effectuate the purposes of this Agreement. Upon the full payment and complete discharge of Borrower's Obligations under this Agreement and the other Loan Documents, Lenders will, at the request and expense of Borrower, prepare and deliver documents evidencing the release and termination of the liens, security interests, and other interests of Lenders under the Security Documents. Section 13.16 Counterpart Execution. This Agreement may be executed simultaneously in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Section 13.17 Compliance with Law. It is the intention of the parties to comply with applicable usury laws (now or later enacted). Accordingly, and notwithstanding any provision to the contrary in this Agreement, the other Security Documents or any other Loan Document, in no event will this Agreement or any other Loan Document require the payment or permit the collection of interest in excess of the maximum amount permitted by those laws. If, under any circumstances, the fulfillment of any provision of this Agreement or of any other Loan Document will involve exceeding the limit prescribed by applicable law for the contracting for or charging or collecting interest, then, ipso facto, the obligation to be fulfilled will be reduced to the allowable limit, and if, under any circumstances, Lenders ever receives pursuant to any of the Loan Documents anything of value as interest or that is deemed to be interest under applicable law that would exceed the highest lawful rate, the amount that would otherwise be excessive interest will be applied to the reduction of the principal amount owing under the Term Note or on account of any other indebtedness owed by Borrower to Lenders, and not to the payment of interest; or, if any portion of the excessive interest exceeds the unpaid balance of principal of that indebtedness, then the excess amount will be refunded to Borrower. In determining whether or not the interest paid or payable with respect to any indebtedness owed by Borrower to Lenders exceeds the highest lawful rate, Borrower and Lenders will, to the maximum extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects of them, (c) amortize, prorate, allocate and spread the total amount of interest throughout the full term of the indebtedness so that the actual rate of interest on account of the indebtedness does not exceed the maximum 87 amount permitted by applicable law, and (d) allocate interest between portions of the indebtedness so that no portion will bear interest at a rate greater than that permitted by applicable law. Section 13.18 EXCULPATION PROVISIONS. EACH OF THE PARTIES AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS AND CONDITIONS CONTAINED IN THEM; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATION OF EACH OF THE LOAN DOCUMENTS AND HAS RECEIVED THE ADVICE OF ITS LEGAL COUNSEL IN ENTERING INTO THE LOAN DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR THAT LIABILITY. EACH PARTY AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF THE PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." Section 13.19 No Other Agreements; No Parol Evidence. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "WRITTEN LOAN AGREEMENT" BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS ADDRESSED IN THEM AND WILL NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES AND, EXCEPT FOR THIS CREDIT AGREEMENT, THE TERM NOTE AND EACH OF THE OTHER LOAN DOCUMENTS, THERE ARE NO PRIOR OR CONTEMPORANEOUS WRITTEN AGREEMENTS BETWEEN THE PARTIES THAT WILL SURVIVE THE EXECUTION OF THIS AGREEMENT. [SIGNATURES BEGIN ON THE FOLLOWING PAGE] 88 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the 6th day of November, 2003. BORROWER: PETROQUEST ENERGY, L.L.C., a Louisiana limited liability corporation By: /s/ MICHAEL O. ALDRIDGE ------------------------------------- Michael O. Aldridge Treasurer GUARANTOR: PETROQUEST ENERGY, INC., a Delaware corporation By: /s/ MICHAEL O. ALDRIDGE ------------------------------------- Michael O. Aldridge Treasurer THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the 6th day of November, 2003. LENDERS: MACQUARIE AMERICAS CORP., a Delaware corporation, an Administrative Agent and a Lender By: /s/ BRIAN B. HUGHES -------------------------------------- Brian B. Hughes Division Director By: /s/ STEPHEN LYONS -------------------------------------- Stephen Lyons Division Director, Legal THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT EX-10.2 5 d10457exv10w2.txt UNCONDITIONAL GUARANTY AGREEMENT EXHIBIT 10.2 UNCONDITIONAL GUARANTY AGREEMENT THIS UNCONDITIONAL GUARANTY AGREEMENT ("Guaranty") dated November 6, 2003, is executed and delivered by PETROQUEST ENERGY, INC., a Delaware corporation ("Guarantor"), to MACQUARIE AMERICAS CORP., a Delaware corporation, as administrative agent ("Administrative Agent") for the benefit of the Lenders under the Credit Agreement (defined below). Capitalized terms used but not defined in this Guaranty have the meanings given them in the Credit Agreement (defined herein). BACKGROUND A. Guarantor is the parent of PetroQuest Energy, L.L.C., a Louisiana limited liability company ("Borrower"), a party to that certain $20,000,000 Senior Second Lien Secured Credit Agreement dated November 6, 2003 (as may be amended from time to time, the "Credit Agreement") among Borrower, Administrative Agent and the Lenders party thereto from time to time ("Lenders"). The Obligations of Borrower under the Credit Agreement are secured by the Security Documents and the liens, security interests and collateral assignment arising under and evidenced by those documents. B. As a condition to the making of an Advance to Borrower under the Credit Agreement, the Lenders require that Guarantor unconditionally guarantee to Administrative Agent, for the ratable benefit of the Lenders, the full and final payment and performance of the Obligations of Borrower. C. Guarantor will benefit, directly or indirectly, from the making of the Term Loan to Borrower by the Lenders under the terms and conditions of the Credit Agreement and the other Loan Documents. AGREEMENTS For and in consideration of the financial accommodations made and to be made to Borrower by the Lenders under the Credit Agreement or otherwise and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by each of the parties, Guarantor and Administrative Agent agree as follows: ARTICLE I PAYMENT AND PERFORMANCE Section 1.1 Guaranty of Payment. Guarantor unconditionally guarantees to Administrative Agent, for the ratable benefit of the Lenders, the payment of the Obligations when due (whether at the stated maturity, by acceleration or otherwise) in accordance with the terms of the Loan Documents. This Guaranty is irrevocable, unconditional and absolute, and if for any reason any portion of the Obligations is not paid promptly when due, Guarantor will immediately pay the full amount owed to Administrative Agent and/or the other Persons to whom such amount is owed, regardless of any defense, right of set-off or counterclaim Borrower may have or assert, and regardless of whether Administrative Agent or any other Person has taken any steps to enforce any rights against Borrower or any other Person to collect such sum, and regardless of any other condition or contingency. This Guaranty will also cover interest on the Obligations (as provided for in the Loan Documents) and all reasonable expenses (including attorneys' fees) incurred by Administrative Agent or the Lenders in enforcing the payment of the Obligations as provided for in the Loan Documents and the performance of this Guaranty. Section 1.2 Guaranty of Performance. Guarantor unconditionally guarantees to Administrative Agent, for the ratable benefit of the Lenders, that Borrower will perform and observe each agreement, covenant, warranty, term and condition in the Loan Documents including any indemnity provisions to be performed or observed by Borrower, and, upon Borrower's failure to do so, Guarantor will promptly perform and observe, or will cause to be promptly performed and observed, each such agreement, covenant, warranty, term or condition. Section 1.3 Guaranty Not Affected by Actions Under Loan Documents. The obligations, covenants, agreements and duties of Guarantor under this Guaranty will in no way be affected or impaired by the occurrence from time to time of any of the following with respect to the Loan Documents, without the necessity of any notice to, or further consent of, Guarantor: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by Borrower or any co-guarantor, surety, endorser or other obligor (collectively, an "Obligor") of any express or implied agreement, covenant, term or condition in any of the Loan Documents to be performed or observed by such party; (b) the extension of the time for the payment of all or any portion of the Obligations or any other sums payable under the Loan Documents or the extension of time for the performance of any other obligation under, arising out of, or in connection with any of the Loan Documents; (c) the supplementation, modification or amendment (whether material or otherwise) of any of the Loan Documents or any of the Obligations of Borrower or the obligations of Guarantor or any other Obligor under, arising out of or in connection with any of the Loan Documents; (d) any failure, omission, delay or lack of diligence on the part of Administrative Agent, or any other Person to enforce, assert or exercise any right, privilege, power or remedy conferred on Administrative Agent or any other Person in any of the Loan Documents, or any action on the part of Administrative Agent or such other Person granting indulgence or extension of any kind; (e) the release of any Collateral under any Mortgage, any other Security Document or any of the other Loan Documents, or the release, modification, waiver or failure to enforce any pledge, security device, insurance agreement, bond or other guaranty, surety or indemnity agreement whatsoever; (f) the release, modification, waiver or failure to enforce any right, benefit, privilege or interest under any contract or agreement, under which the rights of Borrower or any other Obligor have been collaterally or absolutely assigned, or in which a security interest has been granted, to Administrative Agent as direct or indirect security for payment or performance of any Obligations; 2 (g) the voluntary or involuntary liquidation, dissolution, sale of any collateral, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, Borrower, or any other Obligor or any of the assets of Borrower or of any other Obligor or any allegation or contest of the validity of this Guaranty in any such proceeding; (h) any invalidity of or defect or deficiency in any of the Loan Documents or failure to acquire, perfect or maintain perfection of any lien on or security interest in any collateral securing payment or performance of all or any portion of (i) the Obligations, (ii) any other Person's obligations under any of the Loan Documents or (iii) the obligations of Guarantor under this Guaranty; (i) the settlement or compromise of any obligation guaranteed by or incurred in connection with this Guaranty; (j) the failure to give notice to Guarantor of the occurrence of an event of default under the Loan Documents; (k) any defense based upon any legal disability of Borrower or, to the extent permitted by law, any release, discharge, reduction or limitation of or with respect to any sums owing by Borrower or any other liability of Borrower to Administrative Agent or any Lender or their Affiliates; (l) to the extent permitted by law, the release or discharge by operation of law of Guarantor from the performance or observance of any obligation, covenant or agreement contained in this Guaranty; (m) the default or failure of Guarantor fully to perform any of its obligations set forth in this Guaranty; or (n) any change in the corporate structure, existence or ownership of Guarantor or Borrower. Section 1.4 Waiver of Certain Rights. Guarantor hereby waives marshaling of assets and liabilities, sale in inverse order of alienation, notice of acceptance of this Guaranty and of any liability to which it applies or may apply, presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and demands, collection suit and the taking of any other action by Administrative Agent. Section 1.5 Obligations of Guarantor are Severable. This is a guaranty of payment and not of collection, and Guarantor waives any right to require that any action be brought against Borrower or any other Person. If Administrative Agent seeks to enforce the obligations of Guarantor under this Guaranty by action in any court, Guarantor waives any necessity, substantive or procedural, that a judgment be previously rendered against Borrower or any other Person or that Borrower or any other Person be joined in that cause or that a separate action be brought against Borrower or any other Person. The obligations of Guarantor under this Guaranty are several from the Obligations of Borrower or the obligations of any other Person, including any other Obligor, and 3 are primary obligations of Guarantor and on which it is the principal obligor. All waivers in this Section 1.5 are and will be without prejudice to Administrative Agent to proceed, at its option, against Borrower or any other Person, whether by separate action or by joinder. Guarantor agrees that this Guaranty cannot be discharged except by (a) the full and final payment of the Obligations, (b) the termination of all obligations, if any, of Administrative Agent or any other Lender to make any Advance or extend any other accommodation (financial or otherwise) to or on behalf of Borrower and (c) the complete performance of all obligations of Guarantor arising under or in connection with this Guaranty. Section 1.6 No Right of Subrogation Until Guaranty Terminates. Notwithstanding any payment or payments made by Guarantor under this Guaranty or any set-off or application of any funds of Guarantor by Administrative Agent, Guarantor will not be entitled to be subrogated to any of the rights of Administrative Agent or any Lender against Borrower or any collateral, security rights or rights of offset held by Administrative Agent or any Lender for the payment of the Obligations until all amounts owing to Lenders by Borrower for or on account of the Obligations are paid in full and this Guaranty has terminated. Section 1.7 All Credit Granted in Reliance On Guaranty. All Advances, extensions of credit and other financial accommodations made or to be made to Borrower by Administrative Agent or any of the other Lenders under the Credit Agreement or any of the other Loan Documents will be conclusively presumed to have been made in acceptance of and in reliance on this Guaranty. Section 1.8 Information. Guarantor assumes responsibility for being and remaining informed of the financial condition of Borrower, and of all other circumstances bearing upon the risk of nonpayment of amounts owing under the Loan Documents, and agrees that neither Borrower nor the Lenders shall have any duty to advise Guarantor of information known to it regarding such condition or any such circumstances. ARTICLE II REPRESENTATIONS AND WARRANTIES Guarantor warrants and represents that: Section 2.1 Organization; Good Standing. Guarantor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Guaranty and each instrument given to secure this Guaranty. The execution, delivery and performance by Guarantor of this Guaranty and each instrument given to secure this Guaranty have each been duly authorized by all necessary company action. Section 2.2 Binding Obligations. This Guaranty and each instrument given to secure this Guaranty have each been duly and validly executed, issued and delivered by Guarantor, and each constitutes the valid and legally binding obligations of Guarantor, enforceable in accordance with its terms except as the enforceability thereof may be limited or affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by general equitable principles. 4 Section 2.3 No Violation. The execution, delivery and performance of this Guaranty and of each instrument given to secure this Guaranty do not and will not (1) violate any applicable law; (2) conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, any agreement or instrument to which Guarantor is now a party or by which Guarantor or any of its properties may be bound; (3) result in the creation of any lien, charge or encumbrance upon any of Guarantor's property or assets; (4) violate Guarantor's Charter Documents; or (5) except as required by any applicable law, require (a) any consent of any other Person or (b) any consent, license, permit, authorization or other approval of, any giving of notice to, any exemption by, any registration, declaration or filing with, or any taking of any other action in respect of, any court, arbitrator, administrative agency or other Governmental Authority. Section 2.4 Litigation. Except as disclosed in the Credit Agreement and the schedules thereto, there is no action, suit or proceeding pending or, to the best of Guarantor's knowledge, threatened against or affecting Guarantor, at law or in equity, or before or by any Governmental Authority, which might result in any material adverse change in Guarantor's business or financial position or in Guarantor's interest in any of its properties. Section 2.5 Accuracy of Information. All information supplied and statements made to Administrative Agent or the Lenders by or on behalf of Guarantor prior to, contemporaneously with or subsequent to the execution of this Guaranty are and shall be true, correct, complete, valid and genuine. Section 2.6 No Defaults. To its knowledge, Guarantor is not in default with respect to any applicable law or in the payment of any indebtedness for borrowed money or under the terms or provisions of any agreement or instrument evidencing or securing any such indebtedness. Section 2.7 Benefits. The execution and delivery of this Guaranty to Administrative Agent will benefit, directly or indirectly, Guarantor. Section 2.8 Accuracy of Representations of Guarantor. No representation or warranty contained in this Guaranty and no statement contained in any certificate, schedule, list, financial statement or other instrument furnished by or on behalf of Guarantor to Administrative Agent or the Lenders contains (or will contain) any untrue statement of material fact, or omits (or will omit) to state a material fact necessary to make the statements contained herein or therein not misleading. Section 2.9 No Unusual Agreements. Guarantor is not a party to any contract or agreement which materially and adversely affects its business, property, assets or financial condition. Section 2.10 Solvency. Guarantor is solvent and will continue to be solvent after giving effect to the transactions hereunder. Section 2.11 Intercreditor Agreement. The rights and remedies that the Administrative Agent and the Lenders may have under this Guaranty shall be subject to the terms and conditions of the Subordination and Intercreditor Agreement, dated November 6, 2003, among Administrative Agent, Guarantor and Bank One, NA. 5 Section 2.12 Subordination of All Guarantor Claims. As used herein, the term "Guarantor Claims" shall mean all debts and liabilities of Borrower to Guarantor, whether such debts and liabilities now exist or are hereafter incurred or arise, or whether the obligation of Borrower thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or liabilities be evidenced by note, contract, open account, or otherwise, and irrespective of the person or persons in whose favor such debts or liabilities may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by any Guarantor. The Guarantor Claims shall include without limitation all rights and claims of Guarantor against Borrower arising as a result of subrogation or otherwise as a result of Guarantor's payment of all or a portion of the Obligations. Until the Obligations shall be paid and satisfied in full, Guarantors shall not receive or collect, directly or indirectly, from Borrower or any other party any amount upon the Guarantor Claims. ARTICLE III COVENANTS OF GUARANTY Guarantor covenants and agrees that, until termination of this Guaranty, it will and, if necessary, will enable Borrower to, fully comply with those covenants and agreements set forth in the Credit Agreement. ARTICLE IV TERMINATION This Guaranty shall terminate and be of no further force and effect upon (a) the full and final payment of the Obligations, (b) the termination of all obligations, if any, of Administrative Agent or any Lender to make any Advance or extend any other accommodation (financial or otherwise) to or on behalf of Borrower and (c) the complete performance of all obligations of Guarantor arising under or in connection with this Guaranty. If any monies paid to Administrative Agent or any Lender by or on behalf of Borrower are recovered from Administrative Agent or such Lender for any reason, Guarantor shall pay all such sums to Administrative Agent or such Lender on demand, together with interest thereon from date of recovery until paid at the same rate provided in the Term Note for interest on past due principal. ARTICLE V MISCELLANEOUS Section 5.1 Subsidiaries of Guarantor. (a) Subsidiaries as Guarantors. Except as provided in Section 5.1(b) below, Guarantor shall, upon the request of Administrative Agent, cause any current or future subsidiary of Guarantor or Borrower to execute and deliver to Administrative Agent a guaranty substantially in the form of this Guaranty. (b) POG Not a Guarantor; Etc. Notwithstanding Section 5.1(a) above, PetroQuest Oil & Gas, L.L.C., a Louisiana limited liability company ("POG"), will not be required to become a guarantor of the Obligations. Guarantor represents and warrants to Administrative Agent that (i) Guarantor is the sole member of POG and (ii) the assets of POG are comprised solely of legal title to oil, gas and other mineral interests owned 6 exclusively for the benefit of Persons other than Guarantor, Borrower and their respective affiliates. Guarantor shall not allow any other Person to become a member of POG. Guarantor shall not, and shall not cause or permit Borrower or any Person who becomes a guarantor of the Obligations under Section 5.1(a) above to, transfer any assets to or assume or discharge any of the liabilities of POG. Guarantor shall, at the request of Administrative Agent, promptly take any other action or enter into any other agreement necessary, in the sole and absolute discretion of Administrative Agent, to segregate the assets and liabilities of POG from those of Guarantor, Borrower and any other Person who becomes a guarantor of the Obligations under Section 5.1(a) above. Section 5.2 Assignment. All guarantees, warranties, representations, covenants and agreements contained in this Guaranty shall bind the successors, assigns, receivers, trustees and representatives of Guarantor and shall inure to the benefit of Administrative Agent, its successors and assigns, and any holder of the Obligations or any part thereof. Guarantor shall not assign its obligations hereunder without the prior written consent of Administrative Agent. Section 5.3 Waiver of Certain Rights. By its execution hereof, to the extent such laws and rules could be deemed to be applicable to this Guaranty, Guarantor expressly waives each and every right to which it may be entitled by virtue of the suretyship law of the State of Texas, including, without limitation, any rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code and Chapter 34 of the Texas Business and Commerce Code. Section 5.4 Amendment. This Guaranty will be amended, waived (in whole or in part) or otherwise modified only by an agreement in writing signed by all the parties to this Guaranty. Section 5.5 Notices. Any notice, demand or document which either party is required or may desire to give hereunder shall be in writing and, except to the extent provided in the other provisions of this Agreement, given by messenger, telecopy or other electronic transmission, or United States registered or certified mail, postage prepaid, return receipt requested, addressed to such party at its address and telecopy number shown below, or at such other address as either party shall have furnished to the other by notice given in accordance with this provision: If to Guarantor: PetroQuest Energy, L.L.C. 400 E. Kaliste Saloom Rd., Suite 6000 Lafayette, Louisiana 70508 Attention: Michael O. Aldridge Telephone: (337) 232-7028 Telecopy: (337) 232-0044 with a copy to: 7 PetroQuest Energy, L.L.C. 400 E. Kaliste Saloom Rd., Suite 6000 Lafayette, Louisiana 70508 Attention: Daniel G. Fournerat Telephone: (337) 232-7028 Telecopy: (337) 232-0044 If to Administrative Agent, as Administrative Agent: Two Allen Center, Suite 1140 1200 Smith Houston, Texas 77002 Attention: Michael Sextro Telephone:(713) 986-3600 Telecopy:(713) 986-3610 with a copy to: Two Allen Center, Suite 1140 1200 Smith Houston, Texas 77002 Attention: Alma Torres Telephone:(713) 986-3600 Telecopy:(713) 986-3610 Any notice delivered or made by messenger, telecopy, or United States mail shall be deemed to be given on the date of actual delivery as shown by messenger receipt, the addressor's telecopy machine confirmation or other verifiable electronic receipt, or the registry or certification receipt. Administrative Agent need not delay action on notice transmitted orally by an authorized officer of Guarantor to Administrative Agent until receipt of written confirmation of such notice. In the event that a discrepancy exists between the notice received by Administrative Agent orally and the written confirmation, or in the absence of a written confirmation, the oral notice, as understood by Administrative Agent will be deemed the controlling and proper notice. Section 5.6 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ITS PRINCIPLES OF CONFLICTS OF LAWS. Section 5.7 WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT WHICH IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE TERM NOTE, THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY TRANSACTION CONTEMPLATED THEREBY, BEFORE OR AFTER MATURITY. 8 Section 5.8 No Usurious Interest. It is the intention of the parties hereto to comply strictly to usury laws applicable to Administrative Agent. Interest on the Obligations is expressly limited so that in no contingency or event whatsoever, whether by acceleration of the maturity of the Term Note or otherwise, shall the interest taken, reserved, contracted for, charged or received by Administrative Agent exceed the maximum amount permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provisions of this Guaranty, the Term Note or the other Security Documents or of any other document evidencing, securing or pertaining to the indebtedness evidenced by the Term Note, at the time performance of such provision shall be due, would be usurious under applicable law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity so that the aggregate consideration which constitutes interest that is contracted for, taken, reserved, charged for, or received shall not exceed the maximum amount allowed by applicable law and such amount that would otherwise be excessive interest shall be applied to the reduction of the principal amount owing under the Term Note or on account of any other indebtedness of the Borrower or Guarantor to Administrative Agent, or if principal of the Term Note and such other indebtedness has been paid in full, refunded to the Borrower or Guarantor, as applicable. In determining whether or not the interest paid or agreed to be paid for the use, forbearance, or detention of sums hereunder exceeds the highest lawful rate, the Borrower and Administrative Agent shall, to the maximum extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, (c) amortize, prorate, allocate and spread the total amount of interest throughout the full term of such indebtedness so that the actual rate of interest on account of such indebtedness does not exceed the highest lawful rate, and/or (d) allocate interest between portions of such indebtedness, to the end that no such portion shall bear interest at a rate greater than that permitted by applicable law. Section 5.9 FINAL AGREEMENT. THIS GUARANTY AND THE SECURITY DOCUMENTS TO WHICH GUARANTOR IS A PARTY REPRESENT THE FINAL AGREEMENT BETWEEN GUARANTY AND ADMINISTRATIVE AGENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN ON THE FOLLOWING PAGE] 9 IN WITNESS WHEREOF, the undersigned have caused this Guaranty to be duly executed and delivered as of the date first above written. GUARANTOR: PETROQUEST ENERGY, INC., a Delaware corporation By: /s/ MICHAEL O. ALDRIDGE --------------------------- Michael O. Aldridge Treasurer THIS IS A SIGNATURE PAGE TO THE GUARANTY ADMINISTRATIVE AGENT: MACQUARIE AMERICAS CORP., a Delaware corporation, as Administrative Agent By: /s/ BRIAN B. HUGHES ------------------------- Brian B. Hughes Division Director By: /s/ STEPHEN LYONS ------------------------- Stephen Lyons Division Director, Legal THIS IS A SIGNATURE PAGE TO THE GUARANTY EX-10.3 6 d10457exv10w3.txt EMPLOYMENT AGREEMENT EXHIBIT 10.3 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into effective as of July 28, 2003 between PetroQuest Energy, Inc., a Delaware corporation having its principal executive office at 400 E. Kaliste Saloom Road, Suite 6000, Lafayette, Louisiana 70508 (hereinafter referred to as the "Company"), and Stephen H. Green (hereinafter referred to as the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Employee in an executive capacity and the Employee desires to enter the Company's employ. NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Employee hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms have the meanings prescribed below: Affiliate is used in this Agreement to define a relationship to a person or entity and means a person or entity who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity. Annual Bonus shall have the meaning assigned thereto in Section 4.2 hereof. Base Salary shall have the meaning assigned thereto in Section 4.1 hereof. Beneficial Owner shall have the meaning assigned thereto in Rule 13(d)-3 under the Exchange Act; provided, however, and without limitation, that any individual, corporation, partnership, group, association or other person or entity that has the right to acquire any Voting Stock at any time in the future, whether such right is (a) contingent or absolute or (b) exercisable presently or at any time in the future, pursuant to any agreement or understanding or upon the exercise or conversion of rights, options or warrants, or otherwise, shall be the Beneficial Owner of such Voting Stock. Cause shall have the meaning assigned thereto in Section 5.3 hereof. Common Stock means the Company's common stock, par value $.001 per share. Confidential Information shall have the meaning assigned thereto in Section 8.2 hereof. Date of Termination means the earliest to occur of (i) the date of the Employee's death, (ii) the date on which the Employee terminates this Agreement for any reason or (iii) the date of receipt 1 of the Notice of Termination, or such later date as may be prescribed in the Notice of Termination in accordance with Section 5.5 hereof. Disability means an illness or other disability which prevents the Employee from discharging his responsibilities under this Agreement for a period of 180 consecutive calendar days, or an aggregate of 180 calendar days in any calendar year, during the Employment Period, all as determined in good faith by the Board of Directors of the Company (or a committee thereof). Effective Date means the date of execution hereof. Employee means Stephen H. Green whose business address is 400 E. Kaliste Saloom Road, Suite 6000, Lafayette, Louisiana 70508. Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder, all as in effect from time to time during the Employment Period. Company means PetroQuest Energy, Inc., a Delaware corporation, the principal executive office of which is located at 400 E. Kaliste Saloom Road, Suite 6000, Lafayette, Louisiana 70508. Employment Period shall have the meaning assigned thereto in Section 3 hereof. Initial Term shall have the meaning assigned thereto in Section 3 hereof. Notice of Termination shall have the meaning assigned thereto in Section 5.5 hereof. Termination Agreement means the Termination Agreement dated as of the Effective Date of this Executive Employment Agreement between the Company and the Employee. Voting Stock means all outstanding shares of capital stock of the Company entitled to vote generally in an election of directors; provided, however, that if the Company has shares of Voting Stock entitled to more or less than one vote per share, each reference to a proportion of the issued and outstanding shares of Voting Stock shall be deemed to refer to the proportion of the aggregate votes entitled to be cast by the issued and outstanding shares of Voting Stock. Without Cause shall have the meaning assigned thereto in Section 5.4 hereof. 2. General Duties of Company and Employee. 2.1 The Company agrees to employ the Employee, and the Employee agrees to accept employment by the Company and to serve the Company as Senior Vice President-Exploration. The authority, duties and responsibilities of the Employee shall be consistent with those of executive officers in a public company with a similar title, and such other or additional duties as may from time to time be assigned to the Employee by the Board of Directors (or a committee thereof) and agreed to 2 by the Employee. While employed hereunder, the Employee shall devote full time and attention during normal business hours to the affairs of the Company and use his best efforts to perform faithfully and efficiently his duties and responsibilities. The Employee may (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Employee's duties and responsibilities. 2.2 The Employee agrees and acknowledges that he owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company and to do no act and to make no statement, oral or written, which would injure Company's business, its interests or its reputation. 2.3 The Employee agrees to comply at all times during the Employment Period with all applicable policies, rules and regulations of the Company, including, without limitation, the Company's Business Ethics Policy and the Company's policy regarding trading in the Common Stock, as each is in effect from time to time during the Employment Period. 3. Term. Unless sooner terminated pursuant to other provisions hereof, the Employee's period of employment under this Agreement shall be a period of two (2) years beginning on the Effective Date (the "Initial Term"). After the expiration of the Initial Term, the Employee's period of employment under this Agreement shall be automatically renewed for successive one-year terms on each anniversary of the Effective Date (the Initial Term and any and all renewals thereof are referred to herein collectively as the "Employment Period"). 4. Compensation and Benefits. 4.1 Base Salary. As compensation for services to the Company, the Company shall pay to the Employee until the Date of Termination an annual base salary of $180,000.00 (the "Base Salary"). The Board of Directors (or a committee thereof), in its discretion, may increase the Base Salary based upon relevant circumstances. The Base Salary shall be payable in equal semi-monthly installments or in accordance with the Company's established policy, subject only to such payroll and withholding deductions as may be required by law and other deductions applied generally to employees of the Company for insurance and other employee benefit plans. 4.2 Bonus. In addition to the Base Salary, Employee may be awarded, for each fiscal year until the Date of Termination, an annual bonus (either pursuant to a bonus or incentive plan or program of the Company or otherwise) in an amount to be determined by the Board of Directors (or a committee thereof), in its sole discretion (the "Annual Bonus"). Each such Annual Bonus shall be payable at a time to be determined by the Board of Directors (or a committee thereof) in its sole discretion. 4.3 Incentive, Savings and Retirement Plans. Until the Date of Termination, the Employee shall be eligible to participate in and shall receive all benefits under all executive 3 incentive, savings and retirement plans (including 401(k) plans) and programs currently maintained or hereinafter established by the Company for the benefit of its executive officers and/or employees. 4.4 Welfare Benefit Plan. Until the Date of Termination, the Employee and/or the Employee's family, as the case may be, shall be eligible to participate in and shall receive all benefits under each welfare benefit plan of the Company currently maintained or hereinafter established by the Company for the benefit of its employees. Such welfare benefit plans may include, without limitation, medical, dental, disability, group life, accidental death and travel accident insurance plans and programs. 4.5 Reimbursement of Expenses. The Employee may from time to time until the Date of Termination incur various business expenses customarily incurred by persons holding positions of like responsibility, including, without limitation, travel, entertainment and similar expenses incurred for the benefit of the Company. Subject to the Company's policy regarding the reimbursement of such expenses as in effect from time to time during the Employment Period, which does not necessarily allow reimbursement of all such expenses, the Company shall reimburse the Employee for such expenses from time to time, at the Employee's request, and the Employee shall account to the Company for all such expenses. 4.6 Life Insurance. The Company shall provide to the Employee life insurance under programs currently maintained or hereafter established by the Company for the benefit of its executive officer or employees. 4.7 Relocation. The Company and the Employee agree that if the Employee is asked to relocate from Lafayette, Louisiana to Houston, Texas, the Company will provide to Employee reimbursement for out of pocket moving expenses incurred in connection with such move, and it will also reimburse the Employee for any loss incurred by the Employee on the sale of his personal residence in Lafayette, Louisiana, with such loss being calculated on the basis of the difference between the Employee's actual costs less the net sales price. 4.8 Vacation. Until the Date of Termination, subject to the Company's policies regarding vacation as in effect from time to time during the Employment Period, Employee shall be entitled to five (5) weeks paid vacation during each one year period commencing on the anniversary date of Employee's employment with the Company. 4.9 Additional Agreements. In addition to the rights and obligations of the Company and Employee under this Agreement, the Company, Employee or their Affiliates may, from time to time, execute agreements during the Employment Period which provide Employee certain rights with respect to particular oil and gas prospects. Such agreements are not part of this Agreement relating to employment and nothing in such agreements shall confer upon Employee any right to continue in the employ of the Company or interfere with or restrict in any way the rights of the Company, which are hereby expressly reserved, to terminate Employee for any reason, with our without cause. 4 5. Termination. 5.1 Death. This Agreement shall terminate automatically upon the death of the Employee. 5.2 Disability. The Company may terminate this Agreement, upon written notice to the Employee delivered in accordance with Sections 5.5 and 12.1 hereof, upon the Disability of the Employee. 5.3 Cause. The Company may terminate this Agreement, upon written notice to the Employee delivered in accordance with Sections 5.5 and 12.1 hereof, for Cause. For purposes of this Agreement, "Cause" means (i) the conviction of the Employee of a felony (which, through lapse of time or otherwise, is not subject to appeal), (ii) the Employee's willful refusal, without proper legal cause, to perform his duties and responsibilities as contemplated in this Agreement or (iii) the Employee's willful engaging in activities which would (A) constitute a breach of any term of this Agreement, the Company's code of ethics, the Company's policies regarding trading in the Common Stock or reimbursement of business expenses or any other applicable policies, rules or regulations of the Company, or (B) result in a material injury to the business, condition (financial or otherwise), results of operations or prospects of the Company or its Affiliates (as determined in good faith by the Board of Directors of the Company or a committee thereof). 5.4 Without Cause. The Company may terminate this Agreement Without Cause, upon written notice to the Employee delivered in accordance with Sections 5.5 and 12.1 hereof. For purposes of this Agreement, the Employee will be deemed to have been terminated "Without Cause" if the Employee is terminated by the Company for any reason other than Cause, Disability or death. 5.5 Notice of Termination. Any termination of this Agreement by the Company for Cause, Without Cause or as a result of the Employee's Disability shall be communicated by Notice of Termination to the Employee given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated and (iii) specifies the termination date, if such date is other than the date of receipt of such notice (which termination date shall not be more than 15 days after the giving of such notice). 6. Obligations of Company upon Termination. 6.1 Cause by Employee. If this Agreement shall be terminated either by the Company for Cause or by the Employee for any reason, the Company shall pay to the Employee, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the Employee's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred by the Employee, all amounts of such compensation 5 previously deferred and not yet paid by the Company. All other obligations of the Company and rights of the Employee hereunder shall terminate effective as of the Date of Termination. 6.2 Death or Disability. (a) Subject to the provisions of this Section 6.2, if this Agreement is terminated as a result of the Employee's death or Disability, the Company shall pay to the Employee or his estate, in equal semi-monthly installments, the Employee's Base Salary (as in effect on the Date of Termination) for 12 months after such Date of Termination. The Company may purchase insurance to cover all or any part of the obligation contemplated in the foregoing sentence, and the Employee agrees to submit to a physical examination to facilitate the procurement of such insurance. (b) Whenever compensation is payable to the Employee hereunder during a period in which he is partially or totally disabled, and such Disability would (except for the provisions hereof) entitle the Employee to Disability income or salary continuation payments from the Company according to the terms of any plan or program presently maintained or hereafter established by the Company, the Disability income or salary continuation paid to the Employee pursuant to any such plan or program shall be considered a portion of the payment to be made to the Employee pursuant to this Section 6.2 and shall not be in addition hereto. If Disability income is payable directly to the Employee by an insurance company under the terms of an insurance policy paid for by the Company, the amounts paid to the Employee by such insurance company shall be considered a portion of the payment to be made to the Employee pursuant to this Section 6.2 and shall not be in addition hereto. 6.3 Without Cause. If this Agreement shall be terminated by the Company Without Cause: (a) the Company shall pay to the Employee, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (1) if not theretofore paid, the Employee's Base Salary (as in effect on the Date of Termination) through the Date of Termination; and (2) in the case of compensation previously deferred by the Employee, all amounts of such compensation previously deferred and not yet paid by the Company; (b) the Company shall, promptly upon submission by the Employee of supporting documentation, pay or reimburse to the Employee any costs and expenses (including moving and relocation expenses) paid or incurred by the Employee which would have been payable under Sections 4.5 and 4.7 of this Agreement if the Employee's employment had not terminated; and 6 (c) for the 12-month period commencing on the Date of Termination, the Company shall continue benefits to the Employee and/or the Employee's family at least equal to those which would have been provided to them under Section 4.4 if the Employee's employment had not been terminated; and (d) the Company shall pay to the Employee, in equal semi-monthly installments, the Employee's Base Salary (as in effect on the Date of Termination) for 12 months after the Date of Termination. 6.4 Termination of Employment Following a Change in Control. Notwithstanding the provisions of Section 6.3 hereof to the contrary, if the Employee's employment by the Company is terminated by the Company in accordance with the terms of Section 4 of the Termination Agreement and the Employee is entitled to benefits provided in Section 5 of the Termination Agreement, the Company shall pay to the Employee, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the Employee's Base Salary (as in effect on the Date of Termination) through the Date of Termination, if not theretofore paid, and, in the case of compensation previously deferred by the Employee, all amounts of such compensation previously deferred and not yet paid by the Company. Except with respect to the obligations set for forth in the Termination Agreement, notwithstanding any provisions herein to the contrary, all other obligations of the Company and rights of the Employee hereunder shall terminate effective as of the Date of Termination. 7. Employee's Obligation to Avoid Conflicts of Interest. 7.1 In keeping with the Employee's fiduciary duties to the Company, the Employee agrees that he shall not knowingly become involved in a conflict of interest with the Company, or upon discovery thereof, allow such a conflict to continue. The Employee further agrees to disclose to the Company, promptly after discovery, any facts or circumstances which might involve a conflict of interest with the Company. 7.2 The Company and the Employee recognize that it is impossible to provide an exhaustive list of actions or interests which constitute a "conflict of interest." Moreover, the Company and the Employee recognize that there are many borderline situations. In some instances, full disclosure of facts by the Employee to the Company is all that is necessary to enable the Company to protect its interests. In others, if no improper motivation appears to exist and the Company's interests have not suffered, prompt elimination of the outside interest will suffice. In still others, it may be necessary for the Company to terminate the employment relationship. The Company and the Employee agree that the Company's determination as to whether or not a conflict of interest exists shall be conclusive. The Company reserves the right to take such action as, in its judgment, will end the conflict of interest. 7.3 In this connection, it is agreed that any direct or indirect interest in, connection with or benefit from any outside activities, particularly commercial activities, which interest might in any way adversely affect the Company or its Affiliates, involves a possible conflict of interest. 7 Circumstances in which a conflict of interest on the part of the Employee would or might arise, and which should be reported immediately to the Company, include, but are not limited to, the following: (a) Ownership of a material interest in any lender, supplier, contractor, subcontractor, customer or other entity with which the Company does business. (b) Acting in any capacity, including director, officer, partner, consultant, employee, distributor, agent or the like, for any lender, supplier, contractor, subcontractor, customer or other entity with which the Company does business. (c) Acceptance, directly or indirectly, of payments, services or loans from a lender, supplier, contractor, subcontractor, customer or other entity with which the Company does business, including, without limitation, gifts, trips, entertainment or other favors of more than a nominal value, but excluding loans from publicly held insurance companies and commercial or savings banks at market rates of interest. (d) Use of information or facilities to which the Employee has access in a manner which will be detrimental to the Company's interests, such as use for the Employee's own benefit of know-how or information developed through the Company's business activities. (e) Disclosure or other misuse of information of any kind obtained through the Employee's connection with the Company. (f) Acquiring or trading in, directly or indirectly, oil and gas properties or interests for his own account or the account of his Affiliates without the prior written consent of the Board of Directors. 8. Employee's Confidentiality Obligation. 8.1 The Employee hereby acknowledges, understands and agrees that all Confidential Information is the exclusive and confidential property of the Company and its Affiliates which shall at all times be regarded, treated and protected as such in accordance with this Section 8. The Employee acknowledges that all such Confidential Information is in the nature of a trade secret. 8.2 For purposes of this Agreement, "Confidential Information" means information, which is used in the business of the Company or its Affiliates and (i) is proprietary to, about or created by the Company or its Affiliates, (ii) gives the Company or its Affiliates some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company or its Affiliates, (iii) is designated as Confidential Information by the Company or its Affiliates, is known by the Employee to be considered confidential by the Company or its Affiliates, or from all the relevant circumstances should reasonably be assumed by the Employee to be confidential and proprietary to the Company or its Affiliates, or (iv) is not generally known by non-Company personnel. Such Confidential Information 8 includes, without limitation, the following types of information and other information of a similar nature (whether or not reduced to writing or designated as confidential): (a) Internal personnel and financial information of the Company or its Affiliates, information regarding oil and gas properties including reserve information, vendor information (including vendor characteristics, services, prices, lists and agreements), purchasing and internal cost information, internal service and operational manuals, and the manner and methods of conducting the business of the Company or its Affiliates; (b) Marketing and development plans, price and cost data, price and fee amounts, pricing and billing policies, bidding, quoting procedures, marketing techniques, forecasts and forecast assumptions and volumes, and future plans and potential strategies (including, without limitation, all information relating to any oil and gas prospect and the identity of any key contact within the organization of any acquisition prospect) of the Company or its Affiliates which have been or are being discussed; (c) Names of customers and their representatives, contracts (including their contents and parties), customer services, and the type, quantity, specifications and content of products and services purchased, leased, licensed or received by customers of the Company or its Affiliates; and (d) Confidential and proprietary information provided to the Company or its Affiliates by any actual or potential customer, government agency or other third party (including businesses, consultants and other entities and individuals). 8.3 As a consequence of the Employee's acquisition or anticipated acquisition of Confidential Information, the Employee shall occupy a position of trust and confidence with respect to the affairs and business of the Company and its Affiliates. In view of the foregoing and of the consideration to be provided to the Employee, the Employee agrees that it is reasonable and necessary that the Employee make each of the following covenants: (a) At any time during the Employment Period and thereafter, the Employee shall not disclose Confidential Information to any person or entity, either inside or outside of the Company, other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent (unless such disclosure is compelled pursuant to court orders or subpoena, and at which time the Employee shall give notice of such proceedings to the Company). (b) At any time during the Employment Period and thereafter, the Employee shall not use, copy or transfer Confidential Information other than as necessary in carrying out his duties and responsibilities as set forth in Section 2 hereof, without first obtaining the Company's prior written consent. 9 (c) On the Date of Termination, the Employee shall promptly deliver to the Company (or its designee) all written materials, records and documents made by the Employee or which came into his possession prior to or during the Employment Period concerning the business or affairs of the Company or its Affiliates, including, without limitation, all materials containing Confidential Information. 9. Disclosure of Information, Ideas, Concepts, Improvements, Discoveries and Inventions. As part of the Employee's fiduciary duties to the Company, the Employee agrees that during his employment by the Company and for a period of three years following the Date of Termination, the Employee shall promptly disclose in writing to the Company all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, and whether or not reduced to practice, which are conceived, developed, made or acquired by the Employee, either individually or jointly with others, and which relate to the business, products or services of the Company or its Affiliates, irrespective of whether the Employee used the Company's time or facilities and irrespective of whether such information, idea, concept, improvement, discovery or invention was conceived, developed, discovered or acquired by the Employee on the job, at home, or elsewhere. This obligation extends to all types of information, ideas and concepts, including information, ideas and concepts relating to new types of services, corporate opportunities, acquisition prospects, the identity of key representatives within acquisition prospect organizations, prospective names or service marks for the Company's business activities, and the like. 10. Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship. 10.1 All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by the Employee or which are disclosed or made known to the Employee, individually or in conjunction with others, during the Employee's employment by the Company and which relate to the business, products or services of the Company or its Affiliates (including, without limitation, all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customers' organizations or within the organization of acquisition prospects, marketing and merchandising techniques, and prospective names and service marks) are and shall be the sole and exclusive property of the Company. Furthermore, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of the Company. 10.2 In particular regarding the matters identified in Section 10.1, the Employee hereby specifically sells, assigns, transfers and conveys to the Company all of his worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates or other industrial rights 10 which may be filed in respect thereof, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and applications for registration of such names and service marks. The Employee shall assist the Company and its nominee at all times, during the Employment Period and thereafter, in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, which assistance shall include, but shall not be limited to, the execution of all lawful oaths and all assignment documents requested by the Company or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, including divisions, continuations, continuations-in-part, reissues and/or extensions thereof, and any application for the registration of such names and service marks. 10.3 In the event the Employee creates, during the Employment Period, any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as, videotapes, written presentations on acquisitions, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to the Company's business, products or services, whether such work is created solely by the Employee or jointly with others, the Company shall be deemed the author of such work if the work is prepared by the Employee in the scope of his employment; or, if the work is not prepared by the Employee within the scope of his employment but is specially ordered by the Company as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire, and the Company shall be the author of such work. If such work is neither prepared by the Employee within the scope of his employment nor a work specially ordered and deemed to be a work made for hire, then the Employee hereby agrees to sell, transfer, assign and convey, and by these presents, does sell, transfer, assign and convey, to the Company all of the Employee's worldwide right, title and interest in and to such work and all rights of copyright therein. The Employee agrees to assist the Company and its Affiliates, at all times, during the Employment Period and thereafter, in the protection of the Company's worldwide right, title and interest in and to such work and all rights of copyright therein, which assistance shall include, but shall not be limited to, the execution of all documents requested by the Company or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries. 11. Employee's Non-Competition Obligation. 11.1 (a) Until the Date of Termination, the Employee shall not, acting alone or in conjunction with others, directly or indirectly, in any of the business territories in which the Company or any of its Affiliates is presently or from time to time during the Employment Period conducting business, invest or engage, directly or indirectly, in any business which is competitive with that of the Company or accept employment with or render services to such a competitor as a director, officer, agent, employee or consultant, or take any action inconsistent with the fiduciary relationship of an employee to his employer; provided, however, that the beneficial ownership by the Employee of up to three percent of the Voting Stock of any corporation subject to the periodic reporting requirements of the Exchange Act shall not violate this Section 11.1(a). 11 (b) In addition to the other obligations agreed to by the Employee in this Agreement, the Employee agrees that until the Date of Termination, he shall not at any time, directly or indirectly, (i) induce, entice or solicit any employee of the Company to leave his employment, (ii) contact, communicate or solicit any customer or acquisition prospect of the Company derived from any customer list, customer lead, mail, printed matter or other information secured from the Company or its present or past employees or (iii) in any other manner use any customer lists or customer leads, mail, telephone numbers, printed material or other information of the Company relating thereto. 11.2 (a) If this Agreement is terminated either by the Company for Cause or by the Employee for any reason, then for a period of one year following the Date of Termination, the Employee shall not, acting alone or in conjunction with others, directly or indirectly, in any of the business territories in which the Company or any of its Affiliates is presently or at the Date of Termination conducting business, invest or engage, directly or indirectly, in any business which is competitive with that of the Company as of the Date of Termination or accept employment with or render services to such a competitor as a director, officer, agent, employee or consultant, or take any action inconsistent with the fiduciary relationship of an employee to his employer; provided, however, that the beneficial ownership by the Employee of up to three percent of the Voting Stock of any corporation subject to the periodic reporting requirements of the Exchange Act shall not violate this Section 11.2(a). (b) In addition to the other obligations agreed to by the Employee in this Agreement, the Employee agrees that if this Agreement is terminated either by the Company for Cause or by the Employee for any reason, then for a period of one year following the Date of Termination, he shall not at any time, directly or indirectly, (i) induce, entice or solicit any employee of the Company to leave his employment, (ii) contact, communicate or solicit any customer or acquisition prospect of the Company derived from any customer list, customer lead, mail, printed matter or other information secured from the Company or its present or past employees or (iii) in any other manner use any customer lists or customer leads, mail, telephone numbers, printed material or other information of the Company relating thereto. 11.3 If this Agreement is terminated by the Company Without Cause, then the Employee shall not be subject to any non-competition obligation. 12. Miscellaneous. 12.1 Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when delivered by hand or mailed by registered or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): 12 If to the Company to: 400 E. Kaliste Saloom Road Suite 6000 Lafayette, Louisiana 70508 If to the Employee to: 138 Demas Street Lafayette, Louisiana 70506 or to such other names or addresses as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section 12.1. 12.2 Waiver of Breach. The waiver by any party hereto of a breach of any provision of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach by any party. 12.3 Assignment. This Agreement shall be binding upon and inure to the benefit of the Company, its successors, legal representatives and assigns, and upon the Employee, his heirs, executors, administrators, representatives and assigns; provided, however, the Employee agrees that his rights and obligations hereunder are personal to him and may not be assigned without the express written consent of the Company. 12.4 Entire Agreement; No Oral Amendments. This Agreement, together with any exhibit attached hereto and any document, policy, rule or regulation referred to herein, replaces and merges all previous agreements and discussions relating to the same or similar subject matter between the Employee and the Company and constitutes the entire agreement between the Employee and the Company with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any employee, officer, or representative of the Company or by any written agreement unless signed by an officer of the Company who is expressly authorized by the Company to execute such document. 12.5 Enforceability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 12.6 Jurisdiction; Arbitration. The laws of the State of Louisiana shall govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration located in Houston, Texas administered by the American Arbitration Association in accordance with its applicable arbitration rules, and the judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof, which judgment shall be binding upon the parties hereto. 13 12.7 Injunctive Relief. The Company and the Employee agree that a breach of any term of this Agreement by the Employee would cause irreparable damage to the Company and that, in the event of such breach, the Company shall have, in addition to any and all remedies of law, the right to any injunction, specific performance and other equitable relief to prevent or to redress the violation of the Employee's duties or responsibilities hereunder. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. PETROQUEST ENERGY, INC. By: /s/ CHARLES T. GOODSON ----------------------------------- Charles T. Goodson Chief Executive Officer EMPLOYEE: /s/ STEPHEN H. GREEN ---------------------------------------- Stephen H. Green 14 EX-10.4 7 d10457exv10w4.txt 1ST AMENDMENT TO AMENDED/RESTATED CREDIT AGREEMENT EXHIBIT 10.4 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the "Amendment") is made and entered into effective as of November 6, 2003, by and among PETROQUEST ENERGY, L.L.C., a Louisiana limited liability company ("Borrower"); PETROQUEST ENERGY, INC., a Delaware corporation ("Guarantor"): BANK ONE, NA, a national banking association, ("Bank One"); and UNION BANK OF CALIFORNIA, N.A., a national banking association, ("UBOC"). RECITALS: WHEREAS, Borrower, Guarantor, Bank One and UBOC entered into an Amended and Restated Credit Agreement dated May 14, 2003 (which as the same may be amended from time to time is herein called the "Credit Agreement"), pursuant to which Borrower amended and restated a previously existing credit facility dated May 11, 2001; and WHEREAS, Borrower, Guarantor, Bank One and UBOC desire to amend the Credit Agreement as herein set forth. NOW THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. Except as otherwise provided below, unless the context hereof indicates otherwise, all capitalized terms used herein shall have the same meaning as such capitalized terms are defined in the Credit Agreement. (a) Definitions. Article I of the Credit Agreement is hereby amended by adding the following new defined terms and their definitions in proper alphabetical sequence as follows: "Aggregate Outstanding Debt" means the sum of all (i) Aggregate Outstanding Credit Exposure; and (ii) the amount of loans and advances made to Borrower under the Subordinated Credit Agreement, all of which is part of the Subordinated Indebtedness." "Subordinated Credit Agreement" means that certain $20,000,000 Senior Second Lien Secured Credit Agreement dated November 6, 2003 among the Borrower and Subordinated Lenders, as the same may be amended from time to time. "Subordinated Lenders" means Macquarie Americas Corp. a Delaware corporation, individually and as agent, and the other financial institutions who are or become lenders under the Subordinated Credit Agreement. "Subordinated Indebtedness" means the obligation to repay the Subordinated Lenders pursuant to the terms of the Subordinated Credit Agreement. "Subordination Agreement" means the Subordination and Intercreditor Agreement dated November 6, 2003 executed among Borrower, Guarantor, Agent, and Subordinated Lenders in favor of the Agent for the ratable benefit of the Lenders, as amended, supplemented, restated or otherwise modified from time to time. "Tax Adjusted Gross Margin" means Borrower's total revenue from any source minus an amount equal to the sum of Borrower's total lease operating expenses, production taxes, state and federal taxes paid in cash and hedge settlements. "Unutilized Availability" means an amount equal to one hundred thirty percent of the Borrowing Base in effect from time to time; minus the Aggregate Outstanding Debt. (b) Definitions. The following defined terms set forth in Article I of the Credit Agreement are hereby amended as follows: "Consolidated Current Assets shall mean the total of the consolidated current assets of Borrower and Guarantor, plus Unutilized Availability; provided, however, in determining consolidated current assets, such determination shall not include non-cash gains, losses or charges required (a) under SFAS 133 or (b) under SFAS 143." "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, the Rate Management Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent, the LC Issuer or any indemnified party arising under the Loan Documents. "Security Agreement" means that certain Security Agreement (Accounts) now or hereafter executed by the Guarantor, the Borrower or any of their Subsidiaries in favor of the Agent, for the ratable benefit of the Lenders, as they may be amended or modified and in effect from time to time. 2. Amendments to the Credit Agreement. The Credit Agreement is, effective the date hereof, and subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, hereby amended as follows: -2- (a) Section 2.21.1 Issuance, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: 2.21.1 Issuance. Except as provided below, the LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby and commercial 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 an LC Issuer shall not be obligated to issue a Facility LC in favor of any Subordinated Lender; and 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 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed the lesser of (a) the Aggregate Commitment and (b) the Borrowing Base. 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; provided, however, that any Facility LC with a one-year tenor may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the fifth Business Day prior to the Facility Termination Date) unless the LC Issuer provides prior notice of non-renewal to the beneficiary of such Facility LC. (b) A new Section 5.28 Subordinated Indebtedness is hereby added to the Credit Agreement as follows: "5.28. Subordinated Indebtedness, The Obligations constitute senior indebtedness of the Borrower and Guarantor and are entitled to the benefits of the subordination provisions of all outstanding Subordinated Indebtedness." (c) Section 6.2 Use of Proceeds, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "6.2. Use of Proceeds. The Borrower will, and will cause the Guarantor and each of their Subsidiaries to, use the proceeds of the Credit Extensions (x) for the acquisition, development and exploration of Oil & Gas Properties; (y) for working capital requirements; and (z) Letters of Credit. The Borrower will not, and will cause the Guarantor and each of their Subsidiaries not to, use any of the proceeds of the Credit Extensions: (a) to purchase or carry any "margin stock" (as defined in Regulation U) or extend credit to others for the purpose of purchasing or repurchasing or carrying margin stock; and (b) except as permitted hereby, to cancel or make a payment in connection with any obligation arising from the Subordinated Credit Agreement including, without limiting the generality of the foregoing, the repayment of the Subordinated Indebtedness." (d) Section 6.3. Notice of Default, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: -3- "6.3. Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any Default or Unmatured Default and of any other development, financial or otherwise, which could reasonably be expected to have a Material Adverse Effect. Furthermore the Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of any "Event of Default" as defined in the Subordinated Credit Agreement." (e) Section 6.11 Indebtedness, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "6.11. Indebtedness. The Guarantor and the Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (i) the Credit Extensions; (ii) Indebtedness existing on the date hereof and described in Schedule 6.11; (iii) Indebtedness arising under Rate Management Transactions permitted under Section 6.25; (iv) Indebtedness among the Guarantor, the Borrower or any of their Subsidiaries; (v) Indebtedness associated with bonds or surety obligations required by any governmental or regulatory authority or prior owner in connection with owning or operating its Oil and Gas Properties in the ordinary course of business; (vi) unsecured accounts payable incurred in the ordinary course of Business which remain unpaid after the expiration of ninety (90) days beyond invoice date or are being contested in good faith and as to which such reserve as is required by Agreement Accounting Principles has been made; (vii) Indebtedness not to exceed at any one time $500,000 related to purchase money financing; (viii) Indebtedness relating to Capitalized Lease Obligations not to exceed at any one time $500,000; (ix) Indebtedness relating to net production imbalances not to exceed at any one time $1,000,000; -4- (x) Indebtedness relating to overriding royalties and other interests carved out of production incurred in the ordinary course of oil and gas exploration and development projects; (xi) Indebtedness associated with the financing of premiums for business insurance of the Guarantor, the Borrower and their Subsidiaries; (xii) Contingent Obligations of the Guarantor in connection with guarantees of the obligations of the Borrower and its Subsidiaries in connection with owning and operating Oil and Gas Properties in the ordinary course of business. (xiii) Non-Recourse Indebtedness not to exceed $25,000,000; and (xiv) the Subordinated Indebtedness." (f) Section 6.15 Liens, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "6.15. Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except: (i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books; (ii) Liens imposed by Law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than ninety (90) days past due, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books; (iii) Liens arising out of pledges or deposits under worker's compensation Laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; (iv) utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries; -5- (v) Liens existing on the date hereof in favor of the Minerals Management Service; (vi) Liens in favor of the Agent, for the benefit of the Lenders, granted pursuant to any Collateral Document and other Liens expressly permitted under the Collateral Documents; (vii) Liens in favor of operators and non-operators under joint operating agreements or similar contractual arrangements arising in the ordinary course of the business of the Borrower or its Subsidiaries to secure amounts owing, which amounts are not more than ninety (90) days past due or are being contested in good faith by appropriate proceedings, if such reserve as may be required by Agreement Accounting Principles shall have been made therefor; (viii) Liens under production sales agreements, division orders, operating agreements, and other agreements customary in the oil and gas business for processing, producing, and selling Hydrocarbons securing obligations not constituting Indebtedness and provided that such Liens do not secure obligations to deliver Hydrocarbons at some future date without receiving full payment therefor within ninety (90) days of delivery. (ix) Liens in favor of any of the Lenders in connection with Rate Management Transactions; and (x) Liens in favor of the Subordinated Lenders securing the Subordinated Indebtedness, which are inferior in right and time to the Liens in favor of the Lenders." (g) Section 6.24 General and Administrative Expense Limitation of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "6.24. General and Administrative Expense Limitation. Borrower will not permit the Consolidated G&A to exceed: (a) four million five hundred thousand dollars ($4,500,000) in the aggregate for the last six calendar months of 2003; or for each calendar quarter beginning January 1, 2004, the lesser of (i) two million five hundred thousand ($2,500,000) or (ii) thirty-one percent (31%) of the Tax Adjusted Gross Margin; provided, however, if Borrower's Consolidated G&A for any quarter exceed 31% of the Tax Adjusted Gross Margin, the maximum allowable Consolidated G&A for Borrower during the immediately succeeding quarter will be 18% of the Tax Adjusted Gross margin; and provided further that a -6- breach of clause (ii) of this Section 6.24(b) can only form the basis of a Default if Borrower's Consolidated G&A exceed (x) 31% of the Tax Adjusted Gross Margin during any quarter and (y) 18% of the Tax Adjusted Gross Margin during the immediately succeeding quarter; and provided further that, notwithstanding anything in this Section 6.24(b) to the contrary, the Consolidated G&A of Borrower shall not exceed 35% of the Tax Adjusted Gross Margin. " (h) Section 6.25 Rate Management Transactions, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "6.25. Rate Management Transactions. Neither the Borrower nor any Subsidiary will be a party to or in any manner be liable on any Rate Management Transactions except: (i) contracts entered into with the purpose of fixing prices on oil or gas expected to be produced by the Borrower or its Subsidiaries, provided that at all times: (a) no such contract fixes a price for a term of more than twenty-four (24) months for any such contract to which any Lender or any Affiliate thereof is a counter-party and thirty-six (36) months for any such contract for which any Subordinated Lender or any Affiliate thereof is a counter-party; or (b) the aggregate monthly production covered by all such contracts (determined, in the case of contracts that are not settled on a monthly basis, by a monthly pro-ration acceptable to the Agent) for any single month does not in the aggregate exceed seventy-five percent (75%) of the aggregate Projected Oil and Gas Production of Borrower and its Subsidiaries anticipated to be sold in the ordinary course of such Person's business for such month; (c) each such contract is with a counterparty or has a guarantor of the obligation of the counterparty who (unless such counterparty is a Lender, a Subordinated Lender, or one of their respective Affiliates) at the time the agreement is made has (or whose holding company has) long-term obligations rated AA or AA2 or better, respectively, by either S&P or Moody's or is an investment grade-rated industry participant. As used in this subsection, the term "Projected Oil and Gas Production" means the projected production of oil or gas from the "proved, developed, and producing" category set forth in the most recent Reserve Report (measured by volume unit or BTU equivalent, not sales price) for the term of the contracts or a particular month, as applicable, from Oil and Gas Properties and interests owned by the Guarantor, the Borrower and their Subsidiaries which are located in or offshore of the United States of America and which have attributable to them proved oil or gas reserves, as such production is projected in the most recent report delivered pursuant to Section 6.1, after deducting projected production from any properties or interests sold or under contract for sale that had been included in such report and after adding projected production from any properties or interests that had not been reflected in such report but that are reflected in a separate or supplemental -7- reports meeting the requirements of Section 6.1 above and otherwise are satisfactory to the Agent; (ii) contracts entered into by the Borrower or any Subsidiary with the purpose and effect of fixing interest rates on a principal amount of indebtedness of such Person that is accruing interest at a variable rate, provided that (a) the aggregate notional amount of such contracts never exceeds seventy-five percent (75%) of the anticipated outstanding principal balance of the indebtedness to be hedged by such contracts or an average of such principal balances calculated using a generally accepted method of matching interest swap contracts to declining principal balances, (b) the floating rate index of each such contract generally matches the index used to determine the floating rates of interest on the corresponding indebtedness to be hedged by such contract, and (c) each such contract is with a counterparty or has a guarantor of the obligation of the counterparty who (unless such counterparty is a Lender, a Subordinated Lender, or one of their Affiliates) at the time the contract is made has (or whose company has) long-term obligations rated AA or AA2 or better, respectively, by either S&P or Moody's or is an investment grade-rated industry participant. (iii) Existing Rate Management Transactions with Credit Lyonnais Rouse Derivatives and Entergy-Koch Trading LP as more particularly described on Schedule 6.25; and (iv) contracts entered into pursuant to Section 6.17 of the Subordinated Credit Agreement with the purpose of fixing prices on oil or gas expected to be produced by the Borrower or its Subsidiaries. Within ninety (90) days of the date hereof, the Borrower shall establish and shall at all times thereafter maintain Rate Management Transactions consisting of contracts entered into with the purpose of fixing prices on oil or gas expected to be produced by the Guarantor, the Borrower and their Subsidiaries, covering at least fifty percent (50%) of the aggregate volumes of Hydrocarbons listed in the "proved, developed, and producing" category set forth in the most recent Reserve Report, determined on a rolling twelve month basis." (i) A new Section 6.31.4 to the Credit Agreement is hereby added as follows: "6.31.4. Limitation on Aggregate Outstanding Debt. The Borrower shall not permit Aggregate Outstanding Debt to be greater than one hundred and thirty percent (130%) of the Borrowing Base in effect from time to time." (j) A new Section 6.32 to the Credit Agreement is hereby added as follows: -8- "6.32. Subordinated Indebtedness. The Borrower will promptly provide the Agent with copies of all documentation, notices and reports provided by or on behalf of the Borrower, Guarantor or any Subsidiary to the Subordinated Lenders. On or before the tenth (10th) day of each calendar month, the Borrower shall deliver to the Agent a certificate, executed by an Authorized Officer of the Borrower, setting forth the outstanding balance of the Subordinated Indebtedness as of the last day of the preceding month. The Borrower will not, and will not permit the Guarantor or any Subsidiary to, make any (i) payments on the principal amount of any Subordinated Indebtedness; (ii) payments of interest on the Subordinated Indebtedness if (a) the Aggregate Outstanding Credit Exposure of the Borrower exceeds eighty percent (80%) of the Borrowing Base in effect from time to time or (b) after the occurrence of a Unmatured Default or a Default; (iii) amendment or modification to the Subordinated Credit Agreement or any other agreement evidencing or governing any Subordinated Indebtedness without the prior written consent of the Agent; or (iv) directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any portion of the Subordinated Indebtedness without the prior written consent of the Agent." (k) A new Section 6.33 to the Credit Agreement is hereby added as follows: "Section 6.33 Change of Operators. If pursuant to the terms of the Subordinated Credit Agreement, the Subordinated Lenders request that the Borrower or any Subsidiary replace or vote to replace the operator of any of the Oil & Gas Properties, the Borrower will not and will not permit any Subsidiary to do so without the prior written consent of Lenders, which consent will not be unreasonably withheld." (l) Section 7.3 of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: "7.3. The material breach by the Borrower of any of the terms or provisions of Article VI Sections 6.2, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, 6.18, 6.19, 6.20, 6.24, 6.25, 6.26, 6.27, 6.28, 6.29, 6.30, 6.31 or 6.32 and/or the occurrence of an "Event of Default" under the Subordinated Credit Agreement provided, however, any amendment, modification or waiver by the Subordinated Lenders of any such "Event of Default" shall not constitute an amendment, modification or waiver hereunder." (m) A new Section 7.20 to the Credit Agreement is hereby added as follows: "7.20 The Borrower shall fail to timely pay any of its obligations to the Subordinated Lender under the Subordinated Credit Agreement or any other default shall occur thereunder." (n) Section 8.1 Acceleration, of the Credit Agreement is hereby amended by deleting the section in its entirety and substituting the following: -9- "(i) If any Default described in Section 7.6, 7.7 or 7.20 occurs with respect to the Borrower or any of its Subsidiaries, the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuer to issue Facility LCs shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent, the LC Issuer or any Lender and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay to the Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the excess of (x) the amount of LC Obligations at such time, over (y) the amount on deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (such difference, the "Collateral Shortfall Amount"). If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuer to issue Facility LCs, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or notice of any kind, all of which the Borrower hereby expressly waives, and (b) upon notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (ii) If at any time while any Default is continuing, the Agent determines that the Collateral Shortfall Amount is greater than zero, the Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (iii) The Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the Obligations or any other amounts as shall from time to time have become due and payable by the Borrower to the Lenders or the LC Issuer under the Loan Documents. (iv) At any time while any Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After all of the Obligations have been indefeasibly paid in full and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. -10- (v) If, within ten (10) days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans and the obligation and power of the LC Issuer to issue Facility LCs hereunder as a result of any Default (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination." 3. Conditions Precedent to Effectiveness of Amendment. This Amendment shall become effective when, and only when, the Agent and Lenders shall have received counterparts of this Amendment executed by Borrower and Guarantor and Section 2 hereof shall become effective when, and only when, the Agent and Lenders shall have additionally received all of the following documents, each document (unless otherwise indicated) being dated the date of receipt thereof by Lender (which date shall be the same for all such documents), in form and substance satisfactory to the Lender: (a) Counterparts of this Amendment duly executed by Borrower, Guarantor and Lenders; (b) A copy of the resolutions approving this Amendment, and authorizing the transactions contemplated herein or therein duly adopted by the Managers of Borrower, accompanied by a certificate of the duly authorized Secretary of Borrower, that such copy is a true and correct copy of the resolutions duly adopted by the Managers of Borrower, and that such resolutions constitute all the resolutions adopted with respect to such transactions, and have not been amended, modified or revoked in any respect and are in full force and effect as of the date hereof; (c) A copy of the resolutions approving this Amendment, and authorizing the transactions contemplated herein or therein duly adopted by the Board of Directors of Guarantor, accompanied by a certificate of the duly authorized Secretary of Guarantor, that such copy is a true and correct copy of the resolutions duly adopted by the Board of Directors of Guarantor, and that such resolutions constitute all the resolutions adopted with respect to such transactions, and have not been amended, modified or revoked in any respect and are in full force and effect as of the date hereof; (d) Copies of all documentation executed by Borrower and Guarantor in connection with the Subordinated Credit Agreement and the Subordinated Indebtedness, certified by an Authorized Officer of Borrower that such documents are true, correct and complete: (e) The Subordination Agreement, duly executed by Borrower, Guarantor and the Subordinated Lenders; (f) There shall not have been, in the sole judgment of Lenders, any material adverse change in the financial condition, business or operations of Borrower or Guarantor; -11- (g) Payment by Borrower of the fees and expenses of counsel to Lenders in connection with the preparation and negotiation of this Amendment and all documents and instruments contemplated hereby; (h) The legal opinion of counsel to Borrower and Guarantor, in form and substance satisfactory to the Agent and its counsel; (i) The Security Agreement, executed by Borrower and Guarantor, in a form satisfactory to the Agent, the Lenders and their counsel with respect to the accounts therein described, which are a part of the Collateral; and (j) The execution and delivery of such additional documents and instruments which the Agent and its counsel may deem necessary to effectuate this Amendment or any document executed and delivered to Lenders in connection herewith or therewith. 4. Representations and Warranties of Borrower. Borrower represents and warrants as follows: (a) Borrower and Guarantor are each duly authorized and empowered to execute, deliver and perform this Amendment and all other instruments referred to or mentioned herein to which it is a party, and all action on its part requisite for the due execution, delivery and the performance of this Amendment has been duly and effectively taken. This Amendment, when executed and delivered, will constitute valid and binding obligations of Borrower and Guarantor, as the case may be, enforceable against such party in accordance with its terms. This Amendment does not violate any provisions of the Articles of Organization or limited liability agreement of Borrower, the Certificate of Incorporation or By-Laws of Guarantor, or any contract, agreement, law or regulation to which either Borrower or Guarantor is subject, and does not require the consent or approval of any regulatory authority or governmental body of the United States or any state; (b) After giving affect to this Amendment, the representations and warranties contained in the Credit Agreement, as amended hereby, and any other Loan Documents executed in connection herewith or therewith are true, correct and complete on and as of the date hereof as though made on and as of the date hereof; and (c) After giving affect to this Amendment, no event has occurred and is continuing which constitutes a Default or Unmatured Default. 5. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 2 hereof, on and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the Loan Documents shall mean and be a reference to the Credit Agreement as amended hereby. -12- (b) Except as specifically amended above, the Credit Agreement and the Note(s), and all other instruments securing or guaranteeing Borrower's obligations to Lenders, including the Collateral Documents, as amended (collectively, the "Security Instruments") shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Security Instruments and all collateral described therein do and shall continue to secure the payment of all obligations of Borrower and Guarantor under the Credit Agreement and the Note(s), as amended hereby, and under the other Security Instruments. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under any of the Security Instruments, nor constitute a waiver of any provision of any of the Security Instruments. 6. Waiver. As additional consideration for the execution, delivery and performance of this Amendment by the parties hereto and to induce Lenders to enter into this Amendment, Borrower and Guarantor each warrants and represents to Lenders that no facts, events, statuses or conditions exist or have existed which, either now or with the passage of time or giving of notice, or both, constitute or will constitute a basis for any claim or cause of action against Lenders or any defense to (i) the payment of any obligations and indebtedness under the Note(s) and/or the Security Instruments, or (ii) the performance of any of its obligations with respect to the Note(s) and/or the Security Instruments, and in the event any such facts, events, statuses or conditions exist or have existed, Borrower unconditionally and irrevocably waives any and all claims and causes of action against Lenders and any defenses to its payment and performance obligations in respect to the Note(s) and the Security Instruments. 7. Costs and Expenses. Borrower agrees to pay on demand all costs and expenses of Lenders in connection with the preparation, reproduction, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of counsel for Lenders. In addition, Borrower shall pay any and all fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder, and agrees to save Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such fees. 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas. -13- 10. Final Agreement. THIS WRITTEN AMENDMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -14- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed in multiple counterparts, each of which is an original instrument for all purposes, all as of the day and year first above written. "BORROWER" PETROQUEST ENERGY, L.L.C. By: /s/ Michael O. Aldridge ------------------------------------------------ Michael O. Aldridge, Chief Financial Officer "GUARANTOR" PETROQUEST ENERGY, INC. By: /s/ Michael O. Aldridge ------------------------------------------------ Michael O. Aldridge, Chief Financial Officer -15- "LENDERS" BANK ONE, NA, As the Agent, a Lender and LC Issuer By: /s/ Charles Kingswell-Smith ------------------------------------- Charles Kingswell-Smith Director -16- UNION BANK OF CALIFORNIA, N.A. As a Lender By: /s/ Damien Meiburger --------------------------------- Name: Damien Meiburger ------------------------------- Title: Senior Vice President ------------------------------ -17- EX-31.1 8 d10457exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 I, Charles T. Goodson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PetroQuest Energy, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Charles T. Goodson - --------------------------------- Charles T. Goodson Chief Executive Officer November 13, 2003 2 EX-31.2 9 d10457exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 I, Michael O. Aldridge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PetroQuest Energy, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael O. Aldridge - ---------------------------- Michael O. Aldridge Chief Financial Officer November 13, 2003 2 EX-32.1 10 d10457exv32w1.txt CERTIFICATION PURSUANT TO 18 USC SECTION 1350 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PetroQuest Energy, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Charles T. Goodson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles T. Goodson - -------------------------- Charles T. Goodson Chief Executive Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 d10457exv32w2.txt CERTIFICATION PURSUANT TO 18 USC SECTION 1350 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PetroQuest Energy, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Michael O. Aldridge, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael O. Aldridge - -------------------------------- Michael O. Aldridge Chief Financial Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----